Quality Control in Licensing and Franchising
14 November 2012
Every brand is an intangible property of its owner and has a financial value attached to it. It is highly important to maintain the quality standards of a brand in order to keep it as an asset to any company and to maximise its potential value. A strategically well-planned franchise and licensing program should always include business operation guidelines/manuals, training programs and, most importantly, strict quality control measures and mandatory enforcement of quality control guidelines. A licensee/franchisee system which fails to maintain quality control setups is unlikely to survive in today’s tough competitive markets, where consumers know what they want from a particular brand and expect a certain quality standard that they are used to. Quality control is fundamental to ensuring that the license relationship is not detrimental to the brand. Therefore, in order to accomplish brand recognition in a positive manner, it becomes imperative to establish controls over the operations of the licensee or franchisee and the quality of the service or product offered by them.
It has been noted that quite a lot of brand owners and franchisors fear that their decision to license and franchise may lead to a loss of quality control over their brand name and operations and management of their business which their consumers normally expect. It is the quality and uniformity of a product/service that drives the consumers to turn to a brand/franchise for a particular product or service. Adequate control by the licensor is necessary to ensure that the licensee’s products are of the same quality as earlier associated with the licensor’s trademark. A licensor must also maintain quality control over the goods and services sold under the licensed mark in order to retain valid licensing and franchising agreement. Reasonable measure should be taken by the licensor to assure that the goods and services meet the set standards. In case due control over the quality is not maintained, the same may lead to consumer deception and abandonment of the rights vested in the trademark since the same can no longer distinguish the products and services of one proprietor from another. Licenses without adequate quality control have been considered as ‘naked licenses’ and trademark rights have been forfeited in order to protect consumer interests.
On a related note, even when a franchisor provides strict guidelines for the smooth operation of a franchise, they should carry out timely checks to ensure that the franchise is being run according to the standards and specifications laid down by the franchisor. Negligence in monitoring quality in licensing and franchising may also lead to the dilution of the brand and the tarnishing of the reputations of other franchisees in the same franchising network. Compliance with quality control measures should not be viewed as forced actions on the part of the licensor or franchisor but rather should be mutually agreeable genuinely required actions between both the parties for smoother implementation.
Owing to stiff competition in the market and protection of the brand, a number of methods have emerged to maintain quality and to live up to the expectation of the consumers which can be implemented both across licensing and franchising networks. These methods of ensuring quality control can be in the form of express or oral contracts. In other words, quality control may be implemented through provisions agreed to in writing between the parties, through provisions agreed to orally, or through the actual exercise of control, even though there is no written or oral contract.
Written contracts providing for quality control is called a license/franchisee agreement. These agreements usually contain quality control provisions such as the licensee’s/franchisee’s acknowledgment of the licensor’s/franchisor’s:
• right to control quality;
• right to oversee the licensee’s/franchisee’s premises;
• right to observe the products manufacturing process;
• right to approve the licensee’s/franchisee’s marketing, packaging, advertising, and manner of intellectual property usage; and
• right to approve the licensee’s/franchisee’s acknowledgment of the validity of the trademark, ownership by the licensor/franchisor and its agreement for not entering into a competing business.
Licensors/franchisors who strategically develop their system slowly in order to permit the absorption of quality control standards across the board and show the willingness and ability to enforce the quality systems never face quality-related issues and are also successful in avoiding product liability issues arising out of inferior quality products/services.
Lall Lahiri & Salhotra
LLS House, Plot No. B-28,
Sector - 32, Institutional Area,
Gurgaon - 122001, National Capital Region, India
T: +91 124 2382202, 2382203
F: +91 124 4036823, 2384898
E: Rahul@lls.in
W: www.lls.in
