There are 23 items in the Franchise Disclosure Document (FDD) and we're going to give a brief review of Item 13. If you haven’t been following along with our reviews of the previous FDD items you might want to check those out. All of these videos we're creating are progressive, meaning they lead into some of the future items that you would need to know information from items previously to kind of understand these particular items. Item 13, pertains to trademarks, copyrights, and other intellectual property that you have rights to under the franchise agreement.
This item really breaks down into a few different areas:
So, let's talk about trademarks, this is a really, really big one. This one has to do with the right to use their logos, the right to use their marketing materials, and things like that. This is one probably that the franchisor cares the most about because it's the rights to use the name, the logo, the branding, and ultimately that's what you're paying for the rights to use. So you want to make sure that you have a legal right to do so.
What the franchisor will do in this section is they will delineate whether any of these items, the logo, the trademark, and any branding have been registered with the US Patent and Trademark Office. Then they generally provide all the specific details about such. It’s important, at a very high level, to know what those legal rights are:
Who owns it?
Has it been registered?
Then diving deeper, what rights do you get to use in using it?
So generally, the next section on top of that is about royalties, which is basically another rehash of what we've discussed before. What are you paying (royalties) for the right to use those registered trademarks and other intellectual property that you're giving the right to use.
So we're going to just march to the next one, which is advertising, and this is not the fees for advertising. These are really the guidelines and restrictions around advertising that you can and can't do ... really important.
For example, interestingly enough our franchise went through a logo redesign. So when the new FDD came out, everybody had to sign it, and that new logo was registered with the US Patent and Trade Office. So for a logo or trademark, you really can't modify it. For instance, you can't just add locally owned and operated. You can't really do anything.
So think about it a bit, when you go to McDonald's, their logo looks exactly the same no matter where you find their multitude of locations or ads, and there's a reason for it. So we strongly suggest that you don't ever mess with a franchise's brand, tagline, slogans, any of that. We don't think you would want to anyways, that's the main reason for investing in a franchise. But believe us, it's something that the franchisor takes very seriously. The rights of using it, ensuring that you're doing it in the correct way.
We’ll give you a little personal example of one that we thought was pretty funny at the time in our franchise. We actually got busted for putting our franchise logo on our website that was not a high-enough resolution image. They were unhappy literally with just the resolution of the logo on the website, and we had to change it, and we did it very quickly. So this is a pretty good example of where this was enforced. It was clearly spelled out in our FDD that we had to follow these rules as far as using their trademarks.
The next one's intellectual property. And this is things such as copyrights, trade secrets, patents, and those types of intellectual property. We’ll quickly expand on this, it's the secret recipe and the franchise needs to highly protect that. So think about the secret recipe of Colonel Sanders, KFC, right? We bet that their FDD is very detailed on being able to share any of those items that are in that secret recipe. We’re not even sure franchisees know exactly what's in it, but this item is going to delineate that for you.
So for example, even in our coffee and smoothie franchise, we know that there are certain ingredients. We know who produces it, but we therefore cannot go out and create that same exact recipe (or share it) that would be an infringement of the system and this is put in place to protect you and to protect them. This is the secret sauce for them in most cases and they do not want that intellectual property to get into the wrong hands:
you must be careful who you share that information with ...
you certainly can't copy it and do it yourself.
So finally, there's enforcement, and enforcement is really the policies and procedures for enforcing all of this intellectual property and trademark usage. It’s mostly what happens if you are not in compliance and what that process looks like. Again, as in our example above about our logo, we got the compliance police after us when we put up a logo that was the wrong resolution. What they ask us to do is change it as quickly as possible, and we did.
Some things will be a little bit more stringent as far as these Item 13 policies and procedures. For example, how do you handle it if you have an employee that won't wear the uniform? Something like that. They're supposed to wear that uniform, and it's really important to the franchise the trademark behind that uniform. So something like that, what are the policies and procedures that might be around those types of things?
In most franchises, you're going to have follow-up visits with your business coach or your training team, or your consultant, however, the franchise defines it. As part of that will be a compliance visit to make sure you're doing everything correctly. If they see somebody wearing a different company's logo or your signage is not correct or broken, they're going to put you out of compliance. They're going to give you an adequate amount of time to fix it, and then they'll come back and check. If you're truly blatantly misusing any of the parts of their logo and branding, you could be putting yourself in legal jeopardy.
This is a truly critical item of the FDD. We are not franchise attorneys so we highly encourage you to get legal advice from a franchise attorney. For every one of these FDDs, these sections or items are going to be written slightly differently, the language is similar, but there are a lot of little i’s and t’s within this language that can be very different from one franchise to the other.
So please make sure that you read this item in-depth as far as what you can and can't do with the franchise trademarks and all of the other intellectual property that you're being given access to.
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I’m Stacey Riska aka “Small Business Stacey”, your franchise placement specialist. I help aspiring business owners find the PERFECT franchise so they can get to the next level in life and business.