A terminated Indiana real estate office franchisee that continued to use the marks of a franchisor was liable in a default judgment for trademark infringement, trademark dilution, and trademark counterfeiting under the Lanham Act, a federal district court in Lafayette, Indiana, has ruled. The franchisee, terminated for nonpayment of fees, was also liable for false advertising and false designation of origin under Lanham Act, common law unfair competition, and breach of the franchise agreement.

While the franchisee's liability for trademark infringement and dilution was readily established, it was a closer question as to whether the franchisee's conduct amounted to counterfeiting, authorizing enhanced damages and attorney fees and costs, the court reasoned. There was a split in authority among the circuits regarding whether a terminated franchisee's continued unauthorized use of the franchisor's mark could constitute trademark counterfeiting. In the absence of a ruling on the issue from the Seventh Circuit, it was reasonable to conclude, under a plain reading of the Lanham Act, that hold-over franchisees were not excluded from counterfeiting liability, the court held.

To establish counterfeiting, a plaintiff must show: (1) the mark was "counterfeit," meaning "a spurious mark which is identical with, or substantially indistinguishable from, a registered mark"; (2) the mark was registered on the principal register for use on the same goods or services for which the defendant uses the mark; (3) the defendant was not authorized to use the mark at the time the goods or services were manufactured or produced; and (4) the defendant acted with knowledge and intent. An unrelated entity that created an identical trademark and provided unauthorized goods or services (or the kind provided by the owner of the mark) under that mark engaged in counterfeiting. Logically, there was no reason why an ex-franchisee should escape liability for counterfeiting simply because that person had access to a franchisor's original marks under the former relationship and therefore did not need to reproduce an identical or substantially similar mark, according to the court. Indeed, the risk of confusion was greater when an original mark was used to designate inauthentic goods or services. Therefore, the franchisee's continued unlicensed use of the franchisor's trademarks in reference to services that had no connection with, nor approval from, the franchisor, constituted the use of counterfeit marks.

The individual owner and principal of the franchisee was not personally liable for the corporate franchisee's trademark violations, the court determined. Absent allegations or proof of any facts that the principal was personally involved in the infringement, through control or approval of the franchisee's acts, the principal could not be held liable for the franchisee's infringement.

Century 21 Real Estate, LLC v. Destiny Real Estate Properties, DC Ind., ¶14,759

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