Protecting Your Brand: Strategies for Franchisors in Drafting and Registering Franchise Disclosure Documents (FDDs)

For franchisors in all industries, effective brand protection is essential. A valuable and recognizable brand is one of the core elements of an attractive franchise offering, and failure to effectively protect a franchised brand can lead to loss of value, franchisee discontent, and, in some cases, litigation.

So, what can (and should) franchisors do to protect their brands?

Protecting a franchised brand (or a brand you are planning to franchise) is a multi-step process. There are steps that franchisors can (and should) take before preparing their Franchise Disclosure Documents (FDDs), when drafting their FDDs, and when going through the FDD registration process. Here are five introductory tips from the franchise lawyers at Rendigs:

Registering the Franchised Brand with the USPTO

While franchisors are not legally required to register their trademarks, doing so is strongly recommended. Registering a trademark involves filing an application with the U.S. Patent and Trademark Office (USPTO) and then successfully navigating the USPTO’s examination process. The benefits of federal trademark registration include:

• Establishing a presumption of trademark ownership and the right to use (and license) the registered brand.
• Establishing nationwide “priority,” which means that any subsequent attempts by other companies to use or register a confusingly similar mark will be barred.
• Providing public notice of the franchisor’s exclusive trademark rights (all registered trademarks are included in the USPTO’s online database).
• Facilitating trademark registration in other countries should your company seek to franchise internationally.
• Adding value to the franchise offering while limiting your company’s state-level registration obligations (as discussed in greater detail below).

The USPTO’s examination process takes time, so it is best to start the process as early as possible. While most franchisors (and prospective franchisors) will already be using their brands in the marketplace, it is possible to register a brand on an “intent to use” basis.

Carefully Preparing Item 13 of the FDD

Franchisors must disclose the current status of their brands and any related litigation in Item 13 of the FDD. If a franchisor has not yet applied for registration of its primary brand, it must include the following disclosure:

“We do not have a federal registration for our principal trademark. Therefore, our trademark does not have as many legal benefits and rights as a federally registered trademark.  If our right to use the trademark is challenged, you may have to change to an alternative trademark, which may increase your expenses.”

Since applying for trademark registration with the USPTO is a relatively straightforward and inexpensive process (and is essential for protecting the value of the brand), franchisees and their lawyers will often view a franchisor’s failure to apply as a red flag. Whether a franchisor’s brand is registered or unregistered, the franchisor must also disclose any “pending litigation, settlements, agreements, or superior rights that may limit a franchisee’s use of the mark.” Depending on their status and nature, these may raise red flags as well. As a result, careful drafting is essential, and franchisors should work closely with their counsel to ensure that they are meeting their disclosure obligations without raising concerns unnecessarily.

Franchisors can also use Item 13 of the FDD to highlight franchisees’ obligations to help protect their brands—which obligations should be thoroughly addressed in their franchise agreements. The Federal Trade Commission (FTC) offers the following proposed language:

“You must notify us immediately when you learn about an infringement of, or challenge to, your use of our trademark. We will take the action we think appropriate. While we are not required to defend you against a claim against your use of our trademark, we will reimburse you for your liability and reasonable costs in connection with defending our trademark. To receive reimbursement you must have notified us immediately when you learned about the alleged infringement or challenge.”

Including terms and conditions such as these not only provides important protections for franchisors, but it also helps to emphasize that they take brand protection seriously.

Registering the FDD (or “Business Opportunity”) in All Relevant States

Several states require franchisors to register their FDDs before offering franchises for sale. Failure to comply with these franchise registration laws can expose franchisors to administrative penalties and civil liability—both of which can lead to negative publicity, loss of goodwill and brand devaluation. As a result, all franchisors should ensure that they comply with the franchise registration laws (if any) in all states in which they intend to sell franchises.

Instead of franchise registration laws, some states have “business opportunity” registration laws. While the business opportunity registration process is generally more straightforward than the franchise registration process, it is no less important. In some states, however, franchisors are exempt from business opportunity registration if they have a USPTO-registered trademark. North Carolina is one example.

Monitoring for Trademark Infringement

As franchisors prepare, update and register their FDDs, they should also actively monitor for trademark infringement. If a third party uses a franchisor’s trademark (or a confusingly similar trademark) without authorization, taking appropriate legal action promptly can be critical for mitigating the costs involved. Taking appropriate legal action promptly will also help to facilitate a favorable disclosure in Item 13 of the FDD.

Enforcing Brand Compliance Within the Franchise System

Finally, franchisors should also consistently enforce brand compliance within their franchise systems. If a franchisee uses unauthorized marketing materials for example, communicating with the franchisee promptly could be essential for avoiding further issues and litigation. This will help avoid the need for unfavorable disclosures in the FDD as well—which will ultimately help to increase franchise sales, franchise revenue and the value of the franchise system when it comes time to sell.

Contact the Franchise Lawyers at Rendigs

Our franchise lawyers assist new and established franchisors with all aspects of brand protection, FDD drafting and registration, and franchise system management. If you would like to speak with a franchise lawyer at Rendigs in confidence, please call 513-381-9200 or contact us online to arrange a confidential initial consultation.