Intellectual propertyi Brand search
While a proven business model with clearly defined procedures and operating guidelines is an important factor for evaluating a franchise, the cornerstone of most franchise systems is the power of the franchisor's brand. A franchisor's brand is itself composed of intellectual property – which is an intangible asset that has a major impact on the franchise system's likelihood of success. A franchisor's intellectual property, including its trademarks, trade names, patents and trade dress, has a critical influence on how customers perceive, identify and choose the franchisor's goods or services over those of another brand. Not surprisingly, brand identification is one of the most important aspects of building a successful franchise.
Unlike in many countries, trademark rights in the United States are based on use under common law rather than arising from trademark registration. This means that from the moment that an owner begins to use a trademark on or in connection with a good or service, the owner owns rights in the mark and it generates associated goodwill. This is true regardless of whether the owner has applied for a federal registration of the trademark with the US Patent and Trademark Office (USPTO) or state trademark authority. As a result, trademark counsel will routinely recommend that a franchisor run a full trademark clearance search to ascertain whether any third parties are using marks that are the same or confusingly similar to the franchisor's mark. A full clearance search typically includes a search of all federal and state trademark registers and common law uses, which can be found through internet searches and other publicly available materials. Trademark counsel analyse the search results on the basis of likelihood of confusion of the proposed mark with marks disclosed in the search.
Likelihood of confusion is based on balancing a series of factors. Among the more important factors widely recognised by the USPTO and the courts are: the similarity of the two marks in appearance, sound and meaning; the similarity and relatedness of the respective goods or services and their channels of trade; the strength or distinctiveness of the marks; the price of the goods or services and degree of likely consumer care in the purchase process; and any evidence of any actual confusion. A search will also assist in ascertaining the distinctiveness and, hence, the scope of protection that may be accorded the franchisor's mark. For example, if the search reveals several similar marks for related goods or services exist, it is likely that the franchisor's mark will be considered a 'weak' mark and afforded a narrow scope of protection. As another example, if the mark is a word that has been 'disclaimed' in registrations for similar goods or services offered by the franchisor, it will likely be difficult to obtain a registration for that word as a mark. In that instance, trademark counsel may recommend using the word in combination with other words or in a stylised form, which may render the mark distinctive enough that a registration can be obtained.
While trademark conflicts do arise, registration with the USPTO can significantly minimise risk. Since common law usage grants a trademark holder common law rights, the first person in time to utilise a mark generally has superior rights to all others. Such rights are limited, however; including being limited by geographic area and by the industry in which the mark is utilised. Once established, federally registered trademarks provide for national usage and clear protection for the marks 'as registered'. Further, once registered, the federal mark holder has a presumptive argument that it was first in time as of the date of its registration and, if the mark has been granted registration, it is very difficult for a common law mark holder to overcome the presumptions in favour of the federal registrant.ii Brand protection
In the United States, common law trademark rights are limited to the geographical locations in which the mark is used, but federal registration of a mark affords nationwide rights in the mark regardless of where it is being used. Such registration confers nationwide priority as of the application filing date, contingent on the successful registration of the trademark.
Because trademark rights are based on priority of use, the franchisor's nationwide rights are limited to the extent that a third party can establish common law rights through prior use of the same or similar mark on, or in connection with, similar or related goods or services. A federal registration, however, would restrict those third-party rights to the areas of use as of the application filing date of the franchisor's mark. A franchisor can file an application following use of the trademark in commerce, or prior to use, as long as the applicant declares (under penalty of perjury) a bona fide intent to use the trademark in commerce. Where there is only a bona fide intent to use the mark, the registration will not be issued until the franchisor establishes use in commerce and the franchisor files a statement of use with a specimen of the trademark as used. The benefit of filing an intent-to-use application is that once the registration is issued, the effective date of the registration is the filing date of the application rather than of its first use in commerce. One exception to this rule is that an application trademark may be based on a pre-existing foreign registration or application under the Paris Convention or the Madrid Protocol.
Images, designs, software and other works protectable under copyright can attain protection from the moment of creation. As such, in addition to trademark protection, franchisors should consider obtaining copyright protection under the US Copyright Act by registering the copyright with the US Copyright Office. If a franchisor wishes to protect an invention or unique process it has developed, it may apply for a patent with the USPTO. Patents are generally more difficult to obtain than trademark and copyright registration, and the categories of inventions or processes that rise to the level of warranting patent protection are limited.iii Enforcement
In addition to a franchisor using its mark, a franchisor must also enforce its mark against infringement. If a franchisor does not take steps to enforce its trademark rights, its rights in the mark may weaken and – in extreme cases – be forfeited. Enforcement of a trademark is imperative to maintain a strong and distinctive mark. A trademark enforcement strategy often begins with retaining a trademark watch service. Depending upon available resources, the watch service could cover filed federal applications, published applications, use of similar trademarks or names in commerce, and domain name registrations. Infringing uses are also often identified by internet searches and advertisements, and through the franchisor's franchisees, contacts or customers. An effective enforcement strategy typically entails a cease-and-desist letter, which identifies the franchisor's trademark rights, including identification of any federally registered marks, and demands that the infringer cease all use of the infringing mark.
In the event that a cease-and-desist letter does not resolve the infringement, the franchisor may decide to file a trademark infringement action. A trademark infringement suit can be commenced in either federal or state court, although federal court is usually preferred because of the greater familiarity of federal judges with trademark law. The same is true of suits alleging unfair competition or false designation of origin. A trademark owner does not have to hold a trademark registration to sue for trademark infringement. A trademark infringement action can be based on common law trademark rights.
To the extent trademark infringement arises from unauthorised use of a trademark in a website domain name, the franchisor owner may opt for a streamlined mechanism under the Uniform Dispute Resolution Policy. This policy, administered through the World Intellectual Property Organization, the National Arbitration Forum and others, offers limited relief (the cancellation or transfer of an offending domain name) to the extent that the franchisor can demonstrate bad-faith registration of a domain name that incorporates the franchisor's mark or a confusingly similar variation thereof. Use of this mechanism may be preferable to attempting to obtain the same relief in court if the only offending infringement is usage of a domain name, or where the loss of the domain name will result in the elimination of the infringing activity.
Additionally, franchisors should enforce their marks with the USPTO by preventing third parties from applying to register, or maintaining a registration for, the same or similar marks for use on or in connection with similar or related goods and services. The franchisor can do this by filing an opposition proceeding (commenced after an application for an infringing mark is published) or a cancellation proceeding (commenced after an infringing trademark is registered).iv Data protection, cybercrime and e-commerce
In the age of e-commerce, franchisors and franchisees must also be ever vigilant regarding the protection and security of customer information exchanged during online transactions. Franchisors engaging in e-commerce must take special care to develop policies and procedures for their franchisees to adequately secure all customer information and to protect against hackers, viruses and malware. Failure to do so may leave a franchisor and its franchisees vulnerable to lawsuits from customers whose private information has been hacked or stolen. In addition, the FTC, the federal agency responsible for protecting consumers and promoting competition, enforces a wide variety of laws and regulations that require businesses to secure and protect the personal information that is collected, stored, analysed, shared, accessed, used, disclosed and discarded. Further, all 50 states have enacted laws to protect the privacy, security and confidentiality of personal data, some of which are more stringent than federal law. For example, the California Consumer Privacy Act of 2018 (CCPA), which became effective on 1 January 2020, is the most comprehensive data protection law in the United States, and the California Online Privacy Protection Act is the most restrictive online privacy protection law in the United States. In addition to government enforcement actions, private plaintiffs can bring lawsuits, including class actions, under these statutes. Several other states, including New York and Massachusetts, are considering passing data privacy laws similar to the CCPA. Meanwhile, two bills proposing a national federal law are currently pending in the US Congress.
There are also a variety of federal statutes that provide consumer protections in specific industries or with respect to specific kinds of transactions or interactions businesses have with consumers. For example, the Telephone Consumer Protection Act of 1991 (TCPA) governs a range of telecommunications activities. Among other things, the TCPA regulates the use of automated telephone dialling systems and pre-recorded and artificial voice phone messages that are delivered to consumers. The TCPA regulates telemarketing calls, robocalls and text messages delivered to both residential and wireless telephone numbers. The statute also operates in conjunction with the FTC's Telemarketing Sales Rule and the Do Not Call Implementation Act, which forbid telemarketers from calling phone numbers that have been registered on the national Do Not Call Registry.
The Fair Credit Reporting Act (FCRA) is another important consumer protection statute. It regulates businesses that compile 'consumer reports' as well as persons who use such reports and businesses that provide information to credit reporting agencies. It requires companies that use credit reports to give consumers notice when their credit report is investigated or used as part of an adverse decision, such as to deny an application for credit. In addition to actual damages, a violation can result in statutory damages of up to US$2,500 per violation. Franchisors must comply with the FCRA when obtaining credit checks on prospective franchisees.
In addition to the federal laws listed above, there are federal statutes that (1) regulate, with specific opt-out requirements, the delivery of emails in which the primary purpose is the commercial advertisement of a product or service; (2) require operators of websites or mobile applications directed at children under the age of 13 to provide a detailed privacy notice and obtain prior verifiable parental consent before collecting information from children under the age of 13; and (3) require financial institutions to give customers notice of the institutions' privacy practices and to safeguard customers' non-public personal information.
Because of the evolving nature of technology and the ever expanding laws protecting data privacy and security, franchisors should draft franchise agreement provisions relating to technology and data privacy and security as broadly as possible to allow for these future changes in the law, as well as changes in technology.