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Certification Programs: Franchises or Not? Rochelle B. Spandorf, Jennifer L. Brockett, and Anna R. Buono Ideas for Franchise Law Journal articles are often sparked by an important case or an author’s recent experience. This article hatched from an inquiry posted on the ABA Franchise Forum’s LISTSERV seeking guidance about “Zumba, CrossFit, and similarly structured fitness programs” that claim to be training and certification programs, not franchises. The inquiry sparked a flurry of comments revealing considerable confusion about what, if anything, differentiates a non-franchise certifica- tion program from a franchise. Independent testing and certification programs have long been an important tool for establishing consumer confidence. A stroll down any grocery store aisle reveals dozens of private certification programs, from relatively new “Non-GMO Project Verified” eco-certifications to venerable “Certified Kosher” seals. The Idaho Potato Commission certifies potatoes grown in Idaho, and the California Milk Advisory Board certifies California- produced dairy products. Many, if not most, consumer goods bear some type of private or government-issued certification mark, from “Certified Gluten Free” to “Made in USA” to recyclable or compostable symbols on product packaging. Certification programs can be found in any industry. Organizations like Good House- keeping and Consumer Reports rate and certify products and appliances; the Better Business Bureau rates and cer- tifies businesses; and AAA, Michelin, and many others rate and certify hotels and restaurants. Numerous man- ufacturers from Microsoft to BMW offer third-party Ms. Spandorf Ms. Brockett Ms. Buono Rochelle B. Spandorf (rochellespandorf @dwt.com) is a partner in the Los Angeles office of Davis Wright Tremaine, where she heads the firm’s franchise practice. Jennifer L. Brockett ( [email protected]) is also a partner in the firm’s Los Angeles office and focuses her prac- tice on franchise and hospitality industry litigation. Anna R. Buono ([email protected]) is an associate in the Los Angeles office of Davis Wright Tremaine and also focuses her practice on lit- igation. Special thanks to Sheila Fox Morrison, a partner in the Portland office at Davis Wright Tremaine LLP, who practices intellectual property law. Additional appreciation goes to FTC Rule Coordinator Craig Tregillus, who provided historical insight in the preparation of this article. 505
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Page 1: Certification Programs: Franchises or Not? · programs, not franchises. The inquiry sparked a flurry of comments revealing considerable confusion about what, if anything, differentiates

Certification Programs: Franchises or Not?

Rochelle B. Spandorf, Jennifer L. Brockett, and Anna R. Buono

Ideas for Franchise Law Journal articles are often sparkedby an important case or an author’s recent experience.This article hatched from an inquiry posted on theABA Franchise Forum’s LISTSERV seeking guidanceabout “Zumba, CrossFit, and similarly structured fitnessprograms” that claim to be training and certificationprograms, not franchises. The inquiry sparked a flurryof comments revealing considerable confusion aboutwhat, if anything, differentiates a non-franchise certifica-tion program from a franchise.

Independent testing and certification programs havelong been an important tool for establishing consumerconfidence. A stroll down any grocery store aisle revealsdozens of private certification programs, from relativelynew “Non-GMO Project Verified” eco-certifications tovenerable “Certified Kosher” seals. The Idaho PotatoCommission certifies potatoes grown in Idaho, and theCalifornia Milk Advisory Board certifies California-produced dairy products. Many, if not most, consumergoods bear some type of private or government-issuedcertification mark, from “Certified Gluten Free” to“Made in USA” to recyclable or compostable symbolson product packaging. Certification programs can befound in any industry. Organizations like Good House-keeping and Consumer Reports rate and certify productsand appliances; the Better Business Bureau rates and cer-tifies businesses; and AAA, Michelin, and many othersrate and certify hotels and restaurants. Numerous man-ufacturers from Microsoft to BMW offer third-party

Ms. Spandorf

Ms. Brockett

Ms. Buono

Rochelle B. Spandorf ([email protected]) is a partner in the Los Angeles office ofDavis Wright Tremaine, where she heads the firm’s franchise practice. Jennifer L. Brockett( [email protected]) is also a partner in the firm’s Los Angeles office and focuses her prac-tice on franchise and hospitality industry litigation. Anna R. Buono ([email protected]) is anassociate in the Los Angeles office of Davis Wright Tremaine and also focuses her practice on lit-igation. Special thanks to Sheila Fox Morrison, a partner in the Portland office at Davis WrightTremaine LLP, who practices intellectual property law. Additional appreciation goes to FTC RuleCoordinator Craig Tregillus, who provided historical insight in the preparation of this article.

505

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certified repair programs for their products. Although some certification pro-grams are organized as not-for-profits with certification as their only pur-pose, others operate as for-profit, multibrand ventures offering certificationservices as just one of many functions.1

When the Federal Trade Commission (FTC) promulgated the FranchiseRule in 1979, it excluded “bona fide” certification programs from regulationbut said little about what made a certification program bona fide and entitledto claim that exclusion. In the more than thirty years since then, a body ofauthority has defined the contours of the franchise definition but no casesquarely addresses the exclusion for certification programs. As a result, thereremains a dearth of guidance on what precisely constitutes a bona fide, ornon-franchise, certification program.

To help navigate these largely unchartered waters, we propose an analyt-ical framework based upon the Lanham Act’s definition of a certificationmark, as opposed to a trademark, for identifying bona fide, non-franchisecertification programs. We conclude that the definitional exclusion for cer-tification programs is narrow, and very few, if any promoters, who aim toprofit by licensing so-called certification programs are likely to qualify.

I. Historic Exclusion of Certification Programsfrom the Definition of Franchises

The explosive growth of business format franchising during the 1950sand 1960s, amid recurring reports of abusive sales practices, prompted theFTC to begin examining the franchise industry in 1970.2 By then, well-publicized actions by the Securities and Exchange Commission and the at-torneys general of California and New York, as well as a lawsuit initiatedby disgruntled franchisees, shined light on a variety of fraudulent sellingpractices, from promises of instant success to false claims about profitability,franchisor support, celebrity involvement, and the capital a franchisee wouldneed to invest.3 In 1971, the FTC invoked its rulemaking authority underSection 5 of the FTC Act by publishing a proposed trade regulation ruleto remedy these abuses, specifically seeking comments on the proposed defi-nition of “franchisor” and “the possible need for exceptions or exemptions.”4

1. Despite the dearth of authority discussing certification programs, a certifier’s for-profit ornot-for-profit status should not matter in evaluating if the certification program is a franchise.Arrangements between two not-for-profits can be a franchise. Although the FTC has historicallydeclined to apply its Franchise Rule to not-for-profits, the federal definition of “franchise” isbroad enough to cover not-for-profits. See Gary W. Leydig & Angela Toscas Gordon, GirlScouts of Manitou Council and the Application of Franchise and Dealership Laws to Not-for-Profits,31 FRANCHISE L.J. 187, 198 (2012).2. David Gurnick & Steve Vieux, Case History of the American Business Franchise, 24 OKLA.

CITY U. L. REV. 37, 53 (1999).3. Id. at 53–55.4. 36 Fed. Reg. 21,610 (1971). This was not the federal government’s first effort to regulate

franchising. In 1965, legislation was introduced in Congress to protect all franchisees againstunjust terminations; in 1967, at least twelve bills were introduced to regulate franchisor-franchisee

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The original 1971 version of the proposed franchise rule included no excep-tions or exclusions to the suggested franchise definition.

Following public hearings and a public comment period,5 the FTC pub-lished a revised proposed rule on August 22, 1974, that contained some exclu-sions.6 None of these exclusions, however, addressed certification programs.7

The FTC’s rulemaking proceedings lasted until December 21, 1978,when the FTC published its final version of a proposed trade regulationrule along with a Statement of Basis and Purpose (1978 SBP).8 Accordingto the 1978 SBP, all of the testimony and fact finding considered by theFTC in composing the 1978 proposed final rule was in the public recordon August 22, 1974.9 Although absent from all prior drafts, and despitethe apparent absence of new public input since 1974, the exclusion for cer-tification programs first appeared in the 1978 proposed final rule.10

The 1978 SBP only briefly explained the FTC’s reason for excluding“bona fide” certification programs, stating: “Franchising involves the distri-bution of goods [or services] through selected outlets. In contrast, certifiers(as defined) must offer the use of its trademark to all persons meeting itsstandards and willing to pay its fee.”11

relationships; and during the 91st Congress, from 1969 to 1971, at least one bill was introducedthat would have required franchisors to register their franchise offer in a format similar to theprospectus required by the Securities and Exchange Commission for securities offerings. Gur-nick & Vieux, supra note 3, at 55–56, and accompanying footnotes. None of these proposalswere enacted into law.

5. The FTC recounts the history of the rulemaking process in chapter 1 of the Statement ofBasis and Purpose accompanying the final version of the proposed trade regulation rule. See 43Fed. Reg. 59,622 (1978).

6. 39 Fed. Reg. 30,360 (1974).7. Id.8. Statement of Basis and Purpose Relating to Disclosure Requirements and Prohibitions

Concerning Franchising and Business Opportunity Ventures, 43 Fed. Reg. 59,621 (1978) [here-inafter 1978 SBP]. A delay in proceedings occurred in 1972 when the U.S. District Court for theDistrict of Columbia entered a decision holding that the FTC lacked authority to enact traderegulation rules. Nat’l Petroleum Refiners Ass’n v. FTC, 340 F. Supp. 1343 (D.D.C. 1972).After an appeal reversing that decision and denial of certiorari, the franchise rule proceedingsagain became active.

9. 1978 SBP, 43 Fed. Reg. 59,621.10. There was one more ninety-day public comment period immediately following the Au-

gust 22, 1974, publication of a proposed rule, yet the 1978 SBP indicates that the 1978 proposedfinal rule, which modified the 1974 version, was based on the record existing on August 22,1974. Id. at 59,622 (“These modifications [referring to the 1978 proposed final rule] do notraise issues of law or fact which were not fully addressed in the Commission’s notices of pro-posed rulemaking or fully aired in discussion in the record.”). If the idea for the certification ex-clusion sprang from public statements filed after August 22, 1974, the statements might be con-sidered new issues of fact. If the certification exclusion sprang from evidence collected beforeAugust 22, 1974, why did the 1974 version of the rule omit a certification exclusion? Because,as explained above, there is no discussion in the record of certification programs, we maynever know what motivated the FTC to add the certification exclusion in 1978.11. 1978 SBP, 43 Fed. Reg. at 59,709. In the 1978 SBP, the FTC refers to “certifiers (as de-

fined ). . . .” Id. (emphasis added). However, neither the 1978 SBP, the 1978 proposed final rule,nor the 1979 Franchise Rule includes a definition of certifiers, nor does the 1978 SBP refer toanother source where this definition can be found.

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Exactly what testimony or fact findings collected during the three-year-long public comment period prompted the FTC to add the certificationexclusion to the final proposed rule in 1978 may remain a mystery. Despitethe massive public record collected between 1971 and 1974, which includessome 30,000 pages of testimony based on two weeks of public hearings andwritten statements received during at least two ninety-day public commentperiods,12 the public record is not readily available for examination: it liesin a storage vault and is not text searchable.

Although the discussion in the 1978 SBP of other proposed definitionalexclusions included extensive citations to the public record, its discussionof the newly added certification exclusion included no specific reference toanything in the public record. Nevertheless, the FTC sweepingly concludedin the 1978 SBP that “nothing in the record indicates any abuses in this areato which the rule would be relevant.”13 It can only be surmised that any pub-lic record on the proposal to exclude bona fide certification programs fromthe franchise rule was utterly noncontroversial.14

On October 21, 1979, the franchise trade regulation rule (1979 FranchiseRule) became law.15 The exclusion for bona fide certification programsthat first appeared in the 1978 final rule proposal was adopted withoutmodification.

As adopted, Section 436.2 of the 1979 Franchise Rule excluded four typesof relationships from regulation under that rule: (1) employer-employee orgeneral partnership relationships; (2) relationships created by membershipin a bona fide cooperative association; (3) agreements “for the use of a trade-mark, service mark, trade name, seal, advertising, or other commercial sym-bol designating a person who offers on a general basis, for a fee or otherwise,a bona fide service for the evaluation, testing, or certification of goods, com-modities, or services”; and (4) “single license” relationships.16

Three decades later, when the FTC amended the 1979 Franchise Rule in2007, it intentionally omitted all four definitional exclusions. In its State-ment of Basis and Purpose (2007 SBP) accompanying the 2007 AmendedRule, the FTC took pains to point out that removing the exclusions neither

12. Id.13. Id.14. One may speculate why bona fide certification programs are noncontroversial. The expla-

nation may have to do with the fact that “central to the definition of the term ‘franchise’ is theconcept that the relationship must be both ‘continuing’ and ‘commercial.’ ” Id. at 59,700. A con-tinuing commercial relationship is one that is “entered into with the expectation of profit” andinvolves “a course of dealing over a period of time.” Id. Whether or not a particular certificationprogram qualifies as a continuing commercial relationship has never been directly addressedby the FTC, a court, or any state administrative agency. Given the FTC’s reason discussed inthis article for excluding bona fide certification programs from the franchise definition, it is rea-sonable to conclude that the FTC does not consider these programs to be continuing orcommercial.15. Disclosure Requirements and Prohibitions Concerning Franchising and Business Oppor-

tunity Ventures, 44 Fed. Reg. 49,966 (1979).16. Id. at 49,990 (codified at 16 C.F.R. § 436.2(a)(4)).

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changed the definitional scope of “franchise” nor extended coverage to pre-viously excluded relationships.17 The FTC reasoned the exclusions werewell-established by that point and no longer required express identifica-tion.18 Although the 2007 SBP cites public comments questioning the wis-dom of continuing other definitional exclusions, like the 1978 SBP, it citesno authority or public comments with respect to continuing the exclusionfor certification programs.19

Turning from federal to state regulation, Illinois is the only state whosefranchise law expressly excludes bona fide certification programs from itsdefinition of a franchise via an exclusion included in the Illinois FranchiseDisclosure Act in 1987.20 Ohio, which regulates the sale of business oppor-tunities, not franchises per se, similarly excludes bona fide certification pro-grams from its definition of “business opportunity plan.”21 As with the FTCFranchise Rule, no case law or administrative rulings explicate the scope ofeither state’s certification exclusion.

II. Certification Programs and Marks

When the FTC described its reason for excluding bona fide certificationprograms from federal regulation in the 1978 SBP, it identified three certifi-cation organizations: Underwriters Laboratories (appliances and electronics),Automobile Association of America (hotel ratings), and Good Housekeeping(consumer products).22 These examples help to illuminate what distinguishesa bona fide non-franchise certification program from a franchise.

17. Id.; see also Proposed Franchise Rule, 64 Fed. Reg. 57,294, 57,319–20 (1999) (“The Com-mission believes that these exclusions no longer serve a useful purpose. Although there may havebeen some confusion about the extent of Rule coverage at the time the Commission promul-gated the Franchise Rule nearly twenty years ago, the Commissions believes that such confusiondoes not exist today. Since the Rule went into effect in the 1970s, the franchise community hasbecome very familiar with the Rule’s requirements, including the definition of the term fran-chise. In eliminating the four exemptions [sic], however, the Commission is not signaling a sub-stantive change in Commission policy. Rather, the elimination of the exclusions is simply part ofthe Commission’s general effort to streamline the Rule.”).18. Disclosure Requirements and Prohibitions Concerning Franchising, 72 Fed. Reg. 15,444,

at 15,529–30 (2007).19. 2007 SBP, 72 Fed. Reg. at 15,529–30 (2007). Commentators opposed the removal of the

exclusion for cooperatives, for example, out of concerns that it would lead to litigation over rulecoverage or to the FTC changing its view with regard to cooperatives. The Commission, how-ever, found no evidence of confusion between a franchise and a cooperative in the record andtherefore found no reason to continue expressly stating this exclusion.20. Franchise Disclosure Act of 1987, 815 ILL. COMP. STAT. 705/3(1)(c)(iii) (2013). The Illi-

nois exclusion is identical to the exclusion in the 1979 Franchise Rule.21. OHIO REV. CODE ANN. § 1334.12(C) (West 2012). The Ohio exclusion is substantively

identical to the exclusion in the 1979 Franchise Rule and applies to “[a]n agreement for theuse of a trademark, service mark, trade name, seal, advertising, or other commercial symbol des-ignating a person who offers a bona fide service for the evaluation, testing, or certification ofgoods, commodities, or services.” Id.22. Statement of Basis and Purpose Relating to Disclosure Requirements and Prohibitions

Concerning Franchising and Business Opportunity Ventures, 43 Fed. Reg. 59,621, 59,709(1978); see also 1979 Franchise Rule, 44 Fed. Reg. at 49,968–69 (1979). The entities referencedby the FTC all are private organizations. There also are government-sponsored certification

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Underwriters Laboratories is a not-for-profit corporation founded in 1894,which now describes itself as a globalindependent safety science company thatinnovates safety solutions, including thepublic adoption of electricity to ever-changing breakthroughs in renewableenergy.23 It provides certification, vali-dation, testing, inspection, audits, andeducation; and today the “UL Listed”and “UL Certified” marks can be foundon more than twenty-two billion prod-

ucts ranging from appliances and computer equipment to fire extinguishersand light bulb packaging.24 UL licenses its certification marks to anyonewith qualifying products and has been called the single most accepted certi-fication mark in the United States.25 Both “UL Listed” and “UL Certified”are registered with the U.S. Patent and Trademark Office (USPTO) as cer-tification marks rather than trademarks. UL has separately registered “UL”as a trademark, signifying itself as a source of product testing and relatedservices.26

Founded in 1902, AAA (formerlyknown as the American Automobile As-sociation) is a not-for-profit associationof regional “clubs” throughout Amer-ica.27 AAA offers many services, includ-ing insurance, roadside assistance, andtravel planning.28 It began printing ho-tel guides in 1917 and today describesitself as a resource for lodging ratings.29

Using a “Diamond Rating” system with top-rated hotels receiving the “AAAFive Diamond Award,” AAA offers its hotel-rating service to help consumerstake the “guesswork out of booking a room.”30 To establish ratings, listed

programs, such as the EPA’s voluntary EnergyStar program. See, e.g., Environmental ProtectionAgency, About ENERGY STAR, ENERGY STAR, http://www.energystar.gov/index.cfm?c=about.ab_index (last visited Nov. 15, 2013).23. See About UL, UNDERWRITERS LABORATORIES, http://www.ul.com/global/eng/pages/aboutul

(last visited Nov. 18, 2013).24. Id.25. See, e.g., Midw. Plastic Fabricators Inc. v. Underwriters Labs., Inc., 906 F.2d 1568 (Fed.

Cir. 1990).26. UL, Registration No. 4201014.27. AAA, AAA Fact Sheet, http://newsroom.aaa.com/about-aaa/aaa-fact-sheet-2/ (last visited

Feb. 6, 2014).28. Id.29. Dictionary of American History, American Automobile Association, available at http://www.

encyclopedia.com/topic/American_Automobile_Association.aspx#1-1G2:3401800150-full (2003).30. AAA, AAA-Approved Hotels, http://travel.aaa.com/approved-lodging.htm (last visited

Nov. 19, 2013).

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properties undergo unannounced evaluation testing in at least thirty-threeessential requirements.31 AAA similarly rates restaurants, campgrounds, andattractions.32 The “AAA Four Diamond Award” and “AAA Five DiamondAward” marks are separately registered certification marks.33

Since 1909, the Good HousekeepingResearch Institute has awarded the“Good Housekeeping Seal” on testedproducts that meet its requirements.34

As a condition of certification, compa-nies must offer consumers a limitedtwo-year warranty on seal-bearing prod-ucts.35 On average, 5,000 products an-

nually bear the Good Housekeeping Seal.36 Although Hearst Corporationowns both the Good Housekeeping Seal certification program and GoodHousekeeping® magazine, it has registered and licensed the Good House-keeping Seal as a certification mark while also registering “Good House-keeping” as an ordinary trademark for the company’s magazine.37

Common to all three organizations are the following:38

1. Each owns one or more marks that it has formally registered as a cer-tification mark with the USPTO.39

31. See AAA, AAA Inspections, http://newsroom.aaa.com/diamond-ratings/aaa-inspections/(last visited Nov. 15, 2013).32. Id.33. AAA FIVE DIAMONDAWARD, Registration No. 2,387,719; AAA FOURDIAMOND

AWARD, Registration No. 2,563,673.34. See Good Housekeeping, Welcome to the Good Housekeeping Seal, http://www.goodhouse

keeping.com/product-reviews/history/welcome-gh-seal (last visited Nov. 15, 2013).35. Good Housekeeping, About the Good Housekeeping Seal, http://www.goodhousekeeping.

com/product-reviews/history/about-good-housekeeping-seal (last visited Nov. 25, 2013).36. Walter Nicholls, Surviving the Test of Time: At Good Housekeeping, A Modern Makeover and

Old-Fashioned Appeal, WASH. POST, Jan. 2, 2008, at F01, available at http://www.washingtonpost.com/wp-dyn/content/article/2008/01/01/AR2008010100642.html?sid=ST2008010100965.37. Although a certification mark may not be used on products or services by the owner of the

mark, the owner can and often does have related brand marks that are not part of its certificationprogram. See T.M.E.P. § 1306.04 (Oct. 2013) (“Certification is often the sole activity for theowner of a certification mark. However, a person is not necessarily precluded from owning a cer-tification mark because he or she also engages in other activities, including the sale of goods or theperformance of services. However, the certification mark may not be the same mark that the per-son uses as a trademark or service mark on goods or services. See TMEP § 1306.05(a).”), availableat http://tmep.uspto.gov/RDMS/detail/manual/TMEP/Oct2013/TMEP-1300d1e1.xml.38. Two of these entities (UL and Good Housekeeping) also share in common a long rela-

tionship with FTC enforcement relating to use of their marks for certification purposes. See,e.g., In the Matter of Frank C. Huntington, F.T.C. Docket No. 3683 (Mar. 14, 1939) (UL);In re Hearst Magazine, 32 F.T.C. 1440 (1941) (Good Housekeeping). The FTC’s experiencewith these certification marks may explain why the FTC specifically identified these marks whendescribing the exclusion from the definition of a franchise.39. See, e.g., GOODHOUSEKEEPING PROMISES LIMITED WARRANTY TO CON-

SUMERS REPLACEMENT OR REFUND IF DEFECTIVE, Registration No. 3,675,765;GOOD HOUSEKEEPING PROMISES LIMITED WARRENTY TO CONSUMERS RE-PLACEMENT OR REFUND IF DEFFECTIVE, Registration No. 3,675,760; LIMITEDWARRANTY TO CONSUMERS · GOOD · HOUSEKEEPING SINCE 1909 REPLACE-

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2. Each may own other marks containing elements identical or similar tothe registered certification marks but the organization uses these othermarks for purposes that are separate from its certification program.40

3. Each licenses its certification marks exclusively to third parties to certifythe quality of the third party’s goods or services and does not use itscertification marks in a manner to signify itself as a source of its owngoods or services.41

4. Each licenses its certification marks to any party that meets its require-ments and pays its testing and licensing fees and does not discriminatebetween manufacturers or service providers.42

These core features are the touchstone of a bona fide non-franchise cer-tification program. A licensor that purports to offer a certification programlacking these defining characteristics runs the risk of being found to be afranchisor.

III. Distinguishing Certification Marks from Trademarks

The essential distinction between the three certification programs identi-fied in the 1978 SBP and a typical franchise license lies in the function of thelicensed mark. “UL Certified,” “Good Housekeeping Seal,” and “AAA FiveDiamond Award” marks do not function like ordinary trademarks. Althoughcertification marks and trademarks both serve to distinguish goods andservices, a certification mark “is a special creature created for a purposeuniquely different from that of an ordinary service mark or trademark. . . .”43

Traditional trademarks or service marks identify a particular source of aproduct or service, enabling consumers to differentiate between competitorsand make purchasing decisions.44 A trademark is a word, phrase, symbol,and/or design that identifies and distinguishes the source of the goods of oneparty from those of others, while a service mark identifies and distinguishesthe source of a service rather than goods.45

MENT OR REFUND IF DEFECTIVE, Registration No. 3,770,704; UL, RegistrationNo. 2,391,140; UNDERWRITERS’ LABORATORIES, INC. LISTED, Registration No.0,654,922; UL, Registration No. 3,934,920; AAA FOUR DIAMOND AWARD, RegistrationNo. 2,563,673; AAA APPROVED, Registration No. 3,260,840; AAA APPROVED AUTO RE-PAIR, Registration No. 3,426,468.40. T.M.E.P. § 1306.04 (Oct. 2013).41. Id.42. See, e.g., Underwriters Laboratories, Certification, http://www.ul.com/global/eng/pages/

solutions/services/certification/ (last visited Nov. 15, 2013); AAA, AAA Diamonds—for Easy, Re-liable Hotel Selection, http://www.aaa.com/aaa/common/Tourbook/diamonds/whatisthis.html(last visited Nov. 15, 2013); Good Housekeeping, Good Housekeeping Seal: Frequently Asked Ques-tions, http://www.goodhousekeeping.com/product-reviews/history/good-housekeeping-seal-faqs(last visited Nov. 15, 2013).43. In re Florida Citrus Comm’n, 160 U.S.P.Q. 495, 499 (T.T.A.B. 1968).44. Qualitex Co. v. Jacobson Prods. Co., 514 U.S. 159, 163–64 (1995).45. 15 U.S.C. § 1127 (2006).

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By contrast, certification marks signify a particular characteristic of goodsor services, not a proprietary source.46 A certification mark is

any word, name, symbol, or device, or any combination thereof—(1) used by aperson other than its owner, or (2) which its owner has a bona fide intention to per-mit a person other than the owner to use in commerce and files an application toregister on the principal register established by this chapter, to certify regionalor other origin, material, mode of manufacture, quality, accuracy, or other char-acteristics of such person’s goods or services or that the work or labor on thegoods or services was performed by members of a union or other organization.47

Certification marks and traditional trademarks advance different publicpolicies.48 Although certification marks and trademarks both operate to re-duce consumer confusion and aid purchasing decisions, unlike trademarks,certification marks protect the “public interest in free and open competitionamong producers and distributors of the certified product.”49

There are two other critical differences between certification marks andtrademarks. First, under the Lanham Act definition, a true certificationmark “may not be used, in the trademark sense of ‘used,’ by the owner ofthe mark; it may be used only by a person or persons other than the ownerof the mark.”50 In other words, the owner of the mark does not—andcannot—apply the certification mark to its own goods or services.51 Instead,the certification mark owner must authorize others to apply the mark totheir qualifying goods and services. Thus, unlike a trademark or servicemark that indicates a specific commercial or proprietary source, a certifica-tion mark is used on the goods or services of many different producers.For example, only a certification mark establishes “a registered propertyright in a geographical indication,” such as geographically defined appella-tions used for wine-making regions: “Champagne” is a certification marksignifying any brand of sparkling wine grown in Northeastern France; bycontrast, “Moet & Chandon” is a trademark indicating a particular sourceof Champagne.52

46. TRADEMARK MANUAL OF EXAMINING PROCEDURE, supra note 38, § 1306.01(b); see also Mar-tin Schulz, Why Different “Marks” in the Lanham Act?, 12 J. CONTEMP. LEGAL ISSUES 39 (2000).47. 15 U.S.C. § 1127 (2006) (emphasis added).48. Idaho Potato Comm’n v. M&M Produce Farms & Sales, 335 F.3d 130, 138 (2d Cir.

2003).49. Id.50. TRADEMARK MANUAL OF EXAMINING PROCEDURE, supra note 38, § 1306.01(a) (emphasis

added).51. The owner of the mark can, however, use “its certification mark in advertising or promot-

ing recognition of the certification program or of the goods or services meeting the certificationstandards of the registrant.” 15 U.S.C. § 1064 (2006). “[S]o long as the registrant does not itselfproduce, manufacture, or sell any of the certified goods or services to which its identical certi-fication mark is applied,” the mark is not subject to cancellation on the basis of using the markfor promoting the certification program. Id.52. Milo G. Coerper, Certification Marks as a Means of Protecting Wine Appellations in the United

States, 16 INTELL. PROP. L. NEWSL. 24 (ABA Sec. Intell. Prop. L., Spring 1998).

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Second, a certification mark must be licensed to any and all who qualify.As the Ninth Circuit explained in Idaho Potato Commission v. G&T TerminalPackaging, Inc.,

[t]rademark owners have a monopoly over their marks, which they can license asthey see fit as long as such licensing does not cause public confusion. A certifica-tion mark, on the other hand, is a mark used by someone other than its owner tosignify that a product or service has a certain characteristic. The certification markowner is required to license the mark to anyone who meets the certificationcriteria.53

The FTC drew the same distinction when it explained why it excludedbona fide certification programs from franchise regulation in the 1978 SBP:“Franchising involves the distribution of goods through selected outlets. In con-trast, certifiers (as defined) must offer the use of its trademark to all personsmeeting its standards and willing to pay its fee.”54

Certification marks also are subject to a more onerous registration processunder the Lanham Act than ordinary trademarks. Although the USPTO usesthe same standards to determine the registrability of certification marks andordinary trademarks (i.e., distinctiveness), it will refuse to register a mark as acertification mark if it does not perform valid certification functions to sig-nify particular qualities or attributes of goods or services.55 In addition to thesupporting documents required to prosecute an ordinary trademark applica-tion, a certification mark applicant must (1) supply a copy of the standardsused to determine applicability of the certification mark; (2) assert an exer-cise or an intent to exercise legitimate control over the use of the certifica-tion mark in commerce; (3) specify the conditions under which the certifica-tion mark is or will be used; and (4) allege that the applicant is not or will notbe engaged in the production or marketing of the goods or services to whichthe mark is applied.56 Once registered, unlike trademarks, certification marksdo not become incontestable over time and instead always remain subject tocancellation if use deviates from the Lanham Act’s prescriptions.57

Because of the additional hurdles to register a certification mark, somemarks that are used for valid certification purposes may be registered onlyas trademarks. Alternatively, some legitimate certification marks may not befederally registered at all.

Registration of a mark as a certification mark may not insulate a certifica-tion program from further scrutiny as a franchise any more than the failureto register a mark as a certification mark proves a particular certification pro-gram is a franchise. But the additional hurdles entailed in the certificationregistration process and the fact that a certification registration can always

53. 425 F.3d 708, 715 (9th Cir. 2005) (citations omitted).54. 43 Fed. Reg. 59,622, 59,709 (1978) (emphasis added).55. See TRADEMARK MANUAL OF EXAMINING PROCEDURE, supra note 38, § 1306.06.56. 37 C.F.R. § 2.45 (2013); TRADEMARK MANUAL OF EXAMINING PROCEDURE, supra note 38,

§ 1306.06(f ).57. 15 U.S.C. § 1064(5) (2006).

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be canceled would suggest that those who license registered certification marksare committed to seeing that their marks appropriately function as certifica-tion marks in the marketplace.58 Thus, certification mark registration maybe a helpful fact in convincing a court or franchise agency to recognize thebona fides of a certification program.

Nevertheless, the FTC could have limited the exclusion for bona fide cer-tification programs in the 1979 Franchise Rule to those involving a federallyregistered certification mark but chose not to do so. Therefore, in order for acertification program to fit within the definitional exclusion, what apparentlymatters to the FTC is not that the certification program involves a license touse a federally registered certification mark but that it involves a license touse a mark for valid certification purposes only in a way that would entitlethe certifier to a certification registration if the certifier chose to apply forregistration. In other words, the characteristics of the use of the mark andwhether the mark could be registered as a certification mark should be theprimary analysis for whether a mark falls within the exception.

IV. Accidental Franchises

As discussed above, if a promoter complies with the Lanham Act’s re-quirements for a certification mark (whether or not it registers the mark asa certification mark), its certification licensing program should not be treatedas a franchise. Even if the 1979 FTC Rule did not expressly exclude certifi-cation programs from the franchise definition, a true certification mark, asdefined by the Lanham Act, cannot result in substantial association with the li-censor’s trademark or in a license to use the certifier’s mark for trademarkpurposes because a certification mark does not signify the proprietary originof the goods or services.

Merely calling a licensing program a “certification” program, however,will not remove it from franchise regulation.59 For this reason, some self-described “certification” programs are likely inadvertent franchises. We il-lustrate this point with three fitness certification programs, contrasting thePilates Method Alliance’s “PMA® Certified Pilates Teacher” program withthe certified instructor programs offered by Zumba and CrossFit, accordingto information found on each program sponsor’s website.

58. Registration of a certification mark, however, does not provide an automatic safe harborfrom the Franchise Rule. The FTC could have created a safe harbor but did not. The same con-duct that could give rise to a petition to cancel a certification mark also would exhibit evidencethat a certification program is acting outside the scope intended by the 1979 Franchise Ruleexclusion.59. For in-depth discussions of accidental franchises, see Rochelle B. Spandorf & Mark A.

Kirsch, The Accidental Franchise, in ABA 24TH ANNUAL FORUM ON FRANCHISING, at W3 (2001);Mark H. Miller, Unintentional Franchising, 36 ST. MARY’S L.J. 301 (2005); Rochelle B. Spandorf,Structuring Licenses to Avoid the Inadvertent Franchise, 2 LANDSLIDE 35 (Mar./Apr. 2010); Daniel J.Oates, Shannon L. McCarthy & Douglas C. Berry, Substantial Association with a Trademark:A Trap for the Unwary, 32 FRANCHISE L.J. 130 (Winter 2013).

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“Certified Pilates Teacher” is a certi-fication granted by the not-for-profit Pi-lates Method Alliance (PMA).60 PMA’sapplication to register “Certified PilatesTeacher” as a certification mark is pend-

ing and claims to certify “that the user has successfully met the certifier’sstandards of skill and knowledge to achieve the status of a Certified PilatesTeacher.”61 PMA awards its certification to any instructor who meets its el-igibility requirements (completion of a minimum number of hours of Pilatestraining or employment as a Pilates instructor fulfilled elsewhere than throughPMA), passes a written test, and pays an application fee.62 Certification entitlesinstructors to be listed on PMA’s website through a locator function and iden-tify themselves as a “PMA® Certified Pilates Teacher” in their own marketingmaterials.63 Certified instructors must apply for recertification every two yearsby meeting equivalent eligibility requirements.64 Some Pilates studios requirePMA® certification as a condition of employment.65

Zumba Fitness, LLC has registered“Zumba,” “Zumba Fitness,” and relatedmarks as ordinary trademarks for educa-tional services, clothing, vitamin supple-ments, publications, and other productsand services related to Zumba’s exerciseprogram, not as certification marks.66

Zumba’s website describes Zumba as“the World’s Leading Branded FitnessProgram.”67 Zumba offers differenttypes of Zumba classes through licensedZumba instructors, plus “DVD work-outs, original music collections, appareland footwear, video games, interactive

Fitness-Concert™ events, a quarterly lifestyle magazine and more.”68 Certifi-cation as a Zumba instructor involves completing a class offered by Zumba

60. Get PMA Certified!, PILATES METHOD ALLIANCE, http://www.pilatesmethodalliance.org/i4a/pages/index.cfm?pageid=3300 (last visited Nov. 25, 2013).61. U.S. Trademark Application Serial No. 86,070,468 (filed Sept. 20, 2013).62. PILATES METHOD ALLIANCE, http://www.pilatesmethodalliance.org (last visited Nov. 15,

2013).63. Id.64. Id.65. Id.66. See, e.g., ZUMBA, Registration No. 3,984,390; ZUMBA, Registration No. 3,244,094;

ZUMBA, Registration No. 4,035,440; ZUMBA, Registration No. 3,851,238; ZUMBA, Regis-tration No. 3,717,909; ZUMBA FITNESS, Registration No. 4,059,419; ZUMBA FITNESS,Registration No. 4,059,416; ZUMBA FITNESS, Registration No. 3,452,926; ZUMBA FIT-NESS, Registration No. 3,452,872; ZUMBA FITNESS, Registration No. 3,435,705.67. ZUMBA FITNESS, http://www.zumba.com (last visited Nov. 15, 2013).68. Id.

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Fitness, LLC.69 Although there is no particular written or practical test forobtaining Zumba certification, Zumba refers students having “major difficul-ties” with Zumba’s trainer program to a “Zumba® Educational Specialist” toevaluate “if teaching Zumba® classes is a good choice for him or her.”70 Aperson who completes Zumba® instructor training receives an instructorcertificate valid for one year and renewable by completing additional Zumba®classes or joining the Zumba® Instructor Network, or ZIN™, for whichZumba charges $30 per month.71 Zumba describes ZIN™ as “an investmentin your career as a Zumba® Instructor” that “more than pays for itself !”72

ZIN™ members receive additional support services, including choreographyand music updates and free printable marketing materials.73 Zumba Fitness’swebsite also includes a certified instructor locator.74

“CrossFit” describes itself as “a fit-ness regimen” and certifies instructorsin its fitness discipline.75 To earn a cer-

tified CrossFit trainer designation, candidates must complete a CrossFitcourse, pass a written multiple-choice test, and pay a fee, which entitlesthem to be identified on CrossFit’s website locator and promote themselvesas CrossFit certified trainers but forbids the use of CrossFit in their businessname.76 Certified CrossFit trainers may apply to become “CrossFit affili-ates,” which allows them to license the “CrossFit” mark for $3,000 per yearand use “CrossFit” in a business name, such as “CrossFit West End.”77 Cross-Fit affiliates must carry minimum insurance, link their website to the licensor’sblog, adhere to the CrossFit philosophy, and use CrossFit’s training methods;but there are no particular trade dress requirements for affiliate-owned gyms,and affiliates may set their own rates.78 CrossFit offers affiliates optional loca-tion selection and marketing support services.79 CrossFit’s website states thatits programs are not franchises, describing CrossFit instead as “a confedera-tion of legitimate fitness practitioners pooling reliable resources.”80 CrossFithas registered its marks as trademarks (for CrossFit-branded goods) and ser-vice marks (for educational and entertainment services) but not as certificationmarks.81

69. Id.70. Id.71. Id.72. Id.73. Id.74. Id.75. CROSSFIT, http://www.crossfit.com (last visited Nov. 15, 2013).76. Id.77. Id.78. Id.79. Id.80. Id.81. See, e.g., CROSSFIT, Registration No. 3,007,458; CROSSFIT, Registration No. 3,826,111;

CROSSFIT, Registration No. 4,122,681.

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The PMA certification program operates in a markedly different mannerthan Zumba and CrossFit in virtually every respect relevant to the LanhamAct’s definition of a certification mark, which, in turn, influences the evalu-ation of each program’s potential status as an inadvertent franchise.82

As noted, very few cases and administrative opinions have examined if a self-described certification program is a franchise, and none directly address theFTCexclusion.The handful of cases that do address certification or certification-like programs arise under different state laws and turn on their own facts.

In virtually all states, a licensing program’s status as a franchise dependson the coexistence of three core elements: (1) a trademark license or substan-tial association with another’s trademark; (2) the licensor’s significant assis-tance to, or control over, the licensee’s business, which may take the form ofa prescribed marketing plan or a community of interest; and (3) payment of arequired franchise fee to the licensor.83 If a licensing program satisfies thegoverning statute’s definition of a franchise and does not qualify for a statu-tory exemption or exclusion, the licensor’s promotion of the license as a“certification program” is irrelevant.

Although the consequences of being deemed an inadvertent franchise varyby jurisdiction, at a minimum, the licensor may face the unexpected require-ment that its licensees be allowed to rescind their licensing arrangement andthe licensor repurchase any inventory bought from the licensor or its affili-ate. The licensor may be liable for other damages, including, in certainstates, punitive or treble damages if the franchise finding arises in the contextof a wrongful termination dispute.84 In some states, it is a felony to violatefederal and state franchise sales laws.85 Furthermore, the licensors’ directors,officers, and key management may be jointly and severally liable with thefranchisor for damages and fines.86

82. Because it is entirely possible that the PMA, Zumba, and Crossfit certification programsoperate differently in practice than their websites describe them, we reach no conclusion as towhether each is a bona fide non-franchise certification program or a franchise.83. For a general discussion of the typical elements of a franchise, see Spandorf, supra note 60.

A number of excellent articles explore features of these elements. See Oates, McCarthy & Berry,supra note 60; Joseph J. Fittante, Jr., “Community of Interest”: Clarity or Confusion?, 22 FRANCHISE

L.J. 160 (2003); John R. F. Baer, David A. Beyer & Scott P. Weber, When Are Sales Representa-tives Also Franchisees?, 27 FRANCHISE L.J. 151 (2008). In addition, some state definitions includeexceptions that may be relevant to certain certification action programs (such as the “fractionalfranchise” exception) that are outside the scope of this article.84. See Spandorf, supra note 60; see also Puerto Rico Dealers’ Contracts Act, P.R. LAWS ANN.

tit. 10, § 278a1 (2013) (violation of Puerto Rico Dealers’ Contracts Act due to termination of a“dealer contract” without “just cause” is treated as a tort and therefore gives rise to potentialrecovery of punitive damages as well as damages for lost goodwill, which the statute sets as aminimum of five times the average annual profit during the prior five years or fewer yearsthat the dealer was in business); DEL. CODE ANN. tit. 6, § 2553 (Michie 1975) (an “unjust” ter-mination of a franchise in violation of Delaware Franchise Security Law gives rise to potentialdamages that include loss of goodwill and lost profits, which the statute presumes “to be no lessthan 5 times the profit obtained by the franchised distributor, by virtue of the terminated fran-chise, in the most recently completed fiscal year . . .”).85. See, e.g., CAL. CORP. CODE §§ 31410–11.86. See, e.g., CAL. CORP. CODE §§ 31300–02.

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A. “Trademark” Element

Depending on the jurisdiction, the trademark element either requires asimple “license to use” another’s trademark or a “substantial association” be-tween the licensee’s business and the licensor’s trademark.87 Where a “licenseto use” is required, an express or implied right to use the licensor’s trademarkwill suffice, as is the case where a significant amount of a distributor’s businesscomes from selling a particular supplier’s branded products.88 The majority ofstates and the federal Franchise Rule follow the “substantial association” ap-proach.89 In practice, “substantial association” typically requires no more thanthe right to use another’s brand coupled with actual use.90

The trademark element of a franchise serves a “branding” function, teth-ering the licensee to the licensor and a network of licensed businesses. Nico-losi Distributing, Inc. v. BMW of North America,91 although not a franchisestatus case, addressed the branding function of BMW’s Certified CollisionRepair Center (CCRC) program in analyzing if BMW could lawfully re-quire its CCRCs to use only BMW paint on a BMW automobile. NDI, acompeting paint distributor, challenged this practice as an unlawful tyingarrangement.92

Nicolosi ruled that BMW’s certification program was like a franchise andthe sale of the BMW-branded paint a legitimate part of BMW’s franchisesystem rather than an unlawful tying arrangement. The court explained:

Franchises, almost by definition, necessarily consist of “bundled” and relatedproducts or services which are not separate products. Where the challenged aggre-gation is an essential ingredient of the franchised system’s formula for success,there is but a single product and no tie in exists as a matter of law.93

87. Out of twenty-seven jurisdictions that regulate franchising, fifteen contain some sort of“substantial association” requirement. See Oates, McCarthy & Berry, supra note 60, at 130 n.6.88. Id. at 130.89. Id.90. Id. at 130–31. In California, for example, “substantial association” is required, yet deci-

sions rendered by California regulators and courts illustrate how little it takes to meet “substan-tial association.” When Does an Agreement Constitute a “Franchise?,” Cal. Dep’t of Corps.Comm’r Op. No. 3-F (rev. June 22, 1994), available at http://www.dbo.ca.gov/Commissioner/Releases/3-F.asp [hereinafter Release 3-F]; see also Kim v. Servosnax, Inc., 10 Cal. App. 4th1346 (Cal. Ct. App. 1992). Indeed, Release 3-F states that “[i]n resolving the question whetherthere is a substantial association between the Licensee’s business and the licensor’s commercialsymbol, it is necessary to consider whether that commercial symbol is brought to the attentionof the Licensee’s customers to such an extent that the customers regard the Licensee’s establish-ment as one in a chain identified with the licensor.” Yet, the same Release 3-F also says that “if afranchisee is granted the right to use the franchisor’s symbol, that part of the franchise definitionis satisfied even if the franchisee is not obligated to display the symbol.” In Servosnax, there wastestimony that the building agreed to lease to plaintiff simply because the building owner knewthat plaintiff was a Servosnax licensee, even though the licensee was contractually forbidden touse the Servosnax mark and never did. Servosnax, 10 Cal. App. 4th at 1355. The court nonethe-less found the substantial association requirement satisfied. Thus, “substantial association,” atleast in California, may not be much different from “license to use.”91. No. C10-03256SI, 2011 WL 1483424 (N.D. Cal. Apr. 19, 2011).92. Id.93. Id. at *3 (quoting Rick-Mic Enters. v. Equilon Enters., LLC, 532 F.3d 963, 974 (9th Cir.

2008)).

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The court found that the “alleged tying product—CCRC certification—isanalogous to the branding aspect of a franchise agreement.”94

When a trademark license performs a branding function, it connects thelicensee’s business to a proprietary source, the licensor, but when a trade-mark license performs a certification function, it signifies that, regardlessof the brand the licensee uses to identify its goods or services to consumers,those goods or services possess specific defining characteristics. Thus, a bonafide certification license, even if the mark is not registered as a certificationmark, should never satisfy the trademark element in a franchise definitionbecause the mark does not function to identify a proprietary source for thecertified goods and services; it certifies only that that the certifier’s standardsare met.95 Indeed, a bona fide certification mark in many respects accom-plishes the opposite of association, deriving its value from the user’s indepen-dence from the certifier. Because all three franchise definitional elements mustcoexist, if the trademark element is not met, the franchise analysis is over.

B. “Significant Assistance/Substantial Control” or Equivalent Element

If a certification program meets the trademark element, the next inquiryin the inadvertent franchise analysis considers if the certifier exercises signif-icant assistance or substantial control over the licensee’s entire method foroperating its business,96 or, alternatively, depending on the jurisdiction, ifthe certifier prescribes a “marketing plan in substantial part”97 or if a “com-munity of interest” exists between the parties.98

No cases or administrative opinions were found addressing this defini-tional element in the context of a certification program, although FTCInformal Staff Advisory Opinion 98-6 (August 1998) involved a somewhat

94. Id.95. 15 U.S.C. § 1127 (2013).96. The FTC published Interpretive Guides in 1979 to assist franchisors in understanding the

1979 Franchise Rule and complying with its obligations. 44 Fed. Reg. 49,966 (1979). The 1979Interpretive Guides offers examples illustrating “significant assistance” and “substantial con-trol.” “Significant assistance” exists when the licensor provides formal sales, training, or repairprograms; site location assistance; advice on management, marketing, or personnel; promotionalsupport requiring a contribution from the licensee; or other operating advice such as an oper-ations manual. “Significant controls” exist when the licensor approves or restricts the locationor sales territory, sets operating hours, specifies design or appearance requirements, establishesproduction methods or standards, restricts the customer base of the licensee, mandates person-nel policies or practices, or dictates mandatory accounting practices. Also instructive on the issueof significance of assistance or control is the amount of reliance the licensee places on the licen-sor’s experience. No bright-line rule exists on the quality or number of facts proving “signifi-cant” assistance or “substantial” control. Spandorf, supra note 60.97. The “marketing plan” element has four subparts: (1) a marketing plan (2) prescribed (3) in

substantial part (4) by the licensor. See, e.g., Release 3-F, supra note 91.98. Several states follow the elusive “community of interest” model rather than the “market-

ing plan variation” approach, although they differ in its application (e.g., Hawaii, Minnesota,New Jersey, Wisconsin). Fittante, supra note 84. All of these states, however, find communityof interest when parties derive fees from a common source pursuant to a continuing financialrelationship—a broad-ranging definition that describes almost any distributorship and licensingarrangement. Spandorf & Kirsch, supra note 60.

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analogous affiliate program.99 Martin-Williams, a technology integrationservice provider that sold, tested, and repaired computer equipment andprovided computer training services according to specific customer needs,sought advice on whether a membership program administered by its mar-keting and advertising affiliate, Technology Edge Partners (TEP), was afranchise.100 TEP solicited companies in the same line of work to join an al-liance offering advertising and marketing expertise and the right to use the“Technology’s Edge” trademark in a specific geographic territory in ex-change for an initial and continuing monthly fee.101 To qualify for member-ship, companies had to possess competency certifications from specific com-puter software manufacturers and attain minimum sales levels over at leasttwo years in business.102 The FTC concluded that the TEP affiliation pro-gram was “clearly covered by the Franchise Rule,”103 though likely exemptfrom regulation as a fractional franchise.104

C. “Franchise Fee” Element

Payment of a required franchise fee above a minimum threshold, typically$500 annually, is a prerequisite for application of federal and state sales laws,although not for several state relationship laws regulating termination, non-renewal, and other relationship conditions.105 The fee element considers allsources of revenue paid to a licensor for the right to associate with the licen-sor’s brand.106 Because the federal franchise definition requires a licensee to

99. FTC Informal Staff Advisory Opinion 98-6 (August 1998), available at http://www.ftc.gov/bcp/franchise/advops/advis98-6.shtm (last visited Nov. 25, 2013).100. Id.101. Id.102. Id.103. Id.104. Section 436.8 of the 2007 Franchise Rule, like its predecessor, exempts “fractional fran-

chises” from regulation, which are defined as franchises that meet the following two criteriabased on facts existing when the relationship is created: “(1) The franchisee, any of the franchi-see’s current directors or officers, or any current directors or officers of a parent or affiliate, hasmore than two years of experience in the same type of business; and (2) The parties have a rea-sonable basis to anticipate that the sales arising from the relationship will not exceed 20% of thefranchisee’s total dollar volume in sales during the first year of operation.” 16 C.F.R. § 436.1(g)(2013); see also Leonard D. Vines, Beata Krakus & Karen Satterlee, Fractional Franchise ExemptionFriend or Foe?, 30 FRANCHISE L.J. 72 (2010).105. Several jurisdictions do not require a franchise fee to apply their relationship laws, in-

cluding Arkansas, Connecticut, Delaware, Missouri, Nebraska, New Jersey, Wisconsin, PuertoRico, and the Virgin Islands. Because an accidental franchise issue often does not arise untilthere is an attempt to terminate a relationship, in those jurisdictions, the fee element may noteven be relevant.106. The federal franchise definition requires a franchisee to make a minimum payment of at

least $500 within the first six months after the licensee begins operations, allowing licensors tostructure programs legitimately to avoid federal regulation by deferring required payments over$500 until after six months. However, there is no state law analogue to the six-month fee deferralapproach. Furthermore, given the breadth of state franchise definitions, it is possible for a licens-ing program that is not a franchise in year one to spring into a franchise in a subsequent yearwhen more than the statutory minimum payment is paid, and, thereafter, to retain franchise sta-tus despite no minimum payments in subsequent years. See To-Am Equip. Co. v. MitsubishiCaterpillar Forklift Am., Inc., 152 F.3d 658, 663–64 (7th Cir. 1998).

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make a minimum payment of at least $500 within the first six months afterbeginning operations, a licensing program can avoid federal regulation as afranchise by deferring required licensing fees over $500 until after that timeframe.107 State laws do not offer a similar structuring option.

The only case addressing the fee element that involved a certification pro-gram is Wright-Moore Corp. v. Ricoh Corp.,108 which considered whether feespaid to a supplier to train and certify the distributors’ sales representativeswere franchise fees under Indiana law. The distributor, Wright-Moore, broughtthe action after Ricoh refused to renew Wright-Moore’s national distributor-ship agreement.109 Wright-Moore argued the parties’ contract was a franchisebased primarily upon Ricoh’s certification requirements; specifically, Ricoh re-quired that Wright-Moore’s personnel be trained and certified by Ricoh to selland repair Ricoh products according to Ricoh’s methods.110

The Wright-Moore court readily concluded that the relationship met thefirst two statutory elements, finding (1) substantial association with Ricohbased on Wright-Moore’s designation as an authorized Ricoh distributorand Ricoh’s supply of advertising materials bearing Ricoh’s mark; and (2) amarketing plan in Ricoh’s imposition of a sales quota, territory assignment,and mandatory training program.111 The franchise analysis turned onwhether Wright-Moore’s expenses to train and certify its employees, in par-ticular to send its training manager to Ricoh’s five-day “Train the Trainer”certified instructor program, constituted a franchise fee.112

To meet Indiana’s franchise definition, the court held an expense must in-volve “a firm-specific investment in the franchisor,” here, “an unrecoverableinvestment in the Ricoh distributorship.”113 Wright-Moore failed to makethis showing because its manager testified that much of the Ricoh certifica-tion training could be applied to other copier brands; thus, Wright-Moore’scertification training expenses were neither “firm specific” nor “not transfer-rable.”114 However, Wright-Moore suggests that training fees would consti-tute franchise fees when the training instruction has no general applicationoutside of a certification program, as would be the case if, following termi-nation or expiration of a certification program license, licensees are forbid-den from using the training to engage in a competitive business.

V. Components of a True Certification Program

A business wishing to offer a bona fide non-franchise certification pro-gram outside the scope of the FTC Franchise Rule would be well-advised

107. Id.108. 794 F. Supp. 844 (N.D. Ind. 1991).109. Id. at 859–60.110. Id. at 855.111. Id. at 849–51.112. Id. at 855–58.113. Id. at 850.114. Id. at 855, n.14.

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to hew closely to the Lanham Act’s requirements for a certification mark. Inparticular, the business should

• register its mark as a certification mark under the Lanham Act and ad-here to the certification mark registration requirements,115

• ensure that its certification mark differs in some respects from the markthat it uses to identify its own business,116 and

• offer certification to any third-party products or services that meet itsstandards.117

On the flip side, to avoid having a certification program construed as afranchise, a licensor should not

• use the certification mark on its own goods or services;118

• permit its licensees to use the certification mark in a manner that sug-gests that the licensor is the source of the goods or services;119

• refuse to certify third parties who meet the standards forcertification;120

• provide additional programming support, marketing support, or mate-rials as a condition of certification; or

• require certified users to purchase additional goods or services from thecertifier to maintain the relationship.

A certification program that follows these rules avoids franchise status be-cause the licensed certified mark does not, in that case, function as a trade-mark to brand the certified user as part of a network affiliated with the cer-tifier; it simply identifies a particular quality or characteristic of the certifieduser’s goods or services. Consequently, a true certification program is not afranchise regardless of whether the jurisdiction follows the “substantial asso-ciation” or “license to use” variant of the franchise definition. In our real-lifeillustrations, PMA instructors do not use PMA’s certification mark to brandtheir services as being offered by PMA but only to designate a recognizedlevel of proficiency. They teach Pilates classes but they are not “PMA” Pi-lates classes. By contrast, CrossFit affiliates may use CrossFit in the businessname of their gym and CrossFit certified instructors may teach CrossFit-branded fitness classes. Similarly, Zumba’s ZIN™ instructors may teachZumba-branded classes.

With the trademark element missing from true certification programs, therest of the franchise analysis is unnecessary. But to complete the illustration,as to the second definitional element—“significant assistance” or “substantial

115. As discussed above, such registration is neither required nor a safe harbor but isadvisable.116. TRADEMARK MANUAL OF EXAMINING PROCEDURE, supra note 38, § 1306.04.117. Idaho Potato Comm’n v. G&T Terminal Packaging, Inc., 425 F.3d 708, 715 (9th Cir.

2005).118. 15 U.S.C. § 1604(5) (2013).119. Id. § 1127.120. Idaho Potato Comm’n, 425 F.3d at 715.

Certification Programs: Franchises or Not? 523

Page 20: Certification Programs: Franchises or Not? · programs, not franchises. The inquiry sparked a flurry of comments revealing considerable confusion about what, if anything, differentiates

control” or the marketing plan or community of interest variants—it isworth noting that PMA does not condition certification on completing train-ing courses taught by PMA, while Zumba and CrossFit each condition theircertifications on completing their own classes. All three offer similar market-ing assistance through a certified teacher locator function on their websitesbut Zumba and CrossFit offer more extensive support and marketing ser-vices for additional fees. Although it is impossible to conclude from theseprograms’ websites if each does enough to satisfy the highly subjective sub-stantial assistance/significant control or marketing plan elements of a fran-chise, both Zumba and CrossFit market their programs as business opportu-nities, while PMA does not. Because all three certification programs chargecertified users flat fees regardless of the certified business’s revenue, probablynone meet the “community of interest” definitional variant because the par-ties do not derive revenue from a common source.

As a practical matter, few certifying entities, even bona fide non-franchisecertification programs, would be willing to permit others to display their cer-tification seal without collecting some fee to cover testing and monitoringservices. Thus, all certification programs, even non-franchise ones, likely sat-isfy the third definitional element. Although structuring solutions that deferpayments of over $500 for six months (such as Zumba’s ZIN™ membershipfee of $30 per month) may be available in jurisdictions governed just by thefederal Franchise Rule, this approach will not protect certification programsfrom franchise status in states with their own franchise laws or that regulatelicensing programs without regard to whether a fee has been paid to thelicensor.

VI. Conclusion

True certification programs that follow the Lanham Act’s registration re-quirements for certification marks should not qualify as a franchise underany franchise definition. Because promoters of self-claimed certification pro-grams often choose not to, or cannot, register their marks as certificationmarks, their licensing programs are vulnerable to the unintended conse-quences of being deemed a franchisor. Certification programs that offer cer-tified users unifying branding elements or other marketing and operating as-sistance, even if optional, possess attributes incompatible with the sliveredexclusion for bona fide certification licenses. Franchise status disputes arefact intensive and difficult to dismiss before trial, so they carry a high nui-sance value. Despite little enforcement activity to date involving certificationprograms, program promoters should proceed cautiously before assumingthat their self-proclaimed certification program is not a franchise.

524 Franchise Law Journal • Vol. 33, No. 4 • Spring 2014


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