SE­CRET HERBS AND SPICES…

Inside Franchise Business - - Contents - LOUISE WOLF

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.

FRAN­CHISEE RISKS

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

owner.

Se­nior as­so­ciate, cor­po­rate ad­vi­sory and fran­chis­ing team, MST Lawyers

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