Holdover Franchisees-Counterfeiters, Not Just Infringers

05/30/2006 / Thomas Oppold

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"Holdover Franchisees-Counterfeiters, Not Just Infringers," Thomas Oppold, The Franchise Lawyer, ABA Forum on Franchising, Volume 9, Number 3, May 2006.

Courts have recognized that a holdover franchisee's unauthorized use of the franchisor's trademarks "can have no result other than to cause actual confusion." Burger King Corp. v. Hall., 770 F. Supp. 633, 638 (S.D. Fla. 1991). Therefore, upon a showing that the franchisor is the owner of a federally registered trademark, and upon a showing that the ex-franchisee continued to operate the franchise after termination of the franchise agreement, the holdover franchisee is presumed to be liable for federal trademark infringement. While a prevailing trademark owner is entitled to recover its actual damages and the infringer's profits under federal trademark law, courts have wide discretion in determining the amount to award, even if the infringement was willful. Likewise, attorneys’ fees and costs are generally recoverable against a trademark infringer only if the court finds the case "exceptional." A finding of willful infringement is generally not sufficient, by itself, for a court to find a case exceptional for the purpose of allowing the trademark owner to recover its attorney's fees against the infringer.

Accordingly, when pursuing legal action against a holdover franchisee, franchisors should state claims for both federal trademark infringement and trademark counterfeiting (along with, of course, any other theories of recovery). Why counterfeiting? Because, if a claim for trademark counterfeiting is established, federal law mandates that the court triple the amount of damages or profits awarded, whichever is greater, and award reasonable attorney's fees. 15 U.S.C. § 1117(b). Alternatively, rather than recovering actual damages or the counterfeiter's profits, a plaintiff may instead elect a statutory damages award -- a remedy not available for mere infringement. If a plaintiff elects statutory damages, a court may not award less than $500 nor more than $100,000 per counterfeit mark per type of goods or services sold, offered for sale, or distributed. In cases where the use of a counterfeit mark was willful, the court may increase the statutory damage award to an amount not more than $1,000,000 per counterfeit mark per type of goods or services sold, offered for sale, or distributed. 15 U.S.C. § 1117(c).

In order to establish a claim for trademark counterfeiting, the plaintiff must prove (1) the defendant infringed a federally registered trademark, and (2) the defendant intentionally used a counterfeit mark knowing it was a counterfeit. A counterfeit mark is defined under the federal trademark statute as "a spurious mark which is identical with, or substantially indistinguishable from, a [federally] registered mark." 15 U.S.C. § 1127. Therefore, a claim for trademark counterfeiting requires a higher burden of proof than is required for mere trademark infringement.

With a few notable exceptions, courts routinely find holdover franchisees liable for trademark counterfeiting. The moment a franchise agreement is terminated, any product sold by the terminated franchisee that bears the franchisor's trademark or any service rendered by the terminated franchisee under the franchisor's trademark becomes a counterfeit. Thus, a franchisor generally can establish the second prong of a trademark counterfeiting claim (i.e., intentionally using a counterfeit mark knowing the marks to be counterfeit) simply by showing that the holdover franchisee knew the franchise agreement was terminated, but continued to operate the franchise anyway using the franchisor's trademarks.

For example, in Precision Tune Auto Care, Inc. v. Pinole Auto Car, Inc., 2001 U.S. Dist. LEXIS, 24840 (E.D. Va. 2001), a court found a former franchisee of Precision Tune Auto Care liable for trademark counterfeiting on summary judgment where the ex-franchisee continued to sell goods and services using Precision Tune's registered trademarks after termination of the franchise agreement. The court awarded Precision Tune triple damages and attorney fee's. In another case involving a holdover franchisee, Hospitality Int'l Inc. v. Mahtani, 1998 U.S. Dist. LEXIS 16445 (M.D.N.C. 1998), a court found that a terminated franchisee liable for trademark counterfeiting where the ex-franchisee continued to use the "Scotts Inn" trademark in connection with the sale or offering for sale of motel services after the termination of the franchise agreement. The court awarded the plaintiff treble damages, attorneys fees and costs as well as pre and post judgment interest.

In The State of Idaho Potato Commission v. G&T Terminal Packaging, Inc., 425 F.3d 708 (9th Cir. 2005), a case involving an ex-licensee, the Ninth Circuit Court of Appeals appeared to apply the same principles as applied by other courts to holdover franchisees. The Ninth Circuit found a wholesale distributor of potatoes liable for $100,000 in statutory damages for trademark counterfeiting for continuing to use bags bearing the "Idaho" potato certification mark after the expiration of its license to use the certification mark. Because the court did not articulate any conclusions of law as a basis for its decision, one can only infer from the decision that the court presumed that because the defendant used the same bags after the expiration of the license as before, the mark became a counterfeit mark which the defendant used intentionally knowing it was a counterfeit.

There is at least one notable exception to the presumption that use of a franchisor's or licensor's trademark by a holdover franchisee or licensee constitutes trademark counterfeiting. The Sixth Circuit Court of Appeals in U.S. Structures, Inc. v. J.P. Structures, Inc., 130 F.3d 1185 (6th Cir. 1997) held that the use of the franchisor's original trademark by a holdover franchisee after the termination of the franchise agreement was not the use of a "counterfeit mark." Id. at 1192. However, the Sixth Circuit did conclude that the unauthorized use constituted trademark infringement. As indicated above, courts in other jurisdictions have not followed the Sixth Circuit’s decision. In fact, some district courts within the Sixth Circuit that have subsequently considered the issue have found the use of an original trademark by a holdover franchisee to constitute trademark counterfeiting. See, e.g., Abercrombie & Fitch, et al. v. Fashion Shops of Kentucky, Inc., 363 F. Supp. 2d 952 (S.D. Ohio 2005).

Accordingly, to at least ensure the possibility of recovering treble damages and attorney's fees against a holdover franchisee, counsel representing franchisors should consider pleading trademark counterfeiting claims in addition to trademark infringement claims.