Preliminary Injunction Denied : Manufacturer Must Have a Perpetual License to Continue, Court Held

Plaintiffs and counterclaim-defendants Mrs. Fields Famous Brands, LLC (“Famous Brands”) and Mrs. Fields Franchising, LLC (“Fields Franchising”) appealed from the district court’s order granting a preliminary injunction in favour of defendant and counterclaim-plaintiff MFGPC Inc. (“MFGPC”). Famous Brands is a limited liability company organized under the laws of the State of Delaware with its headquarters of business in Broomfield, Colorado. The sole member of Famous Brands is Mrs. Fields Original Cookies, Inc. (MFOC), a Delaware corporation with its headquarters of business in Salt Lake City, Utah. Fields Franchising, LLC is a limited liability company organized under the laws of the State of Delaware with its headquarters of business in Salt Lake City, Utah. The sole member of Fields Franchising is Famous Brands. Defendant MFGPC is a California corporation with its headquarters of business in Mission Viejo, California. The Tenth Circuit (“Appellate Court”) reversed the lower court’s order and held that the district court’s “perpetual license” finding was wrong. (Mrs. Fields Franchising, LLC v. MFGPC, 941 F.3d 1221 (10th Cir. 2019))

MFGPC, a popcorn manufacturer, had an exclusive licensing contract to sell popcorn under the trade name of “Mrs. Fields brand”. Mrs. Fields received running royalties as well as guaranteed royalties from MFCPC. In 2014, Mrs. Fields ended the licensing agreement for failure to pay the guaranteed royalties. MFGPC opposed the termination, holding that they owed no outstanding royalties. Mrs. Fields sued for a declaratory judgment that the license agreement was sufficiently terminated and MFGPC counterclaimed for breach of contract.

In 2015 and 2016, the district court “granted a motion to dismiss MFGPC’s claims and allowed Fields franchising to voluntarily dismiss its claim for a declaratory judgment.” The district court order granted Fields Franchising’s motion for judgment and award of attorney fees. In 2018, the Tenth Circuit issued an order and judgment (A) affirming Fields Franchising’s voluntary dismissal of its claim for declaratory judgment, (B) affirming the dismissal of MFGPC’s account-stated claim “because MFGPC failed to plead an essential element,” and (C) reversing the dismissal of MFGPC’s breach of contract claim “because [MFGPC’s] allegations in the complaint stated a plausible basis for relief.” On remand, the district court entered for a partial summary judgment in favour of MFGPC on its counterclaim for breach of contract, after finding that MFGPC had paid the guaranteed royalty in full. MFGPC then moved for a preliminary injunction, arguing that there was a substantial likelihood that it would prevail at trial on the remedy of specific performance. The district court granted leave to MFGPC’s motion and ordered Mrs. Fields to comply with the terms of the licensing contract it had previously entered into with MFGPC. Mrs. Fields appealed to this decision at the appellate court.

The district court’s held that MFGPC’s permit to use the trademark was effectively perpetual, and thus finding effective breach of contract. The contract renewal clause provided that as long as MFGPC was not in material default, the agreement would automatically renew for progressive five-year terms until either party ends the agreement upon twenty days prior written notice. The contract termination clause illustrated a set of six specific circumstances under which Mrs. Fields and MFGPC could some way or another end the agreement (as opposed to preventing it from renewing). Perusing the arrangement, in general, implied that either party could keep the agreement from renewing at the end of each five years and could terminate it at other times if specific circumstances occurred.

Further, the appellate court noted that the district court was incorrect in finding that the agreement afforded MFGPC a perpetual license whichaffected its examination of MFGPC’s likelihood of success on the merits and the existence of irreparable harm. The district court held it would be difficult to accurately calculate the damages to MFGPC of being permanently deprived of the right to use the Mrs. Fields trademark for popcorn. But because Mrs. Fields could prevent the contract from automatically renewing, MFGPC’s damages would be limited to a period of approximately two-and-a-half years (i.e., the remainder of the third five-year term of the contract). Thusly, the appellate court held that the district court failed in verifying that MFGPC set up a strong likelihood that it will influence its case for specific performance.

Concerning the irreparable harm, the district court concluded that MFGPC would suffer irreparable harm if an injunction is not granted in their favour, because it would be extremely difficult to calculate damages for the future and permanent deprivation of MFGPC’s right to exclusive use of the trademark. The appellate court held that MFGPC would only suffer a “permanent deprivation” if the contract afforded it a perpetual license, which didn’t happen.

Additionally, the district court also held that MFGPC’s prior profitability was not a good forecast of its future profitability because the great recession and the warehouse fire reduced its profits before the violation of the agreement. However, the appellate court held that the parties operated under the terms of the agreement for nearly twelve years. The years before or after the recession could serve as a reasonable proxy to determine MFGPC’s losses. The warehouse fire did not take place until over ten years into the parties’ continuing business relationship and approximately three-and-a-half years after the end of the recession. Leaving the period of great recession and the time after the warehouse fire, approximately eight years and three months’ worth of sales data of MFGPC’s products should be considered for purposes of calculating damages.

The Appellate court, however, held that, since the agreement did not give a popcorn manufacturer a perpetual license to sell popcorn under the Mrs. Fields trademark, the manufacturer should not have been granted a preliminary injunction ordering Mrs. Fields to comply with the contract terms.Finally, the appellate court stated that the district court’s “perpetual license” finding was wrong since the license agreement was renewed every five years and allowed any of the parties to stop renewing at the end of each term. It also allowed either party to terminate under other circumstances. The appellate court reversed the district court’s grant of a preliminary injunction in favour of MFGPC.

Author: Saransh Chaturvedi (Advocate, LLM (IIT Kharagpur)-an associate at IIPRD,  in case of any queries please contact/write back to us via email [email protected]