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Ispahani v. Allied Domecq Retailing USA

320 N.J. Super. 494, 727 A.2d 1023 (App. Div. 1999)

FRANCHISES; TRADEMARKS—The federal Lanham Act does not preempt the New Jersey Franchise Practices Act, and a court can refuse to grant injunctive relief to a franchisor that claims its franchisee is violating the franchisor’s trademark rights.

A donut franchisee had a number of stores and the right to open four additional stores in locations to be approved by its franchisor. Even though the franchisee had purchased property for a new store site and incurred substantial additional expenses allegedly in reliance on verbal approval from a representative of the franchisor, the franchisor refused to grant its approval with respect to the new location. In the suit that followed, the franchisor filed a counterclaim against its franchisee alleging that the franchisee had breached its obligations under the franchise agreement by failing to pay continuing franchise fees and contributions towards advertising expenses. The franchisor also alleged that it had sent all notices required by the franchise agreement including a termination notice. The franchisee’s claim and the franchisor’s counterclaims were pending when the franchisor moved to enjoin the franchisee “from operating donuts shops at their former franchise locations” during the pendency of the litigation. The lower court did not grant the injunctive relief that was sought because it did not believe that the franchisor had made the showing necessary to justify the relief. In particular, it held that the franchisor did not show that the harm to it if the injunction were denied would be greater than the harm to the franchisee if the injunction were granted. The franchisor also argued that it was not obligated to prove the franchisee’s material breach of contract or its own clean hands to justify termination of the franchise. Its argument was that, “as a matter of federal law, a franchise resting on a federally registered trademark can be revoked for any reason, or at least for any infraction of the franchise agreement, without regard to either its own responsibility for the breach or the materiality of the breach.” The Court did not agree with the franchisor. Instead, it pointed out that in a small majority of jurisdictions where wrongful termination claims were held not to be valid defenses to a Lanham Act claim, those decisions appeared to be based on the notion that a franchisor can unilaterally withdraw Lanham Act “consent” to use a mark, subject only to the risk that if that action were later held to be unlawful, the franchisor could be liable for a damage award to the franchisee. In the Court’s view, “[m]ore commonly, however, courts examine whether termination or nonrenewal was lawful to determine whether there has been a violation of the Lanham Act. These cases thus appear to assume that Lanham Act “consent” is subject to state law – both statutory and common law – regulating franchise termination and nonrenewal.” According to the Court, the franchise agreement was subject to the New Jersey Franchise Practices Act. That Act prohibits termination of a franchise except for good cause and, according the Court, is not preempted by the Lanham Act or any other federal law. Consequently, the injunctive relief was properly denied and the parties’ rights and responsibilities were left to be determined following trial.


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