The Franchise Law Review: Intellectual Property
Intellectual property (IP) rights are invariably at the heart of a franchise agreement. It is often the ability, through the ownership of IP rights, to prevent unauthorised third parties from reproducing aspects of the franchised business model that enables the franchisor to demand a royalty payment from prospective franchisees. These IP and related rights include trademarks, patents, trade secrets, confidential information or know-how, copyrights and designs. Some of the key features of these rights are set out below.
One of the most valuable assets of a franchised business is often the goodwill associated with the brand name. Trademark registrations represent the embodiment of this goodwill in a tangible asset that provides a monopoly right to use a name in relation to the goods and services covered by the registration. This confers the right to prevent the unauthorised use of the name or a confusingly similar name by a potential competitor. In addition to the brand name and logo traditionally associated with a business, there are many other aspects of a company's trade dress or get-up that may be protected through trademark registration. The definition of a trademark in many countries has been extended to include other potentially distinctive elements of a brand such as colours, shapes, sounds, animated marks and even smells, tastes and touch. Recently, the actual get-up of a retail outlet has been the subject of successful trademark applications.
It is important to remember that registered trademark rights are territorial, and a registration in one country will give no rights to the use of that name or get-up in another country. Indeed, the mere fact of having secured a registered trademark in one country will be no guarantee that the same mark will be available for use or registration in any other country. Therefore, where international expansion is anticipated it is essential to conduct initial clearance searches to identify any potential infringement risks and, if available, apply for the appropriate trademark registration to cover that territory. This is dealt with in more detail below.
A potential franchisee considering entering into an agreement to be a user of the brand name in a specific country is likely to require confirmation that appropriate searches have been conducted and registrations applied for. Suitable warranties and indemnities to this effect will be requested from the franchisor.
i Trademark registration
Most countries of the world have a national trademark register. It is also possible to file for a European Union-wide trademark registration (an EU trademark (EUTM)) and a single registration covering a number of African countries (an African Intellectual Property Organization trademark). There is also an international filing system that provides a cost-effective method of filing national applications in certain countries that are signatories to the Madrid Agreement and Protocol. Following the United Kingdom's decision to leave the European Union (Brexit), it is important to consider securing registration at the UK Intellectual Property Office in addition to an EUTM registration, which will not cover the United Kingdom if or when it ceases to be a Member State. However, it should be noted that owners of existing EU registrations will be automatically granted a corresponding UK registration following Brexit at no cost.
When filing a trademark application, it is necessary to identify the specific goods and services to be covered by the registration, and identify the classes within which the goods and services fall. Most countries have adopted the Nice Classification System, which divides the register into 45 classes. It is usual for a trademark application to go through an examination process, which will assess whether the mark applied for satisfies the criteria for registration within that particular country. There is also, generally, an opposition period when third parties can seek to prevent the registration if they have an earlier conflicting right or if there is some other basis on which the registration should be refused.
One of the key values of a trademark registration is that potentially the rights can last in perpetuity. As long as the registration is renewed (the normal period for registration is 10 years) and the mark continues to be used correctly, then the registration will probably remain valid.
ii Clearance searches
Before launching a brand in a new geographical region or in respect of an extended range of goods and services, it is imperative that trademark clearance searches are first conducted to identify any potential infringement risks. In some cases, when an established brand in Country A takes the decision to expand its commercial activities through a franchise into Country B, the clearance searches will locate a local registration that could be relied upon by its owner to prevent the proposed use of that name in that country. In this situation, it will either be necessary to look at ways of overcoming the local registration (which could be by way of attacking the validity of the registration, acquiring the registration, or agreeing some form of coexistence with the owner of the conflicting right) or to consider adopting a new brand name for that particular country. This is clearly not ideal if the intention is to create a single brand for use within all countries into which the business intends to expand. An alternative, and usually less attractive, option would be to consider a rebrand of the entire business.
It is also important to bear in mind any local cultural or linguistic issues that may arise from the use of the brand name within a new country. A name that is perfectly suited to one country may have negative connotations in another.
iii Unregistered trademarks
In many countries it is possible to acquire enforceable rights in a name even in the absence of a trademark registration. However, relying upon unregistered rights should not be seen as a substitute for securing trademark registrations where these are available. It is generally more expensive and difficult to establish an infringement of an unregistered right than it is to succeed in an infringement action based on a registered trademark. Furthermore, the existence of the trademark registration itself can prove to be a deterrent to a third party's use of the same or similar name (assuming, of course, that they have bothered to conduct clearance searches before adopting the name).
When conducting clearance searches in countries that recognise unregistered rights it is important, in addition to conducting searches of the trademark registers, to conduct further research to ascertain whether the name is being used in relation to relevant goods and services. This will generally involve internet searches and searches of local domain names and company registers and directories.
A patent (like a registered trademark), is a territorially limited monopoly right, which enables its proprietor to prevent third parties from exploiting the invention claimed in the patent specification. Patent protection can be sought for products and processes that are both novel and inventive over the 'state of the art' as at the priority or filing date of the application for the patent (i.e., to be patentable the invention claimed in the patent specification must not have been disclosed publicly before the priority or filing date of the application, and must also not be obvious over the state of the art at that date). To be patentable, the claimed invention must also meet a number of other criteria – in particular, it should be borne in mind that there are certain things that are exempt from patent protection in various jurisdictions – for example, computer programs, methods of doing business and mathematical methods. However, these exclusions vary from country to country, and so, for example, an invention that might fall foul of the computer program or method of doing business exceptions in the United Kingdom might nevertheless be patentable in the United States (albeit that the scope for obtaining such patents in the United States has narrowed over the course of the past few years).
In practice, while patents are less likely to form the key IP rights in a franchising model than trademarks, they may, in certain circumstances, form an extremely important part of the package of IP rights that are being licensed by the franchisor to the franchisee. This is particularly the case for businesses that provide technical information or equipment to the franchisee to enable them to operate the franchised business successfully. In such situations, certain processes (e.g., to manufacture the products to be sold by the franchisee) may be patented, and a licence under the relevant patents will have to be granted to the franchisee under the franchise agreement. It may also be the case that the product being sold by the franchisee is itself patented – a historical example of such a case is that pertaining to Singer sewing machines, which were patented, and which were distributed in the United States via a network of franchisees in the 1850s.
i Patent registration
Most countries in the world grant patents, which must be applied for on a country-by-country basis. However, there is a centralised system for seeking patent protection in a number of European countries (including several that are not EU Member States, such as Turkey, Norway and Switzerland), via the European Patent Office (EPO). Patent applications filed at the EPO are examined centrally, and if the claimed invention is deemed patentable, the application will mature into a bundle of national patents in the various countries in which the applicant chooses to designate and validate the patents. It was hoped that by now there would be scope to obtain a 'unitary patent' covering up to 25 of the current members of the EU (not currently including Spain, Croatia and Poland) via a single application at the EPO. However, in the light of Brexit, the United Kingdom has now confirmed that it will also not participate in this system and the details and implementation date of the system in the remaining EU Member States have not been finalised (in particular because of a delay in the ratification of the legal framework in Germany). There is also a system operated by the World Intellectual Property Organization, which permits an applicant for a patent in a country that is a member of the Patent Cooperation Treaty (PCT) to designate other PCT member countries. This streamlines the application process (and allows the applicant to rely on the initially filed application for the purposes of the patent's 'priority date', which is the date against which the novelty and inventiveness of the claimed invention is assessed). However, the application will still have to be examined (and if considered patentable, granted) on a national basis.
During the examination process, most patent offices will review the substantive patentability of the claimed invention following the completion of a search for 'prior art', as well as by reference to the relevant exclusions (e.g., for computer programs and methods of doing business, in the EPO). During the examination process, it is possible in some countries for third parties to file 'observations' with the examining patent office to try to persuade them that the patent should not be granted. Additionally, if the claimed invention is deemed patentable, in certain countries (and the EPO), there is an opposition period, during which third parties may challenge the validity of the patent.
Unlike registered trademarks, patents generally have a fixed maximum term of 20 years from the priority date. However, they have to be renewed annually, so it is possible for a patent to lapse in a particular country where it was originally registered, if the relevant renewal fees are not paid.
ii Petty patents or utility models
As a final point, it is worth mentioning that in some countries it is possible to obtain a lower form of patent protection, sometimes referred to as petty patents or utility models. These rights are intended to protect technical advancements (which may be incremental improvements to a previously patented product) that may not be sufficiently inventive to pass the threshold to obtain a full patent. They are generally of shorter duration (most commonly between six and 10 years), and are not formally examined in the same way as 'full' patents. Nevertheless, they may still be of value in the context of a franchising arrangement.
IV TRADE SECRETS, CONFIDENTIAL INFORMATION AND KNOW-HOW
The term 'trade secrets' is often used interchangeably with the terms 'confidential information' and 'know-how', to describe business or commercial information that has not been made public. Such information may be technical in nature (e.g., the specific parameters or tolerances to be employed in a manufacturing process, or the identity and specific amounts of ingredients to be used in a recipe for a food or drink product) or non-technical (supplier or customer data, financial data relating to pricing, etc.). Accordingly, it will be appreciated that in a franchising arrangement there will almost always be information and documentation disclosed by the franchisor to the franchisee that incorporates trade secrets that are necessary to run the franchised business successfully (and in accordance with the franchisor's standards).
While there is no internationally recognised definition of what constitutes a trade secret, there are a couple of overarching principles that are generally applicable. First, the relevant information must be secret, in other words, it must not be generally known or be easily accessible by the public (although it may still be known by a significant number of individuals); and secondly, the information must have been subject to reasonable steps by its 'owner' to keep it secret. There is no method by which trade secrets can be registered, and they are arguably not a true IP right, in the sense that they cannot be formally assigned. However, in the context of a franchising arrangement, the use of trade secrets is certainly licensed, in the sense that the franchisor agrees contractually to disclose the relevant information to the franchisee, and to permit its use for certain specified purposes as set out in the franchise agreement. An EU directive covering trade secrets (including a definition of what constitutes a trade secret) was passed in 2016 and its provisions have now been implemented by all Member States (except for Cyprus). This should therefore lead to greater consistency of protection for trade secrets and confidential information in the EU in the future.
Copyright protects the physical embodiment of literary, dramatic, musical and artistic works (and therefore covers a very wide range of subject matter). However, in the context of a franchise arrangement, literary and artistic works are often the most important (literary works include reports, brochures, tables, marketing or training materials, and computer programs, and artistic works include photographs, logos, drawings, diagrams, plans, etc.). The aesthetic or artistic standard required to qualify for copyright protection is generally fairly low, although this does vary somewhat from country to country. Bearing in mind the range of works that are protected by copyright, it should be appreciated that there will always be copyright works the use of which will have to be licensed in a franchise agreement.
Copyright is not a strict monopoly right (like patents and registered trademarks) since the proprietor can only prevent actual copying of the relevant work. Accordingly, if a third party independently creates an identical (or more likely very similar) work, that will not infringe, since it is not the idea underlying the work that is protected, but rather the specific embodiment of that idea by way of the work. The proprietor of a copyright work is generally the person who actually creates the work (and not the person who commissions and pays for the work). The main exception to this arises when a person creates a work during the conduct of their employment. In those circumstances, the copyright in the work will generally belong to the employer (although the specific circumstances do vary from country to country).
There is no requirement to register a work for copyright to subsist, but in certain countries, most notably the United States, it is possible to register copyright works to establish a verifiable record of the date and content of the work in question, which may assist if infringement proceedings have to be pursued at some point in the future. In accordance with an international convention (the Berne Convention), to which the majority of the world are signatories, copyright works first published in any Berne Convention signatory country are also recognised (and hence enforceable) in any other signatory country. The duration of copyright protection varies from country to country (and in some countries depending on the type of work). However, in most of the world, for literary and artistic works, copyright lasts for the life of the author plus either 50 or 70 years.
In a number of countries, databases are specifically protected by a separate right (in particular, an EU-wide database right exists). These database rights are distinct from copyright and protect against the copying of substantial parts of a database (whereas copyright may protect the selection, arrangement or presentation of the data). Database rights (like copyright) do not have to be registered but are generally of shorter duration than copyright (e.g., the EU database right has a term of 15 years).
Perhaps of less relevance to most franchised businesses is the protection that may be afforded through registration of designs, or in some cases through unregistered design rights.
Design protection may be available in respect of the visual features of a product or, indeed, surface decoration or even other visual images such as logos. However, unlike trademark protection, the protection of design rights has seen little by way of international harmonisation, and local advice will generally be necessary to ascertain the availability and scope of design protection.
As a general rule, it is important to seek this advice and file any appropriate applications for the registration of a design before it is disclosed to the public or made commercially available (although some countries do allow for a limited period after public disclosure when a design application can be filed). As with trademarks, there is an EU-wide design registration system whereby a single design registration can be secured covering the entire European Union. The EU also recognises and protects unregistered designs although these rights confer a lower level and shorter period of protection. There is also an international filing system (the Hague Agreement) that can be utilised to secure cost-effective filings for design protection in those countries that are signatories to that particular agreement. Furthermore, the need to secure UK registrations following the decision of the United Kingdom to leave the European Union has to be considered.
1 Allan Poulter and Robert Williams are partners at Bird & Bird LLP.