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4th Cir.: Contempt, sanctions for infringement affirmed.

Byline: Rebecca M. Lightle

The district court did not err in holding a childcare center in contempt for violating the terms of an injunction related to use of the word rainbow. The center was liable for liquidated damages and attorneys' fees, plus the cost of an audit to uncover continuing violations. Background Appellee Rainbow School has run a childcare facility in Fayetteville, North Carolina, for over 20 years. It uses the word rainbow in its name and includes rainbow imagery on its logo. Appellant Rainbow Early Education operates approximately 0 childcare facilities in several states, including North Carolina. In December 2014, Early Education opened a Fayetteville branch near Rainbow School, operating under the name Rainbow Child Care Center (the Fayetteville facility). It also used rainbow imagery on its logo. Within a few weeks of the Fayetteville facility's opening, Rainbow School sued Early Education for common-law trademark infringement; false advertising and false designation of origin in violation of the Lanham Act; and unfair and deceptive trade practices under state law. The Parties subsequently entered into a Settlement Agreement, and the district court entered a consent judgment and permanent injunction consistent with the Agreement. The Agreement's liquidated damages clause provided that a material breach of the permanent injunction could cause harm to Rainbow School's business. If Rainbow School provided written notice to Early Education of an alleged violation of the injunction, Early Education could cure it within days. If Early Education failed to cure or committed four violations within one year, Rainbow School could seek a court order requiring compliance with the injunction. If a court determined that Early Education had violated the injunction, then Early Education would be liable to Rainbow School for liquidated damages in the amount of $30,000, without prejudice to other remedies. The Agreement also stipulated that, as any damages to Rainbow School will be inherently difficult to ascertain with certainty, the liquidated damages clause was not a penalty but a reasonable measure of damages. In May 2016, Rainbow School filed a contempt motion against Early Education in the district court, alleging multiple violations of the injunction associated with the Fayetteville facility's website, including the use of rainbow logos and the word rainbow in domain names, links, and metatags for the site. It also pointed to a pop-up page that appeared on the Fayetteville facility's website asking users to allow Early Education's corporate website to track the user's location. Rainbow 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 Rainbow School had not been injured by any violations. Before the district court ruled on the first motion, Rainbow School filed a second contempt motion alleging that Early Education was violating the injunction by (1) keeping a prohibited web address live as a redirect page to the Fayetteville facility's new stand-alone website, and (2) inviting residents of the Fayetteville, North Carolina, metro area to 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. The district court granted both motions, identifying four categories of violations, observing actual examples of harm to Rainbow School, and pointing to the Settlement Agreement contemplating this sort of harm. In sum, the district court concluded that $60,000 was a reasonable measure of damages merited in light of numerous violations. Finally, the district court awarded Rainbow School $36,162 in attorneys' fees and costs. Before the district court issued its order on attorneys' fees, however, Rainbow School filed a third contempt motion asking the district court to appoint an auditor to conduct a thorough review of Early Education's operations to assess the extent of any ongoing violations and the viability of further compliance with the injunction. The district court granted Rainbow School's request for an audit, but deferred ruling on the remainder of the third motion, instead ordering the appointment of a temporary, independent auditor at Early Education's expense to bring Early Education's business activities into compliance with the injunction. Early Education appealed both the contempt orders and the order to pay for an independent auditor. Contempt The district court did not clearly err in finding that Early Education violated the injunction in one of the ways alleged in each motion. A single violation of the injunction is sufficient to support a finding of contempt. In the first motion, Rainbow School asserted that Early Education violated the injunction by using the word rainbow in multiple domain names, links, and metatags. For example, the Fayetteville facility website linked to email addresses that used the word rainbow; a Contact Us link on the site redirected users to the main corporate website; a pop-up screen on the Fayetteville facility's site asked users to allow the main corporate website to track their location; and the word rainbow appeared close to 180 times as a link or tag on the Fayetteville facility website. In the face of this data, Early Education offered general denials and asserted that any violations were inadvertent. But the injunction plainly required Early Education to also stop using the word rainbow in connection with the Fayetteville facility. And its internet content provisions specifically required the new stand-alone Fayetteville facility website to be independent from the main corporate website so that the word rainbow' will not appear on the stand-alone web page for Fayetteville Child Care Center, even as a forwarding tag. Any such links connecting to the main corporate website for Rainbow Child Care Centers shall connect only to information about Defendants' programs, curricula, and corporate policies. Given the undisputed existence of these violations and their scope, the district court did not clearly err in concluding that the violations had occurred and had not been adequately corrected. Nor did it clearly err in finding Early Education responsible for knowing the contents of its own website for purposes of establishing the requisite knowledge of the violations. The district court also did not clearly err in finding that Early Education violated the injunction by inviting Fayetteville metropolitan area residents to the summer social. Early Education directly solicited Fayetteville residents, even though the injunction prohibited it from doing business as Rainbow Child Care Center' in that region and from using the word rainbow and rainbow imagery in connection with their business in the Fayetteville metropolitan area. Early Education also challenges the district court's determination that Early Education's violations harmed Rainbow School, but this issue is resolved by the Agreement term consenting to judgment being entered as though the allegations of trademark infringement had been proven at trial. Although the Agreement's liquidated damages provision was not specifically incorporated into the consent judgment and injunction, it nonetheless provided the district court with relevant information concerning what the parties agreed to, supporting the conclusion that violations of the injunction proved sufficient likelihood of harm to Rainbow School for purposes of compelling Early Education's compliance. Coercing compliance is the precise objective of a civil contempt order. Moreover, although the district court could have used other measures to calculate an appropriate award for Early Education's violations, it chose the most natural: the parties' Agreement setting liquidated damages at $30,000. Because the agreement sets this amount for any violation of the injunction, it follows that the district court did not abuse its discretion in deciding to award $60,000 upon finding at least two separate violations. That amount both compensates Rainbow School for its damages and incentivizes Early Education's prompt compliance with the injunction. Attorneys' fees Early Education also argues that the district court abused its discretion in awarding more than $36,000 in attorney's fees because Rainbow School did not submit adequate documentation to support such an award. Specifically, Early Education contends that the School's supporting documentation improperly lumped together tasks, making it impossible to determine how much time was spent on various tasks. Rainbow School sought over $46,000 in fees, which the district court concluded was an unreasonable amount. It noted that Rainbow School's lead attorney admitted the amount was based on a higher hourly rate than she usually charged and which included a penalty assessed to clients who did not consistently make payments. Based on its familiarity with the region's customary hourly rates, the district court first adjusted the hourly rates for the attorneys and paralegals who worked on the case and then reviewed the evidence supporting the number of hours billed and the work performed, finding that number to be reasonable and sufficiently particularized. The court also noted the nature and extent of the litigation necessary to stop Early Education's willful violations of court orders. It concluded these factors supported the fee award. The district court's fee award was not based on clearly incorrect evidence concerning the nature of the work performed. While this court has previously cautioned against generalized billing that inadequately describes the tasks performed within each block of time for which a party seeks fees, the explanations supporting Rainbow School's fee award in this case do not contain the sort of problematic vagueness and generalities that engender the concern that a fee award lacks adequate support. In many cases, Early Education criticizes entries that contain more than one task without considering that the additional descriptions are just that added information about a single, overarching task. This practice is far removed from the sort of vague entry that lumps clerical tasks with tasks requiring attorney judgment. On this record, we cannot conclude that the district court abused its discretion in determining Rainbow School's fee award. Interlocutory appeal This court lacks jurisdiction under 28 U.S.C. 1292(a)(1) to consider interlocutory orders granting, continuing, modifying, refusing or dissolving injunctions, or refusing to dissolve or modify injunctions. The district court's last order arises from a motion to compel enforcement of an existing permanent injunction; it does not alter the already-existing injunction and therefore does not grant, continue, modify, or dissolve the injunction. The court also disagrees with Early Education's assertion of jurisdiction under the collateral order doctrine. The issues Early Education raises do not fall within this framework. Nothing in the district court's order for Early Education to pay for the audit suggests that this initial assessment is a final determination about which party will ultimately bear that expense. If the auditor determines there is no ongoing violation, the district court is free to order Rainbow School to bear the audit's cost as part of the final order. In sum, the most recent order does not resolve matters separate from the merits of whether Early Education remains in contempt (either because of new or continuing violations), and the issues Early Education challenges now will be reviewable on appeal from the court's final judgment. Therefore, the doctrine does not support jurisdiction. This court also declines to exercise discretionary pendent jurisdiction here. The question of whether Early Education should initially pay for an audit is neither inextricably linked nor a necessary precursor to the issues presented in the appeal from the district court's prior order, which made a determination of contempt and had nothing to do with paying for an audit. Lacking jurisdiction to review the district court's most recent order, the appeal of that order will be dismissed. The order finding Early Education in contempt and awarding damages and attorneys' fees is affirmed. Rainbow Sch. Inc. v. Rainbow Early Educ. Holding LLC, Case No. 17-55, Apr. , 2018. 4th Cir. (Agee), from EDNC at Raleigh (Boyle). Carl Moeller Newman for Appellants; Susan Freya Olive for Appellee. VLW No. 018-2-069, 21 pp.

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Author:Lightle, Rebecca M.
Publication:Virginia Lawyers Weekly
Date:Apr 16, 2018
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