When you buy a franchise, you are paying for three main things: (i) the right to rely on the franchisor’s experience and expertise, (ii) the right to use the franchisor’s system, and (iii) the right to use the franchisor’s trademark. So, what if the franchisor’s trademark isn’t registered? While unregistered trademarks still have value, their value is limited—and this is a factor that is worth considering during the franchise buying process. National franchise lawyer Jeffrey M. Goldstein explains.
Interpreting a Franchisor’s Trademark Disclosures in Item 13 of the FDD
Under the Federal Trade Commission’s (FTC) Franchise Rule, franchisors are required to disclose the registration status of their principal trademark in Item 13 of the Franchise Disclosure Document (FDD). If a franchisor’s principal trademark is not registered, the franchisor must include the following disclosure:
“We do not have a federal registration for our principal trademark. Therefore, our trademark does not have as many legal benefits and rights as a federally registered trademark. If our right to use the trademark is challenged, you may have to change to an alternative trademark, which may increase your expenses.”
If a franchisor’s principal trademark is registered, Item 13 will typically include a table that lists the trademark’s registration date and registration number with the U.S. Patent and Trademark Office (USPTO). Whether a trademark is registered or unregistered, the franchisor must also disclose any “pending litigation, settlements, agreements, or superior rights that may limit a franchisee’s use of the trademark.”
So, it should be easy to tell if the franchisor’s trademark is registered. Now, what if it isn’t?
What it Means if a Franchisor Doesn’t Have a Registered Trademark
If a franchisor’s principal trademark isn’t registered, this raises a few important considerations for prospective franchisees. This is true even if the franchisor has a registration application pending with the USPTO. Applying for registration does not guarantee that the franchisor’s application will be approved. The USPTO can reject trademark registration applications for a variety of reasons; and, if another company claims that a franchisor’s applied-for trademark infringes its “prior” trademark rights, it can challenge the application before the USPTO approves.
Generally, if a franchisor’s principal trademark is not registered with the USPTO, this has three important implications for those who are thinking about buying a franchise:
1. Lack of Brand Protection
There is a reason why companies register their trademarks with the USPTO. Registration affords several benefits, the most significant of which is nationwide “priority” of rights. Once a trademark is registered, the trademark owner has the exclusive right to use the trademark (or any “confusingly similar” trademark) in connection with competing goods or services throughout the United States. The only exception is for any pre-existing non-registered trademarks, which remain protected only in the geographic areas where they are already being used.
If a franchisor’s principal trademark is not registered, this means that the franchisor has not established nationwide priority. As a result, if a competitor registers a similar trademark, the franchisor’s ability to use its trademark will become geographically limited. If the franchisor is planning to expand its geographic footprint, this means that it will most likely need to rebrand.
2. Lack of Investment in the Brand Generally
Registering a trademark with the USPTO is fairly inexpensive—especially in comparison to the other costs involved in building a brand and developing a franchise system. As a result, a franchisor’s failure to apply for registration may suggest an overall lack of investment in the brand. If a franchisor hasn’t registered its principal trademark, it is worth asking, “Why?”
If a franchisor hasn’t registered its principal trademark because its leadership team lacks an understanding of the importance and value of registration, this isn’t much better. Trademark protection is fundamental to franchising, and franchise executives should have a clear understanding of both why and how to protect their brands.
3. Increased Likelihood of Costly Rebranding
As mentioned above, if a franchisor’s principal trademark isn’t registered, this increases the risk that the franchisor (and its franchisees) will need to rebrand. As a franchisee, rebranding comes at your expense. Franchisors typically reserve broad rights to make changes to their franchise systems, and they use their franchise agreements to make clear that their franchisees are financially responsible for complying.
Of course, it isn’t guaranteed that rebranding will be necessary, and franchisors can (and do) register their trademarks after they start selling franchises. But, with an unregistered trademark, the risk is higher. If you need to rebrand, not only will you have to incur the costs of rebranding, but you will also have to go through the process of building brand recognition from scratch—and, if you are like most prospective franchisees, avoiding the need to build a brand is likely one of the main reasons why you were considering a franchise in the first place.
Should You Buy a Franchise if the Franchisor Doesn’t Have a Registered Trademark?
With all of this in mind, should you buy a franchise if the franchisor doesn’t have a registered trademark? Ultimately, like any of the various other issues you might encounter during your due diligence, this is just one factor to consider when making an informed buying decision. All else being equal, if one franchisor has a registered trademark and another does not, then choosing the franchisor with the registered mark might be the best option. But this is far from the only risk you should consider, and before you make any decisions about which franchise to buy, you should discuss all of the relevant risks with an experienced franchise lawyer.
Request a Free and Confidential Consultation with Franchise Lawyer Jeffrey M. Goldstein
If you are thinking about buying a franchisor from a franchisor that doesn’t have a registered trademark, franchise lawyer Jeffrey M. Goldstein can help you make an informed buying decision. To request a free and confidential consultation at the Goldstein Law Firm, please call 202-293-3947 or tell us how we can get in touch online today.
