Case Law and franchising

1. an employee comes into possession of a trade secret, know-how and confidential information in the normal course of business and either carelessly or deliberately passes off the information in the normal course of business, as was the case in V.V. Sivaram and Ors v.  Foseco India Limited 2006 (1) Kar LJ 386;
2. an unauthorised person incites such an employee to provide him with such information, as in Electrosteel Castings Ltd. v. Saw Pipes Ltd. and Ors. 2005(1) CHN 612; or
3. under a license for the use of know-how, a licensee in breach of condition, either expressed in an agreement or implied from the conduct, to maintain secrecy in respect of such know-how fails to do so, as in Gujarat Bottling Co. Ltd. and Ors. v. Coca Cola Co. and Ors 1995(5) SCC 545.

Non-competition clauses are those which oblige the franchisor or master franchisee not to operate a competing franchise within a certain radius or for a period after the termination of the franchise agreement. The enforceability of such clause varies widely and depends on its reasonableness. It was observed by Hon’ble Supreme Court in the case of Gujarat Bottling Co. Ltd. and others v. Coca Cola Company and Ors. that:
‘There is a growing trend to regulate distribution of goods and services through franchise agreements providing for grant of franchise by the franchisor on certain terms and conditions to the franchisee. Such agreements often incorporate a condition that the franchisee shall not deal with competing goods. Such a condition restricting the right of the franchisee to deal with competing goods is for facilitating the distribution of the goods of the franchisor and it cannot be regarded as in restraint of trade.’

The conclusion that may be drawn from the above judgement is that although non-compete clauses in franchise agreements are not seen as being in restrain of trade, they should not be excessively harsh or unreasonable. Great care should, therefore, be taken in drafting a restrictive or negative covenant; if the same is very onerous to a single party, the court may refuse to enforce it in its entirety. Protection of confidentiality and post-term restriction on competition are issues that the franchisor must consider very carefully before finalising the form of a franchise agreement.

Intellectual Property Rights:
Protection of IPR is of vital importance to any franchisor in India because its violation may result in the gradual erosion of the saleability of the franchisor’s products. The Trade Marks Act, 1999 provides for the registration and better protection of trademarks and for the prevention of use of fraudulent marks on merchandise. It was observed by the Court in VivekanandaEnglishAcademy and Ors. v. Amoha Education Pvt. Ltd. and Anr. that many franchisees continue using the trademark, technical know-how and other confidential information of the franchisor even after the termination of the franchise agreement; a franchisor should in such situation take advantage of the remedies which are available in India under the statute in relation to trademark and copyright which are particularly effective against the infringement and trafficking in trademark.

An aggrieved franchisor has recourse to three courses of action against the violation of his trade marks: (a) seeking an injunction, (b) action for passing off, (c) criminal action.

In the case of Teju Singh v. Shanta Devi AIR 1973 AP 51, it was stated that infringement of a trademark gives the proprietor of the registered trademark a statutory remedy. It was stated that a registered trademark is considered infringed by if a person who not being the registered proprietor of the trademark or a registered user thereof using by way of permitted use, uses in the course of a trade, a mark which is identical with or deceptively similar to the trademark in relation to any goods and in such manner as to render the use of the mark likely to be taken as being used as the trademark. However, it should be borne in mind that the license to use a trademark does not amount to an assignment of trademark and therefore the original proprietor does not divest high right, interest or title in the mark through the license, as held in the case of Caprihans (India) (P) Ltd. v. Registrar of T.N (1976) 80 CWN 222.

In order to prevent the franchisee from taking undue advantage of the goodwill generated by the franchise brand, the franchisor must not only make suitable provision in the franchise agreement but also take immediate legal action against the erring franchisee so as to set a precedent for all prospective franchisees.

Consumer Rights: A consumer of products or services offered by a franchise may seek a remedy under the provisions of the Consumer Protection Act, 1986. It was observed in cases filed against Kentucky Fried Chicken and McDonald’s in India and the US that the franchisor of a fast food chain has a lot to learn from the large number of lawsuits filed against fast food franchises in the past. Consumer complaints originate due to attitude of complacency of the franchisor. A lawsuit was filed against KFC in Texas for allegedly serving sandwiches containing baby cockroaches. Once a brand name is established, franchisors often take their consumers for granted and fail to adhere to required standards of hygiene that ought to be maintained in any food franchise. In Penelope Baim Block, Brij. M. Sharma, Lisa M. Bertini, Vandana Makker, Bala M. Krishna, TYC Gerhardt and Jeffrey Zimmerman, et al v. McDonald’s Corporation 01 CH 9137, consumers were misled about the actual ingredients used in the preparation of products. McDonald’s was ordered to pay damages to the tune of $ 10 million, and was also asked to issue an apology.

The question which often arises is should the franchisee alone be held liable or also the franchisor? It was seen in the US case of Kerl v. Rasmussen Inc., Wis. Ct. App. No. 02-1273 2003 that the degree of control which the franchisor exercises over the franchisee forms the basis of the franchisor’s liability in any legal action. The more control, the more legal risk. It was stated that “although franchisees operate as separate businesses, plaintiffs often look to the deepest pockets when developing a claim, which means that franchisors are frequent targets in lawsuits. In nearly every case, liability hinges on how much control the franchisor holds over its franchisee. A franchise has an independent nature, but a franchisor must by necessity retain some control over the use of its names, goods or services.”


The provisions of all applicable laws should be adequately complied with at every stage commencing from entering into a franchise agreement to finally setting up the franchise business and carrying on the day-to-day operations. A deviation or complacency at any stage may prove fatal. Restrictive covenants in a franchise agreement should not be unduly onerous; immediate legal action should be taken in case of infringement of any trademark of the franchisor. Adequate provision should also be made in the franchise agreement to prevent the franchisee from misusing the intellectual property of the franchisor. Consumer issues may have substantial impact on the development of the franchise brand and they should be attended to promptly. Further, the franchisor-franchisee liability should be well-defined in the agreement itself so that there is no room for any ambiguity at a later stage. The obvious inference that can be drawn from the above-mentioned cases is that although franchising is certainly one of the most innovative ways of promoting a brand, one simply cannot afford to overlook the legal principles which are primarily responsible for shaping, delineating and defining the commercial relationship within the broad framework of international business relations.

The Franchise Association of India is the country's peak industry body and franchise advisory, committed to strengthening and promoting the best practices in franchising. Franchise Association of India members are businesses and service providers united by their common concerns for the wellbeing of the franchise marketplace.