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

Intellectual Property

30th December 2019.

 

Sandra Eke[1]

 

PROTECTION OF INTELLECTUAL PROPERTY RIGHTS

IN A FRANCHISE AGREEMENT

 

  1. 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.[2] 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.[3] 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.[4] 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,[5] it also states other requirements that should be satisfied before an agreement can be registered,[6] and prescribes the percentage of fees approvable as royalty earnings for registration in a franchise agreement.[7] We will examine some relevant intellectual property rights deserving attention and protection in a franchise arrangement.

  1. 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[8] from those of another. It comprises of logos, designs, drawings, symbols, taglines, numbers, three-dimensional features, or a combination of any of these.[9] 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.[10] 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.[11]

Also, it is important that the Franchisor obtains legal protection for the trademark of its franchise in the jurisdiction[12] of the franchisee since trademark registrations are territorial in nature with the exceptions of some regional registration bodies.[13] 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.[14] 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.[15]

  1. 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.[16] 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.[17] 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.[18]

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,[19] 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.

  1. 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.[20] 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.[21] 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.[22] 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.[23] 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.[24] 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.[25]

  1. 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.[26] 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.[27] 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.[28]

  1. 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: seke@spaajibade.com

www.spaajibade.com

 

[1]       Sandra Eke, Associate Intellectual Property & Technology Law Department, SPA Ajibade & Co., Lagos, NIGERIA.

[2]       Yetunde Okojie (2018) “The Importance of IP Due Diligence in Mergers and Acquisition” available at: http://www.spaajibade.com/resources/the-importance-of-ip-due-diligence-in-mergers-and-acquisition-article-okojie/ accessed 12th October 2019.

[3]       Brand Protect, “Why IP protection is vital to franchisors” available at: https://www.bptm.co.uk/franchising/why-ip-protection-is-vital-to-franchisors/ accessed 13th December 2019.

[4]       The NOTAP Act, Chapter N62, LFN 2004 through its agency, NOTAP (National Office for Technology Acquisition and Promotion) regulates the importation of all foreign technology into Nigeria; the Patents & Designs Act, Cap P2, LFN 2004, makes provisions for the registration of patentable inventions in Nigeria. The Government agency that manages the grant of patents is the Trademarks, Patents and Designs Registry; the Trade Mark Act, Cap. T13, LFN 2004 makes provisions for the registration of Trademarks in Nigeria etc.

[5]       S.5(2) NOTAP Act. Although, as decided in the recent landmark case of Stanbic IBTC v. FRCN & Anor

(2018) LPELR-46507(CA), the court held that the non-registration of a technology transfer agreement under

the NOTAP Act neither renders such agreement invalid nor unenforceable.

[6]      For instance, there must be evidence of registration of intellectual property e.g. trademarks and patents;

In the case of retail shops, there should be evidence of the local sourcing of the raw materials from local

producers; the scope of the agreement should specify the object of the agreement, obligations and

services to be rendered by the technical partner, training and capacity-building, detailed information of

technical experts etc.

[7]      The fees approvable are: Initial/Basic fee: A lump sum (to be reasonably fixed); Franchise/Continuing fee:

0.5%- 2% of net Sales or revenue and Marketing/ Advertising fee: which should not exceed 1% of net sales

or revenue.

[8]       In this instance, it is a source identifier capable of distinguishing one franchise from another.

[9]       See generally, Sandra Eke “Why you need to Protect your Business Hashtags and Catchphrases” available at:http://www.spaajibade.com/resources/why-you-need-to-protect-your-business-hashtags-and-catchphrases-sandra-eke/ accessed 13th December 2019.

[10]     Op. cit. n.1.

[11]     Section 26(1) and (4) Trade Marks Act.

[12]     To obtain a trademark protection in Nigeria, the trademark is required to be registered with the Trademarks,

Patents and Designs Registry in Nigeria.

[13]     Like the African Regional Intellectual Property Organization (ARIPO) and Organisation Africaine de la Propriété  Intellectuelle (OAPI).

[14]     Baybridge, “Intellectual Property in Franchising” available at: https://www.baybridge.com.au/blog/intellectual-property-franchising-why-does-it-matter/ accessed 13th December 2019.

[15]     See Sections 31 and 33(3) Trade Mark Act.

[16]     WIPO, “Managing Trade Secrets in a Franchising Arrangement” available at: https://www.wipo.int/edocs/mdocs/sme/en/wipo_smes_lhe_2_07/wipo_smes_lhe_2_07_topic04.ppt accessed 13th December 2019.

[17]     SPA AJIBADE & CO, “The Role of Trade Secrets in the Protection of IP Rights” available at: http://www.spaajibade.com/resources/the-role-of-trade-secrets-in-the-protection-of-ip-rights/ accessed 14th December 2019.

[18]     Ibid

[19]     No. 96CA1619, 937 P.2d 907 (1997).

[20]     Sandra Eke, “Fundamental elements of copyright ownership and protection under Nigerian Law” available at: http://www.spaajibade.com/resources/fundamental-elements-of-copyright-ownership-and-protection-under-nigerian-law-sandra-eke/ accessed 14th December 2019.

[21]     Ibid.

[22]     Ibid.

[23]     International Franchisors Association, “Basics Track: Franchisor’s Intellectual Property and how to protect It”

available at: https://www.franchise.org/sites/default/files/BasicsTrack_Franchisor%27sIP.pdf accessed 14th

December 2019.

[24]     In Nigeria, copyrighted works can be lodged in the robust depository of the Nigerian Copyrights Commission.

[25]     Op. cit., n.13.

[26]     The duration of a patent in Nigeria is 20 years. A patent expires at the end of the twentieth year from the date of the filing of the relevant patent application after which it falls into public domain.

[27]     S.1 Patents and Designs Act.

[28]     S.2 (4) Patents and Designs Act stipulate that “where an invention is made in the course of employment or in

the execution of a contract for the performance of specified work, the right to a patent in the invention is vested in the employer or, as the case may be, in the person who commissioned the work.”

 

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