Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Pa.: Permanent injunction puts the brakes on operation of expired AAMCO franchise, (Jul 23, 2015)

By Michael Menzhuber, J.D., LL.M.

Franchisor AAMCO Transmissions, Inc. established all of the factors necessary for the granting of a permanent injunction prohibiting a former franchisee from holding himself out as an AAMCO franchisee, the federal district court in Philadelphia has ruled (AAMCO Transmissions, Inc. v. Dunlap, July 22, 2015, Schiller, B.).

Background. AAMCO and James Dunlap entered into franchise agreement in June 1981, permitting Dunlap to operate an AAMCO transmission repair center in Chesapeake, Virginia. The agreement lasted for 15 years with an automatic renewal for another 15 years if neither party gave written notice of termination. Upon termination of the agreement, Dunlap was to: (1) pay AAMCO any money owned; (2) permanently discontinue the use of the AAMCO name and trademark: (3) destroy or surrender any AAMCO signage, stationary, forms or advertisings; and (4) refrain from doing anything that would indicate that he was or was ever was an authorized AAMCO dealer.

In 2006, AAMCO informed Dunlap that it was terminating the franchise agreement. Dunlap continued to operate the AAMCO center and AAMCO sued to enforce termination. The parties later reached a settlement that allowed Dunlap to sell his AAMCO center. However, Dunlap continued to operate it after the settlement agreement expired in June 2011. Consequently, AAMCO sued Dunlap for trademark infringement under the Lanham Act, breach of contract and unfair competition.

The court issued a preliminary injunction against Dunlap that, among other things, prohibited him from holding himself out as an AAMCO franchisee. The court also required the parties to arbitrate their dispute over the expiration of the franchise agreement. The arbitrator ruled in favor of AAMCO and concluded that the agreement expired in June 2011. AAMCO moved to convert the preliminary injunction into a permanent injunction.

Permanent injunctive relief. In determining whether to grant permanent injunctive relief, a court must consider whether: (1) the moving party has shown actual success on the merits; (2) the moving party will be irreparably injured by the denial of injunctive relief; (3) the granting of the permanent injunction will result in even greater harm to the defendant; and (4) the injunction would be in the public interest.

The court concluded that: (1) AAMCO would prevail on its claim that Dunlap violated the terms of the franchise agreement by continuing to use AAMCO trademarks after June 2011, because the arbitrator determined that the franchise agreement expired on that date; (2) the permanent injunction would do no harm to Dunlap because it merely prevented him from engaging in conduct to which he had no legal right; and (3) the permanent injunction would be in the public interest because it would prevent confusion or deception among AAMCO customers, uphold the contractual rights and obligations of the parties, and maintain the viability of the franchise system.

The court also concluded that denial of a permanent injunction would cause AAMCO irreparable harm. It noted that the essence of the irreparable harm caused by trademark infringement is the aggrieved party’s loss of control over its business reputation and goodwill. Although Dunlap argued that he was not continuing to hold himself out as an AAMCO dealer, the court determined that if the permanent injunction was denied AAMCO would have the substantial burden of continuously monitoring whether Dunlap was using its trademarks or holding himself out as a franchisee.

The court also noted that, since Dunlap had continued to use the AAMCO name and trademark after the franchise agreement expired and had only discontinued doing so upon entry of the preliminary injunction, his promises of voluntary cessation were not sufficient to defeat an order for injunctive relief. Finally, the court determined that if the permanent injunction was not granted, no later grant of damages or second injunction would compensate AAMCO for the cost and trouble of having to defend subsequent litigation over issues barred by res judicata.

The case is No. 11-4009

Attorneys: James A. Goniea (Wiggin& Dana LLP) and William B. Jameson (Cottman Transmission Systems, LLC) for AAMCO Transmissions, Inc. James M. Dunlap, pro se.

Companies: AAMCO Transmissions, Inc.

Cases: FranchisingDistribution PennsylvaniaNews