Franchising is a way of doing business and a form of licensing, where a franchisor licences its intellectual property to a franchisee. The relationship involves a franchisor granting rights to a franchisee, to market and distribute their goods and services under the franchisor’s brands, and using the franchisor’s systems.
This can include copyright, trade secrets, business concepts and trademarks. An essential element of a franchise-based business model is the grant of a trademark licence to the franchisee. This is an effective means of exploiting intellectual property, and therefore requires the arrangement to adequately enable protection and enforcement of those trademarks. As a result, there are a variety of issues that must be considered for both parties, during and after the franchise relationship.
1. Is a licence, for use of the trademarks, included in the agreement?
Licences to use the franchisor’s trademarks (in return for fees or royalties) are commonly included in the franchise agreement, which will also specify the manner of authorised use of the trademark. The licence will then allow the franchisee to use the trademarks to sell the franchisor’s products. An example of this is motor vehicle dealers. Furthermore, all rights and obligations concerning this licence should be disclosed to the franchisee to allow them to assess whether they wish to operate under the specific requirements.
2. What conditions are placed upon the use of the intellectual property?
The ways in which the intellectual property rights may be used are important concerns for both parties to the franchise agreement. Certain conditions may include; restricting use of the intellectual property to the bounds of the franchise business, and whether or not the trademarks can be sublicenced. The agreement should establish all conditions placed upon use.
3. What protections of the trademarks are in place?
For franchisors, a number of issues may arise when licencing trademarks. These are unique to the business and are an important element in operating a successful franchise. Therefore, franchisors would be advised to protect their intellectual property through registration. This also reassures franchisees that the trademarks they are licencing are protected from use by competitors. Furthermore, under the Trade Marks Act 1995 (Cth) a trademark can be removed from the Register when the trademark has not been used by the registered owner for a continuous period of three years.
However, if the registered owner has authorised another person to use the trademarks, their use will be regarded as use by the registered owner. Therefore, the franchise agreement should clearly outline the licence to the franchisee in order to protect the trademarks. This licence could also be added to the trademark register for additional proof. Finally, the franchisor should ensure the protection of all intellectual property rights, and commence any action against trademark infringement. As franchisees are often small businesses, they would not be equipped to deal with these claims.
4. How will the reputation of the business be maintained?
Whilst there are a number of benefits in utilising trademarks, a condition placed on this use would likely require the franchisee to comply with rules designed to preserve the value of the intellectual property, and to deliver the required business results. The franchisor should outline how this value ought to be maintained and the extent to which the trademarks should be utilised in the promotion of the business, as failure to do so can result in reputational damage. However, it is possible that these rules may be too restrictive to allow the franchisee to utilise any of their own business creativity.
5. How will trademarks be protected once the franchise relationship is ended?
Upon termination of a franchise agreement, unless otherwise specified, the license granted to the franchisee to use the trademarks, is also terminated. This is because they were only ever granted a licence to use the intellectual property of the franchise, there was never a transfer of ownership. As the former franchisor’s rights are protected through registration, continued use of the trademarks by the former franchisee after the termination of the agreement will be an infringement.
Furthermore, the former franchisee must ensure that any signs associated with their new business are distinguishable from those of the franchise. They cannot deceive consumers into believing that the franchisee is still operating under the franchisor, otherwise they could be liable for damages.