United States: Franchisee Can't Work Its Way Out Of Trademark Infringement And Breach Of Contract Litigation On Jurisdictional Grounds

An out-of-state franchisee sought to escape the reach of the Massachusetts District Court in a breach of contract and trademark infringement litigation filed by its Massachusetts-based franchisor. But, the parties quickly discovered that the Court is primed to flex its muscles when deciding jurisdictional questions presented in the franchisee's motion to dismiss.

Defendant TFL Fishers, owned by co-defendant Rosalyn Harris, had entered into a franchise agreement with Plaintiff GISF to operate an exercise studio in Indiana under the "Get In Shape for Women" brand owned by GISF. The franchise agreement included provisions under which Defendants agreed to pay GISF a percentage of gross sales as royalties, only use GISF names and trademarks for operation of its studio, and to attend an annual training session in Massachusetts. The franchise agreement also contained other significant terms, including a right of GISF to receive notification of any offers to purchase the franchise and to purchase the studio on the same terms, and a clause entitling GISF to recover reasonable attorneys' fees incurred from enforcement of the agreement.

Two years into the agreement, Ms. Harris opted to sell her studio and all of the related assets for $1 to a company owned by her sister and notified GISF that she was closing the studio. However, the studio remained open and began operating under the name Fit Chicks with Ms. Harris as volunteer manager. Notably, Ms. Harris did not remove signage containing the "Get In Shape For Women" name and logo from the exterior of the studio for several weeks after she moved to terminate the franchise agreement.

GISF then demanded that Ms. Harris immediately cease operation of the Fit Chicks studio and comply with the termination procedures in the franchise agreement. GISF also sought payment from Ms. Harris for future royalties that would have been due under the agreement and for a transfer fee that would have been paid to GISF if Ms. Harris had complied with the sale procedures outlined in the agreement—totaling just under $60,000.

Ms. Harris refused the demands, and GISF filed its lawsuit against Defendants in the District of Massachusetts shortly thereafter. Among its causes of action, GISF included a trademark infringement claim under the Lanham Act, arguing that by continuing to display the Get In Shape for Women name and logo after the studio sale, Defendants were likely to cause consumer confusion as to whether the Fit Chicks studio meets quality standards required of GISF's franchisees, and Defendants caused dilution and disparagement of the distinctive quality of the Get In Shape for Women name and related mark.

Defendants then filed a motion to dismiss, alleging lack of personal and subject matter jurisdiction. First, Defendants contended that because the amount in controversy in the case fell below the statutory minimum, the Court could not exercise diversity jurisdiction over Defendants. Second, Defendants claimed that because Ms. Harris does not reside in Massachusetts, the studio was located in Indiana, and she only spent five days in Massachusetts for training during the term of the agreement—thus failing the purposeful availment prong of the test for specific personal jurisdiction.

With respect to the subject matter jurisdiction issue, GISF argued that (i) the Court had federal question jurisdiction because the case involves a Lanham Act claim and (ii) the Court had diversity jurisdiction because the parties are from different states and the amount in controversy would exceed the $75,000 minimum. Regarding personal jurisdiction, GISF claimed that under a theory of specific personal jurisdiction, the litigation arises from Defendants' suit-related conduct, the Massachusetts long-arm statute grants jurisdiction, and exercising such jurisdiction is consistent with the Constitution.

The Court sided with GISF on both counts. Turning first to subject matter jurisdiction, Chief Judge Saris noted that, generally, "[t]he mere existence of a trademark does not confer jurisdiction over a contract dispute." But here, she ruled that because GISF has alleged infringement of its mark and damage to the reputation of its mark under the Lanham Act based upon Defendants' conduct, a federal law cause of action exists and subject matter jurisdiction is proper.

In addition, Chief Judge Saris found that the Court also had diversity jurisdiction of the case. Because GISF had alleged contract damages of nearly $60,000 in conjunction with the fact that it is entitled to attorneys' fees under the franchise agreement, she found GISF's allegations sufficient to indicate it is not a legal certainty that the claim involves less than the jurisdictional amount.

Based upon the above points, the Court denied Defendants' motion to dismiss for lack of subject matter jurisdiction.

Turning next to the issue of personal jurisdiction, neither party opted to argue that the Massachusetts long-arm statute imposes stricter limits on the Court's ability to exercise jurisdiction than the Constitution – despite some case law indicating otherwise. Therefore, the Court proceeded directly to an analysis of whether its exercise of specific personal jurisdiction was proper under the Constitution.

Chief Judge Saris insightfully explained that the facts and circumstances of the present case are eerily similar to those found in one of the foundational cases involving franchisees and personal jurisdiction—Burger King Corp. v. Rudewicz, 471 U.S. 462 (1985). In Burger King, the Supreme Court ruled that a Florida court could exercise specific jurisdiction over a Michigan-based franchisee in a dispute arising out of a franchise agreement between the parties.

In the present case, like in Burger King, Chief Judge Saris noted that:

  • Defendant deliberately reached out to Plaintiff in its home state to negotiate the franchise purchase;
  • The current dispute arose directly out of that purchase;
  • The franchise agreement included a choice-of-law provision stating that the agreement would be governed by the laws in the Plaintiff's home state;
  • All payments under the agreement would be made to Plaintiff in its home state; and
  • The agreement required Defendant to attend training courses and meetings in Plaintiff's home state.

As a result, the Court concluded that exercise of specific personal jurisdiction over TFL Fishers and Ms. Harris would comport with the Constitutional requirements and denied Defendants' motion to dismiss on this ground.

In her opinion, Chief Judge Saris provides a detailed and insightful analysis of the complex and nuanced facets of law governing the exercise of subject matter jurisdiction and personal jurisdiction. As it did not work out for Defendants in this instance, those contemplating interstate franchise arrangements may want to thoughtfully consider contract language and related facts and circumstances before signing—to avoid later sweating through a dispute in an undesirable forum.

The case is Get In Shape Franchise, Inc. v. TFL Fishers, LLC, et al., Civil Action No. 15-12997-PBS (D. Mass. Mar. 9, 2016), before Chief Judge Patti B. Saris. A copy of the opinion can be found here.

Judge: Saris

Franchisee Can't Work Its Way Out Of Trademark Infringement And Breach Of Contract Litigation On Jurisdictional Grounds

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