Franchisors, Got Claims? Don’t Let Them Spoil Like Bad Cheese
Chair, Franchise & Distribution Practice Group
by Barry Kurtz
818-907-3006
This is the tale of two restaurants, each facing trademark infringement claims under the Lanham Act brought by two, separate franchisors. The franchisees’ restaurants had three things in common: First, cheese is a key ingredient in their respective menus (which detail is only critical to cheese-lovers, but we like lists of three). Second and more importantly, time was a key ingredient in their respective defenses.
The third common element is that both defendants won. Here’s why:
Both restaurateurs employed a laches defense. The Laches Doctrine is an old but often used defense employed when an unreasonable amount of time has passed between a supposed transgression by the defendant and a legal complaint is made by the plaintiff. Here are the details:
Delays May Cause Grouchy-ness
In Groucho’s Franchise Systems, LLC v. Grouchy’s Deli, Inc. (d/b/a Grouchy’s New York Deli and Bagels and referred to as “Deli” to avoid confusion), an 11th Circuit Court of Appeal upheld the trial court’s ruling that the franchisor’s (Groucho’s) claim was barred by laches.
To sum up, Groucho’s has been doing business in South Carolina since 1941, opened 20 additional locations over time, and finally registered its trade name in 1997. The Deli opened its restaurant in 2000 in Georgia.
In 2004, Groucho’s sent the Deli a letter alleging the Deli was infringing on the franchisor’s registered mark. The letter further stated the franchisor planned to open a location in Atlanta sometime in the future, and that upon that occasion, would take legal action to stop the Deli’s infringement. The Deli registered its own mark in 2005 and opened a second location. Thereafter, both concepts expanded their operations.
In 2013, Groucho’s sent the Deli another letter, asking the Deli to change its name because of the risk of confusion between Groucho’s and Grouchy’s. The Deli did not respond, and Groucho’s franchisor followed up with a warning about a lawsuit. This time the Deli replied that there was no likelihood of confusion. Groucho’s finally filed a lawsuit in 2014.
Among other allegations, Groucho’s claimed trademark and service mark infringement in violation of the Lanham Act, unfair competition, unjust enrichment, and that the Deli’s name would cause market confusion. The district court granted summary judgment for the Deli.
The 11th Circuit Court stated that a laches defense requires proof of three elements:
1. There must be a delay in asserting a claim;
2. The delay must not be excusable; and
3. The delay must cause the defendant undue prejudice.
The Court further opined that during the decade in which Groucho’s waited to challenge the Deli’s service mark; the Deli built business value around its own mark; registered its mark without opposition; and opened another restaurant which it later sold, licensing the buyer at the time to use the Deli’s recipes and proprietary property. In short, the Deli “rel[ied] to its detriment” on Groucho’s silence. The Court also characterized Groucho’s behavior as “tortoise-like”, and upheld the district court’s decision.
If Groucho’s wanted a successful shot at protecting its name, the franchisor should have taken legal action in 2004.
Franchisor Cheesed Off…Eventually
In Noble Roman’s Inc. v. Hattenhauer Distributing Company, time plays a role again.
Noble Roman’s of Indiana franchises pizza outlets and submarine sandwiches. Hattenhauer owns convenience stores and gas stations in Washington and Oregon. In 2006, the parties entered into franchise agreements to sell pizza and sandwiches at Hattenhauer locations – Hattenhauer agreed to only use ingredients that conform to the franchisor’s specifications.
During an audit in 2014, Noble Roman’s discovered Hattenhauer underreported sales. The franchisee disputed the claims and refused to pay royalty fees. Noble Roman’s also claimed the franchisee was using inferior cheese rather than the franchisor’s proprietary cheese, since 2011. In its 2014 lawsuit, Noble Roman’s added unfair competition and breach of contract to its other claims.
Let’s allow the cheese claim to stand alone:
Noble Roman’s alleged the franchisee’s use of subpar cheese violated the Lanham Act “because it deceived customers into paying full price” for a product that was not, in essence, a Noble Roman’s product. The franchisor also claimed injury because it lost control of products sold under its trademark.
Hattenhauer on the other hand, claimed the franchisor knew about the cheese switch since 2010, because the franchisor received monthly reports from the approved supply distributor indicating that Hattenhauer was not buying its cheese.
In considering the facts, the court determined that the harm was not to customers who ate bad cheese, but to the franchisor, who may have been perceived by those customers to be serving bad cheese, which the court characterized as a claim for injury to personal property.
That being the case, the court then pointed out that the statute of limitations for personal property was two years in Indiana and found that Noble Roman’s four year delay on its cheese claim was unreasonable, and that Hattenhauer was prejudiced by this delay. The court granted summary judgment for Hattenhauer regarding the trademark infringement claim.
Both cases reveal the harm caused to a plaintiff by sitting on its claims.
Barry Kurtz is a State Bar of California Certified Specialist in Franchise & Distribution Law.