New York Franchise Law Blog : Franchise Lawyer & Attorney Charles N. Internicola, Providing National Representation of Franchisees and Franchisors

Trademarks comprise a fundamental component to all franchise systems.  So much so, that FDD "Item 13" is exclusively devoted to disclosures respecting the existence, registration, maintenance and defense of a franchisor's trademarks.  Franchisors that are serious about their "systems" must also also be serious about the protection of their trademarks.  

So, what are some of the factors and steps that serious franchisors (both start-up and established) understand about their trademarks?  Here are a few:

• Trademark Registration is Critical.  This point relates to start-up franchisors and comes down to a basic point: "don't sell a franchise until you register your primary trademarks with the United States Patent and Trademark Office ("USPTO")". Selling your first franchise without first securing USPTO registration will invite unnecessary "litigation risk" should your registration application be rejected or your mark challenged.

• USPTO Registration does Not Insure a Strong Trademark. The "legal value", strength and enforceability of your trademark will be influenced by a number of factors irrespective of your registration status.  Although USPTO registration is an important factor, by itself, it may not be enough.  Additional factors that you must consider and evaluate relate to the "legitimate" use of similar marks by third parties and whether or not your mark is comprised of "descriptive" terms.  Generally, registered trademarks that are comprised of descriptive terms  (i.e., such as "bakery", "store", "spa",   "rapid", and other terms that "describe" your goods or services)  will be afforded less protection than trademarks that are comprised of terms that are "arbitrary" (i.e., words that have no relation to the goods or services of your business).

• Periodic Evaluate your Marks and Registrations.  As systems and business develops, typically, so do trademarks. Over time, franchisors modify existing marks, develop new marks, expand usage of a particular mark (i.e. to a new business category) and, in certain instances, discontinue the use of a mark.   It is critical to insure that your trademark registrations remain current and reflect your "current" usage of your marks.  This "evaluation process" need not be complex nor expensive an open line of communication between management and franchise counsel.  

As your franchise develops and expands the value of your system, brand and owner equity will become more and more dependent on the strength and enforceability of your intellectual property assets.  Trademarks are a big part of your "IP" asset structure and they require serious attention. Strong trademarks are a big part of strong franchise systems.

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Franchise systems have various life cycles and require time to mature and develop the necessary systems and infrastructure to expand. For franchisors, many times, the biggest strain on their franchise system relates to and is traced back to an overambitious rate of expansion. While there are many considerations, motivations and good reasons why your should be aggressive about unit growth, you must nevertheless proceed with extreme caution and evaluate whether or not your systems are capable of supporting your planned levels of expansion. Some factors to consider, include:

• The current location of your franchisees and whether or not expansion should be reserved and limited to designated geographic locations;

• The capacity and capability of your supply chain and whether or not you have lined up the necessary vendors to supply your franchisees and maintain the necessary levels of quality control;

• The capacity of your management and marketing team and your ability to maintain consistent levels of quality control, franchisee development and overall system development;

• Whether or not your internal in-house legal counsel or outside franchise attorneys have implemented clear quality control measures respecting the delivery of your FDD, the management of your franchise agreements and the constant assessment and protection of your trademarks and intellectual property.

Great franchise systems do not need to be large – they just need a coherent plan and sustainable plan for system growth and a management team committed to quality over quantity.

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Short Answer:  Avoid lawsuits.  That is, work on and establish with your legal counsel "legal systems and procedures" that is designed to avoid unnecessary litigation. (Slightly longer answer follows)

While the advice that I am offering here may sound obvious and, possibly, even a little self-serving, it is nevertheless an honest and critical point that far too many franchisors and business owners overlook.  That is, in most (but not all) litigation once your are involved (either as a plaintiff or defendant) the advantages and benefits that may or may not stem from the outcome of the litigation will, many times, be outweighed by:

(a) the legal fees that you will incur,

(b) lost productivity associated with your focus on the lawsuit (as opposed to building your franchise systems), and

(c) the uncertainty that is inherent in all litigation - no matter how strong your case is.  

Faced with the inherent costs in all litigation, the best course of action for both start-up and established franchisors is to establish with your legal counsel open channels of communication focused on cutting-down and mitigating your "litigation exposure".  That is, in addition to the critically important task of managing your regulatory requirements and disclosures as a franchisor, you must discuss and establish with your legal counsel a fair and flexible relationship and system focused on the management and monitoring of your day-to-day legal activities. Some of these activities should include:

(a) The review of vendor agreements,

(b) The establishment of standardized franchisee communications and compliance notices;

(c) The quarterly evaluation and review of your trademarks and the filing of supplemental trademark applications and affidavits;

(d) The establishment and maintenance of a specified and well documented "encroachment policy" respecting the grant of additional franchises;

(e) The establishment of a clear and concise policy respecting the negotiated modification of your franchise agreements;

(f) The maintenance of strategic employment agreements with your key employees that are focused on the implementation "enforceable" restrictive covenants;

While establishing an on-going day-to-day working relationship with your legal counsel may be more expensive than "doing nothing", the value of this planning process will far outweigh the cost associated with unnecessary and avoidable litigation. Once tasks become standardized and well establish, my experience has been than many activities may be incorporated into the tasks of your "in-house" staff and, over time, serve to reduce your long-term legal fees.

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