Fran­chises are all about build­ing on the value of ideas, so peo­ple buy­ing into a fran­chise need to be aware of their rights and obli­ga­tions.

Inside Franchise Business - - Contents -

Fran­chises are all about build­ing on the value of ideas.

There are five main things to con­sider in re­la­tion to the use of in­tel­lec­tual prop­erty...


Iden­tify the owner of the IP and check their own­er­ship.

Does the owner hold the rights or hold rights un­der a li­cence?

If the lat­ter, then what are the terms of the li­cence?

Fran­chisors must dis­close their own­er­ship rights in the dis­clo­sure doc­u­ment. It may com­prise not only trade marks but also patents in cer­tain in­ven­tions and de­signs and/or com­prise copy­right in their works and op­er­a­tions man­u­als, in­clud­ing things such as recipes.

The fran­chisor would gen­er­ally war­rant that they own or hold the rights that they are then grant­ing to the fran­chisee, some of which - for ex­am­ple trade marks - will be reg­is­tered and dis­closed.

Fran­chisees can check these reg­is­tered trade­marks or patents on line.

Of­ten the IP rights are held by the fran­chisors re­lated en­tity which may be a hold­ing com­pany that only holds the rights and li­cences those rights to the fran­chisor's.

The dis­clo­sure doc­u­ment should clearly set out all of the rights held by the fran­chisor and/or its re­lated or as­so­ci­ated com­pa­nies used by the busi­ness.

The right to use this IP ter­mi­nates on ex­piry of the fran­chise agree­ment or on ter­mi­na­tion.

The fran­chise agree­ment will con­tain re­stric­tions as to how the IP may be used by the fran­chisee dur­ing the term of the fran­chise and on ex­piry of it.

The fran­chisee must com­ply with these obli­ga­tions oth­er­wise it may be a breach

of the agree­ment and give the fran­chisor cer­tain rights to re­quire the fran­chisee to cease cer­tain con­duct or even a right to ter­mi­nate for se­ri­ous breach.


Fran­chisors, or their hold­ing com­pany, grant a non-ex­clu­sive li­cence to the fran­chisee to use the IP; this may also be by a sep­a­rate in­tel­lec­tual prop­erty li­cence agree­ment in ad­di­tion to the fran­chise agree­ment.

This li­cence al­lows a fran­chisee to use the fran­chisor’s IP and pay­ment for this is of­ten the up front fran­chise fee and on­go­ing roy­al­ties payable to the fran­chisor.

An IP Li­cense agree­ment or right will set out the fol­low­ing:

• the rights that the fran­chisee is granted to the in­tel­lec­tual prop­erty, for ex­am­ple, whether they can sub-li­cence or as­sign these rights; • any re­stric­tions or con­di­tions on the fran­chisee’s use of the in­tel­lec­tual prop­erty; and

• the term of the li­cence

Ter­mi­na­tion rights and how it can be ter­mi­nated.


A sig­nif­i­cant as­pect to any fran­chise sys­tem is the rights granted by the fran­chisor to the fran­chisee to use the brand and all of the fran­chisor’s in­tel­lec­tual prop­erty and there­fore the fran­chisor will keenly pro­tect its rights if they are aware the fran­chisee is breach­ing its obli­ga­tions.

The fran­chisee may be asked to as­sist the fran­chisor in cer­tain cases where there may be a breach of the fran­chisor’s in­tel­lec­tual prop­erty by third par­ties

The fran­chisee would also ex­pect the fran­chisor to take ac­tion to pro­tect its own IP as that is an in­te­gral part of the suc­cess of the fran­chise. If a fran­chisor does not ad­e­quately pro­tect its in­tel­lec­tual prop­erty and is in­volved in any sort of dis­pute, this may im­pact upon the fran­chisee’s busi­ness.

Fran­chisees should con­sider whether there is in the fran­chise agree­ment a pro­vi­sion that states the fran­chisor will en­sure that all reg­is­tra­tions are kept up to date and an obli­ga­tion on the fran­chisor to pro­tect its IP.


As op­posed to in­tel­lec­tual prop­erty, con­fi­den­tial in­for­ma­tion does not need to be reg­is­tered.

Con­fi­den­tial in­for­ma­tion refers to any­thing that a busi­ness re­gards as clas­si­fied such as its pric­ing struc­tures, sup­plier ar­range­ments and other mat­ters con­fi­den­tial to the run­ning of the busi­ness.

It does not in­clude mat­ters that are of gen­eral knowl­edge or in the public do­main.

Con­fi­den­tial in­for­ma­tion in­cludes fi­nan­cial records, cus­tomer lists, mar­ket­ing plans, and so forth. This in­for­ma­tion is con­fi­den­tial as it is com­mer­cially sen­si­tive in­for­ma­tion to the busi­ness.

Trade se­crets, which is a sub-cat­e­gory of con­fi­den­tial in­for­ma­tion, refers to the pro­cesses, meth­ods and pro­cesses for pro­duc­tion, sup­ply or man­u­fac­tur­ing.

The most fa­mous trade se­cret is per­haps Coca-Cola, which has kept the for­mula for its drink a se­cret for decades.

Fran­chisors re­quire prospec­tive fran­chisees to sign con­fi­den­tial­ity agree­ments or non-dis­clo­sure agree­ments prior to en­ter­ing into or pro­vid­ing in­for­ma­tion about the fran­chise op­por­tu­nity and there are on­go­ing obli­ga­tions to not use the fran­chisor’s con­fi­den­tial in­for­ma­tion with­out the fran­chisor’s con­sent and other than for the pur­pose of the fran­chise busi­ness.

To pro­tect their trade se­crets, fran­chisors will re­quire fran­chisees to sign con­fi­den­tial­ity agree­ments or non-dis­clo­sure agree­ments that ex­tend be­yond the ter­mi­na­tion of the fran­chise re­la­tion­ship.


Ter­mi­na­tion of the fran­chise agree­ment gen­er­ally pro­vides an end to the li­cense to use the IP.

In ad­di­tion there are usu­ally res­traint of trade pro­vi­sions to pre­vent the fran­chisee con­tin­u­ing to op­er­ate a sim­i­lar busi­ness in com­pe­ti­tion with the fran­chisor within a cer­tain area and for a cer­tain time. Some of these re­straints may be un­en­force­able if they go be­yond what is rea­son­able. The fran­chisor may be en­ti­tled to make a claim of dam­ages against a fran­chisee who ig­nores this.

Con­tin­ued use of the fran­chisor’s in­tel­lec­tual prop­erty after ex­piry of the term or ter­mi­na­tion of the agree­ment will be con­sid­ered an in­fringe­ment of the fran­chisor’s in­tel­lec­tual prop­erty law and al­low the fran­chisor to seek in­junc­tive reme­dies to stop the con­duct or seek dam­ages for breach.

Apart from a claim for breach of the agree­ment the fran­chisor can also al­lege the fran­chisee is en­gag­ing in mis­lead­ing and de­cep­tive con­duct un­der the ACL Aus­tralian Con­sumer Laws.

Robert Toth is fran­chise part­ner at Marsh & Ma­her Rich­mond Ben­ni­son Lawyers. He is an ac­cred­ited busi­ness-law spe­cial­ist, a mem­ber of the In­ter­na­tional Fran­chise Lawyers As­so­ci­a­tion (IFLA), and a mem­ber of the Aus­tralian In­sti­tute of Com­pany Di­rec­tors.

ROBERT TOTH Marsh & Ma­her Rich­mond Ben­ni­son Lawyers

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