“LAW & ORDER”/ “DRAGNET”-STYLE DISCLAIMER: The following story, though
loosely based on real events, is fictional. Not only have names been changed to protect the innocent, but facts have been changed to fit my literary purposes.
“Betty” was a former “X Company” franchisee. After X Company terminated her franchise, Betty was able to continue operating an independent version of the business from the same location without violating her non-compete agreement. The newly non-franchised business struggled with operational issues, however, and a large number of customers filled its “comment” box with written complaints about poor service and other problems. Betty, anxious to do damage control, prepared and sent each and every one of the many complaining customers a variation of a form letter apologizing for the unpleasant experience. Unfortunately, she unwittingly had made a bad situation much worse by writing those letters on leftover stationery that contained X Company’s logo and slogan.
X Company, which already had decided to sue Betty on other grounds, learned of the letters’ existence and responded by asserting a claim against her for trademark / service mark infringement (which we’ll just call “trademark infringement”). In short, the parties’ Franchise Agreement was a typical one in that it expressly authorized her to use the company’s registered trademarks only during the franchise relationship – and required her to fully “de-identify” her business with the franchisor’s brand upon termination. X Company argued that, since the contract forbade Betty’s continued, post-termination usage of its marks, her use of X Company letterhead violated not only the contract itself, but also the Lanham Trade-Mark Act (the “Lanham Act”).
The Lanham Act is a federal statute that forbids, among other things, the unauthorized use, or “infringement,” of another’s validly registered trademarks or service marks. The aims of this prohibition include protection of the general public from deceptive trade practices and protection of businesses from unfair competition. For example, one could credibly argue under the statute that an independent fast-food restaurant that displayed the McDonald’s marks without permission would be victimizing both (i) its customers (who could, quite reasonably, think they were purchasing McDonald’s-approved products from a McDonald’s-approved vendor); and (ii) the McDonald’s Corporation (as an impostor would be unfairly benefitting from the franchisor’s marks and maybe even diverting customers from nearby McDonald’s franchisees).
Betty’s actions, however, had not “injured” anyone in quite that way. Betty had, after all, timely removed all “X Company” signage and marks from public view, and, since her termination, she had not used X Company’s marks in connection with advertising. Moreover, her apology letter had lacked the intended effect, as none of its recipients became return customers. What she did do, though, according to the franchisor, was cause it to lose control over the marks and the products / services associated with them. Courts tend to recognize such loss of control as an inherent injury constituting “irreparable harm” to the mark owner’s good will and reputation, regardless of the circumstances. Betty, in fact, had arguably increased the extent of that injury through her particular use of marks; that is, by using X Company’s letterhead in connection with her apology letters, Betty quite possibly had caused disgruntled former customers to hold X Company responsible for their “bad” experiences with her independent business.
One who violates the Lanham Act faces potentially dire consequences. In addition to issuing an immediate injunction (a type of court order) requiring the infringer to stop the unauthorized use of its marks, a court could require the infringer to pay to the mark’s owner (i) the infringer’s profits obtained during the infringement period, (ii) “damages” to compensate the owner for any additional injury that it might have suffered as a result of the infringement, and (iii) costs incurred by the owner in enforcing its rights under the Lanham Act. Even worse for the infringer, the court has the power to increase the damages amount by up to three (3) times the amount of the owner’s actual loss. Finally, in extraordinary circumstances, the court might also require the infringer to pay the owner’s attorneys’ fees.
As demonstrated by Betty’s unfortunate mistake, it is not difficult for a former franchisee to run afoul of the Lanham Act and get into serious trouble. If you’re a terminated or “expiring” franchisee, follow the franchisor’s de-identification requirements to the letter. In the event that the post-termination instructions are insufficient, immediately do at least the following when your franchise relationship expires: (i) remove or cover all of the franchisor’s signs and all other items containing the franchisor’s name; (ii) ensure that you and your employees cease using the franchisor’s name and slogans when answering the telephone, sending emails and engaging in social media; and (iii) stop using the franchisor’s stationery. These steps might be inconvenient, but they’ll be worth your time and energy.