Hong Kong Franchise Infringement Claims: Agree Responsibilities Before You Sign

After buying a franchise in Hong Kong, you may receive a solicitor’s letter alleging that images displayed in your shop, product designs or operating software infringe a third party’s rights. Simply forwarding the letter to the franchisor does not resolve the problem. Franchising depends on co-operation, but who responds, who pays and whether you can continue trading should all be agreed in writing before you sign. This article focuses on handling third-party infringement allegations, rather than simply checking whether a brand is registered.

1. Distinguish permission to use materials from an assurance of non-infringement

Whether the franchisor has the right to authorise your use of particular materials and whether that use infringes someone else’s rights are two separate questions. For example, promotional artwork created by the franchisor may still contain photographs that have not been properly licensed. Software specified by the brand may also come with restrictions on installation locations or user numbers.

Hong Kong has no franchise-specific legislation, nor any statutory pre-sale disclosure or franchise registration regime that generally applies to franchise transactions. The parties’ rights and obligations are primarily governed by common law contract principles and relevant general legislation. Infringement disputes may fall under the Trade Marks Ordinance (Cap. 559), the Copyright Ordinance (Cap. 528), the Patents Ordinance (Cap. 514) or the Registered Designs Ordinance (Cap. 522). Unregistered marks may also give rise to a common law action for passing off.

You should therefore not assume that franchisees automatically have a legal right to have the franchisor defend a claim or cover all losses. Practical guidance from Hong Kong’s Intellectual Property Department notes that franchise arrangements commonly involve trade marks, trade secrets and know-how. The risks and scope of protection for each type of right deserve separate consideration.

2. Request disclosure of disputes and define which uses are protected

Before signing, ask the franchisor to confirm in writing whether the names, images, packaging, software and product designs intended for your Hong Kong outlet are subject to any unresolved infringement complaints, solicitors’ letters or legal proceedings. Do not simply ask whether there is any litigation: a dispute may still be at the negotiation stage.

You can request information with confidential details appropriately redacted so that an independent solicitor can assess whether the dispute could affect your opening. If the franchisor refuses to provide it, ask why and whether it can give specific written assurances instead.

The agreement should distinguish between:

• Use of specified materials or systems without alteration, following the franchisor’s instructions;
• Local adaptations approved in writing by the franchisor;
• Content added by the franchisee or uses that have not been approved.

Protection should not be subject to a blanket exclusion for ‘all local advertising’. Where the franchisor approves an adaptation, specify which intellectual property checks that approval covers and what responsibilities each party retains. Franchisees should also keep copies of material versions, approval emails and usage records.

3. Specify who makes decisions and who pays after a complaint

An infringement allegation does not establish that infringement has occurred, but it cannot be ignored. The agreement can set out deadlines for forwarding notices, designated contacts, responsibilities for preserving evidence and the time allowed for the franchisor’s initial response. These deadlines should be realistic and allow for court orders or other urgent situations.

If the franchisor controls the defence, the franchisee should still be entitled to progress updates and documents relevant to its own liability. In particular, restrict the franchisor’s ability to settle without the franchisee’s consent where a settlement would require the franchisee to admit liability, make a payment, stop trading or take on continuing obligations.

Cost provisions should specify how reasonable legal fees, expert fees, approved settlement payments and court-ordered payments will be allocated. They should also clarify who pays upfront, so that a franchisee does not find itself unable to defend a claim even if it can eventually recover the costs. If the parties’ interests conflict, the procedure and costs for appointing separate solicitors should also be agreed in advance.

4. Agree replacement solutions alongside operational losses

A promise that ‘the franchisor will handle it’ is not enough. Require the franchisor to provide lawfully sourced replacement materials, software or product solutions when an allegation affects operations, with clear deadlines, acceptance procedures and responsibility for replacement costs.

Take a complaint about the specified point-of-sale software as an example. Switching systems may involve equipment configuration, data migration and staff retraining. The agreement should state who pays these direct costs, rather than merely promising new software.

If part of the business must be suspended, also agree how fixed franchise fees will be adjusted during the affected period, how the costs of removing and replacing promotional materials will be handled, and what options will be available if the dispute remains unresolved for an extended period. Whether trading losses are recoverable must be checked against the agreement’s overall liability caps and exclusions of loss, rather than assessed by looking at a single assurance in isolation.

Practical takeaway: Before signing, run through a scenario in which you receive a solicitor’s letter alleging infringement. Ask the franchisor to explain, step by step, the procedures for notification, defence, payment and alternative operating arrangements. Then have a Hong Kong solicitor incorporate the agreed arrangements into the contract. Clear responsibilities are more useful than a vague promise that ‘the brand is protected’.