Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—DColo: Terminated Sporting Goods Franchisee Enjoined from Continued Use of Franchisor’s Trademarks, (Mar 22, 2013)

By Tobias J. Gillett, J.D., LLM.

The federal district court in Denver has preliminarily enjoined a terminated sporting goods store franchisee’s continued use of the franchisor’s trademarks, service marks, and logos in conjunction with further operation of the store, but postponed ruling on portions of the motion that would enjoin continued use of the franchisor’s business system and would enforce certain restrictive covenants (Winmark Corporation v. Schneeberger, March 19, 2013, Martinez, W.).

Winmark Corporation operates a network of franchise retail sporting goods stores under the name Play It Again Sports. Effective December 31, 2002, Winmark entered into a franchise agreement with Choury Holdings, Inc. to open a Play It Again Sports store in Fort Collins, Colorado. Choury Holdings later assigned its rights under the agreement to Todd and Patricia Schneeberger.

The agreement granted the franchisee a limited license and franchise to use the Play It Again Sports trademarks, service marks, and logos (“the marks”), as well as certain business methods and specifications, so long as the agreement was in effect and the franchisee was in compliance with Winmark’s quality standards. Winmark owned federally registered, incontestable trademarks, and had spent considerable sums to promote the Play It Again Sports brand.

Following termination of the franchise, the agreement prohibited the franchisee from continuing to use the marks, required the franchisee to alter the appearance of the store to distinguish it from Play It Again Sports stores, prohibited further use of Winmark’s point-of-sale and inventory management software, and prohibited the franchisee from operating a competing sporting goods business for one year and within an eight-mile radius of the store.

On April 30, 2012, Winmark sent the Schneebergers a letter, notifying them of the December 31, 2013 expiration of their franchise agreement and inviting them to take steps to renew the agreement. Winmark later sent a second letter extending the deadline to January 15, 2013. The Schneebergers did not respond, and the agreement terminated. Despite the termination, the Schneebergers continued to operate the store and to use “numerous Play It Again Sports signs and logos,” although they covered part of the store’s main sign with tape. They also continued to use Winmark’s point-of-sale and inventory management system.

On February 1, 2013, Winmark brought suit against the Schneebergers, alleging trademark infringement in violation of the Lanham Act. The present decision addressed Winmark’s motion for a preliminary injunction. The court chose to limit its consideration of the motion to the use of Winmark’s trademarks, rather than also to the use of Winmark’s business system or the enforcement of restrictive covenants, due to “the fluidity of facts at this stage” and to the fact that the Schneebergers had “indicated that they were willing to have the store completely closed on March 14th.”

The court explained that a plaintiff must establish that four elements weigh in the plaintiff’s favor in order to obtain a preliminary injunction: (1) a substantial likelihood of success on the merits; (2) irreparable injury if the injunction was denied; (3) the threatened injury outweighs the injury the defendant would suffer from the injunction; and (4) the injunction would not be contrary to the public interest. The court concluded that Winmark satisfied this test.

The court determined that Winmark demonstrated a substantial likelihood of success on the merits stemming from the Schneebergers’ continued use of Winmark’s trademarks, and noted that “the potential for consumer confusion is even greater” in cases involving terminated franchisees “than in cases of random infringement.” The Schneebergers’ continued use of the trademarks “would readily lead a consumer to be confused as to whether [Winmark] continues to endorse [the Schneebergers’] use of the Marks (or not). Moreover, the Schneebergers’ sale of the same type of merchandise to the same client base heightened the possibility of confusion, and the fact that the store continued to generate receipts bearing the Play It Again Sports name “only reinforce[d] the result.”

The court also found that Winmark had shown it would incur irreparable harm without an injunction, noting that, with respect to trademark infringement, “irreparable injury is ordinarily presumed once the plaintiff has established a likelihood of confusion.” The evidence demonstrated a high chance for consumer confusion, and a strong likelihood that consumers visiting the store post-termination were having a negative experience that could tarnish Winmark’s branding. Moreover, the franchise agreement expressly provided that Winmark would be “irreparably harmed by a violation” of the franchise agreement, and that injunctive relief would be “essential” to protect Winmark. The Schneeberger’s action in signing the franchise agreement “foreclose[d] any chance that [they] could succeed on this factor.”

The balance of possible harms between Winmark and the Schneebergers also favored Winmark. Winmark would suffer irreparable harm from customer confusion and potential lost business and customer relationships if the Schneebergers were permitted to continue to use the trademarks. The Schneebergers would suffer harm from the loss of the good will associated with the Play It Again Sports trademarks, but this result would not weigh against an injunction “because the injunction would merely prohibit [the Schneebergers] from using marks vested in [Winmark].”

Finally, the factor requiring consideration of the public interest “weigh[ed] heavily in favor of [Winmark],” and would “only promote the purpose behind the relevant statute.” Therefore, the court granted Winmark’s motion for preliminary injunction regarding use of Winmark’s trademarks. The court also ordered the parties to provide a status report regarding the store by April 15, 2013, if the store had not closed by that time, and granted Winmark leave to refile any preliminary injunction motion that had not been addressed by the present decision on or after April 16, 2013.

The case is Civil Action No. 13-cv-0274-WJM-BNB.

Attorneys: John Andrew Chanin (Lindquist & Vennum, PLLP) for Winmark Corporation

Companies: Winmark Corporation

Cases: FranchisingDistribution ColoradoNews