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