Companies with successful brands can expand the reach of those brands by allowing other companies to produce goods and services under the trademark owner’s brand.
Other companies may want to secure the services of manufacturers and distributors that will apply the trademark owner’s trademark to products, then sell and distribute them.
Still other companies may simply need a manufacturer to produce goods for sale by the trademark owner.
All these activities describe licensing arrangements. Trademark licensing is the way a trademark owner gives another permission to make and use their trademark.
However, anytime a trademark is licensed, the owner needs to be careful not to trigger disclosure requirements issued by the Federal Trade Commission (FTC) meant to regulate the offering of franchises. These disclosure requirements are quite extensive and there are fines for failing to provide them to the prospective licensee.
So, how does a trademark owner license their trademark without triggering these regulations?
The FTC defines a franchise as a commercial arrangement that involves the following three requirements: (1) a promise to provide a trademark or other commercial symbol; (2) a promise to provide significant control or assistance in the operation of a business; and (3) a required minimum payment of $500 in the first six months of operations.
Since a trademark license necessarily involves giving someone permission to use a trademark and will almost always involve a payment of more than $500, the difference between triggering and not triggering the FTC rules comes down to how much control or assistance the trademark owner offers to provide the licensee.
Trademark law requires the owner of a trademark to police and control the use of their mark, as well as the quality of the goods and services offered under the trademark. Should an owner fail to monitor and exert control over who uses their mark and/or the quality of the goods or services provided under the mark, then courts may conclude the owner has abandoned their rights in the trademark and the trademark registration becomes subject to cancellation.
As a result, every trademark license needs to have provisions that allow the trademark owner to supervise some aspects of the use of their trademark. However, the more control that a trademark owner exerts over the licensee, the more likely the trademark owner is to trigger the FTC’s franchisor disclosure obligations.
So, how much control can a trademark owner exert and still avoid creating a franchise? First, a franchise agreement involves the trademark owner exercising a significant degree of control or providing significant assistance over the franchisee’s method of operation.
Significant control or assistance is more likely to be the case when the franchisee is relatively inexperienced in the type of business at issue, when they take a large financial risk and/or when the control or assistance offered is unique to that business rather than being generally known and practiced in the industry. In addition, the control or assistance must involve the franchisee’s overall method of operation, not just a small part of the franchisee’s business.
The FTC considers the following requirements to be examples of “significant control or assistance”:
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