Top franchise cases of 2012

Q1 2013

FranCast

Intellectual Property and Technology News

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DLA Piper IPT partners Barry Heller, John Hughes and John Verhey recently conducted a webinar reviewing 2012’s top franchise cases. Here are three of the most significant cases they discussed. 

1.  Lower courts continue to turn to the US Supreme Court’s ruling in eBay Inc. v. MercExchange, LLC1 in addressing post-termination enforcement of trademark rights in the franchise context. While eBay specifically eliminated the presumption of irreparable harm for permanent injunctions in patent infringement cases, it also has been applied to trademark disputes. The good news for franchisors is that preliminary injunctions to stop post-termination use of trademarks do not appear to be substantially harder to obtain post-eBay.

This issue was at the heart of 7-Eleven, Inc. v. Dhaliwal.2 After 7-Eleven terminated a franchise agreement, the former franchisee kept running the store, still using 7-Eleven’s trademarks. In granting 7-Eleven’s motion for preliminary injunction, the court found 7-Eleven would likely succeed on the merits of its trademark claim; that even if there was no presumption of irreparable harm, this unauthorized use was sufficient to establish irreparable harm; and that 7-Eleven did not need to show the former franchisee’s actions were damaging 7-Eleven’s goodwill or reputation because 7-Eleven had the right to maintain control over its trademarks to prevent customer confusion.

Franchisors seeking injunctive relief should be aware that a court may no longer presume irreparable harm once a likelihood of success is established on a Lanham Act claim. That being said, franchisors may be able to establish irreparable harm by showing they no longer have control over use of their trademarks.

2.  In 2012, federal and state courts came to sharply different conclusions on whether franchisors should be deemed employers of their franchisees (and their franchisees’ employees). Should a franchisor be held liable for its franchisees’ tortious conduct or statutory violations in the labor law context? Franchisors can take comfort from a California federal district court’s ruling in Juarez v. Jani-King, Inc.3

In Juarez, franchisees of Jani-King janitorial services brought wage-related claims under the California Labor Code asserting Jani-King was their statutory employer based on the control the franchisor exercised over their businesses. Jani-King maintained the franchisees were independent contractors. The court observed that under California law “the principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.” The franchisees were required to show the franchisor “exercised control beyond that necessary to protect and maintain its interest in its trademark, trade name, and good will.”

The court found Jani-King’s control was no more than necessary to protect its trademark, trade name and goodwill and pointed out that the franchisees retained significant control over their own businesses.

Because janitorial service franchise systems typically involve more extensive franchisor controls than most franchise systems, the Juarez decision bodes well for franchisors who want to maximize protection for their trademarks and goodwill by retaining significant controls over their franchisees’ businesses. However, franchisors should be careful not to assume any traditional employer functions vis-à-vis their franchisees, such as dictating procedures for hiring or firing.

3.  In Stuller, Inc. v. Steak N Shake Enterprises, Inc.,4 the US District Court for the Central District of Illinois dealt a major blow to a franchisor’s ability to set its franchisees’ prices. The US Supreme Court has allowed more flexibility to suppliers to set prices at which retailers may sell their products. To preserve uniformity, many franchisors have thus sought to control their systems’ prices. Steak N Shake Enterprises, Inc. (SNS) adopted a policy requiring franchisees to “follow set menu and pricing.” The system’s longest-standing franchisee, Stuller, Inc., challenged this policy.

Stuller noted that the franchise disclosure document it was given before entering into franchise agreements said franchisees “are free to set selling prices different from prices on SNS-owned restaurant menus and several do so.” The court concluded that the franchise agreements prohibited SNS from adopting the pricing policy. Going forward, franchisors should revise franchise agreements and disclosure documents to expressly permit them to set franchisees’ prices. Before implementing a pricing policy, franchisors should make sure their agreements allow that policy.

For more information about the top franchise cases of 2012 and their effect on your business, please contact Barry Heller, John Verhey or John Hughes.

 


1 547 U.S. 388 (2006).

2 2012 WL 5880462 (E.D. Cal. Nov. 21, 2012).

3 2012 WL 177564 (N.D. Cal. Jan. 23, 2012).

4 2012 WL 2872634 (C.D. Ill. July 12, 2012).