1. IBT – Trademark Franchising Victor H. Bouganim WCL, American University

2. Victor H. Bouganim, WCL, American University, Spring 2001 Trademark Franchising Problem 9.1, Textbook, p. 768 F 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

3. Victor H. Bouganim, WCL, American University, Spring 2001 Franchising - Trademark Licensing F Franchising –Licensing agreement of intellectual property rights u Trademarks u Know how

4. Victor H. Bouganim, WCL, American University, Spring 2001 What is a Trademark? F A sign able to distinguish the goods or services of one company from those of another. F The sign has to be presented as a mark. F A property right. F A Monopoly. Functions F Indication of origin. F Indication of quality. F Identification, communication, advertising: Association

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

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

7. Victor H. Bouganim, WCL, American University, Spring 2001 U.S. Trademark Law Trademarks are protected by - F Common law F State registrations F 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 u “bona fide intent” - registration within 12 months before use u “good cause” - registration within 36 months before use u No use or over-use may result in losing the TM.

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

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

10. Victor H. Bouganim, WCL, American University, Spring 2001 TRIPS - TM Regime F An attempt to narrow the gaps in the way these rights are protected around the world, and to bring them under common international rules F Articles 15-21. –Members are required to provide registration of distinctive visual (sounds and smell are optional) marks. F Incorporate by reference the provisions of the Paris Convention. –In particular: Protection of well-known marks, according to Art. 6Bis. F Geographical Indications - Art. 22-24.

11. Victor H. Bouganim, WCL, American University, Spring 2001 Paris Convention - TM F 1883, last amended 1979 F 160 states are signatories, including U.S. F Effort to harmonize some trademark rules F National treatment F Right of priority of 6 months F 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

12. Victor H. Bouganim, WCL, American University, Spring 2001 Madrid Agreement and Protocol F 1891, the Protocol entered into force in 1995. F Create a system for international registration of marks, which is administered by the WIPO. F About 60 countries are parties, but not the U.S. F 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. F Community TM is available in the EU

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

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

15. Victor H. Bouganim, WCL, American University, Spring 2001 Knowhow F Commercially valuable knowledge –If someone is willing to pay for the information it can be sold or licensed locally or internationally u Trade secrets u Usually, technical or scientific in nature u Marketing and management skills u Business advice u Does not need to be patentable

16. Victor H. Bouganim, WCL, American University, Spring 2001 Legal Protection of Knowhow F Knowledge is a public good F Often Knowhow is not patented in an effort to maintain confidentiality F 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.”

17. Victor H. Bouganim, WCL, American University, Spring 2001 Legal Protection of Knowhow F Preserving the confidentiality of knowhow is an important business strategy –Example: the Coca-Cola formula F Protect knowhow with contracts of confidentiality with relevant employees –Contract and tort remedies never render the employer whole F Criminal penalties are unusual

18. Victor H. Bouganim, WCL, American University, Spring 2001 Franchising Agreements F 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 F 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

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

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

21. Victor H. Bouganim, WCL, American University, Spring 2001 Franchising - Legal Issues F Culture –Legal system u Direct and indirect regulation –Language –Distance from home country –Religious considerations F Protection of trademarks, trade name and trade secrets –Assignment –Advertising –Quality control Foreign business/ ownership laws F Insurance F Taxes F Jurisdiction – choices of law and forum F Termination of franchise agreement F Fee schedule F Accounting regulations

22. Victor H. Bouganim, WCL, American University, Spring 2001 Franchising Contract Checklist - I F Franchise grant –Area – business operation radius –Premises –Term – length of license F Franchise Payment –Royalties –Gross sales defined –Accounting F Services by franchisor –Training –Advertising contribution F Standards and Uniformity –Building and premises –Signs –Equipment –Vending machines –Menu and service –Alternate suppliers –Right of entry and inspection

23. Victor H. Bouganim, WCL, American University, Spring 2001 Franchising Contract Checklist - II F Limitations of franchise –Trademarks, trade names and trade secrets –Assignment F Option and end of term F Insurance F Taxes F Dispute resolution –Governing law –Arbitration F Misc. –Interpretation –Modification –Competition with company

24. Victor H. Bouganim, WCL, American University, Spring 2001 Trademarks Franchising Problem 9.1 Analysis - I F 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 F How might these issues be addressed in a franchise agreement contract?

25. Victor H. Bouganim, WCL, American University, Spring 2001 Trademarks Franchising Problem 9.1 Analysis - II F 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 F How might these issues be addressed in a franchise agreement contract?

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

27. Victor H. Bouganim, WCL, American University, Spring 2001 Legal Interference in Franchising F Some countries require a majority ownership of enterprises by nationals or the government F Some countries impose direct regulations on franchises F Some countries impose indirect regulations on franchises

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

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

30. Victor H. Bouganim, WCL, American University, Spring 2001 Antitrust Considerations - II F 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? F What about –Shared markets –Price recommendations Do these agreements result in unfair restrictions on competition?

31. Victor H. Bouganim, WCL, American University, Spring 2001 The Pronuptia Case European Court of Justice, 1986 F An illustration for possible clashes between the provisions of a franchising agreement and European competition law. F 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.