Franchise 101: Hunka, Hunka Confusion; and Leaky Forum Selection for Roofing Franchisor

Franchisor 101: Hunka, Hunka Confusion

A federal district court in Florida denied a former moving and junk hauling franchisee’s motion to dismiss claims of trademark infringement and unfair competition by franchisor College Hunks Hauling Junk (“CHHJ”).

In May 2021, franchisor and franchisee entered into a franchise agreement to open a CHHJ franchise in New Jersey. Franchisor alleges that franchisee breached the franchise agreement and were sent a notice of default with opportunity to cure followed by two notices of default and termination with opportunity to cure and finally a notice of termination in June 2023. Franchisee did not respond to any of the notices and began operating a competing moving and junk hauling business both prior to and after the franchise agreement was terminated.

Franchisor alleged that the new competing business Spaulding Hauling and Moving (“SHM”) used the same address as the former CHHJ franchise and left the CHHJ sign on the business while using equipment marked SHM. After termination, franchisee advertised itself as both CHHJ and SHM on third party websites using the phone number for CHHJ. Franchisor sent a cease and desist and demand for payment to franchisee and, after receiving no response, filed a lawsuit.

A claim for trademark infringement must allege that: (1) plaintiff possesses valid marks; (2) defendants used plaintiff’s mark(s) in commerce in connection with the sale or advertising of their services; and (3) defendants’ use was in a manner “likely to cause confusion.” Franchisee acknowledged CHHJ has a valid trademark but challenged the other two elements.

Franchisee stated that they left the preexisting CHHJ signage but did not use it because they did not meet with customers or offer moving or junk hauling services from that office. The court disagreed and held that franchisee was required to remove the sign and de-identify under the franchise agreement and having a SHM truck out front of the building with the CHHJ sign, advertising SHM’s competing services on third party websites, and leaving the CHHJ marks on the building met the standard for connection with the sale or advertising element of trademark infringement.

The court also found that the CHHJ trademark is at least suggestive, an incontestable mark and the similarity of advertising and competing services weighed in favor of “likely to cause confusion.” While CHHJ did not show actual intent or confusion in its pleading, at the pleading stage CHHJ met its burden of proof to show a likelihood of confusion and, therefore, the claim survived the motion to dismiss.

Franchisors with franchisees whose franchise agreements expire or terminate need to ensure that their former franchisees comply with the post-termination covenants in the franchise agreement. In particular, franchisors need to protect their trademark(s) and brand and should consult franchise counsel should former franchisees violate post-termination covenants.

CHHJ Franchising LLC v. Spaulding, 2024 U.S. Dist. LEXIS 10506 (M.D. Fla. Jan. 22, 2024)

Franchisee 101: Leaky Forum Selection for Roofing Franchisor

A federal district court in Indiana held that a forum selection clause in the franchise agreement prevailed over a competing forum selection clause in the personal guaranty.

Roofing franchisor, Honest Abe Roofing Franchise, Inc. (“Honest Abe”), signed a franchise agreement with franchisee, Lesjon Holdings, LLC, and a personal guaranty with its owners, the Keims. The franchise agreement provided Illinois as the venue for dispute resolution but the personal guaranty designated Indiana. The franchisee’s training occurred in Indiana, but the franchisee’s territory was in Illinois.

In 2022, Honest Abe terminated the franchise agreement based on breaches related to annual reports, data reporting and minimum local advertising obligations. Honest Abe then filed a lawsuit in Indiana. The franchisee removed the case to federal district court in Indiana and then filed a motion to dismiss for improper venue, or alternatively, to transfer the case to federal district court in Illinois.

The court found that both forum selection clauses appeared to be mandatory, but because they were contradictory, and only one could be enforced, one clause is primary and the other secondary. Honest Abe argued the forum selection clauses were for separate agreements and were unrelated. Franchisee argued that the contracts must be looked at together because they were part of the same transaction, executed simultaneously, and a breach of the personal guaranty required a breach of the franchise agreement. In addition, there was an integration clause and any inconsistencies or conflicts were to be construed against the drafter, franchisor. The court agreed with franchisee.

Because there was a valid forum selection clause, the court then looked at the public interest arguments against a transfer under federal law. The court held that the Central District Court of Illinois was less congested than the Indiana federal court and Illinois franchise law was at issue under the Illinois Franchise Disclosure Act. The court concluded that all of the alleged breaches occurred in Illinois and the contact with Indiana was not substantial and that Illinois was the proper venue.

Franchisees should consult with franchise counsel prior to signing any franchise agreement with a franchisor to evaluate forum selection clause(s) and possible ramifications should a dispute arise. Franchisees also need to be aware of applicable state franchise laws, if any, that might control despite conflicting language regarding choice of law and jurisdiction in the franchise agreement.

Honest Abe Roofing Franchise, Inc. v. Lesjon Holdings, LLC, 2023 U.S. Dist. LEXIS 216811 (S.D. Ind. Dec. 6, 2023)