Unpublished Disposition, 899 F.2d 1225 (9th Cir. 1990)

ROSERICH DESIGNS, LTD.; Septimus Corporation, Plaintiffs-Appellants,v.Richard WEEDN; Flavia M. Weedn; Jack R. Weedn; LisaWeedn; Innocent Age, Ltd.; Weedn InvestmentCorp.; American Flyer Productions,Inc.; and Richard Feldstein,Defendants-Appellees.

No. 89-55652.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Sept. 13, 1989.Decided April 12, 1990.

Before SCHROEDER and BEEZER, Circuit Judges, and JOHN P. VUKASIN,^**  District Judge.

MEMORANDUM^* 

Roserich Designs, Ltd., appeals the district court's denial of a preliminary injunction in its business dispute with the Weedn family. We reverse.

* The Weedns, and the defendant corporations associated with them, produce greeting cards and other products displaying the sentimental artwork of Flavia Weedn. Until 1986, the Weedns marketed their products through their closely held corporation, Roserich. In December 1986, the Weedns sold Roserich to appellant Septimus Corporation. The Weedns and Roserich entered into complex purchasing, licensing, and consulting agreements designed to 1) give the new Roserich fair value for its owners by giving it the continued rights to both existing lines of Weedn products, notably greeting cards, and to the flow of new Weedn designs needed to keep the product lines viable, and 2) give the Weedns cash, royalties, and some scope for future activity outside Roserich in product lines, such as trade books, not included in the agreement.

Performance under the agreements quickly broke down amidst a welter of accusations. Roserich accuses the Weedns of violating the letter and spirit of the agreements, especially by competing directly with it through the codefendant companies. As a result, Roserich invoked a clause allowing it to set off royalty payments against damages, and withheld royalties from the Weedns. The Weedns then terminated the agreements and sold the rights previously held by Roserich to Applause, Inc.

Roserich sued the Weedns under the Lanham Act, 15 U.S.C. § 1125(a), alleging various material misrepresentations in interstate commerce, and added numerous pendant California contract and tort claims. Roserich sought an injunction to prohibit the Weedns from engaging in unfair practices. The motion was originally denied, on the ground that a substantial question existed as to federal jurisdiction.

In denying the Weedns' 12(b) (6) motion, the district court held that Roserich had properly pleaded a Lanham Act claim.¹  The court then considered the injunction request. Ruling from the bench, Judge Lew stated that he recognized that denial of the injunction would cause "a severe problem for [Roserich] as to how they proceed in the operation of their business," but that if he were to grant it, "there already has been a sale [of the rights] to [Applause] and how [the Weedns] would comply to [sic] the order is a matter of another concern. But it appears here that the court should not look at the consequences of its action on that level." He then concluded that since Roserich had not established the "probability of success" on the merits, the injunction would be denied. The court found Roserich's allegations to be conclusionary and unsupported by solid evidence.

Roserich appealed to this court for a stay of the order denying the injunction. The motion was denied, but an expedited appeal was calendared.

We have jurisdiction over this appeal from an interlocutory order denying an injunction. 28 U.S.C. § 1292(a) (1). We review the district court's denial of an injunction for abuse of discretion. See, e.g., Official Airline Guides, Inc. v. Goss, 856 F.2d 85, 87 (9th Cir. 1988). Questions of law that arise in reviewing the district court's judgment are considered de novo, and an application of the wrong legal standard leads to de novo review of the injunction decision. See Benda v. Grand Lodge of Int'l Ass'n of Machinists, 584 F.2d 308, 314 (9th Cir. 1978), cert. dismissed, 441 U.S. 937 (1979).

II

A preliminary injunction should be granted if the movant shows either 1) probable success on the merits and the possibility of irreparable harm if the injunction is not granted, or 2) serious questions as to the merits and a sharp tilt in the balance of hardships toward the movant. See, e.g., Official Airline Guides, 856 F.2d at 87. These are not two independent tests, but rather represent opposite ends on a continuum in which the required showing of harm varies inversely with the required showing on the merits. Republic of the Philippines v. Marcos, 862 F.2d 1355, 1362 (9th Cir. 1988) (en banc), cert. denied, 109 S. Ct. 1933 (1989). The balance of harms is the most important factor. Id.

Roserich argues that the district court erroneously gave too much weight to the probability of success while ignoring the balance of harms. We agree.

A. Balance of Harms

Septimus Corporation paid $324,000 to acquire 80% of Roserich in 1986. When appellants believed that the Weedns had breached the agreement, they suspended royalty payments amounting to $73,000 pursuant to a contractual setoff provision. The Weedns responded to the withholding by terminating the contract with Roserich and contracting anew with Applause.

Appellants contend that Roserich will go out of business if an injunction is not granted. Eighty percent of its sales come from the product lines marketed under the agreements with the Weedns. Roserich reasonably fears called bank loans, defections by key employees, and loss of customers if the Weedns end the business relationship.

Looking at the other side, a preliminary injunction would force the Weedns to breach agreements with Applause entered into after litigation commenced. Additionally, although Roserich paid the Weedns more than $1 million in royalties over a two year period, the Weedns allege that litigation expenses have forced them to sell one family home and liquidate $45,000 from their retirement fund.

On these facts, the balance of hardships tilts sharply toward Roserich. Roserich may go out of business without an injunction. The Weedns, on the other hand, would suffer far less if an injunction were issued. Their primary detriment would arise from breaching their agreements with Applause. They assumed that risk when they contracted after and with full knowledge of the commencement of this lawsuit.

B. The Merits

Each side contends that the other's position is completely meritless. Either would have to concede, however, that there are serious questions as to the merits. Serious questions are "substantial, difficult and doubtful, as to make them a fair ground for litigation and thus for more deliberative investigation." Marcos, 862 F.2d at 1362 (citation omitted). They "need not promise a certainty of success, nor even present a probability of success, but must involve a fair chance of success on the merits." Id. (citation omitted).

The parties make numerous allegations which can only be resolved at trial. For example, lay and expert testimony is necessary to determine whether "Flavia the Dreammaker" is a "gift book" or a "trade book." The basic issue is whether the Weedns breached the agreements prior to Roserich's offset. If so, Roserich's withholding of payments was proper, and the Weedns acted in further breach by terminating the agreements. If not, it was Roserich who breached, and this breach justified termination. Although we do not decide the issue, we conclude that a serious question exists.

Roserich has shown that the balance of harms tips sharply in its favor and that a serious question as to the merits exists. That showing sufficiently supports a preliminary injunction.

III

We therefore reverse and remand to the district court with instructions to require Roserich to post a $500,000 bond and to enter an injunction enjoining the Weedns from (1) falsely representing to Roserich's customers, potential customers, employees, and/or suppliers that Roserich is no longer in business and/or that Roserich is no longer licensed to supply certain products; (2) offering to others, including Roserich's competitors, a license for the entire line of products exclusively licensed to Roserich; and (3) offering to the trade certain products licensed on an exclusive basis to Roserich.

REVERSED AND REMANDED.