Franchise Alchemy

An Intellectual Property Primer for Franchisors

Franchise IP LawIntellectual property is a core asset of any franchisor. In fact, intellectual property is important to virtually all businesses. For some companies, it’s their most valuable asset. A basic knowledge of intellectual property law enables an owner or manager to facilitate the development, protection and commercialization of the company’s intellectual property and to engage in productive discussions with the company’s legal counsel.

Intellectual property falls into four categories – trademarks, copyrights, patents and trade secrets.

  • A trademark is a brand. It’s the words or designs that identify your company when it sells anything.
  • Copyright law protects creative works. In the business context, this includes items like advertisements and operations manuals.
  • Patents protect inventions.
  • Trade secrecy law protects confidential information that is valuable to your business.

One crucial initial step for any startup company is determining the brand name of the products or services it will sell. The trademark may be one or more words or a logo design.

A lack of planning before investing marketing dollars can lead to expensive problems. For example, you may have to rebrand your products or your services if your trademark infringes the rights of a prior owner. Or the mark may not be registrable or protectable because it is too descriptive of the products or services you sell. Or it may be protectable, but so similar to the mark of other companies that its scope of protection will be narrow.

Federal trademark registration is good for any company. It puts the world on notice of the company’s trademark ownership and facilitates action against infringers. Trademark registration is specifically important for franchisors or those contemplating franchising because trademarks are the subject of Item 13 of the franchise disclosure document (FDD). Trademark registration also exempts a franchisor from a number of state business opportunity laws.

Item 14 of the FDD deals with patents, copyrights and proprietary information.

Patents provide strong protection of inventions. A company can infringe another’s patent without even knowing that the patent exists. Copying is not necessary to infringe. Most franchisors do not have patents or patentable inventions. But those that do offer a patented technology have the potential to gain significant market share before the patent expires. The term of a patent is generally 20 years from the date on which the patent was filed, and it cannot be renewed.

Copyrights protect creative works. In business, copyrights protect works such as advertising materials, manuals and photographs. Copyrights also protect computer software and databases. Copyright law protects the expression, not the idea behind it. It protects against copying, not the function of computer code or the thought behind written words. Copyright is important to franchisors, but not nearly as central to the business as trademarks and trade secrets.

“Proprietary information” in Item 14 of the FDD refers to trade secrets and other confidential information. A trade secret is information that the company protects against disclosure and that has commercial value to the company. Trade secrets are fundamental to franchising. Virtually every franchisor talks about its confidential operations manuals that contain the processes and methods that constitute the “secret sauce” of the franchise system.

Trademark protection can last as long as a company continues to use the trademark in commerce and keeps its filings current with the United States Patent and Trademark Office. But if a company fails to stop others from using the mark, it can become generic and lose its protection. For example, Aspirin was at one time a protected trademark.

There is no federal or state filing for trade secrets. But trade secrecy protection continues for as long as the company takes the steps necessary to protect the confidential nature of its trade secrets. This can be essentially forever. Look at the Coke formula.

A license agreement is a tool that enables the owner of intellectual property to exploit its commercial potential. A franchise agreement is one type of license agreement, typically granting rights to trademarks and trade secrets. It is a license agreement that contains extensive quality control requirements regarding the manner in which the franchisee must conduct its business.

In Items 13 and 14 of the FDD, the franchisor discloses not only the nature of the intellectual property that the franchisor owns and licenses to the franchisee, but also disputes over the company’s intellectual property, rulings of government agencies relating to its intellectual property, third party agreements affecting the company’s intellectual property rights, and the respective rights and obligations of the franchisor and franchisee under the franchise agreement with respect to the franchisor’s intellectual property.

You can read a short introduction to intellectual property law here.

Tom Pitegoff,