A franchise buyer's easy guide to intellectual property
We show no hesitation in protecting important assets in our lives such as our homes, health, businesses, and income. So, it makes excellent business sense for the franchise to protect its intellectual property.
Intellectual property (called IP for short) refers to creations of the mind and includes inventions, literary and artistic works, symbols, names, images and even scents, colours and holograms used in commerce. The rights attached to these creations can be bought, sold or licensed.
1. What is the connection between IP and franchising?
Franchising is the licensing of the franchisor’s intellectual property. In granting a franchise a franchisor is giving the right to franchisees to use its intellectual property for the term of the franchise agreement. This includes the brand, the operating systems and procedures, marketing, supply chain and potentially a range of proprietary services and/or products that have been developed.
Franchisees need to know that the business and the brand they are committing to is there for the long term, that it cannot be copied by others and that the franchisor has the power to enforce their rights under the law. In Australia, registering intellectual property with IP Australia (where required) is essential to creating a compelling value proposition.
2. What is intellectual property, and what can and should be protected?
- Patents protect inventions;
- Design registration protects their look;
- Trade mark protect brand names, logos, original sounds and scents, and even aspects of packaging; and
- Copyright protects literary and artistic works such as novels, poems, films, photographs, paintings and architectural designs.
In franchising, the intellectual property typically consists of trade marks, copyright, and trade secrets (also known as confidential information). Some intellectual property doesn’t require registration; for example in Australia you don’t need to register your copyright interests, as copyright is granted from the time an original work is created.
Understanding how each type of intellectual property protection relates to the particular products, services, designs, inventions or knowledge in each franchise business determines the advantages of each one.
A registered trade mark could be the name of the franchisor’s business so it’s important to understand the difference between registering a trade mark with IP Australia and registering your business name with the Australian Securities and Investment Commission (ASIC).
A business name is the name your business operates under and a registration only serves to identify the type of entity you are trading in - for example, a company, a sole trader, unit trust etc. for tax purposes.
Alternatively, the franchise trade mark may be used in relation to the goods and services that you provide. If this is the case, the franchisor should identify what makes up the brand and which of these elements are worth protecting.
For example, apart from the brand name, there may be a logo, a tagline or a unique name for a product, all of which may require trade mark protection.
A trade mark registration covers the whole of Australia and lasts for an initial period of 10 years. In Australia, a trade mark can be renewed indefinitely every 10 years.
3. Who owns the intellectual property?
Many franchisors structure their business with a holding company and a separate operating company. The holding company typically controls any assets and subsidiaries, limiting liability and containing risk. The operating company on the other hand enters into contracts and agreements with suppliers and franchisees.
Holding companies usually own and control the intellectual property portfolio of a common company group and then license it by way of an intellectual property license deed to subsidiaries. This ensures their valuable assets, such as their trade marks and patents, are shielded from the day-to-day commercial activities of the operating company, licensees and franchisees.
For franchisees entering a franchise network, it is important to investigate who owns the intellectual property connected to the franchise. If it is not the franchisor, then what agreements (such as an intellectual property licence deed) are in place that could significantly affect the franchisor’s rights to use, or to give others the right to authorise others to use, the intellectual property.
While the intellectual property laws of most countries share similarities and are moving towards greater standardisation, they remain national (or regional in some cases) and have effect only within a particular country or region.
A franchisee should check that the franchisor has taken adequate steps to protect their intellectual property in the region in which they intend to operate and be granted a franchise. In Australia, details of the franchisor’s intellectual property and the status of any applications or registrations should be included in the franchisor’s disclosure document.
Intellectual property and the brand
Brand power cannot be underestimated, as consumers worldwide become increasingly brand conscious. Intellectual property is the core of the brand and the associated goodwill and trade marks are often a businesses’ most valuable assets.
Whether you are developing a franchise network or interested in buying a franchise, the status of the intellectual property of a franchise should be at the forefront of your mind.