News Briefs

Franchisors Have 50-Day Window to Block Domain Names on .xxx Sites

From Sept. 7, 2011 through Oct. 28, 2011, franchisors and all other trademark owners will have the opportunity to block domain names using the new top-level domain .xxx that contain their marks. The new top-level domain was approved in March 2011 by the Internet Corporation for Assigned Names and Numbers (“ICANN”) for the adult entertainment industry. The .xxx domain is scheduled to go live on Sept. 7, but some sites already are operating through a special “Founders” program developed by the ICM Registry, which is operating the new top-level domain.

The 50-day window (increased from an originally planned 30 days, due to a high number of inquiries) has two elements: Sunrise A, which allows verified members of the adult entertainment industry to register their trademarked names and to reserve domain names in .xxx that they currently have in other top-level domains; and Sunrise B, which enables other trademark owners to reserve or keep their marks off the .xxx domain.

“Sunrise B will allow brand owners who are not members of the adult entertainment industry to block, or reserve, .xxx domain names corresponding to their registered marks for at least the length of the 10-year contract term between ICM and ICANN,” said Jennifer L. Elgin, of counsel to Wiley Rein LLP's Washington, DC office. “A reserved domain name will resolve to a standard informational page indicating the status of the name as reserved through ICM's intellectual property program; the reservation will not result in ownership of the corresponding domain name.”

Elgin added that there are restrictions on which types of names will be accepted by the ICM Registry during the Sunrise period. “The ICM Registry will accept reservation requests only for .xxx domain names corresponding to the entire text of a registered trademark,” she said. “For the purpose of Sunrise B eligibility, a qualified registered trademark must be a live trademark registration of national or regional international effect issued prior to Sept. 1, 2011. Eligible marks do not include federal registrations on the U.S. Supplemental Register, state registrations, trade names, or International Registrations obtained under the Madrid System, unless these are based on or have resulted in a registered trademark of national effect.”

Reserving parties will be charged a one-time fee of approximately $160 per domain by the ICM Registry. Individual registrars, such as GoDaddy.com, have announced that they will add supplemental fees.

ICM has outlined some of the conflict-resolution procedures when two or more applicants have applied to register the same name. If a Sunrise B and Sunrise A applicant have applied for the same name, the Sunrise A applicant “will be given the opportunity to withdraw its application,” said Elgin. “If it does not, priority will be given to the qualified Sunrise A applicant to register the domain name, and the Sunrise B brand owner applicant may later institute appropriate procedures to stop use of the name.”

Beginning on Dec. 6, 2011, .xxx domain registration will be opened to all parties. At this time, brand owners (in the adult entertainment industry or not) can apply to register other domain names. “Owners of marks not eligible for Sunrise B reservations should consider submitting registration applications for non-resolving names once general registration opens on Dec. 6,” Elgin said. “Franchisors also should ensure that their domain monitoring services are covering the .xxx domain space to watch for potentially infringing uses.”

SBA Criticizes Large Franchise Lender, Own Record-Keeping Practices

In a report issued on July 13, the Office of the Inspector General for the Small Business Administration (“SBA”) stated that Banco Popular “did not adequately assess borrower repayment ability when originating Huntington Learning Center ["HLC"] franchise loans” in FY 2007. The report also found poor record keeping by the SBA of loans guaranteed by Banco Popular and other lending institutions under the Section 7(a) program across seven major franchise brands. The SBA investigated 12 loans made by Banco Popular in 2007, 10 of which are currently in liquidation proceedings at a possible loss to the SBA of $2.1 million. “All 12 loans had unrealistic revenue projections,” the report stated. The loans ranged from $196,500 to $379,900, and all but one were for new franchises (one was a resale).

“The lender accepted unrealistic projected annual revenue figures that ranged from $483,000 to $650,025 [for first-year operations] as a basis for demonstrating the ability of the HLC franchises to repay their debts. The lender disregarded relevant and available data, which indicated that the franchises' revenue projections were unreasonable,” wrote the SBA. “This was due, at least in part, to the lender's perception that franchise loans required a lesser degree of due diligence because of the established business model of franchise systems. Had the lender complied with SBA's requirements to use and assess the feasibility of realistic projections, the 12 loans should have been declined.”

SBA's review of HLC's disclosure documents indicated that first-year revenue was, on average, $262,272 ' or roughly 40% to 55% of the projections that HLC accepted. In fact, HLC's franchise disclosure document, effective April 1, 2006, stated that average revenue for all of its franchises in 2005 was $468,442, or below the projections that Banco Popular accepted from first-year borrowers.

A representative of Banco Popular declined to comment to FBLA about the report.

Subsequent to the findings, the Inspector General reported that SBA will seek recovery of the net loss on the 10 guaranteed HLC loans, “where appropriate,” and will track all Banco Popular HLC loans submitted to the SBA for purchase “to ensure the identified underwriting deficiencies are considered in the event of future default.” Banco Popular was one of 12 lenders that used the SBA program to finance HLC franchise purchases in 2007, accounting for a total of 25 loans, according to the SBA.

While researching Banco Popular's HLC loans, the Inspector General also discovered that many of those loans were not coded for HLC in the SBA's database. A search of six other franchise brands that had high numbers of SBA loans from FY 2006 through FY 2009 (AAMCO Transmissions, Cold Stone Creamery, Curves for Women, Meineke Car Care, Planet Beach, and Quiznos) found that numbers published by SBA understated loans to every brand. SBA had issued 1,352 new loans to HLC and the other brands during the period, but only 1,118 were coded, for an overall under-reporting of 17%.

As a result, the Inspector General recommended that the SBA improve the protocol for coding loans. Instead, the SBA committed to issuing a notice to lenders “reminding [them to] ' specifically mention the necessity of indicating whether a loan is being made to a franchisee.”

The report can be found at www.sba.gov/sites/default/files/Audit%20Report%2011-16_0.pdf.

Franchisors Have 50-Day Window to Block Domain Names on .xxx Sites

From Sept. 7, 2011 through Oct. 28, 2011, franchisors and all other trademark owners will have the opportunity to block domain names using the new top-level domain .xxx that contain their marks. The new top-level domain was approved in March 2011 by the Internet Corporation for Assigned Names and Numbers (“ICANN”) for the adult entertainment industry. The .xxx domain is scheduled to go live on Sept. 7, but some sites already are operating through a special “Founders” program developed by the ICM Registry, which is operating the new top-level domain.

The 50-day window (increased from an originally planned 30 days, due to a high number of inquiries) has two elements: Sunrise A, which allows verified members of the adult entertainment industry to register their trademarked names and to reserve domain names in .xxx that they currently have in other top-level domains; and Sunrise B, which enables other trademark owners to reserve or keep their marks off the .xxx domain.

“Sunrise B will allow brand owners who are not members of the adult entertainment industry to block, or reserve, .xxx domain names corresponding to their registered marks for at least the length of the 10-year contract term between ICM and ICANN,” said Jennifer L. Elgin, of counsel to Wiley Rein LLP's Washington, DC office. “A reserved domain name will resolve to a standard informational page indicating the status of the name as reserved through ICM's intellectual property program; the reservation will not result in ownership of the corresponding domain name.”

Elgin added that there are restrictions on which types of names will be accepted by the ICM Registry during the Sunrise period. “The ICM Registry will accept reservation requests only for .xxx domain names corresponding to the entire text of a registered trademark,” she said. “For the purpose of Sunrise B eligibility, a qualified registered trademark must be a live trademark registration of national or regional international effect issued prior to Sept. 1, 2011. Eligible marks do not include federal registrations on the U.S. Supplemental Register, state registrations, trade names, or International Registrations obtained under the Madrid System, unless these are based on or have resulted in a registered trademark of national effect.”

Reserving parties will be charged a one-time fee of approximately $160 per domain by the ICM Registry. Individual registrars, such as GoDaddy.com, have announced that they will add supplemental fees.

ICM has outlined some of the conflict-resolution procedures when two or more applicants have applied to register the same name. If a Sunrise B and Sunrise A applicant have applied for the same name, the Sunrise A applicant “will be given the opportunity to withdraw its application,” said Elgin. “If it does not, priority will be given to the qualified Sunrise A applicant to register the domain name, and the Sunrise B brand owner applicant may later institute appropriate procedures to stop use of the name.”

Beginning on Dec. 6, 2011, .xxx domain registration will be opened to all parties. At this time, brand owners (in the adult entertainment industry or not) can apply to register other domain names. “Owners of marks not eligible for Sunrise B reservations should consider submitting registration applications for non-resolving names once general registration opens on Dec. 6,” Elgin said. “Franchisors also should ensure that their domain monitoring services are covering the .xxx domain space to watch for potentially infringing uses.”

SBA Criticizes Large Franchise Lender, Own Record-Keeping Practices

In a report issued on July 13, the Office of the Inspector General for the Small Business Administration (“SBA”) stated that Banco Popular “did not adequately assess borrower repayment ability when originating Huntington Learning Center ["HLC"] franchise loans” in FY 2007. The report also found poor record keeping by the SBA of loans guaranteed by Banco Popular and other lending institutions under the Section 7(a) program across seven major franchise brands. The SBA investigated 12 loans made by Banco Popular in 2007, 10 of which are currently in liquidation proceedings at a possible loss to the SBA of $2.1 million. “All 12 loans had unrealistic revenue projections,” the report stated. The loans ranged from $196,500 to $379,900, and all but one were for new franchises (one was a resale).

“The lender accepted unrealistic projected annual revenue figures that ranged from $483,000 to $650,025 [for first-year operations] as a basis for demonstrating the ability of the HLC franchises to repay their debts. The lender disregarded relevant and available data, which indicated that the franchises' revenue projections were unreasonable,” wrote the SBA. “This was due, at least in part, to the lender's perception that franchise loans required a lesser degree of due diligence because of the established business model of franchise systems. Had the lender complied with SBA's requirements to use and assess the feasibility of realistic projections, the 12 loans should have been declined.”

SBA's review of HLC's disclosure documents indicated that first-year revenue was, on average, $262,272 ' or roughly 40% to 55% of the projections that HLC accepted. In fact, HLC's franchise disclosure document, effective April 1, 2006, stated that average revenue for all of its franchises in 2005 was $468,442, or below the projections that Banco Popular accepted from first-year borrowers.

A representative of Banco Popular declined to comment to FBLA about the report.

Subsequent to the findings, the Inspector General reported that SBA will seek recovery of the net loss on the 10 guaranteed HLC loans, “where appropriate,” and will track all Banco Popular HLC loans submitted to the SBA for purchase “to ensure the identified underwriting deficiencies are considered in the event of future default.” Banco Popular was one of 12 lenders that used the SBA program to finance HLC franchise purchases in 2007, accounting for a total of 25 loans, according to the SBA.

While researching Banco Popular's HLC loans, the Inspector General also discovered that many of those loans were not coded for HLC in the SBA's database. A search of six other franchise brands that had high numbers of SBA loans from FY 2006 through FY 2009 (AAMCO Transmissions, Cold Stone Creamery, Curves for Women, Meineke Car Care, Planet Beach, and Quiznos) found that numbers published by SBA understated loans to every brand. SBA had issued 1,352 new loans to HLC and the other brands during the period, but only 1,118 were coded, for an overall under-reporting of 17%.

As a result, the Inspector General recommended that the SBA improve the protocol for coding loans. Instead, the SBA committed to issuing a notice to lenders “reminding [them to] ' specifically mention the necessity of indicating whether a loan is being made to a franchisee.”

The report can be found at www.sba.gov/sites/default/files/Audit%20Report%2011-16_0.pdf.