Court Opinion

ID: 3031921
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:46:50.663921+00
Date Added: 2024-06-11T11:48:14.739046
License: Public Domain

United States Court of Appeals
                           FOR THE EIGHTH CIRCUIT
                                   ___________

                                   No. 02-3856
                                   ___________

Medicine Shoppe International, Inc.,      *
                                          *
             Appellee,                    *
                                          *   Appeal from the United States
      v.                                  *   District Court for the
                                          *   Eastern District of Missouri.
S.B.S. Pill Dr., Inc.;                    *
Savannah B. Swartout,                     *
                                          *
             Appellants.                  *

                                   ___________

                             Submitted: May 16, 2003

                                  Filed: July 22, 2003
                                   ___________

Before WOLLMAN, MAGILL, and BEAM, Circuit Judges.
                          ___________

WOLLMAN, Circuit Judge.

      On July 29, 2002, Medicine Shoppe International, Inc. (Medicine Shoppe) sued
S.B.S. Pill Dr. (Pill Dr.) and Savannah B. Swartout to enforce the terms of a contract
between Medicine Shoppe and non-party Cape Fear Apothecaries, Inc. (Cape Fear).
Medicine Shoppe alleged that Pill Dr., as the corporate successor or alter ego of Cape
Fear, was obligated to identify and operate its pharmacy as a Medicine Shoppe
Pharmacy. Pill Dr. and Swartout appeal the district court’s1 preliminary injunction
order enjoining them from identifying the pharmacy as anything other than a
Medicine Shoppe Pharmacy. We affirm.

                                         I.

       On June 9, 1976, Swartout’s father entered into a license agreement with
Medicine Shoppe authorizing him to operate a Medicine Shoppe Pharmacy for a term
of twenty years. On June 21, 1976, Swartout’s father assigned this license agreement
to Cape Fear. Cape Fear operated the pharmacy at 3127 North Main Street, Hope
Mills, North Carolina (Swartout Property), for twenty years and renewed the license
for a ten-year term beginning March 20, 1996. Soon after receiving her pharmacy
license in 1996, Swartout became the pharmacist-manager of the pharmacy. Swartout
became the sole shareholder of Cape Fear in 1998 and acquired sole ownership of the
Swartout Property from her father in 1999.

      In May 2002, Medicine Shoppe informed Swartout that it believed Cape Fear
had under-reported its revenues and owed approximately $300,000 in unpaid license
fees as a result. Soon thereafter, Swartout incorporated Pill Dr., acquired new
permits, purchased new inventory, repackaged and separated Cape Fear inventory,
removed Cape Fear’s office equipment and furnishings, and purchased new office
equipment and furnishings. Appellants began operating a pharmacy on the Swartout
Property as Hope Mills Drug. Swartout provided patients a prescription transfer
authorization form that stated:

             Due to unforeseen circumstances, this pharmacy will no longer be
      run as a “Medicine Shoppe”. We are changing our name to “Hope Mills

      1
       The Honorable Carol E. Jackson, Chief Judge, United States District Court for
the Eastern District of Missouri.

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      Drug”. You may expect the same care and treatment from our same
      staff. Only the name has changed to protect the innocent.
             By signing this sheet, you are requesting that the remainder of
      your prescriptions as well as any refills you may have be transferred
      from “The Medicine Shoppe”, formerly operated by Cape Fear
      Apothecaries, Inc.[,] to the new “Hope Mills Drug” operated by SBS
      PILLDR, Inc.

      On July 2, 2002, the district court entered a temporary restraining order
enjoining Cape Fear and its agents and employees from operating or identifying the
pharmacy on the Swartout Property as anything other than a Medicine Shoppe
Pharmacy. Medicine Shoppe Int’l, Inc. v. Cape Fear Apothecaries, Inc., No.
4:02CV01004CEJ (E.D. Mo. July 2, 2002). One day before a scheduled preliminary
injunction hearing in that case, Cape Fear filed a chapter 7 bankruptcy petition.

       After Cape Fear’s bankruptcy filing, Swartout and Pill Dr. operated the
pharmacy under the new name Hope Mills Drug but used the same telephone number.
The pharmacy had the same customer base and the same employees as it had when
operated as a Medicine Shoppe Pharmacy. Swartout was the president and sole
owner of Cape Fear and is the president and sole owner of Pill Dr. In addition,
Swartout was the pharmacist-manager of the Medicine Shoppe Pharmacy and of Hope
Mills Drug. Pill Dr. paid Cape Fear’s final month of expenses, including utilities,
computer supplies, and drinking fountain rental. During the preliminary injunction
hearing, Medicine Shoppe’s regional operations manager testified that an operating
pharmacy has three primary assets: its inventory, its customer files, and the value in
its location due to the long-term presence of a pharmacy. Pill Dr. acquired Cape
Fear’s customer lists and files without paying compensation.

                                         II.

      “A district court has broad discretion when ruling on requests for preliminary
injunctions, and we will reverse only for clearly erroneous factual determinations, an

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error of law, or an abuse of that discretion.” United Indus. Corp. v. Clorox Co., 140
F.3d 1175, 1179 (8th Cir. 1998) (citations omitted). Our cases establish four factors
that the district court is to consider in determining whether to grant injunctive relief:
“(1) the threat of irreparable harm to the movant; (2) the balance between the
potential harm and any harm that granting the injunction will cause to other parties
to the litigation; (3) the probability that the movant will succeed on the merits; and
(4) the public interest.” Nat’l Credit Union Admin. Bd. v. Johnson, 133 F.3d 1097,
1101 (8th Cir. 1998) (citing Dataphase Sys., Inc. v. C.L. Sys., Inc., 640 F.2d 109, 113
(8th Cir. 1981)). Our deferential review in this context arises from the district court’s
institutional advantages in evaluating witness credibility and weighing evidence,
United Indus., 140 F.3d at 1179, and is limited to ensuring that no clearly erroneous
finding of fact or error of law affected the district court’s balancing of these four
factors, Johnson, 133 F.3d at 1101 (citation omitted). On appeal, Pill Dr. contends
that Medicine Shoppe failed to establish any of the four elements, but it places
primary emphasis on its argument that Medicine Shoppe failed to show a probability
of success on the merits.

       A. Probability of Success on the Merits

       The license agreement between Medicine Shoppe and Cape Fear required Cape
Fear to operate the pharmacy as a Medicine Shoppe Pharmacy. Because neither Pill
Dr. nor Swartout signed the license agreement, Medicine Shoppe’s breach of contract
claim depends on whether Pill Dr. or Swartout is the alter ego of or successor in
interest to Cape Fear. Although the pharmacy at issue is located in North Carolina,
the license specifies that it is to be governed by and construed according to Missouri
law. Accordingly, we look to Missouri law in this diversity action.

       “The general rule in Missouri is that when all of the assets of a corporation are
sold or transferred the transferee is not liable for the transferor’s debts and liabilities.”

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Chemical Design, Inc. v. Am. Standard, Inc., 847 S.W.2d 488, 491 (Mo. Ct. App.
1993). A successor corporation may be liable, however:

      (1) where the purchaser expressly or impliedly agrees to assume the
      debts or liabilities of the transferor; (2) where the transaction amounts
      to a merger or consolidation; (3) where the purchasing corporation is
      merely a continuation of the selling corporation; or (4) where the
      transaction is entered into fraudulently for the purpose of escaping
      liability for the debts and liabilities of the transferor.

ARE Sikeston Ltd. P’ship v. Weslock Nat’l, Inc., 120 F.3d 820, 828 (8th Cir. 1997)
(citing Chemical Design, 847 S.W.2d at 491); Brockman v. O’Neill, 565 S.W.2d 796,
798 (Mo. Ct. App. 1978). Chemical Design establishes that under Missouri law,
transfer of all assets is a sufficient condition to invoke the general rule and its
exceptions; however, the opinion is silent on whether transfer of all assets is a
necessary condition. There appear to be no Missouri cases addressing the question
of whether successor liability may attach to a successor that acquires substantially all,
but less than the totality, of its predecessor’s assets. The majority rule in other
jurisdictions requires only “a transfer or sale of all, or substantially all, [of the
predecessor corporation’s assets].” Grand Labs. v. Midcon Labs., 32 F.3d 1277, 1281
n.5 (8th Cir. 1994) (citations omitted). Swartout boxed up Cape Fear’s inventory of
drugs and stored the drugs, office equipment, and other fixtures belonging to Cape
Fear in the pharmacy’s store room. These items fell under the control of the trustee
in bankruptcy. Despite the separation and storage of some of Cape Fear’s assets, the
district court found that “a substantial amount of Cape Fear’s assets and business
were transferred to Pill Dr., including the patient files, store location, and store
furnishings.”

      Whether substantially all of Cape Fear’s assets were transferred to Pill Dr. is
a finding of fact that we review for clear error. Testimony at the preliminary
injunction hearing indicated that the primary assets of a pharmacy are its inventory,
its customer and patient files, and its location. Although Pill Dr. did not

                                          -5-
automatically begin servicing Cape Fear’s customers, it began operations in the same
location, with the same phone number, employees, and pharmacist-manager, and
invited Cape Fear’s customers to transfer their prescriptions using a form indicating
that only its name had changed. Appellants assert that Cape Fear had no leasehold
or other enforceable interest in the property; however, the goodwill developed by a
pharmacy operating in the same location for more than twenty-five years is likely to
be a substantial part of the value of the pharmacy. See Polytech, Inc. v. Affiliated FM
Ins. Co., 21 F.3d 271, 274-75 (8th Cir. 1994) (“Missouri courts generally have treated
going concern value and goodwill value as intangible property interests.”) (citing
Flarsheim v. Twenty Five Thirty Two Broadway Corp., 432 S.W.2d 245, 257 (Mo.
1968)). We find no clear error in the district court’s finding that “a substantial
amount” of Cape Fear’s assets were transferred to Pill Dr. Although Missouri courts
have not expressly so held, we conclude that this finding is sufficient to invoke the
rule of Chemical Design.

       Having found that there was a substantial transfer of assets, the district court
imposed liability on Pill Dr. based upon its determination that there had been a de
facto merger between Pill Dr. and Cape Fear. Because we conclude that Pill Dr. is
a mere continuation of Cape Fear, we do not decide whether there was also a de facto
merger. Godfrey v. Pulitzer Publ’g Co., 276 F.3d 405, 409-10 (8th Cir. 2002) (stating
that an appellate court may affirm “on any grounds supported by the record”). When
the successor corporation “is merely a continuation” of the predecessor corporation,
Missouri law imposes on the successor liability for the obligations of the predecessor.
Philip G. Louis, Jr., 26 Missouri Practice: Business Organizations § 31.10 (2d ed.
2000) (citations omitted). In determining whether there is such a continuation, the
reviewing court considers several factors, none of which is determinative:

      (1) [w]hether there is common identity of officers, directors and
      stockholders; (2) whether the incorporators of the successor also
      incorporated the predecessor; (3) whether the business operations are
      identical; (4) whether the transferee uses the same trucks, equipment,

                                         -6-
      labor force, supervisors and name of the transferor[;] and (5) whether
      notice has been given of the transfer to employees or customers.

Id.; Roper Elec. Co. v. Quality Castings, Inc., 60 S.W.3d 708, 711-13 (Mo. Ct. App.
2001); see also Flotte v. United Claims, Inc., 657 S.W.2d 387, 388-89 (Mo. Ct. App.
1983). Swartout is the sole shareholder and director of both Cape Fear and Pill Dr.
In addition, Swartout is the president of both corporations. Swartout incorporated Pill
Dr.; her father incorporated Cape Fear. Pill Dr. operates the same type of business
in the same location as did Cape Fear. Although Pill Dr. does not use the same
equipment and trade name as did Cape Fear, it operates with the same phone number,
employees, and pharmacist-manager as did Cape Fear. The last factor, whether
notification was given to employees and customers, would weigh against a finding
of a mere continuation, but for the way in which notice was given: “Only the name
has changed. . . .” Thus, all five factors weigh in favor of finding that Pill Dr. was a
mere continuation of Cape Fear. Accordingly, we find no error in the district court’s
conclusion that Pill Dr. may be held liable as Cape Fear’s successor in interest.

      B. The Threat of Irreparable Harm to Medicine Shoppe

       Pill Dr. contends that the evidence before the district court was too speculative
to support a finding that Medicine Shoppe would suffer irreparable harm if a
preliminary injunction was not granted. Medicine Shoppe presented testimony that
de-identification of the pharmacy creates consumer confusion and erodes consumer
confidence in the Medicine Shoppe network of franchises. Customers of the
pharmacy may be unsure whether they can get their prescriptions filled at that
location. In addition, the closure of one franchise may make customers wonder
whether other Medicine Shoppe franchises will continue to operate in the future.
“Loss of intangible assets such as reputation and goodwill can constitute irreparable
injury.” United Healthcare Ins. Co. v. AdvancePCS, 316 F.3d 737, 741 (8th Cir.
2002) (applying Minnesota law). Harm to reputation and goodwill is difficult, if not

                                          -7-
impossible, to quantify in terms of dollars. We cannot say that the district court
clearly erred in finding that Medicine Shoppe established a threat of irreparable harm.

      C. The Balance of Harms and the Public Interest

       As discussed immediately above, Medicine Shoppe was threatened with
irreparable harm to its business reputation and goodwill – goodwill that had been
developed during twenty-five years of continuous operation at that site. Pill Dr. and
Swartout, on the other hand, had only recently begun operations as Hope Mill Drug,
and therefore did not face risk to a well-developed and longstanding business
reputation. The only evidence regarding potential harms to Pill Dr. and Swartout
related to costs associated with licensing and re-identifying the pharmacy. The
district court did not err by finding that the balance of harms favored Medicine
Shoppe.

       Having found that Medicine Shoppe had established a likelihood of success on
the merits, the district court concluded that the public interest would be served by
requiring Pill Dr. and Swartout to adhere to the obligations of the licensing agreement
and thereby to preserve the integrity of the Medicine Shoppe trademark and
associated goodwill. Although the public interest is not ordinarily implicated by
concerns related to a business’s good name, we agree that the public interest would
not be served by permitting a party to avoid contractual obligations through the
simple expedient of reincorporation under a new name.

                                         III.

      Accordingly, the district court did not abuse its discretion by granting Medicine
Shoppe’s motion for a preliminary injunction. Appellants’ motion to supplement the
record on appeal is denied.

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The judgment is affirmed.

A true copy.

      Attest:

         CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.

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