Trademark Issues

Wetzel's lawsuit alleges that the defendants “breached the Franchise Agreement by failing to comply with Wetzel's standards for the operation of the bakery, including product quality, maintenance and repair of equipment and maintenance of a sanitary bakery.” Wetzel further claims that, after several inspections, it provided written notice to defendants and provided 30 days to cure. See Id. at p. 2.

After the defendants allegedly failed to cure the defaults, Wetzel provided written notice that the franchise agreement was terminated. Under the agreement, upon termination the defendants must “immediately and permanently” cease using Wetzel's marks and “system,” which includes marketing concepts, recipes, and trade secrets. According to Wetzel, the defendants continued to operate the franchise and to use Wetzel's marks without authorization despite the notice of termination and a cease and desist letter. See Id.

The District Court's Decision

In deciding to enter an injunction, the federal court explained that the U.S. Supreme Court has noted the following regarding preliminary injunctions: A plaintiff seeking a preliminary injunction must establish that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest. Id. at p. 4 (quoting Winter v. Natural Resources Defense Council, Inc., 555 U.S. 7, 129 S. Ct. 365, 374 (2008).)

As to the likelihood of success on the merits, the U.S. District Court in Wetzel's Pretzels found that “[t]he termination complied with the prescribed notice periods of the agreement, and with the listed actions constituting breach.” Id. at p. 10. The court explained that “[w]hile Defendants contend they cured the deficiencies listed, they did not provide any documentation corroborating or proving such cures, apart from Johnson's declaration.” The court then noted that the defendants also argued that they had continued to make royalty payments and pay advertising fees, which were accepted, but found that defendants “have provided no proof of these payments (receipts, checks, store payments) and as a result, the Court is not able to conclude from the declaration alone that Wetzel's has in fact received and accepted such payments.” Id. Because the court found that Wetzel's properly terminated the agreement, “any use of the mark by Defendants [after the date of termination] was an unauthorized use.” Id. at p. 11.

The court then found that it could presume irreparable harm: “[h]aving found that Plaintiff has demonstrated a likelihood of success on the merits, under current Ninth Circuit law, the court is permitted to presume irreparable harm.” Id. But even without the presumption, the court explained, unless Wetzel is allowed to protect its marks, “its ability to control its reputation and goodwill associated with the marks will be significantly reduced.” As to the balance of hardships, the court found (among other things) that “[w]hile it is apparent that Defendants would suffer a loss of revenue and that its employees would, in all likelihood, lose their employment, it is Defendants who brought on those risks.” Id. at p. 12.

Finally, with respect to the public interest factor, the court explained that “[t]he public has a strong interest in being free from the confusion caused by unauthorized use of Wetzel's marks.” Id. The court also noted that while the defendants contended that they had been involved in community affairs (such as assisting with school fund raisers) and built goodwill in the community, “[s]uch goodwill does not go towards the larger public interest to be free from deception and confusion.” Id. Accordingly, the court granted Wetzel's motion for preliminary injunction.

Two Critically Important Notions

While the result here may not be surprising given the conduct of the parties, the decision reinforces two critically important notions: 1) in order to effectively protect trademark rights, a franchisor should clearly spell out its protective rights in its franchise agreement; and 2) efforts to deal with deficiencies and inspections and other issues that arise under the franchise agreement should be dealt with in writing, so that a clear record exists for use in the event a party does need to seek court intervention.

Douglas M. Mansfield and J. Todd Kennard are partners at Jones Day, in the Columbus, OH, office. They can be reached at 614-469-3939, [email protected] or [email protected]. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the law firm with which they are associated.

The U.S. District Court for the Central District of California recently entered a preliminary injunction against a former franchisee, where the franchisor had repeatedly notified the franchisee of various deficiencies, and the franchisor ultimately terminated the franchise agreement. See Wetzel's Pretzels, LLC v. Johnson et al., No. 11-44059 (C.D. Cal. June 27, 2011) [Docket No. 24 (minute order in chambers)]; see also Docket No. 25 (order granting injunction).

Factual History

Wetzel's Pretzels (“Wetzel”) sued the Johnsons for trademark infringement, common law trademark infringement, unfair competition under the Lanham Act, and for state trademark and unfair competition violations. See Id. at p. 1. The Johnsons had operated a bakery under a 10-year franchise agreement with Wetzel that began at the end of 2004. Like many other franchise agreements, this one granted a non-exclusive license to the defendants to utilize Wetzel's marks in exchange for a percentage of the franchisee's gross revenues, with terms related to royalty fees and advertising expenses. See Id. at p. 1-2.

Wetzel's lawsuit alleges that the defendants “breached the Franchise Agreement by failing to comply with Wetzel's standards for the operation of the bakery, including product quality, maintenance and repair of equipment and maintenance of a sanitary bakery.” Wetzel further claims that, after several inspections, it provided written notice to defendants and provided 30 days to cure. See Id. at p. 2.

After the defendants allegedly failed to cure the defaults, Wetzel provided written notice that the franchise agreement was terminated. Under the agreement, upon termination the defendants must “immediately and permanently” cease using Wetzel's marks and “system,” which includes marketing concepts, recipes, and trade secrets. According to Wetzel, the defendants continued to operate the franchise and to use Wetzel's marks without authorization despite the notice of termination and a cease and desist letter. See Id.

The District Court's Decision

In deciding to enter an injunction, the federal court explained that the U.S. Supreme Court has noted the following regarding preliminary injunctions: A plaintiff seeking a preliminary injunction must establish that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest. Id. at p. 4 (quoting Winter v. Natural Resources Defense Council, Inc. , 555 U.S. 7, 129 S. Ct. 365, 374 (2008).)

As to the likelihood of success on the merits, the U.S. District Court in Wetzel's Pretzels found that “[t]he termination complied with the prescribed notice periods of the agreement, and with the listed actions constituting breach.” Id. at p. 10. The court explained that “[w]hile Defendants contend they cured the deficiencies listed, they did not provide any documentation corroborating or proving such cures, apart from Johnson's declaration.” The court then noted that the defendants also argued that they had continued to make royalty payments and pay advertising fees, which were accepted, but found that defendants “have provided no proof of these payments (receipts, checks, store payments) and as a result, the Court is not able to conclude from the declaration alone that Wetzel's has in fact received and accepted such payments.” Id. Because the court found that Wetzel's properly terminated the agreement, “any use of the mark by Defendants [after the date of termination] was an unauthorized use.” Id. at p. 11.

The court then found that it could presume irreparable harm: “[h]aving found that Plaintiff has demonstrated a likelihood of success on the merits, under current Ninth Circuit law, the court is permitted to presume irreparable harm.” Id. But even without the presumption, the court explained, unless Wetzel is allowed to protect its marks, “its ability to control its reputation and goodwill associated with the marks will be significantly reduced.” As to the balance of hardships, the court found (among other things) that “[w]hile it is apparent that Defendants would suffer a loss of revenue and that its employees would, in all likelihood, lose their employment, it is Defendants who brought on those risks.” Id. at p. 12.

Finally, with respect to the public interest factor, the court explained that “[t]he public has a strong interest in being free from the confusion caused by unauthorized use of Wetzel's marks.” Id. The court also noted that while the defendants contended that they had been involved in community affairs (such as assisting with school fund raisers) and built goodwill in the community, “[s]uch goodwill does not go towards the larger public interest to be free from deception and confusion.” Id. Accordingly, the court granted Wetzel's motion for preliminary injunction.

Two Critically Important Notions

While the result here may not be surprising given the conduct of the parties, the decision reinforces two critically important notions: 1) in order to effectively protect trademark rights, a franchisor should clearly spell out its protective rights in its franchise agreement; and 2) efforts to deal with deficiencies and inspections and other issues that arise under the franchise agreement should be dealt with in writing, so that a clear record exists for use in the event a party does need to seek court intervention.

Douglas M. Mansfield and J. Todd Kennard are partners at Jones Day, in the Columbus, OH, office. They can be reached at 614-469-3939, [email protected] or [email protected]. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the law firm with which they are associated.