A federal court in Tennessee has recently held that COVID-19 concerns do not justify a terminated franchisee’s continued use of a franchisor’s trademarks, trade secrets and business plan in violation of a temporary restraining order issued by the court. See Gus’s Franchisor, LLC v. Terrapin Restaurant Partners, LLC, Case No. 2:20-cv-2372-JPM-cgc (US W.D. Tenn. Aug. 31, 2020). The case is interesting for this legal point but is also a good illustration of how a franchisor should use aggressive litigation to protect its intellectual property and police its franchise arrangements.
The case involves a fast-food franchise restaurant called Gus’s World Famous Fried Chicken (“Gus’s”). Gus’s began operating in Mason, Tennessee (near Memphis) in 1953 and now has 30 locations in 14 states including three restaurants in California and three in Michigan. In a franchise relationship, the owner of the franchise, the franchisor, contractually agrees with a franchisee to allow the franchisee to operate a franchise by using the franchisor’s trademarks, copyrights, trade dress, trade secrets and proprietary business plans and models. Both the franchisor and the franchisee benefit from the arrangement. The franchisor gains market share by expanding geographically with new locations and the franchisee can start with an already successful business method and a well-known brand with a base of loyal customers. Franchise arrangements are legally complex and, if you are contemplating entering a franchise relationship, you should obtain advice and counsel from experienced business lawyers like those at Revision Legal.
Generally speaking, if the franchisor-franchisee arrangement is terminated, then the franchisee is no longer allowed to use the franchisor’s business mode, trademarks, trade secrets, and other intellectual property.
In the case under discussion, the franchise was located in Greenbelt, Maryland (near Washington, DC). The franchise arrangement was terminated by Gus’s on May 8, 2020 for various reasons.
However, the franchisee continued to operate as a Gus’s World Famous Fried Chicken restaurant after that date. Shortly thereafter, Gus’s sued and sought a court order preventing the franchisee from continuing to hold itself out as a Gus’s restaurant. Gus’s also sued for trademark infringement and for trade secret misappropriation and other claims. Both actions were necessary since owners of trademarks and trade secrets must protect their intellectual property or risk losing them.
Gus’s sought a temporary restraining order from the Court which was granted on June 1, 2020. See here. Note how quickly the franchisor was able to obtain legal relief after terminating the franchise agreement. The court’s order required that the franchisee cease operating as a Gus’s restaurant. The franchisee was ordered to stop using Gus’s trade and service marks, to remove/change signage, to cease using Gus’s menus, furniture and other trade dress, to cease using Gus’s recipes and more.
However, the franchisee failed to abide by the court’s Order. On June 23, 2020, the franchisor filed a motion with the court seeking to enforce the order of June 1st. Again, note how quickly the franchisor sought relief from the court. In defending its continued use of Gus’s business model and intellectual property, the franchisee provided a novel legal argument. The franchisee argued that it should be excused from violating the court’s order because it would be in the “best interest of the restaurant and its employees to remain open during the COVID-19 shutdowns.” The franchisee also claimed that this advice had been provided by its attorney.
The court completely rejected these arguments and held the franchisee in contempt of court. The COVID-19 pandemic does not justify non-compliance with court orders or does not justify non-approved use of another’s business plans, models and intellectual property. The court set a hearing date for a determination of the proper amount of damages, attorneys’ fees and costs.
For more information or if you need business-related legal services, contact the business lawyers at Revision Legal at 231-714-0100.