Intellectual Property (IP) is a vital asset for any business, but it is especially important if you are a franchisee. In a franchise model business, an IP licence permits you to use the franchisor’s IP. The use of this IP is what makes the franchise valuable.

IP includes a business’:

  • branding;
  • trade secrets;
  • patents; and
  • unique products or techniques.

As a prospective franchisee, you should consider IP when conducting your due diligence on the franchise. It is important to find out:

  • what IP the franchisor owns; and
  • how the IP licence arrangement will work.

This article will outline the key considerations you should have about IP licensing as a potential franchisee.

What Rights Do I Have As a Franchisee Under My IP Licence?

Generally, under a franchise IP licence, you will have a conditional licence to use the business’ IP. This means that you have no ownership rights to the franchisor’s IP. Your IP licence will be:

  • non-exclusive (meaning that the owner of the IP can grant more than one licence and use the IP themselves);
  • revocable (meaning that the franchisor can terminate the licence during the term of the licence); and
  • non-assignable (meaning that you cannot transfer your licence to someone else).

Typically, you will pay set fees to use the licensed IP under the agreed terms. Your franchise disclosure document will include these fees.

How Can I Use the IP?

Your IP licence will set out exactly how you can use the franchise’s IP. These details will also usually be set out in the operations manual you receive at the start of your franchise term. Most IP licences and operations manuals will allow you to use the IP as needed to run the business. This usually means using it to:

  • produce marketing products;
  • distribute goods or services under the franchisor’s brand; and
  • operate the franchisor’s business model.

Any new or proposed use of the IP will require separate approval from the franchisor. This could include new marketing material that features the IP:

  • in photos;
  • on flyers; or
  • on social media.

In most cases, this means that franchisees may not set up separate social media accounts for their franchise business without express permission from the franchisor.

Restrictions

The licence agreement will set out other conditions specifying how you can use the IP. These might include restrictions on:

  • where you can use the IP; and
  • when or for how long you can use the IP.

Generally, you may only use the IP within your franchise territory and during the franchise arrangement.

As a franchisee, you will also need to comply with rules intended to protect the reputation of the business. These rules may set high standards for how you use the IP.

Another important condition of the licence agreement will require that some IP, such as trade secrets, is kept confidential.

For example, if you are a KFC franchisee, you will be licensed to use KFC’s recipes with strict confidentiality requirements around how you can use the IP. Your use of the recipes will be limited to use within normal business operations at your restaurant.

Will I Have Rights to Any IP I Modify or Create Under My Licence?

Usually, the creator of IP owns the rights to that IP. However, in a franchise business, you are unlikely to own rights to any IP that you:

  • create;
  • modify;
  • adapt; or
  • improve upon.

Your IP licence agreement is likely to state that the franchisor will automatically own any changes or improvements to IP. In most cases, this means that the franchisor will be the owner of the franchise’s IP regardless of who created it.

What Happens When the Franchise Agreement Ends?

When your franchise agreement ends, all rights to use the franchise’s IP also end. This means that you will need to return all IP to the franchisor and stop using it immediately. The licence agreement should set out:

  • your termination rights; and
  • the consequences of failing to comply with your licence agreement.

Any unauthorised use of the IP after the franchise agreement ends will be considered an infringement of the franchisor’s IP.

Key Takeaways

An IP licence arrangement gives you access to the IP needed to run and grow your franchise business. IP licence arrangements between franchisors and franchisees undoubtedly favour the interests of the franchisor and there can be consequences for misusing the IP. When conducting your due diligence, make sure you understand:

  • how you are allowed to use the IP throughout the course of your franchise arrangement; and
  • what happens when your franchise agreement ends.

If you have any questions, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.
Jessica Coventry

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