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Franchise IP

 

Businesses such as McDonald's, Dymocks bookshops and Eagle Boys Pizza have made the word 'franchise' a household term. According to an article in the 'Business Review Weekly magazine' of 20 January to 16 February 2005, the franchise industry is booming with over 150 new franchise chains appearing in Australia in 2003 and 2004: there are now over 50,000 franchisees in Australia. With such astronomical growth in the industry and a touted 90% success rate for established franchise systems, it's little wonder that when you are thinking about starting a business, franchises appear to be an attractive option. So what are the key IP issues for both sides of the fence - for the franchisee (the buyer of the IP in the business) and the franchisor (the seller of the IP in the business)?

IP and the franchisee (the buyer of the IP in the business)

When a successful business wants to expand its operation without borrowing capital to develop, one possible option is to license their IP to franchisees. In addition to the actual product or service of the franchisor, franchise IP generally includes trade marks, logos, promotional material, a business system, marketing system, various confidential know-how processes and shop fitouts.

Franchisees usually also benefit from coordinated marketing efforts managed by the franchisor. Putting it another way, franchising is really a method of systematically sharing the franchisor's IP to distribute goods or services. The franchisor owns the IP rights over the various elements of the franchise and the franchisee pays a fee or regular royalties to use the franchisor's IP. A Holden car franchise is an exclusive branded distributorship business, and the food and sandwich outlet known as Subway is a business format franchise.

A major benefit of the franchise system is that you as the franchisee are able to trade under a well-known trade mark. In fact, one or more trade marks will usually be at the core of most franchises. The franchisee typically is granted a trade mark license, where the fee is a percentage of the gross turnover. There is usually also a fee for a marketing budget to promote the trade mark as part of the franchise business. As a condition of use and benefit of the franchisor's IP, there is usually a requirement imposed on the franchisee to act in accordance with a set of rules meant to preserve the value of the IP and to deliver the expected business results. This also has a potentially negative side, as the franchisor could set quite strict rules under which you trade and use the franchised IP, therefore stifling any of your own business creativity. Importantly, all your rights relative to the franchisor should be outlined in the disclosure documents presented to you by the franchisor. You can then assess whether the rules are ones you can live by. Such rules must comply with the mandatory
Franchising Code of Conduct, established in July 1998.

The federal government has made buying a franchise a less daunting experience thanks to the introduction of the Franchising Code of Conduct, which sets out the rights of the franchisee more clearly. Also, the Australian Competition and Consumer Commission (ACCC) is watching franchisors who behave badly. The ACCC has a free Franchisee’s Guide available on their website - see www.accc.gov.au to get a copy.



A significant point to remember is that you should check the intellectual property clause of the franchising agreement and/or disclosure document thoroughly before you sign anything. Ideally, you should have your legal or business adviser look over the agreement to ensure you understand your broader obligations and those relating directly to the intellectual property you are licensing as part of the franchising agreement.

 

IP rights and the franchisor (the seller of the IP in the business)

For franchisors there are specific IP issues that come into play when considering turning your business into a franchise system. Your most powerful tools in becoming a successful franchise are your trade marks and your unique business operation. It is strongly advised that you protect trade marks and unique business methods as forms of registered IP. This is not only effective business insurance for you as a franchisor, but will also provide potential franchisees with confidence that the intellectual property they are licensing from you is secure and can be used to restrict competitors’ entry into the market.

You may also wish to explore the option of exporting your franchise system overseas. In this case the protection of your trade marks overseas will be critical to your success, and you should investigate the costs and processes involved in overseas registration. Speak with your legal adviser or trade mark attorney and see www.ipaustralia.gov.au for more information. Austrade, in conjunction with the Franchising Council of Australia, has developed two publications on expanding franchises into overseas markets.

 

Some other options available to you include the use of unregisterable IP rights such as copyright, and the use of confidentiality agreements. A registrable IP right will not always protect the business know - how connected to your franchise licence. While many of the processes and operations of a franchise may end up in the public domain (e.g. everyone will be able to see the fit-out) there could be some confidentiality obligation placed on franchisees, particularly where there is valuable operational know-how or confidential information such as secret recipes.

When you enter into a franchising agreement, generally the franchisee secures the rights to operate the business or use the IP for a set period. You as the franchisor, in turn, train and support the franchisee and market the business. Usually there is an ongoing levy or fee and an advertising fee for this activity.

© McDonnell, McPhee & Associates  2008 - 2009

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