Taking a Closer Look at Franchising Agreements

What is a Franchise?

A franchise refers to a license granted by the owner of a particular trademark which allows another party to sell a product or provide services under the trademark. It in essence allows the franchiser to allow a third party or the franchisee to manufacture goods and sell them in their name.

Franchising offers a variety of strategic advantages to the owner of the Intellectual Property. The franchiser wants the franchisee to succeed since it helps them gain future investments into its franchises which helps the brand expand its footprint across the market. It is also useful to the franchisee since a franchise of a well established brand carries all the goodwill that the brand has been able to build up in the market with the consumers. Furthermore, it will be associated with the quality and standards that have been laid down by the brand which will in turn make it easier to attract customers and run a profitable business.

What is a Franchising Agreement?

The manner in which this relationship comes into being is through what is known as a franchising agreement. This is a legal document that lays down the terms of the agreement as well as the conditions that need to be followed by the franchisee, with the main aim behind this document being to promote the business of the franchiser.

What are some of the features of a Franchising Agreement?

Some of the main features that can be found in a Franchising Agreement are listed below:

– The agreement is based on a contractual relationship

– The franchiser has developed a business that can be identified by a particular brand, and the franchisee while acting under this brand name, makes an initial capital investment and also runs the operations of the franchise.

– The franchiser trains and supervises the franchisee to ensure that their goodwill and brand name is not being misused.

What are the types of Franchising Agreements?

Some of the types of franchising agreements that can be found are as follows:

– Invention Licensing Agreement: This kind of an agreement can be found when the creator of a particular invention wishes to expand it either on a national scale or a worldwide scale and in order to be able to carry this out, he or she licenses out the patent and the design rights.

– Trademark Licensing Agreements: Under this form of agreement, the owner of a trademark grants the licensing rights to the franchisee to use the trademark on goods. These agreements usually contain provisions to ensure that a minimum quality standard is adhered to by the franchisee, and it allows the trademark owner to build brand equity.

– Character Merchandising Agreements: This is when the name of a famous personality, real or fictional, is licensed to be used on some products. There are frameworks put in place in such agreements to ensure that the reputation of the personality is protected.

– Distributor Marketing Agreement: Under such an agreement, the dealer adopts a business system that is used by the franchiser.

Upsides and downsides of franchising agreements for the franchiser and franchisee.

As we have already discussed, franchising can help a brand in expanding its footprint across the market with a relatively low risk due to the limited financial commitments. But the franchiser also runs a few risks when franchising, these risks include a possible loss in the goodwill of the brand in case a franchisee does not act within the terms of the agreement or is not able to adhere to the quality standards.

On the other side, while a franchiser does benefit from being able to capitalize on the brand name, business know how and goodwill of the franchiser, their position does not come without its own share of risks. A franchisee needs to put up a significant amount of initial capital investment in order to come under the brand name of the franchiser. Furthermore, they are constantly placed under the supervision and control of the franchiser which leaves them with a limited amount of freedom in the manner in which they carry out their business operations.

How is the Intellectual Property Right of the Franchiser protected in such agreements?

Since India does not have a single law that governs the protection of the intellectual property of the franchiser, there are a number of different laws that are utilized.

Under the Trademarks Act, 1999, Section 48 permits any person other than the registered proprietor of a trademark to be registered as a registered user and such a user can use the trademark with respect to any or all of the goods that fall under the trademark. What is important to note is that under Section 54 of the Act,  a registered user is not permitted to have the right of assignment or transmission. This is done to ensure that the brand name and the goodwill is not diluted.

Under the Patent Act, 1970, any creation of an assignment or any other such right in a patent needs to be in writing in order for it to be valid; the document so created needs to lay out the terms and conditions of such a right in order to govern the rights and duties created and executed. Thus, the franchise needs to use the registered patent of the parent company only once it has been put down in writing.

Every copyright that is owned by a company needs to be registered. Sections 18 and 19A of the Copyrights Act deal with the assignment of a copyright to another party. It allows the owner of a copyright to assign the same to anybody, this can be done with restrictions on the usage and the time period could be for the entire term of the copyright or a fixed time period. Section 30 of the Franchise Agreement lays down that the franchisee needs a license in order to be able to use the copyright, and the same needs to be done in writing.

Conclusion

As we have seen through this article, a franchise is a tool which allows the franchiser to let a third party produce and sell goods in their name, and in order to create this relationship between the franchiser and franchisee, a franchising agreement is required.

Having defined a franchising agreement, we have looked into the features and types of franchising agreements that can be found and have also analyzed the potential upsides and downsides that franchising presents to both the franchiser as well as the franchisee.

We have then seen how there is no single law that governs franchising agreements in the country, with sections from the Trademarks Act, Patents Act, and Copyrights Act all being relevant towards franchising agreements. And lastly, we have taken a look at how some of these sections can be used in franchising agreements to protect the intellectual property rights of the franchiser.

Author: Ashwin Pandey- a student of  NUJS (Kolkata),  in case of any queries please write back us via email at support@ipandlegalfilings.com or contact us at IP And Legal Filings.