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Franchise systems are particularly dependent on intellectual property — trademarks, copyrights, trade secrets and patents — to secure, protect and exploit their positions in the marketplace. The truly robust franchise system is constantly evolving, developing new items of intellectual property to allow the members of the system to compete more effectively in an increasingly competitive environment. This results in the creation of new advertising slogans, jingles, trade secret recipes, software programs, trademarks and processes. All too frequently, the issue of ownership arises, generally at the most awkward time, such as during financing, an acquisition or even during discovery. Franchisors and their counsel need to consider whether an intellectual property audit should be performed to fully ascertain the nature, extent and sufficiency of the franchisor’s intellectual property portfolio. This audit function should be coupled with an appropriate IP protection program. This article examines the development of an IP audit program for franchisors with respect to trademarks and copyrights. The heart of the IP audit is the gathering and characterization of the relevant items of intellectual property. Most franchisors will own trademarks, copyrights and trade secrets. To a lesser extent, some will own patents. Thus, the first important step is to group the franchisor’s intellectual property assets by class. BRAND IDENTIFICATION Franchising is a means by which a franchisor may expand its revenue base by expanding the market for its goods and services. Market expansion is achieved in large measure by brand identification, which results from the success of the trademarks and service marks employed by the franchisor and its franchises in advertising the sale of their goods and services. Thus, trademarks and service marks are at the heart of every successful franchise system and are, perhaps, the most important items to be evaluated. Marks serve as the means by which consumers identify the franchise system, thereby promoting a community of interest among the members of a franchise system. It is by virtue of brand identification and the resulting community of interest of the members of the franchise system that consumer expectations are created and met. A list of all of the franchisor’s registered trademarks should be compiled on a country-by-country basis, designating those which are in use and those which are no longer in use or which are not considered important to the franchise system. The franchisor should also compile a list of all unregistered trademarks, including advertising slogans and logos, again on a country-by-country basis. In evaluating the trademark portfolio, the auditor should verify that registered marks are being utilized appropriately. This involves a review as to whether the marks are being used on the correct goods, the class and registrant of each mark, whether the recorded owner is the entity controlling the nature and quality of the goods and services with which the mark is used, and whether the registration is valid. Once organized in this fashion, counsel will be able to determine whether the marks are owned by the appropriate entity or if the chain of title is flawed or otherwise incomplete. In addition, counsel will be able to assess whether the appropriate license agreements are in place. For example, a franchisor may have an affiliated Delaware holding company which licenses the marks to the franchisor for use in its own operations and for sublicensing to franchisees. Are all of the trademarks owned by the Delaware holding company? Are they all licensed to the appropriate operating or franchising entity? Moreover, the IP audit will also disclose whether any marks are subject to security interests and, if so, whether the obligations giving rise to such security interests have been satisfied such that the security interest should properly have been terminated. Finally, the IP audit will disclose whether any marks are in danger of being abandoned through the failure to make applicable maintenance filings, such as affidavits of continued use or renewal applications under the Lanham Act. This does not end the inquiry with respect to the franchisor’s trademark rights. The franchisor should take care to ensure that its trademark rights are not eroded over time due to the way it uses its trademarks. On the one hand, suggestive and arbitrary or coined terms which are properly registered as marks may be used in common parlance as the name of the item as opposed to being used as a source identifier. For example, “aspirin” was at one time a registered trademark of Bayer but ultimately became the common term for an analgesic medication. Counsel should review applicable advertising and scripts to determine whether the franchisor’s trademarks are being used as a brand-name identifying source and not as a noun or as the term for the product. A finding that any one or more of the marks central to the identification of the franchised business could sound the death knell for the franchised system, as any franchise agreement would be under attack for insufficiency of consideration. A plaintiff franchisee would have a strong argument for cancellation of the franchise agreement on the grounds that the franchisor did not license anything of value. MANUALS AND OTHER ASSETS Operations manuals — a codified set of operating standards and specifications — are an integral part of every franchise system. Each franchise system’s operations manual embodies the details of how to operate each unit. It is through the adherence to these standards by which the franchise system achieves the goal of uniformity of appearance and consistency of delivery of goods and services. This compilation of information is a copyrightable subject matter. Other assets used in franchise systems are also subject to copyright protection, including software, newsletters and releases, compilations of data, and advertising and promotional materials. The Copyright Act identifies eight classes of works for which copyright protection subsists but recognizes that additional classes of works which deserve protection may exist in the future. � Works of authorship that are subject to copyright protection include the following: � Literary works. � Musical works, including any accompanying words. � Dramatic works, including any accompanying music. � Pantomimer and choreographic works. � Pictorial, graphic and sculptural works. � Sound recordings. � Architectural works. A franchisor may possess a myriad of works which are subject to copyright protection, such as the following: � Its operations manual, newsletters and software programs, all of which are literary works. � The music and lyrics to advertising jingles, which would be musical works. � Commercials for broadcast over television, which would be categorized as dramatic works. � Print advertisements and point-of-sale materials, which would be categorized as pictorial works. � Advertising jingles, as opposed to the narrative music and lyrics, which would be categorized as sound recordings. � Standard building plans, which meet the definition of the term “architectural work.” While copyright protection subsists when a work is fixed in tangible form, there are significant advantages to registering a copyright with the Copyright Office. Registration provides the right to file suit for infringement; the right to recover attorney fees from an infringer, and the right to recover statutory damages. The auditor should initially determine whether the franchisor’s assets are protected by copyright law and should then identify works which are registered in the Copyright Office, check for proper use of the copyright notice, and confirm the identity of the author and that the work is owned by the franchisor. Perhaps the primary issue is confirming a title to a work subject to copyright protection. Was the work created by an employee in the scope of employment or by an independent contractor? If the work was created by an independent contractor, was it a work made for hire or was an assignment granted? These are just a few of the items for consideration in conducting an IP audit. The time available to audit and cost considerations will have an impact on the scope of the audit. An IP audit may be organized by the franchisor’s marketing department, legal department, outside counsel or some combination of the three. Of course, cost and timing will be factors in determining how to organize and staff an IP audit. In most instances, counsel, preferably counsel versed in intellectual property law, will be in the best position to conduct the IP audit, review the results of the audit and make appropriate recommendations. Edward J. DeMarco Jr. is a partner in the business and finance department of Ballard Spahr Andrews & Ingersoll (www.ballardspahr.com) and is the former chairman of the franchise law committee of the Philadelphia Bar Association. If you are interested in submitting an article to law.com, please click here for our submission guidelines.

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