How can franchisors protect their intellectual property (eg, trademarks and copyright)?
One of the principal means for franchisors to protect their intellectual property is through registration. Trademarks can be registered at the state and federal levels, although nationwide protection can be achieved only through federal registration. Unregistered rights in a trademark are governed by the common law and extend only to the geographic territory where the mark is actually used. At the federal level, registration with the US Patent and Trademark Office (USPTO) gives the franchisor a priority of rights in the trademark on a nationwide basis. Once a trademark is registered with the USPTO, there is a rebuttable presumption that the registrant is the owner of the mark, that the mark is valid and that the registrant has the exclusive right to use the mark. The trademark owner may license others to use the mark and to pursue enforcement of infringers. After five years, the registrant’s rights in the mark become ‘incontestable’, which shields the registrant from certain challenges to the validity of the mark. States also have trademark registration laws. However, state trademark registrations have limited value to a franchisor with regional or national expansion plans because the trademark protection is restricted to that state.
The US Copyright Office also has a system for registering copyrights. Under US law, a copyright attaches to an original work of authorship at the time that it is created. While registration with the Copyright Office is not required, if the owner of a copyright wishes to bring a lawsuit for copyright infringement, the owner must register the work before bringing a claim.
Franchisors can take other practical steps to protect their intellectual property in the United States in addition to registration. For example, franchisors can ensure the continuing strength of their trademarks by using the marks consistently and avoiding changes in their appearance and presentation. Franchisors should also use trademark notices (eg, the ‘®’ symbol for federally registered marks and the ‘™’ symbol for all other marks) to demonstrate their ownership rights. Likewise, franchisors can include copyright notices and restrictive legends on their copyrighted works, which communicates to the public that the franchisor considers the work to be proprietary.
Franchisors can further maintain the exclusivity and value of their intellectual property by monitoring the marketplace and taking action against infringers. In particular, there is a risk that a trademark may be deemed abandoned and lose protection under the federal law if a franchisor fails to prevent the unauthorised use of the mark or fails to maintain adequate quality controls in connection with the mark. Franchisors can also benefit from including strong, reasonably tailored in-term and post-term restrictive covenants in their franchise agreements designed to protect their intellectual property, and from enforcing those covenants as necessary.
Must IP licences be registered?
A franchisee’s licence to use the franchisor’s trademarks and other intellectual property in the operation of the franchised business is typically granted by the parties’ franchise agreement. That licence need not be registered with any government agency or other organisation.
How can franchisors protect their know-how and trade secrets?
US law recognises the value in confidential methods and knowledge that rise to the level of ‘trade secrets’. A ‘trade secret’ is defined as any information in any form that derives independent economic value from not being generally known or readily ascertainable and that is the subject of reasonable efforts to maintain its secrecy. No government filing is required in order for information to be recognised as a trade secret.
In 2016 the federal government enacted a statute for the protection of trade secrets entitled the Defend Trade Secrets Act. Before enactment of this act, businesses obtained protection of their trade secrets on a state-by-state basis under state statutes. Forty-eight states have adopted the Uniform Trade Secrets Act. The Defend Trade Secrets Act does not pre-empt the Uniform Trade Secrets Act and claims can be brought under both federal and state law for the misappropriation of trade secrets.
For information to retain its status as a trade secret, a franchisor must closely monitor the information and take measures to maintain its secrecy. Anyone who has access to the information (eg, employees, vendors and franchisees) should be subject to strict confidentiality obligations that are memorialised in written agreements. A franchisor should also:
- keep track of the individuals with access to the information;
- implement physical or electronic barriers to the information as appropriate; and
- make sure to retrieve any pertinent materials from franchisees and employees upon their separation from the system.
What are the consequences of a franchisee’s breach of the franchisor’s IP, know-how or trade secret rights and what remedies are available to the franchisor in this regard?
A franchisee’s breach of its obligations with respect to the franchisor’s intellectual property may result in a loss of the goodwill associated with that intellectual property, customer confusion and damage to the brand’s reputation. Generally, in response to a franchisee’s misappropriation of its intellectual property, a franchisor may:
- seek injunctive relief;
- file suit to seek monetary damages to compensate the franchisor for the breach; or
- if the breach occurs during the term of the franchise agreement, declare a default and terminate the franchise agreement if all other requirements for termination are satisfied.
If successful on a trademark infringement claim, a franchisor can obtain injunctive relief, including an order that the infringing conduct be stopped. In addition, courts may award the trademark owner its actual damages, enhanced treble damages in appropriate cases, costs and attorneys’ fees in exceptional cases. Courts may also order other relief, such as the seizure and destruction of infringing goods.
With respect to trade secrets, remedies that may be available under the Defend Trade Secrets Act and the Uniform Trade Secrets Act include injunctive relief, monetary damages caused by the misappropriation, exemplary damages and an award of attorneys’ fees.
Use the Lexology Navigator tool to compare the answers in this article with those from other jurisdictions.