Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D.N.C.: Holdover franchisee must stop using mark under preliminary injunction, but scope limited to one store, (Apr 4, 2014)

By Mark S. Nelson, J.D.

A former franchisee operating a fast food outlet in Fayetteville, North Carolina has been ordered to stop using American Dairy Queen Corp.’s (ADQ’s) Dairy Queen® and Orange Julius® trademarks under a preliminary injunction issued by the federal district court in Raleigh. YS&J Enterprises, Inc. (YS&J) must stop using the marks and related ADQ proprietary items, but the preliminary injunction is limited in scope to a single store location (American Dairy Queen Corporation v. YS&J Enterprises, Inc., April 2, 2014, Britt, W.).

Background. ADQ licensed the Dairy Queen® and Orange Julius® marks to YS&J as part of a 2004 franchise agreement to operate a shopping mall restaurant (store) in Fayetteville, North Carolina. In May 2013, ADQ told YS&J that it was terminating the franchise agreement because YS&J had not fixed store defects identified by ADQ in a notice of default a year earlier.

The mutual cancellation and release agreement between ADQ and YS&J, and its main shareholder, John A. Ribet III, gave YS&J the option to sell the store’s assets as an alternative to termination. When YS&J failed to sell the store’s assets by the required date, ADQ gave notice it was ending the agreement and twice told YS&J to stop using its marks. A later visit to the store by ADQ’s business consultant found that YS&J was still using ADQ’s marks.

ADQ then sued YS&J for trademark infringement and false identification of origin under the Lanham Act and for breach of contract and unjust enrichment. ADQ also asked for injunctive relief.

Injunction granted. ADQ urged the court to grant the preliminary injunction to stop YS&J’s alleged trademark infringement. ADQ said that it owned the Dairy Queen® and Orange Julius® marks, and that YS&J used the marks in commerce and without authorization while operating the Fayetteville store. The court noted that a “high risk” of confusion can arise in the holdover franchisee context, and found that ADQ showed it would likely win on the merits.

Likewise, the court found that ADQ showed it would likely succeed on the merits in its breach of contract claim. The mutual cancellation and release agreement, which says North Carolina law governs its enforcement, imposed post-termination duties on YS&J to remove any ADQ marks and proprietary items from its store, and not to operate a business with a name that is deceptively similar to ADQ’s marks. YS&J allegedly continued to operate the Fayetteville store using the forbidden marks.

Moreover, the court also found that irreparable harm can arise from the unauthorized use of a trademark. The balance of the equities favored ADQ, despite the fact YS&J may suffer some “largely self-inflicted” harm. Citing a Second Circuit opinion, the court also found that the prevention of trademark infringement and the upholding of valid non-compete agreements serves a public purpose. As a result, the court granted ADQ’s request for preliminary injunctive relief.

Scope of injunction. In granting ADQ’s request for a preliminary injunction, the court opted to limit the scope of this relief to YS&J’s Fayetteville store. In a footnote, the court clarified that the injunction did not apply to a store YS&J allegedly operated in another North Carolina city. ADQ must post a nominal security.

The case is No. 5:14-CV-151-BR.

Attorneys: Isaac Augustin Linnartz (Smith Anderson Blount Dorsett Mitchell & Jernigan, LLP) and Kerry L. Bundy (Faegre & Benson, LLP) for American Dairy Queen Corp.

Companies: American Dairy Queen Corp.; YS&J Enterprises, Inc.

Cases: FranchisingDistribution NorthCarolinaNews