Arch Personal Care Products, L.P. v. Malmstrom

Opinions of the United
2003 Decisions States Court of Appeals
for the Third Circuit
12-24-2003
Arch Personal Care v. Malmstrom
Precedential or Non-Precedential: Non-Precedential
Docket No. 02-3333
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
No. 02-3333
ARCH PERSONAL CARE PRODUCTS, L.P.
v.
IVAR W. MALMSTROM, JR.;
BROOKS INDUSTRIES, INC.,
Appellants
On Appeal from the United States District Court
for the District of New Jersey
(D.C. Civil No. 02-cv-03148)
District Judge: Hon. Joel A. Pisano
Submitted Under Third Circuit LAR 34.1(a)
September 5, 2003
Before: SLOVITER, NYGAARD, and ROTH, Circuit Judges
(Filed December 24, 2003 )
OPINION OF THE COURT
SLOVITER, Circuit Judge.
I.
Defendants Ivar W. Malmstrom and Brooks Industries, Inc. appeal from the order
of the District Court granting the request of plaintiff Arch Personal Care Products, L.P.
(“Arch”) for a preliminary injunction restricting Malmstrom from, “within the United
States, engaging in any activity or business or establishing any new businesses that are
substantially in competition with Arch.” Malmstrom argues that the District Court
abused its discretion because Arch failed to show a likelihood of success on the merits or
an actual threat of irreparable harm, and because the preliminary injunction is overbroad,
ambiguous, and based on conflicting affidavits. Finally, Malmstrom argues that the
District Court lacks subject matter jurisdiction because Arch’s Lanham Act claim is
frivolous and unsubstantiated. We will affirm.
II.
The parties are familiar with the facts and we refer to them only as necessary for
our discussion. Brooks, a company that manufactured cosmetic ingredients which it then
sold to producers of finished cosmetics and personal care products, entered into an
“Asset Purchase Agreement” signed by Malmstrom, the former president and a principal
shareholder in Brooks and the other shareholder, to transfer to Arch the majority of
Brooks’ assets, including tangibles (machinery, equipment, etc.), as well as intangibles
(“all patents, patent applications, trademarks, applications, service marks, trademark and
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service mark applications and registrations, copyrights and copyright registrations, . . .
logos, trademarks, product names, trade names, software, computer programs . . . and
goodwill”) for $37 million. A significant percentage of the purchase price went to
Malmstrom himself. The asset purchase agreement between Arch and Brooks also
included a consultant agreement between Malmstrom and Arch, in which Malmstrom
agreed to work for Arch for $15,000 per month for approximately one year and agreed
not to compete during the duration of the consultancy and for three years beyond that
date. The purchase and consultant agreements went into effect on November 30, 2000.
Arch had the option to extend the agreement but chose instead to terminate it as of
November 30, 2001.
The non-compete agreement provided:
Consultant shall not, for the term of this Agreement and three (3) years
immediately following the termination hereof, within the United States, engage in
activities or businesses, or establish any new businesses, that are substantially in
competition with the Business (“Competitive Activities”), including:
(1) selling goods or services of the type sold by the Business,
(2) soliciting any customer or prospective customer of the Business to
purchase any goods or services sold by the Business from anyone
other than Arch and its affiliates, and
(3) assisting any person in any way to do, or attempt to do, anything
prohibited by clause (i) or (ii) above; including (x) soliciting,
recruiting or hiring any employees of the Business or persons who
have worked for the Business, (y) soliciting or encouraging any
employee of the Business to leave the employment of the Business
and (z) disclosing or furnishing to anyone any confidential
information relating to the Business or otherwise using such
confidential information for its own benefit or the benefit of any
other person.
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App. at 287-88 (emphasis added).
Malmstrom sent a memo dated January 29, 2002, from a return address in South
Plainfield, New Jersey announcing that he was “at liberty to enter into business in the
cosmetics industry outside of the United States,” that he was “in the process of
establishing new companies to transact business in both Europe and Asia,” and that the
companies would “concentrate on providing products manufactured locally to the
regional markets served by each.” App. at 142. Arch demanded that Malmstrom cease
and desist all activities in violation of his contractual obligation not to compete with
Arch within the United States. In a later letter, Arch requested that Malmstrom sign a
statement assigning the Brooks name to Arch, and that he change the name of the
remaining company he still owned from “Brooks Industries” to something that would not
violate the trademark Arch had purchased.
Malmstrom denied that the non-compete agreement to which he was bound
extended beyond his activities within the United States, and stated that his participation
at a conference in London did not constitute a violation of the non-compete agreement.
He conceded that he was affiliated with Brooks, but asserted that Arch had not bought
the corporation itself nor the name.
On June 28, 2002, Arch filed a complaint in the United States District Court for
the District of New Jersey against Malmstrom and Brooks Industries seeking a temporary
restraining order, preliminary and permanent injunctions, specific performance, and
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recovery of monetary damages for breach of contract, breach of the duty of good faith
and fair dealing, infringement of trade name and trademark, false designation of origin
and misrepresentation in commerce, unfair competition, misappropriation, and deceptive
trade practices. Arch alleged that Malmstrom violated the covenant not to compete,
breached representations and warranties made in connection with the sale of Brooks in
November 2000, and made unauthorized use of the Brooks trade name and trademark.
The complaint alleged that Malmstrom’s actions constitute unfair competition under
Section 43(a) of the Lanham Act, 15 U.S.C. Section 1125(a).
In support of Arch’s motion for a temporary restraining order, Arch filed the
affidavits of Andrew Banham and Lisa Lods, former Brooks employees who were now
Arch employees, as well as the affidavit of Arch counsel Joseph Boyle which included
the Asset Purchase Agreement between the parties. Lods’ affidavit alleged that
Malmstrom had solicited a former Brooks/Arch distributor to form a European company
(ACON), which she believed was affiliated with Active Concepts, Inc. The latter is a
company started by another former Brooks/Arch employee that competes with Brooks.
Both Lods and Banham alleged that Active Concepts/ACON distributed products similar
to ones that had been exclusive to Brooks and then to Arch. Banham’s affidavit stated
that a representative from Avon Japan revealed that Malmstrom had attempted to solicit
his business away from Arch to Active Concepts. Lods’ affidavit alleged that
Malmstrom had invited Active Concepts employees and Revlon executives on a boat
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outing, after which time Revlon “move[d] some of its business to Active Concepts” and
away from Arch. And both affidavits stated that Malmstrom attended a New York
cosmetics trade show in December 2001 and hosted a hospitality suite which appeared to
be for Active Concepts. Malmstrom was also overheard saying that Active Concepts was
the “real” or “new” Brooks and that Arch was not Brooks.
The District Court held a hearing on July 1, 2002 on Arch’s motion for a
temporary restraining order. At that hearing, the District Court noted that Malmstrom
had received consideration for the non-compete agreement, and concluded that there was
a likelihood of success on the merits of the complaint, that Malmstrom’s “conduct, if not
restrained, could lead to confusion in the marketplace and could constitute and result in
the dilution of the trademark rights of the plaintiff [Arch],” and that Malmstrom would
not suffer any irreparable harm because the restraints mirrored the non-compete
agreement he had signed. The next day, July 2, 2002, the District Court issued a
temporary restraining order prohibiting “Malmstrom from, within the United States,
engaging in any activity or business or establishing any new businesses that are
substantially in competition with Arch PCP,” with any current or former customers or
distributors of Brooks or Arch, listing 38 companies, including some foreign-based
companies. App. at 6-12. Finally, the District Court found that the restraints were
entered in the public interest, “which is consistent with the enforcement of the terms of
contracts freely entered by people in a particular field of business.” App. at 364. The
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Court also entered an order to show cause for a preliminary injunction at a hearing set for
July 15, 2002.
Malmstrom filed a subsequent affidavit dated July 11, 2002, in which he admitted
he was an owner of ACON, wrote and mailed the January 2002 letter within the United
States, and hosted Arch’s competitors and customers on his boat, but disagreed that this
conduct violated the non-compete agreement. Malmstrom also denied that Arch had
purchased the rights to the Brooks corporate name in the November 2000 Asset Purchase
Agreement.
At the preliminary injunction hearing on July 15, the court rejected Malmstrom’s
argument that the restraints extend beyond the parameters of the non-compete agreement,
stating that Arch and Malmstrom, in negotiating the non-compete agreement, both
understood the terms to which they were agreeing, and reiterated that Malmstrom had
received consideration, in the form of monetary compensation, for his agreement not to
compete. The court agreed with Arch that the prohibition on competition “within the
United States” applied to Malmstrom himself and that Malmstrom’s location at the time
of the conduct determines whether it constitutes impermissible competition. On July 22,
2002, the District Court issued a preliminary injunction which adopted the temporary
restraints ordered on July 2, 2002.
Malmstrom filed this timely appeal. The District Court had jurisdiction pursuant
to 28 U.S.C. § 1331 based on the allegation of violation of the Lanham Act, 15 U.S.C. §
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1051. Jurisdiction is determined on the basis of the complaint, and the defendants’
denial of the facts did not deprive the District Court of its jurisdiction. The District
Court determined that the claims, including those based on violation of federal law, were
not frivolous or lacking merit. Therefore, we need not rely on Arch’s motion to amend
the complaint to add a claim of violation of the Computer Fraud and Abuse Act, 18
U.S.C. §§ 1030 et seq. This court has jurisdiction over the appeal under 28 U.S.C. §
1292(a)(1).
III.
We review an order granting a preliminary injunction for abuse of discretion, its
factual findings for clear error, and its determinations of questions of law de novo.
Nutrasweet Co. v. Vit-Mar Enterprises, 176 F.3d 151, 153 (3d Cir. 1999). This Court
has held that a district court may permissibly grant the “extraordinary remedy” of a
preliminary injunction only if “(1) the plaintiff is likely to succeed on the merits; (2)
denial will result in irreparable harm to the plaintiff; (3) granting the injunction will not
result in irreparable harm to the defendant; and (4) granting the injunction is in the public
interest.” Id. at 153 (quoting Maldonado v. Houstoun, 157 F.3d 179, 184 (3d Cir.
1998)). The burden lies with the plaintiff to establish any element in its favor, or the
grant of a preliminary injunction is inappropriate. See id.The District Court, in reviewing the affidavits presented by Arch, determined that
there was a “likelihood of success on the merits.” The Court considered that
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Malmstrom’s affidavit confirmed that he had indeed been working with ACON and that
he had sent out the letter announcing his re-entry into the cosmetics industry from New
Jersey (“within the United States”). The Court concluded that irreparable harm could
result to Arch if the restraints were not put into place because Malmstrom’s behavior
“could lead to confusion in the marketplace and could . . . result in the dilution of
[Arch’s] trademark rights.” App. at 363. The District Court also considered the fact that
Malmstrom received a significant amount of money for his agreement not to compete,
and found that because the restraints paralleled those in the agreement Malmstrom had
negotiated with Arch, he would not suffer any permanent harm as a result of the
restraints. The Court further concluded that the restraints were within the public’s
interest in the enforcement of contracts according to the terms included by the parties.
The District Court adequately discussed each of these four elements that we held in
Nutrasweet should be considered.
Malmstrom argues on appeal that the District Court’s preliminary injunction was
overbroad and ambiguous, thus rendering it unenforceable as a matter of law. This is
related to his claim that the restraints imposed by the District Court are unconscionable
and prevent him from making a living, contrary to an express term of the contract
between the parties. Covenants not to compete are enforceable if they are limited in
geographical scope and duration. While non-compete agreements that accompany
employment contracts are subject to a reasonableness test, see Solari Industries v.
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Malady, 264 A.2d 53 (N.J. 1970), New Jersey courts afford more deference to restrictive
covenants ancillary to the sale of a business because the participants in the sale of a
business have more equal bargaining power. Jiffy Lube Int’l, Inc. v. Weiss Bros., Inc.,
834 F. Supp. 683, 691 (D.N.J. 1993). The courts seek to protect the “good will”
established by the seller and transferred to the buyer. Id. Good will includes intangibles
like company reputation and customer relationships.
Although the length of the restriction in this case was the same as in Jiffy Lube,
the geographic limitations are far more extensive than in that case, and the circumstances
different. Malmstrom and Arch were positioned in more equal bargaining roles at the
time of the sale of the Brooks assets to Arch than were the individual franchise owner
and international Jiffy Lube corporation in Jiffy Lube. Malmstrom himself had
developed Brooks’ business and, despite the three-year restriction on competitive
activities, he will be able to resume much of the same types of activities once the non-
compete period ends in November 2004. Unlike the franchise owner in Jiffy Lube,
Malmstrom would not lose his livelihood as a result of enforcing the non-compete
agreement. The District Court based its decision to enforce Malmstrom’s agreement not
to compete on the fact that he received a great deal of money for the sale of his business.
Arch had paid a substantial sum for tangible assets, but also for the good will that
Malmstrom had created at Brooks. Allowing him to compete against Arch would destroy
the value of the intangible assets purchased by Arch.
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Malmstrom argues that the District Court’s interpretation of the non-compete
agreement extends beyond what the parties agreed upon during their original
negotiations at the time of the sale of Brooks to Arch. The District Court rejected that
argument, stating “what is restrained is Mr. Malmstrom’s conduct within the United
States,” such as his “conduct in the United States which may have something to do or be
relevant in connection with the dealing with a foreign country, a foreign company.”
App. at 429. The District Court agreed with Arch that the limitations apply to the
location from which Malmstrom himself performs any activity, not the location where the
competitive activity has its impact. Although the District Court’s order includes
international businesses in addition to U.S.-based businesses with which Malmstrom is
prohibited from competing, the order mirrors the language of the original agreement not
to compete by restricting Malmstrom from doing business with these companies while he
is “within the United States.” The District Court’s role in ruling on the motion for a
preliminary injunction was to balance Malmstrom’s needs against the rights purchased by
Arch seeking to enforce the restrictions. The court’s statements at the July 15, 2002
hearing support this interpretation of the restrictions. We cannot conclude that the
District Court abused its discretion in enforcing the non-compete agreement as it was
written, nor that the District Court’s interpretation was outside the scope of the original
agreement.
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IV.
For the reasons set forth, we will affirm the order of the District Court granting a
preliminary injunction.
_______________________
TO THE CLERK:
Please file the foregoing opinion.
/s/ Dolores K. Sloviter
Circuit Judge
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