Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—W.D. Tex.: Dairy Queen franchisee breached agreement, infringed marks after termination, (Apr 28, 2025)

By Donielle Tigay Stutland, J.D.

The franchisee’s failure to use fresh milk to make malts and shakes was a material breach of the plain terms of the Franchise Agreement.

The federal district court in San Antonio has granted a motion for partial summary judgment filed by American Dairy Queen Corporation (“ADQ”) against the terminated franchisee of a Dairy Queen restaurant in Anahuac, Texas. The court found that the franchisor established that the franchisee materially breached the Franchise Agreement, as the franchisee admitted to using soft serve mix instead of fresh milk at its Dairy Queen restaurant, which was in violation of covenants in the agreement. Additionally, the court granted summary judgment to the franchisor on claims alleging Lanham Act trademark infringement, Lanham Act unfair competition, and Texas common law unfair competition claims, as the franchisee continued to use ADQ’s marks in commerce following the termination of the agreement (American Dairy Queen Corp. v. UAM, LLC, No. 5:24-cv-01209-JKP-ESC (W.D. Tex. Apr. 25, 2025)).

Background. The dispute stems from a failed franchise relationship between Plaintiff American Dairy Queen Corporation ("ADQ"), the franchisor of Dairy Queen restaurants, and Defendant UAM, LLC ("UAM"), a franchisee that operated a Dairy Queen restaurant in Anahuac, Texas. The parties had entered into a Franchise Agreement, which granted UAM a license to use the registered trade name ‘DAIRY QUEEN’ and marks in connection with the restaurant. ADQ terminated the Franchise Agreement in October 2024 alleging that UAM had violated various covenants of the Franchise Agreement.

ADQ moved for partial summary judgment on its claims for breach of contract and declaratory judgment and for its claims alleging Lanham Act trademark infringement, Lanham Act unfair competition, and Texas common law unfair competition claims.

Breach of Contract and Declaratory Judgment. The court began its analysis by laying out the elements of a breach of contract claim under Texas law: “(1) the existence of a valid contract between plaintiff and defendant; (2) the plaintiff's performance or tender of performance; (3) the defendant's breach of the contract; and (4) the plaintiff's damage as a result of the breach.” The court stressed that there was no dispute the Franchise Agreement is a valid, enforceable contract. The court also indicated that although UAM argued ADQ improperly terminated the Franchise Agreement based on “extra-contractual grounds,” there was no reasonable dispute ADQ performed under the Franchise Agreement.

However, the court found that ADQ established that UAM breached the Franchise Agreement. ADQ offered summary judgment evidence demonstrating UAM breached the Franchise Agreement by selling shakes made using soft serve mix instead of fresh milk. UAM conceded it breached the Franchise Agreement, but claimed its “isolated and temporary ingredient substitution was a nonmaterial breach insufficient to justify termination.” Looking at the Franchise Agreement, the court concluded that UAM had materially breached the agreement, based on covenants that stated: “[i]f the licensee... shall commit any breach of any covenant or any agreement herein contained, the licensor may, at its option, declare this agreement terminated... [and] “it is agreed between the parties” read in conjunction with covenants that”... [o]nly fresh milk shall be used as liquid parts of malts and shakes.” Thus, the court concluded that by failing to use fresh milk to make malts and shakes, UAM materially breached the plain terms of the Franchise Agreement. Wrote the court, “Because UAM does not contest selling shakes made using soft serve mix instead of milk, UAM fails to raise a genuine dispute of material fact regarding its material breach. ADQ is entitled to summary judgment on this basis.”

The court also rejected UAM’s argument that ADQ waived any breach. The court found that the contractual language in the Franchise Agreement appeared to be unambiguous with regard to waiver and ADQ did not waive any breach. The court held that there was no genuine dispute of material fact for ADQ’s breach of contract cause of action and it granted ADQ’s Motion for Partial Summary Judgment.

Trademark Infringement and Unfair Competition. The court next reviewed ADQ’s claims alleging trademark infringement under the Lanham Act and unfair competition under the Lanham Act and common law. The court outlined that “Unfair competition claims under the Lanham Act are governed by the same standard as those for trademark infringement, e.g., the likelihood of confusion.” Additionally, under the Lanham Act, “a plaintiff must first show that the mark is legally protectable and must then establish infringement by showing a likelihood of confusion.”

UAM did not dispute the first element, that ADQ’s marks are registered, owned, and legally protected by ADQ. However, UAM disputed the timing of its use of the marks, asserting that any use of the “DAIRY QUEEN” marks only occurred prior to its receipt of notice of termination. UAM argued that ADQ improperly delivered its Notice of Termination via email on October 16, 2025, because “[r]evocation could only be effective upon UAM’s receipt of physical notice.” UAM further asserts that “[b]ecause UAM immediately ceased operations on October 23, 2024— the first day after receipt—UAM did not use ADQ’s marks without consent in commerce.”

However, ADQ offered evidence of UAM displaying ADQ’s marks on the following dates, which all were after UAM received written notice from ADQ: October 26, 2024; December 15, 2024, January 11, 2025; and January 24, 2025, which is even after the court entered the Stipulated Preliminary Injunction on November 22, 2024. The court found that ADQ established a likelihood of consumer confusion between licensed Dairy Queen brand restaurants and UAM’s restaurant. The court granted ADQ summary judgment on claims for Lanham Act trademark infringement, Lanham Act unfair competition, and Texas common law unfair competition claims.

The Case is No. 5:24-cv-01209-JKP-ESC.

Judge: Pulliam, J.

Attorneys: Bryan K. Washburn (Faegre Drinker Biddle & Reath LLP) for American Dairy Queen Corp. Gagan Khan (Vestige Law) for UAM, LLC.

Companies: American Dairy Queen Corp.; UAM, LLC

Cases: FranchisingDistribution TexasNews