Resort, Restaurant & Recreation Practice Group
Hospitality
RRReport
Comments from the Chair
In this issue, members of our Resort,
Restaurant & Recreation Practice Group
address issues facing one of the most dynamic and fastest growing aspects of the hospitality business today – theme restaurants.
Theme restaurant developers begin with a
concept likely to have broad appeal and then
design not only a restaurant space to embody
that concept, but a marketing and merchandising strategy to enhance it and lay the
groundwork for future expansion.
Theme restaurants are also becoming a key
component of hotels and resorts around the
world. As a result, we have dedicated this
issue of the ReportFAX as an overview of
legal and business issues surrounding theme
restaurants.
Rick S. Kirkbride, Chair
Resort, Restaurant & Recreation
Practice Group
Fall 1997
Trade Dress Protection: Preventing Infringement
on What Could Well Be the Essence of Your Theme
Restaurant
by Richard M. Asbill
Today, several theme restaurants can
be found in virtually every city.
Because of this competitive setting,
one of the most important business
and legal issues faced by owners of
the restaurant or franchise is protecting from infringement the restaurant’s
trademarks and other intellectual
property, particularly its trade dress,
which may encompass the very
essence of the restaurant.
Trade dress is defined as the “total
image and overall appearance” of a
product or business, including such
qualities as shape, color or color combinations. See Two Pesos, Inc. v. Taco
Cabana, Inc., 505 U.S. 763, 764 n.1
(1992). Specifically in the context of
restaurants, trade dress can include
both the exterior and interior architecture of the restaurant, signs, interior floor plan, the decor, menus and
cuisine.
In the widely cited Two Pesos case, the
Supreme Court held that trade dress
is protectable under Section 43(a) of
the Lanham Act if it has inherent distinctiveness, even though it has not
yet acquired secondary meaning.
While the Two Pesos Court settled the
split in the circuits on this issue, the
Court did not analyze two necessary
elements of protectable trade dress:
nonfunctionality and distinctiveness.
Functionality depends on whether
trade dress is essential to a product’s
use. Courts will examine trade dress
Continued on page 3
Taking Care of Business: Legal & Business Considerations of a Theme
Restaurant
by Barry Brooks
A generation or more ago, if you
thought to combine a dining experience with an entertainment experience, you had two choices: a dinner
theatre or a movie and a tub of popcorn. There was not much in
between. However, with the success
of Hard Rock Cafe and Planet
Hollywood, “theme” restaurants have
been rapidly filling the gap; and not
only in the United States, but
throughout the world.
Theme restaurant developers begin
with a concept likely to have broad
appeal and then design not only a
restaurant space to embody that concept, but a marketing and merchandising strategy to enhance it and lay
the groundwork for future expansion.
Dave and Buster’s, Inc., for example,
has developed its restaurants around
an arcade/carnival theme, offering
interactive simulators and virtual reality systems, along with more traditional games, within a restaurant/pub
setting.
From the initial concept/design phase
to the initial public offering, a theme
restaurant company faces many challenging legal issues. It is never too
early to consider the legal and business issues that will be important to a
theme restaurant company’s ability to
finance its start-up and roll-out stages,
including bank or other debt financing, equity financing, and perhaps an
initial public offering.
Perhaps the most critical phase is at
the beginning, with the concept/
Continued on page 3
Paul, Hastings, Janofsky & Walker
LLP
International Franchising Agreements For Theme Restaurants
by Rick S. Kirkbride
Theme restaurants are now among
the single fastest growing sectors of
the restaurant industry, and much of
this growth has taken place outside of
the United States under the provisions of international franchising
agreements. Planet Hollywood, for
example, already has more than 50
restaurants located in at least 16
countries, and many of these locations were opened by franchisees pursuant to Planet Hollywood international franchise agreements.
Among the reasons why theme
restaurants owners have turned to
franchising their restaurant concepts
abroad are the steep costs often associated with the development and construction of theme restaurants. By
franchising to a third party, the franchisor can capture a portion of the
revenues associated with opening
another theme restaurant location
with little or no risk.
Theme restaurant franchise agreements should be written in broad
terms, giving the franchisor a large
amount of discretion in determining
the obligations of the franchisee.
The provisions of the franchise
agreement governing the architecture
and design of the theme restaurant
become among the most important
aspects of the agreement. The franchise agreement should contain extensive and specific provisions that
require the franchisee to submit its
conceptual design, along with its
plans and specifications, to the franchisor for review, inspection and
approval.
Whether the theme of the restaurant
is movies, music, sports or fashion,
the restaurant’s success, in large part,
is based on its ability to excite the
sensations and inspire the imaginations of its customers. In other
words, theme restaurant architecture
and design have turned into big business and it is no longer unheard of to
spend between $6 million and $25
million to build a single location of a
theme restaurant. For example,
Rainforest Cafes have their own rainforest, complete with waterfalls, intermittent thunderstorms, live parrots, a
robotic gorilla and talking trees!
The franchise agreement should also
contain a provision that requires the
franchisor’s approval of franchisee’s
selected site in the foreign country,
including requiring the franchisee to,
among other things, submit to the
franchisor a demographics study for
any proposed site. To a large degree,
the revenue of a theme restaurant is
derived from tourism, and repeat
business from locals is often considerably lower than for other restaurants. Therefore, it is important that
the franchisee select a major tourist
destination. In the U.S., for example,
a number of theme restaurants
(including the Motown Cafe, Black
Entertainment Television’s
Soundstage, and Planet Hollywood’s
Marvel Mania) are located or locating
in Orlando, Fla., adjacent to
Orlando’s Universal Studios and
Disney World theme parks.
To the extent that the franchisee does
not buy its furniture from the franchisor, the franchisee should be
required to get the franchisor’s
approval before buying and installing
anything within the franchised restaurant. These provisions will allow the
franchisor to ensure that its franchisees deliver the same experience to
the franchisees’ customers as the customers would have at a franchisorowned restaurant.
Merchandising Provisions
Another important issue to be
addressed in the franchise agreement
is the manufacture and distribution of
theme restaurant merchandise in the
foreign country. Franchise agreements typically provide the franchisor
with a royalty on the sales of merchandise in the range of 5 to 20 percent, and it is exceedingly important
for the franchisor to be sure, especially in foreign countries, that it takes
whatever steps are necessary to protect its trademarks in every country in
which it seeks to license its restaurant.
In fact, as much as 40 percent of the
revenue of a theme restaurant often
comes from the sale of its merchandise, and each theme restaurant typically contains a retail shop near its
exit.
The Rainforest Cafe, which is reported to derive more than 25 percent of
its revenue from retail sales in 1995,
often contain an extensive 5,000
square-foot retail shop that sells the
restaurant’s private label merchandise,
including stuffed animals, T-shirts,
and the spices and sauces used in the
restaurant. Merchandising is such a
profitable aspect of theme restaurants
that Planet Hollywood is apparently
planning to open merchandise-only
venues within a number of airports
both in the U.S. and abroad.
Conclusion
A franchise involves a long-term,
evolving contractual relationship, and
franchisor supervision of every aspect
of the development and marketing of
each franchised theme restaurant is
essential to promote efficiency and
consistency throughout the franchise
system.
Rick Kirkbride of the Firm’s Los
Angeles office chairs our Resort, Restaurant
& Recreation Practice Group. He focuses
on the representation of real estate development companies, institutional lenders, operators and capital sources in connection with
the acquisition, development and finance,
and workout and restructuring of hospitality
properties.
David Sudeck, associate, assisted in the
preparation of this article.
Taking Care of Business...
Continued from page 1
design. A theme restaurant company
has to recognize, as Planet Hollywood
did, that what it ultimately will develop and sell is not so much food as a
brand image – a piece, or a collection
of pieces, of intellectual property.
And, from the start, a theme restaurant company should be proactive
about protecting such intellectual
property.
In this initial phase, a theme restaurant company is likely to engage the
services of many creative talents –
from architects and interior designers,
who are responsible for the overall
“look and feel” of the restaurant, to
restaurateurs, who design the menu
and every detail of food preparation
and presentation. During this phase,
it is critical that the theme restaurant
company structure its relationship
with such creative talents in a way
that ensures that the company owns
and controls the rights to all design
elements of its facilities and has the
ability to prevent such creative talents
from offering their services to potential direct competitors.
After the concept/design phase
comes the initial site selection phase.
In addition to having high visibility
and heavy traffic, the initial location
Trade Dress Protection...
Continued from page 1
as a whole to determine functionality,
so that even though individual seats
or menus may be functional, when
taken as a whole, the entire theme
may be nonfunctional.
Various aspects of a restaurant’s trade
dress may be found to be nonfunctional. External features of a building, such as the castle design of the
White Castle restaurants, were afforded trademark protection. See White
Tower Sys., Inc. v. White Castle Sys.
Corp., 90 F.2d 67 (6th Cir. 1937).
must have the potential to attract the
attention of local, regional and, ideally, national media. New York City’s
theatre district has been an early destination for many theme restaurant
companies.
But the site selection phase is critical
to a theme restaurant company for
more than just purposes of marketing
exposure. Often a theme restaurant
company has at this stage nothing
more to show potential investors than
a concept/design and a newly signed
lease or two. How well the leases
have been structured and negotiated
may make the critical difference to
such a potential investor, and to new
investors down the road.
Following the initial site selection
phase, the focus shifts to expansion.
At this point, a theme restaurant company may have one or two “prototypes” up and running successfully.
Now, the challenge becomes the replication of such successes, and financing the replication, which may mean
taking the company public.
Typically, these phases in the development of a successful theme restaurant
company have followed each other in
rapid succession and the companies
have reached the IPO phase with little
operating history to disclose to the
public investor. However, in the
Interior architectural features may
also be protectable, such as dining
booths encased in packing crates in a
Polynesian restaurant. See Warehouse
Restaurant, Inc. v. Customs House
Restaurant, Inc., 217 U.S.P.Q. 411 (N.D.
Cal. 1982); but see Prufrock Ltd., Inc. v.
Lasater, 781 F.2d 129, 131-32 (8th Cir.
1986) (holding that using an exposed
kitchen and large open dining area in
“down home country cooking”
restaurant is functional and not protectable).
The District Court jury found Taco
Cabana’s trade dress to be nonfunc-
strong financial markets of the past
few years, this has not proved to be
an obstacle. Nonetheless, from a
securities law liability standpoint a
theme restaurant company at this
stage needs to pay particular attention
to what is disclosed to the public and
how it is disclosed. In addition to
disclosing the fact of a limited operating history, the company’s prospectus
should disclose in detail the risks to
the company from competition, from
expansion (both operationally and
financially) and from rapidly changing
public tastes, among many other risks.
Given certain demographic trends,
which seem to benefit the restaurant
and family-based entertainment industries, and American culture’s seemingly endless store of “themes,” we are
likely to see many more theme restaurant companies develop and reach
maturity as public companies in the
near future. Each will face many, if
not all, of the issues discussed above.
When and how they face such issues
will be critical to their long-term success.
Barry Brooks of the Firm’s New York
office co-chairs our National Corporate
Finance Practice Group. He has represented issuers, investors (both domestic and foreign), sellers, buyers, and agents in a variety
of domestic and foreign acquisition, finance
and joint venture transactions.
tional, which trade dress is described
as “a festive eating atmosphere . . .
decorated with artifacts, bright colors,
paintings and murals” with the building’s exterior having a “vivid color
scheme using top border paint and
neon stripes.” See Taco Cabana Int’l,
Inc. v. Two Pesos, Inc., 932 F.2d 1113,
1117 (5th Cir. 1991). The Supreme
Court did not choose to review this
issue.
Distinctiveness of trade dress may be
proven by either showing its inherent
distinctiveness or that it has acquired
a secondary meaning. Trade dress is
Continued on page 4
Trade Dress Protection...
Continued from page 3
distinctive if it serves as a symbol of
origin, according to the jury instructions of the Taco Cabana District
Court. Taco Cabana, 932 F.2d at 1120.
Certain types of marks, called fanciful, arbitrary and suggestive, are
inherently distinctive because their
“intrinsic nature serves to identify a
particular source of a product.” Two
Pesos, 505 U.S. at 768. Descriptive
marks, on the other hand, identify a
product’s qualities rather than identifying its origin, and must acquire a
secondary meaning to be distinctive.
Taco Cabana’s trade dress was found
by the jury to be inherently distinctive. The test used by the courts is
unclear, and the outcome will depend
on the facts on which the court or
jury places the most emphasis.
Today, owners or franchisors of
theme restaurants must be creative in
the use of individual items in their
business to create an overall unique
dining environment and experience.
Those who carefully develop their
trade dress will likely benefit from the
trend of many courts toward broad-
ening the scope of protectable trade
dress, thereby adding to the value of
their theme restaurant concept.
Rick Asbill, a partner in the Atlanta office
and co-chair of our Resort, Restaurant &
Recreation Practice Group, represents businesses using franchising or licensing arrangements in the distribution of goods and services. He was recently named chair of the
American Bar Association’s 2,500-member
Forum on Franchising.
Christine Lehr, an associate in the
Atlanta office, assisted with the preparation
of this article.
For more information regarding the Resort, Restaurant & Recreation practice group, please contact: Chair: Rick S. Kirkbride (LA) or Co-Chairs: Alan W. Weakland
(LA), Richard M. Asbill (Atlanta), or Ronnie Kreismann (NY). If you know of someone who might like to receive our Hospitality RRReport please contact Rick
Kirkbride at (213) 683-6261, fax (213) 627-0705 or E-mail rickkirkbride@paulhastings.com. We will need their name, email and mailing addresses.
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(404) 815-2400
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(212) 318-6000
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(203) 961-7400
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(44-171) 562-4000
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construed as legal advice. For specific information on recent developments or particular factual situations, the opinion of legal counsel should be sought. Paul
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