Franchise 101: No Room for Contempt; and Judicial Insulation for Arbitration

Franchisor 101: No Room for Contempt

A federal district court in New Jersey granted summary judgment in favor of Choice Hotels International (“Choice”) in a trademark infringement action against a former franchisee who operated a hotel under Choice’s Econo Lodge trademarks. The court ruled over more than four years after the franchise agreement was terminated, and after contempt proceedings resulted from the franchisee’s violation of a preliminary injunction to stop using the trademarks.

Choice entered into a franchise agreement with AMBA Corporation (“AMBA”) in 2003. The agreement remained effective for 20 years. However, AMBA defaulted on their payment obligations in 2020, and as a result, Choice terminated the franchise agreement in January 2021.

Although Choice’s default notice directed AMBA to cease using its Econo Lodge trademarks, AMBA continued to operate the hotel using the Econo Lodge trademarks on exterior signage, interior materials, digital listings, and in conversations with the puFblic. Prior to filing suit, Choice issued two cease-and-desist notices asserting that AMBA’s continued use of the trademarks was unauthorized.

After initiating suit, Choice moved for a preliminary injunction. AMBA did not oppose the motion, but it continued to use the trademarks after the preliminary injunction was ordered. As a result, the court granted Choice’s motion for contempt and authorized the U.S. Marshals Service to seize infringing signage and other items from the property. AMBA completely ceased its infringing operations in March 2025.

Choice then moved for summary judgment. AMBA only opposed the calculation of monetary relief. The court found that summary judgment for trademark infringement was appropriate as a matter of law because the trademarks were incontestable and AMBA’s use of identical trademarks created a high likelihood of confusion, because guests may believe that AMBA’s hotel was still a part of the Econo Lodge system.

For damages, the court held that where a former franchisee willfully continued using the franchisor’s trademarks for four years, despite court orders and seizure by the U.S. Marshals, lost profits and damages were warranted.

Franchisors should frequently review their franchise agreements with franchise counsel relating to franchisees’ de-identification obligations to ensure their franchise agreements contain clear procedures to aid them in enforcing such obligations. Additionally, franchisors should ensure they have consistent processes in place to both track and take action in instances of trademark infringement to protect the franchisor’s brand and system.

Choice Hotels Int’l, Inc. v. AMBA Corp., Case No. 1:22-cv-4779 (KMW-AMD) (D.N.J. Nov. 25, 2025)

Franchisee 101: Judicial Insulation for Arbitration

The federal district court in Michigan granted a motion to stay the franchisee’s case pending resolution of an arbitration between the franchisee and Spray Foam Genie International (“SFGI”), a spray foam insulation business franchisor.

SFGI offers franchises under several models, including an investor model, which allows franchisees to devote time to other jobs. In this model, SFGI manages the operations, provides support services, and allows part-time participation by franchisees after the franchisee invests upfront to open a location. SFGI and TL Jamil LLC (“TL Jamil”) entered into a franchise agreement for TL Jamil to open franchises in Florida and Washington, D.C. that SFGI would then manage.

TL Jamil claimed SFGI failed to deliver the technology, support, and marketing it had promised. TL Jamil also claimed they were forced to spend 40-50 hours per week managing the Florida franchise themselves and asserted that they invested more than $1.3 million, far exceeding the $100,000 to $650,000 range advertised by SFGI.

TL Jamil initiated arbitration proceedings against SFGI as required under the franchise agreement, along with claims against several of SFGI’s officers and related entities. The non-signatory officers and related entity defendants were dismissed from the arbitration proceeding, leaving only SFGI.

TL Jamil subsequently filed a federal action against the SFGI officers and related entities, alleging fraud, embezzlement/conversion, breach of contract, and violations of the Michigan Franchise Investment Law. The SFGI officers and related entities moved to stay the case pending the outcome of the arbitration proceedings against SFGI.

The court concluded that even though SFGI was not a party to the federal action, the arbitration proceedings are “inextricably intertwined” with allegations in the federal action, with nearly identical claims based on the same set of facts. TL Jamil argued that a stay would delay their claims without binding effect because the arbitration results were not directly enforceable against SFGI’s officers and related entities.

The court disagreed, explaining that, unlike other types of stays, the stay in this case does not dismiss the federal claims, but instead just pauses the proceedings until the results of the arbitration clarify the factual and legal issues in dispute. The court concluded that after the arbitration concludes, TL Jamil may proceed against SFGI’s officers and related entities, possibly with stronger factual bases for pleading the claims.

Prospective franchisees should consult with franchise counsel to ensure they understand the dispute resolution provisions contained in the franchise agreement and how those provisions may affect their ability to bring separate actions against the franchisor or related parties in arbitration or in court.

Jamil v. Longe, Case No. 24-13029 (E.D. Mich. Aug. 21, 2025)