Former Franchisee's Continued Use of Marks After Agreement's Termination Was Infringing

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By Tamlin H. Bason

A hotel franchisor was able to show that a former franchisee's continued use of certain trademarks after the termination of a franchise agreement constituted trademark infringement and false designation of origin under the Lanham Trademark Act of 1946, the U.S. District Court for the Southern District of Texas held April 16 (Choice Hotel International Inc. v. Patel, S.D. Tex., No. 6:12-cv-00023, 4/16/13).

The court granted the franchisor summary judgment on its Lanham Act and Texas state law trademark infringement claims. It also granted the franchisor a permanent injunction preventing the franchisee from continuing to use the relevant marks. However, the court determined that it was unclear whether the defendant intended to cause confusion. It noted that the defendant “undertook extensive efforts to remove the [mark] from the hotel.” Thus, the court declined to determine damages on summary judgment.

Franchise Agreement Terminated After 15 Years

Choice Hotels International Inc. is a global hotel franchisor that licenses numerous brands, including Comfort Inn, Econo Lodge, Quality Inn, and Comfort Suites.

In 1993, Choice Hotels entered a franchise agreement with the defendants, Ilaben Patel and her grandson, Vinodhbai Patel. The agreement licensed the Comfort Inn marks to the Patels for the operation of a hotel in Victoria, Texas.

The agreement gave Choice Hotels the authority to terminate the franchise relationship after 15 years. In 2008, Choice Hotels gave the Patels notice of its intention to exercise its rights under the termination clause. The Patels were informed that they must cease and desist from using any of the Comfort Inn marks by no later than April 8, 2009.

The Patels claimed that prior to that date they tried diligently to remove the Comfort Inn name from the hotel. These efforts included removal and destruction of hotel lobby signs, stationary, shower curtains, and soap and amenity packages. The Patels also filed papers with the Victoria County Clerk's office to change the name of the hotel.

The Patels failed to immediately remove the exterior Comfort Inn signs, including a 30-foot street sign. The Patels initially had this sign covered with a tarp because they hoped to use the sign at a new Comfort Inn location that was subject to a separate license agreement. The tarp, however, routinely blew off and the Comfort Inn signage was often viewable. At some point, the Patels had the sign painted over in black.

The Patels also continued to use the Comfort Inn mark on credit card receipts, and the hotel's wireless network continued to direct users to a website that bore the Comfort Inn marks.

Choice Hotels filed a complaint alleging federal and state law claims of trademark infringement, a Lanham Act claim of false designation of origin, and a Texas common law claim of unfair competition. Choice Hotels sought a permanent injunction, and it also sought as damages all profits the Patels made during the relevant time period, additional reasonable royalty damages, and treble damages pursuant to Section 17(b) of the Lanham Act, 15 U.S.C. §1117(b). Choice Hotels moved for summary judgment.

Infringement Clear

“When a defendant uses a plaintiff's exact marks, as occurred in this case, courts within this Circuit have determined that a thorough analysis of the digits of confusion is unnecessary, and a presumption of confusion exists,” Judge Gregg Costa said. Still, the court gave cursory attention to the likelihood of confusion factors set forth in American Rice Inc. v. Producers Rice Mill Inc., 518 F.3d 321, 86 U.S.P.Q.2d 1162 (5th Cir. 2008) (50 PTD, 3/14/08).

An application of that test “demonstrates that there is no factual dispute regarding a likelihood of confusion in this case,” the court said. Accordingly, it determined that Choice Hotels was entitled to summary judgment on its Lanham Act claims.

However, liability was only established, for summary judgment purposes, with respect to Vinodhbai Patel, the court determined. The evidence suggested that his grandmother was not involved in the daily operations of the hotel, and thus a reasonable jury could find her not liable for infringement, the court said.

Damages Issues Not Appropriate for Summary Judgment

The court determined that Choice Hotels had demonstrated that its brand would continue to suffer absent injunctive relief. The court thus granted Choice Hotels a permanent injunction prohibiting the Patels from displaying any of the Comfort Inn marks on the subject property.

The court then turned to the plaintiff's plea for monetary damages. If a plaintiff prevails on its trademark infringement claims, Section 1117(a) of the Lanham Act gives a court discretion to fashion a monetary award that takes into account the defendant's profits, the plaintiff's damages, and costs.

Choice Hotels argued that it was entitled to all of the profits that the Patels made during the relevant time period. The court said that it was too early to determine whether Choice Hotels was entitled to the defendants' profits. In the Fifth Circuit, the first factor that must be weighed in order to determine if a plaintiff is entitled to the defendant's profits is whether there was an intent to deceive, the court noted.

“Mr. Patel undertook extensive efforts to remove the Comfort name from the hotel,” the court noted. Given these efforts, “A reasonable jury could find that Mr. Patel did not intend to confuse or deceive his clientele,” the court said.

The court also declined to invoke its discretion to treble damages under Section 1117(b). Such a remedy is only available when a defendant willfully and wrongfully engaged in trademark infringement, and even then only when “the court finds extenuating circumstances,” the court noted.

Here, it was unclear whether Patel had intended to infringe the marks, and so it was not appropriate to treble damages on summary judgment, the court determined.

Choice Hotels was represented by Mark Wesley Thayer of Gordon & Rees, Houston. The defendants were represented by Edward J. Hennessy, Houston.

By Tamlin H. Bason  

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