The relationship between Franchisors and Franchisees is focused on two related principles: (1) Franchisors grant rights to Franchisees to operate a business, and (2) Franchisees pay Franchisors to continue using the granted rights. Rights that are granted by Franchisors are, amongst other things, the use of a trademark, tradename, symbol, or logo that is owned or licensed by the Franchisor. It is at this initial point that franchise law intersects with trademark law, and it continues to be an important foundation for franchise system success for all parties throughout the franchise relationship.
At the outset, it is important to note that you cannot grant rights that you do not own or have the legal right to grant. Before Franchisors can grant any rights to Franchisees, they must have the legal authority to do so. More often than we like to see, Franchisors file trademark applications with the Canadian Intellectual Property Office (“CIPO”) without professional assistance. This is generally the first mistake, which then compounds other complications. It is rare that trademark applications filed without the assistance of a trademark lawyer or agent do not contain fundamental flaws that make them difficult to enforce down the road.
Compounding these flaws, Franchisors often assume that the mere filing of a trademark application means they have registered trademark rights. After filing, many Franchisors are unaware that there are several additional steps in the trademark prosecution process. Failure to respond properly to requests from CIPO Examiners frequently results in abandonment of the application.
Even where trademarks are not registered, rights may still arise through use. However, enforcing unregistered trademarks creates its own complications. In many cases, where marks have not been properly cleared, Franchisors may unknowingly use a trademark that is confusingly similar to another company’s registered or unregistered mark that has been in use for a longer period of time.
If a Franchisor has a registered or unregistered trademark as part of its franchise system and intends to grant such rights through the Franchise Disclosure Document (“FDD”), it is crucial that the trademark be searched and cleared prior to use, and that an application for registration be filed. Without proper review, particularly for unregistered trademarks, Franchisors face significant legal and financial risks, including:
- Risk of Forced Rebranding: If trademarks are found to be unregistrable or unenforceable, Franchisors may be forced to rebrand their entire system, resulting in significant costs for both the Franchisor and its Franchisees.
- Risk of Trademark Infringement: Failure to clear a trademark may result in infringement claims from third parties with prior rights. Such claims may need to be disclosed as a material change, creating additional legal and administrative burdens and potentially discouraging prospective Franchisees.
- Risk of Rescission: Where a Franchisor fails to properly disclose trademark status or material changes within the required timeframe, Franchisees may have the right to rescind the franchise agreement. Rescission can be severe, requiring the Franchisor to refund fees, repurchase inventory, and compensate for losses, including lost wages.
It is no coincidence that trademark and franchise departments within law firms work closely together. These two areas of law are truly complementary—two peas in a pod. Conducting a thorough trademark review of a franchise system and understanding a Franchisor’s trademark portfolio prior to preparing the FDD is essential to building a strong, compliant franchise system with minimal legal risk.
If you are a Franchisor interested in discussing how to build a compliant franchise system, please contact Gregory M. Prekupec, Partner and Head of the Corporate and Franchise Team, at [email protected]
