As part of running a business, business owners occasionally need to license their trademarks. Because trademark licenses typically require that the brand owner control use of their trademarks, the agreements require control over the mark. However, if done wrongly, a trademark license can accidentally create a franchise.
In some cases a business owner wants to create a franchise. A franchise can help a business leverage its intellectual property, including its trademark, to make money and grow the business. In some cases, creating a franchise is good; however, having a franchise and not complying the state and federal requirements of a franchise can be a problem. If not done correctly, the owner can be subject to a lawsuit and have civil penalties imposed. Therefore, it is important to understand the differences between trademark licensing and franchising.
Trademark Licensing and Franchising
There is a difference between a having a franchise and licensing a trademark. However, some businesses make the mistake of licensing a trademark in a way that unintentionally creates a franchise. Accidentally creating a franchise imposes additional legal obligations on the franchisor, the owner of the franchise. Failure to comply with the additional legal obligations can impose severe penalties on the trademark owner.
One obligation of a franchisor is that the franchise needs to be registered and the they need to disclose certain information to potential franchisees. The business owner who accidentally creates a franchise and fails to register or provide the necessary information can be sued and fined. In one case, a business owner had to pay $11,000 per day, per violation for failing to properly provide the necessary information.
To avoid accidentally creating a franchise, it is helpful to understand the differences between Trademark Licensing and Franchising.
A trademark license is an agreement between a brand owner and another party, where the brand owner allows the other party to use the brand owner’s, brand. The agreement is called trademark license.
For example, think about Calvin Klein. Whenever you buy a pair of Calvin Klein underwear, you are buying a licensed product. Calvin Klein, apparently, doesn’t make any underwear. The benefits of a trademark license are visible whenever you watch an Avenger’s Movie, buy College Basketball shirt, Buy Pillsbury frozen waffles or drink Hershey’s chocolate Milk. In each case, you are buying a branded product which was not made by the brand owner.
Popular trademarks, like action characters, colleges and sports teams have a large fan base. A Trademark License allows the brand owner to license the use of the brand to others to sell products using the popular trademark. Use of a popular trademark gives a company an immediate market for its products based on the already existing fan base of the popular trademark owner. In addition, by licensing a trademark, a trademark owner can earn money by offering products branded with the popular trademark which are made by someone else. By licensing a trademark, a brand owner can extend its brand even further and make more money.
When you license a trademark, the agreement usually includes terms of the agreement and some of these must be included to avoid losing your trademark. Common Terms for a Trademark License include:
- Payment of Royalties;
- Duration of License (perpetual or limited term);
- Scope of License (Exclusive or Non-exclusive);
- Permitted Goods or Services for use of mark;
- Audit Rights;
- Geographic scope of the license; and
- Quality control provisions, i.e. right to approve or reject any use of a mark.
Franchising is typically a special type of agreement where the Franchisor, or brand owner, authorizes use of a brand. In many cases, it is more than just the use of a brand and includes a particular business model, various types of marketing or advertising materials and offers training, technical support and consulting. Often a potential franchiser is strongly interested in benefiting from a strong brand and business model and using the brand and business model to give them access to a large customer base. The potential franchiser is mostly interested in making money. However, franchising can simply be an agreement related to the use of a brand.
When evaluating if a franchise has been created an analysis. The three prong analysis looks at:
- is there a trademark license;
- does the “franchisor” have significant control or provides significant assistance on the “franchisee’s” operations; and
- was a payment made to the franchisor, or brand owner.
This it typically referred to as the FTC Franchise Rule. It is just a shorthand evaluation. If this is truly a concern, you should contact an attorney to look more deeply into the situation and determine if in fact this is a problem.
Franchises have additional requirements. Because of problems in the past, federal and state laws have been enacted to protect consumers from false or misleading statements of franchisors. As a result, franchisors are required to register and provide something called a Franchise Disclosure Document to any potential Franchisees (someone interested in purchasing a franchise). Failure to properly comply with both state and federal laws can impose stiff penalties on franchisors.
Because the obligations for having a franchise and penalties for failing to do it correctly can be severe, you should understand the difference between trademark As part of growing a business, many business owners think about growing their business and as part of this thought process, the idea of franchising comes up. Does franchising make sense for your business? What is a franchise? Why do people franchise their business? Whether franchising makes sense for your business, you should be aware of what a franchise is and What is a franchise and what do you need to do to expanding their business as a franchise for others.
You should contact one of our attorneys if you have questions about licensing a trademark or creating a franchise.