Identify the perfect franchise for you! Take our short quiz Take our free franchise quiz!
Identify the perfect franchise for you! Take our short quiz Take our free franchise quiz!

Franchise Disclosure Document for Dummies – Part 5

In part five of this series on understanding the FDD, we continue on with Items 13 and 14. Item 13 of the franchise disclosure document discloses the franchisor’s trademark ownership rights and use limitations, and Item 14 covers copyrights, patents and proprietary information.

Trademarks, Copyrights, Patents and Proprietary Information

As a preliminary matter, it is important to understand the distinctions between trademarks, copyrights, patents and proprietary information.

Trademark law protects brands, logos, company names and other “indicia of origin” that distinguish one merchant’s goods or services from its competitors’ in the marketplace. Geographically limited trademark rights are automatic, but national “priority” can be obtained through registration with the USPTO. International registrations can be obtained as well.

Copyright law protects creative expressions of ideas “fixed in a tangible medium.” What this means is that copyright law does not protect ideas themselves, but rather protects written, drawn, designed, recorded, etc. materials embodying those ideas. For example, the concept of a software application to streamline order processing is not protected by copyright, but the software code and the graphic design of the application would be. Copyright protection is also automatic, although registration with the U.S. Copyright Office provides substantial additional benefits.

Patent law protects and provides exclusive rights in inventions for a limited period of time (copyright protection is also limited, but the duration of the limitation is, for all intents and purposes, essentially perpetual for most business operations). There is a limited window of time for claiming patent rights, and the patent process can be grueling.

Proprietary Information refers to trade secrets, customer data and other confidential information that is valuable to the franchisor simply by virtue of its secrecy or restricted access. Since proprietary information is not protectable as a copyright, it must be protected through disclosure controls and contractual limitations.

Item 13 – Trademarks

In Item 13 of the FDD, the franchisor must disclose: (i) its “principal” trademarks, (ii) whether those trademarks are registered or pending registration, and (iii) certain other technical information relating to the applications or registrations. If none of the franchisor’s principal trademarks (most franchisors will only have one) are registered, the FDD must include the following disclaimer:

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.

Not only can loss of trademark rights increase the franchisee’s expenses, it can have a substantial impact on the value of the franchise. Much of the value in purchasing a franchise resides in buying into a recognized brand in order to spur public recognition and acceptance. If the franchisor is forced to change its brand, from a marketing perspective its franchisees are—at least to a certain extent—back to square one.

Other Item 13 disclosures include:

  • Whether there is any pending litigation relating to the trademarks
  • Whether there are any pending Office Actions or other proceedings with the USPTO
  • Whether the franchisor is aware of any “prior” rights in the trademarks held by third parties
  • Control and cost provisions relating to enforcement of trademark rights and litigation instituted against franchisees arising out of their use of the franchisor’s trademarks

Trademark rights are fundamental to a marketable and successful franchise concept, and franchisors and franchisees alike need to pay careful attention to the Item 13 disclosures.

Item 14 – Patents, Copyrights and Proprietary Information

In Item 14 of the FDD, franchisors are required to disclose an array of information relating to their rights in non-trademark intellectual property.

Item 14 disclosures include:

  • Advertising materials, manuals, software and other media subject to copyrights owned by the franchisor
  • Any patents owned by the franchisor
  • The remaining duration of the franchisor’s exclusive rights
  • Whether any agreements or other restrictions limit the franchisor’s ability to use and license its copyrights and patents
  • Whether there is any pending litigation relating to the franchisor’s copyrights or patents
  • Any other intellectual property rights claimed by the franchisor—including proprietary methods, recipes, market data and customer lists.

While Item 14 is treated much as an afterthought by many franchisors, for franchisors and franchisees who recognize and understand the inherent value in a robust intellectual property portfolio, the Item 14 disclosures can be a significant component of the FDD.

Next week’s installment will focus on Items 15 and 16 of the FDD, which cover management and operation of franchised units.

Jeff Fabian is the owner of Fabian, LLC, a boutique intellectual property and business law firm serving new and established franchisors and prospective franchisees.Contact the firm directly at 410.908.0883 or jeff@fabianlegal.com. You can also follow Jeff on Twitter @jsfabian.

_ _

This article is provided for informational purposes only, and does not constitute legal advice. Always consult an attorney before taking any action that may affect your legal rights or liabilities.

Tips for Attending a Franchise Show

Here are a few tips to help you make the most of your franchise show attendance:

9 Keys You Need to Know to Buy a Franchise Through the Eyes of an Expert

Assume that I’ve already identified a franchise opportunity that fits my personal, business and financial profile and my application has been approved.

Why I Have an Issue with the Forbes Franchise Rankings

The 5-Year Growth Rate and 5-Year Franchise Continuity are both great independent metrics of how a franchise is doing on average. As a potential franchisee both of these statistics are vital for selecting a franchise - you want to select a franchise that will provide you with a high return on investment and which will survive in the long run. I think these are, as FRANdata and Forbes suggested, two of the biggest (if not the two biggest) and most obvious metrics for whether or not a franchise is a “good” opportunity for a franchisee. But how do you use these to determine which franchise is BEST? This is the fundamental difficulty in coming up with a ranking system - it isn’t the difficulty in separating the good from the meh from the bad - it’s separating the great from the good and the best from the great. In the case of these rankings I found it to be pretty difficult to comprehend how they differentiated between the top ranked franchises. For instance, if you look at the difference between Discover Map (Forbes #4), Just Between Friends (Forbes #5), & Seniors Helping Seniors (Forbes #6) they all have extremely close continuity ratings and substantially different growth rates. In fact, in the case of these three, the overall rankings are opposite the growth rate rankings. Seniors Helping Seniors is ranked at the bottom of these three franchises despite having a growth rate that is 31 percentage points higher than Discovery Map and a continuity that is only 2 percentage points lower. This suggested to me that continuity was viewed as the dominant factor. But that logic didn’t hold for the rest on the “Economy Class” Top 10, as BrightStar Care (Forbes #7) had the same growth rate as Pop-a-Lock (Forbes #8) but a continuity rate that was 12 percentage points lower. These comparisons show that these were not the only two factors that went into the rankings, which is understandable, but no other factors that are explicitly listed in their results seem to be major factors.