The failure to properly manage intellectual property ownership
and control can create significant problems for franchisors seeking
to sell their business or take on an equity investor. IP
ownership and protection is the first thing checked during any sale
process or due diligence exercise.
In the vast majority of franchise networks, intellectual property
is the single most valuable asset. If there are problems
surrounding the ownership or protection of intellectual property
these problems can have a significant impact on the value of the
The first challenge is to identify the items of intellectual
property that contribute to the value of the business. To
capture all value it is generally necessary to look beyond the list
of registered trade marks to consider all intellectual property
used in the business. In particular, it is important to
consider the issue of copyright and ownership of intellectual
property in items such as:
Product names, logos, slogans, phrases, colour schemes and tag
Websites and domain names, including those relating to
Agreements, operations manuals, procedures, recipes and other
written materials; and
Software, business processes, store lay outs and designs.
The next step is to establish ownership. This can be a problem
if any of these items have been prepared by third parties, such as
graphic artists, designers and consultants. Generally, copyright
can only be assigned in writing. It is not enough that the
parties intended that ownership of the copyright in certain works
were to be assigned to the franchisor once completed and paid for.
An important exception to this rule is where the creator is an
employee of the franchisor. Under an employment relationship,
copyright that is created in the course of employment will
generally be deemed to be owned by the employer (subject to the
terms of employment).
The final challenge is to develop an IP protection strategy. For
trade marks and domain names this may involve registration, but it
should also involve monitoring for infringement by others. With the
reach of the internet, consideration should be given to overseas
registration, particularly in major markets such as the US and
In relation to copyright materials, franchisors need to ensure that
the franchisor obtains an express written assignment of the
intellectual property rights where third parties are engaged to
develop them. In circumstances where the contractor is not willing
to completely assign its rights, the franchisor should at least
insist on a perpetual and transferable licence to use the
intellectual property created. In these circumstances, it is also
worth considering whether you need to restrain the contractor from
providing the same or similar services to your competitors.
It is possible to obtain an assignment of intellectual property
after the event, but negotiating an assignment after commencing a
sale process can leave you exposed to opportunism by contractors
that sense an opportunity to cash in. In the current market, where
buyers and financiers are being very cautious about the businesses
that they are prepared to invest in, it is important to ensure that
franchisors are able to give potential investors comfort about
issues as fundamental as intellectual property ownership.
Although there is often no immediate return on investment for
the costs of obtaining assignments up front, in our experience the
investment pays back in spades in the event of a sale or capital
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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