Intellectual Property (IP) rights are fundamental to any franchise system. When IP rights are set out in a franchise agreement, those rights often relate to the franchisor’s trademarks – which essentially represent the franchise ‘brand’.

Brand protection is paramount in franchising as the franchise business model relies on the utilisation and exploitation of IP, including trademarks. Through the franchise agreement, the franchisor typically exerts a lot of influence over how the franchisee uses that IP while the franchisor maintains its ownership.

Franchising is recognised as one of the most successful methods of rapidly bringing branded goods and/or services into a market. The business model is attractive to franchisees because they can invest in an established brand in which goodwill already resides. Rather than re-invent the wheel, the franchisee is granted the right to use the IP, the proven system and, to some extent, it can rely on reputation developed by the franchisor. In turn, the franchise becomes a much more saleable asset than any stand-alone business.

What is IP?

Most franchise agreements will set out the franchisor’s IP permitted for use by the franchisee. This may include trade secrets and know-how, systems and operations manuals, copyright, designs and patents.

Trademarks in particular are an essential part of a franchise because they indicate the source of the goods and/or services and communicate that source to consumers. Consumers will immediately recognise the brand, which will communicate to the consumer the nature and quality of goods and/or services they can expect to receive from the franchise.

Before entering into a franchise agreement, prospective franchisees will want to be sure that the franchisor has taken all efforts to protect its IP by, in particular, registering its trade marks with IP Australia. Any failure by a franchisor to register its trade mark will no doubt decrease the value of the brand thereby resulting in a less desirable proposition for any prospective franchisee. A franchisee is buying the goodwill of the franchisor, and registered trademarks secure that goodwill.

Why is it important to protect your IP?

Over the years there have been numerous cases demonstrating exactly why it is important that franchisors protect their IP both within Australia and internationally.

In the famous ‘Taco Bell’ case it was shown that a small operator of a Mexican style restaurant in Bondi was able to defeat a large US based multinational franchise in a trademark dispute.

When the US based Taco Bell tried to enter the Australian market it discovered that the same brand was already in use by an unrelated company in respect of a Mexican style restaurant. The US company sought to have the Australian entity cease using the name ‘Taco Bell’ in Australia. They failed on the basis that the US franchisor did not at the time of making their claim have any relevant goodwill or business in the Sydney metropolitan area. The US franchisor appealed the decision, and on appeal the Australian operators obtained orders that the US franchisor be restrained from operating any restaurants in the Sydney metropolitan area under the name ‘Taco Bell’.

A similar situation occurred when Burger King decided to expand its reach into the Australian market when it found that the brand was already used by a local food shop. The local operator did not wish to sell its trademark and this left the US franchisor with no option but to choose an alternative brand for the Australian franchise network.

How do you protect your IP internationally?

IP rights are territorial, which means that they generally only relate to the country where the franchisor has registered and/or used the IP. Various international treaties have harmonised a great deal of IP law making it simpler for businesses to register their trademarks internationally.

It is possible to obtain a trademark registration for the whole of the European Union (28 countries) through the Office for the Harmonisation in the Internal Market (OHIM) in Spain. Additionally, it is possible to obtain international registrations designating a large number of different countries (eg. the US, the EU, China and Japan) by means of the Word Intellectual Property Organisation, located in Geneva, Switzerland.

It is essential that any franchisor establishes a well thought-out strategy for obtaining trade mark protection overseas before entering into franchise agreements outside of Australia.

If a franchisor has failed to protect its trade marks in any international market it wishes to expand to, it may discover that another party has coincidentally, or not so coincidentally, registered an identical trade mark for identical goods and/or services in that jurisdiction.

As we have seen with the Taco Bell and Burger King cases, this will mean that the franchisor will either have to purchase its own trade mark that that country, or consider launching with a new brand in that country.

Why register your trademark?

The main benefits of trade mark registration both in Australia and overseas are that the trademark owner can prevent unauthorised third party use of the trade mark. The owner may be entitled to damages in respect of any unauthorised use, an account of profits and the right to enforce the destruction of any infringing goods. Unregistered trademarks are also protected in Australia by the common law action of “passing off”. However, it can be both costly and unreliable to base trademark protection on common law.

Franchisees’ use of IP

Usually, the franchise agreement will provide that the trademark is licensed to the franchisee for the terms of the franchise agreement only and that the franchisee is not entitled to sub-licence use of the trademark to any third party. Additionally, the franchisee will not be entitled to register the trademark in its own name or the name of any third party.

The franchisee will also be required to inform the franchisor if it becomes aware of any unauthorised third party use of the trademark so that the franchisor can take appropriate action against that third party.

The franchise agreement usually contains clauses in which the franchisee is expected to acknowledge that the franchisor is the owner of the trademark and that any unauthorised use of the trademark will amount to trademark infringement and termination of the franchise agreement.

IP rights, including trademarks and ‘branding’, and the goodwill generated by the business and communicated to consumers through those trademarks, are a vital part of a franchise. The success or failure, and future asset value of a franchise often depends on the protection of its brands, which can be controlled by having a good IP protection strategy in place, both nationally and internationally.