Transcript Gurmeet S Jakhu, Partner Hamilton Pratt Solicitors Birmingham, United Kingdom Topic 7: IP Issues in a Franchise Agreement.

Gurmeet S Jakhu, Partner
Hamilton Pratt Solicitors
Birmingham, United Kingdom
Topic 7: IP Issues in a
Franchise Agreement
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Introduction
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Introduction
Due Diligence – Background
Due Diligence and IP
Franchise Agreement -Trade Marks
Trademark Use Compliance Manual
Trade Dress
Trade Secrets
IP – the Law
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Role of IP in Franchise Agreement Introduction
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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 Diligence
IP issues:
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Due Diligence
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Due Diligence is nothing more that the process of accurately assessing the value to be
acquired
Value whether in relation to
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tangible assets (plant and machine) or
Intangible assets (such a goodwill)
is constantly in a state of flux varies according to:
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Varies depending on the life cycle of business, economic and political environment
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And is subject to objective and subjective variables
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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:
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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
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Fr’ee right to use the TM is limited to uses authorised under the FAgmnt
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FAgmnt will also provide that the Fr’ee will not be able to licence the TM to
a third party.
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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
Agreement
Franchise Agreement
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Fr’ee to comply with the local jurisdiction requirements for filing and
maintaining trade names
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Fr’ee to notify if it learns of any improper use of the TM
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Fr’ee must not register the TM in its own name or a third party to whom it is
associated
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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:
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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
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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
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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
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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.
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