The Franchise Memorandum

A federal court in Tennessee has held a franchisee in contempt for its failure to deidentify its restaurant after entry of a temporary restraining order and consent permanent injunction. Gus's Franchisor, LLC v. Terrapin Rest. Partners, LLC, 2020 WL 5121364 (W.D. Tenn. Aug. 31, 2020). Defendant Terrapin operated a Gus’s fried chicken franchise in a Washington, D.C. suburb until its agreement was terminated in May 2020. Gus’s followed up its termination by filing a complaint and a successful motion for a TRO the same month. In June, the court approved the parties’ consent permanent injunction. The TRO and the consent injunction each required Terrapin to deidentify its restaurant and to file an affidavit of compliance with the court. Terrapin did so, but Gus’s maintained that the restaurant was in fact not deidentified. In a motion for contempt, Gus’s submitted photographs of the store taken after the entry of the TRO, but prior to the entry of the injunction, showing use of Gus’s marks and trade dress inside and outside of the restaurant. It also alleged that Gus’s handbooks were still in the restaurant, and that the restaurant continued to use Gus’s fried chicken batter. Further, a recent Yelp review showed customer confusion as to whether the restaurant continued to be a Gus’s franchise. Terrapin’s owner admitted that the restaurant still displayed a Gus’s sign, but said that his lawyer advised him not to deidentify and argued that it was in the best interest of the restaurant and its employees to remain open during the COVID-19 shutdown. He also testified that several of the photos provided as proof of compliance with the TRO were taken before the TRO was entered, and had been “incorrectly” attached to the affidavit of compliance.

The court found the owner’s testimony unreliable, and held that contempt sanctions were appropriate to coerce the franchisee’s compliance. It also noted that the franchisee’s noncompliance had continued to cause customer confusion, going to “the heart of the protections afforded to owners by federal and state trademark law.” The court set an evidentiary hearing to determine the appropriateness of the $25,000 (plus attorney’s fees and costs) sanction requested by Gus’s. That hearing was held in mid-September; the matter remains under advisement.