Franchising is, in essence, a business model built on intellectual property (IP) – it provides a useful forum for commercialising IP. Franchisors gain by sharing use of their IP (including trade marks, patents, designs, copyright materials, know-how and/or confidential information) in return for a fee, and franchisees benefit by obtaining the benefit of an established brand to kick start their own business.
Consequently, franchisors should keep their IP continuously front and centre of their business activities to ensure their IP is protected and the value of their franchise offering is maximised.
Step 1: Identify and value your IP
Businesses typically undervalue their IP because they do not accurately assess what IP they have, or how it may be protected. This can harm the IP value in the long term. For example, if a franchisor has failed to adequately assess and protect its brand(s), and its trade marks are unregistered or found to be unenforceable, the franchise parties may find that the brand value is suddenly impacted. This can even lead to the need to re-brand at a significant cost, and expose the franchisor to claims by franchisees.
This situation is not dissimilar to the events in Winnebago Industries, Inc. v Knott Investments Pty Ltd. Knott Investment’s Pty Ltd (Knott) had used the Winnebago brand in Australia for thirty years to sell a motor home of its own design and manufacture. However, despite only operating overseas and only having a US trade mark, at first instance the Federal Court determined that Winnebago Industries Inc (Winnebago) had acquired sufficient reputation in the Australian marketplace prior to Knott utilising the Winnebago brand. Consequently, Knott was found to have engaged in passing off and misleading and deceptive conduct by using the Winnebago marks and was instructed to re-brand. Luckily for Knott and its dealers, the Full Federal Court overturned the restraint of the Winnebago marks on appeal, but only because of Winnebago’s thirty year delay in bringing the action. Knott was able to continue using the marks, but only with a disclaimer.
Had Winnebago understood the value of its IP from the first use of its mark in 1959, it could have taken steps to register its trade mark. Further, had Winnebago understood the limited boundary of its US trade mark, which was registered in 1973, Winnebago could have sought trade marks in other jurisdictions (including Australia) to identify and bring proceedings against Knott and its dealers much earlier.
The importance of identifying and protecting your IP early is of particularly high importance for trade-secrets and confidential information. This is because the value of these rights will be lost if they enter the public domain. Disputes relating to these rights typically involve an ex-employee or collaborator company using information gained during the course of their employment or collaboration in a competitor business. An example of such conduct was seen in Zomojo Pty Ltd v Hurd (No 2), where a former director used confidential information from Zomojo to develop high speed trading devices that were sold by his companies. In that case, the Federal Court required all profits from the sales of the device be paid to Zomojo.
What can you do?
Have your IP properly assessed from the outset and continue to discuss what IP might be emerging in your business. This identification process is about ensuring that IP of value is documented and captured. Continual documentation and review should cover all areas of IP, although typically know-how, trademarks and copyrights will be the primary focus in a franchise business.
Following this identification process, franchisors should check their template franchise agreement to ensure that it details the aspects of the franchisor’s IP that are available for use by franchisees. Failure to adequately articulate the IP permitted for use by franchisees creates uncertainty, but perhaps more importantly, may cause franchisees to question the IP value, which could in turn decrease investment interest in the franchise network.
Step 2: Protecting your IP
Another common issue for franchisors is the failure to promptly protect and register their IP. This typically manifests as an issue when the franchisor is looking to sell its business or seeks to expand its network geographically, for example, because third party rights block access to markets.
Taco Bell and Burger King are US based companies that famously ran into this issue in Australia. These companies sought to expand their successful franchise businesses into Australia, however, both companies found that their names were already in use in Australia, despite having registered US trade marks. Neither company could show that it had established a sufficient reputation or sufficient goodwill in Australia, nor had they registered trade marks here. Consequently, Taco Bell and Burger King were initially limited in their expansion into Australia because of earlier Australian trade mark rights. Indeed the Burger King brand still trades under the name Hungry Jack’s in Australia. The moral to this story, as businesses’ global footprints continually expand, is to protect your brands in new jurisdictions early, and as soon as there is any real intention to move into the new market. Don’t wait for the move itself.
In addition to access to markets, another issue that will arise from a failure to protect IP across jurisdictions, is the inability to prevent third party copycat businesses. The wider your portfolio of identified and documented IP rights, including both registered and unregistered rights, the greater the scope to enforce those rights against allegedly infringing third party use.
What can you do?
Make sure any IP of value is protected, paying particular attention to the brands in use, where they are currently in use and where you would like to expand use, so that any trade marks that are important to the business offering are registered. Any valuable trade marks, designs and inventions can be registered. This should not be seen as a static exercise, but should be integral to any marketing activities so new brands are not overlooked. New brands could be in the form of an updated logo, a new slogan or even a hashtag like #cokecanpics.
Continually documenting the development of copyright materials and know-how will also be critical both so that the business knows when these are created and so that they can put in place suitable protection mechanisms. This will provide piece of mind to franchisees investing in the franchise network and ultimately increase the overall franchise value.
Step 3: Monitor and regulate use
A franchisor’s failure to document and register (where possible) its IP can leave the door open to third parties, including franchisees, who may seek to exploit that IP for their own purposes.
Luckily for Heart Attack Grill in the U.S, operator of Arizona’s infamous medically themed restaurant, when license negotiations broke down and a potential licensee opened Heart Stoppers Sports Grill (complete with hospital design), Heart Attack Grill was able to pursue proceedings because it had 6 registered trade marks including, A TASTE WORTH DYING FOR, HEART ATTACK GRILL and DOUBLE BYPASS BURGER. However, not all franchisors are as prepared.
There are some risks particular to franchise businesses. One such risk issue is the potential negative impact on brand value when franchisors do not strictly enforce the rebranding of franchisees’ businesses upon termination. A particular risk is involved if the ex-franchise business operating under the brand was terminated for complaints, fraud or poor quality goods /services. In these circumstances, the reputation and goodwill in the franchise brand can be quickly damaged.
Where pure third party infringing use of IP occurs, franchisees also want to see action taken to demonstrate their valuable access to rights that are not otherwise available for competitor use.
Testel Australia Pty Ltd is one such company which was aware of its IP and brand value and included provisions that remained in force after the expiry of its franchise agreements. Consequently, in Testel Australia Pty Ltd v Krg Electrics the court was able to rely on Testel’s franchise agreement and its trade mark registration in finding that an ex-franchisee had, among other things: engaged in a substantially similar electrical testing business to that of Testel; had used confidential information; and had used and applied Testel’s mark in connection with electrical testing. Testel was entitled to $25,176 in damages and was also successful in obtaining an injunction which restrained the ex-franchisee from using the “Testel” mark in the future.
What can you do?
Keep an eye on the market so you know what is happening that could impact your business. From an IP perspective, watches can be put in place to assist with this, including register watches for your key brands, general internet and domain name watches, or even competitor watches. The key is to be aware of where the value in your business lies and its IP, and making sure you focus your attention on monitoring these areas.
Additionally, seeking help early will provide an opportunity to find any overlooked IP, minimise risks and put protections in place.
Where terminated franchisees are involved, try and take action early. Before you permit them to leave the business, physically check to make sure that they have completely rebranded and don’t leave it up to them to self-report on this issue. Also be prepared to enforce against ongoing infringing use of IP rights to protect the value in the business’ IP. Other legitimate franchisees will want to see their stake in the business protected. In addition, failure to do so can impact the brand’s goodwill.
The basis of a franchise model is to enable a franchisor to licence a tried and tested brand and business model, with a recognised reputation and a known market, based on its valued IP.
A strong franchise will actively assess and monitor its IP on an ongoing basis to ensure these valuable rights are maintained and recorded. For a franchise to continue to be of value to both franchisor and franchisee, a franchisor must actively manage and appropriately protect its IP. Finally, franchisors must monitor the market to ensure breaches are quickly identified and can be dealt with as soon as possible because, if they are not, the perceived value of the franchised business can be quickly eroded and questioned by existing or potential franchisees.