Franchise
law is one area of commercial law that is significantly
impacted by intellectual property concepts. While franchise
practice in Arkansas is focused mainly on franchisees,
there are some Arkansas-based clients interested in
franchising their business concepts. Arkansas practitioners
should therefore be aware of the framework of franchise
law and how the various types of intellectual property
impact franchise relationships.
A. Basic Franchise Law
1. The Arkansas Franchise
Practices Act
The Arkansas Franchise
Practices Act, Ark. Code Ann. § 4-72-201 et
seq., is applicable to a franchise relationship
if, and only if, the franchisee is required to
do business in Arkansas.1 A "franchise"
is defined as "a written or oral agreement for
a definite or indefinite period in which a person grants
to another person a license to use a trade name, trademark,
service mark, or related characteristic within an exclusive
or nonexclusive territory or to sell or distribute goods
or services within an exclusive or nonexclusive territory
at wholesale or retail, by lease agreement, or otherwise."2
(a) Termination Provisions
At the heart of the Arkansas
Act are its provisions for termination. The Act makes
it a violation to terminate, cancel or fail to renew
a franchise without "good cause." Good cause
is defined as:
(A) failure by a franchisee
to substantially comply with nondiscriminatory requirements
imposed by a franchisor;
(B) failure by a franchisee
to act in good faith and in a commercially reasonable
manner;
(C) voluntary abandonment
of the franchise by the franchisee;
(D) franchisee's conviction
of a felony substantially related to the business conducted
pursuant to the franchise;
(E) any act by a franchisee
that substantially impairs the franchisor's trademarks
or trade name;
(F) institution of insolvency
or bankruptcy proceedings by a franchisee;
(G) loss of the right
to occupy the premises from which the franchise business
is operated; and
(H) failure of the franchisee
to pay the franchisor within 10 days of any sums owing
to the franchisor.3
A franchisee cannot terminate
a franchise for (A) or (B) unless the franchisor first
gives the franchisee 90-days notice of the proposed
termination and a 30-day period to cure the deficiencies.4
However, the law also provides that if a franchisee
has repeated deficiencies over a one-year period, the
franchisee's cure period is shortened to 10 days.5
(b) Unlawful Practices
Of Franchisors
Franchisors may not contract
for a release from liability under the Act as part of
a franchise agreement. They may not prevent free association
among franchisees. In general, franchisors must deal
with franchisees in a commercially reasonable manner
and in good faith.6 The AMI instruction on
unlawful franchisor practices provides a great source
for both advising franchisors and litigating franchise
disputes if necessary.7
(c) Penalties
The Act also contains
a criminal component. No person may knowingly: (1) employ
any device, scheme or artifice to defraud; (2) make
any untrue statement of a material fact or omit to state
a material fact; or (3) engage in any practice which
would operate as a fraud or deceit upon any person.8
Violations of this section are Class B felonies.9
The Act also provides
for a private civil cause of action.10 Any
franchisee harmed by a violation of the Act by a franchisor
is entitled to recover treble damages in a civil action
or obtain injunctive relief and attorneys' fees and
costs.11 The injured franchisee also has
the right to demand that the franchisor repurchase the
franchisee's goods related to the franchise.12
Further, the Attorney General can file an injunctive
proceeding against any franchisor in the Pulaski County
Circuit Court.13
The most recent version
of the Arkansas Model Jury Instructions (Civil 4th)
("AMI") include jury instructions for the
Franchise Practices Act.14 The comments to
those instructions and the instructions themselves are
a valuable resource for research about the various sections
of the Act. The Arkansas Act is not based on a uniform
act. In fact, no states have adopted the National Conference
of Commissioners on Uniform State Laws' proposed act.15
2. The FTC Rule On
Franchising
16 C.F.R. § 436.1
is the Federal Trade Commission's rule concerning Disclosure
Requirements and Prohibitions Concerning Franchising
and Business Opportunity Ventures. The FTC rule lists
20 categories of information that must be provided to
a prospective franchisee prior to signing a Franchise
Agreement.16 The FTC rule makes it an unfair
or deceptive practice under the FTC Act for any franchise
to be offered without a disclosure statement which includes
the 20 categories of information.17 The FTC
may impose civil penalties for committing an unfair
or deceptive practice within the meaning of the FTC
Act.18 There is no private cause of action
under the FTC Act for violation of the franchise disclosure
requirements.19
3. Relationship of
the Arkansas Act and the FTC Rule on Franchising
By its terms, the Arkansas
Franchise Practices Act excludes "those
business relations, actions, transactions, or franchises
subject to the provisions of . . . the FTC rule . .
. ."20 The FTC rule applies to all franchises
advertised, offered, licensed, contracted, sold or other
promotion in or affecting commerce, as "commerce"
is defined in the FTC Act.21 In the FTC Act,
commerce is defined as:
Commerce among the several
States or with foreign nations, or in any Territory
of the United States or
in the District of Columbia, of between any such Territory
and another, or between any such Territory and any State
or foreign nation, or
between the District of Columbia and any State or Territory
or foreign nation.22
Therefore, because the
FTC Rule applies to all franchises involving interstate
commerce, the Arkansas Act seemingly only applies to
those franchise relationships that are wholly within
the state of Arkansas. This restrictive view of the
applicability of the Arkansas Act has not been fully
tested in the courts, although there are several decisions
declining to apply the Franchise Practices Act to a
dispute with ties to this state.23
B.
Intersection of Franchising Law With Traditional Intellectual
Property Concepts
1. Trademarks/Service
Marks
At the heart of each
franchise are registered trademarks or service marks
that have significant value in the relevant marketplace.
Trademarks represent goods sold by a particular business,
and service marks represent services provided by a
business. Both types of marks may be registered nationally,
statewide or both. The United States Patent and Trademark
Office (the "USPTO") is responsible for
registration of marks on the federal level24,
while the Arkansas Secretary of State's office is
responsible for registering marks on the state level.25
In the marks lie the
basic value of the franchise because a franchise business
is only successful if the mark attracts customers
to the goods that it represents. Commonly, trademarks
used in franchising are federally registered, thus
entitling the mark to nationwide protection. It is
possible, however, to franchise a business within
the state of Arkansas using a mark protected only
by state registration. For a variety of reasons, this
path is not recommended.
Franchisors usually
begin franchising their businesses because they are
motivated by a desire to expand their business rapidly.
Expansion is rarely limited to in-state franchisees.
Therefore, it is imperative to obtain federal registration
for all trademarks or service marks that are important
to the franchised business at the earliest possible
date.
Also, obtaining an Arkansas
registration only could be a factor that the Arkansas
courts will examine to determine whether the Arkansas
Franchise Practices Act covers the relationship entered
into by the parties. Obviously, a franchisor who has
a federal registration is more likely to be covered
by the FTC rule on franchises and thus NOT covered
by the Arkansas Act.
2. Trade Dress
Trade dress is a very
important corollary to the use of trademarks in a
franchised business. Trade dress is "the total
image of a product and may include features such as
size, shape, color or color combinations, texture,
graphics or even particular sales techniques."26
Trade dress also includes the shape, style or other
recognizable means of identifying the source of goods
or services. The classic example of protectible trade
dress is the shape and color of a particular restaurant
chain.27 It can also include the size or
shape of the container in which the company's goods
are sold.
Trade dress can be a
vital component of protection for franchised businesses.
Some of the most successful franchises have trade
dress that is more recognizable than their trademarks
or service marks. Franchised businesses often use
trade dress in the shape and style of their retail
locations, the packaging of their products and especially
in their advertising. Attorneys advising franchisors
should be aware that trade dress may be protected
separate and apart from trademarks or service marks
under the Lanham Act.28
3. Copyright
Copyrights are governed
by both common law and federal statutes.29
In general, copyrights protect "original works
of authorship fixed in any tangible medium of expression,
now known or later developed, from which they can
be perceived, reproduced, or otherwise communicated,
either directly or with the aid of a machine or device."30
Works of authorship include the following categories:
(A) literary works;
(B) musical works, including
any accompanying words;
(C) dramatic works,
including any accompanying music;
(D) pantomimes and choreographic
works;
(E) pictorial, graphic,
and sculptural works;
(F) motion pictures
and other audiovisual works;
(G) sound recordings;
and
(H) architectural works.31
In order to register
a copyright, the author should deposit two copies
of the work with the Library of Congress. The Library
of Congress also administers the Copyright Office.
The forms, fees and appropriate methods of filing
for a copyright are available on the Copyright Office's
Internet site.32 Once a copyright is registered
with the Copyright Office, and marked with the copyright
mark [©], the owner of the copyright may sue
infringers in federal court. If successful, the owner
can recover statutory damages of $750.00 to $30,000.00.33
The district court may award attorneys' fees and costs
to the prevailing party in its discretion.34
Franchised businesses
typically encounter copyright issues. The most common
place where copyrights are a concern is a franchisor's
manuals, handbooks and written operations procedures.
Many franchisors neglect to take the simple steps
of marking all such materials with the copyright mark
[©] and the author's name. If the handbook, manuals
or other information is original work of the franchisor
or its agents, it should be registered with the copyright
office. Further, restrictions on use of copyrighted
materials by franchisees should be explicitly covered
in the Franchise Agreement, Uniform Offering Circular
and in the body of the materials themselves. Most
franchisors include limited rights to copy handbooks,
manuals and training materials as part of the franchise.
Each set of materials should be considered separately.
Another growing area
of which franchisors and franchisees should be aware
is the copyright in computer software used in franchised
businesses. Copyrights in software are ordinarily
owned by third parties. The standard arrangement is
where the third party grants a master license (exclusive
or non-exclusive) to the franchisor for use in its
franchised stores. The franchisor then has the power
to grant sublicenses to use the software to its franchisees.
The software company may also elect to do separate
license agreements with each individual franchisee.
If a franchisor develops its own proprietary software,
it will likely grant each franchisee a license to
the software for a separate fee. If the software-licensing
fee is separate from the initial franchise fee, it
must be disclosed in the Offering Circular.35
4. Trade Secrets
Arkansas' Trade Secrets
Act defines a trade secret as: "information,
including a formula, pattern, compilation, program,
device, method, technique, or process, that:
(A) Derives independent
economic value, actual or potential, from not being
generally known to,
and not being readily ascertainable by proper means
by, other persons who
can obtain economic value from its disclosure or use;
and
(B) Is the subject of
efforts that are reasonable under the circumstances
to maintain its secrecy."36
The Supreme Court of Arkansas has published several
important trade secret decisions in recent years.37
In those decisions, the court has adopted a six-factor
test to help determine whether something is a trade
secret.38
Trade secrets are a
crucial part of franchised businesses and are often
improperly protected by franchisors. Often, a franchisor's
trade secrets are more important than the franchisor's
trade marks. Trade secrets are especially important
in food service franchises. For example, a franchise
could be built around a particular recipe for meatloaf.
Assuming that the meatloaf was so tasty that public
demand allowed franchise stores to develop, the franchisor's
only means of protecting the recipe for the meatloaf
would be through trade secrecy.
Franchisors must be
advised about the state of trade secret law, especially
because of the numerous judicial decisions that have
been issued in this state in the last two years. Franchisors
must be careful to allow only certain key individuals
owning the franchised business to know protected trade
secrets. Those individuals should also sign confidentiality
and non disclosure agreements, which should extend
the confidentiality and non disclosure provisions
post-termination.39 This presents special
problems in the context of franchises, when many employees
who need to know confidential information are short-term,
possibly low- or minimum-wage employees. In the meatloaf
franchise restaurant example, the persons with the
greatest need to know the trade secret may be the
cooks, who have high turnover. The franchisee in this
situation must be very diligent to ensure that all
employees exposed to the trade secret keep it confidential.
5. Internet Domain
Names And Web Sites
Persons considering
involvement in franchises must also be aware of the
changing laws and regulations regarding Internet domain
names. The United States Congress enacted the Anti-Cybersquatting
Consumer Protection Act40 (the "ACPA"),
in part because of complaints from large franchisors
whose domain names had been registered by persons
not affiliated with their business. Franchisors should
ensure that domain names similar to their trade name
have disclaimers or other indications that they are
not affiliated with the franchisor. Moreover, franchisors
must maintain strict control over franchisees' use
of the domain name and related domains. The ACPA provides
a useful vehicle for franchisors to enforce their
domain name rights in federal court; however, many
persons who use franchised names in a disparaging
manner are very difficult to locate and serve with
legal process. The best advice for franchisors is
to be Internet-savvy and ensure that the franchisor
is aware of any unauthorized use of the domains.
Endnotes
1 Ark. Code
Ann. § 4-72-203; see also JRT, Inc. v. TCBY
Systems, 52 F.3d 734
(8th Cir. 1995).
2 Ark. Code
Ann. § 4-72-202(1)(A).
3 Ark. Code
Ann. § 4-72-204(a)(1); Ark. Code Ann. §
4-72-202(7).
4 Ark. Code
Ann. §4-72-204(d).5 Ark. Code Ann. § 4-72-204(d).
6 Ark. Code
Ann. § 4-72-206(6).
7 Arkansas
Model Jury Instructions ("AMI"), AMI 3305.
8 Ark. Code
Ann. § 4-72-207(a).
9 Ark. Code
Ann. § 4-72-207(b). Class B felonies carry a
maximum penalty of twenty
years' imprisonment. Ark. Code Ann. § 5-4 401(a)(3).
10 Ark. Code Ann. §
4-72-208(b).
11 Ark. Code Ann. §
4-72-208(a).
12 Ark. Code Ann. §
4-72-209.
13 Ark. Code Ann. §
4-72-208(c).
14 AMI 3301-AMI 3307.
15 See National
Conference of Commissioners on Uniform State Laws'
Internet site,
http://www. nccusl.org/nccusl/DesktopDefault.aspx
(Last visited February
12, 2003) and http://www.law.cornell.edu/uniform/uniform.html.
(Last
visited February 12, 2003).
16 16 C.F.R. §
436.1(a).
17 16 C.F.R. §.
436.1.
18 15 U.S.C. §.
45.
19 15 U.S.C. §
45(a)(2); 45(m).
20 Ark. Code Ann. 4-72-203.
21 16 C.F.R. §
436.1.
22 15 U.S.C. §
44.
23 See, e.g., JRT,
Inc. v. TCBY Sys., 52 F.3d 734 (8th Cir. 1995);
see also Mary
Kay, Inc. v. Isbell, 338 Ark. 556, 999 S.W.2d
669 (1999).
24 15 U.S.C. §
1051 et seq.
25 Ark. Code Ann. §
4-71-201 et seq.
26 Two Pesos, Inc.
v. Taco Cabana, Inc., 529 U.S. 205, 112 S. Ct.
2753 (1992).
27 Id.
28 The Lanham Act is
the federal trademark statutes, 15 U.S.C. § 1051
et seq.
29 17 U.S.C. §
101 et seq. 17 U.S.C. § 201 provides that
ownership of a copyright
vests originally in the author of the work. This is
the codification of the
common law copyright. Once the creator of a work commits
it to a tangible
medium, it is protected. Even though common law protection
applies,
all authors should consider federally registering
their works in order to
take advantage of the federal statutory copyright
protections.
30 17 U.S.C. §
102(a).
31 17 U.S.C. §
102(a)(1)-(8).
32 Located at http://www.copyright.gov.
33 17 U.S.C. §
504(c). If the infringement is found to be willful,
the statutory damage
range goes up to a maximum of $150,000.00. Id. If
the infringement is
found to be innocent, the court may, in its discretion
lower the amount to $200.00
per infringement. Id.
34 17 U.S.C. §
505.
35 16 C.F.R. §
436.1(10).
36 Ark. Code Ann. §
4-75-601(4).
37 See, e.g., Statco
Wireless LLC v. Southwestern Bell Wireless, LLC,
80 Ark.
App. 284, 95 S.W.3d 13 (2003); Tyson Foods, Inc.
v. ConAgra, Inc., 349
Ark. 469, 79 S.W.3d 326 (2002); Weigh Systems South,
Inc. v. Mark's Scales
& Equipment, Inc., 347 Ark. 868, 68 S.W.3d
299 (2002); Wal Mart Stores,
Inc. v. P.O. Market, Inc., 347 Ark. 651, 66 S.W.3d
620 (2002); and ConAgra,
Inc. v. Tyson Foods, Inc., 342 Ark. 672, 30 S.W.3d
725 (2000).
38 See Statco Wireless,
supra note 37. The six factors are: (1) the extent
to which
the information is known outside the business; (2)
the extent to which the
information is known by employees and others involved
in the business; (3)
the extent of measures taken by plaintiff to guard
the secrecy of the information;
(4) the value of the information to plaintiff and
its competitors; (5)
the amount of effort or money expended by plaintiff
in developing the information;
and (6) the ease or difficulty with which the information
could properly
be acquired by others. Id.
39 See Tyson Foods,
Inc. v. ConAgra, Inc., 349 Ark. 469, 79 S.W.3d
326,
329-30 (2002). There, the supreme court held that
while a post-employment confidentiality
agreement is not an absolute prerequisite to finding
a trade secret,
it is a significant factor for courts to review in
trade secret litigation.
40 15 U.S.C. §
1125(d); 15 U.S.C. § 1129.
|
