Chapter 7: Protecting Your Intellectual Property

At the heart of franchising is an agreement between the franchisor and franchisee to share key information and processes that have contributed to the success of the business in exchange for a franchise fee and ongoing royalty payments. However, in order to protect the information associated with the business model, the franchisor must be sure to have legal intellectual property (IP) measures in place, which prevents franchisees from “borrowing” proprietary information, secret recipes, branding assets and more.

“Intellectual property rights, specifically trademarks, patents, copyrights, and trade secrets, are at the heart of a franchise agreement,” explained Mark Brutzkus, a partner at Stubbs Alderton & Markiles, LLP. “In a franchise agreement, it is important that the franchisor is the owner of, or has the legal right to use, the franchise’s intellectual property, including trade names or trademarks. Also, it is critical that the franchise agreement contains provisions to keep trade secrets, i.e. ingredients of a secret sauce, confidential and not disclosed.”

There are four primary types of intellectual property that are crucial for businesses to be aware of: copyrights, patents, trademarks and trade secrets.

Copyrights cover music, pictures, art, writing and other similar pieces of work. For businesses, this often applies to whitepapers and websites.

Patents cover inventions. If a franchisor comes up with a novel way to complete a common task or a brand new product to sell, this invention can be protected for decades, allowing the business to proceed with production and sales of the tool or product without fear of another company replicating the model.

Trademarks cover a word, phrase, symbol or design that represents something specific. In franchising, the most important things to trademark are the logo, slogan and set of designated brand colors.

Trade secrets are anything unique to a company that has helped them succeed. This can be a secret recipe, distribution process, marketing strategy, and even lists of vendors or clients. Franchisors should protect these to ensure former franchisees are not profiting off of using the same business model they learned about during their time in the franchise system.

“The primary issue is that business owners may overlook the importance of IP,” Brutzkus said. “The ownership of IP rights prevents third parties from reproducing the franchise business model, which allows the franchisor to be paid royalty payments from the franchisees. Another noteworthy factor is that based on the nature of the franchise, a critical component of the franchise agreement may be maintaining the confidentiality of trade secrets that help create brand value.”

Without intellectual property protections, a franchisee could legally replicate the franchisor’s business model, negating the need for any type of franchise agreement or royalties paid.

Protecting Franchisors’ Intellectual Property

Intellectual property protections start as early as the development of the franchise agreement. As a franchisor works to put together a franchise agreement and franchise disclosure document, it is almost always best to retain a qualified attorney.

“Given the importance of intellectual property, specifically trade names, trademarks and trade secrets, it is critical that the franchisor retain IP counsel to take the necessary steps to protect itself,” Brutzkus added. “This can help avoid legal headaches down the line.”

During this process, key members of the franchisor’s leadership team should be involved, ensuring they understand the bounds of the agreement and the importance of each regulation. With this information, they will be well-equipped to keep an eye on franchisees’ use of intellectual property and know when local owners are overstepping the bounds of the agreement.

Brutzkus explained that the franchisor should monitor and police “franchisees’ use of the franchise’s intellectual property to ensure it falls within the scope of the franchise agreement.” Should the franchisor notice a franchisee improperly using intellectual property, they can move forward with any consequences or damages associated with a violation of the franchise agreement.