Trademark Law Fundamentals and Related Franchising Issues

• Author: Christopher P. Bussert and Linda K. Stevens
• Pages: 1-58

1

Trademark Law Fundamentals and

Related Franchising Issues

CHAPTER 1

Christopher P. Bussert and Linda K. Stevens

Contents

I. Trademark Licensing and the Franchise Agreement . . . . . . . . . . . . . . . . 3

A. When a Trademark License Is Necessary . . . . . . . . . . . . . . . . . . . .3

B. When a Trademark License Is Not Necessary . . . . . . . . . . . . . . . . . 3

C. The Role of Trademarks in Different Types of Franchise Systems .4

II. Overview of the Basic Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

A. Trademarks and Service Marks . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

B. Trade Names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

C. Trade Dress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

D. Trademark Value and Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

E. Summary of Trademark Functions . . . . . . . . . . . . . . . . . . . . . . . . . .6

F. Sources of Trademark Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

III. Types of Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

A. Words, Letters, and Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

B. Designs, Shapes, and Symbols . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

C. Colors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

D. Combinations of Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

E. Slogans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

F. Trade Dress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0

IV. Selection and Protectability of Trademarks . . . . . . . . . . . . . . . . . . . . . 12

A. Choosing an Appropriate Trademark . . . . . . . . . . . . . . . . . . . . . . 12

1. The Spectrum of Distinctiveness . . . . . . . . . . . . . . . . . . . . . . 1 2

2. Other Factors Determining the “Strength” of a Trademark . . 16

3. Selecting an Optimal Trademark . . . . . . . . . . . . . . . . . . . . . . 1 7

V. Choosing an Available Mark—Clearance of Trademarks . . . . . . . . . . 21

A. The Search Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1

B. Preliminary Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

C. Why Conduct a Search? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

D. Contents of the Commercial Search . . . . . . . . . . . . . . . . . . . . . . . 2 4

E. Avoiding Adverse Consequences . . . . . . . . . . . . . . . . . . . . . . . . 26

2 Fundamentals of Franchising

This chapter focuses on trademark law as it relates to franchising. Among the

major issues addressed are the types, selection, and clearance of trademarks;

state and federal registration; enforcement of trademark rights; trademark li-

censing in the franchise agreement; and international protection.

VI. Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

A. What Is Registration? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 6

B. Benefits of Obtaining a Federal Registration . . . . . . . . . . . . . . . . 27

C. Obtaining a Federal Registration . . . . . . . . . . . . . . . . . . . . . . . . . 29

VII. Proper Marking and Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

A. Use of a Trademark as a Source Identifier . . . . . . . . . . . . . . . . . . 32

B. Avoiding Genericide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

C. Other Conduct that Can Result in Loss of Trademark Rights . . . 3 3

VIII. Enforcement of Trademark Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4

A. Common Situations Prompting Enforcement Actions in

Franchising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

B. Causes of Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

C. Proof of Infringement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 7

D. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

E. Policing Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

F. Non-Judicial Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

IX. Use and Protection of Trademarks in Cyberspace . . . . . . . . . . . . . . . 42

A. Domain Names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

B. Social Media . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

C. Blogs, Fan Sites, Gripe Sites, and Bashtags . . . . . . . . . . . . . . . . . 48

X. Trademark Licensing in the Franchise Agreement . . . . . . . . . . . . . . . 50

A. Important Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

B. Typical Licensing Provisions in Franchise Agreements . . . . . . . 51

XI. International Trademark Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

A. Trademark Rights Are Territorial . . . . . . . . . . . . . . . . . . . . . . . . . 5 5

B. Suitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

C. Registrability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

D. Clearance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6

E. Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6

F. Recordation of Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

G. Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

H. Summary of International Trademark Protection . . . . . . . . . . . . . 58

XII. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Chapter 1 Trademark Law Fundamentals and Related Franchising Issues 3

I. Trademark Licensing

and the Franchise Agreement

Trademark licensing is, in almost all cases, the cornerstone of a franchise sys-

tem.1 A trademark license agreement is a business agreement between the owner

of a trademark and another party that desires to use the trademark, including its

associated goodwill, in its business to identify its products and/or services to the

public while guaranteeing a uniform level of quality.

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

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

one or more of the franchisor’s trademarks in connection with the sale of certain

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

goods and services in accordance with standards and practices that have been

established by the franchisor. In return, the franchisor obtains new sources of

capital, new distribution channels, and motivated vendors of its products or

services. The legal exclusivity that trademark rights afford to the franchisor and

its franchisees offers a competitive advantage essential to a successful fran-

chised business. The necessity and role of the trademark license depend on the

type of arrangement between the parties at issue.

A. When a Trademark License Is Necessary

A trademark license is necessary if one party manufactures and sells a product

or offers a service bearing the trademark to someone other than the trademark

owner or those operating under license from the trademark owner. In franchise

relationships, it is not unusual for the franchisor either to be the trademark owner

or the licensee of the trademark owner.

B. When a Trademark License Is Not Necessary

A trademark license is not necessary if one party merely distributes or sells the

trademark owner’s products without conducting business under the owner’s trade-

mark or name. For example, a convenience store franchisee does not need to

obtain a trademark license from beverage producers to sell the branded bever-

ages of those producers.

A trademark license is also unnecessary if one party manufactures the

product for the trademark owner (or its licensees) and the trademark owner itself

(or a licensee) uses, sells, or distributes the product. For example, a trademark

license is not necessary in “private label” relationships such as producers of

1. Susser v. Carvel Corp., 206 F. Supp. 636 (S.D.N.Y. 1962), aff ’d, 332 F.2d 505, 141

U.S.P.Q. (BNA) 609 (2d Cir. 1964).