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Can you protect your franchise model from being stolen?

Written by Kate Legg on Friday, 13 April 2018. Posted in Legal

Once you’ve established a successful franchise it’s only a matter of time before prospective copycats come sniffing around your business. Fortunately there are ways to protect your brand and your system

Can you protect your franchise model from being stolen?

Franchisees pay significant sums for the rights to use franchise brands and systems so protecting them is a constant concern for all franchisors. Threats come in all shapes and sizes but typically include third parties who have no prior association with the network and wish to unfairly exploit the brand. Beware though that former franchisees sometimes wish to set up their own independent businesses based on the franchisor’s knowledge and system but without paying further fees.
This month, we look at some of the tools available to the franchisor to ensure their most valuable assets are protected.

The first and perhaps most obvious way to protect the brand is to use a registered trademark. A trademark can be any sign which identifies the brand. This is typically the name or logo but in the past registered trademarks have been given for the shape of the classic Coca-Cola bottle and, in some cases, for distinctive colours like Royal Mail red and Cadbury purple.

A registered trademark gives the owner the exclusive right to use their mark in relation to the goods and services they provide. The franchisor would have the right to bring a claim against anyone who uses their mark or any very similar marks without permission. Action could include an injunction to stop the person using the brand and could also include a claim for financial compensation.

Without a registered trademark, the name and logo will still benefit from some protection in the form of “Passing Off”. This gives the franchisor an action in situations where a third party unfairly benefits from the franchisor’s reputation by using a confusingly similar name, logo or trade dress like for example a website that looks and feels very similar to the franchisor’s site. This is a more difficult claim to bring than a claim for infringement of a registered  trademark because with passing off, the franchisor has to prove his brand has an established reputation, that there has been confusion between the two brands and that the franchisor suffered damage as a result.

But franchisor’s intellectual property goes much wider than just its name, logo and trade dress. There will be a significant body of intellectual property in the operations manual and in the know-how and systems that the franchisor teaches to its franchisees.

Any items that are written down will be protected by copyright. However, this does what it says – it’s only a right to prevent copying, not an exclusive right to the general ideas and systems described in the document. This means copyright offers limited protection, although it can still be useful.

In so far as the systems and ideas comprise confidential information, they can be protected by the laws of confidentiality. To benefit from this, the franchisor should impose appropriate confidentiality obligations on recipients of the information. This will typically include a confidentiality clause in the franchise agreement but clauses in employment contracts with franchisees’ employees should also be considered. It is also important to properly identify confidential information. Case law suggests that if a franchisor tries to claim that all information is confidential, this may render the clauses ineffective because some information is clearly not confidential. For this reason, it is good practice to specifically mark information and publications that are intended to be confidential as “Confidential” - but avoid marking everything.

The next layer of protection arises through non-compete restrictions which are intended to stop the franchisee from being involved in competing businesses where opportunities to unfairly exploit the franchisor’s knowledge and intellectual property can arise. The extent to which these restrictions are enforceable depends on the specific circumstances, including the scope of the restricted acts, the time for which the restrictions apply and the geographical area in which they apply. This involves striking a balance between making the restrictions wide enough to protect the franchisor’s legitimate interests but not going any further than is required as any provision which is too wide risks being invalid and unenforceable.

Thought must also be given to who the restrictions apply to. Ideally, any key individuals who have access to sensitive information ought to be subject to restrictions. However, the relationship of the parties is also a factor in determining whether a restriction is enforceable. For example, longer restrictions can be validly imposed on a franchisee in a franchise agreement than can be imposed on employees in employment contracts.

Once protection is in place, it’s important the franchisor takes steps to monitor its rights and enforce infringements. This may include setting up Google alerts to check for unauthorised use of the name or unauthorised links to the franchisor’s website, monitoring  trademark journals for applications for registration of competing marks, ensuring registrations are kept up to date and filing applications for new trademarks when the name or logo changes or new goods and services are added. Enforcement is often easier said than done but having the right forms of protection in place to begin with will make enforcement much easier for your franchise.

About the Author

Kate Legg

Kate Legg

After more than a decade advising other business owners, Legg has recently fulfilled a long held ambition and become one herself. Now the founder, director and CEO of Komerse, a legal practice specialising in commercial law and franchising, Legg is clearly practising what she preaches.

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