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.
Temporary Restraining Orders and Preliminary Injunctions in Franchise Disputes
The Gus’s Franchisor case demonstrates the speed with which a franchisor can obtain emergency injunctive relief when a franchisee refuses to cease operations after termination. The TRO was obtained on June 1, 2020—less than a month after the franchise agreement was terminated on May 8, 2020. This rapid judicial intervention reflects the courts’ general view that trademark infringement and trade secret misappropriation cause irreparable harm that cannot be adequately compensated in money. To obtain a TRO, a plaintiff must demonstrate: (1) a likelihood of success on the merits; (2) irreparable harm if the TRO is not granted; (3) a balance of hardships that tips in the plaintiff’s favor; and (4) that the public interest is not disserved. In franchise termination cases, courts regularly find that the franchisor is likely to prevail—the franchise agreement has been terminated and continued use of marks and trade secrets is unauthorized by definition.
COVID-19 as a Legal Defense: Why Courts Rejected It
The Gus’s Franchisor franchisee argued that the COVID-19 pandemic justified its continued operations in violation of the court’s TRO. The court rejected this argument emphatically. Emergency health conditions may justify modifications to procedural deadlines and court operations but do not suspend substantive legal obligations or provide a defense to contempt of court. A party subject to a court order must comply with that order regardless of external economic conditions, or must seek a formal modification of the order from the court through proper legal channels. Courts during the pandemic period consistently held that debtors could not use COVID-19 as a basis for unilaterally staying their compliance with legal obligations, and that parties to contracts could invoke force majeure clauses only where their specific contract language covered pandemic conditions and where performance was truly impossible rather than merely more difficult or expensive.
The Franchise Agreement: IP Provisions and Termination Obligations
Well-drafted franchise agreements contain specific post-termination obligations: cease using all trademarks, trade dress, and service marks; return or destroy all proprietary materials including operations manuals; cease using the franchisor’s trade secrets and confidential business methods; and cooperate with the transition of customers to other franchise locations. These provisions are typically backed by liquidated damages clauses specifying the daily damages that accrue for each day of non-compliance. Franchisors should ensure that their franchise agreements contain: clear definition of the IP being licensed; specific post-termination obligations; authorization for ex parte TRO applications in cases of continuing violation; choice of law and forum selection clauses that direct disputes to courts favorable to injunctive relief; and attorneys’ fees provisions that allow recovery of enforcement costs.
Protecting Franchise IP: Proactive Monitoring and Enforcement
The Gus’s Franchisor case also illustrates the broader principle that trademark owners—including franchisors—must actively police their intellectual property or risk weakening their rights. A trademark owner who allows widespread, unchallenged infringement of its marks may find that courts view the marks as having lost their distinctiveness, or that the doctrine of laches bars enforcement claims against later infringers. Franchisors should implement systematic monitoring of franchise locations for compliance and should have a clear protocol for escalating from informal notification to formal legal enforcement when a franchisee is non-compliant.
Contact a Franchise and IP Attorney
Whether you are a franchisor seeking to protect your brand after franchise termination or a franchisee facing a TRO application, the stakes in franchise IP litigation are high and move quickly. The business law attorneys at Revision Legal have experience in both franchise dispute resolution and intellectual property enforcement. Contact us at 231-714-0100.
