Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—SDTex: Franchisee Liable for Post-Termination Use of Choice Hotel Trademarks, (Apr 17, 2013)

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

A former Choice Hotels International, Inc. ("Choice") franchisee was liable for trademark infringement for continuing to use Comfort Inn trademarks on his hotel’s exterior signs, receipts, and wireless landing website following termination of the franchise agreement, the federal district court in Victoria, Texas has ruled (Choice Hotels International, Inc. v. Patel, April 16, 2013, Costa, G.). While summary judgment was entered for Choice Hotels on the trademark infringement claims, insufficient evidence precluded summary judgment as to the liability of the franchisee’s spouse. The court permanently enjoined the franchisee from continued use of the trademarks, but declined to award Choice any monetary damages at this stage of the litigation.

On April 2, 1993, Choice entered into a franchise agreement with a franchisee and his spouse that licensed Comfort Inn trademarks to the couple for use in association with a franchise hotel in Victoria, Texas. The agreement allowed Choice to revoke the trademark licenses upon termination of the franchise. On January 16, 2008, Choice chose to exercise its option to terminate the franchise on April 8, 2009.

In April 2009, the franchisee made various efforts to remove uses of the Comfort Inn trademarks, including changing the name of the hotel. However, he did not initially remove exterior signs containing the trademarks. Although he covered the street sign with a tarp, it frequently came off, and entrance and exit signs were never covered. On November 11, 2011, be painted the signs black. He also left the trademarks on the hotel’s receipts until February 15, 2013, and on the hotel’s wireless landing page until March 6, 2013. Choice provided evidence that certain consumers still believed the hotel to be a Comfort Inn after the franchise agreement ended.

Choice filed suit against the franchisee and his spouse, alleging trademark infringement and false designation of origin under the Lanham Act, as well as trademark infringement and unfair competition under Texas common law. Choice moved for summary judgment. Although Choice brought a range of claims, the court observed that it only had to conduct a single inquiry because "the facts that support an action for trademark infringement under the Lanham Act also support the other three actions."

Trademark infringement. The court first determined that Choice was entitled to summary judgment on its trademark infringement claims against the franchisee. Choice had provided uncontested evidence that the Comfort Inn trademarks were registered, and the franchisee had admitted that Choice owned them.

The franchisee had also used the trademarks in commerce without Choice’s consent. Undisputed photographic evidence demonstrated that the trademarks remained on the signage, receipts, and webpage long after the termination of the franchise agreement. The franchisee’s asserted lack of intent to use them was irrelevant. Moreover, the use of the trademarks on the receipts and webpage was part of the hotel’s sale of services, even though they were not visible until guests had already chosen to stay at the hotel.

Finally, the use of the trademarks was likely to cause confusion. The franchisee had used the exact Comfort Inn trademarks. Under Fifth Circuit law, Choice was entitled to a presumption of confusion.

Even if the presumption had not applied, the court found no factual dispute regarding a likelihood of confusion. The trademarks were registered with the United States Patent and Trademark Office, and the franchisee conceded the marks were "well-known" nationwide and internationally, and therefore the strength of the marks heavily favored Choice. The similarity of the marks also strongly favored Choice because the franchisee had used the exact trademarks. The similarity of the products and the identity of retailers and purchasers also favored Choice, because both Choice and the franchisees provided "roadside, value lodging."

The similarity of advertising media did not favor either party, since neither party presented sufficient evidence on that factor. The intent of the defendants also did not favor either party. Although the franchisee undertook extensive efforts to remove the trademarks, he also failed to remove the marks from the signs, receipts, and webpage, despite numerous cease-and-desist letters from Choice. Actual confusion favored Choice, because it had provided limited evidence from consumer complaints that guests had believed they were staying at a Comfort Inn. Finally, the degree of care of potential purchasers was inapplicable because neither party presented evidence on the issue.

Spouse’s liability. However, the court found that the evidence did not support summary judgment with respect to the liability of the franchisee’s spouse. Under Fifth Circuit law, an individual can be held personally liable for trademark infringement if the individual "actively and knowingly caused the infringement."

Here, a reasonable jury could find the franchisee’s spouse did not "actively and knowingly" cause the infringement. Although the couple admitted that they were "engaged in the rendering of hotel/motel services," that admission did not "necessarily mean that [the spouse] participates onsite or that she is involved in the hotel’s use of marks." Moreover, the spouse’s deposition testimony indicated that she "left everything" concerning the hotel in 2004, and the property manager had testified that he did not see her at the property since April 2009.

Remedies

Permanent injunction. The court concluded that Choice had demonstrated that it was entitled to a permanent injunction. Choice had shown that it had suffered an irreparable injury. The court observed that when a likelihood of confusion exists, the plaintiff’s lack of control over the quality of the defendant’s goods or services constitutes an immediate and irreparable injury. A hotel franchisor "is particularly susceptible to irreparable injury." Moreover, Choice had shown injury through the consumer complaints.

Choice’s loss of control and inability to quantify its loss of goodwill and reputation meant there was no adequate monetary remedy. The franchisee’s hardship in complying with federal and state trademark law paled in comparison to Choice’s irreparable harm if the franchisee again displayed the trademarks. Finally, an injunction would serve the public interest by preventing consumer deception or confusion, and by advancing the purposes of the Lanham Act.

Profits. The court determined that Choice was not entitled to a summary judgment ruling awarding it profits obtained during the period of infringement. A reasonable jury could conclude that the franchisee did not intend to cause confusion, in the court’s view. The franchisee had undertaken extensive effort to remove the trademarks, and the inclusion of the trademarks on receipts and the webpage was "not the type of willful and egregious conduct for which" Fifth Circuit courts had previously awarded profits. Moreover, on summary judgment the court considered the delay in removing the exterior signage to be due to the franchisee’s plans to franchise a new Choice Hotel located elsewhere in Victoria.

Further, Choice had not presented sufficient evidence of diverted sales. It had not shown that it had another hotel in Victoria at which guests could have stayed, and the franchisee’s profits may have been attributable to an oilfield boom in the area rather than the use of the Comfort Inn trademarks.

In addition, a permanent injunction would prevent future infringement, and monetary damages for past infringement could be determined after factual issues were resolved. Although Choice’s lack of delay in asserting its rights and the public interest in making infringement unprofitable favored an award of profits, the lack of evidence of "palming off" weighed against it.

Royalties. The court also concluded that Choice was not entitled to a summary judgment award of royalties because it had "failed to present evidence calculating the purported damage to its goodwill or the [franchisee’s] unjust enrichment from using the Comfort marks."

Treble Damages. Choice was also not entitled to treble damages on summary judgment, in the court’s view. Choice had not established that the franchisee "wrongfully intended" to infringe the trademarks. Moreover, factual issues remained regarding "whether extenuating circumstances exist such that equitable principles would disfavor a trebling of damages."

The case is Civil Action No. 6:12-CV-00023.

Attorneys: Mark Wesley Thayer (Gordon & Rees, LLP) for Choice Hotels International, Inc. Edward J. Hennessy for Vinodbhai Patel.

Companies: Choice Hotels International, Inc.

Cases: FranchisingDistribution TexasNews