Typically, a franchise system is a mix of the intellectual property rights (i.e. patents, trademarks, designs, copyright or trade secrets), its know-how and a carefully structured franchise agreement (the only legal document to secure the credentials and confidentialities of a franchise business). The franchise model has always been preferred by majority of the entrepreneurs to build the commercial infrastructure and expand the business in an efficient and profitable manner. Therefore, when opting for franchising, a franchisor has to share the set of exclusive rights for the usage of the brand name, its trademark, product or services, business strategies that make the business work successfully. That is why; it is the most important concern of the franchisor to protect the intellectual property rights for not being misused. This article shares the various ways of securing the IPR through an insight of few case studies regarding the infringement of the IPR in India.
Steps to protecting IPRs
As India lacks a specific and stringent legislation for franchising, therefore the protection of such intellectual property is of paramount consideration. Else, the franchisor may lose all the advantages of the franchising if do not watch out on the restrictive usage of the various intellectual properties by his/ her franchisees. Since the intellectual property rights lies at the core of a franchise, hence the laws governing licensing of intellectual property is of prime importance such as:
- Due diligence by franchise of the IP rights of the franchisor. As per Jitin Talwar, Managing Partner (Lawyer), Talwar and Talwar Consultants, “It is all about due diligence, which must be taken care of when franchising. Moreover, make sure that all the IP are in place and must be registered. In case of unregistered trademarks or patents or copyrights, franchisor must mention issued or in process in the franchise agreement to be on the safer side of the transaction.” For instance, In Teju Singh vs Shanta Devi AIR 1973 AP 51 case, the plaintiff had succeeded only to the extent of securing an injunction at the hands of the lower court or the simple reason that the trade mark or name of the plaintiff had not been registered by the time the suit was filed. The trade name of the plaintiff was ‘One day dry cleaners’ and ‘Only one day dry cleaners’ was of the defendant. The appeal was filed in an action brought for injunction restraining him from using or exhibiting himself or through his servants or agents the trade name of the business used by the respondent or any device resembling it. The suit brought by the plaintiff is only a passing off action.
- While licensing an intellectual property right, the license should be in writing, signed by both the franchisor and the franchisees, specifying the rights licensed the royalty payable if any, the term of the license and the territory for the rights is licensed. The license must always specify the exact nature of rights granted and the extent to which such rights are granted. Careful drafting of the franchise agreement could minimise the risks arising from IPR litigation;
- The franchisor must also ensure that the intellectual property rights licensed to the franchisee are not misused in any manner and it should not be used outside the purview of the franchise agreement. For instance, In the case of Vivekananda English Academy and Ors vs Amoha Education Pvt. Ltd and Anr., a franchisee continued with the same business by using the trade name of the company even after the termination of the franchise agreement. The franchisee (respondent) in the application mentioned the incorporation of restrictive covenant in the franchise agreement in the clause 4.1 and also mentioned the date of agreement’s termination, which was February 2005. Thus, it was observed by the Madras High court that in such cases a franchisor should go for the remedies which are available in India under the statute in relation to trademark and copyright which are particularly effective against the infringement and trafficking in trademark.
- The franchisor and franchisee should ensure that the brand and goodwill associated with the trademark is not diluted in any manner due to any actions or inactions of the franchisee. For instance, In the landmark case of Gujarat Bottling Co. Ltd. and others v. Coca Cola Co. and others, the Coca Cola Co. had imposed a restriction on Gujarat Bottling Co. Ltd from entering into an agreement with any other beverage manufacturing company during the term of their contract. Taking into account the hearing of both the parties, it was observed by the Hon’ble Supreme Court that the franchisor grants a franchise to the franchisee on certain terms and conditions mentioned in the franchise agreement to regulate distribution of good and services. In such conditions where the franchisor restricts the rights of the franchisee to deal with the competing products and services is to ensure the proper distribution of the franchisor. It cannot be regarded as in restraint of trade.
- It is crucial for the franchisor to decide on the amount of know-how and trade secrets s/he wishes to transfer to the franchisee. Moreover, the franchisee must also take adequate precautions to protect the franchisor’s confidential information from third parties.
In order to avoid the legal recourses, costs of litigation and loss of the business, it is very essential to incorporate sufficient clauses in the franchise agreement for proper use of the intellectual property. According to Andreas Gellner, MD, adidas, “Foreign companies can protect their trade marks in India under the Trade and Merchandise Marks Act, 1999 (‘TM Act’) by registering them under the relevant classes applicable and important to their business. Registered owners can also license their IPR to a third party whether exclusive or non-exclusive rights as is done in franchisee agreements.”
In short, a franchisor has to make appropriate provisions and cautiously structure the franchise agreement in order to avoid the franchisees from taking benefits which they are uncalled for. Furthermore, the franchisor is also advised to take due legal action against the erring franchisees to set an example for the prospective franchisees.