Forward Franchising - Las Vegas, Nevada Franchise Attorney Matt Kreutzer

Can Holdover Franchisees Be Held Liable For Trademark Counterfeiting?

One of the most common lawsuits in franchising involves the “holdover” franchisee.  In these cases, the franchise agreement has either expired (because the term has ended, and the franchisee has failed to renew), or it has been terminated (usually due to an alleged breach of the franchise agreement by the franchisee).  The holdover franchisee, however, continues to operate his or her business as though nothing has changed and continues to use the franchisor’s trademarks and trade dress.

In a typical termination or expiration situation, a franchisee is placed on notice that the franchise contract is no longer in effect and is required to de-identify his or her business by removing all signs and other materials bearing the franchisor’s trademarks.  Additionally, it is mandatory under the contract for a terminated franchisee to alter the look and feel of the business (known as “trade dress”) to disassociate the former franchise from the franchise company.  These changes are required by the franchisor to ensure that the general public no longer associates the former franchised location with the franchise company. 

Sometimes, however, a franchisee will refuse to de-identify his or her business and will keep running it as though the franchise agreement was still in place.  Because the franchise contract has been terminated, however, the prior franchisee no longer has the franchisor’s permission franchisor to continue using the company’s trademarks, trade dress, systems, and methods of operation.  In those circumstances, the franchisor is almost always forced to seek a court order requiring the former franchisee to take down the signs, alter the trade dress, and otherwise force the holdover franchisee to comply with the post-termination obligations under the franchise contract.

Historically, courts have wrestled with the determination of the appropriate measure of monetary damages caused by holdover franchisees.  Under the United States Lanham Act (which protects trademark owners), a defendant in a trademark case can be found liable for either simple infringement – that is, unauthorized use of a trademark owned by another – or counterfeiting, which is using a false mark that is either “identical with, or substantially indistinguishable from, a registered mark.” 15 U.S.C. §1127. 

Lawsuit Regarding Strip Club Ad Highlights Importance Of Franchise Brand Management

A recent lawsuit filed by sandwich franchisor Capriotti’s underlines the importance of brand management for franchise companies. The franchisor sued its Las Vegas-based franchisee, seeking to terminate the franchise agreement and an injunction to prevent the franchisee from continuing to operate under the Capriotti’s name.

The franchisee is accused of engaging in an advertising campaign featuring the tagline "a match made in Vegas heaven: boobs and Bobbies." The allegation by Capriotti’s is that the franchise owner collaborated with the Las Vegas strip club Crazy Horse III to offer the Capriotti’s trademark turkey, stuffing, and cranberry sauce sandwich, the "Bobbie," during happy hour at the strip club. The problem with the attention-grabbing campaign, Capriotti’s claims, is that the franchisee never received permission from the company to run the advertisement. If the allegation is true, this very well could provide sufficient justification for termination of the franchise agreement.

Every well-drafted franchise agreement will have certain restrictions regarding the franchisee's ability to advertise. The franchisee will ordinarily be permitted to use any advertisements created by the franchisor's marketing department without obtaining advance permission. If the franchisee creates its own advertisements, however, the franchisor's written permission must first be obtained. Many franchise agreements will have a specific procedure for obtaining this written consent, including a time limitation for the franchise company to grant or deny permission to use the ad. Presumably, this is the provision that the Capriotti's franchisee has been accused of violating by failing to obtain the required approval.

The action by Capriotti's is understandable from a brand management point of view. The purpose of franchise agreement provisions that place limitations on a franchisee's ability to advertise is to protect brand integrity. If a franchisee is given carte blanche to use the franchise company's trademarks in any way that the franchisee sees fit, the overall brand image can be harmed if the franchisee is injudicious in the marks' use. In the Capriotti's example, the "boobs and Bobbies" ad could hurt the brand in the eyes of the public, which may not want to patronize a sandwich shop that associates with a strip club. Which is exactly Capriotti's point, as it contends in the lawsuit that the teaming up of the Capriotti's brand with an adult entertainment business will hurt the family-friendly reputation of the business.

The Capriotti's lawsuit provides important reminders for both franchisees and franchisors. For franchisees, the legal case underscores the absolute importance of obtaining franchisor permission and consent before using any marketing material that has not been created by the company's marketing department. For franchisors, the lawsuit is a reminder that it is critical for the franchise agreement to have appropriate controls for franchisee-created advertising, as well as strong remedies to address a franchisee's violation of those restrictions.

Surprise! You Just Starred In Our Movie

One of my all-time favorite comedies is the movie Bowfinger, in which a down-and-out movie producer named Bobby Bowfinger (played by Steve Martin) makes a movie starring a well-known A-list actor named Kit Ramsey (played by Eddie Murphy) without Ramsey’s knowing participation.  Some of the best scenes in the movie occur when Bowfinger and his “crew” create situations around the increasingly-unhinged Ramsey, secretly filming his hilarious reactions to the ridiculous set-ups.  Apparently, life has (sort of) imitated art: in a recently-filed $3 million lawsuit, actor Jesse Eisenberg (star of The Social Network and Zombieland) claims that he was exploited in a similar manner by the producers of the direct-to-DVD movie, Camp Hell.

According to the lawsuit, in 2007 Eisenberg agreed to appear in Camp Hell as a favor to his friends.  He was on set for only one day of filming, and logged only a few minutes of total screen time.  Because he was only minimally involved in the movie, he was surprised to see that his face was prominently featured on the cover of the DVD, implying that he starred in the film.  His lawsuit asserts various California law causes of action, including claims for unfair business practices and publicity rights.  But, according to Hollywood law blogger Eriq Gardner, the lawsuit reads more like “a consumer class action, saying that the producers are ‘continuing to perpetrate a fraud on the public.’”

Overselling a famous actor’s involvement in a film is a common practice in the industry, although the Camp Hell example may be one of the worst offenders.  But, while there are agreements and rules among various creative unions in Hollywood relating to attribution and credit, there apparently aren’t any that specifically state the number of minutes of screen time that are necessary in a movie before an actor can be marketed as a film’s “star.” 

Fortunately, the franchising world has more explicit rules regarding how a franchise can be marketed and sold to potential franchisees.  Generally, the FTC Franchise Rule and a number of state laws require a franchise company to provide to a prospect certain types of disclosures regarding the business being marketed.  Through a legally compliant Franchise Disclosure Document, a possible franchise buyer will obtain a great deal of information about the franchise being sold, which information should support the marketing claims the franchisor makes generally.  Further, several states have specific restrictions on the types of statements that franchisors can make in advertising pieces, which restrictions are further designed to protect against misinformation to franchise buyers.  These laws work together to attempt to ensure that members of the public are not lured into buying a franchise based on puffery or overblown claims of success. 

It will be interesting to see how the Court handles Mr. Eisenberg’s lawsuit.  I wonder if the movie industry will, in the face of the Camp Hell situation, consider adopting more stringent rules about marketing actors?

I would love to hear from you -- have you ever watched a movie based on the claim that a movie was “starring” a certain actor, only to find out that the actor’s involvement was minimal?

New Law Boosts U.S. Employers' Costs For Deploying Workers To China

Foreign expatriates working in China are now required to participate in, and contribute to, China’s Social Security System under the recently passed "Interim Measures for Social Insurance Coverage of Foreigners Working within the Territory of China" ("Interim Measures"). Generally, the new law, which went into effect on October 15, 2011, forces expatriates working in China to contribute to the social security systems of both China and their home country and substantially increases the costs to employers for deploying workers to China.

Important facts to keep in mind in regards to the Interim Measures include:

• Both expatriates hired by local Chinese businesses (i.e. local hires) and expatriates hired in their home countries and dispatched to work in a Chinese branch or representative office of their employer (i.e. secondees) must contribute to China’s Social Security System.

• Both the employee and employer must make social security contributions. Contribution rates and the maximum amount of earned income the social security tax applies to are determined locally and thus vary depending upon the city in which an expatriate works. For example, an expatriate working in Shanghai must make an 11 percent social security contribution on the first RMB 11,688 (USD 1,843) of his or her monthly salary. The expatriate's employer must make a 37 percent contribution on the first RMB 11,688 (USD 1,843) of that salary. These figures are different for other cities including Beijing.

• Expatriates may start withdrawing payments from their social security contributions once they reach the statutory retirement age in China. If the expatriate leaves China before reaching the statutory retirement age, he or she may close their social security account and receive a lump-sum payment from their contributions.

• Failure to comply with the Interim Measures will result in stiff penalties. These range from 100 to 300 percent of contributions due, in addition to a daily late payment interest surcharge of 0.05 percent of the unpaid or underpaid contribution amount.

New York Adopts Limited Franchise Trade Show Exemption; Will Other Registration States Follow Suit?

The State of New York recently enacted a new, limited exemption to its Franchise Sales Act (N.Y. Gen. Bus. L. § 680 et. seq.) (the "Act"), which will allow franchisors that are not registered with the State to participate in a franchise trade show under certain circumstances.  The exemption, which was enacted in time for franchisors that plan to attend the June 2012 International Franchise Expo in New York City, would allow an eligible franchisor to exhibit and offer for sale, but not to sell, franchises at a franchise trade show.  Before a company can actually sell a franchise covered under the Act, the franchisor would still have to register with the state as provided under New York law.  

Ordinarily, an unregistered franchisor that exhibits at a trade show in a franchise registration state would potentially violate that state's registration law, because the simple act of exhibiting at the show is arguably the making of an unregistered "offer to sell" a franchise.  For this reason, franchise companies have argued that state franchise registration laws unnecessarily discourage (and perhaps prevent) companies from participating in franchise expos for the purpose of obtaining valuable information.  Essentially, franchisors (and companies that are interested in franchising) contend that participating in trade shows can provide a valuable opportunity for them to "test the waters" to determine the market demand for their concepts.  According to their argument, if they are allowed to participate in trade shows without having to first register in the host state, they would be able to gain valuable insight from comments and suggestions made by prospects, other franchisors, and even attending consultants. 

From the franchisee's perspective, greater trade show participation by franchisors will increase the availability of information about a variety of concepts and give them the opportunity to obtain information, one-on-one, from representatives of those concepts – an opportunity that is unique to the franchise expo format.  Further, franchisees contend that more educated franchise companies make better franchisors, and will result in higher-quality Franchise Disclosure Documents and a better overall franchise system. 

For these reasons, both franchisors and franchisees have urged certain registration states to consider adopting an exemption similar to the one recently created in New York.  For example, California (the host state for the annual West Coast Franchise Expo is currently considering (but has not yet passed) a similar regulation that would provide franchisors the opportunity to attend and exhibit at trade shows without first having to go through the full registration process. I will update this blog if and when California and any other state follows New York’s example.

To take advantage of New York’s exemption, a franchisor is required to complete and submit an exemption application form and supporting materials to the Office of the New York Attorney General.  Exemptions are not automatic; the Attorney General's office will review applications and reserves the right to deny any request.   

Negotiating Franchise Sales In California

One of the most misunderstood (and unpopular) aspects of California’s franchise law is its regulation of negotiated sales. Under the law, if a California franchisee has been given a "special deal" that is not part of the franchisor’s standard offering, then the franchisor may be required to disclose the terms of that deal to subsequent California franchisees during the following year.

Of all the states that have franchise sales laws, California is the only one that so heavily regulates negotiations between a franchisor and prospective franchisee. The Federal Trade Commission and other states, to the extent that they do address the possibility of negotiated changes, give franchisors and franchisees wide latitude to negotiate agreements as they see fit. This hands-off policy encourages free negotiation between the parties, which is consistent with the goals of franchise regulations in general.

 

IRS Announces Program To Help Employers Resolve Worker Misclassification

The Internal Revenue Service has announced a new program to help employers resolve misclassification of employees.  The program is voluntary and is designed to be simple and involve a low cost to the employer.

To be eligible, an employer:

• Must have consistently treated workers as non-employees;
• Must have filed required Forms 1099 for the misclassified workers for the past three years; and
• Must not be currently under audit by any federal or state agency concerning classification of the workers in question.

To participate in the program, the employer files Internal Revenue Service Form 8952. The employer should file the form at least 60 days before changing its classification of the workers in question.

If an employer's application is accepted, it must pay an amount approximating just over one percent of the wages paid to the reclassified workers during the past year. The employer will not owe interest or penalties and the Internal Revenue Service will not audit the employer's payroll tax returns related to the workers in question for earlier years. However, the employer will, for the first three years of participating in the program, be subject to a six-year statute of limitations on payroll taxes, rather than the usual three-year statute of limitations.

If you have any questions about this program, please contact a member of Armstrong Teasdale's tax department.

"Where's The Beef?" Gets Resurrected: Why It's Important To Maintain Your Trademark Registrations

The "Footloose" remake is on its way to theaters, Duran Duran is on tour, Ghostbusters is getting a sequel, and now, one of the most famous catchphrases ever is making a comeback.  Clearly, the current wave of 1980s nostalgia is not going to die anytime soon.  

The latest example of 80s influence on pop culture is Wendy's recent resurrection of its "Where's The Beef?" campaign, which is among the greatest and most memorable advertising campaigns ever (at least, for those of us who are over 30).  The ads gave their "little old lady" star, Clara Peller, significantly more than her Warhol-alotted 15 minutes of fame.  In the mid-80s, the catchphrase was everywhere -- repeated by schoolchildren (including me, at the time) and politicians alike (it was famously used by former Vice President Walter Mondale in his debates with Senator Gary Hart).  For those of you who are too young to remember, you can see the original ad that started it all by visiting Wendy's new website, wheresthebeef.com, where Ms. Peller's famous inquiry lives on.  

In fact, "where's the beef" didn't really start to wane in popularity until the new pop culture phenomenon in advertising arrived in the late 1980s with "I've fallen and I can't get up."  Now, perhaps to take advantage of 80s nostalgia, Wendy's has revived the famous campaign to advertise its new product, Dave's Hot 'N Juicy Cheeseburgers.  This new life for the old campaign serves as a valuable reminder of the importance of maintaining your trademark registrations, even on older trademarks.   

America Invents Act Significantly Changes Patent Law

The Leahy-Smith America Invents Act ("The Act") was approved by the Senate on September 8, 2011.  It is expected that it will be signed into law by President Obama in the next few days. The Act will make significant changes to current U.S. patent law, and these changes are summarized below.

First to File System
Perhaps most notably, the Act will transform the U.S. patent system from a "first to invent" system to a "first to file system." Under the current "first to invent" system, the first party to invent is entitled to priority. Under the new "first to file" system, the first inventor to file a patent application will be entitled to priority, regardless of whether that inventor was the first to invent.

The shift to a "first to file" system is aimed at improving certainty in the patent system. For priority purposes, only the date of filing will need to be determined, not the actual date of invention. Further, the majority of other countries already follow a "first to file" patent system. Thus, shifting to a "first to file" system will bring the U.S. into conformity with those countries.

The current statutory provisions for novelty and obviousness (35 U.S.C. §§ 102 and 103, respectively) will be replaced. Prior art will include any prior patent, public use, printed publication, or sale of the claimed invention before the effective filing date. However, there will be a one year grace period to file an application after disclosure that is attributable to the inventor directly or indirectly.

The "first to file" system will become effective eighteen months after enactment of the Act. Under the "first to file" system, there will be a greater emphasis on filing patent applications as quickly as possible.

Protecting Your Trademarks In The New .xxx Domain Space

Beginning on September 7, 2011, a new sponsored top-level domain (sTLD), .xxx, has been made available for domain name registration. This action has been approved by The Internet Corporation for Assigned Names and Numbers (ICANN). The .xxx sTLD is specifically designed for the online adult entertainment industry. For trademark owners outside of the adult entertainment industry, .xxx presents a concern. Specifically, the YourBrand.xxx domain name could soon be used to provide pornographic materials.

There are steps available that can be taken to avoid this potential problem. Concurrent sunrise periods will run from September 7, 2011 through October 28, 2011, during which owners of registered trademarks both inside and outside the adult entertainment industry may take action to reserve .xxx sTLDs corresponding to those marks before the domains are available for purchase to the general public. “Sunrise A” is reserved for owners of registered trademarks or other top-level domains that are already being used in the adult entertainment industry. "Sunrise B" is for non-adult industry owners of registered trademarks, who can reserve their YourBrand.xxx domains, thus preventing another from registering and using those domains for adult content.