Really Good Stuff, LLC v. BAP Investors, L.C.

• Court: Court of Appeals for the Second Circuit
• Decided: June 1, 2020
• Docket: 19-3395
• Status: Unpublished

Opinion

19-3395 Really Good Stuff, LLC v. BAP Investors, L.C. UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING TO A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

At a stated term of the United States Court of Appeals for the Second Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the 1st day of June, two thousand twenty.

PRESENT: JOHN M. WALKER, JR., GERARD E. LYNCH, RICHARD J. SULLIVAN, Circuit Judges. ------------------------------------------------------------------ REALLY GOOD STUFF, LLC,

Plaintiff-Counter-Defendant-Appellee,

v. No. 19-3395-cv

BAP INVESTORS, L.C., CREATIVE KIDS FAR EAST INC.,

Defendants-Counter-Claimants-Appellants,

CREATIVE KIDS, INC.,

Defendant. ------------------------------------------------------------------

FOR APPELLANTS: BRIAN A. COMACK (Douglas A. Miro, on the brief), Amster, Rothstein & Ebenstein LLP, New York, NY.

FOR APPELLEE: EDWARD F. MALUF (Katherine E. Perrelli, Jeremy A. Schachter, on the brief), Seyfarth Shaw LLP, New York, NY.

Appeal from a judgment of the United States District Court for the Southern

District of New York (Louis L. Stanton, J.).

UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,

ADJUDGED, AND DECREED that the judgment of the district court is

AFFIRMED in part and VACATED in part, and the case is REMANDED with

respect to the scope of the preliminary injunction.

Plaintiff-Counter-Defendant-Appellee Really Good Stuff, LLC (“RGS”)

brought suit against Defendants-Counter-Claimants-Appellants BAP Investors,

L.C. (“BAP”) and Creative Kids Far East Inc. (together, “Appellants”), alleging

claims including (1) trademark infringement and unfair competition under the

Lanham Act, 15 U.S.C. § 1114 and § 1125, and New York common law, (2) patent

infringement under 35 U.S.C. § 271(a), and (3) breach of contract under Colorado

law related to the sale and distribution of various science-based educational toys.

2 The district court (Stanton, J.) granted in part and denied in part RGS’s motions

for a preliminary injunction and to dismiss BAP’s counterclaims, and denied

BAP’s cross-motion for a preliminary injunction, determining that RGS and BAP

each owned some of the marks at issue. On appeal, Appellants contend that the

district court abused its discretion in ruling on the cross-motions for preliminary

injunctions and erred in dismissing BAP’s counterclaims. We agree that the

district court abused its discretion only with respect to the scope of the injunction,

which barred Appellants “from selling any unit of any product that RGS sought

to purchase . . . regardless of whether RGS sought to purchase some or all units

from BAP’s remaining inventory of that product.” Special App’x at 34. We

therefore vacate the preliminary injunction solely to the extent that it enjoins the

sale of units (beyond the numbers RGS sought to purchase) of any product lines

from which RGS sought to purchase less than all of the inventory, and remand for

a reexamination of the proper scope of the injunction. We affirm the district court’s

judgment in all other respects. We assume the parties’ familiarity with the

underlying facts, procedural history, and issues on appeal, to which we refer only

as necessary to explain our decision.

3 I. The District Court Properly Granted RGS’s Motion for a Preliminary Injunction, But the Injunction Is Overly Broad

“[A] party seeking a preliminary injunction must establish (1) irreparable

harm and (2) either (a) a likelihood of success on the merits, or (b) sufficiently

serious questions going to the merits of its claims to make them fair ground for

litigation, plus a balance of the hardships tipping decidedly in favor of the moving

party.” Oneida Nation of N.Y. v. Cuomo, 645 F.3d 154, 164 (2d Cir. 2011) (internal

quotation marks omitted). The moving party must also “show that a preliminary

injunction is in the public interest.” Id. “We review the grant of a preliminary

injunction by a district court for abuse of discretion.” Alleyne v. N.Y. State Educ.

Dep’t, 516 F.3d 96, 100 (2d Cir. 2008).

A. RGS Is Likely to Succeed on the Merits of its Claims

Under the Lanham Act and New York common law, a plaintiff

demonstrates a likelihood of success on the merits of a trademark infringement or

unfair competition claim “by showing both [(1)] a legal, exclusive right to the

mark, and [(2)] a likelihood that customers will be confused as to the source of the

infringing product.” 1 Otokoyama Co. v. Wine of Japan Import, Inc., 175 F.3d 266, 270

1 An unfair competition claim under New York common law also requires a showing of bad faith.

4 (2d Cir. 1999); see also Standard & Poor’s Corp. v. Commodity Exch., Inc., 683 F.2d 704,

708 (2d Cir. 1982). Under Colorado law, 2 a plaintiff asserting a claim of breach of

contract must prove “(1) the existence of a contract; (2) performance by the plaintiff

or some justification for nonperformance; (3) failure to perform the contract by the

defendant; and (4) resulting damages to the plaintiff.” W. Distrib. Co. v. Diodosio,

841 P.2d 1053, 1058 (Colo. 1992) (internal citations omitted).

The district court did not abuse its discretion by concluding that RGS is

likely to succeed on the merits of its trademark infringement, unfair competition,

and breach of contract claims. First, RGS is likely to succeed on its trademark

infringement and unfair competition claims because it has a legal, exclusive right

to the marks at issue and there is a likelihood of consumer confusion from BAP’s

continued unauthorized use of the marks.

Appellants primarily contend that BAP, not RGS, owns the “Insta-Snow”

design mark. However, the district court did not err in concluding that RGS owns

the “Insta-Snow” word and design marks based on the language of the Second

Amended Exclusive Licensing Agreement and its Addendum (together, the

See Jeffrey Milstein, Inc. v. Greger, Lawlor, Roth, Inc., 58 F.3d 27, 35 (2d Cir. 1995). 2 The parties agree that Colorado contract law governs the parties’ contract claims.

5 “License Agreement”) and Request for Consent to Assignment Letter (the

“Consent Letter”). Having carefully reviewed both documents, we agree with the

district court that nothing in the Consent Letter altered the definition of Steve

Spangler Inc. (“SSI”) Trademarks in the License Agreement or otherwise

transferred ownership of the “Insta-Snow” design mark to BAP. The district

court’s determination was based on the plain language of the relevant contracts

between the parties and appropriately construed those documents.

Nor did the district court abuse its discretion when it concluded that BAP’s

continued unauthorized use of the marks in question was likely to cause consumer

confusion. Where an ex-licensee continues to use a mark after its license expires,

a strong likelihood of consumer confusion arises. See Church of Scientology Int’l v.

Elmira Mission of the Church of Scientology, 794 F.2d 38, 44 (2d Cir. 1986). Therefore,

because BAP is a previous licensee that continued to use RGS’s marks after the

expiration of the License Agreement, the district court properly concluded that

there was a likelihood of consumer confusion for the identical marks – “Insta-

Snow,” “Steve Spangler Science,” “Sick Science,” “Energy Stick,” and “Geyser

Tube.”

If marks are not exactly the same, however, such as RGS’s “Insta-Snow”

6 mark and BAP’s “Instant Amazing Snow” mark, the determination of likelihood

of confusion is based on the multifactor balancing test established by Polaroid Corp.

v. Polarad Electronics Corp., 287 F.2d 492 (2d Cir. 1961). In Polaroid, we explained

that:

Where the products are different, the prior owner’s chance of success is a function of many variables: the strength of his mark, the degree of similarity between the two marks, the proximity of the products, the likelihood that the prior owner will bridge the gap, actual confusion, and the reciprocal of defendant’s good faith in adopting its own mark, the quality of defendant’s product, and the sophistication of the buyers.

Id. at 495. Here, the district court determined that these factors, on balance,

weighed in favor of finding a likelihood of consumer confusion between the

“Insta-Snow” and “Instant Amazing Snow” marks. Once again, this conclusion

was not an abuse of discretion. The district court identified the correct law,

carefully applied it to the facts, and reasonably balanced the relevant factors to

find a likelihood of confusion.

Second, the district court did not abuse its discretion in determining that

RGS is likely to succeed on its breach of contract claims because the License

Agreement is a valid contract, RGS performed under it, BAP breached it by

refusing to sell to RGS any fewer than all of the remaining copies of the SSI

7 products at issue that RGS sought to purchase, and RGS was harmed by BAP’s

breach. Appellants’ assertion that BAP did not breach the License Agreement

because the plain language required RGS to purchase all or none of the remaining

copies of the SSI products in BAP’s inventory, but not some number in between,

is unpersuasive. The district court began with the text of the License Agreement,

reasonably concluded that it was ambiguous, and therefore turned to the parties’

course of conduct to clarify it, as allowed under Colorado law. The district court

noted that on four occasions when an SSI product was discontinued during the

term of the License Agreement, SSI exercised its right and purchased some units of

the discontinued product remaining in BAP’s inventory, but not all of them. The

district court therefore reasonably concluded that RGS had established a

likelihood of success on the merits of its breach of contract claims because BAP

breached the contract by refusing to sell the products at issue to RGS.

B. RGS Will Be Irreparably Harmed in the Absence of a Preliminary Injunction

Irreparable harm is “harm that (a) occurs to the parties’ legal interests and

(b) cannot be remedied after a final adjudication, whether by damages or a

permanent injunction.” Salinger v. Colting, 607 F.3d 68, 81 (2d Cir. 2010). The loss

of reputation and goodwill constitutes irreparable harm. See Register.com, Inc. v.

8 Verio, Inc., 356 F.3d 393, 404 (2d Cir. 2004). As we have explained, “[w]hen in the

licensing context unlawful use and consumer confusion have been demonstrated,

a finding of irreparable harm is automatic.” Church of Scientology, 794 F.2d at 42.

The district court found that “SSI invested time and effort into developing

its products and marks,” and that “[a]s the current owner of those trademarks,

RGS will suffer the irreparable harm of losing control over the reputation and

goodwill that Steve Spangler Science products have gained if BAP is not enjoined

from using those marks, or confusingly similar imitations of the marks, when

selling and advertising products.” Special App’x at 20–21. It further determined

that the “loss of goodwill is not calculable and cannot be remedied by royalty

payments or other monetary damages.” Id. at 21. These findings are fully

supported by the proper case law, and the district court did not abuse its discretion

in finding that BAP’s unauthorized use of the marks at issue will cause irreparable

harm.

C. The Balance of the Hardships and the Public Interest Weigh in Favor of RGS

The district court first concluded that RGS’s hardships outweighed those of

Appellants. The court explained that whereas RGS faced the continued

irreparable harm of loss of goodwill and control over its reputation absent

9 injunctive relief, Appellants would merely be prevented from using RGS’s marks

and confusingly similar imitations of those marks and from selling the SSI

products that RGS sought to purchase from BAP at the expiration of the License

Agreement. Id. at 22. The court also determined that Appellants’ businesses

would not be severely impacted because they could still sell other products that

did not bear the infringing marks and SSI products that RGS did not offer to

purchase at the expiration of the License Agreement. Id. at 22–23. The district

court’s determination that RGS would suffer the greater hardship is a

quintessential exercise of discretion, and BAP does not establish that the court

abused that discretion.

The district court also found that the public interest favored RGS because

“the public has an interest in not being deceived – in being assured that the mark

it associates with a product is not attached to goods of unknown origin and

quality.” Id. at 23 (internal quotation marks omitted). BAP proffers no persuasive

reasoning that this conclusion was an abuse of discretion.

D. The Preliminary Injunction’s Scope is Overbroad

Appellants further contend that the district court abused its discretion when

it (1) prohibited BAP from selling any of its remaining inventory in specified

10 product lines that RGS sought to purchase; and (2) “inexplicably enjoined BAP

from using the ‘Energy Stick’ and ‘Geyser Tube’ design marks, even though it

found that BAP owns these designs.” Appellants’ Br. at 46.

We agree with BAP that the district court’s injunction – which prohibited

BAP from selling any of its remaining inventory from 22 different SSI product lines

– is overly broad. 3 Upon expiration of the License Agreement, BAP had the right

to sell to third parties the units of leftover SSI products that RGS did not seek to

purchase. RGS sought to purchase the entire remaining inventory for six different

SSI product lines; it also requested a smaller portion of the remaining inventory

for 16 other SSI product lines. Though the district court properly enjoined BAP

from selling any units from the former category – after all, RGS was entitled to the

entire inventory of such products – it abused its discretion by enjoining BAP from

selling any units from the latter group of products, since the License Agreement

provided that BAP would be permitted to sell the units that RGS did not elect to

purchase. Accordingly, we vacate the preliminary injunction solely to the extent

that it enjoins the sale of units (beyond the numbers RGS sought to purchase) of

3We note that, to the extent that any of these product lines contained only products that bore the “Super Slime” mark and did not contain products bearing marks owned by RGS, the district court did not enjoin BAP from selling these product lines.

11 any product lines from which RGS sought to purchase less than all of the

inventory, and remand to the district court for a reexamination of the particular

product lines covered by the injunction.

Appellants also insist that the district court issued a self-contradictory order

when it determined, on the one hand, that BAP owns the “Energy Stick” and

“Geyser Tube” design marks, only to then enjoin BAP from using those very

marks. We reject this characterization of the district court’s decision. Instead, the

district court found that BAP “owns all rights pertaining to the packaging of the

Energy Stick and Geyser Tube products,” which is not inconsistent with the court’s

conclusion that RGS retained ownership of those products’ word and design

marks. Special App’x at 26 (emphasis added). The language of the Consent Letter

explicitly provides that BAP exclusively owns all rights pertaining to packaging

“[o]ther than the SSI IP,” App’x at 337, and the district court correctly determined

that the SSI IP included both word and design marks.

II. The District Court Did Not Abuse its Discretion by Denying BAP’s Cross-Motion for a Preliminary Injunction

BAP maintains that the district court’s finding that RGS owns the “Insta-

Snow” design mark was error, and therefore that the district court abused its

discretion by relying on that finding to deny BAP’s cross-motion for a preliminary

12 injunction premised on its purported ownership of that design mark. As

explained above, the district court did not abuse its discretion in determining that

RGS owns the “Insta-Snow” design mark. Therefore, BAP is unable to

demonstrate a likelihood of success on the merits of its unfair competition and

breach of contract counterclaims with respect to that mark. Accordingly, the

district court did not abuse its discretion in denying BAP’s cross-motion for a

preliminary injunction.

III. The District Court Did Not Err in Dismissing BAP’s Counterclaims

Finally, Appellants assert that the district court erred in dismissing BAP’s

counterclaims for unfair competition (Counts I and V) and breach of contract

(Count XIII) based on the “Insta-Snow” design mark, and its counterclaim for

cancellation of RGS’s “Insta-Snow” word mark registration (U.S. Registration No.

2,928,946) on the basis of genericness (Count XV). “We review de novo a district

court’s dismissal of a complaint pursuant to Rule 12(b)(6), construing the

complaint liberally, accepting all factual allegations in the complaint as true, and

drawing all reasonable inferences in the plaintiff’s favor.” Chambers v. Time

Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002).

BAP’s counterclaims for unfair competition and breach of contract rely

13 solely on BAP’s purported ownership of the “Insta-Snow” design mark. But as

explained above, the License Agreement clearly provides that RGS owns “any

design incorporating” the “Insta-Snow” word mark, and there is nothing in the

Consent Letter that altered that arrangement. See App’x at 323. Therefore, because

BAP cannot establish that it owns the “Insta-Snow” design mark – a necessary

element of its unfair competition and breach of contract counterclaims – the district

court properly dismissed those claims.

As for BAP’s registration cancellation counterclaim, we agree with the

district court that the “Insta-Snow” word mark is not generic. Because “Insta-

Snow” is registered with the U.S. Patent and Trademark Office, BAP bears the

burden of overcoming the presumption that the mark is not generic. See Reese

Publ’g Co. v. Hampton Int’l Commc’ns, Inc., 620 F.2d 7, 11 (2d Cir. 1980). “Generic

marks are those consisting of words identifying the relevant category of goods or

services.” Star Indus., Inc. v. Bacardi & Co., Ltd., 412 F.3d 373, 385 (2d Cir. 2005).

BAP relies on evidence that the phrase “Instant Snow” has been used by “at least

nine” third-party “fake plastic snow toy products” to prove that “Insta-Snow” is a

generic word mark. Appellants’ Br. at 52. But even viewing this evidence in the

light most favorable to Appellants, we fail to see how competitors’ use of a

14 different term proves anything about the genericness of the distinct phrase “Insta-

Snow.” BAP fails to satisfy its burden, and we therefore conclude that the district

court properly dismissed BAP’s cancellation claim.

* * *

We have considered Appellants’ remaining arguments and conclude that

they are without merit. For the foregoing reasons, the judgment of the district

court is AFFIRMED in part and VACATED in part, and the case is REMANDED

for further proceedings consistent with this order in connection with the scope of

the injunction.

FOR THE COURT: Catherine O’Hagan Wolfe, Clerk of Court