US-DIST-CT, FRANCHISE-GUIDE ¶10,157, Sparks Tune-Up Centers, Inc. v. Samuel L. Panchevre, Maricela Panchevre, Fred Hobbs, individually, Alamo City Investments and C & H Corp., (Dec. 02, 1992)

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U. S. District Court, Northern District of Illinois, Eastern Division. No. 90 C 4369. Dated December 2, 1992.

Trademarks and Trade Names--Infringement--Damages--Proof of Actual Damages--Injury from Breach of Contract.--An automobile tune-up shop franchisor could not recover damages for trademark infringement by prospective franchisees because the franchisor did not suffer any actual damages from the infringement. To recover damages under the federal trademark law, a plaintiff must prove (1) that the defendant violated the law, (2) that the violation caused actual confusion among consumers, and (3) that actual injury resulted from the violation. Since the prospective franchisees were previously held to have infringed the franchisor’s trademarks and to have confused consumers (BUSINESS FRANCHISE GUIDE ¶10,116), the franchisor only had to demonstrate actual injury. Rather than alleging actual injury from the trademark infringement (such as a loss of sales, profits or present value), the franchisor alleged injury from breach of contract (in the form of the prospective franchisees’ outstanding franchise fees, initial advertising fees, weekly advertising fees, and royalty payments).

Trademarks and Trade Names--Infringement--Recovery of Profits--Unjust Enrichment of Infringer--Need for Deterrence.--An automobile tune-up shop franchisor that was denied damages for trademark infringement by prospective franchisees could recover the profits of the prospective franchisees during the period of infringement. The recovery of profits does not require proof of injury or damages, since it flows from proof of the infringer’s unjust enrichment and the need for deterrence. In this case, the franchisor was entitled to recover the $38,695 in gross sales that the prospective franchisees earned from March 24, 1990, through August 10, 1990. While not challenging the amount of gross sales, the prospective franchisees argued that they should not have to pay profits because they did not earn a profit during that period. However, the award of profits was justified in order to avoid unjust enrichment of the prospective franchisees and to deter others from willfully infringing a trademark. The failure to take money out of the business did not affect the determination, since it is not uncommon for a new business owner not to take money out until after the new business becomes stable. Moreover, the prospective franchisees failed to present evidence demonstrating that the business did not turn a profit during the pertinent time period.

Trademarks and Trade Names--Infringement--Attorneys’ Fees and Costs--Willfulness--Excessiveness of Request.--An automobile tune-up shop franchisor was awarded $62,300 in attorneys’ fees and costs incurred in bringing a lawsuit against prospective franchisees infringing its trademark. The federal trademark law authorizes such an award to a plaintiff prevailing in a trademark action when the infringement is willful. However, the amount of the award was lowered from the franchisor’s request of more than $95,000, since it should not have taken the franchisor’s attorney over 600 hours to handle such a relatively straightforward case. Accordingly, the request for fees and costs was reduced by approximately 35%.

WILLIAMS, D.J.: Plaintiff Sparks Tune-Up Center, Inc. ("Sparks") brought this law suit against defendants Samuel and Maricela Panchevre and Fred Hobbs, alleging trademark infringement and unfair competition. Specifically, plaintiff claimed that defendants opened and operated a Sparks tune-up center without a valid franchise license. On August 19, 1992, this court granted plaintiffs motion for summary judgment, finding defendants liable for trademark infringement and unfair competition. This case is currently before the court on plaintiff’s request for damages, profits, and attorney’s fees. For the reasons stated below, plaintiff’s request is granted in part and denied in part.

Sparks is a national franchisor of automotive centers which are run under a standard, unique and uniform system developed by Sparks. Sparks has federally registered proprietary service marks and trademarks for computerized automotive tune-up services and for rendering technical aid and assistance in the establishment and/or operation of automotive maintenance and repair shops. At the time this cause of action arose, Sparks had approximately 135 franchisees nationwide.

On July 31, 1989, Samuel Panchevre and Hobbs, representing themselves as partners of a company called Alamo City Investments ("Alamo"), met with Sparks’ director of franchise sales to discuss obtaining a Sparks franchise to be operated in Indianapolis, Indiana. ¹ At the meeting, defendants received a copy of the Sparks Uniform Franchise Offering Circular which contained, among other things, a complete copy of the Franchise Agreement ("Agreement"). On November 9, 1989, the Panchevres personally executed the Agreement and other related documents, and paid $5000 toward the required $20,000 initial franchise fee.

Between November 1989 and March 1990, Samuel Panchevre and Hobbs took steps to open their franchise by ordering equipment, overseeing leasehold improvements on the franchise site, and hiring Walter Rogers ("Rogers") to be their on-site manager. Rogers was sent to the Sparks training class in Downers Grove, Illinois after Panchevre promised Sparks that the remaining balance of the franchise fee, as well as the required advertising fee, would be paid. When these fees were not paid and other conditions precedent to the granting of a Sparks franchise were not met, Sparks informed Panchevre and Hobbs that they would not receive a Sparks franchise license.

Despite warnings by Sparks that they were not authorized to open a Sparks franchise, defendants opened a Sparks Tune-Up Center in Indianapolis on March 24, 1990. In July 1990, defendants changed the exterior signs on the shop to "Alamo Brake & Tune." Thereafter, Sparks sought a temporary restraining order ("TRO") to prevent defendants and their agents from continuing to use the Sparks trademark. After this court issued the TRO on August 2, 1990, defendants’ shop closed.

After discovery was completed, plaintiff moved for summary judgment pursuant to Federal Rule of Civil Procedure 56(c). On August 19, 1992, this court issued a memorandum opinion and order, among other. things, granting plaintiff’s motion for summary judgment. This court found that defendants failed to obtain a valid franchise license because they failed to comply with the conditions precedent prior to opening their Sparks automotive center. Specifically, defendants failed to pay $15,000 of the initial franchise fee and to provide plaintiff with the requisite certificate of insurance. Since defendants opened and operated a Sparks center without authorization to use the Sparks trademark, this court concluded that defendants were liable for trademark infringement and unfair competition.

Plaintiff contends that it is entitled to recover $182,803.80 plus costs from defendants. This figure represents: (1) $48,260.75 due under the Agreement, (2) $38,695.94 in profits, and (3) $95,847.11 in attorney’s fees and costs. Defendants argue that they should not be held accountable for costs under the Agreement because, in its August 19, 1992 opinion, this court established that defendants were not valid franchisees. Defendants also contest the attorney’s fees and costs sought by plaintiff because they claim that they are unreasonable. Finally, defendants argue that Maricela Panchevre should not be held liable for damages because she only signed the Agreement to help her husband, Samuel Panchevre, start his new business and that defendants should not be held liable because they transferred their interest in the business to Hobbs shortly after the automotive center opened.

Section 1117 of the Lanham Act provides the monetary remedy for trademark infringement:

15 U.S.C. §1117 ("Section 1117"). Having previously determined that defendants are liable for trademark infringement, the only remaining question is whether the remedy plaintiff requests is appropriate.

To recover damages for a trademark violation, a plaintiff must prove actual damage resulting from actual consumer contusion or deception. See Schutt Manufacturing Co. v. Riddell Inc., 673 F.2d 202, 206 (7th Cir. 1982). Specifically, a plaintiff must prove: (1) that defendant violated the act, (2) that the violation caused actual confusion among consumers of plaintiff’s product, and (3) that as a result, plaintiff suffered actual injury.

Web Printing Controls Co., Inc. v. Oxy-Dry Corp., 906 F.2d 1202, 1204-05 (7th Cir. 1990). Having determined that defendants violated the trademark act and caused confusion among plaintiff’s consumers, plaintiff must only prove that it has suffered actual damages before it can recover in this instance.

Plaintiff contends that it is entitled to recover defendants’ outstanding payments on their initial franchise fee, initial advertising fee, weekly advertising fees, and royalty payments plus interest due under the Agreement. ² However, such claims do not state a valid damages claim under the Lanham Act. To demonstrate an actual injury from a trademark infringement, a plaintiff must demonstrate, for example, a loss of sales, profits, or present value. Id. at 1205; see also Schutt Manufacturing Co., 673 F.2d at 206 (A party seeking money damages must demonstrate that it has been damaged by actual consumer reliance on defendant’s misrepresentations). Plaintiffs claims appear only to allege injury from breach of contract. Plaintiff has provided this court with no evidence indicating that such damages are recoverable under the Lanham Act or, in what other way, plaintiff has suffered actual injury. Therefore, plaintiff is not entitled to recover the requested damages from defendants.

[Recovery of Profits]

However, other avenues of relief are still available to plaintiff. "In the past, courts have fashioned wide-ranging relief for a violation of the Lanham Act, allowing remedies such as a recovery of defendant’s profits, an award of costs of the action, and, in some exceptional circumstances, an award of attorney’s fees." Id.; see. e.g., Roulo v. Russ Berrie & Co., 886 F.2d 931 (7th Cir. 1989), cert. denied, 110 S.Ct. 1124 (1990); Otis Clapp & Son, Inc. v. Filmore Vitamin Co., 754 F.2d 738 (7th Cir. 1985). Such remedies do not require such a stringent burden of proof as a damages claim. Indeed, such remedies do not even require proof of injury or damages. "These remedies flow not from the plaintiff’s proof of this injury or damages, but from its proof of the defendant’s unjust enrichment or the need for deterrence, for example, or, in the case of costs, merely from its proof of the defendant’s Lanham Act violation." Web Printing Controls Co., 906 F.2d at 1205. This interpretation of the Lanham Act comports with the Seventh Circuit’s repeated admonition that "the trial court’s primary function is to make violations of the Lanham Act unprofitable to the infringing party." Joseph J. Legat Architects, P.C. v. United States Development Corp., 1991 U.S. Dist. Lexis 3358 (N.D. Ill. 1991) (quoting Otis Clapp & Son, Inc., 754 F.2d at 744).

In this case, plaintiff seeks to recover the $38,695.94 in gross sales which defendants’ automotive center earned from March 24, 1990 to August 10, 1990. ³ Plaintiff supports this claim with an exhibit thoroughly analyzing defendants’ automotive center’s gross sales during this time period. ⁴ Defendants do not dispute plaintiff’s calculations or its final figure for the center’s gross sales. Defendants only argue that they should not be held accountable for the center’s profits because they did not receive any profits during the time in question. Indeed, defendants contend that they did not believe that they were earning a profit at that time and that additional money had to be put into the business to keep it open.

This court finds that plaintiff is entitled to recover defendants’ profits. As this court explained in its August 19, 1992 opinion, defendants wilfully opened and operated a Sparks automotive center without plaintiff’s authorization. Defendants cannot be permitted to profit from such a wilful infringement of plaintiff’s trademark or to be unjustly enriched by the profit their automotive center generated. Moreover, awarding plaintiff profits will serve as a deterrent to those who would wilfully infringe upon a trademark. Vuitton et Fils, S.A. v. Crown Handbags, 206 U.S.P.Q. 907,912 (S.D.N.Y. 1979), aff’d, 622 F.2d 577 (2d Cir. 1980).

Defendants’ failure to take money out of their business during the pertinent time period does not affect this court’s determination. It is not uncommon for an owner of a new business not to take money out until after the new business has become stable. Regardless of their decision not to take money out of their business, defendants have not provided this court with evidence demonstrating that their automotive center did not turn a profit during the pertinent time period or any reasons why plaintiff should not be permitted to recover their profits. Absent evidence to the contrary, this court finds that plaintiff has adequately demonstrated that defendants’ automotive center earned $38,695.94 in gross sales during the pertinent time period and that it is entitled to recover this money pursuant to Section 1117.

[Attorneys’ Fees]

Plaintiff is also entitled to recover attorney’s fees. Under Section 1117, "the court, in exceptional cases, may award reasonable attorney’s fees to the prevailing party." This provision is properly invoked when, as in this case, defendants’ violation is wilful. See, e.g., Gorenstein Enterprises v. Quality Care-USA, 874 F.2d 431,436 (7th Cir. 1989); Otis Clapp & Son, Inc., 754 F.2d at 746. However, upon careful review of plaintiffs petition, this court finds plaintiff’s request for $95,847.11 in fees and costs to be excessive.

Plaintiff claims that this case "called for ... an all out effort and defense," and that defendants "should not be surprised that dogged research was necessary, investigation needed to be carried on in several states, extensive discovery and travel was authorized and necessary." ⁵ However, this court agrees with defendants that it should not have taken plaintiff’s attorney over 600 hours to handle this relatively straight-forward case. For example, plaintiff’s motion for a TRO was granted following oral argument and the only major motion brought before the court was plaintiffs motion for summary judgment. Plaintiff also brought a motion to compel and a motion for rule to show cause, but plaintiff has already received attorney’s fees for those motions. ⁶ This court is not persuaded that it should have taken plaintiffs attorney so much time to complete such tasks. Since this court finds the attorney’s fees requested to be excessive compared to the work required, this court reduces plaintiffs request for fees and costs by approximately 35%. Plaintiff is entitled to recover $62,300 in fees and costs.

Defendants argue that Maricela Panchevre should not be held accountable for these damages because she did not actively participate in the disputed business. They claim that she only signed the franchise agreement to help her husband, Samuel Panchevre, start this new business venture. However, in its August 19, 1992 opinion, this court determined that she was liable to plaintiff because she signed the Agreement. Therefore, contrary to defendants’ contention, she can be held accountable for damages plaintiff sustained.

Defendants also argue that they should not be held accountable for plaintiff’s damages because they transferred their interest in the disputed business to Hobbs shortly after the automotive center opened. However, as plaintiff suggests, under the Agreement, defendants were required to obtain plaintiffs consent before any transfer or assignment of the franchise. Since defendants did not obtain such permission, they are responsible for plaintiffs damages as determined above.

For the reasons stated above, plaintiffs request for profits in the amount of $38,695.94 is granted and plaintiffs request for damages in the amount of $48,260.75 is denied. Plaintiff’s request for attorney’s fees and costs is granted, but plaintiff is only entitled to recover approximately 35% of the $95,847.11, totalling $62,300. In total, plaintiff is entitled to recover $100,995.94.