Basic Intellectual Property Issues in Franchise Offerings
By Robert Kouchoukos
Have you ever considered franchising your business in the United States? If so, you should consider the impact a franchise offering may have on your company’s intellectual property rights. The following provides an outline of some basic intellectual property issues that often arise in franchise offerings.
Franchising in the United States is regulated by the U.S. Federal Trade Commission (“FTC”) and various state agencies. The FTC enacted what is referred to as the “Franchise Rule,” which sets forth specific rules governing disclosure requirements and prohibitions concerning franchising and business opportunity ventures. The basic requirement under the Franchise Rule is that franchisors provide prospective franchises with a “uniform disclosure document” that includes written disclosures containing information about the franchisor, the franchised business and the franchise relationship. The Franchise Rule primarily covers business-format franchises, product franchises, and vending machine or display rack business opportunity ventures. Unlike state disclosures (discussed in more detail below), the rule does not require registration, filing, review or approval of any disclosures, advertisements or agreements by the FTC.
A number of states have also enacted separate franchise disclosure laws requiring franchisors to make additional disclosures to potential franchisees. Unlike the Franchise Rule, state franchise regulations often require a franchisor to file a disclosure document, franchise agreement and related materials with a designated state office for review, approval and registration prior to offering or selling a franchise in the state.
While not legally required, there are a number of benefits for a franchisor to obtain a federal trademark registration for its core trademarks prior to commencing the franchise offering process. Some states (including Connecticut, Florida, Georgia and South Carolina) provide franchisors with exemptions from franchise or business opportunity laws if a franchisor can demonstrate it owns a federally registered trademark or service mark. If, however, a franchisor does not have a federal registration for its primary trademark or service mark, it is required to disclose this fact in the uniform disclosure document and to include an accompanying statement informing potential franchisees that: (a) the franchisor’s mark does not have many of the legal rights and benefits afforded to a federally registered trademark; and (b) if the franchisor’s right to use the mark is challenged, the franchisee may have to change to an alternative mark and thus incur additional expenses as result of any such change. Moreover, a franchisor’s lack of a federal registration for its core trademarks may be of serious concern to potential franchisees because the opportunity to use the franchisor’s established trademarks is one of the main assets of the franchised system.
Prior to franchising your business, you should also consider any “trade dress” issues relating to your franchised business. Trade dress is often defined as “the total image of a product which may include features such as size, shape, color or color combinations, texture, graphics, or even particular sales techniques.” A classic example of protectable trade dress is the use of a uniform restaurant design by a restaurant chain, including signage, product packaging, shape, style, décor and interior layout. For example, Subway restaurants (one of the country’s largest franchised sandwich shops), all use a similar color scheme, menus, signage and interior layout. Thus, consumers encountering a Subway store recognize it as a legitimate Subway restaurant. Of important note, trade dress may, and should, be protected separate and apart from trademarks under federal law and is often an important intellectual property asset of a franchised business. Thus, if you have not obtained federal protection for your protectable trade dress, you should consider doing so. Also, in order to maintain consistency from franchise to franchise, you should also consider spelling out within the relevant franchise documents exactly what “trade dress” you require franchises to implement from location to location.
Copyright issues also frequently arise in franchise offerings. For example, a franchised business’ proprietary software, training manuals, handbooks, written operations procedures and other materials may be the subject of copyright protection. To the extent a franchised business’ software, materials or other works are eligible for copyright protection, a franchisor should separately register each work with the U.S. Copyright Office. Moreover, any restrictions on or fees charged for a franchisee’s use of the copyrighted software or materials should be explicitly covered in the uniform disclosure document, franchise agreement or other relevant license agreements.
Franchisors should also take necessary measures to ensure that their trade secrets are adequately protected. Trade secrets are defined as “ information, including, without limitation, a formula, pattern, compilation, program, device, method, technique, product, system, process, design, prototype, procedure, computer programming instruction or code that: (a) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by the public or any other persons who can obtain commercial or economic value from its disclosure or use; and (b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” A franchisor should only disclose its trade secrets to the franchise owner, manager or other personnel on a need-to-know basis in order to protect such information. In addition, each person who receives information regarding the franchisor’s trade secrets or other proprietary information should be required to sign a non-disclosure agreement requiring them to maintain the confidentiality of such information both during and after termination of the franchise relationship.
If you would like any additional information on intellectual property issues arising in the franchise context, please do not hesitate to contact one of our lawyers.
Ask the Attorney: Trademarks
By Jennifer Craft
Q. What’s the difference between a trade name and a trademark?
A. Companies often confuse trade names with trademarks, and the confusion can be quite costly. Simply put, a trade name is the name of your company, whereas a trademark is a word, symbol or other designation used to identify the source of goods/services being offered—for instance, a company’s brand name or logo.
Here’s where it gets tricky. Sometimes, a company’s trade name can be the same as its trademark. Nike, Inc., for example, is the name of a company, but NIKE also serves as a brand name for shoes, apparel and other products. In thinking that their trade names are the same as their trademarks, companies will often register the name with a Secretary of State. In so doing, companies mistakenly believe this gives them unlimited and exclusive rights to use a “trademark” on products or in association with their services. What they have, however, is a limited right to use their trade
name as the name of their company in that particular state.
Here’s where the difference between a trade name and trademark becomes important. In the state of Nevada, for instance, a trademark registration provides a company with the advantage of being the presumed owner of the trademark. A trade name registration does not. A trademark registration also provides the prevailing party in a lawsuit the right to recover attorneys’ fees. A trade name registration does not afford such recovery. There other differences, both good and bad, but the important thing to remember is that when registering your trademark or trade name, consult with an attorney to ensure your company is adequately protected.
United States District Court Permanently Enjoins Proposed Patent Office Rules
By Kenneth D'Alessandro
On August 21, 2007, the U.S. Patent and Trademark Office (“USPTO”) published proposed rules relating to the filing and prosecution of patent applications. These rules were to go into effect on November 1, 2007. The proposed rules drastically altered the options presently available to patent applicants in several material respects relating to the number of claims and the number of continuation applications that applicants would be permitted to submit for examination.
While current law places no limitation on the number of continuation applications that may be filed, the proposed rules sought to limit the number of continuation applications and requests for continued examination available to applicants as a matter of right to two and one, respectively, for each separate invention. The number of actual applications allowed to be filed for any invention would be limited depending on the restriction requirements imposed by the USPTO on the particular application. Only two continuation applications would be allowed for each divisional application filed as a result of a restriction requirement made by an examiner in the parent case. Exceptions to these rules were permitted only under circumstances that effectively rendered the exceptions illusory.
In addition, the proposed rules allowed for examination of only 5 independent and 25 total claims (current law places no restrictions on number of claims). Under a proposed exception to this limit, excess claims were to be permitted if the applicant provides a pre-examination search and a patentability report on for each independent claim. According to many practitioners, such documentation would likely be more costly to the applicant than the application itself, and would most certainly have the undesirable potential to cause prosecution-history estoppel issues if the resulting patent was ever litigated.
In over 500 comments received as a part of the rulemaking process, the proposed rules were almost universally condemned by the patent bar and users of the patent system. The rules were seen by some as a cynical attempt on the part of the USPTO to reduce its workload.
The pharmaceutical company GlaxoSmithKline and Triantafyllos Tafas, an individual, challenged the proposed rules under the Administrative Procedure Act. On October 31, 2007, the United States District Court for the Eastern District of Virginia enjoined the USPTO from implementing the rules. On April 1, 2008, the District Court granted summary judgment in favor of the plaintiffs and permanently enjoined the implementation of the proposed rules. The USPTO has until May 31, 2008 to appeal this ruling.
The basis for the court’s ruling was that the USPTO exceeded the scope of its rulemaking authority, which is procedural in nature and does not extend to substantive rulemaking. The court found that the proposed rules changed the rights enjoyed by patent applicants under existing law, and thus were substantive in nature. In support of its ruling, the court noted that Congress had previously considered, but had not enacted, a grant of substantive rulemaking power to
Even if the USPTO does not appeal this ruling, or loses any appeal, the issues raised by the proposed rules may not be dead. There is legislation presently pending in Congress that has the potential to effectively reverse the court’s ruling by granting substantive rulemaking authority to the USPTO.
One on One with ROBERT KOUCHOUKOS
Favorite part of your job?
Working with talented clients and helping them maximize their creative outputs.
Who are your real-life heroes?
Chris Blackwell, the founder of Island Records (the label that launched the careers of Bob Marley, U2, Cat Stevens, Grace Jones, Steve Winwood, Tom Waits and many more legendary recording artists).
Most amazing place you’ve ever been?
Favorite sport to play?
Used to be soccer (and the older I get, the better I realize I was).
The filet and lobster mashed potatoes at Nine Steakhouse here in Las Vegas.
This Newsletter has been prepared by Lewis and Roca LLP for informational purposes only and is not legal advice. Readers should seek professional legal advice on matters involving these issues.
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