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The Franchise Agreement and IP

The Franchise Agreement and IP

Marsha Simone Cadogan, Barrister & Solicitor

A franchise agreement is a specific contractual relationship in which one entity (the franchisor) allows another (the franchisee) to use its business model as the basis for operating its business. The franchise model may relate to using a manufacturing process, a right to distribute products, or using a specific business format in the everyday aspects of running a business. Intellectual property may be an aspect of franchising agreements in two ways: (i) by the franchisor allowing the franchisee to use its intellectual property on specific terms, and (ii) if the franchisee develops improvements on existing intellectual property which it then grants back to the franchisor for use in the business operation.

The Trademark Aspects of Franchising

A franchise agreement may give the franchisee the right to use the franchisor’s trade name, trademark, or service mark while carrying on its business. This licensing arrangement may be a central part of specific franchising agreements, especially if the franchise model relates to using a business format. For example, trademarks are integral to Burger King, Timothy’s World Coffee and Tim Hortons franchise models. In other instances, trademarks may be essential but play a secondary role to other forms of intellectual property, such as patents, trade secrets or industrial designs.

Notwithstanding where it falls in the IP spectrum of a franchising agreement, trademark management is essential to a good franchise relationship.

What considerations are essential in managing franchise-related trademarks? Monitoring domain name usage on digital platforms and ensuring that the trademark is used on the franchisee’s goods or services are two major areas to keep a check on. Digital platforms include e-commerce sites, social media, or any online activity that features or should feature the trademark goods or services under the franchise agreement. E-commerce websites often provide a suitable alternative (where appropriate) to conduct commercial transactions that otherwise would have been facilitated in person. With this ease of conducting e-business comes the risk of cybersquatting, in which a website’s domain name can become the subject of bad faith registrations and use by others – all targeted at the rightful owner’s trademark. When a franchise agreement licenses trademarks for use to the franchisee and gives the franchisor direct or indirect control over the mark, the franchisor is still responsible for monitoring the mark’s use on digital platforms. Control rests with the trademark owner. In this context, having an internal IP strategy to deal with trademark domain name disputes may be helpful.

How essential is the trademark to the specified goods and services that form the basis of the franchise agreement? If the trademark is not actively used in commerce, it risks cancellation.  

Patent Rights Aspects of Franchising

The franchise agreement may allow the franchisee to use a patent to carry on trade as agreed. The patent license can be carved out to suit the interest of the parties so that not all rights are apportioned under the agreement, only those necessary for the franchise’s operation.

It may be prudent to bear patent expiry dates in mind for franchise concepts that are working in progress, as this may impact how viable the franchise agreement can be. Suppose the franchise concept includes patent licensing for future patent rights. In that case, familiarity with the patent application process, especially how this may play out in different jurisdictions, is likely beneficial. This may be a relevant consideration in international franchising deals.

Design rights and the Franchise Agreement

Design rights relate to the ornamental appearance of a product. Its objective is to safeguard the novel visual appeal of a product and provide rights holders with exclusive rights for a time. Specifically, it relates to any feature of shape, configuration, pattern or ornament (or combination) seen in the finished product. Competitors cannot replicate or use the design over the duration of the proprietary right.

When design rights are a material part of a license agreement, it enables the franchisee (or franchisor if a grant back clause is included) to make, sell, advertise, or rent any product for which the design is registered. There are also rights associated with the import and export of articles which contain the design. This exclusive right can also be carved out to license specific rights and retain others not in the interest of the franchise agreement.

If the franchise concept is still at an idea stage and design rights are being contemplated to be part of the model but not yet registered, entrepreneurs may need to consider: (i) the registration requirements of design rights, especially the requirement for novelty, (ii) the term of design protection in each country of the franchise agreement as this may vary and should be considered when setting the term of the agreement and (iii) the relationship between design rights, copyright and trademark protection.

The final part of this note (part 2) will deal with trade secrets as aspects of franchise agreements.

This is provided for general information purposes only and should not be relied upon as legal advice.