Federal trademark registration is the Holy Grail for companies, especially franchises, looking to expand their footprint and access a national audience. But even though trademark registration confers on owners certain exclusive rights and benefits, such as constructive national notice of use, protects against registration of confusingly similar marks, provides notice of ownership, and enables recovery of statutory and exemplary damages in appropriate cases, it does not extinguish the rights of an owner of a substantially similar mark who has used the mark in commerce prior to registration. This can be especially problematic for growing franchises that have built their business on a recognizable name and charge significant fees for franchisees to use that name in running a local franchise location.
But what happens when a franchise with a registered mark moves into a new geographic location where another user has been using a substantially similar mark for similar goods? The answer is – most likely litigation. Depending on the similarity of the marks and the likelihood of consumer confusion, the local user may be able to preclude the national franchise from using its registered mark in the geographic location where the local user has used its mark. This could spell bad news for the franchisor who signed a franchise agreement and took a fee in exchange for allowing its franchisee to use the franchise IP and mark in connection with the new franchise location. Not only would a challenge from a local user disrupt the franchisee’s business, which would be in its early fragile stages, but it would create tension and conflict between the franchisor and franchisee.
The Lanham Act protects against the use in commerce of “any word, term, name, symbol, or device, or any combination thereof,” which “is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection, or association of such person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities by another person.” 15 U.S.C § 1125(a). Likelihood of confusion under the Lanham Act is not limited to confusion of products, as in mis-dispensing; confusion as to source is also actionable. See Fisons Horticulture, Inc. v. Vigoro Indus., Inc., 30 F.3d 466, 472 (3d Cir. 1994) (“Likelihood of confusion . . . exists when the consumers viewing the mark would probably assume that the product . . . it represents is associated with the source of a different product . . . identified by a similar mark.”). The Act is broad enough to cover “the use of trademarks which are likely to cause confusion, mistake, or deception of any kind, not merely of purchasers nor simply as to source of origin.” Syntex Labs., Inc. v. Norwich Pharmacal Co., 437 F.2d 566, 568 (2d Cir. 1971).
The remedies available for a violation of the Lanham Act and arising from the use of a confusingly similar mark include compensatory damages, disgorgement of profits, costs of the action, and injunctive relief. See 15 U.S.C §§ 1116, 1117. In extraordinary cases, the court may award attorney fees. Id. at § 1117. The most significant hammer available to a local trademark owner who can prove it used the mark in commerce prior to the franchisor’s registration is preliminary and permanent injunctive relief. After filing suit, the local user may seek a preliminary injunction preventing the franchisee from using the registered mark of the franchise, and if successful, would force the franchisor and franchisee to adopt a new name. This of course has devastating consequences for a new franchise location that depends, in large part, on consistency and the ability to use and rely on the franchise name and the goodwill and recognition that has been built.
Therefore, it is imperative that a franchisor and prospective franchisee perform due diligence and trademark searches in any new locale or geographic territory being considered for expansion. Searching state repositories of registered businesses and trade names is always recommended – as well as registering the franchise trade name in any state it decides to conduct business. Oftentimes state trade name registration provides additional protections for registrants, including mandatory attorney fees and statutory damages