By Ngan Pham
Hundreds of domestic and foreign franchises have penetrated the Vietnam market, especially in the food & beverage, retail, and education industries, with famous brands such as KFC, Trung Nguyen Coffee, Highlands Coffee, Family Mart and Circle K establishing a strong presence. A favourable business model post-pandemic, franchising is flourishing these days.
The most common franchise model today is perhaps the business format franchise model, employed by franchises such as McDonald’s, 7-Eleven, and Trung Nguyen Coffee, in which franchisees are permitted to use the same model as the franchisor, along with their intellectual property (IP) rights. Depending on the nature of the business, the IP rights for such franchises may include one or more of the following rights related to trademarks, patents, industrial designs, copyright and trade secrets.
In a fast food business model, for example, the brand names such as “KFC”, “LOTTERIA” or “PHỞ 24” would be protected under trademarks, while the recipe for the batter, soup or spice mix and the cooking method may be protected by patents or trade secrets. The slogans, menus, or store layouts may also be protected under copyright, trade dress or trademarks.
IP Considerations for Franchisors and Franchisees
While globalization promotes business expansion beyond borders, IP rights are territorial – this means that business owners only have rights in the respective country or territory where their industrial properties are protected. Thus, it is imperative to protect the relevant IP rights in targeted markets in advance (the earlier the better), before entering into a franchise agreement. Do take into consideration the time factor that is needed to obtain the respective IP rights, as some countries such as Vietnam would normally take around two years to obtain a registered trademark and three to four years for a granted patent.
Another important point to keep in mind is that novelty is one of the main criteria to determine patentability. Therefore, applicants should keep their invention or industrial design confidential prior to filing. Owners should be extra cautious when sharing such information to avoid unforeseeable mishaps prior to registration.
Owners of IP rights can also take advantage of international registration systems, such as the Madrid system for trademark registrations, PCT for patent registrations or The Hague system for industrial design registrations, which are aimed at reducing administrative procedures and registration time, especially for multiple and simultaneous applications worldwide under one applicant.
Franchises are often highly regarded for their potential to generate significant returns. However, no one should invest in a franchise where the associated IP rights are not adequately protected. When conducting due diligence prior to entering a franchise deal, franchisees must also carefully inspect all IP-related matters. These matters include but are not limited to legal ownership rights and the validity, status and scope of the protected IP in respective countries or regions.
In Vietnam, two food and beverage companies have been engaged in a battle for the “PHỞ THÌN” trademark (see https://www.kass.com.my/articles/pho-thin-in-hot-soup-one-brand-name-two-trademark-owners/). This dispute involves the “Phở Thìn Lò Đúc” and “Phở Thìn Bờ Hồ” brands. The latter brand was the first to register the “PHỞ THÌN” trademark, which led to complications for “Phở Thìn Lò Đúc” in registering its trademarks, as they also included the words “PHỞ THÌN”.
Despite not having obtained registered trademark rights, “Phở Thìn Lò Đúc” has continued to expand in Vietnam and abroad using a franchise model. However, this presents a significant risk for franchisees operating under the “Phở Thìn Lò Đúc” trademark. The franchisees may find themselves operating under the threat of IP rights infringement or without strong legal grounds to defend themselves from unfair competition acts by non-franchisee third parties.
Trademarks: The “heart” of a franchise deal
Trademarks serve as symbols of a company’s reputation and quality of goods/services, and can greatly influence customers’ purchasing decisions. This explains why franchisors are always striving to increase brand recognition.
In Vietnam, we only need to take one look at the “Highlands Coffee” trademark and immediately their aromatic coffee, ice-blended beverages and cozy ambience come to mind. This demonstrates that when building a franchise chain, the business should also have a good and memorable trademark. The strongest type of trademark is known as a “fanciful” or “coined” trademark, where the trademark holds no meaning or association with any words related to its goods or services, for example, Kodak for camera products, Changhi for food and dessert, or even KASS for IP services. However, its disadvantage is that owners will incur substantial advertising costs to promote the brand and build that connection between the trademark and their products and services.
When reviewing the products and services that will be associated with the trademark, it is important to consider future offerings that may arise as the franchise operates in the market. There may be new products/services, which could require registration of the trademark under new classes in accordance with the Nice Classification (international classification of goods and services for trademark application). In this situation, the question of who has the right to register the trademark for new classes or who is the owner of the mark associated with the new products and services should be clarified in the franchising agreement.
The successful registration of a trademark is not the end as there are other steps required to enforce the mark and deter copycats. Here, there is a need for clear terms in the franchise agreement and guidelines as to how trademark infringements will be handled, and to what extent and cost.
If you need professional advice in negotiating, drafting, or reviewing franchising contracts to ensure a thorough and smooth transaction, please do not hesitate to reach out to us at firstname.lastname@example.org!