Franchise Agreement II

Marketing

The franchisor may establish a marketing fund and require all franchisees and sub-franchisees to contribute. The franchisee may pay an advertising levy in conjunction with other fees and charges.  The fund is for the purpose of advertising, marketing and promotional programmes. The franchisor may operate the fund.

The head franchisor may delegate the operation of the fund or a local element of the fund to a master franchisee/ sub-franchisor.

Marketing and promotional fees may be a percentage of gross sales.  This is in addition to local advertising expenditure.  The franchisee may undertake obligations in terms of minimum expenditure on marketing promotion and advertising. Variations in the amount spent may require consent. The franchisor may require that it approves all advertising.

Advertising and marketing materials \are usually be made available to the franchisee and sub-franchisees. Provisions may deal with the adaptation of the materials to the local market.

Franchisor’s Methods

The franchisee is usually obliged to remain faithful to the franchisor’s mode of operation and methods. There may be an obligation to offer products and services designated by the franchisor from time to time and as approved.

The agreement or manuals which are incorporated in it may define in detail the role played by trademarks and operational procedures. The franchisee will undertake to operate the system. Test and systems may be provided for, by which the franchisor can verify compliance on an ongoing basis.

The operations manual may be part of the agreement. The manual may require translation. It may be updated from time to time. The franchisee may be obliged to keep up to date with it and comply with changes and the evolution of the franchisor’s system

The franchisor will wish to protect its business methods, confidential information and trade secrets, with confidentiality obligations. It will wish to protect against the undermining of its franchise and the misuse of information, by way of non-competition agreements.

Premises

In some cases, the franchisor may have to purchase or lease premises and let or sub-let it to the franchisee.  This may be done to control the location or to give the landlord the requisite strength of covenant. Where this would give the franchisee statutory security of tenure, the franchisee may be required to contract out of landlord or tenant act rights of renewal.

In some cases, the franchisor grants a licence to the franchisee, rather than a tenancy. If the arrangement is in substance a tenancy, then Landlord and Tenant Act rights will apply. In many cases, involving licences granted in respect of service stations,  the apparent licensees were able to claim Landlord and Tenant Act rights of renewal, as the arrangement in substance was held to amount to a lease.

General Provisions

In some cases, the franchise may be obliged to act in good faith in performing its obligations. In other cases, the franchisor or both parties may disclaim agency or fiduciary duties, between them, for the removal of any doubt. This position will usually be implied.

The parties may acknowledge that they contract as independent parties and not as joint venturers, agents or an equivalent relationship. The franchisee may be obliged in its dealings with others, conspicuously to identify itself as an independent contractor.

The franchisee may not purport to hold itself out as representing the franchisor or do anything which incurs liability for the latter, other than to the extent expressly permitted. In particular, it may not hold itself out or incur report or incur debts on its behalf.

The franchisee may be required to indemnify the franchisor against any expenses, losses, claims and damages arising from its actions under the agreement, for which the franchisee is responsible or arising out of the franchise and activities related to it. The franchisee may wish to limit or remove the indemnity.

There is no promise or warranty to the distributor or a third party that their investment will necessarily pay off or that the business will be successful. The franchisee almost invariably takes the commercial risk.

Intellectual Property I

The franchisee may acknowledge the franchisor’s intellectual property rights and rights to sell and distribute the products, use the intellectual property within and outside the territory or development area, at all times, including before and after the relevant term.  This may cover all intellectual property including trade names, trademarks, copyright, applicable patented material and other common law intellectual property rights.

There will be ongoing obligations in relation to the use of intellectual property.  The franchisee may be required to notify  the franchisor of any prospective or apparent breaches of its trademarks or equivalent rights. There may be provisions as to the steps to be taken in the event of intellectual property breach.

Intellectual Property II

The franchisee acknowledges the franchisor’s intellectual property rights and accepts the franchisor’s preeminent rights to it. Intellectual property may be used only in accordance with the terms of the agreement. The franchisee’s rights are limited to the terms of the licence in the franchise agreement.

The franchisee may be obliged to notify infringements of which it becomes aware, in relation to the franchisor’s intellectual property. He may agree to take action against or support, support, such as by way of evidence in relation to enforcement.

Where the local law requires that the franchisee or sub-franchisees register the use of the intellectual property to allow its use by the franchisee or sub-franchisees of the intellectual property, they are likely to be obliged to assist in so doing.

Confidentiality I

The franchisee must itself keep (and must procure that sub-franchisees keep) confidential, all information relating to the franchise. The franchise agreement may spell out the elements that are subject to confidentiality and are claimed to qualify for proprietary protection. This may include:

• specifications for development of the franchise programmes and systems,
• format, specifications, procedures,
• sales and marketing techniques,
• computer software,
• statistical knowledge,
• marketing and advertising programmes,
• knowledge of suppliers,
• equipment, fixtures, fittings.

Confidentiality II

The confidential information is licensed. No proprietary right is acquired by the franchisee or sub-franchisees.

Obligations are undertaken by the franchisee, to keep the information confidential and secure from disclosure, insofar as possible at law. Disclosure is usually permissible for the purposes of the agreement and to the extent permissible by law. In the case of common law jurisdictions, it may be agreed that the restrictions are reasonable and are properly enforced by way of injunction.

The franchisor may require undertakings from key employees, directors and staff, etc. The franchise agreement may provide specifically for the confidentiality obligation to be incorporated in employment and service contracts. This may raise complex issues under the relevant foreign law. In most jurisdictions, the mere labelling of information as “confidential”, is not sufficient to impress it with that characteristic.

Restrictions on Competition I

In order to protect confidential information and intellectual property, franchise agreements will usually provide for non-competition clauses obliging the franchisee, developer, sub-franchisees and others, not to compete with the franchise businesses for a certain period, within a certain area or territory.

Under common law principles, a restrictive agreement of this nature must be no more than reasonable to protect the legitimate interest. There is a legitimate interest in protecting (some types of) highly confidential information, intellectual property and other proprietary information at common law. Similar principles apply in other jurisdictions.

The Competition Act limits the extent to which restraints may be imposed. They may be no more than is reasonably permissible.

Restrictions on Competition II

Restrictions on competition during the agreement and for a period afterwards may be permissible having regard to the necessity for protection of the proprietary, confidential information and intellectual property.

Accordingly, a franchisee and sub-franchisee are commonly restricted from having a direct or indirect interest in any competitor business within the area concerned for the term and a period afterwards. It is likely to be restricted from performing services as an officer, agent, representative, consultant or interfere for any such entity.

The agreement may seek to restrain solicitation of former customers or employees. The restraints must meet the reasonableness test. Direct restrictions under a contract between the franchisor, the franchisee or sub-franchisee, are more likely to be enforceable than those against their employees and other contractors, who do not have received the benefit of the franchise agreement.

References and Sources

The Encyclopaedia of Forms and Precedents Vol 16(4)