In today’s competitive marketplace, a strong trademark is essential for any business. It acts as your brand identity, fostering consumer recognition and trust. But with so many brands vying for attention and considering the time and cost associated with trademark registration, choosing the right trademark that sticks in the minds of your customers or clients and is likely to be approved for registration can be a challenge.

The United States Patent and Trademark Office (the “USPTO”) is on a substantial backlog, typically taking 6 to 9 months before assigning an application to an examiner for review. If the examining attorney does not find any issues, they will approve the application and publish it in the Official Gazette for a 30-day opposition period during which time members of the public will have the opportunity to oppose the mark. If no one opposes the registration or requests an extension of time to do so, the USPTO will issue your registration within 90 days of the close of the publication period. As such, the trademark application process typically takes over a year under the best circumstances, making it extremely important to consider and weigh the viability of your application prior to filing to avoid the time and cost associated with refiling or responding to USPTO office actions.

In order to properly consider the viability of your application, it is important to understand the concept of “trademark distinctiveness.” Trademark distinctiveness can best be described as a spectrum of how creative, unique and memorable your chosen trademark is, which will directly impact how easy it is to register and enforce. On this spectrum, trademarks can be categorized into the five levels of distinctiveness which are described below from weakest to strongest.

The Spectrum of Trademark Strength

  • Generic Marks (Unprotectable): These marks directly reference the product or service offered. Imagine trying to trademark “APPLE” for apples – if a registration were granted for this mark, legitimate competition from other sellers of apples wishing to accurately describe their product would be hindered. For that reason, the USPTO will reject any applications for generic marks.
  • Descriptive Marks (Weak): Descriptive marks describe a characteristic or function of the product or service. “The Cupcake Shoppe,” for example, describes a cupcake shop. While it might be the only cupcake shop in the area operating under that name or using that less common spelling of “shop,” registering such marks tends to be difficult, and their protection is limited. To gain protection and registrability, the owner of a descriptive mark needs to prove that the mark has acquired distinctiveness meaning consumers have come to associate it with their specific brand, goods, or services. Acceptable evidence of acquired distinctiveness includes i) continued use in commerce for five or more years, ii) prior registration of a similar mark, or iii) any actual evidence that consumers have come to associate the mark with your brand, goods, or services (typically, this evidence would include any materials showing the success of extensive advertising of the mark or showing notoriety amongst consumers). Descriptive marks are more difficult to register, but not impossible.
  • Suggestive Marks (Stronger): Suggestive marks take things a step further. They hint at the product or service without explicitly describing it. Think “Chick-fil-A”. The name suggests a service related to chicken, but it requires some imagination from the consumer to make the connection. The USPTO is more likely to approve applications for suggestive marks, however, the line between descriptive and suggestive is not always clear, and the USPTO examiner reviewing your application may take a different view than you or your attorney. For that reason, it is important to discuss your proposed mark with an experienced trademark attorney before submitting your application.
  • Arbitrary Marks (Strong): This second-best category includes existing words or symbols that have no inherent connection to the product or service. Think of how “APPLE” was used for computers. The word itself doesn’t tell you anything about the product, but it’s a real word that can be easily remembered. Arbitrary marks are readily registrable and enjoy broad protection due to their inherent distinctiveness.
  • Fanciful Marks (Strongest): Lastly, the holy grail of trademarks, fanciful marks are invented words or symbols with no meaning outside of the brand. “Google” is a perfect example – it has no meaning in everyday language, but it’s become synonymous with search engines. Fanciful marks are the easiest to register and receive the broadest protection because they are inherently distinctive.

Choosing Your Trademark Wisely

Now that you understand distinctiveness, consider these key takeaways:

  • Aim for a trademark that falls on the stronger end of the spectrum (suggestive, arbitrary, or fanciful). If that is not possible, discuss your mark with your attorney to determine the options that may still be available.
  • Remember, there are other factors to consider beyond distinctiveness, such as trademark availability and whether the mark resonates with your target audience, but it is, nevertheless, a crucial consideration when approaching the any trademark application.

Conclusion

A strong trademark is a valuable asset for any business. By understanding the spectrum of trademark distinctiveness, you can make informed decisions when choosing a mark that will effectively represent your brand and offer the legal protection you need. Remember, consulting with a trademark attorney can provide valuable guidance throughout the selection and registration process. If you are looking to register a trademark or need legal assistance with a trademark, please contact John Kellam or one of our trademark attorneys at Manning Fulton or visit our website at www.manningfulton.com/services/intellectual-property/ to review our trademark and intellectual property services.

What is a Franchise Agreement?

The franchise agreement is the legal agreement executed between the franchisor and franchisee that creates the legal foundation for the franchise relationship. It defines the parties’ rights, obligations, and protections. There is no standard form for a franchise agreement because each agreement varies greatly depending on the applicable industry and business model being offered.  A clear and well-drafted franchise agreement protects both the franchisor and the franchisee.

For franchisors, the franchise agreement will protect your brand, grant the licensing of your marks, detail the development of territories, and establish the royalties and other fees that franchisees will need to make. While the brand standard manual will also provide governance for the franchise relationship, the terms, and conditions set forth within the franchise agreement will remain for the entirety of the initial term of the franchise relationship.

As a franchisee, the franchise agreement will protect your business investment. It is important to understand the rights and obligations that are granted to you within the franchise agreement. Furthermore, if you have been promised certain terms, ensuring such terms are written in the franchise agreement or as an addendum to the franchise agreement is important.

Common Provisions Within a Franchise Agreement 

There are many facets to a franchise agreement, here we will discuss some of the common sections, and while no two franchise agreements will be the same, most franchise agreements contain the following sections within the franchise agreement:

1. Grant and Term

The franchise agreement will grant a territory the right to use certain marks, trade dress, and obtain access to proprietary manuals in exchange for recurring fees and/or royalties over a set term – often between 5 to 10-year intervals. It is important that both parties ensure that the duration of the term aligns with the parties’ business plan, allowing enough time for the franchisee to recoup its investment.

2. Initial Training and Ongoing Support 

Initial training is critical to onboarding a franchisee with the knowledge and skills necessary to operate the franchise business successfully. This section within a franchise agreement should state where training will take place if it will be at the franchisee’s location or a corporate office. It should also state how many people may attend initial training, who is required to attend, and the costs for additional people to attend. Additionally, the franchise agreement will detail the additional ongoing support services that the franchisor will provide to the franchisee.

3. Initial Fees and Ongoing Fees

The franchise agreement will define any fees that the franchisee will pay to the franchisor prior to the opening of the franchised business. This can include the initial franchise fee paid to the franchise at the time the franchise agreement is signed, plus any initial inventory or other required purchases that may be due. Additionally, the franchise agreement will include any ongoing fees required by the franchisor. This will include, among other fees, the royalty structure, which may be a percentage of gross revenue or a flat amount due at monthly or weekly intervals.

4. Marks and Brand Manual 

This section outlines how the franchisor’s marks may be utilized, as well as any restrictions placed on the use of those Marks. One common restriction is that franchisees may not utilize the marks in their entity name. Additionally, the franchise agreement will require that the franchisee adhere to the brand manual. The brand manual is a comprehensive document provided by the franchisor to the franchisee on loan for the operation of the franchised business. Unlike the franchise agreement, the brand manual is a living document, meaning that the franchisor may make changes to the brand manual from time to time.

5. Advertising 

The advertising section discusses the advertising requirements and responsibilities under the franchise agreement. Advertising is crucial for brand visibility, customer acquisition, and maintenance of a consistent brand image for all franchise locations. The franchise agreement will set minimum amounts of advertising spend based on percentages of revenues or flat amounts that must be spent or contributed on a weekly, monthly, or annual basis by the franchisee. Typically, this section is subdivided into the following categories:

  • Brand funds: Collected and utilized to finance the development of the franchise system as a whole.
  • Local advertising: Promotes the individual franchise location and targets a specific customer base.
  • Marketing cooperatives: Allows a group or subgroup of franchisees to target a specific region at a larger scale in a collective group.
  • Grand opening: Specifies a certain amount that must be spent by the franchisee to jump-start marketing efforts when beginning operations in a new territory.

6. Site Selection and Development Schedule 

The site selection and development schedule section outlines the process and responsibilities related to finding and establishing a suitable location for the franchised business. This section is critical for both the franchisor and the franchisee as it ensures that the franchised business is in a location that meets the brand’s standards and has the potential to succeed. The franchisor will often require that any location must be approved by the franchisor prior to the franchisee signing a lease. Additionally, this section will provide deadlines for when the location must be acquired and when the franchise business should commence business operations.

7. Transfers and Assignment 

The transfer and assignment section details the procedures for transferring the franchise agreement, either in whole or in part, to another individual or entity. Franchisees will need the franchisor’s prior approval before proceeding with a transfer to ensure the new owner meets the franchisor’s requirements and is capable of upholding the brand standards and operating the franchise successfully.

8. Termination and Post-Termination 

The termination section in the franchise agreement addresses circumstances and procedures under which the franchise agreement may be terminated. The termination section is divided into two parts, termination with no opportunity to cure and termination if no cure is made within a certain amount of prescribed time. Events such as filing for bankruptcy, dissolving the franchisee entity, insolvency, being convicted of a crime, and ceasing to operate for a pre-determined period will allow the franchisor to terminate without the opportunity to cure.

9. Indemnification and Insurance 

The indemnification section outlines the responsibilities and obligations of both the franchisor and franchisee to indemnify or protect the other party from certain liabilities, losses, or claims that may arise during the course of the franchise relationship. The franchise agreement also requires that the franchisee obtain certain insurance policies with minimal coverage amounts and name the franchisor as an insured party.

10. Disputes and Forum Selection

The dispute resolution section in a franchise agreement outlines the procedures and mechanisms to be followed in the event of disagreement, dispute, or conflict and set forth the terms such as venue, choice of law, limitations to bring suit, damage limitations, and whether the dispute requires mediation, arbitration, or litigation. Many franchise agreements require the parties to attempt mediation or negotiation as the first step in resolving a dispute. Mediation and Arbitration are known as alternative dispute resolutions. Mediation involves the use of a neutral third party to facilitate discussions and assist the parties in finding a mutually acceptable resolution. Arbitration involves referring the dispute to an arbitrator or a panel of arbitrators instead of pursuing litigation in court.

Negotiating and Drafting Franchise Agreements

Many prospective franchisees ask whether franchise agreements are negotiable. Typically, certain terms of the franchise agreement may be negotiable, whereas other areas of the franchise agreement are not due to the franchisor’s need to maintain uniformity within the franchise system and implement protections for all franchisees within the franchise system.

If you are looking to purchase a franchise as a prospective franchisee and need legal assistance reviewing the franchise disclosure documents and franchise agreement, or if you own a business and are looking to take the next step into franchising, please contact Elliot Boerman or one of our Franchise attorneys at Manning Fulton or visit our website at www.manningfulton.com/services/franchise-hospitality to review our Franchising services.

With the opening of another year, you may be considering brand expansion through franchising. While there is no magic formula to tell you if you would be a good franchisor or if your business is a perfect fit for the franchise model, the questions below provide a starting point for your analysis. What underlies each of these questions is the reality that becoming a franchisor is starting a new business – the business of franchising. Simply being an excellent operator of your existing business is not alone enough to make you a successful franchisor. However, it is a great start and with additional strategic efforts you soon may be ready.

  1. Have I systematized and streamlined my business operations?

As a franchisor, one of the critical things you sell and then provide to franchisees is your refined system of operations. Your franchisees are looking to join your brand (and are willing to pay you royalties) because they want the benefit of your expertise, know-how, systems, and training – essentially you should be able to offer them a “business in a box.” This sets franchisees apart from other entrepreneurs who launch a new brand and have to learn all the hard lessons themselves.

If you are considering franchising, then likely you have one (or many) successful and well-run corporate unit(s). Your job as a franchisor is to distill your best practices and methods of operation into training, manuals, and instructions that franchisees can quickly and effectively deploy. If you want to have a national brand, the systems must be capable of replication in different market settings with all kinds of franchise owners.

  1. If a franchisee uses my system, will the franchisee be profitable?

The most important factor in a franchisor’s success is how profitable its franchisees are. Profitable franchisees are pleased with their investment, provide great validation for prospective franchises, are more likely to follow franchisor leadership and comply with brand standards, will remain franchisees, and will generate a healthy royalty stream.

Having profitable corporate units does not automatically mean that your franchisees will also be profitable. Franchisees may experience higher initial investment costs than you did. They will invest in the entire system at once whereas you may have added to the business gradually. Even more significantly, franchisees pay a royalty and brand fund fee off the top-line of their revenue that the corporate units have not historically paid. Your systems of operations must be strong enough that franchisees can make money even with these additional costs.

  1. Have I protected my intellectual property?

As a franchisor, one of your primary roles is to license your trademarks and other intellectual property. Before you franchise, you need to obtain (or at least apply for) a federal trademark registration. The benefit of the registration is that it gives you the priority right to use the trademark across the United States. Without it, businesses outside of the geographic area of your corporate units can lawfully use your trademark for their own purposes. Once your registration is obtained you can prevent new, unauthorized uses of your trademark. This is critical in a digital age. When people search for your brand name, they need to find you first and not an infringer or parallel system.

You can learn more about the basics of trademark registration here. Manning Fulton can help businesses of all sizes obtain these trademark registrations and design an intellectual property protection strategy.

  1. Is my franchise offering unique?

Consumers are inundated with businesses competing for their attention and dollars. What helps your brand attract and retain customers is to be distinctive from competitors. The easier it is for a customer to point to the distinctiveness of your brand, the better.

Prospective franchisees are a different kind of consumer – they are investors who must decide how to use their money. Your franchise offering will compete against not only from franchises in the same industry (fast food, home services, professional services, etc.) but also against franchises in the same investment class (cost and time to get open, requirements for owner/operators, average unit volumes, etc.).

Some factors that can help your franchise stand out are superior support from the franchisor in the form of training, refined systems of operations, manuals, robust supplier relationships, strategic use of technology, and effective brand marketing. Corporate units (and eventually franchise units) with strong unit level economics are powerfully persuasive. A business model that has multiple sources of revenue, high margins, and recurring revenue is attractive.  The consumer factors are important as well. If your brand has a unique value proposition for customers, it reassures prospective franchisees that there will be continued demand for the brand.

  1. Do I have the economic resources to invest in franchising?

Launching your franchise will take money. Some of the expenses you need to consider are the costs to protect your trademark, creation of a new entity, audited financial statements, legal fees for creation of the franchise disclosure document and franchise agreement, development of a brand standards manual, and state registration fees. Some franchisors also look to engage franchise consultants to help them design their franchise offering. Franchise sales requires investment in marketing collateral, lead generation, and potentially broker relationships or sales staff.

The return on your investment in franchising comes as you receive initial franchise fees (typically not a source of profit but a way to cover costs) and royalties from successful franchisees (the primary revenue and profit center).

  1. Do I have the time to invest in franchising?

It takes time to develop a franchise disclosure document. Manning Fulton can help franchisors launch their franchise offering in as little as three months, but that process requires focus, work, and decision making by the founders.

By entering into a franchise agreement, you also commit to a long-term relationship of support for your franchisees. Franchisors typically provide an initial training program, guidance on site selection and design, support with supplier relationships, access to a manual, and on-site launch assistance – all of which is before the franchisee even opens. Thereafter you or your staff need to be available for questions, ongoing training, field visits, and conventions. You need time to invest in continuing to develop the best systems for franchisees to use and to be a leader for the brand.

If your corporate unit operations depend on your personal, day to day supervision to operate successfully, you may not have the time to provide the support that franchisees need.

If you have answered “no” to any of these questions, it does not mean that franchising is not right for your business, but it may mean that you need to establish a stronger foundation first. Continuing to increase the profitability of your corporate units, developing efficient and easily replicated systems, and adding to corporate unit counts are some options for laying that foundation.

If you’ve answered “yes” to most of the questions above, then franchising could be an optimum growth strategy for your business. Don’t miss out on this opportunity to expand your brand, generate recurring revenue, and build a network of successful franchisees. Contact Carlie Smith or Ritchie Taylor at Manning Fulton to help you navigate the franchising process or visit our website at https://www.manningfulton.com/services/franchise-hospitality/ to review our Franchising services.

Earlier this year, the Federal Trade Commission (“FTC”) released a set of revisions to its Guides Concerning Use of Endorsements and Testimonials in Advertising (“Endorsement Guides”) which instruct businesses on how to navigate the FTC Act and how to avoid engaging in unfair or deceptive trade practices.  These revisions were intended to modernize the Endorsement Guides to address new advertising channels such as social media, online influencers and artificial intelligence and were released alongside an update to the FTC’s Frequently Asked Questions webpage (FTC’s Endorsement Guides: What People Are Asking) and a proposed Rule on the Use of Consumer Reviews and Testimonials.

What’s Changed?

Of the numerous changes made in the revised Endorsement Guides, the FTC called out six as meriting special attention:

  1. The introduction of a new principle regarding not procuring, suppressing, organizing, upvoting, downvoting, or editing consumer reviews in ways that likely distort what consumers really think of a product.
  2. Clarification incentivized reviews, reviews by employees, and fake negative reviews by competitors.
  3. Adding a definition of “clear and conspicuous” and warning that a platform’s built-in disclosure tool might not be adequate.
  4. Updating the definition of “endorsements” to clarify that it can include fake reviews, virtual influencers, and social media tags.
  5. Providing a clearer explanation of the potential liability that advertisers, endorsers, and intermediaries face for violating the law.
  6. Emphasizing special concerns with child-directed advertising.

What does this mean for you?

If you are displaying customer reviews or exerting any control over third-party hosted reviews, you should make efforts to ensure that your presentation of these reviews accurately captures and that your actions in no way distort the full scope of customer reported experiences. In this vein, you should avoid pruning or suppressing negative reviews, creating fake positive reviews, or artificially inflating online engagement by any means such as view, follow or subscriber purchasing.

To the extent your business utilizes endorsements or paid or incentivized reviews, ensure that the nature of the endorsement or incentive is clearly and conspicuously disclosed. The revised Endorsement Guides define “clear and conspicuous” as difficult to miss (i.e., easily noticeable) and easily understandable by ordinary consumers.” Similarly, take steps to ensure that your endorsers make all necessary disclosures and otherwise comply with the FTC guides, and, to the extent you have a contractual relationship, require they do so in their agreement.

While this post has touched on what the FTC called out as most important among the revisions to the Endorsement Guides and a few recommended compliance responses, this summary is far from exhaustive. That being the case, we recommend consulting with your marketing team and your attorney to discuss any questions you might have and to ensure compliance with the changing landscape of online marketing. Please contact John Kellam or one of our attorneys at Manning Fulton & Skinner, to discuss in further detail.

In the trademark and copyright law world, few disputes have garnered the attention of both the legal and culinary world quite like the “Taco Tuesday” debate. The controversy revolved around the rights to a popular phrase that has been simmering for years, pitting businesses against each other and igniting a discussion around the usage of common expressions. “Taco Tuesday” is a phrase that’s widely used across the United States to promote restaurant deals for tacos sold on a Tuesday. While the term might seem commonplace, that is the focus of the legal dispute.

In the late 1980’s, Taco John’s, a prominent fast-food chain based out of Cheyenne, Wyoming, successfully registered the trademark for “Taco Tuesday.” They sought to claim exclusive rights over this catchy phrase in 49 out of the 50 states, excluding New Jersey where another entity held a prior claim. Since then, Taco John’s has fiercely defended its trademark, even going as far as sending cease-and-desist letters to other businesses using the term to promote their own Tuesday taco specials.

The crux of this debate lies in the question of whether a commonly used phrase like “Taco Tuesday” can be owned by an induvial entity, thereby restricting its use in commercial settings. Critics of Taco John’s argued that the term had become too generic, used widely and indiscriminately, and thus should be free for everyone to use – In other words, they argued “genericide” of the trademark.

On May 16, 2023, Taco Bell filed a Petition for Cancellation with the U.S. Patent and Trademark Office to cancel the trademark, arguing that the phrase “Taco Tuesday” should be canceled under the legal claim of genericness. The basis for any cancelation of a trademark falls into two categories: (1) claims that can be raised within the first five years of a trademark’s registration; and (2) claims that can be raised at any time. During the first five years after a trademark has been registered, cancellation commonly occurs through a variety of claims such as the likelihood of confusion or dilution of a prior registered trademark. After a trademark has been registered for at least five years, it becomes incontestable precluding cancellation on the grounds of descriptiveness. Thereafter, many of these claims are no longer available to raise, but certain claims remain – where a petitioner alleges claims of abandonment, fraud, misrepresentation of sources, or notably, genericness.

Genericness or genericide refers to the process whereby a trademarked term becomes generic through use by the common individual and becomes so common that it loses its protected status. When a term is generic, it cannot be trademarked. This can be expensive and damaging to companies. Controlling how society uses the term is challenging and can become more expensive as it becomes more common in the everyday vernacular.

If the “Taco Tuesday” trademark lost protection because of its genericness, it would not be the first or last time that a trademark has lost protection through becoming generic. Escalator, cola, and aspirin were once trademarked terms that fell victim to genericide. Xerox is a frequently used example of a trademark that was threatened under the claim of genericness. As a result, the company advertised and encouraged consumers to use the term “photocopying” rather than “Xeroxing” to stop misuse of its mark.  Ultimately, these efforts were successful in pivoting common usage and defending against genericness.

Companies looking to protect their trademarks from a potential claim of genericness can take certain measures to reduce any potential risks. Such measures may include adding a descriptive term beside the product to avoid the brand name becoming generic, refraining from using the trademark in generic ways (such as in the form of a verb), using marketing campaigns to change the way consumers refer to their products, and most importantly, consistently enforcing trademark rights through legal guidance when there is common infringement of the trademark.

Ultimately, and significantly on a Tuesday, Taco John’s decided to abandon the “Taco Tuesday” trademark, saying it would “share” the catch phrase, and that instead of defending the trademark against a claim of genericide, would be donating money to charity. The “Taco Tuesday” dispute and its resolution demonstrates the dynamic intersection between language, culture, and trademark law.

While that may be a wrap on the “Taco Tuesday” trademark dispute, if you are concerned about protecting your trademark from genericness, or alternatively, are accused of infringing a trademark whose mark is ubiquitously used to refer to a type of product or service, please contact Elliot Boerman or one of our trademark attorneys at Manning Fulton & Skinner, to discuss in further detail.

Effective October 1, 2023, North Carolina streamlined franchisor compliance with the North Carolina Business Opportunity Act.  The adopted revisions to the North Carolina Business Opportunity Act (“Act”) proposed by the North Carolina Business Law Section task force led by the author eliminate the 40+ year burden imposed on franchisors who are otherwise compliant with the FTC Franchise Rule but are considered business opportunities under North Carolina law because they lack a federally registered trademark.

Under prior law, these subset of franchisors would be required to provide a prospect with a North Carolina specific business opportunity disclosure (“Business Opportunity Disclosure”) in addition to the Federal Trade Commission required franchise disclosure document (“FDD”).  A compliant FDD contained substantially all the disclosures required by the Business Opportunity Disclosure resulting in needless redundancy, opportunities for disclosure errors, and unnecessary legal expenses. 

Now, those franchisors who provide a compliant FDD and lack a federally registered trademark will be able to use their FDD together with a state specific cover page to meet their North Carolina business opportunity disclosure obligations.  The filing requirement with the North Carolina Secretary of State for these franchisors otherwise remains the same.  Nothing changes for franchisors who already license franchisees a federally registered trademark.

As the first state to adopt a business opportunity statute, many state business opportunity statutes are patterned after North Carolina’s statute.  Hopefully, other states will examine how North Carolina has modernized the Act to facilitate commerce with a streamlined disclosure process easily transferrable to other states.

At some point in most franchise sales conversations a prospective franchisee will ask “So, what’s the size of my territory?” Some franchisors grant franchisees a geographic area, or territory, in which the franchisor agrees not to conduct certain competitive activity, like placing another unit. For some types of businesses, the territory is the only area where the franchisee can conduct marketing or serve customers.

If a franchisor decides to grant franchisees a territory, it will disclose critical details about territory protections and size in Item 12 of its Franchise Disclosure Document (“FDD”).

Below we have listed five questions that every franchisor should answer when considering whether to offer a territory to franchisees or when considering how to modify its territory structure.

  1. Should franchisees receive a territory at all?

The decision to award a territory is strongly dependent on the nature of the franchised business. Many franchisees do not receive any territory protections and face competition from the franchisor, its affiliates, or other franchisees from any location or method. These franchisees tend to be in industries that are convenience-based or relationship-based. Some of these franchises are operated in areas with high-density populations or areas with a captive audience like a university campus or sports stadium. In these situations, it is impractical to define a territory because the location of the outlet is driven by the convenience to the customer. If a territory is not awarded, the franchisee is dependent on the franchisor’s judgment in determining how close is too close for another outlet.

In contrast, brands that provide goods and services at the customer’s locations typically do award territories. Doing so incentivizes franchisees to fully develop their markets and helps prevent conflict between outlets claiming ownership of a customer.

The important thing to remember is that a franchisee is not entitled to a protected territory and the franchisor should create a territory structure that works best for its system.

  1. Will the territory be exclusive?

In the FDD, a franchisor will disclose if the territory is “exclusive.” As defined by the FTC, a territory is exclusive if “the franchisor promises not to establish either a company-owned or franchised outlet selling the same or similar goods or services under the same or similar trademarks” in the territory. This type of protection is one that the franchisee is likely most interested in.

Even if the franchisor agrees that no other company or franchised unit will be established in the territory, the franchisor should still reserve other competitive rights. What rights are specifically reserved will vary from system to system. They will also depend on the nature of the franchisor’s other business interests.

Commonly, franchisors reserve the right to use other channels of distribution to sell their goods and services within the territory. For example, a restaurant with a signature sauce may reserve the right to sell the sauce in grocery stores in the territory. This action technically competes with the franchisee but is not establishing another unit within the territory. Another very important channel of distribution for many businesses e-commerce and most franchisors reserve the right to make these sales to customers in the franchisee’s territory.

  1. How will the size of the territory be determined?

An ideal franchisee territory is one that is big enough to allow the franchisee to be financially successful and small enough that the franchisee can fully penetrate the market. A franchisor should examine data to determine how many customers are necessary to be successful and where those customers are located. Using this experience, the franchisor then defines the territory, which can refer to (1) population size, (2) distance, (3) number of target customers in the territory, or (4) well-defined regions like city boundaries of zip codes, among other options.

Examples of these definitions are below:

  • A population of no less than 75,000 people, as calculated using US Census data.
  • A three-mile radius from the location of the franchised business.
  • Containing no less than 20,000 qualified households.
  • Including the following six zip codes.
  1. Will there be circumstances when the franchisor can modify the territory?

Franchise agreements often have substantial term lengths and a lot can change in five, ten, or fifteen years, especially in a region with significant new development. Some franchisors reserve the right to re-evaluate the size of the territory during the term to account for anticipated or unanticipated changes. These adjustments to the territory are not typically unlimited and usually adjust the territory to the size that was originally intended. For example, if a suburban area has a significant population increase, the territory would be adjusted to an area containing the original population size.

Additionally, franchisors may reserve the right to change the size of the territory if a franchisee is not in compliance with its obligations under the franchise agreement. This remedy allows the franchisor to take strong action to encourage compliance, short of termination. One obligation that is often the trigger for changing territory rights is the franchisee’s failure to achieve a certain performance level like a minimum sales obligation.

  1. What are the restrictions on franchisees operating outside of the territory?

The FTC requires the franchisor to disclose in Item 12 the restrictions on what a franchisee can do outside of its territory. Consider if the franchisee will be able to:

  • Conduct advertising and marketing that occurs or targets customers outside of the territory,
  • Accept orders from customers who live outside of the territory,
  • If goods and services are normally provided only at the location, provide goods and services at off-site events, whether through the franchisee’s employees or through a third party (like a delivery service),
  • Provide services to an out-of-territory customer if the area is not currently under a franchise agreement with another franchisee, or
  • Use another channel of distribution to make sales outside of the territory.

Establishing these rules for your franchisees helps to focus their sales and marketing efforts and can reduce friction between franchisees as they compete for customers.

Discussing these questions with qualified franchise counsel will help you to structure franchisee territories in a way that balances the rights of the franchisor with the interests of the franchisee. If you are looking to implement franchise territories or have questions about what approach works best for you, reach out to Manning Fulton to assist you with determining the right strategy and drafting your Franchise Disclosure Document (“FDD”).

In April 2024, the Federal Trade Commission (“FTC”) issued a new rule that broadly prohibited the use of non-competition agreements (“non-competes”) for workers. This rule goes into effect September 4, 2024, but is expected to be subject to significant challenges in court. While the landscape and timing for the rule is likely to continue to change over the coming weeks and months, this post outlines the key impacts that the ban on non-competes will have on franchisors if it is fully implemented.

First and most importantly, the FTC rule applies to non-competes with “workers.” The definition of “worker” expressly excludes the relationship between a franchisor and a franchisee. For now, the non-competes that are in many franchise agreements can still be valid and unenforceable under federal law (outcomes under state law may vary).

The skies are not necessarily clear, however, for franchise agreement non-competes. The FTC is widely expected to update the federal franchise rule and may very well include similar limitations on the use of non-competes in franchise relationships. Further, while the non-compete rule excludes the “franchisee” from the definition of a worker, the impact of the rule on owners in a franchisee entity, owner spouses and other immediate family members, non-owner operators of the franchised business, and non-owner guarantors who may have signed individual non-competes with the franchisor is not clear from the text of the rule. Franchisors should contact their legal counsel to discuss how to approach the non-competes that may have been entered into with these individuals.

Second, people who are employees of the franchisor and franchisees are likely considered “workers” under the new non-compete rule. Franchisors and franchisees need to be prepared to comply with the requirements of the rule with respect to their employees in the same way that non-franchise businesses need to comply.  A summary of those requirements is below:

  1. Subject to the small exception described in item (C), employers will no longer be able to enter into or enforce non-competes.
  2. If an employer has historically entered into non-competes with its employees, the employer is required to provide notice to employees by the effective date of the rule that the non-compete agreement is not enforceable. The FTC has prescribed the form and method of notice.
  3. A limited exception to the non-compete ban allows an employer to enforce an existing non-compete with senior executives who meet certain criteria. But after the effective date of the rule, no new non-compete agreements can be entered into with or enforced against senior executives.

Franchisors can contact their legal counsel to determine how to implement these laws. For more insights, you may also review the client alert provided by employment attorneys at Manning Fulton: https://www.manningfulton.com/news/ftc-bans-non-compete-clauses-in-employment-contracts/.

Third, the FTC ban on non-competes has some other important exceptions. It does not apply to non-solicitation, confidentiality, or non-disclosure provisions and agreements if those provisions and agreements do not have the same practical effect as a non-compete by preventing the employee from working. Franchisors should review these provisions and clauses in their employment agreements and determine if adjustments need to be made to increase the likelihood of their enforceability. Additionally, the new rule does not ban a non-compete that is entered into when a person sells an ownership interest in a business or the entire business is sold. If a franchisor is looking to sell or has franchisees looking to transfers, non-competes may be used in certain circumstances to prohibit the seller from competing.

Fourth, franchisors should counsel with their attorneys to discuss what guidance franchisors should provide to franchisees regarding implementation of the ban on non-competes.

Finally, franchisors should learn how to effectively use other strategies for brand protection. Confidentiality agreements, exercising lease rider or purchase rights to control properties and assets upon termination, expiration, or non-renewal, implementing practical limitations on franchisees’ employees’ access to confidential information and trade secrets, and developing controls for customer information, accounts, technologies, etc. that can be used to stop a terminated franchisee employee or franchisee from using proprietary materials and unfairly competing.

Manning Fulton franchise attorneys stand ready to help you navigate these new laws and protect your franchise business.

When a customer walks into a franchise location in Seattle, Washington, does the customer have the same experience as it would when it visits a location in Miami, Florida? What about Lincoln, Nebraska? One of the hallmarks of franchising is that each franchisee is expected to operate in accordance with brand standards and deliver the same signature goods or services.

Sometimes that ideal can conflict with another important business principle – innovation. When a participant in the franchise system – whether a franchisee or the franchisor – has an improvement that can benefit each franchisee’s business, how is the idea implemented across the system? In this post we analyze how franchise systems can find a balance between consistency and innovation.

  1. The value of consistency.

All franchise agreements are at their core trademark license agreements. Under trademark laws, a licensor must ensure that users of the mark implement the same quality of good or service. In this sense, a brand must enjoy a certain level of consistency across franchise locations. Consistency contributes to its intangible value and customer recognition of the brand.

Consistency also benefits the franchise system internally. Consistency means (i) the best practices can become brand standards, (ii) the business model can be systematized and replicated, and (iii) key performance indicators can be developed and used by all to benchmark and improve performance.

  1. Franchisees are a powerful source of innovation.

Franchisees can develop keen insights from operating the business day in and day out and across different markets. These insights about how to improve the business processes, goods and service offerings, and branding can be invaluable.  For example, iconic menu items in some of the most successful food franchise systems were developed by franchisees: the Big Mac, Egg McMuffin, Blizzard, and $5 Footlong sub. Other franchisee innovations can be subtler but just as important: a new, more efficient way of managing service appointment logistics, an improvement to the sales process, or a marketing campaign that has significant ROI. (The value that franchisee innovations can add to a brand is a reason that all your franchise agreements need clauses that assign franchisee inventions and improvements automatically to the franchisor so they can be implemented brand-wide.)

Innovation is not the same as constantly challenging the business model. We have heard franchisors comment that they want new franchisees to focus for the first few years on learning the franchisor’s model. Then once the franchisee is a strong operator, the franchisee will be better equipped to identify genuine innovations and improvements.

  1. Strategies for recognizing and implementing franchisee-driven innovation.
  • Have key performance indicators to benchmark success. Pay attention to what high performing franchisees are doing and why they are successful.
  • Train franchise field operations people to notice good ideas that originate with franchisees.
  • Develop a method where franchisees can provide their suggestions to the franchisor.
  • For ideas that have strong potential and are consistent with the overall brand, create opportunities for them to be tested by other franchisees or corporate units.
  • Implement innovations through updated brand standards. Provide training and abundant communications about the value of the innovation to the other franchisee’s businesses.

Having a franchisee advisory council or subcommittees are ways that many franchise brands accomplish items C and D above.

  1. Implementing technology.

One of the most rapidly evolving market forces is technology. Cloud products. Point of sale systems. Smartphone apps. Artificial intelligence tools. Each can disrupt the industry your franchise system is in. The franchisor has the responsibility of leading the brand successfully through these market changes. That may require changes in technology even if franchisees are initially hesitant to make changes or incur additional costs.

The franchisor is often the party with the time and resources to evaluate what technologies to implement. Technology can change rapidly, and options have proliferated, so careful research and testing by the franchisor is essential. The most successful technology roll outs in franchise systems have been the product of: (i) research and testing so the franchisor can confidently demonstrate that the technology will improve the franchisee’s business, (ii) strong, clear, and repeated communication about the change and its rationale, and (iii) franchisees who have vetted and validated the technology who help drive the change.

  1. Set the boundaries for consistency and innovation.

The franchise agreement provides the boundaries for both franchisor and franchisee-driven innovation and helps to strike the balance between consistency and innovation. The degree of change a franchisor can require is on a spectrum and highly fact-specific. In general, fundamental changes to the system cannot be made unless the franchisee consents or is required to sign a new franchise agreement at renewal (even so, there are court cases that challenge limits of what changes can be required in new agreements). Other changes, even major changes, are well-supported by provisions in the franchise agreement and can be successfully implemented through updates to the brand standards manual. Generally, franchisors are limited in the kinds of new fees they require franchisees to pay to the franchisor or its affiliates. The consensus in the franchise community is that the best kinds of changes are the ones that franchisees willingly adopt because they see the way the change will increase their profitability.

To discuss whether your franchise agreement adequately accounts for both consistency and innovation or to discuss changes you want to make in your franchise system, contact Carlie Smith or one of Manning Fulton’s franchise attorneys.

Manning, Fulton &, Skinner, P.A. is pleased to announce that Ritchie W. Taylor, head of its Franchise & Hospitality practice group, has been recognized in the 2024 ‘Legal Eagles’ list by Franchise Times magazine.

Mr. Taylor has been routinely recognized in the publication, continuing to represent Manning Fulton as one of the top franchise firms in North Carolina and nationally. Ritchie represents both franchisors and multi-unit franchisees and is routinely recognized for his work in franchise and business law by a variety of publications including Franchise TimesWho’s Who LegalEntrepreneur Magazineand Best Lawyers in America.

Franchise Times, a national industry publication for franchisors and multi-unit franchisees, annually recognizes the ‘star legal professionals in the franchise industry.’ ‘Legal Eagles’ are nominated by their clients and peers, then independently vetted by the Franchise Times editorial board.

Ritchie was quoted in this year’s April edition stating the following on Franchise trends;

“The NLRB’s new joint employer rule is forcing franchisors to think more critically about the services they offer to franchisees and the related contractual obligations. We expect more franchisors to reconsider the provision of those services unless they can be expressly tied to system standards. We are working with clients to help them identify potential problematic areas and other options.”

To view the articles published by Franchise Times that included Ritchie’s insights click the links below.

The average consumer probably associates franchising with the popular fast casual restaurant across the street from their office, their favorite gym down the street, or some other brick-and-mortar building where they obtain routine or specialized products and services. Franchising, however, covers a broad scope of industries and many operate without a brick-and-mortar location where the products or services are provided. These industries include on-demand auto care, residential or commercial cleaning, home and yard maintenance or upgrades, senior care, pet care, consulting, and advertising services. Further, innovative brands are increasingly taking traditional brick and mortar concepts and converting them to mobile operations to capitalize on changing consumer tastes and interests and reduce overhead costs.

These non-brick-and-mortar and mobile franchise systems can result in unique opportunities and challenges for the franchisor. As you work to develop such a franchise system, we recommend accounting for the below issues in your Franchise Disclosure Document (“FDD”).

  1. Territory Composition

There is a lot to think about as you define the composition of an optimum franchisee territory. We’ve written about this subject in more detail in another post [Link here] but want to highlight a unique consideration for non-brick and mortar systems.

In mobile franchises, the customer’s location is generally even more important than it is in brick-and-mortar franchises because the products and services are often delivered to the customer’s location, whether that be an office or residence. To maximize chances of success, the franchisee should (i) have enough potential customer locations within its territory to have a sufficient revenue stream and (ii) be able to service them in a cost-effective manner. This often means that the customers are not too far away from the franchisee’s base and that clustering of appointments is possible.

For example, a pool maintenance franchisee would need a territory size that has a sufficient customer base – people with home pools. The franchisee would also want the density of the pool owners to be high enough so that it could schedule its labor force strategically.

  1. Out of Territory Opportunities

Another decision point is whether franchisees can provide products or services to customers whose locations are outside of the territory boundaries. Most franchisees want some degree of protection against other franchisees servicing customers in their territory. However, there may be good reasons to permit this in special circumstances.

If the business model is one where a franchisee can reach service capacity, it may make sense for all parties involved to permit the adjacent franchisee to be able to service the customer temporarily. The substituting franchisee gets additional revenue, the franchisee whose territory has the customer gets the customer information to follow up for additional sale opportunities, and the franchisor receives a royalty on the revenue generated. Or, in businesses where referrals depend on relationships, a franchisee may need to be able to service the referral in another territory to preserve the personal connection.

Additionally, not all franchisee territories will be contiguous – whether that is because the brand is still growing or whether it is simply because the demand for the brand products and services is concentrated in population centers. This structure may leave customers in an area that has not been assigned to any franchisee. Many franchisors create policies to address how franchisees can service these customers. There are some cautions in doing so: (i) if the franchisee becomes too dependent on out of territory customers it may not dedicate its attention to market penetration in the assigned territory and (ii) it can be a practical challenge to transfer that out of territory customer to a different party if the franchisee has a longstanding relationship to the customer.

  1. Item 19

Item 19 of the FDD contains the disclosures that help to answer the prospective franchisee’s question, “How much money can I make with this franchise?” Franchisors can choose not to include any information in this item, but many do. Most commonly franchisors disclose Gross Sales numbers and sometimes costs, expense, and profit values.

All disclosures included in Item 19 must be capable of being substantiated and must have a “reasonable basis.” Franchisors of non-brick and mortar franchise systems need to think carefully about the nature of the territories they award to ensure that it is reasonable for a prospective franchisee to be able to achieve the same results under the current offering as franchisees in those territories. This consideration includes details such as the size, composition, and population of the territory. Ideally, a franchisee should be able to compare apples (what it receives as a territory) to apples (the types of territories granted to franchisees whose results are in Item 19).

The laws around Item 19 do permit franchisors to create subsets of data, and this may be a helpful way to address differences among franchisee territories. This is especially true if the differences are correlated with different financial results.

For instance, a franchisor may want two sets of Gross Revenues disclosures if its first 30 franchisees received materially larger territories than its most recent 50 franchisees. A franchisor may want to create multiple data sets based upon geography if the demand for franchisee goods and services varies by climate and season. By way of example, pest control businesses in Florida may enjoy a longer service season (and consequently higher revenues) than their fellow franchisees in Wisconsin.

Mobile franchise systems can fit specific customer needs and offer options to franchisees who want to work outside of the typical brick-and-mortar model. If you would like to learn more about setting up mobile franchising or non-brick and mortar franchising, please contact Carlie Smith or Ritchie Taylor at Manning Fulton.