THE INTELLECTUAL PROPERTY BINARY FACING THE PARTIES TO A FRANCHISE AGREEMENT…

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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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Authored by

Raea Khan

Director Lawyer

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Raea Khan Circle
Director Lawyer
Raea Khan

Raea is Managing Director and Principal Lawyer for PBl Law Group. Raea assists clients with major projects, property developments, construction and strata law.

He has worked in Western Australia and Queensland assisting with expansion projects in the energy and resource sector and now predominately advises clients in Strata and Community Association matters.

He is a member of the Australian College of Strata Lawyers where majority of his work is advising developers and owners corporations with dispute related minor and major defects, strata governance and common property litigation. He is proficient at leading negotiations and meetings.

Raea has a particular interest in the commercial aspect of any dispute and always tries to weigh up the risk, reward and benefit of legal proceedings at each different stage.

Raea enjoys all forms of competitive sport, including Crossfit and actively participates in Triathlons, representing Australia as an age group athlete. He was a member of Red Head Surf Lifesaving club.

  • Strata Law
  • Construction & Major Projects
  • Commercial and Business Law
  • Planning & Environment Law