Intellectual Property and the Franchise Owner

Patents, trademarks, copyrights and trade secrets are often lumped together under the heading “intellectual property rights”. While this is be helpful cogs-or-gears-in-human-head-grunge-vector-illustration_Q1WPDLshorthand when writing an article, it sometimes leads to misunderstandings as to how these very different rights are secured and maintained. These misunderstandings can lead the owner of the various intellectual property rights to undermine their own interests.

While the majority of this information focuses on the differences in trademark, copyright, trade secrets and patents, there are three underlying concepts that should be kept in mind when dealing with intellectual property rights. First, these rights, and the value of these rights, are not static. They grow or fade with time and usage. This is particularly true with trademarks and trade secrets. The on-going actions of the franchisor can have substantial impact on the on-going existence and value of the claimed right. For example, the actions of the franchisor can turn a strong trademark into a weak trademark. Unrestrained and improper use of “escalator” turned the brand into the generic name for the product.

The second concept is that while the rights may be intangible in nature, they are generally attached to, or associated with, something tangible.   One way to identify applicable intellectual property rights is to first identify those tangible items that provide value to the business. Those objects should then be evaluated for applicable intellectual property rights. For example, a jingle used in a radio commercial may embody both copyright and trademark rights. An operations manual may contain both trade secrets and a copyright.

The third concept is that the process of maximizing intellectual property rights is just that, a process. Many businesses undermine their own rights because they see intellectual property rights as an event with a defined beginning and end point. The rights are seen as something to be secured at the beginning of the product development or launch. But maximizing the value of intellectual property rights requires recognizing the rights as valuable assets with ongoing maintenance needs. In general the process of maximizing intellectual property rights requires that the rights be: i) identified; ii) registered or otherwise documented; iii) supported by business practices and iv) regularly evaluated in light of current business objectives.

 Trademarks and Service Marks

Trademarks and service marks are an integral part of any franchise. They protect the franchise’s identity in the marketplace and are created through use. Trademarks and service marks are typically thought of as company or product names; but they can also be logos, tag lines, smells, colors, and decor. The law prohibits a second party from using a mark that is confusingly similar to a mark already in use in connection with particular goods or services.

The single most important thing a franchisor can do to solidify their trademark and service mark rights, is to register those rights in the United States Patent and Trademark Office. The dependency of the state registration systems, and common law rights, on actual use of a mark in the desired geographic area, makes those systems unsuitable for almost all franchise operations. Registering the trademark, on the federal trademark register, is the only practical means to prevent a third party from obtaining better rights to the mark, in a geographic area not yet filled by the franchise.

Searching and clearing a mark, before adoption, avoids investing in a mark which is not usable because of third party pre-existing rights. Any franchisor or potential franchisor needs to consider the nationwide usability of the mark, not just the local usability. Best practices suggest that, full searches, not just examination of the federal register, should be conducted to discover any unregistered common law rights.

Franchise owners have been known to undermine their trademark rights by not recognizing all the trademarks or service marks which are valuable to their operation. Remember trademarks apply not just to the business’ name, but can also protect other aspects of the franchise’s identity in the marketplace. A franchisor should evaluate its market footprint with a careful eye to see everything that its customer sees. This includes not just a business or product name, but assumed names, trade names, customer bestowed nicknames, logos, slogans, domain names, jingles, and the overall look and feel of the franchise in the marketplace. What elements make up the customer experience? Are you a fast food restaurant with a particular color scheme? Are you a car repair company with a special window design? Or a financial services company with a catchy slogan? It’s easy to overlook or undervalue what the consumer sees as a key piece of your identity — that is until it is adopted by a competitor.

At its most fundamental level, the strength of a trademark is based upon the consumer’s (not the owner’s) perception of the strength of the mark. This is also a fundamental measurement of the value of the mark to franchisees and potential franchisees. Franchises that are viewed as being well known by, (and liked by), consumers are able to generate higher franchise fees. Because consumer perceptions are influenced and change over time; trademark rights, and their associated value, are influenced and change over time. This principle benefits those franchisors that understand this basic relationship and are willing to implement business practices that support strong trademark rights. This principle hurts those franchisors that view the protection of trademarks as something “the lawyer made me do.”

Building strong trademark rights takes thought and consistency. The presentation of the mark to the consumer must be consistent. Consistent means it all looks the same: same type style, same color, no additional doodads, and no unapproved tag lines. Contractually, franchisees should agree to use the franchise’s trademarks only in accordance with the identity standards provided by the franchisor. But contractual requirements do not build the consumer’s perception. From a practical perspective, the franchisor needs to actively police the use of the marks by the franchisee and correct any usage which falls outside of its identity standards. The strength and value of the mark “Sally’s Hair Emporium” is undermined if franchisees are doing business under Sally’s Hair, SALLY’S HAIR EMPORIUM and SALLY’S. From the consumer’s standpoint, there is no reason to believe that these entities are associated with one another. The personal name “Sally” when used with the descriptive “hair” for a hair stylist starts as a weak mark. It is further weakened when it is presented in a variety of manners to the consumer.

Business owners, not just franchisors, find it easy to misuse their own trademarks. When a name is long, such as “Harvey’s Hair Raising Hairdos”, it is our natural tendency to shorten the name in common usage. So “Harvey’s Hair Raising Hairdos” becomes “Harvey’s” or “HHRH” to the owner and staff. The desire for clever, eye catching and memorable ads encourages word play with a company’s name. At some point these alternate identities become accepted by, and used by the consumers. It is damaging to a trademark if third parties, like a consumer, misuse a company’s trademark. But if the owner of a trademark regularly misuses its trademark mark, it is likely to be fatal to the existence of any meaningful rights in the mark.

The final common problem area for franchises is a tendency to think of trademarks as something that happens at the creation of a franchise system. But successful franchisees will continually add new products and services, or update old ones. New marketing material is created, websites are changed, ads are created and new product and service delivery methods adopted. Therefore, trademark portfolios should be continually monitored to make sure what is being recognized “at headquarters” or “by the lawyers” with registration certificates and policing efforts reflects what is actually of value to the business.

Copyrights

Copyright protects the expression of an idea and is created through fixation of the expression in a tangible form. Copyright exists in a variety of items commonly used by a franchise: manuals, training videos, marketing material, ads, websites, music, logos and software. While registration is not required to obtain copyright protection, registration provides valuable benefits to the registrant if the registrant is in an enforcement situation. Copyright registration provides the registrant with the maximum benefits of the copyright act, including the ability to request statutory damages, attorney’s fees and to have the matter heard in federal court.

The copyright owner (or its licensee) is the only party allowed to reproduce the work, create derivative works, publish or perform the work. One advantage of copyright law is that it places all rights in the creator of the work, without the need for the creator to do anything. Unlike trade secret law, which relies heavily on contractual relationships, copyright exists because of federal law and is independent of any contractual relationship. From a practical standpoint this means that even if an operations manual is found not to qualify for trade secret protection, a competitor can be prevented from reproducing the manual (or creating a derivative version of the manual) by copyright law.

All business owners, not just franchisors, should be aware of the statutory default rules for ownership of the copyright in a work. The statute does not operate in a manner that is intuitive to most people. The creation of a copyright occurs through fixation in a tangible form. By statute the owner of the copyright is the party who creates the tangible form, not the party who pays for the creation of the work. The only exception to this rule is in the case of an employee performing work for their employer (in which case the employer owns the copyright) or in a work for hire situation. A work for hire is a defined term in the Copyright Act which occurs when a third party creates work at the request of someone else.  The work created must fall into one of several enumerated categories and there must be a pre-existing agreement that the work is a work made for hire. When a franchisee creates materials for use by the franchise, and there is no contractual transfer of copyright ownership to the franchisor, ownership of the copyright in the material is a debatable question. Clearly the franchisor doesn’t want the liability and taxation consequences associated with the franchisee being considered an employee of the franchise owner.   Nor is it likely that the statutory “work for hire” criteria will have been met. For the franchise to obtain ownership of the copyright, the franchisor needs a tortured quantum merit based argument. The only way to avoid this situation is to include an assignment of copyright in the franchise agreement.

Copyrights are often confused with patent rights and federal trademark registrations, which can cause copyright to be overlooked as a viable means to protect materials owned by a business. In particular, the expenses and complexities of obtaining either a federally registered trademark or a patent are often attributed to the copyright registration system as well. But the copyright system is both inexpensive and is designed for use by non-lawyers.  The forms for registration are available on the copyright office website, and in most instances can be completed by the rights owner. While it is neither practical nor desirable that all material in use by a franchise be registered, may franchises can benefit from registering selected works in the event enforcement is ever necessary. One caveat is that registered material can be accessed by the public at the copyright office. Therefore, works containing trade secrets should almost never be registered.

Trade Secrets

Trade Secret law protects the confidentiality of information and materials that have economic value because the information is not generally known. Trade secret law can protect ideas, methods, customer lists, processes, formulae, financial information, company plans, new product ideas, supplier lists, and software code.   Trade secret protection can be both flexible and powerful. There is no U.S. registration system for trade secrets. Nor is there any pre-defined limit to the length of a trade secret. Trade secrets last as long as there is economic value and the information is actually kept secret.

In general, third parties do not have an obligation to keep information secret just because information is shared with them. Their secrecy obligations arise from contracts and under the principles of fiduciary relationships. The response is to write broad confidentiality clauses defining everything, including the kitchen sink, as a party’s confidential information. However if the practices of the parties in handling the information do not meet the criteria set forth in the agreement, then trade secret protection for true trade secrets can be undermined.

The key to creation and enforcement of trade secret rights is in using reasonable measures, under the circumstances, to protect the trade secret. In the context of the franchise arrangement, the need and desire to share information with franchisees competes with the legal necessity of limiting the distribution of true trade secret material. Reasonable steps to ensure the identification and protectability of trade secrets include: confidentiality or non-disclosure agreements and clauses; marking of claimed trade secret material, limiting the distribution to “need to know”, password protected computer systems and databases, and locks on cabinets and doors.  The difficulty faced by many businesses is that there is no conscious decision by the business as to what methods will be used to protect confidentiality. Practices grow up as individuals are inspired to protect or not protect certain types of information.   When faced with an enforcement situation, a business with a haphazard approach to protection of information is at a disadvantage.   They face a court arguing that the information is so important to their business that an injunction must be issued and damages awarded; while at the same time being unable to clearly articulate the reasonable standards they used to protect the confidentiality of the information.

Patents

Patent law protects ideas. A patent holder receives the right to exclude other from using, selling or making the claimed invention. Patent rights are obtained through the United States Patent and Trademark office. Before rights are granted, an examiner from that office must determine four things. First, the examiner must determine that there is an invention (e.g. artistic works are typically not inventions). Second, the invention must have utility (e.g. it must be useful for a known purpose). Third, the invention must be novel (e.g. not known or used before). Fourth is whether the invention is obvious. (If a person of ordinary skill working in the field of the invention would consider the idea, then the idea is obvious, and not patentable.) Filing fees and prosecution costs generally run several thousand dollars.

Patents, if they exist, are generally licensed to the franchisee. Or the franchisor arranges for the production of goods which are then purchased by the franchisee.   If a franchise uses or licenses a patent to a franchisee, care needs to be exercised in determining the scope and requirements of the license grant. Patent misuse arises when a patent holder uses its patent to force the purchase of a non-patented item (or something produced with a non-patented process), that the purchaser wouldn’t otherwise buy from the patent holder.

Another area of difficulty for franchisors may arise when a franchisor uses its franchisees to test patentable items or processes. Without clear contractual language to the contrary, the franchisor may unintentionally create joint ownership of its invention, or at least create an ambiguity as to whether or not joint ownership exists. By statute, the patent belongs to the “inventor”, with the term “inventor” being defined by the statute. If a franchisee actively contributes to the invention, such as refining of the invention to a working model, it is conceivable that the franchisee becomes a co-inventor of the patent.

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