LICENSING & FRANCHISING

Intellectual property consists of intangible assets such as:

• copyrights

• patents

• trademarks

• trade secrets

Once registered and owned by a company or an individual, this asset becomes protected against infringement. Most developed economies acknowledge the value of the intellectual property and therefore believe it should be granted the same protective rights that apply to tangible assets.

In a business context, intellectual property can be applied for branding and marketing reasons but  can also be used as a protective measure to gain a competitive advantage. [9]

WHY DO WE NEED INTELLECTUAL PROPERTY?

The European Union Intellectual Property Office (EUIPO) sheds light on a crucial correlation between a company's ownership of various Intellectual Property (IP) rights and its economic performance. Within the European Commission, Small and Medium-sized Enterprises (SMEs) stand out as a significant force, representing 99 percent of all businesses in the EU. 

It becomes evident that the possession of IP rights plays a pivotal role in determining economic success. According to the European Commission, SMEs with ownership of IP rights experience a remarkable 68 percent higher revenue per employee compared to those without any IP rights. This emphasizes the tangible impact that intellectual property has on the financial performance of businesses. 

Furthermore, when SMEs own a combination of patents, trademarks, and registered designs, the financial benefits are even more pronounced. These companies demonstrate an impressive 98 percent increase in income per employee compared to those lacking any of these three crucial IP rights. This robust connection underscores the strategic importance of IP in the innovation process and survival within the fiercely competitive business landscape for SMEs. It becomes evident that IP is not merely a legal safeguard; it emerges as a key factor determining the prosperity of SMEs in their journey of innovation and competitiveness. [62]

WHY IS IP IMPORTANT?

Drives Economic Impact: 

- IP-intensive industries employ over 45 million Americans and hundreds of millions globally. 

- Jobs in IP-intensive sectors are expected to outpace national average job growth. 

IP Fuels Economic Growth: 

- America's IP is valued at $6.6 trillion, surpassing the GDP of any other country. 

- IP-intensive industries contribute 38.2% to the total U.S. GDP. 

- IP represents 52% of U.S. merchandise exports, totaling nearly $842 billion. 

IP Safeguards Consumers: 

- Strong IP rights help consumers make informed choices about safety and reliability. 

- Enforced IP rights ensure authenticity and high quality of products. 

IP Drives Solutions to Global Challenges: 

- Many products on the World Health Organization’s Essential Drug List originate from IP-dependent pharmaceutical research. 

- Innovative agricultural IP contributes to increased productivity and sustainability. 

- IP-driven discoveries in alternative energy address energy security and climate change. 

IP Encourages Innovation: 

- IP rights incentivize entrepreneurs by rewarding innovation. 

- They facilitate information flow critical to new inventions and improvements. 

- Recognized in the U.S. Constitution, strong IP rights have made America a global entrepreneurial leader. [71] 

What is the difference between IP and IPR?

The terms "intellectual property (IP)" and "intellectual property rights (IPRs)" are closely related but refer to slightly different concepts:

Intellectual Property (IP): This term refers to creations of the mind, such as inventions, literary and artistic works, designs, and symbols, names, and images used in commerce. Intellectual property is a broad concept that encompasses various types of creations for which a set of exclusive rights are recognized under the law.

Intellectual Property Rights (IPRs): These are the legal rights that result from intellectual activity in the industrial, scientific, literary, and artistic fields. IPRs grant the creator of an intellectual property an exclusive right over the use of their creation for a certain period of time. This includes rights like patents, copyrights, trademarks, trade secrets, etc.

In simple terms, intellectual property is the creation itself, while intellectual property rights are the legal rights that protect these creations and allow their creators to benefit from them. [52]

WHAT IS THE LEGAL PURPOSE OF AN IPR?

The legal reason for IPR lies in several aspects, the key ones are:

1. To allow for a monopolistic lead which ultimately leads to exploitations of IPRs for commercial advantages

2. Allows relief of direct competition by gaining power and dominance in markets.

3. Increases creativity by creating an incentive to invent new products instead of mimicking the competition.

4. Since it gives the inventor or creator of an IP an exclusive right to exploit his invention or product for a specific length of time, IPR is a powerful weapon for protecting investments in time, money, and effort.

5. By facilitating healthy competition, industrial development, and economic prosperity, protecting IPR contributes to a nation's economic development. [39]

TYPES OF INTELLECTUAL PROPERTY

Moving on to the description of the types of intellectual property, it is worth dealing with each of these aspects in detail. From the very beginning, only patents, trademarks and industrial designs were protected as "industrial property". However, over time, the term "intellectual property" has expanded and gained more meaning.

The main advantages of intellectual property rights are:

1. Protection of the mechanism of combating piracy and unauthorized use of intellectual property materials.

2. Provision of general information for the public, as all forms of intellectual property are published, except in cases of trade secrets.

The main resources for the protection of intellectual property rights are:

1. Patents. A patent is issued for an invention that meets the criteria of novelty and industrial or commercial application. Namely, patents can be issued for products and processes.

2. Industrial samples used for product modeling, whether 2-D or 3-D.

3. Trademarks. For example, names or logos under which trade/industrial activity is conducted and by which the manufacturer or service provider is identified. Trademarks can be bought, sold and licensed. A trademark does not exist apart from the goodwill of the product or service it symbolizes.

4. Copyright. It includes the expression of ideas in material form, formed on the basis of literary, musical, dramatic, artistic and cinematic works, and also includes audio cassettes and computer software.

5. Geographical indications are indications that indicate that they originate from the territory of a country, region or locality within that territory.

Many forms of intellectual property cannot be listed on the balance sheet as assets since there are not specific accounting principles to value them. However, the value of the property tends to be reflected in the price of the stock since market participants are aware of the existence of the intellectual property.

In a business context, intellectual property can be applied for branding and marketing reasons but can also be used as a protective measure to gain a competitive advantage. [9]

WHO OWNS INTELLECTUAL PROPERTY?

Intellectual property is owned by the creator; whether it is a company or an individual. However, the following moments can be distinguished when the rights of authority can be transferred to another person. For example, the assignment of a patent is the transfer of ownership of the patented technology.

The assignor may be the first inventor of such a patent, and the assignee may be the first patent applicant or any interested party. The transfer of a patent or patent application is usually between an employee and an employer; student or professor and university; or between two different corporate bodies. Furthermore, IP agreements can also occur with partners or can be transferable. [25][26]

INTELLECTUAL PROPERTY INFRINGEMENT

Intellectual Property Infringement occurs when there is a violation or unauthorized use of another's intellectual property rights. The infringement of these rights can take various forms, including:

Copyright Infringement: This occurs when someone copies, distributes, performs, displays, or creates derivative works from a copyrighted work without the permission of the copyright owner. [10]
Examples include pirating movies, music, or software.

Trademark Infringement: This involves the unauthorized use of a trademark (a symbol, word, or words legally registered or established by use as representing a company or product) in a manner that is likely to cause confusion about the source of a product or service. [72]

An example is selling counterfeit branded goods.

Patent Infringement: This happens when someone makes, uses, sells, or offers to sell a patented invention without permission from the patent holder. [73]

This can include using a patented technology or process.

Trade Secret Infringement: This involves unauthorized acquisition, use, or disclosure of confidential business information, such as formulas, practices, processes, designs, instruments, or patterns.[74]

Intellectual property infringement not only affects the creators and owners of IP but also has broader economic and societal impacts. Protecting IP rights is essential for fostering innovation, maintaining fair competition, and supporting economic growth. 

Efforts to combat IP infringement include:

Legal Frameworks: Strong intellectual property laws are essential for enforcement. These laws must be up to date with technological advancements to address new forms of infringement effectively.

Awareness and Education: Increasing awareness about the importance of IP rights and the impacts of infringement can foster respect for intellectual property.

International Cooperation: Given the global nature of commerce and technology, international cooperation is crucial in enforcing IP rights across borders.

Technological Measures: Technologies such as digital rights management (DRM) and blockchain can help in tracking and securing intellectual property.

Coexistence Agreements: Allow two or more parties to conduct business without the risk of infringing upon each other's intellectual property rights. These agreements are particularly relevant when entities use similar or identical trademarks, enabling them to operate without fear of legal action for trademark infringement. For such an agreement to be legally valid, the original rights holder must specifically consent to the registration of the competing trademark. [37]

Protection of Trade Secrets: Which is often achieved through Non-Disclosure Agreements (NDAs). Trade secrets include confidential business information, such as formulas, practices, or processes, and are protected indefinitely as long as they remain undisclosed. In the absence of an NDA, trade secret infringement can still occur if the secret is unlawfully obtained. [31]

DEFINITION: WHAT IS IP COMMERCIALISATION?

IP commercialisation is the process of IP making future profits and driving business growth in a new market. IP can be commercialized either directly through its owner, through an assignment or by building up business partnerships. [63]

Managing IP commercialization is a complex endeavor that relies on various internal and external factors. The success of this process is contingent upon factors such as business objectives, the type of IP involved, and the availability of economic and intellectual resources. Furthermore, the commercialization of IP can be pursued through different avenues, including direct ownership, assignment, or through the establishment of business partnerships. Choosing the most suitable approach can be particularly challenging, especially for Small and Medium-sized Enterprises (SMEs). [63]

Ideas emerge through the process of thinking, but they can remain unproductive unless they are transformed into tangible concepts. In order for ideas to be recognized as innovations, it is crucial to document them. This necessitates sharing the ideas with others. The process of disseminating skills, knowledge, ideas, and technologies to governmental bodies and institutions to enhance awareness and accessibility for a broader audience is known as technology transfer. This process can be described as moving from the initial concept to commercialization. [65] 

IP COMMERCIALISATION THROUGH ITS OWNER 

Companies, especially SMEs, forgo partnerships and prefer to commercialize their IP on their own when they have enough marketing capabilities, lack in partnership building capabilities, or do not want to share information with third parties. This chapter indicates what they should consider in that case, when commercializing IP. 

• Firstly, companies should keep their IP to themselves by making sure confidential information is not included in public disclosures and by signing confidentiality agreements with prospective partners before starting the testing of the IP. 

•  Secondly, they should research whether the idea is new and worth being pursued through IP databases or Freedom-to-Operate (FTO). Especially, FTO analyzes and determines whether the owned intellectual property can be commercialized and if the commercial production, marketing and use of their new product, process or service does not infringe the third party rights. 

• Thirdly, keeping records of inventions is important for making patent applications.

• Fourthly, it is essential to enforce intellectual property right infringements, like intellectual property theft or illegal copying of works.

IP COMMERCIALISATION THROUGH ASSIGNMENTS 

In  IP assignments where ownership of an IPR  is transfered from one party (the assignor) to another party (the assignee), companies should take these three steps; sign NDAs, analyze the value and risks by IP due diligence and consider the key terms in the assignment agreement.

• • Non-Disclosure Agreements:

 Non-Disclosure Agreements (NDAs) are legally binding contracts to guarantee that any shared confidential information will not be disclosed to third parties. Assignors should enter into NDAs before the assignor and the assignee start negotiating for a licence agreement even if they do not reach consensus.

• • Value and risk analysis through IP due diligence:

 IP due diligence is the evaluation of the owned intangible assets in order to obtain appropriate knowledge about their value and risks that buyers might incur. This is often done when a potential partner is interested in purchasing or licensing a company’s IP. The main purpose of a due diligence is to collect information about: the ownership status,the status of the IP protection,any restrictions on exploitation (freedom to operate), legal requirements for the assignment, the value of the IP and to be used as a basis during the negotiations. [63][64]

DEFINITION: WHAT IS LICENSING?

In order to explore a foreign market or evaluate a possible partnership in advance of future entrance involving higher resource commitments, such as joint ventures or completely owned subsidiaries, licensing is typically seen as the first step. Sherman conceptualizes licensing as “a contractual method of developing and exploiting intellectual property by transferring rights of use to third parties without the transfer of ownership”. Battersby as “the grant of the right to use another party’s intellectual property on their products or services in exchange for financial consideration, typically a royalty”.

However, as pointed out by Johnson and Mottner, most authors see licensing as “…almost synonymous with the term ‘technology transfer’. [42][43][44]

There is the two fundamental licensing methods. "Licensing in" describes the procedure through which a business obtains and makes use of knowledge or technology that belongs to a third party. "Licensing out" refers to the opposite procedure, in which a company makes its intellectual property accessible and also provides the legal requirements for others to use it. [45]

LICENSE AGREEMENT

The license agreement signed by the licensor and the licensee, which will eventually regulate their relationship, is the backbone of every licensing scheme. While a poor licensing agreement might create more issues than either side wants, a good one can make the application work smoothly. Once the licensing agreement is signed, it frequently happens that the parties never need to refer to it again, but if they do, its form and contents will be vital. Whether the licensee has the authority to give sublicenses to third parties should also be specified in the licensing agreement. The agreement is coordinated between the licensor (the property owner) and the licensee (the permitted party) and outlines the type of licensing agreement, terms of use, and the owner’s compensation. Typically, a licensing contract runs for a duration of 5-7 years which allows the licensor and licensee to maintain a relationship. [29] A survey by the Licensing Letter in 2018 reported that the most common terms of license agreements were between two (27%) and three (40%) years. [43]

Examples of licensing agreements:

1. Trade Secret Licenses: A trade secret license agreement governs the usage, access, and protection of valuable confidential information or trade secrets. It outlines the terms and conditions under which the licensee (the recipient of the license) can use the trade secret while maintaining its confidentiality. 

2. Trademark Licenses: A trademark license agreement allows a licensee to use a trademark owned by another entity for specific purposes, such as branding, advertising, or selling products or services. 

3. Patent Licenses: A patent license agreement grants a licensee the right to use, make, sell, distribute, or export a product or process that is covered by a patent owned by another entity. 

4. Copyright Licenses: A copyright license agreement allows the licensee to reproduce, distribute, display, perform, or sell a copyrighted work owned by someone else. [68]

LICENSING INTELLECTUAL PROPERTY

A licensing agreement for intellectual property allows the licensor to sell the rights of the asset to a licensee. Therefore, licensing agreements could appear as follows:

Copyright Licensing: Copyright is the artwork of the IP world. Copyrights exist in, for example, works of visual art, like paintings, or movies, or songs. Copyrights also exist in characters, like Mickey Mouse. One of the main advantages of copyright in comparison to other IP rights is that it provides lengthy protection, which usually spans from the creation of work to the end of the creator’s life, plus 50-70 years after creator’s death. [2]

Example: A photographer transfers their photography to another company in order to use the content in a film.

There are three types of copyright licenses:

1. Exclusive license; Any further possible licensees are not included in the exclusivity of this agreement. 

Licensor is not permitted to make use of the IP.

2. Sole license; This license is also exclusive; however, the licensor keeps the right to utilize the IP.

3. Non-exclusive license; The licensor may award the license to any number of licensees as desired. [35]

Patent Licensing: Patents cover science and innovation. Patent licensing agreements are the documents through which a patent owner allows someone else to use their patent. Patents are generally considered as the most valuable IP, not only because patent holders can exclude other parties from commercial exploitation of holder’s patented IP for the period of 20 years from registration[4] but also because they boost the development of the country where they are made and stimulate people to invent. [5]

The Patent Cooperation Treaty (PCT) System allows registering of patents on three separate levels: national, regional, and worldwide. The appropriate course of action is often based on the regions in which a corporation plans to use the patent. By submitting a single application(in one of its three official languages English,German,French) and paying a single set of fees to the European Patent Office (EPO), a European patent may be obtained by any contracting state of the European Patent Convention (EPC). Despite the fact that this application is worldwide in scope, each territory's registration is subject to its own national legislation. Then, for a European patent to be put into use, a "bundle" of national patents should be verified at the national IP offices of the states the applicant chose. [38]

Example: Allowing the licensee to manufacture and distribute the intellectual property of the licensor

Trademark licensing: Trademarks are signifiers of commercial sources, namely, brand names and logos or slogans. They can be found in a wide range of products, such as food, toys, clothes, novelties etc. Trademark licensing agreements allow trademark owners to let others use their IP. In comparison to other commercial agreements, trademark licenses last for a fixed time period, typically 5-10 years or longer. [2]

There are three types of marks:

1.  Individual mark; This type of trademark denotes the business nature of the goods and/or services that are secured.

2.  Collective mark; This describes a mark that shows that the goods or services covered by that mark come from several companies, as opposed to simply one. Along with the unique mark of the manufacturer of a specific item or service provider, collective markings may be employed. Due to this, association partners can set their personal goods and/or services apart from those of rivals.

3.  EU Certification mark; The assurance of certain qualities of particular goods and services is relevant here. Despite (without of) who develops or offers the products and services, the certification mark signifies that they adhere to a specific criterion outlined in the laws of use and managed by the mark's owner.

Example: Sports teams sell their trademark in order to commercialize their brand into goods such as clothing, iPhone cases, or food products.

Trade secret licensing: Trade secrets are unique, in that they are not registered with the due to the fact that it is information that is generally kept confidential from the public, but is known by manufacturers within the industry. 

For many businesses whose assets, for example, are not patentable but have significant commercial worth and require to be secured, trade secrets are an invaluable tool. The most valuable trade secrets from the perspective of small and medium-sized businesses are, in particular: commercial practices, market assessments, business partnerships, production procedures, sales information and strategy etc.

Trade secrets are frequently the backbone of an organization's operations since they promote innovation and increase market competitiveness. [36]

Example: Coca-Cola’s special formula recipe, which has been protected for over a century.

THE DIFFERENCE BETWEEN DIGITAL AND NON DIGITAL LICENSING

Software is a crucial element in the context of licensing, raising questions regarding the licensing of digital versus non-digital products. The process of licensing software involves a nexus of contracts, intellectual property considerations, and regulatory regulations. The core of the "software licensing dilemma" lies in the inherent risk associated with selling software outright — buyers can potentially abuse the acquired software by distributing it without the seller's explicit consent. This surrenders control over the software. 

Licensing provides a nuanced approach where the licensee is granted specific usage rights. However, this also entails a certain level of control by the licensor to ensure proper usage and prevent misuse. The challenge facing the industry is to establish an environment where their business model can capitalize on cost-effective distribution and efficient transactions while safeguarding against potential abuses. 

An illustration of successful digital licensing can be found in the music industry. Traditionally, music was distributed through physical mediums like CDs, which, once sold, escaped the control of distributors. However, the advent of digital licensing has revolutionized this landscape. Unlike traditional distribution methods, digital licensing allows music to be seamlessly streamed from various devices. This is an important development for licensing that will gain more importance in the coming years. [60] 

WHY LICENSE?

The use of licensing as a marketing and brand extension tool has grown exponentially over the last 30 years. Well-executed, a strong licensing relationship brings benefits to all parties to the deal. Each of those parties has its own goals and aims to ultimately add value to the final product or service.

To maximize the outcome, each participant in the licensing process has certain responsibilities to fulfill. Every agreement between the licensing parties is unique in its specifics, so even these responsibilities vary to some extent. [18] [20]

Examples of how companies utilize licensing:

A license where one company (licensor) allows another company (licensee) the limited right to use a trademark for a limited purpose. 

Example: An example would include Walt Disney granting McDonalds a license for McDonalds to co-brand its McDonald's Happy Meals with a Disney trademarked character.

A license where a technology company (licensor) grants a license to an individual or company (licensee) to use a particular technology. 

Example: An example would include Microsoft granting a license to individual users allowing them to use the Windows operating system.

A license where a drug company, that owns the patent to a certain drug (licensor), grants a license to another drug company (licensee), allowing them to manufacture and sell a drug that utilizes the patented formula. [23]

LICENSING IN EUROPE

Licensing goes back to the Middle Ages when Roman Catholic Popes granted licenses to local tax collectors who paid “royalties” to the Vatican to have the right to be associated with the church. In 18th century England, two ladies of noble birth licensed their names to the cosmetic companies in return for the percentage of the product's revenue. [1] 

Licensable properties come from a variety of sources. The definitions of various property types are not always clear and they often overlap. Although every licensing program is unique, different areas of the licensing business have specific patterns in terms of how they are organized and how business is done. [17] 

LICENSING ACTIVITIES BY SMEs: EVIDENCE FROM EU TRADE MARK OWNERS 

In 2019, there were 353 IPR-intensive industries in the EU economy.

"IPR-intensive industries are defined as those having an above-average ownership of IPRs per employee, as compared with other IPR-using industries. In principle, this means that an industry is identified as IPR-intensive in the EU if for at least one of the IP rights under consideration, the number of those IPRs per employee exceeds the average of all EU industries that make use of that same IP right.” [48]

EMPLOYMENT

IPR-intensive industries are job creators. Over the period 2014-2016, these industries generated 29.2% of all jobs created in the EU. Thus, they employed more than 63 million people over this period. This percentage refers to direct industries. When indirect industries, which play a key role in the operation of direct industries, are also added, the number of jobs in this sector increases, as they created 21 million jobs. Thus the IPR-intensive industries (direct and indirect) generated 83.8 million jobs or 38.9% of the EU market. [69] 

GROSS DOMESTIC PRODUCT - GPD

CHINA'S ATTEMPTS TO COPY EU IP

China's bad enforcement of IPR causes a big problem for EU companies. EU companies can be denied market entry into China if they do not transfer their technology to the Chinese government and their state-owned firms. Threats of denied regulatory approvals further pressure European companies into cooperating if they want to enter the attractive Chinese market. The same goes for licenses, which are  forced to be priced below market rates. 

This results in not only a poor regulatory system but also causes harm and danger to European companies and consumers. Counterfeit goods that are produced in China and exported to the EU not only withhold sales from European companies that cannot have their IP protected in China due to their weak IP protection but also poses unpredictable safety concerns for EU customers who cannot rely on the quality and safety of the products . More than 80% of all counterfeit goods that arrived in the EU and were seized by the EU customs authorities originated from China. Those concerns can hardly be addressed by the EU, because they either come from a country's lack of knowledge and resources in dealing with IPR or a lack of political will to change the system. [59] 

Pharmaceuticals serve as a prominent example, highlighting the impact of counterfeit drugs. According to the European Intellectual Property Office (EUIPO), companies experienced an average sales loss of 3.6 percent, amounting to €9.6 billion annually, between 2012 and 2016 due to counterfeit pharmaceuticals. Notably, the potential harm caused to patients as a result of this issue is not addressed by the EUIPO.

In terms of both value and volume, China plays a significant role as the source of a substantial proportion of counterfeit and pirated goods reaching the European Union (EU). The report states that more than 80 percent of counterfeit and pirated goods seizures by EU customs authorities are traced back to China and Hong Kong. [67]

THE IMPACT OF COVID-19 ON LICENSING REGULATION IN EU

However, the European Union, due to its weak common regulation in terms of licensing, and the lack of an EU-wide compulsory licensing mechanism, does not allow all its member states to use this option in times of crisis such as the outbreak of a pandemic. The inability of some member states to apply compulsory licensing has been comprehensively highlighted in this crisis phase. Thus, even with some exceptions, the single regulation was not in favor of coordination at EU level. This would have helped Member States to "effectively use the mechanism to address intellectual property challenges". 

A temporary deregulation of intellectual property was therefore favored by the WTO. As the "compulsory license" mechanism was too restrictive in its definition (exclusive to patents) and only allowed for the issuance of such licenses on a national basis, a cross-border solution was put forward by the European generic industry. This epidemic thus revealed that intellectual property law could be considered as protective and could prove to be blocking in an emergency situation. [54] 

DEFINITION: WHAT IS FRANCHISING?

Franchise is a dynamic business model that involves a contractual agreement between a franchisor and a franchisee. In this arrangement, the franchisee gains the rights to utilize the franchisor's intellectual property, business procedures, brand, and the authority to sell branded products and services, all in exchange for a fee. This goes beyond traditional licensing, establishing a lasting relationship between the two parties. [14] The term Franchise more commonly refers to the actual business that the franchisee operates. The practice of creating and distributing the brand and franchise system is most often referred to as franchising. [70] 

To elaborate, the franchisor essentially licenses various aspects of its business model, including procedures, intellectual property, and the right to use its brand. This comprehensive licensing arrangement allows the franchisee to benefit from the established business framework and sell branded products and services under the franchisor's umbrella. This mutually beneficial setup serves as a win-win for both parties involved. 

The appeal of franchising lies in its ability to facilitate business expansion on regional or international scales in the past years. For the franchisor, it offers a means of achieving brand visibility and extensive growth without making substantial investments. Simultaneously, the franchisee gains advantages such as reduced costs and risks, leveraging the market knowledge and established reputation of the franchisor, often a mega company. This approach has proven successful in enabling companies to grow and thrive, marking a significant trend in recent years. [14] 

PERSPECTIVES OF FRANCHISING

Franchising benefits both parties involved. From the franchisor's perspective, it is a great way to expand into new markets without large investments. On the other hand, franchisees benefit from an established business's successful model and receive continuous support and training from the franchisor. [12]

The most important features of franchising and the way it works, are the following: 

1. At least two parties are involved. 

2. There is a written agreement between the parties. 

3. The franchiser owns exclusive rights and allows the franchisee to use them under a license. 

4. The franchisee pays an initial fee and regular license fees. 

5. The franchisor provides support in marketing, equipment and systems, staff training, and record-keeping. 

6. The franchisee must adhere to company policies and laws and cannot compete with other businesses until the contract's specified expiry date. 

7. The agreement is valid for a specified period and may be renewed.

TYPES OF FRANCHISING

Franchising can be divided into types, namely:

1. Business format franchises: A company expands by supplying a well-working business concept to an independent owner in exchange for fees and royalties. 

2. Product franchises: Franchisees can use the franchisor's products, brand/name, and/or trademarks. 

3. Manufacturing franchises: The franchisor offers the right to produce and sell a trademarked product. 

4. Business opportunity ventures: Independent business owners buy and distribute products from a company and receive support in return for a pre-decided fee.

Franchising allows businesses to expand and grow on regional or international levels, bringing brand visibility and large expansion without large investments for the franchisor and fewer costs and risks for the franchisee. It is a win-win situation for both parties involved.

WHY FRANCHISE?

AS A FRANCHISOR:

AS A FRANCHISEE:

FRANCHISING IN EUROPE 

Franchising is a popular market entry strategy in the EU, which has no single set of regulations, with each country having its own set of laws for franchising. In the mid-19th century, some brewers in Germany sold their beers exclusively to tavern owners who agreed to purchase only their beer in exchange for financial support. In France, a franchise agreement must involve the right to use a registered trademark and know-how transfer, and the franchisor must provide pre-contractual documents, as well as transparent disclosure of their business and franchise network. Italy requires franchisors to provide pre-contractual disclosures at least 30 days before the signing of the franchise agreement, and franchise agreements must be for a minimum of three years and include territory specifications and clear royalty calculations. In Poland, franchise contracts can be signed in any language, with no specific laws governing franchising, and parties can choose their jurisdiction. The Netherlands has recently implemented the Dutch Franchise Act, which obliges both franchisors and franchisees to behave in good faith, requires franchisees to disclose their financial position ahead of signing the franchise agreement, and establishes a cooling-off period. Germany and Hungary have no specific laws on franchising, and their legal frameworks come from domestic contract, consumer, commercial, competition, and unfair trade laws. 

In eastern Europe, the inclusion of many countries in the EU has created new opportunities for franchising, which is supported by the European Franchise Federation and the franchise associations in individual countries. Europe is a major continent for franchising, with 14,000 brands, 80% of which are from EU countries. [24][8][61]

Franchising in France 🇫🇷

Franchising in France has been defined by case-law and is subject to business regulations such as contract and commercial law principles. As such, to be considered a franchise in France the agreement must cover the right to use a registered trademark, and cover the transfer of know-how. Furthermore, franchisors have to produce a pre-contractual document and be transparent with their franchisees in terms of their business and franchise network. The pre-contractual document has to be delivered ahead of time before the signing of any franchise agreement. It is imperative that the franchise agreement is balanced and reflects real negotiation between the franchisor and franchisee to avoid any future annulling of contractual provisions down the line (under domestic French laws). [8]

Franchising in Italy 🇮🇹

In Italy, law no 129/2004 applies to all franchisors both local and foreign. This ‘Italian Franchise Law’ outlines rules in relation to content of the contract, such as form, duration, termination and renewal, etc. Under this law franchisors have to provide the pre-contract disclosure at least 30 days before signing the franchise agreement. In terms of duration, the minimum franchise agreement is three years and must include explicit territory specs and clear royalty calculations. To operate in Italy, you will also need to provide a business formula that has been tested on the market. [8]

Franchising in Poland 🇵🇱

The same as in France, there are no specific laws in Poland to regulate franchising. General civil contract laws cover franchising agreements, as well as industrial property law and competition laws. These systems are in accordance with EU regulations. Franchise contracts can be signed in any language. In the event of a dispute, parties have the option between litigation or alternative resolutions and are free to choose any jurisdiction which will accept to settle the dispute. However, most franchisees will expect the contract to be in the Polish language and under Polish law. [8] 

Franchising in The Netherlands 🇳🇱

As of January 1, 2021, the Netherlands implemented the Dutch Franchise Act. This new law is aimed to promote the relationship and cooperation between franchisors and franchisees – in that both parties must behave in good nature towards one another. The Act states the franchisee must disclose information about their financial position ahead of franchisee agreement. On the other hand, the franchisor must provide a draft of the franchise agreement containing applicable fees and financing, as well as ongoing consultations. The Act also introduces a 4-week cooling-off period from when the franchisee receives the full pre-agreement, until the day the franchise agreement is signed. The Dutch Franchise Act also introduces a franchisee’s right to consent of changes in the agreed franchise formula, the right of goodwill compensation for the franchisee upon termination of the franchise agreement, and sets a limitation to exclusive purchasing provisions. This specific franchise law outlines the franchisors obligation to provide reasonable commercial assistance and technical support to the franchisee. [8]

Franchising in Hungary  🇭🇺 & Germany 🇩🇪

There are no specific laws in Hungary and Germany. Therefore, the legal frameworks come through domestic German contract law, consumer law, commercial law, competition law and unfair trade laws. Franchisors in Germany must also deliver pre-contract information to the franchisee ahead of time. In Hungary civil code outlines the basic relationship of a franchise intellectual property laws, competition laws and advertising laws may also play part into franchising regulation. [8]

Franchising in eastern Europe

With the inclusion of many countries in eastern Europe like Croatia, Poland and Hungary and into the EU, new possibilities have been created for them in regards to franchising. The connection between the entrepreneurial behaviours of individuals in organisations and the topic of franchising is very important - especially for researchers. In Europe there is the European Franchise Federation, whose members are franchisors and the country's own franchise associations like the Croatian Franchising Association and the Hungarian Franchise Association. [61] 

THE ATTRACTIVENESS OF FRANCHISING IN THE EU

Europe is the global leader in franchising with 14,000 brands, 80% of which originate from EU countries. Opening a franchise in the EU is a low-risk investment, and most EU countries have opportunities for franchise ownership. With a strong financial base, acquiring established franchises like McDonald's, Marriott Hotels, and Subway is possible, as they have already established a foothold in the European market. 

Even those with less financial resources can acquire franchises like Kumon or Mr Arkwright's Tool for the Irish. [55]

OPPORTUNITIES FOR THE EVOLUTION OF FRANCHISING

Franchising is essential to the EU in many ways. Historically, it is one of the oldest established business structures, and with the globalization of business, franchising has become an important means of creating employment opportunities in a given country, exporting culture and know-how, and indirectly exporting a brand, slogan, or idea. 

From an economic standpoint, franchising contributes significantly to the GDP of the Member States, and thus the total GDP of the EU, with 405,000 points of sale (in 2016). In 2016, the turnover of franchises was estimated at €215 billion. 

However, franchising is not yet fully utilized in the EU, as 83.5% of the turnover is in only 25% of the Member States, such as France, Germany, and Italy. Some EU Member States under-utilize franchising, while the potential for franchising is growing in this region. 

A few years ago, the revenue share of franchises was only €300 billion, which represented 1.86% of the EU's GDP. In comparison, franchising contributed 5.95% to the GDP of the United States and 10.83% to Australia's GDP. The UK's exit from the EU has weakened the digital side of franchising in the region, but the attractiveness of the franchise industry to EU member countries is increasing. 

The lack of franchising in some parts of the EU may be due to a lack of knowledge of the jurisdiction of each country and the associated risks. Non-profit organizations like the EFF (European Franchise Federation) have been established to codify and unify the franchise industry in Europe, making it easier for franchises to enter certain countries due to uniformity. [56] 

SOCIO-ECONOMIC IMPACT OF FRANCHISING IN EUROPE