New York Franchise Law Blog : Franchise Lawyer & Attorney Charles N. Internicola, Providing National Representation of Franchisees and Franchisors

Inherent to every franchise system is the license of intellectual property rights that, for good reason, has been (and should remain) focused on the trademarks and trade dress associated with the franchise system. While trademarks, logos, and trade dress are critically important intellectual property ("IP") assets, an additional (and possibly overlooked) IP asset may exist in the form of "design patents" issued by the United States Patent and Trademark Office. Design patents relate to the "novelty" and "ornamental appearance" of a product and may add a supplemental layer of IP protection for franchisors. When evaluating your IP portfolio and whether or not you are maximizing the legal protection of your IP assets, consider the following:

• Design patents relate to the protection of the "ornamental design" of a product and may include the "surface" design and appearance of products and equipment.

• "Utility patents" protects the way a product is used and works, while "design patents" protects the way a product looks;

• The elements of a "design patent" must be limited to the "ornamental appearance" of a product (i.e., how the product looks) and not thef unctional aspects of the product (i.e., how the product works); and

• Examples of design patents include, the layout of buttons on the "Google" search page, the original Coca-Cola bottle, the exterior surface design of custard vending machines and the ornamental appearance of numerous other products and equipment - many of which may appear quite ordinary.

When managing the legal protections to be afforded to your intellectual property, it is critical to recognize that design patents could very well play an important role in your IP strategy. By branding and acquiring design patents in the ornamental designs associated with the equipment, displays and products offered by your franchise system, you will be adding a valuable layer of IP protection. One valuable strategy to consider is to evaluate the overall trade dress associated with your franchise system and determine whether or not design patents maybe applied to certain products, equipment and designs associated with your system. Dont overlook this IP asset.

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At the New York Franchise Law blog we have been fortunate to receive insightful and instructive comments from our readers.  Many of our readers are franchisors, franchisees and some extremely experienced franchise consultants and professionals.  Basically, our readers have a lot of good information to share.  So, recently my staff had the opportunity to interview and speak with Bob Harper, an existing franchisor.  Mr. Harper, has posted some informative comments on our site and has shared his experiences as a "start-up" franchisor.   Mr. Harper's franchise provides bookkeeping services in the United Kingdom under the "Crunchers" trade name.  In his interview Mr. Harper shares some insights and experiences that prospective franchisors should consider before making the leap from "business owner" to "franchisor".  A portion of Mr. Harper's interview and some of my comments follows: 

Q: What is the Crunchers business all about?

A: Crunchers is a bookkeeping solution provider – we give clients the choice of doing their own books using our software as part of a managed service (where we become the bookkeeping manager) or we do the books for them.  

Q: How did you Get involved in the bookkeeping business? 

A:  My background is a tax accountant, having trained with Price Waterhouse in Windsor UK. After leaving in 1991, I set-up and ran my own accountancy business and from this had the idea to develop my own bookkeeping software because my micro and small clients struggled with the off the shelf [bookkeeping] packages. 

Comment: One interesting point that Mr. Harper brought up in his interview is that his franchise involves the license of certain book keeping software.  Mr. Harper considered expanding his business through a "license structure" only but ultimately decided to proceed with the establishment of a franchise system.  When evaluating a licensing structure as an alternative to franchising there are a number of factors that should be considered, including the fees that will be charged and the degree of control that will be exercised over the franchisees / licensees.

Q: Are your franchisees required to have Prior Experience with Accounting or Bookkeeping?

A: We decided to franchise about two years ago offering 350 territories in the UK. The first franchisees are accountants who have launched Crunchers on the side of their accountancy practice. We also have a few bookkeepers and are now offering the franchise to [individuals without an accounting background].

Comment: This is a critical issue for the start-up franchisor and established franchise systems - that is, what is your criteria and requirements for selecting a qualified franchisee.  Be selective, set clear guidelines as to the types of franchisees that you will approve and reject those that do not meet your select criteria.  Selecting / approving an unqualified franchisee is  costly mistake that creates a number of legal and business issues that will drain the resources of your franchise system.  

Q: What advice would you give to successful business owner about starting a franchise?

A. Running a franchise business is a separate and probably a completely different business to the business they are thinking of franchising. So, treat it as such and make sure you have the right funding, skill set team, systems and resources.

• Look at all other options of expanding so you can justify franchising as the best option because it is not easy.

Comment:  As to this point the advice of  Mr. Harper is extremely instructive for those looking to start a franchise.  Prospective franchisors must recognize that once you "start a franchise" your primary obligation becomes that of a "franchisor" and you are no longer the operator of a business.  Keep in mind that the "franchise business" is very different that the underlying business that you are franchising.  In Mr. Harper's case once he established a franchise system he stopped operating a "bookkeeping business" and became the operator of a franchise system.  Another major point that Mr. Harper mentions is "funding"  when establishing a franchise system, simply preparing and registering your "legal documents" is not enough.  You must possess the necessary capital and resources to establish the systems, products and procedures necessary to support your franchisees and to manage the development and growth of your franchise system. Franchise consultant Joel Libava offers some great pointers and information about this issue (what it takes to establish a franchise) in his article "Do you Really Want to Franchise your Business".

 Thanks to Bob Harper for sharing his experiences with us and, as always, I look forward to hearing from Bob in the future.  If you are a start-up franchisor it would be great to hear about your experiences on these topics.

Disclaimer:  Please note that our reference to a particular franchise should not be viewed as an endorsement of a franchise or a franchise opportunity.  At the New York Franchise Law Blog we do not recommend or solicit the sale of franchise opportunities.

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The licensing of Intellectual property serves as one of the most fundamental rights granted in the franchisor / franchisee relationship.  Successful franchises and franchisors require strong trademarks (and sometimes, patents) that are both recognized by consumers in the marketplace and capable of protection under federal and state law.  When a franchise is granted, the franchisor undertakes a serious responsibility and obligation to defend and preserve the marks that it is licensing.  

When a franchisors trademark is challenged by a competitor or third party, the franchisor must vigorously defend its interests, and indirectly, the interests of its franchisees.  When counseling and advising clients as to intellectual property planning and litigation strategy, the potential purchase of "Intellectual Property Infringement Defense Insurance ("IPIDI") is sometimes raised as a means of defraying what may be substantial legal fees typically incurred in IP litigation.

What is IPIDI - basically it is an insurance policy that covers your legal fees in the event that you are sued for infringing on the trademarks or patents of a third party.  The exact nature of this insurance varies between insurance companies and will be defined by the express terms of the proposed insurance agreement.  So when considering this insurance and comparing premiums, it is critical to have your lawyer evaluate the express terms of the proposed policy.

Should IPIDI be Considered by Franchisors - Yes, but it is critical to recognize that this insurance is typically limited to only those instances where you are sued and not where you are suing a competitor for infringing on your trademarks or patents.  Also, remember that this policy only covers "legal fees" and if you lose the lawsuit (i.e., found to have infringed a competitors IP, insurance will not cover monetary awards or judgments issued against you.

Some of the Important Factors to Consider - When considering this form of insurance, you should discuss with your franchise or business lawyer some of the following issues:

• Does the policy exclude declaratory judgment lawsuits;
• If the policy excludes "intentional acts of infringement" from coverage, how does the policy define "intent;
• Does the policy require frequent opinion letters from legal counsel as to the subject trademarks and patents;
• How does the premium compare to historical and possible future IP "defense" legal fees. 

Like any insurance, Intellectual Property Infringement Defense Insurance does not offer a complete solution, but, depending on the terms of the policy and the cost of the premium, should be considered as a supplement to your intellectual property strategy and planning.

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“Franchising” has been and remains one of the most successful vehicles for the multi-unit expansion of a business. However, for many entrepreneurs looking to expand their business and brand,“franchising” is too often disregarded as a viable business model. For these entrepreneurs, the establishment of a franchise system (unnecessarily) appears to be a daunting task and is disregarded in favor of “licensing”. That is, in an “attempted” effort to avoid franchise regulation, but nevertheless achieve brand growth, the entrepreneur (as a “licensor”) licenses his or her trade name and trademarks to third parties (known as “licensees”) who conduct their own business utilizing the licensed marks.

While “licensing” relationships, without question, possess a legitimate purpose, they are extremely limited and cannot serve as an “end-run” around franchise regulation. That is, license agreements cannot be used to create “franchise-type relationships” without the franchise regulation. The reason for this is simple: in the world of franchise regulation, “substance” matters more than “form”, labels do not matter and just because you call something a “license” does not mean that it is not a “franchise”. In short, your license agreement (no matter what you call it) may in fact be a franchise.

So, how do you determine if your license agreement “crosses the line”? You ignore titles such as “licensor”, “licensee”, “license fee” and “license agreement” and evaluate the “substance” of your business relationship. Under the federal Franchise Rule, the defining characteristics of a franchise include:

(1) Continuing Commercial Relationship.  a “continuing commercial relationship”;

(2) Agreement. a written or oral “agreement”;

(3) License. the “license” of a trademark;

(4) Control / Obligation to Support. “significant control” over your “licensees/franchisees” methods of operation, or, an obligation to “support” those operations, and

(5) Fee. the payment of a “fee”.

Since, factors (1), (2) and (3) are, by necessity, inherent to both franchise and license agreements, the determination as to whether or not your license agreement “crosses the line” into franchise territory, boils down to an evaluation of “control” and “fees”. That is:

• Will you possess significant control over your “licensee’s” methods of operation, or, in the alternative, are you obligated to provide significant support to your “licensee’s” operations? and

• Will you receive or be owed a fee as a condition for your “licensee” to commence its operations?

If the answer to both of these questions is “yes” or “possibly yes”, your “licensee” may actually be a “franchisee” and you may be subject to franchise regulation. When making this evaluation, you must go beyond labels and consider both the substance of the relationship that your are creating and the long-term goals that you are attempting to achieve.

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