Intellectual property forms an important part of the franchise relationship. Acknowledgement of this by both the franchisor and the franchisee is a key issue for franchisors that wish to enter new markets and capture new business grounds. As a franchisor and franchisee, or one new to the franchise business, you might have many questions in mind related to franchising:
Question 1:
Should a Franchisor monitor and enforce the use of their trademark(s) by their Franchisee?
The heart of the franchise business lies in one of its most valuable assets – a unique mark and brand created and established by the Franchisor in the marketplace. It can be seen as the platform on which the business is built and expanded as this is how consumers usually recognize the products and services offered by a franchise and a market niche can be formed. Instead of having to develop a mark and business system from scratch, a Franchisee capitalizes on an existing mark and business system which has been proven and one that has garnered significant recognition and a loyal clientele. The success of a franchise relies upon the Franchisor and Franchisee to protect the rights to this asset.
One of the worst things that could possibly happen to a franchise and Franchisor, as the main owner of a mark, is the loss of rights to that mark and all the goodwill that goes with it. This usually stems from the wrong usage and representation of the mark by other parties including their Franchisee. The wrong usage and representation of a mark, especially by a Franchisee, will greatly reduce the value of the mark.
Now you may be wondering what constitutes as wrong usage of a mark… Well, inconsistency in the manner the mark is represented to the public is one example of wrong usage. Use of a mark in various different colour codes, in different font styles, on different backgrounds or in different arrangements creates a mark that is unstable and unreliable in the eyes of a consumer.
Using the mark in a manner that is vulgar and offensive to the public is another example of wrong usage. The value of the mark reduces as the image associated with the mark will be a tarnished one. Let’s say a fine dining franchise in a shopping mall is promoted by the Franchisee by using female models that are dressed indecently. These female models are asked to wear clothes with the mark embedded in the clothes. This results in the public associating the mark and the fine dining franchise with the image of the models. As a result, the mark that was built up by the Franchisor starts to lose its value.
As a result of this, all the effort and heavy marketing invested into building the brand would be wasted and the market share previously held by the franchise would also be greatly reduced.
Another cause of the loss of rights to a trademark is due to a problem dubbed “genericide” by Trademark Lawyers where the mark becomes a generic term used to call a product or service, through wrong usage. Example of trademarks that have fallen victim to “genericide” are terms such as “Escalator”, “Trampoline”, “Linoleum” and “Aspirin”. These terms used to be trademarks to identify and distinguish their products from others but ended up becoming synonymous to the product itself, which led to their owners losing the rights to them.
It is thus important that a Franchisor ensures that the usage and representation of their mark is correct at all times, especially by their Franchisee, in order to preserve the rights to the mark and success of the franchise as a whole.
Question 2:
What are essential terms of a Franchise Agreement?
First and foremost, as mentioned earlier, the success of a franchise lies in the cooperation of both the Franchisor and Franchisee. Meaning to say that it should be in the interest of both parties to protect the marks of a franchise and expand the business. As the original developer of the franchise, the Franchisor has a duty to provide assistance and best practice guidelines to the Franchisee, and the Franchisee on the other hand is required to follow these guidelines while also maintaining and promoting the franchise.
However as the business continues to grow and there are more and more Franchisees, it is understandable then that it might become more difficult for a Franchisor to control and prevent incorrect usage of a mark for every Franchisee. As such, a Franchisor needs to get creative in developing strategies to monitor the correct use of their mark. Here are some ways which might be useful in monitoring and enforcing the correct use of mark by a Franchisee:
1. Provision of rules in the Franchise Agreement
Before opening a franchise, the Franchisor and Franchisee would enter into an Agreement which is a legal document which normally contains the obligations of both parties towards each other. This Agreement would typically include a component where the Franchisee is required to protect the Intellectual Property of the franchise system. One of the ways that a Franchisor can ensure proper use of a mark is to clearly identify all the marks as they should be displayed and used and that a Franchisee is contractually bound to follow the marks as identified under this component in the Agreement at all times. Any other form of representation of the mark other than those listed in the Agreement would amount to incorrect usage of the mark and if spotted, the Franchisor can send a letter of warning to the Franchisee to amend it. If, after several warnings, the Franchisee continues to use the mark in an improper manner, this could be tantamount to a breach of the Agreement and the Franchisor may be allowed to terminate the franchise arrangement with the Franchisee.
2. Trademark Awareness Programmes
Every Franchisor should develop an active Trademark Awareness Programme designed to educate all of their Franchisees on the proper use and protection of their trademarks.
Being the one who coined the mark and burnt the midnight oil to build the mark to be of some value, the Franchisor knows the manner in which the mark should be used. As owner of the mark, the Franchisor usually has high standards in protecting the mark. Unfortunately, this high standard does not always translate down to the Franchisees as the Franchisor is too busy with operational issues in running the franchise system.
To address this issue, Trademark Awareness Programmes should be held for new Franchisees and Franchisees who intend to renew their franchise agreements with the Franchisor. These programmes should be made compulsory. In the programme, the Franchisor can educate its Franchisees on the proper use of its mark and the dos and don’ts in the representation of the mark to the public.
Take for instance the risk of the mark becoming generic as mentioned earlier. Ways to avoid this problem can be discussed by the Franchisor during the Trademark Awareness Programmes and the Franchisees can learn the correct usage of the mark. One of the ways to avoid genericide is that the trademark should always be used as an adjective and not as a noun or verb. For example, the usage of the trademark, Subway®, in a sentence should be formed and read as, “I would like a Subway® sandwich” and not, “I would like a Subway®” or “Let’s Subway® for dinner!”. The Franchisees, once educated on this proper usage, will certainly apply what they learn during the Programme in their daily running of their business.
3. Policing the use of the marks
Misuse of a mark usually occurs when the mark is used by third parties without the consent of the Franchisor or the Franchisee. Misuse of the mark also reduces the value in the mark as the public views the mark as freely available for use. The monopolistic right the Franchisor and the Franchisee have to the mark slowly starts to diminish if no action is taken to prevent misuse. One of the few ways that a Franchisor can monitor the use of their mark by their Franchisee is to use the sales and distribution force as the “eyes and ears” of the franchise and to have a reporting procedure whereby if any unauthorized use of the mark is detected, it can be brought to the attention of the Franchisor immediately and quick action (either by way of infringement or passing off) can be taken. Professional watching services and tools like Internet search engines can also be used to monitor and track the use of a trademark to ensure that it has been used correctly and by authorised parties.
As trademarks carry tremendous economic value for franchises in the marketplace, it is thus important that the value of a mark is preserved through correct usage by the Franchisee. It would be such a waste if the reason for the dilution of value and loss of rights to a mark was merely because of the incorrect usage of a mark which could have been easily avoided.
Geetha K. is the Director of Trademark and Industrial Designs Division at KASS International. She has extensive experience in handling all aspects of trademarks and designs in various industries, including pharmaceutical, food & beverage, property development, automotive and apparel industries, and manages local, regional and international portfolios. She drafts franchise agreements, assists with the registration of franchises and advises Franchisors and Franchisees. She has also written articles for various local and overseas publications, such as the Institute of Trade Mark Attorneys (ITMA) magazine. Her comments on case law in Malaysia and Singapore have also been quoted in publications abroad such as Asia IP magazine and Managing Intellectual Property magazine, a Euromoney Publication (UK). If you have any queries or need more information, please visit www.kass.com.my or drop an e-mail to ipr@kass.com.my.
