Franchisors, is your intellectual property secure?

Inside Franchise Business: franchisors need to protect their intellectual propertyWhat is a franchisor’s intellectual property?

Generally, the intellectual property of a franchisor will comprise graphics or designs, words or phrases, mechanical or scientific processes and confidential marketing or trade methods. These are valuable to the franchisor’s branding and, when protected and used appropriately, have the ability to expand the product offering to a wider range of consumers by licensing the use of its product and branding to franchisees.

A franchisor’s branding will often be the identifying feature of its business. It is what makes it commercially recognisable to consumers. This is the type of intellectual property that must be protected because it is the way a franchisor develops its goodwill in the marketplace and transforms this into profit.

Why is intellectual property so important for franchisors?

A franchisor’s intellectual property is critical to the continued success of its business. It is what consumers ultimately identify as the franchisor’s product. This means that inappropriate use of branding by franchisees or third parties may negatively affect the value and status of the franchisor’s business, its brand and its products.

Therefore, it is important that a franchisor take steps to secure its intellectual property, which is arguably the most valuable asset to a business’ reputation and future brand.

How can franchisors protect their IP?

1. Register the intellectual property

The protections afforded to a franchisor will depend on the type of intellectual property he or she owns as part of the company’s product and branding. However, a general rule is that all intellectual property rights (for example, trade marks, patents or graphics) should be registered with IP Australia.

Before registering your intellectual property, you must make sure you are not using someone else’s intellectual property by conducting a thorough search in a country’s relevant databases (in Australia, the Australian Trade Mark Search (ATMOSS)) and the Internet. These should provide information into whether there is a product, branding, graphic design or mechanical or scientific process that is not too dissimilar from your intellectual property that would prevent you from using your branding.

The registration of your intellectual property with IP Australia ensures the branding that represents your business will not be used by third parties or franchisees without your consent. It will give you exclusive use of your branding, which will allow you to build your brand without interference. It is important for a franchisor to consult an intellectual property lawyer to determine whether the intellectual property of the franchisor’s business is able to be registered and protected from unauthorised use by other parties.

2. Include all of your intellectual property rights in your franchising agreement

When franchisors enter into an agreement with a potential franchisee, franchisors should ensure that they include all of your intellectual property within the franchise agreement – including trade marks, business names, domain names and patents. In addition, it is important to clearly outline and clarify what the franchisor can and cannot do with the intellectual property.

3. Be aware of your confidential marketing and trade processes

A franchisor should also ensure that its marketing and trade processes, such as secret recipes or “know-hows” are kept confidential and worthy of protection from those who are not directly involved in your company.  Such processes may be what sets your company apart in its success in the marketplace.

For this reason, a franchisor should consider asking a franchisee to sign an agreement that safeguards the confidential aspects of the franchisor’s business.  Such agreements may include a non-disclosure agreement or a confidentiality agreement.

The above documents should contain conditions that prevent the franchisee from disclosing any of the franchisor’s marketing and trade practices which are critical to the commercial success of the franchisor’s products and services.

4. Ensure there is a mechanism for the franchisee’s breach of its duties

To protect your intellectual property, a franchisor must be prepared to apply any penalties that may occur from a franchisee’s breach of its obligations in relation to the use of your branding. This places a responsibility on the franchisor to be aware of the conduct of its franchisees and third parties who may use the product and its branding in ways that you have not approved.

The registration of your intellectual property with IP Australia will go a long way towards protecting the use of your intellectual property and obtaining relief against those who inappropriately use the branding of your business.

Asset management by third parties

Franchisors may protect their intellectual property by incorporating a company that is separate from the franchisor’s business. The new company should hold all of the relevant intellectual property. This helps to reduce the liability of a franchisor in circumstances where a franchisor goes insolvent, or a franchisee or third party takes legal action against the franchisor. This is because the intellectual property is owned by a separate company and therefore secured.

Franchisor protection helps franchisees too

The success of a business often depends on the goodwill it gains from being in the public eye. A franchisor’s ability to licence its business and branding to a franchisee assists in extending the reputation of the brand across Australia, whilst also providing the franchisee with an already recognisable name and business. However, this also raises the risk of the franchisor’s intellectual property assets being misused by franchisees and third parties.

Where appropriate, a franchisor should register its intellectual property with IP Australia in order to protect its branding’s value in the marketplace. Emphasis should also be placed on the need for a franchisor to ensure it is aware of its obligation to monitor and clearly set out the use of its intellectual property in the necessary agreements with franchisees so that both parties may benefit from the commercial relationship.

Authors: Warren Scott, partner, Cassandra Taylor, lawyer and Danielle El-Hajj, law graduate at Mills Oakley