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 impactencroachment, 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 Works
3. 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 Works
5. 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
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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 federallyregistered 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 Mac
Sep 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.