Court Watch

The franchisee later abandoned the franchised location, and Cottman promptly terminated the franchise agreement. In addition, Cottman sent a manager to manage the premises, paid one month of the franchisee's rent, arranged for utility service to the premises, and began to search for a buyer for the location. After approximately a month, Cottman ceased operating on the premises and refused to pay any additional rent to FVLR. Cottman argued that it was not a party to the lease and it did not exercise its option under the lease rider, and, therefore, it had no obligation with respect to the franchisee's unpaid rent. FVLR brought suit against Cottman for breach of contract, arguing that Cottman was responsible for the franchisee's unmet obligations under the lease.

A jury found that the franchisor was bound by the lease and had assumed the franchisee's obligations under the lease rider, even though it was not a signatory to either document. The jury's decision was later affirmed by the Texas Court of Appeals. The jury and appellate court found that although the lease was subject to the statute of frauds and there was no written agreement between Cottman and FVLR, an exception existed for partial performance. Under this exception, generally, an unwritten agreement can be shown to exist if the parties' actions unequivocally corroborate the existence of the agreement.

In this case, Cottman was found to have partially performed under the lease by paying the month's rent and by commencing management of the franchised location. The jury and court also considered evidence that Cottman's agents made oral representations that Cottman “wanted to keep the center,” and other similar representations. These actions by Cottman and its agents were enough to corroborate the existence of an agreement that Cottman would be assuming the lease obligations of the franchisee.

As demonstrated by the finding in this case, franchisors should proceed with caution when taking over operations of a franchised location abandoned by the former franchisee, so as not to be found liable for the former franchisee's obligations. When negotiating with the landlord in such circumstances, franchisors should be clear that they are not assuming the former lease, and they also should ensure that an agreement with the landlord for the temporary operations is made in writing.

Sandwich Shop By Day, Strip Club By Night, Generates Treble Damages

In Doctor's Associates Inc. v. Agnello, Bus. Franchise Guide (CCH) ' 14, 236 (Aug. 27, 2009), a strange factual circumstance demonstrated a situation in which treble damages were awarded to a franchisor for a franchisee's violation of the Lanham Act. The franchisee, Louis Agnello (“Agnello”), entered into a franchise agreement with the franchisor to operate a Subway restaurant in the Bronx, NY. Approximately three months into the relationship, the franchisor terminated Agnello's franchise agreement for several defaults under the franchise agreement and failure to cure such defaults.

After termination of the agreement, Agnello moved to a new location, bringing with him all restaurant equipment and assets used in his franchised business. He then proceeded to operate a Subway restaurant during the day and a strip club from the same location at night. Agnello used the franchisor's trademarks both inside and outside the location, on flyers, signs, menus, wrappers, and bags, to advertise both the sandwich shop and the strip club operations. The new business venture prompted considerable public attention, and eventually the franchisor learned of Agnello's unauthorized and infringing use of its trademarks.

The court extensively discussed the franchisor's claim for damages under the Lanham Act, finding that in a claim for actual damages for infringing use of trademarks, a plaintiff is generally entitled to recover: 1) profits, 2) sustained damages, and 3) the costs of the action (citing the Lanham Act, 15 U.S.C. ' 1117(a)). To make a claim for profits, the plaintiff must show “actual consumer confusion or deception resulting from the violation, or that the defendant's actions were intentionally deceptive[,] thus giving rise to a rebuttable presumption of consumer confusion” (citing George Busch Co., Inc. v. Blue Coral, Inc., 968 F.2d 1532, 1537 (2nd Cir. 1992)). The plaintiff also is required to prove the defendant's sales based on the infringing use, and then the defendant carries the burden to prove any costs or deductions from that amount, in order to arrive at the “profits” that may be recovered by the plaintiff. Finally, the plaintiff must show that the sales it claims as the basis for profits would have otherwise gone to the plaintiff but for the infringement.

This initial analysis in a trademark infringement case is only the first step when the infringing use of the mark is intentional or willful. As the court noted in this case, a court must award treble damages in addition to profits if the infringement involves either:

“'(1) intentionally using a mark or designation, knowing such mark or designation is a counterfeit mark ' in connection with the sale, offering for sale, or distribution of goods or services, or (2) providing goods or services necessary to the commission of a violation ' with the intent that the recipient of the goods or services would put the goods or services to use in committing the violation.' In addition, the court has wide discretion in such cases, and can adjust damages either up or down if damages seem either insufficient or excessive” (citing 15 U.S.C.
' 1117(b)).

The court provided that the mandatory nature of treble damages in such circumstances is intended to be punitive, in order to inflict a penalty on knowing counterfeiters and to deter others from such intentional actions. In this case, the court found that Agnello clearly was not an “innocent infringer.” As a former franchisee, he knew, or should have known better than most, the value of the marks that he was infringing upon. He therefore knowingly misappropriated the marks with deceptive intent. Accordingly, the court found that the franchisor was entitled to treble damages under the Lanham Act.

Finally, in a claim under the Lanham Act, a prevailing party can recover reasonable attorneys' fees in exceptional cases, meaning infringement that is “willful and deliberate” or in “bad faith.” Due to the facts in this case in which the defendant obviously did not act in an innocent manner, reasonable attorneys' fees were also awarded. A side note: The court also analyzed the “reasonableness” of attorneys' fees, finding that the billing of $275/hour by two experienced attorneys working on the case was “very reasonable.”

Comedy Club Update: Supreme Court Denies Petition for Review

On Oct. 5, 2009, the U.S. Supreme Court denied a petition for review of the decision of the Ninth Circuit Court of Appeals in the closely watched case of Comedy Club, Inc. v. Improv West Associates, Bus. Franchise Guide (CCH) ' 14,055 (Jan. 29, 2009). The Supreme Court had previously vacated an earlier decision of the Ninth Circuit, in which that court had vacated a decision of an arbitrator to enforce an in-term covenant not to compete in California, deciding that the decision was made in manifest disregard of the law. The Supreme Court later remanded the case to the Ninth Circuit for reconsideration based on its decision in Hall Street Assoc. v. Mattel, Inc. (Bus. Franchise Guide (CCH) ' 13,703 (Mar. 25, 2008)), which held that the Federal Arbitration Act provided the exclusive grounds to modify or vacate arbitration awards.

On reconsideration, the Ninth Circuit again vacated the arbitrator's decision, apparently finding that Hall Street Assoc. did not do away with the manifest disregard for the law standard for vacating arbitration awards. The Ninth Circuit did provide, however, that in-term noncompete provisions can be enforceable in California in the franchise context if they are narrowly tailored and do not foreclose a party from engaging in its business or trade in a substantial section of the market.

Franchisor Found Liable For Former Franchisee's Lease Obligations

In light of a rise in abandonment by franchisees of their franchised locations, franchisors are resorting to unprecedented measures to attempt to ensure that no interruption in services occurs to the customers of the abandoning franchisee. Some franchisors have undertaken the practice of entering the franchised location and managing its operations until a purchaser is found. However, a recent case arising from the Texas Court of Appeals serves to remind franchisors to exercise caution when resorting to such measures. Cottman Transmission Systems, L.L.C. et al. v. FVLR Enterprises, L.L.C., 2009 WL 2488505 (Tex. Ct. App. Aug. 17, 2009).

The franchisee in Cottman entered into a 10-year lease agreement with the landlord, FVLR Enterprises, L.L.C. (“FVLR”) for its franchised location. FVLR and the franchisee also executed a lease rider at the same time that the lease was executed. The franchisor, Cottman Transmission Systems, L.L.C. (“Cottman”), insisted that the lease rider be executed and was involved in the negotiations. The lease rider provided that Cottman would have the option to assume the lease upon expiration or termination, by agreeing to assume the obligations and to replace the franchisee within 30 days after termination or expiration of the franchise agreement. Cottman did not sign the lease or the lease rider.

The franchisee later abandoned the franchised location, and Cottman promptly terminated the franchise agreement. In addition, Cottman sent a manager to manage the premises, paid one month of the franchisee's rent, arranged for utility service to the premises, and began to search for a buyer for the location. After approximately a month, Cottman ceased operating on the premises and refused to pay any additional rent to FVLR. Cottman argued that it was not a party to the lease and it did not exercise its option under the lease rider, and, therefore, it had no obligation with respect to the franchisee's unpaid rent. FVLR brought suit against Cottman for breach of contract, arguing that Cottman was responsible for the franchisee's unmet obligations under the lease.

A jury found that the franchisor was bound by the lease and had assumed the franchisee's obligations under the lease rider, even though it was not a signatory to either document. The jury's decision was later affirmed by the Texas Court of Appeals. The jury and appellate court found that although the lease was subject to the statute of frauds and there was no written agreement between Cottman and FVLR, an exception existed for partial performance. Under this exception, generally, an unwritten agreement can be shown to exist if the parties' actions unequivocally corroborate the existence of the agreement.

In this case, Cottman was found to have partially performed under the lease by paying the month's rent and by commencing management of the franchised location. The jury and court also considered evidence that Cottman's agents made oral representations that Cottman “wanted to keep the center,” and other similar representations. These actions by Cottman and its agents were enough to corroborate the existence of an agreement that Cottman would be assuming the lease obligations of the franchisee.

As demonstrated by the finding in this case, franchisors should proceed with caution when taking over operations of a franchised location abandoned by the former franchisee, so as not to be found liable for the former franchisee's obligations. When negotiating with the landlord in such circumstances, franchisors should be clear that they are not assuming the former lease, and they also should ensure that an agreement with the landlord for the temporary operations is made in writing.

Sandwich Shop By Day, Strip Club By Night, Generates Treble Damages

In Doctor's Associates Inc. v. Agnello, Bus. Franchise Guide (CCH) ' 14, 236 (Aug. 27, 2009), a strange factual circumstance demonstrated a situation in which treble damages were awarded to a franchisor for a franchisee's violation of the Lanham Act. The franchisee, Louis Agnello (“Agnello”), entered into a franchise agreement with the franchisor to operate a Subway restaurant in the Bronx, NY. Approximately three months into the relationship, the franchisor terminated Agnello's franchise agreement for several defaults under the franchise agreement and failure to cure such defaults.

After termination of the agreement, Agnello moved to a new location, bringing with him all restaurant equipment and assets used in his franchised business. He then proceeded to operate a Subway restaurant during the day and a strip club from the same location at night. Agnello used the franchisor's trademarks both inside and outside the location, on flyers, signs, menus, wrappers, and bags, to advertise both the sandwich shop and the strip club operations. The new business venture prompted considerable public attention, and eventually the franchisor learned of Agnello's unauthorized and infringing use of its trademarks.

The court extensively discussed the franchisor's claim for damages under the Lanham Act, finding that in a claim for actual damages for infringing use of trademarks, a plaintiff is generally entitled to recover: 1) profits, 2) sustained damages, and 3) the costs of the action (citing the Lanham Act, 15 U.S.C. ' 1117(a)). To make a claim for profits, the plaintiff must show “actual consumer confusion or deception resulting from the violation, or that the defendant's actions were intentionally deceptive[,] thus giving rise to a rebuttable presumption of consumer confusion” ( citing George Busch Co., Inc. v. Blue Coral, Inc. , 968 F.2d 1532, 1537 (2nd Cir. 1992)). The plaintiff also is required to prove the defendant's sales based on the infringing use, and then the defendant carries the burden to prove any costs or deductions from that amount, in order to arrive at the “profits” that may be recovered by the plaintiff. Finally, the plaintiff must show that the sales it claims as the basis for profits would have otherwise gone to the plaintiff but for the infringement.

This initial analysis in a trademark infringement case is only the first step when the infringing use of the mark is intentional or willful. As the court noted in this case, a court must award treble damages in addition to profits if the infringement involves either:

“'(1) intentionally using a mark or designation, knowing such mark or designation is a counterfeit mark ' in connection with the sale, offering for sale, or distribution of goods or services, or (2) providing goods or services necessary to the commission of a violation ' with the intent that the recipient of the goods or services would put the goods or services to use in committing the violation.' In addition, the court has wide discretion in such cases, and can adjust damages either up or down if damages seem either insufficient or excessive” (citing 15 U.S.C.
' 1117(b)).

The court provided that the mandatory nature of treble damages in such circumstances is intended to be punitive, in order to inflict a penalty on knowing counterfeiters and to deter others from such intentional actions. In this case, the court found that Agnello clearly was not an “innocent infringer.” As a former franchisee, he knew, or should have known better than most, the value of the marks that he was infringing upon. He therefore knowingly misappropriated the marks with deceptive intent. Accordingly, the court found that the franchisor was entitled to treble damages under the Lanham Act.

Finally, in a claim under the Lanham Act, a prevailing party can recover reasonable attorneys' fees in exceptional cases, meaning infringement that is “willful and deliberate” or in “bad faith.” Due to the facts in this case in which the defendant obviously did not act in an innocent manner, reasonable attorneys' fees were also awarded. A side note: The court also analyzed the “reasonableness” of attorneys' fees, finding that the billing of $275/hour by two experienced attorneys working on the case was “very reasonable.”

Comedy Club Update: Supreme Court Denies Petition for Review

On Oct. 5, 2009, the U.S. Supreme Court denied a petition for review of the decision of the Ninth Circuit Court of Appeals in the closely watched case of Comedy Club, Inc. v. Improv West Associates, Bus. Franchise Guide (CCH) ' 14,055 (Jan. 29, 2009). The Supreme Court had previously vacated an earlier decision of the Ninth Circuit, in which that court had vacated a decision of an arbitrator to enforce an in-term covenant not to compete in California, deciding that the decision was made in manifest disregard of the law. The Supreme Court later remanded the case to the Ninth Circuit for reconsideration based on its decision in Hall Street Assoc. v. Mattel, Inc. (Bus. Franchise Guide (CCH) ' 13,703 (Mar. 25, 2008)), which held that the Federal Arbitration Act provided the exclusive grounds to modify or vacate arbitration awards.

On reconsideration, the Ninth Circuit again vacated the arbitrator's decision, apparently finding that Hall Street Assoc. did not do away with the manifest disregard for the law standard for vacating arbitration awards. The Ninth Circuit did provide, however, that in-term noncompete provisions can be enforceable in California in the franchise context if they are narrowly tailored and do not foreclose a party from engaging in its business or trade in a substantial section of the market.