G URMEET S J AKHU, P ARTNER H AMILTON P RATT S OLICITORS E NGLAND, U NITED K INGDOM Workshop 10: Maximising Intangible Benefits, from IPRs Protection to.

GURMEET S JAKHU, PARTNER HAMILTON PRATT SOLICITORS ENGLAND, UNITED KINGDOM

Workshop 10: Maximising Intangible Benefits, from IPRs Protection to Exploitation of IPRs: Business Strategies based on Franchising and/or MerchandisingIP Issues & Franchising•1

INTRODUCTION: IP ISSUES & FRANCHISING

1. What is a franchise & statistics?2. Definition of franchising.3. Why franchise & is the business

franchisable?4. IPRs,franchising and Due Diligence.

a. Trade Marksb. Confidential Information & Trade Secretsc. Copyright & Patentsd. Goodwill & Trade Dress

5. Conclusion •2

WHAT IS A FRANCHISE? Word franchise’ comes for the old

French ‘franchir’ which meant to liberate/set free.

Offers people the freedom to own, manage and direct their own business.

Business format – most common form. Fr’ee replicates the entire business format/method to conduct their business.

Started off in the US in the 1950’s; rapid growth in the 1980’s due to international expansion into Europe & UK. •3

FRANCHISING IN THE UK,USA & ITALY UK: (BFA/Natwest Survey 2009)

£11.4 billion overall turnover of UK franchise sector in 2008 (drop of 8%); 838 franchise systems (up by about 28); 34,600 (franchise units) 90% franchisees making a operating profit; 467,000 people employed in the franchise sector.

USA: (IFA & News Release October 2009) more than 900,000 franchise businesses in the US provide 20 million jobs

and $2.3 trillion in economic activity President Obama pledged support for increasing the Small Business

Administration loan limit from $2m to $5m to help SB expand and create new jobs and set the country on the road to economic recovery (October 21 2009)

Italy: (1International Franchising In Italy, Trends and Perspectives 2002 (A Majocchi & E Pavione); 2 Infofranchise press 07/03/2007 & 3Rapporto Quadrante Franchising 2008)

Brands 562 (2002)1; 766(2006)2; 847 (2007)3 & 852 (2008)3

Turnover (billion euros) 11 (2000) 1; 19 (2006)2; 21.13 (2007)3 & 21.4 (2008)3

No of outlets 52,725 (2007)3 & 53, 434 (2008)3 [2002; 31,439 Fr’ees1]

No of employees 75,000 (2000)1; 182,215 (2008)3

Franchise Business Outlook 2009 by PWC and FRANdata – Fall in borrowing by franchisees and sharp drop in consumer spending will affect franchising •4

INTERNATIONAL FRANCHISING Market is in overseas growth: (USA: Wall Street Journal Aug

09) Subway & Curves International reported expansion abroad

esp.: Brazil and Central & Eastern Europe. Also in India and China where new middle classes are emerging.

Curves opened 612 centres outside N America from Feb 08, compared to just 18 in US and Canada.

Since Jan 2008, Subways has opened 1,432 locations abroad, 202 more than in the US.

McDonalds Corp has opened 286 units abroad, compared with 56 domestically.

International push due to saturation of US market; master Fr’ee bank roll whereas domestic fr’ees may require bank loans (credit not available locally) or maybe down to tradition: Home Instead Inc (professional care for seniors). In Japan

tradition dictates that aging parents be looked after by the wife of eldest son, but now many have jobs. Fr'sor has 149 locations in Japan, more than half of its 268 international franchises which are spread across 14 countries.

•5

DEFINITION OF FRANCHISING UK has no franchise specific laws; unlike USA,

Canada, Italy and Australia do have franchise specific laws.

EU member states view the relationship between a Fr’sor and a Fr’ee differently: Relationship between 2 independent businesses &

adopt a ‘buyer beware’ approach eg: UK & Ireland where there is no specific legislation aimed at franchising.

Others view franchisees as parties in need of some form of special protection eg: France, Germany and Italy.

But even within these members states they have differing levels of protection (disclosure requirements; list of fr’ees; disputes etc)

•6

DEFINITION OF FRANCHISING (2) European Franchise Federation

(EFFCode):“Franchising is a system of marketing goods and/or services and/or technology, which is based upon a close and ongoing collaboration between legally and financially separate and independent undertakings, the Franchisor and its Individual Franchisees whereby the Franchisor grants its individual Franchisee the right, and imposes the obligation, to conduct a business in accordance with the Franchisor’s concept”.

This definition has been adopted by the BFA (British Franchise Associations).

•7

DEFINITION EXPLAINEDA contract between two legally independent parties which

gives:

a person or group of people (franchisee) the right to market a product or service using the trademark or trade name (IP rights/branding) of another business (franchisor).

The franchisee the right to market a product or service using the operating methods of the franchisor (use of the System -‘know-how’).

an obligation on franchisee to pay the franchisor fees for these rights (made up of an initial fee and ongoing royalty/ management service charge: (payment of royalty is based on levels of franchisee’s turnover and not profit, hence incentive to achieve market penetration rather than profit)).

franchisor’s obligation to provide initial and ongoing support. •8

WHY FRANCHISE?

Cost effective means of raising capital and expanding quickly.

Motivation, skill & finan. comes fromFr’ee

Franchisee’s perspective:Proven brand recognition and profit

potential.Proven concept - don’t worry about failure.Ownership & independence. Being in business for yourself and not by

yourself.

Key: business expansion involving exploitation of an IP asset, Fr’sor control and assistance.

•9

IS THE BUSINESS FRANCHISABLE? Yes – replicated & generates profit for franchisee.

Pilot Testing (establish system & income stream).

BFA’s says concept should consists of know-how ie: trade secrets that can be passed (know-how must be present); If not, a mere trade mark licence granting a right to use a name

Most businesses are franchisable except: Creative businesses (require skill not easily

taught). Technical business (with the exception of

McDonalds who have an extensive training course, most have a short induction).

Fashion production (concept/idea must last original term plus a renewal).

•10

EXAMPLES OF FRANCHISED BUSINESSES Restaurants and fast food - McDonalds, Burger

King, Domino’s Pizza, Pizza Hut, Subway, KFC and 7-Eleven.

Retail Clothes - Benetton; Levi; French Connection. Health and Beauty - Curves; Body Shop; Supercuts;

Saks; Toni & Guy & Rejuvinate Health Clubs. Hotels - Marriot & Choice (Canada). Parcels Delivery - DHL & UPS. Training and Education services - Gymboree

(children’s exercise and learning) & New Horizons. Maintenance, cleaning and sanitation services -

ServiceMaster, Jani King & Dyno Rod. Professional services, accounting, tax and

Copying - TaxAssist; Century 21, Your Move & CartridgeWorld and Kall Kwik.

•11

IPR RIGHTS (GENERAL)

IPR’s are territorial. Different countries have different laws-need

to apply to different countries to get protection.

There is some international harmonisation – via international treaties.

Need to map out IP exploitation ahead of actual expansion overseas.

•12

IPR’S AND FRANCHISING IPRs are inherent to a franchise. Eg: Trademarks - the life blood of a franchise:

Identifier and indicator of source. Immediate consumer recognition. Communicates a way of doing business.

IPRs (differing importance): Trademarks Confidential Information & Trade Secret Copyright Designs rights Patents

Review IPRs being granted (Due Diligence)•13

DUE DILIGENCE & REVIEW OF IPRS

Due Diligence - nothing more that the process of accurately assessing the value to be acquired.

In addition a prospective Franchisee needs to: Obtain a list of all registered IP, such as trade marks,

trade-names, business names and patents (if applicable). Equally important are all unregistered IP rights, trade

secrets, ‘secret sauce’, recipes, copyright or other confidential information which form a part of the target franchise’s model.

Prospect Franchisee would want to know the: Nature of the licensing rights to be held. Whether granted equally to all franchisees. Whether these are capable of being modified during the

term. •14

WHAT IS A TRADEMARK? A Trademark may ‘consists of any sign

capable of being represented graphically, provided such signs are capable of distinguishing the goods or services of one undertaking from those of another’ (Art 2 of the Trade Marks Directive (89/104/EEC)

A sign that distinguishes the goods and services of one enterprise from that of another eg: Rolex (watches): Mont Blanc (pens) & American Express (financial services); Kodak etc

•15

PROTECTION OF A TRADEMARK TM are protected through registration

UK registered within one or more of 45 classes (TMAct 1994) & Italy (Italian Trademarks & Patents Office - Rome)

Community Trade Mark registered in all member EU states via the OHIM (Alicante).

International registration filed under the Madrid Protocol administered by WIPO (Geneva).

TM owner is protected by the law, where appropriate can: (i) Stop any business/person making unlawful use of his TM. (ii) to collect damages for his loss or gather up the

wrongdoer’s profits & (iii) to secure the destruction of any infringing goods

Law of Passing off – available to both reg and unreg TMs (expensive and time consuming, must prove use and

goodwill)•16

TRADEMARKS; FRANCHISE AGREEMENT Franchisors should develop an active TM

protection programme designed to educate its field staff, key employees and all of its fr’ees as to proper usage and protection of the TM.

Franchise Agreement – sets out contractual terms relating to TMs

Trademark User Compliance Manual - more detailed guidelines for proper usage &quality etc.

TUCM incl. in Operations Manual to specify: Proper display of the marks. All documents on which the Fr’ee must display the

TM and identify itself as a Fr’ee.

•17

TRADEMARKS; FRANCHISE AGREEMENT (2)

Every FA will have a section devoted to the proper use and care of the Fr’sors TMs

As a minimum should stipulate the: Identity of the trademark that the Fr’sor is

licensing the Fr’ee to use.Require the Fr’ee to use only the TM

designated by the Fr’sor.And only in the manner authorised. ‘On loan’ during the term of the Agmnt.

•18

TRADEMARKS; FRANCHISE AGREEMENT (3)Franchise Agreement provides that the Franchisee:

Is not be able to licence the TM to a third party.

Must not register the TM in its own name or a third party with whom it is associated.

Notify, if it learns of any improper use of the TM.

Required to expressly acknowledge that the Fr’sor is the owner of the TM & goodwill associated with the TM.

unauthorised use (infringement of Fr’sors rights) & may amount to grounds for termination (often immediate).

On termination must immediately cease use of TM (& CI)

•19

CONFIDENTIAL INFORMATION & TRADE SECRETS

1. Fr’sor consider whether its: techniques, business operations, manuals, recipes, prospect list, customer lists, pricing can be protected as trade secrets.

2. Trade secrets are confidential information that has commercial value (by virtue of being kept secret and reasonable steps have been taken to keep it secret).

•20

CI & TRADE SECRETS (2)3. Although not strictly an IP right,

information may be protected as CI if:a. it is confidential in nature. b. it was disclosed in circumstances

importing an obligation of confidence (Coco v A N Clark (Engineers) Ltd (1969) RPC 41).

c. And there has been a breach of that confidence (by the person receiving the information) to the detriment of the other (person imparting it) ie: causes harm.

d. No registration in the UK.•21

CI & TRADE SECRETS (3)

4. Make it known that disclosure of a TS may result in termination and/or legal action & Monitor compliance.

5. Protection achieved via: Non Disclosure Agreement: at the outset, sets

out what constitutes CI, clarity and certainty. Ops Manual: should identify information which

Fr’sor considers to be trade secrets & discuss the protection and use of those secrets.

FAgmnt: both during and post termination. Law also protects ‘Database’ rights.

•22

COPYRIGHT

1. Protect the results and expressions of creative ability. Eg. Operations Manual & Software Programmes (accounting software), forms, templates etc.

2. Exists automatically upon creation of a piece of work & no registration in the UK.

3. What is protected? creative output - literary & artistic and includes

computer software (Software Directive (91/250/EEC) directs that computer programmes (which includes the preparatory design material) are protected as literary works)

UK, Copyright, Designs and Patents Act 1988, computer software qualifies as a literary work.

•23

COPYRIGHT (2)

4. Prevents unauthorised copying.

5. In case of Infringement: Injunction to prevent further copying; Damages Delivery up and destruction of offending

items)

6. Include additional provisions, in FA/Ops Manual, reinforcing in FA/Ops Manual rights.

•24

PATENTS Protect inventions & on registration grants

monopoly rights for 20 years. In the UK regulated by the Patents Act 1977

(novelty must be present in the invention). International Protection:

European Patents office (Munich) once registered provided protection within member states of EU.

Patent of Co-Op Treaty – enables application in a no of countries but actual patent dealt with at a national level.

Provides protection from TP using the patent. 90% of patents once registered not put to

commercial use.•25

GOODWILL

Goodwill associated with the Franchisee’s local contacts, reputation and customers.

Who does it belong to?Some FAgmnts provide that this could

belong to the Fr’sor, after all the Fr’ee has been using the Fr’sor TM, know how and system to build his own goodwill

However, there is an element of the GW which is down to the hard work of the Fr’ee and which he should be able to realise on sale

•26

TRADE DRESS Unregistered right: combination of

elements, where there is retail / public presence (Part of the ‘Get up and go’).

Trade dress may include, external building feature, interior design, signage, uniforms, packaging.

Designed to build brand awareness and to distinguish one company’s product or services from those of another (Op Man).

•27

CONCLUSION FA - form of business expansion

characterised by the exploitation of IPRs.

IP rights - important intangible asset & can be crucial to the future financial success of the business.

Main IP right in franchising is trade marks, (trade names, CI & trade secrets, copyright).

IP protection is paramount to the survival of any business.

Tough measures are needed to preserve and prevent the misuse of IPRs in FA. •28

THANK YOU The contents of this presentation are

not meant to be legal or professional advice. The presenter and/or Hamilton Pratt do not accept any responsibility for any loss or damage arising out of any attendee’s reliance on the contents of this presentation.

Gurmeet JakhuPartner, Hamilton Pratt England UK+44 (0)121 237 [email protected] •29