Technology Transfer in Franchise Agreements

When you franchise an existing business, you are not simply allowing someone to use its name. You are also sharing the know-how that makes it work: the processes, methods and systems developed through day-to-day operations. This means the agreement may fall within the rules on technology transfer. For a responsible franchise sector, it is important to review this before offering the agreement or asking anyone to sign it.

1. Identify the know-how and rights being transferred

Under Section 4.2 of Republic Act No. 8293, the Philippines’ Intellectual Property Code, a technology transfer arrangement covers the transfer of systematic knowledge for manufacturing a product, applying a process or providing a service. The definition also includes the transfer or licensing of intellectual property rights.

The transfer does not have to involve advanced machinery or an invention. In a franchise business, it may include preparation methods, service delivery systems and the use of a trade mark. Franchise agreements commonly bring these elements together, making a review of the rules on voluntary licensing important.

Before consulting a lawyer, prepare a table with three columns:

• What is being made available: a trade mark, confidential method, system or proprietary software.
• How it is being transferred: demonstrations, documents, training or permission to use it.
• Limits: who may use it, for what purpose and for how long.

Include the annexes and any documents referred to in the agreement. A restriction may appear in a separate policy but still form part of the franchisee’s overall obligations.

2. Look for provisions that need scrutiny

Section 87 of the Code sets out prohibited provisions in technology transfer arrangements. A condition is not necessarily permissible simply because it is common in other franchises.

Conditions requiring review include those that oblige the recipient of the rights to buy equipment or ingredients from a specified source, give the licensor the power to set resale prices, or require the recipient of the technology to transfer inventions or improvements free of charge.

For example, you may want all improvements developed by the franchisee to belong to you automatically, without payment. Although the aim may be to maintain consistency across the system, this could conflict with the prohibition on transferring improvements free of charge. Seek legal advice on how to establish ownership and usage rights in compliance with the law.

For each potentially problematic condition, write down:

1. The problem you want to prevent.
2. Why the restriction is necessary.
3. A narrower alternative that could achieve the same aim.
4. Whether approval for an exemption is needed.

Do not assume that adding the phrase “for brand protection” is enough. The actual effect of the condition needs to be assessed, not just the explanation given for it.

3. Make sure the mandatory provisions are included

Section 88 sets out mandatory provisions. These include applying Philippine law when interpreting the agreement and, in the event of litigation, bringing proceedings before the appropriate court in the place where the licensee has its principal office.

They also include continued access to improvements in the relevant techniques and processes throughout the term of the agreement. If arbitration is provided for, its procedure and venue must comply with those permitted by law. The section also states that Philippine taxes on payments relating to the technology transfer must be borne by the licensor.

This makes collaboration between your lawyer and tax adviser essential. A general statement that “all taxes are payable by the franchisee” may conflict with the required allocation of liability.

Under Section 92, an arrangement that complies with Sections 87 and 88 does not need to be registered with the Intellectual Property Office of the Philippines. A non-compliant arrangement may be unenforceable unless the appropriate exemption has been approved and registered. This is not a minor defect that can be remedied simply by obtaining both parties’ signatures.

4. Keep this review separate from other obligations

The Philippines has no single comprehensive franchise law. The Civil Code governs contracts, the Intellectual Property Code governs licensing, and Republic Act No. 10667 governs competition. Republic Act No. 9178 concerns barangay micro business enterprises — businesses at local community level — rather than franchising.

Executive Order No. 169, issued in 2022, also sets minimum terms for franchise agreements with micro, small and medium-sized enterprise franchisees. It has an associated registration mechanism through the Department of Trade and Industry (DTI). This is separate from the review and registration of technology transfer arrangements; check the applicable procedure with the DTI.

Before offering a franchise, make sure the agreement, its annexes and your actual policies are consistent. Keep a final version reviewed by a lawyer, and have any significant amendments reviewed again.

Practical step: Start by listing the know-how being transferred and the restrictions being imposed. Then have each item reviewed under Sections 87 and 88 before accepting payment or a signature.