Court Watch

The court rejected Pinnacle's arguments, noting that the franchise agreement and federal law recognized Little Caesar's as the owner of the mark and the beneficiary of any usage of the mark from the date of Pinnacle's first use of the mark. Specifically, the franchise agreement included an acknowledgement by Pinnacle that any goodwill that arose from its activities under the agreement would inure directly and exclusively to the benefit of Little Caesar's. In addition, 15 U.S.C. ' 1055 provides that any legitimate use of a registered mark by a related company inures to the benefits of the registrant of the mark, provided that it is not used in such manner as to deceive the public. Thus, the court held that the rights in the slogan vested in Little Caesar's once Pinnacle used the slogan. Because of its rights in the mark, Little Caesar's trademark application was neither fraudulent or unreasonable, and Pinnacle's attempt to cancel the mark was denied. Finally, the court considered Little Caesar's counterclaim that Pinnacle's attempt to cancel the trademark registration breached a provision in the franchise agreement that prohibited Pinnacle from directly or indirectly contesting the validity or ownership of the proprietary marks. Because the court concluded that Little Caesar's owned the mark Hot-N-Ready and Pinnacle had sought to cancel the mark, the court concluded that Pinnacle had breached the franchise agreement. The court rejected Pinnacle's assertion that the covenant not to sue was an unfair or inequitable provision that was prohibited by the SDFA, because Pinnacle did not produce any authority to support its claims. Thus, the court granted summary judgment in favor of Little Caesar's on its counterclaim for breach of contract, affirming the decision of the district court.

Alexander G. Tuneski is an associate in the Washington, DC, office of Kilpatrick Stockton LLP. He can be contacted at 202-508-5814 or [email protected].

Franchisor Permitted to Prospectively Change Mixture of Its Outlet Models

In a recent case in Washington state court, a franchisee unsuccessfully asserted that a franchisor violated the Washington franchise Investment Protection Act (“WFIPA”) by failing to disclose plans to discontinue the model of outlet that the franchisee had opened.

In Something Sweet, LLC v. Nick-N-Willy's Franchise Co., LLC, 2 Bus. Franch. Guide (CCH) ' 14,398 (Wash Ct. App. June 1, 2010), Something Sweet (“Sweet”), the franchisee, purchased the right to open a Nick-N-Willy's (“NNW”) pizza store. The area developer for NNW introduced Sweet to a broker that located a space in a retail mall that explicitly prohibited it from providing cooked pizzas from the space. Accordingly, Sweet opted to operate its store as an “outlet model” from which customers could purchase take-and-bake pizzas to be baked at home, rather than a “restaurant model” in which customers also could purchase ready-to-eat pizzas to be consumed at the store. Two years later, Sweet sought rescission and damages on the grounds that NNW materially omitted from its FDD its intent to discontinue the outlet model in favor of the restaurant model and that the area developer failed to properly register as a sub-franchisor in accordance with the WFIPA. A trial court dismissed both of Sweet's claims, prompting an appeal.

Seven months after Sweet's purchase of a franchise, NNW announced its intent to only offer restaurant model stores to new franchisees. However, at trial NNW presented evidence that it continued to support outlet stores that were already in its system and did not require such stores to change their operations. The court held that the franchisee failed to offer any evidence that NNW's new policy, which was applied prospectively, had any impact on its operations.

In addition, the court noted that the nationwide mixture of outlet and restaurant models in the franchise system was not a key feature in the franchise agreement. In fact, the franchise agreement did not require Sweet to identify whether it would operate the store as an outlet model or restaurant model. Further, the franchisor stated in its disclosure document and franchise agreement that NNW could decide to change its operating methods in the future. Accordingly, there was no reason for Sweet to believe that the proportion of store models would remain static. Because Sweet had failed to demonstrate that the disclosure of the franchisor's intent to change the mix of its store models was necessary to make the franchise offering not misleading, the appellate court affirmed the trial court's dismissal of the claim.

As for the claim that the franchisor's area developer, who assisted Sweet in finding the location, did not register under the Act as a sub-franchisor, the court held that the WFIPA did not require dual registration of the franchisor and sub-franchisor. Because NNW had properly registered the offering in the state, its sub-franchisor could offer and sell the franchise without filing an additional registration. As a result, the court did not need to determine whether the area developer met the definition of sub-franchisor under the WFIPA.

Franchisor Has Right to Use and Register Slogan Developed By Franchisee

In another suit brought by a pizza franchisee, Pinnacle Pizza sued its franchisor, Little Caesar's, for breach of contract and a violation of the South Dakota Franchise Act (“SDFA”) and sought to cancel one of its franchisor's federal trademarks.

In Pinnacle Pizza Co., Inc. v. Little Caesar Enterprises, Inc., 2 Bus. Franch. Guide (CCH) ' 14,341 (8th Cir. 2010), Pinnacle alleged that it created and began using in promotions the slogan “Hot-N-Ready” in May 1997. According to the allegations set forth in the complaint, once the promotion had become successful, Little Caesar's misappropriated the slogan by advertising Hot-N-Ready pizzas at other restaurants without obtaining Pinnacle's permission. By 2000, Little Caesar's had turned the slogan into a successful national advertising program, prompting the franchisor to register the trademark with the U.S. Patent and Trademark Office.

In 2004, Pinnacle filed suit asserting that Little Caesar's had breached a contractual provision that prohibited Little Caesar's from using any original advertising materials created by Pinnacle without first obtaining Pinnacle's consent. Pinnacle further alleged that the alleged misappropriation constituted unfair and inequitable conduct in violation of the SDFA. Pinnacle also asserted a federal claim to attempt to cancel the federal mark, prompting
Little Caesar's to file a breach-of-contact counterclaim asserting that the challenge to its federally registered mark was itself a breach of the franchise agreement.

The district court granted summary judgment in favor of Little Caesar's on the breach-of-contract and SDFA claims after holding that the agreement only protected original advertising materials that were tangible, rather than underlying concepts, ideas, or slogans that were used in such advertisements, such as the Hot-N-Ready slogan. The court concluded that Little Caesar's did not breach the franchise agreement or violate the SDFA by using the slogan at issue.

On appeal, the Eighth Circuit concluded that it was not necessary to determine whether Little Caesar's breached the franchise agreement by using Pinnacle's advertising or concepts. Rather, the Eighth Circuit focused its decision on whether Pinnacle's claims were barred by the statute of limitations, which was six years under the law of the forum, South Dakota. Because the suit was filed seven years after Little Caesar's first began using the mark, the court was required to determine whether Little Caesar's usage of the slogan constituted a single, continuing breach, or whether each use of the slogan constituted a separate breach. After evaluating several Michigan cases (Michigan was the choice of substantive law under the agreement), the Eighth Circuit concluded that Little Caesar's used the Hot-N-Ready slogan continuously without interruption, and so the alleged breach was related to a single use of the phrase. Each subsequent use of the phrase constituted more evidence of the original breach, rather than a new, distinct breach. Thus, if a breach or SDFA violation occurred, it first occurred in 2000 when Little Caesar's first used the slogan. As a result, Pinnacle's contract and SDFA claims were both barred by the statute of limitations.

Next, the court considered Pinnacle's action to cancel Little Caesar's federal registration of the Hot-N-Ready trademark on the grounds that it was registered in bad faith. As evidence of Little Caesar's bad faith and fraudulent registration, Pinnacle pointed to the fact that Little Caesar's identified in its trademark application the date the slogan was first used in commerce as the date that Pinnacle began using the mark, rather than the date that Little Caesar's began using it.

The court rejected Pinnacle's arguments, noting that the franchise agreement and federal law recognized Little Caesar's as the owner of the mark and the beneficiary of any usage of the mark from the date of Pinnacle's first use of the mark. Specifically, the franchise agreement included an acknowledgement by Pinnacle that any goodwill that arose from its activities under the agreement would inure directly and exclusively to the benefit of Little Caesar's. In addition, 15 U.S.C. ' 1055 provides that any legitimate use of a registered mark by a related company inures to the benefits of the registrant of the mark, provided that it is not used in such manner as to deceive the public. Thus, the court held that the rights in the slogan vested in Little Caesar's once Pinnacle used the slogan. Because of its rights in the mark, Little Caesar's trademark application was neither fraudulent or unreasonable, and Pinnacle's attempt to cancel the mark was denied. Finally, the court considered Little Caesar's counterclaim that Pinnacle's attempt to cancel the trademark registration breached a provision in the franchise agreement that prohibited Pinnacle from directly or indirectly contesting the validity or ownership of the proprietary marks. Because the court concluded that Little Caesar's owned the mark Hot-N-Ready and Pinnacle had sought to cancel the mark, the court concluded that Pinnacle had breached the franchise agreement. The court rejected Pinnacle's assertion that the covenant not to sue was an unfair or inequitable provision that was prohibited by the SDFA, because Pinnacle did not produce any authority to support its claims. Thus, the court granted summary judgment in favor of Little Caesar's on its counterclaim for breach of contract, affirming the decision of the district court.

Alexander G. Tuneski is an associate in the Washington, DC, office of Kilpatrick Stockton LLP. He can be contacted at 202-508-5814 or [email protected].