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Ninth Circuit Decision Has Potential Implications for Franchisors Seeking Preliminary Injunctions Against Holdover Franchisees

January 13, 2014

Last month, a panel of the United States Court of Appeals for the Ninth Circuit issued a decision in Herb Reed Enterprises, LLC v. Florida Entertainment Management, Inc., 736 F.3d 1239 (9th Cir. 2013) that, although not arising in a franchise context, could have potential implications for franchisors pursuing preliminary injunctions against holdover franchisees.  This decision continues a trend of heightening the standard applicable to preliminary injunctions.

Until relatively recently, and with occasional exceptions, federal courts routinely granted preliminary injunctions in favor of franchisors that were able to show that a former ranchisee had continued to use the franchisor's licensed marks subsequent to termination of a franchise agreement.  Typically, federal courts would determine whether to grant an injunction based upon some variation of a four-part test: (1) likelihood of success on the merits; (2) likelihood of irreparable harm to the moving party if the injunction were not granted; (3) whether this potential harm to the moving party would outweigh the potential harm to the non-moving party if the injunction were granted; and (4) the public interest.  In reality, where the holdover franchisee's continuing use of the marks was undisputed, this four-part inquiry collapsed down to a single question:  was the franchisor likely to succeed on its claim that it had properly terminated the franchise agreement?  Most courts concluded that the franchisor's lack of control over the use of its marks and system—the necessary effect of the termination of the franchise agreement—was either presumed to cause irreparable harm or would constitute irreparable harm as a matter of law.  Thus, the second element followed logically from the first.  Once likelihood of success on the merits and irreparable harm were established, courts generally concluded that this irreparable harm to the franchisor outweighed any potential harm to the franchisee, which in any event had only itself to blame for its situation, and that the public interest favored avoidance of customer confusion and upholding freely negotiated contracts.

This established law began to change with the Supreme Court's decisions in 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 rejected the quasi-automatic entry of a permanent injunction following a determination of patent infringement and decided instead that the issuance of such an injunction required a showing of the traditional equitable elements, including an irreparable injury that could not be compensated by monetary damages.  Two years later, in Winter, the Court reversed a preliminary injunction because it was based on only a possibility of irreparable harm, rather than the likelihood of such harm, and held that each element of the preliminary injunction standard must be satisfied in order to obtain a preliminary injunction.  Thus, for example, even a strong showing of likelihood of success on the merits could not compensate for failing to prove irreparable harm.  Following eBay and Winter, several federal appellate courts have held that the traditional presumption of irreparable harm arising from trademark infringement was no longer permissible.  See N. Am. Med. Corp. v. Axiom Worldwide, Inc., 522 F.3d 1211, 1228-29 (11th Cir. 2008); Audi AG v. D'Amato, 469 F.3d 534, 550 (6th Cir. 2006).

The Ninth Circuit's decision in Herb Reed Enterprises can be read as an expansion of this trend, although it is not yet clear how broadly it may be followed and applied.  In Herb Reed Enterprises, the court addressed a trademark dispute between parties claiming to have exclusive rights to use the name of the famed 1950s singing group, “The Platters.”  The district court had entered a preliminary injunction in favor of the plaintiff, Herb Reed Enterprises.  In entering the injunction, the district court recognized that it was no longer permissible to automatically presume irreparable harm upon finding a likelihood of success on the merits.  Nevertheless, the district court concluded that it “could not condone trademark infringement” and that to do so “could encourage wide-scale infringement on the part of persons hoping to tread on the goodwill and fame of vintage music groups.”  736 F.3d at 1250.

While acknowledging that its review should be “limited and deferential,” the Ninth Circuit reversed the preliminary injunction and remanded, concluding that these findings were “cursory and conclusory” and “grounded in platitudes rather than evidence.” Id. at 1247, 1250.  The court acknowledged that “[e]vidence of loss of control over business reputation and damage to goodwill could constitute irreparable harm.”  Id. at 1250 (citing Stuhlbarg Int'l Sales Co., Inc. v. John D. Brush and Co., Inc., 240 F.3d 832, 841 (9th Cir. 2001)).  But while chiding the district court for failing to identify sufficient evidence, the Ninth Circuit did not acknowledge that, by showing that the defendant was using its marks without authorization, Herb Reed Enterprises had necessarily shown the loss of control over its business reputation and the concomitant danger of loss of customer goodwill.  And, as any practitioner knows, harm to customer goodwill is notoriously difficult to quantify, leading to the likely inadequacy of monetary damages as a remedy.  From the Ninth Circuit's opinion, it is unclear whether this would constitute an unassailable truth or a mere “platitude” to be disregarded.

In the coming years, it is possible that the law will swing in one direction or the other, with preliminary injunctions against terminated franchisees either once again becoming fairly routine (assuming sufficient evidence of a valid termination) or an exception available principally in situations where the franchisee has caused reputational harm and actively damaged customer goodwill as opposed to misappropriating it for its own benefit.  In the meantime, in order to maximize their chances of success, franchisors seeking a preliminary injunction against a terminated franchisee should take care to particularize their showing of irreparable harm as much as possible to meet the still-evolving standard.