Trademark Considerations in Franchise Transfers

• Author: Christopher P. Bussert and William M. Bryner
• Pages: 223-274

I. INTRODUCTION

Trademarks are fundamental to the modern day marketing of consumer

goods and services, and, accordingly, they are often among the most

valuable assets involved in the transfer of a franchise. The purpose of

this chapter is to provide a practical guide to evaluating the trademark

considerations that may arise in connection with such transfers. As

evident from the discussion below, these trademark considerations are

many, and it therefore is important that franchise businesses consult

competent trademark counsel to avoid costly trademark‑related pitfalls.

A. What Are Trademarks?

Trademarks (including service marks, trade dress, and trade names)

can be symbols, words, numerals, pictures, slogans, colors, congura‑

tions, sounds, scents, the appearance of three‑dimensional objects, or

almost any other indicia that identify the goods or services of a particular

party—be it a manufacturer, merchant, or provider of goods or services—

and that distinguish these from the goods and services

of others.

1

By

1. 15 U.S.C. §1127 (2013) (“The term ‘trademark’ includes any word, name,

symbol, or device, or any combination thereof (1) used by a person, or (2) which

a person has a bona de intention to use in commerce and applies to register

on the principal register established by this Act, to identify and distinguish his

or her goods, including a unique product, from those manufactured or sold by

others and to indicate the source of the goods, even if that source is unknown.”).

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Trademark Considerations in

Franchise Transfers

Christopher P. Bussert and William M. Bryner

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identifying the source of goods and services, trademarks convey valuable infor‑

mation to consumers and reduce the costs consumers would otherwise incur in

acquiring information about such goods or services.

Technically, a “trademark” is used in connection with the sale of goods, whereas

a “service mark” is used in connection with the offering of services. Often, the

same mark is used as both a trademark (e.g., “Krispy Kreme” for doughnuts)

and a service mark (e.g., “Krispy Kreme” for restaurant services). For simplicity,

the broader terminology “trademark” will be used in the following discussion

to describe both trademarks and service marks. A “trade name” is the name

by which a legal entity does business or is known to franchisees, shareholders,

suppliers, creditors, or the public.2 The trade name is usually the same as the

corporate name, but this is not always so, especially in cases involving assumed

names, partnerships, and sole proprietorships. And a trade name often, but not

necessarily, contains the principal trademark of the franchise system. For exam‑

ple, compare Marriott International, Inc., owner of the “Marriott” trademark for

lodging services, with Doctor’s Associates, Inc., owner of the “Subway” trade‑

mark for restaurant services.

Finally, “trade dress” refers to the distinctive features that make up a product’s

packaging or conguration. Trade dress is “the total image of a product and may

include features such as size, shape, color or color combinations, texture, graph‑

ics, or even particular sales techniques.”

3

In connection with services, trade dress

may include the exterior and interior architectural designs and décor, vehicle

decoration, clothing, signs, menus, cuisine, or entertainment features. Promi‑

nent examples of legally protectable trade dress include the exterior design of

White Castle,4 Howard Johnson,5 Wafe House,6 and Kentucky Fried Chicken7

locations; the interior décor of Fuddruckers’ restaurants;

8

the “Marlboro Man”

western cowboy motif,

9

the Ronald McDonald clown outt,

10

the GEICO Gecko

lizard,11 the Chick‑Fil‑A cows,12 the pink color of berglass insulation,13 a Rubik’s

2. Restatement (Third) of Unfair Competition §12 (1995).

3. Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763, 765 n.1 (1992).

4. White Tower Sys., Inc. v. White Castle Sys., 90 F.2d 67 (6th Cir. 1937).

5. Clayton v. Howard Johnson Franchise Sys., Inc., 730 F. Supp. 1553 (M.D. Fla. 1988).

6. U.S. Trademark Reg. No. 2638548 (Oct. 22, 2002).

7. Kentucky Fried Chicken Corp. v. Diversied Packaging Corp., 549 F.2d 368 (5th

Cir. 1977).

8. Fuddruckers, Inc. v. Doc’s B.R. Others, Inc., 826 F.2d 837 (9th Cir. 1987).

9. Phillip Morris Inc. v. Star Tobacco Corp., 879 F. Supp. 379 (S.D.N.Y. 1995).

10. U.S. Trademark Reg. No. 3889000 (Dec. 14, 2010).

11. U.S. Trademark Reg. No. 3398021 (Mar. 18, 2008).

12. U.S. Trademark Reg. Nos. 2468762 (July 17, 2001) & 2463183 (June 26, 2001).

13. In re Owens‑Corning Fiberglass Corp., 774 F.2d 1116 (Fed. Cir. 1985).

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cube puzzle,14 the shape of a classic Ferrari automobile,15 and the overall design

of a sports shoe.16

B. Why is Trademark Law Important to Franchise

Transfers?

Franchising is, in its simplest terms, a more sophisticated form of trademark

licensing. Most franchise agreements grant a franchisee the right to use the

franchisor’s trademarks in connection with certain specied goods and services,

together with a system of marketing and distributing those goods and services

in accordance with the franchisor’s standards and practices. A franchisee uses

the franchisor’s trademarks to inform potential customers that the goods and

services it offers are essentially uniform in type and quality to the goods and

services of others in the franchise system. The legal exclusivity that trademark

rights accord to the franchisor and its franchisees offers the franchise system a

competitive advantage that is essential to the franchising business model.

Because of the central role that trademarks play in a typical franchise system,

it is important to consider carefully the various trademark issues that can arise

during the transfer of a franchise business.

C. Trademarks Distinguished from Patents,

Copyrights, and Trade Secrets

Because the various types of “intellectual property” often are confused, it is impor‑

tant to distinguish trademarks from patents, copyrights, and trade secrets. Patent

law allows inventors of novel, useful, and nonobvious inventions to obtain exclu‑

sive rights to exploit their inventions for a limited time, in exchange for disclosing

the details of their inventions to the public.

17

Copyright law protects “original

works of authorship,” including literary, artistic, and musical works, as well as

sound recordings and audiovisual works.18 “Unlike a patent, copyright gives no

exclusive rights to the art disclosed; protection is given only to the expression

of the idea—not to the idea itself.”19 As noted above, trademark law provides a

means by which parties offering goods or services to consumers can distinguish

their goods or services from those offered by other parties. Thus, unlike patent

14. Ideal Toy Corp. v. Plawner Toy Mfg. Corp., 685 F.2d 78 (3d Cir. 1982).

15. Ferrari S.p.A Esercizio Fabriche Automobili e Corsse v. McBurnie, 11 U.S.P.Q.2d

1843 (S.D. Cal. 1989).

16. L.A. Gear, Inc. v. Thom McAn Shoe Co., 12 U.S.P.Q.2d 1001 (S.D.N.Y. 1989).

17. 35 U.S.C. §§ 101 et seq. (2013).

18. 17 U.S.C. §§ 101 et seq. (2013).

19. Mazer v. Stein, 347 U.S. 201, 217 (1954).

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