Appellate Court Requires Franchisors To Prove Appropriateness of Terminations Prior to Issuance of Injuction
By Robert Zarco, ESQ.
Alejandro Brito, ESQ. (1)
The Eleventh Circuit Court of Appeals has rendered a pivotal decision limiting a franchisor's right to obtain a preliminary injunction against a terminated franchise. In ruling on this issue for the first time (arguably the most pivotal aspect of the decision), the Eleventh Circuit, in McDonald's v. Robertson, (2) specifically determined that a franchisor seeking a preliminary injunction, based upon a franchisee's continued use of the franchisor's trade marks after the franchisee has been terminated, must first affirmatively demonstrate that the contract purporting to authorize the use the protected mark (i.e., the franchise agreement) was properly terminated. The Court, following the Third Circuit's appellate decision in S & R Corp. v. Jiffy Lube International, Inc., 968 F.2d 371 (3rd Cir. 1992) and the Georgia district count's decision in Computer Currents Publishing Corp. v. Jaye Communications, Inc., 968 F.Supp. 684 (N.D. Ga. 1997), held that McDonald's was indeed, required to first make an affirmative showing of the propriety of the termination of the Robertson's franchise agreement before preliminary injunctive relief could be issued, which would thereby require the Robertsons to stop using the franchisor's trademarks, trade dress, and proprietary business system. In affirming the district court's grant of McDonald's application for a preliminary injunction, the Eleventh Circuit expressly rejected the reasoning in Burger King v. Hall, 770 F.Supp 633 (S.D. Fla. 1991), where the court held that after the franchisor had terminated the franchisee, the franchisee was prevented from disputing the cause of the termination prior to the court issuing a preliminary injunction and the franchisee's sole remedy to the termination was to file a lawsuit for wrongful termination; and the reasoning in Burger v. Austin, Case No. 90-0784-Civ-Hoeveler (S.D. Fla. Dec. 16, 1990) and Cle-Ware Rayco, Inc. v. Perlstein, 401 F.Supp. 1231, 1234 (S.D. N.Y. 1975).
Specifically, the court held:
In considering this issue for the first time, we find that the Lanham Act's requirement that a franchisor demonstrate that unauthorized trademark use occurred to prevail on the merits of a trademark infringement claim against a franchisee necessitates some type of showing that the franchisor properly terminated the contract purporting to authorize the trademarks' use, thus resulting in the unauthorized use of trademarks by the former franchisee. Consequently, we are persuaded by the Third Circuit's analysis and conclude that the district court correctly required McDonald's to make a showing that it properly terminated the franchise agreement. (3)
In Robertson, McDonald's moved for preliminary injunctive relief seeking an order that the franchisee stop using the McDonald's proprietary information on the grounds that the Robertsons had violated the federal Lanham Act by continuing to use McDonald's protected marks after have been terminated by McDonald's for allegedly failing to adhere to McDonald's contractual requirements regarding the Quality, Service and Cleanliness ("QSC") of the Robertsons' restaurant. The Robertsons argued, among other things, that McDonald's had wrongfully terminated their franchise agreement and therefore, were not entitled to an injunction. The franchisees' wrongful termination argument was predicted upon their contention that McDonald's had manipulated the restaurant's QSC scores in retribution for the Robertsons' unwillingness to comply with McDonald's request that they relocate their restaurant to a location one block away.
The Eleventh Circuit held that the district court acted within its discretion when it granted the preliminary injunction and when it denied the franchisees' request for an evidentiary hearing prior to the determination on the preliminary injunction motion. With respect to the issuance of the preliminary injunction, the Court specifically held that the district court was warranted in issuing an injunction against the Robertsons since McDonald's had met its burden of establishing the propriety of the termination based on the affidavits and QSC reports introduced by McDonald's which depicted the Robertsons' restaurant as operationally deficient and unsanitary. As to the Robertsons' argument that they were entitled to an evidentiary hearing, the Court stated "where facts are bitterly contested and credibility determinations must be made to decide whether injunctive relief should issue, an evidentiary hearing must be held."(4) The Court found, however, that the Roberts had not presented sufficient material facts in dispute to warrant the necessity of an evidentiary hearing prior to the determination on the preliminary injunction motion.
The Eleventh Circuit's opinion in Robertson is of notable importance to franchisors and franchisees alike. In requiring franchisors to prove that a termination was proper, franchisees are protected from unscrupulous franchisors who may seek to terminate a franchise agreement for illegitimate reasons. Moreover, despite several recent commentaries to the contrary, under the reasoning in Robertson, a franchisor's motivation for terminating a franchise agreement is, indeed, relevant to the determination involving a preliminary injunction if the franchisor cannot meet its burden of proof that the termination of the franchisee's contract was proper.
Robertson, and a recent decision out of the United States District Court in Minnesota, (5) are especially significant to food service operators. These cases reflect what factors the courts are focusing upon when presented with an application for injunctive relief arising from a franchisee's alleged failure to follow the franchisor's policies and procedures. In both cases, the district courts' principal concern was clearly whether the operation of the franchisee's restaurant raised issues of public health and safety and was placing consumers at risk. The courts were not inclined to grant injunctions simply because the franchisees had not kept their restaurant's floors clean, because employees were out of uniform or service times were too slow.
The lesson of Roberts and Michael is that a franchisor must be prepared to establish legitimate reasons for terminating a franchisee before it will be entitled to injunctive relief. Further, if the injunction application is based upon the franchisee's failure to follow company policies, the franchisor must present credible evidence that the franchisee has breached substantially more that just minor "nonmaterial" policies. Clearly, these recent decisions have heightened the standard for franchisors seeking injunctive relief against franchisees and will serve to "level the playing field" for franchisees subject to a termination dispute with their franchisor.
Mr. Zarco is the founding partner of Zarco Einhorn Salkowski & Brito, P.A., a law firm concentrating exclusively in the representation of franchisees around the domestically and internationally. Mr. Brito is an associate at Zarco Einhorn Salkowski & Brito, P.A. Zarco Einhorn & Salkowski has aggressively represented franchisees in over one hundred different franchise systems in disputes with franchisors involving many issues of major significance in the franchise industry. Messrs. Zarco and Brito can be reached at (305) 374-55418, or at Bank of America Tower, 100 S.E. 2d Street, 27th Floor, Miami, Florida 33131.
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(1) McDonald's Corporation v. Roger and Marilyn Robertson, Case No. 97-3308 (11th Cir. July 28, 1998).
(2) Robertson, at p. 16. [emphasis in original]. In a special concurrence, Judge Carnes opined that the Eleventh Circuit's ruling on this issue "was not necessary to the disposition" of the Robertsons' appeal, and therefore, amounted to dicta.
(3) Id. at 27 [citations omitted.]
(4) McDonald's v. Michael,Case No.: 97-CV2252-JMR/FLN
