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reasoning that, where some provisions expressly barred suit, a notice-and-cure provision silent as to effect of noncompliance did not
Summary of this case from IP Glob. Invs. Am., Inc. v. Body Glove IP Holdings, LPOpinion
NO. CIV. S-08-851 LKK/DAD.
August 28, 2008
ORDER
Plaintiff RLED, LLC ("RLED"), the manufacturer of "Roaring Lion" energy drink, has brought the present action against defendants Dan Good Distributing Company, Inc., California Wine Cocktail Co., Inc., and Denis Bonfilio alleging that they distributed a counterfeit product under plaintiff's trademark. Pending before the court are two motions. First, defendants have moved to dismiss on the grounds that plaintiff failed to comply with the written notification and arbitration provisions of the distribution agreement entered into by the parties. Second, plaintiffs have filed a motion for a preliminary injunction. The court resolves the matter upon the parties' papers and after oral argument. For the reasons explained below, the court grants in part and denies in part the motion to dismiss, and grants the motion for preliminary injunction.
At oral argument, the court offered both parties an opportunity to put on evidence in support and opposition to the motion for preliminary injunction. Both parties declined and thus the court proceeds on the written record.
I. Background
Plaintiff RLED manufactures Roaring Lion energy drinks and owns the federally-registered "Roaring Lion" trademark. Compl. ¶ 11. In September 2002, plaintiff and defendants entered into a distribution agreement in which defendants were to serve as distributors of Roaring Lion. Id. ¶ 4. Among other obligations, defendants were prohibited from distributing any other energy drinks or taking any action that would "damage the reputation of RLED or the product." Distribution Agreement, Compl., Ex. C. Defendants distributed plaintiff's three-gallon "bag in a box" product to various commercial establishments, including, locally, the Virgin Sturgeon, Elk Grove Sports Bar, and Little Prague.In August 2007, plaintiff allegedly learned that defendants were using the Roaring Lion name and trademark in connection with a product that was not Roaring Lion. Id. ¶ 16. One of plaintiff's sales representatives, Scott Macumber, was visiting a customer account when he noticed a white box with a white "Roaring Lion Energy drink" label on it. Decl. Of Scott Macumber ¶ 3. Plaintiff normally used a white box with a blue label on its products. Upon closer examination, the sales representative discovered that the packaging inside the box was opaque mylar, rather than the clear plastic that RLED uses. Id.; Decl. of Edward Hackney ¶ 4 (noting that plaintiff's manufacturer used a clear plastic bladder). Thereafter, he visited several other restaurants and bars where defendant had distributed in August 2007 and found similar occurrences. Macumber Decl. ¶¶ 4-12 (attaching photographs of product discovered). In April and May 2008, Mr. Macumber again discovered several instances of the allegedly counterfeit product at customer sites and switched them out with authentic Roaring Lion energy drink. Id. ¶¶ 13-34.
Defendants maintain that the mislabeling was inadvertent. In addition to distributing plaintiff's product, defendants also manufactured another energy drink for distribution to "Jack's" in San Diego between April 2007 and March 2008. Decl. Of Denis Bonfilio ¶ 5. This energy drink was housed in opaque mylar plastic and packaged in unlabeled white boxes. Id. ¶ 6. Defendants maintain that on numerous occasions, plaintiff's product was damaged during transport and that defendants therefore repackaged them in new boxes and affixed white labels identifying them as Roaring Lion. Id. ¶¶ 7-8. Mr. Macumber, plaintiff's sales representative, allegedly knew about this practice and in fact made deliveries of plaintiff's product in this repackaged form. Id. ¶ 10.
Defendants concede, however, that "[e]vidently, a finite amount of energy drink manufactured by Dan Good for distribution to San Diego, was inadvertently mislabeled as Plaintiff's Product." Id. ¶ 11. Defendants maintain that drivers pulling deliveries for Roaring Lion unintentionally applied the white Roaring Lion label to the "Jack's" energy drink. Id. ¶ 12. According to defendants' calculation, a maximum of 317 boxes of energy drink was inadvertently labeled as Roaring Lion between April 2007 and March 2008. Id. ¶ 13. Because each box contained a three gallon bag, plaintiff argues that the mislabeled product could have reached over 87,000 customers.
There were 758 boxes of energy drink available to "Jack's" in San Diego. Bonfilio Decl. ¶ 13. Of these 758 boxes, 441 were sold to Jack's. Id. Accordingly, defendants reason that at most 317 (758 minus 441) boxes of energy drink were inadvertently labeled as plaintiff's product.
Assuming a serving size of 250 ML, 317 three-gallon bags would produce 87,492 servings. Hackney Decl. ¶ 15.
The distribution agreement between the parties contains a notice-and-cure provision that states that with regard to "breaches of agreement under this contract . . . the breaching party shall have thirty days, following written notification, in which to cure any breach." Distribution Agreement ¶ 7. Although the provision does not state the effect of noncompliance (e.g., whether it precludes the nonbreaching party's ability to terminate the agreement, or precludes the assertion of a breach of contract claim), there is no dispute between the parties that defendants did not receive written notification of any alleged breach.
The agreement also provides that "in the event of any actual or threatened breach of this agreement which could cause irreparable harm to either party, that party shall be entitled to seek equitable relief, including . . . injunctive relief." Id. ¶ 12(E). Aside from equitable relief, however, the agreement mandates that "any dispute under or relating to the terms of this Agreement or breach thereof . . . shall be submitted to arbitration. . . . The parties agree to arbitration only after first attempting to resolve the dispute by mediation." Id. ¶ 12(F). In short, non-equitable relief is subject to mediation and arbitration, whereas equitable relief is not. The parties have not entered into either mediation or arbitration.
On April 22, 2008, plaintiff filed the present action against defendants alleging violations of the Lanham Act, 15 U.S.C. §§ 1114 et seq., violations of the California Unfair Competition Law, Cal. Bus. Prof. Code §§ 17200 et seq., common law injury to business reputation, and breach of contract relating to both the distribution agreement and asset purchase agreement. After defendants filed their motion to dismiss (arguing, inter alia, that the majority of plaintiff's claims constituted alleged violations of the distribution agreement and that plaintiff had failed to satisfy the conditions precedent to bringing suit under the agreement), plaintiff voluntarily dismissed its breach of contract claim relating to the distribution agreement.
Plaintiff has also filed a motion for a preliminary injunction. The requested injunction would enjoin defendants from: (1) using the Roaring Lion trademark for any purpose other than selling product that has been manufactured and purchased from plaintiff; (2) using any mark that imitates or is similar to the Roaring Lion trademark, (3) using plaintiff's name except as provided for in the distribution agreement, and (4) passing off any counterfeit products.
II. Standards
A. Motion to Dismiss for Failure to State a Claim
On a motion to dismiss, the allegations of the complaint must be accepted as true. See Cruz v. Beto, 405 U.S. 319, 322 (1972). The court is bound to give the plaintiff the benefit of every reasonable inference to be drawn from the "well-pleaded" allegations of the complaint. See Retail Clerks Intern. Ass'n, Local 1625, AFL-CIO v. Schermerhorn, 373 U.S. 746, 753 n. 6 (1963). Thus, the plaintiff need not necessarily plead a particular fact if that fact is a reasonable inference from facts properly alleged. See id.; see also Wheeldin v. Wheeler, 373 U.S. 647, 648 (1963) (inferring fact from allegations of complaint).
In general, the complaint is construed favorably to the pleader. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). The court may not dismiss the complaint if there is a reasonably founded hope that the plaintiff may show a set of facts consistent with the allegations. Bell Atlantic Corp. v. Twombly, 127 U.S. 1955, 1967-69 (2007). In spite of the deference the court is bound to pay to the plaintiff's allegations, however, it is not proper for the court to assume that "the [plaintiff] can prove facts which [he or she] has not alleged, or that the defendants have violated the . . . laws in ways that have not been alleged." Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 526 (1983).
B. Preliminary Injunctive Relief
The Ninth Circuit has established two sets of criteria for preliminary injunctive relief, both of which balance the plaintiff's likelihood of success against the relative hardships of the parties. See Save Our Sonoran, Inc. v. Flowers, 408 F.3d 1113, 1120 (9th Cir. 2005). "Under the `traditional' criteria, a plaintiff must show `(1) a strong likelihood of success on the merits, (2) the possibility of irreparable injury to plaintiff if preliminary relief is not granted, (3) a balance of hardships favoring the plaintiff, and (4) advancement of the public interest (in certain cases).'" Id. (quoting Johnson v. Cal. Bd. Of Accountancy, 72 F.3d 1427, 1430 (9th Cir. 1995)).
Alternatively, a court may grant the injunction if the plaintiff "demonstrates either a combination of probable success on the merits and the possibility of irreparable injury or that serious questions are raised and the balance of hardships tips sharply in his favor." Id. (emphasis in original). Both formulations "represent two points on a sliding scale in which the required degree of irreparable harm increases as the probability of success decreases. They are not separate tests but rather outer reaches of a single continuum." Baby Tam Co. v. City of Las Vegas, 154 F.3d 1097, 1100 (9th Cir. 1998).
III. Analysis
A. Notice-and-Cure Provision
First, defendants argue that plaintiff has failed to comply with the notice-and-cure provision of the distribution agreement, which provides that "with regard to breaches of agreement under this contract . . . the breaching party shall have thirty days, following written notification, in which to cure the breach." Distribution Agreement ¶ 7. In defendants' view, plaintiff's failure to provide such written notification (which is undisputed) acts as a bar to all of plaintiff's claims, not only the now-dismissed breach of contract claim pertaining to the distribution agreement.
The problem with defendant's view is that the distribution agreement does not state that in order to commence litigation, plaintiff must provide written notification. Indeed, it is silent on the effect of failure to comply with the notice-and-cure provision. Typically, however, the purpose of a notice-and-cure provision is to provide the breaching party the opportunity to cure the breach before the non-breaching party has the right to terminate the contract. See, e.g.,, Civic Ctr. Apartments, Ltd. Partnership v. Sw. Bell Video Servs., 295 F. Supp. 2d 1091, 1096 ("If a Party defaults on its obligations under this Agreement and fails to cure the default within fifteen (15) days after receiving written notice . . . the non-defaulting party may terminate the contract."); Sinclair v. Servicemaster, No. CIV. 07-611 FCD/KJM, 2007 WL 3407138, at *1 (E.D. Cal. Nov. 14, 2007) ("[defendant] is required to provide plaintiff with 10 days written notice and an opportunity to cure any willful and material breach of the Employment Agreement before termination."). Alternately, a party is not deemed to be in "breach" of the contract (i.e., for purposes of a breach of contract claim) until the notice-and-cure provision has been satisfied. See, e.g.,, 24/7 Records, Inc. v. Sony Music Entertainment, Inc., ___ F. Supp. 2d ___, No. 03 Civ. 3204(MGC), 2008 WL 2791522, at *3 ("Neither party to this Agreement shall be deemed to be in breach . . . until the other party [gives] written notice of such default and the alleged breaching party shall have failed to cure such default within thirty (30) days"); California ex rel. Lockyer v. Vons Companies, Inc., NO. 05CV08972 DSF, 2006 WL 1806368, at *17 (C.D. Cal. Jan. 3, 2006).
The case relied upon by defendants, Gerber v. First Horizon Home Loans Corp., No. C05-1554P, 2006 WL 581082 (W.D. Wash. Mar. 8, 2006), is notable more for its differences than its similarities with this case. There, the contract stated: "Neither [party] may commence, join, or be joined to any judicial action . . . until such [party] has notified the other party . . . and afforded the other party hereto a reasonable period after the giving of such notice to take corrective action." Id. at *1. Given that clear language, the court dismissed the action because the plaintiff had failed to give such notice. Id. at *3. Here, however, the distribution agreement is silent on the precise effect of noncompliance with the notice-and-cure provision.
The court finds that the notice-and-cure provision does not operate as a bar to plaintiff's claims. First, where the distribution agreement intended to erect a barrier to suit, it was clear in doing so. In a separate contract provision, for example, the distribution agreement provided that claims for non-equitable relief had to be submitted to arbitration. Distribution Agreement ¶ 12(F) (claims for non-equitable relief "shall be submitted to arbitration"). The notice-and-cure provision, by contrast, and in contrast the provision at issue inGerber, did not contain similar language. In short, had the parties intended for the notice-and-cure provision to stand as a condition precedent to suit, they should have said so.
Second, even if the notice-and-cure provision were read as a condition precedent to suit, it would only apply to the claim for breach of contract (which plaintiff has voluntarily dismissed), rather than plaintiffs' statutory and common law claims. Unlike the arbitration provision, which is written broadly to include "any dispute under or relating to the terms of the Agreement" (and which, as detailed below, must be liberally construed in favor of arbitration pursuant to either the Federal or California Arbitration Act), the notice-and-cure provision is narrow: it applies only to "breaches of agreement under this contract." In order to give every word meaning, the court must presume that these distinctions are purposeful. See Chiron Corp. V. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1131 (9th Cir. 2000) (finding that the "arising out of or relating to" language is "broad and far reaching"). In addition, although the court ultimately concludes that plaintiffs' claims for non-equitable relief are subject to mediation and arbitration, it would make little sense for defendants to "cure a breach" for statutory damages. Accordingly, the court finds that the notice-and-cure provision does not act as a bar to the claims at issue.
B. Arbitration and Mediation Provision
Defendants also argue that to the extent plaintiff's claims seek non-equitable relief, they are barred by the arbitration and mediation provision. As noted above, the distribution agreement provides that "except in the event equitable relief is sought . . . if any dispute under or relating to the terms of this Agreement or breach thereof should arise, it is agreed that the same shall be submitted to arbitration." Distribution Agreement ¶ 12(F). Indeed, arbitration is not even available until the parties first attempt to resolve the dispute by mediation. Id.
Plaintiff responds that they have dismissed their breach of contract claim relating to the distribution agreement and therefore should be free to seek any relief — equitable and non-equitable — for their remaining claims. The problem is that much of the underlying conduct that gave rise to the breach of contract claim is the same conduct that gives rise to the remaining claims. For instance, the distribution agreement clearly states that defendants "shall take no action to damage the reputation of RLED or the Product." Distribution Agreement ¶ 3(H). Plaintiff's claims for common law injury to business reputation, and false designation of origin under the Lanham Act (alleging that defendants' "counterfeit product is different and inferior in quality," Compl. ¶ 62), rely on the same factual predicates cast in a different legal light. Similarly, the distribution agreement forbids the defendants from "distribut[ing] another energy drink," Distribution Agreement ¶ 1, yet that factual allegation is part and parcel of plaintiff's Lanham Act claims.
Accordingly, the question before the court is whether the arbitration provision encompasses only breaches of contract qua breaches of contract, or encompasses conduct that, while perhaps constituting breach of contract, also violates statutory and common law protections.
The contract at issue is governed by either the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1- 16, or the California Arbitration Act ("CAA"), Cal. Code Civ. Proc. §§ 1280 et seq. The FAA represents the "liberal federal policy favoring arbitration agreements" and "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration."Moses H. Cone Mem. Hosp. v. Mercury Const. Corp., ("Moses") 460 U.S. 1, 24-25 (1983). A party cannot avoid arbitration by merely asserting violation of federal law, unless Congress has evinced an intention to preclude arbitration for the statutory rights at issue. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26 (1991). Similarly, under the CAA, courts will "indulge every intendment to give effect to [arbitration] proceedings." Adajar v. RWR Homes, Inc., 160 Cal. App. 4th 563, 568 (2008) (internal quotation marks omitted). For purposes here, the distinction between the FAA and the CAA is immaterial.
The FAA would apply if the distribution agreement evidences a transaction involving interstate commerce. 9 U.S.C. § 2.
In Filimex, LLC v. Novoa Investments, LLC, No. CV 05-3792-PHX-SMM, 2006 WL 2091661 (D. Ariz. Jul. 17, 2006), the court confronted facts similar to the ones present here. There, the parties entered into a trademark licensing agreement, which required arbitration for "any dispute between Licensor and Licensee arising under or pursuant to the terms of this Agreement." Id. at *1. The defendant continued to use the trademark even after the licensing agreement had been terminated. Plaintiff conceded that its breach of contract claim was subject to arbitration but argued that its trademark infringement and related statutory/common law claims were not. The court rejected this argument, finding that the arbitration agreement was susceptible to an interpretation that would encompass such claims. The court noted that under Ninth Circuit law interpreting the FAA, the "factual allegations need only `touch matters' covered by the [agreement]." Id. at *5 (quoting Simula v. Autolive, Inc., 175 F.3d 716, 718 (9th Cir. 1999)). Here, the arbitration is at least as broad (if not broader, given its "relating to" language) than that at issue in Filimex.
Similarly, in Gidatex, S.R.L. v. Campaniello Imports, Ltd., 13 F. Supp. 2d 420 (S.D.N.Y. 1998), the court found that claims for trademark misappropriation, unfair competition, and unjust enrichment were subject to arbitration, even though the contract between the parties pertained only to distribution and licensing.Id. at 426 (finding sufficiently close nexus between contractual relationship and claims at issue).
Because the arbitration and mediation provision of the distribution agreement is written broadly to include "any dispute under or relating to the terms of this Agreement or breach thereof," the court finds that to the extent any claims seek non-equitable relief, they are subject to mediation and arbitration. See Moses, 460 U.S. at 24-25; Filimex, 2006 WL 2091661, at *5; Gidatex, 13 F. Supp. 2d at 420.
The fact that the contract requires mediation as a condition precedent to arbitration does not change this conclusion. InPonce Roofing, Inc. v. Roumel Corp., 190 F. Supp. 2d 264, 267 (D.P.R. 2002), the contract at issue provided that "[a]ny claims arising out of or related to this Subcontract . . . shall be subject to mediation as a condition precedent to arbitration or the institution of legal or equitable proceedings by either party." Because the parties failed to mediate, "the [c]ourt conclude[d] that the parties should proceed to mediation, and, if necessary, arbitration, as they agreed to do when they signed the contract." Id. at 267 (granting motion to dismiss).
Similarly, in Mortimer v. First Mount Vernon Indus. Loan Ass'n, No. Civ. AMD 03-1051, 2003 WL 23305155, at *1 (D. Md. May 19, 2003), the contract at issue stated that "any dispute or claim arising out of or from this Contract . . . shall be mediated. . . . Neither party shall initiate or commence any action in any court . . . without first submitting the dispute or claim to mediation." While the court found that it could not order the parties to mediate, it dismissed the claims without prejudice. Id. at *3. See also DeGroff v. MascoTech Forming Technologies Fort Wayne, Inc., 179 F. Supp. 2d 896, 912-13 (N.D. Ind. 2001) (granting motion to dismiss where parties' had not entered into mediation as a condition precedent to arbitration);SEMCO, LLC v. Ellicott Mach. Corp. Int'l, No. Civ.A. 99-1928, 1999 WL 493278 (E.D.La. Jul. 9, 1999) (enforcing contract compelling mediation as a prerequisite to arbitration). Accordingly, the court finds that to the extent plaintiff's claims seek non-equitable relief, they must be dismissed.
The rationale for the result apparently uniformly reached by courts of this circuit is less than obvious. The ordinary rule is that the breach of the contract by one party releases the other of the obligation to perform. Thus, one would assume that the agreement to mediate is rendered ineffective upon breach. This is not like an agreement to arbitrate, whose enforcement is mandated by statute. Arguably, the agreement to mediate is enforceable because the parties agreed that a breach would not render the mediation provision unenforceable.
Finally, plaintiff argues that the defendants should not be permitted to invoke the terms of distribution agreement, including the arbitration and mediation provision, where they have willfully violated it. Plaintiff also contends that when the parties entered into the agreement, "[i]t was never contemplated that Defendants would steal the RLED name and trademark." Pl.'s Opp'n at 8.
Assuming, for purposes here, that defendants have in fact willfully violated the agreement, there is no exception made in the contract for bad faith conduct. As noted above, the mediation and arbitration provision is clear, and it is broad. It applies to "any dispute under or relating to the terms of this Agreement or breach thereof," without regard to whether the conduct giving rise to the dispute was in good faith or bad faith. Indeed, the Ninth Circuit has held that even a claim for breach of the implied covenant of good faith and fair dealing (i.e., where the breaching party has willfully violated the contract) is nevertheless subject to arbitration. See Building Materials Constr. Teamsters Local No. 216 v. Granite Rock Co., 851 F.2d 1190, 1194 (9th Cir. 1988). Accordingly, the court finds that the claims for non-equitable relief fall within the scope of the mediation and arbitration provision and therefore must be dismissed.
C. Preliminary Injunction
Because the arbitration provision only applies to non-equitable relief, plaintiffs may still pursue their request for a preliminary injunction. As noted above, under the traditional criteria for preliminary injunctive relief, plaintiff must show a likelihood of success on the merits, the possibility of irreparable injury, a balance of hardships favoring the plaintiff, and advancement of public interest. Save Our Sonoran, 408 F.3d at 1120. Alternately, plaintiff may show either a combination of probable success on the merits and the possibility of irreparable injury or that serious questions are raised and the balance of hardships tip strongly in its favor. Id.
As an initial matter, defendants argue that plaintiff has unreasonably delayed in seeking a preliminary injunction. See Oakland Tribune, Inc. v. Chronicle Publ'g Co., Inc., 745 F.2d 1211, 1213 (9th Cir. 1984) ("A delay in seeking a preliminary injunction is a factor to be considered in weighing the propriety of relief."). Here, plaintiff allegedly learned in August 2007 that defendants had been distributing an energy drink other than Roaring Lion. Compl. ¶ 15. The present action was filed in April 2008 and plaintiff filed the instant motion for injunctive relief in June 2008.
Plaintiff responds that at the time plaintiff initially discovered the trademark infringement, plaintiff was already engaged in litigation and could not afford to engage in another lawsuit at that time. Decl. of Edward Hackney ¶¶ 17, 18 (noting that "[i]n August, 2007 RLED was a defendant in a lawsuit brought by Red Bull GmbH that threatened to bankrupt RLED and put it out of business"). Furthermore, plaintiff argues that a portion of the delay was consumed by pre-litigation investigation and that the parties were also engaged in settlement discussions in late April 2008 and early May 2008. Under these circumstances, the court finds that the delay should not bar plaintiff's request for injunctive relief, but should nevertheless weigh as a factor in the court's analysis.
1. Likelihood of Success on Merits
Plaintiff's claims under the Lanham Act, 15 U.S.C. §§ 1114 1125, and the California Unfair Competition Law, Cal. Bus. Prof. Code § 17200, both require the same analysis. See Ford Motor Co. v. Ultra Coachbuilders Inc., NO. EDCV 00-00243-VA, 2000 WL 33256536, at *2 (C.D. Cal. Jul. 11, 2000) (noting that claims for trademark infringement, false designation of origin, and unfair competition all require the same analysis).
"To show a likelihood of success on the merits, plaintiff must establish that a likelihood of confusion exists." Sardi's Restaurant Corp. v. Sardie, 755 F.2d 719, 723 (9th Cir. 1985). The Ninth Circuit has developed eight factors (also referred to as the Sleekcraft factors) to guide this determination. They include "(1) the similarity of the marks; (2) the relatedness of the two companies' services; (3) the marketing channel used; (4) the strength of [plaintiff's] mark; (5) [defendant]'s intent in selecting its mark; (6) evidence of actual confusion; (7) the likelihood of expansion into other markets; and (8) the degree of care likely to be exercised by purchasers." GoTo.com, Inc. v. Walt Disney Co., 202 F.3d 1199, 1205 (9th Cir. 2000).
Intent to confuse customers is not required for a finding of trademark infringement. Brookfield Commc'n, Inc. v. W. Coast Entm't Corp., 174 F.3d 1036, 1045 (9th Cir. 1999). Instead, intent is relevant as a factor simply because, "[w]hen the alleged infringer knowingly adopts a mark similar to another's, reviewing courts can presume that the defendant can accomplish his purpose: that is, that the public will be deceived." AMF Inc. v. Sleekcraft Boats, 599 F.2d 341, 354 (9th Cir. 1979). Stated differently,
Here, there is a strong likelihood for confusion. The two marks at issue are identical: labels that were meant to designate Roaring Lion energy drinks were applied instead to the energy drinks manufactured by defendants. The two products obviously vie for an identical consumer base. Indeed, according to plaintiff's evidence, defendants' product was discovered at several locations where plaintiff was distributing its product. Although the energy drinks manufactured by defendants came in mylar rather than clear plastic bladders, and with white labels rather than blue labels, there is no evidence to suggest that the customers (e.g., restaurants and bars) paid attention to this difference or would have any reason to suspect that the product labeled as Roaring Lion was anything other than Roaring Lion.
Furthermore, there is evidence to suggest that customers in fact believed that the mislabeled products in fact came from Roaring Lion. Mr. Macumber, plaintiff's sales representative, spoke to the bar manager of Zinfandel on April 28, 2008, who said that they had not re-ordered Roaring Lion energy drink because the taste was inconsistent. Macumber Decl. ¶ 29. In light of the factors noted above, it is likely that the recipients of the mislabeled goods simply believed that they were receiving Roaring Lion energy drink.
Although this evidence is hearsay, "it [is] within the discretion of the district court to accept hearsay for purposes of deciding whether to issue the preliminary injunction." Republic of the Philippines v. Marcos, 862 F.2d 1355 (9th Cir. 1988); Flynt Distrib. Co. v. Harvey, 734 F.2d 1389, 1394 (9th Cir. 1984).
2. Possibility of Irreparable Injury
Ordinarily, "[i]n a trademark infringement claim, irreparable injury may be presumed from a showing of likelihood of success on the merits." GoTo.com, 202 F.3d at 1205 n. 4 ("This presumption effectively conflates the dual inquiries of this prong into the single question of whether the plaintiff has shown a likelihood of success on the merits."); see also Stuhlbarg Int'l Sales Co. v. John D. Brush Co., 240 F.3d 832, 841 (9th Cir. 2001) ("Evidence of threatened loss of prospective customers or goodwill certainly supports a finding of the possibility of irreparable harm."). Here, however, defendants argue that they have taken corrective action. Even though plaintiff's have shown a likelihood of success on the merits with respect to defendants' prior conduct, an injunction would do nothing to redress confusion already caused by that conduct. Accordingly, in order to show the possibility of irreparable injury, plaintiff must demonstrate the possibility that defendant will infringe upon their rights in the future.
Defendants represent that they have now ceased the manufacture, purchase, sale, and distribution of all energy drinks; returned any existing stock of plaintiff's product to plaintiff; and destroyed all labels, stickers, and signs concerns plaintiff (and its mark) in its possession. Defendants also represent that they have "changed from white boxes to brown boxes." Defs.' Opp'n at 11.
With regard to the last action, plaintiff argues that defendant has engaged in spoliation of evidence. If plaintiff seeks discovery sanctions, it must file a separate motion fully briefing the issue. Likewise, plaintiff's argument that defendants have failed to comply with their Rule 26 mandatory initial disclosures should be the subject of a separate motion to compel.
It is well-settled "`that an action for an injunction does not become moot merely because the conduct complained of was terminated, if there is a possibility of recurrence, since otherwise the defendant's would be free to return to [their] old ways.'" FTC v. Affordable Media, 179 F.3d 1228, 1237 (9th Cir. 1999) (quoting FTC v. Am. Standard Credit Sys., Inc., 874 F. Supp. 1080, 1087 (C.D. Cal. 1994)).
Here, the possibility of irreparable injury hinges on defendants' representation that the mislabeling was accidental, rather than intentional. Although the absence of "intent" is not a defense to infringement, Brookfield, 174 F.3d at 1045, if the mislabeling was in fact accidental, it would be unlikely to reoccur because defendants possess no other RLED product. Even if defendants decided to resume manufacturing and distribution of their own energy drink product, the only scenario in which that product would be labeled as Roaring Lion is if the defendants willfully infringed upon plaintiff's trademark.
Indeed, it seems quite likely that defendants wish to resume the manufacture and distribution of their own energy drink. For example, they switched from using white boxes (used by plaintiff) to brown boxes — which would only be relevant as a precautionary measure for future sales.
Under the circumstances, the court finds that there is at least a possibility that defendants will resume their past unlawful conduct. The infringement that took place was not an isolated incident: it occurred over a period of several months and affected hundreds of boxes (and thousands of servings) of energy drink. Furthermore, although plaintiff has voluntarily dismissed its breach of contract claim relating to the distribution agreement, it appears that defendants' conduct in manufacturing their own energy drink was in clear violation of the distribution agreement. The court is unpersuaded that the mislabeling of these products was accidental.
As noted earlier, the court notes that there was a modest delay before plaintiff sought an injunction. Nevertheless, given that plaintiff has shown a strong likelihood of success on the merits, and at least a possibility of irreparable injury, the court finds a preliminary injunction is appropriate. The court therefore enjoins defendants from: (1) using the Roaring Lion trademark for any purpose other than selling product that has been manufactured and purchased from plaintiff; (2) using any mark that imitates or is similar to the Roaring Lion trademark, (3) using plaintiff's name except as provided for in the distribution agreement, and (4) passing off any counterfeit products.
IV. Conclusion
For the reasons explained above, defendants' motion to dismiss is GRANTED IN PART without prejudice and DENIED IN PART and plaintiff's motion for preliminary injunction is GRANTED. Plaintiff shall post a $100 bond.
IT IS SO ORDERED.