Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Pa.: Terminated franchisee barred from further operation, trademark use, (Jul 15, 2015)

By Edward L. Puzzo, J.D.

A Dunkin’ Donuts/Baskin-Robbins franchisee that continued to operate a store post-termination infringed on the franchisor’s trademarks, violated a valid non-compete provision of the franchise agreement, and should be subject to a permanent injunction barring this behavior, the federal district court in Philadelphia has ruled (Dunkin Donuts Franchising, LLC v. Claudia III, LLC, July 14, 2015, McHugh, G.).

Dunkin Donuts Franchising LLP is a limited liability company, with its principal place of business in Canton, Massachusetts. Baskin-Robbins Franchising is a Delaware company with its principal place of business in Canton, Massachusetts. Collectively, they operate a large franchise system across the U.S., licensing their well known trademarks and other intellectual property and selling food and beverage products they develop. Claudia III, LLC is a limited liability company, operating a Dunkin’ Donuts/Baskin-Robbins franchise in Pennsylvania.

In 2009, the parties executed a franchise agreement in which Claudia received a license to operate a store, selling the franchisors’ food products and using their intellectual property. In return, Claudia accepted obligations to pay franchise and advertising fees, participate in training, and adhere to bookkeeping and reporting standards. The franchise agreement outlined notice and cure procedures through which the franchisors may terminate the agreement upon the franchisee’s breach.

This dispute focused on the renovation requirement in the agreement, which required the franchise to “refurbish the Store in accordance with [Dunkin’s] then-current standards” by June 5, 2013. Claudia had the obligation to pay for and complete the renovation. The franchisors retained significant control over how the franchisee could accomplish the renovation.

The renovations began in the spring of 2013. The franchisors provided a design concept and the franchisee hired an approved architect. The project was delayed in the fall of 2013, when the township required further information and approval by the Department of Health before issuing a building permit. The Department of Health required some changes in the plans regarding the placement of a bathroom and a drinking water well.

Based on these renovation problems, the franchisors issued a notice of termination and insisted that Claudia was no longer a franchisee. Thus, its continued use of the franchise trademarks and trade dress allegedly constituted infringement of the franchisors’ intellectual property. Claudia responded that it complied with the franchise agreement to the extent possible, meeting all obligations but the remodeling. It continued to operate as a franchise and pay fees, which the franchisors continued to accept.

The franchisor moved for a preliminary injunction, but on August 11, 2014, the court denied the motion, ruling that they had not carried their burden of showing that their benefits from a preliminary injunction were not outweighed by irreparable injury to the franchisee. The court found that parties on all sides contributed to the delays holding up the remodeling. While the franchisors argued that it was the franchisee’s responsibility to renovate the store according to the franchisor’s schedule, the court found that the franchisors maintained a significant amount of control over critical phases of remodeling projects and had an independent relationship with the architectural firm on the project. Moreover, the court noted that the drinking water well caused a delay that was not reasonably foreseeable.

Breach of franchise agreement. At this juncture, the renovations remain uncompleted, the franchisee continues to operate the store using the Dunkin’ Donuts and Baskin-Robbins trademarks, and, according to evidence submitted by the franchisor, the franchisee ceased paying royalty and advertising fees owed to the franchisor in the Fall of 2014. The franchisee did not dispute this allegation, but claimed that the franchisor was at least partially at fault for the franchisee defaults. The court found that the franchise agreement had been properly terminated due to franchisee defaults, that this would be true even if franchisee were to pursue counterclaims for the franchisor’s role in its default, and therefore granted the franchisor summary judgment on the breach of contract claim.

Trademark infringement and unfair competition. There was no dispute that the franchisor owned valid trademarks that franchisee continued to use after termination of the franchise agreement. The franchisee’s continued use of the trademarks, undisputed by franchisee, was likely to cause confusion with the public. Therefore the court granted the franchisor summary judgment on its trademark infringement and unfair competition claims.

Non-compete clause. The franchise agreement contained a provision barring the franchisee from participating in a business selling similar products within five miles of a Dunkin’ Donuts or Baskin-Robbins store for two years after contract termination. Applying Massachusetts law under the agreement’s choice of law provision, the court found the non-compete provision to be enforceable.

Permanent injunction. Since all of the franchisor claims had succeeded, and because the franchisee could continue to operate a competing store without using franchisor trademarks and in compliance with the valid non-compete provision, the court found that the injury to franchisor brand outweighed the injury to franchisee. Thus, a permanent injunction should be granted, the court ruled.

The case is Civil Action No. 14-2293.

Attorneys: Craig R. Tractenberg (Nixon Peabody LLP) for Dunkin' Donuts Franchising, LLC, DD IP Holder LLC, Baskin-Robbins Franchising, LLC, BR IP Holder LLC.

Companies: Dunkin' Donuts Franchising, LLC; DD IP Holder LLC; Baskin-Robbins Franchising, LLC; BR IP Holder LLC; Claudia III, LLC

Cases: FranchisingDistribution PennsylvaniaNews