Case Update: Using a franchisor’s name without a franchise agreement

Michelle Waknine, Associate, Fladgate LLP (mwaknine@fladgate.com)

The recent case of Ghias v (1) Grill’O Xpress Ltd (2) Malik considered the compensation payable where a franchise brand is used after the termination of the franchise agreement without the permission of the brand owner.

The claimant, Ghias, was the franchise brand owner of a group of fried chicken restaurants trading under the names “GRILLER” and “GRILLO” (registered as UK trade marks by the claimant).

The defendants entered into a franchise agreement with the claimant for the use of the claimant’s brand, however, following termination of the agreement, the defendants changed the name of the restaurant to “Grill’O Xpress” which the claimant argued was an infringement of its brand.

The courts ruled in the claimant’s favour and found that an infringement had occurred, and compensation was claimed by the claimant on the following two grounds:

1. Firstly, the claimant claimed “user principle” damages, i.e. compensation based on the fees that would have been payable by the defendants had the franchise agreement remained in place. The court rejected the defendants’ case that the restaurant was loss-making but accepted the claimant’s argument that the business had grown (which meant that the claimant could ask for more by way of franchise fees). The court ordered the defendants to pay £7,500 for the initial fee and £400 per month for the 32 months of infringement (under the original contract, the defendants had paid £5,000 initially and £333 per month). The claimant was also awarded interest (2.75%), which brought total damages in excess of £21,000. The judges maintained that user principle damages should be “liberally assessed”, but should be compensatory, rather than acting as a penalty.
2. The claimant also claimed additional damages under the Intellectual Property (Enforcement, etc.) Regulations 2006, on the basis that the defendants “knew and had reasonable grounds to know” that they were carrying out an infringing activity. However, this claim was dismissed by the court on the basis that additional damages should only be awarded if a claimant would not be adequately compensated with user principle damages – in this case, the court considered that the user principle damages had been “liberally assessed” and had already sufficiently compensated the claimant. The court also rejected the claim on the basis that “knowing infringement” was not enough to trigger additional damages – there had to be something more, as otherwise, additional damages would always be awarded.

Assuming that this decision would apply to any similar dispute involving a franchise brand, e.g. hotel franchise brands, this case produces interesting results for the franchise world. In particular, due to the court’s reserved approach to issuing additional damages (even where there has been “knowing infringement”), this case can be considered as a blow for franchise owners. The fact that the franchise owner in this case was considered to be liberally compensated by receiving just a 2.75% uplift on fees he would have received had a franchise agreement been in place, also certainly begs an interesting question as to whether this is a sufficient deterrent against the use of a franchise brand name without permission/an agreement in place with the brand owner.