About Us
FAQ
Global Advisory Experts Logo
Global Advisory Experts Logo

Find a Global Law Expert

Specialism
Country
Practice Area

Awards

Since 2010, the Global Law Experts annual awards have been celebrating excellence, innovation and performance across the legal communities from around the world.

Protection of Intellectual Property Rights in a Franchise Agreement - Sandra Eke

posted 4 years ago

Introduction

Intellectual Property
Rights (IPRs) are very valuable business assets which do not only contribute to
the general profitability of a business but also leads to the advancement of
the innovative and technological sectors of every country. A Franchise is
a form of licensing arrangement between a franchisee and franchisor which
grants the franchisee, through a franchise agreement, access to use the
proprietary knowledge, processes, technical know-how and other intellectual
property rights of the franchisor, to enable the franchisee trade in the
product or service of the franchisor under the trade name of the franchise. In
a franchise agreement several intellectual property rights are exploited since
the transfer of those intangible rights appears to be the bane of Franchise
arrangements. These rights include trademarks, trade secrets, patents,
copyrights etc. There is often a mutually beneficial relationship between a
franchisor and franchisee, the franchisor seeks to expand its business and
brand name beyond its territorial borders while the franchisee on the other
hand seeks profitable return by exploiting the existing brand reputation of the
franchisor while remitting fees to the franchisor. In the licencing and
transfer of intellectual property rights in a franchise agreement, it is very
important that necessary steps and measures are taken to better protect certain
proprietary intangible rights from unauthorised uses and exploitation by
franchisees. The franchisors have a general duty of brand reputation management
of its franchise especially as it relates to the way the franchise business is
run, the use of its trademark, inventions and confidential information, and the
promotional materials utilised. Sadly, there is no specific regulatory
agency or legislation regulating franchise arrangements in Nigeria. In ensuring
the adequate protection of the intellectual property rights covered in a
franchise arrangement, recourse is made to other existing laws and regulatory
agencies. For instance, the National Office for Technology Acquisition and
Promotion (NOTAP) Act, requires that all agreements for the transfer of foreign
technology to Nigerian parties should be registered with NOTAP not later than
sixty days from the execution of the agreement, it also states other
requirements that should be satisfied before an agreement can be registered, and
prescribes the percentage of fees approvable as royalty earnings for
registration in a franchise agreement. We will examine some relevant
intellectual property rights deserving attention and protection in a franchise
arrangement.

 

2.      Trademarks

Trademarks are an
essential intellectual property right in a business enterprise or going concern
which can be licenced via a franchise agreement. A trademark is a signifier
which is capable of distinguishing the goods and services of one company from
those of another. It comprises of logos, designs, drawings, symbols, taglines,
numbers, three-dimensional features, or a combination of any of these. They
are a very integral part of Intellectual Property because they act as source
identifiers by drawing the attention of the consumers to the origin and source
of the product or service. In a Franchise agreement, the franchisor usually
licences the use of its trademark to a franchisee that in turn pays a fee or
royalty for such use. Examples of some popular franchise brands in Nigeria
include: Chicken Republic, Domino Pizza, Debonairs Pizza, Kentucky Fried
Chicken (KFC), Coldstone creamery, Slot, Mr. Biggs, Tantalizers etc.

However, the modality of
usage of a franchisor’s trademark should be clearly stipulated in a franchise
agreement because if the use of such trademark is not properly managed, the
franchise could face some serious reputational damage to its brand. For
instance, a franchisee that purchases products bearing the trademark of the
franchisor from a counterfeit supplier and distributes such fake products in
its jurisdiction, could tarnish the image of the franchise. Consequently,
the franchise agreement should contain certain obligations required of the
franchisee while utilizing the trademark and brand name of the franchise. The
obligations could entail in addition to the franchisor acknowledging ownership
of the Franchise trademark by the franchisor, that all products distributed by
the franchisee be sourced from a verifiable third-party or the franchisor
itself, and that any unauthorised use or modification of the trademark or the
sale of third-party goods (under the franchise brand) without prior written
approval of the franchisor, may result in the repudiation of the franchise
agreement. It is important to note that, as opposed to some jurisdictions there
is no statutory requirement, asides those that may be implied from persuasive
foreign case laws, for a trademark licensor/franchisor to ensure that specific
standards are met by the licensee/franchisee in Nigeria. Likewise, there is no
requirement that a trademark must be transferred along with the goodwill in the
business.

Also, it is important
that the Franchisor obtains legal protection for the trademark of its franchise
in the jurisdiction of the franchisee since trademark registrations are
territorial in nature with the exceptions of some regional registration bodies. Registration
will give the franchisor exclusive rights and protection of its trademark in
the jurisdiction of the franchisee. There are instances when the trademark of a
franchisor is already in use in the franchisee’s jurisdiction and sometimes the
owners of such mark could have registered the trademark mischievously to take
advantage of the goodwill and brand name of the franchise and to pre-empt a
legitimate claim. This was the unfortunate experience of a few famous franchise
chains like Burger King and Taco Bell when
they decided to expand their brand into new territories; only to discover that
some unrelated third parties were already making use of their trademarks. Registration
is very important in a franchise agreement as it prevents the unauthorised use
of the trademark of the franchisor. However, apart from the registration of the
franchisor’s trademark in Nigeria, there is a need for the franchisor to grant
a right of use (i.e., a licence) to the franchisee to use its brand name in
Nigeria and such licence must be recorded at the Nigerian Trade Mark Registry
to avoid objections by interested parties seeking a declaration of abandonment
for non-use.

 

3.      Trade
Secrets/Confidential Information

There is a temptation to
categorize confidential information as trade secrets since both require the
protection of some sensitive information, but they are not exactly the same.
Trade secrets are basically confidential in nature but it is not all confidential
information that is a trade secret. For an alleged confidential information to
transit into a trade secret, there are certain characteristics identical to a
trade secret that it must possess. For instance, such information should
possess some commercial value and certain reasonable steps should be taken to
protect such information from public access. A franchise agreement usually
involves the transfer of valuable confidential information to the franchisee
and it is essential that such information is protected from general public
knowledge in order not to deprive the franchisor of the benefits of its creations.
In comparison to other intellectual property rights like trademarks and
patents, trade secrets are not territorial in nature and do not require
registrations, periodic renewals or maintenance to be protected. However, once
they get into the public domain, they lose their protection. Therefore,
appropriate measures and relevant provisions should be clearly stipulated in
the franchise agreement to restrict the dissemination of proprietary
information. In a franchise agreement, the confidential information or
trade secrets of the franchisor could be in the form of any of the following;
financial or technical know-how, business plans, implementation strategies,
distribution techniques, operation manuals, pricing technique, recipes,
customer lists, chemical formula etc. It should be noted that the franchisee
has a duty of ascertaining the precise value of the trade secrets because
certain proprietary information could be of doubtful legitimacy and value.

Furthermore non-compete
clauses and provisions restricting the franchisee from taking advantage of the
trade secrets of the franchisor should be laid out in the franchise agreement
to prevent the franchisee from rescinding the agreement in order to establish a
business based on protected information or from furnishing such information to
the competitors of the franchisor upon termination of the agreement. This was
the situation in the case of Gold Messenger v Mc Guay, where
confidential information belonging to the franchisor was given to the
franchisee and the franchise agreement stipulated a provision disallowing the
franchisee from competing with the franchisor for three years and within 50
miles of the franchisor’s franchise territories. At the termination of the
agreement the franchisee utilized the confidential information to set up his
own enterprise and the court held that the franchisee cannot use the
confidential information he obtained during the period of his contract with the
franchisor to compete unfairly with the franchisor. Consequently, it is
important for every franchise agreement to clearly define the franchisor’s
trade secret, require the franchisee to execute non-disclosure agreements with
its employees who may become aware of the franchisors trade secret only on a
need to know basis, prescribe confidentiality clauses that protect the trade
secrets of the franchisor from unauthorised use both during the lifespan of the
franchise agreement and post termination of the agreement.

 

4.      Copyrights

This is another important
intellectual property right that can be impacted in a franchise agreement and
would thus require sufficient protection. A copyright is a legal protection
that avails creators and originators of works eligible for protection. It
confers an exclusive and assignable right to the originator of various kinds of
creative expressions, whether literary, Musical, Artistic or Cinematographic
works or adaptations of any of the aforementioned works. Nigerian law
requires that the author must have expended sufficient effort to give the work
an original character and the work must be fixated in a definite medium of
expression. Copyrightable works in a franchise agreement include literary
works like operation manuals, recipes, source codes; musical, audio-visuals and
sound recordings like radio jingles and television commercials; architectural
works like the template plans and designs of the franchised buildings,
sculptural works like Mascots etc. As discussed under Trademarks,
Copyright registration is also important in obtaining protection in the
jurisdiction of the franchisee. Although copyright subsists in a work upon
creation, most jurisdictions possess a voluntary national registration system
where rights holders can lodge copies of their work. In some
jurisdictions, like the United States, copyright registration entitles a
claimant in a copyright infringement action to statutory damages. It is
important for franchisors to register or lodge their copyrighted materials in
the depository of the prescribed bodies within the jurisdiction of the
franchisee to obtain better protection or in order to facilitate enforcement
proceedings.

Also, it is pertinent for
franchise agreements to contain clauses on the copyright ownership of creations
of the franchisee or employers of the franchisee which were developed during
the course of the franchise, including developments in other forms of
intellectual property.

 

5.      Patents

A patent is an exclusive
and assignable intellectual property right granted to an inventor over his/her
patentable invention for a specified period of time. In Nigeria, for an
invention to be patentable it must be new or constitute an improvement of a
patented invention, result from inventive activity and be capable of industrial
application. Some franchisors possess patented inventions that are
licensed to franchisees in a franchise agreement. These inventions could be in
the form of business methods, computer software application, and equipment
hardware. As has been sufficiently buttressed above, the protection granted by
a patent is territorial in nature, therefore there is a need for the
registration of these rights in the various jurisdictions where the franchisees
operate, in a bid to secure maximum protection over the patent. Franchise
agreements should prescribe the mode of utilization of the patented inventions
of the franchisee in order to prevent unauthorized exploitations. In addition,
it should include specific provisions on the ownership of inventions created
during the course of the franchise arrangement, especially if the franchise
agreement empowers the franchisee to undertake any inventive activity for the
overall benefit of the franchise.

 

6.      Conclusion

Intellectual Property Rights (IPRs) are the main stock-in-trade
in a franchise. They avail franchisors an opportunity of business expansion
while simultaneously making profits through the collection of fees or royalty
payments from their franchisees.  The nature of a franchise exposes the
franchisor to a high risk of possible misappropriation of its trade secrets,
misuse of its brand reputation, goodwill and other intellectual property
rights. There are very crucial provisions that must be inserted in a franchise
agreement to ensure that the IPRs of the franchisor are adequately protected.
In this regard, it is advisable for a prospective franchisor or franchisee to
retain the services of an IP lawyer before venturing into a franchise
arrangement to ensure that all requisite bases are covered.

 

For further information
on this article and area of law, please contact

Sandra
Eke
 at: S. P. A. Ajibade & Co., Lagos by telephone (+234 1
472 9890),

fax
(+234 1 4605092) Mobile: +234.7033442333 or Email: 
[email protected]

www.spaajibade.com

 

Author

Join

who are already getting the benefits
0

Sign up for the latest advisory briefings and news within Global Advisory Experts’ community, as well as a whole host of features, editorial and conference updates direct to your email inbox.

Naturally you can unsubscribe at any time.

Newsletter Sign Up

About Us

Global Advisory Experts is dedicated to providing exceptional advisory services to clients around the world. With a vast network of highly skilled and experienced advisers, we are committed to delivering innovative and tailored solutions to meet the diverse needs of our clients in various jurisdictions.

Contact Us

Stay Informed

Join Mailing List

GAE