When a business thrives, it is often a strategic move to capitalize on this success by licensing its intellectual property to other entities, thereby creating a new and potentially highly profitable revenue stream. This process, however, must be approached with care. Missteps in this journey can not only lead to legal disputes and the potential loss of valuable rights but can also weaken one's position when attempting to halt objected to activity before a litigation is resolved.

When a licensor seeks preliminary injunctive relief to prevent a licensee from infringing the licensed mark, a crucial factor lies not just in proving likelihood of success on the merits, but in the ability to provide supporting evidence demonstrating fulfillment of the specific elements of the preliminary injunction test.

In a recent Second Circuit Court of Appeals decision, Colony Grill Development, LLC v. Colony Grill, Inc. (October 19, 2023), Colony Grill, Inc. (CGI) and Colony Grill of Stamford, LLC (CGS) (collectively Licensor) learned this lesson the hard way when Colony Grill Development, LLC (CGD) and Fairfield Colony (FCLLC) (collectively Licensee) filed suit against the Licensor, and the Licensor countersued for trademark infringement, among other things.

When the Licensor sought a preliminary injunction to expedite the relief it believed it was entitled to against their Licensee, the Licensor ended up on the losing end, resulting in years of litigation incurring costs and wasting time.

Below, we discuss the disparate hurdles a party must go through to obtain preliminary injunctive relief, and what businesses should look out for when attempting to leverage their valuable assets to avoid Colony Grill’s mistake.

Background

Since 1989, CGI had owned and operated the Colony Grill, a longstanding pizza restaurant in Stamford, Connecticut. In 2010, CGI licensed its COLONY GRILL trademark to CGS, which, in turn, sublicensed it to CGD and FCLLC, as well as turned over management of the Stamford restaurant to CGS. However, disputes arose when Licensee stopped paying royalties under the license and filed a lawsuit against the Licensor claiming abandonment of the COLONY GRILL trademark through naked licensing, an issue we discussed in depth in a prior article. See https://www.mosessinger.com/publications/licensing-landmines-how-naked-licensing-can-leave-your-brand-exposed.

The Licensor terminated the license, ostensibly making all of Licensee’s continued use of the COLONY GRILL mark infringing. The Licensor countersued for trademark infringement, among other claims, and sought a preliminary injunction to prevent the Licensee from taking the COLONY GRILL trademark and opening a new location in Virginia.

The district court denied the preliminary injunction prompting an appeal, and the Second Circuit affirmed in part and vacated in part, remanding the case to the district court where it directed the district court to reevaluate the request for a preliminary injunction. Upon remand, the district court once again denied injunctive relief, prompting the latest appeal to the Second Circuit.

The Court's Decision, An Analysis of Preliminary Injunctions

The court of appeals upheld the district court’s ruling against the Licensor.

As the district court explained, and the Second Circuit repeated, injunctive relief is an extraordinary remedy and a party seeking a preliminary injunction must demonstrate:

(1) a likelihood of success on the merits;

(2) a likelihood of irreparable injury in the absence of an injunction;

(3) that the balance of hardships tips in the plaintiff's favor; and

(4) that the public interest would not be disserved by the issuance of an injunction.

A showing of irreparable harm is the single most important prerequisite for the issuance of a preliminary injunction, and to satisfy this requirement, a plaintiff must demonstrate that absent a preliminary injunction it will “suffer an injury that is neither remote nor speculative, but actual and imminent, and one that cannot be remedied if a court waits until the end of trial to resolve the harm.”

Here, it was clear that the Licensor would not suffer irreparable harm if the Licensee continued to operate at additional locations around the U.S. under the COLONY GRILL mark. Monetary damages could adequately compensate the Licensor if successful on its infringement claims, and thus the absence of any harm to the Licensor from Licensee’s activities precluded entitlement to a preliminary injunction.

While the court assumed a likelihood of success on the merits for the Licensor, i.e, they were going to win at trial, without a showing of irreparable harm this was insufficient to obtain a preliminary injunction and became an exercise in futility.

There was no evidence that the Licensee’s use of the COLONY GRILL mark created a likelihood of confusion in the consumers’ mind as to the ownership or sponsorship of the product. The Licensee were the only ones operating Colony Grill restaurants, disproving the risk of confusion in consumers’ minds at this time. In fact, Licensor had no present plan or intention to license or open any new Colony Grill restaurant anywhere, much less in any area where the Licensee currently operated.

Moreover, there was no evidence that the Licensor’s products or services failed to conform to its quality standards. In fact, Licensor did not issue any quality control standards, but rather the Licensee was the party that actually set standards all throughout the relevant period of time.

And finally, the Second Circuit emphasized that Licensor’s claim of irreparable harm was further undermined because they did not file the motion for a preliminary injunction until five months after the lawsuit was filed, and only sought in its motion to block the opening of a single Virginia restaurant and not any of the other restaurants that Licensee continued to operate in Connecticut and New York.

The Second Circuit upheld the district court's decision, paving the way for the case to proceed to a trial on abandonment and trademark infringement claims. While the Licensor may well prevail, they will do so without the safeguard of a preliminary injunction in the interim.

Key Takeaways

Confronted with the legal challenges like those in Colony Grill, businesses should carefully assess the grounds for seeking preliminary injunctions and be prepared to demonstrate that all the requisite elements are met.

Despite the Licensor having a strong likelihood of success in their overall claim because the Licensee’s continuing use of the COLONY GRILL mark was without a license, the Licensor’s request for a preliminary injunction fell far short of the applicable requirements, underscoring the nuanced nature of these legal proceedings.

Even before a dispute escalates to this point, trademark holders should consult with counsel to take adequate precautions in drafting and enforcing licensing agreements to maintain control over their marks and quality standards. This can not only strengthen their case for injunctive relief, but deter the legal issues seen in Colony Grill altogether.