Trademark License Agreement
Most trademark attorneys caution trademark clients against becomes an unknowing franchisor. Franchise laws impose penalties on franchisors who fail to fallow the difficult and complex franchise laws. A trademark license agreement can help trademark owners avoid franchise liability by avoiding too much control. There is a fine line between being a trademark owner who controls their brand and a franchisor owner which is subject to enhanced penalties for failing to fallow franchise laws. In some cases, franchises can be helpful for new business owners trying to start a new business.
What is a Franchise?
A franchise can be created when a trademark owner and a trademark user enter an agreement in which the trademark user obtains the right to use a trademark in exchange for paying a fee to the trademark owner. Generally, the agreement between a trademark owner and a trademark user is called a license agreement. Trademark license agreement can provide a right for the trademark owner to exercise control over the licensor’s use of the mark. Some of these agreements also include control over the trademark licensee’s business or include the licensor provide assistance to the licensee.
Many franchises are considered to be a “new business in a box” where everything is provided to help you start and run a new business. In exchange for payment of the necessary franchise fees, the new business receives all the help needed to operate and run the new business. Many times, the franchisor will receive a base payment and additional required payments for the operation of the business. Many franchises are subject to over promise and under delivery.
A typical franchise has three elements:
- The trademark owner granting a licensee to a licensee for use of a trademark.
- The licensee pays the trademark owner a fee which is unrelated to the purchase of goods.
- The trademark owner also provides substantial assistance to the licensee, maintains a right over the licensee’s methods of operation, or provides a marketing plan or system for the use of the trademark.
In the United States, a franchise requires all three. Regardless of what something is called, if the parties relationship includes all three, then the trademark owner shall be subject to various franchise obligations and the licensee shall be protected under various consumer protection laws which cannot be waived.
License vs. Franchise
The US Federal Trade Commission has explained the difference between a licensor and a franchisor:
- a licensor cares about the end product or result; and
- a franchisor cares about the method of producing that result.
A licensor of auto parts might grant a company the right to use its trademarks, buy parts and install them, and the licensor would focus only on whether the auto parts were installed correctly at the end of the job. A franchisor of a auto parts company cares about the final results, but also about the rest of the licensee’s operations, such as whether the employees are prompt and courteous or offer various auto parts options and upgrades. Imposing controls over how the licensee does its job is the difference between a trademark licence and a franchise.
Many would-be licensors become franchisors. When the goal is business reproduction, most franchisors conclude that a large number of operational controls are required in order to preserve the franchisor’s goodwill. The licensor’s business or other licensee’s businesses may suffer if the employees at another one of the identically named business did not look as clean, was not as good or their staff was not as polite or professional.
Even in instances where the trademark owner attempts to limit its control, in most franchise scenarios the licensor will be called on to provide, or at least make available, substantial assistance. A typical franchisee wants its business to be just as successful as the original and may call upon the original to provide operations manuals, training, recipes, formulas or other guidance that may help the licensee to share in the success of the original franchisor. Meaningful assistance may include training or access to tools or platforms such as a mobile application, point-of-sale system, use of the licensor’s website could constitute enough assistance to impose franchise liability.
Contact one of our trademark attorney’s to discuss how to license your trademark with a trademark license agreement, reducing the risks and penalties associated with a potential franchise.