Business Law

Franchises and Trademarks

Perhaps the most important thing about buying and operating a franchise is your access to and right to sell goods (or services) that the public already knows, trusts, and buys. Unlike businesses that are started from scratch, a franchise gives you instant name and brand recognition.

Primarily, you get that name and brand recognition by being allowed to use the franchisor's trademarks, and it's probably the most crucial aspect of almost every franchise. The franchisor's trademarks (or "marks," as they are sometimes called) are at the heart of the franchise deal: it's really what you're buying.

So, its absolutely vital that you understand generally how franchises and trademarks go hand-in-hand, and more importantly, your rights and obligations with respect to the franchisor's trademarks.

What are Trademarks?

Generally, trademarks are words, names, or symbols that both identify goods made or sold and distinguish them from goods made or sold by others. They're at the core of name and brand recognition. Imagine: what would be the sense of owning a franchise of a well-known fast food restaurant if you couldn't use the signs, logos or product names that the public recognizes and looks for?

In the world of franchising, however, the term "trademark" includes much more. The term covers not only trademarks per se, but also :

  • Service marks, which are the same thing as a trademark but they represent "services," rather than goods. "Lawyers.com" is a good example of a service mark.
  • Trade names, which are simply the name used by a business. Again, restaurant chain names are good examples.
  • Other advertising or commercial symbols, such as a "logo," which is a graphical depiction or picture. Signs for fast-food restaurants are again good examples.

In addition to its trademarks, a franchisor will usually give you access to and use of other sensitive (and often legally protected) materials, such as trade secrets, which can be methods or ways of doing something, like recipes or operating manuals.

Your Rights and Obligations

Like everything else associated with the business, your rights and obligations with respect to the franchisor's marks most likely are governed by the franchise agreement you and the franchisor signed. The terms of franchise agreements, of course, vary by the type of franchise you're buying, but many franchise agreements will have trademark provisions in which:

  • You acknowledge that the franchisor owns the marks and that you have only the right or "license" to use them
  • Your right to use the marks lasts only as long as the franchise agreement is in force, so if the agreement expires and you don't renew it, you can't use the marks anymore
  • You agree not to add to, alter or change any of the marks when using them in the operation of your shop
  • You're barred from using the marks on anything that is not supplied by the franchisor or an authorized supplier. For example, you would not be free to choose any supplier of company shirts featuring the franchisor's logo
  • You can only use the marks on goods or products that are covered by the franchise agreement. For example, if your franchise is one for selling automotive parts, it would probably be a violation of your franchise agreement if you used the franchisor's logo on hamburger wrappers and sold the hamburgers in your parts store
  • You agree to safeguard the franchisor's sensitive information, such as how a product made or a recipe, by not sharing such information with other persons outside the franchise "family" and taking measures to ensure that your employees likewise do not share or divulge the information. Your agreement not to use or share the information usually remains in force after the franchise agreement ends. So, after your fast food restaurant franchise ends, you can continue to make and sell hamburgers, but you can't use any recipes owned by the franchisor
  • You're required to report to the franchisor any unauthorized use of the franchisor's marks that you discover or become aware of

Other than the franchise agreement's provisions for royalty fees, the trademark provisions are probably the most important aspect of the agreement. If you misuse, abuse, or fail to protect the franchisor's marks and information, the franchisor might terminate your franchise, file a lawsuit against you for money damages under federal trademark laws, or possibly both.

Questions for Your Attorney

  • Can my franchisor hold me responsible if a former employee sold the franchisor's trade secrets to a competitor, even if I had no idea the former employee even had access to the information?
  • If my franchisor makes a slight change to its logo, can the franchisor make me pay the costs of changing the logo on things like store signs and employee uniforms? Can I continue to use the old logo?
  • I have an automotive repair franchise. Can I operate a separate auto repair business that performs the same functions as the franchise?
  • I asked for and got permission to use my franchisor's logo on T-shirts, which I bought, and to sell the shirts from my shop. Now, the franchisor is demanding that I pay royalties on the T-shirt sales. Do I have to pay it?

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