The Unintended Employer – How New Legislation Seeks to End a Labor Law Conundrum for Some Licensors

By: Andrew Costa, Associate

Introduction

Trademark owners who license their marks must control how those marks are being used – failure to do so can result in the mark being deemed abandoned or even creating what’s known as a “naked license” – i.e., a term of art for a trademark license without the necessary quality control conditions. As with many things in the law, however, trademark licenses can, sometimes, have unintended consequences. One example is when a trademark license is so extensive, it is deemed a franchise (a discussion for another day). Another example is when the terms of the license cause the trademark owner to be deemed – entirely unintentionally – the joint employer of their licensee’s employees. US Senators Joe Manchin (D-WV), Angus King (I-ME) and James Lankford (R-OK) seek to prevent precisely this scenario in their newly introduced Trademark Licensing Protection Act of 2022 – at least for certain categories of trademark owners.

Concerns arises when labor law and trademark law collide – and the “control” that a trademark owner must have over its licensed mark is interpreted as the “control” necessary to deem a relationship between a worker and a business as an employer-employee relationship. Both current National Labor Relations Board (NLRB) rulemaking and caselaw treat common law agency as the foundation of imposing joint-employer liability. In turn, control is the touchstone of forming a principal-agent relationship under common law. What happens, then, when the “control” requirements of trademark law meets the “control” analysis of agency/labor law? We will discuss that below.

One important thing to note:  this issue is particularly important for trademark licensors who are also franchisors because while franchisors generally control trademarks and intellectual property, they do not want to be held responsible for the actions of their franchisees and their employees.  Indeed, they view their franchisees as entirely separate businesses, albeit ones that follow a stringent set of rules and guidelines. The Trademark Licensing Protection Act of 2022 is directed particularly to the franchise scenario and would introduce protections specifically for trademark owners who are franchisors.

The NLRB and the Common Law of Agency

The National Labor Relations Board (NLRB) is an independent federal agency with quasi-judicial power to enforce the National Labor Relations Act (15 U.S.C. §§ 151-169), through administrative judges, rulemaking and administrative proceedings. The Act’s purpose is to protect American workers’ collective bargaining rights, among others, by enabling the NLRB to investigate employers who engage in unfair labor practices. Employer liability can take the form of complaints, hearings before administrative judges, or payment of damages to employees. Contrary to popular thought, NLRB rulemaking can impact all workers, not just those under collective bargaining agreements.

Importantly, NLRA § 2(2) defines an “employer” broadly as “any person acting as an agent of an employer, directly or indirectly. . . .” and imposes liability on employers jointly if more than one satisfies this definition. Subsequent NLRB decisions clarify what acts satisfy the direct or indirect control standard, but essentially the threshold test turns on common law agency principles, or whether a party has “sufficient control over employees’ essential terms and conditions of employment” even if it is reserved authority. Browning-Ferris Industries of California, Inc. d/b/a BFI Newby Island Recyclery, 362 NLRB 1599 (2015). In fact, on September 7, 2022 the NLRB submitted a proposed rule for comment that first, directly adopts common law agency as the test for “employer” status, and second, defines a non-exhaustive list of activities that satisfy direct and indirect control for joint employers to be liable under the NLRA. Yet despite the pending rule change, the NLRB has held many common business activities probative of joint employment, that could be problematic for franchisors and trademark licensors, including retaining contractual power to terminate workers, establishing or approving wages, working hours and schedules, approving overtime, dictating the number of workers, and specifically, determining the manner or method of the work performed, inspection and approval of work, and ability to terminate employment agreements at will.

The Trademark Licensing Protection Act of 2022 Remedies

The Trademark Licensing Protection Act of 2022 seeks to resolve the employment problems caused by the required control in trademark licenses by rewriting 15 U.S.C. § 1055 to create a safe harbor for trademark licensors that are also franchisors. The Act would permit franchisors to engage in the types of control necessary to comply with the Lanham Act and enable them to license their marks to franchisees with control without being exposed to joint employer liability under the NLRA and NLRB rulemaking. Interestingly, the Act is not the first of its kind. In 2018, Representative Steve Chabot [R-OH] first introduced a bill, H.R. 6695, to address similar concerns. Rep. Chabot’s bill contains comparable language but got stuck in committee possibly due to the broadness of the bill’s language that covered all licensors rather than just franchisors, whereas the 2022 Act only applies in franchise situations. The 2022 Act also adds numerous definitions in subsection (a) to narrow its applicability and, in subsection (b)(2), precludes certain activities from consideration under the NLRA for certain licensors.

Specifically, subsection (b)(2) of the Act explains: “none of the following may be construed, alone or in combination with any other factor, as establishing an employment relationship between the owner of a mark that is a franchisor, or an authorizing person that is a franchisor, and a related company . . . .” The bill then excludes from consideration: “(A) the licensing of the mark for use by [a] related company or the employees of that related company [(presumably a franchisee) and] (B) any exercise of control over the mark by that owner or authorizing person, as applicable[:] (i) with respect to the use of the mark by that related company or the employees of that related company; and (ii) for the purpose of preserving or enhancing goodwill, a reputation, uniformity, or the expectation of the public with respect to the nature and quality of goods or services associated with the mark.” By precluding certain control mechanisms that are specifically tied to trademark use from any control analysis under the NLRA, the Act would appear to effectively protect franchisors from joint employer liability where a franchisor, or even affiliated entity, engages ordinary trademark licensing. But what does this mean for trademark licensors who are not franchisors?

Impact Going Forward

At minimum, by creating a safe harbor for franchisors alone, the Act tacitly acknowledges the risk of joint employer liability under the NLRA faced by all trademark licensors who seek to comply with the Lanham Act and control their trademarks, while offering no guidance or safe harbor for non-franchisor trademark owners. It’s hard to overlook the prevalence of franchises located within the Act’s sponsors’ states as a motivating factor for the specificity of the legislation. For those franchisors, the Act offers a seemingly effective solution. Real questions remain, regardless of whether this legislation passes, relating to the degree of liability a non-franchisor trademark licensor would face under the NLRA, what the NLRB rule change might mean for trademark licensing going forward, and what actions courts could take to protect such entities from liability.