Breaking (Up) Bad: Watch-outs for Brand Owners Faced with Ex-Licensee’s Trademark Use

This situation commonly arises when a franchisee or licensee continues using a franchisor or licensor’s trademarks following termination of a franchise or license agreement.

Under the test for preliminary injunctive relief in most jurisdictions, a plaintiff must establish:

1. A likelihood of success on the merits;
2. A likelihood of irreparable harm absent injunctive relief;
3. That the balance of the equities tips in their favor; and
4. That a preliminary injunction serves the public interest.

Until recently, many courts held that there was a presumption of irreparable harm upon a finding of likelihood of success on the merits. Thus, preliminary injunctive relief was routinely awarded to trademark owners who were able to show continued, unauthorized use of a trademark by a terminated franchisee or licensee, even absent an independent showing of irreparable harm.

The landscape began to change following the Supreme Court’s decisions in two key cases, eBay Inc. v. MercExchange, LLC, 547 U.S. 388 (2006) and Winter v. Natural Resources Defense Council, Inc., 555 U.S. 7 (2008). In eBay, the Court held that “broad classifications” and “categorical rule[s]” about when injunctions should issue were inconsistent with “traditional equitable principles,” which require courts to apply the four-factor test in evaluating preliminary injunctions. Two years later in Winter, the Court clarified that each element of the four-factor test must be satisfied for a preliminary injunction to issue. The practical effect: presuming irreparable harm was no longer permissible. 

In the wake of eBay and Winter, several Circuit Courts have held that Lanham Act plaintiffs must make an independent showing of irreparable harm in order to obtain a preliminary injunction. See Herb Reed Enterprises, LLC v. Florida Entertainment Mgmt., 736 F.3d 1239 (9th Cir. 2013) (trademark) and Groupe SEB USA, Inc. v. Euro-Pro Operating LLC, 774 F.3d 192 (3d Cir. 2014) (false advertising). While the precise showing required varies by jurisdiction, most courts require a plaintiff to put forth specific evidence of why their claimed harm cannot be remedied by monetary damages, such as evidence of consumer confusion, loss of consumer goodwill, or harm to plaintiff’s reputation.

These cases pose hurdles for brand owners seeking to enjoin holdover trademark use by terminated franchisees or licensees, as harm to reputation and loss of consumer goodwill can be exceedingly difficult to quantify. Trademark owners seeking to protect their brand in these situations should work with counsel to carefully document and gather evidence caused by the infringing holdover use, including evidence of actual consumer confusion, evidence of the inferior quality of goods or services offered by the terminated franchisee, and evidence that the parties are competitors in the marketplace. As a preemptive measure, trademark owners should build protections into their franchise and license agreements making clear that unauthorized holdover use constitutes irreparable harm, as some courts have found these provisions persuasive evidence in awarding preliminary injunctive relief.