Licensing and franchising in international business law

Licensing and Franchising
Student’s Name:
Institutional Affiliation:
Couse:
Instructor:
Date:
Licensing and Franchising
Introduction
Licensing and Franchising are common strategies businesses apply to expand their businesses internationally (Brimer et al., 2015). There are several strategies that companies can apply to expand their activities. Licensing and Franchising involve two parties in which one gives its rights to another party to use it in its business (Rosado-Serrano et al., 2018). The difference is that licensing involves two independent parties that use the same trademark in their companies. In comparison, Franchising involves two parties, with one of them being independent while the other is dependent (Mainardes et al., 2019). The two strategies also have risks which are associated with them. These make it of importance for admirers who desire to venture into these fields to be wary. This paper analyzes the characteristics of these two expansion strategies, risks, gives examples of a case study, and finalizes the relationship between them.
Licensing
Definition
Licensing involves an individual or organization, giving another one the right to use the former’s technology, brand, trademark, or other legal rights in their business (Abhijit, 2015). The original owner of the power, legally referred to as license, is usually called the licensor, while the party that receives the right is called the licensee. According to Mrimer et al. (2015), during the creation of the license, both the licensor and licensee get into a mutual agreement, commonly referred to as a ‘license agreement.’ The license agreement details the limits and the rights of the licensee and the licensor to prevent them from exerting excess control over the business activities.
An example is the case of Walt Disney that allowed McDonald’s to use its logo in branding its McDonald’s’ Happy Meals (Gerhardt et al., 2015). Another example includes technology licenses of Microsoft Corporation, which has allowed different users to use the Windows Operating System. Also, the several cases in which pharmaceutical companies gave out patents to drug companies and allowed them to manufacture and sell drugs that contain formulas that the original companies had discovered.
Risks of Licensing
Just like any other business model, licensing is not without risks. Parties contemplating this should deeply consider the risks that are associated with it to come up with the right decisions. Among these risks is that the licensee can choose to become a competitor against the licensor by gaining more clients in the market than the licensor (Abhijit, 2015). Secondly, the licensee can suddenly demand factors such as training of employees, data, and technical assistance, which are costly for the licensor at the time of the request. Additionally, the licensor stays dependent on the competency and well-being of the licensee, which may prove futile and result in losses.
Case Study
A case in which a licensing agreement led had problems is the First Flight Associates V. Professional Golf Company, Inc. Professional Golf Company (Pro Golf) was a US-based company manufacturing and selling golf products. It operated using the trademark of First Flight Associates (FFA), a registered company in the US and other foreign countries. FFA, which was the licensee, later filed charges against Pro Golf for the commissions earned as a sales representative, and for the alleged breach of the agreement between them. FFA also sued Pro Golf with defamation and inducement due to the latter’s activities with Robert Wynn. He was Pro Golf’s representative in the Far East, and recently in Japan.
Pro Golf, on the other hand, demanded to terminate its agreement with FFA alleging violations of its duty as the sales representative. The court justified FFA’s claims and ensured that Pro Golf gave it its commissions. It then dismissed Pro Golf’s demands, making FFA sustain its position.
How can the Risks of Licensing be Managed or Minimized
Licensors can avoid cannibalization by ensuring they are well-equipped in a way that exceeds their licensees. The licensors should avoid operating in the same localities with their licensees (Rosado-Serrano et al., 2018). The two parties should adequately state their terms of agreement (ToA) so that in case any of the demands for anything, they can refer to the ToA (Gerhardt et al., 2015). Losses from overdependence on licensees should make the licensor to state a standard amount of royalty for them to pay at a stipulated regular period.
Franchising
Definition
Franchising is a venture in which a business organization grants to another business the legal right to replicate, develop, or establish business activities of the original company (Guhathakurta, 2016). The party giving its power is the franchisor, while the party creating the secondary businesses is the franchisee. A company can grant its rights to several franchisees, and all will operate under its brand, set up and operations. All these businesses are usually equal in appearance, features, and activities (Mainardes et al., 2019). During the development of the Franchising operation, the involved parties typically get into an agreement that Franchise laws regulate. There are usually three main components present in Franchise laws.
These laws include an initial fee that the franchisee must pay to the franchisor, a trademark license through which the franchisor formally hands over to the franchisee the right to commence operations, and a degree of control to regulate the operations of both parties concerning their activities (Rosado-Serrano et al., 2018). The two parties must also fully elaborate on the terms of the agreement, and must also register with the Franchise Registration States (Guhathakurta, 2016). In the United States, there are many business organization and companies which have practiced Franchising. For example, all the restaurants that use the brand of McDonald’s and Java, and retail business enterprises such as GNC.
Risks of Franchising
Different risks are associated with Franchising. The first risk in Franchising is the high probability of the business losing its brand equity. Given that different companies operate under an umbrella brand, a mistake from one of ...