Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Cal.: Terminated franchisee barred from using franchisor trademarks, (Feb 3, 2015)

By Linda O’Brien, J.D., LL.M.

The franchisor of International House of Pancakes restaurants was entitled to a preliminary injunction barring a terminated franchisee from continuing to use the franchisor’s registered trademarks, the federal district court in Sacramento has held (IHOP Franchising, LLC v. Hameed, January 30, 2015, Nunley, T.).

IHOP Franchising is a franchisor of International House of Pancakes restaurants. In July 1998, IHOP entered into a franchise agreement with Sultan Hameed for the operation of an IHOP restaurant in Sacramento, California. The agreement allowed Hameed to use IHOP’s trademarks and systems and required him to pay royalties and advertising fees. The term of the agreement was 25 years, but allowed the franchisor to terminate the agreement after providing a notice of default. The parties also signed a sublease agreement for the rental of the restaurant premises.

After Hameed failed to pay royalty and advertising fees for May and June 2014, IHOP sent Hameed a notice of default. After Hameed failed to pay the amount owed, the franchisor sent him a notice of termination. Following the termination of the franchise agreement, Hameed refused to surrender possession of the restaurant and continued to IHOP® marks. IHOP filed suit against Hameed, alleging breach of contract, ejectment, trademark infringement, unfair competition, and false advertising. Before the court was IHOP’s motion for preliminary injunction.

The court determined that IHOP was entitled to a preliminary injunction enjoining Hameed from continuing to use IHOP® marks. According to the court, IHOP showed a likelihood of success on the merits of its trademark infringement claims, since it was the owner of numerous valid, protectable marks associated with the IHOP brand and Hameed was authorized to use those marks only under the franchise and sublease agreements. It was undisputed that IHOP terminated the franchise agreement when Hameed failed to pay certain fees and that Hameed was required to stop using IHOP trademarks. Hameed failed to do so and there was no question that patrons of his restaurant believe they are dining at an IHOP.

Additionally, IHOP pleaded sufficient facts to show a likelihood of irreparable harm to their business reputation and goodwill. IHOP alleged irreparable harm to the company reputation caused by Hameed’s continued use of IHOP® marks. The plaintiff established its loss of control over the marks by presenting evidence that Hameed’s restaurant failed an operation evaluation with respect to food storage and premises cleanliness and customers were likely to associate the restaurant’s deficiencies with the IHOP brand. Thus, IHOP had no remedy at law for injuries to its business reputation caused by Hameed’s continuing infringement.

Hameed’s argument that he rightfully withheld funds from IHOP and that the case should proceed to a determination on the merits was rejected. In the court’s view, any hardship claimed by the defendant if the motion were to be granted was self-inflicted and could be discounted. The balance of equities favored the franchisor and against allowing the franchisee to use the franchisor’s mark due to a risk of irreparable harm. Finally, there was a strong public interest in preventing consumer confusion which favored the issuance of the requested injunctive relief. The defendant lost the right to use the franchisor’s mark but continued to do so. Therefore, the franchisor’s motion for a preliminary injunction was granted.

The case is No. 2:14-cv-1752-TLN-CKD.

Attorneys: Joel David Siegel (SNR Denton U.S. LLP) for IHOP Franchising, LLC, IHOP Properties LLC, IHOP IP, LLC, and International House of Pancakes, LLC. Mark E. Ellis (Ellis Law Group, LLP) for Sultan Hameed.

Companies: IHOP Franchising, LLC; IHOP Properties LLC; IHOP IP, LLC; International House of Pancakes, LLC

Cases: FranchisingDistribution CaliforniaNews