International Cosmetics Exchange, Inc. v. Gapardis Health & Beauty, Inc.

                                                         [PUBLISH]


           IN THE UNITED STATES COURT OF APPEALS

                 FOR THE ELEVENTH CIRCUIT                FILED
                                               U.S. COURT OF APPEALS
                       _______________           ELEVENTH CIRCUIT
                                                     August 26, 2002
                                                  THOMAS K. KAHN
                         No. 01-16495                   CLERK
                       _______________

                D. C. Docket No. 00-02280 CV-PCH


INTERNATIONAL COSMETICS EXCHANGE, INC.,
d.b.a. I.C.E. MARKETING CORP.,
a New York Corporation,

                                  Plaintiff-Counter-
                                  Defendant-Appellant-
                                  Cross-Appellee,

GABY MCHEILEH,
AILATAN INVESTMENTS, INC.,

                                  Counter-Defendants-
                                  Appellants-Cross-
                                  Appellees,
versus

GAPARDIS HEALTH & BEAUTY, INC.,
XAVIER TANCOGNE, et al.,

                                  Defendants-Counter-
                                  Claimants-Appellees-
                                  Cross-Appellants.
                           ______________________________

                      Appeals from the United States District Court
                          for the Southern District of Florida
                         ______________________________
                                   (August 26, 2002)

Before BIRCH and WILSON, Circuit Judges, and DOWD*, District Judge.

BIRCH, Circuit Judge:

       This appeal arises out of a contract dispute. I.C.E. Marketing Corp. (“ICE”),

Gabby McHeileh and Ailatan Investments, Inc. (“McHeileh/Ailatan”) appeal a

preliminary injunction in favor of Gapardis Health & Beauty, Inc. (“Gapardis”)

and its principals, Tanios Saba, Abdallah Ghandour, Michel Farah, and Continental

Laboratories Medica (“CLM”) and its principal Xavier Tancogne. The district

court1 found that the contract between ICE and CLM (“Agreement”) was

enforceable and that both parties breached the Agreement, although the first breach

was by Tacogne and CLM. Furthermore, it found that CLM was entitled to

       *
          Honorable David D. Dowd, Jr., U.S. District Judge for the Northern District of Ohio,
sitting by designation.
       1
         The parties consented to the jurisdiction of a magistrate judge pursuant to 28 U.S.C.
636(c)(1). The fact that the order was issued by a magistrate does not affect its appealability.
See Ty, Inc. v. The Jones Group, Inc., 237 F.3d 891 (7th Cir. 2001) (reviewing magistrate’s
interlocutory order granting preliminary injunction without discussing appellate jurisdiction);
Doe v. Natl’ Bd. of Med. Exam’rs, 199 F.3d 146 (3rd Cir. 1999) (reviewing pursuant to 28
U.S.C. §§ 636(c) and 1292(a)(1) the magistrate’s interlocutory order issuing preliminary
injunction); Sherri A.D. v. Kirby, 975 F.2d 193 (5th Cir. 1992) (holding it had jurisdiction to
review a magistrate’s order issued pursuant to § 636(c) as an order with the practical effect of
denying an injunction under § 1292).

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injunctive relief because when ICE began selling non-CLM “FAIR & WHITE”

product, ICE caused confusion regarding that trademark, and subsequent sales by

McHeileh/Ailatan added to the confusion. We AFFIRM.



                               I. BACKGROUND

      CLM, a French corporation, manufacturers and sells ethnic cosmetic

products in France and Europe under its trademark “FAIR & WHITE.” CLM’s

President, Xavier Tancogne, is a chemist with a doctorate in pharmacy and created

the formula for the “FAIR & WHITE” products.

      ICE, a United States company founded by Michael Aini, is engaged in the

purchase, importation, sale and distribution of ethnic cosmetic products. Aini is

also the owner of four “Home Boys” stores in Brooklyn, New York, which are

discount stores selling health and beauty aids to the African-American community.

While in France, Michael’s brother Jacob (“Jack”) became interested in “FAIR &

WHITE.” In 1998, Jack purchased small quantities of “FAIR & WHITE” products

from CLM to test United States market acceptance. These products were sold in

the “Home Boys” stores and were well received.

      Thereafter, ICE and CLM entered into contract negotiations to continue “to

develop, market and promote the “FAIR & WHITE” brand name in the United


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States.” R1-31-44. The Agreement stated that CLM was the owner of the “FAIR

& WHITE” trademark in France and Europe, and that ICE was “the owner and

holder of all rights, title and interest in the mark ‘FAIR & WHITE’ in the United

States, Canada and Caribbean Islands.” Id. In return, the Agreement obligated

ICE to sell $250,000 for the first year and use its best efforts to increase sales by

20 percent per year over the next five years. However, there were no provisions as

to purchase or manufacture of the products. Another term of the Agreement was

that it would be governed by New York law.

      In the fall of 1999, ICE purchased approximately $125,000 of “FAIR &

WHITE” product from CLM. ICE applied to register the mark with the United

States Patent and Trademark Office in early 2000.

      Meanwhile, Michel Farah, owner of Gapardis, a distributor of ethnic

products in Miami, became interested in “FAIR & WHITE” products and

contacted Tancogne. On 13 April 2000, Farah and his associate Tanios Saba

entered into an agreement by which Gapardis became the exclusive distributor in

the United States for CLM’s cosmetics bearing the “FAIR & WHITE” mark.

      At some point, Tancogne became aware that counterfeit “FAIR & WHITE”

goods were being sold in the United States. He believed that ICE was responsible

and stopped providing ICE with product in April of 2000. ICE then took


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immediate steps to procure substitute “FAIR & WHITE” products from a Spanish

manufacturer, Jabones Pardo. ICE provided Pardo with samples of “FAIR &

WHITE” products and the formula of its active ingredients. Thereafter, ICE

distributed non-CLM manufactured goods bearing the “FAIR & WHITE” mark

and the associated trade names in the United States.

      Gaby McHeileh with Ailatan Investments, Inc. was in business with Michel

Farah. When McHeileh was excluded from the agreement between CLM and

Gapardis, he began to receive and sell product from other sources, which were

believed to be counterfeit “FAIR & WHITE” products. As a result of undercover

purchases in several Florida stores, it was established that McHeileh/Ailatan was

selling counterfeit “FAIR & WHITE” product. The “FAIR & WHITE” products

were identified as counterfeit because they contained a small visible “pipette”

inside the bottle, which is not present on the CLM manufactured product. See

generally R3-258.

      ICE filed an action under the Lanham Act, 15 U.S.C. § 1125, against

Gapardis and its principals, Saba, Ghandour, Farah, and CLM and its principal

Tancogne asserting inter alia, trademark infringement and breach of contract. ICE

sought a preliminary injunction for infringement of its United States trademark

rights to the “FAIR & WHITE” mark.


                                         5
      Gapardis, CLM, and Tancogne counterclaimed against ICE and added

counter-defendants McHeileh/Ailitan. Also alleging Lanham Act violations and

related state law claims, they moved for a preliminary injunction to prevent ICE

and McHeileh/Ailitan from importing or selling counterfeit CLM goods under the

“FAIR & WHITE” mark and its associated trade names.

      The district court found that the ICE/CLM Agreement was enforceable and,

according to the Agreement, ICE was owner and holder of all rights in the “FAIR

& WHITE” mark in the United States. It concluded that Tancogne breached the

Agreement when CLM, without notifying ICE, obtained a more favorable

agreement with Gapardis, and when CLM failed to supply ICE with “FAIR &

WHITE” products. However, ICE could not show irreparable harm to substantiate

a preliminary injunction because ICE had breached the Agreement by selling

counterfeit “FAIR & WHITE” products. The district court determined that the

“FAIR & WHITE” mark reverted back to CLM. Further, ICE and

McHeileh/Ailitan were enjoined from using the “FAIR & WHITE” mark and

associated trade name, and from importing and distributing “FAIR & WHITE”

products into the United States.




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                                  II. DISCUSSION

      First, we affirm the ruling that the ICE/CLM Agreement was enforceable.

CLM argues that the Agreement was an invalid “‘assignment in gross,’ which at

minimum assigned the mark to ICE only in conjunction with the sale of genuine

CLM-manufactured products.” Appellee Brief at 25. CLM maintains that ICE

was only interested in owning the mark and did not purchase its formula or any

assets. However, it is well-settled law that “the transfer of a trademark or trade

name without the attendant good-will of the business which it represents is, in

general, an invalid, ‘in gross’ transfer of rights.” Berni v. Int’l Gourmet Rest. of

Am., 838 F.2d 642, 646 (2d Cir. 1988). Although an assignment must be

accompanied by the attendant good-will, there need not be any transfer of tangible

assets. See Defiance Button Mach. Co. v. C & C Metal Prod. Corp., 759 F.2d

1053, 1059-60 (2d Cir. 1985). “[A]n assignment of United States trademark rights

by a foreign manufacturer to its United States distributor ordinarily will not be

regarded as an assignment in gross, even if the transfer occurs after the designation

has acquired trademark significance in this country.” J. Thomas McCarthy,

McCarthy on Trademarks and Unfair Competition § 29:8 (4th ed. 2002) (citation

omitted).

      As the district court correctly notes, the Agreement clearly recognizes the


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prior efforts of ICE with respect to “FAIR & WHITE” product:

             I.C.E. has developed, distributed and marketed the
             “FAIR & WHITE” brand name in connection with the
             Products in the United States . . . and as a result of
             I.C.E.’s efforts, the “FAIR & WHITE” brand name has
             achieved wide-spread popularity, recognition and
             awareness, and has become known to retailers and
             consumers in the United States . . . .

R1-31-44. Thus, at the time the Agreement was created, the assignment was not in

gross because it continued the association of the “FAIR & WHITE” trademark

with the very goods which created its reputation. Thus, we agree with the district

court that the Agreement was enforceable. Having established that the Agreement

was enforceable, we analyze the appropriateness of injunctive relief.

      “The grant or denial of a preliminary injunction is within the sound

discretion of the district court and will not be disturbed absent a clear abuse of

discretion.” Palmer v. Braun, 287 F.3d 1325, 1329 (11th Cir. 2002). A party

seeking a preliminary injunction for trademark infringement must establish four

elements: “(1) a substantial likelihood of success on the merits; (2) a substantial

threat of irreparable injury if the injunction were not granted; (3) that the

threatened injury to plaintiffs outweighs the harm an injunction may cause the

defendant; and (4) that granting the injunction would not disserve the public

interest.” Levi Strauss & Co. v. Sunrise Int’l Trading Co., 51 F.3d 982, 985 (11th


                                           8
Cir. 1995) (quotation omitted).

A.    ICE’s Entitlement to Injunctive Relief

      The district court found that ICE established a substantial likelihood of

success as to its claim against CLM for breach of contract. The essential elements

of an action for breach of contract under New York law are: (1) formation of a

contract between the parties; (2) performance by ICE; (3) non-performance by

Tacogne and CLM; and (4) resulting damages to ICE. See Terwilliger v.

Terwilliger, 206 F.3d 240, 245-46 (2d Cir. 2000) (quotation omitted). The

evidence supports the finding that there was an Agreement between CLM and ICE,

and that ICE made an initial order for approximately $125,000 of product in

August of 1999. CLM and ICE agreed that ICE would use its best efforts to sell

$250,000 of “FAIR & WHITE” product within the first year of the Agreement and

20 percent more within the next five years. CLM failed to supply ICE with “FAIR

& WHITE” product, and therefore, breached the Agreement. In addition, the

district court concluded that CLM’s contract with Gapardis further violated the

Agreement, which granted ICE exclusive distribution rights in the United States as

well as exclusive ownership of the “FAIR & WHITE” mark.

      Even though ICE established a likelihood of success as to its claim for

breach, the district court found that ICE could not show irreparable harm to


                                         9
warrant injunctive relief. The district court concluded that ICE also breached the

Agreement when it began to manufacture and sell counterfeit “FAIR & WHITE”

product. Moreover, by virtue of both parties’ breach of the Agreement, the district

court found that the ICE no longer had exclusive distribution rights in the United

States and that the “FAIR & WHITE” mark reverted back to CLM. Reasoning that

ICE could be compensated for the distribution period when it was the exclusive

distributor of “FAIR & WHITE” products in the United States, the court

determined that an injunction was not warranted.

      ICE maintains that it exercised the ordinary rights of a trademark owner and

of a buyer of goods when it procured substitute goods as “cover.” It relies on New

York Uniform Commercial Code § 2-712, which states that a non-breaching party

to a contract is entitled to obtain substitute goods. N.Y. U.C.C. § 2-712

(McKinney 2002). However, § 2-712 defines “cover” as requiring “good faith”

and a reasonable purchase of goods. Id. There was no evidence that ICE

communicated to Tancogne that it was going to secure “FAIR & WHITE” product

from a different source or that CLM was in breach of the Agreement for refusing to

ship the product. Moreover, the district court found that “[w]hen read in

conjunction with paragraph C, it is clear that the ‘Products’ referred to in the

[Agreement] are those of CLM, especially when the concern regarding counterfeit


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products is mentioned in paragraph C.”2 R3-247-28. Therefore, selling non-CLM

manufactured “FAIR & WHITE” product went beyond the scope of the

Agreement. If CLM breached the Agreement when it stopped selling “FAIR &

WHITE” product to ICE, ICE’s remedy was to sue for breach of contract, not to

palm off a different product as the product it could no longer obtain. See Green

River Bottling Co. v. Green River Corp., 997 F.2d 359, 362 (7th Cir. 1993)

(“[u]nauthorized use of a trademark is an infringement, and we have held that the

infringement of a trademark is not a proper self-help remedy for a breach of a

contract.”).

      Additionally, ICE maintains that there was no reversion clause in the

Agreement and that it is still the owner of the “FAIR & WHITE” mark in the

United States. “The . . . agreement controls the rights of the respective parties in

the use of the [mark].” Affiliated Hosp. Prods., Inc. v. Merdel Game Mfg. Co.,

513 F.2d 1183, 1186 (2d Cir. 1975). The apparent intent of the contract is to



      2
       Paragraph C of the Agreement states:
             Both I.C.E. and C.L.M. desire to enter this Agreement in the
             furtherance of their mutual objective of continuing to develop,
             market and promote the “FAIR & WHITE” brand name in the
             United States, Canada, the Caribbean Islands, and Europe, and in
             furtherance of their mutual desire to ensure the proper and swift
             policing, enforcement and seizure of counterfeit products bearing
             the “FAIR & WHITE” brand name in the United States.
      R1-31-44.

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further CLM and ICE’s “mutual objective of continuing to develop, market and

promote the “FAIR & WHITE” brand name in the United States . . . and in

furtherance of their mutual desire to ensure the proper and swift policing,

enforcement and seizure of counterfeit products bearing the “FAIR & WHITE”

brand name in the United States.” R1-33-44. Finding that ICE maintained

ownership of the trademark after the Agreement was terminated would tend to

undermine the Agreement and the operation of the rights sought to be protected by

trademark law generally. “Use of the mark by the assignee in connection with a

different goodwill and different product would result in a fraud on the purchasing

public . . . .” Marshak v. Green, 746 F.2d 927, 929 (2d Cir. 1984). Since ICE had

no right to continue using the “FAIR & WHITE” mark after losing access to the

trademarked product, it also had no right to prevent CLM from using the trademark

on the grounds that by doing so would confuse consumers. Any confusion is due

to ICE’s palming off another product as “FAIR & WHITE.”3 Consequently,

ownership rights to the “FAIR & WHITE” mark in the United States reverted back



       3
          ICE maintains that CLM’s ownership of the “FAIR & WHITE” mark in Europe is
irrelevant when considering likelihood of confusion. The territoriality doctrine states that a
trademark has a separate existence in each sovereign territory in which it is registered or legally
recognized as a mark. E. Remy Martin & Co., S.A. v. Shaw-Ross Int’l Imports, Inc., 756 F.2d
1525, 1531 (11th Cir. 1985)(holding that the district court commits error to the extent that it
relies on use, goodwill, or the rights in a foreign country). Territoriality is not an issue since the
rights to the “FAIR & WHITE” mark in the United States reverted back to CLM.

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to CLM. Therefore, ICE is not entitled to injunctive relief because it has no longer

has a property interest in the trademark.

B.    CLM’s Entitlement to Injunctive Relief

      The district court found that when ICE began selling counterfeit product, it

caused a likelihood of confusion regarding the “FAIR & WHITE” mark and that

subsequent sales by McHeileh/Ailatan added to the confusion. “While the

trademark laws could not provide a basis for relief unless there was a breach of

contract,” CLM established that ICE breached the Agreement and thus trademark

law is applicable to claims of unauthorized use of the mark. Sterling Drug Inc. v.

Bayer AG, 792 F. Supp. 1357, 1372 n.12 (S.D.N.Y. 1992). In order to succeed on

the merits of a trademark infringement claim, CLM must show that the ICE used

the mark in commerce without its consent and "that the unauthorized use was

likely to deceive, cause confusion, or result in mistake." McDonald's Corp. v.

Robertson, 147 F.3d 1301, 1307 (11th Cir. 1998). There can be no dispute that the

parties’ concurrent use of the “FAIR & WHITE” mark poses a substantial

likelihood of confusion among consumers. See Dial-A-Mattress Operating Corp.

v. Mattress Madness, Inc., 841 F. Supp. 1339, 1346 (E.D.N.Y. 1994) (confusion

inevitable since “parties are selling same products in the same channels of

commerce under the guise of the identical Dial-A-Mattress mark”).


                                            13
      The district court further decided that CLM demonstrated a substantial threat

of irreparable injury if injunctive relief was not granted. It is clear from the

evidence that ICE and McHeileh/Ailatan were selling counterfeit “FAIR &

WHITE” product in the United States. Furthermore, as stated by the district court,

“the threatened injury to CLM, by confusion in the market regarding the F&W

Mark, outweighs any harm to ICE in preventing it from selling product supplied by

third parties, particularly in light of the Court’s finding that ICE is no longer the

exclusive distributor.” R3-247-34.

      AFFIRMED.




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