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"Strategies to Avoid Costly Franchise Holdover Litigation"

Johanna Wilbert
Industry Today

Top strategies franchise leaders can take to successfully navigate and avoid common industry lawsuits.

Thoughtful action now, can lower the cost of franchise holderover litigation, and increase your chances of winning. One of the most common lawsuits involving franchises is holdover litigation. In these cases, there is no franchise agreement in place, either because the agreement expired or the parties terminated the agreement, yet the former franchisee continues to operate its business as if nothing has changed. In doing so, the former franchisee benefits from its unauthorized use of the franchisor’s intellectual property including trademarks, trade dress, copyrights, and trade secrets. In some cases, the former franchisee may even be producing counterfeit goods. The following are actions that can be taken before a problem arises that will increase the chances of success:

  1. Draft Winning Contracts: Franchise agreements should be drafted with holdover litigation in mind. For example, agreements should clearly identify the franchisor’s IP, address the franchisee’s obligation to de-identify and cease all use of that IP upon the termination of the agreement, and include an acknowledgement that continued use of the IP constitutes irreparable harm to the franchisor. Depending on the business, involving non-disclosure agreements or geographically limited non-compete agreements may be appropriate. Also consider the use of separate termination agreements.
  1. Check Ownership: As corporate structure changes over time, oftentimes people forget to update or transfer ownership of trademark or copyright registrations. This can distract from the merits of the lawsuit if the name on the franchise agreement is different from the name on the trademark registration or is different from the party bringing the lawsuit. Update ownership documents in real time to be prepared for quick action.
  1. Document Historic Use of Trademarks: Trademark rights come through actual use of the trademark in commerce. As a result, it is helpful to keep samples of your first use of the mark in commerce and representative samples from subsequent periods of time thereafter. Likewise, advertising awards or laudatory articles about your business can be used to show brand strength. Having this historic record organized before a problem arises, saves time and expense. Too often, bad record keeping makes it challenging to tell a complete story in court or to adequately respond to questions about first use.
  1. Confirm Current Use Is Protected: Logos, slogans, trade dress, and word marks can change over time as packaging is updated or marketing trends change. Registrations should be evaluated on a regular basis to confirm that the current use is still covered by registrations the company has on file.
  1. Identify Key Trade Dress Elements: Trade dress refers to the distinctive, non-functional appearance of a product, service, or business. To the extent your franchise uses design elements that consumers associate with your franchise, such as a unique color scheme, these elements can be protected as trade dress and may be registered with the trademark office. To prove a trade dress claim in a holdover franchise lawsuit, it is critical that the elements of your trade dress be readily identifiable and used consistently throughout all franchise locations. Explicitly addressing trade dress in an operations manual and listing the physical features a franchise location must have is often a good way to address this issue before problems arise.
  1. Identify and Protect Trade Secrets: To enforce rights in trade secrets, you will need to describe the nature of the secret to the court and establish that you took reasonable steps to protect that trade secret. To the extent your franchise is based on use of a secret recipe, a confidential business model, or a confidential manufacturing process this information may be protected as a trade secret if it is properly protected as secret. Such trade secrets should be marked as confidential within the company and subject to protections to keep them confidential such as employee training regarding the confidential nature of the trade secret and use of non-disclosure agreements.
  1. Be Prepared to Act Quickly: Allowing a franchisee to operate without a contract in place can impact the rights you have as time goes by. To avoid waiving possible rights, it best to have a plan in place. The plan should include a scheduled date to contact franchisees before the current contracts lapses and steps to closely monitor communications with any franchisee who has terminated the agreement, so that you are in a position to honor the agreement’s termination provisions and at the same time are prepared to act quickly should the franchisee refuse to de-identify. Simply collecting royalties without a contract in place can waive certain enforcement rights and remedies.

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