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TOTAL LICENSING
By Lauren D. Ruff, Esq
Frankfurt Kurnit Klein
& Selz
AVOIDING LEGAL TRAPS
(212) 826-5583 If you are a trademark licensor you are probably taking franchisee commits to pay the franchisor at least $500. U.S.
lruff@fkks.com steps to ensure the quality of goods and services sold un- Franchise laws require franchisors to deliver to prospective
der your mark, and to protect your mark from infringement franchisees a Disclosure Statement including comprehen-
or abandonment. But did you know that too much quality sive financial and management information. Violations can
control or supervision of your mark could transform your lead to FTC enforcement actions, including asset freezes,
licensing arrangement into a “franchise” relationship in the civil penalties up to $11,000 for each violation, and mon-
eyes of the law? And that this is true even if your licensing etary redress for investors (in a recent FTC action, inves-
agreement specifically states that no franchise relationship tors were awarded $4.9 million). While no federal court
is intended? has allowed a private law suit for violations of federal fran-
In the United States, the offer and sale of a “franchise” is chise laws, all state laws authorize private actions. Ask your
regulated under the Federal Trade Commission Franchise trademark counsel which laws apply to your particular
Protecting
Rule, which was adopted in 1979, and under various state situation. How do you prevent your licensing arrangement
registration, disclosure and fair dealing and termination from becoming a complicated franchise relationship? Be-
Your
laws. Operating a “franchise” is much more complicated cause two of the elements of a franchise (the right to sell
than being a trademark licensor, and entails burdensome goods or services under a licensor’s trademark, and pay-
Trademark
disclosure requirements and substantial filing fees. This es- ment of a fee by the licensee) are typical terms in almost
say provides some basic information to help licensors avoid every licensing and franchising relationship, U.S. courts fo-
without
becoming unintentional franchisors. cus on the “significance” of the licensor’s control of, or as-
sistance to, the licensee’s business to determine whether a
becoming
Protecting a trademark. When a consumer purchases franchise exists.
a cup of “Starbucks” coffee, she expects “Starbucks” cof-
a
fee quality, and trademark law protects her right to rely Significant control or assistance. To help courts and
on the “Starbucks” trademark as a promise of the quality the public determine what “significant control or assis-
Franchisor
and source of the beverage. As a result, U.S. trademark law tance” means, the FTC has issued guidelines that include
requires trademark licensors to institute adequate quality examples of “significant control or assistance.” Examples
control procedures governing the use of their marks and include: site approval; production techniques; location or
the quality of the goods or services sold or provided under sales restrictions or advice; restrictions on customers;
them. A licensor that fails to exercise adequate quality con- hours and style of operation; marketing campaigns requir-
trol risks “abandoning” the mark, leaving it and/or similar ing franchisee participation; accounting and product stock
marks vulnerable to competitors. advice; machine maintenance; seminars; and hotline avail-
ability. While the FTC states that it does not consider
Quality control. Although the law does not say exactly trademark control undertaken to protect the trademark
what constitutes adequate quality control measures for a owner’s legal ownership rights in the mark to constitute
trademark licensor, U.S. courts have held that mere “legal” “significant” control or assistance, the FTC’s focus is on
or “paper” control (i.e., your contract grants you control), the level of control and assistance the franchisor has over
without the exercise of actual control, is not enough: a licen- the franchisee’s “overall” business operations (of which
sor must exercise actual control to avoid misuse or aban- monitoring trademark use and quality is only one part) and
donment of the mark and maintain the quality of goods and the degree to which the franchisee is dependent upon the
services sold under it. Examples of actual control include franchisor’s superior business expertise. Therefore, if licen-
formal supervision through comprehensive inspections, and sor control goes beyond simply monitoring trademark use
providing your licensee with use manuals, marketing mate- and quality and extends to the heart of the franchisee’s
rial guidelines, specific quality standards, lists of ingredients, business operations, such as providing assistance or advice
service guidelines, and other direction. While experienced in connection therewith, then such control (in conjunction
trademark counsel can help you include adequate quality with the licensee’s right to sell goods or services under the
control standards in your license agreement, remember mark and payment of fees) could be deemed sufficient to
that it is up to you to enforce those standards. trigger a franchise relationship. In sum, prudent trademark
licensors will be mindful of franchise law requirements as
Franchise law in a nutshell. The FTC’s Franchise Rule they structure their trademark licensing arrangements with
and most state franchise laws recognize a franchise rela- licensees.
tionship if the following elements are present: (i) the fran-
chisor offers the franchisee the right to distribute approved Disclaimer: This article provides general coverage of its subject
or branded goods or services under a business bearing the area and is provided with the understanding that neither the
franchisor’s trademark; (ii) the franchisor exercises signifi- author nor Frankfurt Kurnit Klein & Selz is engaged herein in
cant control over the franchisee’s method of operation, or rendering legal advice and shall not be liable for any damages
offers significant assistance to the franchisee; and (iii) the resulting from any error, inaccuracy, or omission.
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