Morley's (Fast Foods) Ltd v Nanthakumar & Ors: a stark warning for franchisees

Morley’s and the seventh defendant (referred to in the judgment as “KK”) had a long-running IP dispute.  The earlier dispute concerned KK’s trading under signs including “Mowley’s” and “Morley’s”.  That dispute was compromised in 2018 via a settlement agreement (the “2018 Agreement”), which permitted KK to use a specified figurative Metro’s logo in a prescribed form.  In the years after the 2018 Agreement, KK’s business expanded, and he began granting Metro’s branded franchises to several operators. KK adopted a variant of the prescribed Metro’s logo which, Morley argued, was not permitted by the 2018 Agreement.  Morley’s also took issue with the defendants’ use of the “Triple M” product name.  The IPEC found in favour of Morley’s on almost all issues.

One ground of appeal challenged the first-instance judge’s “salami-slicing” of the relevant consumer population — in particular whether a subgroup of intoxicated late-night revellers could be treated as representative of the notional average consumer for the likelihood-of-confusion assessment. The Court of Appeal accepted there were arguable flaws in that analysis, but nevertheless held any error was immaterial to the outcome: on the facts there was a likelihood of confusion between Metro’s signs and Morley’s marks.

This issue, and the drafting weaknesses of the 2018 Agreement, has generated substantial commentary.  However, one important question that has received comparatively little practical attention is: “What about the franchisees?”

A franchise agreement is an enhanced form of intellectual property licence: it permits replication of a tried and tested brand (and associated business model).  Franchising is common throughout the fast-food industry.  In order to protect the brand, a franchisee is often contractually obliged to comply with detailed brand guidelines and adopt the franchisor’s signs, menus and product names. 

In this case, seven of the defendants were franchisees of the Metro’s brand.  Although KK appears to have driven the defence and provided much of the evidence, each franchisee was sued and ultimately found liable in their own right for trade mark infringement.   As a result, each may be ordered to pay “their share” of the damages suffered by Morley’s or, alternatively, account for profits they made from their infringing activities, as well as legal costs.  Morley’s also obtained an injunction to prevent any future infringement.

Public records do not make clear whether KK agreed to take conduct of, and fund, the defence on behalf of the franchisees, or whether its franchise agreements required it to do so.  Most do not.

Prospective franchisees should therefore carry out thorough due diligence on the brand that they are buying into and insist on clear documentary evidence that the franchisor has the right to grant a licence over the specific names, signs and products that the franchisee will be required to adopt.  It may be that some of the Metro’s franchisees had no knowledge of the earlier dispute and so could not have negotiated bespoke contractual protections at the time.  Even so, there are sensible measures every prospective franchisee should try to secure:  (1) comprehensive trade mark searches for relevant names, signs and products, (2) contractual warranties from the franchisor that approved materials do not infringe third-party IPRs, and (3) an express indemnity from the franchisor to take conduct of, and bear the costs associated with, any IPR claim affecting the brand. 

It is true that many franchise opportunities are offered on a “take-it-or-leave-it” basis, and protections (2) and (3) may be commercially hard to obtain.  But Morley’s is a stark example of the downside risk for a franchisee who simply adopts a franchisor’s branding without having first mitigated their risk.