IBT – Trademark Franchising Victor H. Bouganim WCL, American University.

IBT – Trademark FranchisingIBT – Trademark Franchising

Victor H. Bouganim

WCL, American University

Victor H. Bouganim, WCL, American University, Spring 2001

Trademark Franchising Trademark Franchising Problem 9.1, Textbook, p. 768Problem 9.1, Textbook, p. 768

Colonel Chicken Inc.– Texas fast food franchising corporation– Successfully established over 100 franchises in

the U.S.– Never opened a franchise abroad

– Wants to explore the possibility of

international franchising


Franchising - Trademark LicensingFranchising - Trademark Licensing

Franchising

– Licensing agreement of intellectual property rights Trademarks Know how


What is a Trademark?What is a Trademark?

A sign able to distinguish the goods or services of one company from those of another.

The sign has to be presented as a mark.

A property right. A Monopoly.

Functions Indication of origin. Indication of quality. Identification,

communication, advertising: Association


Trademarks - Some ExamplesTrademarks - Some Examples


Trademark ProtectionTrademark Protection

Most countries offer Trademark protection, normally by way of registration.

Trademark rights based on use of marks on goods in commerce are recognized at common law - Common Law Trademarks.

Trademarks rights are territorial. Therefore, international trademark protection requires separate registrations in every target-country.


U.S. Trademark LawU.S. Trademark Law

Trademarks are protected by - Common law State registrations Federal registrations - The Lanham Act

– Permitted for all marks capable of distinguishing goods and services.

– Mark becomes valid for a term of 10 years following registration. Registration can be renewed indefinitely.

– Use Requirement: Marks must be used on goods “bona fide intent” - registration within 12 months before use “good cause” - registration within 36 months before use No use or over-use may result in losing the TM.


Class DiscussionClass Discussion

How can international conventions assist in international trademarks protection?

What is the role of TRIPS in international trademarks protection?

Is trademark registration a guarantee against trademark piracy?

Can a trademark be valid in one country and generic in another?


International TM ConventionsInternational TM Conventions

TRIPS, Art. 15-21. The Paris Convention The Madrid Agreement for International

Registration of Marks, 1891 Trademarks Law Treaty, Geneva 1994. The 1957 Arrangement of Nice Concerning

the International Classification of Goods and Services


TRIPS - TM RegimeTRIPS - TM Regime

An attempt to narrow the gaps in the way these rights are protected around the world, and to bring them under common international rules

Articles 15-21. – Members are required to provide registration of distinctive

visual (sounds and smell are optional) marks. Incorporate by reference the provisions of the Paris

Convention.– In particular: Protection of well-known marks, according to

Art. 6Bis. Geographical Indications - Art. 22-24.


Paris Convention - TMParis Convention - TM 1883, last amended 1979 160 states are signatories, including U.S. Effort to harmonize some trademark rules National treatment Right of priority of 6 months Article 6bis

– Gives owners of “well known” trademarks the right to block or cancel the unauthorized registration of their marks

– Is the mark well known locally or internationally is a frequent issue


Madrid Agreement and ProtocolMadrid Agreement and Protocol 1891, the Protocol entered into force in 1995. Create a system for international registration of marks,

which is administered by the WIPO. About 60 countries are parties, but not the U.S. This system permits a trademark owner to have marks

protected in several countries by simply filing one application with a single office, in one language, with one set of fees.

Community TM is available in the EU


Trademark Law TreatyTrademark Law Treaty

Geneva, 1994 26 participating countries (as for Jan 2001)

including the U.S. Indicates the direction of international

trademark regulation and protection Alternative to the Madrid System on

trademarks international registration.


TM - The Nice AgreementTM - The Nice Agreement

1957, last amended in 1979 65 participating countries, including U.S. Addresses the question of registration by

“class” or “classification” of goods Article 1 adopts a single classification

system for goods and services


KnowhowKnowhow

Commercially valuable knowledge– If someone is willing to pay for the information

it can be sold or licensed locally or internationally

Trade secrets Usually, technical or scientific in nature Marketing and management skills Business advice Does not need to be patentable


Legal Protection of KnowhowLegal Protection of Knowhow Knowledge is a public good Often Knowhow is not patented in an effort to maintain

confidentiality Economic Espionage Act of 1996

– Criminal penalties for misappropriation of trade secrets for the benefit of foreign governments or anyone

– ‘Trade secret’ is defined as “financial, business, scientific, technical, economic or engineering information” that the owner has taken reasonable measures to keep secret and whose “economic value derives from being closely held.”


Legal Protection of KnowhowLegal Protection of Knowhow

Preserving the confidentiality of knowhow is an important business strategy– Example: the Coca-Cola formula

Protect knowhow with contracts of confidentiality with relevant employees– Contract and tort remedies never render the

employer whole Criminal penalties are unusual


Franchising AgreementsFranchising Agreements

Direct Franchise Agreement– Franchisor franchises individual outlets direct form the

home country to the target country– Works well between countries with similar language

and legal system Master Franchise Agreement

– Gives an organization the right to develop the franchise in a particular country

– Good for countries that are a long distance from the home country and where the legal system and language are considerably different


Franchising TypesFranchising Types

Service franchise– Franchisee offers a service under the business name or

symbol and sometimes the trademark of the franchisor in accordance with the franchisor’s instructions

Production franchise– Franchisee manufactures products according to the

instructions of the franchisor and sells them under the franchisor’s trademark

Distribution franchise– Franchisee sells certain products in a shop which bears

the franchisor’s business name or symbol


Franchiser’s InterestsFranchiser’s Interests

Protection of brand name image– Businesses want to protect

their image in the eyes of the consumer

Confidentiality– Business Know How

Example: McDonalds Service Procedure Manual

– Trade secrets

Consistency– value of the trademark

is diminished by inconsistency

– Quality Control

– Price Control

– Trade dress

– Industrial designs


Franchising - Legal IssuesFranchising - Legal Issues Culture

– Legal system Direct and indirect regulation

– Language– Distance from home country– Religious considerations

Protection of trademarks, trade name and trade secrets– Assignment– Advertising– Quality control

Foreign business/ ownership laws

Insurance Taxes Jurisdiction – choices of law

and forum Termination of franchise

agreement Fee schedule Accounting regulations


Franchising Contract Checklist - IFranchising Contract Checklist - I

Franchise grant– Area – business operation

radius– Premises– Term – length of license

Franchise Payment– Royalties – Gross sales defined– Accounting

Services by franchisor– Training– Advertising contribution

Standards and Uniformity– Building and premises– Signs– Equipment– Vending machines– Menu and service– Alternate suppliers– Right of entry and

inspection


Franchising Contract Checklist - IIFranchising Contract Checklist - II

Limitations of franchise– Trademarks, trade

names and trade secrets

– Assignment Option and end of term Insurance Taxes

Dispute resolution– Governing law– Arbitration

Misc.– Interpretation– Modification– Competition with

company


Trademarks Franchising Trademarks Franchising Problem 9.1 Analysis - IProblem 9.1 Analysis - I

Colonel Chicken’s Formula for success:– Careful selection and ownership of the site by the

company and required use of the site by the franchisee– Mandatory franchisee use of secret recipes, special

patented cooking equipment and purchases of chicken from a list of designated sources

– Extensive English language advertising programs How might these issues be addressed in a

franchise agreement contract?


Trademarks Franchising Trademarks Franchising Problem 9.1 Analysis - IIProblem 9.1 Analysis - II

Colonel Chicken’s Formula for success - Continued– Aggressive protection of its trademarks– Active supervision of quality controls maintained by its

franchisees in accordance with Colonel Chicken’s copyrighted instruction manual

– Exclusive use of a “Western” building design which draws upon the company’s Texas heritage

– Strongly recommended prices

How might these issues be addressed in a franchise agreement contract?


Class DiscussionClass Discussion

How might Colonel Chicken’s “formula for success” be threatened by regulations in the target-country?

What are the legal dangers of Colonel Chicken exercising excessive control over international franchises?


Legal Interference in FranchisingLegal Interference in Franchising

Some countries require a majority ownership of enterprises by nationals or the government

Some countries impose direct regulations on franchises

Some countries impose indirect regulations on franchises


Alberta Franchising ActAlberta Franchising Act

The Franchises Act, Alberta, Canada – Sec. 6 - Registration

Franchises must register with the government

– Sec. 8 - Prospectus A prospectus must be filed with the government

providing full, plain and true disclosure of all material facts relating to the franchise


Antitrust Considerations - IAntitrust Considerations - I

When do the provisions of franchise agreements governing the distribution of goods conflict with anti-trust (anti-monopoly) laws?

Does the licensing of Know How unfairly restrict competition?


Antitrust Considerations - IIAntitrust Considerations - II

Do provisions establishing control necessary for maintaining the identity and reputation of the network identified by the common name or symbol constitute restrictions of competition?

What about– Shared markets – Price recommendations

Do these agreements result in unfair restrictions on competition?


The Pronuptia CaseThe Pronuptia CaseEuropean Court of Justice, 1986European Court of Justice, 1986

An illustration for possible clashes between the provisions of a franchising agreement and European competition law.

Held, among other issues -– Provisions which establish the control necessary to

maintain the franchisor’s reputation and know-how are not restrictions of competition.

– Although provisions which impair the franchisee’s freedom to determine his own prices are restrictive of competition, that is not the case when the franchisor only provides price recommendations.

IBT – Trademark Franchising Victor H. Bouganim WCL, American University.

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Transcript of IBT – Trademark Franchising Victor H. Bouganim WCL, American University.