On the (I) of some problems in franchising

Today is the 4.26 World Intellectual Property Day. The Intellectual Property Center of Zhongcheng Qingtai (Jinan) Law Firm will launch a series of articles on intellectual property in the near future. Today, I will share with you the "(I) on Several Issues in Franchising.

In recent years, with the national "mass entrepreneurship, innovation" and the release and implementation of policies to encourage college graduates to start their own businesses across the country, entrepreneurship has become the choice of many people. As many people are involved in business for the first time, in the case of less principal, lack of resources and relevant experience, the "franchise shop", that is, franchise, has become a cost-effective choice in the eyes of the public. But with the development of franchising, more and more problems are exposed. In my daily work, I can often encounter consultation in this area. Now I will summarize some of the common problems and share them with you.

The History and Legal Basis of 1. Franchising

Definition of (I) Franchising

The World Intellectual Property Organization, in its 1994 Franchising Guide, states that "a franchise is an arrangement in which the party that develops a business system (the franchisor) allows the other party (the franchisee) to use its system under the conditions specified by the franchisor, while obtaining a certain price. The relationship is an ongoing one in which the franchisee operates in accordance with the standards and business practices established by the franchisor and receives the supervision and ongoing assistance and support of the franchisor."[1]

History of (II) Franchising

1. Stage of origin

According to records, the franchise system in the modern sense originated in the United States. In 1851, after the American Shengjia Company invented the sewing machine, in order to solve the problems in its production and operation, it invented a franchise business model in the modern sense, and it was also the world's first franchise in the modern sense.

2. Stage of development

With the advantages of the franchise model has gradually been discovered and recognized by the world, the model has sprung up in the world and gradually developed. Founded in 1955, McDonald's is the world's largest franchise system. KFC, Pizza Hut, Subway and other well-known catering enterprises in the United States are all world-famous catering enterprises that have benefited from this model at this stage.

3. Prosperity stage

With the economic take-off in Asia in the 1980 s and the arrival of China's reform and opening up, the franchise model has developed rapidly from Europe and the United States to Asia, especially China. It can be said that the franchise model has really developed in the world for the first time.

On November 12, 1987, KFC opened China's first restaurant in Qianmen, Beijing, and it really brought a single store of China's first franchise company. Since then, the franchise model has quickly taken root in China.

(III) world-renowned franchise organization

International Franchise Association (IFA)

French Franchise Association (FFF)

American Franchise Association (AFA)

European Franchise Federation (EFA)

Japan Franchise Association (JFA)

6. China Chain Management Association, the only national industry organization in the field of chain management in China, has the Franchise Management Committee of China Chain Management Association.

The Legal Basis of (IV) Franchising

Commercial franchising, as a civil commercial act, is bound to be bound by general laws such as the General Principles of Civil Law and the Contract Law. In view of the close relationship between commercial franchising and intellectual property rights, the activity is also subject to the "Trademark Law", "Patent Law", "Copyright Law" and "Anti-Unfair Competition Law" and other departmental laws. Even, China has made separate legislation for commercial franchising.

On November 14, 1997, the former Ministry of Internal Trade promulgated the Measures for the Administration of Commercial Franchising, which was the first normative document on franchising in Chinese history.

On December 31, 2004, the Ministry of Commerce promulgated the Measures for the Administration of Commercial Franchises.

On February 6, 2007, the 167th executive meeting of the State Council passed the 2007 "Commercial Franchise Management Regulations" (hereinafter referred to as the "Regulations"), which is not only the first administrative regulation on commercial franchising in Chinese history, but also the current The direct legal basis for commercial franchising.

In the regulations, franchising is clearly defined as "commercial franchising (hereinafter referred to as franchising) as mentioned in these regulations refers to enterprises (hereinafter referred to as franchisees) that have registered trademarks, enterprise marks, patents, proprietary technologies and other operating resources, which license their operating resources to other operators (hereinafter referred to as franchisees) in the form of contracts, the franchisee shall operate under a unified business model in accordance with the contract and pay franchise fees to the franchisor." The first is to limit the franchisor can only be an enterprise, the second is to juxtapose business resources and business models, and the third is to emphasize the importance of intellectual property rights in business resources.

The Relationship between 2. Franchising and Intellectual Property
 

(I) Franchising and Intellectual Property

In a franchise, the consideration is paid to each other between the franchisor and the franchisee. The franchisor pays for intangible assets such as trademarks, business names (names), patented technologies, trade secrets and mature and effective business models; the franchisee pays for the funds, markets and channels urgently needed for the development of the franchisor. Therefore, it has been suggested that "franchising is a property transaction that takes place between the franchisor and the franchisee, with the licensing of intellectual property rights as the core".[2]In any case, the trademark and the business model of each single store are essential elements that cannot be bypassed by any kind of franchise. With the development of society and the progress of the times, under the background of the era of knowledge economy, intellectual property has become the trend of the times. Therefore, it is inevitable that intellectual property has become the core element of franchising.

Intellectual property has become the core of franchising, is the most attractive element to attract franchisees to join, but also the core of the competition between franchisors magic weapon. The franchise system established by the franchisor is a system based on intellectual property rights such as trademarks, enterprise names, patented technologies, trade secrets, etc. Therefore, franchising is a licensing and operation of intellectual property rights for the franchisor and the franchisee, which is not only a single store operation, but also a general commodity trading relationship. The most important thing in franchising is the franchisor's trademark, trade name and other corporate logos. Therefore, intellectual property rights run through every link of the franchise.

(II) Franchise and Trademark Right

Franchising is most closely related to corporate logos such as trademarks and trade names. Since the trademark carries the goodwill of the franchisor, the franchisee's participation is often due to its own and the consumer's recognition of the franchisor. And this recognition is to a large extent through carrying the franchisor goodwill of the trademark spread in the relevant public, therefore, the franchise system can be said to some extent is to rely on the trademark to maintain and operate a system, the franchisor and franchisee of both the rights and the trademark has a great relevance.

It should be made clear that according to the definition of franchising in the above-mentioned "Regulations", the franchisor must own a registered trademark. Although in practice, unregistered trademarks are not protected by law, but as the core element of the operation of the entire franchise system, the author still recommends that the franchisee have a specific understanding of this before joining, otherwise it is very easy to cause disputes. Such cases are numerous in judicial practice. In particular, many malicious franchisees often use a trademark that is known as an international brand but has not been registered in China to defraud the franchisee. Therefore, the franchisee must understand that brand and trademark is not a concept, with the essence of different, must be polished before joining the eyes.

The following points need to be noted in the terms of the franchise contract involving trademarks:

1. The term of the franchise contract may exceed the validity period of the licensed trademark, but the term of the licensed trademark exceeds the term of the trademark is invalid;

2, the type of license to use, whether it is a general authorization or the right to re-authorization;

3. Due to the geographical nature of the trademark right, the geographical upper limit of the licensed use shall not exceed the geographical scope of the trademark right itself, and the lower limit can be freely agreed;

4. Clarify the standard sample, type and approved scope of the licensed trademark, standardize its use, and shall not change the standard sample of the trademark without authorization, let alone use it beyond the scope, and clearly stipulate whether the licensee has the right to register a series of trademarks or related trademarks.

(III) Franchise and Patent Rights

There is a big difference between patent right and trademark right, that is, the patent right cannot be renewed. At the same time, during the validity period of the patent, the obligee needs to pay the annual patent fee every year, and the patent right will be invalid if the fee is not paid. Therefore, special attention should be paid to this characteristic of patent right in franchising.

Since patent rights also have regional characteristics, the author encountered many people consulting whether they can join international franchising and obtain the patent authorization of the franchisor. The first point is to remind whether they have obtained patent rights in China. In the case of patents, there are also certain doubts about whether they can obtain authorization in the form of proprietary technology.

In the same way as trademark rights, patent rights also have a limited number of years, so the term of the franchise contract should be shorter than or equal to the number of years of the patent right. However, there is a clear distinction between trademark rights and trademark rights, because trademark rights can be renewed an unlimited number of times, so with the use of popularity and reputation can be continuously improved, so the longer the time, the higher its license value. However, due to the expiration of the patent can not be renewed, after entering the common field to become a well-known technology can be used free of charge, so the value curve of many patent rights is decreasing with the growth of the number of years, for the franchisee needs to be screened accordingly.

Another point is that the ownership of the improved technology that may arise from the franchisee in the licensing process should be clarified in the franchise contract.

(IV) Franchising and Copyright

The main copyrights involved in franchising are business manuals, advertising materials and store designs.

One of the common questions is very representative-if the franchisee operates in accordance with the operating manual without permission, does it infringe the copyright of the franchisor? In this case, the author thinks, it does not infringe the copyright of the franchisor. Since copyright only protects manifestations but not ideas, if the franchisee only implements the contents of the business manual without permission, the franchisor cannot claim rights with copyright, but should apply contract law and anti-unfair competition law to seek relief. If the franchisee copies the business manual without permission, it is an infringement of the right of reproduction in the copyright of the licensor, and the franchisor may request protection in accordance with the law.

(V) Franchising and Anti-unfair Competition

In franchising, due to the large number of franchisees, the licensor not only has to hand over his product formula, processing technology, business strategy, business means and other trade secrets to the licensee, but also allows the licensee to learn and implement these trade secrets. Therefore, the protection of trade secrets is particularly difficult compared to other business models. Although Article 18 of the "Regulations" clearly stipulates that "the franchisee shall not disclose to others or allow others to use the franchisee's trade secrets", it is often difficult in practice.

In daily practice, the franchise contract will focus on confidentiality clauses and non-competition clauses, as the franchisor and the franchisee should strengthen the understanding of the rights and obligations of both parties, in order to prevent intentional or unintentional breach of contract, illegal situation.

The above is the author's point of view on franchising, for the future, please look forward to the franchise in a number of issues (II).

[1]He Yi: Research on Legal Issues of Franchising, China Founder Publishing House, 2004 edition, p. 2.

[2]Hu Xiaosong, ed. Introduction to Franchising, Renmin University of China Press, 2011, p. 56.