Item 14 of the Franchise Disclosure Document: Patents, Copyrights, and Proprietary Information

Under Item 14 of the Franchise Disclosure Document (FDD), franchisors are required to disclose certain information on patents, copyrights, and proprietary information that are material to the operation of the franchised business and licensed to the franchisee under the franchise agreement. Generally, this Item requires disclosures relating to franchisor’s ownership rights or licenses in each applicable type of intellectual property, as well as any legal proceedings, settlements, and restrictions that may impact the franchisee’s ability to use such property. Item 14, in conjunction with Item 13, gives prospective franchisees the full scope of intellectual property and other confidential information that they have the right to use by purchasing a franchise. Our experienced attorneys could reviews the intellectual property that is owned a franchisor and help them determine what should be disclosed in Item 14 of their FDD. 

What Information is Required in Item 14?

The disclosure requirements for Item 14 of the FDD are set forth 16 C.F.R §436.5(n). Item 14 calls for a detailed disclosure of information relating to the franchisor’s intellectual property not otherwise disclosed under Item 13. This includes the franchisor’s patents, copyrights, and propriety information. 

Material Patents and Copyrights

Under Item 14, franchisors must first disclose whether they own rights in, or licenses to, any patents or copyrights that are material to the franchise. This includes any pending patent applications as well. Whether a patent, patent application, or copyright is material enough to require disclosure depends on how the patent is used in the franchise system. For example, if a patent has a material impact on the operations of the franchise system, such as a utility patent for an oven that can prepare pizzas faster than the franchisor’s competitors, and the franchisor markets the impact of that patent to sell franchises and solicit customers, then the patent is likely material to the franchise offering. In contrast, a design patent for a special perforated pizza peel is likely not material to the franchise offering. This type of patent, and others that have no material impact on the operations of the franchise if the franchise were no longer able to use them, do not need to be disclosed under Item 14.

After determining the patents, patent applications, and copyrights that are material to the franchise offering, the franchisor must disclose their nature (i.e., what they do) and its relationship to the franchise system (i.e., how they are used in the franchise system). Similar to the Item 13, the franchisor must disclose the registration status with the United States Patent and Trademark Office (USPTO) or United States Copyright Office (USCO) for each patent, patent application, or copyright. For patents, a franchisor must disclose the duration of the patent, the type of patent (e.g., mechanical, process, or design), and the patent number, issuance date, and title. For pending patent applications, the franchisor must only provide the type of patent application and its serial number, filing date, and title. Lastly, for copyrights, the franchise must disclose the duration of the copyright, the registration number and date, and whether the franchisor can or intends to renew the copyright.

Legal Proceedings for Patents and Copyrights in Item 14

Franchisors must then disclose whether there are any agreements or legal proceedings, either pending or final, that limit the use of the material patent, patent applications, or copyrights. For legal proceedings, franchisors must first disclose whether there has been a material determination regarding the patent or copyright, either issued by a court, the USPTO, or the USCO. For each material determination, the franchisor must disclose what it entails, how it affects the franchise system, the forum, and the case number. Additionally, the franchisor must disclose whether there is currently a material proceeding regarding a patent or copyright that is pending in a court or the USPTO. If so, the franchisor must also disclose the forum, case number, claims asserted, issues involved, and effective determinations in that proceeding.

Like Item 13, for any material proceeding pending in a court or the USPTO, the FTC Rule permits a franchisor to include in Item 14 a summary of an attorney’s opinion regarding the merits of the proceeding. However, a franchisor may only include this as long as the attorney issuing the opinion consents to the use of the summary, and the franchisor attaches the attorney’s full opinion as an exhibit to Item 22 of the FDD. Any proceeding that is disclosed under Item 14 may also need to be disclosed under Item 3, provided that it meets the disclosure requirements.

Usage of the Copyrights and Patents

If there is any agreement that limits the use of the material patent, patent application, or copyright, the franchisor must disclose its existence and state the parties to the agreement, the duration of the agreement, the extent to which the agreement may affect the franchisee, and any other material terms of the agreement.

If a franchisor has a contractual obligation either to protect the intellectual property or to defend the franchisee against claims of infringement or unfair competition arising from the franchisee’s use of patented or copyrighted items, the franchisor must state so and include the following information:

• Whether the franchisor’s obligation is contingent upon the franchisee notifying the franchisor of any infringement claims or whether the franchisee’s notification is discretionary;
• Whether the franchise agreement requires the franchisor to take affirmative action when notified of infringement;
• Who has the right to control any litigation;
• Whether the franchisor must participate in the defense of a franchisee or indemnify the franchisee for expenses or damages in a proceeding involving intellectual property licensed to the franchisee;
• Whether the franchisor’s obligation is contingent upon the franchisee modifying or discontinuing the use of the subject matter covered by the patent or copyright; and
• The franchisee’s rights under the franchise agreement if the franchisor requires the franchisee to modify or discontinue using the subject matter covered by the patent or copyright.

Lastly, the franchisor must also disclose any patent or copyright infringement that the franchisor is aware of that could materially affect the franchised business. If the franchisor knows of any such infringement, it must disclose:

• 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.

After the disclosures relating to patents, patent applications, and copyrights, franchisors must disclose in Item 14 its proprietary rights in confidential information or trade secrets, which typically includes the franchise system’s operations manual. If the franchisor claims any rights in other confidential information, then the franchisor must explain, in general terms, which information the franchisor claims protection over and how the franchisee may use that information. A franchisor also must disclose in Item 14 of the FDD whether its system contains any trade secrets and, if so, a brief description of such trade secrets. The franchisor need not divulge the substance of the proprietary information or trade secret, but need only describe its general nature, such as whether a formula or recipe is considered to be a trade secret.

How to Effectively Draft Item 14 of the FDD

Patents, copyrights, and proprietary information are essential to a franchise system’s profitability and marketability. Although a majority of franchises do not involve a patent license, Item 14 is nonetheless a critical Item to apprise prospective franchisees of the value that proprietary information brings to the franchise system. The intellectual property that a franchisee will be entitled to use under the franchise system, as well as any restrictions in place to protect these rights, should be carefully explained under Item 14 of the franchise disclosure document. In drafting the necessary disclosures under Item 14, franchisors should remember that franchisees want to invest in a business that includes well-documented systems protected by copyright and patent law, as well as the common law.

Some franchisors do not register their copyrights with the USCO because that registration might make confidential information public. For franchisors reluctant to register their copyrights with the USCO, it is best practice to indicate that all proprietary information disclosed in Item 14 is not only proprietary and confidential, but subject to common law copyright protection. Franchisors should indicate to the public that the materials disclosed in Item 14 are copyrighted by using the © symbol or the word “Copyright,” and by stating the name of the copyright owner and the year the material was first published.

It is best practice to consult with a seasoned franchise attorney when drafting the disclosures under Item 14 of the franchise disclosure document. A franchise attorney could assist in determining whether a particular patent, patent application, or copyright is material to the franchise system and worthy of disclosure, and could provide guidance through the registration process with the USPTO or USCO.