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The principle of freedom of contract, the right to control the use of trademarks and the concept of injunctive remedies have all come together in the field of franchise law to create a trend that bodes well for franchisees, but creates significant risks to the franchisor community in the context of franchise terminations. In concept, trademark law creates rights separate and apart from those created by franchise relationships. Trademarks are considered property. Accordingly, under the Lanham Act, trademark owners have the right and, in fact, the duty to control the use of their marks at least in order to maintain the special status granted to owners of marks. Moreover, the Lanham Act makes it unlawful for any person to use a registered mark in various ways without the consent of the registered owner of the mark. Remedies for breach of these statutory rights include an action for damages as well as the right to obtain injunctive relief. Within the franchising context, the franchisee’s right to use the franchisor’s marks is embodied in the franchise agreement. In fact, in most franchise agreements, the very first operative paragraph grants franchisees a right to use the franchisor’s marks, typically in connection with the operation of a business system created by the franchisor and in all cases subject to the terms of the franchise agreement itself. As long as the franchise relationship is intact and the franchisee adheres to his or her contractual obligations, the franchisee’s rights to use the marks are without question. END OF FRANCHISE AGREEMENT Conflict arises, however, when the franchise agreement comes to an end. When the agreement expires by its terms, typically there is little question that the franchisee’s rights to use the marks evaporate, absent an agreement by the parties to renew. If the franchisee continues to use the marks in this situation, case law clearly upholds the franchisor’s right to obtain injunctive relief to prevent the franchisee from further use of the marks. The situation becomes more complicated when a termination, as distinguished from an expiration, of the franchise agreement occurs. When the franchise agreement is duly terminated in accordance with its terms by the franchisor, the situation is no different from where the agreement expired by its terms. The franchisor is likely to prevail and obtain an injunction against the franchisee if the franchisee continues to use the marks after termination has been perfected. However, the validity of the termination itself often is called into question. A typical example is where the franchisor allegedly failed to provide contractually required services and, in response, the franchisee decides to suspend payment of royalty fees. The franchisor, after notifying the franchisee of its breach and the franchisee’s failure to correct the breach, terminates the franchise agreement, and litigation ensues. Until the dispute is definitively resolved, should the franchisee be allowed to continue to use the franchisor’s marks? Or, alternatively, should the franchisee be enjoined from using the franchisor’s marks, either until the rights of the parties have been adjudicated — or, more pointedly, forever — irrespective of who wins the dispute under the franchise agreement? It is here where the world of trademark law collides with the world of franchise law, as evidenced by several cases decided in the past decade that have resulted in a trail of uncertainty for franchisors and franchisees in post-termination situations. Traditionally, courts separated claims of unauthorized trademark use from those relating to breach of franchise agreement. Thus, if the franchise agreement, rightfully or wrongfully, was terminated, the termination itself was considered a revocation of the consent necessary to continue use of the marks and thus authorized a claim under the Lanham Act for unauthorized trademark use. This did not mean that the franchisee was left without relief, only that relief was limited to the recovery of monetary damages. See, e.g., Burger King v. Mojeed, 805 F. Supp. 994 (S.D. Fla. 1992), and Hall v. Burger King Corp., 912 F. Supp. 1509 (S.D. Fla. 1992). FRANCHISOR VICTORY This traditional analysis took a step in a different direction with the 1992 3rd Circuit decision in S&R Corp. v. Jiffy Lube Int’l, Inc., 968 F.2d 371 (3d Cir. 1992). At the end of the day, Jiffy Lubewas unquestionably a clear-cut victory for the franchisor. The franchisor had terminated the franchise agreement as a result of the franchisee’s failure to pay royalties, a course that the franchisee followed after concluding that the franchisor had failed to maintain system standards. Although the 3rd Circuit overturned the District Court’s decision denying the franchisor’s request for a preliminary injunction and thereby prevented the franchisee’s continued use of the franchisor’s marks, the court noted that the franchisor had an obligation to show that the franchise agreement had been properly terminated. However, the court did not consider the franchisor’s missteps relevant to that determination. The fact that the franchisee had failed to pay royalties was sufficient to justify the termination, even if the franchisor had breached the franchise agreement. This left the franchisee with a right to recover its damages, but prevented it from continuing operations under the franchisor’s flag. While Jiffy Lubemade short shrift of the principle that performance of a contract can be conditioned on the other party’s performance, at least in the context of continued trademark use, the court’s reference to a “proper termination” opened the door to a trend that has proven franchisee-favorable. Subsequent to Jiffy Lube, most of the cases involving the continued use of a franchisor’s marks after a termination have ultimately ruled in favor of the franchisor and granted injunctive relief. But in so doing, the courts have examined whether there was good cause to terminate (e.g., whether the termination was “proper”) before dooming the franchisee’s operations. Such was the case in The Original Great American Chocolate Chip Cookie Co. v. River Valley Cookies, 970 F.2d 273 (7th Cir. 1992), and McDonald’s Corp. v. Robertson, 147 F.3d 1301 (11th Cir. 1998). In River Valley, the Seventh Circuit found that the franchisee had, among other breaches, failed to make timely payments of invoices, underreported income and failed to adhere to quality standards. In this light, the court had little difficulty concluding that the trial court had erred in not granting a preliminary injunction for the franchisor. In Robertson, the franchisee argued that the franchisor had terminated the franchise relationship because the franchisor wanted the franchisee to relocate, but the franchisee had refused to do so. The franchisor, on the other hand, demonstrated a continuing franchisee failure to adhere to safety standards. Affirming the trial court’s grant of a preliminary injunction for the franchisor, the 11th Circuit noted that a showing of proper termination was a condition to granting an injunction based on an unauthorized trademark use in violation of the Lanham Act. There are two other cases, however, that, absent Jiffy Lube, would have likely been decided for the franchisor, but in the shadow of Jiffy Lube, resulted in franchisee favorable decisions. MORE CASE LAW In Delaria v. KFC Corp., Bus. Fran. Guide (CCH) �10667 (D. Minn. 1995), the court refused to grant an injunction against the franchisee’s continued use of the franchisor’s marks after termination. The franchisee in Delariarefused to renovate its operations, in violation of the express provisions of the franchisor’s national standards and, accordingly, the franchisor terminated the franchise agreement. The franchisee claimed that the requirement was unreasonable, and the court agreed with the franchisee. An important factor in this decision was that the franchisee was otherwise “pure.” It was current on its financial obligations, and the franchisor failed to prove that the franchisee was not adhering to the franchisor’s other standards. Thus, the court concluded, there was no irreparable damage. The court also concluded that the franchisor had failed to establish that the franchise agreement had been properly terminated. Four years later, in Ispahani v. Allied Domecq Retailing USA, 320 N.J. Super. 494 (App. Div. 1999), a New Jersey court similarly refused to grant the franchisor’s motion for a preliminary injunction under the Lanham Act for trademark usage after termination of the franchise agreement. In Ispahani, the franchisee had been late in making payments to the franchisor. Thus, the franchisee did not come into the litigation in as strong a position as the franchisee in Delaria. The franchisee successfully argued, however, that it was in poor financial condition because the franchisor had committed unconscionable acts by encouraging the franchisee to incur significant startup costs and then refusing to give final approval to the franchisee’s plan. After examining the parties’ evidence, which was characterized by the trial court as scant and conclusory, the trial and appellate courts concluded that the franchisor had not established good cause for termination under the New Jersey Franchise Practices Act and denied the franchisor’s request for injunctive relief. Thus the concepts of consent and authorized use had to be considered in light of the New Jersey act’s good cause requirement. Where will the law travel from here? The crystal ball is, on the whole, difficult to read. Make no mistake that, as was demonstrated in Robertson, the franchisor who documents his file on franchisee breaches will have a courtroom advantage. But, in the same vein, as Delariademonstrates, the franchisee whose record of franchise compliance is clean will make a sympathetic party worthy of the court’s protection against the Goliathfranchisor. Although the outcome in these disputes may be difficult to predict, it seems clear that the pre- Jiffy Lubedays, where the franchise relationship was held irrelevant to the Lanham Act claims, are gone for good. “Good cause” and “proper termination” now seem to be permanent factors in determining whether a franchisee can claim continued trademark rights after a franchise agreement termination. Rupert M. Barkoff is a partner and head of the franchise practice team in Atlanta-based Kilpatrick Stockton. He also is a former chairman of the American Bar Association’s Forum on Franchising. His partner Chris Bussert and Martin Gilbert of Stryker, Tams & Dillof Newark provided counsel on this column.

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