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Intellectual Property and Franchising- Laws in India

What is a Franchise?

The term franchise is not defined in Indian law, but it is described by Black's Law Dictionary as:
a licensee from the owner of a trademark or trade name authorizing another to offer a product or service under that name or mark.

In other terms, a franchisee is a firm where a parent company provides its business strategy and brand name to a third party. Individuals own and manage franchises, but they are branded and overseen by much larger global corporations.

Legal issues governing Franchise

  1. Frachising Agreement
  2. Intellectual property and its protection
  3. Competition and taxation concerns
  4. Agency
  5. Tortious issues
  6. Weighting and measurement concerns
  7. Data protection
  8. Property laws
  9. Labor laws
  10. Others

Intellectual property rights and its protection in Franchising
In India there is no specific, comprehensive single law which regulated or governs the intellectual property in franchising business and its related aspects. There are different laws which governs various aspects of intellectual property, which somehow or the other covers the franchising related concerns as well.

Major laws in this regard are:

  1. Indian Contract Act, 1872
  2. Trade Marks Act, 1999
  3. The Copyrights Act, 1957
  4. Patent Act, 1970
  5. Design Act, 2000

Indian Contract Act, 1872

Although the Indian Contract Act, in itself does not provide for laws or provisions relating to intellectual property or franchising, or both, however, before forming of a franchise, an contract is to be prepared with covers all the particulars of the franchise to be formed. This contract is called Franchising Agreement. Fundamentally, every franchising relationship is a contractual relationship and therefore, the Indian Contract Act, 1872 would be applicable to all franchising arrangements.

While the Contract Act does not stipulate that a contract has to be in writing, it is advisable to have a formal and written franchising agreement to precisely lay down the rights and obligations of the franchisor and the franchisee. This would aid in the resolution of any future deadlocks or disagreements. The contract must address all franchising contingencies. Specific provisions relating to the use, assignment, licence, and other items of the parent company's intellectual property to be used by the franchise in the conduct of its business shall be included.

Specific and explicit intellectual property provisions aid in establishing the scope of the franchisee's power to use the parent company's intellectual property. The franchisee is only allowed to use the Franchisor's Proprietary Marks in connection with the operation of the franchised unit in the place where the franchise is settled, and all such provisions must be included in the Franchise Agreement. Intellectual property rights are territorial, which means they only apply to the country where the IP is registered or utilized. However, the geographical applicability of IP rights to be used by franchisee must be specified in the franchise agreement.

Before entering into a franchising agreement, the franchisee must show that the IP rights being licenced under the agreement exist and that the franchisor has the authority to licence such rights. The franchisee should ensure that the rights being licenced do not infringe on any third-party intellectual property rights to avoid future liabilities. The nature of the rights granted, as well as the scope of those rights, must always be indicated in the licence. The franchisor must decide how much know-how, rights, and trade secrets to transfer up to the franchisee during and after the agreement's termination.

Trade Marks Act, 1999

A trademark registered in the name of proprietor, shall be used by him only, however, under section 48 of the Act, is provided for use of trademark other than the registered proprietor, called as registered user. Registered user can use trademark in respect of any or all of the goods or services in respect of which the trade mark is registered. A new franchise of any business shall register themselves as the, registered user, for the free use of trademark. The permitted use of a trade mark shall be deemed to be used by the proprietor.

Section 49 of the Act provides for registration of registered user. A joint application by registered user and proprietor shall be submitted before registrar.

Application shall provide for:
  1. Their existing or proposed relationship, including details demonstrating the proprietor's degree of control over the permitted use conferred by their relationship, and whether it is a term of their relationship that the proposed registered user shall be the sole registered user or that there shall be any other restriction on who may register as a registered user
  2. Specifying the goods or services for which registration is sought.
  3. Specifying any proposed terms or limits relating to the qualities of the goods or services, the manner or place of permissible use, or any other subject.
  4. Specifying whether the permissible usage is for a limited time or indefinitely, and, if for a limited time, the length of time;

Any franchise shall not have the right of assignment or transmission of their any right as registered user to any other person, as provided under section 54. The franchisor and franchisee should ensure that the brand and goodwill associated with the trademark is not diluted in any manner due to any actions or inactions of the franchisee.

The Copyright Act, 1957

Every copyright shall be registered by its owner, under this Act.
Any franchise would require the right to use the copyright of the parent business, to be identified as its franchise. Section 18 19A of the Act provides for assignment of the copyright to another.

The owner of the copyright in an existing work or the prospective owner of the copyright in a future work may assign the copyright to anybody, in whole or in part, generally or with restrictions, and for the entire life of the copyright or for a portion of it. Only a written assignment signed by the assignor or his duly authorised representative is permitted.

A license is a right or interest formed in the property by the owner, whereas an assignment is the right to use particular property as approved by the owner. The phrase license encompasses a broader definition than assignment.

Section 30 of the franchise agreement requires the franchisee to seek a license from the copyright owner in order to use the copyright in his business. Any interest in the right may be granted by a license in writing by the owner of the copyright in any current work or the potential owner of the copyright in any future work. Section 30A specifies that the provisions of section 19 and 19A regarding assignment also apply to it.

The Patent Act, 1970

Every patent is required to be registered with the registrar. An assignment of a patent or a share in a patent, a mortgage, license, or the creation of any other interest in a patent shall not be valid unless it is in writing and the agreement between the parties is reduced to the form of a document embodying all the terms and conditions governing their rights and obligations and duly executed, according to section 68 of the Patent Act.

As a result, a franchise that is required to use the parent company's registered patent must be in writing. When a franchisee acquires an interest in a patent, a share in a patent, a licensee, or any other interest in a patent, he must apply to the Controller in writing in the specified manner for the registration of his title or, as the case may be, notice of his interest in the register.

The design Act, 2000

Certain designs are protected under the Designs Act of 2000. Shape, configuration, pattern, ornament, or composition of lines or colours applied to any article by an industrial process, whether in two or three dimensional forms (or both), that appealing to the eye might be registered under the aforementioned Act. In addition, full design classification has been added in accordance with the international regime. Under the 2000 Act, the design's copyright would be protected for ten years from the date of registration.

When a design is registered under section 11 of the Act, the registered proprietor of the design has copyright in the design for ten years from the date of registration, subject to the requirements of the Act.

The franchisee must utilize the exact same design as the original company; otherwise, there will be issues and legal action.

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