Dollars to Donuts: The Dark Side of Trademark Injunctions in Franchise Actions
When a franchisor sues a franchisee to obtain judicial blessing of a notice of default and termination—on the franchisor’s own initiative, or because the franchisee challenges the validity of the termination—typically the franchisor will include a cause of action for trademark infringement and move early, perhaps immediately, for a preliminary injunction enjoining the franchisee from continuing to use the franchisor’s intellectual property. Such an injunction, if granted, effectively shuts down the franchisee, inasmuch as it is the use of the franchisor’s intellectual property that the franchisee is paying for, principally.
The franchisor’s argument to the court, as it must be, is that the continued use of its trade marks, et cetera, by the franchisee allegedly in default is a violation of both contract and law that will cause the franchisor irreparable harm. This is probably true if the default at issue concerns a system violation concerning heath, safety, or the quality of goods or services provided by the franchisee.
But what if the default is simply an alleged failure to pay money, or the like? The franchisor might be likely to prevail on this cause of action, and in the end would be entitled to terminate the franchise agreement (and the included license to use its marks), but there is no harm to the public during the pendency of the action. If the doughnuts are the same as they ever were, for example, then there is no risk of consumer confusion, the sine qua non of trademark protection. Accordingly there is, arguably, no reason to enjoin the franchisee’s use of the marks pending trial of the action.
To the contrary, injunction would require the franchisee to go dark, almost always ruining its business. Therefore, even if trial reveals that the franchisor is not entitled to judgment, potentially irremediable damage to the franchisee will have been done—damage that an injunction bond might not adequately protect against.
The law is, for better or worse (that is, better for franchisors, worse for franchisees), that a franchisor is entitled to stop a franchisee from using the franchisor’s marks even while it remains to be decided by a court whether the franchisee has defaulted in its obligations under its franchise agreements. But should it be so?
The franchisor will typically assert, in support of its application for a preliminary injunction, that it has already terminated the franchise of the franchisee and therefore the franchisee is already using the franchisor’s marks without a license to do so. But often the lawsuit that provides the context for the injunction application is intended to ratify the termination, and accordingly unless and until the court rules in favor of the franchisor ultimately that the franchise is no longer in effect, the franchisee possesses a valid and continuing license to use the marks at issue under the terms of the franchise agreement. Under those circumstances, then, the franchisor would seek a preliminary injunction to do the opposite of what a preliminary injunction is generally intended to do: preserve the status quo pending a determination on the merits of the claims asserted. A grant of a preliminary injunction would be tantamount to a grant of summary judgment on a claim of trademark infringement (and perhaps claims of trademark dilution, trade dress infringement, and unfair competition, which often accompany the primary trademark claim).
The franchisor will also typically assert that it will lose control over its trademarks because of the purported termination. Such an assertion is likely to be misleading. The franchisee that has contested the purported termination will continue its business pending the determination of the court. And in continuing its business, the franchisee will provide to the consuming public the same products or services that it has been providing all along. There will be, therefore, no variation in the quality of the goods or services sold under the marks of the plaintiffs. The goods or services will continue to be “authentic,” and the franchisor will suffer no damage to its reputation and will lose no customers.
There is case law that a demonstrated likelihood of success on the merits of a trademark infringement cause of action almost inevitably leads to irreparable injury… but, as courts have acknowledged (“almost”) such is not always the case. The franchisor will argue that a franchisor will lack control over its trademarks when a franchise agreement is terminated yet the franchisee continues to use the franchisor’s marks… a situation that the franchisor will claim results in irreparable harm. But the franchisor might create this situation itself, or the illusion thereof, and not just by purporting to terminate the franchisees. The franchisor might be less than forthright with a court by intentionally pretending that it will have no control over the franchisee’s continued use of the franchisor’s marks during the pendency of the plenary action.
Were the parties at the end of the action, with the court having determined that the franchise agreement at issue has been terminated properly and effectively, then the franchisor might have a legitimate complaint. But with only the franchisor’s assertion that the agreement has ended (but the franchisee’s assertion to the contrary), the franchisee concedes the franchisor’s right to continue to control the franchisee’s use of the marks at issue. The franchisee will desire to continue doing business as usual, including by discharging all obligations under the franchise agreement, loath to run (further) afoul of the franchisor. Additional defaults or purported terminations will do the franchisee no good at all.
So the franchisor will have no true reason to suspect or to assert that it will be unable to control the franchisee’s use of the trademarks at issue. Any such loss of control would be created by the franchisor itself (or merely suggested as a possibility as a means to persuade the court to grant the preliminary injunction sought). But self-inflicted harm can not be deemed irreparable as a matter of law.
Finally, the court is supposed to take into consideration in both trademark and preliminary injunction analyses the effect on the public. The relevant consuming public—those who patronize the franchisor’s franchise locations—likely do want to be able to depend on getting true products and services from stores operating under the licensed names. The public, on the other hand, can not be said to care whether the franchisee in question has paid its franchise fees. If the franchisee were selling inferior products or services, then the public interest might be implicated. In a minor contract dispute about the payment of money only, and so long as the public is not informed that the franchisor has purported to terminate the license of the franchisee, there will be no consumer confusion. Certainly, the franchisee will not inform the public, for to do so could mean the ruin of its business almost as surely as if its store were to go dark. If the franchisor intends to publicize its purported revocation of the franchisee’s license, then the franchisor would again be inflicting the alleged harm upon itself.
Nevertheless, almost without exception, any lawsuit by a franchisor against a franchisee will (should?) include a claim of trademark infringement (which has the added not-insignificant benefit of opening the doors of federal courts). A motion for a preliminary injunction, however, is often overkill, and merely a tactic intended to ruin the franchisee. Until courts realize this, however, the option remains available.
