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Sep, 01 2007

COMPONENTS THAT DEFINE BUSINESS RIGHTS

UNLIKE developed countries such as the United States and most European nations, India does not have a specific law to deal with franchising.

UNLIKE developed countries such as the United States and most European nations, India does not have a specific law to deal with franchising. However, the absence of a specific franchising law and the need to comply with the often disjointed set of applicable rules has not hampered the expansion of franchising business which witnessed impressive growth in the recent past. In addition to the Contract Act, the other important laws that deal with various facets and dimensions of franchising are Trade Marks Act, 1999, Patents Act, 1970 and Copyright Act.

Patents, copyright and trademarks are vital for any business to have its unique identity especially in the world of franchising. Oftentimes, one of the most valuable commodities a franchise has, can be its brand identity and the trademarks protecting it. Franchisees pay huge fees for access to trademarked logos and materials associated with certain franchises. Maintaining control of trademarks is the key focus for maximising profits in many franchised organisations. Without trademarks, some of the most well known international franchises would dilute their market share and brand identity, effectively losing their value. The significance of the business`s intellectual property - the patents, trademarks, copyrights - which provides value for the franchisor and the franchisee is elaborated below:

Patents

A patent is a government grant to an inventor of the exclusive right to use, manufacture or sell a certain invention for a specific period of time, usually 15 to 20 years. In order to receive a patent, the inventor must show that the device is novel, useful and non-obvious. Under patent laws, the owner of technology can enter into a technical know-how or license agreement with an Indian party. These agreements are required to contain details such as the time period, territory for which the agreement is entered into, proof of up-front payment, a running and minimum royalty, etc. India has recently updated the Patents Act to provide adequate protection to many types of intellectual property frequently involved in franchising arrangements.

A patent gives an inventor exclusive rights to use his invention for his products. These rights will prevent other parties from copying or selling the invention without the permission of the inventor. You can patent products, technical or functional processes and software. Inventions only qualify for patents if they are new, are an inventive step, and can feasibly be manufactured and used.

You can file for a process where the Intellectual Property Office will search through existing files to determine if your invention has already been patented or if your invention is just a progression of an existing product or process. A patent lasts for up to 20 years from the day of registration, but after 4 years you must renew the patent every year, if you do not renew it, the patent will expire.

Trademarks

In terms of the Trademarks Act, a trademark includes any sign capable of being represented graphically including:

. A device, logo or representation

. A name or signature

. A word, words, phrase or slogan

. A letter or series of letters

. A numeral or series of numerals

. The shape and configuration of a product or part thereof

. The pattern and ornamentation appearing on a product, packaging or advertising materials

. A colour or combination of colours

. A container for goods

It is often said that the cornerstone of the Trademarks Act is distinctiveness. To be capable of being registered and function as a trademark, the mark must distinguish the goods and services in relation to which it is used from the goods or services of others. A registered trademark gives the business exclusive rights to use the trademark and may lawfully prosecute any parties that use the same trademark in the future. Trademarks cannot be freely registered and will be investigated thoroughly before registration is approved.

Thus, a trademark is the name by which a legal entity does business or is known to franchises, shareholders, the public, suppliers or creditors. It is usually the same as a corporate name, although this is not always the case, especially in situations involving assumed names, partnerships or sole proprietors. It often, but not necessarily, contains the key trademark of the business franchising system.

Trademark value and goodwill

A well recognised and respected trademark can become a business asset of incalculable value, usually referred to as goodwill. Goodwill in a trademark develops as a result of favourable consumer recognition and association. Trademark law is designed to protect business goodwill by protecting consumers from confusing various producers of goods or providers of services. The owner of a well recognised trademark is more likely to attract business partners willing to make an investment and pay royalties because of their desire to market goods or services under an already established brand with goodwill.

Licensing and franchising

Franchise owners licence the use of their trademarks to franchisee, provided he maintains control over the quality of the goods and services provided by the franchisor under the trademark. Trademark licensing is, in almost all cases, the cornerstone of a franchise system. A trademark licence agreement is a legally sanctioned business agreement between the owner of a trademark and another party that desires to use the trademark, including its associated goodwill, as the central element in its business to identify its products and services to the public while guaranteeing a uniform level of quality.

Franchising, in its simplest terms, is a more sophisticated form of trademark licensing. Most business franchising agreements grant the franchisee the right to use one or more of the franchisor`s trademarks in connection with certain goods and services, in accordance with standards and practices that have been established by the franchisor. In return, the trademark owner or franchisor, obtains new sources of capital, new distribution markets and motivated vendors for its products or services. The legal exclusivity that trademark rights afford to the franchisor and its franchisees offers a competitive advantage that is essential to a successful business franchising.

Copyright

A copyright is a property right that legally gives an author four main economic rights:

. The right to reproduce the work

. The right to adapt the work or to prepare derivative works

. The right to publicly distribute copies of the work

. The right to publicly perform or display the work

Copyright protects original works of expression, such as novels, fine and graphic arts, music, photography, software, video, cinema and choreography by preventing people from copying or commercially exploiting them without the copyright owner`s permission. A critical point to remember is that generally the author of copyright work is also the owner thereof, unless the work was made by an employee during the course of his employment. In this instance, the employee will be the author, but the employer will be the owner. It is therefore essential that copyright in all works including logos, promotional materials, company documentation and other works which are prepared externally or outsourced, even if they have been paid for, are competently transferred to the franchisor in writing. If this is not attended to, although the franchisor and the franchisees will be able to use any such materials, the franchisor will not be the owner thereof.

There are, however, areas where both trademark and copyright laws may be used to protect different aspects of the same product. For example, copyright laws may protect the artistic aspects of a graphic or logo used by a business to identify its goods or services, while trademark may protect the graphic or logo from use by others in a confusing manner in the marketplace. Similarly, trademark laws are often used along with copyright laws to protect advertising copy. The trademark laws protect the product or service name and any slogans used in the advertising, whereas the copyright laws protect the additional creative written expression contained in the advertisement.

Advantages to franchisees

Operating a franchise business can offer several advantages if you feel you are not quite ready to open an independent business from scratch. Purchasing a franchise offers you the privilege to promote an already successful, widely recognised product or service.

Likewise, you may also benefit from the right to use the parent company`s logo, storefront designs, and other unique elements. Well-recognised logos and storefronts provide the means of attracting greater number of customers. Another advantage that may be attained through the purchase of a franchise is the use of any trademarks, copyrights, and patents that the parent company may hold.

Advisory

Most franchise agreements include detailed provisions to ensure the protection of the franchise system`s trademarks, copyrights and patents. However, many of these agreements fail to adequately address protection for what may be the franchisor`s most valuable asset, his trade secrets.

In the context of a franchise, it is vital for both franchisors and franchisees to understand what a trade secret is, why trade secret protection is important, how that protection may be lost, and the efforts necessary to help ensure the protection of the franchise`s trade secrets in order to maintain the system`s competitive advantage.

Given the importance of trade secrets to a franchise system, and the potential for loss as a result of a single person associated with the franchise not exercising reasonable precautions to maintain their secrecy, it is critical that franchisors and franchisees take actions to protect the franchise system`s trade secrets. As technology and intellectual property becomes more important, franchisors need to look again at their franchise agreements, and franchisees need to review the way they operate their franchise to assure they are adequately protecting the franchise system. Intellectual property is the new wealth of the information age. Building and maximising this wealth requires an understanding of the various types of intellectual property and how to acquire and protect them.

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