Eighth Circuit Holds That Franchisor Failed to Establish Willful Infringement

Franchisors must demonstrate at least minimal willful infringement when seeking to recover monetary damages under the Lanham Act, even when the defendants fail to defend the claim.

In Martinizing Int’l, LLC v. BC Cleaners, LLC, No. 16-1069, 2017 WL 1521508 (8th Cir. Apr. 28, 2017), the Eighth Circuit reversed a district court’s award of damages by default judgment to a franchisor under the Lanham Act and the Minnesota Deceptive Trade Practices Act (MDTPA). This outcome will likely surprise franchisors given the facts of the case.

Martinizing International, LLC entered into two franchise agreements with franchisee Markus Kanning, doing business as KM Cleaners, Inc. The franchise agreements prohibited Kanning from selling the franchise locations or assigning the franchise agreements without Martinizing’s prior written consent. Several years later, Martinizing learned that Kanning had entered into an asset purchase agreement with BC Cleaners, LLC, without Martinizing’s consent, and that Brent Lundell and Timothy Carver – who signed the asset purchase agreement and personally guaranteed BC Cleaners’ financial obligations under the Agreement – continued to operate the franchised stores using Martinizing’s trademarks.

Martinizing sent a cease and desist letter to BC Cleaners and Lundell demanding that they either sign a franchise agreement or refrain from using Martinizing’s trademarks. BC Cleaners and Lundell did not sign an agreement but continued using the marks. Martinizing then filed a complaint against BC Cleaners, Lundell, and Carver. While the district court action was pending, Lundell and BC Cleaners expressly declined to execute a franchise agreement and indicated that they were no longer operating the stores. The defendants defaulted in the lawsuit. The district court concluded that there had been trademark infringement, and awarded damages, attorneys’ fees, and costs to Martinizing against BC Cleaners, but not against Lundell and Carver in their individual capacities. Additionally, the district court awarded injunctive relief preventing defendants from further using Martinizing’s marks.

On appeal, Martinizing argued that the district court erred by denying default judgment against Lundell and Carver personally and by reducing the award for attorneys’ fees for willful infringement. The Eighth Circuit rejected Martinizing’s argument, concluding that Martinizing had failed to prove willful infringement by BC Cleaners, as required under the Lanham Act. Thus, the Eighth Circuit reversed the award of damages and attorneys’ fees against BC Cleaners, resulting in a surprising upset for the franchisor.

The Eighth Circuit’s decision provides an important lesson for franchisors. The Eighth Circuit was unable to reconcile Martinizing’s allegations of trademark infringement against the express terms of the asset purchase agreement. The asset purchase agreement assigned the franchise agreements to BC Cleaners after it made payments under a promissory note. Until the last payment was complete, Kanning remained Martinizing’s authorized franchisee. The Eighth Circuit found that “KM Cleaners’ promise to assign valid franchise agreements necessarily included obtaining Martinizing’s approval” for the transfer. Thus, the record established only that “BC Cleaners (i) entered into an agreement to acquire the store assets and obtain a valid assignment of the franchise agreements, (ii) operated the stores during the period when the existing franchisee had promised to obtain Martinizing’s consent to the assignments, and (iii) vacated the stores when the uncompleted deal fell through.”

This case serves as a reminder for franchisors that the factual evidence of infringement must be compelling and well-documented – as the Eighth Circuit will only uphold an award of damages in an “exceptional case.”