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Aspects of A Franchise Agreement – Part One Territory

You have decided to buy a franchised business. As a part of this you receive a copy of the franchise agreement, but you are unsure about your obligations. Our series ‘aspects of a franchise agreement’ will provide clarity on the main parts of a franchise agreement.

Your franchise agreement should clearly set out your territory. Franchisors would have already divided up the country (or state) into concise and separate territories which will be allocated to each franchisee. You should look carefully at the details of the territory to ensure it matches what you have discussed with the franchisor.

When we use the word territory, we mean a specific area where you will be able to conduct the franchised business. If the premises is within a shopping mall what will be the territory? Is it just the mall or does it include the area surrounding the mall? Ideally your territory should be identified on a map with clear boundary lines.

There are two types of territory:

Exclusive. The franchisor is not permitted to appoint another franchisee within your territory.

Non-exclusive. The franchisor can appoint another franchisee in your territory, subject to offering the new location within the territory to you first.

Some franchise systems prescribe no territories at all. If that is the case with your business, then you should be concerned about the saturation of the area of your proposed franchised business. This is especially relevant when in the case of a new system there are no actual (as opposed to hypothetical or anticipated) figures to justify a viable business. You could request a limit on the number of franchisees to operate in the area although this can also be counterproductive because it may stop the establishment of and/or the growing of brand awareness to the public.

Premises and territory are two separate matters. You can have a premises within a territory. If you move premises during the term of the franchise agreement but it is still within the territory, then that move will not be considered an assignment or transfer under the franchise agreement. However, franchise agreements usually contain a requirement that you must have the prior written approval of the franchisor in regard to any alternative premises.

Your territory can become non-exclusive or be modified if you do not comply with the terms of your agreement – for example minimum performance criteria or if the franchisor, having reviewed your performance feels you are not adequately servicing the territory. Should this occur, it must be subject to consultation with both parties.

In conclusion, you should always take great care when reviewing the territory and you must know what you are getting in relation to a territory or area.

Intellectual Property Protection in New Zealand

Before international franchisors enter into the New Zealand market, they should ensure that their intellectual property is protected in New Zealand. The term “intellectual property” encompasses trade marks, registered designs, copyright and patents.  The protection of the rights to intellectual property is fundamental to any franchised business.

In New Zealand the franchisor’s intellectual property can be protected as follows:

Trade Marks

It is imperative for a franchisor to obtain formal trade mark or service mark protection as a basis for any trading operation.  There are 42 classes of goods and services in which trade mark protection can be obtained in New Zealand and of those classes 34 relate to goods and 8 to services.  For example, there are 3 food classes and 2 classes covering products such as beer, alcoholic beverages, fruit juices and mineral water. There is also a service class to protect advertising and business services.

The nature and extent of any trade mark protection needs to be considered for each particular case.

Trade marks may comprise any word, brand, label, symbol, device or logo which serves to distinguish the particular goods or services of one party from the goods or services of another party and the Trade Marks Act 2002 governs registration of all marks.

The principal function of a trade mark is to indicate the origin of goods and services.  It is important to select a distinctive trade mark in order that the public will associate your goods and services with the unique brand.

Trade marks are protected by registration in the Intellectual Property Office of New Zealand (IPONZ).  Once you have selected or designed your trade mark then as a precautionary move it is possible to obtain a search of the Trade Mark Register to ensure that it does not conflict with anyone else’s mark.

Assuming that the trade mark is available, its protection is afforded by filing an application and paying the requisite fee.  This obtains a filing date and application number from the Trade Mark Office.

The benefits of registration are as follows:

(a) It can be used to prevent any competitor from using the same or similar mark on any goods or services in New Zealand.

(b) It serves as public notification of your rights in that trade or service mark.

(c) It can prevent registration of an identical or confusingly similar mark.

(d) Trade mark registration is a valuable business asset.

It is also possible to have common law rights in an unregistered mark which can be protected by the tortious action of Passing Off.

Registered Designs

Registered Design protection pursuant to the Designs Act 1953 is available for a wide range of products.  Protection may be obtained for novel features of shape, configuration, pattern or ornament applied to an article by an industrial process. The features protected by a registered design must appeal to and be judged by the eye such as design on china and cutlery.

It is possible to obtain a preliminary search in the Designs section on the Intellectual Property Office of New Zealand website and this search can provide advice as to whether or not the proposed design is likely to infringe an existing registered design and/or whether it is in fact registrable.

Copyright

Under the Copyright Act 1994 the labour, skill and judgment which an author, artist or creator has expended in the creation of an original literary, artistic, musical or dramatic work is protected.  Copyright arises automatically in the work.  It is not the ideas that can be protected but the tangible form the ideas take such as the manual, the logo or the advertising jingle.

Protection is in the form of a right to prevent anyone else from copying or reproducing the work or a substantial part of the work without the author’s permission.

Patents

You can obtain patent protection under the Patents Act 2013.  In broad terms, patent protection may be obtained for inventions (ideas) which are novel, involve an ‘inventive step and be useful. An inventive step is a non-obvious improvement over known technologies.

Patent rights are granted by statute and the system operates as a reward for technical innovation by granting exclusive monopoly rights for a defined period.

In order to obtain a valid patent the invention must be new.  An invention should not have been used, sold, published or otherwise known in New Zealand by the applicant or any third party prior to the date of application.

Conclusion

New Zealand welcomes international brands but it is essential that international franchisors have protected their intellectual property before they start appointing franchisees in New Zealand. A typical clause in the franchise agreement would also set out that the franchisee is bound by the confidentiality and secrecy provisions in relation to confidential information and intellectual property. The franchisee can only use the intellectual property in order to operate the business and does not have any ownership rights over the intellectual property.

You should obtain expert advice regarding protection of your intellectual property. If you have any questions about protection please contact SGL.