5 steps to understanding intellectual property as a franchise buyer

By Robert Toth | 09 Dec 2018 View comments

Franchises are all about building on the value of ideas, so people buying into a franchise need to be aware of their rights and obligations.

A franchisor is effectively licensing to a franchisee the goodwill and intellectual property of a brand, so the rules around the intellectual property should be a substantial consideration in a franchisee’s purchasing decision.

There are five main steps when it comes to buying the rights to use intellectual property…

5 steps to understanding intellectual property

1. Ownership of intellectual property

Intellectual property provided to franchisees through a franchise agreement will continue to be owned by the franchisor. The franchisor’s rights in intellectual property will be protected through registration with IP Australia.

A franchisee may check the intellectual property (IP) owned by a business on the IP Australia database and the time frame of the registration. It is important to remember that a franchisor may not directly own the intellectual property, but rather may be using a separate legal entity or holding company to own the intellectual property.

A franchise agreement should set out all the intellectual property the franchisor owns and how it is used by the business. It will also state that the franchisee does not acquire any rights, interests or ownership in the intellectual property.

A franchisor may not have registered all of its intellectual property. In this case, the franchisor may use clauses in the franchise agreement to restrict the application of intellectual property that is not registered.

On the other hand, the franchise agreement may be broader and simply outline that the franchisee must comply with any direction given by the franchisor relative to intellectual property.

2. Intellectual property licence agreement

Franchisors, or a franchisor’s holding company, will generally grant a non-exclusive licence to the franchisee through an intellectual property licence agreement that acts in addition to the franchise agreement. This licence agreement will allow a franchisee to use and exercise the rights attached to a franchisor’s IP in return for a licence fee, which may be a nominal amount.

It is important to carefully read the licence agreement, which among other things will set out the following:

  • the rights the franchisee may exercise relative to the intellectual property, for example, whether they can sub-licence or assign their rights;
  • the restrictions or conditions on the franchisee’s use of the intellectual property; and
  • the term of the licence and how it can be terminated.

If, however, the franchise agreement already covers the positions of the franchisor and franchisee, it may be that the licence agreement provides simply for the licence without any qualifications.

3. Protection of intellectual property

As a franchisee is merely granted a licence to use the franchisor’s IP, it may not seem like a big issue whether the intellectual property is registered or unregistered. However, protection of the franchisor’s intellectual property, including trademarks, designs and patents, will have a strong effect on the success of a franchisee.

If a franchisor does not adequately protect its intellectual property and is involved in any sort of dispute, this will impact upon the franchisee’s business.

It is an important consideration that should not be overlooked by potential franchisees, and why it is so beneficial for the potential franchisee to search the IP Australia database before entering into any franchise agreement.

To avoid potential pitfalls, franchisees should also consider inserting a clause into the franchise or licence agreement that the franchisor will ensure that all registrations are kept up to date or, in broader terms, to obligate the franchisor to protect the IP.

A franchisee should try to negotiate for protection in the event a franchisor goes into liquidation. This may be that the licence agreement continues to stay in effect and the franchisee may continue running the business while using the IP without the franchise agreement.

4. Confidential information

Unlike other types of intellectual property, confidential information is a type of IP that does not need to be registered.

Confidential information refers to anything a business regards as classified, though it does not include anything that is general knowledge or which is in the public domain.

Confidential information may include financial records, customer lists, marketing plans and so forth. This information is kept secret because of its importance to the commercial success of the franchisor’s business.

Trade secrets, a sub-category of confidential Information, refers to the processes, methods and processes for production or manufacturing. The most famous trade secret is perhaps Coca-Cola, which has kept the formula for its drink a secret for decades.

To protect their trade secrets, franchisors will require franchisees to sign confidentiality agreements or non-disclosure agreements that extend beyond the termination of the franchise relationship.

5. Termination of a franchise relationship

When a franchise agreement and the licence agreement are terminated, the franchisee will no longer be entitled to use the franchisor’s intellectual property. The franchisor may be entitled to make a claim of damages against a franchisee who ignores this.

If the IP is registered, any continued use of the franchisor’s intellectual property by the franchisee without permission will be considered an infringement of intellectual property law.

However, if the IP is not registered, a franchisor may still make a claim against the franchisee for a breach of the franchise agreement or the confidentiality agreement.

A franchisee who continues to use IP not belonging to them gives the impression to the public that they act on behalf of the franchisor’s business. This can result in misrepresentation, which in turn may result in a compensation claim against the franchisee for reputational damage or loss of profits.