SECRET HERBS AND SPICES…
Who owns the intellectual property that gives the business its value?
One of the greatest benefits of buying a franchised business is access to the established reputation and goodwill that resides in the intellectual property of the brand. However, buying a franchised business does not give franchisees ownership or control over the intellectual property. As well as learning about the franchisor and the system, it is important that franchisees investigate who owns the intellectual property and the limitations on their rights to use it.
A trademark, design, brand, patent, secret herbs and spices - these all help make a franchise an appealing prospect, but who owns all the
intellectual property that gives the business its value?
Intellectual property usually associated with a franchise system includes trademarks and brand “get up”, copyrighted material such as its operations manuals, and secret or confidential information, such as recipes. Intellectual property may also include registered designs and patents, depending on the type of franchise system.
A franchise system’s intellectual property is sometimes owned by the franchisor. Often it is owned by an entity related to the franchisor or an individual associated with the franchisor, such as the founder or one of the directors. In the case of a brand originating outside Australia, it will often be owned by an entity or individual overseas.
When the intellectual property is owned by a separate entity from the franchisor, it is protected should, for example, the franchisor become involved in litigation or become insolvent. Separation quarantines the intellectual property in a separate non-trading entity, helping protect its value.
Where the intellectual property is not owned by the franchisor, there should be a written licence agreement between the IP owner and the franchisor, setting out the terms and conditions upon which the franchisor is permitted to use the intellectual property, and the way in which the franchisor can allow others to use it.
The Australian Franchising Code of Conduct prescribes that certain details about a franchise system’s intellectual property be included in the disclosure document, and that the disclosure document be provided to every prospective franchisee.
In its disclosure document, a franchisor must specify the type of intellectual property used in the franchise system and identify the IP owner. If applicable, the franchisor must also provide details about the licence agreement between the IP owner and the franchisor. This includes identifying the parties to the licence agreement, the term of the agreement, the nature and extent of any limitations and the conditions under which the agreement can be terminated.
There are risks for franchisees where... 1. the term of the licence agreement is short (especially if it is shorter than the term of the franchise agreement) and no renewal terms are provided for; or 2. the licence agreement can be terminated on short notice.
If the licence agreement is terminated for any reason or expires, the franchisor loses its right to let franchisees use the intellectual property, unless a new licence agreement is entered into between the IP owner and the franchisor.
If the IP owner and the franchisor are owned or controlled by the same individuals, the risks for a franchisee are reduced. However, where the franchisor is not owned by the same individuals as the IP owner, as is often the case when an overseas franchisor appoints a master franchisee in Australia, the risks are far greater.
To minimise such risks, prospective franchisees must find out as much about the intellectual property as they can: • who owns it, including details of the
shareholders behind the owner
• the duration of the licence agreement and how long before it expires if the licence agreement can be renewed
• under what conditions the licence agreement can be terminated. Prospective franchisees should carefully read the disclosure document provided by the franchisor as this should provide answers to most of these questions. Prospective franchisees should also seek advice from experienced franchising or intellectual property lawyers.
The reputation of an established brand and recognised intellectual property offers franchisees some comfort in embarking on a business venture, but it is critical to ensure, as far as possible, that a franchisee’s rights to use such intellectual property will continue for at least the term of the franchise agreement.
In its disclosure document, a franchisor must specify the type of intellectual property used in the franchise system and identify the IP