Enjoining Unlicensed Trademark Use By Terminated Franchisees

“The only exception might be in an abandonment situation, when you want to check on the facility and make sure it's secure,” said Vaughan.

Kevin Adler is associate editor of this newsletter.

Franchisors struggle to stop terminated franchisees from using the system's trademarks. In a recent presentation to the Maryland State Bar Association's Franchise Law Committee, Stephen Vaughan and David Worthen, shareholders with Gray Plant Mooty, discussed how to obtain an injunction that will prevent unlicensed trademark use by a terminated franchisee, as well as strategies for fending off arguments commonly raised by franchisees when confronted with a motion for an injunction.

Quick and Decisive Action

Quick and decisive action is crucial, starting with the termination of the franchise, said Worthen. “If there has been a breach of the franchise contract, my advice to a franchisor is to send notice of termination,” he said. “If you then want to negotiate with the franchise, fine. ' It gives you the stronger position if you go for a motion for a preliminary injunction.”

If the franchisee continues to use the mark after the termination date, the franchisor again needs to act quickly. “Don't delay seeking the injunction,” said Vaughan. “If you delay, you undermine your claim that you are suffering harm.”

Deciding which type of injunction to seek ' preliminary or a permanent, or even a temporary restraining order ' is important. The franchisor must assess the strength of the claims it can make to a judge without engaging in discovery. “Do you have enough evidence to make your case at this time?” asked Worthen. “Typically, you need to be able to establish a likelihood that your claim will succeed on the merits. A judge will be hesitant to take away a franchisee's business, his livelihood.”

Judges will consider both the obvious harm to the franchisee, who will be enjoined from operating his business, with the franchisor's claims that its brand is being damaged by the unauthorized, out-of-compliance operation. The public interest also is factored into the equation, usually in the context of the franchisor's interest in protecting its intellectual property.

Different types of claims are much easier to make than others, said Vaughan. “If the franchisee has been terminated for nonpayment of royalties, a representative of the company can show the judge the contract and testify that payment was not made. Abandonment is easy to demonstrate, too,” he said. But a franchisor that is making the case for a preliminary injunction by citing a termination based on an allegation by a third party that the franchisee made an unauthorized transfer of money will have a more difficult challenge.

In some jurisdictions, Worthen added, the bar for an injunction is higher: Courts might require “clear evidence” of the success of the case on its merits, rather than a likelihood of success.

Temporary restraining orders are not commonly used, but they can come into play in particularly high-profile situations. They have the merit of being issued very quickly, and sometimes without notice of the hearing even being given to the other party. But Worthen said that they are difficult to obtain unless public health or safety is affected, such as a restaurant that is in serious breach of health codes. Also, since the temporary restraining orders usually last 10 days to two weeks, the franchisor will still need to follow up with a request for an injunction.

Selecting a Venue

Selecting a venue is another important decision. The franchisor has two decisions to make: where to seek an injunction, and which court to approach. Worthen and Vaughan recommended that franchisors seek injunctions in the franchisee's jurisdiction and that they use federal courts, not state courts. “Many franchise contracts allow franchisors to bring disputes to the jurisdiction where they are headquartered, but we do not think this is necessarily a good idea in these termination-and-trademark cases,” said Worthen. “If you consistently bring them in your home area, the judges might feel as if you're doing nothing but terminating mom-and-pop franchises, and you might be getting the attention of an enterprising young lawyer who decides to specialize in defending the franchisees. Also, you can get caught in a venue dispute that slows down the injunction you are seeking.”

As for selecting federal courts over state courts, Vaughan observed, “The process in federal court tends to be more established and consistent, and federal judges often are familiar with franchise trademark cases.”

Pulling on Heartstings

Terminations are contentious, so it's not surprising that hearings about injunctions are contentious, too. “You tend to see [attempts to pull on] the heartstrings of the judge, to hear claims that the injunction will destroy a family business and life savings and throw all the employees out of work,” said Vaughan. “These are real issues, but courts recognize when the franchisee's harm is self-inflicted through actions that resulted in termination.”

Franchisees will raise a number of defenses, but Worthen said that franchisors can respond effectively by sticking to the facts of the case and the language of the franchise contract. Typical defenses include:

• Termination is a pretext for taking the franchise. Franchisees will argue that a franchisor wants to terminate a store location because it wants to resell the franchise to another operator or encroach on the franchisee's territory. “Judges tend to stick to the facts on whether the termination is valid, rather than on the motivation, or alleged motivation, for the termination,” Worthen said.
• The franchisor is discriminating. Franchisees will argue that they are being discriminated against. “None of those allegations should matter when you are seeking an injunction,” said Worthen. “Either you can make your case for termination, or you can't.”
• The franchisor caused the breach. Franchisees will argue that inadequate training, provision of poor equipment or overpriced supplies, or other such actions by the franchisor led to the breach of the contract and termination. “Franchisees can bring up almost limitless rationales for why the franchisor breached its obligation,” said Worthen. “Again, the law is pretty well established in this area. But the franchisee still can seek damages after termination, if the franchisor did breach its obligations.”

Challenges Raised By the Internet

As with so many areas of law and business, the Internet is raising new questions and challenges, especially because terminations usually include non-compete provisions. Enforcing non-competes in the online environment is complex and remains full of uncertainty. Worthen said that he has worked with franchisors who got injunctions against former franchisees who created their own Web sites that incorporated the franchisor's brand in them (e.g., Joe'sDunkinDonuts.com). “Those are fairly easy to shut down,” he said.

Other situations require more creativity to solve satisfactorily. “We had a case recently where a former franchisee was ' selling competing products on the Internet,” said Worthen. “The judge came up with what I felt was a pretty ingenious solution. The judge said that the former franchisee could not accept business from customers within a defined radius of any existing franchise location. Basically, he created a bubble around each existing store.” The former franchisee's Web site had a standardized message that would reject orders from addresses within those non-compete areas.

Beware of Self-Help

As a final note, Worthen and Vaughan counseled franchisors against “self-help,” that is, taking matters into their own hands by going to the site of the terminated franchisee and trying to take down signs and remove equipment. “Self-help isn't a good idea. ' I've seen it attempted, and guns have been drawn, knives pulled, and tires slashed. There's no reason to put a franchisor's employees in danger,” Worthen said.

“The only exception might be in an abandonment situation, when you want to check on the facility and make sure it's secure,” said Vaughan.

Kevin Adler is associate editor of this newsletter.