Anatomy of a franchise termination suit for nonpayment of fees

Ever wonder what happens if you don’t pay those pesky but hopefully well-earned franchise fees? The answer is found in a legion of cases with a common rubric regardless of brand.

It goes like this: Fees are due; fees are not paid; franchisor inquires; franchisee is evasive or nonresponsive; franchisor sends notice of default with a mandatory cure date, typically seven to 10 days; franchisee fails to pay within that time; franchisor sends a notice terminating the franchise; the notice instructs the franchisee to immediately stop using the franchisor’s trademarks; franchisee continues doing business using the franchise name and signs unabated; franchisor documents such use with photos of the facility and images from franchisee’s website; franchisor sues for trademark infringement; judgment for the franchisor.

Franchise agreements virtually always contain a provision permitting the franchisor to terminate the franchise upon nonpayment by the franchisee. Further, contracts typically provide that, following termination, the franchisee must immediately stop using franchisor’s intellectual property. Failing to cease and desist constitutes trademark infringement.

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Franchisors often begin by seeking a preliminary injunction. This is a court order that prevents the franchisee from using the trademark while the case is pending. A preliminary injunction is granted when the franchisor can prove the following two requirements: 

  1. Irreparable harm if the injunction is not granted; and
  2. A substantial likelihood of success on the merits at trial.

Sounds daunting, but it isn’t. Use of a franchisor’s trademark by a terminated franchisee is recognized by most courts as causing irreparable harm to the franchisor’s good will, and also establishes the necessary likelihood of success on the merits.

To win in the underlying infringement case, the franchisor must prove a likelihood of consumer confusion. Again, many courts hold that this requirement is sufficiently established by the fact of a terminated franchisee’s continued use of the franchisor’s trademarks. Incidents of actual confusion bolster the case.

After trial, a successful franchisor is entitled to a permanent injunction preventing the franchisee from ever using the franchisor’s trademarks again. The judge will likely require that the franchisee deliver to the franchisor by a specified date all signage and marketing materials that contain the franchisor’s trademark. The court might also require the franchisee to submit a report confirming compliance. Also, the franchisee will likely be directed to submit to the court an accounting of any profits the franchisee derived from the unauthorized use of the trademarks. And, of course, those unpaid franchise fees remain due and owing, plus interest and other add-ons.

The lesson: Timely pay your franchise fees. If not possible, alert the franchisor early and negotiate a payment plan.

Karen Morris is a lawyer, municipal judge and Distinguished Professor at Monroe Community College in Rochester, N.Y., where she teaches hospitality law. Contact her at [email protected].

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