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6 things you need to know about franchising and intellectual property

PUBLISHED ON 27TH OF JANUARY 2015 ONLINE – FRANCHISING MAGAZINE

Franchising is a form of licensing where the franchisee is licensed by the franchisor to use its intellectual property (trade marks, copyright, know-how, trade secrets, designs, patents, branding, operational manuals, business concept, methodologies, recipes, etc).

Franchising is also considered as one of the most effective ways of exploiting intellectual property, which is the main attraction of buying a franchise.

Before entering into a franchise relationship, a potential franchisee must, as part of their due diligence, ask the following questions:

1. Who owns the franchisor’s intellectual property rights?In most franchise systems, either the franchisor or as associate of the franchisor owns all the intellectual property rights of the franchisor’s brand. This information can be found in section 8 of the franchisor’s disclosure document.

2. How can you check if the franchisor’s brand has any registered trademarks, designs and/or patents?IP Australia is a government agency which administers registration of all intellectual property rights in Australia.  These include patents, trademarks and designs. Anyone is able to check IP Australia’s registers for free at www.ipaustralia.gov.au.    

3. Why in many franchise systems does a separate company own the intellectual property?When a franchise system is set up, asset protection is one of the areas discussed at length by the franchisor’s legal and accounting advisers. Setting up a separate entity to own the intellectual property of the franchise system allows the franchisor to ensure its intellectual property is completely protected in the event that the franchisor entity is sued or liquidated.

4. What happens if the franchisor is not an owner of the intellectual property?If the franchisor, does the franchisor’s licence to use and allow its franchisees to use the intellectual property last longer than the term of the franchisee’s franchise agreement?

Franchisees should carefully review the information provided by the franchisor in section 8 of the disclosure document to ascertain how long the franchisor is licensed to use intellectual property and whether such licence extends past the term (and further term) of the franchise agreement. 

5.  What happens to the intellectual property of a franchise system if the franchisor becomes bankrupt or insolvent?If the franchisor entity is in financial trouble, an administrator or a liquidator is appointed. Their role is to either try to keep the franchisor’s business afloat and sell it to a third party (preferred option) or, if the first option does not eventuate, to sell the franchisor’s assets separately. Intellectual property, if it is owned by the franchisor, will be included as one of the franchisor’s assets.

If the franchisor’s business is sold to a third party, then the franchise agreements are assigned to the new owner and the franchisees can continue business as usual. However, if not, the only option left for the franchisees is to ban together and negotiate with the administrator or liquidator to buy the intellectual property. In any event, the franchisees must continue to abide by their franchise agreement, even when the franchisor’s entity is in liquidation, unless the franchisee negotiates a termination of their franchise agreement.  

Unlike the franchisor, who is able to terminate the franchise agreement upon the franchisee’s insolvency or bankruptcy under the Franchising Code of Conduct, franchisees do not have an automatic right to terminate the franchise agreement. 

Lastly, in the event that the franchisor’s associate owns the intellectual property, the franchisees will not be able to use it until and unless the associate of the franchisor licences their use of the intellectual property.

6. What recourse does a franchisee have if the intellectual property is damaged by the franchisor?Most franchise agreements include a clause that deals with the franchisor’s obligations to protect the intellectual property of the franchise system. However, even if such a clause is not expressly stated, court may, and have in many cases, imply such a clause into the franchise agreement. Each situation will need to be assessed on its merits but in many cases the franchisees are able to make a claim against the franchisor for damages.

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