Franchisors: Don't delay in discovering agreement violations!
"Act now, don't delay." That was the important lesson that a federal court recently handed down to franchisors when the court denied Noble Roman's claim that its franchisee violated the federal Lanham Act. This decision is an important reminder to franchisors that they must be diligent in their efforts to discover violations of the franchise agreement, and to the extent they find any violations, to promptly preserve their right to pursue enforcement and damages.
Typical with most franchise agreements, Noble Roman's required Hattenhauer Distribution Company ("Franchisee") to purchase and use pre-approved ingredients, including a specific propriety cheese blend. Noble Roman's changed its approved distributor in 2010. But when Franchisee began using that distributor, it unknowingly purchased a different (more expensive) blend of cheese; not the proprietary cheese required by Noble Roman's. From 2010 through 2014, the distributor sent monthly reports to Noble Roman's showing the sales it made to all franchisees, which included Franchisee's purchase of unapproved cheese. Noble Roman's, however, did not notice the discrepancy.
Noble Roman's ultimately filed a lawsuit alleging, in part, that Franchisee violated the federal Lanham Act because of its use of the unapproved cheese. Noble Roman's argued that Franchisee was deceiving customers into paying full price for a product that Franchisee represented was a Noble Roman's pizza when in fact it was not, and that Noble Roman's was injured because it lost its ability to control the products sold under its trademark.
The District Court for the Southern District of Indiana ultimately granted summary judgment to Franchisee, finding that the Lanham Act claim was barred by the doctrine of laches -- meaning, Noble Roman's waited too long to take action. The court first found that Noble Roman's had constructive knowledge of Franchisee's use of the non-approved cheese because of the monthly reports mentioned above (even though Noble Roman's did not actually know about the problem). The court then found that the four-year delay was unreasonable and that Franchisee was prejudiced by it. Franchisee, in fact, immediately addressed the problem once it was identified by Noble Roman's. Since Noble Roman's did not timely notice and advise Franchisee that it was buying and using the wrong cheese blend, the Franchisee could not be legally liable under the federal Lanham Act to Noble Roman's. Noble Roman's must now pursue any potential remaining claims in state court.
Perhaps this decision would have been different if certain facts were changed -- for example, if Franchisee intentionally purchased non-approved cheese, if Franchisee benefitted financially from the purchases, or if Franchisee refused to cure the violation. Regardless, this decision teaches an important lesson to franchisors. Franchisors need to make a conscious effort to review the monthly reports it requires its suppliers, franchisees and others to submit. And more importantly, franchisors should not wait to take action to correct a violation of the Franchise Agreement and protect its proprietary trademark and the franchise system. The court's decision can be found at: Noble Roman's Inc. v. Hattenhauer Distributing Co., 2017 WL 747539 (S.D. Ind. Feb. 27, 2017).
•For more information, contact Adam Calisoff (email@example.com or 312-726-2505), Christina Fugate (firstname.lastname@example.org or 317-236-2374), George Gasper (email@example.com or 317-236-2275), or another member of Ice Miller's Franchise and Distribution group.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.