Contract Law

What are the differences between a license agreement and a franchise agreement?

Author: Boyana Boyadzhieva

Licensing and franchising are highly sought-after forms of business collaboration – they reduce the risk of failure as the product or service being licensed or franchised has already proven successful in the marketplace.
But how do we choose which form of collaboration is better suited to our business needs?

This article will attempt to clarify the legal aspects and differences in substance between a franchise agreement and a license agreement by identifying their characteristics and features.

What is a license agreement?

A license is a contract by which the Licensor grants the right to use its intellectual property (invention, utility model, industrial design, trademark, integrated circuit topology, or manufacturing know-how) to the Licensee for a territorial scope defined by the parties. It is important to note that if there is no provision in the agreement agreeing on the territorial scope, the license is deemed to be granted for use in the territory of Bulgaria.

The license agreement is regulated in Chapter Thirty-Five of the Commerce Act. According to the provisions, such an agreement is formal, therefore an important condition for its validity is that it must be concluded in writing. A special feature of a license agreement is that once concluded, it must be entered in the relevant state register kept by the Patent Office in order to be effective against third parties.

Depending on what the parties agree on, the license is either exclusive or non-exclusive. In the case of an exclusive license agreement, the Licensor may not grant licenses with the same subject matter to others. He is only entitled to use the licensed premises if this is expressly agreed in the contract. In the case of an exclusive license agreement, it is possible to conclude a sub-license agreement, under which the exclusive licensee has the right to assign to another person the right to use the subject matter of the license. A clause may be written into the exclusive license agreement that the Licensee may not enter into sub-licenses or that such an agreement may only be entered into with the express consent of the Licensor. In the case of a non-exclusive license agreement, the Licensor shall be entitled to assign the right to use the intellectual property object to several persons at the same time.

The license agreement is a contract for consideration. Therefore, the Licensee has the right to use the intellectual property subject to the contract for a fee. The royalty can be determined in several ways:
– a single payment (lump sum form) – this amount is paid in one lump sum at the conclusion of the contract, its entry into force, upon delivery of the documentation, or at another time chosen by the parties.
– payment in installments (royalty) – these installments are paid at the end of fixed terms and are a % of the proceeds from the sale of the product or as a fixed amount for each unit of output produced under the license.
– Mixed payment – a lump sum at the signing or entry into force of the contract and royalties at a fixed time (quarterly, at the end of each year, for example).

The license agreement is a fixed-term contract. If no term is specified, in accordance with the provisions of the Commerce Act, either party may terminate it by written notice to the other party. The period of notice shall be six months unless otherwise agreed. The Licensor shall also be entitled to terminate the contract before the first year of its validity has elapsed. If the Licensee continues to use the IP object subject to the contract after the expiry of the term with the knowledge and without the Licensor’s objection, the contract shall be deemed to be extended for the duration of the protection of the IP object.

What is a franchise agreement?

Franchising is a more complex form of business cooperation. It involves an agreement between two companies, whereby one of them (the Franchisor) grants the other (the Franchisee) the right to use its established structure and business model, including the trademark, the products or services it offers, and all procedures and management systems to develop the business, for a fee and only under strictly agreed terms.

The franchise agreement has no explicit regulatory provisions. It is a relatively unnamed contract, i.e. it is only defined, with no legal regulation on the form, rights, and obligations of the parties, the obligation to register, remuneration, termination, etc. Only the subject matter of the franchise agreement can be found in Bulgarian law. Pursuant to §1, item 10 of the Additional Provisions of the Corporate Income Tax Act, a “franchise” is a set of industrial or intellectual property rights relating to trademarks, trade names, company signs, elaborated models, designs, copyright, know-how or patents granted for remuneration to be used for the sale of goods and/or provision of services.

Given the fact that the franchise agreement does not have an extensive legal framework, its power follows from the principle of freedom of negotiation between the two parties, who themselves can determine the content of the agreement, as well as any specific features of the subject of the franchise, taking into account their business interests and objectives. It is therefore for the parties themselves to decide on the form of the contract (and we are bound to point out that in such important and extensive contracts, the written form is always advisable), the territorial scope, whether the assignment of the franchise is exclusive or non-exclusive, whether sub-franchising is permissible, and what the remuneration payable will be and how it will be calculated. Generally, the consideration owed by a Franchisee is equal to an initial franchise fee and subsequent fees determined by a percentage of the Franchisee’s revenues.

By entering into a franchise agreement, Franchisor agrees to provide support and training to Franchisee and its employees regarding the technical workmanship, maintenance, and marketing and advertising of the goods and services covered by the agreement. The Franchisee, in turn, undertakes to comply strictly with the Franchisor’s established standards and requirements and to permit the Franchisor to conduct quality inspections of the products and services covered by the agreement.

Comparison between a license agreement and a franchise agreement

It is clear from the above that despite their similarity, as both forms of agreement relate to the joint use of business assets and intellectual property rights, there are several significant differences between a license agreement and a franchise agreement, which will be compared more clearly in the following lines.

Regulatory framework: The license agreement is regulated by Bulgarian law (Art. 587 – Art. 599 of the Commerce Act; Art. 22 of the Trademarks and Geographical Indications Act; Art. 26 of the Industrial Design Act; Art. 31 of the Patents and Utility Models Registration Act). The franchise agreement, on the other hand, has no explicit legal regulation.

Business model: Licensing is related to products and services, such as website leasing, software, various types of technology, etc., while franchising is mainly related to business services, such as logistics, hair, and beauty services, fast food services, etc.

Process: In licensing, the Licensor has an obligation only to grant the right to use the intellectual property, while in franchising, the Franchisor has an obligation, in addition to granting the right to use, also to provide technical and material support to the Franchisee. Furthermore, the Franchisor may provide support in the start-up of the Franchisee’s business by assisting in the selection of the location, acquisition of equipment, and preparation of a marketing plan.

Degree of freedom: In licensing, the Licensee is free to use the intellectual property granted to it for use in any manner it sees fit, as long as it does not exceed the boundaries of the provisions of the agreement without being subject to certain business practices and processes. In franchising, however, the Franchisor sets certain business rules and procedures that the Franchisee must strictly follow. Thus, if the Franchisor’s business model changes, the Franchisee will invariably have to incorporate the newly introduced changes into its own business. In addition, the Franchisor’s strict requirements and standards limit the Franchisee’s ability to respond to local customer needs and preferences, especially if it is a global franchise.

Right of Control: The degree of control is the main difference between a license agreement and a franchise agreement. Under a license, the Licensor does not directly influence the way the Licensee operates its enterprise or the products or services the Licensee provides. Therefore, the Licensee has the right to make decisions regarding the products or services without the need for the Licensor’s approval. The Licensor’s lack of direct control over the Licensee’s actions may lead to unforeseen problems and risks. In the case of franchising, however, the Franchisee is significantly limited in its freedom of action in making decisions because, as already mentioned, it must act only within the rights and obligations granted under the contract. Therefore, control over all business strategies and the quality of the products or services provided remains entirely in the hands of the Franchisor. This may also limit the Franchisee’s creativity.

Risks and Responsibilities: From the abovementioned points, we can deduce that under a license, the Licensor assumes fewer risks and responsibilities as it does not directly control the Licensee’s business operations. This is fundamentally different in franchising where the Franchisor assumes significantly greater risks and responsibilities. Failure of the Franchisee may negatively affect the Franchisor’s reputation.

Costs and investment: The license fee is often less than what the Franchisee owes the Franchisor. This is because in addition to the franchise fee established in the agreement, other additional fees are sometimes required, such as training, maintenance, materials or marketing fees.

Duration: In practice, license agreements tend to be shorter than franchise agreements, which are often long-term due to the greater training and maintenance commitments made by the Franchisor.

Requirement for registration: In order to be effective against third parties, the license agreement must be registered with the Patent Office under Bulgarian law. In this way, the Licensee will be able to defend its rights under the agreement against persons infringing its rights, as well as against creditors or the Licensor’s bad faith conduct. There is no such registration requirement for the franchise agreement.

Both forms of business collaboration can be extremely useful for companies that want to legally exploit the intellectual property of others without taking the risks of developing new products or services. However, before entering into any contract, the parties should be aware of and make sure they understand all the limitations and risks involved.

Licensing can be an easier form of collaboration as it does not require too much investment and does not involve significant responsibilities. Franchising, however, despite a greater degree of control by the Franchisor, can bring more certainty because it provides the Franchisee with an established system for managing the business that will help avoid mistakes and achieve rapid growth.

This material prepared by Boyana Boyadzhieva aims to provide more information about the differences between a license agreement and a franchise agreement. It does not constitute a legal opinion and cannot be interpreted as individual consultation on any concrete facts or circumstances. The advice of an intellectual property specialist should be obtained for specific questions and situations. For more information on the above-mentioned issues and individual consultations, please contact KrasimiraKadieva law office at 00359 882 308 670 or make an inquiry using the contact form on this website. Boyana Boyadjieva is a legal associate at the law firm. She holds a Master’s degree in Intellectual Property Law from the Queen Mary University of London. Prior to joining the team of the law firm, Boyana interned at the European Union Intellectual Property Office (EUIPO). Her professional interests are related to intellectual property, data protection, e-commerce, and contract law, and regularly attends conferences, practical courses, seminars, and webinars in these areas of law. She is fluent in English.

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