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Gurmeet S Jakhu, Partner Hamilton Pratt Solicitors

Birmingham, United Kingdom

Topic 7: IP Issues in a Franchise Agreement

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Introduction

1. Introduction2. Due Diligence – Background3. Due Diligence and IP4. Franchise Agreement -Trade Marks5. Trademark Use Compliance Manual6. Trade Dress7. Trade Secrets8. IP – the Law

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Role of IP in Franchise Agreement - Introduction• Not all IP rights have same degree of

importance in franchising• Trademarks, trade names, trade secrets are

very important • Copyright will be important (to a lesser extent)• Design Rights may feature and increase in

importance• Patents not so important (but not insignificant)

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Background – Due DiligenceIP issues:

• Due Diligence – Due Diligence is nothing more that the process of accurately assessing the value to be

acquired

• Value whether in relation to • tangible assets (plant and machine) or• Intangible assets (such a goodwill)

is constantly in a state of flux varies according to:

• Varies depending on the life cycle of business, economic and political environment

• And is subject to objective and subjective variables

• which means that the present value can never be a guarantee of future returns.

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Due Diligence & Review of IP

• In addition to normal due diligence in acquiring a business, additional factors in franchising depend on the nature of assets being acquired

• Once operating model and legal effect of the franchise structure is assessed remaining component (in determining the value of a given franchise system) is the intellectual property.

• Prospective Fr’ee needs to obtain a list of all registered IP, such as trade marks, trade-names, business names, copyrights and patents (if applicable)

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Review of IP

• Equally important are all unregistered IP rights, trade secrets, ‘secret sauce’, recipes or other confidential information which form a part of the target franchise’s model

• Prospect Fr’ee would want to know the:– Nature of the licensing rights to be held;– Whether granted equally to all Fr’ees– Whether these are capable of being modified during

the term

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Searches

• A prudent purchaser may wish to conduct searches on key elements such as the main trade mark – Is it valid, is it registed?

• The searches should determine: – Distinctiveness– Also to ascertain whether the Fr’sor has

allocated resources to challenge potentially confusing and infringing marks

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Trademarks

Franchise Agreement

• Every FA will have a section devoted to the proper use and care of the Fr’sors trademarks; which should as a minimum stipulate the following:– Identity of the trademark that the Fr’sor is licensing

the Fr’ee to use– Fr’ee to use only the TM designated by the Fr’sor– And only in the manner authorised by the Fr’sor– ‘On loan’ during the term of the Agmnt

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Trademarks Franchise Agreement:

• Fr’ee must use the marks: – Only in connection with the Franchisee’s Business– Fr’ee to identify itself as a licensee of the Fr’sor and not the owner (and if

required by local law to reflect that status)– Such identification to be included on all invoices, order forms, receipts, business

stationery and contracts– Fr’ee to display a notice at is location/centre that is operates under licence as

franchise

• Fr’ee right to use the TM is limited to uses authorised under the FAgmnt

• FAgmnt will also provide that the Fr’ee will not be able to licence the TM to a third party.

• Any unauthorised use is an infringement of the Fr’sors rights and could amount to grounds for termination (often immediate termination)

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Trademarks – Franchise AgreementFranchise Agreement

• Fr’ee to comply with the local jurisdiction requirements for filing and maintaining trade names

• Fr’ee to notify if it learns of any improper use of the TM

• Fr’ee must not register the TM in its own name or a third party to whom it is associated

• In addition the Fr’ee should be required to expressly acknowledge that:

– The Fr’sor is the owner of the all right, title and interest in the TM and goodwill associated with the TM

– The TM is valid and serve to identify the Fr’sors system and those who are licensed to operate a franchise according to the system

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Trademarks – Franchise Agreement• Every Fr’sor should develop an active TM

protection programme designed to educate the Fr’sor field staff, key vendors, officers, employees and all of its fr’ees as to proper usage and protection of the TM

• This is in addition to the detailed TM obligations in the FAgmnt.

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Trademark Use Compliance Manual• These contain more detailed guidelines for

proper usage and quality etc.• The compliance manual may be a section of the

Operations Manual and should specify the following:– Proper display of the marks– Instructions and information regarding the state of the

filings.– All documents on which the Fr’ee must display the TM

and identify itself as a Fr’ee– All authorised use of the marks and prohibited names

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Trade Dress

• Total image of a business is the result of a combination of elements, this is more so in the context of businesses which have a retail / public presence.

• Trade dress may include, external building feature, interior design, signage, uniforms, packaging

• These are designed to build brand awareness and to distinguish one company’s product or services from those of another

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Trade Dress

• The distinctiveness of these elements reveals to the customer the source of the goods or services being offered

• It’s all part of the ‘get up and go’ or the image which the Fr’sor wants to convey

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Trade Secrets

• Franchised businesses to consider whether its techniques, manuals, recipes, prospect list, pricing can be protected as trade secrets.

• Factors to determine if information amounts to a TS:– Is it known outside the company– Have measures been taken to guard its secrecy– How much money was spent developing it– What is the value of the information for your company

and to your competitor

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Trade Secrets

• Trade Secret Protection should form part of the Fr’sors training program

• A portion of Ops Manual should: – identify all information which the Fr’sor

considers to be trade secrets and – discuss the protection and use of those

secrets

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Trade Secrets

• Trade Secret Audit – to establish a trade secret protection and compliance programme

• Consider appointing a Trade Secret Compliance Officer• Advantages of a written policy includes:

– Clarity (how to identify and protect) &– Demonstrates commitment to protection

• Educate and train Fr’ee and staff in need to protect Trade Secrets

• Make it known that disclosure of a TS may result in termination and/or legal action.

• Monitor compliance

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Goodwill

Goodwill associated with the Franchisee’s local contacts, reputation and customers.

Question who does it belong to?

• Some FAgmnts provide that this could belong to the Fr’sor, after all the Fr’ee has been using the Fr’sor TM, know how and system to build his own goodwill

• However, there is an element of the GW which is down to the hard work of the Fr’ee and which he should be able to realise on sale

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IP Rights

• Patents•Protect inventions – monopoly rights for 20 years generally

•Regulated by the Patents Act 1977

•Obtaining a patent protection for equipment used in the franchise is relatively uncommon

•International Patents

•European Patent Convention

•Patent Cooperation Treaty

•Provides protection from someone else using the patent

• 90% patents once lodged for initial registration are not put to commercial use

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Patents

• To be patentable it must be:– New e.g.: a machine to manufacture cookies or carpet washing

equipment (which leaves the carpet dry – not new!)

– Sufficiently new to a reasonable person

– Capable of being put to a industrial or business use

• Present application to Patents office, describing in detail• Until file a patent, it remains a trade secret• Keep detailed records of inventions should a dispute arise• Areas of prime use: pharmacology; biotechnology or nano

technologies• Can infringe even if you are not aware that patent exists (cf:

with copyright breach – need to show knowledge of infringement)

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IP Rights

• Copyright• Exists automatically upon creation of a work• No registration in the UK• Infringement – apply to the court for:

– Injunction to restrain further copying (including against internet service providers)

– Damages – Delivery up – Destruction of offending items

• Computer Software• Copyright, Designs and Patents Act 1988 specifically that

computer software qualifies as a literary work • Infringement includes making unauthorised copies or

adaptations, converting into different language/code

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IP Rights

• Registered or Unregistered Designs– Whether to seek registration or rely on the unregistered right depends on factors

such as:• the type of design in question, • the amount invested in its development,• the importance of the design to the business and • the likelihood of a competitor creating a similar design

• Community or National Registration– Can exist cumulatively or as alternatives– Advantages of CRD:

• A Community-wide right • Cheaper

• More convenient administratively

• available without substantive examination

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IP Rights

• Registered Designs

– acquired by application to the OHIM – detailed scrutiny only takes place in the event of a subsequent challenge – validity can be challenged either in proceedings at the Community Design Office

or by way of defence to an infringement action

– registration lasts for up to 25 years and gives the proprietor an absolute

monopoly • rights conferred are to use the design and to prevent a third party from using

it without consent – exclusions

– Must satisfy tests of novelty and individual character

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IP Rights

• Design Protection v Trade Mark Registrations– Designs right protects the design itself – May be available for a mark which is open to challenge in trade mark law – No need to show use and thus defensive registrations are possible – Infringement - it is not necessary to prove confusion or reputation – Cost advantages – Process quicker than registering a Community trade mark – CRD provides a relatively short maximum period of protection - 25 years

• trade mark protection which is generally perpetual– Design application must be made within 12 months of release to the public

• trade marks may be registered at any time, provided that the criteria for registration can be met.

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IP Rights

• Community Unregistered Design Right – Aimed at industry sectors

– Much shorter period of protection of 3 years from the date on which the design

was first made available to the public within the Community – Novelty is assessed at the date on which the design was first made available to

the public – Infringement of the CUDR

• similar to those of the CRD• since it is an unregistered right, copying by the defendant must be

established• and protection will not extend to designs which have been arrived at

independently

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IP Rights

• UK Unregistered Designs– Replaced previous concept of design copyright protection– Copyright and Design Rights are mutually exclusive

– Design must be original at the time of its creation – UDR continues until the 15th anniversary of the end of the year in which the

design was first recorded in a design document or an article was first made to the design, whichever was first

• Trade Marks and Passing off– Trade Marks Act 1994 – A person infringes a registered trade mark if he uses in the course of a trade

• Sign identical with registered TM in relation to identical goods/services

• Sign identical with registered TM in relation to similar goods/services

• Sign which is similar in relation to identical goods/services

• Sign identical/similar to registered TM in relation to non-identical and dissimilar goods/services

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IP Rights

• Community and International Trade Marks– Grant of a CTM enable the owner to rely on single registration with effect

throughout European Union– Such application will only succeed if there are no identical registrations in any of

the territories selected– Protocol of Madrid Agreement

• Passing Off– Action available whether or not a trade mark has been registered– Claimant must show:

• A misrepresentation• Made by a trader in the course of trade• To prospective customers• Which is calculated to injure the business of goodwill• Which causes actual damage

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IP Rights

• Franchising and Internet– Worldwide access– Website operated by a franchisor may conflict with grant of rights to franchisees– Opportunity to increase sales

• Trade Mark Licences– If a licence is registered benefits to a franchisee– Benefits to franchisor

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Conclusion

• IP rights are an important intangible asset

• Its protection and continued presence is paramount to the survival of the business

• Tough measures are need to preserve and prevent the misuse of IP rights

• The main ones in franchising are trade marks, trade names, trade secrets and trade dress.