Lean on me when you’re not strong – licensing, distribution and franchising

At its core, a license agreement is an agreement not to sue someone else for infringement of your intellectual property. In other words, it is an agreement in which consent is granted to another person to use your intellectual property, usually, in exchange for a royalty or sum of money.

Any intellectual property can form the subject of a licence. For example, you could license your original music score for use in a movie; you could license a company to produce and sell a patented product; or you could license the use of your trade mark to others to sell products in association with that mark. By licensing intellectual property, a business could generate a revenue stream from a market in which it otherwise would be unable to participate (due to lack of manufacturing capacity or geographic remoteness, for example).

When a new trade mark is adopted, the owner must build a reputation through use, marketing, visibility and sale of the product bearing that trade mark. When a trade mark is licensed, there is some assurance that the product will sell as the market is familiar with the brand. In short, a trade mark is only licensable when it has established a reputation and has proven its ability to attract custom.

In granting use rights, a trade mark licensor runs the risk that the licensee tarnishes the reputation of the trade mark, diluting the value of the mark, by for example, selling sub-par products or offering poor after-sales service. For this reason, a trade mark licence agreement includes terms regulating control of the quality of the goods sold in association with the mark.

A trade mark licence arrangement should be distinguished from a distribution arrangement in terms of which a distributor buys goods from the trade mark proprietor and on-sells them for profit. In this case, the distributor may use the trade mark to advertise the goods for sale but does not purport to be the originator of the goods or the owner of the trade mark.

Franchising, on the other hand, is aimed at enabling a licensee to replicate an entire business model. While at its heart, franchising is a licence arrangement granting a third-party rights to use certain intellectual property, the nature of the subject intellectual property distinguishes it from other license agreements. This intellectual property is formulated as an integral bundle and is licensed on an all-or-nothing basis. Not only is a franchisee entitled to use and reproduce the copyright works, trade marks, and information provided, it is obliged to do so, so that the essential characteristics of the franchise are preserved, and the reputation of the franchise is protected from damage.

For example, if the franchise is for a restaurant chain, the franchisor may provide the franchisee with all information required to establish and run a business with the same look, feel, quality of product/service and therefore also, the same chances of success in the market. The franchisee is typically given the right to replicate the menu, product costing and store layouts; use tried and tested recipes; and source quality raw materials from the same preferred suppliers. A bundle of intellectual property is licensed including trade marks; copyright (e.g. in menus, training manuals, and software); and useful information, such as recipes, supplier contacts, equipment specifications, etc.). Of course, the franchisee may not use the trade mark but then formulate its own menu or alter the décor of the outlet – a franchisee must conform the franchise, in look, feel and operation, to established specifications. In other words, the franchisee adopts an entire business model and rides on the back of the recognized goodwill of an established brand.

A franchisee may also gain access to certain business systems and processes (such as supply management, stock taking or point-of-sale software, staff training, quality control processes, etc.) to give it the best chance of commercial success. A further advantage for a franchisee is the ability to benefit from joint marketing collateral and promotional efforts, improvement of products, training on how to run the business and ongoing help from the franchisor in dealing with downturns in trade or other issues commonly experienced amongst franchisees.

To some degree, a franchisee is protected by the Consumer Protection Act (68 of 2008), which regards the franchisee as the consumer and the franchisor as the supplier. While a franchisor can recommend certain suppliers, it cannot, for example, oblige a franchisee to purchase materials from, or at the direction of, the franchisor, unless such materials are reasonably related to the branded products or services that are the subject of the franchise agreement.

In summary, a licensing, distribution or franchising arrangement may be an option for you, whether for the purpose of commercialising your own intellectual property or using the intellectual property of others to advance your business. Seek out opportunities to generate alternative revenue streams. Lead where you can and partner for the rest.

Date published: 10 September 2019
Author: Dina Biagio and Natalie Slabbert

Tags: licensing distribution franchising intellectual property ip