Is Carls required to defend or indemnify franchisees against claims of infringement or unfair competition arising out of the use of Proprietary Marks?

According to Carls's 2024 Franchise Disclosure Document, Carls is not required to defend or indemnify franchisees against claims of infringement or unfair competition related to the use of its Proprietary Marks. The Franchise Agreement does not contain any provisions mandating Carls to provide such defense or indemnification. However, franchisees are obligated to notify Carls immediately if any litigation involving the Proprietary Marks is initiated or threatened against them and must fully cooperate in defending or settling the litigation. Franchisees are also prohibited from directly or indirectly contesting the validity or ownership of Carls's Proprietary Marks.

This lack of indemnification means that if a franchisee is sued for trademark infringement due to their use of Carls's Proprietary Marks, the franchisee will be responsible for their own legal defense and any resulting damages. This can create a significant financial risk for franchisees, as legal battles can be costly. It is crucial for prospective franchisees to understand this aspect of the agreement and consider obtaining their own legal counsel to assess the potential risks and liabilities associated with trademark usage.

While Carls retains the right, but not the obligation, to bring an action to prevent infringement of its Proprietary Marks, this does not translate into a duty to defend or indemnify franchisees. The franchisee may be joined as a party to any action in which Carls is or may be a party. This arrangement is not uncommon in franchising, as franchisors often want to control the defense of their trademarks but may not want to bear the full financial burden of defending every franchisee against infringement claims. Franchisees should factor this potential expense into their financial planning and consider insurance options to mitigate the risk.