An Introduction to Innovation, New Product Development ... · a new product. Product development research is focused on needs of customers while launch research focuses on understanding

An Introduction to Innovation, New Product Development,

Franchising and IP Disputes and Resolution Strategy in the

Franchising Sector

Guriqbal Singh JaiyaDirector, SMEs Division, WIPO

www.wipo.int/sme

Topics Covered1. Innovation2. New Product development3. Introduction to Franchising4. Case Study: INDITEX5. Dispute Resolution in

Franchising

INNOVATION

What is Innovation?• Innovation is the process and outcome of

creating something new, which is also of value.

• Innovation involves the whole process from opportunity identification, ideation or invention to development, prototyping, production, marketing and sales, while entrepreneurship only needs to involve commercialization (Schumpeter).

What is Innovation?• It involves the capacity to quickly

adapt by adopting new innovations (products, processes, strategies, organization, etc)

• Traditionally the focus has been on new products or processes, but recently new business models have come into focus, i.e., the way a firm delivers value and secures profits.

What is Innovation?

• Schumpeter argued that innovation comes about through new combinations made by an entrepreneur, resulting in – a new product, – a new process, – opening of new market, – new way of organizing the business – new sources of supply

Dimensions of Innovation

There are several types of innovation– Process, product/service, strategy,

which can vary in degree of newness:– Incremental to radical,

and impact:continuous to discontinuous

The Need for Innovation• Commodity businesses compete on price• Advantage goes to the low cost producer

– Perhaps due to lower labor costs, materials costs, or a superior process

• The only way to avoid commoditization is innovation– Products– Processes– Value-added via integration or services

Drivers for Innovation– Financial pressures to reduce costs, increase efficiency, do more

with less, etc– Increased competition– Shorter product life cycles– Value migration– Stricter regulation– Industry and community needs for sustainable development– Increased demend for accountability– Demographic, social and maket changes– Rising customer expectations regarding service and quality– Changing economy– Greater availability of potentially useful technologies coupled with

a need to exceed the competition in these technologies

New Conditions for Innovation

• Small start-up entrepreneurs increasingly depend on large firms: – as suppliers or customers– for venture finance, – for exit opportunites, – for knowledge (production, markets and

R&D) – and for opening new markets.

New Conditions for Innovation

• Large firms increasingly depend on small start-ups – for New Product Development (NPD): – as suppliers of new knowledge (which

they cannot develop themselves); – or organizational renewal, for

experimentation with busienss models; – for opening new markets; etc

Different Types of Innovation• Disruptive Innovation – an

invention that can displace the present market leader or create an entirely new market

DuPont Diamond Award Winners 2002Tetra Pak, Inc., Sweden / USANestlé Purina PetCare, ItalyFirst Retortable Carton System for Nestlé Dog Food.This represents the first retortable carton packaging system on the market.

Different Types of Innovation

• Marketing Innovation: Improves the interaction with customers

Different Types of Innovation

• Application Innovation: Takes existing technologies into new markets to serve new purposes

Different Types of Innovation

• Product Innovation: Takes an established product to the next level –reduced cost, improved quality, greater functionality

Different Types of Innovation

• Process Innovation: Makes processes for established products in established markets more effective and more efficient

Different Types of Innovation

• Experiential Innovation: Makes some superficial changes in the product that improve the customer’s experience with the product –adding delight, greater satisfaction, or reassurance

Different Types of Innovation

• Business Model Innovation: Reframes the role of the company in the value chain or the way in which the company meets customer needs

Different Types of Innovation

• Structural Innovation: Capitalizes on disruption and changes in the industry to restructure industry relationships

New developments in innovation raises new issues and problems

• Greater emphasis on commercializing scientific discoveries, particularly in IT and the bio-sciences

• Speed and potential value of scientific progress leads to emphasis on solid and well-designed portfolios of research projects

• Universites as active drivers of innovation: Academic entrepreneurship and the entrepreneurial university

• University-industry partnerships• Increased search for radical innovation and top-line

growth.

NEW PRODUCT DEVELOPMENT

New Product Development

All businesses must do this or eventually die.…use the firm’s resources to meet objectives

in an ever changing environment.

Acquisition versus Innovationrisk versus reward tradeoff

New Product Development

Acquisition versus Innovationcorporate acquisition

buy the companyrapid entry, total controlinvites antitrust attention, threat of divestiture

patent acquisitionbuy the patent

avoids antitrust problemsdoes not give total control

New Product Development

Acquisition versus Innovation (cont.)license the patent

…rent itminimum investment, fast introduction, fast income fast competition, lack of control, less reward

innovation…develop new products internally

maximize long term profit, gain technological leadershipno legal problems...

New Product Development

Why is this so difficult?– Shortage of fundamentally new solutions

to old problems– Fragmented markets due to increased

competition – Decreased reaction time– Increase in social and government

constraints– Cost

New Product Development

New Product Adoption Process

InnovatorsEarly Adopters

Early MajorityLate Majority

Laggards

Area under curve sums horizontally to form first three stages of the product life cycle.

New Product Development

• New Product Adoption Process is also known as the diffusion process.

• Each successive set of consumers behaves differently.

• Rate of Adoption is a function of:– relative advantage, compatibility,

complexity, availability of trial, observability

Risk Management in New Product Development

Why research and analysis before new product development

New product development is linked with very limited historical or preliminary data. Hence, risky

Risk can be in form of market, technical, or organizational issues. Risk analysis solves the problem through flexible modeling, primary and secondary research.

A good strategy is a must for evaluating and dealing with the associated and unavoidable risks.

Research conducted to understand customer needs and develop a new product is different from research required to launch a new product.

Product development research is focused on needs of customers while launch research focuses on understanding the motivation and attitudes of early adopters. Successful targeting of early adopters builds the fountain for new product success.

New product have a very high failure rates.Products fail, not because of technical shortcomings, but due to absence of market.Over 60% of new product fail before entering the market, and out of the remaining 40% that do see the ray of light, 40% fail to yield profit and are withdrawn from the market. Timely and reliable knowledge about customer preferences is most important. Such data is obtained from business research.

Success Rate of Entirely New Products

3000 rawideas.03%

300 submittedideas.3%

125 beginningprojects

.8%

9 largedevelopments

11%

4 majordevelopments

25%

1.7 launches60%

1 commercialsuccess

Stevens and Burley,RTM May-June 1997

THE PRODUCT LIFE CYCLE

• A reminder that most products do not live for ever

• A conceptual framework only

• Difficult to measure where a product is in its life cycle

The chances for failure are greatestwhen you know the least about the technology being developed and/or

the target market

The “Familiarity Matrix” allows mapping ofR&D projects based on the extent of knowledge

about technologies and markets

Edward B. Roberts and Charles A. Berry, “Entering New Businesses: Selecting Strategies for Success” Sloan Management Review, Spring 1985 pp 3-17

Familiarity Matrix: A Guide Place Your Project in One of the Nine Boxes

Decreasing knowledge of the technologyDec

reas

ing

know

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e of

the

mar

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Familiar New , familiar New , unfamiliarFam

iliar

N

ew, f

amili

ar N

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unfa

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Familiarity Matrix: A Guide Place Your Project in One of the Nine Boxes

Decreasing knowledge of the technologyDec

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know

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the

mar

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MarketPenetration

MarketExtension

MarketExpansion

ProductExtension

BusinessExtension

BusinessExpansion

New BusinessModel

BusinessExpansion

ProductExpansion

Familiarity Matrix: A Guide Place Your Project in One of the Nine Boxes

MarketPenetration

MarketExtension

MarketExpansion

ProductExtension

BusinessExtension

BusinessExpansion

New BusinessModel

BusinessExpansion

ProductExpansion

Probability of Success

New Product with unrelated technology in existing market: 50%

Familiarity Matrix: A Guide Place Your Project in One of the Nine Boxes

MarketPenetration

MarketExtension

MarketExpansion

ProductExtension

BusinessExtension

BusinessExpansion

New BusinessModel

BusinessExpansion

ProductExpansion

Probability of Success

Existing product in a new market: 15%

Familiarity Matrix: A Guide Place Your Project in One of the Nine Boxes

MarketPenetration

MarketExtension

MarketExpansion

ProductExtension

BusinessExtension

BusinessExpansion

New BusinessModel

BusinessExpansion

ProductExpansion

Probability of Success

Improved product in existing market: 75%

“Suicide Square”.03%

Familiarity Matrix: A Guide Place Your Project in One of the Nine Boxes

MarketPenetration

MarketExtension

MarketExpansion

ProductExtension

BusinessExtension

BusinessExpansion

New BusinessModel

BusinessExpansion

ProductExpansion

Probability of Success

New Product in a New Market: 5%

Time

Profita

bili

ty

DisruptiveInnovation

ApplicationInnovation

Product Innovation

ProcessInnovation

MarketingInnovation Business

ModelInnovation

StructuralInnovation

Different types of Innovation give greater profitability at different points in the life cycle of a product family

Geoffrey A. Moore “Darwin and the Demon: Innovating Within Established Enterprises” HBR July-August 2004 pp.87-92

New product invention, tailoring, and development

INTRODUCTION TO

FRANCHISING

Commercial Essence of Franchising

Franchisor provides access to:• an established and proven business

format;• the franchisor’s intellectual property rights;• the franchisor’s management experience

and expertise;• group purchasing power; and• training and support services.

Commercial Essence of Franchising

Franchisee provides:• Capital;• Experience and Effort;• Access to Premises;• Purchasing Power

Advantages of Franchising

Franchisor• Allows Franchisor to maximize brand

equity by rapid growth at a moderate cost;

• Cheaper way to exploit intellectual property rights;

• Businesses usually more efficient than company owned outlets;

• Limited financial risk;

Advantages of Franchising

Franchisee• Allows Franchisee access to

established brand and management experience and expertise of Franchisor;

• Reduces risk of business failure;

Franchisor’s Imperative• Franchisor will want to protect

their investment in the intellectual property and system for its own benefit and the benefit of all franchisees;

• This results in uniform restrictions in respect of each franchisee.

Franchise Due Diligence1. Is the type of business right for you?2. How long has the franchise been in

operation?3. How many franchisees does the

franchise contain?4. How accessible were they?5. Have any franchisees failed to

successfully exploit the franchise and why?

Franchise Due Diligence6. Has the franchisor made sufficient

information available regarding the financial performance of the existing franchised businesses?

7. Have sufficient allowances been made for the working capital that will be required?

8. Has franchisor protected its IPRs?

Franchise Due Diligence9. What is the background of the people

behind the franchise?10. How sustainable is the franchisors’

business model?11. How successful is the franchise vis a

vis its competitors in the marketplace?

12. Does the franchise match your lifestyle preferences?

International Dimension• Direct Franchising v Master Licenses• Master Licenses – Features

Usually for a longer termHigher capital costExpress right to sub-franchiseMore equal negotiating powerPilot Franchises

Dealing with a Master Licensee

• Will be subject to restrictions as to how they recruit, train, and negotiate with franchisees;

• Be wary of:a Master Licensee who seems more interested in signing up franchisees than in proving a sustainable business model;a Master Licensee who cannot answer the difficult questions themselves

Survival and Growth Rates– Why is a growing franchise system different?

• Investor’s (franchisee) risk is not limited to the value of the initial investment but must include opportunity cost of labour

• Many new franchisees already have a history of self-employment the benefit is a ‘proven business formula’.

– How certain is the survival of a new system?• US and UK data confirm that there are high failure rates amongst

young franchise systems• These are at a level typical to small businesses in general• Which undermines the message of low risk and high success rates

usually communicated• A broad pattern of survival is that young systems are more likely to

fail than old, very small are more likely to fail than their larger counterparts.

• The most powerful influence on survival is whether or not they grow within a short period after start-up

Survival – The Franchisor• The development of a business from a proven concept to

sale is typically long, expensive and risky. • There are sizeable upfront costs• 28.6% of 1980 US franchise system start-ups survived to

1992 overall of 2,524 firms entering the franchise industry 1,941 exited (Lafontaine and Shaw (1996). 138 US franchise systems 24.6% survived 10 years (Shane, 1996)

• UK franchising 1,658 (1984-1995), 601 remained in existence (36%) at the end of the period (Price, 1996).

• High entry, impression of growth, high exit. Firms choose to stop franchising because the system fails or does not fit the firm’s strategies for growth.

Survival – The Franchisee• Despite the widely documented view that 92% of franchises

are still in business at the end of five years versus 23% for independent firms – reports to the US government indicated ‘real’ number of failures was unknown (Franchising in the Economy, 1988).

• IFA claims that 96.9% of franchised units reach five years (1992)

• Data complied by surveying franchisors, rather than the actual franchisee owners

• “one of the major selling points of franchising over the years has been the statistics on low failure rates. These statistics never had a real scientific basis” Lafontine, 1995.

• Birkland (1997) noted in a PhD thesis on King Cleaners franchisees that they regularly ‘disappeared’ 30% discontinued outright and 5.4% sold the franchise

Survival – The Franchisee• Small business formation statistics from the US Census Bureau also

contradict the IFA’s claim. A sample of 20,554 (1991) between 1987 – 1991 34.7% of the franchisees and 28% of the non-franchised young firms had discontinued operations.

• See Bates (2003) for a detailed study• In summary, franchises closely resemble the broader universe of

small business start-ups.• Failure prone young firms tend to be small, poorly capitalised, where

the owner works part-time and the very youngest are the most prone to shut.

• Franchisees differ from young small businesses, i) better educated owners are not more likely to see their firms survive and ii) the ongoing characteristic of the system is directly related to enhanced likelihood of firm closure.

• Risk preferences may influence franchising survival rates. The more risk-adverse choosing franchise systems

• Self-employment or business formation is not made safer by investing in a franchise

• Franchisees starting out by purchasing a unit from a previous owner were riskier than starting out from scratch.

Franchising Growth – Franchise Systems

• The notion that franchising in the US and internationally is growing is widespread

• Views are based on: i) growth of various groups of franchisors who are growing intend to grow ii) The increase in new franchise opportunities

• Reports on growth developed ignore exit data• The exit rates are quite sizeable (Price, 1997)• In the US looking at every one of the years except 1976 the

growth in the number of franchisors was greater than the growth in the number of units

• 1982-1995 the number of business format franchisors in the US did grow inline with growth in the economy

• No sign of phenomenal growth, at best the growth in business format franchising has mirrored the US economy and consolidated from 1995-2000

• In the UK franchising went through consolidation during the 1990s, growing modestly by 12% between 1990-1995. When taking inflation into account it contracted during this period.

Entry and Exit• At best one franchise system in four can be judged

to be successful over a ten year period, around half the sample was judged to have failed completely.

• Entry and exit rates of franchisees are comparable with little or no growth in the general population

• High exit rates imply that many firms try their hand at franchising – investing and hence losing, in most cases significant amounts of resources, but then decide to discontinue.

• Many of the departures ‘cease’ operation, i.e. continue in business but don’t franchise

• About half fail outright• Large numbers of franchisees in fact face failed

franchisors

Factors affecting franchisor exit• Franchise fee linked to survival. The collection of

higher franchise fees relaxes one of the constraints in the early years of growth, namely lack of funds.

• Franchisor rankings are not really a useful evaluation criteria for franchise survival and success

• Number of years of experience of the franchisor in the business format prior to launching the franchise linked to survivability – might depend on the economic cycle.

• Franchisors who spend more time developing their prototype, operating procedures and documentation are more likely to succeed in franchising

• Most of the publicly available observables on franchising have little capacity to explain future success or failure

A Model of Franchise Growth

•Similar to small business growth franchise systems experience common problems arising at similar stages of development

•Which can be defined as a sequence of identifiable stages

Hatchling–Hatchling: concept development –

• decision to start;• ideas hatched and refined; • refines an idea for a product or

service and sets up in business; • securing customers, delivering

product common problems to SMEs

Nestling– Nestling: business development –

• a commitment made to franchising; • testing of a conventional business configuration and a franchise format; • may be single or multi-unit businesses; • the business concept should be flourishing; • the concept should be tested in more than one location;• “We are going to need a fairly good track record, so it is important that we get

it right… so potential franchisees can look at us with confidence and know that we have got the experience and the history to back them up”

• development of systems of support• testing and refining concept• Development of infrastructure, documentation, team• Can take 0.5 – 2.5 years depending on investment• Often needs venture finance• Nestling concentrates overwhelmingly on developing a business configuration

and franchise format sufficiently• “There were a number of factors that we didn’t allow for… and developing the

brand and developing the systems takes a huge reinvestment. So, everything that we thought we were going to make got reinvested in building a franchise of quality”

Fledgling– Fledgling- Initial Franchisees

• A critical step because the fledgling business embarks on the path to independent survival

• Franchisees required for fast growth to rapidly reach economies of scale before cash reserves are exhausted

• Quality franchisees are required • Franchise selection processes must be evaluated and fine tuned frequently• Franchise systems support, infrastructure and management systems are variously

developed as limitations are identified• “That race is to get all documentation done and all systems in place and, at the same

time, to get to a level where the franchisees are generating enough return to be able to be self-sufficient and be able to develop further”

• Attracting franchisees for growth; waived fees; incentives; employees; trade fairs• Location; securing good sites important in the fledgling stage; establish sites and

operations before selling franchisees; securing leases in advance• Head office development; effective franchise management team; delegating managerial

responsibilities; capacity to support further growth.• “The response to franchisees demands was too long. We were burning the candle at

both ends, always tired and almost anti-social. The house was getting neglected. But you get all this work and you have to service it”

• Unforeseen problems: unexpected problems can inhibit system development, e.g. a marriage break-up, local authority by-laws, volcanic activity and French nuclear testing

Adulthood– The adulthood: Franchise expansion

• Head office with some degree of functional organisation; well-documented operating procedures for most aspects and networks of franchisees

• Primary focus strategic: managing delicate franchisor-franchisee relationships; maintaining the brand; building and maintaining market share and reducing internal inefficiencies

• “It is important for us never to get tempted to do anything that would in anyway upset the relationship with our franchisees and put them under pressure”

• “It’s a vicious circle because… enforcing is not easy and, at times, having the franchisee understand where the hell it is all at in terms of what we are trying to do in the marketplace –they just can’t see the wood from the trees”

• “The biggest problems we always have are with struggling stores. We put an extraordinary amount of time into working to support struggling store owners”

Beyond Adulthood•Logical development beyond adulthood is expansion into foreign markets

CASE STUDY: INDITEX

64

EXPERIENCE OF TWO DIFFERENT MARKS IN THE SAME COMPANY: INDITEX

Creation and protection of the trademark

VS

Creation and protection of the trademark

65

INDITEX NOW3,384 stores

69 countries

72.377 employees

62 % International Sales

8.196 M € TURNOVER 2004Manufacturing and distribution of fashion clothing, footwear and accessories

66

COMMERCIAL FORMATS (brands)

67

ZARA HOME

COMMERCIAL FORMATS (brands)

68

1963 First ZARA workshop

69

• ZARA was born (Confecciones GOA) in Coruña in 1964

• Manufacturer of women’s clothing

• Distribution through sales agents

• Sales Volume: Approx. 2,000 MM

• 300 employees

STARTING POINT: 1960s...1970s

70

1975 – 1st ZARA store in A Coruña

71

Years 1975 – 1980Creation of the retail company GOASAM, S.L. and the ZARA brand.

Opening of own stores

Expansion limited to Galicia with openings in the main Galician cities

Continuation of manufacturing and distribution through agents

Limited sale of own products (15% of total sales only)

72

EXPANSION IN SPAIN + CONSOLIDATION OF BASIC BUSINESS PRINCIPLES

Increase of own manufacturing

Flexibility of production lines: Manufacturing in light of consumers' demand

Productive System of vertical integration

Reinvestment of almost all the profits

Strengthening of Design and Window Dressing Departments

Reduced periods of product rotation

END 1988: 71 stores; 2,330 employees; turnover 21,000 m ptas

1st INTERNATIONAL TRADEMARK Application: 1984

Years 1980 – 1988

73

- 1st INTERNATIONAL OPENING: OPORTO 12/12/1988

- 1st OPENING OUTSIDE SPAIN AND PORTUGAL: PARIS 2/10/1989

- 1st OPENING OUTSIDE EUROPE: NEW YORK 21/09/1989

•Own stores •Franchises•Joint ventures

90’s INTERNATIONAL EXPANSION

74

1990s: DIVERSIFICATION / BRANDS

ZARA HOME 2003

1991

Creation 1985 – Purchase 1991

1993

1998

Creation 1993 – Purchase 1999

2001

75

CHARACTERISTICS :Vertical Integration

MANUFACTURING

STORE

DISTRIBUTION

DESIGN

Quick answer to market demands!!

76

CHARACTERISTICS : Attractive points of sale

77

CHARACTERISTICS: Model of store management

CustomerService

Easypayment

EasyProduct refund

Excitementfor clients

Price

Quality

Attention to details

78

Trademark MANAGEMENT MODELS

EXPERIENCE OF TWO DIFFERENT MARKS AT TWO DIFFERENT TIMES:

creation and protection of the trademark

VS

creation and protection of the trademark

79

Trademark MANAGEMENT MODELS: CREATION

Internal creative process in accordance with commercial project

Legal viability verifications

Vocation to stay

Inalterability

Random choice without a clear vocation

Unknown legal viability

Acceptance of possiblechanges

•Starting point•Beginning 90’s

80

Trademark MANAGEMENT: LEGAL PROTECTION

Professional management only afterwards

First application only 3 years after use (1975/1978)

Fist international application (WIPO)1984

Professional management from the start

Planned protection prior to use

Optimization of international mechanisms of protection

81

Trademark MANAGEMENT: LEGAL PROTECTION

Protection in stages with various legal obstacles

(decisions in light of circumstances; pressure; need of litigation and negotiation)

Uniform, quick and peaceful protection

(almost no incidences, if any solved in advance or without strain)

82

Trademark MANAGEMENT:CONSEQUENCES

Legal Expansion in accordance with and prior to the commercial one:

rhythm and advantages

Commercial Expansion discordant with legal expansion and protection:

No rhythm and many risks

DISPUTE RESOLUTION

IN FRANCHISING

Critical Components of a Franchise System

There are three critical components of a franchise system -- the brand, the operating system, and the ongoing support and training provided by the franchisor to the franchisee:

(1) The brand creates the demand, allowing the franchisee to initially obtain customers. (2) The operating system essentially "delivers the promise,” thereby allowing the franchisee to maintain customer relationships and build loyalty. (3) The ongoing support and training provide the impetus for growth, providing the franchisee with the tools and tips to expand its customer base and build its market share.

How Franchising Adds Value• A responsibly-built franchise system is one which

provides value to its franchisees by teaching them how to get and keep as many customers as possible, who consume as many products and services as possible, as often as possible.

• In fact, most litigation in franchising revolves around the gap between the actual needs of the franchisees to remain competitive in the marketplace and the reality of what support the franchisor is capable of providing.

• The genesis of the disappointment begins during the recruitment phase of the relationship and continues beyond the start-up as the franchisee struggles to remain competitive, unless the franchisor delivers on its promises and is committed to providing excellent initial and ongoing training and support.

Road to Growth and Prosperity

• Franchising is not a quick road to riches, but it can be a successful and profitable way to future growth and prosperity.

• There will be a multitude of issues to consider, but whether you are a franchisor or franchisee, taking care that the franchise brand is well protected and understanding the importance of all representations and statements made at the outset, can help smooth the path ahead.

The Problems of Success• Franchising's "success" and resulting rapid growth

may also cause problems. • Often, franchise business developments continue

to outpace any attempts at developing a well-structured, orderly approach to the legal issues associated with franchising.

• Court decisions, administrative regulations, and legislation have failed to provide even the most basic element for a nationwide legal standard: a uniformly accepted definition of franchising

It is almost like a marriage…• A franchise relationship is the corporate

equivalent to a civil marriage. • When disputes arise, a lot is at stake as the

parties often bring years of concerns to the table. The challenge, where appropriate, is to handle the disagreement to make it possible for the marriage to survive and flourish; failing which, to result in the least amount of pain while separating/parting ways.

Dialogue…Listening…• Oftentimes, franchisees are quick to act out

against franchisors when the business is not performing, and sometimes franchisors are quick to slap owners with outrageous fees or threaten to remove them from the franchise altogether.

• Through meaningful dialogue, however, and the willingness to listen twice as much as they speak, franchisors may discover a new way to help the franchisee turn the business around or exit the franchise as painlessly as possible.

Disputes… Way Forward• Well-founded legal advice, and practical

management of a dispute may avoid escalation of disagreements between a Franchisee and a Franchisor. However, there are times when this is not enough.

• Franchising Lawyers handle franchise disputes through negotiation/mediation, arbitration, and, if necessary, litigation.

What Franchising Lawyers do…

They assist with:• Defining and communicating the major issues to

all relevant parties;• Devising a multi-step strategy to achieve desired

results with minimal business interruption;• Appointing a mediator and representing the

client at mediation; and• Informing, where appropriate, legislative bodies,

industry associations or the media of alleged misconduct.

Negotiating Your Contract• Whether you’re a novice or an experienced

person, negotiating a fair franchise agreement can be complicated.

• If you can’t decipher between a balanced contract and one that is more one-sided, it’s strongly recommended that you hire an experienced and impartial third party (franchise expert) who understands both the business area/sector and franchising to assist in the negotiations of the agreement.

A US Example…• A key component of the International Franchise

Association Self Regulation Program is the National Franchise Mediation Program (NFMP).

• The NFMP was founded in 1993. It is a mediation program designed specially for the franchise industry.

• The program is governed by a steering committee comprised of both franchisors and franchisees and administered by the CPR Institute for Dispute Resolution.

National Franchise Mediation Program

The National Franchise Mediation Program provides a specific step-by-step approach to dispute resolution for both franchisors and franchisees and assists in the setting up a meaningful mediation process.

The NFMP has specific ground rules for mediation: * Process is non-binding * Mediator will be neutral and impartial * Parties will cooperate with mediator * Mediator controls the procedural aspects of the mediation but

the process is typically not formal * Each party must have a decision maker with authority to

negotiate a resolution at the mediation * Process will be conducted expeditiously * Entire process is confidential * The franchisee may withdraw from the process at any time

National Franchise Mediation Program

• The objective of the program is to create a process which enables disputes between franchisors and franchisees to be resolved, without the high costs of litigation.

• Costs of litigation are not only monetary, but include (1) impaired relationships,

(2) lack of focus on the core business, and (3) increased stress on all parties.

National Franchise Mediation Program

• Successful franchisors participating in the NFMP communicate to their franchisees about the program on an ongoing basis before any problems arise.

• Education about the NFMP and the mediation dispute resolution topic is a part of the ongoing franchisor-franchisee relationship through articles in newsletters, presentations at conventions and other franchisee meetings.

• Franchisee advisory councils can be major advocates of the program and assist greatly in getting the word out to the franchisee community within the system.

National Franchise Mediation Program

Common complaints seen in the program include impact-encroachment, franchisee development rights, termination of franchise, renewal of franchise, alleged underreporting of fees owed and customer service issues.

How the NFMP WorksWhile either a franchisor or a franchisee could initiate a complaint, the most common use of the program is franchisee initiated; so how does the program work?

1. The franchisee completes a form letter briefly describing the complaint against the franchisor to the administrator of the program.

2. The franchisee agrees to meet within a specified time period with a senior representative of the franchisor to discuss the issues informally with the franchisor. Many times, this step resolves the dispute because the franchisor and the franchisee are communicating directly about the problem. Various educational tools are available to the franchisor to assist in this important part of the process. Even if a resolution cannot be reached, a mutual respect and understanding of the issues can set the stage for a successful resolution at a later stage of the process.

How the NFMP Works3. If the dispute cannot be resolved through the

initial negotiations of the parties, the administrator of the program will recommend up to five experienced franchise mediators for the parties to choose from.

4. If the parties cannot agree on a mediator, the administer will select the mediator based upon a ranking order priority from both parties.

How the NFMP Works5. The mediator's compensation rate is determined

before appointment and each party pays one-half of the cost of the mediator along with an administrative fee to the administrator.

6. Mediation is scheduled within a specified time frame. 7. Each party delivers to the mediator a summary of the

background of the dispute and other information to familiarize the mediator with the dispute.

8. Mediation is held and normally can be accomplished in a one-day session.

9. If the mediation does not result in a negotiated resolution, the mediator will give both parties a written evaluation of the issues.

How the NFMP Works• The program has a success rate of

more than 90 percent in cases where the franchisee agreed to participate and in which a mediator was needed.

• Many times the disputes are resolved prior to the need for a mediator's intervention.

Mediation Will Grow • With the court systems overloaded in

the USA some states, like Texas, are mandating mediation as soon as litigation is initiated.

• With the increasing costs of litigation in both time and dollars, mediation will continue to grow nationwide as a method to resolve disputes fairly, amicably and efficiently.

Some key points to ponder…• Franchisors who do not have a formal

mediation program should consider establishing one.

• Franchisees or franchisee advisory councils should discuss a mediation program with their franchisors.

• The time to set the rules for a meaningful mediation program is before disputes arise.

• Relationships are the base of the franchiseindustry and successful franchise systems develop ways to resolve disputes without destroying those relationships.

A Useful Website…

• http://www.franchiselawblog.com/archives/cat_intellectual_property.html

Subway Jan 2007• Sarnie maker Subway is taking a former UK franchise holder to the

High Court for copyright infringement over a website that he has set up complaining about the way the multinational has treated him.

• The company is seeking an injunction and up to £100,000 in damages. • It claims the site - www.subwayuncovered.com - infringes its

trademarks.• Such disputes are usually taken to the World Intellectual Property

Organisation (WIPO). But in recent cases, such as Ryanair's disputewith the owner of Ryanaircampaign.org, the WIPO panel has ruled that you can make limited use of trademarks in order to comment on a company.

• The ex-franchisee's site states who the trademarks belong to, but does make various allegations against Subway.

• Robert Moorhouse, the man behind the site, told The Register: "They're claiming trademark abuse and copyright infringement and want the case heard in the High Court rather than Leeds near where I live. I set up the website to give information to would-be franchishees that otherwise they would not get until after they had joined."

• Moorhouse used to run a Subway store and is in dispute with the firm over payments relating to the transfer of leases and equipment costs.

Papa John's Alleges Racketeering

• Kentucky-based Papa John’s International, Inc. has sued a group of Chicago pizza makers, alleging that they operate as "fronts" for a terminated Papa John’s franchisee.

• Papa John’s terminated its franchise agreement with Antoine "Tony" Rezko in 2004. AR Pizza (alleged by Papa John’s to stand for "Antoine Rezko") and Newco Pizza (yes, somebody actually named their new company "Newco") were incorporated shortly after the Rezko termination.

• Papa John’s alleges that AR Pizza, Newco Pizza and another entity, LayaZia, LLC and certain of their principals use Papa John’s intellectual property while operating under names including "Papa Tony’s" and "Pizzeria Zia." The federal court complaint alleges, among other things, racketeering, trademark infringement and unfair competition.

• Mr. Rezko is not a defendant in the suit. An attorney for Mr. Rezko, Gene Murphy, stated, "This is a squeeze play on Papa John’s part to eliminate the competition."

Jimmy John's Settles Menu Copyright Suit: Nov 2005

• Jimmy John's, which owns, manages or franchises 335 gourmet sandwich shops, settled a copyright and trade dress infringement lawsuit against TM Foods of Avon, Inc., which operates a House of Sandwich shop in Avon, Indiana.

• Jimmy John's filed suit in the Southern District of Indiana alleging that the House of Sandwich's menu and menu boards infringed on Jimmy John's copyrights.

• Jimmy John's claimed that the overall selection, arrangement and grouping of sandwiches and the use of a unitary price for each sandwich group on the House of Sandwich menu resembled the copyrighted menus used by Jimmy John's.

• As part of the settlement, TM Foods agreed to pay Jimmy John's $50,000 and to destroy its menus and menu boards.

• Additionally, the parties entered into a consent judgment which permanently enjoins the owners, officers, directors and shareholders of the House of Sandwich from copying or using aspects of its menus.

Subway Sends Cease and Desist Letter to Connecticut Sandwich Shop: Sep “05

• Subway has asked Steakways Famous Philly Cheese Steaks, a sandwich shop located two miles from the company's headquarters in Milford, Connecticut, to cease and desist using the name "Steakways," which Subway claims is confusingly similar to its own.

• According to one local news source, Subway's letter to Steakways stated that Steakways must change its name within two weeks or Subway will bring trademark infringement claims.

• Kevin Kane, spokesperson for Subway, said that Subway has always supported small business owners, but the company must protect its name if it appears that there may be an infringement. Steakways, which specializes in Philly cheesesteaks and other hot sandwiches, has been open for one year and plans to open a second store in nearby Bridgeport.

Is That Near the In-N-Out Burger?Sep 2005

• An Aspen restaurant called the In & Out House may soon be faced with a name change (which might be a blessing given that the word outhouse is part of the restaurant's name) based on pressure from California-based In-N-Out Burger, a burger franchise with units in California, Nevada and Arizona.

• In-N-Out Burger was founded in 1948, while the In & Out House has operated in Aspen for two decades.

• The parties are presently negotiating over the name although In-N-Out Burger has no plans to expand into Colorada at present. And yes, Donnie, it's near the In-N-Out Burger.

Mister Softee Investigates "Rip-Off Trucks“: July 2005

• Policing your marks can be difficult and expensive, particularly when the infringers are on wheels.

• This New York Times report follows the efforts of Mister Softee, the largest franchisor of soft ice cream trucks in the United States, to shut down infringing trucks.

• The company hired private investigators to identify independent ice cream trucks that resemble the Mister Softee vehicles in their color scheme, logos or jingle.

• The investigation turned up hundreds of operators who paint their ice cream trucks blue and white and create menu boards and logos identical to Mister Softee's, including the company's famous cone-head trademark.

• According to the investigators, they have gathered enough evidence against 30 operators of "rip-off trucks" in New York City and on Long Island for Mister Softee to bring trademark and copyright infringement lawsuits against them.

Mo's Files Trademark Infringement Suit Against Moe's: January 2005

• Mo's Restaurants, an Oregon-based restaurant chain famous for its clam chowder, filed a trademark infringement lawsuit on June 28, 2005 in the United States District Court in Portland, Oregon against Moe's Southwest Grill, a restaurant chain based in Atlanta Georgia.

• According to Mo's, "[n]o matter how you spell it, there is only one Mo’s." Mo's decision to sue came after Moe’s Southwest Grill's aggressive expansion into Oregon and the opening of its first restaurant in Oregon in April 2005.

• Founded in 1952 by Mohava “Mo” Niemi, Mo’s operates six restaurants on the Oregon coast and has owned a federally-registered trademark for Mo's since 1986.

• The company employs approximately 350 people and serves 1.3 million customers a year. Moe's Southwest Grill, established in 2000 and has 229 restaurants across the country, plans to open 20 more restaurants in Oregon through its Pacific Northwest franchise holder, Wraps of the Northwest. Clam chowder, however, is not currently on Moe's menu.

Trademark Dilution brought to you by Starbucks: August 2004

• After the Supreme Court handed down the Victoria's Secret decision in March 2003, many trademark experts and lawyers were left scrambling to figure out how to prove trademark dilution.

• Starbucks, however, may have a new case to test the requirements of the Federal Trademark Dilution Act -- Starbucks v. StarbockBeer. In Galveston, Texas, the case between Starbucks U.S. Brands Corp. and Rex Wayne Bell continues.

• Bell owns a bar in Galveston and attempted to register "StarbockBeer" as a trademark in 2003.

• Starbucks opposed the registration and Bell filed this declaratory judgment action asking the court to find that his use of the name Starbock Beer in connection with alcoholic beverages is not confusingly similar to or in conflict with Starbucks' marks.

• Starbucks suggests that the mark "is both derivative of and dilutive of their trademark rights."

• Now that mediation between the parties has failed, the case has been scheduled for a March 2005 trial date.

Et tu Brute?: June 2004• Little Caesars has filed suit against forty

franchisees for using non-conforming ingredients at their Little Caesars restaurants.

• The complaint alleges trademark infringement and breach of contract.

• The franchisee association claims that the lawsuit is nothing more than Little Caesars retaliation against franchisees who refuse to purchase product from the franchisor's distributorship.

What's in a Name? March 2004• After losing a trademark dispute in February, Capri

Coffee franchises are facing a name change beginning on Monday.

• The Colorado-based franchisor learned late last year that its trademark application was refused because the trademark was owned by another company, CaffeD'Arte LLC.

• Caffe D'Arte, a Seattle-based coffee roaster, then filed a federal trademark infringement against Capri.

• Capri's franchisees have been given options to convert to Saxby's Coffee (a different concept launched by the former Capri president) or to remain Capri and address the name change.

• At least eleven franchisees have abandoned the franchise altogether and operate independent shops in a deal negotiated by the group's lawyer.

McDonald's Seeks Protection for MacSep 2003

• McDonald's Seeks Protection for Mac in Singapore. In a country where it has 129 restaurants, McDonald's has argued to Singapore's highest court that products such as MacNoodles, MacChocolate and MacTea are likely to confuse consumers, who would associate McDonalds with these products.

• McDonald's claims that "Mc" and "Mac" are essential elements of its trademark, which deserve protection.

• In a separate forum, the owner of the "Mac" products, Futures Enterprises Singapore (FES) has challenged the right of McDonald's Russia to use the brand McCafein Moscow. (FES succeeded in its challenge in 2004)

• Futures, which has sold instant coffee under the name MacCoffee since 1994, intends to launch a chain of MacCoffee shops in Russia and has held the right to the name in Russia since 1998.

In Argentina…A decision of the Court of Appeals voided a Master Franchise Agreement because the Franchisor did not have a valid trademark covering the class of products, subject matter of the franchise, despite the fact that Franchisor had valid registration of its trademark in different classes.

In Argentina…Contd…The franchisor was forced to return to franchisee as damages all the costs associated with the execution of the franchise agreement and all contracts that were the direct consequence of said Master Franchise Agreement, the lease arrangements, and its cancellation, the purchase price of installations, dismissal of personnel, advertising expenses and lawyer fees for the execution of the agreement and the filing of its claim.