Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D Tex.: Hotel operator that took over property from terminated franchisee infringed franchisor’s marks, (Feb 21, 2014)

By Thomas Long, J.D.

Hotel chain operator Choice Hotels was entitled to summary judgment as to liability on its trademark infringement and unfair competition claims against Goldmark Hotel Property for using Choice Hotels’ trademarks without authorization in connection with a Dallas hotel property, the federal district court in Dallas has decided (Choice Hotels International, Inc. v. Goldmark Hospitality, LLC, February 19, 2014, Fitzwater, S.). Goldmark had taken over the property after acquiring it via foreclosure from a former franchisee of Choice Hotels.

Choice Hotels offered hotel and motel services under such brand names as Quality, Quality Inn, Quality Suites, and Quality Inn & Suites. It owned several registered trademarks (the “Quality Marks”) for use in the hotel and motel services industry.

Choice Hotels operated as a franchisor. In 2007, Choice Hotels entered into a franchise agreement with Kroopa Investment, LLC, under which Kroopa operated a Quality Suites hotel in Dallas. In early 2010, Kroopa filed for bankruptcy but continued to operate the hotel. Later that year, Choice Hotels informed the franchisee that it had defaulted under the franchise agreement and that, if the default was not cured, Choice Hotels would terminate the agreement. Kroopa fell into default in 2011, and Choice Hotels eventually terminated the franchise agreement, which extinguished Kroopa’s right to use the Quality Marks.

Goldmark was a beneficiary of a deed of trust on the Dallas hotel property. Around the time Kroopa went into default, Goldmark commenced foreclosure proceedings and secured ownership of the Dallas hotel (the “Goldmark Hotel Property”) by foreclosure deed. Choice Hotels notified Kroopa by a September 27, 2011 letter that it had learned that the Goldmark Hotel Property was displaying several of the Quality Marks after the termination of the franchise agreement. On October 11, 2011, Goldmark’s counsel represented to Choice Hotels that Goldmark was not operating the property as a Quality Suites but were operating as an independent hotel called the Amerigold Suites. Goldmark’s counsel stated that Goldmark had covered the Quality signs with temporary signs and were waiting for permanent signs to be approved.

After this letter was sent, two signs bearing Quality Suites marks remained on the Goldmark Hotel Property—a large overhead sign on top of a tower and a smaller sign affixed to a short pole near the property’s driveway. Eventually, the driveway sign was painted over, but the tower sign remained uncovered. According to a February 2, 2012 letter from Goldmark’s counsel, removing or covering the sign was “cost prohibitive.”

On February 22, 2012, Choice Hotels filed suit against Goldmark for trademark infringement and false designation of origin under the Lanham Act, common law trademark infringement under Texas law, and common law unfair competition under Texas law. Choice Hotels moved for summary judgment.

Trademark Infringement

Choice Hotels contended that it had established each essential element of trademark infringement—ownership of a valid mark, use in commerce, and likelihood of confusion. Goldmark asserted that there were genuine issues of material fact regarding whether Goldmark used Choice Hotels’ trademarks in commerce and whether there was a likelihood of confusion. There was no dispute that Choice Hotels owned a legally protectable family of marks.

Use in commerce. Goldmark argued that Choice Hotels did not present any evidence that Goldmark actually used the marks because the evidence Choice Hotels provided merely showed that Goldmark failed to take down signage while it repurposed the Goldmark Hotel Property. Goldmark argued that it “actively tried to disassociate itself” from Choice Hotels by rebranding the hotel as an Amerigold Suites and positioning itself as a “higher-quality, extended-stay residence location as opposed to the one-night ‘cheapy’-style hotel” operated by Kroopa.

However, the court held, the evidence showed that Goldmark had used the Quality Marks in commerce, as a matter of law. Goldmark was operating the Goldmark Hotel Property as a hotel during the relevant time period, even while the hotel was being repurposed. Photographs of the two signs bearing the Quality Marks were introduced into evidence, and Goldmark conceded that the signs bore Choice Hotels’ exact marks. This evidence was sufficient under the Lanham Act to establish use in commerce, the court said.

Whether Goldmark attempted to disassociate itself from Choice Hotels and the prior franchisee was irrelevant for purposes of determining whether the marks were used. Even if Goldmark’s intent were relevant to this question, Goldmark did not provide evidence to back up its assertion that it took steps to dissociate itself from the Quality Marks.

Likelihood of confusion. Choice Hotels argued that, because it was undisputed that Goldmark used Choice Hotels’ exact marks, it was unnecessary for the court to examine the separate likelihood of confusion factors. Even if it were necessary to analyze these factors, the court said, Choice Hotels had established that there was no genuine issue of material fact regarding the likelihood of confusion.

Goldmark did not dispute the strength of Choice Hotels’ marks, nor the fact that they were registered. It also did not dispute that the marks at issue were Choice Hotels’ exact marks. Although Goldmark asserted that it was attempting to distinguish its hotel business from that of the previous operator, Goldmark’s and Choice Hotels’ businesses were significantly similar, in the court’s view. Goldmark failed to provide evidence from which the court could infer that its customers would use a high degree of care in making purchasing decisions, thus lessening the likelihood of confusion.

Goldmark argued that the parties used different advertising media, and that factor weighed against a likelihood of confusion. It maintained that the parties had different websites, online reservation systems, and Internet domain names. Neither party presented evidence sufficient to compare the parties’ overall advertising approaches, the court noted, but it was undisputed that the tower sign and driveway sign remained visible to the public for months following the foreclosure. Accordingly, this factor also favored Choice Hotels.

The factor of Goldmark’s intent did not favor either party, the court said. Although Goldmark’s intent to dissociate itself from Choice Hotels’ brand was evidenced by its removal of most of the signage on the property, it had left two prominent signs visible to the public. In addition, neither party presented evidence allowing the court to make a conclusion regarding any actual confusion that might have taken place, and that factor did not figure prominently in the court’s analysis.

According to the court, the overall context of Goldmark’s use of the Quality Marks supported the conclusion that Choice Hotels had demonstrated the existence of a likelihood of confusion as a matter of law. Before the termination of the franchise agreement between Choice Hotels and Kroopa, the Goldmark Hotel Property was operated as a licensed Quality Suites. After the franchise agreement was terminated and Goldmark took over operations, the continued display of the Quality Marks would likely cause confusion among consumers—especially among those consumers who were under the mistaken impression that the Goldmark Hotel Property was still a licensed Quality Suites. Although Goldmark was not the former franchisee, an ordinary consumer would not have been able to perceive a difference between Kroopa and Goldmark, the court said.

Accordingly, Choice Hotels was entitled to summary judgment as to liability on its trademark infringement claim under the Lanham Act.

False Designation, Common Law Trademark Infringement, Common Law Unfair Competition

Choice Hotels argued—and Goldmark conceded—that the facts establishing liability for its Lanham Act trademark infringement claim were identical to those that would establish liability for its claims for false designation of origin under the Lanham Act, common law trademark infringement, and common law unfair competition. The court held that Choice Hotels was entitled to summary judgment as to liability with regard to these claims.

Permanent Injunction

The court denied Choice Hotels’ motion for summary judgment to the extent that it asked for a permanent injunction barring Goldmark from using any of the Quality Marks. There were disputed issues of material fact regarding irreparable harm. There was evidence that, by the time the motion was filed, Goldmark had painted over, covered up, or otherwise removed the signs in question and that no signs bearing the Quality Marks were currently visible on the Goldmark Hotel Property.

Damages

Choice Hotels requested summary judgment on monetary damages, seeking awards of (1) Goldmark’s profits during the period of infringement; (2) actual damages as measured by a reasonable royalty; and (3) treble damages. All three requests were denied.

With regard to profits, there was a factual dispute as to the accuracy of accounting statements used by Choice Hotels to determine Goldmark’s gross profits. With regard to actual damages, the court held that Choice Hotels’ reasonable royalty damages theory was legally viable, but Choice Hotels had not established “beyond peradventure” the amount of legal damages. There was a genuine issue of material fact as to the reasonable royalty rate that applied to the case. Choice Hotels’ request for treble damages, the court said, was premature, based on the court’s denial of summary judgment on actual damages.

The case is Civil Action No. 3:12-CV-0548-D.

Attorneys: Robert A. Bragalone (Gordon & Rees LLC) for Choice Hotels International, Inc. Jules P. Slim (Law Office of Jules P. Slim) for Goldmark Hospitality, LLC.

Companies: Choice Hotels International, Inc.; Goldmark Hospitality, LLC

Cases: FranchisingDistribution TexasNews