What you must know about the franchisor and intellectual property
Franchising is a method of systematically sharing the franchisor's intellectual property to distribute goods or services. Before taking a leap of faith, a potential franchisee should understand what intellectual property is owned or licensed by the franchisor and what responsibility a franchisee has in relation to the intellectual property of the franchisor.
Before signing up to a franchise, a potential franchisee must, as part of their due diligence, ask the following questions:
1. What intellectual property does the franchisor have?
The most well-known types of intellectual property include trade marks, copyright, designs and patents. Although most intellectual property is registered with IP Australia, which is a government agency administering registration of all intellectual property rights in Australia, many intellectual property rights still exist in their unregistered form.
A potential franchisee should consider whether the franchisor has a well-established trade mark and brand clearly recognised by the general public. They or their lawyer should also check IP Australia's register to ensure that the information provided in the disclosure document is correct.
2. How do franchisors protect their intellectual property?
Although it is commonly thought that franchisors own their intellectual property, franchisors are often advised to register all their intellectual property in a separate company for asset protection purposes. Such a company usually has the same director(s) as the franchisor and the intellectual property is then licensed to the franchisor. If this is the case, the disclosure document must detail the owner of the intellectual property, if the franchisor is not the owner, and what licensing arrangements are in place between them.
Franchisees are strongly recommended to carefully review the information provided by the franchisor in the disclosure document to understand the duration and conditions of the franchisor's licence to use intellectual property and what impact it has on the franchise agreement.
3. What rights do franchisees have?
All of the franchisee's rights and obligations in relation to running their franchise are contained in the franchise agreement. The franchisees must review all the conditions attached to the use of the franchisor's intellectual property, its limitations and its duration.
4. What happens to the franchisor's intellectual property if the franchisor becomes bankrupt?
It is imperative for potential franchisees to understand that if the franchisor becomes bankrupt, the franchisees may lose the rights to operate under the franchisor's brand or use any of the trade marks or systems of the franchisor.
The administrator or the liquidator of the franchisor would first try to sell the franchisor's business to a third party and to assign all franchise agreements over. However, if this doesn't happen then all the franchisor's assets would be sold separately – and that includes the intellectual property, if it is owned by the franchisor. It should be noted that franchisees are not able to terminate their franchise agreements in the event of the franchisor's insolvency or bankruptcy under the Franchising Code of Conduct; this right is only afforded to franchisors.
Franchisees should ensure that they are fully informed about the franchisor's intellectual property, how and what parts of it they can use and the limitations imposed within the franchise agreement.