Monday, January 30, 2006

When the moon hits your eye like a big pizza pie ...

... it could be a jab from a disgruntled family member.

Rosati's Franchise Systems, Inc. v. Rosati, 2006 WL 163145 (N.D.Ill.)

Rosati’s Franchise is a family business of pizza restaurants. The corporate plaintiff has federal registrations for “Rosati’s Pizza” and related marks; it has ten director/shareholders, all of whom are family members. Frederic, Michael, William, and Jeffrey Rosati, the first three of whom are minority director/shareholders, are the defendants in this trademark and false advertising case.

As a result of disputes between the majority and minority Rosatis, the shareholders agreed to split exclusive territorial rights. Rosati’s Franchise agreed to cease franchising and instead issue licenses to each of the shareholders to use and sublicense the Rosati marks and recipes (which are claimed as trade secrets). After this agreement, the shareholders created a marketing cooperative to advertise the individual pizza stores, both existing franchises and new licensees. All ten shareholders used the cooperative to market the 140 Rosati’s.

In 1999, “a website was created” – I use the passive voice because that’s how the complaint says it – at (warning: plays music). It listed the names of all Rosati’s nationwide. A third party owned the domain name.

In 2005, unbeknownst to the majority, the minority shareholders purchased and from the third-party owners. Soon thereafter, the family rift became open, and the minority group’s lawyer sent a letter to one of the majority Rosatis, stating that would be revised to list only the locations owned and controlled by the minority. And indeed, the 94 Rosati’s stores franchised or licensed by the majority were taken off the site.

As a result, the plaintiffs alleged, both customers and licensees had expressed confusion and anger, which had resulted in a substantial loss of business and goodwill. Moreover, because the website was changed, they were forced to pull ads because their Rosati’s stores weren’t listed on the site named in the ads.

Moreover, at the time the complaint was filed, a message appeared on the listings for Arizona restaurants:

Note to our valued customers:

… In 2001 a second group started licensing the Rosati name to independent owner operators. Due to the high number of complaints received at this web site in relation to locations controlled by the second group, we want to make it clear that the Original Valley Owners have no ownership or authority over locations that use the Rosati name that are not listed on this web site. Any complaints for locations not listed on this web site should be directed to that location and should be resolved by the parties that own that location. We apologize for any confusion.

Plaintiffs alleged that this constituted unfair competition under the Lanham Act and violation of the Illinois consumer fraud and deceptive trade practices statutes.

The court dismissed the federal trademark claims based on the authorization granted to each shareholder, including the minority shareholders, to use the mark in connection with their own sublicensing activities. The license, however, did not allow the minority to make false or misleading representations of fact about the majority, so the federal false advertising claim survived, as did the coordinate federal claims.

This case included a standing challenge – defendants argued that the individual plaintiffs, as non-exclusive licensees, had no standing to sue. This is the rule for trademark infringement under §1114, but §1125(a) confers standing on a broader range of plaintiffs, “any person who believes that he or she is or is likely to be damaged by” prohibited conduct. The individual plaintiffs were such persons.

Brief comment: Usually, quality controls within a family business will be assumed to exist, avoiding the charge that the mark has been abandoned through naked licensing. Can that general rule possibly apply here, where it appears that one segment of the family has no control over the other? The existence of this litigation shows an attempt to monitor the use of the marks under the license; perhaps that’s enough. But the reviews at epinions suggest that consumers might not understand the convoluted ways in which this franchise has developed.

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