Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D. Cal.: Former franchisee liable for nonpayment of fees, post-termination trademark use, (Mar 9, 2015)

By Dan Selcke, J.D.

The federal district court in San Francisco, California entered a monetary default judgment and a permanent injunction against a former real estate franchisee and its guarantors for nonpayment of fees and post-termination use of the franchisor’s trademarks (Century 21 Real Estate LLC v. Realtycomp.com, March 6, 2015, Chen, E.).

Franchise agreements. Joe Lim and John Scott each signed a franchise agreement with Century 21, on behalf of defendant Realtycomp.com. Under the agreement, Century 21 promised, among other things, to “grant a non-exclusive license to RealtyComp to utilize Century trademarks and [its] marketing system.” In return, RealtyComp agreed to pay Century 21 six percent of its gross revenues as royalty fees and two percent of its gross revenues for a “National Advertising Fund” (NAF). Lim and Scott each signed documents personally guaranteeing all of RealtyComp’s obligations under the agreement.

RealtyComp also borrowed money from Century 21 and promised to repay it in a pair of “Account Balance Promissory Notes.” Upon termination of the agreement, the notes could be accelerated and become due immediately. Finally, RealtyComp signed a security agreement under which it offered up many of its assets as collateral to secure its obligations under the franchise agreement and the promissory notes.

Breach, termination, and complaint. The franchisees did not pay the fees they owed Century 21 under the agreement. When they failed to cure their default, Century 21 terminated the agreement. Pursuant to the post-termination conditions of the agreement, the franchisees had to stop using Century 21 marks, destroy any items containing Century 21 marks, and stop advertising themselves as a Century 21 franchise. Century 21 sued to enforce the agreement, asking for both a default money judgment of $99,330 and injunctive relief.

Default judgment granted. After deciding that Century 21’s complaint had been properly served, the court decided to grant Century 21’s motion for default judgment, having previously defaulted the franchisees. Denying the motion would have prejudiced Century 21, since the company would be left without a remedy. Also, the sum of money Century 21 sought was narrowly tailored to the defendants’ specific misconduct. While there was a preference for making decisions on the merits, the franchisees’ choice not to defend this action made that impractical, if not impossible.

Breach of contract. As for the merits of Century 21’s claims, the company had adequately alleged that the franchiees had breached the franchise agreement. The franchisees had bound themselves to the terms of that agreement by signing the promissory notes, the security agreement, and the franchise agreement. By signing the personal guarantees, Lim and Scott agreed to be held jointly and severally liable with RealtyComp for any amounts due Century 21 under the agreement. Lastly, Century 21 alleged that the franchisees’ breach of the agreement caused it damages.

Trademark infringement. Century 21 also brought a cause of action for trademark infringement under the Lanham Act. Again, the company alleged enough facts to state a claim. Specifically, it alleged that it had registered various marks with the United States Patent and Trademark Office, including the word ‘Century 21,’ that the defendants continued to use the Century 21 name after the termination of the agreement, and that such use had “caused and continues to cause a likelihood of confusion.”

Injunctive relief. Finally, Century 21 stated a sufficient claim for permanent injunctive relief prohibiting the defendants from further use of the Century 21 marks. For one thing, Century 21 would suffer irreparable harm if the injunction did not issue, since the company stood to lose profits and goodwill if customers patronized the terminated franchise thinking it was authorized by Century 21. Failure to issue an injunction would leave the two businesses to compete with each other, even as one held itself out as sanctioned by the other. Lastly, the franchise agreement expressly provided that Century 21 could obtain a permanent injunction to protect its rights in the event of termination.

Damages. The court considered whether Century 21 had proved up its requested monetary relief. In the end, it decided to grant all the relief the company asked for. First, Century 21 claimed that the defendants owed it $49,632 in unpaid royalties and NAF fees under the franchise agreement and notes. It backed this up with a declaration from its Senior Director of Real Estate Financial Services and a copy of a “Custom Account Sales Report,” which documented in detail the amounts due Century 21.

The court also approved the $9,957 that Century 21 was seeking in lost profits, which it calculated pursuant to the applicable section of the franchise agreement by taking the average monthly royalty and NAF fees payable by the defendants while they were franchisees and multiplying it by the number of months remaining on the term of the agreement when it was terminated. The relevant figures provided by Century 21, once plugged into that equation, equaled the asked-for total.

Century 21 also argued that it was entitled to actual damages for the defendants’ ongoing infringement of its trademarks. The court agreed. At a minimum, Century 21 was due all the royalty and NAF fees the franchisees had not been paying since the franchise agreement was terminated. Further, those damages should be trebled because the franchisees had continued to willfully infringe Century’s trademarks during that time, for a grand total of $39,741. Century 21 showed that the infringement was willful by pointing out that the termination letter specifically directed the franchisee to stop using Century 21’s marks, as did two subsequent cease-and-desist letters.

The court approved an award of $9,574 in attorney’s fees, since a provision in the franchise agreement specifically allowed for attorney’s fees, and the rates were not unreasonable, given the relative simplicity of the matter and the market for this kind of work.

The case number is: C-14-4774

Attorneys: Lisa Karen Garner (Gordon & Rees LLP) for Century 21 Real Estate LLC

Companies: Century 21 Real Estate LLC; RealtyComp.com

Cases: FranchisingDistribution CaliforniaNews