Franchising and virtual reality and augmented reality – what legal issues you need to be considering now

by Dentons


With predictions that Virtual Reality arcades may be a new trend.1, the time has come for franchisors to seriously consider the impact on franchising of the growth in Virtual Reality (VR) and Augmented Reality (AR). Although the developments are exciting, legal issues abound and VR and AR strategies for franchising need to be thought through carefully. This article aims to provide you with an overview of the VR and AR in franchising and set out some of the complexities.

What is virtual reality and augmented reality?

VR is an artificial software-created virtual environment which users see through a head mounted device. They see displays presented in such an immersive way that it is easy to accept them as real.

By contrast, AR supplements the real world. The user sees the real world on a device, such as a tablet or mobile phone, but with the addition of computer generated images which are overlaid onto various real objects. Augmentations can be sound, video, graphics or data. AR achieves this by adding computer vision and object recognition to data about the real environment surrounding the user. AR presents that content overlaid onto the user's real world.

How are franchise systems now exploiting AR and VR technology?

There are an increasing number of franchised brands who are capitalising on opportunities to exploit this new technology. Notable examples of VR and AR being used in franchised business are the following.

  1. McDonald's launched an AR app that showed the production process of its food. Additionally, in Sweden, McDonald’s released their own version of the Google Cardboard turning the Happy Meal Box into a McDonald’s Cardboard VR Headset. Customers could play a game on their phones called Slope Stars and McDonald’s gained another promotion opportunity.
  2. Häagen-Dazs uses AR to entertain consumers while they wait for their icecream to become soft enough to scoop. A virtual violin concerto is projected onto the top of a tub of icecream.
  3. Marriott uses VR to showcase its hotels to potential guests.
  4. A hairdressing franchise in Australia, Just Cuts, has introduced a VR Kiosk Salon.
  5. A VR arcade pilot has been run for The VOID’s VR theme park in Utah, USA.

It is inevitable that franchise systems will need to embrace AR and VR as part of their brand strategies – not just for use in franchise training but also for use in franchise marketing, franchisee induction and employee initiation and outlet design.  Three dimensional displays allow customers or franchisees to immerse themselves in the brand – whether as part of franchisee assessment or part of customer engagement in the brand experience at an in-depth level. Franchisors are also maximising other efficiency opportunities such as using VR to design and assess retail locations.

The success of the AR game, Pokémon-Go, last year paved the way for these early adopters. Franchises have now embraced VR and AR as an opportunity to attract increased footfall into their outlets. Franchises initially capitalised on the Pokémon-Go craze by using the Pokéstop feature of the game (locations where gamers collect items) and marketing the fact that they were near those locations or others where game characters could be "collected". Additionally, franchises were paying to locate a "lure" near their premises (which brings a Pokémon character to a location) or were sponsoring such locations. McDonald's, for instance, entered into such a sponsorship deal when Pokémon-Go launched in Japan.

Legal issues associated with VR and AR and franchising

However, franchisors and franchisees need to consider some of the legal issues which are associated with this new and exciting technology.

Real world IP rights in the virtual world

Consider, for example, who might own the intellectual property rights in a virtual T-shirt with a favourite brand's logo on it which is created by the user for their avatar to wear online? Franchise agreements need to deal with VR and AR intellectual property which is created in virtual settings.

Trade mark rights also need to be considered – there is a difference between virtual world goods and real world goods. Franchisors may find the scope of their trade mark rights cover only real goods which may not be adequate for the franchise business.

Virtual IP rights in the real world

Another issue to be considered by franchisors is who owns rights to geo-tag real world locations such as a franchised premises. An owner of a famous landmark or flagship store may well want to claim rights as to how that landmark is to be identified or have a grievance if false information is given about it.

It should be borne in mind that VR facilitates the creation of very personal virtual worlds by the user. Users can create different identities and an alternate world which can be very novel. Franchisors, in developing their interactive platforms, need to be clear about the ownership of any IP created via their VR / AR technology in terms of its agreements with its franchisees and then the use agreements with users. This is particularly so as the deeply personal nature of virtual experiences leads many users to strongly identify with their virtual world.

Virtual liability

Usually, under the franchise agreement, the franchised business is responsible for injuries or trespass associated with the use of VR / AR technology. This becomes more significant if customers or users can interact with each other. Could they threaten or hurt each other? Franchisors need to consider if their VR / AR applications encourage trespass onto private land or some other illegality and ensure that their terms of use disclaim the VR / AR platform's liability. Will more need to be done in particular circumstances to avoid liability? Last year, there were reports of distracted gamers walking in front of vehicles to catch Pokémon characters or mobile phones being stolen while gamers were in unsafe locations to which they were encouraged to travel when playing the game. At the minimum, franchisors should require their franchisees to incorporate appropriate warnings and health and safety notices and police virtual locations and act on any trouble spots.

Royalties on virtual sales and restrictions on virtual locations

Another issue to consider is whether the franchise agreement adequately deals with the virtual opportunities.

  • Does the franchise agreement, for example, consider whether royalties are payable for virtual sales made by franchisees to customers using digital currencies that would have no value to a third party in the real world?
  • Does the franchise agreement provision for virtual locations, such as franchised business being located in a virtual mall?
  • How are rights allocated in the franchise agreement relating to the geo-tagging for any particular premises – and what will happen to the geo-tagging data once the franchise brand no longer occupies that location?


In summary, many franchisors, particularly in the retail space, are developing their virtual strategies. VR and AR looks set to grow strongly and its future in franchise systems is inevitable.

1. See "Are Virtual Reality Arcades Becoming A Trend?" dated 23 June 2016 by Jonathan Nafarrete in VR Scout.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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