Trademarks are the crux of any franchise, and understanding franchising trademark needs and licenses common in franchise systems helps counsel advise on franchise matters, whether on behalf of a franchisor or a franchisee.
Franchisor Trademark Registrations
Trademarks are registered in international classes (“Class(es)”) at the United States Patent and Trademark Office (“USPTO”). Classes identify which goods or services the trademark is associated with for its claimed nationwide exclusivity of use. Most franchises understand that they should protect the right to use the trademark in the Class associated with the franchised business, such as lawn care, massage services, restaurant services, etc.
However, fewer emerging franchisors will register additionally for “franchise services,” which is a separate Class and serves to protect the franchise system and franchisor. Failing to register does not mean the franchise cannot use the trademarks to offer and sell franchises, but counsel is advised to review for this Class to see how seriously the franchise is taking itself. If the franchise is not concerned with these trademarks registrations, it may mean that the franchise is not concerned with other best practices or does not have a solid team advising on its structuring and growth.
Review a Franchisor’s Trademarks for a Prospective Franchisee
As part of the review of a Franchise Disclosure Document (FDD), counsel is advised to review the trademarks listed in the FDD’s Item 13 disclosure of the primary trademarks licensed to the franchisee for use in the franchised business. While this Item 13 list need not be exhaustive of all the trademarks a franchisee is permitted to use, it should include the primary trademark(s). Counsel is also advised to search generally for by the name of the company owning the trademarks to see any broader issues.
Two primary reasons for this review are:
1. Ensure the Franchisee is Permitted to Use the Trademarks
A review of these trademark applications or registrations may uncover information important to a potential franchisee that would give it pause before investing.
Examples of these issues include:
A. Trademarks were proposed to be licensed to a franchisee for markets where they had been forced via an Office Action (refusal) and opposition proceeding to waive exclusive trademark rights because of a prior user in these markets who retained the rights to the same name for the same type of business. This limitation had been minimally disclosed in the Item 13, and further review of the USPTO records was necessary and appropriate. Franchisee still invested with this information in mind, but understood it could be sued for its use of the brand in these markets.
B. A franchisor whose trademarks were licensed to it by an international brand to run its U.S. franchise operations were in serious jeopardy of being terminated by the licensor. These facts and the litigation were discussed minimally in the FDD Item 13 and Item 2 (litigation disclosures). Upon learning of the potential loss of trademark rights and a review of the litigation, the franchisee ultimately did not invest due to the attendant risks from the loss of the branding if the franchisor lost the case.
2. Avoid Costly Rebranding
A trademark review may also uncover information that could require the franchisee to rebrand, a potentially expensive process that can also confuse consumers. This review is important because franchise agreement trademark licensing provisions typically permit the franchisor to require the franchisee to change its name and/or other branding upon minimal notice from the franchisor, so knowing as much as possible about potentially necessary rebranding is important from the outset.
Rebranding is a common outcome after am unfavorable USPTO review of a trademark application because the franchisor will determine it cannot continue the trademark because of refusals issued in the USPTO review process, such as other similar pending or registered trademarks, mere descriptiveness, misdescriptiveness, etc.). Counsel is advised to review any pending Office Actions or other claims to assess the likelihood of potential rebranding and help the potential franchisee evaluate the related costs (e.g. cost of new exterior and interior signage, cost of new marketing materials, cost to conduct additional marketing to help consumers understand the new brand, etc.).
Because of the importance of trademarks to the franchisor – franchisee relationship, counsel is advised to consider the franchisor’s trademarks and potential limits to them to help their client understand how the trademarks can best serve everyone involved.
This article was previously published in the Colorado Bar Association Business Law Section Newsletter.