FEDERAL COURT OF AUSTRALIA

Capital Networks Pty Ltd v .au Domain Administration Limited

[2004] FCA 808

CONTRACT – respondent administrator of .au domain name space – contract for accreditation of registrar (applicant) in .au domain name space – scope of respondent’s right to request information in relation the “registrar’s business” – does right extend to information in relation to .au domain space only or does it extend to the registrar’s generic top level domain space business – threat to suspend accreditation for failure to provide information in relation to generic top level domain space business – appropriate use of respondent’s constitution and other governing documents in construing the contract

TRADE PRACTICES – assertion thatrequest for information pursuant to right under contract – allegation that no right existed under contract therefore assertion was misleading or deceptive – allegation that threat to suspend accreditation for failing to provide information was misleading and deceptive as no right to request information – allegation that the request for information and threat to suspend accreditation was unconscionable

FRANCHISING CODE OF CONDUCT - is the contract a “franchise agreement” – do the obligations imposed on the registrar amount to a “system or marketing plan” – does suspension of accreditation equate to termination of the contract under regulation 21

WORDS AND PHRASES – “franchise agreement”, “system or marketing plan”

Trade Practices Act 1975 (Cth) s 51AC, s 51AD, s 52, s 80

Trade Practices (Industry – Franchising) Regulations 1998

Australian Competition & Consumer Commission v 4WD Systems Pty Ltd (2003) 200 ALR 491

Aquaclear Technology Pty Ltd v Cameron and Brister & Co Pty Ltd [2001] SASC 186

Boat & Motor Mart v Sea Ray Boats, Inc (1987) 825 F 2d 1285

Chem-Tek, Inc v General Motors Corporation (1993) 816 F Supp 123

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337

Foran v Wight (1989) 168 CLR 385

Gardner Mountain and D’Ambrumenil Ltd v Inland Revenue Commissioner [1947] 1 All ER 650

Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82

Grand Light & Supply Co, Inc v Honeywell, Inc (1985) 771 F 2d 672

In re A Solicitor [1945] 1 KB 368

Master Abrasives Corporation v Williams (1984) 469 NE 2 d 1196

Registrar of Titles (WA) v Franzon (1975) 132 CLR 611

Subway Systems Australia Pty Ltd v Thorpe  [2000] QSC 099

The Australian Heritage Commission v Mount Isa Mines Limited (1997) 187 CLR 297

Wright-Moore Corporation v Ricoh Competition (1990) 908 F 2d 128

Explanatory Statement to the Trade Practices (Industry Codes – Franchising) Regulations 1998

Tilman, Peter, The Legal Advisers Guide to Franchising, CCH Australia Limited, Sydney, 1999

American Jurisprudence, 2nd Ed, vol 62B, Lawyers Cooperative Publishing, Rochester, New York, 1990

CAPITAL NETWORKS PTY LTD (ACN 080 342 301) V .au DOMAIN ADMINISTRATION LIMITED (ACN 079 009 340)       

ACD9 OF 2004

BENNETT J

24 JUNE 2004

SYDNEY (HEARD IN CANBERRA)

THE COURT ORDERS THAT:

1.              The application is dismissed.

2.              The applicant is to pay the costs respondents costs of the hearings before Gyles J.

3.              The applicant is to pay the respondent’s costs of the hearing before Bennett J.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

background

1                     ICANN (Internet Corporation for Assigned Names and Numbers) is a corporation that oversees operations of the Internet’s root server system. ICANN appoints and regulates domain registrars in relation to generic top level domains (gTLD’s), such as .com, .net and .org.  ICANN also provides technical coordination of the Internet throughout the world and, in particular, is responsible for the Internet domain name system.  In addition to controlling gTLD’s, ICANN is responsible for the two letter designation of country code top level domains (ccTLD’s) such as .au, .nz and .uk.  The .au suffix is the ccTLD for Australia.

2                     The respondent, .au Domain Administration Limited (‘auDA’), was appointed by ICANN to be the sole administrator of the .au ccTLD, for an indefinite period, pursuant to a sponsorship agreement dated 25 October 2001 (‘the Sponsorship Agreement’). Under the Sponsorship Agreement, auDA appoints and regulates .au ccTLD domain registrars (‘Registrar’). AuDA administers the .au ccTLD in accordance with the Principles for Delegation and Administration of ccTLDs (‘the GAC principles’).

3                     A person in Australia can apply for any number of different domain names managed by different bodies or government organisations throughout the world and is not limited to applying for a .au domain name.

4                     The authoritative database for each level of domain is called a Registry.  The .au Registry operator is responsible for maintaining the .au ccTLD Registry and ensuring the integrity and stability of the domain name system.  The .au Registry operator is required to enter into an agreement with auDA pursuant to which auDA grants it a licence to operate the Registry.  The .au Registry operator does not interact directly with a person who wishes to register a domain name.  Rather, that person, who is known as the registrant, usually applies for a domain name through a Registrar.  A registrant can also apply for registration of a domain name through a reseller, essentially a sales agent for a Registrar. 

5                     A Registrar has direct access to the Registry and provides sales and support services to registrants.  A Registrar provides services in all open second level domains (‘2LDs’), such as .org.au and .com.au, .au is a top level domain.  A registrar of .au domain names is required to be accredited by auDA and must enter into a formal agreement (‘the Registrar Agreement’) with auDA which sets out, among other things, the obligations as a Registrar.  The applicant, Capital Networks Pty Ltd (‘Capnet’), is currently accredited by auDA to act as a .au ccTLD domain registrar pursuant to a Registrar Agreement. Twenty companies are currently accredited by auDA to act as Registrars.  In the gTLD space there are currently approximately 206 registrars, of which Capnet is one.

PROCEDURAL HISTORY

6                     On 30 April 2004, Capnet made an urgent application to the Court to restrain auDA from suspending or terminating its .au accreditation. AuDA had threatened to suspend or terminate Capnet’s accreditation at 4 pm that day. Capnet sought:

·         interim, interlocutory and final injunctions restraining auDA from suspending or terminating Capnet’s auDA accreditation;

·         interim and interlocutory orders that the application and affidavit be confidential;

·         declarations that auDA has no entitlement to suspend or terminate Capnet’s auDA accreditation; and

·         damages including exemplary damages.

7                     Capnet claimed that the threat of termination or suspension was misleading and deceptive conduct in breach of s 52 of the Trade Practices Act 1975 (Cth) (‘the TPA’) and that actual termination would constitute:

·         unconscionable conduct in breach of s 51AA(1) and s 51AC(1) of the TPA;

·         a misuse of market power in breach of s 46 of the TPA; and

·         breach of contract (the Registrar Agreement).

8                     The matter came before the duty judge the same day and, after some discussion, auDA gave an undertaking not to suspend or terminate the applicant’s accreditation until the interlocutory application was heard.  Capnet gave the usual undertaking as to damages.

9                     Gyles J granted an interlocutory injunction retraining auDA from suspending or terminating Capnet’s auDA accreditation, upon Capnet continuing its undertaking as to damages. The interlocutory injunction was granted, in part, on the basis of an expedited final hearing of the matter.  The matter was also listed for directions.

10                  When the matter came before Gyles J for directions, Capnet stated that it would not proceed with its claim under s 46 of the TPA.

The statement of claim AND AGREED FACTUAL MATTERS

11                  There are a number of factual matters pleaded in the statement of claim  that are not in dispute. 

12                  The auDA constitution (‘the Constitution’), which is pleaded, provides in clause 3.1 that the principal purposes of auDA are, inter alia, ‘to be the administrator of, and the Australian self regulatory policy body for the .au ccTLD and its associated Second Level Domains’and also‘to establish appropriate complaints handling and dispute resolution processes to provide for conciliation or redress of grievances on matters associated with the administration of the .au ccTLD’. 

13                  For the purposes of achieving the principal purposes, the Constitution also provides, inter alia:

‘3.2      Activities

            Solely for the purposes of achieving its principal purposes as set out in clause 3.1, auDA will enhance the benefits to Internet users through:

a.                  ensuring the continued operational stability of the domain name system in Australia;

b.                  establishing mechanisms to ensure it is responsive and accountable to the supply and demand sides of the Australian Internet Community;

c.                   the promotion of competition in the provision of domain name services;

d.                  the promotion of fair trading;

e.                   the promotion of consumer protection;

f.                    adopting open and transparent procedures which are inclusive of all parties having an interest in use of the domain name system in Australia;

g.                  ensuring its operations produce timely outputs which are relevant to the needs of the Australian Internet Community.’

14                  The statement of claim pleads, by reason of the operation of the Sponsorship Agreement, auDA administers the .au domain space. It is also agreed that auDA administers the .au domain space in the public or common interest.  The recitals to the Sponsorship Agreement note auDA’s commitment to operate the ccTLD in the interest of the relevant local community and the global Internet community, in accordance with clause 9 of the GAC Principles.  The preamble to the GAC Principles states that, by the term ‘global Internet community’ reference is made to ‘all those who are affected by, now or in the future, the operation of the relevant TLD, because such operation may impinge on more than one jurisdiction and affect the interests of individuals and entities from both within the relevant country or territory and elsewhere’.

15                  The historical background to auDA’s assumption of the role of administrator of the .au ccTLD includes an endorsement of auDA on or about 31 December 2000 by the Commonwealth Government of Australia as the appropriate body to hold the delegation of authority from ICANN for administration of the .au ccTLD.  The industry self-regulatory regime for the .au domain space was established in the context that the Internet naming system is a public resource (as described in the letter of endorsement), in the sense that its functions must be administered in the public or common interest.

16                  The Government’s endorsement of auDA was consistent with clause 9 of the GAC Principles and contingent upon auDA demonstrating to the Government its ability to meet a number of criteria, including:

• to be inclusive of and accountable to members of the Internet Community including both the supply and demand sides;
• to enhance benefits to Internet users through the promotion of competition, fair trading and provisions for consumer protection and support; and
• to represent the Australian Internet industry interests in the Internet domain name system at national and international fora.

17                  It is also not in dispute that auDA’s complaints policy, as advertised, states, inter alia, that auDA does not have jurisdiction to handle complaints about gTLD’s or other ccTLD’s.  It is admitted in the pleadings that, under its Constitution and complaints policy, auDA has jurisdiction to consider only over complaints in relation to .au domain names.

18                  The applicant applies for relief under s 80 of the TPA in respect of its allegation that the respondent engaged in conduct that was misleading and deceptive.  The statement of claim relevantly pleads:

‘21.      By letter dated 17 March 2004 to Capnet, auDA requested information including information relating to Capnet’s conduct as an ICANN accredited registrar in relation to domain names registrations in the gTLDs .com, .net and .org.

22.       To the extent to which the request for information related to the .au name space, it was answered in full by the letter from Capital Networks dated 20 April 2004.

23.       AuDA’s solicitor’s wrote to Capnet by letter dated 27 April 2004 and threatened that auDA would suspend Capital Network’s accreditation unless Capnet provides “the information sought, to [auDA’s] reasonable satisfaction” by 4 pm on Friday 30 April 2004.

24.       By the same letter, auDA’s solicitors contended that “Capital Networks’ activities” have already brought auDA into disrepute and that “this breach is not capable of remedy”.

25.       By the letter dated 27 April 2004, auDA communicated to Capnet that it had already formed a conclusion that Capnet should be suspended and that it had reached this conclusion on the basis of material which it has not disclosed to Capnet.’

…

34.       By making the demands alleged in paragraphs 21-25, auDA engaged in conduct that was misleading and deceptive.

35.       By threatening to suspend Capnet’s accreditation, auDA engaged in conduct that was misleading and deceptive.’

19                  This was clarified before Gyles J as an allegation that the representation by auDA as to its authority in relation to matters beyond the .au network and its threat in relation to ‘the withdrawal of registration’ constituted misleading and deceptive conduct.  The representations were made to Capnet.

20                  Mr O’Neill, who appears for the applicant, further clarified Capnet’s case.  The misleading or deceptive conduct alleged is an assertion by auDA that it is entitled to information about Capnet’s activities with respect to gTLD domain names.  Capnet alleges that, by making the demands set out in its letters, concerning the information relating to Capnet’s conduct as an ICANN accredited registrar in relation to domain names registrations in the gTLD’s .com, .net and .org and by threatening to suspend Capnet’s accreditation, auDA engaged in conduct in trade and commerce that was misleading and deceptive and thereby contravened s 52 of the TPA.

21                  In addition, Capnet:

·                     Pleads that, by threatening to suspend Capnet’s accreditation, auDA is engaging is conduct which would constitute a breach of the Registrar Agreement. 

·                     Relies upon the application of the Franchising Code of Conduct (‘the Code’), an industry code within the meaning of s 51AD of the TPA, and alleges contravention of the Code by auDA.  It must be said that the pleading of the application of the Code leaves much to be desired.  However, as the matter was brought to hearing with expedition, the extent to which the respondent was taken by surprise has been obviated by the opportunity to provide written submissions after the conclusion of the hearing.

·                     Pleads that the conduct of auDA in, inter alia, demanding information and threatening to suspend Capnet’s accreditation, constitutes unconscionable conduct contrary to s 51AC of the TPA.

22                  There were other matters pleaded in the statement of claim including allegations of contravention by auDA of its obligations under the Registrar Agreement.  They were not pursued.  Clearly, Capnet wishes the Registrar Agreement to remain in force.

23                  It is alleged that the Registrar Agreement is a “franchise agreement” within the meaning of regulation 4 of the Code, under which auDA is the franchisor and Capnet the franchisee.  Various breaches of the Code are pleaded and auDA admits that the Registrar Agreement does not comply with the Code.  However, auDA contends that the Code has no application to the Registrar Agreement.  In addition, insofar as Capnet relies on an alleged breach by auDA of regulation 21 of the Code, which relates to the steps to be taken by the franchisor before termination by the franchisor of the franchise agreement, auDA’s contention is that there has been no threat to terminate the Registrar Agreement; a distinction is drawn between suspension or termination of accreditation and termination of the Registrar Agreement.

24                  There are a number of further matters not in dispute:

·                    if there has been a breach of the Registrar Agreement and the Code does not apply, auDA is entitled to suspend Capnet’s accreditation;

·                    the alleged breaches by auDA of obligations under the Code other than regulation 21 are irrelevant to these proceedings;

·                    if Capnet’s business with respect to gTLD activity is not substantially or materially associated with the trade mark or symbol of auDA, the Registrar Agreement is not a franchise agreement within regulation 4 of the Code;

·                    if the Code does apply and if regulation 21 applies to the proposed suspension of accreditation, auDA has not complied with the requirements of the regulation;

·                    the only basis for the rights of auDA in this matter are under the Registrar Agreement.  If the Registrar Agreement does not apply to the actions by auDA in respect of  gTLD activities and the representations that it does so apply were made in trade and commerce, Capnet is entitled to an order.  ; and

·                    if the representations by auDA are in trade and commerce and if the Code applies, auDA is in breach of the Code and, by reason of s 51AD of the TPA, Part VI of the TPA and the remedies therein apply.

The Registrar Agreement

25                  Pursuant to the Registrar Agreement executed between Capnet and auDA on or about 2 July 2002, Capnet was appointed as an accredited Registrar.  The Registrar Agreement is in a standard form issued by auDA. 

26                  The recitals in the Registrar Agreement are as follows:

‘A.       auDA is a non-profit organisation that is the industry self-regulatory body responsible for the administration of the .au ccTLD.  ICANN (the Internet Corporation for Assigned Names and Numbers) delegated the .au ccTLD to auDA on 25 October 2001.

B.         auDA is committed to exercising its responsibilities to the Registrar and the Australian Internet community in an open and transparent manner, and to apply standards and policies in a way which are not arbitrary, unjust or inequitable.  These commitments are reflected in clause 19 of this document.

C.        The Registrar wishes to be auDA Accredited and to provide the Registrar Services for the Designated 2LD.

D.        This document records the agreement between auDA and the Registrar in respect of, amongst other things, the provision by the Registrar of the Registrar Services for the Designated 2LD.’

27                  Broadly speaking, entry into the Registrar Agreement results in auDA accreditation as a Registrar, enabling operation and provision of services by the Registrar in the designated second level domain (clause 3.2) for the term of the agreement under a non-exclusive, worldwide, royalty-free licence (clause 6.1).  The Registrar is also granted the right to use the auDA logo to indicate that the Registrar is accredited by auDA as a registrar for the designated second level domain (clause 6.1) but for no other use (clause 6.2).

28                  Clause 1 of the Registrar Agreement contains a number of defined terms, including “Registrar”.  AuDA emphasises the importance of defined terms in the Registrar Agreement and the distinction to be drawn between a defined term and a non-defined term.  Specifically, “Registrar” is defined to mean ‘the party to this document in its capacity as a registrar for the Designated 2LD’ (.au) and “registrar” is an undefined term.  Clause 28.5.5 provides that ‘where an expression is defined, another part of speech or grammatical form of that expression has a corresponding meaning’.  Capnet relies upon clause 28.5.5 to equate those two terms.  It seems to me that the distinction between the defined and undefined terms is to be drawn and that it cannot be said that the general word “registrar” is another part of speech or grammatical form of the defined word “Registrar”.  The two words are used independently in the Registrar Agreement, as in clause 14.1.9. 

29                  The Australian Internet community is not defined in the Registrar Agreement, although it is referred to in a number of provisions including a reference, in clause 18.5.3, to auDA’s role to protect the interests of that community. Clause 2 provides that auDA may only terminate the Registrar Agreement under clause 23.  Clause 23 provides for the Events of Default for which auDA is entitled to terminate and includes:

‘23.1.4             the party commits a breach of this document which is not capable of being remedied; or

23.1.5              the party commits a breach of this document and fails to rectify that breach within 30 days after receipt of written notice specifying the breach and requiring rectification’.

30                  Clause 23.2 provides that, at any time following an Event of Default, the non-defaulting party may, inter alia:

‘23.2.3             declare that the obligations of the non defaulting party under this document cease and the non defaulting party is no longer obliged to perform any obligations under this document; or

…

23.2.5                            terminate this Agreement.’

31                  Upon termination, each party is released from its further obligations under the Registrar Agreement, except those provisions which are expressly intended to survive termination (clause 24.1).

32                  There is separate provision, in clause 4, for loss of the Registrar’s accreditation.  Clause 4.2 provides:

‘auDA may suspend or terminate the Registrar’s auDA Accreditation if auDA considers that an Event of Default has occurred in respect of the Registrar.’

33                  Accordingly, the Registrar Agreement provides for termination of the Registrar Agreement by auDA where there is an Event of Default and also for suspension or termination of the Registrar’s auDA accreditation where auDA considers that an Event of Default has occurred in respect of the Registrar.  The distinction between the suspension of a Registrar’s accreditation, termination of a Registrar’s accreditation and termination of the Registrar Agreement is also clearly provided for in clause 5 of Schedule B to the Registrar Agreement, which contains certain Mandatory Provisions.

34                  Pursuant to the Registrar Agreement, the Registrar must pay fees to auDA.

35                  The Registrar Agreement provides for the obligations of the Registrar in connection with, for example, receipt of a domain name application and the agreement to be entered into between the Registrar and Registrant  (the holder of, or an applicant for, a domain name licence in the .au domain name space).  One of those obligations is that the Registrar must ensure that its Registrant can easily transfer registered domain names (in the .au domain) to another Registrar (clause 12.1).

36                  Other obligations of the Registrar are set out in terms of positive and negative covenants.  They include:

‘14.1    Positive Covenants

            The Registrar must:

14.1.1                            act in good faith in its dealings with auDA, the Registry Operator, other registrars and each Registrant;

            …

14.1.5              provide to auDA (at auDA’s request) and to the Registry Operator (at all times), all information related to each approved Domain Name, including information relating to the renewal, transfer, modification, or cancellation a Domain Name Licence;  

…

14.1.9              provide to auDA from time to time, upon auDA’s request, all information in relation to the Registrar and the operation of the registrar’s business as auDA may reasonably request;

14.1.10            within two Business Days, give notice to auDA of any impending claims, litigation, proceedings or material disputes against the Registrar by any person or authority relating directly or indirectly to its provision of Registrar Services including arbitration and administrative or governmental investigation;

…

14.1.12                       comply with all applicable law.

14.2     Negative Covenants

            The Registrar must not:

…

14.2.4              be involved in any activity which may directly or indirectly bring the Registry Operator or auDA into disrepute’.

37                  AuDA’s obligations are set out in clause 19.1.  They include:

‘19.1    General obligations

            With respect to all matters that impact the rights, obligations or role of the Registrar, auDA must during the Term:

19.1.1                             exercise its responsibilities in good faith and in an open and transparent manner; and

19.1.2                             not unreasonably restrain competition and, to the extent possible, promote and encourage robust competition, and

19.1.3                             not apply standards, policies, procedures or practices arbitrarily, unjustifiably, or inequitably; and

19.1.4                             not single out the Registrar for disparate treatment unless justified by substantial and reasonable cause’.

The auDa Constitution

38                  The principal purposes of auDA are set out in clause 3.1 of the Constitution.  They are:

‘a.       to be the administrator of, and the Australian self regulatory policy body for the .au ccTLD and its associated Second Level Domains;

b.                  to maintain and promote the operational stability and utility of the .au ccTLD;

c.                  to ensure a cost effective administration of the .au ccTLD and its sub-domains;

d.                  to develop and establish a policy framework for the development and administration of the .au ccTLD including:

i.                    rules governing the operations of second level domain registries;

ii.                  the creation of second level domains;

iii.                rules governing the accreditation of registrars and registry operators;

             (Amended by Special Resolution, 23 September 2002.)

iv.                rules governing the registration of names within second level domains and access to second level domain registries;

v.                  ensuring that registrars have equal access to second level registry services.

e.                  to manage the operation of critical technical functions including:

i.                    the primary and secondary .au name servers;

ii.                  zone files for second level domains; and

iii.                a searchable data base containing information on registrations within the .au ccTLD.

f.                   to liaise with national and international bodies on issues relating to the development and administration of domain name systems.

g.                  to establish appropriate complaints handling and dispute resolution processes to provide for conciliation or redress of grievances on matters associated with the administration of the .au ccTLD.’

39                  Clause 5 provides that the income and property of auDA must be applied solely in promoting the objects of auDA as set out in the Constitution and that it function as a non-profit entity.

40                  Mr O’Neill submits that the Constitution defines the scope and the purposes and activities of auDA, that it provides the context in which the Registrar Agreement should be interpreted.  If this were the case, auDA’s responsibilities include obligations to users and suppliers of services via the Internet who are based in Australia, whether or not those users are users of names in the .au domain.  Such a submission supports auDA’s contention that it is entitled to information from a Registrar that extends beyond the direct subject matter of .au domain name activity to other services extended via the Internet.  Indeed, Mr O’Neill agreed that the Constitution extended auDA’s interests to encompass gTLD activities in Australia.

41                  Mr Elliott, counsel for auDA, contends that, while the purposes in clause 3 relate directly to the administration of the .au ccTLD, they are not necessarily so limited. Mr Elliott draws attention to, for example, clause 3.1(f) in support of his contention.

42                  Mr Elliott put the matter this way: a party (the 20 Registrars in Australia) who, by reason of the Registrar Agreement, agrees to come under the “auDA regime”, has a nexus with auDA.  Within that regime, auDA has an overriding responsibility in relation to both the supply and demand sides of the Australian Internet Community (clause 3.2(b) of the Constitution), as defined in the Constitution.  The “Australian Internet Community” is defined in clause 1.2 to mean ‘those users and suppliers of services via the Internet who are based in Australia’.  That responsibility extends to the activities in Australia of the Registrars with regard to domain names generally.  That is so, notwithstanding the fact that there is nothing in the Registrar Agreement that expressly incorporates the Constitution, although there is acknowledgment in the recitals and in clause 18.5.3 of the Registrar Agreement that auDA has certain responsibilities, including responsibilities to the Australian Internet community.  Australian Internet community is not defined in the Registrar Agreement.    

43                  Mr Elliott submitted that, unless those duties and functions are inconsistent with the Registrar Agreement, the Registrar Agreement should be read subject to them.  In a reflection of Mr O’Neill’s submission, Mr Elliott submitted that, as the regime of the Constitution was in place prior to the entry by Capnet into the Registrar Agreement, the Constitution formed part of the ‘factual matrix’ at the time of entry into the Registrar Agreement.

44                  It is not disputed, indeed it seems to be agreed, that the Constitution was in existence at the time the Registrar Agreement was entered into.  Mr Elliott contends that it was known to both parties.  That submission was not contradicted and is supported by Mr O’Neill’s submissions as to construction.  Further, recital A of the Registrar Agreement refers to the delegation by ICANN to auDA on 25 October 2001.  That instrument of delegation, the Sponsorship Agreement, refers to the Constitution. 

45                  I note that the Registrar Accreditation Application Package for prospective registrars of .au domain names makes it clear that ‘[p]rospective registrars will need to familiarise themselves with the Code of Practice and auDA’s Published Policies’.  It does not refer specifically to the Constitution.

46                  Clause 7.5 of the Registrar Agreement provides that, in the event of any inconsistency between the Registrar Agreement and the ‘Published Policies and Code of Practice’, the documents are interpreted in the order of the following priority:  the Published Policies, the Code of Practice and the Registrar Agreement.  The broader role of auDA is referred to in the former documents which, in turn, refer to the Constitution.

47                  In the circumstances, I am of the opinion that the Constitution may be called in aid to the construction of the Registrar Agreement, not to contradict the language of that agreement but to assist in the interpretation of it where the language is ambiguous or susceptible of more than one meaning (Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352 per Mason J).  An example of such an aid would be in understanding the term “Australian Internet community” as it appears (undefined) in the Registrar Agreement.  However, for the purposes of construing the Registrar Agreement strictly, I will not import into the Registrar Agreement the definition contained in the Constitution.

The application form

48                  In its application dated 14 November 2001, Capnet responded to a number of questions in the application form.  In particular, in response to the question ‘What are your current business operations or business plan?’, Capnet referred to its ICANN accredited gTLD registrar division (‘TotalNIC’), to an Australian webhosting service and to its ccTLD registry for Heard and McDonald islands.

49                  In response to the question ‘What management, communication and information processing systems do you have (or propose to have) to handle your projected volume of registrations per month?’, Capnet responded:

‘Our current systems have proven effective for registrations in gTLD to the extent of approximately twice our anticipated Australian 2LD registration volumes.

Currently we operate telephone, fax and email based support services between 8am and midnight Monday to Friday from our Australian offices.  Our US gTLD office provides service outside these hours – we have not determined at this point if the US office will offer support services in relation to Australian 2LD registrations however we anticipate that this will be the case’. 

50                  In response to a question about systems or procedures to handle customer complaints, Capnet’s response referred to ‘the level of complaints we have experienced historically has been very low’ which must have referred, in context to, inter alia, its gTLD or non .au activities.

51                  The warranties in that application form, signed by Mr Sweeney as a director of Capnet, included a warranty that he had read and understood not only the Registrar Agreement but also the Domain Name Policy Rules, the .au Dispute Resolution Policy and ‘any other applicable Published Policies of auDA’.  No such polices were named or identified.  AuDA is also given permission to ‘contact third parties, investigate, request and obtain additional information and documentation, and otherwise verify the information contained in this application’.

The auDA Complaints Policy

52                  Capnet also tendered in evidence the auDA Complaints Policy document.  Mr O’Neill conceded that Capnet agreed to be bound by this policy.  That document makes reference to complaints-handling principles, including the principle that, under ‘Federal Government policy’, the Australian domain name industry is self regulatory and that auDA is an office of last resort with regard to making a complaint about a registrar.  Clause 3.1 of the auDA Complaints Policy limits auDA’s jurisdiction to handle complaints about registrars to matters ‘relating to the allocation and management of a domain name in the .au domain space’.  As pointed out in [17], it is not in dispute that auDA does not have jurisdiction to handle complaints about gTLD domain names.

53                  It is also not in dispute that, since about mid 2003, auDA has received, or become aware of a number of complaints in relation to Capnet’s alleged practice with respect to different matters in the gTLD domain name space, including allegations of refusal to transfer domain names to other registrars and the placing of onerous conditions on people to transfer their names to other registrars.  The truth or otherwise of those allegations is not in issue.

Correspondence between auDA and Capnet

54                  The evidence establishes that complaints about Capnet’s gTLD activities have been received by auDA or directed to auDA by other agencies, such as the Australian Competition & Consumer Commission (‘the ACCC’).

55                  On 6 June 2003 and 11 December 2003, auDA sent emails to Capnet in relation to complaints received by auDA in connection with gTLD matters.  No response was received.

56                  On 17 March 2004, auDA wrote to Mr Sweeney, concerning complaints received about alleged deficiencies in Capnet’s practice in respect of gTLD’s and an alleged failure to respond to those complaints.  The letter also refers to an alleged lack of response to the previous email requests by auDA for information and action in respect of the gTLD related complaints and in respect of Capnet’s contact details.  The letter also makes reference to and cites the words of clause 14.1.9 of the Registrar Agreement.  The letter concludes with a “formal requirement” on the part of auDA, to be complied with within 30 days as follows:

‘Pursuant to the Registrar Agreement I now formally require you, within 30 days hereof, to:-

1)         Provide auDA with full details of the methods/systems you use to deal with requests to transfer gTLD domain names away from TotalNIC;

2)         Provide us with up to date contact details and place those details on your web site; and

3)         Provide us with details of any impending claims, litigation, proceedings or material disputes against TotalNIC by any person or authority relating to its provision of Registrar Services in both .au and the gTLD space including arbitration and administrative or governmental investigation.’

57                  No response was received within the 30 day period.

58                  A reply, dated 20 April 2004, denies auDA’s jurisdiction over or relating to gTLD subject matter and asserts that such requests are neither legitimate nor reasonable.  A response is given with respect to .au name space activity and it is stated that Mr Sweeney is not aware of any complaints related to that activity.  Current contact details are provided.

59                  In a letter of 27 April 2004, auDA’s solicitors:

·                    reassert the application of clause 14.1.9  and the application of that clause to the right to seek all information relating to Capnet’s business, particularly when the operations relate to the domain name registration business, whether relating to gTLD space or within .au;

·                    refer also to clause 14.2.4, whereby Capnet agreed that it will not be involved in any activity which may directly or indirectly bring auDA into disrepute.  It is asserted that the alleged activity of Capnet would have that effect;

·                    assert that Events of Default have occurred under the terms of the Registrar Agreement, first,  in relation to the lack of provision of information and, secondly,  in relation to the fact that auDA considers that Capnet’s activities directly or indirectly bring auDA into disrepute and that this breach is not capable of remedy; 

·                    demand on behalf of auDA that Capnet immediately comply with its requests to provide the information requested in the letter dated 17 March 2004;

·                    state that, unless the information sought is provided by 4pm on 30 April 2004, auDA will take immediate steps to suspend Capnet’s auDA accreditation; and

·                    reserve auDA’s rights in respect of the Events of Default including those in relation to activities that auDA considers directly or indirectly bring it into disrepute.

60                  In its reply dated 28 April 2004, Capnet made it clear that it did not agree with auDA’s interpretation of clause 14.1.9.  Capnet also denied that auDA accreditation ‘carries the public perception of association with, endorsement by or approval of auDA.  All that accreditations says is that Capital Networks is an approved registrar able to effect registrations in .au’.  Capnet asserted that there has been no provision of details by auDA in respect of the allegations or of the alleged breaches, to enable Capnet properly to respond.

61                  The further reply by auDA’s solicitors reasserted auDA’s position and made it clear that  the breach on which auDA relied to suspend accreditation is ‘the continuing refusal by Capital Networks to provide the information sought by auDA pursuant to clause 14.1.9 of Capital Networks’ Registrar Agreement’, for which it intended to suspend accreditation.

auDA’s belief

62                  Mr Disspain, the Chief Executive Officer of auDA gives unchallenged evidence as to his belief as follows:

‘33.      Given that a number of people within Australia have made complaint to auDA in relation to the Applicant’s activities (including activities in the gTLD domain space), I believe that the activities of the Applicant leading to the complaints may either amount to a breach of the law (in breach of the Registrar Agreement), and/or bring auDA into disrepute.  Given that auDA’s obligations include obligations with respect to both the Australian and global internet community, and that the Applicant currently advertises its status as being auDA accredited, if its activities are allowed to run unchecked, those activities, in my view, clearly have the potential to bring auDA into disrepute.  It is also my view that, in light of this risk, the information that auDA requested the Applicant to provide was reasonable.

34.       With respect to my concerns that the relevant activities may be a breach of the law, I note that in the First Sweeney Affidavit, Mr Sweeney deposes (in paragraph 23) that the Applicant has received a Section 155 Notice from the Australian Competition and Consumer Commission which seeks information in relation to the same subject matter as the auDA correspondence.  I assume that the reference to this Notice is a reference to a Notice served under Section 155 of the Trade Practices Act 1974.  I note that Section 155 (1) of this Act provides that such a Notice can be served where the Commission, the Chairperson or the Deputy Chairperson has reason to believe that a party may be able to furnish information, produce documents or to give evidence relating to a matter that constitutes or may constitute, a contravention of the Act.  The first notice that auDA received of the Commission’s investigation was the reference to the Section 155 Notice in the First Sweeney Affidavit.  I am informed by Craig Ng of Maddocks, and believe, that this affidavit was served on Maddocks after 2.00 pm on Friday, 30 April 2004.  The applicant had not previously informed auDA that the ACCC was seeking information from it or disclose the fact of this investigation to auDA.  

35.       Based on the information available today as set out above, auDA’s present view is that the Applicant ought to be suspended of its Accreditation.  Further, given the refusal of the Applicant to provide the information requested I consider that, at the very least, for this reason alone an event of default has occurred.  If the Applicant rectifies this breach, and if auDA is satisfied that there are no other existing events of default, auDA would terminate the Applicant’s (proposed) suspension of its accreditation.’

QUESTIONS FOR DETERMINATION

63                  I have identified a number of questions for consideration.

Question 1(a):  Does the Registrar Agreement extend to any aspect of the commercial conduct of the Registrar or in respect of its domain name system businesses other than in the .au domain space?

64                  There is no dispute that auDA has rights to take certain actions with respect to the .au domain space.  Capnet submits that any action on the part of auDA is limited to that subject matter.

65                  The breach on which auDA relies is the failure on the part of Capnet to give the information sought in reliance on clause 14.1.9.  Mr Elliott submits that the right to seek information from the Registrar without restriction (excluding source documentation, which is not sought) is reasonable, giving as an example, conduct which may reflect on auDA’s reputation or the reputation of the domain name system.

66                  I agree with Capnet’s submission that the reference to ‘information in relation to the Registrar’ relates to the Registrar in respect of its functions in the .au domain space.  From my conclusion as to the words “Registrar” and “registrar” in [28], however, it follows that, in my view, clause 14.1.9 does apply to the provision of information about the operation of the “registrar’s business”, that is business not limited to operations in the .au domain space, as auDA may reasonably request.  The construction advanced by Capnet, that the information that can be sought under the second limb of clause 14.1.9 is limited to ‘the registrar’s business as a .au registrar’, really requires reading “registrar” as “Registrar”.  This is not only inconsistent with the use of the different words in the clause but also gives the second limb of clause 14.1.9 no work to do.  I agree with Mr Elliott’s submission that the conclusion is also supported by the contrasting language in clause 14.1.10.  Clause 14.1.10 imposes a positive obligation on the applicant (ie without any need for a request) to provide notice of any material disputes ‘relating directly or indirectly to its provision of Registrar Services’.  Unlike “registrar’s business”, Registrar Services is a defined term and is confined to services provided pursuant to the Registrar Agreement.  It is submitted that the only sensible meaning that may be attributed to “registrar’s business” to give it a meaning other than Registrar Services, is a broader meaning.  I agree.

67                  Capnet submits that clause 14.1.9 of the Registrar Agreement should be read down so that, even if auDA were otherwise permitted to investigate complaints relating to gTLD domain names, it would have to give way to the limitation in the Complaints Policy, which limits its jurisdiction to handle complaints.  I agree with the submission by auDA that an inability actually to handle and determine complaints does not restrict the relationship between auDA and the Registrar and, therefore, does not preclude auDA from seeking the information requested.

68                  The next question is whether the request made by auDA was reasonable.    There may be subject matter that would be unreasonable to request, such as subject matter that has no connection with the internet activities of the registrar. On the other hand, there may be good reason why particular information is sought in respect of activities that, while not directly connected with .au domain space activity, have an indirect connection with that activity. 

69                  To the extent that the question of reasonableness concerns the scope of the request and the fact that it extends beyond information relating solely to Capnet’s .au activity, additional matters of relevance are:

·                    Clause 6.1.2 of the Registrar Agreement provides that the Capnet may use the auDA logo with respect to the .au domain.  Clause 6.2.1 provides that Capnet may not use auDA’s name or logo other than in accordance with clause 6.1.  Capnet does use the auDA logo and states on its web page ‘Capital Networks Pty Ltd is an AUDA accredited registrar’.  That web page provides the prospective registrant with the choice of registering a new .au domain name and/or registering a .com, .net or .org domain name (not in .au).  That is, the gTLD domain names are offered by Capnet on the same website in which Capnet offers .au domain names.  In my opinion, that has at least two consequences.  First, it is reasonable for auDA to inquire into gTLD activities insofar as they may reflect on auDA.  Secondly, it is reasonable for auDA to seek information as to the extent to which its accreditation is being used by Capnet with respect to non .au domain activities.

·                    Clause 14.2.4 of the Registrar Agreement provides that the Registrar must not ‘be involved in any activity which may directly or indirectly bring … auDA into disrepute’ (emphasis added).

·                    In its application form to auDA, Capnet linked its auDA and gTLD activities. Those linked activities included registrations and complaints. 

·                    The Registrar is obliged, under clause 12.1 of the Registrar Agreement, to ensure that .au domain name transfers can be easily effected.  If complaints are made in relation to .au domain name transfers, auDA would, as Mr Sweeney accepted, be entitled to inquire into them. Many of the complaints received by auDA related to difficulties in effecting gTLD transfers through Capnet. 

·                    The allegations made in the complaints received by auDA were, as accepted by Mr Sweeney in cross-examination, very serious.

70                  In those circumstances, the information sought was reasonable.  Indeed, it could be said to be reasonably sought, in this case, in respect of the first limb of clause 14.1.9, ‘in relation to the Registrar’.  It also comes within the second limb of clause 14.1.9.  I do not accept Capnet’s submissions that auDA was not entitled to the information sought nor that it was information in respect of which no action could be taken under the Registrar Agreement and thereby unreasonable.  It was information that Capnet made relevant in its application to be a Registrar and also, in view of the complaints received by auDA and the fact of and use of Capnet’s auDA accreditation, information that may have been relevant to auDA’s  reputation and the use of the auDA logo.   It is another question altogether whether auDA has a right to regulate Capnet’s activities in the gTLD domain space where auDA accreditation and logo are not used

71                  In determining the reasonableness of auDA’s request, not only the whole of the Registrar Agreement but also the Constitution and the Sponsorship Agreement may be relevant.  In In re A Solicitor [1945] 1 KB 368 at 371 Scott LJ  said:

‘The word “reasonable” has in law the  prima facie meaning of reasonable in regard to those existing circumstances of which the actor, called on to act reasonably, knows or ought to know.’

AuDA clearly knew the existence of and content of the Constitution, the Sponsorship Agreement, the GAC Principles and the terms of the Government’s endorsement.

72                  Both parties rely upon the Constitution and the Sponsorship Agreement to assess the appropriateness and, thereby reasonableness of auDA’s action.  In particular:

·                    the recitals in the Registrar Agreement which refer, inter alia, to the fact that auDA is the industry self-regulatory body;

·                    the recitals in the Registrar Agreement also refer to the fact that auDA has responsibilities to the Australian Internet community (undefined in that agreement);

·                    clause 1.2 of the Constitution defines “Australian Internet Community” in terms of users and suppliers of services via the Internet who are based in Australia ;

·                    clause 3.2 of the Constitution refers to auDA’s obligations to the Australian Internet Community; and

·                    clause 3.2 of the Constitution also provides that auDA will:

o                     ensure the continued operational stability of the domain name system in Australia;

o                    promote competition in the provision of domain name services; and

o                    adopt procedures with respect to parties having an interest in the use of the domain name system in Australia.

73                  Mr Elliott submits that Capnet’s conduct in relation to both gTLDs and its general business practices are of relevance to the Australian Internet community and, similarly, to its performance under the Registrar Agreement. 

74                  To the extent that the question of reasonableness concerns the actions of auDA, I have no hesitation in concluding that, in the light of the Constitution, the Sponsorship Agreement and the GAC Principles, as well as its role as the recipient of complaints, auDA’s actions in requesting the information in dispute were reasonable.

75                   I do not accept Capnet’s submissions to the effect that auDA was only entitled to information that was strictly about .au domain name activities or that auDA was not entitled to any information about Capnet’s gTLD activities or its business.  AuDA’s submissions are based on its right to seek the information in its role as the regulatory body responsible for the administration of the .au ccTLD.  In seeking the information, it does not presently assert a right directly to control Capnet’s gTLD activities.  While auDA did make reference to clause 14.2.4 in the correspondence, it is not a breach of that clause that is presently asserted or relied upon. Even without reference to the Constitution or any other document, I am of the view that auDA was entitled to the information sought by reason of the Registrar Agreement alone. 

76                  AuDA relied on various provisions of its Constitution in interpreting the Registrar Agreement.  Capnet also relied on the Constitution, in a different way, to support the submission that auDA’s actions are limited by that document.  If I were to accept submissions of Counsel as to the applicability of the Constitution in the construction of the Registrar Agreement, I would also conclude that auDA was thereby entitled to the information sought.

77                  Accordingly, I answer question 1(a): yes, clause 14.1.9 entitles auDA to the information requested in the correspondence.

Question 1(b):  Was auDA’s conduct misleading or deceptive

78                  The statement of claim pleads that, in making the demands contained in the correspondence, auDA engaged in conduct that was misleading and deceptive in contravention of the TPA.  Capnet asserts that the representations were made in trade and commerce.  AuDA submits that this is not the case and that the TPA has no application.  The conduct the subject of complaint appears to be:

• auDA has sought information from the applicant pursuant to clause 14.1.9 of the Registrar Agreement;
• auDA has complained about the failure of the applicant to respond to the request for information; and
• in light of the failure of the applicant to provide information as requested, auDA has threatened to suspend the applicant’s auDA accreditation.

79                  As I have found that the demands, by reason of the Registrar Agreement, were demands that auDA was entitled to make, auDA’s conduct in that regard was not misleading or deceptive.  Accordingly there has been no contravention of the TPA in this regard.

80                  The statement of claim pleads that, by threatening to suspend Capnet’s accreditation, auDA engaged in conduct that was misleading and deceptive.  In its written submissions, Capnet identified the way in which it alleges the conduct to be misleading as conduct that ‘represented to the applicant that the applicant was under a duty to comply with the wishes of the respondent’.  To the extent that the conduct is alleged to amount to a representation that auDA was entitled to suspend Capnet’s accreditation under the Registrar Agreement, I have found that it was so entitled.  The conduct in that regard was not misleading or deceptive and there was no contravention of the TPA in that regard.

81                  To the extent that the conduct was alleged in the statement of claim to be misleading and deceptive because ‘the request for information was not genuine and was not in good faith as auDA had already decided to suspend Capnet’s accreditation’, there was no evidence to support that allegation.  The applicant chose not to cross-examine Mr Disspain.  I am not prepared to draw such an inference from the correspondence.  As I read the correspondence, it does not support such an allegation and no submissions were put to me that it does.

82                  In any event, auDA’s position was, at the very least, arguable.  That Mr Disspain considered that auDA was entitled to the information is not in dispute.  That opinion had a basis in the Constitution, the Sponsorship Agreement and the Registrar Agreement.  Accordingly, the statement that auDA considered that there had been a breach of the Registrar Agreement is not misleading (Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82 at 88).

83                  Accordingly, I answer question 1(b): no.

Question 2:  Do the acts of the applicant amount to a breach of the Registrar Agreement?

84                  The information was requested pursuant to clause 14.1.9.  It was not provided.  Capnet was given written notice specifying the breach and requiring rectification.  The breach was not rectified within 30 days after receipt of the written notice.  An Event of Default within clause 23.1 has occurred.

85                  In any event, Mr O’Neill agreed that, if auDA were entitled to the information requested, the failure to comply with the request constituted a breach of the Registrar Agreement.

86                  I answer question 2: yes

Question 3:  Is auDA entitled to suspend or terminate Capnet’s accreditation by reason of clause 4.2 of the Registrar Agreement?

87                  Under clause 4.2, auDA is entitled to suspend or terminate the Registrar’s accreditation if auDA considers that an Event of Default has occurred.  Mr Disspain’s evidence establishes that auDA considers that an Event of Default has occurred.  There is no suggestion that such belief or consideration is other than genuine or, in the words of clause 19.1.1, ‘in good faith’.  Where the Registrar Agreement provided that events occur if auDA “considers” that something has occurred, the question is whether it is established that such is the fact (The Australian Heritage Commission v Mount Isa Mines Limited (1997) 187 CLR 297 at 306, 308; Aquaclear Technology Pty Ltd v Cameron and Brister & Co Pty Ltd [2001] SASC 186).  It is not a question of establishing whether the underlying fact has been established.

88                  I answer question 3: yes.

Question 4:  Was the conduct of auDA Unconscionable

89                  Mr O’Neill submitted that the fundamental issue as to the allegation of unconscionability was whether auDA had authority to seek to regulate Capnet’s activities in areas other than the .au domain name space.

90                  There was no cross-examination of Mr Disspain or of auDA’s solicitor.  There was no evidence that could be said to support any allegation of bad faith on the part of auDA.  Mr O’Neill’s submission is that, if the conduct was beyond power and misleading, it was ‘in any way unfair in the context of being unconscionable’.  There was no development by Mr O’Neill of the claim of unconscionability.  The conduct complained of cannot properly be characterised as an allegation by auDA that it had authority to regulate Capnet’s activities    outside the .au domain name space.  The conduct extended to the request for information.

91                  I answer question 4: no.  

Question 5:  Does the Franchising Code of Conduct apply?

(a)        Is the Registrar Agreement a franchise agreement under the Code?

92                  Capnet submits that the Registrar Agreement is a franchise agreement within the meaning of regulation 4 of the Code.  Franchise agreement is defined in regulation 4 as follows:

‘(1)      A “franchise agreement” is an agreement:

            (a)        that takes the form, in whole or part, of any of the following:

                        (i)         a written agreement;

                        (ii)        an oral agreement;

                        (iii)       an implied agreement; and

(b)       in which a person (“the franchisor”) grants to another person (“the franchisee”) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor; and

(c)        under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol:

(i)        owned, used or licensed by the franchisor or an associate of the franchisor; or

(ii)       specified by the franchisor or an associate or the franchisor; and

(d)       under which, before starting business or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example:

                        (i)         an initial capital investment fee; or

                        (ii)        a payment for goods or services; or

(iii)      a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee; or

                        (iv)       a training fee or training school fee;

                                    but excluding:

(v)       payment for goods and services at or below their usual wholesale price; or

(vi)      repayment by the franchisee of a loan from the franchisor; or

(vii)     payment of the usual wholesale price for goods taken on consignment; or

(viii)    payment of market value for purchase or lease of real property, fixtures, equipment or supplies needed to start business or to continue business under the franchise agreement.’

93                  Broadly speaking, Capnet relies upon the following:

(1)        The Registrar Agreement is in writing.

(2)        Customers cannot obtain .au names except via the protocols and structures sanctioned by auDA.

(3)        Capnet is required to use the commercial symbols .au and the auDA logo.

(4)        The agreement requires Capnet to pay money to auDA.

94                  AuDA points out that each of the four distinct elements of the definition of “franchise agreement” must be satisfied.  A complete answer, it is submitted, is that Capnet has not pleaded nor sought to prove that sub regulation 4(1)(b), an essential element of the definition, is established.

95                  In response, Capnet relies upon the prescriptive nature of clauses affecting the Registrar’s business in the Registrar Agreement, which was ‘non-negotiable’.  Such clauses, it is submitted, illustrate the extent of the ‘control’ which auDA exercises over the 2LD .au business of Registrars.  This is said to constitute the ‘system or marketing plan substantially determined, controlled or suggested by’ auDA.  Nothing further was put as to how this amounts to the requisite “system or marketing plan” and there was no evidence from Capnet as to the working of the “system” or how the business was “under” such a system.

Regulation 4(1)(a)

96                  It is not in dispute that this part of the definition is met as there is a written agreement between the parties.

Regulation 4(1)(b)

97                  This regulation has a number of components:

(a)        A person (referred to as a franchisor) grants to another person (referred to as a franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia;

(b)        The right to carry on business is granted under a system or marketing plan;

(c)        The system or marketing plan must be determined, controlled or suggested by the franchisor.

            It is accepted that auDA has granted to the applicant the right to carry on business in accordance with paragraph 4(a).  It is also accepted that, if the Registrar Agreement were a system or marketing plan under which the right to carry on business is granted, it was determined or at least suggested by auDA.

98                  As to paragraph (b), there are essentially two requirements that need to be satisfied.  First, there must be a “system or marketing plan”.  Secondly, the business to be carried on pursuant to the right must be carried on “under” the “system or marketing plan”.  In other words, the mere existence of a “system or marketing plan” does not satisfy the criteria; there must also be a superimposition of that “system or marketing plan” on the carrying on of the business.

99                  A “system or marketing plan” is not defined in the Code.

100               AuDA has referred to the definition of “system” in the Macquarie Dictionary, the explanatory statement to the Trade Practices (Industry Codes – Franchising) Regulations 1998, the regulations introducing the Code and The Legal Advisers Guide to Franchising (Peter Tilman, CCH Australia Limited, Sydney, 1999).  The Legal Advisers Guide to Franchising, in turn, refers to the use of “system” and “marketing plan” in United States of America (‘the US’) legislation dealing with franchising.  That legislation does not precisely replicate the terms of the Code.

101               Naturally, an element of caution needs to exist in looking at the US authorities, as the wording of the US legislation does not precisely replicate the terms of the Code, although there are marked similarities.  In American Jurisprudence, 2nd ed, vol 62B, Lawyers Cooperative Publishing, Rochester, New York, 1990 (‘American Jurisprudence’) in the chapter on ‘Private Franchise Contracts’, it was stated (at 37):

‘The various state franchise laws which have thusfar been adopted [in the United States] appear to be in general agreement that, in order to qualify as a franchise, three conditions must be met:

(1)       A franchisor is engaged in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by the franchisor; and

(2)       The operation of the franchisee’s business pursuant to such plan or system is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate; and

(3)       The franchisee is required to pay, directly or indirectly, a franchise fee.’

 (emphasis added)

102                Some matters that have been considered as indicating a marketing plan or system are set out in American Jurisprudence (at 38-39):

‘Where a manufacturer was obliged to hold management conferences, sales meetings, and training seminars and to provide promotional assistance, the court concluded that the defendant prescribed the material elements of a marketing plan for the sale of its products.  There is substantial evidence of the existence of a marketing plan or system when it is shown that the alleged franchisor provides the following: (1) a detailed compensation and bonus structure for distributors selling the products; (2) a centralized bookkeeping and record keeping computer operation for distributors; (3) a prescribed scheme through which a person can be become [sic] a distributor, direct distributor, district director, regional director, or zone director; (4) a reservation by the alleged franchisor of the right to screen and approve all promotional materials used by distributors; (5) a prohibition on repackaging of products by distributors; (6) assistance by the alleged franchisor to its distributors in conducting “opportunity meetings”; (7) suggested retail price of products; and (8) a comprehensive advertising and promotional program by the alleged franchisor.’

Clearly it is not necessary that each of these factors be shown to be present but they are helpful indicators of the kinds of factors that have been found relevant.

103               For example, in the Indiana Franchise Disclosure Law, “franchise” is defined.  The definition of “franchise” included:

 ‘the contract by which … the franchisee is granted the right to engage in the business of dispensing goods or services, under a marketing plan or system prescribed in substantial part by the franchisor.’

104               In holding that the distribution agreement was a franchise for the purpose of the Indiana Franchise Disclosure Law, the Court of Appeals of Indiana held in Master Abrasives Corporation v Williams (1984) 469 NE 2d 1196 (‘Master Abrasives’) that, notwithstanding that there was no mention of the marketing plan in the agreement itself, there was substantial evidence from which a court could infer that such a plan existed.  In holding that such a plan did exist the Court considered the following characteristics of the agreement relevant:

• the agreement divided the state into marketing areas;
• the agreement authorised the establishment of sales quotas;
• the franchisor had approval rights of any sales personnel the franchisee sought to employ;
• a mandatory sales training regime was imposed;
• quotation sheets were provided to the franchise employees;
• prescribed invoices and other sales forms were also provided by the franchisor;
• the franchisee was required to elicit information from its customers and provide that information to the franchisor; and
• the franchisee could not sell any of the franchisor’s products without first consulting the franchisor.

105               In Grand Light & Supply Co, Inc v Honeywell, Inc (1985) 771 F 2d 672, the United States Court of Appeals for the Second Circuit had to consider whether or not an agreement came under the Connecticut Franchise Act.  The relevant definition was as follows:

‘Franchise means an oral or written agreement or arrangement in which …  a franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor.’

106               The case concerned termination of a distribution agreement by a manufacturer, with the distributor asserting that termination was unlawful because it breached the Connecticut Franchise Act.  In overturning the decision of United States District Court for the District of Connecticut, the following was stated in the judgment of the Court of Appeals:

‘Observing that the plain language of the Act included no exclusive dealing requirement, the district court concluded that the instant arrangement constituted a franchise even though [the manufacturer’s] products represented less than three percent of [the distributor’s] sales …  We do not agree with this conclusion.  While we acknowledge that one literal interpretation supports the district court’s position, we hold that the plaintiff is not a franchisee within the contemplation of the Act … In view of the purpose of the statute, it seems wrong to suggest that a distribution relationship involving only a minute percentage of business creates a franchise under Connecticut law.’

107               A further decision of the United States Court of Appeals (this time the Ninth Circuit) dealt with the meaning of “franchise” under California Franchise Regulation Act.  In Boat & Motor Mart v Sea Ray Boats, Inc (1987) 825 F 2d 1285, the Court was concerned with the following definition:

‘A franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor’.

During the course of the judgment reference is made to the ‘Guidelines for Determining Whether an Agreement Constitutes a ‘Franchise’ as issued by the California Department of Corporations.  Those guidelines indicated that a franchisor ‘“ostensibly” assumed responsibility for outlets by causing them to be operated “with the appearance of some centralised management” and with “uniform standards as regards the quality and price of goods sold, services rendered and other material instances of the operation”’.

108               The agreement in question was held to be a “franchise agreement” because there was an obligation ‘to advertise intensively’ to conduct a variety of promotions and to carry Sea Ray’s array of accessory sales devices.  In addition Boat & Motor Mart operated within the context of Sea Ray’s instructions and received its basic sales and promotions from Sea Ray’s.

109               In Wright-Moore Corporation v Ricoh Corporation (1990) 908 F 2d 128, the United States Court of Appeals for the Seventh Circuit specifically adopted the approach taken in Master Abrasives in observing that there was a quota for sales, a territory was defined and that franchise personnel were required to go through mandatory training before sales could be made, equated to a “marketing plan” for purposes of establishing a “franchise”.

110               Finally, in Chem-Tek, Inc v General Motors Corporation (1993) 816 F Supp 123, the Connecticut legislation was again the subject of judicial consideration.  In relation to a “marketing plan”, the following was stated:

‘The Act focuses on the amount of control exercised in the conduct of the franchisee’s business as a significant factor in whether a franchise was created.  M & S Audo, Inc v Bogen Communications, Inc (1992) WL 231459 (Conn.Super.Ct.)  Thus, a franchisor must be able to prescribe a substantial part of a marketing plan for the franchisee … Several factors relevant to this determination include: control over hours and days of operation, advertising, financial support, auditing of books, inspection of premises, control over lighting, employee uniform, prices, trading stamps, hiring, sales quotas and management training … There is no such precise formula as to how many of such factors must exist, in the aggregate, before the control exercised by a manufacturer rises to a marketing plan or system prescribed in substantial part by a franchisor.’

111               In Australian Competition & Consumer Commission v 4WD Systems Pty Ltd (2003) 200 ALR 491, Selway J expressed the view that the word “franchise” in the Code bears its normal meaning.  His Honour said (at [56]) :  ‘the word ‘franchise’ in this context simply means the right, usually exclusive, of a retailer or distributor to sell the products of another, usually a manufacturer’.  Muir J in Subway Systems Australia Pty Ltd v Thorpe  [2000] QSC 099 held that a “franchise” for the purpose of the Code must, inter alia, arise under a “franchise agreement”.  In my view, while it is the case that the definition may apply to arrangements not previously considered as “franchise agreements”, the facts of each case must be considered on the basis of the evidence to ascertain, in particular, whether Regulation 4(1)(b) applies.

112               Capnet’s submissions consisted of a list of the clauses in the Registrar Agreement upon which it placed emphasis.  I understood the submission to be that those clauses, of themselves, considered individually and cumulatively, led to the conclusion of the existence of the requisite “system” or “marketing plan”, manifested in the Registrar Agreement itself.  Mr O’Neill submitted that the Registrar Agreement evidenced the requisite “system”,  that was substantially determined, controlled or suggested by auDA.  It is fair to say that he relied upon “system” rather than “marketing plan”.

113               Mr Elliott responded in detail with respect to each such clause.  His response highlighted the absence of evidence and the lack of an established nexus between the obligations of the Registrar as set out in the Registrar Agreement and the concepts in regulation 4(1)(b), such as the ‘business of offering, supplying or distributing goods or services in Australia’ and a ‘system or marketing plan’ or the manner in which the applicant is to conduct its business.  Accepting that certain requirements are imposed on the Registrar, including the provision of information to Registrants and the Registry, Mr Elliott submits that the requirements do not amount to a ‘system or marketing plan’, let alone a ‘system or marketing plan’ in relation to ‘the offering, supply or distribution of goods or services’.   At most, he contends, they are a series of ‘singular requirement[s]’.  The submission is that the ‘mere fact’ that auDA seeks to maintain some control in relation to certain regulatory matters does not mean that a ‘system or marketing plan’ is in existence.  Such a broad application of the Code, which would encompass any licence agreement could not, Mr Elliott submits, have been intended.

114               Mr Elliott pointed to the absence in the Registrar Agreement of the kinds of provisions necessary to provide the requisite system or marketing plan.   In that regard, he points to the factors considered in the US decisions and also to the matters referred to in The Legal Advisers Guide to Franchising, in particular:

‘For present purposes, a marketing plan may be said to include the plan or system that specifies one or more material aspects for conducting the business, namely:

·                specification as to price for goods or services;

·                special pricing or discount plans;

·                sales or display equipment or merchandising devices;

·                the type of plant or equipment which the franchisee must use to perform the services;

·                prescribed sales techniques;

·                promotional or advertising materials or co-operative advertising;

·                guidance in respect of the operation or management of the franchise;

·                technical or financial guidelines; or

·                a training programme for franchisees and their staff’

115               Mr Elliott also identifies other matters that are not dealt with in the Registrar Agreement which might, he submits, be thought to form part of a system or marketing plan:

·                    The means by which the applicant actually markets its goods or services.

·                    The management structures and systems of the applicant.

·                    The accounting and bookkeeping structures and systems of the applicant.

·                    The wearing of uniforms.

·                    The use of particular stationery.

·                    The requirement of signage, displays or merchandising in a particular manner.

·                    Controls on the trading name of the applicant.

·                    The creation of territories within Australia for a Registrar to trade.

·                    The trading hours in which the applicant may operate.

·                    Restrictions on the ability of the Registrar to compete with other Registrars.

·                    Restrictions on the ability of the applicant to sell products which compete with .au domain names.

·                    The imposition of meetings or seminars that the applicant is required to attend.

·                    Training of staff and management.

·                    Reporting systems in relation to profit or turnover.

·                    The approval of staff of the applicant.

·                    Specific sales quotas.

·                    The ability to audit the books of the applicant.

·                    The absence of the restrictions on advertising by the applicant.

116               It is not suggested by Mr Elliott that a specific or definitive list of criteria can be specified for the purposes of regulation 4(1)(b).  However, the absence of such provisions and the absence of evidence from Capnet make it difficult to conclude that Capnet has established the application of that regulation.  Further, the regulation requires that the franchisor grant to the franchisee the right to carry on its business “under” a system or marketing plan. 

117               Mr Elliott submits that, for the regulation to operate, the suggested system or marketing plan must be a system or marketing plan which the franchisor intended the business to be conducted under.  If it is simply a system or business plan in relation to ‘a minute or insubstantial part of the business’ then, he contends, the requirement is not met.  Mr Elliott effectively concedes that specific requirements may have been imposed in relation to some minor aspects of the Registrar’s business but that does not amount to a system “under”which the business is carried on.

118               I accept the force of Mr Elliott’s submissions and I agree with them.  In particular, I note the absence of evidence that would enable the conclusion that the business of the Registrar or Capnetis carried on under a system substantially determined, controlled or suggested by auDA.

119               In my opinion, Capnet has failed to establish the application of regulation 4(1)(b).  As the requirements are conjunctive, all the elements must be present.  However, for completeness I will consider the application of regulation 4(1)(c) and regulation 4(1)(d).

Regulation 4(1)(c)

120               There is evidence that Capnet uses the auDA logo on its website.  There is little evidence of the extent to which Capnet’s .au business is operated with or without the auDA logo.  Indeed, there is little evidence of the operation of that business at all.  Capnet asserts, in its letter of 28 April 2004 and in the evidence of Mr Sweeney, that being auDA accredited does not carry with it the public perception of ‘association with endorsement by or approval of auDA’.  All that accreditation says is that Capnet is an approved registrar able to effect registrations in .au.

121               Clause 6.1 of the Registrar Agreement grants to Capnet a non-exclusive, worldwide, royalty-free licence to state that it is accredited by auDA as a registrar for the designated 2LD and to use the auDA logo.

122               Clause 11.4.2 of the Registrar Agreement provides that the Registrar must ensure that certain information is publicly available and, if that is through the Registrar’s website, it must contain the auDA logo.  Capnet’s website uses the auDA logo.

123               Capnet submits that there is no evidence to suggest that use of the logo was optional.  In my view, the state of the evidence is such that it is insufficient to establish or conclude that the operation of Capnet’s .au business will be or is ‘substantially or materially associated’ with an auDA ‘trade mark, advertising or a commercial symbol’.

124               On the evidence, I am not prepared to find that sub regulation 4(1)(c) is satisfied.

Regulation 4(1)(d)

125               Capnet pays certain fees to auDA, including an annual licence fee, and agreed to make such payments in the Registrar Agreement.  AuDA accepts that the fees imposed under the Registrar Agreement meet the requirements of Regulation 4(1)(d).

Conclusion

126               The requirements each of Regulation 4(1)(a), (b), (c) and (d) must be met.  Capnet has not established the application of Regulation 4(1)(b) or 4(1)(c).  It follows that I am not satisfied that the Registrar Agreement is a “franchise agreement” within the meaning of the Code.

(b)        Does suspension or termination of accreditation equate to termination of the Registrar Agreement for the purposes of regulation 21 of the Code?

127               Even if the Code applied, Capnet would need to establish a contravention of regulation 21.  While Capnet submitted that auDA had ‘probably failed to comply with most of the requirements of the Code’, the only requirement pressed as a contravention by auDA was regulation 21.

128               Section 51AD of the TPA provides:

‘A corporation must not, in trade or commerce, contravene an applicable industry code.’

129               Regulation 21 of the Code provides:

‘(1)      This [regulation] applies if:

(a)        a franchisee breaches a franchise agreement; and

(b)        the franchisor proposes to terminate the franchise agreement; and

(c)        clause 23 does not apply.

(2)        The franchisor must:

(a)       give to the franchisee reasonable notice that the franchisor proposes to terminate the franchise agreement because of the breach; and

(b)       tell the franchisee what the franchisor requires to be done to remedy the breach; and

(c)       allow the franchisee a reasonable time to remedy the breach.

(3)        For paragraph (2) (c), the franchisor does not have to allow more than 30 days.

(4)        If the breach is remedied in accordance with paragraphs (2) (b) and (c), the franchisor cannot terminate the franchise agreement because of that breach.

(5)        Part 4 (resolving disputes) applies in relation to a dispute arising from termination under this clause.’

130               It is apparent that regulation 21 refers to termination of the “franchise agreement”, here alleged to be the Registrar Agreement.

131               Regulation 21 of the Code provides for the steps that must be taken by a franchisor if a franchisee breaches a franchise agreement and if the franchisor proposes to terminate the franchise agreement.  It is not in dispute that those steps have not been taken by auDA.

132               It is clear from clause 4.2 of the Registrar Agreement that if auDA considers that an Event of Default has occurred, auDA may suspend or terminate accreditation.

133               Clause 23.2 provides for the actions that auDA may take, in the alternative or cumulatively, if an Event of Default has occurred.  One of these actions is to declare that the obligations of the non-defaulting party (auDA) under the Registrar Agreement cease, another is to terminate the Registrar Agreement.

134               Accordingly, the Registrar Agreement clearly provides for different consequences of an Event of Default. Provision is made for a continuation of some rights and obligations or, in the alternative, for termination of the Registrar Agreement, where all rights and obligations cease. Accreditation is but one of the rights and obligations set out in the Registrar Agreement. When the accreditation is suspended, the Registrar cannot register new domain names. It can, however, continue to provide administrative services in respect of existing domain names.  If there is a breach by one party and there is a concurrent and dependent obligation on the non-defaulting party, that non-defaulting party is relieved of the obligation to perform (Foran v Wight (1989) 168 CLR 385).  These consequences are not the same as termination.

135               AuDA has not proposed to terminate the Registrar Agreement but to suspend Capnet’s accreditation.  For the reasons I have given above, I do not agree that suspension amounts to termination of the Registrar Agreement.  They are separately provided for in the Registrar Agreement.  The right to suspend is enlivened in different circumstances to those that enliven the right to terminate and the consequences are different.  One cannot look to the Registrar Agreement to determine the correct meaning of the term “terminate” in the Code.  Nonetheless, there is a distinction made between suspension and termination in the Registrar Agreement which can be said to reflect the contrast in the meaning of these two terms.

136               Capnet submits that, for the purposes of the Code, suspension equates to termination.  Mr Elliott submits that, although “terminate” and “termination” are not expressly defined in the Code, the terms are used in various places throughout the Code, which assists in determining its meaning in regulation 21.  As was stated by Mason J in Registrar of Titles (WA) v Franzon (1975) 132 CLR 611:

‘It is a sound rule of construction to give the same meaning to the same words appearing in different parts of a statute unless there is reason to do otherwise.’

137               In regulation 13 the word “terminate” is used in the context of a cooling off period.  It is clear from regulation 13(3) that “terminate” is used in a context of finality and does not appear to incorporate conduct akin to suspension.  Although the use of the word “termination” in regulations 22 and 23 does not seem to take the matter any further one way or the other, the use of the word “termination” in regulation 30A is also consistent with the meaning of “termination” not incorporating suspension.  For completeness, reference is also made to clauses 6.4(c), (d) and (g) and 17(e), (f), (g) and (h) of Annexure 1 to the Code.  In particular, in relation to clause 6.4(g), Mr Elliott submits that it would be inconsistent with “terminate” incorporating “suspend” to contemplate the business being purchased back by the franchisor.

138               Further, the meaning of the word “terminate” does not naturally or ordinarily incorporate “suspend”.  The word terminate is defined in the Macquarie Dictionary (3^rd edition) as follows:

‘terminate …1. bring to an end; put an end to.  2. to occur at or from the conclusion of.  3. to bound or limit spatially; form or be situated at the extremity of …  4. to end, conclude, or cease.  5. (of a train, bus, etc.) to complete a scheduled journey at a certain place …  6. to issue or result in.’

139               Suspend is relatively defined in the Macquarie Dictionary (3^rd edition) as:

‘suspend …5. to defer or postpone, as sentence on a convicted person.  6. to cause to cease, or bring to a stop or stay, usually for a time: to suspend payment.  7. to cause to cease for a time from operation or effect, as a law, rule, privilege, or the like  8. to debar, usually for a time, from the exercise of an office or function or the enjoyment of a privilege: a student may be suspended for a breach of discipline.   9. to put or hold in a state of suspense …  10. to come to a stop, usually temporarily; cease from operation for a time.’  

140               In Gardner Mountain and D’Ambrumenil Ltd v Inland Revenue Commissioner [1947] 1 All ER 650 at 661 Lord Porter stated:

‘To my mind “termination of the agency” or “termination of the agreement” mean the same thing, viz., the cessation of all the mutual obligations of either party forthwith.’

141               If the accreditation of the applicant is merely suspended, the Registrar Agreement must remain on foot.  It is clearly quite inconsistent with the parties ceasing all mutual obligations.

142               Accordingly, even if the Registrar Agreement were a “franchise agreement” within the meaning of the Code and auDA’s actions were in trade and commerce, Capnet has not established a contravention of regulation 21 or, as a consequence, of s 51AD of the TPA.

143               I answer question 6(b): no.

Question 6:  Is the conduct of the respondent in trade and commerce?

144               This is of relevance to the question of the application of the TPA.  I have dealt with that above. 

145               It is also put by auDA that, as its conduct was not in trade and commerce and the TPA has no application for that reason, the Court does not have jurisdiction to hear the matter.  AuDA submits that each act the subject of complaint is conduct of auDA taken in performance of its regulatory and administrative functions and not in trade or commerce.  This is a matter that I do not need to decide, as I have found that auDa’s conduct is not misleading or deceptive.

146               AuDA also submits that the claims made under the TPA, ‘are colourable and have been included for the purpose of fabricating a jurisdiction that would not otherwise exist’.  That submission was also made to Gyles J at the interlocutory hearing.  His Honour declined to accept the submission.  Mr Elliott was unable to point to any particular evidence or basis for this submission, other than the assertion that the actions of the respondent are not in trade and commerce.  I, too, reject the submission.  Capnet’s TPA claim was not unarguable and nothing has been put even to suggest that the claim was fabricated or other than bona fide.  The Court is not deprived of jurisdiction to hear and determine the question of the application of the TPA.

Conclusion

147               It was conceded by Mr O’Neill that, if there were a breach of the Registrar Agreement and the Code did not apply, then auDA was entitled to suspend Capnet’s accreditation and there was no contravention of the TPA. 

148               I have come to the conclusion that, pursuant to the Registrar Agreement, auDA is entitled to suspend Capnet’s accreditation. The Code does not apply. Accordingly, the application should be dismissed.

149               Costs before Gyles J were reserved.  I will hear the parties on the appropriate orders as to costs.

Associate:    

Dated:              24 June 2004