Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Md.: Continued operation of terminated franchise warranted injunction, attorney fees, (Aug 1, 2014)

By Edward L. Puzzo, J.D.

Ledo Pizza franchisees who continued to operate after termination of their franchise agreement were liable for unfair competition in violation of the Lanham Act and for trade name infringement under Maryland law, according to a report and recommendation issued by a magistrate judge in the federal district court in Baltimore. The magistrate recommended that attorney fees be assessed and a permanent injunction be entered against the franchisees (Ledo Pizza System, Inc. v. Singh, July 31, 2014, Gesner, B.).

On May 31, 2012, franchisor Ledo Pizza issued a termination notice to franchisee Inderjit Singh and sub-franchisee Tri-Bro, Inc. for failure to pay advertising fees, royalty fees, and other obligations required under the franchise agreement signed June 8, 2007 for operation of a restaurant in Lorton, Virginia. In order to provide the franchisees the opportunity to sell the franchise or its assets, Ledo Pizza signed certain forbearance agreements delaying their exercise of termination rights until July 31, 2013. On August 14, 2013, Ledo Pizza filed a lawsuit against the franchisees alleging, among other claims, Lanham Act and common law unfair competition and trademark dilution claims. On October 24, 2013, a preliminary injunction was issued against Singh (1) ordering him to stop operating as a Ledo Pizza franchise and to cease and desist from using the Ledo Pizza name, trade secrets, or trade dress, and (2) requiring compliance with the covenant-not-to-compete within ten miles of the business premises for a two-year period.

Lanham Act. In order to establish a cause of action for unfair competition in violation of the Lanham Act, a plaintiff must demonstrate that: (1) it owns a valid mark, (2) the defendant used the mark in commerce and without authorization, (3) the defendant used the mark (or an imitation of it) in the sale, offering for sale, distribution or advertising of goods or services, and (4) the defendant’s use of the mark was likely to confuse consumers. Here, the evidence indicated that, after the franchise agreement was terminated, the franchisees lost their permission to use Ledo Pizza’s mark, but continued to display signs with the Ledo Pizza mark, continued to identify their premises as a Ledo Pizza franchise location, and continued to offer products and services confusingly similar to those offered at official Ledo Pizza franchises. Accordingly, the magistrate judge found, plaintiffs had stated a legitimate cause of action under §1125(a) of the Lanham Act.

Trade name infringement. Ledo Pizza alleged unfair competition and trade name infringement under Maryland law. To state a cause of action of unfair competition under Maryland common law, the magistrate judge explained, plaintiffs must demonstrate that a defendant committed deceptive acts by holding out goods of one dealer as goods of another and, subsequently, receiving a profit that he would not have received but for the deception. Here, the franchisees continued identifying themselves as a Ledo Pizza establishment subsequent to the termination of the franchise agreement, the magistrate judge stated. They thereby deceived customers and continued to profit from the unauthorized use of the Ledo Pizza name.

To state a cause of action for trade name infringement, a plaintiff must show that a defendant, without a privilege to do so, used in his business a designation that is identical with or confusingly similar to the other’s trade name, though he does not use the designation for the purpose of deception, and that the other’s interest in his trade name is protected with reference to the goods, services, or business in connection with which the actor uses his designation, and the markets in which the actor uses his designation. Here, the Ledo Pizza trade name was registered both in Maryland and federally. Singh and Tri-Bro lost the right to use this trade name upon termination of the franchise agreement, yet continued to use the name. Accordingly, plaintiff stated legitimate causes of action for both unfair competition and trade name infringement under Maryland common law, the magistrate judge determined.

Damages. The magistrate judge ruled that plaintiff was entitled to an award of reasonable attorneys fees by virtue of both the franchise agreement and the Lanham Act. The franchise agreement required the former franchisees to pay all costs of enforcement and collection, including attorneys’ fees, incurred by Ledo Pizza in enforcing its rights under the agreement. The magistrate judge—satisfied that the requested legal fees and costs were reasonable based on the number of attorneys, their hourly rates and the work performed—awarded plaintiffs $44,540 in fees and $1,482 in costs.

Permanent injunction. As a remedy for Singh’s and Tri-Bro’s unfair competition and trademark dilution claims under the Lanham Act and Maryland common law, plaintiffs requested that the defendants be enjoined from selling under the protected trademark and trade dress Ledo Pizza or operating or advertising as Ledo Pizza or any derivation thereof.

In order to award a permanent injunction, the magistrate judge explained, plaintiffs must demonstrate (1) irreparable harm, (2) the inadequacy of a legal remedy (monetary damages), (3) a weight in its favor when balancing hardships, and (4) that the public would not be disserved by making the injunction permanent. Here irreparable harm was shown by the post-termination use of the Ledo Pizza trademark, threatening the reputation and good will of Ledo Pizza, and lost profits. Also, absent a permanent injunction, the magistrate judge continued, the former franchisees would likely continue their use of plaintiff’s trademark and trade dress, as they did during the period of July 31, 2013 through October 15, 2013. Thus, monetary damages would be insufficient, the magistrate judge ruled. The equities also tipped in plaintiff’s favor, given plaintiff’s efforts to give defendants the opportunity to avoid termination. Accordingly, the magistrate judge recommended granting the requested injunctive relief.

The case is Civil Action No. WDQ-13-2365.

Attorneys: Charles H. Henderson (McNamee Hosea Jernigan Kim Greenan and Walker PA) for Ledo Pizza System, Inc., and Ledo Pizza Carryouts, Ltd.

Companies: Ledo Pizza System, Inc.; Ledo Pizza Carryouts, Ltd.; Tri-Bro, Inc.

Cases: FranchisingDistribution StateUnfairTradePractices MarylandNews