“Goodwill” or the reputation attaching to the name or mark of a franchisor can be the most significant and powerful asset or resource held by a franchisor and similarly, can be the asset most susceptible to destruction or damage by the actions of franchisees and other third parties.
Whilst intellectual property rights (establishing a franchisor’s “brand”) are generally protected by statute and common law, it is often the goodwill or reputation attaching to a franchisor’s brand that suffers a greater injury in the event of misuse of that intellectual property by its franchisees, a circumstance not readily contemplated or catered for by intellectual property law.
Further than misuse of a franchisor’s mark, almost any act, omission or transgression of a franchisee has the potential to damage or devalue the goodwill attaching to the franchisor’s business.
In light of the above, protection of goodwill must be in the forethought of a franchisor and its legal advisors when drafting franchise documentation and entering into franchise arrangements with franchisees.
At the very least, documentation governing the relationship between a franchisor and its franchisees must:
- provide for stringent restraint and anti-competition provisions (both during and after the franchise relationship comes to an end);
- impose strong confidentiality obligations upon the franchisee;
- spell out with unmistakeable clarity, the way in which the franchisor demands that a franchisee conduct itself in its dealings with the franchisor, suppliers, customers and other franchisees;
- allow a franchisor adequate access to the franchisee’s business to carry out inspections and audits to enable the franchisor to satisfy itself as to the compliance by the franchisee with the terms of the governing documentation; and
- allow a franchisor to act with speed and effectiveness in the event of a breach by the franchisee or a third party, including step-in rights and the ability for the franchisor to have full control of the conduct of any proceedings which are commenced, with reasonable assistance from the franchisee as required.
Franchisors must keep informed of the activities of each franchisee and be in a position to take immediate action in the event of a breach. The franchisor’s rights should include the rights to step-in and render assistance, or completely suspend or remove a franchisee from its business (at the sole discretion of the franchisor). Be aware however, that unless this action is taken effectively and discretely, the detriment caused may outweigh the benefit.
The above represents but a drop in the ocean of issues relevant to the protection of rights and interests of franchisors, either established or newly formed.
For further advice or information, please contact Tim Osborn at Turnbull Hill Lawyers on (02) 4904 8000.
