Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—SDTex: Former Choice Hotels Franchisee Liable for Trademark Infringement for Use of Trademarks After Termination, (Apr 8, 2013)

By Tobias J. Gillett, J.D., LL.M.

A former franchisee of hotel chain Choice Hotels International, Inc. (CHI) was liable for trademark infringement and false designation of origin under the Lanham Act, and for trademark infringement and unfair competition under the Texas common law, for continuing to use CHI’s trademarks for more than a year after the termination of the franchise agreement, the federal district court in Corpus Christi, Texas, has ruled. However, CHI was not entitled to treble damages or attorney fees (Choice Hotels International, Inc. v. Hemant Bhakta, April 5, 2013, Ramos, N.).

J. Bhagwanji, Inc. (JBI) owned a franchise through CHI. The franchise agreement licensed JBI to use CHI’s trademarks for the duration of the franchise agreement. The agreement was later amended to require JBI to make certain upgrades to the hotel. After JBI failed three consecutive inspections of its hotel that revealed the upgrades had not been completed, CHI terminated the franchise agreement on October 29, 2010. Despite receiving notice of termination, JBI continued to use CHI’s trademarks until February 23, 2012.

CHI filed a lawsuit against JBI and Hemant Bhakta, asserting claims for trademark infringement, false designation of origin, and unfair competition under the Lanham Act and Texas common law. In the present decision, the court addressed CHI’s motions for summary judgment and to strike certain evidence offered by the defendants.

Termination of Franchise Agreement. The court initially determined that CHI had properly terminated the franchise agreement. JBI had breached the agreement by allowing its property to deteriorate in a manner that required the upgrades, by failing to make timely payment of certain fees, by failing to respond to customer complaints, and by failing the three inspections. CHI had sent JBI a termination letter pursuant to its contractual right to terminate. Although the defendants counterclaimed that they still had time to complete the upgrades under the improvement plan, the plan had expired, and the defendants supplied no evidence that would contradict the grounds for summary judgment, in the court’s view.

Trademark infringement. The court also concluded that CHI was entitled to summary judgment on its claims for trademark infringement and unfair competition. The court explained that to establish trademark infringement CHI would have to show "(1) it possesses a legally protectable mark and (2) JBI and Bhakta used the same or similar marks in commerce in manner likely to confuse potential customers as to the affiliation, connection, or association of JBI/Bhakta with CHI."

The court noted that it was "undisputed that CHI owns the subject trademarks and that JBI and Bhakta continued to use them after October 29, 2010. Since likelihood of confusion is established when a defendant uses the plaintiff’s exact mark, and since uncontroverted evidence showed customers had demonstrated actual confusion when they contacted CHI to complain about JBI’s properties, CHI was entitled to summary judgment. The court noted that a finding of federal trademark infringement also constituted proof of trademark infringement and unfair competition under the Texas common law."

Acquiescence. Although the defendants alleged that they had the right to continue to use the trademarks because they believed CHI had wrongfully terminated the franchise agreement, the court observed that they had not pled the affirmative defense of acquiescence, and hence could not overcome summary judgment on it. Nonetheless, the court proceeded to review the defense. The court explained that it required that "(1) CHI knew or should have known of JBI and Bhakta’s continued use of the trademark; CHI made implicit or explicit assurances to JBI and Bhakta that use was permitted; and (3) JBI and Bhakta relied on the assurances."

The court concluded that the defendants’ evidence of "assurances," emails between CHI and a case goods company regarding JBI and Bhakta’s procurement of goods, was "consistent with [CHI’s] previous termination of the Franchise Agreement" and did not "constitute any express or implied approval of any use of trademarks." Moreover, the letter of termination and subsequent letters explicitly demanded that JBI and Bhakta cease and desist using the trademarks. Therefore, the defendants could not establish that CHI had acquiesced to their continuing use of the trademarks.

Remedies. Having established that CHI was entitled to summary judgment on its Lanham Act claims for trademark infringement and false designation of origin, and its Texas common law claims for trademark infringement and unfair competition, the court proceeded to determine the appropriate remedies for the violations. The court observed that "[t]here is no dispute that CHI is entitled to a permanent injunction," and therefore granted CHI’s request for a permanent injunction against further unauthorized use of the trademarks.

With respect to CHI’s claims for money damages, the court noted that damages under the Lanham Act were "determined pursuant to the Court’s appropriate exercise of discretion in its capacity to do equity," and were "intended to make violations of the Act unprofitable, but not to act as a penalty." The court determined that the defendants were liable for infringement from November 2010 through February 2012, rejecting CHI’s contention that the infringement extended through June 2012, when JBI ceased using CHI’s assumed name, on the ground that JBI had ceased using the trademarks in commerce on March 1, 2012.

The court concluded that CHI could recover $105,453 as JBI’s profits, based on JBI’s net income from hotel operations. The court determined that CHI only had to include profitable months in its calculation, and did not have to offset JBI’s unprofitable months, which would have amounted to more than its net income. The court explained that "the owner of the intellectual property is not treated as a ‘partner’ subject to both profits and losses," and could "pick and choose the transactions on which it will recover."

The court also concluded CHI was entitled to royalty damages of $39,521. The court concluded that CHI calculations based on all of the defendants’ bank deposits were incorrect, because only those bank deposits from gross room revenue could be included under the franchise agreement.

However, the court declined to grant CHI treble damages and attorneys’ fees, concluding that the defendants’ actions, "though clearly wrongful," had been "done not out of fraud or malice but out of the hope that reinstatement would follow—however remote that possibility may have been." Therefore, the court granted a total of $105,453 in profits, $39,521 in royalties, and additional damages in the amount of $75,000, but declined to declare the case "exceptional" or to grant CHI attorneys’ fees.

The case is Civil Action No. 2:11-CV-00411.

Attorneys: Mark Wesley Thayer (Gordon & Rees, LLP) for Choice Hotels International, Inc. Daniel Orlando Gonzalez (Wood Boykin & Wolter PC) for Hemant Bhakta.

Companies: J. Bhagwanji, Inc.; Choice Hotels International, Inc.

Cases: FranchisingDistribution TexasNews