Appeals Court Affirms that Franchisor Owns Trademark Created by Franchisee

The Court of Appeals for the Eighth Circuit recently held that a trademark created by a Little Caesar’s franchisee is owned by Little Caesar’s, and that Little Caesar’s did not violate its franchise agreement by registering the trademark.

In Pinnacle Pizza Company, Inc. v. Little Caesar Enterprises, Inc., Pinnacle, a Little Caesar’s franchisee who owned several stores in South Dakota, created a marketing concept on May 6, 1997 called “Hot-N-Ready.” The marketing concept guaranteed customers a hot, medium pepperoni pizza for $4 within five minutes of request every Tuesday, and it was extremely successful. Pinnacle shared the “Hot-N-Ready” concept with other Little Caesar’s franchisees and one of these franchisees later made a presentation of the concept to a Little Caesar’s convention. Little Caesar’s thereafter began actively marketing the "Hot-N-Ready" concept to its franchisees.

In 2002, Little Caesar’s filed an application in the U.S. Trademark Office to register “Hot-N-Ready” as a trademark. The application claimed that the mark was first used on May 6, 1997, the date on which Pinnacle first used the mark. Little Caesar’s was issued a registration for the “Hot-N-Ready” mark.

When Pinnacle learned of Little Caesar’s trademark registration in 2004, it filed suit against Little Caesar’s claiming, among other things: breach of contract for violation of its franchise agreement with Little Caesar’s and violation of the South Dakota Franchise Act.  Pinnacle also claimed that Little Caesar’s obtained the trademark registration in bad faith and it sought to cancel the registration. Little Caesar’s counterclaimed for breach by Pinnacle of the franchise agreement which included a clause that stated that Pinnacle “shall not directly or indirectly contest or aid in contesting and/or consent to a third party contesting the validity or ownership of” Little Caesar’s trademarks.

As an initial matter, Little Caesar’s argued that Pinnacle’s claims of breach of contract and violation of the state franchise act were barred by the statute of limitations. The statute of limitations for each claim was six years, and Little Caesar’s maintained that because the claims arose in 1997, Pinnacle was barred from asserting them in 2004. Pinnacle argued, however, that Little Caesar’s continued use of the “Hot-N-Ready” mark was an ongoing wrong that was not barred. The Court of Appeals agreed with Little Caesar’s and held that each subsequent use of the “Hot-N-Ready”  mark was merely more evidence of the original breach, but not a new, distinct breach. Therefore, the court held that Pinnacle’s claims of breach of contract and violation of the state franchise act were barred by the statute of limitations and the court did not rule on these claims.

The court then turned to Pinnacle’s request to cancel Little Caesar’s trademark registration for “Hot-N-Ready.” Pinnacle claimed that Little Caesar’s registered the mark in bad faith because the mark was owned by Pinnacle. As evidence of this bad faith, Pinnacle pointed to the fact that Little Caesar’s listed May 6, 1997 – the date on which Pinnacle began use of the mark – as the date of first use of the mark.

The court, however, looked to the franchise agreement which provided:

“Franchise Owner expressly acknowledges that any and all goodwill associated with said Proprietary Marks, including any goodwill which might be deemed to have arisen or to arise in the future through the activities of any Licensee of LITTLE CAESAR, inures directly and exclusively to the benefit of LITTLE CAESAR.”

The court also looked to the U.S. Trademark Act which provides that any use of a trademark by a “related company,” which includes parties such as licensees and franchisees, inures to the benefit of owner of the mark. Accordingly, the court held that the franchise agreement authorized Little Caesar’s actions and its registration of the “Hot-N-Ready” mark was valid and not in bad faith.

Lastly, the court turned to Little Caesar’s claim that Pinnacle violated that franchise agreement by contesting the validity and ownership of Little Caesar’s registration for “Hot-N-Ready.” Pinnacle claimed that it was not in breach of this provision of the franchise agreement because it brought the lawsuit against Little Caesar’s in good faith. The court noted, however, that Pinnacle could not point to any provision in the franchise agreement, or under applicable state law, that implies a good-faith exception to a covenant not to sue. Therefore, because Pinnacle provided no authority to suggest that it is unfair or inequitable for a franchisor to exercise its rights under a mutually agreed upon covenant not to sue, the court ruled for Little Caesar’s and held that Pinnacle was in breach of the franchise agreement.