"... the case serves as a warning to franchisors who seek to take advantage of a franchisee's request for consent to an assignment of the franchise agreement. A court may find unconscionable conduct if consent is used as a lever to extract a better bargain than was originally made by the parties to the agreement, although it appears that evidence of bad faith may be required, as an erroneous construction of a contractual right will not in itself be unconscionable. However, careful drafting of the franchisor's contractual rights with a consideration of both this decision and Clause 20 of the Franchising Code may provide franchisors with greater flexibility in relation to the terms by which 'new' franchisees introduced under a transfer are bound".
Wednesday, 14 July 2010
Seal-a-Fridge: even franchising has its limits
One of the best ways of generating quality earnings from a trade mark is by licensing its use under a business format franchise. In theory, once the business formula is tried and tested, the franchise becomes a licence to print money: the licensee invests in premises, equipment, hardware and labour, while the licensor -- while receiving sign-on fees, possible service and consultancy retainers and regular royalty payments --advertises the franchised service and reaps the benefit as the brand equity just keeps rising.
There are however limits to the money-making potential of the franchise format, as can be seen from a recent episode in Australia. In "Court decision brings cold comfort to franchisor", Tim Golder, Robyn Chatwood and Ben Mee (Allens Arthur Robinson) discuss in their firm's Intellectual Property Focus a complaint made against Seal-A-Fridge, in which the Federal Court ruled that the franchisor had abused its position of strength in order to impose significant increases in fees payable by its franchisees. This case also tested out the legality of a franchisor withholding its consent to assignment of a franchisee's interest to a new licensee unless the latter executes a franchise agreement which gives the franchisor additional benefits.
After explaining the facts of the complaint, the relevant legal principles and the outcome, the authors conclude as follows: