Court Opinion

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Opinions of the United
1998 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

5-13-1998

Pappan Entr Inc v. Hardees Food Sys Inc
Precedential or Non-Precedential:

Docket 97-3473

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Recommended Citation
"Pappan Entr Inc v. Hardees Food Sys Inc" (1998). 1998 Decisions. Paper 109.
http://digitalcommons.law.villanova.edu/thirdcircuit_1998/109

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Filed 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 District Judge for the
Northern District of Georgia, sitting by designation.
       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 Mid-
Atlantic Corp. ("MRO") appeal from the district court's order
denying their motion for a preliminary injunction to
restrain Pappan Enterprises, Inc. ("Pappan") from using 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 injury as a
result of that use outweighs any injury Pappan might suffer
from the entry of a preliminary injunction, we will reverse
the district court and remand with directions to grant 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 United States Patent
and Trademark Office. Hardee's became the owner of the marks in 1990.
The marks are now owned by MRO.

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restaurant system and assumed all of the rights and
obligations as franchisor under then-existing ROY ROGERS
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's
acquired the stock of MRO, and MRO became a wholly-
owned 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 ceased
making royalty and advertising payments on its five (5)
remaining restaurants as required by the franchise
agreements. In October 1994, the parties entered into a
letter agreement ("letter agreement"). The parties agreed
that Pappan would begin making all required payments
under its existing franchise agreements on November 1,
1994, and would remain current on its payments
thereafter. Further, the parties agreed that with respect to
any restaurants sold or closed by Pappan by December 31,
1995, all amounts owed up to November 1, 1994, would be
forgiven. At Pappan's request, the December 31, 1995,
deadline was extended to March 31, 1996.

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

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

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

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also filed a counterclaim for breach of contract based on
Pappan's failure to pay royalty and advertising fees 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 Default
and Termination regarding the unpaid royalties and
advertising fees for each store. The notice informed Pappan
that it had ten (10) days to cure the default or Pappan's five
(5) remaining franchise agreements would terminate.
Pappan received the notice on March 10, 1997, but failed 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 using
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 arising
out of the termination of Pappan's franchise agreements,
including claims for breach of post-termination contractual
obligations, unjust enrichment, and trademark
infringement.

On April 25, 1997, Hardee's and MRO moved for a
preliminary injunction to restrain Pappan's continuing use
of the ROY ROGERS marks. The district court denied
Hardee's and MRO's motion, finding that the irreparable
harm to Pappan from the entry of a preliminary injunction
outweighed the irreparable harm to Hardee's and MRO from
the denial of a preliminary injunction. MRO and Hardee's
filed the instant appeal. Pappan admits that, despite the
termination of the franchise agreements, it is continuing 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 relief for
an abuse of discretion." S & R Corp. v. Jiffy Lube Intern.,
Inc., 968 F.2d 371, 374 (3d Cir. 1992)(citing Opticians Ass'n
of Am. v. Independent Opticians of Am., 920 F.2d 187, 192

                               4
(3d Cir. 1990)). "A district court abuses its discretion when
its decision rests upon a clearly erroneous finding of fact,
an errant conclusion of law, or an improper application of
law to fact." Hofkin v. Provident Life & Accident Ins. Co., 81
F.3d 365, 369 (3d Cir. 1995)(citations omitted). This court
"cannot reverse unless the trial court has committed an
obvious error in applying the law or a serious mistake 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) the 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 preliminary
injunction is issued; and (4) the public interest. Jiffy Lube,
968 F.2d at 374 (citing Hoxworth v. Blinder, Robinson & Co.,
903 F.2d 186, 197-98 (3d Cir. 1990)); Opticians, 920 F.2d
at 191-92 (citing Bill Blass, Ltd. v. Saz Corp., 751 F.2d 152,
154 (3d Cir. 1984)).

The district court determined that the first and second
factors -- the likelihood that Hardee's and MRO would
prevail on the merits and irreparable harm to Hardee's and
MRO as a result of Pappan's continued non-consensual use
of the ROY ROGERS marks -- weighed in favor of granting
preliminary injunctive relief. The district court then
balanced Pappan's irreparable harm against Hardee's and
MRO's irreparable harm and determined that the balancing
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 court then
noted that the public interest weighed in favor of granting
preliminary injunctive relief. Report & Recommendation, 11
n.13.

A.

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

                               5
trademark use is likely to succeed at trial. To prevail 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. Philadelphia 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 use
is "likely to create confusion concerning the origin of the
goods or services." Jiffy Lube, 968 F.2d at 375 (citing
Opticians, 920 F.2d at 192).

"Likelihood of confusion exists when consumers viewing
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 similar mark."
First Keystone Fed. Sav. Bank v. First Keystone Mortgage,
Inc., 923 F. Supp. 693, 703-04 (E.D. Pa. 1996)(citing Fisons
Horticulture, Inc. v. Vigoro Indus., Inc., 30 F.3d 466, 472 (3d
Cir. 1994)). This court has held that where the identical
mark is used concurrently by unrelated entities, the
likelihood of confusion is inevitable. Opticians, 920 F.2d at
195; United States Jaycees, 639 F.2d at 142. It appears to
be undisputed that Pappan is continuing to use the ROY
ROGERS marks. The district court determined that such
use created a likelihood of confusion among consumers
concerning the origin of the goods and services. Report &
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 granting
preliminary injunctive relief. We agree.

Pappan disputes the district court's determination and
alleges several Lanham Act defenses. 15 U.S.C. S 1115(b).
Pappan asserts that these defenses render the likelihood
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 plaintiff
loses the presumption of validity, ownership and right to
protection." First Keystone, 923 F. Supp. at 701 (citing Ford
Motor Co. v. Summit Motor Prods., 930 F.2d 277, 291 (3d
Cir.), cert. denied, 502 U.S. 939, 112 S.Ct. 373, 116 L.E.2d
324 (1991)). Pappan asserts that the doctrines of laches

                               6
and 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 considered
Pappan's statutory defenses and determined that neither
laches nor acquiescence was a viable defense to Hardee's
and MRO's infringement claim.

Laches is an equitable doctrine that prevents recovery
when a defendant can show inexcusable delay in instituting
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 1040, 1044
(3d Cir.), cert. denied, 459 U.S. 1087, 103 S.Ct. 571, 74
L.E.2d 933 (1982)). The doctrine of acquiescence applies
when the trademark owner, by affirmative word or deed,
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 after
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 continuing
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, Hardee's
and MRO had no basis upon which to seek an injunction,
and their failure to do so does not constitute delay.

Similarly, Pappan argues that Hardee's and MRO
consented to Pappan's trademark infringement when they
continued to do business with Pappan after Pappan began
defaulting on its required fees in late 1995. But Pappan
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 applicable in
that there was no unreasonable delay in applying for relief.

                                7
Report & Recommendation, 7. We agree and uphold the
district court's ruling on the issue of Hardee's and MRO's
likelihood of success on the merits without further
discussion.

B.

The second factor a court must consider before granting
preliminary injunctive relief is the extent to which plaintiff
will suffer irreparable injury if preliminary injunctive relief
is denied. Grounds for irreparable injury include loss of
control of reputation, loss of trade, and loss of goodwill.
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 confusion caused
by trademark infringement has been established, the
inescapable conclusion is that there was also irreparable
injury. Opticians, 920 F.2d at 196-97 (citations omitted).

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 was
inevitable because the identical trademark was being used
simultaneously by both Pappan and MRO. Accordingly, the
district court determined that the second factor weighed in
favor of granting preliminary injunctive relief. Report &
Recommendation, 9.

C.

The third factor a district court must consider before
granting preliminary injunctive relief is the harm defendant
might suffer should the relief be granted. In considering
this harm, the district court must undertake to balance 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 support
of this finding, the district court noted that Pappan had

                                8
continued to invest money in the restaurants, including
several months of logoed product, and had continued to
build up the goodwill of its customers. Id. The district court
then balanced the hardships to the parties and found in
favor of Pappan.

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

       Hardee's and MRO's apparent efforts to disengage
       themselves from the Roy Rogers system does not
       suggest that they will suffer greater harm than Pappan
       if the injunction is denied. Moreover, it was largely
       because of [Hardee's and MRO's] failure to take any
       action to terminate Pappan's franchises for fifteen
       months knowing that it was not receiving their royalty
       payments and advertising fees and their willingness to
       forgive past due fees that Pappan continued to invest
       monies into its restaurants. Under these
       circumstances, it does not appear that the hardship
       suffered by [Hardee's and MRO] at this juncture
       outweighs the harm which would befall Pappan should
       we grant the requested relief.

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

The district court's determination that Hardee's and MRO
failed to specify in what manner they had been injured 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 Pappan's
non-consensual use of the ROY ROGERS marks in the
forms of loss of control of reputation and the inevitable
likelihood of confusion to consumers. Pappan, on the other
hand, has failed to demonstrate irreparable injury.
Moreover, any difficulties Pappan now faces were brought
on by its own conduct in continuing to use the ROY
ROGERS marks despite the termination of the franchise
agreements.

                                9
Irreparable 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 worth of
logoed product. The district court, however, did not set
forth what alleged injuries Pappan would suffer that could
not be remedied by money damages. Pappan argues that it
would suffer the loss of its customers' goodwill if it were
forced to convert to a non-affiliated restaurant and then to
another chain shortly thereafter. However, the portion of
the case cited by Pappan in support of this argument
addresses the injuries of the party whose mark is being
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 restaurant.

The self-inflicted nature of any harm suffered by Pappan
also weighs in favor of granting preliminary injunctive relief.
This court held in Jiffy Lube and Opticians that a party's
self-inflicted harm by choosing to stop its own performance
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. Demetrios
Pappan, President of Pappan Enterprises, Inc., stated in his
affidavit dated June 9, 1997, that "Pappan could stop 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 will suffer
irreparable harm should the preliminary injunction issue.

In balancing the hardships to the parties, we believe that
any injury Pappan might suffer as a result of the issuance
of a preliminary injunction is outweighed by the irreparable
harm Hardee's and MRO would continue to suffer as a
result of Pappan's non-consensual use of the ROY ROGERS
marks. Pappan argues that the district court was correct in
finding that because Hardee's and MRO had demonstrated
a lack of interest in the ROY ROGERS system for years, any
injury they might suffer as a result of Pappan's continued
use of the marks was minimal. Pappan further argues that

                               10
Hardee's and MRO's alleged injury is self-inflicted, resulting
from Hardee's and MRO's failure to fulfill their obligations
under the franchise agreements.

We first note that Pappan is not arguing that Hardee'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 number
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 ROGERS
marks will cause them little harm. Courts have recognized
that a trademark owner's decision to reduce the size of its
business or to cease operations alone does not undermine
the owner's legal right to enforce and protect its trademark.
See Defiance Button Machine Co. v. C & C Metal Prods.
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 the
issuance of a preliminary injunction, the courtfinds
Pappan's argument to be without merit. Pappan's non-
consensual use of the ROY ROGERS marks is the direct
cause of Hardee's and MRO's irreparable injury. Pappan
argues that Hardee's and MRO's injury is self-inflicted due
to their failure to fulfill their contractual obligations to
Pappan. In other words, Pappan argues that because
Hardee's and MRO have failed to fulfill their contractual
obligations, Pappan has been forced to continue using the
ROY ROGERS marks following termination of the franchise
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 stop
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

                               11
Lube, this court followed several other courts in applying
this law to franchise termination disputes. This court held
that "[w]here the franchise agreement gives the franchisor
the power to unilaterally terminate the agreement under
certain conditions, and those conditions exist, pre-
termination complaints are not relevant to infringement
under the Lanham Act. Rather, pre-termination disputes
affect the issue of damages." Id. at 377. We believe that
Hardee's and MRO's irreparable injury is not self-inflicted.

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

D.

Lastly, a district court must consider whether the
issuance of a preliminary injunction serves the public
interest before granting preliminary injunctive relief. "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." Opticians, 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 mandated a
finding that the public interest would be damaged if Pappan
is permitted to continue using the mark. We agree and find
that the district court did not err in finding that the public
interest weighed in favor of granting preliminary injunctive
relief.

Pappan argues that the public interest does not weigh in
favor of granting preliminary injunctive relief. Pappan cites
no law in support of its position. In addition, Pappan
asserts that the district court did not actually find that the
public interest weighed in favor of granting the relief
because the order stated that the court was not addressing
that issue. The court did, however, address the issue 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 the
district court clearly erred in denying Hardee's and MRO's

                                12
motion for a preliminary injunction. The district court's
order denying Hardee's and MRO's motion for a preliminary
injunction is hereby reversed. This case is hereby remanded
to the district court with instructions to grant Hardee'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

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