The Legal Beat

Franchise Negotiation Considerations

The wild world of entrepreneurship is a high risk, high reward realm in which to play. Those who step into the rocky waters of self-employment and business building turn in the security of steady and predictable compensation for the unpredictable ebb and flow of eating what they kill. A total lack of control over policy and business approach is exchanged for complete control over management, administrative duties, marketing and every other aspect of business operations. Indeed it takes a special kind of person to go out on a limb and attempt to start a business from scratch. For those quasi-special people who are brave enough to undertake running a business, but do not quite want to start one from scratch, franchising is a great option.

Operating a franchise is a good idea for the more risk-averse entrepreneur because franchises have proven systems that are articulated clearly and definitively in a franchise manual, and typically entail support from the franchisor to help make the business successful. I know, I know ... that sounds like the franchisor sales pitch doesn’t it? Well, I will temper my exuberance with a sampling of the legal issues a franchisee should consider when embarking upon a franchise venture – or otherwise find oppression from a new boss in the form of a franchisor.

Franchises typically entail licensing intellectual property from the franchisor, with that intellectual property being the basis upon which the franchisee will conduct its business. Therefore it is important to ensure you are licensing everything you will need to start up, operate and grow your franchise. Some unsuspecting franchisees find that after entering into a franchise agreement, they do not have the right to use certain valuable intellectual property owned by the franchisor that is useful, and in some cases necessary, to achieve the full profit potential of the franchise. When negotiating a franchise agreement, make sure you receive the right to use all names, trademarks, systems, processes, and other intellectual property you anticipate using to implement the franchise. If you don’t, you may be required to pay additional fees just conduct basic actions required to succeed in your franchise enterprise.

Franchisors often times upgrade their brand images, logos, facility standards, etc. When they do, they require their franchisees to incur costs to implement changes at their franchise location consistent with these changes. The costs associated with these changes can be very extensive, and unexpected. The best way to limit these costs is to establish a cap for the expenditures required to be undertaken in connection with such upgrades in the franchise agreement during initial negotiations. Moreover, include a reasonable notice provision requiring the franchisor to give you a sufficient amount of time to implement the changes. This will afford you the opportunity to budget and plan for the expense as the requirement comes down from the franchisor.

Another big matter to address in managing a franchise is the opportunity to be rewarded for the business you build. Franchisors love to horn in on a franchisee’s sale of the franchise. They will require a payment in connection with any sale of the franchise, usually some percentage of the sale price. This is sometimes in addition to a franchise fee that must be paid by the new franchisee; basically allowing the franchisor to double dip. While negotiating this provision away is usually contentious, it will make your franchise more marketable as you seek to exit and cash out down the road, and is worth the effort.

Franchising is a nice middle-of-the-road approach to entrepreneurship, but to get that real feeling of controlling your own destiny, fight hard to keep the strong arm of the franchisor from around your neck.

 

Contributed by Travis Townsend Jr. 

Licensing the Right to Sue for Third-Party Patent Infringement

IP Licensing is everywhere. Many of us were introduced to licensing practices during the 1990's when shrink wrap licensing was popularized by Microsoft and other software manufacturers. More recently, click-through (or click wrap) licenses have emerged. With the rise of shrink wrap and click-through licensing, most of us, whether wittingly or unwittingly, are or have been a patent or technology licensee. Whether you read the license or simply check the “I have read and agree to be bound by the foregoing terms” box before you hit the download button, you understand the basic concepts: you get some right to a licensed technology or product, usually the right to use that technology or product, subject to certain restrictions and conditions. This type of licensing is typically referred to as end-user licensing.

End-user licensing is conceptually similar to license arrangements between companies, which can be referred to as business-to-business, or B-to-B licensing. Basically, one company acquires some right to a licensed technology or product from another company. Patent rights licensed in B-to-B licensing arrangements, however, tend to be very different in many respects. One arrangement that is sometimes used by patent owners involves granting a licensee the right to sue third-parties for infringements of licensed patent claims.

Several years ago, I had a client that was in an industry where this practice was heavily used. It provides a good example of one of the reasons why companies might license enforcement rights to another company. The industry was large, lucrative and was dominated by a handful of huge companies. Each of the top feeders owned a portfolio of patents that, if asserted against the others, would be crippling to the market. Specifically, each seemed to appreciate that launching a direct patent infringement assault against one of the other major actors would cause the target of the assault to counter with its own patent claims, which would most likely cause a chain reaction of escalating assaults which would ensure mutual self-destruction for all. To avoid that outcome, the patent holder would typically assign a patent, or more commonly license a right to sue on the patent, to a third party, who could then sue the target or otherwise enforce patent rights against the target. Although it was clear what was going on to anyone paying attention, this veil of plausible deniability was enough for patent holders to strategically slow down their competitors and prevent total industry meltdown.

The scenario above is just one example of how licensing the right to sue can be strategically used in patent cases. Be mindful, however, that patent licensing in this area is extremely nuanced and any strategy involving granting the right to sue to another party should be carefully thought out and well planned. As outlined in my April 26, 2010, Legal Beat blog post,  too often patent holders intend to grant a licensee the right to sue under a patent. But they only discover at the time of suit that the licensee can only bring suit if the patent holder is joined as a co-plaintiff or may discover that the licensee has no right to bring suit under any condition. This result can undermine the entire license strategy and might only be discovered after significant time has passed and after the licensee has paid substantial license fees to the licensor. Moreover, as outlined in my May 10, 2010, blog post, it is possible to arrive at a much more damaging result through poor licensing, where no one has the right to bring suit on the patent(s).

 
  Contributed by Tennell Lockett, partner at Townsend Lockett & Milfort, LLC