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Marketing Funds Are Important

All franchisors will be interested in marketing their brands. How is this done? Normally by way of national marketing where the franchisees pay a percentage of turnover; and also, by local marketing where a franchisee markets in a particular territory or area.

The national marketing fund can total a considerable sum of money so where is that money held? In New Zealand there is no mandatory requirement to keep the marketing funds in a separate bank account except if a franchise agreement prescribes the requirement to do just that.

There is no franchise-specific legislation in New Zealand, but the Franchise Association of New Zealand has a Code of Practice and Code of Ethics, but both are silent on marketing.

Where marketing funds are held is a hot topic and there should be a mandatory requirement for all franchisors to keep the marketing fund in a separate bank account which is tantamount to a trust account. After all, the franchisees pay the marketing levies, and the franchisor uses those funds to market the brand to benefit all franchisees.

A franchise agreement drafted by Stewart Germann Law Office includes the following clause:

“The National Marketing Amount paid by the Franchisee to the Franchisor shall be held by the Franchisor in a separate bank account which shall be deemed to be a trust account along with all other marketing levies received from other franchisees and the Franchisor shall use such funds solely for the purpose of marketing as determined by the Franchisor.”

In Australia the position is slightly different. If a franchisee is required to contribute to a marketing fund, then the franchisor must provide certain information to the franchisee about the fund. The franchisor must prepare annual financial statements detailing all of the fund’s receipts and payments.  The statement must provide the franchisee with meaningful information about sources of income and items of expenditure. The statement must be audited by a registered company auditor unless 75% of franchisees who contribute to the fund vote not to audit the statement.

Over the past two years Stewart Germann Law Office has acted for separate groups of franchisees who have become unhappy with the respective franchisor’s handling of the marketing fund and the financial reconciliation. All franchisors should provide an income and expenditure statement in relation to the marketing fund which must be transparent and available to all franchisees in a particular system, in my opinion.

The Board of the Franchise Association of New Zealand agrees that this is an important topic, and it is highly likely that in 2023 the Code of Practice will be amended to make it mandatory for all franchisors to keep the marketing funds in a separate bank account and to account annually to the franchisees. This is very important as it takes away any doubts or suspicions by franchisees towards the franchisor.

Intellectual Property Protection in New Zealand

Before international franchisors enter into the New Zealand market, they should ensure that their intellectual property is protected in New Zealand. The term “intellectual property” encompasses trade marks, registered designs, copyright and patents.  The protection of the rights to intellectual property is fundamental to any franchised business.

In New Zealand the franchisor’s intellectual property can be protected as follows:

Trade Marks

It is imperative for a franchisor to obtain formal trade mark or service mark protection as a basis for any trading operation.  There are 42 classes of goods and services in which trade mark protection can be obtained in New Zealand and of those classes 34 relate to goods and 8 to services.  For example, there are 3 food classes and 2 classes covering products such as beer, alcoholic beverages, fruit juices and mineral water. There is also a service class to protect advertising and business services.

The nature and extent of any trade mark protection needs to be considered for each particular case.

Trade marks may comprise any word, brand, label, symbol, device or logo which serves to distinguish the particular goods or services of one party from the goods or services of another party and the Trade Marks Act 2002 governs registration of all marks.

The principal function of a trade mark is to indicate the origin of goods and services.  It is important to select a distinctive trade mark in order that the public will associate your goods and services with the unique brand.

Trade marks are protected by registration in the Intellectual Property Office of New Zealand (IPONZ).  Once you have selected or designed your trade mark then as a precautionary move it is possible to obtain a search of the Trade Mark Register to ensure that it does not conflict with anyone else’s mark.

Assuming that the trade mark is available, its protection is afforded by filing an application and paying the requisite fee.  This obtains a filing date and application number from the Trade Mark Office.

The benefits of registration are as follows:

(a) It can be used to prevent any competitor from using the same or similar mark on any goods or services in New Zealand.

(b) It serves as public notification of your rights in that trade or service mark.

(c) It can prevent registration of an identical or confusingly similar mark.

(d) Trade mark registration is a valuable business asset.

It is also possible to have common law rights in an unregistered mark which can be protected by the tortious action of Passing Off.

Registered Designs

Registered Design protection pursuant to the Designs Act 1953 is available for a wide range of products.  Protection may be obtained for novel features of shape, configuration, pattern or ornament applied to an article by an industrial process. The features protected by a registered design must appeal to and be judged by the eye such as design on china and cutlery.

It is possible to obtain a preliminary search in the Designs section on the Intellectual Property Office of New Zealand website and this search can provide advice as to whether or not the proposed design is likely to infringe an existing registered design and/or whether it is in fact registrable.

Copyright

Under the Copyright Act 1994 the labour, skill and judgment which an author, artist or creator has expended in the creation of an original literary, artistic, musical or dramatic work is protected.  Copyright arises automatically in the work.  It is not the ideas that can be protected but the tangible form the ideas take such as the manual, the logo or the advertising jingle.

Protection is in the form of a right to prevent anyone else from copying or reproducing the work or a substantial part of the work without the author’s permission.

Patents

You can obtain patent protection under the Patents Act 2013.  In broad terms, patent protection may be obtained for inventions (ideas) which are novel, involve an ‘inventive step and be useful. An inventive step is a non-obvious improvement over known technologies.

Patent rights are granted by statute and the system operates as a reward for technical innovation by granting exclusive monopoly rights for a defined period.

In order to obtain a valid patent the invention must be new.  An invention should not have been used, sold, published or otherwise known in New Zealand by the applicant or any third party prior to the date of application.

Conclusion

New Zealand welcomes international brands but it is essential that international franchisors have protected their intellectual property before they start appointing franchisees in New Zealand. A typical clause in the franchise agreement would also set out that the franchisee is bound by the confidentiality and secrecy provisions in relation to confidential information and intellectual property. The franchisee can only use the intellectual property in order to operate the business and does not have any ownership rights over the intellectual property.

You should obtain expert advice regarding protection of your intellectual property. If you have any questions about protection please contact SGL.

New Unfair Contract Terms and Unconscionable Conduct Regime

The Fair Trading Amendment Act 2021 (“Amendment Act”) extends the existing prohibition on unfair contract terms in consumer contracts to standard form small trade contracts worth under $250,000 (including GST). The Amendment Act also introduced a new prohibition on unconscionable conduct.

These changes will come into force on 16 August 2022 and affect standard form small trade contracts. A contract is a standard form small trade contract if it falls within the following definition:

  • Each party is engaged in trade (i.e. two businesses);
  • It is not a contract between a business and a consumer; and
  • The relationship between the two parties in trade in relation to the goods, services or interest in land provided does not exceed the annual value threshold of $250,000 (including GST) per annum for goods, services or an interest in land when the relationship first arises (i.e. when you first sign the contract).

Any contract signed prior to 16 August 2022 will not be subject to the new amendments. However, if the contract is varied, amended or renewed and it falls within the definition of a standard form small trade contract above then the new regime applies to the varied, amended or renewed contract.

The unfair contract terms previously only applied to contracts between a consumer and a business, for instance gym membership agreement. The new amendments will ensure that small businesses also receive protection against any unfair contract terms.

The following is taken into consideration when assessing whether a term is unfair:

  • Whether the term would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
  • Whether the term is reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  • Whether the term would cause detriment (whether financial or otherwise) to a party if it were applied, enforced or relied on.

The new amendments will not apply to the following contractual terms:

  • Definition of the main subject matter of the contract.
  • Setting the upfront price payable under the contract, so long as the price term is clear and unambiguous.
  • Any terms that are required or expressly permitted by any legislation.

The extent to which the term is clear and the context of the contract as a whole will also be taken into account. However, the new amendments will not disadvantage a business that has a legitimate business interest and the term is necessary to protect that interest. At this stage the Commerce Commission has not updated its guidance regarding unfair contract terms but we assume this will be issued soon to assist businesses.

Penalties

The Commerce Commission can apply to a Court for a declaration that a term in a contract is unfair. If it is found to be unfair by a Court then that business must not include a term (or is amended with the Court’s approval) or attempt to enforce or rely on the term. A business may also face:

  • In the case of an individual fines not exceeding $200,000 and a company a fine not exceeding $600,000.
  • Court orders stopping that business from applying or enforcing that term and or orders directing a refund or payment of damages.

Unconscionable Conduct

The unconscionable conduct in trade provisions are much broader as it applies to all conduct not just contractual terms. The term unconscionable conduct is not defined but the Amendment Act states that a Court can take the following into consideration:

  • The relative bargaining power of the parties;
  • The extent to which the parties acted in good faith;
  • Whether the affected person was reasonably able to protect their interests; and
  • Whether unfair pressure or tactics were used.

It may be that New Zealand will take guidance from Australian cases but at this stage no guidance or comment has been provided by the Commerce Commission.

Penalties

The Commerce Commission can seek penalties and fines as above. The Commerce Commission could also could bring civil proceedings; for example seeking a declaration from the Court in relation to unfair contract terms. The remedies include damages, injunctions and other Court orders.

Conclusion

Whether the new amendments apply to any contract will depend on whether it falls within the definition of a standard form small trade contract. When looking at the annual value threshold this is assessed when the relationship first arises.

Khushbu Sundarji is a franchising lawyer and partner of Stewart Germann Law Office at Auckland, New Zealand. She can be contacted on 09 308 9925 or at khushbu@germann.co.nz.

Official Results of the 2021 Franchising New Zealand Survey

Franchising is a method of distributing products or services involving a franchisor, who establishes the brand’s trademark or trade name and a business system, and a franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor’s name and system.

Stewart Germann Law Office was a key sponsor of the survey conducted by Massey University on behalf of the Franchise Association of New Zealand.

The results of the survey provide valuable insights on the size, impact, structure, strategies, challenges and opportunities of franchising companies in New Zealand.

On 7 December 2021 the results of the Survey were released and some of the highlights are as follows:

  • There are 590 business format franchisors in New Zealand
  • There is an estimated total of 32,300 units operating in business format franchises
  • More than 156,820 are employed directly in business format franchises
  • Sales turnover for business format franchises was estimated at $36.8 billion
  • Sales turnover for the entire franchising sector was estimated at $58.5 billion
  • 70% of franchise brands originated in New Zealand
  • Online sales grew tremendously with now almost 80% of brands engaging in online sales
  • More than 20% of franchisors have entered international markets
  • 90% of franchise brands return profits back into the community
  • Almost two-thirds of franchisors identified environmental sustainability and ethical supply chain examples, with the principal examples being enforced recycling of materials, waste minimisation programmes and hybrid car use
  • Only 18.5% of franchisors were involved in a substantial dispute (with one or more franchisees) in the past 12 months
  • COVID-19 brought considerable disruptions to trading, greater stress and mental health considerations, adjusted hours of operation, supply chain interruptions, significant sales reductions and many other issues

The data in the Survey provides a reliable source of information about the New Zealand franchise sector. Massey University was pleased to collaborate in this important research with the FANZ, the peak body of franchise representation, and SGL was proud to be a key sponsor.