Franchising in the Exploitation of Inventions

To most people the concept of franchising conveys an image of fast food or instant printing establishments.  However, franchising can present a means by which a new invention can be exploited.  Franchising is an ever growing part of the retail scene and now represents a major part of the retail operations in the United States.

 

For the innovator a first problem is whether a new concept is protectable by some of the traditional methods of protecting ideas, for example, patents or copyright.  A number of commercially valuable ideas unfortunately do not have the technical content to bring them within the scope of the patent law.  Specifically, it is usually considered that patents exclude "business plans".  For that reason, if the developer of a new concept consults a patent attorney, he or she will often be told that the concept is unprotectable, which is true in the context of patent or design protection.  If you have a bright idea for a business the fact that it is unregistrable does not mean that you cannot develop that business by some means such as franchising.  It is still possible to develop systems, by way of franchising, in which the franchisees can be bound by contract so that some measure of protection will be securable.

 

Even in the context of protecting technical developments, it may also be true that a franchise is commercially a very significant means of exploitation.  Even if your concept is technical and protectable by patents etc., franchising can provide a means by which a greater return is available than would be obtained by licensing of the project.

 

Let us assume that the new technical development is a machine for cleaning carpets, which is a fairly substantial machine.  Let us also assume that with this new machine there is a new cleaning fluid which can be used with this machine, or separately with other

Iain C. Baillie

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types of cleaning devices.  The commercial market for the machine, while significant, may not be a mass market since the machines would primarily be used by commercial carpet cleaners.  The fluid could be developed both for commercial use in one embodiment and retail use in another.  The developer of the system might be advised to consider the possibility of opening a small business with one or two prototype machines and developing a reputation and a franchisable concept.  As soon as the pilot project is successful, one could then launch into franchising using the franchise fees to pay for the manufacture of more machines, giving a better return than obtainable from selling the machine or licensing the technology.  By confining the novel inventive cleaning material, so far as its commercial embodiment is concerned, to these franchises, one would have an extra commercial advantage.  This would still leave the possibility of exploiting separately the domestic version of the cleaning material.

 

If a franchising development is to be a potential route for exploitation - what is meant by "franchising"?  In the first instance, it must be emphasised that it is very unusual for a franchise to be successfully based solely on an "idea".  Usually a franchise starts by developing a particular pilot project in which there is established:

 

1.  A distinctive identity (trademark or trade name);

 

2.  A style of business (colours and style of premises or vehicles);

 

3.  Particular techniques for operating the system (trade secrets);

 

4.  Special machines/materials (possibly protected by patent).

 

The aim is to develop a successful business which can be transferred to others so that, as the pilot operation matures, one will be developing training methods.  Where there is some history of one or two pilot operations it will also be easier to secure financing for further development since many of the larger banks are well acquainted with the franchising concept and are perhaps more willing to finance such projects than other types of commercial initiative.

 

Thus, a franchise is a form of licensing in which the agreement between franchisor and franchisee creates the relationship by which the franchisee can use, usually on a non-exclusive basis, certain of the rights - particularly the reputation of the franchisor.  Conveyed by a franchise can be a whole bundle of commercial entities including distribution arrangements for franchisor's goods, business operations, joint advertising arrangements, management consultancy, financial assistance, etc.  However, the fundamental difference between franchising and other methods of licensing or distributorship is that essentially the franchisee in either the whole of the premises or in a part of the premises creates an entity which the public take to be part of a countrywide chain rather than a single individual enterprise.

 

Fundamentally, the franchisee runs a controlled business using the reputation and techniques of the franchisor.  Although the training in the methods of the franchisor and the business assistance represent much of the commercial value of the franchise, nevertheless ultimately it is the image of the franchisor, its reputation, its face to the public, which is being transferred.  For that reason it is fundamentally important to any franchise that those legal rights which protect the reputation and skill be as well developed and as well protected as possible.

 

As will be evident from the above, the secret of a franchise is to have what might be described as market exclusivity.  A franchisee is an independent entity which is under contract to the franchisor to operate a business as if (to the outside world) it were a part of a single business.  The exclusivity which protects the franchisee against competitors is a combination of "reputation" and "know-how".

 

Thus, in addition to the technical aspects of the business which may be part of the character of the business and its exclusivity, a very important aspect of any franchise is the features which identify it to the public.  Thus the franchise trading name/service mark and other sub-brands must all be chosen carefully at the beginning of the development of the project to allow for early trademark registration, so as to ensure exclusivity.  One of the dangers of franchise operations is that the innovator picks a name which is unregistrable and depends on common law protection, which can mean that it is very difficult to enforce countrywide or, indeed, difficult to enforce in any circumstances.  The name must, therefore, meet the usual test for a good protectable trademark i.e. not be descriptive or a common surname, geographic name etc., although it may be desirable to have a name which evokes the nature of the business to which it is being applied.

It is very important for franchising that any name be registered as soon as possible and not depend on the build-up of a countrywide reputation to support registrability.  Thus, in designing the franchise, one can take the advantage of trademark law both in relation to names (words) and types of logos and designs, distinctive colour combinations on premises and vehicles and other registrable elements.  One can also perhaps design specific items of equipment for use in the premises e.g. specific types of distinctive cabinet on which design registration protection is also available.

 

One important aspect of a franchise can also be the trade secrets.  Thus, the franchisees may have to use certain combinations of materials which are kept secret by the franchisor and which the franchisee must not reveal to others, or release samples to others.  Therefore, if a technical concept is not easily protectable because of its weak relationship to the prior art, a franchise may provide a means of exploiting it through trade secrets -which may be easier than attempts to control the licensing of technology.

Copyright protects the actual expression of various concepts and particularly will cover the manual, illustrated material used in the franchise, advertising etc.  No special legal steps are necessary in the UK, to enforce copyright but it is desirable to mark the material which is to be protected with the internationally recognised symbol ©, owner, and year of first publication.  In some countries registration is necessary, although these are rare.  It is not necessary in the United States but can be advisable.

 

At the time the franchise is first launched the franchisees will have to sign an agreement.  The types of franchise agreement are almost as varied as the types of businesses involved.  Usually the franchisee will undertake to operate a business under a given style and name (although notice will have to be given to the public of the true owner's name); to abide by the quality standards set by the franchisor; to secure certain essential supplies from the franchisor; to accept training in the franchisor's business and possibly regular retraining, to use certain specified telephone numbers and to cooperate with the franchisor and other franchisees in common advertising programmes.  A very important part of a franchise agreement can be the confidentiality clauses which bind a franchisee during the agreement and, even after it lapses, to control carefully the technology provided by the franchisor.

 

It is customary in franchise contracts to require the franchisee to operate only within a given area, which is possible for franchise agreements under European-law, although it would not be possible for other types of licence agreement.  Thus, the franchise agreement is a combination of a licence under certain intellectual property rights for the names, patents and designs, use in the franchise, a supply contract, a training contract and various other contracts relating to the operation of the business.  There may even be involved real estate agreements involving the premises.  The franchisee will normally pay an up-front capital sum which may cover items such as initial training, help in locating an appropriate franchise location for the premises, and then will pay a running franchise income based on the turnover of the franchise.

However, a franchisor is well advised to remember that the successful franchises are those which are operated as partnerships between franchisor and the group of franchisees.  An overbearing attitude to franchisees and an excessively strict enforcement of contract provisions rarely leads to continued success.

 

For obvious reasons a franchise agreement can be a very much more complex agreement and can only be briefly outlined in this article.  It is important, that before developing a franchise, adequate commercial and legal advice be taken.  A leading organisation is the British Franchise Association - http://www.thebfa.org/  This is a professional group which monitors the whole field of franchising and sets standards for those in the franchising industry.  It can be a great help to aspiring franchisors.  Moreover, its listed affiliates include professional firms who have experience in dealing in franchise matters including banks (for franchising finance), lawyers (for franchising agreements), intellectual property firms (to assist in developing the requisite intellectual property), accountants (who have experience in dealing with the specific problems of franchising accounts) and other services.

 

It is obvious that franchising could be combined with other means of exploiting an invention.  For example, the owner of an invention could set up a franchise in the UK and set up licensing and sales agreements, for the protected products, in other countries.  It may be that a successful franchise can then be extended into other countries, making use of the intellectual property rights previously developed for these countries.