LICENSING & FRANCHISING IN MALAYSIA

LICENSING & FRANCHISING IN MALAYSIA
LEE SWEE SENG LLB, LLM, MBA Advocate & Solicitor Notary Public, Trademark, Patent Agent Certified Mediator

Topic Licensing Licensor / A Licensee Licensing Process Chart
License Agreement Types of License Agreement Common Terms and Conditions in Licensing Agreement Licensing Fees & Payment Terms Contract Duration, Renewal and Termination The Benefits of Licensing for Licensor The Benefits of Licensing for Licensing Intellectual Property License Agreement

Topic Franchise Franchisor / A Franchisee Franchise Agreement
Requirement of A Franchise Agreement under Section 18 of Franchise Act 1998 (Act 590) & Regulation Payment of Franchise Fee, etc. Section 22 – Promotion Fund Section 23 – Promotion Fees, etc. Section 24 – Registration of Trade Mark or Service Mark Section Franchise Term Section 26 – Confidential Information Section 27 – Prohibition Against Similar Business

Topic Section 28 – Waivers Void Section 29 – Conduct of Parties Section 30 – Obligations of Franchisor & Franchisee Section Termination of A Franchise Agreement Section 32 – Non Renewal of A Franchise Agreement Section 33 – Earlier Termination of A Franchise Term Section Extension of A Franchise Term Statistic of Approved Franchise Registration Some of the Franchise Categories Approved by the Registrar of Franchise Comparison between Licensing and Franchising

LICENSING IN MALAYSIA

Licensing Licensing is the practice of leasing a legally protected property (such as a trademarked or copyrighted name, logo, likeness, character, phrase or design) to another party in conjunction with a product, service or promotion. It is based on a contractual agreement between the owner of the property (or its agent) known as the licensor and licensee (normally a manufacturer or retailer). Sources:

Licensing It grants the licensee permission to use the property subject to specific terms and conditions which may include the purpose of use, a defined territory and a defined time period. In exchange for this usage, the licensor receives financial remuneration – normally in the form of a guaranteed fee and/or royalty on a percentage of sales. Sources:

Licensing The verb license or grant license means to give permission. The noun license (licence in British spelling) refers to that permission as well as to the document memorializing that permission. License may be granted by a party ("licensor") to another party ("licensee") as an element of an agreement between those parties. A shorthand definition of a license is "an authorisation (by the licensor) to use the licensed material (by the licensee)." Sources:

Licensor The owner of the Licensed property or brand.
e.g Bugs Bunny is owned by Warner Bros, so Warner Bros is the Licensor of Bugs Bunny. Licensee The manufacturer or distributor of a product or service that has purchased use of a license to sell products to retailers. Major retailers can also be licensees as they often sign license agreements directly with licensors Sources:

Licensing Process Chart
Sources:

A License Agreement Ensuring that the intention of the parties (Licensor and Licensee) arrangement is properly documented is vital to protecting the parties’ position in the event of a dispute in the future. Remember the faintest ink is better than the most retentive memory. Documentary evidence in less susceptible to being challenged in a court of law. Sources:

Types of Licensing Agreement
1. Sole License “The Licensor grants the Licensee a sole license of the Rights for the Territory for the duration of this Agreement. The Licensor shall not, subject as provided below appoint other licensees for the Territory, but may itself manufacture and sell the Products in the Territory. or “A Sole License means that you as trade mark owner and the licensee (but no one else) may use the trade marks”. Sources: http//pharmalicensing.com/public/articles_Susan Singleton

2. Exclusive License ”.“The Licensor grants the Licensee an exclusive license of the Rights for the Territory for the duration of this Agreement. The Licensor shall not, subject as provided below, actively sell the Products on the Territory nor appoint other licensees for the Territory”. or “An Exclusive License means that only the licensee may use the trade marks”. Sources: http//pharmalicensing.com/public/articles_Susan Singleton

Exclusive License The Copyright, Design and Patent Act 1998 UK defines it as a license in writing signed by or on behalf of the owner of the right authorising the licensee to the exclusion of all other persons, including the person granting the license, to exercise a right which would otherwise be execisable exclusively by the owner of the right.

3. Non-Exclusive License “The Licensor grants the Licensee a non-exclusive license of the Rights for the Territory for the duration of This Agreement. The Licensor shall be free to manufacturer and sell the Products in the Territory and appoint other licensees to do so”. or “A Non-Exclusive License means that you as a trade mark owner may also use the trade marks and may grant the right to use the trade marks to as many others as you wish”. Sources: http//pharmalicensing.com/public/articles_Susan Singleton

Common Terms and Conditions in Licensing Agreement
Below are some of the important issues that should be considered when preparing a licensing agreement. 1. Consider relevant requirements of each party as follows:- 1.1 whether agreement comes into force on the date of agreement or specified start date; duration of license and any renewal terms; 1.3 whether renewal is automatic or optional; 1.4 whether agreement is terminable by either or both parties and on what ground; Sources: Tolley’s Commercial Contract Checklist _Lexis Nexis

1.5 whether duration of license is simply linked to performance or payment of license fees; 1.6 whether approval is required in respect of specification and any relevant provisions; 1.7 what documentation and in what forms it is to be provided i.e., disk, paper, web, . 1.8 testing and acceptance arrangements (if applicable); Sources: Tolley’s Commercial Contract Checklist _Lexis Nexis

2. What types of license is required? Will it be a Sole license, an Exclusive license or Non-exclusive license or Sole and Exclusive. 3. Review the relevant territory. “Territorial limitations are extremely common, particularly in the area of trade-mark licenses where different distribution partners may be granted exclusivity for their regions. The territory may be as broad as “world-wide”, limited to a particular province or region, or even as restricted as a plant location . Sources: 1) Tolley’s Commercial Contract Checklist _Lexis Nexis 2) Key Aspects of IP License Agreement, Donald M. Cameron & Rowena Borenstein © 2003

4. Licensing Fees and Payments 5. Termination 6. Consequences of Termination 7. Service of Notice Clause 8. Confidentiality Clause 9. Applicable Law Clause 10. Mediation and Arbitration Clause Sources: Tolley’s Commercial Contract Checklist _Lexis Nexis

Licensing Fees & Payment Terms
License fees and payment terms consider or specify 1. License fee payable. 2. License fee payment date (s):- 2.1 monthly 2.2 quarterly on quarter dates 2.3 annually days after specified period 2.5 any deposit or initial payments or fees due upon singing license 2.6 any time based charged Sources: Tolley’s Commercial Contract Checklist _Lexis Nexis

Licensing Fees & Payment Terms
2.7 any additional costs/material charges 2.8 whether any fixed cost are applicable (including staff, material and travel expenses) 2.9 whether fee and sums are inclusive or exclusive of taxation; payments; 2.10 whether renewal fees are payable and if so when and at what rate Sources: Tolley’s Commercial Contract Checklist _Lexis Nexis

Contract Duration, Renewal and Termination
1. Term and Expiration The license agreement should specify the following:- 1.1 Date of commencement 1.2 The period of time during which the parties‘ obligations are in force 1.3 An expiration date, unless it is intended to be a perpetual agreement Sources: Key Aspects of IP License Agreement handout by Donald M Cameron Rowena Borenstein_Ogilvy Renault

2.1 The agreement may also provide for a right of renewal; 2.2 A renewal provision it is always open to the parties to negotiate; 2.3 If the renewal is not automatic, the licensee will be required to provide the licensor with notice of its intent to renew within a set period of time before expiry; 2.4 If the renewal is automatic, the notice will only be required if a party does not wish to have the agreement term be extended. Sources: Key Aspects of IP License Agreement handout by Donald M Cameron Rowena Borenstein_Ogilvy Renault

3. Right to Terminate There are two basic types of termination rights 3.1. Termination for convenience A party with a right to terminate the agreement for convenience may usually do so at any time, provided that adequate notice is given to the other party Licensee typically do not want the licensor to be able to terminate the Agreement for convenience, as they have a great deal of money invested in a business plan related to exploitation of Intellectual Property, including unrecoverable costs. Sources: Key Aspects of IP License Agreement handout by Donald M Cameron Rowena Borenstein_Ogilvy Renault

3.2 Termination for cause Termination for cause can encompass any number of events The most common triggering events allowing a party to terminate for cause including the material of breach by other party of terms of the Agreement, or the failure of the other party to conduct business ordinary course. Sources: Key Aspects of IP License Agreement handout by Donald M Cameron Rowena Borenstein_Ogilvy Renault

3.2.3 Licensee have the right to terminate the Agreement if the licensed intellectual property is determined to be invalid. The Licensee may also wish to be able terminate the Agreement if it is sued by a third party for infringement, particularly if it does not have a resource of indemnity from the licensor. Sources: Key Aspects of IP License Agreement handout by Donald M Cameron Rowena Borenstein_Ogilvy Renault

4. Effects of Termination 4.1 A-well drafted license agreement should provide for the consequences of termination on the rights and obligations of each of the parties, to avoid additional disputes at a time when the parties may already be on less than good terms. 4.2 The licensee's most pressing business concern will be the ability to wind down and exhaust any existing inventories. Sources: Key Aspects of IP License Agreement handout by Donald M Cameron Rowena Borenstein_Ogilvy Renault

4.3 The licensor's perspective, its most pressing concern is that the licensee discontinue all exploitation of Intellectual Property as soon as possible. It may opt to reverse the right to purchase any of the licensee‘s existing stock, at cost of the licensee is amenable, rather than extend the license grant 4.4 The licensor may also require that the licensee return any and all materials that contain or reflect licensed know-how. This provision may operate in tandem with the provision requiring the return or destruction of all confidential information. Sources: Key Aspects of IP License Agreement handout by Donald M Cameron Rowena Borenstein_Ogilvy Renault

The Benefits of Licensing for Licensor
The key benefit for a licensor is the ability to exploit and enhance its brand or property 1. Increasing its brand presence at retail or distribution outlet. 2. Creating further brand awareness to support its core products or services. 3. Supporting and enhancing its core values by associations with the licensed products. 4. Entering new markets (consumer or geographical) which were unfeasible with it’s own resources or capabilities. 5. Generating new revenue streams, often with little involvement or additional financial or other resources implication. Sources:

The Benefits of Licensing for Licensees
The key benefit for a licensee (especially manufacturer or retailer) is the ability to significantly increase consumer interest in and sales of its products or services. Licensing can be applied as follows:- 1. Transferring the values and consumer favour towards the property to the licensed product or service. 2. Providing added value and differentiation from competitive offerings. 3. Providing additional marketing support or momentum from the core property’s activity provided by the licensor. Sources:

The Benefits of Licensing for Licensees
4. Appealing to new target markets who have not historically been interested in a licensee’s product or service. 5. Giving credibility for moving into new market sectors through product extension. 6. Gaining additional retail space and favour. Sources:

Intellectual Property License Agreement
1. The Nature of the Intellectual Property will dictate the scope of the rights granted under the Agreement. 2. A Licensor can only part with those rights that it itself holds – therefore the license of patent is typically limited to any or all of the right to make, use and sell the patented invention. 3. A license granted under copyright could include any of many subsidiary and derivation right accorded to the copyright owner. Sources: Key Aspects of IP License Agreement handout by Donald M Cameron Rowena Borenstein_Ogilvy Renault

Intellectual Property License Agreement
Obligation of the Parties 1. Each of the Licensor and Licensee may have obligations to fulfill under the Agreement other than the grant of License Rights and the Payment of Royalties or other License Fees. 2. The nature of the obligation is dependent upon the nature of the Intellectual Property Licensed and the scope of the License Grant. Sources: Key Aspects of IP License Agreement handout by Donald M Cameron Rowena Borenstein_Ogilvy Renault

Obligation of the Parties
3. The obligations may either be positive obligations to take certain actions or negative obligations in the form of restrictive covenants. a) Disclosure and Assistance If the Agreement contemplates a license grant including know-how, or if the licensor is otherwise expected to disclose information and offer assistance to the licensee in the exploitation of its license rights, the one of the licensor’s obligations will be to disclose in the required information within a certain amount the time. Sources: Key Aspects of IP License Agreement handout by Donald M Cameron Rowena Borenstein_Ogilvy Renault

Obligation of the Parties
b) Exclusivity If the license grant is exclusive, the Agreement may include a provision whereby the licensor agrees that it will not license the technology to any other person within the defined exclusive territory or for use in the defined exclusive field. c) Enforcement of Intellectual Property Rights The agreement should contain a clause indicating which party will be responsible for the maintenance of registered intellectual property rights, and which party is responsible for payment of all the fees associated which those registration. Sources: Key Aspects of IP License Agreement handout by Donald M Cameron Rowena Borenstein_Ogilvy Renault

Conflict of Resolution
Litigation 1. If an alternative dispute resolution procedure is not provided for the Agreement, a party may still attempt to resolve disputes through arbitration, but will only be able to do so if the other party agrees. Sources: Key Aspects of IP License Agreement handout by Donald M Cameron Rowena Borenstein_Ogilvy Renault

FRANCHISING IN MALAYSIA
FRANCHISE As governed by Franchise Act 1998 (Act 590) & Regulation which came into force on 8 October 1998

FRANCHISE Section 4 - “franchise” means a contract or an agreement, either expressed or implied, whether oral or written, between two or more persons by which – (a) The franchisor grants to the franchisee the right to operate a business according to the franchise system as determined by the franchisor during a term to be determined by the franchisor

FRANCHISE (b) The franchisor grants to the franchisee the right to use a mark, or a trade secret, or any confidential information or intellectual property, owned by the franchisor or relating to the franchisor, and includes a situation where the franchisor, who is the registered user of, or is licensed by another person to use, any intellectual property, grants such right that he possesses to permit the franchisee to use the intellectual property;

FRANCHISE (c) The franchisor possesses the right to administer continuous control during the franchise term over the franchisee’s business operation in according with the franchise system; (d) The franchisor has the responsibility to provide assistance to the franchisee to operate his business including such assistance as the provision or supply of materials and services, training, marketing, and business or technical assistance;

FRANCHISOR Section 4 – “franchisor” means a person who grants a franchise to a franchisee ad includes a master franchisee with regard to his relationship with a sub-franchisee, unless stated otherwise in the Act. FRANCHISEE Section 4 – “franchisee” means a person to whom a franchise is granted and includes, unless stated otherwise in the Act.

FRANCHISE AGREEMENT Section 4 - “franchise agreement” means a contract or an agreement made between a franchisor and a franchisee in respect of a franchise in return for any form of consideration but does not include any contract or agreement made for the purposes of direct selling as provided by the Direct Sales Act 1993.

REQUIREMENTS OF A FRANCHISE AGREEMENT
SECTION 18 (1) - A franchise agreement shall be in writing. SECTION 18 (2) – A franchise agreement shall contain but is not limited to - a) The name and description of the product and business under the franchise. b) The territorial rights granted to the franchisee. c) The franchise fee, promotion fee, royalty or any related type of payment which may be imposed on the franchisee, if any.

d) The obligation of the franchisor. e) The obligation of the franchisee. f) The franchisee’s right to use the mark or any other intellectual property , pending the registration or after the registration of the franchise. g) The conditions under which the franchisee may assign the rights under the franchise. h) A statement of the cooling off period as provided in subsection (4). i) A description pertaining to the mark or any other intellectual owned or related to the franchisor which is used in the franchise.

j) If the agreement is related to a master franchise, the franchisor’s identity and the right obtained by the master franchisee form the franchisor . k) The type and particulars of assistance provided by the franchisor . l) The duration of the franchise and the terms of renewal m) The effect of termination or expiration of the franchise agreement .

SECTION 18 (3) – Failure to comply with subsection (2) shall render a franchise agreement null and void. SECTION 18 (4) – A franchise agreement shall have a cooling of period, which shall be determined by both contracting parties but shall not be less than seven working days, during which the franchisee has the option to terminate the agreement. SECTION 18 (5) – Upon termination of the franchise agreement under subsection (4), an amount to cover the reasonable expenses incurred by the franchisor to prepare the agreement may be retained by the franchisor from the initial fees paid under section 19; however, all other monies shall be refunded to the franchisee.

TYPE OF FEES UNDER FRANCHISE ACT 1998 (ACT 590) AND REGULATIONS
SECTION 21 – PAYMENT OF FRANCHISE OF FRANCHISE FEES OR ROYALTY If a franchisee is required to pay any franchise fees or royalty to a franchisor, the rate of franchise fees or royalty shall be the rate as provided in the disclosure documents.

SECTION 22 – PROMOTION FUND
1. A franchisor who requires a franchisee to make any payment for the purposes of the promotion of a franchise shall establish a Promotion Fund (“Fund”). 2. The Fund shall be managed under a separate account and shall only be used for the promotion of the product under the franchise. 3. If a franchisee is required to make any payment under section 23, the franchisor shall submit a financial statement of the Fund, which has been endorsed by a registered public account, to the Registrar within thirty days after the conclusion of the last financial term.

SECTION 22 – PROMOTION FUND
4. The financial statement in subsection (3) shall be submitted to the Registrar together with the annual report under Section 16. 5. A person who fails to comply with this section commits and offence.

SECTION 23 – PROMOTION FEES, ETC.
1. If a franchisee is required to make any payment for promotional purposes or pay promotion fees to the franchisor, the payment shall be at the rate as provided in the disclosure documents. 2. The payment required to be made under subsection (1) shall be deposited into the Fund.

SECTION 24 – REGISTRATION OF TRADE MARK OR SERVICE MARK
Franchisor is required to register his trademark or service mark relevant to his franchise in accordance with the Trade Marks Act 1976 (if they are registrable under the Act) before applying for the registration of the franchise Under Section 7. SECTION 25 – FRANCHISE TERM Stated that a franchise term shall not be less than five years.

SECTION 26 – CONFIDENTIAL INFORMATION
1. A franchisee shall give a written guarantee to a franchisor that the franchisee and his employees shall not disclose to any person any information contained in the operation manual or obtained while undergoing training organized by the franchisor during the franchise term and for two years after the expiration or earlier termination of the franchise agreement. 2. The franchisee and his employees shall comply with the terms of the written guarantee given under subsection (1).

SECTION 26 – CONFIDENTIAL INFORMATION
3. A person who fails to comply with subsection (1) or (2) commits an offence SECTION 27 – PROHIBITION AGAINST SIMILAR BUSINESS 1. Franchisee shall give a written notice guarantee to a franchisor that the franchisee and his employees shall not carry on any other business similar to the franchised business operated by the franchisee during the franchise term and for two years after the expiration or earlier termination of the franchise agreement.

SECTION 27 – PROHIBITION AGAINST SIMILAR BUSINESS
2. The franchisee and employees shall comply with the terms of the written guarantee given under subsection (1). 3. A person who fails to comply with subsection (1) or (2) commit offence. SECTION 28 – WAIVERS VOID 1. Any condition, stipulation or provision on a franchise agreement purporting to bind a franchisee to waive compliance with any provision of this Act is void. 2. This section shall not prevent any person from entering onto a settlement agreement or executing a general release regarding a potential or actual civil action filed in respect of the franchise nor shall it prevent the arbitration of any claim.

SECTION 29 – CONDUCT OF PARTIES
1. A franchisor and a franchisee shall act in an honest and lawful manner and shall endeavour to pursue the best franchise business practice of the time and place 2. A franchisor and a franchisee in their dealings with one another shall avoid the following conduct: (a) substantial and unreasonable overvaluation of fees and prices; (b) conduct which is unnecessary and unreasonable in relation to the risks to be incurred by one party; and

SECTION 29 – CONDUCT OF PARTIES
(c) conduct that is not reasonably necessary for the protection of the legitimate business interests of the franchisor, franchisee or franchise system. SECTION 30 – OBLIGATIONS OF FRANCHISOR AND FRANCHISEE A franchisor shall give a written notice about breach of contract by a franchisee and allow franchisee time to remedy the breach. 2. A franchisee shall pay the franchise fees, royalty, promotion fees or any other payment as provided in the franchise agreement.

SECTION 31 – TERMINATION OF A FRANCHISE AGREMMENT
1. No franchisor shall terminate the franchise agreement before the expiration date except for “good cause “ as provided in subsections (2) and (3) 2. “Good cause” shall include, but is not limited to – (a) the failure of a franchisee to comply with any terms of the franchise agreement or any other relevant agreement entered into between the franchisor and franchisee; and (b) the failure of the franchisee to remedy the breach committed by him or any of his employees within the period stated in a written notice given by the franchisor, which shall not be less than fourteen days, for the breach to be remedied.

SECTION 31 – TERMINATION OF A FRANCHISE AGREMMENT
3. “Good cause” shall include, but without the requirement of notice and an opportunity to remedy the breach, circumstances in which the franchisee:- (a) Makes an assignment of the franchise rights for the benefit or creditors or a similar disposition of the assets of the franchise to any other person; (b) Voluntarily abandons the franchised business; (c) Is convicted of a criminal offence which substantially impairs the goodwill associated with the franchisor’s mark or other intellectual property; or

SECTION 32 - NON-RENEWAL OF A FRANCHISE AGREEMENT
A franchisor commits an offence if he refuses to renew a franchise agreement or extend a franchise term without compensating a franchisee either by a repurchase or by other means at a price to be agreed to between the franchisor and franchisee after considering the diminution in the value of the franchised business.

SECTION 33 – EARLIER TERMINATION OF A FRANCHISE TERM
Notwithstanding Section 25, a franchise term may be terminated before the expiry of the minimum term of five years in the following circumstances: Where both parties to the franchise agreement agree to a termination; or (b) Where court has decided tat there are certain conditions in the franchise agreement which merit the agreement to be terminated earlier than the minimum term.

SECTION 34 – EXTENSION OF A FRANCHISE TERM
1. At any time before the expiration of the franchise term, a franchisee shall at his option give written notice to the franchisor to extend the franchise term. 2. Except when a franchisee has breached the term of a previous franchise agreement, a franchisor shall extend the franchise term to another period if the franchisee has applied for the extension of term under subsection (1). 3. A franchise agreement which franchise term has been extended shall contain conditions which are similar or not less favourable than the conditions in the previous franchise agreement.

STATISTIC OF APPROVED FRANCHISE BY THE REGISTRAR OF FRANCHISE UNDER FRANCHISE ACT AS OF 22 JULY 2009 DESCRIPTION NOS. BUMIPUTERA 96 NON-BUMIPUTERA 249 TOTAL 345 Sources:

SOME OF THE FRANCHISE CATEGORY APPROVED BY THE REGISTRAR OF FRANCHISE
Category: Clothing Category: Food & Beverage Sources:

THE REGISTRAR OFFICE ADDRESS:-
Registrar of Franchise Ministry of Entrepreneur and Co-Operative Development (MECD) Franchise & Vendor Division, Level 4, Menara Block, No. 18 Persiaran Perdana, Presint 2, Putrajaya Tel : Fax :

Comparison between Licensing and Franchising
A) Licensing Not bound to any Act of Parliament or Regulation A Licensing Agreement can contain terms which are restricted in a Franchise Agreement by the Franchise Act 1998. Lower cost Duration of licensing agreement is flexible, need not be at least 5 years Licensing is cheaper when in bad economic situation

Comparison between Licensing and Franchising
B) Franchise As governed by Franchise Act 1998 (Act 590) & Regulation which came in force on 8 October 1998 Section 7 of Franchise Act 1998 stated that all Franchise business is compulsory to register with the REGISTRAR OF FRANCHISE (“ROF”). Cost buying a well-known franchise is very expensive Section 25 stated the duration of franchise term shall not less than five years

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LICENSING & FRANCHISING IN MALAYSIA

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