Intellectual Property System and the Franchising Sector

Intellectual property or “IP” is the product of the mind. It is something intangible. What does it have to do then with franchising, a crucial part of the very tangible field of business? I dare say that without IP, there would ultimately be no franchising. IP is to franchising what the soul is to the body. What is being transferred or licensed is IP. IP makes franchising viable – much like the soul, which, though intangible, animates our tangible body.

The IP system, locally governed by Republic Act No. 8293 or the Intellectual Property Code of the Philippines (IP Code), which took effect on 01 January 1998, gives creative individuals exclusive and time-limited IP rights, generally categorized as industrial property rights and copyright and related rights.

Industrial property rights include trademarks (protects brands and logos) and patents (protects inventions). Also included are geographical indications (indicates the origin of the goods), utility models (protects the functionality of an innovation), and industrial design (protects the aesthetic aspect or form of a product). Copyright and related rights protect literary and artistic works, performances, sound recordings and broadcasts.

These rights can be transferred, assigned or licensed. From the enumeration of the rights and the object of those rights, the franchising business can have a wide variety of IP assets to choose from, depending on the nature of the business.

Although our economy operates under a private or free enterprise system, the State, through the IP Code, still rightfully regulates IP franchising to ensure the proper and fair dissemination of technology through licensing of IP rights in the form of “technology transfer arrangements” or TTAs.

Sec. 4.2 of the IP Code defines TTAs as:

“… 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.”

Simply put, TTAs cover, first, the transfer of systematic knowledge. This knowledge should involve the making of a product, or the use of a process, or providing a service. Second, TTAs include the transfer of all kinds of IP rights. Thus, contracts that involve the conveyance of these body of knowledge and/or IP rights, whatever they may be called or titled, qualify as TTAs.

While these TTAs need not be registered with the Documentation, Information and Technology Transfer Bureau (DITTB) of IPOPHL to be enforceable, Sec. 85 of the IP Code requires that they be compliant with certain provisions.”

The first of these provisions refer to the “Prohibited Clauses” under Sec. 87, which enumerates anti-competitive and anti-trade clauses such as on tie-in purchasing; price-fixing; restriction on production of volume; a full or partial purchase option; a free grant-back; requiring payment for unused patents; export restriction; restriction to use the technology after the term; requiring payment for expired patents; non-contestability of patents; R&D restriction; adaptation restriction; and hold harmless.

Sec. 87 also includes a catch-all provision that covers other clauses not enumerated therein but have equivalent effects as those listed.

The other provision TTAs must comply with is Sec. 88 which contains the mandatory provisions that must be included in the TTAs, such as the assurance of continued access to improvements in techniques and processes and that the licensor will bear all locally-imposed taxes related to the technology. TTAs must also harbor governing laws on litigation and arbitration.

Significantly, non-conformity with any of the provisions of Sec. 87 and 88 shall mean that the TTA is unenforceable, unless they can be exempted from compliance for meritorious or exceptional cases under Sec. 91, such as high technology content or high employment generation.

IPOPHL recognizes the importance of TTAs to the overall promotion of national development and progress and the common good. We therefore encourage the franchising sector to register their TTAs with us and to check our website and social media accounts for programs and activities that have been lined up for the sector.