Holdover franchisee engaged in counterfeiting

Century 21 Real Estate, LLC v. Destiny Real Estate Properties, Slip Copy, 2011 WL 6736060 (N.D. Ind.)

Century 21 entered into a franchise agreement with Destiny Real Estate Properties in Lowell, Indiana allowing Destiny to use Century 21’s marks.  Failure to pay royalties and advertising fees would allow Century 21 to terminate the agreement, prohibiting any future use of Century 21’s trademarks and triggering a liquidated damages provision. In 2011, Century 21 terminated Destiny for nonpayment, but Destiny continued to operate using Century 21’s marks.

Century 21 sued; Destiny defaulted.  The court awarded damages, including liquidated damages, under the franchise agreement, along with attorney’s fees.  Century 21 also sued for infringement and counterfeiting under § 1116(d)(1)(B), seeking mandatory treble damages under 15 U.S.C. § 1117(b) because the counterfeiting was knowing and willful.  (It sought trebling of at least the minimum it would have received under the franchise agreement between the time of termination and the filing of the complaint.)

While infringement was easily established, the court spend more time on the counterfeiting issue.  The case law on whether continued use of a mark after the termination of a franchise constitutes counterfeiting, allowing an award of enhanced damages and fees.  Counterfeiting requires the unauthorized use, for the same goods or services as to which the plaintiff has a registration, of “a spurious mark which is identical with, or substantially indistinguishable from, a registered mark.”  It also requires knowledge and intent.  The only issue not clearly established was whether the continued use of a formerly authorized mark by a hold-over franchisee constitutes the use of a “counterfeit” mark.

In light of the reasonable meaning of the statute and Seventh Circuit precedent, the court held that it did, a Sixth Circuit holding to the contrary nothwithstanding, see U.S. Structures, Inc. v. J.P. Structures, Inc., 130 F.3d 1185 (6th Cir.1997).  (The court commented that relatively few franchise cases had addressed the issue, which to me is evidence that Century 21 might be claiming too aggressively—this is a pretty big stick to hand franchisor-plaintiffs over above contract and ordinary trademark law, and it comes with a label that invites obloquoy and even criminal prosecution; cf. the CFAA.  Note also that we might want to be pretty careful about the requisite “knowledge and intent” under these circumstances—a franchisee who has even an unreasonable belief that the franchisor isn’t allowed to terminate, much less a reasonable but wrong one, knows she’s continuing to use the mark and intends to continue to share in the mark’s goodwill, but is that really enough to make her a counterfeiter?)

The Ninth Circuit has held that for certification marks, the continued use of a mark by a former licensee constitutes counterfeiting. State of Idaho Potato Comm'n v. G & T Terminal Packaging, Inc., 425 F.3d 708 (9th Cir. 2005).  Neither the Sixth or the Ninth, the court thought, offered much in the way of reasoning.  Pennzoil-Quaker State Co. v. Smith, No. 2:05cv1505, 2008 WL 4107159 (W.D. Pa. Sept.2, 2008), involved a variant, where a successor business to a formerly licensed distributor continued to use the former business’s signs. The court found infringement but not counterfeiting because the signs were genuine.  The Seventh Circuit, while lacking cases directly on point, has held that counterfeiting isn’t limited to reproduced marks and can include the use of a genuine mark on an unauthorized product, such as packaging unauthorized goods in boxes bearing the mark.  General Elec. Co. v. Speicher, 877 F.2d 531 (7th Cir.1989).  “The happenstance of having trademarks made by the owner in one's possession, so that one doesn't have to copy them, has no relevance to the purposes of the statute. Indeed, the danger of confusion is even greater because the ‘imitation’ is not merely colorable, but perfect.”

The court found this to create an instructive analogy: “the ex-franchisee sells a non-genuine service wrapped in the ‘package’ stamped with the former franchisor's trademarks. The consumer associates the service with the franchisor's brand and may never know that the service provided was unauthorized. Profits are diverted that may have gone to sales of authorized services, and the franchisor loses control over its trademarks.”  The court thought that an unrelated entity would obviously be counterfeiting; it could “conceive of no reason why an ex-franchisee should escape liability for counterfeiting simply because that person had access to a franchisor's original marks because of the former relationship and therefore did not need to reproduce an identical or substantially similar mark.”

The court then turned to damages, specified by statute as three times profits or damages, whichever is greater, along with a reasonable attorney’s fee.  Century 21 sought actual damages equal to the minimum royalties and advertising fund contributions between the termination of the agreement and the filing of the complaint; a separate award of treble that amount; and treble the amount of damages and profits uncovered in an accounting of Destiny's profits.  The court disagreed.  First, the way Century 21 put it, it was seeking four times its actual damages.  Second, Century 21 was seeking double recovery.  The court did order an accounting, but if it revealed profits or damages from the infringement greater than the actual damages based on the franchise agreement, that higher amount would be trebled as the total award. 

Plus, the liquidated damages awarded under the franchise agreement already accounted for at least a portion of Century 21’s lost profits.  Some authority permits such a double recovery, “apparently under the theory that the liquidated damages and trademark damages compensate for different injuries and that limiting damages to liquidated damages gives incentives for franchisees to hold-out and continue using licensed marks despite the termination of the franchise agreements.”  While breach of contract and infringement are separate wrongs, and while a franchisor’s recovery for infringement should not be limited to agreed-on liquidated damages, there was still a question of the proper amount of damages, which weren’t automatically created by the existence of two separate wrongs.  “[A] trebling of the lost royalty stream, on top of the liquidated damages award … , would result in a recovery of quadruple damages. While Century 21's harm from Defendant's infringement may go well beyond lost royalties to include damages resulting from the trademark holder's loss of control over the mark, the dilution of the value of the mark, public confusion, and other harms, the trebling provision of § 1117 accounts for the difficulty of ascertaining the extent of the actual harm.”

As a result, the court reduced the award of treble damages for infringement by a third to take into account Century 21’s separate recovery of its lost royalty and ad fees through liquidated damages.  If Century 21 chose an accounting, it could file a supplemental claim for damages based on additional evidence.

The court also refused to hold Destiny’s president individually liable because the complaint didn’t provide enough detail beyond the legal conclusion that he was the active force behind the infringement.

Century 21 was also entitled to a permanent injunction because of the loss of control over and harm to its marks.  Destiny was enjoined from new infringing acts and to cease all physical and online use of Century 21’s marks (including a domain name incorporating the mark, a Facebook page, and a Yelp page), as well as to contact any third party website that identifies Destiny as associated with Century 21 and request that any such references be removed and to assign its telephone numbers to Century 21 or its designee. The court declined to order corrective advertising “because any lingering associations in the public's mind between Destiny and Century 21 are more the result of the decade-plus affiliation than the post-termination infringement. In any event, the injunctive remedies above should sufficiently demonstrate to the public that the relationship has been severed.”