“Twilight Zone” of Trademark Licensing

By: Bill Harding

So your company would like to license its trademark to another company.  Sounds simple, right?

Wrong.  A legal “twilight zone” exists between 1) a licensor adequately policing the licensed use of its trademark, and 2) a franchisor providing significant assistance to or exercising control of a licensee’s business.

A trademark identifies goods to consumers by both their origin and their quality.  The federal Lanham Act requires a licensor of a registered mark to control the quality and uniformity of goods and services associated with the licensed mark to ensure the mark is not used by a licensee in “such a manner as to deceive the public.”  Failure of the trademark owner to exercise sufficient control may constitute abandonment of the mark and result in loss of trademark protection.  A license without sufficient quality controls is termed a “naked” license.

But by taking steps to exercise sufficient control over licensee use of a mark, the licensor may accidentally fashion a trademark license that constitutes an “accidental” franchise agreement.  Such a mistake may be very costly for a mark owner, as applicable franchise laws may impose unexpected registration and/or disclosure requirements on the licensor, and/or may regulate important aspects of the business relationship between the license parties, such as termination and non-renewal of the agreement.  The parties to a trademark license agreement cannot avoid an accidental franchise by calling their agreement by another name or by including provision language that disclaims the existence of a franchise.

Defining “Franchise”

Although federal and state jurisdictions that regulate franchises vary in their approaches, creation of a franchise generally consists of three elements:

1) grant of use of the franchisor’s mark in association with franchisee’s business,

2) a franchise fee paid to the franchisor by the franchisee, and

3) control exerted by the franchisor over the franchisee.

If all three statutory elements are present, a franchise relationship exists regardless of the intentions of the parties.

Be careful out there, aspiring trademark licensors.  Better yet, get a lawyer!