Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—7th Cir.: Franchisee’s claims barred by res judicata, (Jan 28, 2016)

By Michael Menzhuber, J.D., LL.M.

An action by a franchisee to set aside a default judgment—which enjoined it from continuing to use the franchisor’s intellectual property, awarded damages to the franchisor, and asserted the same claims as in a voluntarily-dismissed prior proceeding—was precluded by res judicata, according to the U.S. Court of Appeals in Chicago. The court further determined that, even if res judicata did not apply, the application of the “law of the case” doctrine would lead to the same result (Window World of Chicagoland, LLC v. Window World, Inc., January 27, 2016, Easterbrook, F.).

David Hampton and his business, Window World of Chicagoland, LLC (collectively, “Hampton”), entered into several contracts with Window World, Inc. (Window World) to use its trademarks and business methods for its retail window and door business. After several years of operation, Hampton was notified by Window World that their dealings were subject to the Illinois Franchise Disclosure Act (Act). Hampton was then given 35 days to elect between: (1) rescinding the contracts (which would mean stopping the use of Window World’s intellectual property); or (2) signing a formal franchise agreement.

Instead of pursuing one of these alternatives, Hampton filed a federal suit (Suit 1) that accused Window World of violating the Act and other state laws. While Suit 1 was pending, Window World filed a suit (Suit 2) under the Lanham Act, seeking: (1) damages for Hampton’s continued use of its intellectual property after the expiration of the 35-day period; and (2) an injunction against future use of its marks and methods.

Hampton dismissed Suit 1 and did not hire a lawyer to represent him in Suit 2. He also did not pay attention to the court’s electronic filing system and, therefore, did not respond to Window World’s motions or appear at the scheduled hearings. The court subsequently entered a default judgment that awarded Window World damages and enjoined Hampton from using any of Window World’s intellectual property.

Hampton continued to call his business “Window World of Chicagoland, LLC” and, after his business closed, filed a new federal suit (Suit 3). In addition to presenting the same claims as in Suit 1, Suit 3 asked that the default judgment in Suit 2 be set aside. The court found that excusable neglect justified vacatur of the default judgment but conditioned the reopening of Suit 2 on Hampton’s payment of $33,000. Hampton did not pay, and the court vacated the vacatur.

Hampton did not appeal the re-entered judgment in Suit 2 and pursued Suit 3, even though the claims asserted were compulsory counterclaims in Suit 2. The court concluded that the twice-final and unappealed judgment in Suit 2 foreclosed any claim that Hampton was owed damages from Window World or that he could continue to use Window World’s intellectual property. Consequently, it dismissed Suit 3 under principles of res judicata.

On appeal, Hampton argued that res judicata did not apply because: (1) that principle concerns how the final decision in one suit affects proceedings in a different suit; and (2) Suits 2 and 3 were the same suit because they had been consolidated in the prior proceeding. The appellate court noted, however, that the prior court determined that the outcome of Suit 2 was preclusive in Suit 3 and that the consolidation of the suits was for administrative convenience. It concluded that, since suits that are administratively consolidated retain their independent existence, res judicata applied.

The appellate court further determined that, even if Suits 2 and 3 had been fully consolidated, the “law of the case” doctrine would lead to same conclusion because the relief Hampton sought under state law would be inconsistent with the relief Window World had already received.

The case is No. 15-2224.

Attorneys: Jonathan E. Fortman (Law Offices of Jonathan E. Fortman LLC) for Window World of Chicagoland, LLC. and David L. Hampton. Fredric A. Cohen (Cheng Cohen LLC) for Window World, Inc.

Companies: Window World of Chicagoland, LLC; Window World, Inc.

Cases: FranchisingDistribution IllinoisNews