Rainbow Sch., Inc. v. Rainbow Early Educ. Holding LLC

• Decision Date: 10 April 2018
• Docket Number: No. 17-1123,No. 17-1055,17-1055
• Citation: 887 F.3d 610
• Parties: RAINBOW SCHOOL, INC., Plaintiff–Appellee, v. RAINBOW EARLY EDUCATION HOLDING LLC; Ree Southeast, Inc., Defendants–Appellants. Rainbow School, Inc., Plaintiff–Appellee, v. Rainbow Early Education Holding LLC; Ree Southeast, Inc., Defendants–Appellants.
• Court: U.S. Court of Appeals — Fourth Circuit

887 F.3d 610

RAINBOW SCHOOL, INC., Plaintiff–Appellee,

v.RAINBOW EARLY EDUCATION HOLDING LLC; Ree Southeast, Inc., Defendants–Appellants.

Rainbow School, Inc., Plaintiff–Appellee,

v.Rainbow Early Education Holding LLC; Ree Southeast, Inc., Defendants–Appellants.

No. 17-1055

No. 17-1123

United States Court of Appeals, Fourth Circuit.

Argued: January 25, 2018

Decided: April 10, 2018

ARGUED: Carl Moeller Newman, CRANFILL, SUMNER & HARTZOG, LLP, Raleigh, North Carolina, for Appellants. Susan Freya Olive, OLIVE & OLIVE, PA, Durham, North Carolina, for Appellee. ON BRIEF: Pankaj K. Shere, Jaye E. Bingham-Hinch, David G. Williams, CRANFILL, SUMNER & HARTZOG, LLP, Raleigh, North Carolina, for Appellants. David L. McKenzie, OLIVE & OLIVE, PA, Durham, North Carolina, for Appellee.

Before GREGORY, Chief Judge, and NIEMEYER and AGEE, Circuit Judges.

Affirmed in part and dismissed in part by published opinion. Judge Agee wrote the opinion, in which Chief Judge Gregory and Judge Niemeyer concurred.

AGEE, Circuit Judge:

After finding that Rainbow Early Education Holding LLC ("Early Education") had violated the terms of a consent judgment and permanent injunction, the district court held Early Education in contempt and awarded $60,000 to Rainbow School, Inc. ("the School"), plus attorney's fees and costs. When the School moved for additional relief based on what it alleged to be continued and new violations of the injunction, the district court deferred a final determination and ordered Early Education to pay for an audit to assist in determining whether violations remained and could reasonably be cured. Early Education appeals both decisions. For the reasons set out below, we affirm the district court's finding of contempt and award of sanctions, and dismiss for lack of jurisdiction Early Education's appeal from the order requiring it to undergo an audit.

I.

A.

The School has run a childcare facility—Rainbow School—in Fayetteville, North Carolina, for over twenty years. In addition to using the word "rainbow" in its name, the School uses rainbow imagery on its logo.

Early Education operates approximately 100 childcare facilities in several states, including North Carolina.¹ In December 2014, Early Education opened a Fayetteville branch near the School. It operated under the name "Rainbow Child Care Center" ("the Fayetteville facility"), and, like the School, it also used rainbow imagery on its logo.

Within a few weeks of the Fayetteville facility's opening, the School sued Early Education in the United States District Court for the Eastern District of North Carolina for common law trademark infringement; false advertising and false designation of origin in violation of the Lanham Act; and unfair and deceptive trade practices in violation of North Carolina law. Following discovery and the district court's issuance of a preliminary injunction against Early Education, the Parties entered into a settlement agreement. The district court entered a consent judgment and permanent injunction consistent with that agreement.

Under the terms of the consent judgment, Early Education did "not contest entry of judgment ... as though the allegations of trademark infringement had been proven at trial." J.A. 77. Early Education was enjoined from:

• "doing business as ‘Rainbow Child Care Center’ in the Fayetteville, North Carolina metropolitan area";

• "using the word ‘Rainbow’ in connection with their business in the Fayetteville metropolitan area, including but not limited to use by them of the word ‘Rainbow’ in connection with the provision of child care, preschool, before-school, afterschool, and summer camp services in the Fayetteville metropolitan area";

• "using the web address ... www.rainbowccc.com/fayetteville2 [ ("prohibited/fayetteville2 address") ] or any other web address or domain name using the word ‘rainbow’ in connection with any business or services offered by them in the Fayetteville metropolitan area";

• "using any rainbow design on any website or domain identifying or advertising any business or services offered by them in the Fayetteville, North Carolina metropolitan area, but this restriction ... does not ... restrict or prevent the use of the word ‘rainbow’ or a rainbow design on the general corporate website."

J.A. 77–78. In addition, Early Education agreed to

redirect their new website with respect to any connection to the main corporate website for Rainbow Child Care Centers found at www.rainbowccc.com [by] creating a stand-alone web page for the [Fayetteville facility] and routing all links to www.rainbowccc.com through a forwarding page so that the word "rainbow" will not appear on the stand-alone web page for [the Fayetteville facility], even as a forwarding tag.... [A]nd there shall not be any links from [Early Education's] main corporate website to the stand-alone web page for [the Fayetteville facility].

J.A. 78–79.

In addition, the settlement agreement—though not the consent judgment—contained a liquidated damages clause setting out how the Parties would handle violations of the injunction. The Parties agreed that a material breach of the permanent injunction "could cause harm to" the School's business. J.A. 186. If the School believed Early Education was violating the injunction, the School was required to provide Early Education with written notice. Early Education, in turn, had ten days following receipt of the notice to cure the violation. If Early Education failed to cure the violation in that time, or if it had committed four violations within one year, the School could "seek a court order requiring compliance" with the injunction. J.A. 186. And if a court determined that Early Education had violated the injunction and not cured it, then Early Education would be "liable to [the School] for liquidated damages in the amount of $30,000.00, without prejudice to such other remedies, if any, as may be available, including but not limited to an award of attorneys' fees." J.A. 186–87. In agreeing to this liquidated damages provision, the Parties acknowledged

that any damages to [the School] will be inherently difficult to ascertain with certainty .... Given the Parties' experience in the child care industry and the nature of the losses that may result from a breach ..., the Parties agree[d] that this provision is not a penalty, but rather a reasonable measure of damages.

J.A. 187.

B.

In May 2016, the School filed a contempt motion against Early Education in the district court ("the First Motion"). It alleged multiple violations of the injunction associated with the Fayetteville facility's website, including the use of rainbow logos in online photo galleries and the use of the word "rainbow" in "domain names, ... links, and ... metatags used to drive traffic to" the site. J.A. 90.² It also pointed to a pop-up page that appeared on the Fayetteville facility's website, which asked users to allow Early Education's corporate website to track the user's location. The School sought damages and fees for the alleged violations.

Early Education filed a cursory response stating that it was not in violation of the injunction, that any violations were inadvertent omissions and errors that had been timely cured, and that the School had not been injured by any violations that had occurred.

In August 2016—before the district court ruled on the First Motion—the School filed a second contempt motion ("the Second Motion"). This time, the School alleged that Early Education was violating the injunction by keeping the prohibited/fayetteville2 address "live" as a redirect page to the Fayetteville facility's new stand-alone website. The Second Motion also alleged Early Education violated the injunction by sending an invitation to residents of the Fayetteville, North Carolina, metropolitan area that advertised a "Rainbow Child Care Center" summer social event. The invitation encouraged recipients to visit Early Education's corporate website to learn where the event would be held in their area.

Early Education filed a lengthier response to the Second Motion, denying that it was in contempt and claiming that it had cured the alleged violations involving the prohibited /fayetteville2 address. As for the summer social invitation, Early Education explained that it had been inadvertently sent and did not violate the injunction because it did not advertise or reference the Fayetteville facility.

At the conclusion of a hearing on August 30, the district court granted both Motions. Pointing to the settlement agreement's damages provision, the court awarded $60,000 in liquidated damages, noting that it found multiple violations as alleged as part of each Motion. The court also stated that it would award attorney's fees, allowed the School the opportunity to submit evidence as to the amount of those fees, and noted that a written order would follow.

On December 14, 2016, the district court issued its written order granting the First and Second Motions ("December 14 order"). Rainbow Sch., Inc. v. Rainbow Early Educ. Holding LLC , No. 5:14-CV-482-BO, 2016 WL 7243538 (E.D.N.C. Dec. 14, 2016). The order identified four categories of violations by Early Education: (1) the photo gallery on the Fayetteville facility's new website contained multiple images depicting rainbows; (2) the Fayetteville facility website used the word "rainbow" in multiple places (including emails, links, the pop-up tracking request, and metatags); (3) the prohibited/fayetteville2 address was still in use; and (4) Early Education had invited Fayetteville area residents to a summer social using the "rainbow" moniker. The district court then observed that the School had been harmed, pointing out actual examples of confusion associated with the violations. It also noted there was a presumption of harm resulting from trademark infringement and pointed to the Parties' settlement agreement contemplating this sort of harm and agreeing to a liquidated damages amount for any violations of the injunction. In sum, ...