When a franchisor sues a franchisee to obtain judicial blessing of a notice of default and termination—on the franchisor’s own initiative, or because the franchisee challenges the validity of the termination—typically the franchisor will include a cause of action for trademark infringement and move early, perhaps immediately, for a preliminary injunction enjoining the franchisee from continuing to use the franchisor’s intellectual property. Such an injunction, if granted, effectively shuts down the franchisee, inasmuch as it is the use of the franchisor’s intellectual property that the franchisee is paying for, principally.
The franchisor’s argument to the court, as it must be, is that the continued use of its trade marks, et cetera, by the franchisee allegedly in default is a violation of both contract and law that will cause the franchisor irreparable harm. This is probably true if the default at issue concerns a system violation concerning heath, safety, or the quality of goods or services provided by the franchisee.
But what if the default is simply an alleged failure to pay money, or the like? The franchisor might be likely to prevail on this cause of action, and in the end would be entitled to terminate the franchise agreement (and the included license to use its marks), but there is no harm to the public during the pendency of the action. If the doughnuts are the same as they ever were, for example, then there is no risk of consumer confusion, the sine qua non of trademark protection. Accordingly there is, arguably, no reason to enjoin the franchisee’s use of the marks pending trial of the action.
To the contrary, injunction would require the franchisee to go dark, almost always ruining its business. Therefore, even if trial reveals that the franchisor is not entitled to judgment, potentially irremediable damage to the franchisee will have been done—damage that an injunction bond might not adequately protect against.
The law is, for better or worse (that is, better for franchisors, worse for franchisees), that a franchisor is entitled to stop a franchisee from using the franchisor’s marks even while it remains to be decided by a court whether the franchisee has defaulted in its obligations under its franchise agreements. But should it be so?