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.”
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