IP & Franchising (Part I)

MSC Intellectual Property & Technology Law | 5 min read

A franchise agreement is a specific type of contractual relationship in which one entity (the franchisor) allows other firms (the franchisee) to use its business model as the basis for operating their business. The franchise model may relate to the use of a manufacturing process, a right to distribute products, or to use 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 trade name, trademark, or service mark of the franchisor during the course of carrying on its business. This licensing arrangement may be a central part of specific franchising agreements, especially if the franchise model relates to the use of a business format. For example, trademarks are an integral aspect of Burger King, Timothy’s World Coffee and Tim Hortons franchise models. In other instances, trademarks may be important, 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 sound franchise relationship.

What considerations are essential in managing franchise-related trademarks in pandemic times? Trademark domain name monitoring on digital platforms and ensuring that the trademark is actually used on the franchisee’s goods or services, are two major areas to keep a check on. Digital platforms include e-commerce networks, social media, or any online activity that features or should feature the trademark good or services, pursuant to the franchise agreement. E-commerce and other similar networks, 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 license trademarks for use to the franchisee, and gives the franchisor direct or indirect control over the mark, the franchisor still maintains the responsibility to monitor 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 it for the trademark which is the subject of the franchise agreement to be used on the specified goods and/or services agreed to in the arrangement? Very essential -unless there is a good reason why it was not being used over a specific period of time. A trademark that is not being used on the good and/or services for which it was registered can be expunged from the trademark registry.

Patent rights Aspects of Franchising

The franchise agreement may allow the franchisee use of a patent for the purpose of carrying on trade as agreed under the arrangement. The patent license can be carved out to suit the interest of the parties in such a way that not all rights are apportioned under the agreement, only those that are necessary for the working of the franchise.

For franchise concepts that are works in progress, it may be prudent to bear patent expiry dates in mind as this may impact how viable the franchise agreement can be. If the franchise concept includes patent licensing for future patent rights, the prospective franchisor should be armed with realistic knowledge about the patent application process, especially how this may play out in different jurisdictions. 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. Specifically, it relates to any feature of shape, configuration, pattern or ornament (or combination of these) that is seen in the finished product. Its aim is to create a high level of visual appeal among consumers, to an extent that the design cannot be replicated or used by competitors over the duration of the proprietary right. This may be warranted in crowded product spaces where many products are competing for the attention of a specific type of consumer.

When design rights are a material part of a license agreement, it enable 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. The right can also be carved out to license specific rights and to retain others that are not in the interest of the franchise agreement.

If the franchise concept is still at an idea stage and design rights are being contemplated as an inclusion in the model, but not yet registered, entrepreneurs may note: (i) the registration requirements of design rights, especially the requirement for novelty (ii) the term of design right 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 trade secrets as aspects of franchise agreements.

This is provided for general information purposes only and should not be relied upon as legal advice. You should consult a qualified lawyer on any specific legal question or matter.