When running a franchise business, one of the most important considerations is your relationship with the franchisor - the company that has licenced its brand assets, methodology and product range to yours.

If a dispute arises, it can affect both businesses in significant ways, and this scenario is always best avoided. To support healthy relationships between franchisees and franchisors, it is important to understand the areas in which disputes commonly arise, so that you can take preventative action and avoid any conflict wherever possible.

One of the biggest areas where disputes can arise - and one that many businesses fail to account for - is intellectual property (IP). A company’s IP assets are often among its most valuable. They include brand elements like the organisation’s name, logo and tagline, and other valuable assets that a company might use to distinguish itself from its competitors. Usually, these will be secured using trade marks.

Therefore, much of what a franchisee is buying when they pay a licence fee is access to this intellectual property. Even more than the company’s hamburger recipes, McDonald’s franchisees pay to use the company’s brand elements. In turn, this allows them to benefit from the relationships of customers to the brand and offers a head-start in building a customer base for the franchisee’s business.

At the same time, a franchise agreement will contain rules about how this intellectual property can be used. In order to benefit from the positive customer association with the brand, or use the franchisor’s unique methodology, you must follow any brand guidelines you are given and work within the rules that have been established.

Here, the experienced and knowledgeable intellectual property solicitors at JMW explain some of the common disputes that can arise between franchisors and franchisees, and how you can approach resolving them. If you need legal support to resolve a dispute, get in touch with JMW’s expert intellectual property team today. Call us on 0345 872 6666, or fill in our online enquiry form to request a call back at your convenience.

What are the common causes of IP disputes?

As we have said, IP disputes between a franchisor and a franchisee can be particularly contentious given the reliance on branding, proprietary knowledge, and established business practices within a franchise model.

There are several areas where disputes can commonly arise. One of the most frequent issues pertains to the misuse or unauthorised use of the franchisor's trademarks and branding elements. This can include improper display of logos, deviations from brand guidelines, or using the brand's goodwill for unauthorised purposes. This can also happen after a franchise agreement has been terminated, if the franchisee continues to use IP assets it no longer has the right to use. In some cases, this would be considered trade mark infringement and could lead to serious legal consequences.

If the franchise model involves patented technology or processes, the franchisee may be restricted in how they can use, modify, or replicate these elements. Unauthorised use could result in patent infringement claims. Any modifications to these processes that are not approved by the franchisor, or changes to products or services that affect the brand’s identity, could be considered an infringement in a similar way.

Franchisees often receive operational manuals, marketing materials, and other copyrighted content from the franchisor. Unauthorised reproduction, distribution, or modification of these materials may infringe on copyright and can lead to IP disputes. A related (but often more serious) breach is the distribution of proprietary information, such as customer lists, pricing strategies, or business methods that are unique to a particular franchise. The misuse or disclosure of this information can be considered a violation of trade secrets.

Any misuse of brand assets, software, or other pieces of intellectual property of which a company has registered its ownership may be considered infringement of that business’ IP rights. This can lead to legal consequences, alongside the challenge of a dispute between the franchisor and franchisee.

However, using these assets in a way that contravenes the brand guidelines specified in your franchise agreement may not be enough to be considered IP infringement. In these cases, it may be easier to resolve the dispute without the need for legal action, and this can often be the fastest and most cost-effective solution for all parties.

How can you resolve a franchise dispute over IP?

The best way to resolve a dispute is to avoid it in the first place. Proper due diligence by franchisees and franchisors, along with a clear and well-drafted agreement, can help mitigate the risk of IP disputes down the line. This can help to ensure that all parties understand their responsibilities and obligations, along with the rules that govern how they can use the franchisor’s IP.

If a dispute does arise, there are several different ways you might consider to approach a resolution. A solicitor with experience in this area can discuss your desired outcomes and advise you on the approach that will work best for you. Often, the first approach should be negotiation between the parties involved. By communicating openly and honestly, it may be possible to resolve a misunderstanding or reach a compromise or resolution that works for everyone. This can prevent a disagreement or concern from escalating into a dispute.

If negotiation does not seem viable, or you have tried and failed to reach an agreement, the next step will be to check your contract. The terms of a franchise agreement may contain clauses dictating how disputes should be handled, including the specific processes and venues for resolution. For example, the franchise agreement may mandate that an alternative dispute resolution process like arbitration or mediation should be used.

If the contract does not specify this, one of these alternative dispute resolution processes may be suitable. There are advantages and disadvantages to each, so it is worthwhile to discuss this with your solicitor to evaluate your chances of the outcome you want to achieve. However, it is important to bear in mind that both parties must agree to a particular process before it can be pursued.

In mediation, a third-party mediator is brought in to help facilitate a resolution. Mediation is less formal than arbitration and court proceedings, usually quicker, and can be less costly. It also allows for more creative solutions that may suit both parties, so this may help to achieve the outcome you are seeking.

Arbitration is a more formal process than mediation and involves a neutral third party, or arbitrator, making a binding decision based on the evidence presented. Arbitration can be quicker than going to court but can be expensive, and the ability to appeal the decision is generally limited. Both parties must agree on the arbitrator, and if the dispute has escalated significantly, it may be difficult to reach an agreement on even this detail.

Is legal action necessary to resolve a franchise dispute?

If other methods of dispute resolution fail, or if the breach is deemed severe enough, legal action may be necessary. Court proceedings can be lengthy and expensive, and the result is made public, which could potentially harm the brand's reputation. However, in some cases, this may be the only option to enforce IP rights effectively.

Given the complexity of IP law, both franchisors and franchisees should seek advice from legal professionals specialising in this area. This can be crucial in understanding the nuances of the case, the strength of the legal position, and the best course of action to take. By speaking to JMW’s team at the earliest opportunity, you will be able to discuss your situation and learn whether legal action is likely to be your only option, or whether another approach might deliver the result you want.

Even if a dispute progresses to legal action, it can be settled out of court through a settlement agreement. These agreements specify the terms under which both parties agree to resolve the dispute, often involving some form of compensation or corrective action. However, if you have tried negotiating or used a form of alternative dispute resolution already, it is less likely that a resolution will be reached out of court at this stage.

By selecting the most appropriate method for the specific dispute and acting quickly and professionally, parties can often resolve their differences without causing lasting damage to the business relationship or the brand. With legal advice from the team at JMW, you will be able to evaluate the potential outcomes and choose the approach that is most likely to deliver the resolution you want.

Call us today on 0345 872 6666, or fill in our online enquiry form to request a call back at your convenience, and discuss your intellectual property concerns with us today.