Checking Trademark Licensing Chains and Usage Limits Before Franchising in China

When an established business prepares to offer franchises, it can be tempting to treat “we have always used this brand” as proof of its right to license it. Yet arrangements in which the founder owns the trademark, an associated company runs the business and another company signs franchise agreements can leave gaps in the licensing chain. For a franchise network, checking trademarks means more than collecting certificates: it means establishing who has the right to grant licences, what they can license and what happens if those rights are interrupted. The following discussion concerns the rules in mainland China.

1. Confirm that the contracting company has the right to grant licences

The Regulations on the Administration of Commercial Franchising identify registered trademarks, business logos, patents and proprietary know-how, among other assets, as business resources. A trademark is not the sole basis for determining whether an arrangement constitutes franchising. However, if franchise recruitment centres on a particular brand, the company signing the agreement should be able to demonstrate that it has the right to license that brand to franchisees.

Start by mapping a clear licensing chain: registered trademark owner—franchisor—franchisee. Where the registered owner and franchisor are the same entity, check its name, legal status and the trademark’s status. Where they differ, examine the upstream licence agreement rather than relying solely on group relationships, the founder’s verbal consent or a copy of the trademark registration certificate.

At a minimum, the upstream licence should answer these questions:

• Is the franchisor expressly permitted to sublicense the trademark to franchisees?
• Which goods, services, territories and forms of use are covered?
• Does sublicensing require approval for each outlet or the signing of additional documents?
• What happens to existing franchise outlets if the upstream licence expires or is terminated, or if the trademark is transferred?

Pay particular attention to whether the licence periods align. A franchisor with only a short period remaining on its own licence should not unconditionally promise franchisees a longer period of brand use. An intention to renew is not the same as an established right to renewal. Where necessary, secure the additional upstream rights before signing franchise agreements.

2. Check the trademark’s status, not just its registration certificate

Create a trademark register recording registration numbers, registered owners, approved goods or services, validity periods, licensing arrangements and any disputes. Verify these details against public information from the China National Intellectual Property Administration and the relevant rights documentation. An old certificate is not complete proof of the current status of the rights.

Under the Trademark Law of the People’s Republic of China, the exclusive right to use a registered trademark is limited to the mark as registered and the goods for which it is approved. Businesses should map each aspect of an outlet’s actual activities against the scope of protection, rather than assume that registration in one class covers everything they do.

For example, a food and beverage brand may involve outlet services, packaged foods and retail sales. Registration for outlet services does not automatically cover packaged products bearing the same name. Check the specific approved goods and services, rather than simply recording class numbers. New products and services should also trigger a fresh assessment of the scope of protection.

Compare the versions actually in use, too. Do the wording and graphics on signage, packaging, food delivery profile images and membership pages match the registered mark? A redesigned graphic produced by the marketing team should not be promoted as the original registered trademark without first being checked.

For marks with pending applications, clearly distinguish between “application pending” and “registered”. An approaching renewal deadline, cancellation or invalidation proceedings, or an ownership dispute does not necessarily mean that rights have already been lost. However, businesses should assess the implications for franchise licensing and avoid unsupported assurances about the security of those rights.

3. Define the licence scope in the agreement and put licence management into practice

A trademark schedule should be agreed alongside the franchise agreement, listing each mark, registration number, approved goods or services, licence period and limits on use. Avoid wording that merely “permits use of the franchisor’s brand”, leaving outlets to interpret the extent of their permissions.

At a minimum, address the following situations:

• Physical outlets: Which operating entity and address does the licence cover? Is approval required to relocate or open additional outlets?
• Online operations: May franchisees open online shops, food delivery accounts or social media accounts? Who approves account names and profile images?
• Promotional materials: May outlets produce their own packaging, posters or co-branded campaign materials?
• Further licensing: May franchisees allow associated companies, joint operators or other outlets to use the brand?

The territory covered by a trademark licence is not the same as territorial protection under a franchise agreement. Allowing an outlet to use a trademark in a particular location does not automatically prevent the franchisor from opening nearby. Any exclusivity arrangements should have their scope and exceptions expressly defined.

Article 43 of the Trademark Law requires licensors to supervise the quality of goods on which licensees use the registered trademark, while licensees must ensure the quality of those goods. Goods bearing another party’s registered trademark under licence must also indicate the licensee’s name and the place of production. Businesses should implement quality reviews, spot checks and corrective procedures suited to their operations, rather than treat trademark licensing simply as a fee-collection arrangement.

The same article requires the licensor to file the trademark licence with the Trademark Office, which then publishes it. An unfiled licence cannot be asserted against a good-faith third party. Trademark licence recordal and commercial franchise filing are separate requirements; neither replaces the other. Businesses should check who must file, which documents are needed and what procedures apply to their particular licensing and sublicensing structure.

4. Agree in advance how changes to rights and franchise exits will be handled

A franchise agreement should cover not only the conditions for starting to use the brand, but also changes to rights and circumstances requiring use to stop. It should establish who is responsible for notification, assessment, enforcement of rights and any resulting losses if the upstream licence is terminated, the trademark is not successfully renewed or an ownership dispute arises.

Avoid sweeping provisions stating that “the franchisor may change the brand at any time, with all costs borne by the franchisee”. Distinguish between the reasons for a change and specify the legal basis for using replacement marks, procedures for replacing signage and packaging, reasonable transition arrangements and the allocation of costs. Where a change materially affects operations, review contractual liability and standard terms against the Civil Code of the People’s Republic of China. Exclusion clauses should not take the place of risk management.

The exit checklist should cover signage, uniforms, packaging, online shop names, location listings and brand accounts. Separately agree how remaining stock will be handled, whether materials must be returned or collected, and who must provide evidence that use has stopped. Do not assume that franchisees may continue selling remaining trademarked goods indefinitely. Account arrangements must also comply with platform rules and personal information protection requirements.

These arrangements should be consistent with franchise recruitment materials. The Regulations on the Administration of Commercial Franchising and the Measures for the Administration of Information Disclosure in Commercial Franchising impose pre-contract disclosure obligations, including disclosure of relevant business resources. Known licensing restrictions or material risks should not be obscured by promotional claims such as “nationwide brand licensing rights”.

Practical takeaway: Before offering franchises, complete a trademark status register, a licensing-chain diagram and a trademark schedule for the agreement. If any of these fails to establish that the business can lawfully license the brand to franchisees throughout the intended term, put the necessary rights in place before proceeding with contracts.