The Court of Appeal handed down judgment at the end of November in relation to a dispute between a franchisor and an ex franchisee which highlights the dangers of failing to enter into properly drafted franchise agreements.
The franchisor had started to trade as Caspian Pizza in Birmingham in 1991 and had opened other outlets in the West Midlands. The defendant, Mr Shah opened a Caspian Pizza restaurant in Worcester in 2002 which closed in 2005 and further Caspian Pizza restaurants from 2004 onwards. Mr Shah’s restaurants were opened with the agreement of the franchisor, although no written franchise agreement was entered into. The franchisor argued that an oral franchise agreement had been entered into which required all goodwill in the trade mark to be transferred to the franchisor.
The franchisor obtained registered trade marks for both the name, “Caspian” and for its logo in 2005 and 2010 respectively.
A dispute arose between the parties and the arrangement between the two, whatever that arrangement may have been, came to an end, but Mr Shah continued to use the Caspian name and logo. The franchisor brought trade mark infringement proceedings but lost and appealed to the Court of Appeal. The Court of Appeal concluded that Mr Shah had indeed obtained a local goodwill in the Caspian name from 2002 onwards prior to the franchisor registering its trade marks. By virtue of Section 11 of the Trade Mark Act 1994 (“TMA”), a registered trade mark is not infringed by the use in the course of trade in a particular locality of an earlier right which applies only to that locality. Further, by virtue of Section 5(4) of the TMA, a trade mark shall not be registered if, by a passing off action, the owner of an unregistered trade mark, would be entitled to prevent the use of the trade mark. The Court of Appeal found that in the Worcester area, Mr Shah would indeed have been able to prevent the use of the trade mark, because he had developed his own goodwill in it and the Court of Appeal went on to decide that the Caspian trade mark had been invalidly registered. A bad day for the franchisor.
The case highlights that in almost all cases franchisors should obtain a registered trade mark before franchising and if they do not, very clear written contractual provisions must be agreed setting out who owns the goodwill in the trade marks and what is to happen following termination.
John Pratt, IDI franchising country expert for UK