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
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
- 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?