A business’ intellectual property (IP) comprises much of its intangible assets. This includes any trade secrets, patents and trade marks. However, IP is especially important in a franchise. This is because the cornerstone of franchising is gaining the right to use someone else’s IP in exchange for royalties. This exchange is typically outlined in the franchise agreement, in which the Franchisor grants the Franchisee a licence to use the Franchisor’s IP. This article will take you through some key concepts about the IP licensed to a franchisee.
What Rights Do I Have?
The franchise agreement will contain the terms on which the Franchisor’s IP is licensed to the Franchisee.
The nature of the agreement means that your ability to use the franchisor’s IP will be subject to certain conditions. This might include conditions that:
- the franchisor can grant multiple franchisees the same licence (non-exclusive);
- the franchisor can terminate your rights in certain circumstances;
- you cannot transfer your licence to someone else without the franchisor’s condition; or
- you can only use the licence within certain geographical boundaries.
Your ongoing rights to use this IP is granted in exchange for royalties. Royalties are ongoing payments usually calculated as a percentage of your gross sales. Failure to pay royalties will usually be a breach of the franchise agreement. In that case, the franchisor may revoke your licence to use the IP.
How Can I Use My Licensed IP?
Your franchise agreement will establish how you can use the franchisor’s IP. Usually, these terms will also be further outlined in the operations manual.
The franchise agreement and operations manual will typically enable you the right to use the franchisor’s IP where necessary to run the business. For example, this might mean you can use your licensed IP to distribute approved marketing materials and to sell goods or services under the franchisor’s brand.
If you want to use this licensed IP in a way not outlined in the operations manual or licensing agreement, you will need to seek permission from the franchisor. This can include permission to open a social media account for your franchise or to create original marketing materials.
It will be considered a breach of the franchise agreement if you do not use the IP in a way approved by the franchisor. If you breach the terms, the franchisor may terminate the agreement. This is especially true if you do not rectify the breach. For this reason, it is critical you familiarise yourself with the agreement and abide by its terms.
Where the franchisor allows you to modify the IP for your own use, they will own any of these updated versions. This is the case regardless of who created the updated IP materials.
Continue reading this article below the formLimitations on IP Use
In addition to outlining how to use the franchisor’s IP, the franchise agreement will explicitly outline any usage limitations. This includes:
- limitations on how long you can use the franchisor’s IP; and
- where you can use the IP.
Firstly, the licence to use the IP will only be valid for the term of the franchise agreement. This means that your rights to the Franchisor’s IP will cease when the Franchise Agreement expires or is terminated. In that case, you should cease use of the franchisor’s IP and return any remaining goods. This might include:
- any leftover marketing materials with the franchisor’s brand;
- handing over the account details to any social media accounts;
- financial records;
- marketing plans; and
- customer lists.
The franchisor may be entitled to claim damages against a franchisee who ignores their end-of-term obligations.
Further, the franchise agreement will also establish where you can use the IP. This will differ between franchises. For example, some franchises operate within specified territories. In that case, you cannot use the franchisor’s IP outside of your designated boundaries.
There may also be confidentiality requirements around how you can use the IP. For example, a restaurant business that relies on its recipes will restrict the use of these trade secrets and confidential information to restaurant employees only.
This publication provides you with the fundamentals for franchising your New Zealand business, including set up, branding and management.
Key Takeaways
IP is significant in a franchise. This is because the cornerstone of franchising is gaining the right to use someone else’s IP. The right to use the franchisor’s IP will be outlined in the franchise agreement between you and the franchisor. Some key things to understand about licensing agreements as a franchisee include:
- what rights you have;
- how you can use your licensed IP; and
- any limitations on your IP use.
If you need assistance understanding your rights under your franchise agreement in New Zealand, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.
Frequently Asked Questions
Your franchise agreement will establish how you can use the franchisor’s IP. The agreement will also explicitly outline any usage limitations. This includes limitations on how long you can use the franchisor’s IP and where you can use the IP.
Your licence to use the IP will only be valid for the duration of the franchise arrangement. This means that your rights to the Franchisor’s IP will cease at the end of the franchise term. Therefore, you must cease use of the franchisor’s IP and return any remaining IP materials at the end of the franchise term.
We appreciate your feedback – your submission has been successfully received.
