5 THINGS TO KNOW ABOUT INTELLECTUAL PROPERTY
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.
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...
1. OWNERSHIP 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.
2. INTELLECTUAL PROPERTY LICENCE AGREEMENT
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.
3. PROTECTION OF INTELLECTUAL PROPERTY
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.
4. CONFIDENTIAL INFORMATION
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.
5. TERMINATION OF A 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.