The essence of franchising is that a franchisor grants a licence to the franchisee to use the franchisor’s intellectual property in conducting the business. Accordingly, the franchisor’s intellectual property is an essential element of the conduct of any franchised business. The term “intellectual property”, in the context of franchising is used to mean:

• patents;

• designs;

• trade marks;

• copyright;

• business names;

• company names; and

• know-how.

However, from a legal point of view, business names, company names and know-how are not intellectual property, as they are not property capable of being owned.

See Protecting the franchisor’s intellectual property.

The most important intellectual property involved in almost any franchise is the trade mark under which the franchised business will operate. Indeed, "use of a trade mark, advertising or a commercial symbol" is an essential element in the definition of "franchise agreement" in the Franchising Code of Conduct.

Although it is possible to conduct a business under an unregistered trade mark, it is essential that the franchisor’s trade mark should be registered under the Trade Marks Act 1995 (Cth). Otherwise, franchisees will place very little value on the grant of the franchise.

Trade marks are registered in one or more of the 45 categories listed in Sch 1 of the Trade Marks Regulations 1995 (Cth).

The registration and use of business names is governed by the Business Names Registration Act 2011 (Cth).

Most franchised businesses are operated under a business name provided by the franchisor. While one party can register a trade mark and license its use to another party, the Business Names Registration Act 2011 (Cth) has no such system. The Act requires that the party carrying on the business must register the business name. Accordingly, in theory, each franchisee should register the name of the business, even if that name was provided by the franchisor. In practice, franchisors insist on retaining everything they regard as intellectual property including business names and company names, even though these are not property.

Company names are governed by the Corporations Act 2001 (Cth). Like business names, they are not property and, accordingly, cannot be owned by the franchisor and licensed to a franchisee. However, there is no legal requirement that the company name should be the same as the name under which the business is operated. Accordingly, the problem can easily be overcome by not including any name associated with the franchisor in the name of the company, but trading under a business name associated with the franchise.

The definition of Franchise Agreement in the Franchising Code of Conduct includes providing the franchisee the right to use “a system or marketing plan substantially determined, controlled or suggested” by the franchisor or an associate of the franchisor. Generally, this is incorporated into a manual supplied to the franchisee, setting out how the business should be conducted, in considerable detail.

While the words used in the manual are protected by copyright law, the ideas are not. Accordingly, while the franchisor regards its systems and marketing plans as intellectual property, they are not property. They can only be protected by ensuring that the manual is only provided to people who have agreed to maintain its confidentiality.

Like know-how, confidential information is not property and cannot be sold or licensed like copyright. However, confidential information, such as a client database, can be a valuable part of a franchised business. It is best protected by agreements between the disclosing party and the recipient where the recipient acknowledges that the information is confidential, and agrees not to use or disclose it, otherwise than as authorised by the disclosing party.

While all franchise agreements are licences, not all licence agreements are franchise agreements.

There is a common perception in the business community that carrying on business as a franchisor involves enormous legal complication and expense. For this reason, many companies try to avoid having to comply with the Franchising Code of Conduct , by claiming that their business model involves licensing, not franchising. However, the definition of “franchise agreement” in cl 5 of the Franchising Code of Conduct is so wide that most of these licence agreements are, in fact, franchise agreements within the meaning of the Code.

Section 26 of the Trade Marks Act 1995 (Cth) refers to trade marks being used by an “authorised user”. This is the legislative basis which enables trade marks to be owned by one party and licensed to another.

Many statutes require licences to conduct businesses, for example selling real estate or liquor. These statutes do not allow one person to hold the licence, then to grant a licence to another person to conduct business.

See Licensing the franchisor’s intellectual property.