Why Your Franchisor Lawyers Cannot Spend Your Money & Gain Victory

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There are exceptions to Blaise Pascal's suggestion that the more things change the more they are really the same - Le plus ca change le plus c'est la meme chose. Franchise branding is one of those situations from the perspective of many legal doctrines.

This case study is somewhat dear to my heart because it involves a company that in years past I used to represent from time to time until it decided to hire its own in house general counsel, a man who's entrepreneurial spirit caused him to think it was just fine to demand a kickback/referral fee from outside law firms he hired to represent the company in lawsuits.

When I declined to pay him for the company's legal business, for reasons just about anyone can appreciate, the company and I parted ways.

To be sure, there were other ways in which the gentleman derived extraneous income from his client's business, and it might be a good story scenario for Saturday Night Live, but not here.

Fortunately, there were other firms that also declined his blandishments that in desperation were hired anyway because the company's situation was rather desperate and the firms were ethical enough to just say no.

In these desperate situations the large firms did not produce victories and charged a bloody fortune to obtain settlements that were hardly favorable, in one instance charging $16,000,000 before fessing up that they were unable to present a plausible case.

The latest of these exceptional situations came to a bad end recently and represents a good case study about a company's management believing it could simply spend its way to victory no matter what.

It happened eventually to General Motors, so for a privately owned franchise company to convince itself that a litigation budget was the road to invincibility is an exceptional case study in arrogance and one worth discussing.

There is a doctrine in intellectual property law known as "secondary meaning". Secondary meaning imputes to a "look" the value and power of a trade or service mark when that "look" becomes so identified in the public mind with the company that the look alone becomes an automatic source identifier. Imagine that the Golden Arches were not registered intellectual property of McDonalds. Even without that statutory protection they so speak to McDonalds in the mind of the public that one would say with confidence that they had secondary meaning.

Not all things that could eventually have secondary meaning as source identifiers attain that status, and some that do eventually lose it because the "look" becomes generic to that segment of trade, mainly through its functionality aspects.

Functionality is a secondary meaning killer because serving a function common to most companies in that business inherently means that all will adopt it. In the beginning, however, for a fleeting moment something functional could be a source identifier in that interim before others start using it throughout the industry. Think of the "serpentine" line up of customers waiting for service back in the early days of Wendy's when Wendy's was the only company using it. There was actually a case on that subject in Tennessee back in the day (Judy's Hamburgers).

In normal circumstances functional features do not achieve secondary meaning status. This case study involves the assertion of an incredibly ridiculous claim that the interior appearance of this brand of restaurant was itself a brand identifier. Impossible and absurd on its face in all but the most exceptional situation (which this was not), but insisted upon as the product of arrogance and stupidity by company management and by the large nationally known law firm it hired to make that assertion in court. The legal expenses were outrageously huge.

One could posit that they were not outrageous on the theory that the firm had to know it was a balls out loser and would only make the assertion if it could find a client dumb enough to pay a fortune to finance the effort. It would be difficult to find a competent trade dress lawyer to give an opinion that the functional aspects of the interior of any chain restaurant had secondary meaning.

Face it, the interior contains tables, chairs, counters, maybe a bar, and any kind of "back of the house" configuration you like. Paint and decor could be extremely distinctive, but that could be fixed by an accused infringer with a cheap paint job on a weekend.

No one litigates over something curable by a cheap paint job.

Where it is a paint job resolution the accused infringer has to be a fool for refusing to redecorate and the franchisor has to be a fool for not being able to resolve it short of the cost of full blown litigation to a verdict. That is a total failure of relationship management as well as dispute resolution management. But this company and its former franchisee did exactly that.

Moreover, the company hired one of the country's major franchise litigating firms to handle it. No large firm can afford to turn down a big fee with all that overhead, no matter how stupid the position it has to take in a public forum.

Let's take a second look at this and give someone the benefit of the doubt by suggesting that the decor infringement claims were really just the manure spread across a field planted with the seeds of a post termination covenant not to compete. If that is the case, then the franchisor is doubly stupid. If the covenant is enforceable, why screw it up with BS? And if the covenant claims are worthless, is the BS decor infringement claim going to put lipstick on this pig? This is wall to wall stupidity no matter how you slice it.

Something tells me that maybe this client went through a number of competent firms with self respect who turned it down before it came upon a firm who, for the right money, would represent anyone on any claim regardless of the merits. There's a song about a girl who just can't say no, and this is that kind of firm. I know this company's regular firm - went to school with one of its partners, and he is smart enough to know better than to do this to a regular client. I also know the trial firm who took the case, and this is the kind of trash they will roast in a slow oven for a long time and tell you it's good brisket. If you are a spoilt child client who will pay anything to have someone tell you that you can have your way, I guess you really deserve this kind of result. Intelligent folks don't shoot themselves in the foot (or elsewhere on their anatomy) like this.

One could posit that the usefulness of this court's ruling to other departing franchisees represents an enormous impact loss. Almost all franchise contracts and disclosure documents claim great value in distinctive decor. Will their next step be to try to force franchisee investment in a new decor that is distinctive, an investment that at this stage if its life cycle holds no promise of generating ROI. When arrogance trumps analysis the result is always to ignore realities.

Certain kinds of relationships - franchising is one of them - tend to imbue the lead player with a sense of entitlement that simply won't work all the time. The passage of time - the impact of history - changes in technology, market and company life cycle changes all coalesce to erode balances of power. What once may have been a reliable option may, even with the same contract language over time become less useful and even dangerous. That's called reality. Refusal to take hard looks at your situation when trouble arises often leads to unnecessary expenses of large magnitudes and to serious structural damage to your future potentialities. The insights borne of crisis management experience transfer well from industry to industry and company to company. Don't let your access to this resource go unused. It may save your company, your distributive systems and your future.

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Tamerlane group's purpose is to prevent you from shooting yourself in the foot when you see a bad event threaten to develop. Our focused expertise in crisis management can prevent these situations from developing if we are called before someone makes self-humiliating public statements/files absurd lawsuits.

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1 Comment

When one wants what one wants, no matter how foolish or impossible it's hard to find someone for a little money who will tell you that you shouldn't spend a great deal of money to pursue folly.

I had a law firm once who always told our company we can do that for you, very quickly & all of the time.

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This page contains a single entry by Richard Solomon published on November 26, 2013 2:52 PM.

Why You Cannot Hope To Negotiate Your Franchise Contract was the previous entry in this blog.

The 4 Steps to Creating a Modern Franchise Owner's Group is the next entry in this blog.

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