How do Trademarks in a Franchise Agreement or in a License Agreement Differ?

Anny Ramos, an associate in Honduras and expert in Intellectual Property, shares this article on how the protection provided by a trademark registration represented through a distinctive sign establishes control mechanisms over its exploitation, ensuring benefits both for the company, which strengthens its growth with a globalized product and for the consumer, who gains access to a quality product, regardless of who uses or exploits the trademark. 

Trademark law in the execution of a franchise agreement or a license to use. How do they differ? 

Over the years, globalization has been a fundamental catalyst in the growing integration of economies around the world, the clearest example being the direct impact it has had on the business need to bring businesses closer to consumers in all parts of the world and the need for them to have access to a globalized market. Within this phenomenon, there are a number of companies that being leaders in their local market, have managed to navigate in a globalized scope through their own efforts or through third parties, which has led them to place their flagship products or services as benchmarks in their respective markets, giving them a global presence, being recognizable in any corner of the world, either for its utility, cost or quality, for which, it is enough to identify the distinctive sign that distinguishes it, and it is enough to know how to identify the brand of a product or service to have clarity of its characteristics.  

Today, there are a few "global” products or services whose trademarks are so distinctive that they have taken precedence over the product or service itself. But this global recognition brings with it several challenges, one of the most critical of which is undoubtedly the need to protect the integrity of the brand, which is, strictly speaking, the most valuable of assets.  

In the massification of a product or service, countless risk elements come into play for the trademark to be globalized, which is why the owners of such trademarks must try to establish a control mechanism for the use of their trademark, mainly when the globalization of the product is largely in the hands of a third party, granting, as the case may be, a license of use or through a franchising system.  

In the beginning, the main problem seems to be the establishment of control mechanisms to the variable, different and diverse options that exist today to achieve the exploitation of an already recognized trademark, which can be attributed to various factors, but mainly to the lack of legal certainty offered by some markets, which results in a non-existent capacity to combat plagiarism, piracy and in general any form of exploitation that lacks the due authorization of the owner. Thus, the license of use and the franchise contract are the most common legal vehicles to "bring” a product or service closer to consumers, and of course, they are control mechanisms for the use and exploitation of the trademark that is intended to be positioned.  

It is important in the first instance to understand the difference between both contractual relationships; based on the local legislation, it is understood that the license agreement is the commercial relationship between parties, and who are the parties? The licensor, who is the owner of the trademark or trademarks already registered or in the process of registration, and the licensee, who is the third party that will make use of the trademark as a result of the established agreement, this contract may or may not be registered before the Industrial Property Registry Office with the purpose of making public knowledge of the existence of the license, without this constituting a requirement to assert any right or obligation covered by the license; the term will last as long as the parties have agreed or the term of validity of the registration of the trademark. Within its regulations and prohibitions, priority is given to the protection and good practices of the licensees when using the trademarks either using a service or manufacture of products, since its purpose is the authorization of the effective use of these, safeguarding its correct commercialization.  

On the other hand, the franchise contract, which, unlike the previous one, does not adhere to a specific regulation, that is, it is not a contract with minimum agreements established by law, but a mere liberality and will of the parties, who assign their right and grant obligations achieving the exploitation of the industrial property, goods, services, business knowledge (Know-how); however, in the local regulation it is covered by the Code of Commerce, which defines the contract as ... "a convention under which one or more persons are obliged to another or others or reciprocally, to give, do or not do something”... The parties to this contract are the franchisor, who is the natural or legal person that establishes and provides a whole chain of services, understanding this as all the planning and logistics that is behind every business, from its commercial strategy (know-how) to the stability and support of a brand; making the franchisee, the one who through a pre-established agreement achieves the exploitation of a business already organized and instituted providing an opportunity for growth through a brand that before a consumer society of certain sectors has the support of acceptance.  

So, the question arises, why is trademark protection through a license or franchise agreement vital? 

Trademarks are much more than a name or a logo. They are the promise of a unique experience that only your business can offer. When we talk about the exploitation of a trademark either through a license of use or a franchise system, this promise is multiplied in each establishment that opens its doors to the consumer under a brand that distinguishes itself. This is where brand protection comes into play as an invisible guardian that keeps safe, first and foremost, the reputation of the product or service, but in a deeper sense, the reputation of the company, its values, and ideas. As we have already established, the brand is the most valuable asset, as it is through it that, globalizes and supports the success of a business, for example, recent data reveals that 85-90% of franchises survive beyond the first five years, compared to 50% of independent businesses. What does this mean for franchisors and licensees as investors and brand owners? A greater likelihood of success from the start.  

This data only confirms that the fundamental pillar for an investor is its trademark, as it is its most valuable asset. It is distinctiveness that wins over franchisees and licensees and that supports and creates expectations for customers no matter where they are in the world.  

That is why adequate protection of the trademark is crucial for the good exercise of the will. Having a valid and authorized registration protects third parties or competitors from using the trademarks in bad faith, affecting its reputation and damaging the prestige achieved; this detriment may be through trademarks that are similar or even identical copies since this could cause customers to confuse the service or product and end up in the wrong place.  

Also, having the registration supports the owners to use all the protection that the legislation provides through the due process of justice. The registration of a trademark is an imminent solution to protect investment. Thus, protection through Intellectual Property becomes the starting point. 

In summary, intellectual property, translated or represented through a distinctive sign, cannot be subject to a massification lacking legal vehicles that guarantee its protection, and it is that, from the understanding of why they are protected, the control mechanisms of how they are exploited will be established, thus guaranteeing a win-win situation, both for the company that grows with a globalized product that generates great benefits and for the consumer who has access to a quality product, regardless of who uses or exploits the trademark.   

The information provided by ARIAS® is presented for informational purposes only. This information is not legal advice and is not intended to create, and does not constitute, an attorney-client relationship. Readers should not act upon this information without seeking advice from professional advisers.