Franchise Times® The News and Information Source for Franchising www.franchisetimes.com February 2002 It may not be too late: Protecting franchise systems with business-

By Christina Peterson, Jody DeStefanis and Gregory Rosenblatt

atents are often overlooked as a means for a franchisor to protect its franchise system. Although almost all franchisors boast a unique and proprietary business system, few seek Ppatent protection. For a franchisor that develops a unique business method that meets the minimum requirements, a business-method can be an integral part of its franchise system and a significant asset for building brand equity. Christina Jody Gregory Recent developments in , spurred in part Peterson DeStefanis Rosenblatt by the growing market potential of the Internet, have widened the application of business method patents. In 1998, in State Street Bank Likewise, a patent can give a franchisor more power to enforce in- & Trust Co. v. Signature Financial Group, the Court of Appeals for the term compliance. The patent’s claims and specifications may assist the Federal Circuit dispelled the long-standing misconception that busi- franchisor in drafting its operations manual to set forth clearly how a ness methods were unpatentable. In the wake of this decision, franchisee is to comply with the requirements of the franchised companies have sought business method patents to protect the way system. If a quality-assurance inspection reveals that a franchisee is they operate their businesses. deviating from the prescribed model, this deviation may constitute a Business methods associated with franchise systems, such as breach of the patent license. The franchisor can terminate the franchise methods of cooking hamburgers, providing cleaning services or agreement and any further practice of the patented method would painting automobiles are all potentially patentable. For example, in constitute infringement. April 2000, the United States Patent and Trademark Office (USPTO) issued a patent on a “Method of Providing and Maintaining Clean and Patent drawbacks Sanitary Bedspreads in Hotels.” In September 2001, the USPTO In order to obtain patent protection, the must be new, issued a patent directed to a “Railroad Theme Restaurant and Food useful and non-obvious. To meet the “new” requirement, the invention Delivery System and Method of Making Same.” The claims of this may not be offered for sale in the United States or publicly disclosed patent cover a restaurant food delivery system, complete with loco- anywhere in the world more than one year before applying for patent motive cars and a train track running between a kitchen area and the protection. Although confidential disclosure to franchisees would patron seating area, as well as a means for receiving and delivering typically not be considered public disclosure, the fact that a franchisor customer orders. has licensed and trained franchisees in its proprietary business system, or has itself utilized the business method, will bar it from obtaining a Patent advantages patent. This requirement may be a significant obstacle for a franchisor Business-method patents allow a franchisor to prohibit others from that has marketed or implemented its franchise system for more than using its claimed unique business model or, at a minimum, the claimed a year before seeking patent protection. unique features of its franchise system. Any party practicing the inven- The newness requirement, however, does not bar patent protection tion without permission from the patent owner may be held liable for on new aspects of a long-existing system. New twists on an old theme infringement of the patent. Penalties for infringement could include may result in patentable business methods. Even an established fran- the patent owner’s lost profits, attorneys’ fees, costs, an injunction chisor might obtain patent protection, however limited, on features of against continuing the infringing activity and treble damages. Patent its franchise system that were not previously disclosed or imple- protection, therefore, can provide a franchisor with an added means of mented. Accordingly, new franchisors should take care to consider protecting its system from former franchisees and competitors. patent protection early in the development of their franchise systems and established franchisors should take similar measures upon the applicant agrees not to file the application outside the United States. identification of improvements to their systems. Published patent applications that do not mature into issued patents A second drawback of seeking patent protection is the time are publicly available and their contents become . In involved. Because they are more carefully examined at the USPTO, other words, if your published application is not successful, the business-method patents can take three to four years to issue. disclosed subject matter is not treated as a and may be Accordingly, patent protection should be sought as soon as a new practiced by anyone. These are important implications for a franchisor concept is identified. that had been previously successful in licensing its system. Because For a new franchise system, there is a risk that the system will be the information is publicly available, existing franchisees may argue fine-tuned and altered in the time between the filing of the application that there is no proprietary “system.” and when the patent issues. Originally filed applications may quickly For a franchisor, business-method patents may be another compo- become obsolete and new patent applications may be necessary to nent of a solid intellectual property portfolio. Because of the potential cover the entire franchise system. This process may become expensive value that a business-method patent can add to a franchisor’s system, and time-consuming. Great care should be taken to assess the value of including competitive advantage and increase in market share, fran- pending and issued patents frequently to determine the longevity of chisors should consider whether the benefits of pursuing a their value to the franchise system. business-method patent outweigh the risks. A third drawback of seeking a patent is the implication for the fran- Christina Peterson, Jody DeStefanis and Gregory Rosenblatt are attorneys with Wiggins & Dana, a law firm founded chisor if the USPTO determines that the does not in New Haven, Conn., in 1934 with predecessor firms dating back to the 19th century. The firm now has more meet patentability requirements. The USPTO publishes patent appli- than 150 attorneys in offices in New Haven, Stamford and Hartford, Conn., and Philadelphia. cations 18 months from the filing of the patent application unless the

Wiggin & Dana

Intellectual Property Solutions for Franchise Systems

For more information Wplease contact: Jack Dunham [email protected]

Wiggin & Dana llp Greg Rosenblatt Franchise Lawyers [email protected]

Joe Schumacher New Haven & [email protected] Hartford Stamford Philadelphia www.wiggin.com

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