Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. N.Y.: Ice cream truck franchisors awarded preliminary injunction against former franchisee, (Jun 6, 2014)

By Peter Reap, J.D., LL.M.

An ice cream truck franchisor and two of its master franchisees, Mister Softee, Inc., Mister Softee of Queens Inc. (“MSQ”), and Spabo Ice Cream Corp. (“Spabo,” and collectively the “Plaintiffs”), were entitled to a preliminary injunction against a terminated franchisee Dimitrios Tsirkos (the “Defendant”) barring the Defendant from using the franchisor’s registered trademarks or confusingly similar marks, and from competing with any other of the franchisor’s franchisees in violation of noncompete covenants in the parties’ agreements, the federal district court in New York City has decided (Mister Softee, Inc. v. Tsirkos, June 5, 2014, Swain, L.).

Background. Mister Softee-branded trucks have a distinctive appearance. The court took judicial notice that Mister Softee’s truck design registration, as available on the website of the USPTO, includes the colors blue and white as features of the mark, consisting of a “blue horizontal stripe at the bottom of the white truck with blue wheels and including the word mark Mister Softee, and the design of an ice cream cone head. The mark also includes a sundae container with the Mister Softee word mark and a milkshake container with the Mister Softee ice cream cone head included therein.” The registration includes the words “SUNDAES SHAKES CONES DELICIOUS SHAKES” as incorporated in the truck design.

The Defendant is a former franchisee of Spabo and MSQ and has operated Mister Softee trucks for almost 30 years. The Defendant signed six franchise agreements with Spabo and one with MSQ.

At some point, the Defendant ceased making royalty payments and parking his trucks at the designated depot. Consequently, the Defendant received a notice of termination on February 19, 2014 that terminated the parties’ franchise agreements.

After termination of the Franchise Agreements, the Defendant continued to operate in areas for which Mister Softee and its affiliates had granted franchises. The Defendant initially labeled his trucks as “Master Softee” trucks and later labeled at least one truck “Soft King” instead of “Master Softee,” the court noted. The Defendant no longer used the Mister Softee jingle. However, his “Master Softee” trucks were the same two-axle models and remained strikingly similar in appearance to the Mister Softee branded trucks in several respects, the court noted.

Preliminary Injunction

A court determining whether to grant a preliminary injunction must consider three factors: (1) irreparable harm absent injunctive relief; (2) either a likelihood of success on the merits, or a serious question going to the merits to make them a fair ground for trial, with a balance of hardships tipping decidedly in the plaintiff’s favor; and (3) that the public’s interest weighs in favor of granting an injunction.

Likelihood of success on infringement claim. The Plaintiffs asserted claims of trademark infringement based on the Defendant’s use of marks that they argued were likely to confuse customers into believing that he was selling the goods and services of a Mister Softee franchise. The Plaintiffs seek a preliminary injunction barring the Defendant from using the Mister Softee trademarks or marks confusingly similar to them.

The plaintiff in a trademark infringement action establishes a likelihood of success by showing both (1) a legal, exclusive right to the mark, and (2) a likelihood that customers will be confused as to the source of the infringing product. To determine whether there is a likelihood of confusion, courts looks to the eight-factor balancing test—the Polaroid test announced in Polaroid Corp. v. Polarad Elecs. Corp., 287 F.2d 492 (2d Cir. 1961). The eight factors are: (1) strength of the trademark; (2) similarity of the marks; (3) proximity of the products and their competitiveness with one another; (4) evidence that the senior user may bridge the gap by developing a product for sale in the market of the alleged infringer’s product; (5) evidence of actual consumer confusion; (6) evidence that the imitative mark was adopted in bad faith; (7) respective quality of the products; and (8) sophistication of consumers in the relevant market.

The relevant Polaroid factors all favored the Plaintiffs, the court determined. The combination of logos and trade dress elements was distinctive and arbitrary, rather than generic. The Defendant’s “Master Softee” and “Soft King” truck motifs were strikingly similar to Plaintiffs’ Mister Softee trade dress and logos. Both companies engaged in retail sales of soft ice cream from trucks, thus establishing product proximity and competitiveness, and eliminating any question of bridging the gap, according to the court. The Plaintiff proffered evidence of actual consumer confusion, the court noted.

Moreover, it was obvious that the Defendant adopted his truck designs with the object of achieving an appearance similar to the Plaintiffs’ Mister Softee trucks, indicating the existence of bad faith. The trucks are designed to appeal to children, who are relatively unsophisticated consumers. There was no evidence concerning the respective quality of the products. Seven of the eight Polaroid factors thus favored the Plaintiffs.

Defendant’s “Master Softee” and “Soft King” truck designs were likely to cause customers confusion as to the affiliation with Mister Softee. Therefore, the Plaintiffs demonstrated that they are likely to succeed on the merits of their trademark infringement claims against the Defendant.

Likelihood of success on breach of noncompete covenant claim. The Plaintiffs sought to enjoin the Defendant from competing in his former territories and those of any other Mister Softee franchisee for two years, pursuant to the non-competition covenants in the franchise agreements.

The Defendant proffered that he was operating his ice cream trucks, and seeks to continue to operate his ice cream trucks, in his former territories and in the territories of other Mister Softee franchisees. The Defendant argued that injunctive relief should be denied because he was entitled to rescission of the franchise agreements due to the Plaintiffs’ alleged failure to comply with a prospectus requirement imposed by the New York Franchise Sales Act, the court noted.

The New York Franchise Sales Act does not define “provide,” and there was no precedent defining what it means to “provide” a prospectus. In common English usage, “provide” means “to supply or make available,” according to the court. Here, the Plaintiffs demonstrated that they made the prospectus available to the Defendant, when they offered it to him, and he rejected the document. The Defendant’s argument ran contrary to the plain language of the statute and he offered no authority that supported his reading of the statute. Furthermore, even if the failure to follow through and physically deliver a prospectus constituted a violation of the mandate to “provide” a prospectus, nothing in the current record indicated that such violation was willful, the court observed. To the contrary, the Plaintiffs’ evidence indicated that they intended to comply with the prospectus delivery requirement.

The Plaintiffs clearly demonstrated a likelihood of success in showing the reasonableness of the covenant insofar as it applied to retail operations (fixed or mobile) in the Defendant’s former Mister Softee territories and areas proximate thereto. The franchisor explained credibly that recruiting a new franchise holder for the former territories would be far more difficult if the former franchise holder is operating in the same area, and that because of the short selling season it would take two years to establish a replacement franchisee. Customer goodwill and business methods were legitimate spheres of protection with respect to former franchisee competition.

The Plaintiffs failed, however, to make a clear showing as to why their legitimate business interests required restraint on the Defendant’s ability to compete in wholesale ice cream and supply operations or in retail distribution of ice cream or other frozen confections outside of the Defendant’s former territories and nearby areas. Therefore, the Plaintiffs failed to demonstrate a likelihood of success, or even sufficiently serious questions going to the merits, on their claim that the covenant was reasonable to the extent it would restrict wholesale operations as such, or retail ice cream sales in areas well outside of Defendant’s former territories.

The Plaintiffs demonstrated a legitimate business interest in preventing their former franchisee from engaging in retail ice cream sales in his former territories and in other Mister Softee franchisees’ territories that were within a five-mile radius of his former territories for a period of two years from the termination of Defendant’s franchises, the court ruled. The restrictive covenant, narrowed in this fashion, was reasonable time and geographic scope and would not be oppressive in its operation as to the Defendant’s business, and was thus enforceable.

Irreparable harm to the Plaintiff’s businesses. The Plaintiffs clearly demonstrated harm to their business if the Defendant continued to use the franchisor’s trademarks or confusingly similar marks, the court held. The Plaintiffs made a clear showing that they would suffer irreparable harm in the form of customer confusion, loss of good will, and potential damage to their reputation if the Defendant was allowed to continue to use confusing markings on his trucks. The Plaintiffs showed that they would no longer be able to ensure that the Defendant’s trucks were stocked with proper ice cream products that are in compliance with Mister Softee’s criteria. They also demonstrated that they would not be able to ensure that Defendant’s trucks were operated in a sanitary manner. Because customers were likely to believe that the Plaintiffs were responsible for the quality of the Defendant’s products and service, the Plaintiffs’ reputations would be irreparably injured as a result of the Defendants continued use of confusing marks if the quality fell below Mister Softee standards.

In addition, the Plaintiffs clearly demonstrated that they would suffer irreparable harm through loss of good will of its customers and difficulty in establishing replacement franchisees if the Defendant competed as a retail seller in his former territories or those of other Mister Softee franchisees in close proximity to his former territories before the two-year restrictive covenant period elapsed.

Public interest. There was nothing in the record to indicate that the public interest would be harmed in any way by the issuance of a preliminary injunction in this case, the court said. Because the Plaintiffs demonstrated that the injunction sought will stop Mister Softee consumers from being confused by the Defendant’s marks, this injunction was clearly in the public interest. Enforcement of the covenant not to compete within reasonable parameters was also consistent with the public interest in upholding reasonable contractual undertakings and protecting the value of franchises, the court held.

The case is No. 14 Civ. 1975 (LTS)(RLE).

Attorneys: Jeffrey Alan Zucker (Fisher Zucker LLC) for Mister Softee Inc., and Spabo Ice Cream Corp. Nicholas John Damadeo (Nicholas John Damadeo, Attorney at Law) for Dimitrious Tsirkos.

Companies: Mister Softee Inc.; Spabo Ice Cream Corp.

Cases: FranchisingDistribution NewYorkNews