Q&A with Frank Zaid: Issues Regarding Intellectual Property

By Frank Zaid
www.franchiseinfo.ca
April 18, 2017

Q: What issues are being raised in today’s Canadian franchise agreements and disclosure documents with regard to intellectual property?

Historically, the term ‘intellectual property’ referred to statutory patents, trademarks, industrial designs and copyrights. With the fast-changing world of the Internet and social media, however, the term has become much broader in its relevance to the operation of franchise systems. As a result, references to intellectual property in franchise agreements and disclosure documents need to be reviewed and revised, both to protect the interests of franchisors and to ensure full disclosure to franchisees.

For a baseline example, one can refer to the disclosure requirements of Canada’s most recently enacted franchise legislation: British Columbia’s Franchises Act, which came into force on Feb. 1, 2017. As in other provinces that have enacted franchise legislation, the act requires franchisors to provide disclosure documents—containing specifically prescribed information—to prospective franchisees within a certain period.

One of the disclosure items prescribed in British Columbia, like most other regulated provinces, relates to ‘trademarks and other proprietary rights.’ Specifically, the disclosure document must contain a description of the rights the franchisor has to the trademark, trade name, logo, advertising or other commercial symbols associated with the franchise system. This type of disclosure seems to focus on brand identification, rather than to intellectual property rights by either a traditional or contemporary definition.

A disclosure document in the regulated provinces must also contain a description of all ‘material facts,’ which in British Columbia (and most of the other provinces) would include any information about the franchisor’s business, operations, capital, control and system that would reasonably be expected to have a significant effect on the price or value of the franchise to be granted and, for that matter, the franchisee’s decision to acquire
the franchise.

Issues to address
Thus, the term ‘material facts’ is very broad, requiring a comprehensive review of all background information relating to a franchise system. Since many aspects of intellectual property relate to the franchise and are indeed relevant to its value for the prospective franchisee, the inclusion of a high degree of disclosure about the rights to intellectual property may be legally required in the disclosure document.

Some or all of the following issues, for example, could turn out to be relevant:

 

  • What specific trademarks and trade names are used in association with the franchise?
  • Have applications been filed to officially register those trademarks?
  • If so, what is the status of these applications? Have they been allowed? Are the trademarks already registered?
  • In which specific countries has the franchisor filed applications for registration of its trademarks and what is the status of each?
  • Is the franchisor aware of any possible obstacles to obtaining registration, such as use of the same or similar trademarks by unrelated third parties?
  • Are there any known threatened or pending legal or regulatory proceedings regulating to
    the trademarks?
  • Does the franchisor reserve the right to amend, modify or otherwise change its trademarks or introduce new ones and, if so, what are the obligations for the franchisee in such events?
  • Can the franchisor require the franchisee to stop using earlier trademarks or trade names when new ones are being introduced?
  • Does the franchisor provide an indemnity to the franchisee with respect to the franchisee’s use of its trademarks or trade names?
  • What are the obligations of the franchisee if he/she becomes aware of a possible infringement or unauthorized use by a third party of the trademarks or trade names?
  • What are the requirements of the franchisee in respect of his/her own use of the trademarks or trade names?
  • Can the franchisee use the trademarks as part of its corporate business name?
  • Are there specific graphic standards regarding how the franchisee can use the trademarks or trade names?
  • Can the franchisee enter contracts with its suppliers or customers using the trademarks or trade names?
  • Can the franchisee continue to use the trademarks or trade names if his/her franchise agreement expires or is terminated?

 

Visual materials
As mentioned, trademarks and trade names are not the only types of intellectual property that legally require disclosure. Logos, advertising and commercial symbols associated with the franchisor must be disclosed, too.

Logos are fairly easy to understand. They generally take the form of artistic renderings of designs representing trademarks or trade names. As such, the issues regarding logos are similar to those listed above for trademarks and trade names.

Advertising may be a less clear-cut concept, but there should be a separate disclosure item regarding how it is undertaken in general. It is common for franchisees to pay into a centralized ad fund for national or regional campaigns, but they might also access some of the same materials for local advertising on their own accord, with the franchisor’s approval.

‘Commercial symbols’ is a much less common term, referring to certain types of renderings and drawings that are not strictly logos, but are directly associated with the franchise system and, as such, must be disclosed.

Undisclosed intellectual property

The other core types of intellectual property include patents, industrial designs and copyrights, but none of the regulated provinces currently address these in their franchise legislation.

Interestingly, in 2005, the Uniform Law Conference of Canada (ULCC) developed and adopted a ‘Uniform Franchises Act,’ for the purpose of suggesting a model regulatory regime for use across Canada. (At the time, only Alberta and Ontario had legislation in force that directly regulated franchising.) The model regulation included considerably expanded disclosure regarding intellectual property, including descriptions of the following:

 

  • Any patents, copyrights and proprietary information and rights associated with the franchise.
  • The status of those items.
  • The franchisor’s right to modify or discontinue their use.
  • Any known impediments to their use.
  • Any known or alleged material infringements of them.

 

More than 10 years later, British Columbia’s new franchise legislation does not involve a more inclusive disclosure requirement with regard to intellectual property. Nevertheless, if a franchisor has applied for or obtained patents for certain proprietary products or services that are fundamental to its franchise system, then those would most likely be legally considered material facts that should be disclosed. The same issues could apply to copyrights or industrial designs, which are also essential components of franchise systems.

As such, franchisors should pay careful attention to the preparation of their franchise agreements and disclosure documents in relation to all forms of intellectual property that are important to the operations of their businesses. And in turn, any franchisees who feel they have suffered a loss due to inadequate or incomplete disclosure should consider their associated legal rights to all of the material facts.

Frank Zaid practised franchise law for 40 years and has appeared as an expert witness in franchise disputes. Today, he is a franchise mediator, arbitrator and ombudsman with ADR Chambers in Toronto, where he chairs a special panel to resolve franchise disputes. He also operates his own business, Frank Zaid FRANlegal Support Services. For more information, contact him at (416) 322-8300 or (416) 362-8555 or via e-mail at fzaid@frankzaid.com or fzaid@adrchambers.com.