The Seventh Circuit U.S. Court of Appeals, which sits in Chicago, recently handed down a decision which could significantly impact hotel and restaurant franchisors and terminated franchisees. In WMS Gaming Inc. v. WPC Gaming Products Limited, the court addressed the damages that can be awarded in trademark infringement cases. WMS sued WPC for wrongful use of its trade marks "Jackpot Party" and "Super Jackpot Party." WMS had used these registered trade marks for a number of years for gaming machines and devices that it manufactured. The lower court found that the illegal use of these registered trade marks by WPC for its internet gambling business was well documented, frequent and persistent. The lower court awarded damages of $2.7 million, which represented the court's calculation of only those profits WPC derived from the use of the infringing marks.

The Seventh Circuit reversed the trial court's damage calculation. The appeals court noted that relief under the relevant Federal trademark statute, the Lanham Act, 15 U.S.C. § 1117(a) for trade mark infringement, is supposed to include all profits realized by the infringer during the period of infringement. In construing the Lanham Act, the court held that the trademark owner need only offer evidence of gross sales of the infringing goods or services. The infringer then has the burden to offer evidence of appropriate elements of costs or deduction. Should the infringer fail to meet that burden, the trademark owner is entitled to damages in the full amount of the infringer's gross sales.

In this case, the infringer chose not to appear in the trial court and offered no evidence in its defense. The infringing defendant is based in Gibraltar and, by the time of trial, had ceased most U.S. operations. Its failure to appear in the case was a tacit assertion that the U.S. District Court lacked jurisdiction over the foreign company. However, both the lower court and the appellate court found that the infringing defendant had been properly served and was properly before the court. The infringer is likely to pay dearly for its decision not to appear and defend. The Appeals Court remanded the case to the trial court for a new damage calculation based on its ruling. Rather than a $2.7 million judgment, the infringing defendant now faces exposure in the full amount of its gross sales for the relevant period - $287 million.

Claims for trademark infringement under the Lanham Act frequently arise in franchise disputes. Typically, these claims are brought when a franchise agreement terminates or expires and the franchisee fails to "de-identify" its business by removing signage, trade marks and trade names. This case simplifies and streamlines the proof that a franchisor must present to the court to recover damages from an infringing former franchisee. Franchisees who fail to promptly "de-identify" also face larger potential exposure for trade mark infringement.