Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D. Ill.: Terminated franchisee ordered to stop using IHOP trademark, (Sep 3, 2015)

By Greg Hammond, J.D.

An Illinois International House of Pancakes (IHOP) franchisee that was terminated after allegedly failing six consecutive operational evaluations for food safety, premises safety and appearance, and restroom sanitation has been ordered to stop using IHOP trademarks. The federal district court in Chicago granted IHOP’s motion for preliminary injunction, finding the franchisor was likely to succeed on the merits of its trademark infringement, breach of contract, and unfair competition claims, and that the balance of harms and public interest favored injunctive relief (Chaudhry v. International House of Pancakes, LLC, August 26, 2015, Darrah, J.).

Plaintiff Azhar Chaudhry is a Muslim American who emigrated from Pakistan and is a naturalized American citizen. He owned and operated IHOP franchises in Bridgeview, Arlington Heights, and St. Charles, Illinois. Chaudhry filed suit, claiming that IHOP unlawfully terminated the St. Charles agreement in 2013 and the Arlington Heights agreement by letter dated April 17, 2015, bringing claims for breach of contract and racial discrimination.

IHOP filed counterclaims for breach of contract, as well as trademark infringement and unfair competition under the Lanham Act. It claims that Chaudhry’s Arlington Heights restaurant failed four consecutive operational evaluations for various food safety, premises safety and appearance, and restroom sanitation. After receiving a notice of default, the restaurant failed two additional operational evaluations and was issued a Notice of Termination. Chaudhry, however, continues to operate the Arlington Heights Restaurant under IHOP trademarks, the franchisor claims. IHOP moved for preliminary injunction, seeking to prohibit Chaudhry from using any IHOP trademark or similar designation, passing off any of its goods or services as those of IHOP, causing likelihood of confusion, and unfairly competing with IHOP and IHOP franchisees.

Likelihood of success. The court found that IHOP demonstrated some chance of success on the merits of its breach of contract, trademark infringement, and unfair competition claims. First, the court found that IHOP provided sufficient evidence that the failed evaluation grades justified termination of the franchise agreement and that the continued use of IHOP trademarks is a violation of Chaudhry’s post-franchise obligations. Chaudhry did not dispute that it received the failing grades.

Second, whether or not the franchise agreement was legally terminated was not a defense to Chaudhry’s continued use of IHOP’s trademarks, where it was undisputed that the franchise agreement was terminated. IHOP therefore demonstrated a chance of success on the merits for the trademark infringement claim.

Finally, the court found that IHOP demonstrated a chance of success on the merits for its unfair competition claim because (1) Choudhry’s unauthorized use of a trademark after termination of a franchise agreement, falsely designating the source or sponsorship of goods or services, constitutes a violation of the Lanham Act; (2) there is substantial likelihood that Chaudhry’s continued use of the trademarks after the franchise agreement was terminated would cause consumer confusion; and (3) continued operation of the restaurant using IHOP trademarks would falsely designate the source of its good and services.

Balance of harms, public interest. The court next determined that IHOP satisfied the irreparable harm requirement to obtain preliminary injunction because Chaudhry did not dispute that the Arlington Heights restaurant failed six consecutive evaluations and it was reasonable to conclude that Chaudhry would continue to violate IHOP’s safety and sanitation standards, which could cause injury to IHOP’s goodwill and reputation in the community. Chaudhry provided no evidence to demonstrate that the loss of profits it would presumably suffer outweighed the harm to IHOP from the continued use of its trademarks. Instead, the court concluded that public interest would be served by an injunction because enforcement of the trademark laws prevents consumer confusion.

The case is number 15-cv-3504.

Attorneys: Carmen David Caruso for Azhar Chaudhry, ARS Restaurant, Inc., and Lucky Star #5409, Inc. Michael David Hultquist (Dentons US LLP) for International House of Pancakes, LLC.

Companies: International House of Pancakes, LLC; ARS Restaurant, Inc.; Lucky Star #5409, Inc.

Cases: FranchisingDistribution IllinoisNews