Category: Uncategorized

 
A pilot program launched in 2012 by the United States Patent and Trademark Office (USPTO), suggests that many trademarks registered may not actually be used.  Per remarks by the Trademark Commission regarding the pilot program,  more than half of the trademark registrations selected in the pilot program were unable to verify the actual use of the mark for the goods or services queried.

To date, in just over half of the registrations selected for the pilot, the trademark owners failed to meet the requirement to verify the previously claimed use on particular goods and/or services.  173 of the registrations, or 35%, involved deletions of the goods and/or services queried under the pilot.  In another 80 registrations, or 16%, the trademark owners failed to respond to the requirements of the pilot and any other issues raised during examination of the underlying maintenance filing, resulting in cancellation of the registration.  Accordingly, of the 500 registrations selected for the pilot, to date a total of 253 registrations, or 51%, were unable to verify the previously claimed use in their Section 8 or 71 Declarations.  Post Registration Proof of Use Pilot Status Report

The Trademark Commissioners on the blog remarked:

When selecting a mark for a new product or service, a business will search the USPTO database of registered marks to determine whether a particular mark is
available. Registered trademarks that are not actually in use in commerce unnecessarily block someone else from registering the mark.

The gap between the use of trademarks and registrations detracts from the validity of the trademarks registration status and dilutes the trademarks processes.
Renewal filing requirements are meant to preclude this exact problem.  5 years from initially registering a trademarks and every 10 years thereafter, trademark owners are required to submit use samples [referred to as specimens] to the USPTO.
In response to the widespread issue of false renewal trademarks, the USPTO has changed the renewal process.  As part of the renewing trademarks every 5 and 10 years, trademark owners have always been required to sign a sworn declaration saying that the mark is being used.  The USPTO has made the sworn declaration easier to read and more blatant.

Old Attestation

 

New Attestation

To the further address this issue, the USPTO is looking at instituting a new ‘Expungement’ status for trademarks that have never been used and streamlining procedures to delete trademarks that has been abandoned or that use-requirements were not met.
Based on the pilot program findings, the USPTO has announced its intention to continue random on-going checks of registered trademarks.
 

 
What are sufficient grounds for terminating a franchise?

• Franchisee adds unauthorized food items to the menu.
• Franchisee make takes artistic liabilities with the Brand Logo in published advertisements
• Franchisee fails to name the franchisor as an additional insured on its insurance policies.

Are these sufficient grounds for the franchisor to terminate the franchise agreement?  An arbitration panel deciding question followed a two-step process to determine the answer.

• Does the franchise agreement allow termination for these violations?
• Is there a lesser available alternative to termination?

The case was Benihana, Inc. [BI] v.  Benihana of Tokyo, LLC [BOT].  The franchise agreement at issue had two applicable termination provisions.

If [BOT] violates any [] substantial term or condition of this Agreement and [BOT] fails to cure such violation within thirty [30] days after written notice from [BI] to cure same; [or]

If [BI] gives [] three [] notices of any default hereunder [and such defaults are thereafter cured], within any consecutive twelve [] month period ….

The arbitration panel majority found that the franchisor had a contract right to terminate the franchise agreement, but failed uphold a termination of the franchise agreement saying that a less harsh alternative of injunction compelling the franchisee compliance existed.   This is a bizarre finding by the arbitration panel, which the court reviewing the case questioned, but was powerless to change.
This case highlights the uncertainty associated with the arbitration and court reviews of the franchise terminations and defaults.  Though questionable, uncertain, bizarre, and perhaps not required, the arbitration panel’s process of asking about less harsh alternatives to termination is worth consideration.  Franchise termination carries a high probability for arbitration or litigation challenges and the outcome of such challenges is never certain.

http://eepurl.com/cpZain

To resolve a litigation dispute, franchisor and franchisee enter into settlement agreements.  Settlement Agreements can be a way to avoid costs and time of litigation.  An added benefit is confidentiality.  Litigation is a matter of public record, but settlements can include a confidentiality provisions that prevent the parties from discussing the particulars of case and terms of settlement. Covenants of confidentiality can be a great incentive for entering into a settlement. 
Franchisors may not want the terms of the settlement released or discussed for fear that other franchisees will want that same deal.  Franchisors likewise most likely don’t want prospective franchisees to learn any more about the case than what is required to be disclosed in the FDD.  The inverse may also be true.  Franchisees, may not want their business wrongdoings and possible loss of franchise business discussed with others. 
Both rely on the confidentiality provision in settlement agreement.  What if the confidentiality is broken or violated?  The person with loose lips should be held responsible, right.  They should be made to pay.  Not in the case of Jana Caudill, et al., Plaintiffs-Appellants v. Keller Williams Realty, Inc. In this case, the Franchisor distributed the FDD [Franchise Disclosure Document] to 2,000 persons.  This is overwhelming beyond the persons and entities required to be disclosure to under the FTC Rule and other franchise disclosure laws.  As part of the FTC franchise disclosure laws, franchisors must outline in item 3, claims filed by and against the franchisor, including the claims, demands, and outcome. 
Because the franchisor gave the FDD to more people than required by franchise disclosure laws, the franchisee asserted this constituted a breach of the confidentiality agreement in the settlement agreement.  The court agreed, but refused to award the franchisee liquid damages.  For each incident violation, damages would have totaled $20 million.  The court said there was no evidence that the franchisee suffered any actual monetary damages and without a showing that the franchisee suffered monetary losses, the court awarded the franchisee nothing.  The court simply issued a permanent injunction preventing the franchisor from disclosing or publishing the FDD beyond what is required under the FTC Franchise Disclosures laws.
Disturbing outcome.  To fend against such an outcome, make sure to build-in contractual incentives into settlement agreements aimed at fostering adherence to confidentiality provision.   And, if violations occurs, be prepared to site actual evidence of monetary loses caused by the violation. 
 

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The American Legal System is based on the right to enter into legal contracts freely.  Individuals and businesses are free to contract with whomever they choice. And, so long as the contract is not unlawful, the courts will give deference to the agreement- contact.
Hence the case of  H.B. Automotive Group, Inc, d/b/a Kia of the Bronx, and Major Motors of Long Island City, Inc., d/b/a Major Kia of Long Island City [Dealership Franchisee or Kia Motors of the Bronx ] v.  Kia Motors America [Kia Motors].  Dealership Franchisee  was in violation of their dealership franchise agreement with Kia Motors.  Kia Motors could terminate the Dealership Franchisee’s franchise agreement, but settlement was entered instead.  Under the settlement, the termination was delayed in order to allow the Dealership Franchisee to transfer the franchise to another franchisee.
Franchisee presented 2 prospective buyers or transferees.  The franchisor rejected both saying that they have poor satisfaction ratings [and other things].  Dealership Franchisee presented a third, but time was up under the settlement agreement. Kia Motors terminated the Franchise Agreement.
The case is in New York.  And the court said editing the New York law:

[i]t shall be unlawful for any franchisor directly or indirectly to impose unreasonable restriction on the franchised motor vehicle dealer relative to transfer, sale … or termination of a franchise ….

But, the court goes on to explain, relaying prior cases, settlement agreements can act as a waiver.  Yes, waiver. Hence, settlements are like a- free pass.  Kia Motors did not have to be reasonable when it rejected the third transfer request, because under the settlement agreement, the time to get a transfer approved was up.  Under the settlement agreement, if transfer was not approved by September 1, 2013, the franchise agreement terminated.  The third buyer’s application was not completed till September 11, 2013.  The franchise agreement termination stands.

As dicta, the franchise rejected all three proposed transfers on grounds that the prospective buyers  or transferees’ satisfaction ratings were substandard.  Otherwise stated the franchisor would not approve proposed transfers of the Dealership Franchisee’s franchise agreement, because the buyer [other existing dealerships] had deficient customer service scores below the average satisfaction scores of all Kia Motor dealerships in the Kia Motors System and this was sufficient reasonable grounds for   denying the transfer per the court.  So, the important dictation note from the court is that poor satisfaction rating scores of existing prospective franchisee buyers can be reasonable good cause grounds for a franchisor to deny a franchisee transfer. 
Returning to the holding in the case, settlement can be a wonderful thing for both franchisors and franchisees.  What ordinarily would have been the rule, under franchise laws and statutes, can be void if there is a properly written settlement agreement.  In this case it was the obligation to approve or disapprove a transfer.  But, settlement agreements can also operate as a release of claims, when the release is forbidden by the law.  Settlement agreements can also operate as an enforceable agreement that a material default under the franchise agreement is present and termination of the franchise agreement is permissible and enforceable.  When looking at the options, know the power of the settlement.

It is a story that is not unique.  Franchisee fails to pay royalties as required under a franchise agreement.  Franchisor terminates franchisee.  Franchisee continues to operate.  Franchisor sues franchisee.  This scenario is not in of itself ‘blog worth.’
What makes it ‘blog worthy’ is the franchisor’s claims against the former franchisee.  The franchisor’s complaint against the franchisee, asserts trademark infringement.  Trademark infringement has some teeth.  If a trademark infringement is found, the franchisor could be entitled to attorney fees and cost.  And, the franchisee would be disgorged of all profits from using the name improperly.

Disgorgement is a wonderful graphic word. Disgorgement is [a] remedy requiring a party who profits from illegal or wrongful acts to give up any profits he or she made as a result of his or her illegal or wrongful conduct. The purpose of this remedy is to prevent unjust enrichment.
Under the franchise agreement, the franchisor is entitled to a percentage royalty or flat fee royalty of revenues, which is typically a small percentage of all revenues.  Disgorgement is something greater.  It is all profits.  And, at the end of the day, it was what is.  A franchise agreement is licensure allowing franchisees to use the franchisor’s trademark in a limited way, limited time, and under limited conditions.  Any, use beyond what is called for in the franchise agreement is trademark infringement.

The case is Ghazi Ghori and Chooza, LLC.   https://www.pacermonitor.com/public/case/17827256/KFC_Corporation_v_Ghori_et_al  Assertions of the trademark infringement is probably again not unique in the case of the claims against former franchisees, but a noteworthy reminder of the claims available, liability exposure, and need for trademarking.
 

 
The Franchise Disclosure Document [FDD], is given to each prospective franchisee.  It contains countless required disclosures.  The disclosures includeseverything from who are the persons with franchise management and sale responsibilities, what fees are changed, what are the revenues and profits of the franchisor, and what if any, representations the franchisor makes regarding franchisee earnings.
What if something is missing?  What if something is inaccurate in the Franchise Disclosure Document?
The general answer, if there is a material inaccuracy in the Franchise Disclosure document, is rescission.  If the FDD contains misinformation, the common remedy is the franchisee is entitled to rescission.
Rescission is like a money back guaranty.  Rescission operates to undo the transaction- to put everything back the way it was if before the franchise agreement was signed.  That means the franchisee is entitled to be reimbursed the initial franchisee fee and a lot more.  If the franchisee bought inventory, paid travel expenses for the initial training, purchased equipment, and put a deposit on utilities, the franchisee may be entitled to compensation for all these things.  How much could this cost?  How much money may the franchise be entitled?  Look at the initial investment cost listed in item 7 of the FDD.  Yes, it is all those things and anything else the franchisee paid.

Does every inaccuracy, every omission in the FDD warrant rescission?  No, of course not.  It is up to a court, a trier of fact, and perhaps state enforcement agencies.  Cases go both ways.  In a case by the Georgia court of appeals, the answer was no.  The case is Legacy Academy, Inc., et al. v. Doles-Smith Enterprises, Inc., et al.  The facts of the case revealed an accuracy in the Franchisor’s cash flow statement in the FDD.  And, that the FDD contained an inaccuracy in the Franchisor’s litigation history.  The case arose when the franchisee notified the franchisor it was unilaterally terminating the franchise agreement.  And, the franchise discontinued paying royalties, de-branded and continued business operations.  The franchisee was upset, because it was not turning a profit.  The franchisor sued for failure to pay royalties. The franchisee counter-sued saying it was entitled rescission of the franchise agreement.

The lower courts agreed and awarded the franchisee 350,000 dollars in negligent misrepresentations and 40,000 dollars in negligence.  But, the Appellate court reversed saying that the errors and omissions in the franchisor’s cash flow statement and the litigation history did not cause the franchisee to lose money.  The errors in the FDD did not depreciate or lessen the value of the franchise; therefore, the franchisee was not entitled to damages for negligent misrepresentations.  The damages that the franchisee suffered where consequential and not connected the franchisor’s errors in the FDD.  This left the franchisee with damages solely for negligent, which were offset by royalty payments that the franchisee failed to pay and were due.  It was almost a wash.  The franchisee nor the franchisor got a large payout.
Interesting didee of a case.  It shows that when it comes to errors in the FDD, the court can go either way.  The risk of the errors in the FDD can cost 40,000 dollars or 400,000  dollars or nothing.  It is all in how the court decides and there is no predictability.

Franchisor liability for employment claims has stolen the spot light from another big source of Franchisor liability- liability to customers.  In recent cases of McDonalds and other unfortunate cases, franchisors are being found liable to employees for wages and hours, discrimination and other work related claims.
But there is another big source of the liability that faces franchisors.  It is not new.  It is not uncommon.  And, it is very real.  It rides on the same principals as employee claims.  The source of the liability is customer, third party tort claims.  Customers or other third parties are injured from a slip and fall, bad food, unperformed services, and many other claims.  The customers or other persons sue the franchisee, but they also in the same law suit sue the franchisor.  The basis for the claim lies in the control that franchisors have over franchisee.
In one such case a Florida jury has awarded 10.1 million dollars to a victim of the car accident caused by a Domino driver to be paid by the Franchisor.  Why? How?  The jury said that the franchisor had control and therefore was liable for the accident.  Domino discontinued  its 30 minute delivery guarantee, but continues to offer incentives for speedy deliveries and consumer satisfaction.

This sends   the historic message that in practice and in the franchise agreement, cautions need to be taken to protect third party liability by limited Franchisor control.  How is that   possible when attempting to create good quality assurances and uniformity?  Here are some suggestions;
 

1. Give suggestions, choices to meet objectives.
2. State the goal, not the means to the goal.
3. Adopt standards and guidance from recognized trade groups, associations, or governmental entities rather than creating your own.

 

 
There is a new buzz term in franchising: Co-branding. Co-branding is the offer of more than one franchise concept by the franchisor/franchisee. The concept is not new. A franchisor offering more than one franchise concept is sometimes referred to as a family of brands or sister brands. Think of the food industry. Think of hotels. A deal was just announced by Doc Popcorn & Dippin’ Dots. The sister brands, Doc Popcorn and Dippin’ Dots were offered franchisees with the opportunity to operate the two concepts in joint in-line or kiosks in malls. http://www.businesswire.com/news/home/20160322005428/en/Sweet-Savory-Growth-Plan-Doc-Popcorn-Dippin%E2%80%99
 
For co-branding the franchisor provides more than one franchise the opportunity offered to the same franchisee. There are pluses and minuses to co-branding.  How are covenants of non-competition, non-solicitation, and confidentiality handled? Are franchise terms coterminous?

A new twist on the co-branding has been the pairing of unaffiliated brands [brands not owned by the same franchisor]. As with co-branding, the pluses and minuses are still present, but the concerns regarding cross defaults, renewal, and co-mingling are enhanced and more problematic.

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Have a Question?

Quick Fact:
Plaintiff Rib City Franchising, LLC, enters into a franchise agreement with Toni Jorgensen for Rib City franchisee. The franchise agreement is sequecently terminated for breach of contract. Toni Jorgensen sell the assets of franchise to Sara Bowen post the franchise Termination. Sara Bowen open a restaurant at the same location, using the same telephone number, website [and website content], and made no changes to the interior restaurant layout, decor, color scheme, wall hangings, artwork, dark-colored wood booths, hanging light fixtures, and hanging window frames previously used in Rib City Grill, and kept the menu basically the same. Sarah Bowen called her new restaurant Pig City BBQ.
The issues:
While there is a non-compete with franchisees and former franchisee, there is no non-compete with 3rd parties.
Solution:
Sue anyone that buys former franchisee assets and attempts to operate a completing business using the franchisee system’s décor [referred to as trade dress in legal terms], menu, and steals social media content and accounts on claims of trademark infringement and misappropriation of trade secrets [in common lingo stealing and using].
Outcome: The court said:
• No relief for similar names Pig City and Rib City. The court argued that Pig and Rib sound significantly different. And, Rib City Grill is not ‘conceptually or commercially strong.’ On the spectrum Rib City is a descriptive with diminished enforceability.
• No Relief for using Trade Dress: The décor including interior restaurant layout, decor, color scheme, wall hangings, artwork, dark-colored wood booths, hanging light fixtures, and hanging window frames was not distinctive enough to be trademark protect-able.  The décor was not distinctive enough to get trade dress protection.
• No relief for the menu and receipts. The court said that the menu was distributed to the public, so the menu could not be confidential. And the receipts, Rib City said that had to provide it that could not just say is tasted like their receipts.
Lessons to Learn:
1. Do de-identify locations post termination
2. Do create arbitrary and fanciful trademarks not descriptive trademarks
3. Do not share anything that you want to keep confidential
4. Don’t let franchisee have their own URL addresses
5. Maintain control of social media accounts
The lessons learned are not just for the benefit of franchisors. It is for all other franchisees in the system that have to compete with a copycat.
 
The case: Rib City Franchising, LLC v. Sarah Bowen, et al. in the Central District of Utah.

It is common place within the franchise industry that a franchisor requests a franchisee to complete a questionnaire before signing the franchise agreement saying that franchisor followed disclosure protocol:
 

• Franchisee was given the franchise agreement with all blanks filled in 7 days before signing or paying any money; and
• Did the Franchisor provide Franchise Disclosure Document [FDD] 14 days before signing franchise agreement or paying any money; and
• Did the franchise rely on any earning or financial representation other than those disclosed in the franchise agreement.

In some instance the franchisor may ask the franchise to attest to the proper disclosure and no financial performance as provision of the franchise agreement.
 
Is this just more boilerplate, or do these questions and attestation have any teeth.  Do they preclude the franchisee from later alleging that they did not have proper disclosure or that there was an improper earning claim or financial performance representation made?

One case provides antidotal evidence that the franchisee’s attestation and answers on the questionnaires do have meaning.  The case is Fantastic Sams Salons Corp. v. PSTEVO, LLC.  In the body of the franchise agreement there was a disclaimer that read:
 

• NO ORAL, WRITTEN OR VISUAL CLAIM OR REPRESENTATION WHICH CONTRADICTED THE DISCLOSURE DOCUMENT WAS MADE TO ME, EXCEPT: and
• NO ORAL, WRITTEN OR VISUAL CLAIM OR REPRESENTATION WHICH STATED OR SUGGESTED ANY SALES, INCOME, OR PROFIT LEVELS WAS MADE TO ME, EXCEPT:

 
There was space provided for the franchise to insert comment or statements.  The franchisee wrote ‘none’ after each disclaimer and initial his statement.

What can you tell a buyer about a franchise outlet? Click here or go to:  http://wp.me/p4bshS-17C

 
The court reasoned that the franchisee could not have been fraudulently deceived by franchisor’s representations.  The franchise wrote none when asked.  The franchisee argued that the disclaimer did not squarely ask about the representations he alleged.  The court tossed that argument to the wind saying the franchisee should have said something, wrote something other than ‘none.’

Case dismissed.

The franchisee lost his case against the franchisor.  The franchisee’s attestation in the franchise agreement, coupled with his none response, prevented the franchisee from winning its fraudulent misrepresentation case against the franchisor.
 
It the franchisee won his case, he would have been entitled to reimbursement of his initial franchise fee, all the money he spent attempting start-up and operation of the franchise, and perhaps much more.