D. Expansion of Inwood Standard to “Non-Product” Cases: The “Direct Control and Monitoring” Test: 5. Franchisors and Franchisees
Trademark disputes involving franchisors and franchisees can arise in a variety of ways. Typical cases involve direct infringement of the franchisor’s ( or licensor’s) mark by the franchisee. This type of infringement is governed by a well-developed body of case law. See, e.g. Burger King Corp. v. Hall, 770 F.Supp. 633 (S.D. Fla. 1991)(noting “well-settled doctrine that a terminated franchisee’s continued use of its former franchisor’s trademarks … constitutes trademark infringement.”) and cases cited therein. See also, L & L Wings, Inc. v. Marco-Destin, Inc., 676 F.Supp.2d 179 (S.D.N.Y. 2009)(imposing contributory liability on landlord and management consultant to direct infringer for trademark infringement arising out of breach of licensing agreement); Four Seasons Hotels and Resorts B.V. v. Consorcio Barr, S.A., 267 F.Supp.2d 1268, 1331, n.7 (S.D. Fla. 2003)(noting that in addition to its acts of direct trademark infringement committed outside the scope of its trademark licensing agreement, a hotel licensee’s “willful blindness” in permitting a third party’s infringement of the licensor’s marks constituted contributory infringement). Additionally, the law imposes a duty upon a licensor (such as a franchisor) to supervise a licensee’s use of the licensor’s own trademark. Mini Maid v. Maid Brigade, 967 F.2d 1516, 1519 (11th Cir. 1992). This duty is derived from the abandonment provisions of the Lanham Act, which state that a registrant’s mark may be canceled if the registrant fails to control its licensee’s use of the licensed mark. Id. citing 15 U.S.C. §1064(5) (A). The policy underlying these statutory provisions is to “protect the public from being misled about the quality or consistency of the products offered under the licensor’s mark.” Id.
Another type of trademark dispute can arise when a third party seeks redress from a franchisor for the infringing acts of its franchisee, as in Mini Maid, supra. Mini Maid, a case of first impression, called upon the Eleventh Circuit to distinguish between the above mentioned laws requiring a franchisor’s duty to supervise its own mark and the law governing a franchisor’s liability for the infringement of another party’s mark by its franchisee. This latter type of dispute, the Eleventh Circuit held, is governed by the doctrine of contributory liability.
Mini Maid involved a franchisee’s alleged trademark infringement of the mark of a competing franchise. Deciding on the heels of Hard Rock Café, supra, but prior to Fonovisa and Lockheed, supra, the Eleventh Circuit held that the contributory liability doctrine enunciated in Inwood extends to the franchisor/franchisee context. Specifically, the court ruled that a “franchisor may be held accountable only if it intentionally induced its franchisees to infringe another’s trademark or if it knowingly participated in a scheme of trademark infringement carried out by its franchisees.” Mini Maid, supra at 1522 (emphasis added)(citing Inwood, supra).
This ruling, standing alone, increases the level of knowledge a plaintiff would have to demonstrate beyond the “willful blindness” standard articulated in the Hard Rock-Fonovisa-Lockheed Martin line of cases that coincided with and followed it. Arguably, however, the court’s further explanation of its holding with regard to determining intent and knowledge allows for a more lenient standard from this opinion, as will be discussed below.
The plaintiff in Mini Maid, “Mini Maid” and defendant “Maid Brigade” were competing franchisors of residential cleaning service businesses. The plaintiff owned the registration for the mark MINI MAID and the defendant owned the federal registration for the service mark MAID BRIGADE. Both companies licensed their marks through franchise agreements. Id. at 1517-1518. A business transaction between the parties’ franchisees, both of which were located in southern California, led to the trademark dispute in this case.
Specifically, one of the Maid Brigade’s franchisees had agreed to purchase a number of assets from a Mini Maid franchise that was closing its business. Id. at 1518. These assets included customer lists, automobiles, office space and the telephone number connected to that office space. Id. at 1518. Shortly after the purchase, Mini Maid discovered that its franchisee’s telephone number appeared in a “yellow pages” classified advertisement which had been placed prior to the asset transfer. Thus, potential customers could, upon finding the advertisement with the MINI MAID mark and calling the number listed therein, reach Mini Maid’s competitor, the Maid Brigade franchisee to whom that telephone number had been transferred. Id.
Mini Maid thereafter contacted Maid Brigade to request that it stop its franchisee from using the telephone number. It then sued the franchisor and its president for trademark infringement, alleging that they were liable for failing to prevent the infringement committed by the Maid Brigade franchisee. The district court directed a verdict against the defendants on the issue of their liability for their franchisee’s trademark infringement. Id. at 1518. Specifically, it found that they had failed to exercise their duty to supervise the franchisee with “reasonable diligence to prevent [it] from violating he trademark laws.” Id. at 1519.
The Eleventh Circuit disagreed, finding that the “reasonable diligence” standard was incorrectly applied by the district court because, in this case, the franchisee had allegedly infringed another party’s mark, not the mark of the franchisor. Mini Maid, supra at 1519. While the law does impose “a duty upon a licensor (such as a franchisor) to supervise a licensee’s use of the licensor’s own trademark[, s]uch a duty of supervision derives from the Lanham Act’s abandonment provisions, which specify that a registrant’s mark may be canceled if the registrant fails to control its licensee’s use of the licensed mark”. Mini Maid, supra at 1519, citing 15 U.S.C. §1064(5)(other citations omitted). In this case, however, the franchisee had infringed a third party’s trademark and the court concluded that a “licensor’s duty to control a licensee’s use of the licensor’s own trademark [could not] be blindly converted into a duty to prevent a licensee’s misuse of another party’s trademark.” Id. at 1520. See also 1-800 Contacts v. Lens.com, 755 F.Supp.2d 1151, 1182 n205 (D. Utah 2010) (citing Mini Maid for the proposition that the Lanham Act does not “automatically saddle the licensor with the responsibilities under state law of a principal for his agent.”)
Although a franchisor might not be liable under a “reasonable diligence” standard for a single franchisee’s infringement, the Eleventh Circuit held that the doctrine of contributory liability would apply in this case, even if the franchisor did not itself perform any infringing acts. Mini Maid, supra, at 1521, citing Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844 (1982). Contributory liability for independent infringing acts of franchisees, the court further held, should only be imposed on a franchisor in certain circumstances. Specifically, “a franchisor may be held accountable only if it intentionally induced its franchisees to infringe another’s trademark or it knowingly participated in a scheme of trademark infringement carried out by its franchisees.” Mini Maid, supra at 1522. As noted above, this ruling requires a plaintiff to demonstrate actual knowledge on the part of the defendant, as opposed to meeting the more lenient “willful blindness” test set forth in the Hard Rock-Fonovisa-Lockheed Martin line of cases.
Nevertheless, the court’s further language explaining the circumstances under which contributory liability might be found leaves room for deducing a standard that is akin to willful blindness. In order to determine intent and knowledge, the Eleventh Circuit continued,
a district court should consider the nature and extent of the communication between a franchisor and its franchisees regarding the infringing acts; specifically the court should decide whether or not the franchisor explicitly or implicitly encouraged the trademark violations. … In addition, the court may wish to consider the extent and nature of the violations being committed. If the infringement is serious and widespread, it is more likely that the franchisor knows about and condones the acts of its franchisees. Finally, under appropriate facts, contributory trademark infringement might be grounded upon a franchisor’s bad faith refusal to exercise a clear contractual power to halt the infringing activities of its franchisees.
Mini Maid, supra at1522 (emphasis added).
The court’s acknowledgment of circumstances in which infringement is “serious and widespread” as ones in which “it is more likely that the franchisor knows about and condones” the infringement is akin to the “reason to know” standard set forth in Hard Rock Café, supra. Its further recognition that “contributory trademark infringement might be grounded upon a franchisor’s bad faith refusal to exercise a clear contractual power to halt the infringing activities of its franchisees” is similar, albeit not identical, to the requirement that to be “willfully blind, a person must suspect wrongdoing and deliberately fail to investigate.” Hard Rock Café, 955 F.2d 1143, 1149. Thus, although strictly speaking the Eleventh Circuit ruling requires a plaintiff to demonstrate actual knowledge on the part of a defendant, there is room to argue a more lenient standard based on its supporting language. In this regard, it is also worth noting that the particular facts of Mini Maid caused the court to be concerned that “[w]ithout the standards we announce today, the combination of a renegade franchisee and an ambiguous franchise agreement might leave a franchisor in a very difficult position.” Mini Maid, supra at 1522, n.4