Item 13 of the Franchise Disclosure Document: Trademarks

Item 13 of the Franchise Disclosure Document (FDD) requires franchisors to disclose certain information relating to the registration status and legal validity of the franchise system’s trademarks, as well as the franchisee’s rights for and restrictions on using those trademarks. Because granting franchisees a license to use the franchise system’s trademarks is a fundamental and essentially definitional component of the franchise relationship, Item 13 is designed to provide prospective franchisees with sufficient information to determine the value of the trademark license granted under the franchise agreement. Our attorneys could work with franchisors to meet all of the requirements for this Item as well as explain how to best organize this information.

Item 13 Requirements

The particular disclosure requirements for Item 13 are found under the Amended Franchise Rule, 16 C.F.R. § 436.5(m), and they are best understood categorically. There are three categories of trademark information that a franchisor must disclose under Item 13: (1) the registration status of the franchise system’s trademarks; (2) litigation and contractual limitations on the franchisor’s right to use those trademarks; and (3) the franchisor’s obligations to protect the franchisee’s right to use those trademarks, and to protect the franchisee against claims of infringement or unfair competition.

Principal Trademarks & Registration Status

The first category of trademark information that a franchisor must disclose under Item 13 of the FDD is information relating to the registration status of the franchise system’s trademarks. Under Item 13, a franchisor must first disclose all of its “principal trademarks” that it will license to the franchisee for use in connection with the franchised business. The FTC Rule explicitly states that a franchisor’s principal trademarks are not every trademark the franchisor owns; but rather, the term “principal trademarks” refers only to those “primary trademarks, service marks, names, logos, and commercial symbols the franchisee will use to identify the franchised business.”

Once a franchisor has identified and presented all of its principal trademarks, it must further disclose whether each principal trademark is federally registered with the United States Patent and Trademark Office (USPTO). If a franchisor’s principal trademark is registered, the franchisor must further disclose:

• The trademark registration date and identification number;
• Whether the franchisor has filed all required affidavits;
• Whether any registration has been renewed; and
• Whether the trademark is registered on the USPTO’s Principal Register or Supplemental Register.

If, however, a franchisor’s principal trademark is not registered, the franchisor must state whether he or she has filed with the USPTO a trademark application, an “intent to use” application, or an application based on actual use. If an application has been filed at the time the franchisor is drafting its FDD, the franchisor must provide the date and identification number of the application.

If a franchise system’s principal trademark is not registered with the USPTO, is pending application, or is registered under the USPTO’s Supplemental Register, the franchisor must provide the following statement prescribed by the FTC Rule, word-for-word, under Item 13:

We do not have a federal registration for our principal trademark. Therefore, our trademark does not have 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. 

Litigation Information and Contractual Limitations

The second category of trademark information that a franchisor must disclose under Item 13 is information pertaining to trademark litigation and contractual limitations on the franchisee’s right to use the franchise system’s trademarks. Because litigation on the validity of the franchise system’s trademarks may affect the franchisee’s right to use those trademarks, a franchisor must disclose the following information relating to ligation:

• Any currently effective material determinations of the USPTO, the Trademark Trial and Appeal Board, or any state trademark administrator or court that affect the ownership, use, or licensing of the trademark, as well as to how that material determination affects such ownership, use, or licensing of the trademark;
• Any pending infringement, opposition, or cancellation proceeding, including those in which the franchisor unsuccessfully sought to prevent registration of a trademark in order to protect a trademark licensed by the franchisor; and
• Any pending material federal or state court litigation regarding the franchisor’s use or ownership rights in a trademark.

If there is any pending material federal or state court litigation regarding the franchisor’s use or ownership rights in a trademark, the franchisor must also disclose:

• The forum and case number for the litigation;
• The nature of claims made opposing the franchisor’s use of the trademark or by the franchisor opposing another person’s use of the trademark; and
• Any effective court or administrative agency ruling in the matter.

Also, the FTC Rule permits franchisors to include in their FDD an attorney’s opinion relative to the merits of the litigation. A franchisor including an attorney’s opinion may summarize the essence of the opinion under Item 13, provided that the full opinion is referenced under Item 22 and attached as an exhibit to the FDD, and that the attorney issuing the opinion consents to the use of the summary. It is important for franchisors to be aware that civil actions disclosed under Item 13 of the FDD may also need to be disclosed under Item 3, provided that they meet that Item’s disclosure requirements.

In addition to litigation information, a franchisor must also disclose any currently effective agreements that the franchisor is party to, and which “significantly limit” the franchisor’s rights to use or license the franchise system’s trademarks in a manner material to the franchise. For each of these agreements, a franchisor must also disclose the following:

• The manner and extent of the limitation or grant;
• The extent to which the agreement may affect the franchisee;
• The agreement’s duration;
• The parties to the agreement;
• The circumstances when the agreement may be canceled or modified; and
• All other material terms.

Franchisor Obligations to Protect Franchisee’s Use of Trademarks

The final category of trademark information that a franchisor must disclose under Item 13 relates to the franchisor’s obligations to protect the franchisee’s right to use the franchise system’s trademarks, whether it be through litigation, indemnification, or otherwise, as well as the franchisor’s and franchisee’s rights relating to the control of such trademark litigation. In particular, a franchisor must disclose:

• Whether the franchisor must protect the franchisee’s right to use the principal trademarks, and must protect the franchisee against claims of infringement or unfair competition arising out of the franchisee’s use of the trademarks;
• The franchisee’s obligation to notify the franchisor of the use of, or claims of rights to, a trademark identical to or confusingly similar to a trademark licensed to the franchisee;
• Whether the franchise agreement requires the franchisor to take affirmative action when notified of these uses or claims;
• Whether the franchisor or franchisee has the right to control any administrative proceedings or litigation involving a trademark licensed by the franchisor to the franchisee;
• Whether the franchise agreement requires the franchisor to participate in the franchisee’s defense and/or indemnify the franchisee for expenses or damages if the franchisee is a party to an administrative or judicial proceeding involving a trademark licensed by the franchisor to the franchisee, or if the proceeding is resolved unfavorably to the franchisee; and
• The franchisee’s rights under the franchise agreement if the franchisor requires the franchisee to modify or discontinue using a trademark.

While it may not fit so nicely in the three categories discussed above, there is one final disclosure required under Item 13 that, in theory, serves as a protection on the franchisee’s right to use the franchise system’s trademarks. A franchisor must disclose whether he or she knows of either superior rights to, or infringing uses of, the franchise system’s principal trademarks that could materially affect the franchisee’s use of those in the state where the franchised business will be located. If a franchisor believes there is a current infringing use of one of the franchise system’s principal trademarks that could materially affect the franchisee’s use of a trademark, then the franchisor must disclose the following:

• The nature of the infringement;
• The locations where the infringement is occurring;
• The length of time of the infringement (to the extent known); and
• Any action taken or anticipated by the franchisor. 

Item 13 Drafting Tips and Best Practices

Item 13 of the FDD compels franchisors to be proactive. A truly proactive franchisor is one who registers its trademarks with the USPTO, and gathers the relevant registration information for such trademarks, before drafting the FDD. The validity and strength of a franchise system’s trademarks undoubtedly correspond with the value that prospective franchisees perceive and attribute to the franchise system. Franchisors who register their trademarks with the USPTO and vigorously police their use are likely to be more successful in procuring franchisees to their franchise system. Therefore, it is highly recommended that franchisors register their trademarks on the USPTO’s Principal Register.

While franchisors are not required to register their trademarks with the USPTO before offering franchises or preparing the FDD, it is extremely wise to do just that. For one reason, trademarks registered with the USPTO receive greater protection under federal law, and the indication of greater protection to franchisees in a franchisor’s Item 13 disclosures is likely to instill a greater sense of trust in the franchise relationship. There is generally a twelve-to-eighteen-month time span between application and successful registration. In light of this lengthy process, it is prudent for franchisors to file registration applications, and obtain reasonable certainty that the trademark will achieve registration, before offering a franchise for sale.

Franchisors should also be careful and precise when drafting Item 13 of the FDD. Because the FTC Rule explicitly requires that Item 13 include only the franchise system’s principal trademarks, rather than all of the trademarks that the franchisor owns, franchisors are afforded broad discretion in choosing which trademarks to characterize as principal. It is best practice for a franchisor to include as principal trademarks in Item 13 those that are most strongly associated with the franchise system. Franchisors may still disclose other key trademarks used in the franchise system as principal trademarks, but should refrain from over-disclosing, if possible.

If a trademark characterized as a principal trademark under Item 13 is in reality merely a secondary trademark used in the franchise system, it may do the franchisor more harm than good. A secondary trademark disclosed under Item 13 that is subject to disputes or issues with private parties or the USPTO could inevitably force the franchisor to disclose the details of that dispute or issue under Item 13. Having to disclose such additional information on these secondary marks could result in the franchisor having to update the FDD when it otherwise would not have had to.

To avoid these potential costs, and to ensure that Item 13 not only complies with the FTC Rule, but also presents the franchise system in a positive light, it is wise to consult with a seasoned franchise attorney when drafting Item 13 of the franchise disclosure document.