The United States District Court for the Middle District of Florida recently ordered a former franchisee who failed to de-identify its motel to pay damages to the franchisor. In the case, the franchisee entered into an assignment of a franchise agreement, permitting it to operate a motel under the Scottish Inn flag. In the franchise agreement, the franchisee agreed that, upon termination, it would cease operation of the motel as a “Scottish Inn”, cease use of the Scottish Inn marks and, importantly, de-identify the property. The franchisor terminated the agreement for what the opinion describes as “many breaches” and obtained damages of royalties, reservation and marketing fees, and liquidated damages from a Georgia state court.

The terminated franchisee failed to satisfy the monetary judgment. Even worse, it continued to operate its motel as a “Scottish Inn”, using the Scottish Inn marks and name without authorization. In fact, based upon several visits over a six to eight month time period, the only “de-identification” a representative of the franchisor observed was that a large “Scottish Inn” sign had been removed because it apparently had been damaged in a storm. Which, as you can imagine, is not quite the image the Scottish Inn wishes to convey!  Moreover, until shortly before the hearing in federal court, persons answering the phone at the motel were answering it as “Scottish Inn”.

The franchisor sought damages pursuant to the Lanham Act for trademark infringement, and the court agreed that the continued, unauthorized use of the marks by the franchisee violated the Act. As damages, the judge concluded that a monthly franchise fee of $400 per month for approximately 35 months–the amount of time the motel continued to be identified as a “Scottish Inn” after termination of the franchise agreement–was a suitable amount of damages. He awarded such damages for each month after notice of termination had been provided to the franchisee. The judge further entered a permanent injunction against the franchisee’s use of the “Scottish Inn” marks and awarded attorneys’ fees to the franchisor. The amount of attorneys’ fees awarded, in fact, was significantly larger than the total amount of the monthly franchisee fee.

The entry of an award of attorneys’ fees under the Lanham Act is significant. The Act provides that attorneys’ fees are warranted only if the court finds malicious, fraudulent, deliberate and willful conduct–a high standard indeed. Here, the franchisee’s continued use of the “Scottish Inn” marks after the termination of the franchisee agreement, filing of the complaint and throughout the litigation gave the court “sufficient” reason to award attorneys’ fees.

Despite the award of attorneys’ fees, the court did reject a request for treble damages under the Lanham Act. Courts have considerable discretion when awarding treble damages. In addition to being discretionary, treble damages may not be punitive and must be based on a showing of actual harm. Here, the judge found that the franchisor failed to demonstrate any harm beyond the $400 per month franchise fee and, as such, refused the request for treble damages.

What is the Takeaway? Franchisors and franchisees need to act quickly when a franchise agreement is terminated. Franchisors need to ensure de-identification so as to protect their marks and brand. Frankly, I think that the court here was generous in concluding that the franchisor had not sat on its rights when it failed to act for 35 months. I can only conclude the court felt that the franchisee’s conduct was so egregious so as to forgive the franchisor’s lethargy in defending its marks. At the same time, the delinquent franchisee, despite facing an award of significant attorneys’ fees, was lucky to escape treble damages. Perhaps only the franchisor’s lethargy saved it from an even higher damages award against it.