Case Alert - New Protections for Franchisors
Business Law News
Written By: Roger J. Brothers, Esq. and Dominic V. Signorotti, Esq.
Buchman Provine Brothers Smith LLP
Walnut Creek, California
Terminated Franchisees that Continue to Use Protected Marks May Be Held Liable for Trademark Counterfeiting, and Subject to Treble Damages
A terminated franchisee who continues to use the trademarks of the franchisor may be held liable for trademark counterfeiting, according to a recent U.S. District Court case. In Century 21 Real Estate LLC v. Destiny Real Estate Properties, an Indiana district court held that a terminated Century 21 Real Estate franchise who continued to use Century 21's protected trademarks was liable for trademark counterfeiting under 15 U.S.C. § 1114[1], and that the franchisor was therefore entitled to mandatory treble damages pursuant to 15 U.S.C. § 1117(b)[2].
In Century 21, a Century 21 franchise in Indiana was terminated due to non-payment of franchise fees. After the termination, the franchisee continued to operate under the "Century 21" name, including on signs outside its office and various websites identifying the brokerage as part of the Century 21 franchise system. Century 21 sued, alleging that the continued use of its trademarks after termination of the franchise constituted trademark counterfeiting under federal law.
In order to establish trademark counterfeiting, a plaintiff must establish (1) that the mark is "counterfeit", meaning "a spurious mark which is identical with, or substantially indistinguishable from, a registered mark;" (2) that the mark is registered; (3) the defendant was not authorized to use the mark; and (4) that the defendant acted with knowledge and intent. The Century 21 Court focused on whether the continued use of a formerly authorized trademark by a hold-over franchisee constituted the use of a "counterfeit" mark. The Century 21 Court held that it did.
Relying in part on a Ninth Circuit decision, the Century 21 Court explained that when the use of a mark that is identical to a registered mark is likely to cause confusion among the public over whether the goods met certain standards, or were produced by a certain entity, the unregistered mark is a "counterfeit." Applied to hold-over franchisees, the Century 21 Court could find "no reason why an ex-franchisee should escape liability for counterfeiting simply because that person had access to a franchisor's original marks because of the former relationship and therefore did not need to reproduce an identical or substantially similar mark." Based on this, the Century 21 Court held that that the continued use of a trademark mark by a terminated franchisee constituted trademark counterfeiting, and subjected the former franchisee to treble damages.
The immediate effect of Century 21 is that franchisors have an additional cause of action that they can bring against former franchisees who violated the franchise agreement. In addition to causes of action for breach of contract, fraud, account stated in writing and quantum meruit, franchisors should not consider brining a cause of action for trademark counterfeiting if the franchisee continued to use the franchisor's trademarks after the date of termination. Doing so has two (2) immediate effects. The first is that succeeding on a trademark counterfeit claim will entitle the franchisor to recover treble damages against the former franchisee. The second is that the former franchisee, looking at the possibility of treble damages, may be more inclined to reach a quicker resolution of the entire matter. Either way, the Century 21 case provides a valuable weapon for franchisors who are involved in, or contemplating suing their former franchisees.
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