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D ock e t 97-3473

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. e du/thir dc ir c uit_1998/109Filed May 13, 1998

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

NO. 97-3473

PAPPAN ENTERPRISES, INC.

v.

HARDEE'S FOOD SYSTEMS, INC.;
MRO MID-ATLANTIC CORP., Appellants

v.

LOUIS D. PAPPAN; PANAGIOTA PAPPAN

On Appeal From the United States District Court For the Western District of Pennsylvania (D.C. Civil Action No. 96-cv-01778)

Argued March 12, 1998

Before: BEFORE: STAPLETON and ALITO, Circuit Judges
, and O'KELLEY,* District Judge

(Opinion Filed May 13, 1998)

___________________________________________________ ______________

*Honorable William C. O'Kelley, United States Distr ict Judge for the Northern District of Georgia, sitting by designatio n.Arthur I. Cantor (Argued)

Peter J. Klarfeld Andrew P. Zappia Wiley, Rein & Fielding 1776 K Street, N.W. Washington, DC 20006 Attorneys for Appellants

Gene J. Brockland (Argued)

Mark R. Dunn
Lori F. Kutilek Herzog, Crebs & McGhee, LLP One City Centre, 24th Floor
515 North Sixth Street St. Louis, MO 63101 Attorneys for Appellees

OPINION OF THE COURT

O'KELLEY, Senior District Judge:

Hardee's Food Systems, Inc. ("Hardee's") and MRO Mi dAtlantic Corp. ("MRO") appeal from the district cou rt's order denying their motion for a preliminary injunction t o restrain Pappan Enterprises, Inc. ("Pappan") from u sing the ROY ROGERS marks owned by Hardee's and MRO.1 Because we find that Hardee's and MRO have clearly established irreparable injury to their marks from Pappan's non-consensual use and that their irreparable injur y as a result of that use outweighs any injury Pappan migh t suffer from the entry of a preliminary injunction, we will reverse the district court and remand with directions to gr ant the motion for a preliminary injunction.

I.

Pappan has been a ROY ROGERS franchisee since October, 1972. In 1990, MRO acquired the ROY ROGERS

___________________________________________________ ______________

1. The ROY ROGERS marks are registered with the Uni ted States Patent
and Trademark Office. Hardee's became the owner of the marks in 1990. The marks are now owned by MRO.

2restaurant system and assumed all of the rights and

obligations as franchisor under then-existing ROY R OGERS franchise agreements. At that time, pursuant to its franchise agreements, Pappan operated nineteen (19) ROY ROGERS restaurants in the greater Pittsburgh, Pennsylvania metropolitan area. Thereafter, Hardee' sacquired the stock of MRO, and MRO became a whollyowned subsidiary of Hardee's.

Between 1990 and 1993, Pappan closed thirteen (13) of its ROY ROGERS restaurants and transferred one (1) to a third party. Beginning in April, 1993, Pappan cease d making royalty and advertising payments on its five (5) remaining restaurants as required by the franchise agreements. In October 1994, the parties entered in to a letter agreement ("letter agreement"). The parties agreed that Pappan would begin making all required payment s under its existing franchise agreements on November 1, 1994, and would remain current on its payments thereafter. Further, the parties agreed that with r espect to any restaurants sold or closed by Pappan by Decembe r 31, 1995, all amounts owed up to November 1, 1994, woul d be forgiven. At Pappan's request, the December 31, 199 5, deadline was extended to March 31, 1996.

Pappan re-commenced royalty and advertising payment s on or about November 1, 1994, for its five (5) rema ining restaurants. In November or December 1995, Pappan a gain ceased making royalty and advertising payments for each of the five (5) restaurants. It appears that Pappan ha s not made any of the required payments since that time.

On September 26, 1996, Pappan filed the present act ion alleging breach of contract, breach of covenant of good faith and fair dealing, negligence, and tortious interfer ence with business relations. Pappan contends that Hardee's a nd MRO have mismanaged the ROY ROGERS system and, as a result, it has lost significant value. By order d ated February 20, 1997, the district court dismissed Pap pan's claims for negligence and tortious interference wit h
business relations.

On March 7, 1997, Hardee's and MRO filed their answ er denying the two (2) remaining claims. Hardee's and MRO

3also filed a counterclaim for breach of contract ba sed on

Pappan's failure to pay royalty and advertising fee s as required by the franchise agreements. As of March 6 , 1997, Pappan was in arrears as to the five (5) remaining restaurants in the amount of $172,038.70. Pursuant to the franchise agreements, MRO sent Pappan a Notice of D efault and Termination regarding the unpaid royalties and advertising fees for each store. The notice informe d Pappan that it had ten (10) days to cure the default or Pa ppan's five (5) remaining franchise agreements would terminate. Pappan received the notice on March 10, 1997, but f ailed to

cure the default.

By letter dated March 25, 1997, MRO confirmed to Pappan that the franchise agreements had terminated on March 20, 1997. MRO demanded that Pappan cease usin g the ROY ROGERS marks and comply with the other post termination obligations in the franchise agreements

. Pappan failed to do so. On April 3, 1997, MRO filed an amended counterclaim asserting additional claims ar ising out of the termination of Pappan's franchise agreem ents, including claims for breach of post-termination con tractual obligations, unjust enrichment, and trademark infringement.

On April 25, 1997, Hardee's and MRO moved for a preliminary injunction to restrain Pappan's continu ing use
of the ROY ROGERS marks. The district court denied Hardee's and MRO's motion, finding that the irrepar able harm to Pappan from the entry of a preliminary inju nction outweighed the irreparable harm to Hardee's and MRO from the denial of a preliminary injunction. MRO and Har dee's filed the instant appeal. Pappan admits that, despi te the termination of the franchise agreements, it is cont inuing to
use the ROY ROGERS marks and to hold itself out to the public as a ROY ROGERS franchisee.

II.

"We review the denial of a request for injunctive r elief for an abuse of discretion." S & R Corp. v. Jiffy Lube Intern., Inc., 968 F.2d 371, 374 (3d Cir. 1992)(citing Optic ians Ass'n of Am. v. Independent Opticians of Am., 920 F.2d 18 7, 192

4(3d Cir. 1990)). "A district court abuses its discr etion when

its decision rests upon a clearly erroneous finding of fact, an errant conclusion of law, or an improper applica tion of
law to fact." Hofkin v. Provident Life & Accident I ns. Co., 81 F.3d 365, 369 (3d Cir. 1995)(citations omitted). Th is court
"cannot reverse unless the trial court has committe d an obvious error in applying the law or a serious mist ake in considering the proof." Opticians, 920 F.2d at 192 (citing Freixenet, S.A. v. Admiral Wine & Liquor Co., 731 F .2d 148, 150 (3d Cir. 1984)).

When ruling on a motion for preliminary injunctive relief, a district court must consider four factors: (1) th e likelihood that plaintiff will prevail on the merits at final hearing; (2) the extent to which plaintiff is being irreparably harmed by the conduct complained of; (3) the extent to which defendant will suffer irreparable harm if the preli minary injunction is issued; and (4) the public interest. Jiffy Lube, 968 F.2d at 374 (citing Hoxworth v. Blinder, Robins on & Co., 903 F.2d 186, 197-98 (3d Cir. 1990)); Opticians, 92 0 F.2d at 191-92 (citing Bill Blass, Ltd. v. Saz Corp., 75 1 F.2d 152, 154 (3d Cir. 1984)).

The district court determined that the first and se cond
factors -- the likelihood that Hardee's and MRO wou ld prevail on the merits and irreparable harm to Harde e's and MRO as a result of Pappan's continued non-consensua l use of the ROY ROGERS marks -- weighed in favor of gran ting preliminary injunctive relief. The district court t hen balanced Pappan's irreparable harm against Hardee's and MRO's irreparable harm and determined that the bala ncing of hardships weighed against granting preliminary injunctive relief. Accordingly, the district court declined to consider the fourth factor as all four (4) factors must favor the granting of injunctive relief. However, the cou rt then noted that the public interest weighed in favor of granting preliminary injunctive relief. Report & Recommendat ion, 11

n.13.

A.

With respect to the first factor, Hardee's and MRO must demonstrate that their claim of damage from unautho rized

5trademark use is likely to succeed at trial. To pre vail on an

infringement claim under S 32 of the Act, Hardee's and MRO must demonstrate that Pappan's use of the ROY ROGERS marks was/is unauthorized. Jiffy Lube, 968 F .2d at 375 (citing United States Jaycees v. Philadelphi a Jaycees, 639 F.2d 134, 137 (3d Cir. 1981)). Under S 43(a) of the Lanham Act, Hardee's and MRO can demonstrate injury from Pappan's use of the ROY ROGERS marks if such u se is "likely to create confusion concerning the origi n of the goods or services." Jiffy Lube, 968 F.2d at 375 (ci ting Opticians, 920 F.2d at 192).

"Likelihood of confusion exists when consumers view ing the mark would probably assume that the product or service it represents is associated with the source of a different product or service identified by a simila r mark." First Keystone Fed. Sav. Bank v. First Keystone Mor tgage, Inc., 923 F. Supp. 693, 703-04 (E.D. Pa. 1996)(citi ng Fisons Horticulture, Inc. v. Vigoro Indus., Inc., 30 F.3d 466, 472 (3d Cir. 1994)). This court has held that where the ide ntical mark is used concurrently by unrelated entities, th e likelihood of confusion is inevitable. Opticians, 9 20 F.2d at 195; United States Jaycees, 639 F.2d at 142. It app ears to be undisputed that Pappan is continuing to use the ROY
ROGERS marks. The district court determined that su ch use created a likelihood of confusion among consume rs concerning the origin of the goods and services. Re port & Recommendation, 4. Accordingly, the district court found
that the first factor -- the likelihood that Hardee 's and MRO will prevail on the merits -- weighed in favor of g ranting preliminary injunctive relief. We agree.

Pappan disputes the district court's determination and alleges several Lanham Act defenses. 15 U.S.C. S 11 15(b). Pappan asserts that these defenses render the likel ihood that Hardee's and MRO will prevail on the merits speculative. If a defendant prevails on one of the statutory defenses in a trademark infringement case, "the pla intiff loses the presumption of validity, ownership and ri ght to protection." First Keystone, 923 F. Supp. at 701 (c iting Ford Motor Co. v. Summit Motor Prods., 930 F.2d 277, 291 (3d Cir.), cert. denied, 502 U.S. 939, 112 S.Ct. 373, 1 16 L.E.2d 324 (1991)). Pappan asserts that the doctrines of l aches

6and acquiescence apply in this case and preclude a finding

that Hardee's and MRO are likely to prevail on the merits of their infringement claim. The district court con sidered Pappan's statutory defenses and determined that nei ther laches nor acquiescence was a viable defense to Har dee's and MRO's infringement claim.

Laches is an equitable doctrine that prevents recov ery when a defendant can show inexcusable delay in inst ituting suit and prejudice to the defendant resulting from such delay. First Keystone, 923 F. Supp. at 701 (citing University of Pittsburgh v. Champion Prods., Inc., 686 F.2d 10 40, 1044 (3d Cir.), cert. denied, 459 U.S. 1087, 103 S.Ct. 5 71, 74 L.E.2d 933 (1982)). The doctrine of acquiescence ap plies when the trademark owner, by affirmative word or de ed, conveys its implied consent to another. 4 McCarthy On Trademarks and Unfair Competition, S 31.51 at 31-76 (4th ed. 1997). The facts of this case show that Hardee' s and MRO sought a preliminary injunction one (1) month a fter
the franchises were terminated.

Pappan asserts that the relevant time period in considering Hardee's and MRO's delay is the fifteen (15) month period during which Pappan was failing to pay the required royalty and advertising payments while con tinuing
to use the ROY ROGERS marks. As the district court held, however, Pappan did not begin infringing on the ROY
ROGERS marks until Hardee's and MRO terminated Pappan's franchise agreements. Until that time, Har dee's and MRO had no basis upon which to seek an injuncti on, and their failure to do so does not constitute dela y.

Similarly, Pappan argues that Hardee's and MRO consented to Pappan's trademark infringement when t hey continued to do business with Pappan after Pappan b egan defaulting on its required fees in late 1995. But P appan again confuses the relevant time period; Pappan did not begin infringing upon Hardee's and MRO's trademark until March 20, 1997. There is no evidence that Hardee's and MRO continued to do business with Pappan after this date.

Accordingly, the district court determined that the doctrines of laches and acquiescence were not appli cable in that there was no unreasonable delay in applying fo r relief.

7Report & Recommendation, 7. We agree and uphold the

district court's ruling on the issue of Hardee's an d MRO's
likelihood of success on the merits without further
discussion.

B.

The second factor a court must consider before gran ting preliminary injunctive relief is the extent to whic h plaintiff will suffer irreparable injury if preliminary injun ctive relief is denied. Grounds for irreparable injury include l oss of control of reputation, loss of trade, and loss of g oodwill. Opticians, 920 F.2d at 195. Irreparable injury can also be based upon the possibility of confusion. Id. at 196 . This
court has held that once the likelihood of confusio n caused by trademark infringement has been established, the inescapable conclusion is that there was also irrep arable injury. Opticians, 920 F.2d at 196-97 (citations om itted).

The district court found that Hardee's and MRO had shown irreparable injury given that the court had previously found that the likelihood of confusion w as inevitable because the identical trademark was bein g used simultaneously by both Pappan and MRO. Accordingly, the
district court determined that the second factor we ighed in favor of granting preliminary injunctive relief. Re port & Recommendation, 9.

C.

The third factor a district court must consider bef ore granting preliminary injunctive relief is the harm defendant might suffer should the relief be granted. In consi dering this harm, the district court must undertake to bal ance the hardships to the respective parties. Opticians, 920 F.2d at
197. The court must "ensure that the issuance of an injunction would not harm the infringer more than a denial

would harm the mark's owner." Id.

The district court found that Pappan would suffer irreparable injury should it be enjoined from using the ROY ROGERS marks. Report & Recommendation, 9. In suppor t of this finding, the district court noted that Papp an had

8continued to invest money in the restaurants, inclu ding

several months of logoed product, and had continued to build up the goodwill of its customers. Id. The dis trict court then balanced the hardships to the parties and foun d in favor of Pappan.

The district court determined that Hardee's and MRO had failed to specify in what manner they had been harm ed.
The district court also found that Hardee's and MRO had
demonstrated a lack of interest in the ROY ROGERS s ystem for years. The district court stated:

Hardee's and MRO's apparent efforts to disen gage themselves from the Roy Rogers system does n ot suggest that they will suffer greater harm t han Pappan if the injunction is denied. Moreover, it wa s largely because of [Hardee's and MRO's] failure to t ake any action to terminate Pappan's franchises for fifteen months knowing that it was not receiving the ir royalty payments and advertising fees and their will ingness to forgive past due fees that Pappan continued to invest
monies into its restaurants. Under these circumstances, it does not appear that the h ardship suffered by [Hardee's and MRO] at this junct ure outweighs the harm which would befall Pappan should we grant the requested relief.

Report & Recommendation, 10. This finding by the di strict court constitutes clear error, and we now reverse.

The district court's determination that Hardee's an d MRO failed to specify in what manner they had been inju red is unsupported by the record. The district court found , and we agree, that Hardee's and MRO have clearly demonstrated irreparable injury as a result of Papp an's
non-consensual use of the ROY ROGERS marks in the forms of loss of control of reputation and the inev itable likelihood of confusion to consumers. Pappan, on th e other hand, has failed to demonstrate irreparable injury. Moreover, any difficulties Pappan now faces were br ought on by its own conduct in continuing to use the ROY ROGERS marks despite the termination of the franchi se agreements.

9Irreparable harm "must be of a peculiar nature, so that

compensation in money alone cannot atone for it." Opticians, 920 F.2d at 195 (citing Morton v. Beyer, 822 F.2d 364, 372 (3d Cir. 1987)). The district court found that Pappan would suffer significant financial injuries should the injunction issue, including several months wort h of logoed product. The district court, however, did no t set forth what alleged injuries Pappan would suffer tha t could not be remedied by money damages. Pappan argues tha t it would suffer the loss of its customers' goodwill if it were
forced to convert to a non-affiliated restaurant an d then to another chain shortly thereafter. However, the port ion of the case cited by Pappan in support of this argumen t addresses the injuries of the party whose mark is b eing infringed. Opticians, 920 F.2d at 195. The concept of customers' goodwill in the context of trademark law is goodwill for the mark, not for the specific restaur ant.

The self-inflicted nature of any harm suffered by P appan also weighs in favor of granting preliminary injunc tive relief. This court held in Jiffy Lube and Opticians that a party's self-inflicted harm by choosing to stop its own per formance under the contract and thus effectively terminating the agreement is outweighed by the immeasurable damage done to the franchisor of the mark. Jiffy Lube, 968 F.2d at 379; Opticicans, 902 F.2d at 197. Lastly, Mr. Demet rios Pappan, President of Pappan Enterprises, Inc., stat ed in his affidavit dated June 9, 1997, that "Pappan could st op using
the ROY ROGERS marks in the next four to six months without being harmed, ... ." Affidavit of Demetrios Pappan, P 8. Accordingly, it does not appear that Pappan wi ll suffer irreparable harm should the preliminary injunction issue.

In balancing the hardships to the parties, we belie ve that any injury Pappan might suffer as a result of the i ssuance of a preliminary injunction is outweighed by the ir reparable
harm Hardee's and MRO would continue to suffer as a result of Pappan's non-consensual use of the ROY RO GERS marks. Pappan argues that the district court was co rrect in finding that because Hardee's and MRO had demonstra ted a lack of interest in the ROY ROGERS system for yea rs, any injury they might suffer as a result of Pappan's co ntinued use of the marks was minimal. Pappan further argues that

10Hardee's and MRO's alleged injury is self-inflicted , resulting

from Hardee's and MRO's failure to fulfill their ob ligations under the franchise agreements.

We first note that Pappan is not arguing that Harde e's

and MRO have abandoned the ROY ROGERS marks. Appellee's Brief, 22-23. Pappan instead appears to argue that because Hardee's and MRO have reduced the numb er of ROY ROGERS franchisees, they have demonstrated a lack of interest in the ROY ROGERS system and thus Pappan's continued unauthorized use of the ROY ROGE RS
marks will cause them little harm. Courts have reco gnized
that a trademark owner's decision to reduce the siz e of its business or to cease operations alone does not unde rmine the owner's legal right to enforce and protect its trademark.
See Defiance Button Machine Co. v. C & C Metal Prod s. Corp., 759 F.2d 1053, 1061 (2d Cir.), cert . denied , 474 U.S. 844, 106 S.Ct. 131, 88 L.Ed.2d 108 (1985); Berni v. Int'l Gourmet Restaurants of Am., Inc., 838 F.2d 642, 646 (2d Cir. 1988). Moreover, Hardee's and MRO have clearly established irreparable injury.

With respect to Pappan's argument that Hardee's and MRO's injury is self-inflicted and thus precludes t he issuance of a preliminary injunction, the courtfind s Pappan's argument to be without merit. Pappan's non consensual use of the ROY ROGERS marks is the direc t cause of Hardee's and MRO's irreparable injury. Pap pan argues that Hardee's and MRO's injury is self-infli cted due to their failure to fulfill their contractual oblig ations to Pappan. In other words, Pappan argues that because
Hardee's and MRO have failed to fulfill their contr actual obligations, Pappan has been forced to continue usi ng the ROY ROGERS marks following termination of the franc hise
agreements.

"Under basic contract principles, when one party to a contract feels that the other contracting party has breached its agreement, the non-breaching party may either s top performance and assume the contract is avoided, or continue its performance and sue for damages. Under no circumstances may the non-breaching party stop performance and continue to take advantage of the contract's benefits." Jiffy Lube, 968 F.2d at 376. In Jiffy

11Lube, this court followed several other courts in a pplying

this law to franchise termination disputes. This co urt held that "[w]here the franchise agreement gives the fra nchisor the power to unilaterally terminate the agreement u nder certain conditions, and those conditions exist, pre termination complaints are not relevant to infringe ment under the Lanham Act. Rather, pre-termination dispu tes affect the issue of damages." Id. at 377. We believ e that Hardee's and MRO's irreparable injury is not self-i nflicted.

Accordingly, the balancing of the parties' hardship s weighs in favor of granting preliminary injunctive relief.

D.

Lastly, a district court must consider whether the issuance of a preliminary injunction serves the pub lic interest before granting preliminary injunctive rel ief. "Public interest can be defined a number of ways, but in a trademark case, it is most often a synonym for the right of the public not to be deceived or confused." Opticia ns, 920 F.2d at 197. The district court found that Pappan's use of the ROY ROGERS mark is likely to create confusion. The district court then determined that this finding ma ndated a finding that the public interest would be damaged i f Pappan is permitted to continue using the mark. We agree a nd find that the district court did not err in finding that the public interest weighed in favor of granting preliminary i njunctive
relief.

Pappan argues that the public interest does not wei gh in favor of granting preliminary injunctive relief. Pa ppan cites no law in support of its position. In addition, Pap pan asserts that the district court did not actually fi nd that the public interest weighed in favor of granting the re lief

because the order stated that the court was not add ressing that issue. The court did, however, address the iss ue of public interest. Report & Recommendation, 11 n.13. Pappan's arguments regarding the public interest do not
merit further discussion.

III.

Based on the foregoing analysis, we conclude that t he district court clearly erred in denying Hardee's an d MRO's

12motion for a preliminary injunction. The district c ourt's

order denying Hardee's and MRO's motion for a preli minary injunction is hereby reversed. This case is hereby remanded to the district court with instructions to grant Ha rdee's and MRO's motion for a preliminary injunction.

A True Copy:

Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

13