When a franchisee operates its franchised outlet, having the permission of the franchisor to do so, i.e. it is licensed by the franchisor to use its intellectual property. Intellectual property (IP) includes things like copyright, trademarks, trade secrets (recipes, methodologies, etc), know-how, patents and designs.
In many ways, the most attractive feature of a franchise business is the right to use the valuable IP that the franchisor owns.
Before you go ahead and sign a franchise agreement with a franchisor, you should address a number of important issues relating to the franchisor’s IP and IP rights (IPRs):
Ownership of IPRs
Typically, in the majority of franchise systems, the owner of the IPRs will be the franchisor or a third party associate. Read section 8 of the franchisor’s disclosure document. This will tell you who actually owns the IPRs.
Additionally, a separate company will often own the IP so that it can protect its assets to the fullest extent. This type of ownership structure allows the franchisor to carry on the business without risking the IP in the event that the franchisor is sued or goes into liquidation.
You might want to know whether the franchisor has registered its trademarks, patents or designs. This is important information, as registered trademarks are easier to enforce than unregistered trademarks. If you wish to search for any registered IP, use the IP Australia register at: www.ipaustralia.gov.au.
The term of the licence
In some cases, franchisors will be permitted to licence the IP for longer than the term of the franchise agreement. Section 8 and the disclosure document will detail the term of the franchisor’s licence, and whether it goes beyond the term (and any additional term) of the franchise agreement.
Another important question to ask is what will happen with the IP if the franchisor becomes bankrupt? Typically, an administrator or a liquidator will be appointed to manage the business (keep it alive) and try to attract a third party buyer. This is the first choice in the event of liquidation. The second option is to sell each of the franchisor’s assets, which would include its intellectual property.
Assuming a third party buyer shows interest in buying the franchise from the franchisor, all franchise agreements would be assigned over to the new owner and the operations of the franchised outlets can continue without too much interference or interruption.
Unfortunately for franchisees, a third party buyer does not always eventuate, and franchisees are left with the only other option, which is to come together and attempt to buy the IPRs themselves. Of course, even if the franchisees manage to do this, they will still be bound to the terms of the franchise agreement in spite of the financial state of affairs that the franchisor may be in (liquidation). The franchisee can always try and negotiate with the franchisor to prematurely terminate the agreement.
What’s interesting, and somewhat contradictory, is that franchisors may terminate the franchise agreement if the franchisee becomes bankrupt/insolvent under the Franchising Code of Conduct.
Finally, if the IP is actually owned by the associate of the franchisor, unless it is licenced to the franchisees, they will not be able to use it.
What can the franchisee do if the IP is damaged by the franchisor?
In most franchise agreements, a franchise lawyer will insert an IP-protection clause that requires the franchisor to protect, wherever possible, the IP of the franchise. Regardless of whether this clause appears in your franchise agreement, a court may still imply such a term. Obviously the Courts will assess the overall conduct, any damage that may be suffered by the franchisees, and whether the most appropriate recourse is to allow a claim for damages against the franchisors.
As a franchisee, it is understandable that you would have some concerns about the use of the IP, the limits of that use, the term of that use, and whether there are clauses in the franchise agreement aimed at protecting that use. For assistance in reviewing the franchise agreements or other relevant franchise document, contact LegalVision on 1300 544 755 to talk to one of our franchise lawyers.