The intangible elements of franchising in Italy

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​​​​​​​​​​​​​published on 18​ April 2024 | reading time approx. 8 minutes


The success of the franchising network depends not only on the tangible elements of the franchising agreement, but also and especially on the intangible elements that distinguish it. Among these, a role of considerable importance is played by the trademark name, that allows the franchisor and his network to be identified within the market, and the know-how, which consists in the knowledge acquired and developed by the franchisor that franchisees can exploit to enjoy the economic advantages already available on the market and associated to the products or services offered. ​

 
This article is part of the article series “Franchising”. It is a cross border collaboration and is intended to highlight the key elements of a franchising agreement in selected countries. To the article series “Franchising” »


The trademark
Among the intangible elements, the trademark has a crucial role. In fact, the trademark is an essential element because it plays a key role for the promotion of the products and services and thus allows to determine the success of the franchising network. This shows that trademark is not only a simple “distinctive sign” that the franchisor gives to his own network, but it represents the commercial image through which the franchising network accredits itself within its target market.
 
The key role that the trademark plays for the franchising network requires that the franchisor protects it adequately and effectively against any other competitor. However, in choosing his own trademark, the franchisor must respect the legislation contained in the Intellectual Property Code (hereinafter “IPC”), introduced in Italy by Legislative Decree n. 30 of 2005.
  
In Article 7 of IPC, the Italian legislator has established what requirements the trademark must have in order to be set and, consequently, registered. The provision mentioned states that “All signs, in particular words, including people names, designs, letters, numbers, sounds, shapes of the product or its packaging, color combinations or shades, could be the subject of registration as a trademark company, if they are suitable: 
  • To distinguish the products or the services provided by a company from the ones provided by other companies; 
  • To be represented in the register in a way that allows to the competent authority and to the public to determine with clarity and precision the object of the protection conferred on the owner”.
  
The legislator has established that the trademark must have such features as to allow the proper identification of the products and services provided by the franchisor and must be suitable to allow the distinction between those products and the ones provided by the competitors. Even though the trademark registration is not mandatorily required by law, but it is still recommended that the franchisor proceeds with it. In fact, the trademark registration allows its owner to exercise the rights regulated in Article 20 of IPC, including the right to prevent unauthorized third parties from using a similar or identical trademark. In this way the trademark owner will be able to ensure the exclusivity and the identity of his company in the marketplace.
  
Depending on what use the franchisor wants to make of his trademark and on the economy strategy that he wants to pursue, he may choose to register the trademark at the national, European or international level. Once the territorial choice has been made, the franchisor will have to identify the category of products or services for which he intends to register his own trademark. After that, before submitting the application to the reference Office, the franchisor will have to conduct a prior verification to ensure that his trademark possesses the “novelty” requirement. In fact, the franchisor must verify that his own trademark is not similar or identical to any other trademark already registered within the same territory or related to the same products or services offered. Therefore, it follows that the trademark registration can be made only in case the prior verification has a negative result and so only after the franchisor has verified that there are no other earlier identical or similar trademarks registered in the same territory and for the same category of products or services.
  
In this regard, it should be kept in mind that the rights to use the trademark are only valid in the national territory in which the registration has been made. If the franchisor wants to create a franchising network in the Italian territory or exports his own franchising network from Italy to a foreign country, he has to make the right choice in the trademark registration.
  
The trademark protection on multiple territories could be done through
  • a series of “single” registrations, to be made in the national trademark Offices of each country in which it is necessary the protection, 
  • the registration of a European trademark which is valid in the EU, 
  • the registration of an international trademark.
  
The trademark registered at the European level is valid in every European Country and, automatically, in every country that later enters the EU. The application for registration must be submitted to the EUIPO (European Union Intellectual Property Office) and the registration will be valid for ten years. The European registration could also be renewed for ten years more as many times as the trademark owner wants.
  
Moreover, in the regard of the international trademark, there is no trademark registration which has an international validity, but it is allowed to extend the national or the European trademark to an international validity in all the countries that have joined the Treaty of Madrid. The international extension of the trademark registration has to be made through the WIPO (World Intellectual Property Organization) Office of Geneve. In this scenario, the franchisor who wants to register his own trademark at the international level must indicate in the application each country for which he demands the extension and the protection of his trademark. For the countries that have not joined the Treaty of Madrid on the international trademark, the franchisor must proceed through single registrations to the national trademark Office of each country in which he wants to extend his own franchising network.
   
Once the trademark has been registered, the franchisor will have to conduct a constant monitoring on the reference Registers in order to check that there are no third-party competitors who are infringing his rights. Constant monitoring of the Registers enables the franchisor to act promptly to protect his own rights in case of violation.
  
While retaining the trademark ownership, the law allows to the franchisor to transmit the use of the trademark and its rights to third parties. This transmission takes place with a license to use, through which the franchisor allows the franchisee to use the trademark and its distinctive signs. The license to use the trademark is one of the constituent elements of the franchising agreement which, on one side guarantees all franchisees the use of the trademark owned by the franchisor and, on the other side, ensures the franchisor the benefits of increasing and extending the impact of his own business within the network. The use of the trademark chosen by the franchisor is mandatory for all the franchisees which are bound to use it in the marketplace as part of the business operations inherent in the network and, at the same time, to comply with its requirements and standards. For those reasons, it is essential to introduce in the franchising agreement termination clauses aimed to implement all necessary precautions to inhibit the use of the trademark by franchisees who violate or damage the franchisor trademark.
  
In conclusion, the trademark represents the commercial image of the company on the marketplace and its use is the first factor in the expansion of the franchising network. The use of the trademark ensures notoriety to the entire network which will be able to exploit the synergy effect of the franchising.
  

The know-how

Another intangible element that distinguishes the franchise agreement from other similar contractual forms is the know-how that enables the franchisee to exploit the competitive advantage acquired by the franchisor on the market over possible competitors.

The definition of know-how

The term know-how means “a patrimony of unpatented practical knowledge deriving from experience and tests carried out by the franchisor, which patrimony is secret, substantial and identified”. The definition of know-how is contained in Article 1, paragraph 3, letter a) of Law No. 129/2004 by which the Italian legislator transposed European Regulation No. 4087/1988. As can be easily verified, know-how has a content of various types and consists, in principle, in the sum of skills, information and knowledge of which the franchisor is the owner and which are necessary and essential to the proper performance of the activity within the network. The franchisor transfers its own know-how to the franchisee with the so-called “franchise package” by means of transfer agreements or license agreements. For its part, the franchisee pays the fee to the franchisor, that is called “franchise”, which may be fixed or variable, depending on the agreements and the type of know-how to be transferred. 

This wealth of knowledge, which is shared, allows all users to have a competitive advantage in a given economic context, which is the strong point of franchising.
  

Transmission of know-how 

Notwithstanding the need for the franchisor to transfer the know-how to the franchisee, Italian Law does not impose any rules as to the mode of transmission. However, as a matter of established practice, it is considered that the “safest” way to transmit know-how is to prepare an operating manual which is attached to the franchise agreement and becomes an integral part of it.
  
The benefit of using an operating manual consists in the possibility of indicating in a clear and exhaustive manner all that is necessary for the conduct of the business and for the exploitation of prior skills and knowledge. However, to understand the operations manual at its best and to be able to gain the competitive advantage of know-how, it must not be a list or the mere enunciation of generic formulas, but it must contain a clear and intelligible indication of the quality standards of the entire affiliate network.
  
The only limit that the written transmission of know-how encounters lies in the need to transmit practical knowledge as well; in this case, the trend is to organize training session or courses that allow the franchisor to transmit the know-how to his network. In this sense, the trend is to organize training sessions throughout the duration of the franchising agreement and to allow for the continuous updating of the franchisees and their staff as the business and network develop. This means that the franchisor is free to make changes to the know-how within the scope of its business, as long as it informs its franchisees and allows them immediate access to the new know-how.
  
The importance and necessity that know-how be transmitted by the franchisor to the franchisee is confirmed by Article 3, paragraph 4, of Law 129/2004 by which the Italian Legislator provided for the obligation to specifically indicate the “know-how provided by the franchisor to the franchisee” and “the possible modalities of recognition of the contribution of know-how by the franchisee”. It follows that if the know-how is not transmitted or if it is insufficient for the purposes of the exercise of the activity, the franchising agreement must be considered void for vagueness of the object. In this hypothesis, the franchisee will also be entitled to demand the restitution of all sums eventually paid to the franchisor and to claim compensation for any damage suffered.
  

Protection of know-how

It is clear that know-how plays a crucial role, i.e. the sum of knowledge developed over the years by the franchisor – also known as the business formula – and which represents the core of the business. Therefore, it is indispensable for companies to protect their know-how and to prevent it from being dispersed or disclosed to other competitors. For this reason, know-how must be the subject of specific confidentiality clauses that are included in the franchising agreement and that extend not only to franchisees but also to their employees. Moreover, these clauses continue to produce their effects beyond the time limit of the duration of the franchising agreement. Indeed, the duty of secrecy and confidentiality survives the franchising agreement and thus requires the franchisee to protect the economic value of the know-how. Unlike the license for the use of the trademark, which terminates when the franchising agreement ends, in the case of know-how the difficulty is defining the contours of the prohibition of using by franchisees and their employees once the agreement is ended.
  
Precisely, in order to guarantee a high level of protection, the legislator has also introduced specific rules within the IPC aimed at safeguarding and protecting know-how and trade secrets. More precisely, in order to gain these forms of protection, the franchisor must prove that 
  • the information conveyed with the know-how is secret and identified; 
  • the know-how has an economic value; and 
  • it has taken all necessary measures to ensure its secrecy.
  
Once the franchisor has proved the existence of both these three requirements, then he will have the full right to proceed in court to protect his own reasons and will be able to claim against both intentional and negligent conduct. 
  
In fact, the Legislator has provided that the conduct of acquiring, using and disclosing know-how and trade secrets committed by someone who knew or should have known that this information had been obtained from a third party who, in turn, used or disclosed it in an unlawful manner must be sanctioned. In addition to the mentioned conducts, the Legislator has also provided that sanctions may be imposed on those who have produced or commercialized goods while knowing (or being culpably unaware) that they were the subject of the unlawful use of the trade secrets and know-how of third parties.
  
In conclusion, to ensure the most effective protection of know-how, the franchisor will have to 
  • Carefully choose his trademark and register it taking into account the business choices within the market;
  • Provide for express termination clauses or penalties to protect his own trademark and any unlawful use of it;
  • Produce an operating manual for the transmission of know-how, describing and setting out clearly and exhaustively the information that franchisor intends to transmit;
  • Organise training courses for franchisees, aimed at acquiring new know-how;
  • Preserve evidence of know-how transmission and provide for specific confidentiality clauses aimed at protecting know-how even beyond the time limit of the franchise agreement;
  • Constantly supervise the activities of franchisees, guaranteeing the correct use of the trademark and know-how;
  • Act promptly, even in Court, should it be ascertained the violation of his rights inherent to the trademark and also to the know-how.​
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