Within Item 13, the franchisor must disclose information about the trademarks of the franchise system including whether they are registered with the United States Patent and Trademark Office, their registration status, and whether the franchisor has notice of a trademark conflict or dispute.
As a defining feature of the franchise relationship, trademarks play a critical role in the franchise sales process.
Although franchisors aren’t required by law to register their trademarks before offering or selling a franchise opportunity, the potential risks associated with unregistered trademarks can make the process worth it. From infringement suits to stolen logos and confused customers, registering your trademark is the best way to protect your brand’s identity. It can also be a great way to help franchisees recognize the added value of your franchise when they’re reviewing Item 13 of the Franchise Disclosure Document (FDD).
Below, we’ll explore the information that must be disclosed in Item 13 so prospective franchisees can feel secure about the legal protection of the trademarks they’ll use in their future business’s daily operations.
Principal Trademarks
According to the federal Franchise Rule, franchisors must disclose each principal trademark that will be licensed to the franchisee. This might include the franchise’s business name, logo, slogan or other key trademarks.
For disclosure purposes, principal trademarks are defined by the Federal Trade Commission as “the primary trademarks, service marks, names, logos, and commercial symbols the franchisee will use to identify the franchised business.” Because franchisors must only disclose the principal trademarks associated with the franchise, secondary trademarks need not be disclosed in Item 13.
Registration Status
Within Item 13, franchisors must state the registration status of each principal trademark disclosed. Under the amended Franchise Rule, each disclosure must address specific details depending on its status.
Registered Trademarks
For principal trademarks that are registered with the U.S. Patent and Trademark Office (USPTO), franchisors must disclose:
The date and identification number of each registration;
Whether all required affidavits have been filed by the franchisor;
Whether registration has been renewed; and
Whether each trademark has been registered on the Principal or Supplemental Register of the USPTO.
Pending Applications
Franchisors that have not registered their trademark with the USPTO must state whether they have filed any trademark applications, including “intent to use” and actual use. This disclosure must include the application’s identification number and date.
No Registered Trademark
Because the licensing of a trademark by the franchisor to the franchisee is a key component of the franchise relationship, failing to register a trademark can leave the door open for potential legal and financial liabilities for both parties. In situations where the franchisor does not have its trademark(s) registered with the USPTO and has not applied for registration, the following mandatory statement must be included in Item 13: “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.”
Material Determinations
Per 16 CFR § 436.5(m)(5), franchisors must disclose any “currently effective material determinations of the United States Patent and Trademark Office, the Trademark Trial and Appeal Board, or any state trademark administrator or court, and any pending infringement, opposition, or cancellation proceeding.”
This includes infringement, opposition or cancellation proceedings where a franchisor unsuccessfully attempted to protect its licensed trademark by preventing its registration. When disclosing such proceedings, the franchisor must address how that determination affects the licensing, use or ownership of the trademark.
Litigation
Within Item 13, franchisors must disclose any pending federal or state litigation regarding the franchisor’s ownership or use of a trademark, including the forum and case number, nature of the claims, and any effective administrative or court ruling in the case.
Agreement Limitations
Under the amended Franchise Rule, franchisors must also disclose any effective agreements that “limit the franchisor's rights to use or license the use of trademarks listed in this section in a manner material to the franchise” within Item 13. For each agreement disclosed, the franchisor must address:
The parties involved;
The duration of the agreement;
The manner and extent of the agreement’s limitation or grant;
How the franchisee will be affected;
The circumstances for modification of the agreement; and
Any other material terms.
Franchisor’s Trademark Protection Obligations
Within Item 13, franchisors must disclose whether the franchisor has an obligation to protect the franchisee’s right to use the principal trademarks disclosed and whether the franchisor is obligated to protect the franchisee against any infringement or unfair competition allegations from the use of those trademarks.
Rights and Obligations
Because franchisees need to understand what is expected of them when it comes to trademark use, Item 13 must clarify whether the franchisee is obligated to notify the franchisor about any use or claims of rights to trademarks that are similar or identical to a trademark licensed by the franchisor. Item 13 must also address whether the franchisor is obligated to take affirmative action when notified of such claims.
Additionally, the franchisor must disclose whether the franchisor or franchisee has any right to control litigation or administrative proceedings involving the franchisor’s licensed trademarks, and whether the franchise agreement requires the franchisor to participate in the franchisee’s defense or indemnify the franchisee for damages or expenses for litigation related to the franchisor’s principal trademarks. The franchisor must also disclose the franchisee’s rights under the franchise agreement in situations where a franchisee is required to modify or discontinue the use of a trademark.
Known Infringements
Under 16 CFR § 436.5(m)(9), the franchisor must disclose whether it is aware of any “superior prior rights or infringing uses that could materially affect the franchisee's use of the principal trademarks in the state where the franchised business will be located.” For each disclosure, the franchisor must address:
The nature of the infringement;
Location(s) of the infringement;
Known duration of the infringement; and
Any actions taken or expected by the franchisor.
Other Considerations
For startup franchisors, making sure your trademark is legally protected is a critical step in the franchising process. Because the process for registering a trademark with the USPTO can be complicated and often requires extensive research, it’s important to work with an experienced attorney that can guide you through the trademark registration process and help you avoid potentially costly legal mistakes.