COVID-19 and IP: the impact of the lock down on IP licences and franchise agreements

Boris Johnson recently announced a ramp-up in the protective measures in place in the UK to attempt to slow the spread of COVID-19. All non-essential businesses must now close at least for an initial period of three weeks.

McDonald's was ahead of the curve, announcing on Monday 23rd March that all of its UK restaurants would be closed by the end of the day. In 2018 there were an estimated 48,600 franchised business outlets in the UK – many of which will now face the same fate. There will be huge ramifications of the government’s latest ‘lockdown’ measures for such businesses - but what does it mean for the parties to these franchise agreements and other IP licences?

Franchise Agreements & IP Licences

We regard franchise agreements as intellectual property licences with a few ‘whistles & bells’ thrown on. They grant permission to the franchisee to use the brand, logo, trademark, copyright or know-how of the franchisor. In exchange, the franchisee is subject to certain output conditions, such as minimum production levels, specified sales or opening hours, and obligations to promote and market products in accordance with an agreed marketing plan often meeting a minimum spend.

Along with regular IP licences they typically contain audit rights to ensure that a licensor can monitor the extent of use of the licenced IP by the licencee. There are also normally rights of inspection of goods produced under the licence. With businesses closed, such audits and inspections cannot physically be carried out.

A UK lockdown was an inevitable and critical step to protect the NHS and save lives. One of the many knock-on effects is that franchisees and IP licencees will find themselves unable to perform these obligations. In these unprecedented circumstances, are licencees and franchisees excused from these obligations? We would argue there may be a practical and moral imperative for that to be the case for a period of time. So what happens to the IP licence rights when normality resumes?  It is important that in granting concessions franchisors and licensors make clear exactly what rights are being waived or suspended and for how long.

Force Majeure

The vast majority of IP licences and franchise agreements should have a force majeure clause. These clauses are used to excuse performance by one or more parties to a contract. They are a way of allocating contractual risk, and excuse one of the parties from liability, where the parties experience unforeseen events.

The term ‘force majeure’ has no recognised meaning in English law or Scots law. Therefore, the precise wording of a force majeure clause, and in particular the exact definition as to what constitutes a force majeure event, will be a key factor in assessing whether the COVID-19 pandemic is a force majeure event in your franchise agreement or IP licence.

Some common language, often seen in force majeure definitions include:

• ‘acts of god’ or an ‘event outside the parties’ reasonable control’
• ‘disease’, ‘epidemic’ or ‘pandemic’
• ‘government restrictions’

COVID-19 is a pandemic and there have been increasing government restrictions. As such, COVID-19 could amount to a force majeure event in your franchise agreement. However, it is important that there is clear language and each clause must be considered on its own merits.

It is also crucial that the parties demonstrate that coronavirus has caused the failure to perform the conditions within the franchise agreement.  In the context of business closures, this will not only require analysis of the force majeure clause, but also of the government guidance.

What can franchisors and IP licensors do now?

As is often the case, it will depend on what your agreement says. However, even in circumstances where there is no force majeure clause, or where it does not apply, franchisors or licensors may agree to relax the franchisee’s obligations in the short term.

However, it will be important to check that the franchise agreement contains “no waiver” provisions, in order to ensure that any sensible relaxation of the licencee or franchisee’s obligations in the short term does not prejudice the position for the remainder of the contract.

Will these IP licences survive the pandemic?

Where there is a force majeure clause in your franchise agreement, it will depend upon the exact wording of the clause whether its effect is to excuse performance of obligations temporarily or permanently.

If permanently, the whole contract may fall away as a result of lockdown and you would need to re-instate the franchise agreements. The franchisee’s right to use the franchisor’s IP would also fall away.

If the effect of the force majeure clause is only to temporarily excuse parties from their obligations, the franchisee’s right to use the franchisor’s IP may continue to subsist or it may resume alongside the performance of the franchisee’s obligations.

Conclusions

The UK government’s lockdown and wider effects of the COVID-19 pandemic will have major impacts on parties to IP licences and franchise agreements.  We recommend that these are revisited now in light of the unexpected having happened.

We would hope that common-sense will dictate a response which allows licencees and franchisees to continue to trade without immediate enforcement of licence obligations upon them.  However, it is of great importance that any waiver or suspension of obligations is done clearly and in writing so that all parties know where they stand now and when normal trading conditions return.