Focused on Franchise Law - May 2013

by Lewitt Hackman



 "The Leap of Faith: How to Acquire a Franchisor" authored by Barry Kurtz was published in the April 2013 issue of the Santa Barbara Lawyer, the monthly news magazine of the Santa Barbara County Bar Association

[]. To see the article, click here.


Laws focusing on the franchisees' rights are referred to as relationship laws, and in recent months, franchisee groups fighting for new relationship laws have been noticeably successful, scoring legislative victories in several states. There are some significant differences among the bills currently being considered or that have recently passed, but most are intended to restrict the power of franchisors to terminate, not renew, or deny consent to the transfer of franchise agreements without good cause. Some are aimed at leveling the playing field when a dispute arises between a franchisee and its franchisor and many seek to mandate "good faith" dealings between the parties to franchise agreements.


Maine, California and Massachusetts all have sweeping new franchise relationship bills currently pending in their legislatures. The Maine Small Business Investment Protection Act ("LD 1458") is designed to build upon California's 33 year-old Franchise Relationship Law and to be the first law of the 21st Century to truly address commercial problems in franchising, thus making it a model for other states. If passed, LD 1458 would, among other things, require franchisors to: (1) provide franchisees additional time to cure defaults; (2) allow franchisees to assemble in trade groups without fear of retaliation; (3) renew franchise agreements without increasing royalty rates or imposing new fees; and (4) compensate damaged franchisees for placing outlets within their territories.


California's legislature is currently considering two bills. The California Small Business Investment Protection Act, AB 1141, aims to revise California law to: (1) provide franchisees greater freedom to transfer their businesses; (2) require automatic renewal of franchise agreements absent a material breach; (3) protect franchisees from unreasonable terminations; (4) require the parties deal with each other in "good faith"; and (5) provide franchisees the right to assemble in trade groups without fear of retaliation. In addition, California's SB 610, if passed, would require parties to franchise agreements to deal with each other in "good faith" and would protect franchisees that participate in franchisee associations.


Colorado's legislature recently passed legislation aimed at bolstering franchisee protections for motor vehicle dealers in that state, which its Governor is expected to sign. And late last year, Ohio amended its Business Opportunity Plan Law to give damaged franchisees the right to sue for errors in the disclosure document they were provided, absent proof of fraud. The Ohio amendment also requires disputes between Ohio franchisees and their franchisors to be governed by Ohio law, notwithstanding the terms of the franchise agreement, and requires arbitration hearings relating to franchise disputes to take place in Ohio. More importantly, the Ohio amendment provides franchise purchasers the right to cancel their agreements any time within 12 months of signing their franchise agreement, under certain circumstances.  


No doubt, franchisors are starting to feel the heat. Regardless, the winds of change are blowing and franchisors must pay attention as states bolster laws governing the franchise relationship in favor of franchisees. 




Something franchisees must know: Franchisees that continue to use their franchisors' registered trademarks after their franchise agreements have been properly terminated by their franchisors could face crippling damage awards. Under the federal Lantham Act, courts may award an injured franchisor "treble damages" -three times the amount of damages actually suffered-for willful and knowing trademark infringement, and infringers may also be required to pay the trademark owner's attorneys fees.

In Choice Hotels Int'l, Inc. v. Bhakta, a federal district court in Corpus Christi, Texas recently held that Choice Hotels International, Inc. ("CHI") was entitled to summary judgment on trademark infringement and unfair competition claims against a terminated franchisee, J. Bhagwanji, Inc., and its owner, Hemant Bhakta. To prove trademark infringement, CHI had to show: (1) it possessed a legally protectable mark; and (2) the franchisee used the same or similar marks in commerce in a manner likely to confuse potential customers as to the affiliation, connection, or association of the hotel with CHI. Both sides agreed that CHI owned the subject trademarks and that the franchisee continued to use them after the franchise was terminated. The court found that since the franchisee continued to use CHI's exact mark after CHI terminated the franchise agreement and since customers had complained to CHI about the condition of the franchisee's property, customers were actually confused, which was enough to prove the franchisee used the marks in a manner likely to confuse potential customers.


The franchisee argued that CHI had wrongfully terminated the franchise agreement and had expressly or impliedly approved continued use of its trademark. The court disagreed and awarded CHI a permanent injunction to prevent the franchisee from continuing to use CHI's mark. The court also reminded the franchisee that the Lantham Act is intended to make trademark infringement unprofitable and that it could, if warranted, award CHI treble damage and attorney's fees. After considering the time period during which the franchisee infringed on CHI's marks and the franchisee's gross sales and profits during the infringement period, the court awarded CHI $219,974.57 in damages, but declined to award CHI treble damages or attorney's fees. Regardless, the Choice Hotels case serves as a reminder to franchisees of the risks associated with continuing to use their franchisor's registered trademarks after their franchise agreements are terminated. Click here to see the entire case.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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