The Franchise Memorandum

A storm shelter manufacturer’s “vast infringement campaign” against a dealer’s trademarks was an exceptional case that warranted the award of attorneys’ fees under the Lanham Act, the U.S. Court of Appeals for the Seventh Circuit recently held, reversing the district court’s denial and granting attorneys’ fees to the dealer. 4SEMO.com Inc. v. S. Ill. Storm Shelters, Inc., 939 F.3d 905 (7th Cir. 2019). This dispute arose from a dealership agreement between Southern Illinois Storm Shelters (“SISS”) and 4SEMO, which granted 4SEMO the exclusive territorial rights to sell SISS storm shelters. As part of its marketing campaign, 4SEMO created a wordmark — LIFE SAVER STORM SHELTERS — and a logo using that name, which it affixed to the shelters. When SISS later asked 4SEMO for permission to use these marks outside 4SEMO’s territory, 4SEMO agreed to grant a license on three conditions: only shelters manufactured by SISS could be sold under the marks; SISS would install all branded shelters in a manner familiar to 4SEMO; and 4SEMO would maintain control over all promotional materials bearing the marks.

SISS did not comply with the license agreement. Instead, the manufacturer used the marks in connection with a nationwide sales campaign, supplied other dealers with LIFE SAVER branded shelters, and even registered the domain name www.lifesaverstormshelters.com. When 4SEMO discovered the widespread infringement, the manufacturer immediately offered to purchase the marks. But when negotiations collapsed, SISS terminated the dealership agreement and sued 4SEMO for trademark infringement, claiming prior use and ownership of the LIFE SAVER word mark. 4SEMO counterclaimed for trademark infringement and false endorsement under the Lanham Act. The district court granted 4SEMO’s motion for summary judgment and dismissed SISS’s claims. After a bench trial, the court found for 4SEMO across the board, holding that 4SEMO owned both marks and that SISS breached a valid license, generating consumer confusion and deception, in violation of the Lanham Act. 4SEMO was awarded more than $17 million in damages, but the judge denied 4SEMO’s motion for attorneys’ fees and vexatious litigation sanctions.

On appeal, the Seventh Circuit reversed the lower court on fees, holding that the judge’s factual findings of willfulness, maliciousness, and bad faith warranted an award of attorneys’ fees under the Lanham Act. Specifically, the judge determined that the manufacturer engaged in a vast infringement campaign and indeed planned in advance to offer to buy the marks only “if and when 4SEMO discovered their improper use and complained.” While this misconduct justified an award of attorneys’ fees, the Seventh Circuit denied 4SEMO’s claim for vexatious litigation sanctions against SISS’s attorneys. Although SISS’s claims were “meritless,” the Seventh Circuit did not find that the attorneys acted in objective bad faith or reckless indifference.