This advisory opinion addresses the single license exclusion to the Franchise Rule, 16 C.F.R. § 436.2(a)(4)(iv).
I. Introduction
In your letter, you state that your client owns a registered trademark for a series of hair care products. The client wishes to license the mark to a hair salon business. The proposed licensee will operate the salon under the client’s mark. The client will not exercise control over the operation of the business (e.g., hours of operation, number of employees, store design). Nor will the licensee be required to account for revenues, or meet any minimum revenues or profit requirements. The client also makes no financial performance representations.
Rather, the only conditions or restrictions placed on the use of the mark will be the following:
- The licensee may only use the licensor’s brand of hair care products in the salon.
- The licensee’s use of the trademark in the signs affixed to the store, or in any kind of advertising, must comply with the “licensor’s brand book” to preserve the integrity of the name, to avoid confusion concerning the use of the name, and to prevent trademark infringement by others.
- The licensee must pay all of its bills and taxes, and otherwise comply with all applicable federal, state, and municipal laws. This includes maintaining a positive balance in the salon’s operating account and never issuing checks against an account with insufficient funds.
- The licensee must continue to employ a particular manager, and that the license only be available to the licensee for so long as this particular manager remains in control of the business operations.
You now ask whether the contemplated license would fall within the single trademark license exclusion to the Rule.
II. THE SINGLE TRADEMARK LICENSE EXCLUSION
The Franchise Rule specifies four types of relationships that are not deemed to constitute franchises. One of these four is the single trademark license exclusion:
The term franchise shall not be deemed to include any continuing commercial relationship created solely by:
(iv) 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 the trademark, service mark, advertising, or other commercial symbol.
16 C.F.R. § 436.2(a)(4)(iv).
In the Statement of Basis and Purpose accompanying the Rule, the Commission distinguished between trademark licensing and business format franchising as follows:
The primary difference between simple trademark licensing and package franchising is in the type and degree of control exercised by the franchisor and licensor. The trademark licensor is interested in the quality of the final good produced by the licensee, not in the licensee’s method of operation. The kind of control he exercises is thus likely to be limited to “passive” control such as inspection of product goods and testing to insure that quality standards are met. Package franchising, on the other hand, involves active control over the franchisee’s “method of operation”: The location of the business, the hours of operation, the management of the business, and other business matters.
43 Fed. Reg. 59,614 at 59,710 (December 31, 1978).
The Commission noted, however, that where a trademark licensor exercises significant control, the “licensing arrangement becomes conceptually indistinguishable from package franchising.” Id. Nonetheless, the Commission found that trademark licensing arrangements typically involve very limited numbers of licensees and that the record contained no evidence to suggest that such licenses should be covered by the Rule. Id. Accordingly, the Commission determined to exclude from Rule coverage “trademark licensing arrangements in which a single licensee is granted the right to use the trademark.”
III. APPLICATION OF THE EXCLUSION TO YOUR CLIENT’S LICENSES
The grant of a license by your client to a single salon owner appears to fall squarely within the Rule’s single trademark license exclusion1. As noted above, your client does not intend to impose the types of controls over the business operations typically associated with a franchise arrangement, such as business location, hours of operation, or outlet design. Rather, the license conditions and restrictions are reasonably tailored to preserving the integrity of licensor’s mark (e.g., use of appropriate signage) and to preserve goodwill associated with the mark (e.g., payment of taxes, compliance with federal, state, and local law, and preventing bounced checks). Finally, the provision conditioning the license on the continued employment of a particular manager, while arguably a form of control over the business operations, does not rise to the level necessary to change a single trademark license into a franchise arrangement.
Please be advised that our opinion is based on all of the information furnished in your request. This opinion applies only to your client and to the extent that actual company practices conform to the material submitted for review. Please be advised further that the views expressed in this letter are those of the FTC staff. They have not been reviewed, approved, or adopted by the Commission, and they are not binding on the Commission. However, they do reflect the opinions of the staff members charged with enforcement of the Franchise Rule.
Date: January 5, 2005
1Our 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. In a previous advisory opinion, we determined that application of the single trademark license exclusion is determine by, among other things, the number of licensees, not the number of outlets. Accordingly, the exclusion would remain available where a single licensee opens multiple outlets, even under separate license agreements with the trademark holder-licensor. Advisory 02-1, Bus. Fran. Guide (CCH) ¶ 6512 (2002).