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Howard Johnson International, Inc. v. Holeyfield

03-418 (U.S. Dist. Ct. D. N.J. 2004) (Unpublished)

FRANCHISES; TRADEMARKS—Where a franchisee does not remove the franchisor’s trademarks and building signs after the agreement has been terminated, as called for in the agreement, it is liable for damages to the franchisor, especially where the building is empty.

A hotel franchisor and its franchisee entered into a license agreement that required the franchisee to operate a facility for fifteen years. Under the agreement, in the event of a termination, the franchisee was to pay liquidated damages and repay the balance of a development advance note. Shortly after opening, the franchisee closed the hotel because of extremely low occupancy. The franchisor concluded the license agreement was terminated because its franchisee discontinued operation. Accordingly, the franchisor demanded that its franchisee discontinue use of the franchisor’s marks, pay liquidated damages, and pay the principal balance of the development advance note. The franchisee did not remove the franchisor’s marks for approximately one year, nor did it pay the liquidated damages or the principal balance of the monetary advance. For those reasons, the franchisor sued.

In response, the franchisee claimed that it closed its hotel because the franchisor failed to provide adequate support, as required by the license agreement. This puzzled the Court because of a letter from the franchisee to the franchisor stating only that it was closing the hotel “due to extremely low occupancy.” In addition, the franchisee provided no evidence that supported its contention that the franchisor had breached the agreement.

The franchisor also sought damages for the franchisee’s violation of the Lanham Act, which forbids the use of a company’s mark without its consent. The Court found that the franchisor had demanded the franchisee to immediately cease using its marks, but for nearly ten months following the demand letter, six inspections showed that the franchisee had not removed the franchisor’s marks. It was not until eleven months after the demand, that the marks had been removed. Thus, the Court held that the franchisee had violated the license agreement for eleven months by unlawfully using the marks.

The franchisee argued that its continued use of the marks after termination was permissible because the facility was closed. However, the Court noted that the license agreement obligated the franchisee to “remove all signage and other items bearing any Marks” and “promptly paint over the Facility’s distinctive trade dress, color schemes and architectural features” within ten days of termination. Additionally, the Court stated that the harm from having the franchisor’s marks on a closed and boarded facility could even be greater than the harm from continued use of the marks in an ongoing business.

Therefore, the Court held that the franchisee breached the license agreement and awarded the franchisor liquidated damages, the balance of the development advance note, as well as infringement damages.

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