May 7, 2015 - Franchise Articles by |

Legal Update: Avoiding Treble Trouble in Trademark Disputes

Franchise termination disputes frequently involve claims by the franchisor that the franchisee has violated the federal trademark or Lanham Act. And, of most interest for the franchisee or dealer, the Lanham Act allows franchisors or the mark-owner to obtain treble damages for a franchisee's use of the franchisor's marks after termination. Accordingly, the job of your franchisee lawyer is to, in part, help you avoid treble damages in franchise termination cases. 

Franchise agreements always contain language allowing a franchisee to use the franchisor’s logo and other trademarks. When a serious dispute arises between a franchisor and franchisee, the franchisor in most circumstances will terminate the franchisee and demand that the franchisee immediately de-identify its business. In the face of a franchisor’s demand to the franchisee to “take down the signs,” some franchisees remove all of the franchisor’s trademarks; others, however, refuse to do so. In those cases where the franchisee continues to use the franchisor’s mark and name after the alleged termination date, the franchisor will almost certainly sue the franchisee, alleging that the franchisee’s use of the mark and name is injuring the franchisor.

Under the Lanham Act, a federal statute governing use of a trade mark or trade name, franchisors are permitted to seek in court from franchisees triple the amount of damages the franchisors allege they have sustained arising out of the franchisee’s continued use of the name and mark. Under the Lanham Act, a court can award triple the actual damages, called “treble damages,” if a court finds that the franchisee, in failing to de-identify, engaged in conduct that was “malicious, fraudulent, willful and deliberate.” The presumption had been that franchisors could often automatically be entitled to treble damages, and franchisors almost always asked for such damages.

One case where a franchisor requested triple damages was Ramada Franchise Systems Inc. v. Gene Boychuk and BSB Inns, Ltd. In Boychuk, a Federal court in New York found that the franchisor, Ramada, was not automatically entitled to treble its actual damages, despite the fact that the hotel failed to de-identify itself as a Ramada. In that case, Ramada, a national hotel franchisor, terminated one of its franchisees, George Boychuk (who had died before termination, and neither he nor his estate was party to this suit). Ramada then sued George’s brother Gene Boychuk (“Boychuk”), who had been running the hotel since George’s death, and also sued the brothers’ management company, BSB Inns. Ramada claimed that the franchise agreement had been breached due to a failure to pay franchise fees as provided in the franchise agreement.

This case does not concern contractual damages, such as liquidated damages, because the court held that Boychuk and BSB were never parties to the license agreement. The court ruled that if Ramada wished to pursue liquidated damages, it would have to pursue a separate action against the estate of George Boychuk, who was still considered to be the sole franchisee.

Boychuk and BSB, in their pleadings, admitted that there had been violations of the Lanham Act, which protects a company’s trademarks. Boychuk and BSB admitted that Ramada Inn’s trademarks had been used, in violation of the Lanham Act, from the date of termination on May 24, 2001 to January 23, 2002. Both parties also agreed that Ramada was due some measure of damages, but neither side was able to agree on the exact amount. Ramada asked for treble their actual damages, which is allowable under the Lanham Act, 15 U.S.C. §§ 1114(1)(a), 1125(a) and (c).

Ramada claimed that it was owed $66,713.27 in actual damages, which was the amount of revenue that it would have been paid in franchise fees if Boychuk and BSB had not been terminated (8.5% of the gross room revenues of $784,862 for the period of infringement). Boychuk and BSB argued that the amount due should have been reduced to 4%, because they claimed that the additional 4.5% of the total room revenues were supposed to be paid for the use of the Ramada reservation system, which the hotel was not allowed to use after it was terminated. The court stated that the fee was paid for a wide variety of services, and not just the Ramada reservation system. Accordingly, the Court awarded Ramada $66,713.27 in actual damages, or 8.5% of the gross room revenues. Additionally, the court ordered BSB, the management company, to pay Ramada’s reasonable attorney’s fees.

Ramada also asked the court to triple its actual damages, due to the “malicious, fraudulent, willful and deliberate conduct” of the Defendants in failing to de-identify. In rejecting Ramada’s request, the Court examined the award, and found that the actual amount of damages already granted was sufficient. The Court concluded that allowing treble damages is a compensatory measure only, which means that treble damages are only available to parties whose actual damages are too low to properly compensate them for the harm that they suffered. Any additional damages would have been punitive, and the court explained that purely punitive damages are not allowed under the Lanham Act. The court explained further that Ramada was properly compensated by the actual damage award alone. Since Ramada had not shown any non-punitive reasons to enhance the damages under the Lanham Act, the court refused to award additional damages in the form of treble damages. So, the court held that the actual measure of damages given to Ramada was enough to compensate it for any damages done. Again, it is important to note that the court’s holding here, however, is limited to treble damages for violations of the Lanham Act.

Although from a franchisee’s point of view the Boychuk decision is helpful precedent, franchisees must nevertheless keep in mind that this case does not mean that franchisees don’t have to pay Lanham Act damages. The Boychuk Court still awarded the full amount of actual damages that Ramada requested. Franchisees facing a termination should immediately involve an experienced franchise litigator.

The only way to escape liability under the Lanham Act is, in appropriate circumstances, to fully de-identify the premises. Franchisors are extremely observant and will not hesitate to bring suit for the slightest infraction. Many times all it takes to trigger a lawsuit is one old hotel sign on a back door, or an ice bucket or napkins with the franchisor’s logo on them. Defending a Lanham Act claim costs a franchisee far more money than it will save by failing to remove and dispose of all logo

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