Court Watch

Court Awards Franchisor Attorneys' Fees in Trademark Infringement Action Against Competitor

As trademark infringement actions can involve hundreds of thousands of dollars in attorneys' fees for each party, a critical consideration for potential infringement plaintiffs may be whether they are likely to be awarded their fees. In certain “exceptional cases,” federal law allows parties claiming trademark infringement to be awarded their attorneys' fees. The recent decision of the federal District Court for the District of Minnesota in Zerorez Franchising System, Inc. v. Distinctive Cleaning, Inc., No. 13-2326 (D. Minn. May 5, 2015), demonstrates that patience and restraint could increase a franchisor's odds of recovering its fees in trademark litigation with a competitor.

Zerorez Franchising System, Inc. (ZFSI) is a franchisor of a carpet and surface cleaning business with franchisees throughout the United States. ZFSI has registered “Zerorez” as a trademark. One of ZFSI's franchisees operates in Richfield, MN, doing business under the name ZEROREZ (for convenience, ZFSI and the franchisee are sometimes collectively referred to as ZFSI). In April 2012, the franchisee discovered online advertisements stating “Zero Rez Carpet Cleaning.” The franchisee learned that this advertisement appeared in response to various Google searches, including “Zerorez,” “twin cities carpet cleaning,” and similar phrases. The advertisements linked to the website of a competitor, Distinctive Cleaning, Inc., which offered various cleaning services, including carpet cleaning, in the same market area. Shortly thereafter, ZFSI sent Distinctive a cease and desist letter, advising Distinctive that Zerorez is a protected mark and asserting that Distinctive's advertisements were deceptive and constituted trademark infringement.

In addition to receiving various communications from confused customers that hired Distinctive but intended to hire ZEROREZ, in January 2013, the franchisee learned that Distinctive was advertising using the phrase “ZERO REZ” Carpet Cleaning.” A second cease and desist letter was sent. (Also around this time, Distinctive's counsel communicated to Distinctive that the term “ZEROREZ” was trademarked and that it should not be using that term in any form.) But Distinctive doubled down, purchasing “Zero Rez” and “Zerorez” as Google keyword search terms and, through April 2013, continuing to advertise using similar Google ads. In August 2013, the franchisee hired a private investigator, who determined that Distinctive employees were representing that Distinctive's services were identical to those offered by the franchisee.

ZFSI filed suit in late August 2013. Within a month, ZFSI and Distinctive reached an agreement, adopted by court order, which prohibited Distinctive from using phrases such as “zero rez,” “zero residue,” and “zero res,” in any form of advertising. Despite its agreement, by January 2014, Distinctive was advertising using the prohibited key words.

Considering ZFSI's motion for summary judgment, the court first found a likelihood of confusion caused by Distinctive's advertisements, relying upon evidence of actual consumer confusion. Having found infringement, the court considered whether to award attorneys' fees. The court recognized that the U.S. Court of Appeals for the Eighth Circuit considers whether the defendant's conduct was “wilful and deliberate” in deciding whether the circumstances are sufficiently exceptional to merit an award of fees.

The court determined there was sufficient evidence of willful and deliberate conduct. Distinctive was clearly aware of ZFSI's marks, having received two cease and desist letters, having been warned by counsel, and having had a court order directing it not to use certain phrases similar to the mark (a court order which it violated no less). Despite all of this, Distinctive continued advertising using similar variations on the marks, providing sufficient indicia of willful and deliberate conduct to justify an award of fees.

Zerorez Franchising System shows that a defendant's continued knowing infringement is likely to result in an award of attorneys' fees to the plaintiff. While ZFSI may have been tempted to seek injunctive relief as soon as possible in or around April 2012, it would not file suit until over a year later, after it had repeatedly apprised Distinctive of its ownership of the mark and after it had compiled compelling evidence of knowing infringement. While there are risks with waiting to file suit for infringement, attorneys' fees may be more easily obtained by the trademark owner.

Court Clarifies Meaning Of Termination for Breach and Exceptional Lanham Act Claims

In Burford v. Accounting Practice Sales, Inc., 786 F.3d 582 (7th Cir. 2015), the Seventh Circuit overturned a district court's ruling that an indefinite contract was terminable at will because the contract stated, “[Accounting Practice Sales, Inc. (APS)] cannot terminate this agreement unless it is violated by Burford.” Id. at 1736. The court went on to affirm the district court's denial of Burford's request for legal fees after APS dropped its Lanham Act counterclaim against Burford when it initially prevailed on the contract issue. The case provides caution regarding termination of indefinite contracts and dismissing supplementary claims, as well as clarity around “exceptional claims” under the Lanham Act.

APS contracted with Burford for the purchase and sale of accounting practices on their behalf in five states through a written and subsequent oral agreements. The 12-month contract renewed automatically for an additional 12 months every year. While Burford could terminate the contract with 30 days' notice, subject to a one-year non-compete agreement, APS could only terminate for material breach of the contract. On Jan. 15, 2012, APS sent a termination notice to Burford without citing any material breach. Burford started a competing company, “American Accounting Practice Sales,” and filed a breach of contract claim against APS (among other claims). APS's four counterclaims included a Lanham Act trademark violation claim against Burford.

On cross motions for summary judgment, the district court applied Illinois contract law in finding the contract of indefinite duration, and therefore terminable at will. Considering the restriction on APS's ability to terminate only for breach, the court considered the clause redundant of the contract law standard that all contracts can be terminated for material breach. Determining that the clause added nothing new to the contract, the court ruled that the contract remained terminable at will and that APS's termination was therefore permissible. Having prevailed on the core contract claim, APS moved to have their Lanham Act counterclaim dismissed with prejudice, which the court granted. Upon the dismissal of the Lanham Act claim, Burford moved for an award of attorneys' fees under that Act as the prevailing party, which the court denied. Burford appealed the district court's decision on the contract termination provision and his claim of attorney fees under the Lanham Act.

The U.S. Court of Appeals for the Seventh Circuit reversed the district court's ruling on the contract termination provision. While the appellate court agreed that the 12-month renewal rendered the contract of indeterminate duration and therefore terminable at will, the court disagreed with the interpretation of APS's termination provision. Citing the Illinois Supreme Court decision in Jesperson v. Minn. Mining & Manufacturing Co., 700 N.E.2d 1014 (Ill. 1998), the appellate court drew a line between a permissive termination clause and a restrictive termination clause: “There is a decisive difference between saying that A may terminate if B breaches and saying that A may terminate only if B breaches.” Burford, 114 U.S.P.Q.2d at 1736 (emphasis added). Because the latter, restrictive form of clause applied to APS's contract, the court held that APS was prohibited from terminating at will ' in spite of Illinois' preference for contracts of definite duration or terminable at will.

The Seventh Circuit, however, agreed with the district court's dismissal of Burford's motion for attorney fees under the Lanham Act. Under the Lanham Act, a prevailing party may be awarded attorney fees in “exceptional cases.” 15 U.S.C. '117(a). Because the district court dismissed with prejudice APS's Lanham Act claim ' upon APS's motion ' Burford prevailed on that claim. Previously, in Nightingale Home Healthcare, Inc. v. Anodyne Therapy, LLC, F.3d 958 (7th Cir. 2010), the Seventh Circuit noted wide variation in definitions of “exceptional cases” and established its own rule: “[I]f the losing party was the plaintiff and was guilty of abuse of process in suing, or if the losing party was the defendant and had no defense yet persisted in the trademark infringement or false advertising for which he was being sued, in order to impose costs on his opponent.” Nightingale, 626 F.3d at 963'64. Following up on its prior interpretation, the court clarified that “an abuse of process [exists] when the claim was objectively unreasonable because it is one 'a rational litigant would pursue only because it would impose disproportionate costs on his opponent.'” Burford, 114 U.S.P.Q.2d at 1737 (quoting Nightingale, 626 F.3d at 965). Indeed, Burford claimed that APS brought its Lanham Act claim for exactly that purpose and pointed to the fact that APS dropped the claim as evidence of its frivolity.

The court disagreed with Burford, however, finding APS's filing and dismissal rational and not frivolous. “It can be perfectly rational to pursue a counterclaim when you already have to spend time and money defending other claims in a case, yet to think the counterclaim is not worth the effort after your opponent's claim drops out.” Burford, 114 U.S.P.Q.2d at 1738. The court also disagreed with Burford's argument that the Lanham Act claim was frivolous because APS could not support its claim with evidence. Instead, remaining skeptical of and without deciding the merits of APS's claim, the court found APS could offer evidence that its mark was both protectable and created a likelihood of confusion ' at least sufficient to show a good-faith basis for filing their claim. Without direct evidence that APS brought its claim for the sole purpose of netting some benefit unrelated to the suit, its claim was not objectively unreasonable. This contrasts with the court's finding in Nightingale , where “[n]ot only had the Lanham Act claim no possible merit (which would not by itself demonstrate an abuse of process), but the district judge found that Nightingale had made the claim in an attempt to coerce a price reduction from Anodyne.” 626 F.3d at 965.

Burford provides one more cautionary tidbit. Not only did APS's voluntary dismissal of the Lanham Act claim apparently provide an opportunity for Burford to bring a motion for attorney fees, but APS cannot now renew its Lanham Act claim. Because APS asked to have the claim dismissed with prejudice, it is foreclosed from raising the claim again ' even though the reason for requesting the dismissal was reversed on appeal.

Thus, Burford provides three takeaways: First, contracting parties should take extreme care in their termination language to distinguish between an at-will contract that may be terminated for material breach and restrictive contracts that may be terminated only for breach. Second, to avoid fee-shifting in Lanham Act cases, parties should ensure their claim or defense is at least objectively reasonable. Finally, litigants who receive a favorable ruling in a lower court should take care when requesting court dismissals with prejudice in an effort to end litigation.

Cynthia M. Klaus is a shareholder with Larkin Hoffman and a member of this newsletter's Board of Editors. She can be reached at [email protected]. Bryan Huntington is an attorney with the firm. Reach him at [email protected].

Court Awards Franchisor Attorneys' Fees in Trademark Infringement Action Against Competitor

As trademark infringement actions can involve hundreds of thousands of dollars in attorneys' fees for each party, a critical consideration for potential infringement plaintiffs may be whether they are likely to be awarded their fees. In certain “exceptional cases,” federal law allows parties claiming trademark infringement to be awarded their attorneys' fees. The recent decision of the federal District Court for the District of Minnesota in Zerorez Franchising System, Inc. v. Distinctive Cleaning, Inc., No. 13-2326 (D. Minn. May 5, 2015), demonstrates that patience and restraint could increase a franchisor's odds of recovering its fees in trademark litigation with a competitor.

Zerorez Franchising System, Inc. (ZFSI) is a franchisor of a carpet and surface cleaning business with franchisees throughout the United States. ZFSI has registered “Zerorez” as a trademark. One of ZFSI's franchisees operates in Richfield, MN, doing business under the name ZEROREZ (for convenience, ZFSI and the franchisee are sometimes collectively referred to as ZFSI). In April 2012, the franchisee discovered online advertisements stating “Zero Rez Carpet Cleaning.” The franchisee learned that this advertisement appeared in response to various Google searches, including “Zerorez,” “twin cities carpet cleaning,” and similar phrases. The advertisements linked to the website of a competitor, Distinctive Cleaning, Inc., which offered various cleaning services, including carpet cleaning, in the same market area. Shortly thereafter, ZFSI sent Distinctive a cease and desist letter, advising Distinctive that Zerorez is a protected mark and asserting that Distinctive's advertisements were deceptive and constituted trademark infringement.

In addition to receiving various communications from confused customers that hired Distinctive but intended to hire ZEROREZ, in January 2013, the franchisee learned that Distinctive was advertising using the phrase “ZERO REZ” Carpet Cleaning.” A second cease and desist letter was sent. (Also around this time, Distinctive's counsel communicated to Distinctive that the term “ZEROREZ” was trademarked and that it should not be using that term in any form.) But Distinctive doubled down, purchasing “Zero Rez” and “Zerorez” as Google keyword search terms and, through April 2013, continuing to advertise using similar Google ads. In August 2013, the franchisee hired a private investigator, who determined that Distinctive employees were representing that Distinctive's services were identical to those offered by the franchisee.

ZFSI filed suit in late August 2013. Within a month, ZFSI and Distinctive reached an agreement, adopted by court order, which prohibited Distinctive from using phrases such as “zero rez,” “zero residue,” and “zero res,” in any form of advertising. Despite its agreement, by January 2014, Distinctive was advertising using the prohibited key words.

Considering ZFSI's motion for summary judgment, the court first found a likelihood of confusion caused by Distinctive's advertisements, relying upon evidence of actual consumer confusion. Having found infringement, the court considered whether to award attorneys' fees. The court recognized that the U.S. Court of Appeals for the Eighth Circuit considers whether the defendant's conduct was “wilful and deliberate” in deciding whether the circumstances are sufficiently exceptional to merit an award of fees.

The court determined there was sufficient evidence of willful and deliberate conduct. Distinctive was clearly aware of ZFSI's marks, having received two cease and desist letters, having been warned by counsel, and having had a court order directing it not to use certain phrases similar to the mark (a court order which it violated no less). Despite all of this, Distinctive continued advertising using similar variations on the marks, providing sufficient indicia of willful and deliberate conduct to justify an award of fees.

Zerorez Franchising System shows that a defendant's continued knowing infringement is likely to result in an award of attorneys' fees to the plaintiff. While ZFSI may have been tempted to seek injunctive relief as soon as possible in or around April 2012, it would not file suit until over a year later, after it had repeatedly apprised Distinctive of its ownership of the mark and after it had compiled compelling evidence of knowing infringement. While there are risks with waiting to file suit for infringement, attorneys' fees may be more easily obtained by the trademark owner.

Court Clarifies Meaning Of Termination for Breach and Exceptional Lanham Act Claims

In Burford v. Accounting Practice Sales, Inc. , 786 F.3d 582 (7th Cir. 2015), the Seventh Circuit overturned a district court's ruling that an indefinite contract was terminable at will because the contract stated, “[Accounting Practice Sales, Inc. (APS)] cannot terminate this agreement unless it is violated by Burford.” Id . at 1736. The court went on to affirm the district court's denial of Burford's request for legal fees after APS dropped its Lanham Act counterclaim against Burford when it initially prevailed on the contract issue. The case provides caution regarding termination of indefinite contracts and dismissing supplementary claims, as well as clarity around “exceptional claims” under the Lanham Act.

APS contracted with Burford for the purchase and sale of accounting practices on their behalf in five states through a written and subsequent oral agreements. The 12-month contract renewed automatically for an additional 12 months every year. While Burford could terminate the contract with 30 days' notice, subject to a one-year non-compete agreement, APS could only terminate for material breach of the contract. On Jan. 15, 2012, APS sent a termination notice to Burford without citing any material breach. Burford started a competing company, “American Accounting Practice Sales,” and filed a breach of contract claim against APS (among other claims). APS's four counterclaims included a Lanham Act trademark violation claim against Burford.

On cross motions for summary judgment, the district court applied Illinois contract law in finding the contract of indefinite duration, and therefore terminable at will. Considering the restriction on APS's ability to terminate only for breach, the court considered the clause redundant of the contract law standard that all contracts can be terminated for material breach. Determining that the clause added nothing new to the contract, the court ruled that the contract remained terminable at will and that APS's termination was therefore permissible. Having prevailed on the core contract claim, APS moved to have their Lanham Act counterclaim dismissed with prejudice, which the court granted. Upon the dismissal of the Lanham Act claim, Burford moved for an award of attorneys' fees under that Act as the prevailing party, which the court denied. Burford appealed the district court's decision on the contract termination provision and his claim of attorney fees under the Lanham Act.

The U.S. Court of Appeals for the Seventh Circuit reversed the district court's ruling on the contract termination provision. While the appellate court agreed that the 12-month renewal rendered the contract of indeterminate duration and therefore terminable at will, the court disagreed with the interpretation of APS's termination provision. Citing the Illinois Supreme Court decision in Jesperson v. Minn. Mining & Manufacturing Co. , 700 N.E.2d 1014 (Ill. 1998), the appellate court drew a line between a permissive termination clause and a restrictive termination clause: “There is a decisive difference between saying that A may terminate if B breaches and saying that A may terminate only if B breaches.” Burford , 114 U.S.P.Q.2d at 1736 (emphasis added). Because the latter, restrictive form of clause applied to APS's contract, the court held that APS was prohibited from terminating at will ' in spite of Illinois' preference for contracts of definite duration or terminable at will.

The Seventh Circuit, however, agreed with the district court's dismissal of Burford's motion for attorney fees under the Lanham Act. Under the Lanham Act, a prevailing party may be awarded attorney fees in “exceptional cases.” 15 U.S.C. '117(a). Because the district court dismissed with prejudice APS's Lanham Act claim ' upon APS's motion ' Burford prevailed on that claim. Previously, in Nightingale Home Healthcare, Inc. v. Anodyne Therapy, LLC, F.3d 958 (7th Cir. 2010), the Seventh Circuit noted wide variation in definitions of “exceptional cases” and established its own rule: “[I]f the losing party was the plaintiff and was guilty of abuse of process in suing, or if the losing party was the defendant and had no defense yet persisted in the trademark infringement or false advertising for which he was being sued, in order to impose costs on his opponent.” Nightingale, 626 F.3d at 963'64. Following up on its prior interpretation, the court clarified that “an abuse of process [exists] when the claim was objectively unreasonable because it is one 'a rational litigant would pursue only because it would impose disproportionate costs on his opponent.'” Burford, 114 U.S.P.Q.2d at 1737 (quoting Nightingale, 626 F.3d at 965). Indeed, Burford claimed that APS brought its Lanham Act claim for exactly that purpose and pointed to the fact that APS dropped the claim as evidence of its frivolity.

The court disagreed with Burford, however, finding APS's filing and dismissal rational and not frivolous. “It can be perfectly rational to pursue a counterclaim when you already have to spend time and money defending other claims in a case, yet to think the counterclaim is not worth the effort after your opponent's claim drops out.” Burford, 114 U.S.P.Q.2d at 1738. The court also disagreed with Burford's argument that the Lanham Act claim was frivolous because APS could not support its claim with evidence. Instead, remaining skeptical of and without deciding the merits of APS's claim, the court found APS could offer evidence that its mark was both protectable and created a likelihood of confusion ' at least sufficient to show a good-faith basis for filing their claim. Without direct evidence that APS brought its claim for the sole purpose of netting some benefit unrelated to the suit, its claim was not objectively unreasonable. This contrasts with the court's finding in Nightingale , where “[n]ot only had the Lanham Act claim no possible merit (which would not by itself demonstrate an abuse of process), but the district judge found that Nightingale had made the claim in an attempt to coerce a price reduction from Anodyne.” 626 F.3d at 965.

Burford provides one more cautionary tidbit. Not only did APS's voluntary dismissal of the Lanham Act claim apparently provide an opportunity for Burford to bring a motion for attorney fees, but APS cannot now renew its Lanham Act claim. Because APS asked to have the claim dismissed with prejudice, it is foreclosed from raising the claim again ' even though the reason for requesting the dismissal was reversed on appeal.

Thus, Burford provides three takeaways: First, contracting parties should take extreme care in their termination language to distinguish between an at-will contract that may be terminated for material breach and restrictive contracts that may be terminated only for breach. Second, to avoid fee-shifting in Lanham Act cases, parties should ensure their claim or defense is at least objectively reasonable. Finally, litigants who receive a favorable ruling in a lower court should take care when requesting court dismissals with prejudice in an effort to end litigation.

Cynthia M. Klaus is a shareholder with Larkin Hoffman and a member of this newsletter's Board of Editors. She can be reached at [email protected]. Bryan Huntington is an attorney with the firm. Reach him at [email protected].