Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D. W.Va.: Former EconoLodge franchisee liable for trademark infringement, unfair competition, (Feb 28, 2014)

By Edward L. Puzzo, J.D.

A former franchisee who continued to use EconoLodge marks after his franchise agreement and reinstatement agreement were terminated by the franchisor was liable for federal and state trademark infringement and unfair competition, the federal district court in Elkins, West Virginia has ruled (Choice Hotels International, Inc. v. Fisher, February 27, 2014, Bailey, J.).

James and Patricia Fischer operated an EconoLodge franchise in Elkins, West Virginia under a 1995 franchise agreement with Choice Hotels. In February 2009, Choice Hotels issued a termination notice to the Fishers based on their alleged default on material obligations under the franchise agreement.

In June 2009, Choice Hotels and the Fishers entered into a reinstatement agreement. This agreement permitted the Fishers to re-enter the EconoLodge system if certain renovations were completed within 12 months. The franchisee failed to make the renovations by the June 2010 deadline. Choice issued another termination notice in November 2011, instructing the franchisee to immediately cease and desist use of any and all marks owned by Choice Hotels. After the former franchisee allegedly continued to use those marks, Choice filed this action against former franchisee James Fisher (his wife had since died), alleging federal trademark infringement, federal unfair competition, common law trademark infringement/unfair competition, and breaches of the franchise agreement. Choice sought Lanham Act damages, and to enjoin Fisher from using any of the EconoLodge marks.

Trademark infringement and unfair competition. One element of Lanham Act trademark infringement is whether the defendant’s use of the mark is likely to confuse consumers, the court stated. “This Court can think of no better example of consumer confusion than that of a former franchise carrying on as if it were still a franchise. Continuing to do so represents the epitome of trademark infringement…”

Fisher attempted to raise as a defense that the true party in interest should have been an entity called Crossroads Hospitality, but the court found the defense to be disingenuous. Since Crossroads was formed by the Fishers, assignment under the franchise agreement was null and void without Choice’s consent. Fisher ran the business as a one-man operation, and Fisher’s infringing conduct gave rise to individual liability as well as liability of the corporate entity on whose behalf he was acting. The existence of Crossroads was irrelevant to the inquiry as to whether Fisher infringed on Choice’s trademarks.

Since it was undisputed that Fisher used the mark in connection with the sale of services after the termination of the agreement, Choice’s motion for summary judgment on federal trademark infringement was granted.

Similarly, unfair competition under the Lanham Act required that the plaintiff owned a protectable mark and that the defendant’s unauthorized use of that mark was likely to create confusion, the court explained. Here, it was undisputed that EconoLodge marks were protected, and that Fisher’s motel continued to carry on as if it were still an EconoLodge franchise. Therefore, Choice’s motion for summary judgment on federal unfair competition was also granted.

Since the tests for trademark infringement and unfair competition under state law followed those for federal law, the court also granted summary judgment for Choice on the West Virginia trademark infringement and unfair competition claims.

Breach of contract and counterclaim. The court found that there was no dispute that Fisher defaulted on his obligations under the franchise agreement and reinstatement agreement, and Fisher never responded to requests to produce evidence that the franchise agreement was terminated without cause. Consequently, the court ruled that Choice should be granted summary judgment on its breach of contract claim, and Fisher’s breach of contract counterclaim should be denied.

Permanent injunction. Despite the contractual relationship between Choice and Fisher, it was apparent that Choice has been powerless to ensure the quality of Fisher’s operation and that his failure to comply with brand specifications undermined the public’s faith in Choice’s product. This irreparable injury was not adequately addressed by remedies at law, since Fisher continued to use the marks even after the filing of this lawsuit. Therefore, there were grounds to permanently enjoin Fisher from continuing to use EconoLodge marks.

The case is No. 2:13-CV-23.

Attorneys: Brian J. Warner (Shuman, McCuskey & Slicer, PLLC) for Choice Hotels International, Inc. Scott A. Curnutte (Curnutte Law Office) for James G. Fisher, II.

Companies: Choice Hotels International, Inc.

Cases: FranchisingDistribution WestVirginiaNews