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Fundamentals of Franchising: Fourth Edition

Fundamentals of Franchising: Fourth Edition

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Fundamentals of Franchising: Fourth Edition

975 pages
7 hours
Dec 1, 2016


Franchising is experiencing explosive growth in the U.S. and abroad, triggering more legal transactions and queries about this multi-faceted area of law. Written specifically to help lawyers and non-lawyers brush up on franchise law, this respected publication – now in its fourth edition – is charged with useful definitions, practical tips, and expert advice from experienced franchise law practitioners. Covering the basics of franchise law in one, easy-to-read volume, this practical guide examines franchise law from a wide-range of experiences and viewpoints.

Each chapter is written by two experienced practitioners and provides a well-rounded overview of franchise law. Key franchise law topics covered include:

Trademark law

Structuring the franchise relationship

Disclosure issues


Franchise relationship laws

Antitrust law

International franchising

Counseling franchisees

In addition to covering the legal fundamentals, this resource also includes time-saving appendices on state franchise and business opportunity statutes; franchise relationship law citations and popular names; types of franchise relationship laws; statutory examples of good cause for termination; procedural requirements for termination and nonrenewal; and examples of other unlawful practices.

Dec 1, 2016

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Fundamentals of Franchising - American Bar Association



Rupert M. Barkoff Joseph J. Fittante

Ronald K. Gardner, Jr. Andrew C. Selden


Cover design by Jill Tedhams/ABA Publishing.

The materials contained herein represent the opinions of the authors and editors and should not be construed to be the views or opinions of the law firms or companies with whom such persons are in partnership with, associated with, or employed by, nor of the American Bar Association or the Forum on Franchising unless adopted pursuant to the bylaws of the Association.

Nothing contained in this book is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This book and any forms and agreements herein are intended for educational and informational purposes only.

© 2015 American Bar Association. All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. For permission, contact the ABA Copyrights and Contracts Department by e-mail at copyright@americanbar.org, or complete the online request form at http://www.americanbar.org/utility/reprint.html.

Library of Congress Cataloging-in-Publication Data

Fundamentals of franchising / Joseph J. Fittante, Jr., Ronald K. Gardner, Jr., editors. — Fourth edition.

pages cm

Includes bibliographical references and index.

e-ISBN: 978-1-63425-283-6

1. Franchises (Retail trade)—Law and legislation—United States. I. Fittante, Joseph J., Jr. II. Gardner, Ronald K., Jr., 1963- editor. III. American Bar Association. Forum Committee on Franchising.

KF2023.F85 2015                                                  346.7304’8—dc23


Discounts are available for books ordered in bulk. Special consideration is given to state bars, CLE programs, and other bar-related organizations. Inquire at Book Publishing, ABA Publishing, American Bar Association, 321 N. Clark Street, Chicago, Illinois 60654-7598.






Chapter 1

Trademark Law Fundamentals and Related Franchising Issues

Christopher P. Bussert and Linda K. Stevens

I. Trademark Licensing and the Franchise Agreement

A. When a Trademark License Is Necessary

B. When a Trademark License Is Not Necessary

C. The Role of Trademarks in Different Types of Franchise Systems

II. Overview of the Basic Concepts

A. Trademarks and Service Marks

B. Trade Names

C. Trade Dress

D. Trademark Value and Goodwill

E. Summary of Trademark Functions

F. Sources of Trademark Rights

III. Types of Trademarks

A. Words, Letters, and Numbers

B. Designs, Shapes, and Symbols

C. Colors

D. Combinations of Trademarks

E. Slogans

F. Trade Dress

IV. Selection and Protectability of Trademarks

A. Choosing an Appropriate Trademark

1. The Spectrum of Distinctiveness

2. Other Factors Determining the Strength of a Trademark

3. Selecting an Optimal Trademark

V. Choosing an Available Mark—Clearance of Trademarks

A. The Search Process

B. Preliminary Considerations

C. Why Conduct a Search?

D. Contents of the Commercial Search

E. Avoiding Adverse Consequences

VI. Registration

A. What Is Registration?

B. Benefits of Obtaining a Federal Registration

C. Obtaining a Federal Registration

VII. Proper Marking and Use

A. Use of a Trademark as a Source Identifier

B. Avoiding Genericide

C. Other Conduct that Can Result in Loss of Trademark Rights

VIII. Enforcement of Trademark Rights

A. Common Situations Prompting Enforcement Actions in Franchising

B. Causes of Action

C. Proof of Infringement

D. Remedies

E. Policing Trademarks

F. Non-Judicial Enforcement

IX. Use and Protection of Trademarks in Cyberspace

A. Domain Names

B. Social Media

C. Blogs, Fan Sites, Gripe Sites, and Bashtags

X. Trademark Licensing in the Franchise Agreement

A. Important Considerations

B. Typical Licensing Provisions in Franchise Agreements

XI. International Trademark Protection

A. Trademark Rights Are Territorial

B. Suitability

C. Registrability

D. Clearance

E. Registration

F. Recordation of Licenses

G. Protection

H. Summary of International Trademark Protection

XII. Conclusion

Chapter 2

Structuring the Franchise Relationship

Dennis E. Wieczorek and Max J. Schott II

I. Why Franchise?

A. Advantages of Franchising

B. Disadvantages of Franchising

II. Other Methods of Business Expansion

A. Vertical Integration

B. Joint Venture/Partnership

C. Licensing

D. Dealerships

E. Sales Representatives

F. Exemption-Based Franchising

III. Single-Unit Franchise

IV. Multi-Unit Franchises

A. Area Development

1. General Description

2. Advantages

3. Challenges

4. Key Provisions

B. Subfranchise Rights

1. General Description

2. Advantages

3. Challenges

4. Key Provisions

C. Area Representation

1. General Description

2. Advantages

3. Challenges

4. Key Provisions

D. Drafting Tips

E. Conclusion

Chapter 3

Franchise Disclosure Issues

David W. Oppenheim and Rebekah Prince

I. History of Franchise Disclosure Laws

A. State Franchise and Business Opportunity Disclosure Laws

B. FTC Franchise Rule

C. NASAA 1993 UFOC Guidelines

D. 2007 FTC Rule Amendments

E. 2008 NASAA FDD Guidelines

II. Reasons for Disclosure and Disclosure Requirements

Business Benefits

III. Exemptions from Disclosure

IV. The Franchise Disclosure Document

A. General Discussion of the FDD Subjects Covered

B. Review of Each Item

C. Multi-State Disclosure Documents

V. The Disclosure Process

A. Jurisdictional Scope of FTC Franchise Rule

B. Timing of Disclosure

C. Who Must Receive Disclosure

D. Methods of Disclosure

1. CD-Rom or Hard Copy of the FDD

2. Electronic Disclosure

E. Identification of Franchise Sellers

F. Multiple-State Disclosure

G. Policing the Process

VI. Changes to the Franchise Disclosure Document

A. FTC Rule Requirements

1. FTC Rule Annual and Quarterly Updates

2. Updates to Item 19 FPRs

B. State Law Requirements

1. FTC Rule Requirements

2. State Law Requirements

C. Negotiated Changes

D. Procedures for Amending the Disclosure Document

E. Effect of Amendment on Franchise Sales Activities

VII. Unique Disclosure Issues for Multi-Unit Offerings

VIII. Liability for Failure to Disclose

Chapter 4


Joseph J. Fittante, Jr. and Suzanne Trigg

I. Overview of State Regulation of Franchise Sales

A. Jurisdictional Scope of State Franchise Registration and Disclosure Laws

B. Exemptions from State Franchise Registration Requirements

C. North American Securities Administrators Association, Inc.’s Effect on the Registration Process

II. Registering a Franchise Offering

A. When to File

1. Initial Applications

2. Renewal Applications

3. Amendment Applications

B. The Filing and Registration Process

1. The Franchise Application

2. Electronic Filing

3. Use of a Multi-State FDD in the Registration Process

C. Working with State Franchise Examiners

D. Registration of Multi-Unit Franchise Offerings

III. Other Registration Duties

A. Compliance with Business Opportunity Laws

B. Registration of Salespersons

C. Filing of Advertising and Promotional Materials

D. Satisfying Financial Assurance Requests

1. Deferral of Payment of Initial Fees

2. Escrow

3. Surety Bond

4. Guaranty of Performance

5. Capital Infusion/Debt Conversion

E. Agents for Service of Process

IV. Enforcement

A. Remedies Under State Registration and Disclosure Laws

1. Civil Remedies

2. Administrative Enforcement

3. Criminal Penalties

Chapter 5

Franchise Relationship Laws

Kerry L. Bundy and Robert M. Einhorn

I. Brief History and Overview of Franchise Relationship Laws

A. Abuses

B. Federal Legislation

C. State Legislation

II. Definition of Franchise Under State Relationship Laws

A. Breadth of Definition

B. A Closer Look at the Elements of a Franchise

1. Trademark

2. Marketing Plan

3. Community of Interest

4. Fee

III. Good Cause for Termination

A. Statutory Good Cause Requirements

B. Cases Interpreting Good Cause

1. Underreporting Sales or Failure to Report Sales or Pay Royalties

2. Failure to Maintain Standards and Other Contractual Requirements

3. Failure to Meet Sales and Other Performance Requirements

4. Sale of Competing Products

5. Damage to Franchisor’s Reputation

6. Market Withdrawal by the Franchisor

7. Unfair Actions by Franchisors

8. Termination upon Transfer by the Franchisee

9. Incurable Conduct by the Franchisee

IV. Procedural Requirements for Termination

A. Statutory Procedural Requirements

B. Cases Interpreting Procedural Requirements

1. Compliance with Notice Requirements

2. Franchisor Compliance during Notice Period

3. Giving Reasons for Termination

4. Procedural Requirements for Insolvent and Bankrupt Franchisees

5. Incurable Breaches

V. Nonrenewal

A. Statutory Renewal Requirements

B. Cases Dealing with Nonrenewal

VI. The Perpetual Agreement Issue

A. The Problem

B. Types of Agreements

C. The Franchisor’s Position

D. Judicial Relief

E. Conclusion

VII. Remedies

A. Types of Remedies

B. Repurchase

C. Goodwill

D. Injunctive Relief

E. Lost Profits

VIII. Transfers

A. Grounds for Withholding Consent to Transfers

B. Procedural Requirements for Transfer

C. Stock Transfers

D. Transfer upon the Death of a Franchisee

IX. Common Law Theories Affecting the Franchise Relationship

A. Breach of Contract

B. Promissory Estoppel and Recoupment

C. Non-Compete Requirements

D. Consent to Transfer

E. Encroachment

F. Fraud

G. Fiduciary Relationship

H. Good Faith

I. Antitrust

X. Conclusion

Chapter 6

Antitrust Law

Kay Lynn Brumbaugh and Michael K. Lindsey

I. The Essential Antitrust Statutes and Principles

A. Essential Antitrust Statutes

1. Sherman Act Section 1

2. Sherman Act Section 2

3. The Clayton Act

4. The Robinson-Patman Act

5. The Federal Trade Commission Act

6. State Laws

7. Reach of U.S. Antitrust Law

8. Non-U.S. Competition Laws

B. Essential Principles

1. The Per Se Rule

2. The Rule of Reason and the Relevant Market

3. Horizontal v. Vertical Restraints

4. Unilateral v. Concerted Action

5. Interbrand v. Intrabrand Competition

6. How Franchising Fits within the Framework of the Antitrust Laws

C. Antitrust Enforcement

1. Federal Enforcement

2. State Enforcement

3. Private Enforcement

D. Compliance Programs and Their Impact

II. Horizontal Restraints

A. Horizontal Practices Subject to Challenge

1. Horizontal Price-Fixing and Bid-Rigging

2. Horizontal Market and Customer Allocation or Division

3. Group Boycotts (Concerted Refusals to Deal)

4. Information Exchanges

5. Most Favored Nations Clauses

6. Employee Non-solicitation Agreements

B. Effect of Dual-Distribution Structure

III. Vertical Price and Non-price Restraints

A. Vertical Price Restraints

1. Maximum Resale Price Maintenance

2. Minimum Resale Price Maintenance

a. Leegin and Its Impact

b. Pre-Leegin Law

c. The Colgate Doctrine

d. Suggested Resale Prices

e. Minimum Advertised Pricing and Cooperative Advertising

f. National Account Programs

B. Territorial and Customer Restraints

1. Location Clauses

2. Exclusive Appointments

3. Area of Primary Responsibility Clauses

4. Profit Passover Arrangements

5. Exclusive Dealing

6. Covenants Not to Compete

C. Terminations/Refusals to Deal

IV. Tying Arrangements

A. Quality Control Mechanisms

B. Essential Tying Principles

1. The Two-Product Issue

2. Conditioned Sale

3. Market Power

C. Ramifications of Kodak for Franchise Tying Claims

1. Definition of Relevant Market

2. Information and Switching Costs

D. Full-Line Forcing

E. Allocation Systems

V. Other Issues of Potential Concern

A. Discrimination Among Franchisees Under the Robinson-Patman Act

1. Discrimination in Pricing

2. Discrimination in Services or Facilities

3. Dummy Brokerage

4. Application to Franchising

B. Mergers and Acquisitions

C. Trade and Industry Association Participation

Chapter 7

International Franchising

Mark A. Kirsch and John H. Pratt

I. Going International

A. Drivers of International Expansion

B. General Considerations

C. Franchisor Resources

D. Due Diligence Regarding the Target Country

E. Hiring Local Counsel

F. Identifying and Prospecting Countries

II. Trademarks and Intellectual Property

A. Introduction

B. Selection/Registration

C. Registration

D. Community Trademarks

E. The Madrid System

F. Licensing Issues

G. Domain Names and Social Networking

H. Other Intellectual Property Rights, Including Copyright and Trade Secrets

1. Trade Secrets

2. Copyright

3. Patents

III. Structure of International Arrangements

A. Master Franchising

B. Direct Single-Unit Franchise Sales

C. Area Development/Multi-Unit Development

D. Area Representative Agreements

E. Options and Rights of First Refusal

F. Joint Ventures

IV. Legal Issues

A. Franchise Disclosure

1. Disclosure Laws

2. Code of Ethics

3. Civil Law Principles

4. Franchise Disclosure Document

B. Registration/Recording

1. Trademark Filings and Approval

2. Foreign Investment Approval

3. Franchisor Registration

C. Exchange Control/Central Bank Restrictions

D. International Tax Planning

1. Withholding Taxes

E. Post-Termination Indemnification/Agency Laws

1. Local Ownership Requirement

2. Competition Law

F. Data Privacy

G. Import/Export Control

V. The Master Franchise Agreement

A. Commercial Issues

1. Territory

2. Fees

3. Unit Development

4. Term and Renewal

5. System Changes

B. Legal Issues

1. Confidentiality and Covenant Against Competition

2. Transfer Restrictions

3. Termination and Nonrenewal

4. Indemnification Obligations

5. Guarantees/Letters of Credit

6. Liquidated Damages/Penalty Clauses

7. The Subfranchise Agreement

VI. Dispute Resolution

A. Introduction

B. Choice of Law Governing the Relationship

C. Choice of Forum to Resolve Disputes

D. Mediation and Informal Dispute Resolution

E. Arbitration of Disputes

F. Laws Governing International Arbitration

G. Arbitration Procedures

H. Other Issues That Impact International Arbitration

Chapter 8

Representing Franchisees

Ronald K. Gardner, Jr. and Julianne Lusthaus

I. Counseling the Prospective Franchisee

A. The Role of the Lawyer

B. The Counseling Process

C. Deconstructing the Franchise Disclosure Document (FDD)

D. Alternatives: Nobody Has to Buy a Franchise

II. The Negotiability of Franchise Agreements

III. What to Consider Negotiating

IV. Special Considerations for Clients Buying Existing Units

V. Representing Area Developers (Multi-Unit Operators)

VI. Representing Master Franchisees (AKA: Subfranchisors) and Area Representatives

VII. Franchisee Associations

A. The Evolution of Franchisee Associations

B. Structuring an Association

C. The Lawyer’s Role in Counseling Franchisee Associations

VIII. Dispute Resolution

A. Introduction

B. Settling Franchise Disputes

C. Mediating Franchise Disputes

D. Litigation and Arbitration: When All Else Fails

1. Procedural Issues Unique to Franchising

a. Choice of Law Issues

b. Venue Issues

c. Dispute Resolution Clauses

d. The Prevalence of Arbitration

e. The Pros and Cons of Franchise Arbitration

2. Substantive Issues Unique to Franchising

a. Consider Franchise Statutes and Regulations as Well as Common Law

b. Disclosure Claims

c. Fraud—Statutory and Common Law

d. Termination Claims

e. Trademark and Non-compete Claims

f. Other Claims Frequently Asserted

IX. Conclusion

Appendix A: State Franchise and Business Opportunity Registration and/or Disclosure Statutes

Appendix B: Franchise Relationship Law Names and Citations

Appendix C: Types of Franchise Relationship Laws

Appendix D: Statutory Examples of Good Cause

Appendix E: Procedural Requirements for Termination and Nonrenewal

Appendix F: Examples of Other Unlawful Practices

About the Editors

About the Contributors

Table of Cases



Fundamentals of Franchising remains one of the most valuable books in the Forum on Franchising’s library of excellent books. Since the publication of the first edition in 1997, Fundamentals has provided guidance to many lawyers new to the practice of franchise law but continues to serve as a resource for more seasoned franchise practitioners as well.

No one mentions this book without invoking the names of Rupert Barkoff and Andy Selden. They were the editors of the first edition and have served as co-editors with Ron Gardner and Joe Fittante on this current edition. We thank Ron and Joe, who will carry on Rupert and Andy’s excellent work for future editions. But our appreciation must clearly go to Rupert and Andy for sharing their wisdom, insight, and scholarship with us from the first edition through the fourth.

We also recognize the dedicated efforts of the chapter authors: Chapter 1—Trademark Fundamentals for the Franchise Lawyer by Christopher P. Bussert and Linda K. Stevens; Chapter 2—Structuring the Franchise Relationship by Dennis E. Wieczorek [RIP] and Max Schott III; Chapter 3—Franchise Disclosure Issues by David W. Oppenheim and Rebekah Prince; Chapter 4—Registration by Joseph J. Fittante, Jr. and Suzanne Trigg; Chapter 5—Relationship Laws by Kerry Bundy and Robert Einhorn; Chapter 6—Anti-Trust Laws by Kay Lynn Brumbaugh and Michael K. Lindsey; Chapter 7—International Franchising by Mark A. Kirsch and John H. Pratt; and Chapter 8—Representing Franchisees by Ronald K. Gardner, Jr. and Julianne Lusthaus.

Jim Goniea and Karen Satterlee, as the publications officers for the Forum during the development of this book, have done their customary great job in bringing this edition to print. A thanks also goes to Teri Koller, the liaison from the publications committee, who oversaw the development of this book from start to finish.

On behalf of the Forum, I express my gratitude to all of you who have been involved in updating this essential and vital resource for the Forum.

Deb Coldwell

Chair, Forum on Franchising



One of the core goals of the Forum on Franchising is to educate lawyers on the law of franchising. The book you hold in your hands is an integral tool in accomplishing that goal. First published approximately 20 years ago, Fundamentals of Franchising has contributed to the education of franchise lawyers for more than a generation. Its overview of the subjects that make up the bedrock of franchise law and practice, combined with its practical pointers, make it a must-read for those new to franchising or those seeking a quick refresher on the law of franchising. This edition not only updates the subjects covered in earlier editions, but also, for the first time, provides the reader with an overview of international franchising, as well as the key areas lawyers must recognize when litigating franchise disputes.

The most noteworthy publications are those that are a labor of love for those involved. This publication has been the life’s work of Rupert Barkoff and Andy Selden, each a past chair of the Forum on Franchising. Rupert and Andy each spent innumerable hours creating the program called the Fundamentals of Franchising, shepherding the initial publication of the Fundamentals of Franchising book, as well as all subsequent editions, including this one. Simply put, without their dedication and passion for this topic and this book, it would not have stood the test of time. We owe them a great debt of gratitude.

We would be remiss if we did not acknowledge those who have recently passed away who, at one time or another, were contributors to this book—Dennis Wieczorek, a past chair of the Forum on Franchising, who is a coauthor of one of the current chapters; Jack Dunham, who was integrally involved in the third edition of this book as the Forum Chair at that time; and John Baer, a former Forum governing committee member, and the first Lewis G. Rudnick Award recipient, who also contributed to the third edition of this book. Their contributions will always be remembered.

If you are new to franchising, welcome to the club. You will find that we are a collegial group. As far as welcoming gifts go, we could give you no better gift than what you hold in your hands. Previous editions have educated past and current members and leaders of the Forum. This edition is dedicated to the education of its future leaders.

Joseph J. Fittante, Jr.

Ronald K. Gardner, Jr.


Fundamentals of Franchising represents significant effort by many talented lawyers, including the authors who prepared the manuscripts included in this book, and the other contributors who have assisted in updating the Fundamentals materials since they first appeared in 1987. These include:

Chapter 1

Authors: Christopher P. Bussert and Linda K. Stevens

Contributors: Lawrence R. Hefter, Mark H. Miller, Louis T. Pirkey and William A. Finkelstein

Chapter 2

Authors: Max J. Schott II and Dennis E. Wieczorek

Contributors: John R. F. Baer, Charles S. Modell, Lewis C. Rudnick, Stuart Hershman and Andrew A. Caffey

Chapter 3

Authors: David W. Oppenheim and Rebekah Prince

Contributors: Gayle Cannon, Ann Hurwitz, Carol McErlean, Ronald P. Roman, Judith M. Bailey and Dennis E. Wieczorek

Chapter 4

Authors: Joseph J. Fittante, Jr. and Suzanne Trigg

Contributors: Sawan Patel, Kenneth R. Darrow, Anne Hurwitz, Rochelle B. Spandorf and Mark B. Forseth

Chapter 5

Authors: Kerry L. Bundy and Robert M. Einhorn

Contributors: M. Christine Carty, Thomas M. Pitegoff and W. Michael Garner

Chapter 6

Authors: Kay Lynn Brumbaugh and Michael K. Lindsey

Contributors: Arthur I. Cantor, Michael J. Lockerby, Michael M. Eaton, Alan M. Maclin, Robert T. Joseph and Lee N. Abrams

Chapter 7

Authors: Mark A. Kirsch and John H. Pratt

Chapter 8

Authors: Ronald K. Gardner, Jr. and Julianne Lusthaus

Contributors: Patrick J. Carter, Jan M. Davidson, David Laufer, Andrew C. Selden and Rupert M. Barkoff

We also express our appreciation to:

Our colleagues at Dady & Gardner and Larkin Hoffman who assisted in writing certain chapter content, proofreading, and otherwise preparing this edition for publication. These include Jill Cundy, Mark Dady, Keith Marnholtz, Andrew Jackson, Andrew Malzahn, Chuck Modell, Sawan Patel, Jill Henson, and Karen Nygard.

Our Forum on Franchising liaison, Teri D. Koller, and the Forum’s Publication Officer, Jim Goniea, both of whom were tenacious yet gracious drivers of excellence in getting this project done.

Current Forum Chair Deborah Coldwell, who gave us much leeway in getting this done in a manner that was satisfactory to many different viewpoints.

The Forum on Franchising itself, for continuing to support this important publication and dedicating the resources necessary to keep it current and vibrant.

And last, but certainly not least, to the visionaries behind this entire project (and our co-editors on this fourth edition), Rupert M. Barkoff and Andrew C. Selden. With the help of many from their firms (Kilpatrick Townsend and Briggs and Morgan P.A., respectively), and a cast of thousands involved in the first three editions of this book, Rupert and Andy have created a legacy that will be with those of us in the franchise law business for as far as the eye can see. To our Founding Fathers, we say, Thank you—and we hope to do you proud in coming editions.

Joseph J. Fittante, Jr.

Ronald K. Gardner, Jr.


June 2015


Trademark Law Fundamentals and Related Franchising Issues

Christopher P. Bussert and Linda K. Stevens

This chapter focuses on trademark law as it relates to franchising. Among the major issues addressed are the types, selection, and clearance of trademarks; state and federal registration; enforcement of trademark rights; trademark licensing in the franchise agreement; and international protection.


I. Trademark Licensing and the Franchise Agreement

A. When a Trademark License Is Necessary

B. When a Trademark License Is Not Necessary

C. The Role of Trademarks in Different Types of Franchise Systems

II. Overview of the Basic Concepts

A. Trademarks and Service Marks

B. Trade Names

C. Trade Dress

D. Trademark Value and Goodwill

E. Summary of Trademark Functions

F. Sources of Trademark Rights

III. Types of Trademarks

A. Words, Letters, and Numbers

B. Designs, Shapes, and Symbols

C. Colors

D. Combinations of Trademarks

E. Slogans

F. Trade Dress

IV. Selection and Protectability of Trademarks

A. Choosing an Appropriate Trademark

1. The Spectrum of Distinctiveness

2. Other Factors Determining the Strength of a Trademark

3. Selecting an Optimal Trademark

V. Choosing an Available Mark—Clearance of Trademarks

A. The Search Process

B. Preliminary Considerations

C. Why Conduct a Search?

D. Contents of the Commercial Search

E. Avoiding Adverse Consequences

VI. Registration

A. What Is Registration?

B. Benefits of Obtaining a Federal Registration

C. Obtaining a Federal Registration

VII. Proper Marking and Use

A. Use of a Trademark as a Source Identifier

B. Avoiding Genericide

C. Other Conduct that Can Result in Loss of Trademark Rights

VIII. Enforcement of Trademark Rights

A. Common Situations Prompting Enforcement Actions in Franchising

B. Causes of Action

C. Proof of Infringement

D. Remedies

E. Policing Trademarks

F. Non-Judicial Enforcement

IX. Use and Protection of Trademarks in Cyberspace

A. Domain Names

B. Social Media

C. Blogs, Fan Sites, Gripe Sites, and Bashtags

X. Trademark Licensing in the Franchise Agreement

A. Important Considerations

B. Typical Licensing Provisions in Franchise Agreements

XI. International Trademark Protection

A. Trademark Rights Are Territorial

B. Suitability

C. Registrability

D. Clearance

E. Registration

F. Recordation of Licenses

G. Protection

H. Summary of International Trademark Protection

XII. Conclusion

I. Trademark Licensing and the Franchise Agreement

Trademark licensing is, in almost all cases, the cornerstone of a franchise system.¹ A trademark license agreement is a business agreement between the owner of a trademark and another party that desires to use the trademark, including its associated goodwill, in its business to identify its products and/or services to the public while guaranteeing a uniform level of quality.

Franchising, in its simplest terms, is a more sophisticated form of trademark licensing. Most franchise agreements grant the franchisee the right to use one or more of the franchisor’s trademarks in connection with the sale of certain goods and services, together with a system of marketing and distributing those goods and services in accordance with standards and practices that have been established by the franchisor. In return, the franchisor obtains new sources of capital, new distribution channels, and motivated vendors of its products or services. The legal exclusivity that trademark rights afford to the franchisor and its franchisees offers a competitive advantage essential to a successful franchised business. The necessity and role of the trademark license depend on the type of arrangement between the parties at issue.

A. When a Trademark License Is Necessary

A trademark license is necessary if one party manufactures and sells a product or offers a service bearing the trademark to someone other than the trademark owner or those operating under license from the trademark owner. In franchise relationships, it is not unusual for the franchisor either to be the trademark owner or the licensee of the trademark owner.

B. When a Trademark License Is Not Necessary

A trademark license is not necessary if one party merely distributes or sells the trademark owner’s products without conducting business under the owner’s trademark or name. For example, a convenience store franchisee does not need to obtain a trademark license from beverage producers to sell the branded beverages of those producers.

A trademark license is also unnecessary if one party manufactures the product for the trademark owner (or its licensees) and the trademark owner itself (or a licensee) uses, sells, or distributes the product. For example, a trademark license is not necessary in private label relationships such as producers of napkins displaying a restaurant logo for the franchise system or a manufacturer of T-shirts for the trademark owner’s promotional use.

C. The Role of Trademarks in Different Types of Franchise Systems

A product distribution franchise relationship is used for the marketing of products that are made by or for the account of the franchisor. Its purpose is to provide the franchisor with a distribution system to market its products. It is similar to an ordinary supplier-dealer relationship, but the franchisee has a greater identification with the franchisor’s trademark and might be precluded from selling competitors’ products. Examples include gas stations and automobile dealerships.

Under a conversion format franchise relationship, the franchisor provides a license to use one or more trademarks and also provides a business format for the retail sale of goods or services under the trademark. The franchisor typically does not manufacture any products, but may offer to supply expertise, equipment, ingredients, raw materials, packaging materials, advertising, and so forth. The franchisee typically performs services, but may sell products in conjunction with those services. The franchisee usually deals exclusively in the franchisor’s sponsored goods or services and is required to adopt the franchisor’s trademark and overall presentation format as its exclusive trade identity. Examples include restaurants, hotels and motels, auto repair, car rental, and temporary employment services.

Under a conversion franchise relationship, the franchisor recruits into its system as licensees persons who are already established in the particular line of business. Each of the businesses is required to adopt and use the franchisor’s trademark, but they may be permitted to continue using their own trademarks as secondary trademarks. Often, these businesses do not use the same overall presentation or identity format except for the trademark itself. Examples are insurance, financial, and real estate brokerage services.

II. Overview of the Basic Concepts

A. Trademarks and Service Marks

Trademarks and service marks are at the heart of the modern-day marketing of consumer goods and services.² Trademarks can be symbols, words, numerals, pictures, slogans, colors, configurations, sounds, scents, the appearance of three-dimensional objects, or virtually any other indicia that identify the goods or services of a particular party—be it a manufacturer, merchant, or provider of services—and that distinguish these from the goods and services of others. Simply put, trademarks and service marks help consumers select goods or services by identifying those that have been satisfactory in the past while rejecting those that have not.

By identifying the source of goods or services, trademarks convey valuable information to consumers while reducing the costs (i.e., time, trial and error, and inconvenience) of acquiring information about particular goods or services, because consumers can come to rely on a trademark and the brand image it conveys. Moreover, trademarks affix responsibility, thereby inducing higher-quality goods and services, and provide a framework for effective advertising.

B. Trade Names

A trade name is a word, name, symbol, device, or other designation that is distinctive of a business and is used in a way that identifies the business and distinguishes it from others.³ Thus, a trade name is the name by which a legal entity does business or is known to third parties, including the public. It is usually the same as a corporate name, although this is not always the case, especially in situations involving assumed names. It often, but not necessarily, contains the key trademark of the franchise system. For example, contrast Marriott International, Inc., owner of the Marriott trademark for lodging services, with Doctor’s Associates, Inc., owner of the Subway trademark for restaurant services.

C. Trade Dress

Trade dress refers to the combination of elements that together make up the look, feel, or environment of a product or business. The term can refer to individual elements of a product or business image, as well as to the image the combination of those elements creates as a whole.

There is neither a fixed list of features that constitute protectable trade dress nor a statutory definition of the term. A product’s trade dress may include its size, shape, label, packaging, color, color combinations, texture, or graphics. The trade dress of a service may include exterior and interior architectural designs and decor, vehicle decoration, clothing, signs, menus, cuisine, or entertainment features—anything and everything that individually or in combination identifies and distinguishes a business.

Trade dress protection attempts to balance three public policy objectives:

The protection of consumers from confusion;

The protection and reward of investment in unique and original features identifying a product or service; and

The protection of the rights of others to compete freely by having unrestricted access to the ordinary public domain features of products or attributes of providing services, or design elements that are functional in nature or necessary to allow competition.

D. Trademark Value and Goodwill

A well-recognized and respected trademark can become a business asset of incalculable value, usually referred to as goodwill.⁴ Goodwill in a trademark develops as a result of favorable consumer recognition and association. Trademark law is designed to protect business goodwill by protecting consumers from confusing various producers of goods or providers of services. The owner of a well-recognized trademark is more likely to attract business partners (i.e., franchisees) willing to make an investment and pay royalties because of their desire to market goods or services under an already established brand with goodwill.

E. Summary of Trademark Functions

Trademarks perform several key functions that are recognized and protected by the courts:

They identify the goods or services of the owner and/or of its licensees and distinguish them from those of competitors;

They signify that all goods or services bearing the trademark emanate from a single, albeit sometimes anonymous, source or connote common sponsorship;

They signify that all goods or services bearing the trademark are of the same or similar quality;

They act as a tool for advertising the goods or services with which the trademark is used; and

They bind a franchise system together by providing a common identity for goods and services throughout the system.

F. Sources of Trademark Rights

Trademark rights in the United States, unlike most other countries, are use-based—i.e. they arise through use of the trademark on or in connection with particular goods or services. Trademark rights accrue automatically—that is, without any formality or paperwork—to the first party using a particular trademark to identify its goods or services. The first or senior user has the right to prevent competitors, including subsequent federal registrants, from using that trademark or a confusingly similar trademark in the geographic area in which the first user’s trademark has become well known, as well as in the first user’s area of natural expansion. Trademark rights that come into existence in this manner are called common law rights. In addition to being limited to certain specific geographic areas, common law rights are also subject to the rights of other parties who have previously filed applications for federal registration, have already obtained one or more federal registrations, or have used the trademark in geographic area in which one’s use and reputation have not yet extended.

Although not mandatory for the protection of trademark rights, federal trademark registration on the Principal Register of the U.S. Patent and Trademark Office (PTO) provides many substantive and procedural benefits and is, therefore, highly recommended, especially if more than local use is contemplated. For example, a federal registration provides a prima facie presumption of validity, ownership, and the exclusive right to use the trademark, and allows the possibility of acquiring incontestability status five years after the registration has issued. Importantly for franchised businesses, it provides constructive notice of the registrant’s registration, thereby giving the trademark owner preemptive nationwide superior rights even if the owner does not use the trademark throughout the entire United States. State trademark registrations are also available, but offer few benefits beyond common law rights and are generally recommended only in particular situations.

There is no federal registration of trade names. However, the prior user of a trade name can block another’s subsequent use or attempt to register a trademark if confusion is likely. A trade name may be registered as a trademark if it is also used as a brand to identify the source of certain goods and/or services and presented to the consuming public in the form of a trademark.⁵ For example, Pizza Hut is a trade name, but Pizza Hut is also used as a brand to identify certain food products and restaurant services.

III. Types of Trademarks

As indicated above, there are many different words, names, symbols, designs, or other devices that can serve as a trademark. Some types of trademarks are described in the following sections.

A. Words, Letters, and Numbers

Words are the most common form of trademarks. They can be recognizable existing words or new, arbitrary combinations of letters. Even an individual letter⁶ (e.g., S for Singer sewing machines) or combinations of letters such as acronyms or abbreviations (e.g., DQ for Dairy Queen for various ice cream confections and food products,⁷ Ho-Jo for Howard Johnson’s restaurants and food products⁸ and KFC for restaurant services)⁹ can function as a trademark.

Likewise, numbers alone (e.g., 7 Eleven for retail convenience store services)¹⁰ or in combination with letters (e.g., Century 21 for real estate services,¹¹ and Motel 6 for hotel services)¹² can be trademarks, provided that the numbers are in fact used as a brand and not primarily in a descriptive manner to indicate the model, grade, size, or other feature or characteristic of a product or service.

Telephone number and letter combinations (e.g., 1-800-Flowers for receiving and placing orders for flowers and flower products)¹³ have been found to be protectable trademarks as well.

B. Designs, Shapes, and Symbols

Designs (i.e. the McDonald’s Golden Arches for restaurant services),¹⁴ drawings (i.e. the image of Colonel Sanders for restaurant services),¹⁵ and symbols (i.e. the Circle K logo for convenience store services)¹⁶ may serve as trademarks if they are perceived by customers as indicators of source and not only as ornamentation.¹⁷ Realistic drawings illustrating the product or service or commonplace geometrical figures or product configurations (such as the Coke bottle) are protectable if they are inherently distinctive or upon a showing of secondary meaning.

C. Colors

Combinations of colors, colors as part of a design, and even single colors without any other elements can be protected as trademarks under certain circumstances. A single color alone can only be a valid trademark under the Lanham Act if it has attained secondary meaning—i.e., that the public has come to identify a particular color on a product as signifying a brand from a single source.¹⁸

The color, however, may not be functional and other colors must be equally available to competitors. For example, UPS has successfully registered the color brown for its shipping services.¹⁹

D. Combinations of Trademarks

A product or service can be identified by more than one trademark, and labels and packages often contain a combination of several trademarks. Each designation that creates a separate commercial impression distinct from other material appearing on the label and that serves as a source indicator is considered a separate trademark. For example, many businesses use their corporate names as a house trademark (e.g., DuPont in the oval logo) in combination with one or more different secondary trademarks (e.g., Teflon) for each of its various products or services. This practice is particularly prevalent in the franchise field. For example, Burger King serves as a house mark to identify a system of franchised fast-food restaurants and Whopper is one of several secondary marks that identifies an individual product of that system.

E. Slogans

Slogans may serve as trademarks if they are capable of identifying goods and services and are not descriptive thereof.²⁰ Examples of protectable slogans include: White Castle’s use of The Taste Some People Won’t Live Without²¹ for restaurant services, Chick-fil-A Corp.’s use of We Didn’t Invent the Chicken, Just the Chicken Sandwich²² for restaurant services, and UPS’s use of What Can Brown Do For You?²³ for transportation and delivery of personal property.

F. Trade Dress

As indicated above, trade dress may also qualify for trademark-like protection under certain circumstances. Prominent examples of legally protectable trade dress include the exterior design of White Castle,²⁴ Howard Johnson,²⁵ and Kentucky Fried Chicken restaurants;²⁶ the interior decor of Fuddrucker’s restaurants;²⁷ the Ronald McDonald clown outfit;²⁸ the design and layout of Apple’s retail stores;²⁹ the Chick-fil-A cows;³⁰ the Marlboro Man cowboy motif;³¹ the Rubik’s Cube puzzle;³² and even the inverted Y design on Jockey shorts.³³

Trade dress protection does not, however, extend to vague or abstract images or themes. For instance, courts have refused to extend trade dress protection to the concept of a full-service restaurant … serving down-home country cooking … in a relaxed and informal atmosphere³⁴ or a Scandinavian marketing theme for ice cream.³⁵ Trade dress protection also does not extend to common elements used by competitors in a particular field, such as those used in restaurants.³⁶ On the other hand, trade dress protection was granted to an arbitrary, extensive, and distinctive signature collection of interior design characteristics of a restaurant.³⁷

Trade dress in a product configuration is entitled to protection only upon a showing that it has achieved secondary meaning.³⁸ Examples of product configurations that have achieved sufficient secondary meaning to be protectable are bedroom furniture,³⁹ notebooks,⁴⁰ shoes,⁴¹ radio microphones,⁴² the design of a line of high-end cookware,⁴³ and the design of the Apple iPhone cell phone.⁴⁴

Certain types of trade dress may be federally registered as a trademark on the Principal Register of the PTO.⁴⁵ Other types of trade dress are unregistrable because of definition and specificity issues (such as the interior design of a restaurant). Whether or not trade dress is registered, courts may protect such rights in infringement litigation brought under Section 43(a) of the Lanham Act and similar state unfair competition laws.⁴⁶ To succeed on a claim for trade dress infringement, a trade dress owner must establish all of the following:

The specific nature and scope of its trade dress;

The trade dress is nonfunctional, in that it has no function other than being an embellishment added for purpose of identification.⁴⁷ However, the combination of otherwise unprotectable functional features can create trade dress that is protectable as a whole;⁴⁸

The trade dress either is inherently distinctive⁴⁹ or has acquired secondary meaning;⁵⁰

There is a likelihood of confusion between the parties’ trade dress;⁵¹ and

The trade dress owner has been or is likely to be damaged.

IV. Selection and Protectability of Trademarks

The selection of a trademark can be crucial to the success of a franchised business. The centerpiece of the franchise system’s unified marketing efforts, the system’s brand becomes the focal point of the goodwill to be developed among its customers and the system’s most important asset. Failure to devote sufficient attention to the selection and usage of this valuable intellectual property can have catastrophic results, including expensive litigation, increased advertising costs, and/or inability to expand use of the trademark to new goods or services or to new geographic areas. Counsel can be instrumental in guiding the selection process⁵² and encouraging the franchisor to choose trademarks that are legally protectable, culturally appropriate, and available for use in the target markets.

A. Choosing an Appropriate Trademark

1. The Spectrum of Distinctiveness

First, the trademark must be legally protectable. In assessing their protectability, trademarks are often grouped on a continuum called the spectrum of distinctiveness.⁵³ The spectrum ranges from the weakest, most generic terms on one end, to the strongest, most distinctive trademarks on the other end:

As this graphic illustrates, the more fanciful the mark, the more distinctive it is—and the more protectable it is likely to be. When one considers examples of each category, their arrangement on the spectrum makes sense:

Generic: These are words that describe the general category to which the underlying product belongs, or the names that people use to talk about things in a general way (the generic name for a product), e.g., Milk.

Descriptive: These are words that describe what is being marketed without any imagination or deductive leap, e.g., Fresh Milk or Farm Milk.

Suggestive: These are words or designs that require thought, imagination, and perception to associate them with the product or service they identify. These trademarks indirectly suggest characteristics or features of the goods or services without describing them, e.g., Barn-Barn Milk or Greenfield Milk.

Arbitrary: These are dictionary words or designs having a meaning that bears no relationship to the product they are meant to identify. Barnbarnfish Milk or Omega Milk milk would be an example of an arbitrary mark.⁵⁴

Fanciful: These are coined new words that have been invented to serve as trademarks and have no other meaning besides their identifying function (e.g., Br-ssssh Milk).

The closer to the right-hand end of this spectrum, the stronger the mark is considered to be. The strength of a trademark defines the scope of protection it is accorded—the stronger the trademark, the more extensive the scope of legal protection against infringing trademarks over a wide range of goods and services categories or geographic markets and a wider range of appearance, sound, and meaning variations.

Generic and Other Non-Protectable Terms

Generic terms (words that are the common name of goods or services or that describe the category of goods to which the product belongs) can never be trademarks because they cannot distinguish those goods originating from a particular business from other goods of the same kind (e.g., discount mufflers is generic for repair and replacement muffler services or shredded wheat for cereal).⁵⁵ And even if a mark is protectable at the time use is commenced, it can become generic over time—and subject to cancellation. Some words that used to be trademarks but became generic and non-protectable are aspirin (formerly a trademark of Bayer AG), and escalator (formerly a trademark of Otis Elevator Company).⁵⁶

Descriptive Trademarks

Descriptive trademarks include (1) trademarks that merely describe in words or pictures the intended purpose, function, quality, size, ingredients, characteristics, class of users, or intended effect on the user of the goods or services they identify; (2) trademarks that primarily describe the geographical origin of the goods or services; (3) trademarks that primarily constitute a person’s surname; and (4) trademarks that primarily describe laudatory aspects of the goods or services.⁵⁷ Descriptive marks tell us something about the product. Examples of marks that have been held to be descriptive are: Giant Hamburgers for hamburgers and restaurant services,⁵⁸ Pestaway for pest control services,⁵⁹ Beef & Brew for restaurant services,⁶⁰ Vision Center for optical clinic services,⁶¹ First Bank for banking services,⁶² Platinum for home loan mortgage services,⁶³ and Fast-Fix Jewelry Repairs and Jewelry Repair Center for jewelry repair.⁶⁴ Trademarks found by courts or the PTO to be merely descriptive will be denied protection and will also be found unregistrable, unless and until a secondary meaning can be shown. Secondary meaning occurs when, as a result of extensive use and advertisement, the relevant consuming public associates the trademark, not in its descriptive or surname sense, but as indicating a single source of the goods or services, as in the case of Holiday Inn, All Bran, and Supercuts.⁶⁵

Inherently Distinctive Trademarks

Inherently distinctive trademarks are legally protectable and registrable from the moment they are used in commerce. The following types of trademarks are inherently distinctive: fanciful, arbitrary, and suggestive. Suggestive marks do not describe, but merely suggest, the product being sold (e.g., Cork ’N Cleaver for restaurant services).⁶⁶ Arbitrary marks are actual words, but are not generally associated with, and do not suggest, the product at issue, such as Domino’s for pizza and Apple for computers. Fanciful marks are made-up terms, such as Exxon and Xerox.⁶⁷

All three of these categories of inherently distinctive marks are immediately protectable and registrable without requiring proof of secondary meaning. Although fanciful and arbitrary marks are stronger and more likely to be available, suggestive marks are popular because they are considered to be inherently distinctive (and thus immediately protectable and registrable without requiring proof of secondary meaning) while also being more satisfactory marketing tools because they convey some information about (i.e., suggest) the goods or services.

2. Other Factors Determining the Strength of a Trademark

As the foregoing makes clear, strength is a relative notion, with trademarks falling on a continuum ranging from very strong to weak. In addition to descriptiveness, the relative strength of a particular mark will be determined by these additional factors.

How Common the Trademark Is in the Field of Use

Consumers are aware that laudatory terms such as Star, Gold Medal, Best, Platinum, and Universal⁶⁸ are used as trademarks by many unrelated businesses. Therefore, they are weak source identifiers. Additionally, when many similar trademarks exist in the marketplace, the field is said to be crowded, each of the respective trademarks in the crowd of trademarks is not very distinctive, and such a mark is weak and has a relatively narrow scope of protection.⁶⁹ Generally, trademarks consisting of one or two letters or numbers also are considered weak.⁷⁰

The Degree of Fame and Marketplace Recognition of the Trademark

Even if a trademark is fanciful or arbitrary, it might be relatively unknown to the public because of minimal sales and is thus commercially weak. Conversely, after significant use and advertising, a descriptive trademark initially classified in the weaker part of the spectrum may become a strong trademark. For example, Kentucky Fried Chicken (consisting of a geographic term and a generic term) and McDonald’s (a surname and thus descriptive) have accumulated an amount of secondary meaning that far exceeds the minimum required for protectability and qualifies these trademarks as strong. The use of McDental for dental services was enjoined based on McDonald’s strong family of Mc trademarks, even though fast food and dentistry are not related.⁷¹

When selecting trademarks, marketing people are often attracted to descriptive terms because they believe that the more descriptive the term is, the more it communicates about the goods or services to the consumer. Legally, however, such terms tend to be less distinctive and thus less protectable. Therefore, the owner of a weak trademark needs to invest significantly in marketing and advertising to educate the public that the trademark is proprietary and thereby has acquired secondary meaning. On the other hand, fanciful and arbitrary trademarks are inherently distinctive and strong, but they convey little or no message to the consumer about the goods or services and might require extensive advertising to teach the consumer to remember a particular trademark. One way out of this dilemma is to avoid both extremes and select a trademark that is marketable and attractive and yet suggests features of the goods or services.

3. Selecting an Optimal Trademark

In selecting an optimal trademark, the following principles should be considered:

Avoid Descriptive Terms—No Matter How They Are Spelled

Clever word play might, or might not, transform a descriptive mark into one that is more distinctive. A simple misspelling is not enough, especially if the misspelling follows the pronunciation of the descriptive word (e.g., nite for night). However, the trademark Muff-Funs for mini-muffins was found registrable because it plays on the words muffin and fun.⁷² The simple translation of a descriptive term into a foreign language is insufficient (e.g., saporito as the equivalent of tasty in Italian).⁷³ However, a combination of foreign and English words may result in a suggestive trademark (e.g., Le Crystal Naturel).⁷⁴

Suggestive Trademarks Are Often the Answer

Suggestive trademarks do not describe, but instead simply suggest a link to the goods or services. Drawing the line between suggestive and descriptive trademarks is often difficult. The amount of imagination, thought, and perception necessary for a term to be recognized by the PTO and the courts as suggestive rather than descriptive has not been defined. As a rule, if the term in question has been frequently used by competitors, it is likely that it will be found to be descriptive.⁷⁵

Avoid Geographic Names

Geographic names are particularly weak if the goods or services are generally expected to, and in fact do, originate from that area. For example, St. Louis for ribs and Chicago for deep-dish pizza would be among the more risky choices. If, however, an area is not known for the particular type of goods or services, use of that geographic area in the trademark may be protectable. For example, Philadelphia for cream cheese was found to be an arbitrary trademark because this cheese is made in the small city of Philadelphia, New York, not in the more obviously recognized city of Philadelphia, Pennsylvania, and neither of these cities has a reputation for the production of cheese.⁷⁶

Avoid Surnames

Surnames are not optimum choices for trademarks because they are likely already in use as common law trademarks or as part of trade names somewhere in the United States, creating both distinctiveness and potential prior rights issues. Registration on the Principal Register will be denied, without proof of secondary meaning, if a trademark is primarily merely a surname.⁷⁷ A key inquiry in this determination is whether the consuming public perceives the term at issue as a personal name.⁷⁸ On the other hand, marks that consist of or include surnames can present additional registrability problems on an international level, because many countries are more restrictive than the United States as to the registration of surnames.

Avoid Choosing a Functional Feature as a Trademark

Certain product features (e.g., color, shape and configuration) can sometimes function as trademarks, which are often referred to as trade dress. However, features that are essential to the use or purpose of the goods or

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