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ARE YOU PROTECTED FROM RISK?

At PBL we often receive instructions from both franchisors and franchisees in respect of the rights and risks associated with the valuable IP that goes hand in hand with the franchise relationship. As most stakeholders would be aware, often it is the trademarks brand and logos that are fundamental to the franchisor‘s offer to a franchisee that will induce the franchisee to agree to enter into the license arrangement offered by the franchisor.

But there are fundamental rights, risks and obligations associated with such IP. 

Typically the franchisor will have already received good quality advice to the effect that the IP should be owned by another entity which will then license it to the franchisor entity to enable it to achieve the umbrella asset protection afforded from such a structure. Normally the license so created is either able to be terminated at will by the asset holding entity or on certain events such as the insolvency of the franchisor. It makes good sense to have this structure in place if you are a franchisor. Also often there is a royalty fee that is payable under such license which can be calculated by reference to market value of other such methodologies available to the franchisor.

On the other hand the franchisee obtains the rights under the franchise agreement to use the IP in the operation of the franchise business until the franchise is terminated but such agreements nearly always mandate that the franchisee has no rights whatsoever to the IP and it is all subject to the overarching agreement in place between the franchisor and the asset holding entity. Sometimes the franchisee pays a fee as well for use of such IP.

But what happens if the franchisor goes belly up?

The problem is at least 3 fold:

1. The franchisee is still bound by the terms of the Franchise Agreement and will be held to their obligations by the liquidator or administrators in most cases.
2. The IP License Agreement between the franchisor and asset holding entity can be and no doubt will be terminated IMMEDIATELY. This means that suddenly you have a franchise system without one of the essential ingredients of the system: the IP!
3. The asset holding entity is free to dispose of the IP to whoever it sees fit. This may mean a disposal to the liquidator but you cannot count on this to happen if you are a franchisee.

So there are both rights and risks associated with the IP in franchising which mostly favor the franchisor and if you are a franchisee or thinking about becoming one then it is wise to undertake a full due diligence audit on the IP preferably before you enter into the Franchise Agreement.

At PBL we can provide you with valuable advice about this and other franchise topics.

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