A series of recent Circuit Court decisions has made it more difficult for a franchisor to enjoin a former franchisee from using the franchisor’s federally registered trademarks after the franchise agreement has been terminated. I recently authored an article for the New Jersey Lawyer entitled, “Will New Court Rulings Make it Harder for Franchisors to Rescue a Hostage Trademark?“, discussing the impact of these decisions. Since its publication, I have received a number of comments from practitioners in the area, most of whom represent franchisors. All are completely frustrated with the new hurdles imposed by these decisions on efforts to obtain injunctive relief for trademark infringement.
Most jurisdictions require a franchisor plaintiff to establish some combination of the following elements:
- a likelihood of success on the merits,
- a likelihood of irreparable harm in the absence of an injunction,
- the balance of equities favors plaintiff, and
- a preliminary injunction is in the public interest.
Historically, once a franchisor demonstrated that it was likely to succeed on the merits of the case, a relatively easy task in a holdover usage case, irreparable harm was presumed.
This presumption of irreparable harm was weakened by two U.S. Supreme Court decisions: eBay Inc. v. MercExchange, L.L.C. (2006), and Winter v. Natural Resources Defense Council, Inc. (2008). In eBay, a patent case, the U.S. Supreme Court ruled that the traditional, four-factor test must be applied by courts when addressing permanent injunctions. While the eBay ruling did not specifically address the validity of the presumption of irreparable harm, it held that “traditional equitable principles” did not allow broad classifications similar to the presumption of irreparable harm. In Winter, the Supreme Court specifically addressed the irreparable harm standard in a preliminary injunction context. The Court held that “issuing a preliminary injunction based only on a possibility of irreparable harm” would no longer suffice. Instead, the court concluded that an award of injunctive relief can only be made after an evaluation of the entire four factor test.
Since those decisions, many circuit courts began to use Winter, and the permanent injunction holding in eBay, to hold that irreparable harm would no longer be presumed in trademark infringement cases. While these courts have not specifically addressed holdover usage by a franchisee, it seems clear that a franchisor trademark owner seeking a preliminary injunction will likely have to take comprehensive, documented steps to prove a likelihood of irreparable harm, even in a straightforward holdover usage case.
Until further guidance is provided, franchisor counsel should advise clients that they can no longer assume they will secure a preliminary injunction based on the likely success on the merits of their case. Franchisor counsel should prepare their clients to demonstrate actual and irreparable harm caused by the ongoing infringement. Counsel will need to document the harm their clients suffer from a holdover franchisee, and should – along with their client – take steps to collect evidence of such irreparable harm including the loss of control of reputation, loss of trade, loss of goodwill, and the possibility of confusion. This includes evidence regarding any customer complaints and service calls, negative customer reviews, and complaints by nearby franchisees who believe their franchised name is getting a bad reputation as a result of the unauthorized continued use of the mark by the terminated franchisee. Finally, franchisor counsel should prepare their clients to testify that once the holdover franchisee is out of system, there is no way to monitor its actions, even though the former franchisee continues to use the franchisor’s trademark.