ADT LLC v. Northstar Alarm Services, LLC

• Court: Court of Appeals for the Eleventh Circuit
• Decided: April 14, 2017
• Docket: 16-15351
• Status: Published

Opinion

Case: 16-15351 Date Filed: 04/14/2017 Page: 1 of 14

[PUBLISH]

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT ________________________

No. 16-15351 ________________________

D.C. Docket No. 9:12-cv-81120-DTKH

ADT LLC,

Plaintiff-Appellee, versus

NORTHSTAR ALARM SERVICES, LLC,

Interested Party-Appellant.

________________________

Appeal from the United States District Court for the Southern District of Florida _______________________

(April 14, 2017)

Before WILLIAM PRYOR and MARTIN, Circuit Judges, and DUFFEY, * District Judge.

WILLIAM PRYOR, Circuit Judge:

* Honorable William S. Duffey, Jr., United States District Judge for the Northern District of Georgia, sitting by designation. Case: 16-15351 Date Filed: 04/14/2017 Page: 2 of 14

This appeal presents the question whether a nonparty, not in privity with a

party to an injunction, may be bound by that injunction as a successor in interest

under the theory of de facto merger. After ADT LLC, sued Vision Security, LLC,

for violations of the Lanham Act, 15 U.S.C. § 1125(a), the parties agreed to an

injunction that prohibited Vision Security from using certain sales tactics.

NorthStar Alarm Services, LLC, then acquired customer accounts, rental leases,

and other assets from Vision Security and hired four senior officers and some of

the sales team of Vision Security. When NorthStar allegedly used sales tactics

prohibited by the injunction, ADT moved the district court to hold NorthStar in

contempt of the injunction. The district court determined that, although NorthStar

and Vision Security were not in privity, NorthStar was bound by the injunction as a

successor to Vision Security under a state-law theory of de facto merger. We

disagree. NorthStar cannot be bound by the injunction when it is not in privity with

Vision Security and in the absence of any evidence that it had notice of the

injunction, Fed. R. Civ. P. 65(d)(2). We vacate the order that held that NorthStar is

bound by the injunction.

I. BACKGROUND

In 2012, ADT filed a complaint against Vision Security that alleged

violations of the Lanham Act, 15 U.S.C. § 1125(a). ADT alleged that Vision

Security made false statements to customers of ADT to trick them into signing

2 Case: 16-15351 Date Filed: 04/14/2017 Page: 3 of 14

contracts with a different security alarm company. The parties settled the lawsuit

by agreeing to an injunction, which prohibited Vision Security from making false

statements about ADT and from training “any person who may sell for or solicit

customer[s] on behalf of Vision[] to violate the terms of th[e] Permanent

Injunction.”

In January 2015, Vision Security executed an asset purchase agreement with

NorthStar. Although ADT argues that the agreement effected a corporate merger,

NorthStar insists that the agreement involved only the purchase of some customer

accounts from Vision Security. Under the agreement, NorthStar acquired from

Vision Security 8,000 customer accounts to add to the 35,000 accounts NorthStar

had before the agreement, goodwill, deferred revenues relating to the customer

accounts, all the furniture, fixtures and equipment used in connection with the

business that relate to the customer accounts, and obligations under some contracts,

including real estate leases in Arizona and Utah. The agreement also specified that

NorthStar did not acquire from Vision Security cash, bank accounts, customer

accounts, contracts, and other accounts and assets not listed in the agreement,

intellectual property, books of account and books of original entry, personnel

records, any insurance policies or associated causes of action, all claims for tax

refunds, all rights of Vision Security, and the equipment of the sole remaining

3 Case: 16-15351 Date Filed: 04/14/2017 Page: 4 of 14

employee of Vision Security, Danielle Paletz. The agreement never mentioned the

injunction in favor of ADT.

The agreement provided that NorthStar would hire four senior officers from

Vision Security. One officer, Robert Harris, was the owner and chief executive

officer of Vision Security and became the president of NorthStar. He also became

a member of the board of directors of NorthStar and received almost fourteen

percent of its stock. In his new position at NorthStar, Harris oversaw seven or eight

regional sales managers, four of whom came to NorthStar from Vision Security.

He testified that “[t]he leadership of the sales organization report directly to

[him.]” But he also testified that his “primary role at NorthStar is involved in

recruiting people to come work for NorthStar” and that he did not “personally do

any sales training at NorthStar.” NorthStar also hired between thirty and thirty-five

of the 250 sales representatives of Vision Security. But there was high turnover in

the sales staff of Vision Security from year to year because most of the sales agents

were seasonal independent contractors.

Vision Security terminated its sales force after it executed the agreement,

consistent with a clause that prohibited Vision Security and Harris from competing

with NorthStar for five years. But Paletz remained employed by Vision Security to

service between 1,500 and 2,000 accounts that Vision Security retained. Another

company provided monitoring services for those accounts.

4 Case: 16-15351 Date Filed: 04/14/2017 Page: 5 of 14

About one year after the entry of the injunction against Vision Security,

ADT determined that NorthStar was violating the terms of the injunction. It moved

the district court for an order to show cause why NorthStar and Harris should not

be held in contempt of the injunction. ADT argued that that the injunction against

Vision Security bound NorthStar because NorthStar had purchased part of the

alarm business of Vision Security.

After a hearing, a magistrate judge recommended that NorthStar and Harris

be bound by the injunction. The magistrate judge determined that NorthStar and

Vision Security were not in privity, but that NorthStar was bound by the injunction

as a successor to Vision Security under a state-law theory of de facto merger. The

magistrate judge also determined that Harris was bound “because in his capacity as

CEO and sole managing member of Vision [Security], his liability is the same as if

he had been a named party in the underlying lawsuit.” The district court adopted

the recommendation of the magistrate judge, and only NorthStar appealed.

II. STANDARDS OF REVIEW

We review an order that grants, continues, or modifies an injunction for

abuse of discretion. Siegel v. LePore, 234 F.3d 1163, 1178 (11th Cir. 2000) (en

banc). “We review the underlying findings of fact for clear error and conclusions

of law de novo.” Common Cause/Ga. v. Billups, 554 F.3d 1340, 1349 (11th Cir.

2009). Whether a party is in privity with another party is a question of fact that we

5 Case: 16-15351 Date Filed: 04/14/2017 Page: 6 of 14

review for clear error. See E.E.O.C. v. Pemco Aeroplex, Inc., 383 F.3d 1280, 1285

(11th Cir. 2004).

III. DISCUSSION

Federal Rule of Civil Procedure 65 governs who may be bound by a federal

injunction:

(2) Persons Bound. The order binds only the following who receive actual notice of it by personal service or otherwise: (A) the parties; (B) the parties’ officers, agents, servants, employees, and attorneys; and (C) other persons who are in active concert or participation with anyone described in Rule 65(d)(2)(A) or (B).

Fed. R. Civ. P. 65(d)(2) (second and third emphases added). The rule “does not

really add or detract from the range of persons that were bound by a decree under

basic equity practice and due-process principles applied on the equity side of the

federal courts prior to 1938.” 11A Charles Alan Wright, Arthur R. Miller, et al.,

Federal Practice and Procedure § 2956 (3d ed.), 11A Fed. Prac. & Proc. § 2956,

Westlaw (database updated Jan. 2017) (citation omitted). That is, Rule 65(d)

“embod[ies] rather than . . . limit[s]” the common law powers of the district court.

United States v. Hall, 472 F.2d 261, 267 (5th Cir. 1972) (Wisdom, J.). At common

law, an injunction bound “not only . . . the parties defendant but also those

identified with them in interest, in ‘privity’ with them, represented by them or

subject to their control.” Regal Knitwear Co. v. N.L.R.B., 324 U.S. 9, 14 (1945).

6 Case: 16-15351 Date Filed: 04/14/2017 Page: 7 of 14

“Broadly speaking, both [Rule 65] and the common-law doctrine

contemplate two categories of nonparties potentially bound by an injunction.”

Nat’l Spiritual Assembly of Bahá’ís of the U.S. under the Hereditary

Guardianship, Inc. v. Nat’l Spiritual Assembly of the Bahá’ís of the U.S., 628 F.3d

837, 848 (7th Cir. 2010) (Sykes, J.). The first category is comprised of parties who

aid and abet the party bound by the injunction in carrying out prohibited acts. See

F.T.C. v. Leshin, 618 F.3d 1221, 1236 (11th Cir. 2010). The second category,

“captured under the general rubric of ‘privity,’” includes “nonparty successors in

interest” and nonparties “otherwise ‘legally identified’ with the enjoined party.”

Nat’l Spiritual Assembly, 628 F.3d at 848–49 (citation omitted); see also Wright &

Miller, supra, at § 2956. This appeal concerns the second category.

We divide our discussion in two parts. We first explain that NorthStar and

Vision are not in privity. We then explain that NorthStar may not be bound by the

injunction under the theory of de facto merger because NorthStar lacked notice of

the injunction.

A. NorthStar and Vision Security Are Not in Privity.

“‘[P]rivity’ denotes a legal conclusion rather than a judgmental process.”

Sw. Airlines Co. v. Tex. Int’l Airlines, Inc., 546 F.2d 84, 95 (5th Cir. 1977)

(Wisdom, J.). It “represents a legal conclusion that the relationship between the

one who is a party on the record and the non-party is sufficiently close” to bind the

7 Case: 16-15351 Date Filed: 04/14/2017 Page: 8 of 14

nonparty to the injunction. Id. (citation omitted). But “[t]he concept of privity . . .

is ultimately bounded by due process.” Nat’l Spiritual Assembly, 628 F.3d at 849.

An injunction may not extend to “persons who act independently and whose rights

have not been adjudged according to law.” Chase Nat’l Bank v. City of Norwalk,

291 U.S. 431, 437 (1934) (citations omitted); see also Wright & Miller, supra,

§ 2956 (explaining that a court may not bind a party that is not “so identified in

interest with those named in the decree that it would be reasonable to conclude that

their rights and interests have been represented and adjudicated in the original

injunction proceeding” (citations omitted)). A similar requirement governs when

res judicata may bind a nonparty to a prior judgment. See Pemco Aeroplex, 383

F.3d at 1286 (explaining that the rule that “a party cannot be bound by a judgment

in a prior suit in which it was neither a party nor in privity with a party” is “part of

our deep-rooted historic tradition that everyone should have his own day in court”

(internal quotation marks and citations omitted)).

The district court determined that NorthStar and Vision Security are not in

privity because there was “insufficient evidence to conclude that NorthStar’s

interests are so intertwined with Vision’s that NorthStar should be bound by the

injunction.” The district court found that NorthStar “was a much larger alarm

company” that “existed for fourteen years before acquiring some of Vision’s

assets” and that “NorthStar’s sales tactics were clearly established prior to, and

8 Case: 16-15351 Date Filed: 04/14/2017 Page: 9 of 14

independent of, NorthStar’s relationship with Vision.” The district court explained

the lack of any evidence that NorthStar had a relationship with Vision before the

agreement or that NorthStar and Vision Security controlled each other. And,

“[m]ost importantly,” the district court found that “NorthStar did not have any

involvement in the underlying litigation, and its interests were not represented

when the injunction was negotiated.”

ADT argues that NorthStar and Vision Security are in privity based on the

decision in Golden State Bottling Co., Inc. v. N.L.R.B., 414 U.S. 168 (1973). ADT

contends that Golden State stands for the proposition that privity “is shown where

the successor buys the predecessor’s business, in circumstances where the

successor may fairly be charged with knowledge of the injunction at the time of the

purchase.” But the facts of this appeal are distinguishable from Golden State.

Golden State held that “a bona fide purchaser, acquiring, with knowledge

that the wrong remains unremedied, [an] employing enterprise which was the locus

of [an] unfair labor practice, may be considered in privity with its predecessor for

purposes of Rule 65(d).” 414 U.S. at 180 (citations omitted). All American

Beverages, Inc. purchased the soft drink bottling and distribution business of

Golden State after the National Labor Relations Board ordered Golden State to

reinstate an employee with back pay. Id. at 170. Later, the Board “found that All

American continued after the acquisition to carry on the business [of Golden State]

9 Case: 16-15351 Date Filed: 04/14/2017 Page: 10 of 14

without interruption or substantial changes in method of operation, employee

complement, or supervisory personnel.” Id. at 171. The Board also found that All

American purchased Golden State with knowledge of the unfair labor practice that

was the subject of the order entered against Golden State. Id. at 173. The trial

examiner discredited the testimony of the manager and the president of Golden

State that they did not inform All American of the litigation before the completion

of the sale and “inferred from the unexplained failure of All American to produce

its negotiators as witnesses that their testimony would not have supported All

American’s disclaimer of knowledge.” Id. at 174 (citations omitted). The Supreme

Court affirmed the determination that All American knew about the unfair labor

practice and held that All American could be considered “in privity” with Golden

State under Rule 65(d). Id. at 173, 180. The Court also explained that its decision

did not “contravene[ ] the policy underlying Rule 65(d)[ ] of not having ‘order(s)

or injunction(s) so broad as to make punishable the conduct of persons who act

independently and whose rights have not been adjudged according to law’”

because “[t]he tie between the offending employer and the bona fide purchaser of

the business, supplied by a . . . finding of a continuing business enterprise,

establishe[d] the requisite relationship of dependence.” Id. at 180 (quoting Regal

Knitwear, 324 U.S. at 13).

10 Case: 16-15351 Date Filed: 04/14/2017 Page: 11 of 14

In contrast with Golden State, the record before us contains no evidence that

NorthStar knew about the injunction before it acquired assets from or hired

employees of Vision Security. Golden State explained that a successor “may” be

considered in privity with a predecessor where it acquires an entity that is the

subject of the injunction “with knowledge that the wrong remains unremedied.” Id.

(emphasis added); see also Brunswick Corp. v. Chrysler Corp., 408 F.2d 335, 337

(7th Cir. 1969) (binding the successor of a business to an injunction that bound its

predecessor where it purchased the predecessor with knowledge of the injunction).

But the district court made no finding that NorthStar knew about the injunction

when it entered the asset purchase agreement with Vision Security, and ADT offers

no evidence that NorthStar knew about the injunction.

ADT argues that Golden State stands for the proposition that “the acquirer’s

knowledge may be inferred where the manager of the predecessor business

continues as its manager and ‘president’ after the sale,” but Golden State does not

hold that knowledge must be inferred when the head of a company bound by an

injunction takes a job with another company. In Golden State, the trier of fact drew

an inference of knowledge after hearing testimony and reviewing the record.

Golden State, 414 U.S. at 173. But the district court drew no such inference about

NorthStar. The chief executive officer of NorthStar never testified that he knew

about the injunction, and Harris never testified that he informed anyone else at

11 Case: 16-15351 Date Filed: 04/14/2017 Page: 12 of 14

NorthStar about the injunction. And the asset purchase agreement did not disclose

the injunction in its schedule of litigation. As a court of appellate review, we

cannot say, based on this record, that NorthStar knew of any wrongdoing by Vision

Security when they entered into their agreement.

B. NorthStar Cannot Be Bound as a Successor in Interest. The district court determined that, although NorthStar and Vision Security

were not in privity, NorthStar could be bound as a successor in interest to Vision

Security under the theory of de facto merger. De facto merger is a state-law

exception to the general rule that a “corporation that purchases or otherwise

acquires the assets of a second corporation does not assume the debts and liabilities

of the second corporation.” Bud Antle, Inc. v. E. Foods, Inc., 758 F.2d 1451, 1456–

57 (11th Cir. 1985). It applies “where a sale is really a merger [of] one corporation

absorbing the other, the absorbed corporation going out of existence and losing its

identity to the absorbing corporation that remains.” Atlas Tool Co., Inc. v.

Commissioner, 614 F.2d 860, 870 (3d Cir. 1980).

Even if Vision Security and NorthStar de facto merged, that NorthStar is a

successor to Vision Security under state law does not mean that NorthStar is bound

by a federal injunction issued against Vision Security. “[T]he question of the extent

to which a federal injunction applies to non-parties is governed by Federal Rule of

Civil Procedure 65(d), not by state law.” Additive Controls & Measurement Sys.,

12 Case: 16-15351 Date Filed: 04/14/2017 Page: 13 of 14

Inc. v. Flowdata, Inc., 154 F.3d 1345, 1355 (Fed. Cir. 1998); accord Hall, 472

F.2d at 266–67. Rule 65 requires that a party have notice of an injunction before

that party may be bound by the injunction. See Rule 65(d)(2) (stating that an

injunction binds only enumerated parties “who receive actual notice” of the

injunction “by personal service or otherwise”); see also Brunswick Corp., 408 F.2d

at 337 (binding a nonparty to a consent decree where the nonparty was in privity

with a party to the consent decree and had knowledge of the consent decree);

Interstate Commerce Comm’n v. Rio Grande Growers Coop., 564 F.2d 848, 849

(9th Cir. 1977) (binding a nonparty to an injunction where the nonparty was a

successor to a party to the injunction and the incorporator of the successor had

knowledge of the injunction); New York v. Operation Rescue Nat’l, 80 F.3d 64,

70–71 (2d Cir. 1996) (binding a nonparty to an injunction where the nonparty was

a successor of a party to the injunction and had notice of the injunction). An order

may not be “so broad as to make punishable the conduct of persons who act

independently and whose rights have not been adjudged according to law.” Regal

Knitwear, 324 U.S. at 13.

The district court made no finding that NorthStar had knowledge of the

injunction against Vision Security, as required by Rule 65(d). The district court

found that the interests of NorthStar were not represented when the injunction was

13 Case: 16-15351 Date Filed: 04/14/2017 Page: 14 of 14

negotiated, and it found that the sales practices at issue in this appeal developed

“prior to, and independent of, NorthStar’s relationship with Vision [Security].”

ADT counters that “successorship liability do[es] not distinguish between

so-called ‘independent’ actions of the successor, as opposed to continued acts by

agents or assets of the predecessor,” but the caselaw cited by ADT addresses

factors that apply in the context of employment discrimination. Criswell v. Delta

Air Lines, Inc., 868 F.2d 1093, 1094 (9th Cir. 1989). And even in that context, one

factor that is “critical to the imposition of successor liability” requires “notice to

the successor employer of its predecessor’s legal obligation.” Id. (quoting

Musikiwamba v. Essi, Inc., 760 F.2d 740, 750 (7th Cir. 1985)).

In the absence of a finding that NorthStar knew about the injunction against

Vision Security, the district court erred when it ruled that NorthStar was bound by

the injunction under a theory of de facto merger. A court cannot bind a party

whose “rights have not been adjudged according to law.” Regal Knitwear, 324

U.S. at 13. The record does not support a ruling that NorthStar is bound by the

injunction.

IV. CONCLUSION

We VACATE the order that NorthStar is bound by the injunction.