By Michael H. Seid, Managing Director, MSA Worldwide

What I’ve learned over my career working in franchising, is that while most experienced franchise executives understand marketing and logos and color palettes and taglines and how brand awareness drives customer traffic and that customer traffic drive royalty revenue – a surprising number don’t understand how all of that is impacted by the law.

Most have never heard of the Lanham Act – the federal statute upon which the entire legal architecture of franchise licensing rests – and those that have heard of it rarely are able to tell you why the Lanham Act matters, or what happens to their portfolio or trademark if they fail to comply with its requirements. I have had the same experience with some lawyers who do not routinely work in franchising and licensing.

In any industry there is a depth of legal knowledge that non-lawyers need to have. When you are in franchising, not knowing about the Lanham Act or understanding its purpose and requirements is not a small issue, because the Lanham Act is not peripheral to franchising and errors can be potentially catastrophic. The Lanham Act is the foundation upon which franchising is built and without it, the franchise license we give to our franchisees arguably would have little validity.

I am going to digress a bit into a discussion of branding because to understand why you need to know about the Lanham Act, you first have to understand what a brand actually is.

A brand is simultaneously the greatest strength and most valuable asset of a franchise system – and at the same time its most dangerous vulnerability.

What a Brand Actually Is — and What People Get Wrong

A brand is not a logo – it’s not a name or a color scheme or a slogan, or a social media presence. Those are merely expressions of a brand – important ones for sure – but they are not the brand itself. A brand is best understood as the promise a company makes to the customer and the customer’s accumulated experience of whether that promise is kept. It is how the public perceives a company and its products or services every time they encounter its mark. It’s the smell, taste and emotional feeling a customer instinctively gets – if you are a restaurant – when they are driving by your billboard at 65 miles an hour.

In franchising, the Brand Promise operates through a chain that is only as strong as its weakest link – the franchisor establishes the standards, the franchisee executes the standards, the customer experiences the promise, the customer returns, they refer the brand to friends, who become new customers and – at the end of the chain – the brand’s value increases and the franchise system grows. Every link in that chain depends on the one before it. Break any link, and the chain fails: not just at that location, not just in that market, but for the entire brand everywhere the mark is seen. Nothing in franchising is local today when it comes to how people trust in your brand promise, and social media reports on an experience in Seattle will impact a buyer’s decision in Miami Beach.

The purpose of a brand is that it eliminates risk in the customer’s mind. When a customer walks through the door of any franchise location – whether one they have visited a hundred times, or one they are walking into for the first time in a city they have never been to before – they are not making a neutral decision. They are relying on a prior experience, and they have expectations which were built over time, at another location. The brand is the mechanism that transfers a consumer’s trust from one location to another, because the customer is trusting that what they received before is what they will receive again.

When the brand keeps that promise, it creates something that no amount of marketing spending can buy – loyalty – and loyalty is all that is needed for repeat business. Customers will even pay a premium for their favorite brands, because they trust the outcome is predictable. However, when the brand breaks that promise – even once and even at a single location – it damages that trust and that is something that marketing cannot easily, if ever, repair.

The Brand as the Greatest Strength of a Franchise System

The reason franchising works – the reason a franchisee of a well-known brand can open a business on day one with customers already predisposed to walk through the door – is the brand. The franchisee is not starting from zero. They are inheriting the accumulated trust that the franchisor and every other franchisee before them have built. That is an extraordinary thing to receive, and, in many respects, it is what the franchisee is hoping for when they pay a franchise fee and an ongoing royalty. They are buying access to a promise that someone else built and that the entire system is obligated to maintain.

This is the network effect of franchising at its most powerful. As the system grows, the brand gets stronger. More locations mean more customer touchpoints, more awareness, more trust deposited into the collective account. A franchisee who opens in a new market where the brand has minimal presence still benefits from the national or international recognition that prior expansion may have built, because the brand does marketing work that the individual franchisee could never afford to do alone. It is the compounding return on consistent, standards-compliant execution across every location, every day. This strength is what makes franchising such a remarkably efficient model for scaling a business. The brand is the connective tissue – the thing that makes those independent operations function, in the customer’s mind, as a single coherent entity.

McDonald’s is perhaps the most studied example in the world, but the principle applies equally to every well-executed franchise system at every scale. A regional home services brand with forty locations carries the same fundamental dynamic as a global QSR with forty thousand. The franchisee in location 37 benefits from the brand that the franchisees in locations 1–36 helped build. And the franchisee in location 100 down the line will depend on what location 37 does today.

The Brand as the Greatest Vulnerability of a Franchise System

Here is the part that franchise executives often fail to sit with long enough to truly absorb – the same property that makes the brand the system’s greatest asset also makes it the system’s greatest liability. A bad franchisee – one who cuts corners on quality, ignores service standards, or simply does not care about the customer experience – does not just damage their own business, but every other franchisee in the system. They squander the brand equity that every compliant franchisee has worked to build and contributed to maintain. The franchisor that skimps on the necessary support – because the contract may allow them to do so – puts the enterprise at risk, even if that risk is not legal.

We are long past the era in which brand damage stays local. In the age of social media, instant reviews, and consumer-generated content that travels at the speed of the internet, a single bad experience at a single location is no longer a local problem – it is a system problem. A customer who posts a photograph of a substandard meal, a dirty facility, or a rude service interaction is not tagging that location – they are tagging the brand. And everyone who sees that post will remember it the next time they pass any location bearing that mark.

Those of us experienced in franchising have seen this dynamic play out repeatedly over our careers, and it never gets less instructive. A franchise system spends years and millions of dollars building a reputation for quality and then, a handful of franchisees or maybe even just one underperforms. It’s for this reason that the franchisor must be willing to have the difficult conversations and even take the necessary steps to correct the issue. Because if you allow non-compliance to persist, the brand begins to drift – and disappointed customers stop coming back. When that happens, the compliant franchisees start seeing their customer counts decline, positive validation calls for prospective new franchisees get harder to achieve – and the franchise development pipeline slows.

We are often called in to help turn a system around or deal with a problem management can solve on their own. What we find, frequently, is a franchisor blaming the economy or the competitive landscape or consumer trends for their system problems, when the answer is staring back at them in the mirror.

I have written and lectured about what many systems mistakenly do when brand drift goes uncorrected and same-store sales decline or underperform the competition. Invariably they reach for discounting, because discounting is what some executives do when they cannot think of another way to get customers back in the door. It never works in the long run because you cannot discount your way out of a broken brand promise. In addition, discounting is particularly corrosive to every franchise system because it erodes franchisee revenue at the unit level and signals to the market that the brand no longer has the confidence to sell at full price. Once you start down that road, recovery is slow and expensive (if even possible) because the franchisees also start to cut back – because the revenue they need to do it right is no longer there.

This vulnerability is an inherent risk built into the franchise model itself. When you license your brand to independent operators, you are accepting that you cannot be in every location every day. You are depending on franchisees and their staff – with all of their variability in commitment, capability, and character – to keep a promise to every customer that shops at the brand. That is an enormous amount of trust to extend, and the only way to manage it responsibly is through the system’s brand standards and oversight mechanisms that the Federal Lanham (Trademark) Act enables and demands.

The Lanham Act: Why It Exists and What It Actually Requires

Enacted by Congress in 1946, the Lanham Act is the primary federal law governing trademarks, service marks, and unfair competition in the United States. Its foundational purpose is to protect consumers from confusion about the source of goods and services, and to protect the rights of those who have built value in a distinctive mark. The Act defines a trademark as:

“[A]ny word, name, symbol, or device or combination thereof (1) used by a person…to identify and distinguish his or her goods, including a unique product, from those manufactured or sold by others and to indicate the source of the goods, even if that source is unknown.”

What franchise executives – and general practice lawyers who do not work routinely in this field – often do not know is that the Act imposes an affirmative, ongoing obligation on every trademark owner who licenses the mark to another party. That obligation cannot be waived, it’s not optional, and it’s not merely contractual. The obligations are the legal price of trademark ownership itself. When you license your mark to a franchisee, a dealer, or any other licensee, you have an obligation to set brand standards so that you have the mechanisms to control the quality of what is delivered under your mark. If you do not, you have what trademark law calls a naked license – a license that exists without the quality control that gives it legal validity. And a naked license is the path to abandonment of the mark itself.

This is the legal foundation upon which modern franchising is built. Without the quality control obligation the Lanham Act imposes, there really is no legal basis for the brand standard. Without brand standards, there can be no consistent customer experience, and without a consistent customer experience, the trademark fails at its essential purpose. Also, consider that once a trademark fails at its essential purpose, you are at risk of losing legal protection over the mark. The Lanham Act is not simply one of many considerations in franchise system design and management, but the one upon which the entire system stands. Remove it, and the franchise relationship loses its cohesion.

Naked Licensing: The Legal Doctrine Every Franchisor Must Understand

The doctrine of naked licensing is straightforward in principle and devastating in consequence. A trademark owner who licenses its mark without maintaining adequate quality control over how that mark is used has effectively abandoned the mark. The licensor cannot simply lend its name and walk away. If it does, the mark ceases to function as a reliable indicator of source and quality — and courts will treat it as abandoned.

Those of you who know me well know that I try to stay on my side of the line when dealing with legal issues; I rarely start to cite cases because that purview is reserved for lawyers. I will only violate that principle when the case or law is so well known that not including it gets me email comments from my legal friends telling me where to look it up. I will avoid those emails here.

In Dawn Donut Co. v. Hart’s Food Stores Co., 267 F.2d 358 (2d Cir. 1959), the Second Circuit established that a licensor who fails to exercise quality control over its licensees’ goods risks losing trademark rights entirely. The Ninth Circuit reinforced this in Barcamerica International USA Trust v. Tyfield Importers, Inc., 289 F.3d 589 (9th Cir. 2002), finding abandonment even where a written license agreement existed – because the licensor had not actually monitored quality for years. The Seventh Circuit reached the same conclusion in Eva’s Bridal Ltd. v. Halanick Enterprises, Inc., 639 F.3d 788 (7th Cir. 2011), where the court held that a licensor with effectively no brand standards and quality control mechanism had abandoned its mark. Taken together, these decisions establish a consistent principle across multiple federal circuits: the written contract is not enough. Actual, documented oversight and performance is required.

Think about what that means for a franchise system that has allowed brand drift to go uncorrected. The franchisor who tolerates non-compliant franchisees, who fails to enforce brand standards consistently, who has not updated the operations manual in years or adequately staffed the field support function – that franchisor is not just running a weaker business, it is potentially abandoning the very marks that define its value. The brand’s vulnerability I described earlier is not only a commercial problem – it is a legal one.

This is why franchisee selection is so consequential. A bad franchisee does not just harm the brand commercially – it creates evidence that the franchisor is not exercising adequate quality control. The franchisee who ignores brand standards is not just a problem franchisee – they are a potential exhibit in a trademark abandonment case. Every franchisor should understand that when they look the other way on non-compliance because they don’t want to have the difficult discussion, they are not just making a business judgment – they are making a legal one, and it is not a good one.

The FTC Franchise Rule: The Same Obligation, Confirmed

The Lanham Act does not operate alone. In 1978, Congress empowered the Federal Trade Commission to adopt the FTC Franchise Rule, most recently revised in 2007 (16 C.F.R. Part 436), which established the federal disclosure framework governing franchise sales. The Rule defines a franchise, in relevant part, as a commercial relationship in which:

“The franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation.” 16 C.F.R. § 436.1(h)(2).

The alignment between the Lanham Act and the FTC Rule is intentional and important. Just as the Lanham Act requires quality control to preserve the trademark, the FTC Rule defines the franchise relationship – in part – by the existence of that same control. The two frameworks are mutually reinforcing: quality control is both the legal foundation of the trademark license, and the defining characteristic of the franchise relationship itself. A relationship in which the franchisor has neither meaningful control nor provides meaningful assistance may fail to meet the FTC’s definition of a franchise — and will almost certainly fail its Lanham Act obligations.

The FTC Rule’s exclusions are equally instructive. Health and safety restrictions required by law, and the right of inspection, are specifically identified as things that do not constitute significant control. The FTC’s position is that a franchisor’s inspections are snapshots in time, and the franchisor’s quality control relates to brand standards, not the day-to-day employment decisions and operational management of the franchisee’s independently owned business. That distinction matters enormously.

What the Law Requires — and What Good Franchise Systems Actually Do

The Lanham Act does not prescribe a specific methodology for quality control. Courts look at the totality of a franchisor’s oversight activity and ask a simple question – is this a system with brand standards and genuine quality control, or is it one where the franchisor has licensed the mark and walked away? The mechanisms that answer that question affirmatively include:

• A franchise agreement that establishes brand standards. The agreement must expressly give the franchisor the right to set, modify, and enforce brand standards; to inspect operations; to approve products, suppliers, and marketing; to incorporate the Brand Standards Manual by reference; and to have the contractual right to terminate the license – should there be non-compliance. Without these provisions, the franchisor cannot demonstrate the right to control that the Lanham Act requires.
• Actual, documented exercise of that control. Having brand standards and the contractual right to control is not enough. Franchisors must document that they have actual oversight activity through field consultant reports and remediation correspondence for example. These records are the difference, in franchise litigation, between a franchisor who can demonstrate Lanham Act compliance and one who cannot.
• A Brand Standards Manual that is current. The Brand Standards Manual is the primary vehicle for communicating brand standards throughout the system. It needs to be regularly updated. A manual library that has not been revised in years is not evidence of brand standards and quality control. Courts will actually treat it as evidence of the absence of those things.
• A properly resourced field support program. Well-structured field consultant programs serve dual purposes – they fulfill the Lanham Act’s quality control requirement, and they are the primary vehicle of franchise relationship management. The field consultant is simultaneously a business advisor, the face of the franchisor to the franchisee network, and the person who verifies compliance to brand standards. Franchise systems that underinvest in field support are not just weakening their franchisee relationships – they are undermining their trademark position.
• Consistent enforcement across the system. Selective enforcement – applying standards rigorously to some franchisees while overlooking identical non-compliance in others – is not just a relationship management problem, it can also be a legal one because it weakens the argument that the standards constitute genuine quality control. If that occurs, it can create exposure that compliant franchisees should not have to bear.

Dealers and Traditional Franchising

The Lanham Act’s quality control obligation applies wherever a trademark is licensed – not only in business format franchising. Traditional or product franchising, which predates the modern franchise model, encompasses automobile dealers, beverage distributors, farm equipment dealers, gasoline retailers, and similar arrangements in which a manufacturer licenses its mark to a dealer network for product distribution and the dealer generally has pre-sale and post-sale obligations related to the product. The same naked licensing risk applies to every one of those relationships.

A manufacturer that licenses its trademark to dealers and fails to exercise quality control over how those dealers represent the brand and its products faces the same risk of trademark abandonment as a franchisor who ignores its franchisees. The legal obligation follows the trademark, not the commercial structure. Dealer agreements have historically been less comprehensive in specifying quality control mechanisms than modern franchise agreements, and that gap has produced its own body of litigation. The discipline of brand standard enforcement is not a franchise-specific practice. It is a trademark law imperative.

The Paradox: Brand Control Versus Employment Control

Here is where the Lanham Act intersects with the most significant legal challenge in contemporary franchising: the joint employer and vicarious liability question. This paradox is at the heart of modern franchise litigation, and every franchisor must navigate it with precision.

The more control a franchisor exercises over franchisee operations, the stronger its trademark position under the Lanham Act. But if that control extends into employment practices – how franchisees hire, schedule, discipline, or terminate their workers – the franchisor risks being found a joint employer under the National Labor Relations Act, the Fair Labor Standards Act, or applicable state law. This is one of the reasons that the IFA’s efforts to have the American Franchise Act passed by Congress and signed into law is so important, and why all of us in franchising need to get behind that effort.

In vicarious liability cases, plaintiffs’ counsel routinely attempt to use evidence of brand standard enforcement as proof of the operational control that would make the franchisor responsible for a franchisee’s employee conduct. The Lanham Act compliance record that protects the trademark is the same record plaintiffs seek to repurpose as evidence of control.

The resolution is a clean, documented, consistently observed distinction between two fundamentally different categories of control:

• Brand standard control — the franchisor’s direction of what the brand represents, what products and services are delivered, and how the customer experience is defined — is required by the Lanham Act and is the essence of the franchise license.
• Employment control — the day-to-day decisions about staffing, scheduling, wage rates, discipline, and termination — belongs exclusively to the franchisee as the independent employer of record.

The franchise system’s core documents — the franchise agreement and Brand Standards Manual — must make this distinction explicit, and the entire organization must honor it in practice. Franchisor field consultants and training staff must be trained to operate firmly within the brand-standard domain. A field consultant who weighs in on how a franchisee should schedule its employees, or who expresses an opinion about a particular employee’s performance, is not providing brand support. That consultant is creating liability exposure for the franchisor. These two functions are not different in degree. They are categorically different in kind — and the franchise system’s legal architecture, its operational practices, and its training culture must all reflect that difference.

The Foundation Is Not Optional

The brand is the franchise system’s greatest strength because it transfers trust at scale – allowing independent operators to open their doors on day one with customers already predisposed to walk through them. And the brand is also the system’s greatest vulnerability because that trust is collective – every franchisee depends on every other franchisee to keep a promise they did not personally make to the other. One location that fails the customer does not just lose that customer – it withdraws from the shared account that every other franchisee in the system helped build.

The Lanham Act is the legal framework that holds all of this together. It is why brand standards are not just a preference, but a legal obligation. It is why quality controls are not optional and why the Brand Standards Manual, the work of field consultants, the supply chain requirements and restrictions, and the enforcement mechanisms in the franchise agreement are not simply contractual rights and obligations but the legal scaffolding upon which ownership of the trademark – and everything built on top of it – depends.

Modern franchising exists because the Lanham Act created a legal framework within which a brand can be safely licensed at scale. Franchise executives who understand this build better systems – systems that protect their marks, support their franchisees, and honor the promise their brand has made to every customer who walks through the door. Those who do not understand it, or who treat brand standards as negotiable depending on the franchisee or the circumstance, are not just running a weaker business – they are eroding the legal basis for the license that makes their business a franchise at all. The Lanham Act is not optional, and branding is not decoration. Franchising – when done right – is the proof of what happens when both are taken seriously.

MSA works regularly with our clients to strengthen the performance of their systems and the execution of their brand standards throughout their network. Because of our litigation support practice and our work as experts in complex litigation, we are also uniquely qualified to help our clients navigate through the high grass of brand standards vs. controls and the liability under joint employment and vicarious liability. Give us a call if we can be of assistance to you.

Michael Seid is Managing Director of MSA Worldwide. You can reach him at mseid@msaworldwide.comor 860-523-4257.