Defining the authorized and appropriate use of a franchisor’s trademarks lies at the heart of every franchise agreement. The trademarks are in many ways the franchisor’s most valuable asset. The franchisee’s obligations in this regard carry serious ramifications and penalties if those obligations are not met, intentionally or otherwise. A recent case in the Eastern District of New York, although not strictly a franchise case, provides a timely reminder of the importance of these issues.
In Martal Cosmetics, LTD v. International Beauty Exchange Inc., 2010 WL 2243253 (E.D.N.Y. 2010), Martal was a seller of health and beauty products under the “Symba” trademark, including Symba soap and Symba cream, and the defendants were authorized distributors of these products.
Due to an unexpected dip in its US sales, Martal came to suspect that some counterfeit products had entered the market. Upon investigation, Martal came to focus on the defendants. Further investigation bore out this suspicion; warrants were issued and counterfeit merchandise was seized from each of the defendants.
Subsequently, Martal commenced suit against the defendants seeking to recover under various sections of the Lanham Act. In particular, Martal sought recovery for the defendants’ infringement of Martal’s trademarks under 15 USC §§1114 and 1125(a), treble damages for the trafficking of counterfeit goods under 15 USC §1117(c)(2), and attorneys’ fees under 15 USC §1117(a)(3).
The court noted that intentional infringement is not required to find a Lanham Act violation, but that once a Lanham Act violation has been established; a litigant may then seek additional damages in cases where the defendant’s conduct was willful.
15 USC §1117(c)(2) provides for treble damages against a defendant who peddles a counterfeit mark, if “the use of the counterfeit mark was willful.” Moreover, 15 USC §1117(a)(3) allows an award of attorney fees “in exceptional cases,” which includes instances of “willful infringement.” See, e.g., Patsy’s Brand, Inc. v. I.O.B. Realty, Inc., 317 F.3d 209, 221 (2d Cir. 2003).
The court explained that “willfulness” in this context includes actual knowledge as well as “recklessly disregard[ing] the possibility.” See, e.g., Kepner-Tregoe, Inc. v. Vroom, 186 F.3d 283, 288 (2d Cir. 1999).
For franchisees, this case provides several important reminders. First, a franchisee has an obligation to exercise diligence in making certain that goods sold are actually the goods it is authorized to sell. Turning a blind-eye to questionable practices could lead to the imposition of treble damages. Second, the case also underscores the importance of promptly de-identifying once a franchisee leaves the franchise system. Given a franchisee’s level of knowledge about the franchise, it would be nearly impossible to argue that continued use of the franchise’s trademarks was not “willful infringement.” Although the awarding of attorneys’ fees is discretionary, given the high price of lawyers, it is a risk that a franchisee should not take.