A franchise relationship is a trademark license relationship that has crossed the control line into turn-key business. A franchise relationship exists when: (1) there is a trademark license; (2) a fee; and (3) the trademark owner provides significant control over the operation of the business. This control element exceeds the quality control requirement of a trademark license, which is to monitor only the quality of the goods or services, and marketing collateral bearing the mark to ensure a certain standard is maintained. In some cases, a franchise relationship is the best way to scale a business and building unity between the franchisor and franchisees is key to success.
A franchisee is the franchisor’s presence in a given geographic area. In other words, the franchisee is the eyes and ears of the company. The United States is not a homogeneous market. What is important to consumers in Midwest about about a good or service may not be the same to consumers in, for example, the Northeast and so on and so on. A strong relationship between franchisor and franchisee can result in this information exchange and more targeted branding.
One aspect of a targeted branding strategy is the use of different taglines. A house mark (i.e., the trademark that appears across product and service lines) or product mark (i.e., the trademark that appears on a specific product or service) cannot change by the market. There needs to be consistent use of these trademarks for many reasons. A house mark or product mark also does not have to tell a prospective consumer everything about your goods or services. Other marketing collateral can be used convey this type of information including taglines.
A tagline can indicate source just like a house mark or product mark, so they should be protected and searched like a house mark or product mark. But the luxury of a tagline is that it can be more targeted to the geographic market it is being used in. This is not to say that franchisors should not also have a national tagline for the business. What this means is that a business should recognize that consumers can and will identify with their business through multiple trademarks. So the franchisor should develop a trademark portfolio accordingly by working with its franchisees on what taglines resonate with consumers in their particular geographic markets.
In September 2017, Toys R Us representatives announced that the company was filing for bankruptcy protection. The company closed and sold all 735 stores in the United States and shutdown its website. What remained was to auction off its intellectual property. But that plan was abruptly put to an end on Monday when the controlling lenders ended the auction.
The lenders determined that any bids they would receive in the auction for – primarily – the brands, would be significantly less than the value they could create by leveraging the brands themselves. The reorganization plan contemplates a new Toys R Us and Babies R Us branding company that will maintain its global licenses and can invent in or create new, domestic retail operating businesses.
This is a great story about the power and value a brand possesses. Too often, trademarks take a back seat to patents and copyrights. Businesses, especially startups, see value in the patent and not the trademark. Patents are not appropriate for every type of business, but every business has a brand. Every business has something consumers rely on to distinguish it from other goods or services in the marketplace.
This is why selecting a strong trademark to begin with is so important, and why working with a naming company could be some of the best money a business can spend. It is also why making sure the name you choose is protectable by doing a trademark search is so important.
Finally, this is why protecting the scope of your trademark rights is important. The more capable a trademark is of identifying the owner as the source of goods and services, the more valuable it becomes. Having a thoughtful enforcement strategy will directly increase in the value of a brand. The money spent should be thought of as an investment instead of a cost.
When a trademark owner licenses its rights to another then subsequently files for bankruptcy, the bankruptcy trustee has the option to reject the trademark license. To reject, rather than assume, the trademark license means to terminate the license agreement. In this situation, the trademark licensee has no option to continue using the trademark. The trademark license is simply terminated. Generally, trademark licenses are rejected by a bankruptcy trustee when the agreement stands in the way of a restructuring.
This treatment of trademarks in the Bankruptcy Code is different from the other forms of intellectual property. When copyrights, patents, and trade secrets are involved, while the bankruptcy trustee can reject the license agreement, the licensee can elect to continue to use the intellectual property provide the royalty payments and other obligations under the license are followed.
For some Courts, this different treatment of intellectual property rights was wrong, so they treated trademarks like the other forms of intellectual property under the Bankruptcy Code. For other Courts, the language in the Bankruptcy Code was clear and Congress by its words decided to treat trademarks differently from the other forms of intellectual property. Mission Product Holdings, Inc. recently filed a Petition for a Writ of Certiorari in the Supreme Court of the United States to resolve the split among the Courts.
The International Trademark Association filed an Amicus Curiae (i.e., Friend of the Court) brief in favor of the U.S. Supreme Court taking the case. According to INTA, allowing trademark licenses to survive bankruptcy will result in a stronger trademark system that will increase the royalties trademark licensees are willing to pay.
There is no question that it is the trademark licensor’s obligation to ensure a certain level of quality in the licensed goods or services is maintained. In some cases, a trademark licensor can satisfy this obligation by relying on its relationship with the licensee. But the types of relationships that allows for this quality control delegation are few in number. If a trademark licensor fails to engage in actual quality control, the result can be an abandonment of all trademark rights.
The difficult question is whether a debtor trademark licensor should be obligated to incur the expense of engaging in quality control if the trademark licensee wants to continue using the trademark. If the Supreme Court takes the case and decides that trademarks should be treated like other intellectual property, then it may make sense to negotiate in any trademark licenses that the licensee must pay the costs for the debtor trademark licensor to exercise it quality control obligations in addition to any royalties owed.
Nestle announced that it was paying $7.15 billion dollars for the right to sell Starbucks coffee. Nestle is not buying any physical assets from Starbucks. This is a pure trademark license deal. This trademark license deal is a great example of the power of a brand. Despite its best effort to make inroads in the coffee market with its Nespresso product, Nestle recognizes Starbucks’ stronghold on the coffee market and rather than fight it Nestle decided to get onboard the Starbucks train.
In the case of the Nestle deal, it appears that Nestle will sell Starbucks beans and capsules. So no trademark search is necessary. However, trademark license deals often involving leveraging the popularity of a brand to expand into other product or service lines. In those cases, a trademark search is necessary not only to protect the licensee but also to protect the licensor.
In a prior post, we talked about product extensions not being automatic. What are the possible ramifications of the inability to expand into a particular product or service? From the licensee’s perspective the ramification is obvious: you will not be able to sell the product or service either at all or at least within a specific geographic region. The trademark licensee may also be ordered to pay any profits it made from the infringing sales.
With respect to the trademark licensor, the possible ramification is to reimburse the trademark licensee for any monetary damages it is ordered to pay, and to pay the attorneys’ fees and costs incurred by the licensee to defend itself. Most trademark licenses include an indemnification section that requires the trademark licensor to indemnify, defend, and hold harmless the licensee from any claims of trademark infringement. In essence, these sections function as a form of insurance for the licensee against a trademark infringement lawsuit, which is why some licensees will require the licensor to prove it has insurance coverage for a trademark infringement claim and that the licensor name the licensee as an additional insured. Agreeing to indemnify and defend is a nice gesture, but meaningless if the trademark licensor does not have the money to actually pay for a future liability or the defense of a lawsuit.
In a prior post, we also talked about how much a proceeding before the Trademark Trial and Appeal Board can cost. All of this can be avoided with a proper trademark search conducted prior to putting pen to paper on a contract that may harm both parties.