Franchise agreement – The Fifth in The Series of 5 Important IP Contracts

IP Licensing Agreements – The First in The Series of 5 Important IP Contracts

Here is the fifth and the last article of the series, 5 Important IP Contracts.  In this article, Varshita Dogra of VIPS discusses Confidentiality or Non-Disclosure Agreements.

Franchise agreement

Franchise agreement, technically, are not IP contracts but a major part of Franchise agreement deals with intellectual property. Franchising is essentially a structured and sophisticated form of licensing. A company would engage into franchising its business, when it has strong and distinguishable intellectual property, such as its trademarks, trade dress, copyright, know-how, trade secrets, relevant industrial designs, patents, business concepts or methodologies, in order to capture new markets and expand its presence.

The expertise of an IP lawyer would be desirable/beneficial while drafting a Franchise agreement. Franchising is one of the most effective way to exploit another company’s IP as it provides the person taking the franchisee with an infrastructure that enables successful protection. When properly structured and run, franchising provides benefits and satisfaction to both the parties.

Although licensing forms the heart of a franchise agreement, there are a lot of technical differences between a licensing agreement and a franchise agreement. A franchise agreement involves a number of formalities required for setting up a franchise. It also goes into detail about maintaining quality and standard of product or service being provided. The control of a franchisor is comparatively more than that of a licensor in the usage of intellectual property by the franchiser.

There are two types of franchising :

1. Product and trademark franchise, wherein the franchisee uses the franchisor’s trade name and sells the franchisor’s products. Such form of franchising is popular in businesses like motor vehicle dealerships, soft drink bottlers and gas stations.
2. Business format franchising, wherein the franchisee uses the franchisor’s entire business concept including the trade names, goodwill, know-how, trade secrets, etc. of the franchisor. This form of franchising can be commonly seen in fast food chains such as McDonalds, Pizza Hut, Dominos etc.

Key Clauses in a Franchise agreement

As there is no specific law in India governing the franchising industry, it is even more crucial that the Franchise agreement is drafted well. It can prove to be fatal for either the franchisor or the franchisee if the agreement is not made with proper precaution.  

The agreement sets out the type of franchise arrangement, the grant of the license, the extent of the rights granted and the duties, rights and obligations of the parties as per the agreed terms. Usually, these agreements are in the form of dos and donts as a list of things to adhere to and things to strictly avoid during the course of business. Franchisors exercise control and supervision over the exploitation or use by the franchisee of their IPRs, know-how and confidential information.

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• Use of intellectual property by the franchisee

It is necessary to specify in a Franchise agreement, the details of the intellectual property in regard of which the rights to use are being licensed. It must also be specified that the marks so being licensed are only with regard to the operation of the franchised unit at location where such franchise is settled. Most of Franchise agreement have a clause requiring the franchisee to notify the franchisor in case there has been infringement of the intellectual property by any third person. It is necessary to specify in the Franchise agreement, the prohibition on usage of the trademark by the franchisee; post termination of the franchise agreement.

• Fees and royalty clause

Usually Franchise agreement include payment of a non-refundable franchise fees which is a one-time fee and royalty as well. This clause also specifies the mode of payment and due dates, for payment of both the franchise fee and the royalty as decided between the franchisor and franchisee.

• Business Operations (only in business format franchising)

This clause contains detailed information about the level of support that will be provided by the franchisor for running the business and responsibilities of the franchisee. It specifies the details of the goods and services that can be offered by the franchisee and fixed quality standards for these goods and services. Generally for a business format franchising, it is also required that the franchisee exclusively purchase raw material or goods from franchisor and maintain accounts as per the franchisor’s requirements. The franchisor also makes sure to include a clause granting right to the franchisor to inspect the unit at regular intervals.

• Confidentiality Clause

One of the biggest concerns for any franchisor is to ensure confidentiality of the intellectual property (trade secrets, know-how, patents, etc.) while entering into a Franchise agreement. Strict clause for confidentiality specifying the penalties for non-compliance is a must in any Franchise agreement. In order to ensure that the franchisee keeps the information confidential, it is also suggested to enter into a separate confidentiality agreement which specifically deals with protection of the confidential information of the franchisor.

• Advertising and Brand Promotion

Franchisors spend a significant amount of resources for promotion of their brand. Therefore, a franchise agreement also covers the aspect of advertising and brand promotion. Usually, the responsibility lies on the franchisor to promote the brand and the franchisee is supposed to contribute by taking active part in brand building activities.

• Training, Supervisions and Support

Training with respect to know-how, trade secrets and working of the business model of a franchise is necessary to ensure that the franchisee is able to meet the standards set forth in the agreement by the franchisor. It is the duty of the franchisor to provide as much support, training and supervision as required by the franchisee.

• Assignment or transfer of franchise

A transfer of franchise usually cannot be made, unless expressly stated in theFranchise agreement. If the franchisor seeks to allow transfer of franchise, a clause specifying that the transfer cannot be made without approval of the franchisor would be appropriate.

• Indemnity Clause

Franchise agreement usually cover indemnity rights requiring the franchisee to indemnify and defend the franchisor for incidents arising at or in connection with the franchisee’s business or location and requiring the franchisee to name the franchisor as an additional insured on its insurance provisions. Suits against a franchisee and its franchisor as co-defendants are increasingly common. Whether because plaintiffs are simply seeking deeper pockets or because plaintiffs do not understand the nature of franchising, plaintiffs often name the franchisor as a co-defendant whenever suing its franchisee for incidents arising in connection with the franchisee’s location or business. For example, a restaurant patron may sue a franchisee and franchisor in connection with a slip-and-fall at the franchisee’s restaurant. A franchisee may sue its franchisor and sister franchisee for the other franchisee’s alleged encroachment.  Although indemnification clauses are generally enforceable, they are subject to certain limitations and defenses. A party cannot be indemnified for its own negligence absent an explicit, conspicuous commitment to do so that includes the word “negligence” in the indemnification clause.

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