From Founder to Foreign Franchises: Client Legal Director, Damien Gervais explains how businesses can protect their Intellectual Property Rights (“IP Rights”) when building a franchise business.
Walk along any British high street (or stop at your local drive-through) and you will see a plethora of familiar franchises. Subway, Costa Coffee, Skechers and Clarks Shoes all rank in the Top 20 UK franchise brands in 2023 and, although fast food retailers dominate that list, other developing franchise sectors include education, real estate and driving schools.
Consistent quality and customer experiences build trust and customer loyalty, so clear (often unique) brand proposition is often the key to successful franchises. This brand proposition depends on trade marks, as supported both in-store and on-line by consistency of message, style and copy.
So, how can founders protect that brand and associated IP Rights when facing sudden expansion, new territories and partners, and an unfamiliar arms-length connection to the shop floor?
TLD Client Legal Director, Damien Gervais suggests starting with the basics:
Start well and half your task is done. Identify the key IP Rights, which countries they will be needed for, and where the right ownership for them should be right from the start.
Having supported various TLD clients and UK-founded franchise businesses with expansion across Asia, the Middle East and Europe, Damien shares his advice on how to protect your IP overseas.
Separate IP ownership
If you are a UK-based company considering international expansion, think about where your IP Rights should sit moving forward. If moving from a UK operating business to an international franchise model, consider separating IP Rights out from the UK business immediately. Future administration will be easier, and you will avoid the risk of UK operation insolvency affecting the business and its trade marks globally.
Plan ahead
Identify territories that are likely prospects: check the trade marks are available there and take initial steps to reserve trade marks ahead of when they will need to be registered.
Group structure and economics
Work with the finance function to establish the tax and cash-flow implications of a separate company for IP Rights ownership within the group structure.
Trade mark hierarchy
Consider whether you have a core trade mark with ancillary trade marks such as Cadburys (core) and Dairy Milk (ancillary), or several marks of equal importance. This may help determine the extent of IP Rights protection needed by the market. Once you have established that hierarchy, evaluate the potential market by value to ensure your trade marks are covered appropriately. For key markets, all trade marks may need protection, but in lesser markets, perhaps only the core trade mark may be needed, at least initially.
If your core markets have languages other than English and especially if they do not use the Roman alphabet, (such as China, Korea, Japan or the Middle East), consider whether variations of the trade mark (or part of it) may be helpful. This may, for example, involve using the same logo but with another script.
As mentioned, registrations can be lined up years in advance (before use in that territory) so this could – and should – be done pre-emptively. Bear in mind that different words mean different things in different countries to avoid embarrassing and expensive missteps that will be amusing to others but less so for you!
Securing ownership of IP Rights in a territory will be essential for any new franchisee. Granting the franchise, conversely, should avoid any ambiguity over IP Rights when the franchise terminates, and best practice is to have explicit provision for transfer of IP Rights back to the brand when the franchise ends.
Beware third party rights
Be clear about the IP Rights you want to protect and work with your general counsel or franchise lawyers to develop appropriate licensing agreements. An experienced commercial lawyer can advise on the legal, commercial and competition law aspects relevant to the territory. It will be far costlier to buy IP Rights back or litigate to enforce them.
Copyright considerations
Content creation is critical to successful marketing campaigns, so be clear about who owns what and ensure it is consistent with the brand message. Develop a library of franchise materials which should be used by all franchisees.
If you are working with marketing or advertising agencies, influencers and consultants, ensure you have a content development agreement in place. Pre-empt the discussion about ‘who owns the advert’ and ensure contracts cover where IP Rights are generated for the brand and that you, as the business owner, have the right to use it.
Develop clear brand standards and a franchisee handbook, both of which should be at the heart of any franchise relationship.
Is it a secret – and do you need an NDA?
Food or beverage retail is a notable example of a sector where trade secrets, special recipes and related know-how are “baked in”. So, if your recipe needs to remain secret, use a Non-Disclosure Agreement (NDA) or confidentiality agreement when engaging franchisees. Again, an IP lawyer can help you clarify the purpose and duration of any such agreement. Always use plain English and be clear and fair about what disclosures can and cannot be made, and to whom.
Take care of your business processes
Pay close attention to your contracts with suppliers, distributors, customers, and agencies. Know where they are and when they are due to expire and leave plenty of time for renegotiation.
Do not forget employee and director contracts here too. Although most IP passes automatically to the business within an employment/director contract, it is always worth clarifying. This is particularly important for creative industries and science and technology businesses, where patents – and the protection of inventions – are commonplace.
And finally … don’t forget your founder
Any founder of a growing, successful business will have invested countless hours in building their dream. So, when the time comes to sell, or for the founder to step aside, it is important to ensure all the IP they generated remains with the company and isn’t walking out of the door with them.
Be clear about the founder’s employment status, as the brand, logo or recipe may pre-date incorporation of the business and as such, any future sale will falter unless the IP Rights are secured. Some very famous companies have logos that were created very early on – sometimes by third parties engaged by the founder of what was then a much smaller business. What arrangements formalised that process, if any? Invariably, there won’t be any arrangements, and it’s better to deal with this straightaway rather than wait for the fact to emerge unexpectedly and risk derailing the big deal.
In all cases, consider IP holistically – seeing the bigger picture is key and every new market will throw up its own challenges. When it comes to IP ownership, never assume. Do your homework and don’t cut corners with false economies: seek professional advice from a general counsel, or IP lawyer to protect the future growth of your business.
Protect your investment
If you are in search of IP legal advice, support with managing foreign franchise agreements or would like help auditing your business’s IP, then please contact: damien.gervais@thelegaldirector.co.uk.
