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Smashburger Mysterious Trademark Settlement

Smashburger refreshment cup
A Dairy Cheer "Home of the Smashburger" refreshment cup in Pikeville, Ky.

LEXINGTON, Ky. – Icon Burger executives began using the trade name “Smashburger” in 2007, knowing it had belonged for over fifty years to Dairy Cheer in Kentucky. Not until Icon was ready to put a store in Lexington, did they think there was a trademark conflict.

Icon Burger executives entered into discussion with Dairy Cheer, prior to the Denver-based company opening their new restaurant. They assured owner Lou Compton that she had nothing to worry about. The two  Smashburger brands could operate in Kentucky separate from each other.

But Compton, known to be a shrewd businesswoman and, as one Dairy Cheer owner put it, “. . . not a very nice person and that’s putting it mildly.”

Compton had owned Dairy Cheer for thirty-five years after she purchased the original restaurant in Ashland from founder Bill Culvertson. He had built the brand on his unique cooking method of smashing the meat with a large No. 10 bean can. The process allowed the hamburger to cook in its own juices. Out of that “Smashburger” was born.

Compton opened several other restaurants. Dairy Cheer became “Home of the Smashburger.” The tagline was prominently displayed at shops along Eastern Kentucky. She soon began franchising the stores to collect royalties. Eventually Compton sold the stores outright to franchisees, giving them “forever” contracts.

The fledgling Colorado franchise company knew it had to come up with a quick resolution, as people in Kentucky loved the Smashburger menu items, which they had been eating for over three decades.

Icon further explained to Dairy Cheer’s owner and her attorney that while Smashburger was in urban communities in 16 states, Compton’s little chain of approximately six shops was only in small-town areas. And while Smashburger’s modern structures used bold red and white signage in their decor, Dairy Cheer store colors were displayed green and white, showing no connection between the two brands.

But Lou Compton wasn’t buying it.

Trademark dispute heats up

As negotiations went forward, Compton came out swinging. She asserted that the two Smashburger trademarks so resembled each other that it would cause “confusion, mistake and deception” under trademark law. She insisted that Dairy Cheer could be damaged by the Colorado franchise company using the same name.

After a number of exchanges between the parties, Icon made a lump sum settlement offer.  Compton countered with a “two percent” of ongoing royalty fees” [assuming she meant Kentucky Smashburger stores]. Icon rejected that offer.  

Compton’s attorney Michael S. Hargis of King & Schickli then presented their proposal for settlement. In his email letter of April 8, 2010 to Icon’s general counsel John M. Moore, the original Smashburger demanded the following:

  • An assignment of all rights in the SMASHBURGER and HOME OF THE SMASHBURGER service marks owned by Dairy Cheer Stores, Inc. including over fifty years of continuous use which would make Smashburger Master LLC the senior user nationwide vis-a-vis any other geographically limited users of the mark or other confusingly similar marks;
  • A license back to Dairy Cheer Stores, Inc. to continue operating the existing six store locations and to expand within the Commonwealth of Kentucky in a geographically limited area outside of the more heavily populated cities (e.g., Lexington and Louisville) as agreed to by the parties;
  • A one time payment of $750,000.00 due at the time of execution;
  • A $30,000.00 royalty/Lexington store per year and a $15,000.00 royalty/other store per year beginning one year after a store opens; and
  • A mutual release of any and all claims concerning any and all use/intended use of the SMASHBURGER service mark.

Hargis stated that given Smashburger’s eleventh hour notice to Compton concerning the opening of their Lexington store with its impending April 16, 2011 opening date. They were adamant that resolution be made promptly to preserve Compton’s rights. The attorney wanted a reply from Icon’s John Moore by 7:00 p.m.

Compton’s attorney made it known that Dairy Cheer would sue or take steps to impede Icon Burger’s ability to continue its use of the trademark, if they did not reach a settlement. She asserted that her company would file petition to cancel Icon’s federal registration of “Smashburger.”

Settlement discussions break down

Inside a Smashburger in Kentucky
Inside a Lexington Smashburger by Denver-based Icon

Icon Burger said it would not agree to Dairy Cheer’s “exorbitant demands” to settle the trademark dispute. Discussion broke down. Compton then petitioned to cancel Icon Burger’s trademark registration on June 18, 2010. 

Icon Burger responded by filing an amended complaint in Kentucky federal court four months later, asking for declaratory relief. The Colorado chain states, “This dispute, if left unresolved, will adversely affect Icon Burger’s relationship with its [Smashburger] franchisees and other partners and impede its ability to expand in Kentucky and other areas of the United States.”

Icon showed copies of its many registrations for the Smashburger name and many other menu items. They asserted that they did not infringe on any trademark right and Dairy Cheer is not adversely impacted by the claims it makes. Icon asked for attorneys’ fees and costs and other appropriate relief.

Court gives few answers to resolution

The court docket is puzzling as to how the case then proceeded. It shows that on March 25, 2011 a notice of settlement was filed and an order dismissing the case with prejudice, meaning that it cannot be re-filed. And yet in July an order was granted to the parties for a re-docket of the case.

Compton’s attorney Michael Hargis did not return a telephone call, asking what the current case status was. And a telephone call to Icon Burger’s outside counsel Nadya C. Bosch of Holland & Hart in Boulder only resulted in her replying, “All I can tell you is look at the court docket.”

IP attorney gives insight

Franchise attorney Peter Silverman of Shumaker, Loop & Kendrick in Toledo, Ohio has dealt with intellectual property cases concerning trademark disputes. He said Dairy Cheer had common law rights in the name Smashburger in the area it operated. “When you use a name in an area, you obtain common law rights for use of that name,” he explained. But, he added, “Dairy Cheer would have needed to prove customer confusion between its sandwich named “Smashburger” and the restaurant named “Smashburger,” which is an expensive case to litigate.”

Silverman also noted that a franchisor that wants to use a name conducts a search of the trademark register, state name registrations and the Internet to make sure no one else is using the name for the same purpose. “If the franchisor misses a local use and later finds out about it, the prudent step would be to negotiate a license with the local user that would allow the franchisor to use its registered name in the local area, have the local user waive objection to the franchisor’s using the name outside the area, and pay for those rights,” he said. Sometimes local users will think they’ve hit the lottery and can prevent registration, but they probably can do nothing more than limit the franchisor’s use of the name in the local area.

Silverman said the court docket shows the parties settled, but not the terms. He adds, “Smashburger’s franchise disclosure document that prospective franchise owners use should say something about it in Item 3 on litigation or Item 13 on trademarks.”

Unfortunately, the trademark infringement is not declared by the franchisor in its franchise disclosure documents. Its FDD does show that “Home of the Smashburger” was registered to Icon Burger as of October 25, 2011.

Silverman agrees that the re-docketing is confusing, and was never done.

Coming Part Three. . .

Read Part 1: The Real Story of Smashburger


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