Franchise 101: A Sticky Situation

Lewitt HackmanA federal court in Maryland entered default judgment and a permanent injunction in favor of an ice cream franchisor against a franchisee that continued operating its ice cream shop after termination.

A franchisor of Thai ice cream roll shops terminated its Yuma, Arizona franchisee for failing to pay required fees. The franchisee continued operating the ice cream shop, offering the same rolled ice cream. The franchise agreement had a non-competition clause prohibiting operation of a dessert business selling ice cream or frozen desserts within five-miles of the franchised location.

The franchisor sued, claiming breach of contract, trademark infringement, and unfair competition due to the terminated franchisee’s noncompliance with post-termination restrictions. The franchisee appeared at the first hearing, but then failed to appear at further hearings, including the preliminary injunction hearing. The court entered a default judgment, permanent injunction and award of attorney fees against the franchisee.

Franchisors should review their franchise agreement with counsel to make sure the non-competition provisions are adequate, reasonable and offer protections to ensure, where permitted by law, that former franchisees do not harm the brand by operating a competing business. After terminating a franchisee, the best interest for the franchisor, the brand, the system and the public, is usually to make sure the franchisee de-identifies and follows the franchise agreement’s post-termination provisions. If the franchisee is not complying, legal action can be considered to enforce the provisions and protect the brand and proprietary information from being used by the terminated franchisee.

ICENY USA, LLC v. M&M’s LLC, TDC-19-2418 (D. Md. Apr. 16, 2020)

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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