PLAYBOY ENTERPRISES INTERNATIONAL, INC., a Delaware corporation, Plaintiff,
PLAY BEVERAGES, LLC, a Delaware limited liability company; CIRTRAN BEVERAGE CORPORATION, a Utah corporation; and CIRTRAN CORPORATION, a Nevada corporation, Defendants.
MEMORANDUM OPINION AND ORDER
ROBERT W. GETTLEMAN, District Judge.
On February 1, 2013, Playboy Enterprises International, Inc. ("plaintiff") filed a motion for preliminary injunction to enjoin Play Beverages, LLC ("Play Bev"), CirTran Beverage Corporation ("CBC"), and CirTran Corporation ("CirTran") (collectively, "defendants") from using plaintiff's trademarks on defendants' products. Defendants opposed the entry of a preliminary injunction, and on March 5, 2013, moved to dismiss or stay this action pending the resolution of a parallel case in state court. For the reasons described below, the court grants defendants' motion to stay the instant case and denies the motion for a preliminary injunction without prejudice.
The instant dispute arises from a license agreement between the parties regarding the use of two of plaintiff's trademarks: the "Playboy" name and the Rabbit Head Design. In 2006, plaintiff and Play Bev entered into a product license agreement ("license agreement") that granted Play Bev the right to distribute certain non-alcoholic drinks, including an energy drink labeled "Playboy Energy Drink, " in certain territories. Play Bev subsequently entered into a manufacturing and distribution agreement with CBC, a subsidiary of CirTran, that granted CBC certain manufacturing and distribution rights regarding Playboy Energy Drink. CBC in turn recruited various sub-distributors in different countries, including Redi FZE, an entity based in the United Kingdom.
The parties characterize the terms of the license agreement slightly differently. Plaintiff states that the license agreement had an initial five and a half year term with three five-year renewal options that required explicit approval by plaintiff. Defendants state that the license agreement had a twenty year term, with an initial five year term and additional renewal terms. The parties agree that under the terms of the license agreement, Play Bev was required to pay plaintiff a guaranteed royalty and meet a certain amount of "minimum net sales" each year the license was in effect. During the initial five year term, Play Bev did not meet the minimum net sales amount, but plaintiff expressly waived this default.
Plaintiff contends that the license agreement has expired and that defendants continue to use the Playboy marks illegally, creating confusion among consumers and causing irreparable harm. Defendants allege that, even if the agreement has expired, plaintiff is obligated to renew the license and the continuing use of the mark does not constitute infringement.
According to defendants, in March 2011, plaintiff expressly indicated that it intended to renew the license agreement with two amendments: plaintiff would accept the quarterly payments of guaranteed royalties; and the net sales target would be waived as long as Play Bev developed its territory and distribution network. Plaintiff then allegedly reversed its position on April 1, 2011, when it demanded the full $2 million guaranteed royalty owed under contract. Defendants allege that plaintiff intended to terminate the license agreement in order to work with an alternative licensee: Redi FZE. Plaintiff allegedly was in formal negotiations with Redi FZE by May 2011, while Redi FZE was under contract with CBC and subject to a non-circumvention provision. Defendants also allege that plaintiff disrupted defendants' business operations and distribution network by communicating with distributors and sub-licensees, contributing to defendants' default on certain contract requirements.
The instant case is not the first time these parties have met in court in connection with the license agreement. On April 26, 2011, prior to the expiration of the initial term of the agreement, several Play Bev creditors filed a petition commencing an involuntary Chapter 7 bankruptcy proceeding against Play Bev, which Play Bev converted to a voluntary bankruptcy under Chapter 11. On June 7, 2011, plaintiff notified defendants that the license agreement had expired due to defendants' failure to pay the royalties. Play Bev advised plaintiff of the bankruptcy proceeding and indicated that the termination notice was void due to the bankruptcy. On August 29, 2011, Play Bev initiated an adversary proceeding against plaintiff and others in the bankruptcy court, alleging that plaintiff had breached its contractual obligations and tortiously interfered with Play Bev's distribution network. Plaintiff filed a counterclaim. The parties subsequently negotiated a standstill agreement wherein Play Bev agreed to dismiss the adversary proceeding without prejudice in order for the parties to negotiate a business resolution. No resolution was reached in these negotiations.
Under the license agreement, the initial five-year term was to expire on March 30, 2012. During the course of the bankruptcy proceedings, the parties entered into two extension agreements in furtherance of the parties' negotiations for a settlement of claims and a new license agreement. The parties first agreed to extend the original license agreement until July 31, 2012. In July 2012, the parties entered into a second extension agreement, which provided three alternative expiration dates for the original license agreement. The extension agreement stated that the license agreement would expire on September 30, 2012, and provided that the license agreement would end on an alternative date if Play Bev obtained an order confirming its Chapter 11 plan of reorganization by September 30, 2012. Alternatively, the extension agreement provided that it would "terminate automatically and without further action by either party or the Bankruptcy Court" if Play Bev's proposed reorganized debtor did not make a $2 million payment into escrow for the benefit of Playboy in a specified time-frame.
In August 2012, a new license agreement was executed. Play Bev, however, failed to the make the $2 million payment required to make the agreement effective.
On October 15, 2012, plaintiff provided notice to defendants that it considered the license agreement to be expired and asserted that Play Bev had no continuing license rights. In response, on October 25, 2012, Play Bev and CBC filed a lawsuit in Illinois state court against Playboy and others, re-alleging the claims from the adversary proceeding. That case is currently proceeding before Judge Pantle in the Circuit Court of Cook County.
The bankruptcy court in Utah dismissed Play Bev's case on December 7, 2012. On December 11, 2012, plaintiff filed a complaint and motion for a preliminary injunction in federal court in the Central District of California. On January 30, 2013, the federal court dismissed plaintiff's action without prejudice, finding that venue was more proper in Illinois. On February 1, 2013, plaintiff filed the instant action and sought a preliminary injunction. On March 5, 2013, defendants filed a motion to stay the instant suit under the abstention doctrine announced in Colorado River Water Conservation District v. United States , 424 U.S. 800, 96 S.Ct. 1236 (1976), or alternatively, under the first-to-file rule.
The court first analyzes defendants' motion to stay the instant case pending the resolution of the state court case. "Federal courts have a virtually unflagging obligation' to exercise the jurisdiction conferred on them by Congress." AAR International, Inc. v. Nimelias Enterprises S.A. , 250 F.3d 510, 517 (7th Cir. 2001), quoting Colorado River , 424 U.S. at 817. Nonetheless, animated by concerns about "wise judicial administration" and "conservation of judicial resources, " in Colorado River the Supreme Court held that under "limited" and "exceptional" circumstances, a federal district court may stay or dismiss an ...