A licensor who relies on the single trademark license exclusion must exercise caution because despite not being subject to the federal definition of a franchise, the license may still fall within the scope of state-level franchise laws. Such state laws might not contain a similar exemption for a single trademark license. Fourteen states have franchise registration/disclosure statutes, 19 jurisdictions have franchise relationship laws, and several states have enacted business opportunity statutes that may also affect the sale of franchises or other business opportunities.
The Federal Trade Commission’s Original and Amended Franchise Rules
The legal basis for the federal single license exclusion can be found in the Federal Trade Commission’s (FTC’s) original Franchise Rule, as well as the FTC’s Compliance Guide, which it issued in connection with its amended Franchise Rule. The FTC enacted the original set of federal regulations governing the sale of franchises in 1979 and substantially revised the regulations in 2007.
The original Franchise Rule contained an explicit exclusion from the definition of a “franchise” for the following: “a single licensee to license a trademark, trade name, service mark, advertising or other commercial symbol where such license is the only one of its general nature and type to be granted by the licensor with respect to that trademark, trade name, service mark, advertising, or other commercial symbol.” In addition, the original Franchise Rule contained the following explicit exclusion from the definition of a “franchise”:
Exclusions. The term “franchise” shall not be deemed to include any continuing commercial relationship created solely by: . . . An agreement between a licensor and a single licensee to license a trademark, trade name, service mark, advertising or other commercial symbol where such license is the only one of its general nature and type to be granted by the licensor with respect to that trademark, trade name, service mark, advertising, or other commercial symbol.
16 C.F.R. § 436.2(ii)(B)(4)(vi).
Three other types of arrangements were also explicitly excluded: employer-employee relationships, cooperative associations, and relationships involving testing or certification service. 43 Fed. Reg. 59,614, 59,708–10 (Dec. 21, 1978).
In the amended Franchise Rule, the FTC removed the explicit exemption from the text of the regulation but explained in the Statement and Basis of Purpose issued with the amended Franchise Rule that the exemption remained valid under the amended Franchise Rule. The FTC explained that the “proper forum to discuss limits to the definition of the term ‘franchise’ is in [the Statement and Basis of Purpose] and in future Compliance Guides” and that the single trademark license exclusion would be retained as a matter of policy and incorporated by reference in the Statement and Basis of Purpose itself. 72 Fed. Reg. 15,444, 15,520, n.777 (Mar. 30, 2007); Id. at 15,530. The FTC Rule Compliance Guide explicitly states that the exclusion remains valid.
The Franchise Rule continues to exclude the trademark licensing arrangements in which a single licensee is granted the right to use the trademark. This exclusion also applies to a “one-on-one” licensing arrangement, i.e., the license of a trademark to a single licensee who manufactures the trademarked goods according to the licensor’s specifications. This arrangement is common, for example, in the clothing industry where trademark owners license the manufacture of textiles. The exclusion also applies to “collateral product” licensing, i.e., the practice of licensing a trademark that is well known in one context (e.g., a soft drink logo) for use in another (e.g., on clothing or decorative items embossed with the soft drink logo). This exclusion also applies to licensing agreements entered into in the course of settlement negotiations in trademark infringement litigation, when the licensor grants the infringing party a license to use the trademark for a specified period.
FTC Staff Advisory Opinions
In three FTC staff advisory opinions, the FTC helped clarify the scope of the single trademark license exclusion, emphasizing that a license arrangement will qualify for this exclusion only where the totality of the circumstances shows that the licensor is issuing a license solely to a single licensee and that the licensor does not have any plans or intentions of issuing any licenses to other licensees. However, no court cases appear to have addressed the single trademark license exclusion. While the FTC staff opinions are helpful in predicting how a court or agency might rule on the issue, FTC staff opinions do not have any binding effect. On the other hand, they do reflect the opinions of the staff members charged with enforcement of the Franchise Rule.
1. Family Restaurant Advisory Opinion
In FTC Staff Advisory Opinion No. 00-3 (issued on March 20, 2000), the owner and operator of several “Family Restaurant” locations requested the FTC’s opinion on whether the single trademark license exclusion applied where the restaurant owner was considering issuing an exclusive license to an investor to operate a similar restaurant under the same brand name in certain geographic areas. The licensee would receive training in the operation of the restaurant, and the restaurant owner would be compensated for issuing the license by a monthly royalty fee or a percentage equity interest in the licensee’s entity.
The FTC found that the arrangement met the three elements to qualify as a franchise and then considered whether the arrangement qualified for the single trademark license exclusion. The FTC found that to qualify for the single trademark exclusion, the licensor must either issue an exclusive national license or, if it offers only a regional or statewide exclusive license, the licensor must demonstrate that it does not intend to offer additional licenses in the future.
The opinion further stated that
[t]o take advantage of the single trademark exclusion, the franchisor must offer the Licensee an exclusive license to use its marks. If the totality of circumstances suggests that the licensor intends to offer, or reserve the right to offer, more than a single exclusive license, then the exclusion will not apply. Where the licensor reserves the right to offer additional licenses in the future, then the Commission will conclude the franchisor did not intend to grant a single, exclusive license to the licensee. For this reason, we would also expect the grant of an exclusive right to use the licensor’s mark to be on a national basis.
The FTC found that there was insufficient information to make a final determination because it would need information about the restaurant owner’s intention to issue additional licenses to other licensees in the future.
2. Pasquini Restaurant Advisory Opinion
In FTC Staff Advisory Opinion No. 02-01 (issued January on 10, 2002), the owner and operator of a “Pasquini” restaurant requested the FTC’s opinion on whether the single trademark license exclusion applied where the restaurant owner planned to issue multiple similar licenses to the same licensee to operate several “Pasquini” restaurants in different locations.
The FTC found that the first license fell squarely within the exclusion because the licensor did not have any intention to issue additional licenses to other licensees.
The FTC then addressed the question of whether multiple licenses to the same licensee to operate restaurants at multiple locations may still qualify for the exclusion. The FTC found that the exclusion would still apply to multiple licenses to the same licensee.
The opinion stated that
[the restaurant owner] initially could have granted a license to H&S for the right to open multiple “Pasquini Pizzeria” restaurants. Such an arrangement would have qualified for the exclusion because the restaurants opened would have arisen out of the same, single trademark license granted to H&S.
Mr. Pasquini, however, has determined to enter into a series of individual license arrangements with H&S, one for each restaurant. We find no compelling policy reason to distinguish between this scenario and a one-time license agreement permitting the opening of multiple units. As long as Mr. Pasquini offers licenses to H&S, and H&S remains the only licensee to obtain the right to use the “Pasquini’s” trademark, then the relationship between Mr. Pasquini and H&S remains that of a single trademark licensor-licensee.
The FTC noted that its conclusion might be different if Mr. Pasquini imposed different operating terms and conditions in the license agreements with H&S or if Mr. Pasquini changed the underlying restaurant concept.
3. Hair Salon Advisory Opinion
In FTC Staff Advisory Opinion No. 05-01 (issued on January 5, 2005), the owner of a trademark for certain hair care products sought to issue a license to operate a hair salon business under the owner’s mark. The FTC found that the license qualified for the single trademark license exclusion. The FTC emphasized that the exclusion applies only if the licensor does not have any plans or intention to issue licenses to any additional licensees, noting that “[o]ur analysis would be different, of course, if your client contemplates granting multiple licenses in the future to other salons. However, nothing would prevent the salon in question from opening other outlets.”