Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D.N.C.: Franchisee permanently enjoined from post-termination use of franchisor trademarks, trade secrets, (May 18, 2015)

By John W. Arden, J.D., LL.M.

A Grout Doctor franchisee that declared its intent to operate as an independent company prior to termination of its franchise agreement was permanently enjoined from infringing the franchisor’s registered trademarks; misappropriating the franchisor’s trade secrets; harassing or threatening the franchisor, its employees, or franchisees; or making false claims regarding the franchisor, its employees, or franchisees. In addition, the federal district court in Elizabeth City, North Carolina, entered a judgment for breach of contract, a damage award for unjust enrichment from misappropriation of trade secrets, and trebled damages for violation of the North Carolina Unfair and Deceptive Trade Practices Act (Grout Doctor Global Franchise Corp. v. Groutman, Inc., May 14, 2015, Boyle, T.).

Grout Doctor Global Franchise Corporation—which franchises grout cleaning, repair, and maintenance stores—filed a complaint, seeking a permanent injunction and monetary damages from franchisee Groutman, Inc. and its owner, Gary Swanson. The franchisee represented himself at a hearing, during which the court granted the franchisor’s motion for preliminary injunction. The franchisee subsequently filed a motion to dismiss, which was denied. Two corporate defendants failed to file a responsive pleading, and the court entered default against them. Because of the default, well-pleaded allegations were taken as true. The court then set out to determine whether the allegations support the relief sought and to make an independent determination of damages.

Breach of contract. Both Groutman and Swanson breached numerous provisions of the franchise agreement, which was entered in 2006 and renewed in 2014. The franchisee failed to pay the $500 franchise renewal fee, the monthly royalty payments, and the customer refund reimbursements. After termination of the franchise agreement, both Groutman and Swanson engaged in a grout repair business within the franchise territory. Grout Doctor was entitled to receive unpaid fees and lost profits caused by the abandonment of the franchise, according to the court. Lost profits were calculated by multiplying the minimum due under the agreement—$416 per month—by the seven years remaining on the franchise agreement.

Trademark infringement. Grout Doctor demonstrated trademark infringement by showing ownership of valid trademarks and Groutman’s unlawful trademark applications containing sworn statements of its use of the marks in commerce. Common sense compelled the conclusion that a strong risk of consumer confusion arises when a terminated franchisee continues to use the former franchisor’s trademarks, according to the court. Groutman’s trademark applications on Grout Doctor’s marks were ordered cancelled.

Trade secrets. Groutman acknowledged that a “secret, unique, and confidential” franchisee manual provided by Grout Doctor contained trade secrets. Groutman disclosed these trade secrets without authorization by publishing portions of them on the Internet after termination of the franchise relationship and selling portions to consumers for $0.99 per download.

Unfair and deceptive practices. Groutman’s misappropriation of trade secrets, breaches of contract, and fraudulent representations to the US Patent and Trademark Office constituted violations of the North Carolina Unfair and Deceptive Trade Practices Act, the court held.

Permanent injunction. Grout Doctor established all elements necessary for a permanent injunction, since (1) it suffered an irreparable injury; (2) the injury could not be compensated by money damages; (3) the balance of equities tipped decidedly in its favor; and (4) there was a strong public interest in enforcing mutually agreed upon contracts.

The case is No. 7:14-CV-105-BO.

Attorneys: Corby C. Anderson (Nexsen Pruet, PLLC) for Grout Doctor Global Franchise Corp.

Companies: Grout Doctor Global Franchise Corp.; Groutman, Inc.; Doctor Plumber, LLC

Cases: FranchisingDistribution StateUnfairTradePractices NorthCarolinaNews