Court Watch

Unauthorized Use of Registered Mark

In Choice Hotels Int'l, Inc. v. Zeal, LLC, No. 4:13-cv-1961 (Sept. 19, 2015) (D.S.C. Sept. 29, 2015), the U.S. District Court for South Carolina granted summary judgment relating to the unpermitted use of the ECONO LODGE mark, as well as use of the ECONO STUDIOS INN & SUITES name, by the successors-in-interest of a former Econo Lodge franchisee.

The plaintiff, franchisor Choice Hotels International, Inc., is the owner of a family of ECONO LODGE trademarks that are both used and registered in connection with its lodging franchise. The defendants were owners of a hotel in Myrtle Beach that was previously owned by a former franchisee of Choice Hotels. Although the former franchisee had operated an ECONO LODGE INN & SUITES hotel, its agreement was terminated before the defendants acquired the hotel. Nonetheless, the defendants continued to operate the hotel as an ECONO LODGE INN & SUITES for some time before changing the name to ECONO STUDIOS INN & SUITES.

The court found in Choice Hotel's favor on its trademark infringement claims, as well as unfair competition and common law trademark infringement claims, and granted a permanent injunction in relation to the same.

In reaching its decision, the court first noted that the defendants had used Choice Hotels' marks in commerce without permission in two different manners. First, when the plaintiff purchased the subject property from the prior holdover franchisee, it operated the facility for a short period of time with a sign and other branded materials that featured the exact ECONO LODGE mark while it negotiated a possible franchise agreement with the plaintiff. When the discussions were unsuccessful, the defendants then changed the name to ECONO STUDIOS INN & SUITES. The defendant conceded this point, but argued that the new mark was sufficiently distinct and, therefore, its use did not require Choice Hotels' permission.

The court noted that it is “axiomatic that continued unauthorized use of a mark by a holdover franchisee creates a likelihood of confusion in the marketplace.” Here, however, the defendants were not holdover franchisees, but were merely successors to holdover franchisees, and never had permission to use the plaintiff's mark at any point. The defense's argument that any use of the exact ECONO LODGE mark was de minimis was unsupported, and the court found that the defendants' operation of the property before deflagging it created a likelihood of consumer confusion.

The majority in the opinion focuses on whether the defendants' use of the variation ECONO STUDIOS INN & SUITES also infringed the plaintiff's marks. In support of its position, the defendant asserted that the plaintiff's marks were descriptive because “ECONO” served as an abbreviation for “economy.” However, the court found that several factors weighed in favor of treating the marks as suggestive and therefore entitling them to trademark protection. The plaintiff's marks were not only registered, but had achieved incontestable status. In addition, the registrations were granted by the United States Patent and Trademark Office (USPTO) without any evidence of secondary meaning being required. The court noted that although the USPTO's determination was not conclusive, it shifted the burden to the defendant to prove that the marks were not sufficiently distinctive and that the defendants failed to meet that burden. The court also recognized the marks as commercially strong because of their long-standing use by the plaintiff and its predecessors, further evidencing the secondary meaning of the marks.

In support of its decision, the court cited a 2000 case in the Middle District of Alabama involving Choice Hotels and its ECONO- marks (Choice Hotels Int'l, Inc. v. Kaushik, 147 F. Supp. 2d 1242 (M.D. Ala. 2000), aff'd sub nom. Choice Hotels Inter'l v. Kaushik, 260 F.3d 627 (11th Cir. 2001)), as well as a Trademark Trial and Appeal Board (TTAB) case involving a variety of plaintiff's ECONO- marks ( Econo-Travel Motor Hotel Corp., 199 U.S. P.Q. (BNA) 307 (T.T.A.B. Mar. 28, 1978)). In both of these disputes, the ECONO LODGE mark was found to be sufficiently strong to warrant trademark protection. Indeed, the TTAB expressly rejected the argument that the mark ECONO-TRAVEL was weak, generic, or merely descriptive. The court similarly found the plaintiffs' marks to be strong here.

The court refused to accept the defendant's arguments that the use of different colors (green and brown as opposed to red and yellow), different fonts, and the omission of plaintiff's distinctive “e” were sufficient to avoid similarity with the plaintiff's marks, especially because the services were “as similar as they could possibly be because the defendants are operating a facility that used to be an ECONO LODGE.” Although the court did not find that sufficient evidence existed to rule that the defendants' intended to infringe the plaintiff's marks with its new name, overall, the other factors outweighed the difficulties with proving the defendants' intent to infringe. For example, two customer complaints made to the plaintiffs regarding the subject property served as considerable evidence of actual consumer confusion, especially as these instances involved consumers mistakenly attempting to file lawsuits against the plaintiff instead of the defendant.

Claims in Curves Franchisee Dispute

In Armstrong v. Curves Int'l, No. 4:15-cv-1006 (TCM) (E.D. Miss. Oct. 15, 2015), the court dismissed 95 claims of a 165-count mass action brought against fitness franchisor Curves International, Inc. and related parties, finding that these claims were barred by the statute of limitations. The remaining claims were then transferred to Texas, the forum listed in the franchise agreements signed by the franchisees, despite the plaintiffs' argument that this provision should not be enforced due to the plaintiffs' alleged fraudulent conduct. Although the plaintiffs had filed a notice voluntarily dismissing many of the counts after the defendant filed its motion to dismiss, because this request did not contain a stipulation of dismissal by all parties that appeared, the court ruled on the defendants' motion to dismiss.

The case involved 33 groups of franchises owned by various individuals and entities pursuant to a license agreement with defendant Curves International. The action involved three groups of violations. The first group included allegations that the defendants knowingly made false representations relevant to the purchasing of a franchise, which the franchisees then relied upon in purchasing or renewing the franchise. In addition, plaintiffs alleged that Curves did not, as represented, assist with grand openings, proper training, or with the selection, negotiation or development of the site or location of the franchise property. The complaint also included claims that Curves oversaturated the mark contrary to statements in their FDD, on their website, and in the media that they had researched their relevant demographics and would not grant franchises unless they could be supported.

The second group of violations related to unanticipated demands that franchisees encountered after the franchises were opened, including demands for additional payments. In addition, the company introduced required new systems and programs that included purchases of various new equipment and products. Curves also required that franchisees purchase equipment from the company and allegedly charged excessive shipping fees.

The third group focused on Curves' failure to fulfill the obligations anticipated by the franchise agreement, including reviewing franchisees' sales, promotional efforts and financial status, and providing suggestions for the same. This group also claimed that Curves failed to conduct the promised merchandising, advertising and marketing research and did not communicate new developments and improvements to the systems. The franchisees also noted Curves' failure to advertise nationally and regionally.

All of the above claims were brought on the grounds of breach of contract, violation of the Texas Business Opportunity Action, and violation of the Texas Deceptive Trade Practices Act.

The court found that the allegations in the first group all related to promises broken before or at the opening of a franchise. The court rejected the plaintiffs' arguments that this should be viewed as a continuing contract and that the statute of limitations should not run until the agreement was fully performed. Instead, the court found that the statute of limitations began to run on all of the claims in the first group (with the exception of the representations relating to a three month break-even point) four years after the franchise was opened.

As to the second group, the court dismissed all claims relating to additional demands as time-barred if they related to demands made in 2001, 2003, 2004, 2008, 2010, 2011, 2012 or 2013. Because no time frame was provided in the pleadings for the 17th demand (that equipment must be purchased through Curves), that claim survived.

The third group ' regarding Curves' failure to deliver on future obligations ' did not contain a time frame for those breaches.

The court then specifically went through each plaintiff and identified which, if any, of their causes of action remained. Ninety-five counts are listed as dismissed without prejudice.

The surviving claims were then transferred to Texas, despite plaintiffs' arguments that that the forum selection clause should not be enforced due to the allegations of fraudulent conduct. The court stressed that a forum selection clause in a contract is not enforceable if the inclusion of the forum clause itself was the product of fraud or coercion, and that a general allegation of fraud in the inducement of a contract was insufficient to negate the forum selection clause. Accordingly, the plaintiffs' general allegation of fraud required that any remaining dispute under the agreements be heard in Texas.

Lauren Sullins Ralls is an associate in the Atlanta office of Kilpatrick Townsend & Stockton LLP. She can be contacted at 404-532-6967 or [email protected].

Unauthorized Use of Registered Mark

In Choice Hotels Int'l, Inc. v. Zeal, LLC, No. 4:13-cv-1961 (Sept. 19, 2015) (D.S.C. Sept. 29, 2015), the U.S. District Court for South Carolina granted summary judgment relating to the unpermitted use of the ECONO LODGE mark, as well as use of the ECONO STUDIOS INN & SUITES name, by the successors-in-interest of a former Econo Lodge franchisee.

The plaintiff, franchisor Choice Hotels International, Inc., is the owner of a family of ECONO LODGE trademarks that are both used and registered in connection with its lodging franchise. The defendants were owners of a hotel in Myrtle Beach that was previously owned by a former franchisee of Choice Hotels. Although the former franchisee had operated an ECONO LODGE INN & SUITES hotel, its agreement was terminated before the defendants acquired the hotel. Nonetheless, the defendants continued to operate the hotel as an ECONO LODGE INN & SUITES for some time before changing the name to ECONO STUDIOS INN & SUITES.

The court found in Choice Hotel's favor on its trademark infringement claims, as well as unfair competition and common law trademark infringement claims, and granted a permanent injunction in relation to the same.

In reaching its decision, the court first noted that the defendants had used Choice Hotels' marks in commerce without permission in two different manners. First, when the plaintiff purchased the subject property from the prior holdover franchisee, it operated the facility for a short period of time with a sign and other branded materials that featured the exact ECONO LODGE mark while it negotiated a possible franchise agreement with the plaintiff. When the discussions were unsuccessful, the defendants then changed the name to ECONO STUDIOS INN & SUITES. The defendant conceded this point, but argued that the new mark was sufficiently distinct and, therefore, its use did not require Choice Hotels' permission.

The court noted that it is “axiomatic that continued unauthorized use of a mark by a holdover franchisee creates a likelihood of confusion in the marketplace.” Here, however, the defendants were not holdover franchisees, but were merely successors to holdover franchisees, and never had permission to use the plaintiff's mark at any point. The defense's argument that any use of the exact ECONO LODGE mark was de minimis was unsupported, and the court found that the defendants' operation of the property before deflagging it created a likelihood of consumer confusion.

The majority in the opinion focuses on whether the defendants' use of the variation ECONO STUDIOS INN & SUITES also infringed the plaintiff's marks. In support of its position, the defendant asserted that the plaintiff's marks were descriptive because “ECONO” served as an abbreviation for “economy.” However, the court found that several factors weighed in favor of treating the marks as suggestive and therefore entitling them to trademark protection. The plaintiff's marks were not only registered, but had achieved incontestable status. In addition, the registrations were granted by the United States Patent and Trademark Office (USPTO) without any evidence of secondary meaning being required. The court noted that although the USPTO's determination was not conclusive, it shifted the burden to the defendant to prove that the marks were not sufficiently distinctive and that the defendants failed to meet that burden. The court also recognized the marks as commercially strong because of their long-standing use by the plaintiff and its predecessors, further evidencing the secondary meaning of the marks.

In support of its decision, the court cited a 2000 case in the Middle District of Alabama involving Choice Hotels and its ECONO- marks (Choice Hotels Int'l, Inc. v. Kaushik, 147 F. Supp. 2d 1242 (M.D. Ala. 2000), aff'd sub nom . Choice Hotels Inter'l v. Kaushik, 260 F.3d 627 (11th Cir. 2001)), as well as a Trademark Trial and Appeal Board (TTAB) case involving a variety of plaintiff's ECONO- marks ( Econo-Travel Motor Hotel Corp., 199 U.S. P.Q. (BNA) 307 (T.T.A.B. Mar. 28, 1978)). In both of these disputes, the ECONO LODGE mark was found to be sufficiently strong to warrant trademark protection. Indeed, the TTAB expressly rejected the argument that the mark ECONO-TRAVEL was weak, generic, or merely descriptive. The court similarly found the plaintiffs' marks to be strong here.

The court refused to accept the defendant's arguments that the use of different colors (green and brown as opposed to red and yellow), different fonts, and the omission of plaintiff's distinctive “e” were sufficient to avoid similarity with the plaintiff's marks, especially because the services were “as similar as they could possibly be because the defendants are operating a facility that used to be an ECONO LODGE.” Although the court did not find that sufficient evidence existed to rule that the defendants' intended to infringe the plaintiff's marks with its new name, overall, the other factors outweighed the difficulties with proving the defendants' intent to infringe. For example, two customer complaints made to the plaintiffs regarding the subject property served as considerable evidence of actual consumer confusion, especially as these instances involved consumers mistakenly attempting to file lawsuits against the plaintiff instead of the defendant.

Claims in Curves Franchisee Dispute

In Armstrong v. Curves Int'l, No. 4:15-cv-1006 (TCM) (E.D. Miss. Oct. 15, 2015), the court dismissed 95 claims of a 165-count mass action brought against fitness franchisor Curves International, Inc. and related parties, finding that these claims were barred by the statute of limitations. The remaining claims were then transferred to Texas, the forum listed in the franchise agreements signed by the franchisees, despite the plaintiffs' argument that this provision should not be enforced due to the plaintiffs' alleged fraudulent conduct. Although the plaintiffs had filed a notice voluntarily dismissing many of the counts after the defendant filed its motion to dismiss, because this request did not contain a stipulation of dismissal by all parties that appeared, the court ruled on the defendants' motion to dismiss.

The case involved 33 groups of franchises owned by various individuals and entities pursuant to a license agreement with defendant Curves International. The action involved three groups of violations. The first group included allegations that the defendants knowingly made false representations relevant to the purchasing of a franchise, which the franchisees then relied upon in purchasing or renewing the franchise. In addition, plaintiffs alleged that Curves did not, as represented, assist with grand openings, proper training, or with the selection, negotiation or development of the site or location of the franchise property. The complaint also included claims that Curves oversaturated the mark contrary to statements in their FDD, on their website, and in the media that they had researched their relevant demographics and would not grant franchises unless they could be supported.

The second group of violations related to unanticipated demands that franchisees encountered after the franchises were opened, including demands for additional payments. In addition, the company introduced required new systems and programs that included purchases of various new equipment and products. Curves also required that franchisees purchase equipment from the company and allegedly charged excessive shipping fees.

The third group focused on Curves' failure to fulfill the obligations anticipated by the franchise agreement, including reviewing franchisees' sales, promotional efforts and financial status, and providing suggestions for the same. This group also claimed that Curves failed to conduct the promised merchandising, advertising and marketing research and did not communicate new developments and improvements to the systems. The franchisees also noted Curves' failure to advertise nationally and regionally.

All of the above claims were brought on the grounds of breach of contract, violation of the Texas Business Opportunity Action, and violation of the Texas Deceptive Trade Practices Act.

The court found that the allegations in the first group all related to promises broken before or at the opening of a franchise. The court rejected the plaintiffs' arguments that this should be viewed as a continuing contract and that the statute of limitations should not run until the agreement was fully performed. Instead, the court found that the statute of limitations began to run on all of the claims in the first group (with the exception of the representations relating to a three month break-even point) four years after the franchise was opened.

As to the second group, the court dismissed all claims relating to additional demands as time-barred if they related to demands made in 2001, 2003, 2004, 2008, 2010, 2011, 2012 or 2013. Because no time frame was provided in the pleadings for the 17th demand (that equipment must be purchased through Curves), that claim survived.

The third group ' regarding Curves' failure to deliver on future obligations ' did not contain a time frame for those breaches.

The court then specifically went through each plaintiff and identified which, if any, of their causes of action remained. Ninety-five counts are listed as dismissed without prejudice.

The surviving claims were then transferred to Texas, despite plaintiffs' arguments that that the forum selection clause should not be enforced due to the allegations of fraudulent conduct. The court stressed that a forum selection clause in a contract is not enforceable if the inclusion of the forum clause itself was the product of fraud or coercion, and that a general allegation of fraud in the inducement of a contract was insufficient to negate the forum selection clause. Accordingly, the plaintiffs' general allegation of fraud required that any remaining dispute under the agreements be heard in Texas.

Lauren Sullins Ralls is an associate in the Atlanta office of Kilpatrick Townsend & Stockton LLP. She can be contacted at 404-532-6967 or [email protected].