A fundamental feature of a franchise system is a license that permits one to sell a product or service under the franchisor’s trademark or commercial symbol. Over the years, the franchise system has evolved from a mere authorization to use a trademark to a comprehensive licensing scheme involving the right to use a business method. Thus, in addition to giving trademark rights, a franchise will license marketing plans, quality control system and a variety of other business methods.
The comprehensive licensing scheme results in the standardization of the business operation of all franchisees anywhere in the world. Thus, the public can expect to see the same store appearance, similar staff uniform, etc. in all the branches of a particular franchised business.
In consideration for the permission to use the trademarks and other business method, franchisors are compensated in various forms, including payment of royalty fees based on sales or payments for the goods or services provided by the franchisor such as advertising fees, training fees, etc.
In a business context, a franchise is a network of distributing goods and services. In a legal context, it is a contract between the parties. As a contract, the parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.
Contrary to certain misconceptions, the franchise agreement squarely falls under the definition of a technology transfer arrangement (TTA) under the Intellectual Property Code (IP Code). A TTA refers to "contracts or agreements involving the transfer of systematic knowledge for the manufacture of a product, the application of a process, or rendering of a service including management contracts; and the transfer, assignment or licensing of all forms of intellectual property rights, including licensing of computer software except computer software developed for mass market." In order that the TTA can be enforced in the Philippines, the TTA must exclude certain provisions that are deemed to have an adverse effect on competition and trade and must include certain clauses that are devices intended to protect the licensee or franchisee.
Specifically, Sec. 87 of the IP Code enumerates the Prohibited Clauses that are deemed to have an adverse effect on competition and trade and must be excluded from the TTA, as follows:
1. obligation to acquire from a specific source capital goods, raw materials, etc.;
2. licensor’s right to fix the resale price;
3. restrictions on volume and structure of production;
4. prohibit the use of competitive technologies in a non-exclusive arrangement;
5. purchase option in favor of licensor;
6. transfer for free licensee’s improvements;
7. payment of royalties for patents not used;
8. prohibition to export unless justified;
9. restricting the use of technology after the expiration of the agreement;
10. payments for patents after their expiration or termination;
11. no right to contest the validity of the patent;
12. restrict research activities of the licensee;
13. prevent licensee from adapting the imported technology to local conditions;
14. exempting licensor from liability;
15. other clauses with equivalent effects.
On the other hand, Sec. 88 of the IP Code sets out the Mandatory provisions that must be included in the agreement, as follows:
1. Philippine law shall govern and venue shall be the proper court in the place where licensee has its principal office;
2. Licensee shall have continued access to improvements;
3. In case of arbitration, Arbitration Law of the Philippines and/or UNCITRAL and/or ICC shall apply and venue shall be the Philippines or any neutral country;
4. Philippine taxes shall be borne by the licensor.
In order to avoid the applicability of the foregoing provisions, the TTA must qualify as an "exceptional or meritorious case." The IP Code provides that in "exceptional or meritorious cases where substantial benefits will accrue to the economy, such as high technology content, increase in foreign exchange earnings, employment generation, regional dispersal of industries and/or substitution with or use of local raw materials, or in the case of Board of Investments registered companies with pioneer status, exemption from any of the above requirements may be allowed by the Documentation Information and Technology transfer bureau after evaluation thereof on a case by case basis." The exemption can be obtained upon proper application filed before the DITTB together with the justification(s) for the request for exemption. However, it has been observed that the DITTB has been strict in granting requests for exemption unless the application is considered an "exceptional or meritorious" case.
Under the IP Code, there is no need to register a TTA with the Documentation Information and Technology Transfer Bureau (DITTB) of the Intellectual Property Office (IPO). While the TTA need not be registered, the franchisee may nevertheless decide to submit such agreement to the IPO for review and registration. If the IPO finds that the provisions of the agreement are consistent with the requirements of the IP Code, it will register the agreement. Otherwise, the IPO will require the agreement to be revised accordingly before registering the same. The rule will apply regardless of the nationalities of the parties in the TTA.
Registration of the agreement with the IPO will assure that the TTA complies with the provisions of, and is enforceable under, the IP Code. Non-conformance with any of the Prohibited Clauses and Mandatory Provisions "shall automatically render the TTA unenforceable." (Sec. 92 IP Code). Clearly, there are benefits in registering and/or recording the agreement with the DITTB. Its registration and/or recordal appears to be a prudent business judgment as it will give the parties, among others, peace of mind that the agreement they are concluding is enforceable in Philippine courts.
(Atty. Fider is a partner of ACCRALAW. He obtained his LLM from Queen Mary College, University of London in 1990 where he read Industrial and Intellectual Property Law. He can be contacted at tel. 830-8000 or at e-mail address asfider@accralaw.com.)