Franchising is one of the most popular ways of doing business, offering several key benefits for franchise owners. Franchising allows you to expand geographically, whilst sharing risk with a franchisee. By having a presence in multiple geographical locations, your brand is visible to more people, so you benefit from enhanced brand awareness.
In this guide, our intellectual property solicitors explain the role of intellectual property in franchising and how you can protect it both during the course of your relationship with a franchisee.
Contents:
- Why is intellectual property important in franchising?
- How intellectual property is used in franchising
- Trade marks
- Copyright
- Trade secrets
- Intellectual property clauses in franchise agreements
- The parties’ intellectual property rights and obligations
- Intellectual property and franchise disputes
- How to enforce your intellectual property rights
- Intellectual property and franchise exit strategies
- Summary
Why is intellectual property important in franchising?
To operate their franchise, the franchisee needs access to assets such as your business name, logo and know-how, all of which form part of your business’s intellectual property. Licensing that intellectual property to the franchisee is central to your arrangement with them. A well-managed intellectual property portfolio that facilitates its successful protection, commercialisation and enforcement is crucial.
How intellectual property is used in franchising
The basic premise of a franchise arrangement is that, in return for the franchise fee, the franchisee receives the right to use some of the franchisor’s intellectual property within carefully defined boundaries. This usually includes its trade marks, trade secrets and copyright. For example, to operate as a McDonald’s restaurant, a franchisee would need to use McDonald’s intellectual property, including its trade marks for the McDonald’s name and logo, its copyright for the logo and any other graphical branding, and its know-how regarding recipes and cooking techniques.
We set out below, in more detail, how trade marks, trade secrets and copyright are used in franchising situations.
Trade marks
What is a trade mark?
A trade mark is a ‘badge of origin’. It informs consumers where the goods or services in question originate from. The presence of a trade mark on goods or services provides assurances to consumers on matters such as quality and ethics. For example, a consumer might be more likely to visit a McDonald’s restaurant than an unknown burger restaurant since they know what to expect in terms of food and experience.
The benefits of registering a trade mark
Trade marks are powerful intellectual property rights. They give their owner a monopoly over the marks in respect of the relevant goods or services. Provided they are renewed, trade marks last indefinitely. If a third party uses your trade mark without permission, you may have a claim against them for trade mark infringement.
The importance of trade marks
A franchisor’s brand is central to a franchise. For example, a McDonald’s without the branding is arguably no different from any other burger restaurant. The ability to trade under a well-known brand is often a key reason behind a business deciding to pay franchise fees and operate as a franchise as opposed to under its own business name for free.
To protect their investment, a franchisee will want to be certain that you not only legally own your branding, but also proactively protect it against copycats. A well-managed, comprehensive trade mark portfolio is crucial to brand protection, and will be amongst the most important assets licensed to the franchisee in the franchise agreement.
How do I register a trade mark?
Given the complexities of trade marks law and procedure, and the importance of trade marks to brand protection, most business owners ask intellectual property solicitors to register their branding as trade marks.
Your intellectual property solicitor will begin by assessing the registrability of your branding and conducting searches to ensure that no earlier rights exist that might defeat your trade mark applications. If they identify any issues, our intellectual property solicitors will work with you to make the changes necessary to give your application the best chance of success.
Your intellectual property solicitor will then prepare your trade mark application, including the detailed ‘specification’ that must accompany it. A specification sets out the proposed mark and the goods or services you intend to use it in connection with. Your solicitor will send the application to the UK Intellectual Property Office (IPO), who will check that it meets the registration criteria and does not infringe any earlier trade marks. If no issues are identified, the IPO will publish your application in the Trade Marks Journal.
Any third parties who object to your trade mark registration – because it is too similar to their pre-existing mark, perhaps - can oppose your application. If no opposition is raised, or any opposition fails, your mark will proceed to registration.
How long does it take to register a trade mark in the UK?
On average, straightforward applications can achieve registration within 3-4 months. If the IPO has concerns about the trade mark’s registration eligibility, or a third party opposes it, the registration process will be delayed.
How much does it cost to register a trade mark in the UK?
It currently costs £170 to register a UK trade mark, not including legal fees. Since the success and enforcement of a mark rely heavily on effective drafting, most businesses consider the modest fees charged by intellectual property solicitors a worthwhile investment.
Protecting your brand abroad
Trade marks are territorial rights. As a general rule, if you register a trade mark in the UK, it is only effective here. If you intend to franchise your brand globally, you must plan ahead and put the appropriate protections in place. This involves developing a portfolio of international trade mark registrations to license to franchisees in the relevant jurisdictions.
Our intellectual property solicitors will advise on the procedures involved and whether any applicable international systems might reduce the number of registrations required.
Copyright
What is copyright?
Copyright protects various types of original works, including artistic, literary and musical works. Copyright owners can prevent third parties from copying their work, which includes distributing, adapting and displaying it.
To benefit from copyright protection, the work must be original. The level of originality required is low. The work does not need to be groundbreaking or novel and need not exhibit artistic or scientific merit. It is enough that the creator created it using their own skill and effort.
How does copyright arise?
Copyright arises automatically, without the need for registration. You must carefully record and retain details of the work’s creation, so you can prove how and when it was developed should you ever need to do so. You should sign and date all relevant documentation and mark it with the © symbol.
Importance of copyright
Copyright protects artistic works, including any logos and graphics associated with the branding. It will be licensed to the franchisee under the franchise agreement to enable them to operate their franchise.
A franchisee will require access to the franchisor’s materials that may be protected by copyright, such as instruction manuals, marketing literature and photographs. The copyright in these materials should also be licensed under the franchise agreement.
Trade secrets
What is a trade secret?
A trade secret is a type of confidential information that gives its owner a competitive edge since it is not generally known. UK law recognises the value of trade secrets to businesses, so it protects them from misuse by third parties.
The information must satisfy the following legal criteria to be considered a ‘trade secret’:
- The information is secret, in that it is not readily available to others.
- The information has commercial value because it is secret.
- The owner has taken reasonable steps to keep the information secret.
Why is it important to protect your trade secrets?
Trade secrets are crucial to your business’s success and must be protected. If you do not take reasonable steps to protect the information you consider ‘trade secrets’, and keep it secret, it might not qualify for legal protection, so you may have no recourse against any third party misusing it.
Importance of trade secrets to franchise situations
Trade secrets are integral to any franchising arrangement. To enable your franchisees to operate, you must share confidential information about your commercial operations, such as recipes, formulas and software code. Much of that information will constitute ’trade secrets’. If you do not protect them and they become widely known, they are rendered largely worthless and your business can be severely damaged.
How to protect your trade secrets
Not only does proactively protecting your trade secrets in a franchising situation mean they are more likely to qualify for legal protection, but it also reduces the likelihood of needing to rely on that legal protection by minimising the risk of your franchisees misusing it.
You must identify any proprietary information you intend to share with a franchisee as part of the franchise agreement. The agreement must make clear that the information is secret and must be treated as such by the franchisee. The agreement must also clearly define the boundaries within which the franchisee is permitted to use your trade secrets. Non-disclosure clauses, prohibiting the franchisee from divulging your trade secrets to anybody else, and non-compete clauses prohibiting them from using your trade secrets in competition with you, are critical elements of any franchise agreement.
Intellectual property clauses in franchise agreements
The foundation of a successful franchising programme is a well-drafted franchise agreement. The licensing of the franchisor’s intellectual property to the franchisee is central to all franchise agreements. The intellectual property clauses must be carefully considered, accurately drafted and sufficiently comprehensive. Our intellectual property solicitors will prepare the franchise agreement on your behalf, ensuring it mirrors the parties’ intentions and protects your position.
Franchisors must strictly control their franchisees’ use of their intellectual property. By doing so, you will:
- Protect the value of your intellectual property
- Ensure consistency across all franchises
- Maintain quality standards
- Safeguard customer experience
You should implement systems and processes to monitor your franchisees’ use of your intellectual property.
The intellectual property clauses must detail all the intellectual property being licensed, with reference to trade marks schedules where necessary. The parties must also consider whether the licence is to be exclusive, non-exclusive or sole. An exclusive licence allows the franchisee to use the intellectual property to the exclusion of all others, including the franchisor. A non-exclusive licence allows the franchisor to licence the same intellectual property to third parties. A sole licence is exclusive, but the franchisor retains the right to exploit the intellectual property itself. The nature of franchising programmes is such that the licences are usually non-exclusive, although a franchisor might agree to exclusivity within defined parameters, such as geographical area.
Given the significance of trade marks in a franchising context, franchisors often require franchisees to enter into separate trade mark licences.
The parties’ intellectual property rights and obligations
The parties’ rights and obligations will depend on the agreement reached between them. Most franchise agreements contain the following provisions:
Franchisor’s intellectual property rights and obligations
- The franchisor must own the intellectual property it purports to licence
- The franchisor must maintain the relevant intellectual property, for example by renewing the trade mark registrations
- The franchisor will retain ownership of the intellectual property and any goodwill
- The franchisor will retain the right to bring and run any infringement proceedings
Franchisee’s intellectual property rights and obligations
- The franchisee is entitled to use the franchisor’s intellectual property in the manner agreed
- The franchisee must only use the intellectual property as permitted, and to the agreed extent, for example within the specified territory
- The franchisee must acknowledge it has no rights to, or interest in, the intellectual property, save as provided for in the agreement
- The franchisee must not apply to register any of the intellectual property in its own name
- The franchisee must alert the franchisee to third party infringements and assist in pursuing them
- The franchisee must cease using the intellectual property upon termination of the agreement
Intellectual property and franchise disputes
There is always the potential for disputes when third parties use your intellectual property, even with permission. Examples of the circumstances that give rise to most intellectual property disputes in franchising scenarios include the following:
- A franchisee misusing your trade marks and branding, or deviating from your brand guidelines.
- A franchisee reproducing, distributing or altering materials such as instruction manuals without your permission.
- A franchisee using your goodwill for purposes outside the scope of your agreement.
You should monitor your franchisees’ activities to identify any misuse as soon as possible, and promptly address it to minimise brand damage and dilution.
How to enforce your intellectual property rights
The first thing you should do when you identify a misuse of your intellectual property by a franchisee is to seek legal advice. Our intellectual property solicitors will assess whether the use constitutes a breach of the franchise agreement and, if so, the remedies available. If no breach has been committed, the use may nevertheless be unlawful; it might, for example, constitute trade mark infringement. Our solicitors will advise on the relevant law and its applicability to your situation.
Whether a franchisee’s actions constitute a breach depends entirely on the terms of the franchise agreement and the circumstances surrounding their conduct. If a breach is established, the remedies available depend on the nature of the term breached. Some breaches will give rise to a claim for damages whereas others might allow you to terminate the agreement. It is imperative to seek legal advice before you seek to terminate the franchise agreement or take any other action in response to the franchisee’s conduct, to avoid severely prejudicing your position.
Intellectual property and franchise exit strategies
Franchise agreements do not usually include a right of early termination since doing so would threaten the security of the business model. As a result, in the absence of a breach justifying termination, it can be difficult to extricate your business from the agreement. The best solution is to seek an amicable parting of ways with the franchisee.
During the exit process, the parties must review the terms of the agreement with regards the franchisee’s intellectual property obligations, and the franchisee must comply with them. The obligations will depend on the agreement reached between the parties, but often include the following:
- The franchisee will immediately stop using the franchisor’s intellectual property.
- The franchisee will return to the franchisor all material that bears the franchisor’s intellectual property, including signage, instruction manuals, stationery and marketing materials.
- The franchisee will refrain from using the franchisor’s trade secrets or disclosing them to third parties.
- The franchisee will not compete with the franchisor for a specified period.
If the franchisee fails to comply with their obligations by, for example, continuing to use the franchisor’s trade marks, the franchisor may have a claim for intellectual property infringement.
Summary
Franchising offers a valuable opportunity for the right type of business. It generates income, increases brand awareness and allows you to grow your business whilst sharing risk. You will need to provide your franchisees with commercially sensitive information and permitting them access to your intellectual property, so must be strictly controlled by a comprehensive franchise agreement. The agreement must ensure your intellectual property and trade secrets are fully protected, both during the course of the agreement and when it ends, so expert legal advice is crucial.
Our intellectual property solicitors will also ensure your intellectual property portfolios are properly maintained and can be effectively licensed and enforced. If a franchisee misuses your intellectual property, our intellectual property solicitors will take prompt, decisive action to minimise the damage and advise on your options both under the franchise agreement and any other applicable law.
