IP Law Daily, TRADEMARK—W.D. Okla.: Sonic prevails on injunction request against former franchisees, (Aug 29, 2022)

By Ursula Furi-Perry, J.D.

The terminated franchisees’ continued use of the franchisor’s trademarks, by its very nature, constituted trademark infringement.

Sonic filed suit against two franchisees, alleging failure to pay royalties for operating Sonic restaurant franchises and using Sonic’s registered trademarks. The company alleged that it properly terminated the franchisees’ license agreements and requested an injunction. The court granted Sonic’s request, holding that the company was likely to succeed on its claims under the Lanham Act, proving that its mark was used in commerce without the company’s consent, and that the unauthorized use was likely to cause confusion; the court also held that Sonic would suffer irreparable harm were the injunction not granted. (Sonic Industries LLC v. Olympia Cascade Drive-Ins, LLC, August 24, 2022, Wyrick, P.).

Background. Sonic filed suit against two of its franchisees, alleging that the company properly terminated the franchisees’ license agreements, involving ten restaurants, for failure to cure monetary defaults and pay the company royalties for operating Sonic restaurant franchises and using Sonic’s registered trademarks. Over an eight-month period, Sonic sent the franchisees several letters and notices of default, granting extensions for the royalty payments when the franchisees informed Sonic that they were attempting to sell the restaurants. Finally, in May 2022, Sonic sent the franchisees a notice of immediate termination, ordering them to immediately cease all operations, de-identify the restaurants, and pay the fees owed. The defendants nevertheless continued to hold themselves out as authorized Sonic franchisees, owning a total of $2,756,355 in fees. Sonic filed a motion for a temporary restraining order in the U.S. District Court for the Western District of Oklahoma.

Analysis. In its decision dated August 24, 2022, the federal district court addressed the procedural issue of a temporary restraining order as a preliminary injunction, reviewing whether Sonic could show that: “(1) Sonic is substantially likely to succeed on the merits; (2) Sonic will suffer irreparable injury if the injunction is denied; (3) Sonic’s threatened injury outweighs the injury Defendants will suffer under the injunction; and (4) the injunction would not be adverse to the public interest.”

Likelihood of success on the merits. To succeed on the merits of its Lanham Act claims, Sonic had to prove that its mark was used in commerce without the company’s consent, and that the unauthorized use was likely to cause confusion. Sonic properly terminated the franchise agreements, the court held, rejecting the franchisees’ arguments that Sonic failed to provide a precise accounting of the fees owed. Sonic’s termination was proper under Washington state law and comported with the Washington Franchise Investment Protection Act, the court noted.

Sonic was likely to succeed on its Lanham Act claims. The franchisees did not dispute that they used Sonic’s marks in commerce, and because the agreement was terminated, the use was without Sonic’s consent, the court held. The court looked to “well-settled doctrine that a terminated franchisee’s continued use of its former franchisor’s trademarks, by its very nature, constitutes trademark infringement.”

Irreparable harm. Sonic also met its burden to show that it would suffer irreparable harm if the injunction were denied, the court stated. The Trademark Protection Act of 2020 created a rebuttable presumption of irreparable harm upon a finding of likelihood of success on the merits, the court noted, shifting the burden to the defendants to show that consumer confusion was unlikely to lead to irreparable harm, which the franchisees here failed to do. Additionally, the court noted that “unauthorized use of a trademark by a former franchisee almost always causes irreparable harm because the franchisor loses control over the reputation of the mark, customers will be confused as to the franchisees’ status, and the franchisor can no longer monitor use of the mark to ensure quality control.”

Balance of the harms. This factor also weighed in Sonic’s favor, as balance of harms analysis generally favors the trademark holder. The franchisees could not avoid a preliminary injunction by claiming harm to a business built upon infringement, and any harm to their restaurants was a product of their own failure to comply with the franchise agreements.

Public interest. Lastly, the court held that Sonic met its burden to establish that the injunction would not be adverse to the public interest, which was served by enforcing right of the public not to be deceived or confused, as well as enforcing contractual obligations.

Accordingly, the court granted Sonic’s request for a preliminary injunction.

The case is No. 5:22-cv-00449-PRW.

Attorneys: Joe M. Hampton (Tomlinson McKinstry PC) for Sonic Industries, LLC, Sonic Franchising, LLC and Sonic Industries Services, Inc. Jeffery S. Haff (Dady & Gardner PA) for Olympic Cascade Drive Ins, LLC.

Companies: Sonic Industries, LLC; Sonic Franchising, LLC; Sonic Industries Services, Inc.; Olympic Cascade Drive Ins, LLC

Cases: Trademark OklahomaNews