IP Disputes and Resolution Strategy in the Franchising

Industry; Case studies

Guriqbal Singh Jaiya

Director, SMEs Division

WIPO

Critical Components of a Franchise System

There are three critical components of a franchise system -- the brand, the operating system, and the ongoing support and training provided by the franchisor to the franchisee: (1) The brand creates the demand, allowing the franchisee to initially obtain customers. (2) The operating system essentially "delivers the promise,” thereby allowing the franchisee to maintain customer relationships and build loyalty. (3) The ongoing support and training provide the impetus for growth, providing the franchisee with the tools and tips to expand its customer base and build its market share.

How Franchising Adds Value

• A responsibly-built franchise system is one which provides value to its franchisees by teaching them how to get and keep as many customers as possible, who consume as many products and services as possible, as often as possible.

• In fact, most litigation in franchising revolves around the gap between the actual needs of the franchisees to remain competitive in the marketplace and the reality of what support the franchisor is capable of providing.

• The genesis of the disappointment begins during the recruitment phase of the relationship and continues beyond the start-up as the franchisee struggles to remain competitive, unless the franchisor delivers on its promises and is committed to providing excellent initial and ongoing training and support.

Road to Growth and Prosperity

• Franchishing is not a quick road to riches, but it can be a successful and profitable way to future growth and prosperity. 

• There will be a multitude of issues to consider, but whether you are a franchisor or franchisee, taking care that the franchise brand is well protected and understanding the importance of all representations and statements made at the outset, can help smooth the path ahead.

The Problems of Success

• Franchising's "success" and resulting rapid growth may also cause problems.

• Often, franchise business developments continue to outpace any attempts at developing a well-structured, orderly approach to the legal issues associated with franchising.

• Court decisions, administrative regulations, and legislation have failed to provide even the most basic element for a nationwide legal standard: a uniformly accepted definition of franchising

It is almost like a marriage…

• A franchise relationship is the corporate equivalent to a civil marriage.

• When disputes arise, a lot is at stake as the parties often bring years of concerns to the table. The challenge, where appropriate, is to handle the disagreement to make it possible for the marriage to survive and flourish; failing which, to result in the least amount of pain while separating/parting ways.

Dialogue…Listening…• Oftentimes, franchisees are quick to act out

against franchisors when the business is not performing, and sometimes franchisors are quick to slap owners with outrageous fees or threaten to remove them from the franchise altogether.

• Through meaningful dialogue, however, and the willingness to listen twice as much as they speak, franchisors may discover a new way to help the franchisee turn the business around or exit the franchise as painlessly as possible.

Disputes… Way Forward

• Well-founded legal advice, and practical management of a dispute may avoid escalation of disagreements between a Franchisee and a Franchisor. However, there are times when this is not enough.

• Franchising Lawyers handle franchise disputes through negotiation/mediation, arbitration, and, if necessary, litigation.

What Franchising Lawyers do…

They assist with: • Defining and communicating the major issues to

all relevant parties; • Devising a multi-step strategy to achieve desired

results with minimal business interruption; • Appointing a mediator and representing the

client at mediation; and • Informing, where appropriate, legislative bodies,

industry associations or the media of alleged misconduct.

Negotiating Your Contract

• Whether you’re a novice or an experienced person, negotiating a fair franchise agreement can be complicated.

• If you can’t decipher between a balanced contract and one that is more one-sided, it’s strongly recommended that you hire an experienced and impartial third party (franchise expert) who understands both the business area/sector and franchising to assist in the negotiations of the agreement. 

A US Example…

• A key component of the International Franchise Association Self Regulation Program is the National Franchise Mediation Program (NFMP).

• The NFMP was founded in 1993. It is a mediation program designed specially for the franchise industry.

• The program is governed by a steering committee comprised of both franchisors and franchisees and administered by the CPR Institute for Dispute Resolution.

National Franchise Mediation Program

The National Franchise Mediation Program provides a specific step-by-step approach to dispute resolution for both franchisors and franchisees and assists in the setting up a meaningful mediation process.

The NFMP has specific ground rules for mediation: * Process is non-binding * Mediator will be neutral and impartial * Parties will cooperate with mediator * Mediator controls the procedural aspects of the mediation

but the process is typically not formal * Each party must have a decision maker with authority to

negotiate a resolution at the mediation * Process will be conducted expeditiously * Entire process is confidential * The franchisee may withdraw from the process at any time

National Franchise Mediation Program

• The objective of the program is to create a process which enables disputes between franchisors and franchisees to be resolved, without the high costs of litigation.

• Costs of litigation are not only monetary, but include (1) impaired relationships,

(2) lack of focus on the core business, and (3) increased stress on all parties.

National Franchise Mediation Program

• Successful franchisors participating in the NFMP communicate to their franchisees about the program on an ongoing basis before any problems arise.

• Education about the NFMP and the mediation dispute resolution topic is a part of the ongoing franchisor-franchisee relationship through articles in newsletters, presentations at conventions and other franchisee meetings.

• Franchisee advisory councils can be major advocates of the program and assist greatly in getting the word out to the franchisee community within the system.

National Franchise Mediation Program

Common complaints seen in the program include impact-encroachment, franchisee development rights, termination of franchise, renewal of franchise, alleged underreporting of fees owed and customer service issues.

How the NFMP Works While either a franchisor or a franchisee could initiate a

complaint, the most common use of the program is franchisee initiated; so how does the program work?

1. The franchisee completes a form letter briefly describing the complaint against the franchisor to the administrator of the program.

2. The franchisee agrees to meet within a specified time period with a senior representative of the franchisor to discuss the issues informally with the franchisor. Many times, this step resolves the dispute because the franchisor and the franchisee are communicating directly about the problem. Various educational tools are available to the franchisor to assist in this important part of the process. Even if a resolution cannot be reached, a mutual respect and understanding of the issues can set the stage for a successful resolution at a later stage of the process.

How the NFMP Works3. If the dispute cannot be resolved through the

initial negotiations of the parties, the administrator of the program will recommend up to five experienced franchise mediators for the parties to choose from.

4. If the parties cannot agree on a mediator, the administer will select the mediator based upon a ranking order priority from both parties.

How the NFMP Works5. The mediator's compensation rate is determined

before appointment and each party pays one-half of the cost of the mediator along with an administrative fee to the administrator.

6. Mediation is scheduled within a specified time frame. 7. Each party delivers to the mediator a summary of the

background of the dispute and other information to familiarize the mediator with the dispute.

8. Mediation is held and normally can be accomplished in a one-day session.

9. If the mediation does not result in a negotiated resolution, the mediator will give both parties a written evaluation of the issues.

How the NFMP Works

• The program has a success rate of more than 90 percent in cases where the franchisee agreed to participate and in which a mediator was needed.

• Many times the disputes are resolved prior to the need for a mediator's intervention.

Mediation Will Grow • With the court systems overloaded in

the USA some states, like Texas, are mandating mediation as soon as litigation is initiated.

• With the increasing costs of litigation in both time and dollars, mediation will continue to grow nationwide as a method to resolve disputes fairly, amicably and efficiently.

Some key points to ponder…• Franchisors who do not have a formal

mediation program should consider establishing one.

• Franchisees or franchisee advisory councils should discuss a mediation program with their franchisors.

• The time to set the rules for a meaningful mediation program is before disputes arise.

• Relationships are the base of the franchise industry and successful franchise systems develop ways to resolve disputes without destroying those relationships.

A Useful Website…

• http://www.franchiselawblog.com/archives/cat_intellectual_property.html

Subway Jan 2007• Sarnie maker Subway is taking a former UK franchise holder to the

High Court for copyright infringement over a website that he has set up complaining about the way the multinational has treated him.

• The company is seeking an injunction and up to £100,000 in damages. • It claims the site - www.subwayuncovered.com - infringes its trademarks.

• Such disputes are usually taken to the World Intellectual Property

Organisation (WIPO). But in recent cases, such as Ryanair's dispute with the owner of Ryanaircampaign.org, the WIPO panel has ruled that you can make limited use of trademarks in order to comment on a company.

• The ex-franchisee's site states who the trademarks belong to, but does make various allegations against Subway.

• Robert Moorhouse, the man behind the site, told The Register: "They're claiming trademark abuse and copyright infringement and want the case heard in the High Court rather than Leeds near where I live. I set up the website to give information to would-be franchishees that otherwise they would not get until after they had joined."

• Moorhouse used to run a Subway store and is in dispute with the firm over payments relating to the transfer of leases and equipment costs.

Papa John's Alleges Racketeering

• Kentucky-based Papa John’s International, Inc. has sued a group of Chicago pizza makers, alleging that they operate as "fronts" for a terminated Papa John’s franchisee.

• Papa John’s terminated its franchise agreement with Antoine "Tony" Rezko in 2004. AR Pizza (alleged by Papa John’s to stand for "Antoine Rezko") and Newco Pizza (yes, somebody actually named their new company "Newco") were incorporated shortly after the Rezko termination.

• Papa John’s alleges that AR Pizza, Newco Pizza and another entity, LayaZia, LLC and certain of their principals use Papa John’s intellectual property while operating under names including "Papa Tony’s" and "Pizzeria Zia." The federal court complaint alleges, among other things, racketeering, trademark infringement and unfair competition.

• Mr. Rezko is not a defendant in the suit. An attorney for Mr. Rezko, Gene Murphy, stated, "This is a squeeze play on Papa John’s part to eliminate the competition."

Jimmy John's Settles Menu Copyright Suit: Nov 2005

• Jimmy John's, which owns, manages or franchises 335 gourmet sandwich shops, settled a copyright and trade dress infringement lawsuit against TM Foods of Avon, Inc., which operates a House of Sandwich shop in Avon, Indiana.

• Jimmy John's filed suit in the Southern District of Indiana alleging that the House of Sandwich's menu and menu boards infringed on Jimmy John's copyrights.

• Jimmy John's claimed that the overall selection, arrangement and grouping of sandwiches and the use of a unitary price for each sandwich group on the House of Sandwich menu resembled the copyrighted menus used by Jimmy John's.

• As part of the settlement, TM Foods agreed to pay Jimmy John's $50,000 and to destroy its menus and menu boards.

• Additionally, the parties entered into a consent judgment which permanently enjoins the owners, officers, directors and shareholders of the House of Sandwich from copying or using aspects of its menus.

Subway Sends Cease and Desist Letter to Connecticut Sandwich Shop: Sep “05

• Subway has asked Steakways Famous Philly Cheese Steaks, a sandwich shop located two miles from the company's headquarters in Milford, Connecticut, to cease and desist using the name "Steakways," which Subway claims is confusingly similar to its own.

• According to one local news source, Subway's letter to Steakways stated that Steakways must change its name within two weeks or Subway will bring trademark infringement claims.

• Kevin Kane, spokesperson for Subway, said that Subway has always supported small business owners, but the company must protect its name if it appears that there may be an infringement. Steakways, which specializes in Philly cheesesteaks and other hot sandwiches, has been open for one year and plans to open a second store in nearby Bridgeport.

Is That Near the In-N-Out Burger?Sep 2005

• An Aspen restaurant called the In & Out House may soon be faced with a name change (which might be a blessing given that the word outhouse is part of the restaurant's name) based on pressure from California-based In-N-Out Burger, a burger franchise with units in California, Nevada and Arizona.

• In-N-Out Burger was founded in 1948, while the In & Out House has operated in Aspen for two decades.

• The parties are presently negotiating over the name although In-N-Out Burger has no plans to expand into Colorada at present. And yes, Donnie, it's near the In-N-Out Burger.

Mister Softee Investigates "Rip-Off Trucks“: July 2005

• Policing your marks can be difficult and expensive, particularly when the infringers are on wheels.

• This New York Times report follows the efforts of Mister Softee, the largest franchisor of soft ice cream trucks in the United States, to shut down infringing trucks.

• The company hired private investigators to identify independent ice cream trucks that resemble the Mister Softee vehicles in their color scheme, logos or jingle.

• The investigation turned up hundreds of operators who paint their ice cream trucks blue and white and create menu boards and logos identical to Mister Softee's, including the company's famous cone-head trademark.

• According to the investigators, they have gathered enough evidence against 30 operators of "rip-off trucks" in New York City and on Long Island for Mister Softee to bring trademark and copyright infringement lawsuits against them.

Mo's Files Trademark Infringement Suit Against Moe's: January 2005

• Mo's Restaurants, an Oregon-based restaurant chain famous for its clam chowder, filed a trademark infringement lawsuit on June 28, 2005 in the United States District Court in Portland, Oregon against Moe's Southwest Grill, a restaurant chain based in Atlanta Georgia.

• According to Mo's, "[n]o matter how you spell it, there is only one Mo’s." Mo's decision to sue came after Moe’s Southwest Grill's aggressive expansion into Oregon and the opening of its first restaurant in Oregon in April 2005.

• Founded in 1952 by Mohava “Mo” Niemi, Mo’s operates six restaurants on the Oregon coast and has owned a federally-registered trademark for Mo's since 1986.

• The company employs approximately 350 people and serves 1.3 million customers a year. Moe's Southwest Grill, established in 2000 and has 229 restaurants across the country, plans to open 20 more restaurants in Oregon through its Pacific Northwest franchise holder, Wraps of the Northwest. Clam chowder, however, is not currently on Moe's menu.

Trademark Dilution brought to you by Starbucks: August 2004

• After the Supreme Court handed down the Victoria's Secret decision in March 2003, many trademark experts and lawyers were left scrambling to figure out how to prove trademark dilution.

• Starbucks, however, may have a new case to test the requirements of the Federal Trademark Dilution Act -- Starbucks v. Starbock Beer. In Galveston, Texas, the case between Starbucks U.S. Brands Corp. and Rex Wayne Bell continues.

• Bell owns a bar in Galveston and attempted to register "Starbock Beer" as a trademark in 2003.

• Starbucks opposed the registration and Bell filed this declaratory judgment action asking the court to find that his use of the name Starbock Beer in connection with alcoholic beverages is not confusingly similar to or in conflict with Starbucks' marks.

• Starbucks suggests that the mark "is both derivative of and dilutive of their trademark rights."

• Now that mediation between the parties has failed, the case has been scheduled for a March 2005 trial date.

Et tu Brute?: June 2004

• Little Caesars has filed suit against forty franchisees for using non-conforming ingredients at their Little Caesars restaurants.

• The complaint alleges trademark infringement and breach of contract.

• The franchisee association claims that the lawsuit is nothing more than Little Caesars retaliation against franchisees who refuse to purchase product from the franchisor's distributorship.

What's in a Name? March 2004

• After losing a trademark dispute in February, Capri Coffee franchises are facing a name change beginning on Monday.

• The Colorado-based franchisor learned late last year that its trademark application was refused because the trademark was owned by another company, Caffe D'Arte LLC.

• Caffe D'Arte, a Seattle-based coffee roaster, then filed a federal trademark infringement against Capri.

• Capri's franchisees have been given options to convert to Saxby's Coffee (a different concept launched by the former Capri president) or to remain Capri and address the name change.

• At least eleven franchisees have abandoned the franchise altogether and operate independent shops in a deal negotiated by the group's lawyer.

McDonald's Seeks Protection for MacSep 2003

• McDonald's Seeks Protection for Mac in Singapore. In a country where it has 129 restaurants, McDonald's has argued to Singapore's highest court that products such as MacNoodles, MacChocolate and MacTea are likely to confuse consumers, who would associate McDonalds with these products.

• McDonald's claims that "Mc" and "Mac" are essential elements of its trademark, which deserve protection.

• In a separate forum, the owner of the "Mac" products, Futures Enterprises Singapore (FES) has challenged the right of McDonald's Russia to use the brand McCafe in Moscow. (FES succeeded in its challenge in 2004)

• Futures, which has sold instant coffee under the name MacCoffee since 1994, intends to launch a chain of MacCoffee shops in Russia and has held the right to the name in Russia since 1998.

In Argentina… A decision of the Court of Appeals

voided a Master Franchise Agreement because the Franchisor did not have a valid trademark covering the class of products, subject matter of the franchise, despite the fact that Franchisor had valid registration of its trademark in different classes.

In Argentina…Contd…

The franchisor was forced to return to franchisee as damages all the costs associated with the execution of the franchise agreement and all contracts that were the direct consequence of said Master Franchise Agreement, the lease arrangements, and its cancellation, the purchase price of installations, dismissal of personnel, advertising expenses and lawyer fees for the execution of the agreement and the filing of its claim.