Trademark Licenses and Accidental Franchises

Description

Trademark licensing is a highly popular business practice utilized by companies in all industry sectors. Trademark licensing enables a brand owner to broaden public exposure for their brand by authorizing third-party licensees to sell branded goods and services, which, in turn, produces revenue for the licensor in the form of royalty fees. One of the hallmarks of an enforceable trademark license is that the trademark owner retains sufficient control over the quality of the goods or services that a licensee produces under the license in order to avoid being deemed to have abandoned their trademark rights. If a trademark owner fails to maintain control over the use of the mark, the licensor could lose all rights in a trademark. This is known as a naked license.

Counsel must also understand the subtle difference and overlap between trademark licensing and franchise law. Franchises are a special subset of trademark licenses. Appreciating the distinction between franchise licenses and non-franchise licenses is essential because the accidental or unintended creation of a franchise may subject a brand owner to complicated and demanding franchise laws. Significant consequences, including damages, rescission, fines, and penalties, can flow from noncompliance with franchise laws. Franchise statutes impose personal liability on a franchisor’s owners, officers, directors and key management, and violating franchise laws is potentially punishable as a felony (although criminal prosecution is rare).

The razor-thin line separating the quality controls that a trademark owner must retain to avoid naked licensing may be indistinguishable from the control or assistance characteristically associated with a franchise. Compounding the difficulty in sorting franchise licenses from non-franchise licenses is misinformation circulating on the internet that suggests that the difference between franchising and licensing is the extent of control that a trademark owner retains over the licensee.

Listen as our authoritative panel of attorneys examines the differences between trademark licenses and franchises and provides best practices for structuring licenses to avoid inadvertently creating a franchise. The panel will also discuss best practices for complying with franchise laws if an inadvertent franchise has been established and minimizing vicarious liability based on the activities of licensees.