Brand And Goodwill Protection: Why Is It Important For Franchising
Intellectual Property (IP) rights are fundamental to a franchise. When IP rights are mentioned in a franchise agreement, those rights often relate to trademarks – which essentially represent the franchise ‘brand’.
Brand protection is very important for franchises, because a franchise is a type of business model which involves the utilisation of IP, including trade marks. The franchisor typically exerts a lot of inﬂuence over the use of that IP by the franchisee.
Franchising is a method of rapidly and extensively bringing branded goods and/ or services into a market. It is attractive to franchisees because they can invest in a brand that has already been established and in respect of which goodwill is already attached to a greater or lesser extent (depending on the market). This of course means that it will be easier to attract business since the reputation of the business has already been established by the franchisor and creates a far better saleable asset.
Trade marks in particular are an essential part of a franchise because they indicate the source of the goods and/or services and communicate that source to consumers. Consumers will recognise the brand immediately and this will communicate to the consumer the nature and quality of services and/or goods they can expect to receive from the franchise.
Before entering into a franchise agreement, franchisees should carry out a due diligence exercise in order to assess the IP owned by the franchisor. Franchisees should obtain details of all the intellectual property owned by the franchise, whether registered or unregistered. That IP usually includes trade marks, but can also include copyright, trade secrets, designs and patents.
IP rights are territorial, which means that they generally only relate to the country where you have registered and/or used the IP. Various international treaties have harmonised a great deal of IP law, and there are ways of obtaining trade mark registrations, for example, without necessarily having to instruct lawyers in the overseas countries where you would like to obtain that trade mark protection.
For example, it is possible to obtain a trade mark registration for the whole of the European Union (all 27 countries) through the Ofﬁce for the Harmonisation in the Internal Market (OHIM) in Alicante, Spain. Additionally, it is possible to obtain an international registration designating a large number of different countries (including, for example, the USA, the EU, China and Japan) by means of the World Intellectual Property Organisation, which is located in Geneva, Switzerland.
It is essential that the franchisor establishes a well thought out strategy for obtaining trade mark protection overseas before entering into franchise agreements outside of Australia.
When a franchisor wishes to expand, if it has not protected its trade marks in overseas territories, it is possible that it will discover that another party may have coincidentally, or not so coincidentally, registered an identical trade mark for identical goods/services in that overseas territory.
This means that the franchisor either has to try to purchase its own trade mark in that country, or consider launching with a new brand in that country, which will mean losing the goodwill and reputation in the established brand. This was the situation that Burger King was confronted with when that company came to launching its franchise in Australia, and discovered that the trade mark Burger King had already been registered in Australia by an unrelated third party who did not want to sell the trade mark. A similar situation was encountered by Taco Bell, when it came to launch its franchise in Australia and discovered that the same brand was already in use by an unrelated company in respect of a Mexican restaurant in Bondi.
The main beneﬁts of trade mark registration both in Australia and overseas, are that the trade mark owner can prevent unauthorised third party use of the trade mark, and may be entitled to damages in respect of that use, an account of proﬁts obtained through the unauthorised use and destruction of any infringing goods. Unregistered trade marks are also protected in Australia by the common law action of ‘passing off’. However, it can be costly and unreliable to base trade mark protection on common law rights.
Once trade mark registration has been obtained, or is underway, franchisors should also make sure that all their staff and franchisees understand the proper use of the brand. This is to make sure that the trade mark does not become ‘generic’ and therefore vulnerable to removal on that basis. Additionally, if a mark is not used in the form in which it was registered (or very close to that form) then the mark may also become vulnerable to removal from the Register on the basis of non-use. There will usually be guidelines provided in the franchise agreement which relate to use of the trade mark(s).
Usually, the franchise agreement will also contain information in relation to the fact that the trade mark is licensed to the franchisee for the term of the franchise agreement, that the franchisee is not entitled to sub-licence use of the trade mark to a third party. Additionally, the franchisee will not be entitled to register the trade mark in its own name, or that of any other third party.
The franchisee should also inform the franchisor if it becomes aware of any unauthorised third party use of the trade mark, so that the franchisor can take the appropriate action against that third party.
The franchise agreement usually contains clauses in which the franchisee is expected to acknowledge that the franchisor is the owner of the trade mark, and that any unauthorised use of the trade mark by the franchisee will amount to trade mark infringement and termination of the franchise agreement. If that occurs, the franchisee must cease use of the trade mark immediately.
Although goodwill is usually attributed to the franchisor in franchise agreements, some goodwill will be generated by the local franchisee, and therefore could be attributed to the franchisee.
IP rights, including trademarks and ‘branding’, and the goodwill generated by the business and communicated to consumers by those trade marks, are a vital part of a franchise. The success or failure, and future asset value of a franchise often depends on the protection of its brands, which can be controlled by having a good IP protection strategy in place, both nationally and internationally.
Marwan is a leading authority in the franchising, licensing and distribution sectors. With over 14 years of experience working with leading corporations, Marwan utilises his wealth of knowledge and experience to focus on creating international alliances to meet the needs of his clients.
DCS Lawyers are Australasia’s leading lawyers in franchising, licensing, intellectual property and business law. Specialising in both commercial and corporate law, DCS lawyers provide top level, practical legal advice that delivers measurable outcomes for sustainable business growth.