Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Md.: Pizzeria owner enjoined from using franchisor’s trademarks, (Oct 25, 2013)

By Mark Engstrom, J.D.

Pizzeria franchisor Ledo Pizza System was entitled to a preliminary injunction that prohibited a former franchisee (Inderjit Singh) from using Ledo’s trademarks, the federal district court in Baltimore has ruled (Ledo Pizza System, Inc. v. Singh, October 24, 2013, Quarles, W.). The injunction also required Singh to adhere to the non-compete clause of his franchise agreement.

Background. In 2007, Singh signed a franchise agreement that allowed him to operate a Ledo pizza restaurant in Lorton, Virginia. Singh sub-licensed the franchise to his operating company, Tri-Bro. In 2012, Ledo terminated the franchise because Singh and Tri-Bro had defaulted on several franchise obligations and owed Ledo more than $50,000 in unpaid advertising and royalty fees.

In August of 2013, Ledo sued Injerjit Singh and Tri-Bro Inc. for trademark infringement, unfair competition, and breach of contract. The plaintiffs sought contract damages, specific performance, injunctive relief, and attorneys’ fees and costs.

On October 10, 2013, the Court granted Ledo a temporary restraining order (TRO) that prohibited Singh from using Ledo’s trademarks and trade dress. It also stayed Ledo’s suit against Tri-Bro because Tri-Bro had filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. According to Ledo, Singh continued to operate his business as a Ledo pizza restaurant until October 14, 2013, when he closed the restaurant. Five days later, he reopened the restaurant as a Stallion pizza franchise.

Ledo’s president, Jim Beall, testified that: (1) Ledo did not authorize Singh’s competing pizza franchise; (2) the decor and floor plan of Singh’s Ledo franchise was used for his Stallion franchise; (3) Singh’s Stallion franchise used Ledo’s proprietary software system to manage its sales; (4) some of the food that was sold by Singh’s new restaurant used Ledo recipes; (5) Singh retained Ledo’s operating manuals.

Injunctive Relief, Trademark Infringement

To obtain a preliminary injunction, Ledo had to show that: (1) success on the merits of his trademark claims was likely; (2) irreparable harm was likely absent preliminary relief; (3) the balance of equities favored Ledo; and (4) an injunction was in the public interest.

Likelihood of success on the merits. Beall testified that Ledo owned the trademark LEDO PIZZA, which Singh had used, without permission, after its franchise agreement had been terminated by Ledo. Beall also testified that customers were confused about the status of Singh’s franchise and had complained to Ledo about it. Because the court had previously ruled that a franchisee’s continued use of a franchisor’s trademarks following the termination of the parties’ franchise agreement was likely to cause consumer confusion, the court concluded that Ledo had established a likelihood of success on the merits of its trademark claims.

Irreparable harm. Singh’s unauthorized use of Ledo’s trademark and trade dress harmed Ledo’s relationship with its customers and other franchisees, according to Beall. Because Singh’s franchise agreement had been terminated, Ledo could no longer control the quality of the products and services at Singh’s restaurant. Ledo’s injury was continuing, even though Singh had reopened as a Stallion franchise, because many customers still associated the location of Singh’s restaurant with Ledo. In addition, Singh’s restaurant was still using Ledo’s proprietary software systems, trade dress, and recipes, and was diverting customers from Ledo franchises, which decreased Ledo’s profits. In the court’s view, irreparable harm was demonstrated by Ledo’s loss of profits, loss of control over Singh’s restaurant, and the threat to Ledo’s reputation and the goodwill that it had established with customers and other franchisees.

Balance of the equities. The court found that any hardship that Singh might incur as the result of a preliminary injunction would be self-inflicted. Beall testified, for example, that he and Ledo had: (1) worked with Singh, before the franchise was terminated, to cure its defaults; (2) granted Singh several extensions of time to find a buyer for the franchise or its assets; and (3) identified several potential buyers so Singh could recoup some of his losses. The balance of equities thus favored Ledo, in the court’s view.

Public interest. Ledo sought to protect its trademark rights and thereby avoid consumer confusion. The public interest thus favored a preliminary injunction that would prohibit Singh from infringing Ledo’s marks.

Contract Claims

According to the court, Ledo was likely to establish that: (1) Ledo and Singh had entered into a valid contract (the franchise agreement); (2) the franchise agreement had been terminated; and (3) the termination of the franchise agreement required Singh to comply with all post-termination obligations, including the franchise agreement’s covenant not to compete.

Covenant Not to Compete. Ledo sought a preliminary injunction to enforce the non-compete clause in Singh’s franchise agreement. The clause prohibited Singh from operating “any dine in or carryout food products business” within ten miles of his Ledo pizza location, for two years after the franchise agreement was terminated.

After determining that Ledo was likely to succeed on the merits of its contract claim—because the geographic and durational scope of Singh’s non-compete clause was similar to other non-compete clauses that were found to be reasonable in other Maryland franchise cases—the court analyzed the remaining preliminary injunction factors in a manner that was substantially similar to its analysis of those factors for the purpose of injunctive relief with respect to the use of Ledo’s trademarks.

Mandatory injunctive relief. Ledo sought an injunction that would require affirmative action by Singh to comply with several post-termination obligations in the franchise agreement (e.g., the cancellation of assumed names and registrations that were related to the use of Ledo’s trademarks, the removal of signs and decor that were associated with Ledo’s trademarks and trade dress, the return of Ledo’s operating manuals, etc.).

The court noted that preliminary injunctions were usually issued to protect the status quo, to prevent irreparable harm during the pendency of a lawsuit, and to preserve the court’s ability to render a meaningful judgment on the merits. Mandatory preliminary injunctions were warranted “only in the most extraordinary circumstances.”

In this case, Beall testified that the “Ledo brand” was harmed when customers encountered a closed Ledo franchise location, but he failed to identify any harm that would result from a closed Stallion franchise at the former Ledo location. In addition, he failed to specify the irreparable harm that Ledo would suffer from Singh’s failure to immediately: (1) change the telephone number of his new pizza store; (2) change the store’s interior décor; or (3) return Ledo’s operating manuals, after Singh discontinued his Stallion pizza business.

Further, many of Ledo’s requests (e.g., the modification of the physical interior of Singh’s restaurant) would likely result in “some expense” to Singh. According to the court, the hardship to Singh of awarding mandatory relief to Ledo could outweigh the hardship to Ledo when Singh’s business stopped operating. Because the previously approved injunctive relief remedied the primary source of Ledo’s injuries—Singh’s continued operation of a pizza restaurant in his former franchise location—Ledo did not meet its heightened burden to justify a mandatory preliminary injunction.

The case is No. WDQ-13-2365.

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

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

Cases: FranchisingDistribution MarylandNews