Guide to Rebranding During the Franchising Process

Steps to Take and Information to Evaluate When You Have to Rebrand

1. Reasons For Rebranding

From a trademark prospective, making the transition from a local or regional business to a national or international franchise brand is not always a simple process. Many local business owners do not consider applying for national protection of the trade name, word, phrase, or image that they are using with their business because they are only using them locally and rely on what is commonly referred to as “common law” rights (see below).

Often times, the local business would not even meet the minimum qualifications for registration with the United States Patent and Trademark Office (“USPTO”). Once the business owner “flips the switch” and starts the franchising process, the common law rights are no longer sufficient and trademark rights have to re-evaluated on a national scale.

2. Evaluate Common Law Rights

Generally speaking, common law rights to a trade name, word, phrase, or image that you are using as part of your business will provide a certain level of protection within the geographic area in which you conduct business. These rights are granted automatically and there is no requirement for any filings related to them.

Although there are a number of variables, common law rights will exist within the immediate area where you are using the word, phrase, or image. The unofficial test of how far your common law rights would extend geographically would be to determine the geographic area(s) where people would associate your company with the product(s) or service(s) you offer. This area could be as small as one block or as large as an entire city. It really depends on the specific circumstances. If you sell goods or offer services online, your common law rights may not be in the physical location where your business is located. There are many different tests each court could use to evaluate this when selling online, but the bottom line is that, in order to extend your rights to a certain area generating from online sales, you would have to demonstrate that you “penetrated” that market area and people in that area are familiar with your product(s) or service(s). Having a website alone is not enough to demonstrate that you have common law rights on a national or global level.

3. Evaluate Trademark Rights As A Franchisor

As a franchisor, the ability to protect yourself and your franchisees from a trademark perspective is extremely important to your brand and long-term success. This refers to both stopping anyone else from using a similar trademark to you and your franchisees (what we refer to as, “offensively”), as well as, preventing others from stopping you or one of your franchisees from using the trademark in their territory (what we refer to as, “defensively”).

Obtaining registration from the USPTO creates a legal presumption as to the validity, ownership, and the ability to exclusively use the trade name, word, phrase, or image throughout the country. Although there is no certainty that having a registered trademark with the USPTO will preclude anyone else from challenging your ownership and right to use the trade name, word, phrase, or image, it is the best indicator, legally speaking, to your exclusive right to use it.

4. Evaluate The Transition From A Local To National Business

When a business expands from its home market to a national level, as is the case with franchising, the trade name, word, phrase, or image must also transition and the common law rights relied upon by the local business owner are no longer sufficient. One of the first steps in the franchising process will be to file an application for national trademark protection with the USPTO. This is where franchisors sometimes run into an issue and are forced to reconsider their brand. In many instances, the common law rights are effectively “transitioned” and registered with the USPTO. In other instances, the transition is not as smooth and a franchisor receives one of the following responses:

• A response from the USPTO which states that the franchisor’s trademark is too close to an already registered trademark and likely to cause confusion with the already registered trademark
• A response from the USPTO which states that the franchisor’s trademark does not qualify for trademark protection on a national level and cannot be registered. Some common reasons why this would happen is that the trade name, word, phrase, or image is too generic (not unique enough), describes components of the goods or services, uses a geographic term, uses someone else’s name or appearance without authorization
• Receives opposition to registration from a third-party claiming to have superior rights to the franchisor. This usually comes in the form of a “cease and desist” letter or a filed opposition with the USPTO
• As part of the franchising process, an evaluation is made that anticipates one of the above outcomes and it is suggested that alternate options are made available.

5. Evaluating The Possible Responses

For those that are faced with one of the situations above, there are a few options available to you. You can choose to:

• Challenge the objection by responding
• Modify the trade name, word, phrase, or image to make it more likely that you can obtain registration with the USPTO
• Rebrand completely
• Or do a combination of the above.

The formula for determining the best way to respond takes into account the following variables – the probability of ultimately obtaining registration and “strong” trademark rights, the cost to challenge the opposition versus the cost to rebrand, the value of the actual goodwill attached to the trade name, word, phrase, or image, and the resources (time and money) available.

Unfortunately, the “formula” is not absolute and there are many variables where certain assumptions have to be made. Even if a franchisor decides to challenge the objection, it is always advisable to create a backup plan in the event the challenge is not successful. The reason being that it takes approximately one year after an application is filed with the USPTO to obtain registration so, in most instances, it is advisable to “start the clock” as soon as possible.

6. Evaluate“Trademark Limbo” For Franchise Brands

“Trademark limbo” for a franchise brand occurs between the time when a franchisor learns that there is an obstacle in obtaining trademark rights and the time the franchise obtains trademark registration with the original trademark or a rebranded trademark. A franchisor is faced with the following questions and factors to consider:

• Should I issue my Franchise Disclosure Document with the original trade name, word, phrase, or image even though I am aware of the potential issue?
  
  Pros: Franchise brand is established with the trademark that has goodwill/brand awareness attached to it which may have value to a franchise prospect; Easier validation of concept when selling units
  
  Cons: May open franchise up to additional liability from franchisee; Required disclosure in the FDD about potential trademark conflict may dissuade potential franchisees; May cost more to rebrand as the franchisor typically would pay for the franchisee’s costs associated with rebranding

• Should I issue my Franchise Disclosure Document with the new trade name, word, phrase, or image even though I do not have trademark registration yet?
  
  Pros: May avoid necessity to rebrand (again) in the future if the trademark ultimately gets registered; Avoid delays in issuing FDD and obtaining registration/filing in relevant states.
  
  Cons: Required disclosure in the FDD about unregistered trademark may dissuade potential franchisees; May cause issue with validation of concept when selling units; Limited goodwill/brand awareness from limited use.

7. Choosing A Strong Trademark

If there are others in the same industry utilizing the same or similar term or trademark, this is an indication that it would be considered a “weak” trademark and something we would want to avoid.

The scenarios we are trying to prevent by obtaining registration to a “strong” trademark are:

• One of your franchisees operates in a territory and there is someone in his territory who has the same or similar trademark and that other user starts a lawsuit against your franchisee. You, as the franchisor, would be required to defend this claim against the third party. Additionally, there will likely be some type of compensation or damages required to be paid to the franchisee should he not be able to utilize the trademark for their business.
• Or you develop a system with 100 units and someone with superior trademark rights starts a lawsuit for trademark infringement which causes you to rebrand the system. This would cause great expense and could destroy the franchise. At the very least, if that third party has better rights than you have to the trademark, he will be in a much better negotiating position than you and effectively can hold you hostage at the negotiating table.

These are generally not things that a non-franchised business would have to consider, but, as a franchisor, you would be responsible to defend the trademark on behalf of all of your franchisees and within all of the territories you sell in. Additionally, as part of the FDD process, you are asserting to the prospective franchisees that you are not aware of any potential conflicts with your trademark which could be a potential problem if there is to be one down the road. As you can see, it is foundational as a franchisor to obtain enforceable rights to a strong trademark to avoid any potential issues in the future. This is why we analyze the trademark with a high degree of caution for our brands.