The Role of Your Trademarks In Your Franchise System
As a start-up franchisor or as the franchisor of an existing and emerging franchise system, your trademark(s) represent critically important assets to your franchise system. As a franchisor, within your franchise agreement, one of the core assets and rights that you will be granting to franchisees will be a license permitting a franchisee to utilize your trademarks and, in turn, you are representing to your franchisee that you own the trademarks and that you will protect and defend your trademark. Recognizing the significance of trademarks to franchising, under the franchise laws, FDD Item 13 is devoted to describing and disclosing the franchisors trademarks and whether or not the trademarks are registered with the United States Patent and Trademark Office ("USPTO").
Below we will discuss various aspects of trademarks, trademark registration and what you need to know as a franchisor. Keep in mind that as a franchisor you are now taking on a new role and, as franchisor, you are granting franchisees the license and right to use your trademarks. So its important to make sure that you actually own and can protect the trademark that you are purportedly licensing to your franchisees.
What Is a Trademark?
A trademark is a word (i.e., your business name and your trade name) or symbol (i.e., your logo) adopted and used by you to identify your business and to identify the goods you sell and/or the services that you provide. Your trademark is your brand, your brand name, your trade name and your logo. Your business may have multiple trademarks that may even include specialized names that you give to your products or services. As a business owner you understand that your business name is your trademark and brand. The next step is to evaluate whether or not your trademark is legally protectable and if it is then to evaluate whether or not you own the trademark.
Is Your Trademark Legally Protected?
Just because you have used the name of your business (your trademark) for many years or just because your corporate name (when you incorporated and formed your business) does not mean that your trademark is legally protectable nor that you own it. Ownership and legal rights associated with a trademark comes about through two sources: (i) The first source is through your actual usage of the trademark and the rights that you obtain through this usage is known as a common law trademark, (ii) The second source is through registration of the trademark with the USPTO and the rights that you obtain through this usage is known as a federally registered trademark. Trademark rights obtained through a federal registration are much stronger than rights obtained through common law usage.
In addition to evaluating "how" you obtained your trademark rights, it is important to evaluate the strength of your trademark. Under the law, a trademark that is "descriptive" is not capable of protection. A descriptive trademark is a mark that describes the products that you sell or the services that you provide. Examples of a descriptive trademarks include "Brick Fired Pizza" for a pizza restaurant or "Rapid Printing" for a printing business. Trademarks that are arbitrary and have nothing to do with the products or services of your business are afforded the highest level of legal protection. Examples of arbitrary trademarks include "apple" for computers and "H&R Block" for tax preparation services. Trademarks that are suggestive are marks that fall in between descriptive and arbitrary and are afforded some protection.
So, understanding whether or not your trademarks are legally protectable requires an evaluation of whether or not you possess common law rights or registered rights and whether or not your trademark is descriptive, arbitrary or suggestive. Factors to know and understand, include:
- Your Trademark Eventually Needs to Be Registered.
As a franchisor your entire system will be growing around your trademark and brand. Common law trademark rights are weak and may be inferior to the rights of others who may (in a different part of the country) have adopted a similar or identical trademark. When you obtain USPTO registration of your trademark you obtain trademark rights that are nationwide and superior to anyone and everyone in the country who may later attempt to utilize the same or confusingly similar trademark. Common law rights are much weaker than a federal registration and should not be relied upon as a franchisor.
- Conduct Trademark Searches Early On.
If you are at the franchise development stage then it is critical that your franchise lawyer conduct trademark searches to determine if your trademarks are even protectable. If another business in the same industry has previously filed or obtained registration of a trademark that is the same as yours or confusingly similar to yours, then you will not obtain registration and you will be required to establish an alternative trademark and trade name. If you have already launched your franchise, then it is important to ensure that you obtain registration and closely monitor the status of your trademark registrations.
- Evaluate the Strength of Your trademark Early On.
Even if your trademark has not been adopted or registered by a third-party, if the mark is descriptive the USPTO will deny registration. In such case you will be required to modify your trademark to negate its descriptive nature and make it suggestive.
- Do You Have Notice of Third Party Usage.
As a franchisor you must police your trademark and monitor usage by other businesses. As a franchisor your business and brand will be expanding throughout the country and with that expansion comes additional scrutiny. Understand that even if your trademark is registered, your rights may nevertheless be inferior to a local business with a common law interest if that local business was in operation prior to the date of your USPTO registration. Prior to sending cease and desist notices to what you believe to be third-party infringers, your franchise lawyer should evaluate the third-party's usage to determine if they possess any pre-existing rights. If you license and grant a franchise in a territory where a third-party possesses superior common law rights, you may be exposing your franchise system and your franchisee to potential trademark infringement claims.
The Trademark Registration Process
Protection of your trademarks will require the filing of a trademark registration application with the USPTO. The trademark registration application will include sample of your trademark, will identify the owner of the trademark, the date that you first used the trademark in commerce and the classification codes for your business. Once a trademark application is filed there will be a waiting period until the application is assigned to an "examining attorney". The examining attorney will conduct trademark searches to determine whether or not someone else already registered the trademark and the examining attorney will evaluate the legal strength of the trademark to determine if it is legally protectable.
If the examining attorney believes the trademark is descriptive then she will issue what is known as an "Office Action Letter" where she indicates that she has refused to grant registration. Part of the trademark registration process will involve responding to office action letters where your franchise and trademark lawyer addresses issues raised by the examining attorney. If your trademark application passes review by the examining attorney, then your application will be published in what is known as the Trademark Official Gazette which serves as notice to the world that you are claiming protection to your trademark. If there is no opposition to the publication of your trademark, then registration will eventually be granted. The typical time period for obtaining USPTO trademark registration is approximately 8 months from the date of your initial registration application.
Trademark Disclosures in Your FDD
FDD Item 13 is specifically devoted to disclosures about a franchisor's trademarks. Within Item 13, as to each of a franchisor's principal trademarks, a franchisor must disclose each trademark and whether or not each trademark is registered with the USPTO and the status of all USPTO trademark applications and the renewal status of each trademark. Additionally, within Item 13 a franchisor must disclose "the existence of any pending litigation, settlements, or superior rights that may limit a franchisee's use of the trademark". If a trademark is not registered with the USPTO, Item 13 must include the following trademark registration disclaimer:
We do not have a federal registration for our principal trademark. Therefore, our trademark does not have as many legal benefits and rights as a federally registered trademark. If our right to use the trademark is challenged, you may have to change to an alternative trademark, which may increase your expenses.
As a franchisor, it is critical that you evaluate and protect your trademarks at the franchise development stage, through the launch stage of your franchise system and on an on-going basis as your franchise system grows.
Lawsuits involving trademark infringement are, most commonly, governed by federal law. The federal Lanham Act provides a federal cause of action for trademark infringement. Franchisors possess claims for trademark infringement against any third party (including former and, possibly, existing franchisees) who use a "word, symbol or device" to "cause confusion" regarding the source of origin of the products or services. When assessing, a potential lawsuit involving trademark infringement, franchisors must consider the following:
- Federal Trademark Registration is Critical but not a Guaranty.
As discussed earlier, federal USPTO registration affords a number of legal benefits and rights that will enhance a franchisor's ability to protect and defend its trademarks. However, federal registration is no guaranty and prior to commencing any litigation whether or not the prospective defendant claims any pre-existing common law rights to the mark. Although unregistered, a third party's pre-existing common law usage of a mark may serve as a defense to an infringement action. Also, this defense may weaken the strength of your mark and lead to many collateral issues. So prior to commencing any trademark litigation, it is critical to understand and evaluate any claims of pre-existing use.
- You Must Prove That your Trademark is Entitled to Protection.
To establish a claim for trademark infringement, you must establish that (a) the your trademark is protectable (i.e., that the trademark is not merely descriptive), and (b) the defendant's use of an identical or similar mark is "likely to cause confusion" among consumers. Remember, not every mark is protectable.
Evaluating, registering and protecting a franchisor's trademarks is a part of our Franchise Launch Program for new franchisors and part of our Franchise Counsel Program for existing franchisors.