Unpublished Disposition, 914 F.2d 263 (9th Cir. 1990)

MEMORANDUM^* 

Appellant Merle Norman Cosmetics, Inc. ("Merle Norman") filed this action alleging trademark infringement and several state-law claims against appellees, who operate several Merle Norman retail shops in Louisiana. The district court denied Merle Norman's motion for a preliminary injunction barring appellees from continuing to use the Merle Norman trade name and trademarks pending a final resolution of the merits of the dispute. Deeming the merits of the infringement claim to hinge on whether Merle Norman could properly terminate appellees under the terms of a licensing/franchising agreement, the district court ruled that Merle Norman had failed to demonstrate a likelihood of success on the merits. Additionally, the court determined that the balance of hardships tipped in favor of appellees.

We have jurisdiction pursuant to 28 U.S.C. 1292(a) (1) and affirm the judgment of the district court.

* "The denial of a preliminary injunction is subject to a limited standard of review. We reverse the denial only when the district court abused its discretion or based its decision on an erroneous legal standard or on clearly erroneous findings of fact." Religious Technology Center, Church of Scientology Int'l, Inc., 869 F.2d 1306, 1309 (9th Cir. 1989) (citations omitted); see also Sardi's Restaurant Corp. v. Sardie, 755 F.2d 719, 722-23 (9th Cir. 1985) (explaining that the erroneous legal standard could be either the preliminary injunction standard itself or the underlying substantive law). Whether the court applied an erroneous legal standard is a question of pure law and as such is subject to de novo review. See generally United States v. McConney, 728 F.2d 1195 (9th Cir.) (en banc), cert. denied, 469 U.S. 824 (1984).

II

"To qualify for a preliminary injunction, the moving party must show either (1) a combination of probable success on the merits and the possibility of irreparable harm, or (2) the existence of serious questions going to the merits and the balance of hardships tipping in its favor." Vision Sports, Inc. v. Melville Corp., 888 F.2d 609, 612 (9th Cir. 1989) (citations omitted). "These two formulations represent two points on a sliding scale in which the required degree of irreparable harm increases as the probability of success decreases." Oakland Tribune, Inc. v. Chronicle Publishing Co., 762 F.2d 1374, 1376 (9th Cir. 1985) (citation omitted). The district court in the instant case addressed both standards. First, the court concluded that Merle Norman had failed to demonstrate a likelihood of success on the merits even though it faced the possibility of irreparable harm. Second, it ruled that the balance of hardships tipped in favor of appellees despite the fact that Merle Norman had demonstrated the existence of serious questions going to the merits of the dispute.

* As a preliminary matter, the district court deemed the merits of the parties' dispute to be "whether plaintiff may properly terminate defendant's contractual right to use the trademarks and tradename." But Merle Norman argues that the propriety of termination was never at issue in its suit.

Merle Norman has insisted from the start of this litigation that the only issue presented in its federal trademark claim is whether a former trademark licensee should be enjoined from making continued use of the trademark holder's trade names and trademarks. On appeal, Merle Norman characterizes appellees as former licensees who are confusing the public by suggesting an ongoing relationship with a mark holder. It claims that appellees never placed the propriety of their termination in issue by counterclaiming for breach of contract. Furthermore, appellant argues that even if appellees had properly contested their termination, their recovery if any would be limited to money damages. Because specific performance of the agreement would be unavailable, Merle Norman argues that it is entitled to an injunction even if its termination was improper.

We disagree with Merle Norman's reasoning. Appellees need not have sued for breach of contract in order to preserve their wrongful termination argument. They were perfectly free to sit back, be sued by Merle Norman, and then defend on the basis that the termination was improper. Once they did so, it was more than appropriate for the district court to frame the relevant issue around the propriety of appellees' termination.

Moreover, that specific performance of the agreement might be unavailable is largely irrelevant at this point in the dispute. It does not lessen appellees' likelihood of success on the question whether the termination was proper, which is of course the only relevant inquiry here. We refuse to read as much significance as does Merle Norman in appellees' failure to explicitly ask for contract damages in its complaint.

B

Merle Norman's first purported ground for termination was appellees' failure to make certain purchase payments. The agreement signed by appellees contains two clauses that support Merle Norman's contention that failure to make such payments is a ground for termination. First is a clause appearing under the heading "Payment Terms":

1) A monthly statement will be mailed two or three days following the billing date established for your Studio. The statement will itemize all invoices and credits for the previous thirty days. Payment for purchases on regular credit terms is due within twelve days from the date on the statement.

The second clause appears under the headings "Your Obligations on Terminating Your Studio" and "Causes of Termination":

2. Merle Norman Cosmetics will sell its products to you for as long as you make timely payment for your purchases, and observe the other requirements of this Agreement. In the event that the Company believes that you have failed to observe these requirements, you will be given at least thirty days notice, and an opportunity to comply with them.

Appellees do not dispute the existence of a debt; they simply claim that Merle Norman had told them it would be forgiven. Thus, they might have a valid defense based upon waiver or estoppel. See Vylene Enters. v. Naugles, 63 Bankr. 900, 911 (Bankr.C.D. Cal. 1986) (citation omitted) (listing elements of estoppel under California law). In addition, appellees note that Merle Norman filed the instant law suit seeking payment for money owed a full five months prior to notifying them they would be terminated. But perhaps appellees' strongest defense is that by waiting for so long to terminate appellees' studio rights in the face of outstanding debt, Merle Norman failed to show the requisite irreparable harm necessitating issuance of a preliminary injunction. See Oakland Tribune, 762 F.2d at 1377 ("Plaintiff's long delay before seeking a preliminary injunction implies a lack or urgency and irreparable harm."). Although the district court found the requisite irreparable harm, we can affirm on any basis that has support in the record. Here, in spite of the fact that appellant might prevail on the merits, the fact that it waited for several years to sue on the debt counsels against issuing a preliminary injunction, as does the fact that Merle Norman waited a full six months after initiating this suit until moving for preliminary relief.

The second purported ground for termination was appellees' sale of Premier Collection cosmetics at their Merle Norman retail outlets. This ground too finds support in the agreement signed by appellees:

1) You must use your best efforts to promote the sale of Merle Norman Cosmetics products.

2) You may not display, sell, or offer for sale, any merchandise of any other manufacturer which is likely to confuse the public as to the origin or quality of such merchandise or to enable others to trade upon the trade names, trademarks, and goodwill of Merle Norman Cosmetics or its other Studios.

Common sense suggests that there is an inherent danger of trademark infringement whenever a competitor's products are sold in a manufacturer's own retail outlet. This possibility was increased in the instant case by virtue of the fact that the competing products were new and not instantly recognizable to the public. Indeed, there is some evidence of actual confusion about the origin of Premier Collection products. On the other hand, the labeling and packaging on the Premier Collection cosmetics appears to be strikingly different from that of appellant's own products. Additionally, appellee Jeanette Martin's deposition testimony indicates that she scrupulously disclosed the lack of affiliation between the Merle Norman name on her outlets and the Premier Collection products to all purchasers who walked through the door.¹  Given the complexity of the determination, the district court certainly did not abuse its discretion by finding that Merle Norman had not demonstrated a likelihood of success on the merits and that the confusion issue warranted extensive consideration at trial.

This is especially true given the contract's strange wording. After all, if Merle Norman had wanted to prevent its retail establishments from carrying competitor's products altogether, it could have insisted as much in its form contract. The fact that the contract tracks the Lanham Act itself by only proscribing goods that are likely to confuse consumers indicates that for whatever reason Merle Norman envisioned competitors' products to at least occasionally sit side by side its own on its retailer's shelves. Given this, it is simply unfair for appellants to interpose the "best efforts" clause against appellees' sale of competing products altogether.² 

It is not entirely clear that Merle Norman notified appellees that they were failing to use their "best efforts" in selling Merle Norman products on the basis of their sale of Premier Collection products. Perhaps Merle Norman was actually complaining about listless salesmanship in appellees' shops. Unfortunately, the initial letter sent to appellees did not say what they had done wrong. And although it did explain that appellees had 30 days in which to cure their "deficiencies" as per the agreement, appellees insist that such notification was meaningless without an explicit explanation of what they needed to do in order to cure. This failure arguably violates the implied covenant of good faith and fair dealing that California law incorporates into every contract. See Naugles, 63 Bankr. at 908-09 (citing Seaman's Direct Buying Serv., Inc. v. Standard Oil Co., 36 Cal. 3d 752, 768, 686 P.2d 1158, 1166, 206 Cal. Rptr. 354, 362 (1984)).

In sum, although Merle Norman has highlighted conduct that conceivably justifies its termination of appellees, appellees present several defenses compelling enough to defeat any claim that the district court's failure to grant preliminary relief to Merle Norman was an abuse of discretion.³  In the sliding scale between likelihood of success on the merits and serious questions on the merits, Merle Norman finds itself towards the latter end. Thus, in order to qualify for a preliminary injunction, it needs to show that the balance of hardships tilts in its own favor. This it cannot do.

To be sure, Merle Norman stands to lose customers who enter appellees' shops in the mistaken belief that they are authorized by appellant and are given makeovers, beauty advice, or other "services" that do not conform with Merle Norman's standard operating procedures. Nonetheless, appellees face even greater hardships. Merle Norman is a big, established company with many retail outlets whereas appellees operate a mere handful of stores and can likely change their signs only at considerable expense. Moreover, appellees would likely suffer financially if their stores lose customers and possibly even go under altogether due to a perceived change in affiliation with Merle Norman. See Sardie, 755 F.2d at 726 (noting that "the relative size of the respective businesses" is "relevant to the potential hardship from changing a business' name); Naugles, 63 Bankr. at 911 (noting that franchisee's hardship in changing signs and advertisements outweighs franchisor's hardship).

III

The judgment of the district court is AFFIRMED. Appellant's motion for sanctions is denied.