Published — January 25, 2018
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.
Read Also: Key Benefits of Written Contracts in Business
Expansion is a fair expectation for every growing business. With this in mind, many owners of growing enterprises are wondering how they will enlarge their scope, and consequently, their revenues, to even greater levels. In expansion, businessmen have a handful of options on how they want it to be; some will straight-out open their businesses to investors to enable them to set up multiple branches, while others will take another direction like merging with other business entities, establishing distributorship and dealership agreements, or by franchising their businesses to others.
Depending on the kind of business one is engaged in, these various expansion methods have their own pros and cons that can greatly influence the concerned business owner as to which one he will take. For entrepreneurs who are inclined to take the franchising route, there are certain matters that they need to consider, especially on the legal side.
The franchise agreement
Though verbal agreements are legally valid, there are simply too much to risk if franchise agreements would not be documented. Not only the entrepreneur’s cash and property will be put at stake, but also the business itself which he built through his blood, sweat and tears. Always take note that those who will buy a franchise will be given, to a certain extent, control over proprietary aspects of the business. Thus, everything that the franchisor established through years of sacrifice might be lost simply because of unfulfilled commitments and difficult-to-enforce verbal agreements.
The franchise agreement serves as the tool for conflict resolution by clearly defining therein the rights and obligations of both parties—the franchisor and the franchisee—as well as their respective representations and warranties. It also serves as reference for both parties for their mutual compliance, and even for enforcement by one against the other in case of breach.
Intellectual property licensing
Franchisors must always consider that licensing of their intellectual property, especially trademarks, plays a huge role in influencing potential franchisees to actually acquire a franchise. It is so because many of such franchisees are after the right to use a recognized and established trademark, and to benefit from any advertising for such mark that the franchisor would undertake to build more goodwill. Without trademark licensing, many of such would-be franchisees would simply be better off establishing their own brand and abandon their ideas of acquiring a franchise.
Because of this, franchisors need to be more vigilant in ensuring that its franchisees comply with the former’s quality standards to avoid his trademark from losing its value. This is the risk that the franchisors necessarily have to take, and an obligation that they should be willing to assume.
Technology transfer arrangements
Technology transfer arrangements refer to the “contracts or arrangements involving the transfer of systematic knowledge for the manufacture of a product, the application of a process or rendering of a service” [Sec. 4.2, Intellectual Property Code].
In many franchises, the franchisor transfers to the franchisee the means by which it does things in operating the business, and some of which even involves the disclosure of trade secrets. Thus, to encourage the transfer and dissemination of technology, and to prevent or control practices that may constitute abuse of intellectual property rights having an adverse effect on competition and trade, technology transfer arrangements are regulated by the Intellectual Property Code [See: Sec. 85].
The law therefore prohibits the licensor from imposing certain conditions that are deemed unreasonable restrictions on the licensee’s conduct of its own trade, such as but not limited to imposing upon the licensee the obligations to acquire goods, raw materials and other technologies only from a specific source, permanently employing personnel indicated by the licensor, reserving upon the licensor the right to fix the sale price of the products manufactured, placing restrictions on the volume and structure of production, preventing the licensee from adapting an imported technology to local conditions, or introducing innovation to it, as long as it does not impair the quality standards prescribed by the licensor, etc [See: Sec. 87].
Just bear in mind that aside from the prohibitions in a technology transfer arrangement, the law likewise imposes upon the franchisor the obligation to bear the Philippine taxes on all payments relating to the technology transfer arrangement [Sec. 88.4].
Technology transfer arrangements that do not conform to the above regulations have to be registered with, and secure the approval of, the Documentation, Information and Technology Transfer Bureau. Non-compliance shall automatically render the technology transfer arrangement unenforceable [Sec. 92].
Confidentiality or non-disclosure clauses
Considering that the franchisor is opening up a significant portion of his business to other people, it is very important that all confidential information remain confidential. In transferring knowledge of the business’ operations to more franchisees, keeping the confidentiality of trade secrets, operating processes and other proprietary information would become increasingly difficult without any control measures being put in place.
Therefore, the execution of a confidentiality agreement assumes importance, as the franchisee would be expressly binding himself not to disclose such classified information that he may acquire in the course of operating his acquired franchise under the pain of stipulated penalties and possible legal liabilities.
It is clear that franchising business is among the viable ways of expanding one’s enterprise. However, it is not as simple as a plug-and-play device that one can set up without considering the possible implications surrounding it, especially on the legal side. Business owners, without a doubt, have the right to grow their enterprises, and doing it while taking all necessary measures to ensure that they are legally protected is the prudent way to go.
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding franchising, contracts and enforcement of contractual rights, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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