The Bankruptcy Code in the United States is generally intended to give honest but unfortunate debtors the opportunity for a fresh start. This includes the honest but unfortunate franchisee who attempts to start a franchise but ultimately fails. Generally, if a franchisee files a personal bankruptcy case, the personal liability of the individual who filed bankruptcy is discharged and that individual has the opportunity for a fresh start.
However, there is an exception to discharge that can come into play. Section 523(a)(6) of the Bankruptcy Code provides that debts for a "willful and malicious injury by the debtor to another entity or to the property of another entity are not dischargeable."
In one recent case, the bankruptcy court found that the continued use of a trademark after the termination of the franchise agreement amounted to a willful and malicious injury under Section 523(a)(6). In In re Gharbi, 2011 WL 831706 (Bankr. W.D. Tex. Mar. 3, 2011) aff'd, 2011 WL 2181197 (W.D. Tex. June 3, 2011), the franchisee continued to use the "Century 21" mark after the termination of the franchise agreements. Specifically, the franchisee intentionally used websites with "Century21" in the domain name and intentionally used the "Century 21" mark on a website. The franchisee continued these infringing activities for a significant period of time after the termination of the franchise agreements.
As a result of the infringement on its trademark, Century 21 filed a lawsuit in the bankruptcy court against the franchisee. Century 21 prevailed on its infringement claims and was awarded damages of $75,000 and attorney's fees of $147,996. The bankruptcy court specifically found that the franchisee could not discharge these debts because they were the result of a willful and malicious injury by the franchisee against Century 21.
This case highlights the potential negative consequences of the continued use of a trademark following the termination of a franchise agreement. Although bankruptcy can generally provide a fresh start for individuals, that fresh start can be greatly hindered, or completely lost, if one of the debts is the result of a willful and malicious trademark infringement.
This has been a guest post by Michael J. Carey. Mr. Carey's practice is focused in the area of bankruptcy and creditors' rights. His original post was here.