Franchisee ideas become the property of the franchisor, ruled the 8th Circuit Court of Appeals. And if the franchisee complains, that is a breach of the franchise agreement.

Pinnacle Pizza v. Little Caesar Enterprises was previously discussed on BMM.

1. Jim Fischer was a franchisee (and co-owner of Pinnacle), and on May 7, 1997 he ran an advertisement guaranteeing that on every Tuesday, a customer would get a pepperoni pizza for $5 made in 4 minutes.
2. Fisher used the slogan "Hot-n-Ready."
3. The ad campaign was a great success, and other franchisees imitated the campaign.
4. Fischer did not object, and even encouraged other franchisees to use the slogan.
5. In 2002, the franchisor (privately-owned Little Caesar Enterprises) filed for trademark protection.
6. The franchisor stated the date of first use of the slogan was May 6, 1997-- the day that Fisher had placed the ad with the newspaper.

The trial court ruled that "Hot-n-Ready" belonged to the franchisor, and the trial court ruled that in contesting the franchisor's right to the slogan, Pinnacle had breached the franchise agreement. However, the trial court did not grant the franchisor's demand for legal fees, and instead awarded the franchisor $1 (One Dollar) as damages.

On appeal, the 8th Circuit ruled (March 22, 2010) that all of the use of "Hot-n-Ready" constituted a single actionable event, and hence held that Pinnacle's claims against the franchisor (for breach of contract and violations of state law) were barred by the statute of limitations. The Court upheld the trial court ruling that the slogan belonged to the franchisor at the very moment it was first used by the franchisee in the advertisement, and upheld the $1.

Even so, the trial court held Pinnacle liable for $23,868.22 in costs (later increased to $28,895.42) and ordered Pinnacle to pay that to the same franchisor that centered an advertising campaign using Pinnacle's idea without any compensation. (In addition, Pinnacle agreed to pay an additional amount of $11,092.85 to Little Caesar for expert costs. The Court subsequently found those expenses to not be allowable as costs, but since the parties had entered into a stipulation the court noted that the additional amount could be enforced outside the Bill of Costs).

So, the franchisee who came up with "Hot-n-Ready" ended up paying his own legal fees, plus he had to give his franchisor $39,988.27. ...and if he uses his own slogan without permission, he will be liable for infringement.

In the previous BMM article, one attorney commented that the "winners" were the Little Caesar's franchisees since they can use Jim Fischer's idea without paying any "additional royalties." While factually correct, that logic would suggest that people who download bootleg movies are also "winners."

The legal lesson here is that franchisees who improve their franchise system are giving a gift to their franchisor.

The moral lesson is not so simple. Jim Fischer never brought suit against anyone who used "Hot-n-Ready." He brought suit because his franchisor trademarked the slogan developed by Fischer.

Not only did Mike Ilitch make a large amount of money from Jim Fischer, he took Fischer's idea and then counterclaimed for legal fees when Fischer tried to assert ownership of the idea which Fischer had developed. Mike Illitch, who conducts a major public relations effort to present himself as a philanthropist and humanitarian, is not so nice when it comes to his franchisees.

Law and morality are two distinct concepts. And while the trial court's award of a single dollar in "damages" indicates what the Judge thought of Mike Illitch, the courts are bound to enforce the law... not ethical behavior.