Report on Intellectual Property Issues in Malaysia Franchising- Franchising laws and regulations

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Intellectual Property Issues in Malaysia and International Franchising

Intellectual property issues in Malaysia franchising

Franchising in Malaysia is governed by the Franchise Act 1988, which is amended and named as Franchise Act 2012, came into force on January 1, 2013. It applies to the sale and operation of any franchise business in Malaysia, where an offer to buy or sell is made and accepted within or outside Malaysia. Franchising laws and regulations in the country are enforced and regulated by the Franchise Development Division of the Ministry of Domestic Trade, Co-operatives and Consumerism, headed by the Registrar of Franchises (Hoy, Perrigot and Terry, 2017). 

Franchises are granted with intellectual property rights, non-exclusive in nature, in relation to the franchise business. The intellectual property rights are granted during the franchising term and period for regulating and ensuring effective provisioning of the intellectual property rights. The scope of the intellectual property rights include right to use:

Trade marks for the purpose of identifying franchise brand, and, promoting it as well. 

Securing and protecting confidential and private nature information in the operations manual and software. 

Know-how in running and operating franchisee business. 

Applying patents to the unique nature products and processes in the franchise business. 

Intellectual property rights grants and provide specific rights to franchisor in the franchise arrangement, it is ceased on the termination of franchise agreement. The provision of Franchise Act 1988, gives specific intellectual property rights to franchisor for protecting confidential information. It is a kind of non-compete obligation, asking franchisee to give a written guarantee not to disclose information contained in the operational manual to any person or party (Seid and Mazero, 2017). This disclosure by the franchisee gives necessary confidence to the franchisor for preventing any kind of mis-use or illegal use of confidential and secret nature information. This restraint is effective during the franchise term, or for the period of two years, after the expiry or early termination of the agreement (Seid and Mazero, 2017).

In order to investigate intellectual property issues in Malaysia’s franchising agreement, some pertinent case laws are discussed:

1) Essential to add and present registrar of trademarks as defendant

This legal issue imply the fact that trademarks owners need to consider the fact that they need to add and present registrar of trademarks as defendant, in the legal proceedings and cases of expungement, alteration and rectification of trademarks. In the recent case of Ho Tack Sien and others v Rotta Research Laboratorium 2012, the respondent has registered for Viatril-S trade mark in Malaysia, and, first and second appellant are employed as the authorised distributor of Viatril-S in Malaysia (Malaysian IP cases: Managing Intellectual Property, 2013). In the employment course, they are having access to confidential information related to customers list, sales figures, distribution network and marketing strategy of Viatril-S. After some period, second appellant has asked and appointed third appellant, and, became as the registered owner of the Artril 250 trademark. As a result, respondents filed the case in the high court for infringement and passing of the Viatril-S trade mark, furthermore, to expunge the Artril 250 trademark from the register. 

The High Court has favoured the decision and ordered for expungement of Artril 250 from the Register. The case moved to the Court of Appeal, where court held the fact that although Artril 250 trademark seems quite similar to the Viatril-S trademark, but still it could not allow the expungement. The order of expungement could not be made without hearing the registrar of trademarks on why he allowed the registration of Artril 250 trademark, when it appear to be confusingly similar to the Viatril-S trademark. By giving reference to the Section 62 of the Malaysian Trade marks act 1976, the Court of Appeal held the decision of High Court as incorrect considering the fact that registrar of trademarks needs to be appeared and heard, before announcing decision of expungement (Malaysian IP cases: Managing Intellectual Property, 2013). 

In light of this, trademarks owners in Malaysia need to consider the fact that actions for expungement is quite strict in the country, and it could not filed or claimed, until and unless the registrar of trademarks is added and presented as a defendant. 

2) Limiting appeals against High Court decisions 

Generally speaking, appeals against the decision announced by the registrar of trademarks are made to the High Court, with the possibility of further appeal to the Court of Appeal, and, making final appeal to the Federal court. However, in the case law of Tio Chee Hing V United Overseas Bank (Malaysia), January 2013, it is announced that registrar of trademarks is not just a ‘subordinate court’. The case involved an appeal to the Federal court, against the decision made by the High Court and Court of Appeal where respondent filed a preliminary objection on the ground that decision made by High Court is not effective and valid due to poor consideration of facts and evidences (Malaysian IP cases: Managing Intellectual Property, 2013). 

In response to this preliminary objection made by the respondent, Federal Court disagreed with the view that High Court has not deliberately analysed the facts and evidences. It is held that status of High Court and Court of Appeal is not the subordinate court, and, Federal Court is not established for looking into the factual matters, which had already been resolved at the High Court and Court of Appeal stage. Accordingly, respondent is not granted with the permission to appeal to the Federal Court, and, it is subsequently followed in two other case laws Societe Des Produits Nestie v Hiu Khan Hoe and Soo Juan Choo v La Pointique International in 2013 (Malaysian IP cases: Managing Intellectual Property, 2013). 

The above cases clarify the fact that respondents in Malaysia are allowed to appeal against the decision of registrar of trademarks to the High Court and, one more level, to the Court of Appeal, but there is no possibility and scope of making further appeal to the Federal Court. 

3) Complications in amending Patents

The Court of Appeal at Malaysia specified the fact that patents are governed by the Patents Act 1983 therefore entitled to amend and modify under the act, Court of Appeal should not be considered as the forum of amending, rectifying and modifying patents. In the case of Pfizer Ireland Pharmaceuticals Vs Ranbaxy 2013, Pfizer (defendant) has developed and marketed a prescription drug called Viagra, after spending considerable amount of time and money in research process. Viagra is protected by several patents, such as Malaysian patent My-11446-A, which was owned by the defendant, i.e., Pfizer. After certain time, it has also launched another drug called Caverta with same formula and compound as Viagra (Malaysian IP cases: Managing Intellectual Property, 2013). 

As a result, plaintiff named Ranbaxy Laboratories has brought legal action against the defendant declaring the patent as null and void in Malaysia. Pfizer, defendant considered 446-A patent as valid relied upon by the decision of US court, and, proceeded for amending the patent for new drug Caverta, by filing an application with the High Court, Malaysia. On dismissal of application by High Court, defendant made an appeal to the Court of Appeal, which has further stressed that it is not the forum to amend the patent, given the fact that patents are governed and regulated by the Patents Act 1983. This court decision upheld the fact that process of amending any patent is quite complicated under the Malaysian Intellectual Property, respondents need to approach Patent act for it (Malaysian IP cases: Managing Intellectual Property, 2013). 

Intellectual property issues in International Franchising

The cultural norms vary considerably among countries require different degree of subjectivity on the part of business owners and professionals. The international franchising laws sometimes give rise to cultural faux, which might result in loss of sales or even serious litigation issues on account of not adhering to local laws and regulations. Breaking, violating or abusing international law not only pose threat to the international franchises, but it also gives risk to smooth functioning and operation of normal business. It is worth mentioning that franchising agreement already function outside of traditional business models; it entails high level complexities and regimes, necessary to understand and implicate (International Franchising: The Legal Issues, 2018). 

The variation in countries’ cultural models also intensify the problem furthermore, for example, the disclosure acknowledgement and ‘cooling off’ periods are quite longer in Australia, as compared to US. Besides, Brazil requires franchise agreement to be translated into Portuguese and registered with the Brazilian Patent and Trade Office. Likewise, Mexico contains special stipulations and norms for terminating franchise agreement, and, Spain imposes special registration laws on franchise. Companies considering expansion decision to new territories need to gain a quick overview of the country’s franchising laws and regulations (Alon, 2012). In this context, some legal issues with respect to court cases references evolved in international franchising include:

a) Legalities issues: It throws light on the need of doing extensive research into legalities, as franchising team need to utilise their legal expertise for understanding international trade and franchising law. Usually, majority of international franchising law focuses on business structure, trade and funding, but in some countries and locations, franchise locations also matter a lot due to special local ordinances and laws to follow and implement (Abell, 2013). 

The case law based on Kentucky Fried Chicken in Japan and US on the occasion of Christmas. Where Japanese families carve for bucket of KFC products on Christmas Eve, US families do not carve for it. It is found that around 3.6 million families in Japan ordered KFC products on Christmas from international franchises located in Japan. The lines and crowd stretched around Tokyo and across country. KFC was quite happy to step in and serving huge demands of Japanese families, in this context, franchise laws of the country also favoured and provided easier method and mode of setting up franchisee outlets. As a result, Japan has become the world’s third largest KFC market with more than 1,181 KFC locations. On the other hand, US franchising laws are not much favourable as franchisor needs to face several legalities for establishing franchising outlets in the country (Frankenberry, 2017). 

b) Politics of international franchises: As franchisors around the world emphasis and work for growing their business empires, countries are handling, managing and defending their own issues. The political officials of countries across the globe are concerned with trade negotiations, subsidy agreements and other aspects governing international business, with less interest and weightage to intellectual property concerns and franchising agreements. As dynamics of relationships between nations and countries change, franchisors find themselves in unwilling pawns, which sometimes, even become the casualties of war (International Franchising: The Legal Issues, 2018). 

In international franchising world, case law based on McDonald demonstrates negative impact of politics of international franchises. McDonald once fell victim and faced heavy criticism in Russia, and, 12 franchises were closed on account of ‘violations of intellectual property regulation requirements’, as imposed by the US and other western power against Russia. This unanticipated closure in one of the world’s fastest growing markets has created negative impact on profit potential of McDonald’s (Frankenberry, 2017). 

c) Employment law aspects: In international franchising agreement, it is also necessary to carefully consider and understand applicable employment law and labour standards. There are several issues and factors of which franchisors should be aware and understanding laws of the relevant jurisdiction. Courts, in some cases, have concluded and appointed franchisor as the employer taking into account intellectual property aspects and regulations. For entering and operating under franchise agreement, it is particularly important to understand the employment terms and agreements (Abell, 2013). 

For example, employment agreements in Canada are quite strict where terminations can occur only upon fulfilling provision of reasonable notice. It is contrary to the employment concept exist in some US jurisdictions where termination purely depends on ‘at will’. In Canada, franchisors need to give significant thought to the termination of provision of employment, and, other aspects of franchise and intellectual property agreements. The High Court at Canada deliberately analyse the franchising agreements and provisions ensuring that it should not be oppressive or unfair in any manner, and, establishing intellectual property provisions and rules with fair, equal and impartial treatment (Rogers, Richards and Friedman, 2009). 

In all, international franchising agreement varies considerably among countries asking for due diligence approach on the part of business firms and employers, for ensuring strong and adequate protection to intellectual property aspects and avoiding legal litigations arising on account of violations. 

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