Home > Article > Joseph Adler

The fundamental aspects of the franchise agreement Part 5

Written by : Joseph Adler
Records and Reporting Obligations

The franchise agreement will typically impose a number of record keeping and reporting obligations on the franchisee. For example, franchisees are usually required to submit the following reports to the franchisor:

  • complete and accurate records of gross sales for the preceding reporting period together with an income statement for such period;

  • income statements and balance sheets;

  • copies of all federal and provincial income, sales and goods and services tax returns submitted by Franchisee for any period;

  • annual audited or unaudited financial statements prepared by an independent chartered accountant approved by the franchisor detailing the performance of the franchised business

  • such financial or other reports relating to the operation of the franchised Business as the franchisor may reasonably require from time to time.

  • For the sake of consistency and to facilitate the reporting process, franchisees will often be required to use the franchisor’s approved accounting, record keeping, reporting and computer systems. These reporting obligations help the franchisor to ensure that royalty and advertising fees have been calculated accurately. Moreover, the franchisor will usually reserve the right to audit all records, books of account and tax returns. The cost of such an audit is typically borne by the franchisor, unless the audit reveals an underpayment by the franchisee of a predetermined threshold percentage in which case the franchisee will typically bear the cost of the audit.

    Trade-mark Protection

    A significant portion of the franchise agreement is dedicated to provisions which protect the trade-marks of franchisors. This is not surprising given just how important trade-marks are for the success and growth of franchise systems. Trade-marks are, without a doubt, at the core of any successful franchise program. Without adequate protections in place, franchisors are at risk of losing any goodwill associated with their trade-marks and their franchise systems.

    As such, it is important to ensure that the definition of “trade-marks” is defined as broadly as possible so as to give the franchisor the ability to add or remove any trade-marks during the course of the franchised relationship. “Trade-Marks” should include not only those trade-marks, logos and trade names specifically listed in the franchise agreement but also any others presently or subsequently used by the franchise system as may be set out in the franchisor’s operations manual and not later withdrawn.

    With the proliferation of computers and the Internet, furthermore, a franchisor’s task in this regard has become exponentially more complex and difficult to manage. In an instant, respectable trade-marks are at risk of being used and abused by third party usurpers who have no regard for the trade-marks and the goodwill attached to them. Franchise agreements therefore should include provisions which specifically address the use of trade-marks and other intellectual property on the Internet.

    Since the abolition of the registered user requirements under the Trade Marks Act R.S.C. 1985, c. T-13 in 1993, a franchisor is no longer required to file with the Trade-marks Office a registered user document for each franchisee and for each trade-mark used by the franchisor. Instead, franchisors are now required under Section 50(1) of the Trade Marks Act to authorize their franchisees to use the franchisors’ trade-marks and to control their franchisees’ use of such marks:

    50. (1) For the purposes of this Act, if an entity is licensed by or with the authority of the owner of a trade-mark to use the trademark in a country and the owner has, under the licence, direct or indirect control of the character or quality of the wares or services, then the use, advertisement or display of the trade-mark in that country as or in a trade-mark, trade-name or otherwise by that entity has, and is deemed always to have had, the same effect as such a use, advertisement or display of the trade-mark in that country by the owner.

    Control of the trade-marks may be exercised by the franchisor providing its franchisees with guidelines as to the proper use of the franchisor’s trade-marks, establishing a compliance program for monitoring the use by the franchisee of the trade-marks and by regularly inspecting the goods and/or services which display such trade-marks to ensure that they are being displayed in a manner acceptable to the franchisor. Failure to implement these controls could jeopardize the validity of the franchisor’s trade-marks, as it is only through the trade-mark license agreement that a use of the trade-mark by a third party (in this case, a franchisee) would be deemed to be use of the trade-mark by the franchisor.

    To adequately protect the trade-marks, the franchisor should provide for the following in its franchise agreement:

  • The franchisee should acknowledge both in the franchise agreement and in a public manner that the trade names and trade-marks owned or licensed by the franchisor are the sole property of (or under license by) the franchisor and are exclusively owned by or licensed by the franchisor. For instance, a franchisor should insist that its franchisees post a sign at the franchised location and/or on its letterhead indicating that such franchisees are licensees of the marks and are franchisees of the system. Such a requirement could have other very important benefits as well. For example, it could assist the franchisor in its attempt to avoid any potential vicarious liability for the acts,omissions or negligence of its franchisees.

  • The franchisee should agree that it will not impair, abrogate or contest the ownership of such trade names or trade-marks and that its rights to use same is limited to the operation of the franchised business and that its usage must be in compliance with the franchise agreement and all applicable law.

  • The franchisee should acknowledge that all goodwill generated by the use of the trade names or trade marks will enure to the benefit of the franchisor and agree that upon the termination or expiration of the franchise agreement, the franchisee will not identify itself as a franchisee or former franchisee of the franchisor.

  • The franchisor should also place very specific and detailed limitations on the franchisee’s usage of the trade names, trade-marks and system owned or licensed by the franchisor, whether used in association with the franchisee’s stationary, contracts, signs, menus, advertising or websites.

  • The franchisee should be required to notify the franchisor of any infringements of the franchisor’s trade-marks and to give the franchisor further assurances that it will take whatever steps are necessary to protect the interests and rights of the franchisor in this regard.

  • The franchisor should require the franchisee (and the franchisee shall cause its employees, contractors and agents) to maintain the confidentiality of all trade secrets and confidential information belonging to the franchisor and to develop procedures to ensure that the franchisee or its employees, contractors and agents do not breach this covenant.

  • Franchise systems often involve the use of certain distinctive trade dress such as color schemes, uniforms, and building decor and these should also be protected by the franchisor as with the other intellectual property in the manner referred to above.

  • Finally, appropriate language should also be inserted into the franchise agreement that gives the franchisor complete control over the registration, prosecution of any Infringement and abandonment of the said trade-marks.

  • Other articles on Columnist franchise
    If franchisors are reluctant to negotiate the terms of their franchise agreements, what is the point of having it reviewed by a franchise lawyer before signing? Consider The Following Issues BUYING A READY-MADE BUSINESS IS APPEALING TO MANY MID-LIFE ENTREPRENEURS BY JAMES PASTERNAK