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					IBT – Trademark Franchising

     Victor H. Bouganim
   WCL, American University
     Trademark Franchising
   Problem 9.1, Textbook, p. 768
 Colonel   Chicken Inc.
  – Texas fast food franchising corporation
  – Successfully established over 100 franchises in
    the U.S.
  – Never opened a franchise abroad
  – Wants to explore the possibility of
    international franchising


                       Victor H. Bouganim, WCL, American University, Spring 2001
Franchising - Trademark Licensing

 Franchising
  – Licensing
    agreement of
    intellectual
    property rights
    Trademarks

    Know   how

                      Victor H. Bouganim, WCL, American University, Spring 2001
       What is a Trademark?

 A sign able to
  distinguish the goods        Functions
  or services of one
  company from those                Indication of origin.
  of another.                   Indication of quality.
 The sign has to be
                                Identification,
  presented as a mark.
                                 communication,
 A property right.
                                 advertising:
 A Monopoly.
                                     Association


                          Victor H. Bouganim, WCL, American University, Spring 2001
Trademarks - Some Examples




           Victor H. Bouganim, WCL, American University, Spring 2001
      Trademark Protection
 Most  countries offer Trademark protection,
  normally by way of registration.
 Trademark rights based on use of marks on
  goods in commerce are recognized at
  common law - Common Law Trademarks.
 Trademarks rights are territorial. Therefore,
  international trademark protection requires
  separate registrations in every target-country.


                      Victor H. Bouganim, WCL, American University, Spring 2001
          U.S. Trademark Law
Trademarks are protected by -
 Common law
 State registrations
 Federal registrations - The Lanham Act
   – Permitted for all marks capable of distinguishing goods
     and services.
   – Mark becomes valid for a term of 10 years following
     registration. Registration can be renewed indefinitely.
   – Use Requirement: Marks must be used on goods
       “bona fide intent” - registration within 12 months before use
       “good cause” - registration within 36 months before use

       No use or over-use may result in losing the TM.

                               Victor H. Bouganim, WCL, American University, Spring 2001
           Class Discussion
 How   can international conventions assist in
  international trademarks protection?
 What is the role of TRIPS in international
  trademarks protection?
 Is trademark registration a guarantee against
  trademark piracy?
 Can a trademark be valid in one country and
  generic in another?


                     Victor H. Bouganim, WCL, American University, Spring 2001
International TM Conventions
 TRIPS,   Art. 15-21.
 The Paris Convention
 The Madrid Agreement for International
  Registration of Marks, 1891
 Trademarks Law Treaty, Geneva 1994.
 The 1957 Arrangement of Nice Concerning
  the International Classification of Goods and
  Services


                     Victor H. Bouganim, WCL, American University, Spring 2001
           TRIPS - TM Regime
 An attempt to narrow the gaps in the way these
  rights are protected around the world, and to bring
  them under common international rules
 Articles 15-21.
    – Members are required to provide registration of
      distinctive visual (sounds and smell are optional)
      marks.
   Incorporate by reference the provisions of the
    Paris Convention.
    – In particular: Protection of well-known marks,
      according to Art. 6Bis.
   Geographical Indications - Art. 22-24.
                             Victor H. Bouganim, WCL, American University, Spring 2001
         Paris Convention - TM
 1883, last amended 1979
 160 states are signatories, including U.S.
 Effort to harmonize some trademark rules
 National treatment
 Right of priority of 6 months
 Article 6bis
    – Gives owners of “well known” trademarks the right to
      block or cancel the unauthorized registration of their
      marks
    – Is the mark well known locally or internationally
       is a frequent issue


                             Victor H. Bouganim, WCL, American University, Spring 2001
    Madrid Agreement and Protocol
 1891, the Protocol entered into force in 1995.
 Create a system for international registration of marks,
  which is administered by the WIPO.
 About 60 countries are parties, but not the U.S.
 This system permits a trademark owner to have marks
  protected in several countries by simply filing one
  application with a single office, in one language, with
  one set of fees.
 Community      TM is available in the EU


                           Victor H. Bouganim, WCL, American University, Spring 2001
     Trademark Law Treaty
 Geneva,  1994
 26 participating countries (as for Jan 2001)
  including the U.S.
 Indicates the direction of international
  trademark regulation and protection
 Alternative to the Madrid System on
  trademarks international registration.


                     Victor H. Bouganim, WCL, American University, Spring 2001
    TM - The Nice Agreement
 1957, last amended in 1979
 65 participating countries, including U.S.
 Addresses the question of registration by
  “class” or “classification” of goods
 Article 1 adopts a single classification
  system for goods and services



                     Victor H. Bouganim, WCL, American University, Spring 2001
                 Knowhow
 Commercially     valuable knowledge
  – If someone is willing to pay for the
    information it can be sold or licensed
    locally or internationally
    Trade secrets
    Usually, technical or scientific in nature

    Marketing and management skills

    Business advice

    Does not need to be patentable

                       Victor H. Bouganim, WCL, American University, Spring 2001
   Legal Protection of Knowhow
 Knowledge  is a public good
 Often Knowhow is not patented in an effort to
  maintain confidentiality
 Economic Espionage Act of 1996
  – Criminal penalties for misappropriation of trade secrets
    for the benefit of foreign governments or anyone
  – ‘Trade secret’ is defined as “financial, business,
    scientific, technical, economic or engineering
    information” that the owner has taken reasonable
    measures to keep secret and whose “economic
    value derives from being closely held.”
                          Victor H. Bouganim, WCL, American University, Spring 2001
 Legal Protection of Knowhow
 Preserving the confidentiality of knowhow
  is an important business strategy
  – Example: the Coca-Cola formula
 Protectknowhow with contracts of
  confidentiality with relevant employees
  – Contract and tort remedies never render the
    employer whole
 Criminal   penalties are unusual

                       Victor H. Bouganim, WCL, American University, Spring 2001
       Franchising Agreements
   Direct Franchise Agreement
    – Franchisor franchises individual outlets direct form the
      home country to the target country
    – Works well between countries with similar language
      and legal system
   Master Franchise Agreement
    – Gives an organization the right to develop the franchise
      in a particular country
    – Good for countries that are a long distance from the
      home country and where the legal system and language
      are considerably different


                             Victor H. Bouganim, WCL, American University, Spring 2001
             Franchising Types
   Service franchise
    – Franchisee offers a service under the business name or
      symbol and sometimes the trademark of the franchisor
      in accordance with the franchisor’s instructions
   Production franchise
    – Franchisee manufactures products according to the
      instructions of the franchisor and sells them under the
      franchisor’s trademark
   Distribution franchise
    – Franchisee sells certain products in a shop which bears
      the franchisor’s business name or symbol


                             Victor H. Bouganim, WCL, American University, Spring 2001
               Franchiser’s Interests
   Protection of brand name                    Consistency
    image                                          – value of the trademark
    – Businesses want to protect                     is diminished by
      their image in the eyes of the
      consumer                                       inconsistency
   Confidentiality                                – Quality Control
    – Business Know How                            – Price Control
        Example: McDonalds                        – Trade dress
         Service Procedure
         Manual
                                                   – Industrial designs
    – Trade secrets




                                   Victor H. Bouganim, WCL, American University, Spring 2001
            Franchising - Legal Issues
   Culture                       Foreign business/
    – Legal system
           Direct and indirect
                                    ownership laws
            regulation
                                   Insurance
    – Language
    – Distance from home           Taxes
      country
    – Religious considerations     Jurisdiction – choices of

   Protection of                   law and forum
    trademarks, trade              Termination of
    name and trade                  franchise agreement
    secrets                        Fee schedule
    – Assignment
    – Advertising                  Accounting regulations
    – Quality control
                                  Victor H. Bouganim, WCL, American University, Spring 2001
    Franchising Contract Checklist - I

   Franchise grant
    – Area – business operation
                                             Standards and
      radius                                  Uniformity
    – Premises                                  –    Building and premises
    – Term – length of license                  –    Signs
   Franchise Payment                           –    Equipment
    – Royalties
                                                –    Vending machines
    – Gross sales defined
    – Accounting                                –    Menu and service
   Services by franchisor                      –    Alternate suppliers
    – Training                                  –    Right of entry and
    – Advertising contribution                       inspection


                                  Victor H. Bouganim, WCL, American University, Spring 2001
     Franchising Contract Checklist - II


   Limitations of franchise          Dispute resolution
     – Trademarks, trade               – Governing law
       names and trade                 – Arbitration
       secrets
                                      Misc.
    – Assignment
 Option and end of term               – Interpretation
 Insurance
                                       – Modification
 Taxes
                                       – Competition with
                                         company


                           Victor H. Bouganim, WCL, American University, Spring 2001
        Trademarks Franchising
            Problem 9.1 Analysis - I
 Colonel   Chicken’s Formula for success:
  – Careful selection and ownership of the site by the
    company and required use of the site by the
    franchisee
  – Mandatory franchisee use of secret recipes, special
    patented cooking equipment and purchases of
    chicken from a list of designated sources
  – Extensive English language advertising programs
 How might these issues be addressed in a
 franchise agreement contract?

                          Victor H. Bouganim, WCL, American University, Spring 2001
       Trademarks Franchising
         Problem 9.1 Analysis - II
   Colonel Chicken’s Formula for success -
    Continued
    – Aggressive protection of its trademarks
    – Active supervision of quality controls maintained by its
      franchisees in accordance with Colonel Chicken’s
      copyrighted instruction manual
    – Exclusive use of a “Western” building design which
      draws upon the company’s Texas heritage
    – Strongly recommended prices
 How    might these issues be addressed in a
    franchise agreement contract?

                             Victor H. Bouganim, WCL, American University, Spring 2001
         Class Discussion
 How   might Colonel Chicken’s
  “formula for success” be threatened by
  regulations in the target-country?
 What are the legal dangers of Colonel
  Chicken exercising excessive control
  over international franchises?


                  Victor H. Bouganim, WCL, American University, Spring 2001
 Legal Interference in Franchising

 Some   countries require a majority
  ownership of enterprises by nationals
  or the government
 Some countries impose direct
  regulations on franchises
 Some countries impose indirect
  regulations on franchises

                   Victor H. Bouganim, WCL, American University, Spring 2001
        Alberta Franchising Act
 The   Franchises Act, Alberta, Canada
  – Sec. 6 - Registration
    Franchises  must register with the
        government
  – Sec. 8 - Prospectus
    A     prospectus must be filed with the
        government providing full, plain and true
        disclosure of all material facts relating to the
        franchise

                           Victor H. Bouganim, WCL, American University, Spring 2001
  Antitrust Considerations - I
 When   do the provisions of franchise
  agreements governing the distribution
  of goods conflict with anti-trust (anti-
  monopoly) laws?
 Does the licensing of Know How
  unfairly restrict competition?


                    Victor H. Bouganim, WCL, American University, Spring 2001
    Antitrust Considerations - II
 Do provisions establishing control necessary for
  maintaining the identity and reputation of the
  network identified by the common name or
  symbol constitute restrictions of competition?
 What about
    – Shared markets
    – Price recommendations

  Do these agreements result in
unfair restrictions on competition?

                          Victor H. Bouganim, WCL, American University, Spring 2001
           The Pronuptia Case
     European Court of Justice, 1986
 An illustration for possible clashes between the
  provisions of a franchising agreement and
  European competition law.
 Held, among other issues -
    – Provisions which establish the control necessary to
      maintain the franchisor’s reputation and know-how are
      not restrictions of competition.
    – Although provisions which impair the franchisee’s
      freedom to determine his own prices are restrictive of
      competition, that is not the case when the franchisor
      only provides price recommendations.


                            Victor H. Bouganim, WCL, American University, Spring 2001

				
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