Franchising and licensing disputes don’t typically end all that well for franchisees or licensees.[1] The Federal Reporters and Federal Supplements are rife with reports of proceedings to confirm arbitration awards, or to enter default judgments, permanent injunctions and judgments for money damages in amounts that, one guesses, will probably never be satisfied in full. So it may come as a surprise that one such encounter, at least, ended with a more modest tab for the licensee.
Although Ledo Pizza System, Inc. is a franchisor, and the parties did have a licensing agreement, the dispute between Ledo Pizza System, Inc. and Ledo Restaurant, Inc. was not actually a franchise dispute. Rather, it involved some minor breaches of the licensing agreement and, more fundamentally, of a prior settlement agreement between the parties. But, first, a little background.
Ledo Restaurant, Inc. was the original Ledo Restaurant, formed jointly by members of the Beall family and the Marcos family in Adelphi, Maryland, in 1955. (It later moved a few miles to College Park, Maryland.) After decades of happy dough-making together, there was a falling-out between the families, and a lawsuit was filed. It was settled in 1994 under an agreement in which the Bealls obtained ownership of the Ledo Pizza® trademark (and franchising rights) and the Marcoses obtained full ownership of the original Ledo Restaurant, a license to use the Ledo name with certain restrictions, and the right to establish future restaurants or carry-outs in Bowie, Maryland. Things were again fine for the next 12 (or almost a baker’s dozen) years.
However, another dispute eventually arose between the Bealls and the Marcoses. [2] The Bealls sued the Marcoses and related parties in 2006, asserting breach of contract, trademark infringement and unfair competition. Among other things, Ledo Pizza System complained about the alleged use of its trademarks by Expressions Catering, a business owned partly by the Marcoses and partly by other investors. The dispute initially arose from a wedding party catered by Expressions at which eight pizzas from the Ledo Restaurant were heated and served. The dispute then expanded to encompass two or three other events catered by Expressions, including a bar mitzvah at which six pizzas from a Ledo Pizza® (franchise) location were served, and a church event which did not feature pizza but did involve “Ledo” lasagna and tiramisu.
As found by United States District Judge Deborah K. Chasanow, who presided over the dispute for six years, Ledo Restaurant supplied the eight pizzas on request for the wedding party but took no other part in the catering operation, which was, instead, handled solely by Expressions. (Tommy Marcos sent Deborah Hamann, the operator of Expressions, an open invoice for the eight pizzas.) Judge Chasanow concluded that none of the Marcoses directly infringed on the Ledo Pizza® trademark but, after the wedding party, Ms. Hamann apparently used the expression “Ledo Pizza” on some of the catering operation’s menus.[3] After a full trial, Judge Chasanow concluded that the Bealls had established a breach of the settlement agreement, but that “it was totally inadvertent,” and that the Marcos brothers, while they owned a majority of the catering company that had infringed the mark, were not responsible for its day-to-day operations. Judge Chasanow found two minor breaches of contract for which the defendants were responsible. One of these resulted from the posting of a link to a Washingtonian magazine review that opined that the pizza offered “through the mediocre Ledo Pizza chain” did not “do justice” to the “real thing” available at the Ledo Restaurant.[4] Judge Chasanow awarded nominal damages of two dollars, one dollar for each breach.[5] So, first serving: to the plaintiffs. Tab to the defendants: two bucks.
On appeal, however, the United States Court of Appeals for the Fourth Circuit disagreed in part, holding that the Marcoses were also responsible for a breach of the settlement agreement in the use of the Ledo Pizza® mark by Expressions, the catering company. The Fourth Circuit vacated that portion of the District Court judgment and remanded it “to allow the District Court to consider damages on this claim.”[6] On remand, Judge Chasanow carefully checked each item on the Fourth Circuit’s order – and added five dollars to the Marcoses’ tab on five other breaches. [7] (These included the use of the Ledo mark on the wedding party and bar mitzvah invoices.) There, after six years, the story pretty much ended.
To recap the courses: appetizer in federal District Court: tab of two dollars. Trip up to Richmond to the Fourth Circuit and back down for the main course: Five dollars more. Putting this another way – with the caveat that I have not actually checked menu prices – about the cost of one topping in Round One and maybe some garlic bread or mozzarella sticks in Round Three. No delivery charge, of course, because Ledo’s doesn’t deliver. (Hey! If it’s worth getting pizza, it’s worth going there in person!) As a cola, er, I mean, coda, to the story, Ms. Hamann of Expressions did not actually pay Mr. Marcos for the eight pizzas supplied by Ledo Restaurant at the wedding event. Instead, she “‘bartered’ with [him] by preparing desserts for the restaurant.”[8]
In all seriousness, I should note that, while the facts here provide the ingredients for a rather entertaining story, violations of franchise and/or license agreements are not generally matters for comic relief. As the Ledo plaintiffs themselves argued to Judge Chasanow, “this case was never about damages, but rather about clarifying rights.”[9] Fair statement. And that’s generally worth a lot more than a buck or two. But, after incurring over a quarter of a million dollars in legal fees, this case can also serve as a reminder that it is generally wise at the outset to carefully consider objectives, weigh all options and make a realistic assessment of what one stands to gain (or lose). Litigation is sometimes necessary, sometimes unavoidable, sometimes even beneficial, but it should never be approached as an All You Can Eat Buffet.
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*The image pictured does not portray actual Ledo Pizza
[1] Not that disputes typically end much better for franchisors or licensors, either. They commonly face business disruptions and lots of attorneys’ fees, and may have to seek injunctive proceedings to protect trademarks, or accounting proceedings with only the prospect of uncollectible judgments at the end. But well-written franchise agreements and proper disclosure documents generally afford them more protection than their counterparties.
[2] At least in part, the dispute seems to have been fired by questions as to who was entitled to benefit from publicity stoked by a favorable review on the Oprah Winfrey Show. See Ledo Pizza System, Inc. v. Ledo Restaurant, Inc., 2010 WL 1328538 at *1 n.3 (D.Md. March 29, 2010) (Ledo I).
[3] Id. at *3.
[4] Id. at *4.
[5] Id.
[6] Ledo Pizza System, Inc. v. Ledo Restaurant, Inc., 407 Fed.Appx. 729, 732 (4th Cir. Jan. 7, 2011) (Ledo II).
[7] See Ledo Pizza System, Inc. v. Ledo Restaurant, Inc., 2012 WL 1247103 (D.Md. April 12, 2012) (Ledo III). Judge Chasanow did also award attorneys fees of $25,000 to the plaintiffs, less than one-tenth of the fees sought of $251,493.50. Id. at *6-8. She did later amend the fee award to include an additional amount of $4,620 in attorneys’ fees. Ledo Pizza System, Inc. v. Ledo Restaurant, Inc., 2012 WL 4324881 (D.Md. Sept. 18, 2012) (Ledo IV).
[8] Ledo I at *3.
[9] Ledo I at *9.
