“Franchise” is not defined in Indian Law, but the according to Black’s Law Dictionary “a licensee from the owner of a trademark or trade name authorizing another to offer a product or service under that name or mark” an agreement between parties that gives a person or group of people (Franchisee) the rights to market services and product using trademark and goodwill of another business (Franchisor). It is a more secure way to start a business as the franchisee will be trading under the goodwill of an established name, this is a more secure way of establishing business.
Types of franchise models
1-Company Owned Company Operated (COCO)
Brand owns and operates each franchise store unit, eliminating the traditional concept of franchising. In this arrangement, the company bears the entire financial responsibility for the franchise, and the day-to-day operations are overseen by the brand’s own employees. Example: Big Bazzar, Jio Mart
2-Company Owned Franchise Operated (COFO)
This model involves the company making an investment in the franchise business, with the franchisee managing operations in accordance with the company’s established guidelines. This approach is atypical and not widely seen in the market, as most businesses opting for expansion usually prefer to handle it independently. Example: call centers handle calls on behalf of company
3-Franchise Owned Company Operated (FOCO)
The franchisee possesses and is accountable for any associated additional capital expenses related to the property. The day-to-day operations of the store or outlet are overseen by the franchisor. Example: Bistro 57
4-Franchise Owned Franchise Operated (FOFO)
In this model of franchise, the company permits the franchisee to utilize its brand name, procedures, and trademarks at its franchise outlet. The agreement includes a non-refundable franchise fee and has a predetermined duration, which is subject to renewal. The brand sets the product prices, and the franchise owner covers all operational expenses. Additionally, the franchisee is obligated to pay an annual royalty, representing a percentage of the profits to the company. This franchise model is widely adopted and recognized as the most popular in the market. Example: McDonald’s, Burger King, Dunkin’ Donuts, Subway.
India – Franchise – Intellectual Property
Securing a competitive edge and maintaining exclusivity in the business are crucial, and registering trademarks and patents is vital for achieving this. It enhances the overall value of the business. Therefore, to ensure lasting success in Indian franchising, it is necessary to prioritize the registration and protection of intellectual property.
For franchisors in India, the registration of trademarks serves as a profitable strategy to safeguard their exclusivity and goodwill. This process not only offers legal remedies against infringement but also elevates the brand’s value while establishing exclusivity in the market.
Trade secrets and know-how are the hidden treasures that give franchisors a distinct advantage over their competition in Indian franchising. To protect these valuable assets, franchisors should establish clear policies and procedures to safeguard their confidential information. This includes measures such as non-disclosure agreements, employee training, and restricted access to sensitive information.
In the realm of Indian franchising, franchisors face a significant challenge in the form of trademark infringement. Neglecting the safeguarding of trademarks and other proprietary information may lead to financial setbacks, reputational damage, and legal consequences. To protect their business interests, franchisors must adopt a proactive approach by identifying and resolving any issues related to trademark infringement.
In the Indian franchising sector, the significance of efficient dispute resolution. Employing effective mechanisms in Indian franchising is crucial for maintaining positive business relationships and safeguarding your interests. Mediation and arbitration are commonly favored options. It is time efficient, cost efficient, and confidential compared to traditional litigation.
Mediation entails a neutral third-party facilitating negotiations between involved parties to achieve a mutually agreeable resolution. Arbitration, on the other hand, is a more formal process where an arbitrator issues a final and binding decision on the dispute. However, certain situations may necessitate litigation, particularly in cases of severe contract breaches or intellectual property infringements.
Indian contract act, 1872
While the Indian Contract Act doesn’t explicitly address intellectual property or franchising, it is essential to draft a comprehensive contract before establishing a franchise. Although the Act doesn’t mandate written contracts, it is advisable to have a formal, written franchising agreement to clearly outline the rights and responsibilities of both the franchisor and the franchisee.
Including specific and explicit intellectual property provisions in the agreement is crucial to define the franchisee’s authorized use of the franchisor’s intellectual property. The franchisee is permitted to use the Franchisor’s Proprietary Marks exclusively for the operation of the franchised unit within the specified location.
Trade Mark Act, 1999
Section 49 of the Act outlines the procedure for registering a registered user. The registered user and proprietor must jointly submit to the registrar.
The application should include following:
1-The existing or proposed relationship between the registered user and the proprietor, highlighting the extent of control the proprietor has over the authorized use granted by this relationship. It should also specify whether the proposed registered user will be the exclusive user or if there are any restrictions on who can register as a user.
2-Clearly stating the goods or services for which registration is being sought.
3-Outlining any proposed terms or limitations related to the qualities of the goods or services, the permissible manner or location of use, or any other relevant considerations.
4-Whether the authorized usage is for a limited duration or indefinitely, and if limited, specifying the duration of the permissible usage.
According to section 54 of Trade Marks Act, 1999 a franchise is prohibited from assigning or transferring any of its registered user rights to another individual. Both the franchisor and franchisee must take measures to prevent any compromise to the brand and goodwill linked with the trademark, ensuring that the actions or inactions of the franchisee do not undermine them in any way.
Since intellectual property rights are territorial, applying only to the country of registration or utilization, it is important to specify the geographical scope of IP rights in the franchise agreement. Before entering into the agreement, the franchisee should verify the existence of the IP rights being licensed and ensure that the franchisor has the legal authority to grant such licenses.
Legal requirements for Franchise Agreement in India
Franchise agreements in India do not necessitate compulsory registration. Nevertheless, if the franchise agreement incorporates a trademark license, it is imperative for the franchisor to register the trademark with the Indian Trademark Office.
The obligations related to franchise disclosure have a major contribution in promoting transparency and accountability within the franchising sector. They empower potential franchisees to make well-informed decisions regarding their investments.
1-Trademark Rights The franchise agreement should explicitly outline the terms governing the trademark rights extended to the franchisee including copyrights, patents, and trade secrets.
2-Jurisdiction The franchise agreement should clearly outline the applicable governing law and jurisdiction for resolving any disputes arising from the agreement.
3-Discloser In India, franchise disclosure regulations mandate that franchisors must furnish comprehensive and transparent information regarding the franchise. This includes disclosing essential facts such as agreement terms, investment details, provided training and support, and any ongoing fees or royalties.
4-Terms and conditions for the termination of the franchise agreement by either party should be explicitly stated in the agreement, including the specified duration of the agreement. The franchisor is required to give adequate notice before terminating the agreement.Top of Form
5-Non-Compete Clause in franchise agreement, preventing the franchisee from engaging in competition with the franchisor throughout the agreement’s duration and for a sensible duration following termination.
Duties and Rights
1-The primary goal of establishing the franchise is to extend business operations, and therefore, the franchisee should be situated in a location that draws a substantial customer base. The franchisee is responsible for choosing the franchise’s location and subsequently confirming it with the franchisor. Additionally, after the termination of the agreement, a non-compete clause will be in effect, preventing the establishment of a similar business in the franchise’s geographical area.
2-For the successful operation of the franchisor’s business, it is essential for the franchisee to possess adequate infrastructure and financial resources. The franchisee must make an initial capital investment as a commitment to ensuring that their business operations align with the standards set by the franchisor.
3-The distribution of negotiating authority for procuring raw materials from suppliers will be determined through mutual agreement between the Franchisor and Franchisee. Given that the quality of raw materials significantly influences the final product quality, it is crucial for the Franchisee to adhere to the standards set by the Franchisor’s business. The Franchisor reserves the right to instruct the Franchisee to obtain a specific product from a designated vendor, ensuring consistency across all franchise outlets.
4-In order to guarantee the seamless functioning of the franchise, it is necessary for the Franchisee to actively manage the operations either personally or by appointing a dedicated supervisor for day-to-day activities.
1-In the course of establishment of the franchise outlet, it is necessary to secure legal and regulatory approvals from local authorities. The franchisor will aid the franchisee in obtaining the necessary approvals to conduct business.
2-The franchisor must provide the franchisee with a copy of their operational manual, consisting proprietary and operational details. This manual should cover aspects such as outlet layout specifications, hiring policies, operating procedures, and a training manual that includes technical know-how for executing business operations (e.g., equipment usage, method understanding). It is an essential obligation for the franchisor to uphold the business standards, ensuring the franchisee delivers products/services of similar quality to that of the franchisor.
3-Throughout the duration of the franchise agreement, the franchisor is obligated to provide guidance and assistance to the franchisee in areas such as business promotion, advertising, management, and general business operations.
4-The franchisor can aid the franchisee in choosing an optimal location for their franchise to enhance customer attraction. If the franchisor intends to grant exclusive rights to the franchisee for a specific geographical area, a provision to that effect should be included in the agreement.
As previously mentioned, the franchising model has emerged as a highly lucrative approach for global expansion and business development in today’s highly competitive globalized landscape, offering an alternative to initiating operations from the ground up.
Nevertheless, sustaining the success of a franchise is challenging, given that the franchisee’s reputation hinges on their actions. Hence, it is imperative for both the franchisor and the franchisee to adhere to their respective duties and obligations to ensure the prosperity of the franchise.