Hot Branding Issues for U.S. Franchisors in Global Distribution Agreements
Most franchisors that make products available to their franchisees internationally have relationships with U.S. and international distributors who facilitate delivery of the products to the franchisees' locations. Product sales demand vigilance by franchisors to ensure that their products and the distributors who house and deliver those products represent the brand in the most positive and accurate light. Below are a few scenarios in which franchisors and distributors are called upon to work together to ensure that brand value is maintained.
1) Use of the brand during the term and post-term
To maintain the strength, value, and integrity of the franchisor's brand, its mark must be used consistently and properly. Distributors play an important role in a franchisor's or manufacturer's brand messaging. In consideration of a license of its trademark to a distributor, the franchisor expects the distributor to use the mark in a manner comporting with the franchisor's instructions to protect its goodwill.
In addition to appropriate quality controls, a franchisor should provide brand guidelines to its distributors with instructions on use of its trademarks, trade dress, and other brand property. By doing so, the franchisor establishes an operating framework with the distributor, helping to ensure a consistent quality experience for customers. The franchisor must retain control over its trademarks so there is no loss of rights because of unauthorized or improper use.
The distributor should be required to use signage and advertising materials approved by the franchisor that maintain the consistency in brand presentation that customers have come to recognize as the source of the branded goods. This includes using correct names and complying with the display requirements (including punctuation, symbols, capitalization, spacing, size, imagery, and resolution) for the logos and marks that the distributor is authorized to use. It is important to ensure that no unauthorized modifications occur, including modifications in colors, lettering, proportion, space, borders, filters, and background, and to specify differences in use depending on whether in digital or print advertisements, banners, or alongside other logos.
It is also important to require distributors (and resellers) to give clear indication as to the source of the goods with a consistent visual identity across the franchisor's or manufacturer's network. The distributor should also be instructed that their names and domain names may not contain the franchisor's name or marks. Managing this process requires a central place where inquiries from distributors and customers can be made to the franchisor.
Finally, monitoring compliance by distributors is paramount. A franchisor will want to train its internal and external sales team to watch and report any violations. Conducting periodic web reviews for all of its brands is advisable.
The distribution agreement (and sometimes, local laws) typically address the disposition of signs and marketing materials, sometimes requiring the franchisor to repurchase those items. With respect to digital materials, it would be appropriate to designate a winding-down period for the distributor's use of the franchisor's branding on any websites, social media accounts, and other digital sources such as domain names and emails.
2) Protecting against counterfeit goods and gray market goods
- Counterfeit goods. Franchisors have remedies to address sellers of unauthorized goods that are counterfeit. In the U.S., a trademark owner may commence a civil or criminal action and obtain seizure of counterfeit goods under applicable law. But aside from legal action, there are steps that the U.S. franchisor should undertake to protect itself from counterfeiting. These include the establishment of policing programs by franchisors and manufacturers to identify counterfeit versions of its goods and the origin of the counterfeiting activity. Monitoring the Internet for the sale of counterfeit goods is a critical element of any policing program, including a toll-free number for anyone to use to report counterfeit goods.
Registration of a franchisor's primary marks with the U.S. Patent and Trademark Office is important, and recording registrations with U.S. Customs and Border Protection can increase the likelihood of the agency acting and getting personnel at ports to enforce the franchisor's rights. The agency can only realistically inspect a small portion of goods entering the U.S. and normally targets shipments based on past seizure history, country of origin, type of goods, name of importer and shipper, and method of shipment. A franchisor can increase the chances of counterfeit shipments being intercepted by providing information to the agency about suspected counterfeit shipments.
- Gray market goods (also known as "parallel imports") include trademarked goods that are manufactured outside the U.S. for sale and use abroad and imported into the U.S. without the franchisor's or manufacturer's consent. Normally, the goods are lower-priced versions of the goods sold in a country outside of the U.S. and then imported into the U.S. in competition with the higher-priced version of the goods. Gray market goods can cause significant harm in lost revenue each year, as well as damage to reputation as a result of consumers' experience with the goods and differing warranty, recall, and servicing programs. Gray marketers leverage available excess inventory, lower costs, economic conditions, currency exchange rates -- and therefore, lower pricing -- by facilitating export of such goods.
Aside from taking action to block the import of gray market goods under applicable law, taking action to differentiate a franchisor's goods sold in the U.S. from those it offers in other markets can strengthen the franchisor's legal position that the goods are materially different (such as differences in packaging, appearance, labeling, manuals, warranties, codes, and components). Training distributors and consumers about gray market goods and the differences that can be identified when attempting sell or buy such goods is critical. In addition, franchisors should add provisions in their agreements with distributors and franchisees, where local law permits, to restrict the sale of goods in certain markets. Establishing policing programs is also advisable to increase the likelihood of gray market goods being identified. Again, getting information on the source of the gray market goods, monitoring the Internet and social media, and using a toll-free phone number are all critical investigatory tools.
3) Online advertising, sales, and territorial restrictions/encroachment
Online sales of goods by the franchisor or another distributor can encroach on sales in a distributor's exclusive territory. A franchisor will most likely want to retain the rights to make online sales in any distributor's or franchisee's territory. Contractual provisions that expressly retain the franchisor's rights to conduct sales activity directly or indirectly, including through the Internet, are recommended.
To motivate distributors and franchisees not to sell in violation of Internet sales restrictions, a franchisor may want to require them to provide contact information about their customers and/or require compensation be paid or withheld when a sale is made to a customer outside of a distributor's or franchisee's territory.
4) Blockchain technology and certifications
A supply chain necessarily contemplates "the creation, exchange and use of material things" having potentially negative consequences such as environmental damage, unsafe work conditions, forgery, and valuable material waste. Consider the 50,000 tons of beef found to contain horse DNA.
Blockchain technology and particularly, Provenance, is making it possible to "secure traceability of certifications and other salient information in supply chains" by enabling "every physical product to come with a digital 'passport' that proves authenticity and origin, creating an auditable record of the journey behind all physical products. The potential benefits for businesses, as well as for society and the environment, are hard to overstate: preventing the selling of fake goods, as well as the problem of 'double spending' of certifications present in current systems."
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