Licensing Agreement versus Franchising Agreement in the Philippines

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Published — April 12, 2019

The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.

Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.

Related article: How to protect yourself in franchising your business

Franchising Agreement is a written contract or agreement between two or more parties by which a Franchisor grants the Franchisee, the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan/system/concept, for a certain consideration.  Unless otherwise provided, said right includes the use of a trademark, service mark, trade name/business name, know-how, logo-type advertising, or other commercial symbols associated with a particular business (Department of Trade and Industry (DTI) Bureau Order 10-24, Series of 2010).

The different types of Franchising are product franchising, and business format franchising.

Product franchising, also known as trade name franchising, is that type of franchising wherein a manufacturer grants a franchisee the right to sell its products, but with no method of doing business. Examples of this type of franchising are car dealerships and service stations (Philippine Franchise Association, “What is Franchising?”, Retrieved from http://www.pfa.org.ph/what-is-franchising on April 08, 2019). Only the right to sell the products of the franchisor is granted. The process and management of the business thereof is left to the discretion of the franchisee.

The business format franchising, also identified as a name and process franchise, features a broader and ongoing relationship between the franchisor and the franchisee, wherein aside from granting the right to use the name and market the products and services of the franchisor, the franchisee is also provided a complete plan for managing and operating the business – a transfer of the proven way of doing business that has been developed by the franchisor. This plan often includes a full range of services, including site selection, training, product supply, marketing plans and even assistance in obtaining financing. All of the franchisor’s operating systems, technical expertise, marketing systems, training systems, management methods and essentially all relevant information, are transferred to the franchisee (Ibid).

In the Philippines, franchising agreements usually involves food businesses. It is common in the country to franchise small to medium scale food stalls or stores that are well known and patronized by Filipinos. In franchising these kinds of business, the franchisee’s main concern will only be his/her capital because the management, operations, products or services, and trade name or mark of the business to be franchised will be included in the franchise. In the franchising agreements, the franchisor will provide all of the main components and may set rules, limitations, and metes and bounds for franchising the business, and the franchisee will have to adapt and comply with all that is set and written in the franchising agreement. In drafting the contract for franchising agreement, the provisions of the Civil Code of the Philippines shall be complied with. The parties have the liberty to stipulate anything, provided it is not contrary to law, customs, public morals, or public policy.

On the other hand, licensing agreements in the country usually pertains to licensing of goods or services, trademarks or patents. Section 4.2 of the Intellectual Property Code of the Philippines provides for Technology Transfer Agreements which refers to contracts or agreements involving the transfer of systematic knowledge for the manufacture of a product, the application of a process, or rendering of a service including management contracts; and the transfer, assignment, or licensing of all forms intellectual property rights, including licensing of computer software except computer software developed for mass market. In the licensing agreement, the licensor grants the licensee the right to use his/her intellectual property. Take for example an owner of a retail clothing store who wants to imprint on the shirts that he/she will sell, a picture of a well-loved cartoon character, the trademark of which belongs to registered trademark owner thereof. The owner of the retail clothing store can enter into a licensing agreement with the registered owner of the cartoon character, stipulating that the cartoon character can be used for imprinting on the shirts to be sold by the retail owner provided all necessary requirements and stipulations on the said agreement are complied with.

Further, Section 88 of the Intellectual Property Code of the Philippines provides for mandatory provisions which shall be included in the voluntary license contracts to wit:

“88.1. That the laws of the Philippines shall govern the interpretation of the same and in the event of litigation, the venue shall be the proper court in the place where the licensee has its principal office;

88.2. Continued access to improvements in techniques and processes related to the technology shall be made available during the period of the technology transfer arrangement;

88.3. In the event the technology transfer arrangement shall provide for arbitration, the Procedure of Arbitration of the Arbitration Law of the Philippines or the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) or the Rules of Conciliation and Arbitration of the International Chamber of Commerce (ICC) shall apply and the venue of arbitration shall be the Philippines or any neutral country; and

88.4. The Philippine taxes on all payments relating to the technology transfer arrangement shall be borne by the licensor.”

            While Section 87 of the Intellectual Property Code of the Philippines provides for prohibited clauses that should not be included in the license contracts, to wit:

“Section 87. Prohibited Clauses. – Except in cases under Section 91, the following provisions shall be deemed prima facie to have an adverse effect on competition and trade:

87.1. Those which impose upon the licensee the obligation to acquire from a specific source capital goods, intermediate products, raw materials, and other technologies, or of permanently employing personnel indicated by the licensor;

87.2. Those pursuant to which the licensor reserves the right to fix the sale or resale prices of the products manufactured on the basis of the license;

87.3. Those that contain restrictions regarding the volume and structure of production;

87.4. Those that prohibit the use of competitive technologies in a non-exclusive technology transfer agreement;

87.5. Those that establish a full or partial purchase option in favor of the licensor;

87.6. Those that obligate the licensee to transfer for free to the licensor the inventions or improvements that may be obtained through the use of the licensed technology;

87.7. Those that require payment of royalties to the owners of patents for patents which are not used;

87.8. Those that prohibit the licensee to export the licensed product unless justified for the protection of the legitimate interest of the licensor such as exports to countries where exclusive licenses to manufacture and/or distribute the licensed product(s) have already been granted;

87.9. Those which restrict the use of the technology supplied after the expiration of the technology transfer arrangement, except in cases of early termination of the technology transfer arrangement due to reason(s) attributable to the licensee;

87.10. Those which require payments for patents and other industrial property rights after their expiration, termination arrangement;

87.11. Those which require that the technology recipient shall not contest the validity of any of the patents of the technology supplier;

87.12. Those which restrict the research and development activities of the licensee designed to absorb and adapt the transferred technology to local conditions or to initiate research and development programs in connection with new products, processes or equipment;

87.13. Those which prevent the licensee from adapting the imported technology to local conditions, or introducing innovation to it, as long as it does not impair the quality standards prescribed by the licensor;

87.14. Those which exempt the licensor for liability for non-fulfilment of his responsibilities under the technology transfer arrangement and/or liability arising from third party suits brought about by the use of the licensed product or the licensed technology; and

87.15. Other clauses with equivalent effects.”

Non-conformance with any of the provisions of Section 87 and 88 of the Intellectual Property Code of the Philippines, however, shall automatically render the technology transfer arrangement unenforceable, unless said technology transfer arrangement is approved and registered with the Documentation, Information and Technology Transfer Bureau under the provisions of Section 91 on exceptional cases (Section 92 of the Intellectual Property Code of the Philippines). Hence, if the license contract is in conformity with the provisions of Section 87 and 88 of the IP Code of the Philippines then it is not required to be registered with the Documentation, Information and Technology Transfer Bureau.

Therefore, there is a fine line between licensing agreement, and franchising agreement. Nonetheless, in wondering if one must enter into a licensing agreement or franchising agreement, one must consider the subject matter of the agreement and all of the things discussed above as a guide in making his/her decision.

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Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.

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