Franchising

What is a Franchise?

 

Generally, the term “franchising” is used to describe the licensing of a business system which invariably includes the licensing of various types of intellectual property.

The CPA (Consumer Protection Act 68 of 2008) came into force on 1 April 2011. Prior to the CPA, there was no statutory definition for a “franchise agreement” in South Africa.

Although the CPA does not include a statutory definition for the term “franchising”, the CPA includes a wide definition for the phrase ‘‘franchise agreement’’. In short, the definition of a “franchise agreement” includes that:

  • a franchise is a business which pays to carry on business in a part of, or in the whole of South Africa, under the same marketing plan controlled by the franchisor;
  • a franchise is a business which is associated with the trade marks, advertising and get-up of the franchisor;
  • the agreement governs the relationship between the franchisor and franchisee with respect to the goods or services to be supplied at the direction of the franchisor.

In addition to the definition, Section 7 of the CPA prescribes that any franchise agreement must:

  • be in writing and signed by or on behalf of the franchisee;
  • include or address any prescribed information prescribed by the relevant Minister by publishing Regulations;
  • comply with Section 22 which requires that the franchise agreement must be drafted in plain understandable language; and
  • indicate on the top of the first page that a franchisee may cancel the franchise agreement by giving written notice within 10 business days after signing, without costs or penalty.

 

How does the CPA protect Franchisees?

The CPA applies to every transaction in South Africa concerning the supply of goods or services where the “consumer” is a natural person or a juristic person with an annual turnover or asset value under the threshold of R2 million.

As prospective Franchisees are basically start-up businesses it is not surprising that they are deemed to be “consumers” in terms of the CPA. CPA includes specific references to franchise agreements and affords franchisees a range of consumer rights.

Considering the set threshold value of R2 million, one may think that pre-existing franchises having a value above the threshold are not compelled to comply with the CPA. However, in terms of Section 5(6) of the CPA certain transactions are not exempted, irrespective of the threshold value of the consumer. These transactions include the following:

 

  • A solicitation of offers to enter into a franchise agreement
  • An offer by a potential franchisor to enter into a franchise agreement with a potential franchisee
  • A franchise agreement or an agreement supplementary to a franchise agreement
  • The supply of any goods or services to a franchisee in terms of a franchise agreement

All franchises are therefore obliged to comply with the CPA regardless of size and value. As most businesses have to make adjustments to comply with the CPA, and as franchisees are awarded statutory protection in South Africa on many aspects for the first time, all franchises are likely to undergo some changes this year.

What documentation is required?

Franchise documentation generally includes at least three types of documents, namely

  • A franchise agreement
  • A disclosure document
  • An operational manual

 

The purpose of the disclosure document and operating manual is to disclose the know-how necessary to operate the business system and to train the franchisee and its employees to operate the franchised business system.

On 1 April 2011, new Regulations were published in the Government Gazette in terms of the CPA which relate to franchises. The Regulations include prescriptions on the contents of franchise agreements, disclosure documents and operational manuals. The deadline by which franchises had to comply with these Franchise Regulations was 30 September 2011.

 

Buying or selling a franchise?

Before offering or selling a franchise, it is recommended that a quick due diligence be conducted on the intellectual property to be licensed. The franchise fee is usually calculated based on the value of the intellectual property (including reputation) associated with a Franchisor business. It is therefore sensible to instruct an independent attorney to review the franchise agreement and at least the trade mark portfolio of the Franchisor.

In the event that a Franchisor has not applied or acquired registration of its pertinent trade marks as yet, and the franchise has not been trading for a number for years without any conflicts, there may be risks that the trade marks associated with the franchise may be vulnerable to conflicts by third parties.

Franchise agreements should generally comply with general contract law principles and some relevant statutes, such as the new Consumer Protection Act and others. Franchisees should generally be allowed a reasonable time to review the franchise agreement and consult with an independent attorney to ensure all aspects in the agreement are clear, reasonable and legal.

 

Are the trade marks protected?

It is the duty of the Franchisor to register and protect the trade marks subject to the licence granted in terms of the franchise agreement. Generally, a Franchisor should attempt to protect its trade marks as broadly as possible. By doing this, a Franchisor strengthen its rights in a trade mark which will place it in a better position to avoid and/or successfully prevent third parties from passing off or copying its trade marks in any manner.

Trade marks are also regarded as corporate assets of a business and a widely registered trade mark portfolio should assist in justifying a possible higher franchise fee. A solid and strong trade mark portfolio should add value to the business and lower possible risks of the Franchisor. It is recommended that a Franchisor guarantee its ownership in the trade marks, or provide details of such registrations for certainty in the franchise agreement.

Trade marks are registered on the Trade Marks Register. There is no cross-referencing between the Trade Marks Register, Close Corporation or Companies Registers and any Domain Name Registers. It is recommended that Franchisor businesses register their business name and pertinent trade marks on all these separate registers to avoid possible conflicts and properly secure its rights.

The Franchisees should further be restricted and discouraged from registering the Franchisor’s business name or any of its trade marks, as whole or as parts, of its close corporation or company registration, or possible separate website addresses. Most franchise agreements include restraints of trade. The express restrictions on the unauthorised use or registration of the franchise intellectual property by Franchisees are recommended.

Marks which are eligible for trade mark protection include business names, domain names, slogans and logos which are distinctive. Some Franchisors consider it sufficient to register their main business name as a trade mark. However, slogans, logos, icons, signatures, combination of colours, and banners could also qualify as trade marks, if they are sufficiently distinctive.

Industries with only a few competitors usually rely heavily on colour marks and combination marks to help the public distinguish their products and services. For example, most members of the public will be able to know which separate banks are referred to merely by referring to the separate colours green, blue and red , or which telecommunication service providers are referred to by the separate colours yellow or blue. Depending on the marketing strategy of a business, colours could be strong visual identifiers which can become valuable trade marks.

To help the Franchisor determine whether it is necessary to register a mark as a trade mark, two questions may assist, namely, whether the mark is an essential or distinctive feature of the get-up of the business, and whether it will be hurtful for the business if a competitor were to adopt and use the same or similar feature. It is recommended that Franchisor businesses should instruct attorneys to conduct trade mark audits from time to time to ensure that all trade marks used in trade are adequately protected.

 

Emmie de Kock from De Kock Attorneys can be contacted at info@dekock.co.za, or www.dekock.co.za.

Copyright © 2013. All Rights Reserved. De Kock Attorneys

No comments yet.

Leave a Reply