Opinion
Civil Action No. 3:01-CV-1515-D
November 6, 2001
MEMORANDUM OPINION AND ORDER
Plaintiffs AA Global Industries, Inc. ("AA Global Industries") and AA Global Industries of Texas, Inc. ("AA Texas") (collectively "AA") move for preliminary injunctive relief against defendants Kevin Wolfe ("Wolfe") and Kidz Zone, Inc. ("Kidz Zone") seeking to enjoin alleged violations of plaintiffs' trademark and trade dress rights and contractual rights under a covenant not to compete. For the reasons that follow, AA Texas's motion for preliminary injunction is granted in part and denied in part. AA Global Industries's motion is denied. The court has entered a preliminary injunction by separate order filed today.
Plaintiffs' preliminary injunction application is before the court under the procedure permitted by Fed.R.Civ.P. 43(e) and is being decided on the papers without an evidentiary hearing. See, e.g., Jones v. Bush, 122 F. Supp.2d 713, 715 (N.D. Tex.) (Fitzwater, J.), aff'd, 244 F.3d 134 (5th Cir. 2000) (per curiam) (table), cert. denied, 531 U.S. 1062 (2001).
The court sets out in this memorandum opinion and order its findings of fact and conclusions of law. See Rule 52(a).
I
Plaintiff AA Global Industries is a manufacturer and distributor of bulk vending machines and supplies. Through its Koko's Confectionery division, AA Global Industries manufactures and sells a variety of candy products. AA Texas is a wholly-owned subsidiary of AA Global Industries that is engaged in manufacturing and selling the Koko's product line. Kidz Zone is a company that has in the past manufactured and sold confectionery and novelty products both domestically and internationally. Clayton Parker ("Parker") founded Kidz Zone and, before a corporate name change, it operated under the name Loboz Enterprises, Inc. Wolfe was employed by Kidz Zone and played a key role in the day-to-day operations of the company. On or about January 26, 2000 AA Texas entered into an asset purchase agreement with Kidz Zone, Parker, and Wolfe. Plaintiffs contend that, pursuant to this agreement, AA Texas purchased all the assets of Kidz Zone related to the confectionery business. Among the assets plaintiffs contend were acquired are the trademark and trade dress rights in the following marks: KA-BLUEY, KA-BLUEY BLAST, CONFETTI, BUMM GUMM, CD'S DIGITAL GUM, WURMZ DIRT, KOOKY CHEW, Y2KANDY, and CONFETTI FUN CANDY MIX. The asset purchase agreement contained a covenant not to compete, which plaintiffs contend Wolfe and Kidz Zone have violated.
In connection with the acquisition of Kidz Zone's assets by AA Texas, AA Texas hired Wolfe as a manager. Wolfe's employment with AA Texas was terminated on June 11, 2001.
II
Plaintiffs first seek to enjoin defendants' unauthorized use of the KA-BLUEY trademark and packaging in the United States. The standard for granting preliminary injunctive relief against alleged acts of trademark infringement and unfair competition requires the movant to establish (1) a substantial likelihood of success on the merits, (2) a substantial threat that the movant will suffer irreparable injury if the injunction is denied, (3) that the threatened injury outweighs the damage the injunction will cause the defendant, and (4) that the injunction will not disserve the public interest. See Sugar Busters LLC v. Brennan, 177 F.3d 258, 265 (5th Cir. 1999); Sunbeam Products, Inc. v. West Bend Co., 123 F.3d 246, 250 (5th Cir. 1997).
In their reply brief, plaintiffs clarify that their motion for preliminary injunctive relief is predicated solely on alleged infringement/dilution of the United States KA-BLUEY mark. See Ps. Rep. at 5 ("The ownership of the Australian KA-BLUEY mark is at issue in this case but is not a predicate for the instant motion.").
To establish a likelihood of success on the merits, plaintiffs rely on an account of events alleged to have transpired at the National Association of Confectioners trade show in Chicago in June 2001. Regarding these events, plaintiffs contend:
[I]t was learned during the NAC show that Defendants and other clandestine industry operatives produced, distributed, and sold candy and gum under a counterfeit KA-BLUEY mark as directed and brokered by Mr. Wolfe from his Texas home base. The products are [now] known to have been shipped to and sold in a variety of markets including New Zealand and Australia from which Mr. Wolfe received cash payments in the United States. Mr. Wolfe conducted activities in the United States directed to international commerce in the counterfeit KA-BLUEY products. He also participated in meetings in Chicago to exchange counterfeit KA-BLUEY, discuss sales strategies, and confer about introducing new products under the counterfeit mark.
Ps. Br. at 4-5.
The only proof that plaintiffs offer to support their version of what transpired is a citation to pages 6-8 of their appendix and to certain paragraphs (26-36, and 38) of their verified complaint reproduced therein. See Ps. Br. at 4. Although these portions of the complaint assert allegations about the Chicago trade show events that are consistent with the description offered by plaintiffs' brief, they adduce — with the exception of ¶ 37, which was excluded from the brief's paragraph-specific citation — no extrinsic evidence that the allegations are true. Paragraph 37 does contain a quotation from the text of an e-mail communication from Wolfe to John Wilkinson ("Wilkinson") of Australian International Traders Pty. Ltd. in which Wolfe urges Wilkinson to prevent Teobaldo Fumero (a Costa Rican candy manufacturer with whom Wolfe is alleged to have associated in the production of counterfeit KA-BLUEY merchandise) from exhibiting any products bearing the KA-BLUEY mark at the Chicago trade show. See Ps. App. 8. This evidence is of itself insufficient to show a substantial likelihood that plaintiffs will succeed in proving that Wolfe committed acts of infringement at the trade show. On its face, the e-mail shows that Wolfe was attempting to prevent any display of the allegedly counterfeit KA-BLUEY merchandise. No evidence (beyond assertions in the complaint) has been advanced to demonstrate that any such display actually took place, or to show the features of the products that may have been displayed. Although plaintiffs' brief in the instant motion focuses on Wolfe's "activities directed to international commerce in the counterfeit KA-BLUEY products" ( i.e., attempts to sell KA-BLUEY products in Australia and New Zealand), plaintiffs concede that infringement of the Australian KA-BLUEY mark forms no part of the basis of their present motion. See Ps. Rep. at 5 ("The ownership of the Australian KA-BLUEY mark is at issue in this case but is not a predicate for the instant motion."). Given this fact, plaintiffs' sole visual evidence of the infringing item, taken from an Australian website, is insufficient to demonstrate a substantial likelihood of success in proving infringement or dilution of the U.S. mark. See Ps. App. 86 (reproducing image of allegedly counterfeit KA-BLUEY package offered for sale on Australian website http://www.debralee.com.au/html/photo/bluebg.html). Because plaintiffs have not shown, on the evidence presented, a substantial likelihood of success in demonstrating infringement or dilution of the U.S. KA-BLUEY mark, the court declines to order a preliminary injunction based on plaintiffs' Lanham Act or state law anti-dilution claims.
III
Plaintiffs also seek injunctive relief based on Wolfe's alleged violations of his obligations under a covenant not to compete contained in the asset purchase agreement, which reads as follows: Covenant Not to Compete:(a) For a period of one (1) year, commencing on the date of Closing, or one (1) year from the date employment by Kevin J. Wolfe by Purchaser terminates, whichever shall last occur. Seller and Kevin J. Wolfe covenant and agree not to, directly or indirectly, compete with or against Purchaser anywhere where Seller currently has business customers, in a business similar to the Business presently operated by seller in any capacity or on behalf of any business entity, but only with respect to the product items purchased pursuant to this Agreement.
(b) The covenants contained in paragraph (a) are intended to be separate and divisible covenants, and if, for any reason, any one or more such covenants shall be held to be invalid or unenforceable, in whole or in part, it is agreed that the same shall not be held to affect the validity or enforceability of any other covenant set forth in paragraph a of this agreement. If held invalid or unenforceable, the periods and areas set forth in such subparagraph shall be reduced to the maximum permitted by the law actually applied to determine the validity of such paragraph.
Ps. App. 48.
A
Because the court by October 29, 2001 memorandum opinion and order has compelled arbitration of plaintiffs' breach of contract claim against Wolfe and Kidz Zone, the court must address the threshold question whether the court has the power, in light of 9 U.S.C. § 3, to enter a preliminary injunction pending the outcome of the arbitration. The court addressed this issue in Ruscitto v. Merrill Lynch, Pierce, Fenner Smith, Inc., 777 F. Supp. 1349, 1353 (N.D. Tex. 1991) (Fitzwater, J.), aff'd, 948 F.2d 1286 (5th Cir. 1991) (per curiam) (table). It held "that a preliminary injunction that does nothing more than preserve the status quo does not run afoul of 9 U.S.C. § 3." Id Because the court maintains the power to issue an injunction that will preserve the status quo, it must evaluate the merits of plaintiffs' application.
B
To obtain a preliminary injunction, plaintiffs must establish (1) a substantial likelihood that they will prevail on the merits, (2) a substantial threat that they will suffer irreparable injury if the injunction is not granted, (3) that the threatened injury to them outweighs the threatened harm the injunction may do to Wolfe, and (4) that granting the preliminary injunction will not disserve the public interest. See Jones v. Bush, 122 F. Supp.2d 713, 718 (N.D. Tex.) (Fitzwater, J.) (citing Ruscitto, 777 F. Supp. at 1353), aff'd, 244 F.3d 134 (5th Cir. 2000) (per curiam) (table), cert. denied, 531 U.S. 1062 (2001). "A preliminary injunction `is an extraordinary and drastic remedy, not to be granted routinely, but only when the movant, by a clear showing, carries the burden of persuasion.'" Id. (quoting White v. Carlucci, 862 F.2d 1209, 1211 (5th Cir. 1989); Holland Am. Ins. Co. v. Succession of Roy, 777 F.2d 992, 997 (5th Cir. 1985)).
1
The parties to the asset purchase agreement chose Texas law to govern the agreement, see Ps. App. 51 (reproducing choice of law provision). The court will therefore apply Texas law to decide whether plaintiffs have established a substantial likelihood of success. Under Texas statutory standards governing enforcement of covenants not to compete, a covenant not to compete is enforceable to the extent it (1) is ancillary to an otherwise enforceable agreement and (2) contains reasonable limitations as to the time, geographical area, and scope of activity to be restrained that do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee. See Tex. Bus. Com. Code Ann. §§ 15.50 and 15.51 (Vernon Supp. 2001). Section 15.51(a) specifically provides that a court may award the promisee injunctive relief for a breach of the covenant.
Under the statute, the court first determines if the covenant is ancillary to an otherwise enforceable agreement. As to AA Texas, this first test is met; the covenant was part of an agreement entered into among AA Texas, Kidz Zone, Wolfe, and Parker relating to the sale of Kidz Zone's assets. AA Global Industries, however, was not a signatory to the asset purchase agreement. This fact precludes AA Global Industries from demonstrating a substantial likelihood of success on the merits of its claim for breach of the covenant not to compete. Although AA Global Industries appears to have been a signatory to a guarantee contract that was entered into contemporaneously with the asset purchase agreement, it is the asset purchase agreement that forms the basis of the claim for breach of the covenant not to compete.
"Once the first criteri[on] is met, the courts have no choice but to enforce the covenant if the promisee seeks reasonable enforcement." Property Tax Assocs., Inc. v. Staffeldt, 800 S.W.2d 349, 350 (Tex.App. 1990, writ denied). The present record plainly shows that AA Texas's request is reasonable. Wolfe may continue to operate in the confectionery industry. He is merely restricted for a period of one year following the date of his termination from competing with AA Texas in the sale or manufacture of the product items (including KA-BLUEY) that AA Texas purchased pursuant to the asset purchase agreement. See Ruscitto, 111 F. Supp. at 1354 (holding that injunction that prevented brokerage account executive, following termination, from soliciting and accepting business from brokerage's clients was reasonable). The duration of the covenant is plainly reasonable under Texas law. Moreover, the evidence presented in plaintiffs' appendix and in the exhibits to the complaint itself strongly indicates that Wolfe has been engaged in competition with AA Texas in regard to the KA-BLUEY product and others, regardless of the true status of ownership of the Australian KA-BLUEY mark or the occurrence of any acts of infringement with respect to the U.S. mark. See P. App. 12-15, 69-84.
For these reasons, the court concludes that AA Texas is likely to succeed on the merits of its claim against Wolfe under the covenant not to compete.
2
The court next considers the element of irreparable injury. "In Texas, injury resulting from the breach of non-compete covenants is the epitome of irreparable injury." Am. Express Fin. Advisors, Inc. v. Scott, 955 F. Supp. 688, 693 (N.D. Tex. 1996) (Solis, J.) (citing Ruscitto, 111 F. Supp. at 1354). Tex. Bus. Com. Code Ann. § 15.51(a) expressly makes available injunctive relief. The factual record supports a finding that AA Texas is threatened with irreparable injury by Wolfe's breach of the Agreement.
3
The court determines next that the threat of injury to plaintiffs outweighs the threat of injury to Wolfe. The preliminary injunctive relief here granted will not, as Wolfe contends, "prohibit[ ] [Wolfe] from working in the candy industry" or "preclude [Wolfe] from employment entirely." Wolfe Br. at 7. Despite the injunction, Wolfe will be permitted to pursue all avenues of employment in the confectionery industry that do not constitute competitive activities "with respect to the product items purchased pursuant to this Agreement." The burden of this restriction does not outweigh the damage likely to be incurred by AA Texas in the absence of an injunction.
4
The entry of a preliminary injunction will not disserve the public interest.
C
The application for a preliminary injunction against Wolfe is granted for the reasons stated. The court considers it appropriate to provide additional explanation regarding the scope of the activities enjoined. Wolfe urges that
[a]t most, any preliminary injunction should track the language of the covenant not to compete such as that Kevin Wolfe shall not, directly or indirectly, compete with or against AA Texas with respect to the customers of Kidz Zone as of January 26, 2000, but only with respect to the product items purchased pursuant to the asset purchase agreement, to wit: Ka-bluey, Ka-bluey Blast, Confetti, Bum Gumm, CD's Digital Gum, Wurmz Dirt, Kooky Chew, and Y2Kandy; provided, however, that Kevin Wolfe is permitted to use or authorize others to use Ka-Bluey and/or a combination thereof in Australia.
Wolfe Br. at 7-8. This reading ignores the additional part of section (a) of the covenant not to compete, in which Wolfe covenants not to compete directly or indirectly with or against AA Texas "in a business similar to the Business presently operated by seller in any capacity or on behalf of any business entity" with respect to the purchased items. Reading this section of part (a) together with part (b)-and therefore treating it as a divisible covenant-the court concludes that the covenant not to compete is sufficient in scope to support an injunction against any production, sale, or use by Wolfe of the enumerated purchased items in Australia. The scope of the injunction is not so broad, however, as to prohibit Wolfe from "[e]ngaging in any commercial activities" with the list of organizations and individuals enumerated by plaintiffs in their proposed order. See Wolfe Br. at 8; Ps. Proposed Prel. Inj. at 2-3. Association with these and any other individuals or entities is permitted to the extent such association does not violate the covenant not to compete.
In reaching this conclusion, the court rejects Wolfe's contention that the contractual term "item" is insufficiently broad to include KA-BLUEY products sold under the Australian mark for KA-BLUEY (which Wolfe contends AA Texas did not acquire under the asset purchase agreement). See Wolfe Br. at 6.
The duration of the preliminary injunction is limited to the time period specified in the covenant not to compete. Given the uncontested evidence that June 11, 2001 was the date of Wolfe's termination, see Wolfe Br. at 9, the preliminary injunction will therefore expire of its own terms no later than June 11, 2002.
The injunction can also be dissolved earlier than that date if an arbitration award so provides.