## Facts

- Quality Care-USA, Inc. franchised home health-care services under its registered trademark/service mark.
- In 1978, Gorenstein Enterprises, Inc. and its principals (Sam and David Gorenstein) obtained a franchise to provide such services in the Chicago area under the mark.
- The franchisees soon defaulted on royalty payments.
- In 1980, Quality Care terminated the franchise and demanded the franchisees stop using the mark.
- The franchisees continued using the mark and sued for rescission based on alleged misrepresentation; the dispute proceeded in federal court along with Quality Care’s claims for royalties and trademark infringement.
- The district court entered a preliminary injunction against continued use of the mark; the franchisees later sought to amend their counterclaim based on purported newly discovered evidence, which the court denied as late and weak.
- A jury awarded damages for trademark infringement; the court trebled damages, awarded attorney’s fees, and added prejudgment interest at 9%, finding the infringement deliberate and the case exceptional.
- The franchisees appealed liability, denial of amendment, enhanced remedies, attorney’s fees, and the interest rate.

## Issues

1. Whether a terminated franchisee may continue using the franchisor’s registered mark while disputing the franchise agreement or termination.
2. Whether the district court abused its discretion by denying leave to amend a counterclaim based on alleged newly discovered evidence.
3. Whether findings of deliberate infringement supported treble damages and an award of attorney’s fees under the Lanham Act.
4. Whether prejudgment interest at 9% was an abuse of discretion or excessive.
5. Whether the appeal was frivolous such that appellate attorney’s fees were warranted.

## Decision

- The Seventh Circuit affirmed the judgment in all material respects.
- The court held that post-termination use of the mark by the former franchisee constituted trademark infringement.
- The denial of leave to amend the counterclaim was affirmed as within the district court’s discretion due to delay and lack of true novelty or merit.
- The court upheld treble damages and attorney’s fees based on deliberate infringement and the exceptional character of the case.
- The 9% prejudgment interest award was affirmed as a reasonable compensatory rate.
- The court found the appeal frivolous and authorized an award of appellate attorney’s fees to Quality Care.

## Legal Principles

- A trademark’s function is source identification tied to consistent quality; when a licensor terminates a license/franchise, it can no longer control the former licensee’s quality, so continued use of the mark is infringement.
- A terminated franchisee’s remedy for alleged misrepresentation lies in contract or franchise-law claims (e.g., rescission or damages), not in continued use of the trademark without authorization or royalties.
- Denial of leave to amend pleadings is reviewed for abuse of discretion; substantial delay, prejudice, and evidence discoverable earlier with due diligence support denial.
- Under the Lanham Act, deliberate infringement can justify enhanced monetary relief (including trebling) and attorney’s fees in an exceptional case.
- Prejudgment interest is compensatory and may be set at a rate that reflects the time value of money and the defendant’s created risk of delay; selection of a market-oriented rate can be within the court’s discretion.
- A frivolous appeal can support an award of appellate attorney’s fees.

## Conclusion

The Seventh Circuit held that a franchisee whose license has been terminated may not keep using the franchisor’s trademark while contesting the franchise relationship, and it affirmed enhanced monetary relief, attorney’s fees, and a 9% prejudgment interest award based on deliberate infringement and meritless litigation positions.


Gorenstein Enters., Inc. v. Quality Care-USA, Inc., 874 F.2d 431 (7th Cir. 1989)