IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

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No. 94-30055

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PEACHES ENTERTAINMENT CORPORATION

Plaintiff/Appellant/Cross-Appellee.

versus

ENTERTAINMENT REPERTOIRE ASSOCIATES, INC.

Defendant/Appellee/Cross-Appellant.

____________________________________________________

Appeal from United States District Court

for the Eastern District of Louisiana

__________________________________________________

August 16, 1995

Before HIGGINBOTHAM, SMITH and STEWART, Circuit Judges.

CARL E. STEWART, Circuit Judge:

Peaches Entertainment Corporation ("PEC"), owner of the

federally registered service mark PEACHES , appeals the district

court's judgment, which held that Entertainment Repertoire

Association, In c. ("ERA"), retained limited, exclusive rights to

use a similar mark within stores in two parishes in Louisiana and

advertise in five more. ERA appeals the district court's holding

that limited future store expansion to the two parishes where it

had operated stores. For the following reasons, the judgment of

the district court is affirmed in part, modified, and remanded with

directions.

BACKGROUND

Peaches Entertainment Corporation, a retail music and vi deo

chain, operates twenty-one locations in six states. It is the1 Lish on's, which changed its name to Peaches Records and

Tapes, Inc., filed for bankruptcy in 1981. PEC subsequently

acquired many of its assets, including the PEACHES service mark.

2 The parties have stip ulated that the owners of ERA were

inspired to use the mark and name PEACHES after listening to a hit

record by the Allman Brothers entitled "Eat a Peach." The album,

which was produced by Capricorn Records, was marketed to record

stores in a peach crate m arked with the illustration of a peach.

In July 1975, ERA obtained permission from Capricorn to use PEACHES

as a word mark and Capricorn's illustration as a design mark. ERA

was unaware of PEC's predecessor's use.

2 owner of the federally registered service mark PEACHES for "retail

tape and record services," the mark having been registered by a

corporate predecessor, Lish on's Inc. ("Lishon's"), 1 on July 6,

1976. Lishon's began using the mark in commerce in relation to

music stores sometime in 1974.

Likewise, ERA owns a retail music and video store in New

Orleans, Louisiana, which does bu siness under the trade name

PEACHES. 2 ERA first began to use the name PEACHES and a related

graphic service mark in August 1975, when it opened stores in both

Orleans and Jefferson Parish.

ERA's PEACHES fame spread beyond the Louisiana area, and

Lishon's learned of ERA's use of the PEACHES name and mark. On

December 2, 1975, Lishon's sent a cease a nd desist letter to ERA

notifying it of its claim to the PEACHES trademark and demanding

that ERA stop using the trademark PEACHES in connection with its

Louisiana music stores. ERA responded, by letter, that when it

first began to use the trademark PEACHES, it was unaware of

Lishon's prior use of the trademark. Because Lishon's did not

reply to its le tter, ERA assumed that it continued to have the3

rig ht to use the PEACHES trademark in Louisiana. Consequently,

ERA's use of the trademark neither ceased nor desisted, and it

continued to expand its operations. By May 1980, ERA operated six

stores in Louisiana, two stores in Jefferson Parish and four stores

in Orleans Parish. In 1981, Lishon's filed for bankruptcy and sold

the PEACHES trademark to PEC.

In 1992, when PEC learned of ERA's use of the mark PEACHES, it

brought an infringement suit in federal court under the Lanham

Trademark Act of 1946, seeking an injunction and damages. See 15

U.S.C. § 1221. At that time, ERA was operating only one store in

Orleans Parish, although the one store was extremely profitable.

ERA defended on the grounds that it was an "intermediate junior

user," entitled to exclusive use of the trademark within the

territory that it had established prior to the federal registration

of the mark. The district court agreed.

The triable issues that remained were limited to determining

the extent of PEC's right to use the PEACHES service mark and ERA's

additional defense of laches. After considering the evidence, the

d istrict court held that ERA's use was protected under two

doctrines. First, ERA was an intermediate junior user and, second,

PEC was estopped by laches from encroaching on ERA's territory on

account of its seve nteen-year delay in pursuing its rights.

Moreover, the court stated that it would not hold ERA to a "strict

standard" of proof of its trade territory, because of the delay.

To determ ine the trade territory, the district court determined

ERA's trade territory based "primarily on the evidence of the3 These seven parishes are: Orleans, Jefferson, Plaquemines,

St. Bernard, St. Tammany, St. Charles, and St. John the Baptist.

4 Insofar as the applicable law here is concerned, the terms

"service mark" and "trade mark" are synonymous. C f. B oston

Professional Hockey Ass'n, Inc. v. Dallas Cap & Emblem Mfg., Inc.

, 510 F.2d 1004, 1009 (5th Cir.), cert. denied

, 423 U.S. 868 (1975).

4 geo graphic extent of ERA's continuous radio advertising and its

r eputation." It also relied on ERA's evidence "regarding the

geographic origin of its customers." This evidence came primarily

from Harris and Shirani Rea, who co-o wned and operated ERA. The

district court issued a permanent injunction that allowed ERA to

advertise in a seven parish territory, 3 but l imited future store

expansion to Orleans and Jefferson Parish, the two parishes where

ERA had operated stores.

LAW

In 1946, Congress passed the Lanham Act in order to federalize

the commo n law protection of trademarks used in interstate

commerce. See Lanham Trademark Act of 1946, c. 540, 60 Stat. 427

(co dified as amended at 15 U.S.C. §§ 1051-1127). The Act was

designed to protect both consumers' confidence in the quality and

source of goods and services and protect business es' goodwill in

their products by creating a federal right of action for trademark

infringement. S. Rep. No. 1333, 79th Cong., 2d Sess. at 1,

reprinted in 1946 U.S. Cong. Ser v. 1274, 1274. Owners of a

federally recognized trademark, 11 U.S.C. § 1052, service mark 11

U.S.C. § 1053, or other collective mark, 11 U.S.C. § 1054; s ee

also

, 11 U.S.C. § 1127 (defining types of marks), 4 may bring suit

in federal court for damages or injunctive relief against users of5 The 1988 amendments to the Act made certain changes to this

doctrine that are not relevant to the case at hand.

5 similar marks whose use is "likely to cause confusion, or to cause

mistake, or to deceive." 11 U.S.C. § 1114.

The basic scheme that creates rights under the Lanham Act is

a national registration system. Under the common law, use of a

distinctive mark in commerce only created a right through priority

and market. S ee United Drug Co. v. Theodore Rectanus Co.

, 248 U.S.

90, 97 (1918) ("There is no such thing as property in a trade-mark

except as a right appurtenant to an established business or trade

in connection with which the mark is employed."). The Lanham Act,

however, changed the common law rule by allowing a user to acquire

rights in a mark by registration. To complicate this process,

howev er, Congress also created several defenses to a registereduser's rights. Significant to this case, junior users, parties who

use a mark subsequent to another's use, may retain rights. If the

use predates the senior user's registration, 5 then the Act provides

a defense if the mark "was adopted without knowledge of the

registrant's prior use and has been continuously used by such party

. . . from a date prior to registration of the mark . . ." 11

U.S.C. § 1115(b)(5). The rights of a junior intermediate user,

however, "apply only for the area in which such continuous prior

use is proved." 11 U.S.C. § 1115(b)(5); s ee generally

, 3 J. Thomas

McCarthy, M C C ARTHY ON T RADEMARKS AND U NFAIR C OMPETITION § 26.18[1] (3d ed.

1994) (examining "limited area defense"). The junior user's area

of continuous prior use, which is f rozen at the time the senior6

user obtains registration, see John R. Thompson v. Hollow ay , 366

F.2d 108, 116 (5th Cir. 1966); and Dawn Donuts Co. v. Hart's Food

Stores, Inc.

, 267 F.2d 358, 360 (2d Cir. 1959)

, becomes the junior

user's trade territory.

The junior user may establish his trade territory by

identifying the "zone of reputation" acquired for his mark. S ee

William J. Gross, Comment, The Territorial Scope of Trademark

Rights , 44 U. M IAMI L. R EV

. 1075, 1084-87 (1990); see also

, Hanover

Star Milling Co. v. Metcalf

, 240 U.S. 403, 415-16 (1916) ("Into

whatever markets the use of a trademark has extended, or its

meaning has become known

, there will be the manufacturer or trader

whose trade is pirated by an infringing use be entitled to

protection and redress." [emphasis added]); Thrifty Rent-A-Car

System, Inc. v. Thrift Cars, Inc.

, 639 F. Supp. 750, 753 (D. Mass.

1986), aff'd.

, 831 F.2d 1177 (1st Cir. 1987) ("A party who has

established a reputation in an area may acquire exclusive rights to

its mark there, even though the product bearing the mark is

unavailable."); Quill Corp. v. LeBlanc , 654 F. Supp. 380, 385

(D.N.H. 1987) ("At the point in time of registration, the junior

user's current market -- its 'area [of] continuous prior use'

. . . -- is frozen, and

. . . the jun ior user's reputation,

advertising, and sa les delimit its frozen area." [citations

omitted]); and 3 McCarthy, supra

, § 26.12[1] at 26-41 ("The

territorial scope of a trademark and its goodwill must be defined

in terms of the area from which customers are drawn, the coverage

of advertising media and the nature of goods or services sold.").7

Provided that the junior user has significant sales in the areas

the mark has gained reputation, these ar eas comprise the junior

user's trade territory at the time the senior user obtained

registration. S ee Thrifty Rent-A-Car System

, 639 F. Supp. at 753.

Advertising alone cannot establish the ju nior user's trademark

rights in an area. Id.

STANDARD OF REVIEW

We review the trial court's grantin g or denial of permanent

injunction for abuse of discretion. S ee Merrill Lynch v. Stidham

,

658 F.2d 1098 (5th Cir. 1981) (holding that the trial court had not

abused its discretion in permanently enjoining the defendants); see

also

, Lone Star Steakhouse & Saloon, Inc. v. Alpha of Virginia,

Inc.

, 43 F.3d 922, 939 (4th Cir. 1995) (noting that abuse of

discretion is the appropriate standard of review for a granting or

denial of permane nt injunction). The district court abuses its

discretion if it (1) relies on clearly erroneous factual findings

when deciding to grant or deny the permanent injunction (2) relies

on erroneous conclusions of law when deciding to grant or deny the

permanent injunction, or (3) misa pplies the factual or legal

conclusions when fashioning its injunctive relief.

"The standard of review over the district court's grant of a

permanent injunction must, of course, be segmented according to the

component functio ns performed by the district court." M ultnomah

Legal Serv. Workers Union v. Legal Serv. Corp., 936 F.2d 1547, 1552

(9th Cir. 1991). Thus, we will review the district court's8

findings of fact under the clearly erroneous standard, and the

conclusions of law under the de novo standard.

Historically, finding the territorial scope of trademark

rights has been a question of fact. 3 McCarthy, s upra

, § 26.12[1]

at 26-41; s ee also

, Federal Glass Co. v. Loshin

, 224 F.2d 100, 102

(2d Cir. 1955); c f. American Foods, Inc. v. Golden Flake, Inc.

,

312 F.2d 619, 627 (5th Cir. 1963) ("The ancient observation that

each trade-mark case must be decided upon its own facts still

o btains

. . . ."). W e overturn the district court's factual

findings only if they are clearly erroneous. C hevron Chemical Co.

v. Voluntary Purchasing Groups, Inc. , 659 F.2d 695, 703 (5th Cir.

1981). The determination of the proper legal standard for

assessing a junior or senior user's trade territory is a question

of law that we review de novo

. See id.

If we find that the district court misapplied its factual

findings and/or legal conclusions when fashioning its permanent

injunction, we must remand the case for modification of the order.

Mo difications of an order granting injunctive relief "cannot be

devised from on high. The district court must bear the

responsibility for doing so." S ee United States v. Lawrence County

School Dist.

, 799 F.2d 1031, 1047 (5th Cir. 1986); see also

, B & A

Pipeline Co. v. Dorney, 904 F.2d 996, 1002 (5th Cir. 1990)

(remanded the case with directions that the court modify its

judgment in order to limit the permanent injunction placed on the

defendant); and Premier Indus. Corp. v. Texas Indus. Fastener Co.

,

450 F.2d 444, 448 (5th Cir. 1971) (remanded the case with9

directions that the district court modify its judgment in order to

extend the time of the injunctive relief).

ANALYSIS

I. SIZE OF TRADE AREA

PEC contends that the district court made several errors in

determining the size of ERA's trade area. Initially, it contends

that the dist rict court erred in not holding PEC to a "strict

proof" of its trade area. Our research has found no jurisprudence

to the effect that ERA sh ould have been held to a "strict proof"

requirement and PEC has virtually conceded this point in its reply

brief.

PEC also contends that the district court relied on

inadmissible hearsay adduced at trial in making its judgment. The

testimony at issue is that of Harris Rea and his wife. They

testified that they drew their customers primaril y from within

seven parishes and sometimes beyond. They based their testimony on

their business experiences acquired through the day-to-day

operation of the record store and personal contacts with customers

who sought out their wide inventory mix of rhythm and blues, blues,

jazz, gospel, and rap music. ERA stocked hard-to-find collector's

items and music indigenous to Louisiana such as cajun, zydeco and

dixieland jazz. PEC concedes that it did not object to this

testimony during trial.

In this circuit, "unobjected-to hearsay may be considered by

the trier of fact for such probative value as it may have." F lores

v. Estelle , 513 F.2d 764, 766 (5th Cir.), c ert. denied

, 423 U .S.10

989, 96 S.Ct. 401, 46 L.Ed.2d 308 (1975). When a party fails to

object to the admission of evidence, we can review only for plain

error. P ermian Petroleum v. Petroleos Mexicanos

, 934 F.2d 635, 648

(5th Cir. 1991); Fed. R. Evid. 103(d). Plain error is error which,

when examined in the context of the entire case, is so obvious and

substantial that failure to notice and correct it would affect the

fairness, integrity, or public reputation of judicial proceedings.

Permian Petroleum , 934 F.2d at 648.

At trial, it was established that the retail record business

is a cash-and-carry business. Most customers pay by cash or check,

leaving no written record of their residence. Thus, the testimony

of Harris Rea was probative as to the location of the custo mer

base. It also gave every indication of being reliable,

particularly in view of the absence of any contrary evidence

p resented by PEC. S ee Flores

, 513 F.2d at 766 (holdi ng that

"unobjected-to hearsay may be considered by the trier of fact for

such probative value as it may have"). Moreover, the district

court also heard testimony of ERA's extensive radio advertising and

promotion activity, which the district court relied upon in issuing

the permanent injunction. Consequently, the alleged hearsay

testimony was not the sole basis for the district court judgment.

We find no error in the admission of this testimony that would have

affected the fairness, integrity or public reputation of the

district court proceedings.11

II. ERA'S TRADE TERRITORY

The trial court identifie d ERA's trade territory, which was

frozen at the time Lishon obtained registration of the PEACHES

mark, using uncontroverted testimony regarding ERA's reputation,

advertising and sales in the areas in which it concentrated its

advertising. We hold that the zone of reputation -- that is, the

reputation, advertising, and sales proven in a given service area

-- may be used to determine a junio r or senior user's trade

territory. Therefore, the trial court did not err in relying on

ERA's zone of reputation to classify ERA's trade territory.

In calculating ERA's trade area, the trial court made the

following factual findings:

On August 1, 1975, Smith and Rea began using the service

mark PEACHES on exterior and interi or signs, point-ofsale displays at its original locations in Gretna and on Elysian Fields and on bags for purchased merchandise. At

that time it also began distributing flyers using the

PEACHES service mark and word mark in various other forms

of advertising is uncontroverted. In this vein, Rea

testified that in August 1975, ERA began advertising on

numerous radio stations in the metropolitan area of New

Orleans, including WXEL (which is now WLT X-FM), WNNR

(which is now WYAT), WYLD-AM and FM, WBOK, WTIX and WRNOFM[.]

. . . The coverage areas for the broadcast signals

of the radio stations on which ERA advertised all include

Orleans and Jefferson Parishes and most i nclude all of

the parishes south of New Orleans to the Gulf of Mexico,

all of the parishes on the north shore of Lake

Ponchartrain and across the state line well into

Mississippi on the north and east, past Baton Rouge to

the northwest, and past Lafayette to the west.

The trial court deduced that the market served continuously by

ERA's PEACHES prior to Lishon's registration included the greater

New Orleans area (i.e., Orleans Parish), and its contiguous12

par ishes, Jefferson, Plaquemines, St. Bernard, St. Tammany, St.

Charles and St. John the Baptist.

Our review of the record, and in particular the trial court's

memorandum opinion, demonstrates that the trial court's

determina tion of ERA's trade territory was based upon cumulative

evidence regarding ERA's reputati on. The trial court's

determination was not made on the basis of the radio signals going

out to various far-reaching areas, but rather on recognized sales

coming in from particular localities. A comparison of the radio

signals and the court-recognized trade territory reveals that the

radio signals through which ERA advertised clearly went far beyond

the seven parishes identified as ERA's trade territor y. For

example, some of the radio signals stretched to the Gulf of Mexico,

while others penetrated Mississippi. Evidence adduced at trial

magnifies the incongruity b etween ERA's sales and the radio

signals. Harris Rea testified that ERA's PEACHES store survived

despite the presence of two nearby Sound Warehouse stores because

of ERA's ability to draw from a larger trade area than the PEACHES

stores' immedi ate neighborhoods. He further testified that

PEACHES' "reputation" and "customer loyalty" regularly drew

customers from the following parishes: Orleans, Jefferson, St.

Tammany, Tangipahoa, St. John the Baptist, St. Charles, St. Bernard

and Plaquemines. The trial court carefully tailored the trade

territory to conform with evidence regarding ERA's sa les; it did

not rely solely on ERA's advertising evidence. Because ERA proved

its reputation, advertising and sales in these seven parishes, the13

trial court delineated these parishes as ERA's trade territory. We

cannot say that the trial court's factual finding of ERA's trade

territory, which was fully supported by testimony and evidence at

trial, was clearly erroneous.

III. EXPANSION LIMITATION

Both parties appeal the restrictions placed on ERA's ability

to expand within the trade area. PEC argues that ERA should be

limited to the one store that is operating now, despite the fact

that its trade area covers seven parishes. We find no support for

this contention in the case law. As an intermediate junior user,

ERA has the right to fully exploit the market potential of its

trade area. D awn Donuts Co.

, 267 F.2d at 362. PEC's rights are

not affected by the opening of one store or one hundred stores as

long as ERA does not infringe upon PEC's trademark outside of the

seven parish trade area. We find PEC's argument to be without

merit.

ERA appeals the portion of the district court's judgment that

limits it from opening new stores outside of the Orleans and

Jefferson Parish parts of the trade area. Harris Rea testified

that ERA's specialization in ethnic music and its wide inventory of

Louisiana music had gained it a loyal following. He also testified

that gross revenues for the single store had been growing over the

last few years despite competition from large franchise stores. As

noted above, in 1991, gross revenues were $345,000. In 1992, they

were $455,000. In 1993, they were $650,000. By July 31, 1994,14

gross revenues exceeded $750,000. He testified that gross revenues

by square footage in 1994 was $417 dollars per square foot, which

is approximately three times the industry average of $165 dollars

per square foot.

Rea testified that in order to increase profitability in the

future, he had planned to expand the size of his store in Orleans

Parish as well as open new stores within the trade area. By

opening new stores, he stated that he would be able to spread

management costs over sev eral stores and generate more sales for

the same advertising dollar. Rea also testified that the new

stores would make ERA eligible for volume discounts from record

manufacturers and distributors.

Based on this uncontroverted evidence at trial, the district

court stated in its memorandum opinion that:

It appear s incongruous for a court to limit an

intermediate junior user to a specific retail location or

a set of specific locations within its defined Trade

Territory when the law is precisely to the effect that an

interme diate junior user is entitled to freely use its

mark within the confines of its established trade

territory without interference by the registered owner of

the mark. Accordingly, the Court is of the opinion that

it is inappropriate to interfere with the ERA 's use of

its mark within its Trade Territo ry by delineating

specific locations therein where the intermediate junior

use is permitted [to] utilize its mark . [Footnote

omitted.]

This conclusion comports perfectly with the principle that an

intermediate junior user is entitled to fully exploit its trade

area. See Dawn Donuts , 267 F.2d at 362.6 We do not address the merits of the laches defense upheld by

the trial court because a discussion of this defense is not

necessary to sustain the judgment.

15 In its judgment, however, the district court limited the

opening of new stores to the Orleans and Jefferson Parish,

explaining its reason for the restriction:

The court imposes such restriction for the sole purpose

of avoiding the possibility of a prohibited expansion of

the intermediate junior user's trade territory which

would logically follow the establishment of additional

retail locations approaching the outer boundaries of

ERA's Trade Territory.

This restriction is unsupported by the record or law. There was no

evidence adduced at trial indicating that a restriction on the

physical location of an ERA store was required to prevent the

expansion of ERA's trade area. In fact, the evidence at trial was

that the opening of new stores was planned by ERA as a means of

exploiting the existing trade area. This evidence was not

contested by PEC. Neither the district court nor PEC cites any

case that has allowed this type of restriction on the location of

a store within a trade area, nor has our own research produced any

case law that has imposed this type of restriction.

The district court reached the factual conclusion that ERA's

trade area consisted of seven contiguous parishes in South

Louisiana. This conclusion was fully supported by the evidence and

testimony submitted at trial. Having reached that conclusion, it

was error for the district court to restrict the location of any of

ERA's future stores to Orleans and Jefferson Parish. 616 CONCLUSION

For the foregoing reasons, we REMAND the cause to the district

court, and the district court is directed to MODIFY its judgment,

consistent with this opinion, by removing the stricture prohibiting

ERA from open ing new stores outside of Orleans and Jefferson

Parish. In all other respects, the judgment of the district court

is AFFIRMED.

Affirmed in part, modified, and remanded with directions.