By David Schollenberger, Partner and Head of IT/IP Healys solicitors
Starting and operating a franchise network without adequate brand protection is like unprotected sex. Well maybe not quite as enjoyable- but it is reckless and involves taking risks that could be avoidable and could prove catastrophic to the franchisor’s business.
Brands and franchising
A franchise is a license for use of a brand and a system of know-how, procedures and standards related to that brand. Brands can have huge commercial value and may even account for the majority of a company’s assets. The top worldwide brands of franchisors such as McDonalds® restaurants or Holiday Inn® hotels are worth billions of Pounds. A brand provides a reassurance to a customer about the quality and consistency of the franchised services.
The brand for a product or service is protected by the use of a trade mark. Trademark, creation, management and protection are essential for a franchisee seeking protection of its assets and ensuring both initial and continuing commercial success.
What are trade marks?
Trademarks are a designation by a trader to distinguish its goods and services from another trader. Trademarks can be unregistered or registered with government trade mark offices in each country of the world. In the UK, this government agency that deals with trade marks is called the Intellectual Property Office. A UK trade mark is only enforceable in the UK. The UK registration lasts for ten years, and are renewable for further ten-year periods.
In the EU, a European Union Trade Mark or EUTM (formerly known a Community Trade Mark or CTM) may be obtained through application to the EU Intellectual Property Office or EUIPO (formerly known as the Office of Harmonization in the Internal Market or OHIM) in Alicante, Spain. A EUTM is enforceable throughout the EU. The EUTM is also for a term of ten years, and renewable for further ten year periods.
For both UK and EU, registration is done within a class or goods or services set out in the Nice Classifications. So for example a name could be registered in class 44 for Turkish bath services and the same name could be registered in class 35 by another applicant for photocopying services.
Enforcing unregistered trade marks.
It is possible to bring a passing off action of an unregistered trade mark, but it is quite difficult to prove and expensive. This requires proof of a reputation or goodwill in the mark, a misrepresentation to the public and likelihood of confusion and proof of damage. The use of the trade mark by the party bringing the claim must also pre-date the use of the trade mark and it is sometimes difficult to establish how long the other party will have been using the trade mark.
Advantages of registration
Registration of a brand as a trade mark is voluntary, but highly advisable, and gives the owner a number of advantages. It gives the trade mark owner a statutory right to use that name for that class of services.
Registration also confers the right to bring infringement actions against unregistered traders in that jurisdiction who use that trade mark or something similar to it, in a manner which is likely to damage it or cause confusion in the target market. An EUTM further gives the trade mark owner the right to object to infringement throughout the EU and seek a pan-EU injunction. The trade mark registers are public, so the registration acts as a notice to the public of the owner’s rights in that mark.
A registered trade mark is a valuable commercial asset, commercially exploitable through licensing or transfer, relatively easy to protect and enforce, a deterrent to infringement and may be renewed indefinitely.
Risks of non-registration
Not timely registering a trade mark in a jurisdiction exposes the brand to use and registration by other parties. Even famous brands may lose out if they are too late to register their marks. For example, when the global hamburger brand “Burger King” went to open its first franchise in Australia in 1971, it found the name “Burger King” was already registered by an Adelaide takeaway restaurant and was unavailable for use by Burger King Corporation. The company offered the franchisee other names in its portfolio and ended up with a trademark used for pancake mix in other countries, “Hungry Jack”. Franchisees in Australia now trade under the brand name and registered trade mark “Hungry Jack’s.”
In some countries such as the US where Franchise Disclosure Documents are required prior to offering of franchises, not having a trade mark registered is a risk that must be disclosed to prospective franchisees and disclose that the franchisee may have to change the name of the brand and incur expenses for such change.
Any prospective franchisee doing due diligence on a franchisor will be wary of making a substantial investment in a franchise system that has not adequately protected its brand through trade mark registration of the brand in the relevant jurisdictions. Particularly since there are most often a number of franchise alternatives for a franchisee.
A franchisor not having the trade mark for the brand registered further increases the risk of challenge by third parties for passing off or trade mark infringement and substantial damages and also for actions by any franchisees with which it has concluded a franchise and/or license agreement for the use of the mark.
Why risk the brand for which you may have built up substantial goodwill and recognition because of a failure to take the necessary steps of registering the trademarks where you want to do business? Why put your franchise system at a competitive disadvantage with respect to your competitors? Why risk tying up your time and money in courts with challenges to your use of your brands?
The one time effort and costs in getting trade marks registered and maintaining them far outweigh the risks of lack of protection. An ounce of prevention is worth a pound of cure. Don’t be like the ostrich and ignore the obvious.