Terminated Franchisee’s Continued Use of Trademark Qualified as Counterfeiting

A federal district court in Indiana held that a terminated real estate franchisee who continued to use the trademarks of its former franchisor was liable for trademark infringement, trademark dilution, and most notably, trademark counterfeiting. The franchisee was also found liable for false advertising and false designation of origin under the Lanham Act, unfair competition, and breach of the franchise agreement.

Federal judicial circuits are currently split regarding whether a terminated franchisee’s continued unauthorized use of a franchisor’s trademark can constitute counterfeiting. If the Indiana district court’s decision is upheld, it may provide strong precedent for franchisors seeking to curtail the activities of holdover franchisees. Under the federal Lanham Act, liability for counterfeiting is accompanied by mandatory treble or other statutory damages, as well as an award of reasonable costs and attorney fees.

Century 21 Real Estate, LLC v. Destiny Real Estate Properties, 2011 WL 6736060, N.D. Ind., Dec. 19, 2011.

Non-Compete Provision Voided

A federal district court in Georgia ruled that a provision in a franchise agreement barring a former hair salon franchisee from working in “any similar business” for a period of two years was unreasonably restrictive. The provision at issue prohibited the hair salon owner from serving in any capacity “in any business engaged in the sale or rental of products or services the same as or similar to those of the Fantastic Sams System” within a five mile radius of the franchised salon, or within a two and a half mile radius of any other Fantastic Sams location for a period of two years.

While the court agreed with the franchisor that the time and distance restrictions were likely reasonable, it found that the scope of the restriction (i.e., serving in “any other capacity”) was overbroad. Because Georgia’s “blue pencil” law was passed after the non-compete agreement was drafted, the court could not strike through the invalid portion of the clause while maintaining its valid provisions. Thus, the court held that the entire non-compete clause was void.

Fantastic Sams Salons Corp. v. Maxie Enterprises, Inc. and Paul Rubin, M.D., Ga. No. 3:2011-cv-00022, January 24, 2012.

Venue and Governing Law Provision Ignored

A Washington appellate court affirmed a lower court’s decision refusing to enforce the venue and governing law provision of a franchise agreement’s arbitration clause. The ruling arose from a dispute between a Subway franchisor and a Washington-area franchisee over alleged violations of their franchise agreement.

After the franchisor moved to compel arbitration of their dispute in Connecticut, the franchisee filed suit in Washington state court arguing that arbitration was improper. While the trial court agreed to compel arbitration, it found that the venue and governing law requirements in the franchise agreement’s arbitration clause were unconscionable, and instead ordered arbitration to be held in Washington.

After receiving an unfavorable arbitration ruling, the franchisor moved to vacate the award on the grounds that the original arbitration order contradicted the franchise agreement’s arbitration clause. On appeal, the court affirmed the arbitration award, noting that there were no differences between Connecticut and Washington law applicable to the dispute. Furthermore, the court found no evidence that the franchisor was prejudiced by arbitrating in Washington as opposed to Connecticut.

Saleemi v. Doctor’s Associates, Inc., Wash. Ct. App. No. 40351-0-11, January 24, 2012.