INFORMAL STAFF ADVISORY OPINION 02-1
This advisory opinion addresses whether the grant of multiple licenses to the same licensee qualifies for the single license exclusion to the Franchise Rule, 16 C.F.R. § 436.1(a)(4)(iv).
In your letter, you state that your client, Antonio Pasquini, operates two "Pasquini Pizzeria" Italian restaurants and a bakery in Denver, Colorado. In 1998, he entered into a license agreement with Humbolt and Seventeenth, LLC ("H&S"), permitting H&S to open and operate a restaurant using the name "Pasquini's." As a result, H&S opened a restaurant under the name "Pasquini's Pizzeria Uptown."
You state that your client and H&S are now negotiating the terms of a second "Pasquini's" restaurant to be owned and operated by H&S. The new restaurant will also be modeled after the Pasquini Pizzeria concept. You add that no other license agreements exist between Mr. Pasquini and any other third party licensee for the use of the "Pasquini's" name or restaurant concept.
You now ask whether a second license between Mr. Pasquini and H&S would fall within the single trademark license exclusion to the Rule. If so, you ask if there is any limit to the number of licenses Mr. Pasquini can grant to H&S. Finally, you ask if a change in the management or control of H&S - a limited liability corporation - would affect its status as a single licensee for purposes of the single trademark license exclusion.
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 first grant of a license by your client to H&S appears to fall squarely within the Rule's single trademark exclusion. The question presented is whether an additional license to H&S would still qualify for the exclusion. Although we repeatedly have stated that exclusions and exemptions from the Rule will be narrowly construed, we can find no principled basis for distinguishing between a one-time license and multiple licenses to the same licensee, as explained below.
The single trademark license exclusion focuses on the relationship between the licensor and the licensee, not on the number of outlets the licensee may ultimately open. For example, Mr. Pasquini 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 "Paquini's" trademark, then the relationship between
Mr. Pasquini and H&S remains that of a single trademark licensor-licensee. We believe this is true even though the parties have technically entered into a series of license agreements. In effect, the series of license agreements merely permit what the parties could have arranged initially through a one-time, broader license agreement covering multiple units.
In concluding that a series of licenses is the functional equivalent of a one-time multiple- use license, we assume that the license agreements between Mr. Pasquini and H&S are substantially identical. Our conclusion might be different, however, if Mr. Pasquini imposed different operating terms and conditions in its license agreements with H&S, or if Mr. Pasquini changed the underlying restaurant concept. Where license agreements set forth different terms or involve different concepts, it would be difficult to find the existence of a "single license," as contemplated by the exclusion. In short, in order to take advantage of the single license exclusion, we must find either a one-time multiple-use license agreement, or a series of substantially identical licenses, granted to the same licensee.(1)
Next we turn to the issue of control of the licensee. Ordinarily, the ownership and management of a licensee would not be relevant in determining the continued availability of the single trademark license exclusion. The determining factor is the identity of the single trademark licensee. As stated in your letter, H&S is a limited liability corporation. In any license agreement between the trademark holder and a corporation, we would expect that ordinary corporate law principles would apply, establishing the corporation as the licensee for purposes of the exclusion, not its individual officers or directors. Nonetheless, we would take a different view if a licensor and licensee manipulated control of a single corporate-licensee in an effort to avoid Rule coverage. Where the corporate form is used as a sham essentially to sell individual restaurants to different groups of investors, the Commission would focus on the realities of the business relationship, concluding that the exclusion is unavailable.
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 10, 2002
1. We do not believe the exclusion imposes any specific cap on the number of licenses granted, as long as Mr Pasquini's licenses are substantial identical are granted only to H&S.