IP Law Daily, TRADEMARK—W.D. Wis.: New restaurant opened in place of Erbert & Gerbert’s franchise not likely to confuse customers, (Nov 5, 2018)

By Harold S. Berman, J.D.

A restaurant franchising company whose franchise agreement included a non-compete clause could not obtain a preliminary injunction against a franchisee for opening a new restaurant on the premises of the old franchise, a federal district court in Wisconsin ruled. The franchisor produced no specific design elements that could support its claim of trade dress infringement against the franchisee for using its purported design. Nor could the franchisor show it would be harmed by the franchisee’s new restaurant when the nearest franchise was 600 miles away in another state (E&G Franchise Systems Inc. v. Janik, October 31, 2018, Conley, W.).

Franchise agreement. E&G Franchise Systems, Inc. ("E&G" is a franchising company that licenses other entities to operate restaurants under the "Erbert & Gerbert’s" and "Erbert & Gerbert’s Sandwich Shop" marks. A company based in Texas had been a franchisee of E&G, and had operated a licensed E&G restaurant. E&G had a number of registered marks. E&G also claimed, and the Texas franchisee disputed, that it had developed a "distinctive food service system" which was reflected in the distinctive premises of its franchisees, including specific design and decor, furnishings, layout, and signage.

In August 2015, E&G and the Texas franchisee entered into a franchise agreement for the franchisee’s E&G restaurant in Plano, Texas. The agreement granted the franchisee a license to use certain E&G marks under certain terms and conditions. The agreement also included a post-termination provision which prohibited the franchisee from operating a "competitive business" within five miles of the franchised business. A competitive business included any business that derived over 50% of its revenue from sandwiches.

Breach of agreement. In late 2017 and early 2018, the franchisee failed E&G quality reviews, failed to pay two royalty/advertising fee payments, and failed to timely provide required financial statements. The franchisee also closed the restaurant for Christmas Eve without advance approval, as required by the agreement. E&G also alleged that the franchisee failed, as required by the agreement, to purchase items from approved suppliers, purchase E&G-approved products, or maintain sufficient inventories. Consequently, E&G terminated the agreement in May 2018. E&G contended that, upon termination, the franchisee was required to immediately stop using all E&G marks and the E&G system.

New restaurant. The franchisee allegedly closed its E&G restaurant in late May 2018, and subsequently opened a new restaurant called Nemo’s. The franchisee’s CEO described Nemo’s as a casual eatery that focused on sandwiches. E&G claimed that, notwithstanding the franchisee’s rebranding, the new restaurant used the same color scheme, furnishings, layout and design as the previous E&G restaurant, and offered a similar menu. The franchisee countered that it removed all E&G trademarks, logos, and brand decorations, that customers did not confuse the old franchise and the new restaurant, and that sandwiches accounted for less than 50% of the new restaurant’s business.

Preliminary injunction motion. E&G asserted claims against the franchisee and its CEO for breach of contract, trademark infringement, and trade dress infringement. E&G moved for a preliminary injunction against the franchisee, arguing that relief was warranted by the franchisee’s continued trade dress infringement and operation of a "competitive business" on the site of the former franchise, in violation of the agreement.

Trade dress infringement. The court denied E&G’s request for an injunction, first finding that E&G had not demonstrated a more than negligible likelihood of success on the merits of its trade dress claim. E&G failed to specify the specific elements of the design, decor, layout and color scheme that it claimed were elements of E&G’s proprietary system referenced in the franchise agreement, or offer any facts or details to support its generalized description.

Additionally, E&G had not registered its trade dress, and failed to show that its trade dress was not merely functional. The layout of the restaurant’s counters, tables, and lighting placement appeared to be solely functional. Although E&G claimed that it had a protectable interest in its trade dress because franchises were required to adhere to distinctive design and layout requirements, it failed to demonstrate consistent use of these undefined requirements by its franchisees. Rather, the franchisee brought evidence showing inconsistencies across authorized E&G franchisees regarding color scheme.

Breach of non-compete provision /operation of competitive business. The court next found that the agreement’s non-compete provision prohibiting the franchisee from operating a "competitive business" within five miles of the previous E&G location could not provide a basis for preliminarily enjoining the franchisee from operating Nemo’s. The key issue concerning whether there would be a likelihood of confusion among customers centered on whether the franchisee derived over 50% of its sales from sandwiches. E&G and the franchisee disputed what constituted a sandwich under the agreement, and the court was unable to resolve this factual dispute on the limited record before it.

However, even if E&G could show a likelihood of success on its contract claim, it could not show it would suffer irreparable harm absent an injunction. Although the agreement stipulated that any violation constituted irreparable harm for which no adequate remedy was available, this provision was not conclusive in light of other factual evidence. E&G had no restaurants in Plano, the Dallas area, or even in the state of Texas. With the closest restaurant 600 miles away in Colorado, the court had no basis to find that Nemo’s could divert customers or compete with an existing E&G restaurant.

This case is No. 3:18-cv-00416-wmc.

Attorneys: William E. Wallo (Weld Riley Prenn & Ricci, SC) and Alicia Goedde (Lathrop Gage LLP) for E&G Franchise Systems, Inc. Joshua F. Brown (Law Office Of Josh F. Brown, LLC) for Aubrey Janik and The Janik Group, LLC.

Companies: E&G Franchise Systems, Inc.; The Janik Group, LLC

Cases: Trademark WisconsinNews