It is a fact pattern that recurs

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1 Too Hot to Cybersquat: How Franchisors Can Use the Anticybersquatting Consumer Protection Act Daniel M. Eliades, Joseph M. Cerra, and Deirdre Burke It is a fact pattern that recurs too frequently for the sake of franchisors: a former franchisee, terminated for defaulting on royalty payments or for failing to maintain system standards, continues to use the franchisor s trademarks after termination of its franchise agreement. Later, when sued under the Lanham Act 1 for post-termination misuse of the franchisor s marks, the former Daniel M. Eliades franchisee hides behind incomplete and imprecise financial disclosures while asserting that it realized virtually no post-termination income. Such bad-acting former franchisees oftentimes then seek the cover of bankruptcy to avoid recompense. An even more serious issue in today s society is the former franchisee s continued use of domain names incorporating the franchisor s principal mark. Given the Joseph M. Cerra popularity of the Internet, such use reaches a potentially tremendous audience at an astonishing speed, and the ramifications are difficult to control. For a franchisor dedicated to preserving the integrity of its trademarks and policing their use, a terminated franchisee s unauthorized use of trademarks presents a public relations nightmare and possibly a challenge to the franchisor s control over the use of its proprietary marks. 2 Franchisors must actively address such situations. In years past, a franchisor s financial remedy of recovery of the infringing franchisee s profits often depended on its ability to prove the amount of the infringing franchisee s sales during the time of its unauthorized use of the marks. 3 Unfortunately, the best evidence of the infringing party s sales often resides exclusively in the possession of the infringing party. This article explores the remedies available to franchisors when a former franchisee makes unauthorized use of domain Daniel M. Eliades and Joseph M. Cerra are members of Forman Holt Eliades & Ravin LLC, where they regularly represent various franchisors in franchisee bankruptcy cases throughout the United States. Deirdre Burke is a law clerk at the firm. Ms. Burke is not pictured. names incorporating the franchisor s trademarks. In particular, it assesses the impact of a recent federal bankruptcy court decision, In re Gharbi, 4 on the franchisor s right to recover statutory damages and attorney fees for a violation of the franchisor s intellectual property rights under the Anticybersquatting Consumer Protection Act. Anticybersquatting Consumer Protection Act In 1999, Congress enacted the Anticybersquatting Consumer Protection Act 5 (ACPA) in response to the increasingly common practice of cybersquatting. Cybersquatters register Internet domain names of well-known entities for the purpose of forcing the trademark owners to pay for the right to engage in electronic commerce under their own brand name. 6 The ACPA provides a mechanism for holding a party liable for cybersquatting when it has a bad faith intent to profit from that mark... and registers, traffics in, or uses a domain name that... is famous at the time of registration of the domain name, is identical or confusingly similar to or dilutive of that mark, or is a trade name protected by reason of section 706 of Title 18 or section of Title Soon after its addition to the Lanham Act, the ACPA became a useful tool for trademark owners to deter cybersquatting, primarily due to the threat of statutory damage awards. 8 A violation of the ACPA can result in liability of not less than $1,000 and not more than $100,000 per domain name. 9 For trademark owners, it can be difficult to establish the damages caused by a cybersquatter and even harder to demonstrate the cybersquatter s profits 10 because the calculation of actual damages is often dependent on the infringing party disclosing and producing financial information. 11 However, under the ACPA, a plaintiff can now choose to pursue statutory damages as authorized by 11 U.S.C. 1117(d). Post-Termination Use of Registered Marks Perhaps the most harmful and continuing injury inflicted upon a franchisor is a former franchisee s post-termination use of the franchisor s intellectual property. 12 Most franchise agreements revoke the right (typically a nonexclusive license) of the franchisee to utilize the trademarks of the franchisor immediately upon termination of the franchise agreement. An important reason to require immediate separation of the terminated franchisee from the franchise system is to protect public regard for the brand. Customers have certain expectations of established brands. Whether the expectation is Spring 2012 Franchise Law Journal 215

2 quality, level of service, value, speed of service, image, experience, or some combination thereof, the loyal customers of established brands have identifiable consumer expectations. Those expectations, which are usually nurtured at great expense to the franchisor, are either strengthened or weakened as a result of a consumer s experiences with the franchisee representatives of the brand. If a consumer experiences product or service inferiority from a rogue former franchisee that is unlawfully exploiting the marks of the franchisor, the consumer s loyalty to the brand can be weakened or even lost, causing erosion of the franchisor s brand. To protect against such harm, franchisors must be diligent in confirming that former franchisees de-identify themselves of all of the franchisor s marks and, if necessary, should bring an action under the Lanham Act for trademark infringement.... [C]reative use of existing provisions of the Lanham Act and the Bankruptcy Code can put the franchisor in a much better position to obtain meaningful monetary relief. Franchisors are often unable to assess accurately the actual damages and lost profits from a former franchisee s use of the franchisor s intellectual property. However, if the infringing activity includes the use of Internet domain names, pursuit of a claim under the ACPA and election of statutory damages can be a useful alternative for a franchisor. In some cases opting to pursue statutory damages for cybersquatting is preferable to the franchisor due to the expense of pursuing in-depth financial discovery from the recalcitrant franchisee and/or because such damages may be more rewarding than any profits that may be recovered from the infringer. In re Gharbi Litigation Recently, in the case of In re Gharbi, Century 21 Real Estate, LLC (Century 21) was faced with several problems associated with a noncompliant terminated franchisee that continued to use Century 21 s trademarks in Internet domain names. Specifically, the franchisee used the domain names to point to the terminated franchisee s website. The former franchisee eventually filed for bankruptcy, hoping to discharge its obligations to Century 21 including any liability arising with the post-termination use of the Century 21 marks. Century 21 had granted a nonexclusive license for the use of its trademarks and franchise system to an entity owned and controlled by Mohammad Gharbi. Gharbi operated several Century 21 real estate brokerage offices in the vicinity of Austin, Texas. In October 2005, after defaulting on his obligations under three franchise agreements, Century 21 terminated its relationship with Gharbi. The agreements required Gharbi to de-identify the brokerage businesses from their appearance as Century 21 affiliated offices and immediately to cease use of all of the Century 21 trademarks and service marks. Gharbi, however, continued to use the Century 21 trademarks without authorization and in violation of federal law in order to increase revenue for his new independent real estate brokerage business. 13 In June 2008, Gharbi filed a voluntary Chapter 7 bankruptcy petition. In connection with his bankruptcy case, Gharbi listed in his bankruptcy schedules ownership of the websites and A third website, 21capitalteam[,] was later discovered. Additionally, a fourth website, displayed the Century 21 mark until at least July 13, Each website prominently displayed Century 21 trademarks long after the termination of the franchise agreements. In addition, the sites served as pointers, which would direct users to the website of [Gharbi s] new real estate business. 15 Century 21 initiated two adversary proceedings in the bankruptcy court that alleged violations of the Lanham Act and sought restraints against further use of the Century 21 trademarks. As part of the litigation in the bankruptcy court, Century 21 sued the former franchisee under 523 of the Bankruptcy Code 16 for a determination that any damages for violations of the Lanham Act resulted from willful and malicious actions of Gharbi, which are not dischargeable in bankruptcy. During discovery, Century 21 requested Gharbi s books and records, tax returns, and other financial data from which revenues and profits could be ascertained. Gharbi declined to provide any meaningful financial disclosure, claiming that the documents did not exist and were lost in a fire. 17 Gharbi s failure to participate in the discovery process made it all but impossible to calculate damages, leaving the franchisor with little monetary remedy under a traditional avenue of recovery for Gharbi s violations of the Lanham Act. 18 Century 21 s Innovative Use of the ACPA Rather than incur the potentially significant costs of piecing together evidence of the former franchisee s sales from various collateral sources, Century 21 took advantage of a 1999 amendment to the Lanham Act that authorizes an award of statutory damages in cases of bad faith cybersquatting. Century 21 moved for summary judgment against Gharbi, asserting that, among other things, he violated 1125(d) (ACPA) of the Lanham Act. As the court noted, the main purpose of the [ACPA] is to prevent someone from purchasing domain names that are similar to another s trademark with the intent of selling the domain name to the trademark s rightful owner. 19 However, Century 21 contended that upon termination, Gharbi had lost his right to use all of the franchisor s trademarks and was therefore in the same position as any other cybersquatter. The court accepted the argument, finding that someone can also violate the statute by diverting consumers from the website of the trademark owner to the 216 Franchise Law Journal Spring 2012

3 defendant s own website, where those consumers would purchase the defendant s products or services instead of the trademark owners [sic]. 20 A determination that Gharbi violated the ACPA would serve two important functions. First, it would eliminate the need to obtain from Gharbi financially related discovery upon which actual damages could be calculated because Century 21 could then elect to receive statutory damages under Section 1117(d) for up to $100,000 per violation. 21 Second, due to the bad faith intent requirement of 1125(d), Century 21 believed it could establish that Gharbi acted willfully and maliciously within the meaning of 523(a)(6) of the Bankruptcy Code, 22 thereby making any award of statutory damages nondischargeable in the bankruptcy case. For a trademark owner to show a violation of 1125(d), it must prove that the defendant has a bad faith intent to profit from the mark and registers, traffics in, or uses a domain name that... is identical or confusingly similar to or dilutive of that mark. 23 Based in part on the fact that the Century 21 marks were registered and in continuous use for over five years, the court concluded that they were famous at the time of Gharbi s registration of the domain names. 24 The court determined that a trial was necessary on the issue of whether Gharbi s actions were motivated by a bad faith intent to profit from the use of Century 21 marks within his domain names. 25 Trial on Violation of the ACPA and Statutory Damages The bankruptcy court conducted a trial to determine whether Gharbi had violated the ACPA, whether Century 21 could receive statutory damages, and whether such award would be dischargeable in bankruptcy. Gharbi claimed that he perhaps just acted slowly, without any bad intent, in his lackluster efforts to take down the domain names. 26 Gharbi s defense to the motion for summary judgment was undermined by the evidence at trial through the testimony of a website designer who owned the company that hosted Gharbi s websites. 27 Among other things, the website designer produced a letter he sent to Gharbi that warned of the possible illegality of Gharbi s continued use of the Century 21 name in domain names used as pointers to Gharbi s websites. 28 In response, Gharbi authorized the website designer to remove all Century 21 content from his websites but requested that the domain names, including those that contained the Century 21 name, remain active. The effect of this request was that Internet users who found the Century 21 domain names would be forwarded to the website of Gharbi s new business rather than to a legitimate Century 21 franchisee. The court, which entered its decision on March 9, 2011, examined several aspects of cybersquatting and bad faith. First, the court conducted a careful analysis of the various factors to be considered in weighing whether a party has cybersquatted with bad faith intent to profit. 29 Next, the court discussed other cases where bad faith was found under the ACPA. Most importantly, the court recognized that Gharbi s case represented a novel use of the ACPA because it was factually distinct from other cases in which the statute had been applied. 30 The court noted that at the time of registration, Defendant had the right to use the trademarked name, whereas the prior cases involved defendants that registered the domain name with the intent to profit at the time of registration. 31 Despite the factual differences, the court held that the prior cases were still analogous to the present case because they involve defendants using a famous name without permission from the trademark holder the exact fact pattern of this case. 32 Therefore, it was not the registration itself that was in violation of the ACPA but rather Gharbi s unauthorized post-termination use of the domain names. After considering the trial evidence, the court reached the following decision on Gharbi s intent, finding the testimony of the website designer to be highly probative: The evidence adduced at trial shows that Defendant acted with the intent to divert consumers from Century 21 s online locations (through the use of the websites) to Defendant s new place of business for the purpose of commercial gain. Mr. Suggs testified that Defendant asked about the advisability of using Century 21 names as pointers to lead to his website. Mr. Suggs stated that he advised Defendant against the idea and recommended that the domain names be turned off. Defendant, however, provided written instructions to Mr. Suggs not to turn off the domain names, but rather to use those domain names as pointers to Defendant s new website. Defendant testified that the handwriting on these instructions was not his, but the Court does not find this testimony compelling. Defendant s conduct suggests a clear intent from Defendant to use the Century 21 name to direct traffic to his new business for commercial gain. Accordingly, after hearing the arguments of both parties, there is ample evidence to find that Defendant had a bad faith intent to profit in regard to the use of the domain names in question. 33 The court concluded that Gharbi was liable to Century 21 for three violations of 1125(d) due to his intentional use of three domain names that included the Century 21 name. 34 The court recognized the tactical advantage of pursuing statutory damages under 1117(d), finding that Gharbi never supplied the Court or Plaintiff detailed records which could be used to fashion a monetary award under 1117(a). 35 The court thus permitted Century 21 to elect damages under 1117(d). 36 In determining the appropriate statutory damage award, the In re Gharbi court noted thus: The Fifth Circuit has stated that the statutory damage provisions of ACPA are akin to the statutory damage provisions of the copyright laws, which the Supreme Court has said not merely compel[] restitution of profit and reparation for injury but [are] designed to discourage wrongful conduct. The Ninth Circuit has stated that the policy behind Section 1117 damages is to take all economic incentive out of trademark infringement. A District Court in California discussed several factors to take into consideration when determining the amount to award a plaintiff under 1117(d). Those factors Spring 2012 Franchise Law Journal 217

4 include the egregiousness or willfulness of the cybersquatting conduct, the use of false contact information to conceal its infringing activities, the patterns of infringing conduct by the defendant, and other behavior by the defendant showing attitude of contempt towards the court or the proceedings. 37 The limited case law on the range of ACPA damages reveals discretionary statutory awards ranging from $1,000 to $100,000 per violation. 38 The In re Gharbi court fixed Century 21 s statutory award at $25,000 per violation for a total of $75, In addition, Century 21 was awarded its attorney fees. 40 Dischargeability of Violations of the ACPA Under 523(a)(6) of the Bankruptcy Code For a debt to be deemed nondischargeable under 523(a)(6) of the Bankruptcy Code, there must be a willful and malicious injury by the debtor to another entity or to the property of another entity. 41 The Supreme Court has interpreted this statute to mean that a finding of nondischargeability requires a deliberate or intentional injury, not merely a deliberate act that results in injury. 42 In the U.S. Court of Appeals for the Fifth Circuit, courts use an objective and subjective test when determining whether a debtor has acted willfully and maliciously: a debtor must have acted with objective substantial certainty or subjective motive to inflict injury. 43 Courts have recognized the similarity between the bad faith requirement in the ACPA and the willful and malicious requirement of 523(a)(6). 44 Some courts have even found that any finding of an injury caused by cyber-squatting the Plaintiff s trade names would also constitute a willful and malicious injury under 523(a)(6). 45 In In re Gharbi, the bankruptcy court was hesitant to make such a broad per se determination and instead proceeded with the normal analysis of finding willful and malicious activity under 523(a)(6). The court reiterated that Gharbi s prior use of the Century 21 marks was permitted but limited under the franchise agreements. The agreements put Gharbi on notice that upon termination he no longer had the right to use Century 21 s trademarks. In addition, he had been advised by his website designer that continuing to use the domain names with Century 21 marks could expose Gharbi to liability for trademark infringement. However, Gharbi continued to use the names in a calculated effort to drive Internet traffic to his new website for his own financial gain. Further, use of the trademarked name was likely to confuse the public into believing he was affiliated with Century 21 and could result in appropriation of business from Century 21. The court believed that Gharbi s continued use of Century 21 s intellectual property was done consciously and knowingly and that Gharbi knew that his conduct was in violation of the franchise agreements. Finally, the court held that Gharbi knew that his conduct was certain to cause injury to Century 21, and he intended such injury to result from his actions. Although the court declined to hold that every finding of bad faith under 1125(d) of the Lanham Act automatically renders the judgment nondischargeable under 523(a)(6) the Bankruptcy Code, it was still clear to the court that Gharbi s actions caused Century 21 willful and malicious injury of the type the ACPA is intended to reach. 46 For this reason, the court excepted Gharbi s Lanham Act obligations to Century 21 from discharge in his Chapter 7 bankruptcy case. Conclusion Franchisors are often put in difficult positions when a franchise agreement is terminated and the former franchisee files for bankruptcy and continues to use the intellectual property of the franchisor. However, in instances of virtual trademark infringement, the case of In re Gharbi illustrates that creative use of existing provisions of the Lanham Act and the Bankruptcy Code can put the franchisor in a much better position to obtain meaningful monetary relief than it would be otherwise. If post-termination use of a registered mark in an Internet domain name occurs, a franchisor can elect to pursue statutory damages rather than engage in protracted, and often unhelpful, discovery. If a judgment under the ACPA is obtained, there is a strong argument that any later, or concurrent, bankruptcy petition will not discharge the franchisee of its liability because the finding of a bad faith intent to profit from the act of cybersquatting is highly suggestive of the willfulness and maliciousness necessary to except a damages award from discharge under 11 U.S.C. 523(a)(6). Endnotes U.S.C et seq. 2. See McAlpine v. AAMCO Automatic Transmissions, Inc., 461 F. Supp. 1232, (E.D. Mich. 1978) ( For a licensor, through the relaxation of quality control, to permit inferior products to be presented to the public under its licensed trademark might well constitute a misuse of the mark. ) U.S.C. 1117(a) authorizes, among other things, an award to the mark s owner of the infringer s profits, and places on the owner the obligation to prove defendant s sales only. Thereafter, after arriving at profits, the statute places the burden of proving costs and deductions on the defendant. 4. No CAG, 2011 WL (Bankr. W.D. Tex. Mar. 3, 2011), aff d, No. A-11-CA-291 LY, 2011 WL (W.D. Tex. June 3, 2011). 5. Codified at 15 U.S.C. 1125(d). 6. S. Rep. No , at 5 (1999) U.S.C. 1125(d); In re Gharbi, No CAG, 2010 WL , at *6 (Bankr. W.D. Tex. Apr. 19, 2010). 8. In re Wright, 355 B.R. 192, 212 (Bankr. C.D. Cal. 2006) ( ACPA statutory damages serve to deter wrongful conduct and to provide adequate remedies for trademark owners who seek to enforce their rights in court. (quoting S. Rep. No , at 8)) U.S.C. 1117(d). 10. Calculation of actual damages is governed by 15 U.S.C. 1117(a). 11. See Mark A. Thurmon, Confusion Codified: Why Trademark Remedies Make No Sense, 17 J. Intellectual Prop. L. 245, 248 (2010) ( Indeed, the magnitude of money judgments in trademark cases depends more on the efficiency of the infringing operation than the injury to the trademark owner or culpability of the infringer. Calculators have replaced common sense. ). 218 Franchise Law Journal Spring 2012

5 12. See, e.g., Dunkin Donuts Franchised Rests. LLC v. D & D Donuts, Inc., 566 F. Supp. 2d 1350, 1361 (M.D. Fla. 2008) (quoting Societe des Produits Nestle, S.A. v. Casa Helvetia, Inc., 982 F.2d 633, 640 (1st Cir. 1992) ( By its very nature, trademark infringement results in irreparable harm because the attendant loss of profits, goodwill, and reputation cannot be satisfactorily quantified and, thus, the trademark owner cannot adequately be compensated. )); In re Tudor Motor Lodge Assocs., Ltd. P ship, 102 B.R. 936, (Bankr. D.N.J. 1989) (finding that maintaining a franchise in substandard fashion diminishes public regard for franchise); In re B-K of Kan., Inc., 69 B.R. 812, 815 (Bankr. D. Kan. 1987) ( [T]he property in this case, the use of trademarks and service marks, is of such a type that money may never adequately protect the [franchisor]. The [franchisor s] reputation to the general public is at stake. ). 13. In re Gharbi, No CAG, 2011 WL , at *6 (Bankr. W.D. Tex. Mar. 3, 2011), aff d, No. A-11-CA-291 LY, 2011 WL (W.D. Tex. June 3, 2011) ( The evidence adduced at trial shows that Defendant acted with the intent to divert consumers from Century 21 s online locations... to the Defendant s new place of business for the purpose of commercial gain. ). 14. Id. at * Id U.S.C See In re Gharbi, 2011 WL , at *10 n.3 ( Defendant stated that the records were destroyed as part of an act of vandalism. However, the Court does not find this persuasive as it is not the fault of the Plaintiff that Defendant allegedly chose to keep only one copy of records and store these in a less-than-secure place. ). 18. Under 1117(a) of the Lanham Act, for a violation under section 1125(a) or (d)... the plaintiff shall be entitled... to recover (1) defendant s profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action. Without evidence to show profits and damages, a reward under 1117(a) can be limited to the costs of the action. 15 U.S.C. 1117(d). 19. In re Gharbi, No CAG, 2010 WL , at *6 (Bankr. W.D. Tex. Apr. 19, 2010). 20. Id. (quoting Utah Lighthouse Ministry v. Found. for Apologetic Info. & Research, 527 F.3d 1045, 1058 (10th Cir. 2008)). 21. See 15 U.S.C. 1117(d) ( [T]he plaintiff may elect, at any time before final judgment is rendered by the trial court, to recover, instead of actual damages and profits, an award of statutory damages in the amount of not less than $1,000 and not more than $100,000 per domain name, as the court considers just. ). In addition, under 1117(a), the court in exceptional cases may award reasonable attorney fees to the prevailing party. 15 U.S.C. 1117(a). 22. See 11 U.S.C. 523(a)(6) ( A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt... for willful and malicious injury by the debtor to another entity or to the property of another entity. ). 23. See Audi AG v. D Amato, 469 F.3d 534, 549 (6th Cir. 2006); see also Utah Lighthouse Ministry, 527 F.3d at In re Gharbi, No CAG, 2011 WL , at *4 (Bankr. W.D. Tex. Mar. 3, 2011), aff d, No. A-11-CA-291 LY, 2011 WL (W.D. Tex. June 3, 2011) (finding the Century 21 mark was famous at the time [Gharbi s] domain names were registered ). 25. Id. at * Id. 27. Id. at * Id. 29. The ACPA contains a nonexclusive list of factors to determine if a defendant has acted in bad faith, codified at 15 U.S.C. 1125(d) (1)(B)(i). 30. In re Gharbi, 2011 WL , at * Id. (emphasis in original). 32. Id. 33. Id. at * Id. The court noted that Gharbi could not claim the safe harbor provision of the ACPA because upon termination of the franchise agreements, he was on notice that he no longer had a lawful right to use the Century 21 registered marks. Because the trademarked name appeared in a domain name, 1125(d)(1)(A)(ii)(III) was also satisfied. 35. Id. 36. Id. at * Id. at * Id. 39. Id. at *8. The court based its calculation of damages on the holding of E & J Gallo Winery v. Spider Webs Ltd., 286 F.3d 270, 278 (5th Cir. 2002). There, plaintiff also did not have the evidence necessary to show lost business but was still at risk of losing business due to a tarnished reputation and was thus awarded $25, Id. ( Reasonable attorneys fees are allowed for violations of the ACPA under Section 1117(a) in exceptional cases. ) U.S.C. 523(a)(6). 42. In re Gharbi, 2011 WL , at *9 (citing Kawaauhua v. Geiger, 523 U.S. 57, 61 (1998)). 43. Id. at *8 (quoting In re Williams, 337 F.3d 504, (5th Cir. 2003)). 44. In re Luby, 438 B.R. 817, 839 (Bankr. E.D. Pa. 2010) ( Why this analysis of bad faith matters for present purpose is for its similarity to willful and malicious intent. Bad faith and malice are essentially the same state of mind: both intend harm. ). 45. Id.; see also In re Wright, 355 B.R. 192, 212 (Bankr. C.D. Cal. 2006) (concluding that once bad faith is found for purposes of ACPA, resulting injury is within scope of 523(a)(6)); In re Chaires, 249 B.R. 101, 106 (Bankr. D. Md. 2000) (finding bad faith to equate with willfulness and maliciousness for purposes of 523(a)(6)). 46. In re Gharbi, 2011 WL , at *10. Spring 2012 Franchise Law Journal 219