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michael webster's picture

Franchisee Fees

So, let me get this straight.  

The franchisor took payments from the franchisee for renting a trademark the franchisor knew or ought to have known that they obtained by false pretences.

Why should the franchisor be allowed to retain these payments?

RichardSolomon's picture

If the FHS franchise agreement is competently drafted there is a

provision that says that the franchisor has the right to change the name and the franchisees have to change the namne they use at their own expense. It should also say that should the frachisor for any reason lose the right to use its name, that will not constitute a breach of the agreement by the frachisor and the frachisor will not be liable to the franchisee for any loss, claim or damage on account thereof - or similar language.

Because of that the franchisees who signed the agreement would have no claim against FHS.

michael webster's picture

Restitution Damages

Richard writes: 

It should also say that should the frachisor for any reason lose the right to use its name, that will not constitute a breach of the agreement by the frachisor and the frachisor will not be liable to the franchisee for any loss, claim or damage on account thereof - or similar language.

Richard, I agree that there is standard language.  Was it meant to allow the franchisor to collect and keep royalties for a trademark that was fraudulently obtained?

RichardSolomon's picture

It isn't fraud if that language is in the contract. The signer

is told that loss of name is a possibility by that language. If he signs it he agrees that in a lost name event he has no claim.

Even if you interpret the contract as you would an insurance policy, that would still be the result.  It is equal to an excluded peril clause.

I would love everything to be "fraud", as you know, because I thrive on fraud. Fraud is my second favorite F word. The third is Fiduciary. The fourth is Fried Chicked.

Paul Steinberg's picture

The jury found fraud, and a judge agreed

It is surprising that a reputable company such as Firehouse did this. The record shows not only that Firehouse knew about this, but that they went out of their way to lie to the government.

That is very serious, and that is why the franchisor was forced to pay the other side's legal fees.

I spoke to an attorney specializing in this area, and he tells me that this is very rare--you don't normally find the smoking gun as in this instance.

It would be one thing if a franchisor made a mistake as to their rights to the trademark. That is not what happened here.

This was fraud.

The jury determined that, and the judge upheld the verdict based on overwhelming evidence--namely, the franchisor's own words.

When one of the most important--if not the most important--things you are buying is the use of the trademark, it is a serious matter when the purported owner of the mark knew they had committed fraud to obtain the mark.

Why Firehouse picked this fight rather than let sleeping dogs lie is a mystery to me. This is not the level of integrity one would want to see in a business associate.

The smoking gun

Here's the smoking gun in which the franchisor knowingly lied about the trademark:

"Sorensen (Firehouse Subs co-founder) acknowledged that Firehouse Grill & Pub “predated” FRG Restaurants (franchisor Firehouse Subs) and “may” have superior rights in their market area."

"letter from (franchisor) Sorensen to (Tampa franchisee) Kanji referring to Firehouse Grill & Pub (the original and righful trademark holder) as “food and beverage establishment” and stating “nothing can be gained from their learning about us and our registered mark. To the contrary, the longer we operate at the same time, particularly given our recent press and notoriety in the restaurant industry, will only strengthen our rights vis a vis any rights they may have.” - From page 7 of 35 of the court's opinion.

In other words, Firehouse Subs sold these franchises knowing that they didn't have rights to the brand name. And the positive media coverage of Firehouse Subs empowered and emboldened the franchisor in its fraud.

Is this a trend

After reading comments on this post, I was wondering if this could be a trend for large companies in the U.S. Many large companies us their size, and how much money they have to pressure small mom and pop companies, who often have senior rights, from being able to defend themselves. At what point does someone, either in the government or the PTO realize that this is an unfair practice? The extreme cost involved in cases like this eliminate small business owners with rights from being able to battle the large companies in court. For instance, in this case, the multimillion dollar company that brought the case to trial was found to have committed fraud on the PTO. The defendant won the right to keep their name, and one half of their attorney fees. It seems to me that other large companies would see this ruling as a benefit to them cost wise, because they really have nothing to lose. Most mom and pops won't fight, and if they do fight and win, the large company is not even required to pay their attorney fees. It seems to me that this area of law needs to be looked at to make the playing field as equal as possible.

RichardSolomon's picture

You're not there yet. The lie was told to the USPTO, not to any

franchisee - at least not in that case's record.

that case was not a fraud on a franchisee case. The lie is not repeated in the franchise disclosure documents (FDD)).

Your opinion of Mr Sorenson is a good opinion that I share, but your are stretching if you claim that that case shown fraud on any franchisee.

 

michael webster's picture

FDD Item 13

Richard, have you read the FDD and item 13?  

The standard language likely does not contain the "All affidavits and renewals required by the PTO where necessary have been filed ... but, we lied to the USPTO on our affidavit".  

Pretty sure that is a material omission. Fancy talk for: a lie.

RichardSolomon's picture

How frequently have you seen cases made in franchise

disclosure matters where the gravamen was omission?

RichardSolomon's picture

Fraud on the patent office does not automatically translate into

fraud in the franchise sale - even on these extreme facts.

It depends in large measure upon how the contracts and FDD were prepared.

Fraud on the patent office is not rare in either patents or trademarks/service marks. Especially the way the patent code works lately and presently, and patents are usually considered the sacred ground of IP.

The litigation between Interstate Transmissions and Interstate Batteries is a typical example. IBG claimed that the use of Interstate Transmissions as a name infringed because transmissions represented a natural area of expansion for IB. When IT lost its name it's franchisees sued and lost. It was a long time ago in Federal court in Michigan, but the rule and the reasoning are still the law, I believe (but have not checked to be sure). IT knew very well of IB's use of the name and of the scope and nature of its commercial activity. IT's counsel was seriosly challenged in the area when the name was chosen. IT was a group of former AAMCO franchisees who broke away.

michael webster's picture

Material Breach

If the franchisor has lost the exclusive right to a trademark, you likely have a material breach of the contract by the franchisor.

RichardSolomon's picture

Loss of the name would never be a breach of a properly

drafted franchise agreement.

If loss does not equal breach due to good  draftsmanship, the circumstances of the loss are not likely to contravee what the parties agreed to in writing.

michael webster's picture

Loss of Name?

Hmm.  Pretty sure that we are talking about more than a simple name change here.

But maybe you are right. Paying royalties to someone for something they don't own, a federal trademark, just seems wrong. Jeez, even Cuppy's went to the trouble of getting a federal trademark registered.

Don Sniegowski's picture

CEO says firehouse brand sound. Won't see $5 footlong. Really?

I recently read an interview of the CEO of Firehouse Subs, Don Fox, by Jacksonville's Financial News & Daily Record. Less than two weeks ago on October 21, Fox said:

The brand is fundamentally sound

Disingenuous?

The pronouncement of a sound brand was said days after an August 20th verdict against franchisor Firehouse Subs was finally filed to the public on October 17. A jury and judge specifically found that Firehouse did not have a sound brand. The franchisor had lied to the U.S. Patent and Trademark Office in obtaining its brand/trademark. It did not have rights to use the "Firehouse Subs" trademark. Yet, there was no mention of the ruling on its brand name to the reporter.

Curious.

CEO Fox then said:

... coupons don’t promote brand loyalty and that the same is true for catchy promotions competitors use. “You won’t see Firehouse do a $5 footlong,” Fox told the group. He said the company will not compromise its ingredients to fit such a promotion and franchisees will not make money with such deals.

Yesterday, I visited a new Firehouse Subs shop. I remember in 2009 upon entering one of their shops I was amazed how this chain managed to maintain such high prices for its subs during a major recession when its competitors were cutting prices left and right. As I recall, I bought a fairly typical sandwich for over eight dollars. But last night the sandwich prices on the menu board were $5.49 all in a row. That's quite a tumble. One can imagine what that does to a franchised unit's profit line. As I looked at those $5.49 prices, I thought of Fox's comment of not seeing a $5 footlong in his chain. I take it that he means although item prices may come down by dollars, he won't be offering 49 cent discount coupons to even out a sub at $5. Or maybe he means that the chain's sub sandwiches won't ever be exactly a foot long.

Disingenuous?

It looks to me that Subway's five dollar footlong campaign continues to have a profound impact on its competitors. They just won't admit it.

RichardSolomon's picture

Losing the right to federal registration of the mark does not

mean you can't use the mark. It means that you do not have the rights conferred on account of valid federal registration and subsequent Section 8 & 15 filings. You still have your comon law rights. The prior use by others may have an impact geographically, but FHS still has the right tio use and to sue to protect their position under comon law.

I think most folks in here are aassuming that FHS lost the right to use the mark. That aint so.

Ed Teixeira's picture

FireHouse Subs

I wrote a blog about this case a few months ago. The owner was ironically a former fireman who risked everything to fight this battle. I recall the title of the blog was " The Little Guy Takes on the Large Franchisor"  The other item is that not long ago Firehouse Subs was lauded for including its franchisees in a plan to reverse a negative sales trend. As my late mother would say: "You never know"

Don Sniegowski's picture

Firehouse Subs never had rights to trademark

I see that the NY Times covered the supposed turnaround of Firehouse Subs. The franchising company had a bipolar franchisor disorder. Faced with sinking sales, the franchisor got depressed and just gave up, figuring that their franchisees individually could do better. So they cancelled their two percent ad fund and let the franchisees fend for themselves in their local market.

Anarchy didn't work.

Firehouse Subs then came back with a vengence. They then "listened" to their franchisees, who would give advice on centrally controlled national marketing efforts. The franchisor implement a marketing plan at four percent, double the original ad fund rate.  The franchisor declared that top line sales improved.

Of course, Firehouse Subs is up against the very modern system of Subway sandwich shops, in which franchisees take charge of national advertising through their own ad company, where franchisees hire top-notch marketing executives that lead such functions. That franchisee cooperative structure is quite different than just letting franchisees individually fend for themselves to market in their own neighborhoods like Firehouse Subs did.

The irony of all of this now is that the court has ruled that the brand never belonged to Firehouse Subs. Mr. Webster points out that the franchisees are paying royalties and fees for something that isn't the franchisor's to give.

Legal questions to trademark experts

The ruling says that the federal jury ordered cancellation based on fraud being used to obtain the Firehouse Subs trademark. I thought the U.S. Patent & Trademark office was the one to cancel a trademark since they are the ones that grant it. No? Or is this just a formality?

  1. In doing due-diligence, would a franchisee be able to catch the fact that Firehouse Subs never really owned its trademark? Experts here tell franchisees that one of the first things they should do is to look on the US Patent & Trademark site to see if the franchisor does indeed own the trademarks. Would that have helped Firehouse Subs franchisee wannabees? Right now a search on USPTO says, "Sorry, no results found for 'Firehouse Subs'."

  2. How strong are franchise agreements if the franchisor doesn't hold the brand trademark at the time the contract was signed?

  3. What is the franchisor's likely next step? I'm assuming the next step for the franchisor with no trademarked name is to change their name, OR see if they can refile federally for Firehouse Subs. If so, then they pay the millions(??) necessary to purchase the trademark in certain states where the name is already in use by others. Sellers of the trademark would be in a strong position.

As of today, Firehouse Subs continues to use their name and logo on their website. Franchises continue to hang Firehouse Subs signs in front of their stores and use menus and posters with that name.


This is just Don Sniegowski's personal comments and questions in a discussion thread. It is not an investigative news piece that has been edited and vetted for accuracy.

Don Sniegowski's picture

Franchise Business Review: Firehouse zees among most satisfied

One more observation: As franchisees experienced the down and then up over the turmoil in ad fees, Franchise Business Review lists Firehouse Subs as one of its top 30 restaurants chains (pdf) as having the most satisfied franchisees. It should be pointed out that franchisees tend not to be very satisfied during times of turbulence and the raising of fees. That reported satisfaction also happened as the legal case that challenged their franchisor's right to carry the brand (trademark) went through the court. The court now has entered a verdict in which they decried Firehouse Subs in the strongest terms for fraud in respect to obtaining the trademark. It should also be pointed out that business owners buy a franchise and pay royalties for the right to use a trademark.

Among the most satisfied restaurant franchisees?

That is hard to swallow.


This is just Don Sniegowski's opinion that contributes to a comment thread. It is not an investigative news article that has been edited and vetted for accuracy.

Franchise Business Review is a Paid Review Company

Franchise Business Review (FBR) is franchise lead generation site masquerading as the "Consumer Reports" of franchising.

FBR is paid provider of positive franchisor reviews.

Ray Borradale's picture

Arsenic and Sugar

These types of ratings reviews and the paid-for awards dished out within the franchising industry are merely small cogs in the highly sophisticated sham that not only suckers gullible investors generating leads but gives parasites to the industry, Courts, prosecutors and government an apparently digestible excuse to deny what is more often than not fraud. Franchising has created a false aura of health and corporate decency where there is very little. Only fools sign today’s franchise contracts.

Don Sniegowski's picture

Who was the franchising consultant for Firehouse Subs?

Does anyone know who was the franchising and legal consultant for Firehouse Subs as they launched into franchising in 1994?

RichardSolomon's picture

I know who did Oinkadoodle Moo, but not who did Firehouse.

If FHS were here in Houston I could bet who the guy was who skimmed the Patent Office forms.

Usually it is safer to scam the Patent Office than it is for a woman to have dinner with Herman Cain.

Oinkadoodle Moo

Oinkadoodle Moo -- now that is one creative and funny name. Bowmoo Mint could be another.