How to be prepared and make the correct moves to protect your intellectual property position
The media is abuzz with talk and comment on the ramifications Brexit will have on commerce. Much relates to transport, travel and currency with the impact this will have on the marketplace. A vital area, not to be overlooked, is the effect Brexit will have on intellectual property rights, such as trademarks, from a business perspective. It is important for businesses, including small-to-medium-sized enterprises (SMEs), to have some understanding, and strategy, that copes with the certainty, and uncertainty associated with its consequences.
There are a series of headings that need to be reviewed apart from trademarks so that the many businesses that rely on other types of intellectual property can prepare themselves. The main elements that SMEs may encounter are:
Any person or company holding an EU Trademark (EUTM) must review its position in light of the UK exit. It may lose its protection in that market and may have to reapply. Of course, the UK government might agree to some arrangement whereby existing rights will automatically transfer, with or without the payment of a fee, but that’s by no means a certainty.
One aspect of this relates to the “use” requirement for trademark protection. It has been the practice that, if a mark was used in, say, the UK and Ireland, that this should constitute sufficient use to enjoy protection in all member states. When the UK leaves the EU, a business may have insufficient use of its EUTM elsewhere in the EU to meet the threshold requirement. In such a case EU-wide protection could be lost.
Registered Community Design:
Like the EUTM, a Registered Community Design (RCD) provides design protection across the EU. That which can be protected is very wide-ranging indeed. It includes furniture, bicycles, chocolates and, for example, decoration applied to such items or clothing and fashion items. After the UK leaves the EU, however, the RCD will no longer be enforceable in the UK. If an SME designs and markets any product – from high fashion to bathroom fittings – it will need to know how to protect the designs in the UK post-Brexit.
Domain names: .eu designation
If you are a corporate owner of .eu domain names, you need to review your domain name portfolio to ensure it is Brexit-proof. After the UK leaves the EU, it is not clear whether a UK entity will still be permitted to own a .eu domain name. Busineses and companies with .eu domain names will need to identify such domain names in their portfolio and decide whether it will be necessary to transfer ownership into an entity placed within the EEA.
While the effect of Brexit on contracts generally is likely to be dealt with in the UK/EU Brexit agreement(s), in the context of IP, SMEs will need to know what effect Brexit will have on IP licences and agreements. For example, will a trademark licence for “the territory of the EU” include the UK after Brexit? If a settlement agreement with a competitor provides that they agree not to use brand X in the EU, will they be permitted to use it in the UK post-Brexit? It will also be important to ensure that any agreements or licences which are negotiated in the period leading up to March 2019 properly address the effect of the UK’s departure from the EU to minimize trading uncertainty.
Geographical Indications and Appellations of Origin
These terms relate to the geographic location used to designate the goods or services which originate from a particular region or place. Champagne must come from that region in France while Feta cheese must come from Greece. It is not yet clear what effect Brexit is going to have on the extensive scheme of EU protections for geographical indications, which include Protected Designations of Origin and Protected Geographical Indications. Although some of these EU schemes are open to non-EU applicants, the “home” country must provide reciprocal recognition (we will protect your name if you protect ours). In the absence of mutual recognition, food producers could face competition from cheaper versions of protected names. That said, the law of passing off will still be available post-Brexit and the UK Courts are extremely unlikely to allow SMEs to use famous names like champagne or Feta in the UK after Brexit.
While Brexit presents a particular level of uncertainty in respect to some aspects of patent law, others remain unchanged. Indeed, the good news for inventors seeking to protect their inventions in Europe, is that they may not need to adjust their filing strategies because of Brexit. Even after the UK leaves the EU, it will still be possible for inventors to obtain protection for their inventions in the UK by filing patent applications directly at the UK Intellectual Property Office. Because these patent applications (and eventual patents) are governed by UK national patent law, Brexit will have no effect on UK patents granted by the UK Intellectual Property Office.
Similarly, inventors will still be able to obtain protection for their inventions in other European countries by filing European Patent Applications at the European Patent Office, because the European Patent Convention (EPC) is not a piece of EU legislation and will be unaffected when the UK leaves the EU. Existing European patents covering the UK are also unaffected by the Brexit decision.
There has been a huge increase in the number of UK trademark filings. For example, UK trademark filings by US applicants have jumped by over 150%, filings from China by over 175% and filings from Canada by about 100%.
Clearly, businesses are taking action now to protect their intellectual property (IP) rights rather than awaiting the outcome of the divorce talks between the remaining EU states and the UK. Many are pro-actively ‘Brexit-proofing’ their IP rights.
Although it is hoped that the divorce settlement will make provision for the re-registration of European Union Trade Marks (EUTMs) and of Registered Community Designs (RCDs) before the UKIPO, if the UK and EU were to fail to reach agreement all EUTMs and all RCDs would simply cease to have effect in the UK after 29 March 2019 (the day that the UK will leave the EU).
The potential loss of enforcement of your EUTMs or RCDs in the UK may have very serious consequences, so it may be an idea to review your position sooner rather than later. The authors, Shireen Smith and Kieran Heneghan would be delighted to assist you with this.
JK Rowling is now a successful writer with one of the most valuable brands. It’s taken her just 21 years to get there. Initially, when she sent her first manuscript to publishers, she was turned down by more than 12 of them before Bloomsbury, a publishing house in London, accepted her book.
Authors starting out will rarely have an agent to look after their interests. So it’s important in those early days, for a writer to take advice on the publishing agreement before signing it. It’s the same with any project involving IP – it’s vital to get IP advice before implementing your ideas.
Why a publishing agreement is so critical
Certainly, JK Rowling’s considerable wealth didn’t result from book sales alone. However, the foundations for that wealth began with her first publishing agreement which is a critical contract.
The publishing agreement determines how the intellectual property arising may be exploited. The rights you give your publisher set out who may control the various rights in the work you create.
As the creator of the work, the writer will own the copyright in it. Therefore, the agreement should protect your copyright, and you should never give it away to the publisher. So, if your publishing agreement has a copyright assignment clause in favour of the publisher, don’t sign it before taking advice.
Most publishers will let authors keep the copyright, and will insist on having certain rights, such as the exclusive right to print, or to produce translations, licensed to them. Other rights like film, or television rights might well be left entirely to the author, while it will depend on the type of book and the publisher what happens to book club rights or similar.
At the time JK Rowling secured her first publishing deal, who could have known her books would have so much success? Yet if you are someone creating a business, or an artistic work, or piece of music, you need to assume you will be hugely successful, and not give away your rights unthinkingly.
Ownership of copyright underlies JK Rowlng’s wealth
If JK Rowling had assigned her copyright in Harry Potter to the publisher, she would not have achieved the profits and wealth that her writing gave rise to. It’s because she retained ownership of copyright that she was able to licence others to use the name on merchandise, to license the making of films, and to carve out rights to licensees of her work on a geographic basis.
Harry Potter has been registered as a trademark as have other characters, along with many designs produced around the books’ elements. Securing such IP rights or giving others the right to do so plays a crucial role in the income generated by the brand.
Once you own IP rights which are desirable to others to use, you may license a whole host of businesses in exchange for royalties. Licensing increases your revenues for as long as there is a market for your creations. And unlike physical property there is no natural limit to the number of people to whom you can give a right to use your IP. So the revenues to be earned from IP far exceed what you would be able to earn from investment in physical property like land which may only be let out to one party at a time.
Consequently JK Rowling’s creations have been used on a variety of goods and services. The movie characters have been licensed to theme parks and other organisations, and reproduced on many different merchandise. Licensing agreements are flexible as they allow you to license as much or as little of your IP as you like. JK Rowling’s creations have made billion dollar profits as a result.
In conclusion, Rowling’s considerable wealth today is all down to her intellectual property, with her biggest source of income being generated from licensing.
So the moral is to protect your IP if you have ideas to bring to the world. Whether you are an author, designer, software developer, or entrepreneur, don’t ignore IP whatever you’re creating. By taking timely advice and setting your IP strategy you will be better placed to secure essential IP assets and build your business on strong foundations. The future growth of any business is based on its IP.
Why not begin by attending my next workshop by following the link on the sidebar of this blog.
The High Court recently published its judgment in a case involving the Marussia Formula One team. The case related to a claim for trade mark infringement and underlined the importance of businesses ensuring they properly manage their IP rights.
The court heard how the claimant had licensed its trade mark to the defendant Formula One team, but that the defendant team had continued to use the trade mark after the licence term had expired. The team was refused permission by Formula One’s governing body to change its name during the course of a season, leaving them with little option but to continue racing and infringe the claimant’s trade mark as a result. Refusing to race would mean forfeiting the team’s entitlement to a substantial amount of money due to it.
The court held that the defendant therefore had no real prospect of proving, as it had asserted, that the use of the claimant’s trade mark had occurred with the claimant’s consent. It further held that the defences advanced by the defendant were unlikely to succeed and that the defendant would need to provide £1.75 million by way of security for costs if it wished to proceed to trial.
The case shows the importance of considering IP rights at an early stage and ensuring any agreements entered into properly reflect the needs of the parties and protect their interests. In particular, the defendant in this case would have benefitted from ensuring the licence was not timed to expire part way through a season. The facts of the case show the balance of power was strongly weighted in the trade mark owner’s favour, since the licensee was heavily dependent on the owner providing the funds which would allow it to participate in the Formula One season.
Many SMEs could potentially benefit by holding their IP in a separate IP company and having the holding company licence that IP to the company through which the business is operated. This has the benefit of protecting a business’ investment in its IP by ring-fencing its intangible assets. This will be particularly important if the main business falls into difficulties and should be considered at an early stage.
As intellectual property (IP) becomes more recognised as an asset class, interest in it is increasing – so much so that apparently according to the IPKAT Hong Kong property surveyors have been trying to break into assessing the intellectual property value in a business.
IP valuation is a sub-category of business valuations or a self-contained professional endeavor; and
(ii) in either case, to what extent must an IP valuation professional understand the legal context of IP rights?
The starting point is to consider what we mean by IP
What is IP?
The term IP is generally associated with registrable rights like trademarks, patents and designs. However, SMEs also have many non registrable IP issues to consider, such as copyright, know how, trade secrets, database rights, organisational knowledge and more.
Unless an SME takes advice to identify, manage, and protect its IP assets it could be seriously exposed because intangibles are a poorly understood asset class.
There is no one size fits all when it comes to determining a business’s risks and opportunities. Even two businesses in the same industry, with similar business model, may have different issues to address depending on how they develop their businesses and what contracts and other arrangements they have in place, For one business copyright may be the critical asset, while for another it may be the database or a patent.
They will not necessarily be equally desirable to an investor as their value on exit would be impacted by a number of factors unique to each business.
Why have an IP valuation?
One issue a valuation will consider is whether there is key IP underpinning a company’s competitive advantage. If so, another question is whether that competitive advantage is adequately protected.
Banks and investors may accept IP assets as valuable security to finance an SME’s growth if the business can demonstrate that those IP assets underpin revenues and forecasts, and impact cash flow.
How the strength of the IP asset is critical
A fictional example may help convey how IP works.
Say a company has developed an innovative solution that becomes well known in its industry. That competitors will copy a good idea is inevitable. So, if a company’s asset isn’t protected with a patent or other barrier to entry, it is more vulnerable to copy cats.
However, where there are no patents to protect the product, it is a mistake to assume there is little you can do to prevent a competitor stealing market share. You may not be able to stop them creating similar products but you may be able to protect your competitive position and create barriers to entry through the name you choose for the product.
The name is a potential barrier to entry because it can stop competitors using similar ones to identify their offerings – but only if it is a name that the business can uniquely use.
If the business chooses a generic name (that is, one that describes what the product does, rather than an actual name), the name will not be capable of protecting the company’s asset. This is so even if the company registers that name as a trademark combined with a logo. Such a registration would effectively only protect the logo where the name is generic.
So the upshot is that the business has a product that gives it a competitive advantage. It has a valuable asset, but not as valuable as it would be if the name was capable of stopping competitors stealing market share when providing ‘me too’ solutions.
That not all names are equally effective at containing IP value is not generally well understood
Shifting value of IP
IP value is rarely static. Intellectual property rights can change in value over time for a variety of reasons. For example, when you first patent something, it’s possible you have a unique solution to a problem so that your patent provides a strong competitive advantage. But then as other solutions to the problem emerge, the value of your patent may be reduced. On the other hand, if you have successfully marketed your product, despite your patent becoming less critical to your competitive advantage, your trademark may have gained value as your name recognition has increased.
So, failing to give a product a distinctive name that is capable of functioning as a trademark, or not checking whether other people’s rights might prevent use of the chosen name long term impacts the value that is generated, and that would inevitably depress the value of your IP.
IP value is impacted by the choices you make
The above example is designed to illustrate how the IP in question, or the choices you make impact IP value. You need to be ready to make changes if needs be. However, names are not the sum total of IP. There are so many other issues that impact IP value.
There are a number of IP actions required in order to build value and wealth. Implementing effective contracts is a hugely important, but misunderstood aspect of IP protection.
Because it is never possible to foresee what problems and scenarios might arise for a business in the future, it is prudent to secure its IP rights to the fullest extent, so the business has adequate protection to protects its position in the market.
Therefore, identifying IP rights, and protecting and managing them, is essential for any ambitious business.
Clearly IP valuation is not an area in which surveyors would have appropriate transferable skills.
IP and business are closely intertwined. In practice, you need to take both into account. That is why it requires the combined skills of business and IP experts to get the most effective IP valuation and strategic advice.
In a future post, I will explore the different methods for valuing IP.
A copyright lawsuit involving the world-famous “Happy Birthday” song has ended following a ruling this week. The dispute about the famous song has been finally resolved a BBC Article reports. Watner/Chappell Music will no longer be collecting royalties for the song Happy Birthday following US District Judge George H. King’s ruling.
The song’s original copyright was acquired by music giant Warner/Chappell who have made around $2 million a year from royalty payments whenever the song is used in a film, television episode, advertisement or other public performance.
The tune was composed by two sisters Parry and Mildred Hill in 1893 under the name Good Morning all and was acquired by Warner/Chappell in 1935 and, without the court judgement, it would not have been freely available in the public domain in the US until 2030 and in the EU until 31 December 2016.
Copyright Lawsuit And The Ruling
The case was filed by Rupa Marya and Robert Siegel in 2013 because they are making a film about the song and did not want to pay royalties. They argued the song is in the public domain and should not be subject to copyright fees.
The judge ruled that the original copyright granted to the defendants was only for specific arrangements and is not exclusive. Therefore, they do not own a valid copyright in the song. The ruling can be read online here. However, this still does not mean that the song is freely available in the public domain to use because, as Chloe Smith reports for the Law Gazette, there still may be elements of the song that are copyright protected.
Last week, the Republic of Ireland readied themselves to vote on what was, for a catholic state, a very controversial referendum; yes or no to gay marriage. The BBC reported here how one family in particular had other controversial concerns about the referendum for an altogether different yet important reason.
This family, unknown to them, were made the “poster boy” of the No campaign. In 2014 they had signed up for a free family photoshoot. In return the family provided consent for the photographer to sell these photos on stock image websites. Their photo was displayed amongst many other seemingly similar photos. The family felt unfortunate to have been selected for this purpose.
Although the family morally disagree with the use of their stock photo for the No campaign they accept there is nothing they can do to prevent use of their image in this way.
There are many considerations to be made when assigning or licencing your rights; not only in relation to use of your image but also when granting permission for others to use your music, literature and branding materials such as trade marks and logos.
Not giving enough thought to the implications of a licence or an assignment can have unintended effects financial consequences as well sometimes, so take care to consider documents you are asked to sign carefully and if you aren’t sure seek legal advice.
Percy Sledge, the well-known R&B singer, who is reputed to have written the song “When a Man Loves a Woman” died this week. While Sledge had a long and illustrious career in the music industry, his later works never reached the height of fame of his original song. Sledge is said to have composed the melody himself, however there are conflicting stories as to whether he just played a part and what part that was in writing the lyrics. The song reached number 1 on the US charts, after he signed away his rights to it.
Sledge has reportedly said that giving up the rights to the song was the ‘worst decision I ever made’, because ‘I didn’t know any better’.” Although there are debates as to how much of the song Sledge did actually write, what is clear is that if Sledge did indeed write a portion of the song he has since lost millions in royalties.
Copyright is a property right, like many other IP rights. So, it can be sold, bought, given away or left to someone in a will. The copyright owner is the one entitled to ‘exploit’ the work, such as by copying parts of it and selling copies to the public. The rights exclusively enjoyed by a copyright owner include renting or licensing the work to others, broadcasting it, transmitting it over the Internet, adapting it into other languages, and so on.
Understanding copyright is crucial to everyone in the digital world, and especially to those in the creative industries of music, publishing, film, software and more.
Owning copyright gives you a potential source of revenue. The copyright owner has the right to control the sharing of a copyright product, and to stop competitors from exploiting the investment you make in developing your product. As such, it is a right which should never be given away without first receiving proper advice from an IP lawyer.
Music Copyright disputes
Over the years there has been a fair bit of litigation over copyright law within the music industry, such as O’Sullivan v Management Agency & Music Ltd  QB 428 where O’Sullivan ultimately succeeded in having a number of management, sole agency, recording and publishing agreements and transfers of copyright set aside for undue influence.
Undue influence is an equitable principle that prevents the enforcement of contracts that have been entered into unfairly or where the parties do not come to the table on an equal footing. This is particularly common in the music industry given that new talent is often willing to take their chances to reach fame by signing agreements which they may later regret.
Undue influence, duress and restraint of trade
Undue influence is often described as similar to the common law defence of duress. It is successfully applied where there is an unreasonable amount of pressure exerted by one of the parties to an agreement.
Undue influence has been a common argument in the music industry when new talent entering into agreements have later regretted their agreements once they’ve had commercial success. So artists are now required, as a matter of course, to obtain independent advice before entering into agreements so their interests are protected and the label isn’t open to litigation.
“In the music industry there has been a blurring of the distinction between the doctrine of restraint of trade and undue influence“. This reflects the fact that both doctrines are used to protect the interests of artists who enter into restrictive agreements when their bargaining power is poor. Zang Tumb Tuum Records Ltd v. Johnson  EMLR 61 is a case that dealt with both. Holly Johnson, the lead singer for the band Frankie Goes to Holloywood entered to a contract with Zang in the early 1980s. Johnson later sued Zang for royalties that were withheld because his contract required that the costs of producing the album be excluded from the profits. Johnson successfully argued that when he entered into the contract that he was subject to undue influence given that he had been a starving actor without much work.
One case where undue influence was not a successful argument was Elton John v. Dick James, where John and his writer sued their producer for additional royalties, claiming that when they signed their original contract, they were young, inexperienced and subject to undue influence. The royalties in dispute were for over $14 million in 1985 with legal fees in excess of $2.2 million. John ultimately lost the case. The judge said that it was a “hard bargain, but that it would be unjust now to set aside”.
In Samuel v Wadlow  is a good example of pressing your luck says the IPkat. Singer-songwriter Seal, having successfully renegotiated his obligation to pay commission to long-time manager Wadlow, stopped paying commission altogether on the basis that he had agreed the terms of the settlement contract through undue influence. The Court of Appeal upheld Mr Justice Gray’s refusal to accept that this was the case. Far from being oppressive, the terms of the settlement contract were beneficial to him and he entered into the deal having received independent legal advice.
These cases demonstrate the commercial importance of copyright. It is important that anyone who is transferring IP rights should first get independent legal advice. That is the best way to avoid the regrets that an artist like Percy Sledge might have borne throughout his career.
In this second part, we look at how the use of stock libraries and Creative Commons Licences can minimise the risk of copyright infringement, what to look out for when using them, and how to get copyright permission from the owner. We also cover the new Orphan Works Scheme introduced by the UK Intellectual Property Office, and the Copyright Hub portal.
As we saw in part one of this blog post, it is usually a breach of copyright to use an image without the owner’s consent. Establishing who owns copyright in an image in order to get their consent can be difficult in practice.
A simple alternative is to buy images from stock libraries or to find images available under a Creative Commons licence.
There are several image libraries out there, as you will see if you carry out a simple Google search. These include Getty Images, Shutterstock and iStock. Libraries such as these contain thousands of images that be used under licence subject to payment of a fee. There are a variety of licences to choose from, depending on your intended use.
If you want to use a photo multiple times for different projects you will need a royalty-free licence, which does not require payment for each individual use. Other types of licence would cover editorial use and there are also rights-managed services that let you choose the rights you need.
The advantage of using a well-known stock library is the huge choice of images and the range of formats and resolutions available. And most importantly, you are protected, (or at least should be protected), against infringement.
iStock gives an indemnity of up to $10,000 if one of their images is found to infringe. You can raise this to $250,000 if you require greater peace of mind. Other libraries offer similar indemnities.
Be careful if you are using an image from a smaller, lesser-known library. Check the terms of the licence to make sure you are properly covered. If in doubt about this, take legal advice.
Creative Commons (creativecommons.org) helps creative people share their work by offering model licensing terms. (Creative Commons is one of many interesting approaches to permissive licensing. A review of them is beyond the scope of this article.)
Under a Creative Commons (“CC”) licence, some, (although not all) of the owner’s rights under copyright law are surrendered.
An advantage of this type of licence is that the terms are standard and widely understood. As a result, search engines such as Google or Flickr can easily tell you what rights you have to use an image.
There are a variety of Creative Commons licences you can use. A pure attribution licence allows you to use an image commercially, share and modify it, so long as you attribute it to the owner.
A CC BY-NC-ND (Attribution, Non-Commercial, No Derivatives) licence only lets you use the unaltered image in a non-commercial context; you have to give credit to the author.
Like stock image libraries, you should check the terms of the Creative Commons licence for the image you are using.
One danger of using Creative Commons searches is something we mentioned in part one of this blog. What happens if the uploader doesn’t own copyright in the image? Innocence is no defence. You could still be liable for damages despite thinking you have a licence from the owner. If you really must have a certain image, you may have to carry out your own investigation in order to find the actual owner.
Even then you may not be out of the woods. Has the so-called owner assigned their rights? Or, are the rights owned by their employer? Then there are practical considerations. Even if you get an indemnity from the owner, would they have the funds to cover your losses if you tried to enforce it?
The safety-first route for commercial use of images is to get your images from a well-known image library, if possible. This doesn’t always involve a cost.
Getty Images recently released millions of free images. There is a snag though. Their use is subject to restrictions. These include:
You must embed the images on your website or through social media using Getty’s own system.
Getty reserves the right to collect analytics data relating to your use of the images.
You can only use the images in relation to events which are newsworthy or of public interest.
You are not permitted to use them for commercial purposes.
Despite these restrictions they are still a useful resource for some people, such as bloggers.
As the name suggests, orphan works are those whose creator (or other owners) cannot be identified.
This might conjure up images of dusty old books, or visuals on the internet that have done the rounds without ever being attributed to a creator. However, the scope of the orphan works scheme goes well beyond this, and applies to tens of millions of UK creative works.
In October last year, the UK Intellectual Property Office (UKIPO) introduced the orphan works licensing scheme, which is designed to:
Protect people who wish to use orphan works by granting a licence for their use
To reunite owners with their lost works by offering a searchable database
To remunerate owners of orphan works should they ever come forward
Of course, these licences do not come free and users will need to pay for the right to reproduce the work. The fees collected are partly to cover an administration charge for running the scheme, and partly to remunerate the owners of copyright work, if they claim ownership in the future.
However, unlike the other licensing models, the UKIPO will need to be satisfied that the applicant has carried out a diligent search to find the owner before they grant a licence to use orphan works.
This could involve contacting a range of artists’ associations, searches through multiple online search engines, checking for watermarks, reviewing stock image libraries, liaising with trade bodies and collecting societies, and making other investigations, such as inspecting relevant museum and other catalogues.
The Copyright Hub
Kick-started by a government fund, The Copyright Hub is a non-profit organisation that runs a web portal to help users and copyright owners request and grant permission to use copyright works.
The idea was to make it as easy as possible to find and license content. The initiative should help increase revenues for copyright owners, reduce instances of copyright infringement, and provide a useful source of creative materials.
The Copyright Hub also helps to raise awareness of copyright protection and licensing, by:
publishing information about copyright through the online portal;
offering an accessible platform so users can find out how to get copyright permission; and
making it easier to trace copyright content back to their owners.
So, in practice, the aim of both the Copyright Hub and orphan works is to implement Hargreaves’ recommendations in order to make it easier for people to locate and license creative works.
The complexity of copyright
As you have seen, using images downloaded from the Internet online is fraught with danger. While some improvements have been introduced by the law recently, the situation is still complex.
Litigation and the payment of damages is not uncommon. So, the safest course of action is to assume you can’t use an image without the consent of the owner. Even when you get consent, it is sensible to take legal advice to understand the terms of the licence. Alternatively, use a reputable licensing platform.
I’ll start with the basics and explain what franchising and licensing mean, and then it will be much easier to understand the difference between the two. However, there is widespread confusion about an aspect of franchising and licensing which is caused by the difference between the laws in the USA and the UK. So, I will be clearing up the confusion that I see in many articles online.
Franchising is a way to scale a business once the business model is successful and proven. You can franchise most types of business, provided it is possible to give instructions for others to follow, using an Operations manual.
Under a franchise, the owner (franchisor) retains control of the brand and grants permission to the franchisee to use its successful business model and brand. In exchange, the franchisee puts up the initial capital for the business, helps to promote the brand and pays a recurring fee. The franchisor supports its franchisees by providing training, know how, marketing and other resources and skills.
A franchise agreement will usually give the franchisor the ability to control how the business is run. For example, if a customer visits a branch of McDonald’s while on a trip abroad, expecting the familiar service they are used to at home, it is important that they should not be disappointed. Any unpleasant surprises due to changes in the business format could damage McDonald’s brand generally, not just that of the outlet. For that reason, McDonald’s franchise agreement (and franchise agreements of other organisations generally) contain strict quality control provisions.
Given that the franchisee will be putting up the initial capital for the business, paying the franchisor a fee, and will be promoting the franchisor’s brand, the franchisee naturally expects to end up with a successful business simply because they are following the successful proven path of the franchising business. In return, the franchisee agrees to strictly comply with the established ways of running the business as stipulated in the operations manuals.
The franchisor is expected to provide support to its franchisees in the form of marketing, access to trusted suppliers, systems, and other resources and skills. Training becomes a core part of your business activity once you take on franchisees.
Franchising a business involves finding franchisees with the necessary skills and experience to operate branches of the same business. McDonald’s is a classic and the best-known example of a business that has grown through franchising. By contrast, Starbucks chose to grow by opening its own branches. This requires a lot more capital to achieve than franchising.
An essential element of a franchise relates to the formalities involved in setting it up. There is often a steep initial capital outlay involved in order to get ready to franchise.
Licensing is essentially how you exploit intellectual property. Franchising is a type of licensing arrangement.
Licensing of intellectual property (IP) is at the heart of a franchise contract. So, in fact, a franchise is licensing of a business format in a particular way. Typically, this will comprise giving permission to the licensee to use its know-how and other confidential information, trademarks, logos and designs, and copyright materials. For some businesses, there may be patents, too. In return, the franchisee follows instructions and operates their business in the agreed way.
Licensing is simply the terminology for exploiting intellectual property in a way that involves retaining ownership of that Intellectual Property while granting permission to a third party to make specific uses of it. The equivalent to licensing for the physical property is renting out a house say and getting rental income in return.
The details of the terms and conditions in a licensing agreement will vary considerably depending on the business transaction you’re aiming to achieve.
The type of licensing agreement you need depends on the IP you are licensing as well as on the type of business arrangement you’re setting up.
Is the IP a brand, or technology, or content, designs, or a business as a whole or something else? This determines the type of clauses the licence agreement needs to incorporate.
Before you embark on licensing it’s essential to ensure you have the necessary intellectual property rights in place.
Licensing can be an excellent way to introduce a new revenue stream to your business. Here are some quick examples of how it might be used:
Where a business wants to enable others to make use of its technology or products
Where computer software is ‘sold’ to consumers – it effectively involves a licence to use the software.
Merchandising – which is common in the entertainment industry, involves licensing third parties to use characters or names from films for example, on different types of product.
Sponsorship whereby sponsors allow you to use their brand during promotions.
Endorsement or product placement arrangements whereby a business is paid for promoting another business’ product such as by using it in a TV program.
And it’s also used when a business wants a franchise style expansion format, without the high set up costs and formalities involved in franchising. So, licensing business formats is possible so that it’s effectively franchising under a different name.
Back in the 1850s the inventor of the sewing machine, Isaac Singer, granted licences to entrepreneurs to sell his machines in different parts of the USA. He also offered training in the use of the machines. In this case, the IP licensed was a patent, a brand name and know how. This arrangement was so similar to what we associate with franchising today that some people even consider Singer the father of franchising.
I will cover this question of business format licensing later in this article.
Another example of how licensing can be used involves giving access to your methodology for doing something. This is pure know-how licensing. It could be used by a car wash that has developed a successful process for getting its customers to opt for hot wax and other optional extras. By licensing a proven process and know-how to other car wash businesses in return for royalties each month or a one-off payment, a business can generate income from its proven way of promoting hot wax so more customers buy it.
Such licensing transactions as well as other types of licensing mentioned earlier, such as of software like Microsoft Office – are all ways whereby a third party is given the right to use something on the terms and conditions of the licence. The licensee will not own anything more than a right.
The terms and conditions need to be carefully drafted by someone who understands intellectual property, and commercial transactions.
I would caution strongly against a do it yourself approach with licensing agreements, such as using someone else’s document for your situation. Using the wrong terminology, such as giving an exclusive licence to someone can destroy the owner’s rights to exploit its intellectual property. There are all sorts of considerations that go into the presence of certain clauses in licensing agreements, so make sure you use a competent lawyer to help you.
For those that have built up a brand name, one way to scale their business is to issue a licence to a third party to deliver a related product under their brand name. So, a successful fashion designer might license a perfume manufacturer to create a perfume range for its label.
Another option if you have a successful product or brand, is to grant a licence to someone to sell your product under their own brand name. An example is the model Twiggy producing a range of clothes for Marks & Spencer. Similarly, a cook such as Nigella Lawson could grant a licence to a company selling cooking utensils and crockery to use her name on its products. An established licensing model is explained in an article involving Disney’s licences to use its characters (and its brand) on third party merchandise.
Luxury brands are highly sought after for licensing, as their brand brings a cachet to the product to which they lend their name. But brands should beware of veering too far away from their market or offering licences too liberally. Pierre Cardin is a classic example of this. By engaging in indiscriminate licensing, it devalued its brand and lost much of its cachet.
Licensing covers many possible business arrangements because it is simply a way to make income from intellectual property – that is from know-how, ideas, creative output, reputation, patents, trademarks, designs, methodology and so on depending on what you have available. It has many applications which franchising isn’t designed to address.
To give yourself the strongest position make sure you have properly protected that IP, and have chosen good names that can contain the value of the brand.
The Virgin Group
Certain comments in the FT illustrate some of the complexities faced by successful brands which have grown through licensing and franchising. One of the key issues, is how ownership, control and use of the brand can be spread between different businesses. The FT article, Virgin group: Brand it like Branson, is a fascinating look at some of the hurdles faced by Richard Branson and provides some revealing information.
For example, the group makes about £120m a year from licensing its brand to other companies. Some of those companies are publicly concerned about the fact that damage to the brand as a whole, could impact their business, and that they have little power to prevent it. Virgin America, in its IPO prospectus, explains that:
“The ‘Virgin’ brand is not under our control, and negative publicity related to the Virgin brand name could materially adversely affect our business”
The Virgin brand has been valued at roughly £1bn and is an excellent case study for anyone hoping to grow their business through licensing and franchising.
Given the dearth of information available to educate brand owners on how these two strategies differ and overlap. I decided to write this piece to clear up the widespread confusion that exists online about the difference between licensing and franchising and why that matters.
Now that I’ve explained what franchising and licensing mean and highlighted some different situations when licensing might be used, I want to focus on the confusion that exists.
Why the Distinction Between Franchising and Licensing Matters
It’s perfectly possible to set up the same type of arrangement as a franchise using a business format licence instead. So, a franchise-like arrangement can be achieved with a licence.
However, because in the USA franchising is heavily regulated. There are hefty fines if you attempt to pass off what is essentially franchising by another name, namely as licensing. So, only use the business format licence instead of franchising if you’re in the UK or other countries where franchising isn’t heavily regulated.
It’s not possible to escape the regulators’ attention by passing off a franchise as a licence because the law looks at the essence of an arrangement rather than its name. It’s not what you call something that matters. It’s about the substance of the transaction.
Most books on franchising and licensing are written by US authors and many blogs online are either US articles or written by people who don’t understand this fundamental reason why it’s not permissible to use licensing in the USA to replicate a business format.
Therefore, there is this confusion whereby people believe that licensing is incapable of giving them a business format arrangement to replicate an existing business. They assume that there is something inherently different about franchising.
They don’t realise that franchising is a type of licensing arrangement. That it’s simply because in the USA franchising is the only option for licensing your business format.
Business owners in the UK can, therefore, be misled into believing that franchising is their only option. They don’t appreciate that they’re completely free to use licensing instead of franchising to achieve the same ends.
Why License Instead of Franchise?
Franchising gives you the potential for national and international expansion, rapid growth with lower capital outlay. However, franchising is not an appropriate strategy for every business.
When it works, it is highly effective, but for franchising to work you need to get it right. You could waste a lot of money, not just the franchise set-up costs, but also in resolving disputes if you jump into franchising before you’re completely ready.
Nobody wants to waste time and energy embroiled in litigation, but it can happen when business performance doesn’t match expectations. Even a successful litigant in court will be substantially out of pocket given the high cost of legal proceedings. So, everyone loses when a case ends up in court. Even if a solution is negotiated between the parties, just the fact that a dispute arises can absorb a lot of time and money and cause real anxiety and stress.
It’s true that franchising is a relatively low-cost way of expanding a business, when compared to the capital required to grow on your own. However, it is not a no-cost means of expansion. It requires quite a big capital outlay initially in setting up the franchise. There are hefty costs to set up the franchise and develop the operations manual. You’ll need marketing literature, and to promote the business to attract potential franchisees. These costs are sizeable and likely to require a loan.
For businesses in the UK, the option exists to use licensing instead and work towards franchising in a way that will help you to create a better business anyway, rather than putting all your attention on franchising
My suggestion, if it would work for your business model, is to give yourself time to evaluate whether franchising is the right option by testing the waters with licensing first. This does involve some costs but working towards franchising gradually will both improve your business anyway and give you a way to test whether the arrangement is right for you. By licensing your format you get the chance to iron out kinks before you jump both feet first into franchising.
If after trying out business format licensing you decide franchising is the right option then there will be less work to do to prepare your business for franchising because you will have already done much of the work. You will have sorted out your systems, protected your IP, put it into a holding company (which is a good thing to do anyway to shield your IP), systemised your processes so you can provide an Operations manual to your licensees, and tested the arrangement in real life. You will know what issues are thrown up when licensees are using your business format. You can also decide whether the new roles required of you as a licensor – such as to train and educate licensees – suit your temperament and inclinations.
So, you will be much clearer whether franchising is the right step to take after you’ve tried licensing, and if it’s not, then most of your costs in setting up a licence will be worthwhile because these are steps anyone should take to create a better business.
Licensing is a type of legal agreement for exploiting IP that is highly flexible. Using lawyers who understand the intellectual property you can set up any type of licensing arrangement you like.
When it comes to licensing a business format, whereby you grant a third party the right to replicate your business, the important point is that franchising traditionally involves a number of formalities and costs that you can avoid when you choose the licensing route.
Licensing can be done in a less prescriptive way, and you can customise an arrangement to suit your own needs and license as much or as little of your business as you like. You can test he waters with licensees you know, and benefit from the practical experience this will provide.
There is little difference between licensing and franchising if what you’re aiming to achieve is to enable a third party to replicate your business format. You can use either route if you’re in the UK and make the arrangement so close to franchising that it would be difficult to distinguish between the two. But as explained earlier this is not feasible in the USA.
Given that franchising is extremely expensive to set up, licensing can be a good way to start the process if you’re interested in the possibility of franchising your business. Rather than diving straight into franchising with all the due diligence and formalities and costs that it entails, you could start with licensing and if the arrangement suits you, you can then move on to franchising as a second step.
Whether you are licensing or franchising, the important thing is to start by protecting your IP. Your brand, patents, know how, trademarks etc. are precious assets, which should not be shared casually, and should first be appropriately protected. The terms on which you grant licences or franchises need to be carefully considered. Here at Azrights we specialise in supporting businesses that want to use licensing to scale their business.