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A Limit to Franchisor’s Permanent Restraints

A Limit to Franchisor’s Permanent Restraints

Quiznos - A Limit to Franchisor’s Permanent Restraints

To what extent will a Court allow permanent restraints when a Franchisee clearly violates the terms of the franchise agreement? In this decision, the Court addressed a default judgment motion filed by the Franchisor against a Quiznos Franchisee, which had terminated the agreement and then continued running the restaurant at the same location under the new trade name: “Toasty Subs.” During the litigation discovery period, the Franchisor had established that the Franchisee’s employees continued to represent to customers that Toasty was a Quiznos unit, continued to run telephone directory listings as Quiznos, and had simply painted-over signage or décor which displayed the Quiznos trademarks, and further, substituted these signs with “Toasty Grill Subs” signage.

The Franchisor sought and was awarded monetary damages for past-due amounts and interest, together with an estimated net present value of royalties due on the balance of the agreement. In addition, the Court awarded damages for future marketing and promotional fees, local advertising fees, and regional advertising fees. These damages were based upon the Franchisee’s average monthly gross sales for the twelve months preceding the termination.

Note: The Court signaled the limit of its authority to award injunctive relief. Although the Court granted permanent injunctive relief concerning use of marks, trade dress, trademark, service mark, logo, trade name and elements of the design and décor, and a return of proprietary and confidential material, including the operations manual; it declined to award relief per the restrictive covenant (two years/ five miles), citing Colorado law which disfavored such terms. The Court noted this narrow exception to the state’s prohibition: that the Franchisor would suffer irreparable harm absent the relief. Here, the Court found that Quiznos was unable to meet the burden.

Finally, the Court did impose permanent restraints upon the Franchisee (and its employees) from holding themselves out as a Quiznos, and to take steps to advise the telephone directories, accordingly.

Citation: QFA Royalties, LLC v. ZT Invs., LLC, 2017 U.S. Dist. LEXIS 190538

BE ADVISED that these comments are not intended as legal opinions and are not to be relied upon as legal advice. If you need franchise-related legal advice, please contact us to discuss the specifics of your franchise business.
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