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IP Newsletter | Spring/Summer 2018
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TRADEMARK, DESIGN & UNFAIR COMPETITION
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Franchise Founders Criminally Indicted for Failure to Transfer Trademarks to Their Franchises
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An unusual feature of many Korean franchising businesses is that the trademarks on the brands for these businesses often are owned by the individual founders of the businesses, and not by the businesses themselves. The businesses pay a licensing royalty to the individual founders, and the cost of the licensing fees is passed on to the franchisees. This structure has been the subject of many complaints by franchisees in Korea, who generally feel that the fees are too high and make it overly costly to run their franchises.
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On May 13, 2018, after a years-long investigation, the Seoul District Prosecutor's Office decided to issue criminal felony indictments against the individual founders of several Korean franchising businesses, charging them with breaches of trust under the Act of Aggravated Punishment for Specific Economic Crimes. The position of the Prosecutor's Office appears to be that failure of a business owner to transfer relevant trademarks to the business once it grows large enough to license the brand to franchisees unlawfully interferes with the business' ability to maximize its own profits and thereby constitutes a breach of trust and abuse of trademark rights.
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It should be noted that according to statistics published by the Korean Intellectual Property Office (KIPO), about 77% of all registered franchise trademarks in Korea are owned by individuals rather than the franchise business. While many have applauded the prosecutors' decision to pursue these charges, particularly franchisees who in many cases feel that their franchise fees have become unreasonably high due to high royalty fees charged by the individual trademark owners, others have criticized the implication that individual founders owning franchise trademarks are required to transfer their marks against their will, given that the goodwill and brand reputation of franchise companies are largely due to the efforts and investment of the founding individuals. In any event, Korean companies are paying close attention to the upcoming district court decision.
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The prosecutors' aggressive approach has been mirrored by KIPO as well, which has recently announced a plan to revise its trademark examination guidelines to require individuals applying for franchise trademarks in their own name rather than the name of the franchise to prove the individual's intent to use the trademark before the application can be allowed. In the absence of such proof, KIPO will issue an office action rejecting the application, which can only be overcome by changing the name of the applicant to the franchise company which will be using the mark. It is unclear what, if any, effect these new guidelines will have in practice, however, since in most cases applications for franchise trademarks are filed before the franchise becomes well known.
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For more information, please visit our website: www.ip.kimchang.com
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