Lunt v. Frost Shades Franchising, LLC

• Decision Date: 16 May 2023
• Docket Number: 3:22-cv-00775
• Citation: Lunt v. Frost Shades Franchising, LLC, 3:22-cv-00775 (M.D. Tenn. May 16, 2023)
• Parties: BOB LUNT, Plaintiff, v. FROST SHADES FRANCHISING, LLC, LEIBY GOLDBERGER, and CURT SWANSON, Defendants.
• Court: U.S. District Court — Middle District of Tennessee

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BOB LUNT, Plaintiff, v. FROST SHADES FRANCHISING, LLC, LEIBY GOLDBERGER, and CURT SWANSON, Defendants.

No. 3:22-cv-00775

United States District Court, M.D. Tennessee, Nashville Division

May 16, 2023

MEMORANDUM

ALETA A. TRAUGER, UNITED STATES DISTRICT JUDGE.

Defendants Frost Shades Franchising, LLC (“Frost Shades”) Leiby Goldberger, and Curt Swanson have filed a Motion to Dismiss and Compel Arbitration or, In the Alternative, Motion to Join an Indispensable Party (Doc. No. 11), to which Bob Lunt has filed a Response (Doc. No. 25), and the defendants have filed a Reply (Doc. No. 26). Lunt has filed a Motion for Preliminary Injunction (Doc. No. 27), to which the defendants have filed a Response (Doc. No. 36), Lunt has filed a Reply (Doc. No. 43) and Supplemental Reply (Doc. No. 42), and the defendants have filed a Response to the Supplemental Reply (Doc. No. 46). For the reasons set out herein, each motion will be granted in part and denied in part.

I. BACKGROUND

When a party “owns” a trademark, that does not mean that the party has a property interest in the creative aspects of the words or visual elements that make up the mark. Rights like those-that is, creative rights-are covered by copyright not trademark. Trademark law is concerned, instead, with the commercial goodwill that the mark embodies based on its association with a particular furnisher of goods or services. “Under traditional principles of trademark law, ‘[t]here is no such thing as property in a trademark except as a right appurtenant to an established business or trade in connection with which the mark is employed.'” Yellowbook Inc. v. Brandeberry, 708 F.3d 837, 844 (6th Cir. 2013) (quoting Rock & Roll Hall of Fame & Museum, Inc. v. Gentile Prods., 134 F.3d 749, 753 (6th Cir.1998); citing Mark A. Lemley, The Modern Lanham Act and the Death of Common Sense, 108 Yale L.J. 1687, 1688 (1999)). The commercial value of a trademark-or a cluster of trademarks fashioned into a brand identity- rests primarily in the mark's ability to convey to consumers that the good or service being offered is the product of an actual, existing business toward which consumers have, or could develop, some degree of goodwill.

Making money off of an existing trademark is therefore not as simple as just selling rights to use the mark to the highest bidder, like a musical composition or piece of copyright-protected software. Indeed, that is not even an option, because “[a]ssignment of a trademark without its associated goodwill is treated as an invalid ‘assignment in gross' that gives the assignee no rights.” Id. (citing 15 U.S.C. § 1060; In re Roman Cleanser Co., 802 F.2d 207, 208 (6th Cir. 1986); Greenlon Inc. of Cincinnati v. Greenlawn, Inc., 542 F.Supp. 890, 893 (S.D. Ohio 1982)). Rather, a party that wishes to increase the amount of money it is making off of a trademark has, broadly speaking, three options: it can expand or otherwise improve the existing business with which the trademark is associated, thereby increasing the goodwill embodied by the mark; it can liquidate that goodwill by selling the entire business, trademarks and all, to a buyer; or it can retain ownership of the mark but license limited usage rights to third parties who are contractually bound to honor certain quality-control obligations that would prevent the license from being struck down as an invalid assignment in gross. That third strategy- licensing-can take many forms, one of which is “franchising,” the licensing of a brand identity to individual operators to carry out the licensor's preexisting business model as formally distinct, but contractually linked, franchisees. Franchising is common, and many well-known brands are, in fact, not unitary enterprises, but wide-reaching franchise operations.

Franchising, like many industries, provides opportunities for bad actors to take advantage of unsophisticated counterparties-for example, by luring prospective franchisees into paying exorbitant fees to open franchises with little or no chance of actual success. In light of those risks, “[o]n November 11, 1971, the [Federal Trade Commission (‘FTC')] announced the initiation of a proceeding for the promulgation of a trade regulation rule relating to disclosure requirements and prohibitions concerning franchising,” which ultimately culminated in the final issuance of that agency's “Franchise Rule” several years later. 43 Fed.Reg. 59614, at 59,622. The Franchise Rule “requires franchisors to furnish prospective franchisees with disclosure documents”-commonly known as the company's “FDD”-“at least 14 calendar days before the prospective franchisee signs the franchise agreement.” Arruda v. Curves Int'l, Inc., 861 Fed.Appx. 831, 835 (5th Cir. 2021) (citing 16 C.F.R. § 436.2(a)). An FDD must contain certain required information about the franchisor and the business being franchised, see 16 C.F.R. § 436.5, and “[a]ll information in the disclosure document” must “be current as of the close of the franchisor's most recent fiscal year.” 16 C.F.R. § 436.7(a).

Frost Shades is a franchisor whose franchisees “sell[] and install[] residential window tinting, commercial window tinting, decorative and designer window films, and privacy and security films” under the “Frost Shades” brand. (Doc. No. 1 ¶ 9.) It is organized as a Tennessee limited liability company that, at the time this litigation commenced, had three members: defendant Goldberger, who lives in New Jersey; defendant Swanson, who lives in New York; and nonparty Thomas J. Scott, who lives in Tennessee.^[1] (Id. ¶¶ 2-5; Doc. No. 15 at 3.) The Franchise Rule's disclosure requirements reach beyond the franchisor itself to “the franchisor's directors, trustees, general partners, principal officers, and any other individuals who will have management responsibility relating to the sale or operation of franchises offered.” 16 C.F.R. § 436.5. Accordingly, Goldberger, Swanson, and Scott were among the subjects required to be covered by Frost Shades' FDDs for the periods during which they were involved with the company.

The Franchise Rule groups the information required in an FDD into categories numbered Item 1 through Item 23. See 16 C.F.R. § 436.5(a)-(w). Item 3 requires the disclosure of certain information regarding the litigation history of the franchisor and covered individuals. See 16 C.F.R. § 436.5(c). Goldberger and Swanson were previously involved with another franchisor, Patch Boys Franchising, LLC (“Patch Boys”), which was the subject of several potentially relevant matters: two lawsuits by private plaintiffs in the District of Minnesota (hereinafter, the “Anderson” case and “Borgen” case); an investigation by the Minnesota Department of Commerce; and an investigation by the Attorney General of New York. (Doc. No. 1 ¶¶ 17-23, 27, 29.) The Minnesota Department of Commerce investigation resulted in a Consent Order “whereby Patch Boys and Goldberger acknowledged that they violated the Minnesota Franchise Act” and “agreed to pay a civil penalty in the amount of $7,500, agreed to refrain from violating any laws, rule or orders in Minnesota, including the Minnesota Franchise Act, and [agreed not to] sell franchises in Minnesota until the Patch Boys' FDD was registered.” (Id. ¶ 27.) The New York investigation resulted in an “Assurance [of] Discontinuance Pursuant to [N.Y.] Executive Law § 63(12) . . ., wherein Patch Boys and Goldberger acknowledged that they sold franchises without disclosing Goldberger's 1999 felony conviction [for credit card fraud] in Patch Boys' FDD, as required by New York law, and agreed to pay a $10,000 fine.” (Id. ¶ 29.) The Complaint and supporting materials provide less detail about the conclusion of the two private Minnesota lawsuits, but they confirm that Goldberger and Swanson were named defendants in both. (Id. ¶¶ 18, 21; Doc. Nos. 1-5, 1-6.) The Complaint asserts that details of all of those matters-as well as an additional lawsuit against Goldberger involving bad checks-should have been included in Frost Shades' standard FDD.^[2] (Doc. No. 1 ¶¶ 30-40.) Instead, the FDD included only the following:

Item 3

LITIGATION

No litigation is required to be disclosed in this Item. (Doc. No. 29-1 at 3.) Lunt entered into a franchise agreement with Frost Shades in what he says was reliance on the allegedly deficient FDD, and he was granted a Frost Shades territory in upper South Carolina. (Doc. No. 1 ¶¶ 30, 51; Doc No. 29 ¶¶ 4, 7-8.)

Not long thereafter, however, the parties' relationship broke down. One of the factors that led to tension between the parties, according to Lunt, was that Frost Shades “provided little, if any, of the support that it was supposed to provide.” (Doc. No. 29 ¶ 10(a).) For example, Lunt states that he “was never given a ‘Brand Standards Manual' or access to any ‘Brand Standards' as the FDD stated [he] would be provided,” nor was he given promised technical specifications. (Id.) Lunt states that the training and onsite support he received were inadequate and that, as a result, he “essentially had to learn how to properly specify window tinting and otherwise run [his] franchise business on [his] own.” (Id.) Meanwhile, “as a result of a dispute between the owners of” Frost Shades, Lunt became aware of the history that had not been disclosed in the FDD. (Id. ¶ 6.)

On October 2, 2022, Lunt filed a Complaint in this court asserting claims against Frost Shades, Goldberger, and Swanson. (Doc. No. 1.) The Complaint purports to assert three counts. Counts One and Two are each for fraudulent inducement to contract, with Count One focusing on affirmative misrepresentations and Count Two focusing on fraudulent concealment. (Id. ¶¶ 59-71.) The Complaint characterizes Count Three as a claim for “injunctive relief,”...