Franchising as a Technology Transfer Arrangement Part 1

Concept of Franchising
McDonald’s, Jollibee, Starbucks, Figaro, 7-11. These are but a few of formidable global brands which boast of enviable franchising narratives. Each of these brands’ stories would make for a compelling business proposition that franchising is a bankable enterprise. According to CareerBliss, a website for jobs, franchise owners could earn around $60,000 a year on average.

Technically, franchising involves the use by a party called franchisee—the entity who taps into a well-known brand—of the trademark and business system owned by a
franchisor—the party who owns the rights to the brand. Understanding the dynamics behind franchising, one could appreciate that it could indeed be a promising venture. Its system allows for practically
inexperienced people to own and operate an enterprise with well-established and proven business plans.

Law on Franchising
In the Philippines, franchising falls within the ambit of, and is governed by, a system called technology transfer arrangement (TTA). Republic Act 8293, or the
Intellectual Property (IP) Code of the Philippines, defines TTA as contracts or agreements involving the transfer of systematic knowledge for the manufacture of a product, the application of a process, or the rendering of a service, including management of contracts and licensing of all forms of IP rights. In the context of the foregoing definition, franchising is thus considered a form of technology transfer agreement—which is a partnership between an IP rights owner (franchisor) and another who is authorized to use such rights (franchisee), in exchange for an agreed payment (i.e. a fixed fee or royalty).

The IP rights which are made subject of a franchising agreement would, principally, include the right to operate a business—including distribution of goods and services—using the franchisor’s business name and systems which will last over an agreed period as may be so stipulated in the franchising contract.

Why do Franchise?
While franchising may not necessarily involve licensing of the rights to, say, a hard technology (i.e. a state-of-the-art equipment or machinery), the concept of technology has in time evolved to mean the application of scientific knowledge or a system or organized body of knowledge] for practical purposes.

In franchising, several IP rights could be licensed out, such as the logo or trademark, the designs, the copyright on marketing materials, the business plan, or the operations system embodied in a detailed manual of operations. The business plan and the manual may contain an organized body of knowledge which is useful in the practical operations of the franchise business. This is why franchising is considered a type of TTA—the execution of which is determined according to the strictures laid out in RA 8293, specifically Sections 87 and 88.

Entrepreneurs who want to take a dip in the market would go the route of franchising for a host of reasons. Putting up a simple food business, for example, may not be that easy. With franchising, an entrepreneur need not develop his own recipe, or bother himself with learning the intricacies attendant to jumpstarting, say a restaurant.

Obtaining the rights to use the business logo as well as the operations manual could be easier with franchising. The franchisor will train the franchisee’s staff and capacitate them with store operations and marketing techniques—including orienting them on all relevant knowhow which made the franchisor’s business a trusted brand. With all these in place, the entrepreneur is now ready to kick off with his food franchise.

Franchising as a licensing venture may have its pros and cons. On the one hand, a franchise comes with a ready business plan, making it less risky, easier for securing financing, creates passive income, creates leverage for access into foreign markets, generates self-employment opportunities, and offers freedom to devise a unique marketing approach. On the other hand, a franchise may be susceptible to or increase the incidence of IP theft. It may also create dependency on the franchisor, create an added competition in the marketplace, and be time-limiting.

Moreover, revenues may not be guaranteed, and the royalty may tarry in streaming in. Not withstanding all these, acquiring a franchise boils down to a business decision which entails a studied consideration of the business prospects. By and large, popular or trusted brands are known to afford some measure of profitability owing to their reliable stability in the market which they have secured over time.

Drafting the Franchise Contract
Writing the franchise agreement may prove to be a bit tedious. Some entities consult the services of experts in the field to flesh out the terms of the contract. Practically, the terms and conditions contemplated in the franchise agreement must conform to the provisions of RA 8293, specifically Sections 87 and 88. Section 87 contains the prohibitive clauses, while Section 88 describes the mandatory clauses.

Prohibitive clauses are those terms and conditions which a franchise agreement must not include. Conversely, mandatory clauses (as the phrase suggests) are those terms and conditions that a franchise agreement must include.

A tie-in is one example of a provision which is proscribed in Section 87.1. This provision requires a franchisee to purchase the raw materials, intermediate products or capital goods from the franchisor or its authorized suppliers. Sugar, for example, is both a raw material and an intermediate product. What the provision prohibits is for the franchisor to dictate the source when the goods could be obtained from another source at a cheaper price.

Nevertheless, merits of the argument that the restriction is essential in maintaining the quality and performance of the products according to clear specifications of quality set out by the franchisor, will be carefully assessed. If a proposition, in the judgment of the IP Office of the Philippines (IPOPHL), proves to be untenable, a decision will be made vis-à-vis the prism of the potential effect of the entire agreement on competition and trade.