Licensing, distribution and franchising

When an organisation has developed intellectual property, particularly in relation to products, the challenge is often to get those products out in the market. If the organisation does not have the capacity, funding or resources to do so itself, it is often a good idea to involve other organisations in order to accelerate the distribution of the products or the provisions of the organisation’s services in the market.

The organisation can establish, amongst other things, a licensing, distribution, franchising or agency relationship with another party, depending on the parties’ specific requirements.

There is no specific South African legislation that deals with these types of arrangements. However, the Consumer Protection Act, 2008 (“CPA”) regulates franchising in part. To an extent, it will also be applicable if an agent, distributor or licensee qualifies as a consumer in terms of the CPA’s provisions.

A distribution agreement is an agreement in terms of which the manufacturer grants the distributor the rights to distribute the manufacturer’s products. The distributor can be appointed on an exclusive or non-exclusive basis. Often, a specific territory is allocated to the distributor.

In an agency relationship, the agent carries out certain obligations on behalf of the principal. Agency and distribution are concepts that are often used interchangeably, but in terms of South African law, there is a distinct difference between an agent and a distributor. In terms of an agency agreement, the principal will often be bound by acts and/or omissions of the agent, as if the acts and/or omissions were those of the principal. On the other hand, a distributor functions independently of the manufacturer or supplier.

A licence agreement is an agreement in terms of which the licensor provides the licensee with permission to exercise some kind of right which the licensor possesses, for example copyright or trade mark rights. As consideration for such licence, the licensee usually pays royalties or other fees to the licensor.

In order to establish a franchise, a written franchise agreement must be concluded. Franchise agreements are specifically regulated by the CPA. In terms of a franchise agreement, the franchisee is granted the rights to carry on business under the franchisor’s business system and trade marks. In consideration for this, the franchisee must normally pay franchise fees to the franchisor.

The CPA prescribes specific information and provisions that must be included in a franchise agreement. The CPA also requires that a franchisor must provide a franchisee with a disclosure document. This must be done no later than 14 (fourteen) full days before signature of the franchise agreement. The minimum content of the disclosure document is prescribed by the CPA and, in short, must provide a summary of the franchise to potential franchisees.