Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D. Md.: Restraining order barred post-termination trademark use, did not enforce no-compete clause, (Oct 11, 2013)

By John W. Arden, J.D., LL.M.

The federal district court in Baltimore granted a pizza restaurant franchisor’s motion for a temporary restraining order, barring a terminated franchisee and related companies from continuing to use the franchisor’s trademarks and trade dress (Ledo Pizza System, Inc. v. Singh, October 10, 2013, Quarles, W.). However, the court denied the franchisor’s motion for a restraining order enforcing post-termination obligations in the franchise agreement and its covenant not to compete.

Ledo Pizza System, Inc. entered into a franchise agreement with Inderjit Singh to operate a Ledo pizza restaurant in Lorton, Virginia. Beginning in 2010, the franchisee defaulted on several obligations under the agreement and allegedly owed Ledo tens of thousands of dollars in overdue franchise and other fees. Ledo terminated the franchise agreement on May 14, 2012, but entered a forbearance agreement with the franchisee on May 31, 2012. Under this agreement, Ledo refrained from exercising its post-termination rights to give the franchisee an opportunity to sell the franchise or dispose of its assets.

Although the forbearance agreement expired on November 1, 2012, Ledo agreed in June 2013 to extend the forbearance period through July 31, 2013. The franchisor contended that the franchisee continued to operate the franchise following the termination of the franchise agreement and the expiration of the forbearance periods.

On August 14, 2013, Ledo moved for a temporary restraining order and a preliminary injunction, barring the franchisee from continuing to use its trademarks and trade dress, allegedly in violation of the Lanham Act and Ledo’s common law rights. Ledo also sought to enforce compliance with the post-termination obligations of the franchise agreement, including the covenant-not-to-compete. Ledo’s complaint sought a permanent injunction, specific performance, damages for breach of contract, costs, and attorney fees.

Although defendant Tri-Bro filed for bankruptcy, Ledo sought injunctive relief against it. The court found that the claim for injunctive relief was barred by the automatic stay in bankruptcy.

Trademark infringement. The district court granted Ledo’s claim for a restraining order against the franchisee’s trademark infringement, ruling that the franchisor had shown a likelihood of success on the merits of its Lanham Act claims, that the franchisor had suffered irreparable harm from the franchisee’s trademark infringement, that the balance of equities tipped in the franchisor’s favor, and that the public interest favored the enforcement of trademark rights.

To prevail on its Lanham Act claims, Ledo had to show that it had a valid and enforceable trademark and that the franchisee’s use of a “colorable imitation” of the trademark was likely to cause confusion among consumers. In the context of a terminated franchise, the former franchisee’s continued use of the franchisor’s trademark is likely to cause confusion among consumers. It was probable that consumers would be misled or confused as to the source of the goods or services in question.

A finding of unlawful use of a trademark and a likelihood of confusion usually is held to show irreparable harm to a trademark owner, the court observed. The former franchisee’s continued use of Ledo’s trademarks and trade dress undermined Ledo’s goodwill, reputation, and loyal patronage.

Although the former franchisee would suffer serious economic harm from the closure of his restaurant, this hardship “appears to be self-inflicted.” Thus, the balance of equities favored Ledo. Finally, the public interest favored the entry of injunctive relief, since the public “has a strong interest in the protection of trademarks” and Ledo sought to avoid consumer confusion.

Contract enforcement. Ledo’s motion for a restraining order enforcing the post-termination obligations against the franchisee was denied by the district court. Ledo was likely to establish that it entered into a contract with the franchisee, that the franchisee was terminated, and that the agreement required the franchisee to comply with several post-termination obligations, including the covenant not to compete. However, Ledo failed to establish the requisite imminent irreparable harm that would entitle it to immediate injunctive relief.

Ledo failed to show that the former franchisee’s potential violation of the covenant not to compete would irreparably harm Ledo’s goodwill and reputation or prevent Ledo from soliciting new franchisees. The injunctive relief granted by the court would prohibit the former franchisee from offering “products and services in essentially the same manner” as it had before. Thus, immediate enforcement of the covenant not to compete was not necessary to prevent irreparable harm to Ledo.

The case is Civil No. WDQ-13-2365.

Attorneys: Charles H. Henderson (McNamee Hosea Jernigan Kim Greenan and Walker PA) for Ledo Pizza System Inc.

Companies: Ledo Pizza System Inc.; Tri-Bro, Inc.

Cases: FranchisingDistribution MarylandNews