Opinion ID: 521946
Heading Depth: 1
Heading Rank: 3

Heading: The Wrinkles

Text: 12 In examining the findings of the district court, we note the factual nature of the dispositive issues before us. A finding of fact by a trial court may not be reversed by an appellate court unless clearly erroneous. Fed.R.Civ.P. 52(a); Anderson v. City of Bessemer, 470 U.S. 564, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985). In this case the court was asked to determine whether the evidence presented to it established a breach by the defendant of its sub-franchise contract. 13 The Supreme Court has held that Rule 52(a) does not divide facts into categories; in particular, it does not divide findings of fact into those that deal with 'ultimate' and those that deal with 'subsidiary' facts. Pullman-Standard v. Swint, 456 U.S. 273, 287, 102 S.Ct. 1781, 1789, 72 L.Ed.2d 66 (1982). We have held that a district court's application of the legal standard ... to the facts of the case ... is reviewed under the 'clearly erroneous standard.'  Daley v. United States, 792 F.2d 1081, 1086 (11th Cir.1986) (quoting Miller v. United States, 587 F.2d 991, 994 (9th Cir.1978). The question of whether a contract has been breached is such an issue of ultimate fact, requiring the application of a legal standard to a given set of facts. See Cabriolet Porsche Audi, Inc. v. American Honda Motor Co., 773 F.2d 1193 (11th Cir.1985), cert. denied, 475 U.S. 1122, 106 S.Ct. 1641, 90 L.Ed.2d 186 (1986). Thus we apply the clearly erroneous standard to the district court's finding that the sub-franchise was not breached.
14 As grounds for termination of the franchise, Matusa claimed that Inc. had failed to make the rums strictly in accordance with the secret formulas and processes called for in the franchise agreement. Matusa claimed that some time after the Abascals were fired by Matusa and Limited, the defendants began to use commercially purchased extracts and concentrates instead of the natural prune and vanilla bean macerations required to make Formula # 2. Until this time, Inc. had purchased the formula from Limited. 15 Matusa alleges that Inc.'s actions amount to a breach of the sub-franchise contract as a matter of law. Matusa also claims that the defendant's continued use of the trademark after receiving notice of termination constitutes federal trademark infringement under the Lanham Act, 15 U.S.C. Sec. 1114 (1982), as well as several violations of state law, entitling Matusa to damages and an accounting. 16 It is clear that a trademark owner has a duty to exercise control and supervision over the licensee's use of the mark. Sheila's Shine Prods., Inc. v. Sheila Shine, Inc., 486 F.2d 114, 124 (5th Cir.1973). 6 Thus courts have held that a franchise may be terminated for breach of contract where the franchisee sells a product under the trademark owner's mark which is not made or approved by the trademark owner. See Amoco Oil Co. v. D.Z. Enters., Inc., 607 F.Supp. 595 (E.D.N.Y.1985). In this case it was properly an issue for the trier of fact whether the franchisee's actions amounted to trademark infringement and a breach of contract warranting termination. 17 It is an established principle of contract law that an injured party may terminate a contract for breach only if the breach is material. Hensley v. E.R. Carpenter Co., 633 F.2d 1106, 1109-10 (5th Cir.1980). Whether a breach is material is an issue of fact, id., and the general inquiry is whether the injured party has received substantially what he bargained for. Ferrell v. Secretary of Defense, 662 F.2d 1179, 1181 (5th Cir.1981). Courts should also look to factors such as the extent to which the injured party can be compensated for the benefit of which he was deprived, the extent to which the party failing to perform will suffer forfeiture due to the contract's termination, and the extent to which the behavior of the party failing to perform comports with standards of good faith and fair dealing. Restatement (Second) of Contracts Sec. 241 (1981). In addition, courts should encourage the parties to keep the deal together by allowing the injured party to terminate the contract only after an appropriate length of time has passed. Farnsworth, Contracts Sec. 8.15 (1982). 18 Assuming that Inc. substituted commercial extracts for the natural prune and vanilla bean macerations required to make its rums, it is impossible to establish from the record any time frame for these events. Federico Abascal (Vice President of United and son of Ricardo Abascal) testified that Inc. began making its own macerations at the beginning of 1983, using the beans and the prunes (R13-1119), and that this continued until about one year before trial. Gerardo Abascal testified that when the formula bought from Limited ran out in 1983, Inc. began to make its own formula. 7 James Hammond, the general manager of the bottler, Jacquin-Florida Distilling Company, testified that Jacquin had equipment and facilities for macerating whole prunes and vanilla beans on its premises, but could not recall if the equipment had been used. (R9-307, 308). 19 The district court found that Inc.'s deviation from the letter of the secret formula was so minor as to render any finding of injury to Matusa negligible: 20 With regard to the use of the formula, the only evidence or the only conclusion that I can draw is that the formula used by Inc. and United was substantially similar to the formula, the original formula that the grandfather put in the book. Both parties have exchanged these formulas and I have heard nothing to indicate that they are not similar. 21 With regard to the substituting of extracts for the original vanilla and prune macerations, it's difficult to tell from this evidence if there is any change in the ultimate results. 22 (R7-160 Ex. 111-12). Thus, although the plaintiff presented evidence that Inc. used commercial extracts instead of macerations in the making of Matusalem rums, the district court found no trademark violation and no breach of contract: 23 [W]hether or not there was a violation of the trademark, I don't find on these facts such a violation.... [C]onsidering all the facts and circumstances, I don't find a wilful violation of the trademark, nor do I find any attempt at a false labeling, false designation or unfair competition. 24 (R7-160 Ex. 1-10-11). In light of the inconclusive nature of the plaintiff's evidence as to the extent and duration of Inc.'s alleged violation of its quality control obligations, and keeping in mind that questions of credibility and the weight to be given testimony is peculiarly a matter for the trier of fact, we will not second guess the trial court's ruling that the plaintiff failed to meet its burden of proof. 8
25 Matusa claims that the district court erred in failing to find that Inc. repudiated the franchise agreement by filing a United States trademark registration for the trademark Ron Matusalem, and by its refusal to assign or abandon its registration subsequent to the October 15, 1982 letter from Matusa demanding such action. Inc. filed the application to register the trademark Ron Matusalem in the United States on August 3, 1981. Matusa demanded in its letter that Inc. abandon or assign to it Inc.'s pending application. 26 Rather than finding a repudiation of the franchise, the district court found that Inc. had filed at a time when it was acting for the benefit of Matusa: 27 I think that the efforts to secure the trademarks and trade names, whatever registrations, initially were done at a time when there was peace and tranquility in the family and were done on behalf of the welfare of everyone. In fact, I have heard testimony ... that that was always their intention, to secure these for the benefit of Matusa. (R7-160 Ex. 1-10). 28 We find nothing in the record to contradict this finding. The plaintiff presented no evidence suggesting that it did not agree to the filing prior to October 15, 1982. The district court found that the defendants previously had been successful in securing a trademark registration in Puerto Rico, and it was the consensus of feeling that that registration would benefit an application to Washington to get further registrations. (R7-160 Ex. 1-10). The record supports the district court finding that Inc. did not repudiate its sub-franchise by filing a trademark registration on behalf of itself and Matusa. 29 A closer question is whether Inc.'s refusal to assign or abandon its pending application after October 15, 1982 constitutes trademark infringement. Some courts have held that a licensee's registration of its licensor's mark may cause confusion, and thus constitute trademark infringement. See, e.g. Snelling & Snelling, Inc. v. Dupay Enters., Inc., 125 Ariz. 362, 609 P.2d 1062 (Ct.App.1980). However, the district court ruled that given the equities involved, the refusal could not be grounds for termination of the franchise. [T]heir refusal to withdraw the petition for a trademark was arbitrary, but both sides were being arbitrary at this time. Both sides were acting like spoiled children and insisting on any leverage they could get hoping to have an edge. (R7-160 Ex. 1-17). [T]o the degree that this case involves equity, both parties had unclean hands.... Id. at 18. We have held that the application of the doctrine of unclean hands in a trademark case lies within the sound discretion of the district court, Shatel Corp. v. Mao Ta Lumber & Yacht Corp., 697 F.2d 1352, 1355 (11th Cir.1983), and we decline to disturb the district court's ruling. 9 30 Although Inc.'s action with regard to the trademark application did not infringe Matusa's trademark, the district court ruled that any pending applications or any trade names that were acquired ... would be deemed to be and should be transferred to Matusa for their ownership. (R7-160 Ex. 1-10). Because the trademark clearly belongs to the plaintiff, we agree that the order is proper. 31 We are similarly unpersuaded by the plaintiff's claim that Inc.'s sales of the Roncoco liqueur in Canada constituted a repudiation of its franchise as a matter of law. The franchise prohibits Inc.'s use of the Ron Matusalem trademark in several countries, including Canada, except by agreement with Limited. The district court made a factual finding that at the time the Canadian venture began, it was done for the benefit of all parties concerned. The court stated that it was a business opportunity that was made available to the part of the family that was running the corporation at that time. (R7-160 Ex. 1-21). Because the label was designed to resemble the Ron Matusalem trademark, the court ordered that Inc. pay Matusa the ten percent royalty required in the franchise. Again, we find nothing in the record sufficient to disturb the district court's finding that the incorporation of the Canadian company was done for the benefit and with the acquiescence of both parties. By the time Matusa sent Inc. its notice of breach letter in 1982, the atmosphere of mutually beneficial business dealings had disappeared. As the court stated, all the rules have changed. This is no longer a family, it's two different corporations, so you have got to start enforcing these things like corporations instead of family. (R7-160 Ex. 1-20). 32 This is not to say that the district court did, or might write a new contract for the parties where the language of the contract is unambiguous. Haenal v. United States Fidelity & Guar. Co., 88 So.2d 888 (Fla.1956); Home Dev. Co. v. Bursani, 178 So.2d 113 (Fla.1965). Rather, it simply acknowledged that the franchise agreement could no longer be treated as an informal understanding purporting to lend legal authority to whatever the two parties chose to do at any given time. Where both parties had seemingly ignored the letter of the contract throughout the course of the franchise, the district court was understandably reluctant to allow Matusa to terminate Inc.'s franchise on the grounds that Inc. persisted in doing what it had been doing, with Matusa's approval, for some time. 33 The district court also recognized that termination of a franchise is a drastic remedy where neither party has caused irreparable harm: 34 When the franchise was given to Inc., it was a very substantial benefit.... This right should not be set aside lightly, and I think, that the agreement recognized it.... [O]n a simple mistake or misunderstanding a person doesn't lose a valuable property interest, which I believe this franchise is.... 35 (R7-160 Ex. 1-8). The record supports the district court's finding that Inc. behaved as it did with the acquiescence and for the benefit of the plaintiff. Thus we affirm the ruling that the sub-franchise is still in existence and that it should be strictly enforced.
36 Finally, Matusa argues that the district court erred by entering judgment against a party not before the court. The sub-franchise granted to Inc. in 1967 covered all areas of the world except those specifically reserved to Limited. By default, this arrangement left all of Latin America except Cuba within Inc.'s franchise. However, the court found that Limited had invaded Inc.'s territory by entering into business in Central America at a time when things were peaceful and that was agreed to. (R7-160 Ex. 1-20). 37 Because the contract must now be construed as an arms-length agreement, the court ruled that it would enforce the letter of the sub-franchise. Thus the court ruled that 38 to the extent sales have been made in Costa Rica and Central America through Limited, they were acquiesced in, but in the future, they will have to stop distributing in that area and that area will be allocated to Inc. under its franchise agreement. 39 (R7-160 Ex. 1-20). The court also ruled that if Inc. wished to operate in Latin America, the plaintiffs would have to be reimbursed to the extent of their investment, including all developmental costs and good will. At a post-trial hearing on December 8, 1987, Matusa argued to the court that it was not the plaintiff Matusa, but rather Limited, a party not before the court, which was doing business in Latin America. Thus, Matusa claimed that the order was invalid. The court rejected the argument and ruled in its final order that the plaintiff, its shareholders, directors, officers, employees, agents, licensees and sub-franchisees are ... perpetually enjoined from interfering with the rights of [Inc.] in any of the geographic areas granted to it under the sub-franchise. (R7-160 2-3). 40 Rule 65 of the Federal Rules of Civil Procedure provides, in part: 41 (d) Form and Scope of Injunction or Restraining Order. 42 Every order granting an injunction and every restraining order ... is binding only upon the parties to the action, their officers, agents, servants, employees, and attorneys, and upon those persons in active concert or participation with them who receive actual notice of the order by personal service or otherwise. 43 (emphasis added). The Supreme Court has held that a nonparty with notice cannot be held in contempt until shown to be in concert or participation. Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 112, 89 S.Ct. 1562, 1570, 23 L.Ed.2d 129 (1969). In that case the Court held that it was error to enter an injunction against Hazeltine, the corporate parent of HRI, the named counter-defendant, where Hazeltine was not a party to the suit and where the trial court made no finding that HRI and Hazeltine were one entity. 44 By the same analysis, the portion of the order in this case which enjoins Matusa from interfering with Inc.'s Latin American territory is binding only as to Matusa and those in active concert or participation with them. We express no opinion as to whether the order is therefore binding upon Limited, since the court made no factual finding on this question. The order states only that the injunction runs to the plaintiff and its shareholders, directors, officers, employees, agents, licensees and sub-franchises. We will leave to another day the delineation of the precise scope of the injunction. The district court has made a valiant effort to resolve both the legal questions presented and the intra-family squabbles. We assume all the individuals involved will attempt good faith compliance. 10 45 AFFIRMED.