ADT LLC v. Northstar Alarm Services, LLC , 853 F.3d 1348 ( 2017 )

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[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 16-15351
________________________
D.C. Docket No. 9:12-cv-81120-DTKH
ADT LLC,
Plaintiff-Appellee,
versus
NORTHSTAR ALARM SERVICES, LLC,
Interested Party-Appellant.
________________________
Appeal from the United States District Court
for the Southern District of Florida
_______________________
(April 14, 2017)
Before WILLIAM PRYOR and MARTIN, Circuit Judges, and DUFFEY, * District
Judge.
WILLIAM PRYOR, Circuit Judge:
*
Honorable William S. Duffey, Jr., United States District Judge for the Northern District of
Georgia, sitting by designation.
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This appeal presents the question whether a nonparty, not in privity with a
party to an injunction, may be bound by that injunction as a successor in interest
under the theory of de facto merger. After ADT LLC, sued Vision Security, LLC,
for violations of the Lanham Act, 15 U.S.C. § 1125(a), the parties agreed to an
injunction that prohibited Vision Security from using certain sales tactics.
NorthStar Alarm Services, LLC, then acquired customer accounts, rental leases,
and other assets from Vision Security and hired four senior officers and some of
the sales team of Vision Security. When NorthStar allegedly used sales tactics
prohibited by the injunction, ADT moved the district court to hold NorthStar in
contempt of the injunction. The district court determined that, although NorthStar
and Vision Security were not in privity, NorthStar was bound by the injunction as a
successor to Vision Security under a state-law theory of de facto merger. We
disagree. NorthStar cannot be bound by the injunction when it is not in privity with
Vision Security and in the absence of any evidence that it had notice of the
injunction, Fed. R. Civ. P. 65(d)(2). We vacate the order that held that NorthStar is
bound by the injunction.
I. BACKGROUND
In 2012, ADT filed a complaint against Vision Security that alleged
violations of the Lanham Act, 15 U.S.C. § 1125(a). ADT alleged that Vision
Security made false statements to customers of ADT to trick them into signing
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contracts with a different security alarm company. The parties settled the lawsuit
by agreeing to an injunction, which prohibited Vision Security from making false
statements about ADT and from training “any person who may sell for or solicit
customer[s] on behalf of Vision[] to violate the terms of th[e] Permanent
Injunction.”
In January 2015, Vision Security executed an asset purchase agreement with
NorthStar. Although ADT argues that the agreement effected a corporate merger,
NorthStar insists that the agreement involved only the purchase of some customer
accounts from Vision Security. Under the agreement, NorthStar acquired from
Vision Security 8,000 customer accounts to add to the 35,000 accounts NorthStar
had before the agreement, goodwill, deferred revenues relating to the customer
accounts, all the furniture, fixtures and equipment used in connection with the
business that relate to the customer accounts, and obligations under some contracts,
including real estate leases in Arizona and Utah. The agreement also specified that
NorthStar did not acquire from Vision Security cash, bank accounts, customer
accounts, contracts, and other accounts and assets not listed in the agreement,
intellectual property, books of account and books of original entry, personnel
records, any insurance policies or associated causes of action, all claims for tax
refunds, all rights of Vision Security, and the equipment of the sole remaining
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employee of Vision Security, Danielle Paletz. The agreement never mentioned the
injunction in favor of ADT.
The agreement provided that NorthStar would hire four senior officers from
Vision Security. One officer, Robert Harris, was the owner and chief executive
officer of Vision Security and became the president of NorthStar. He also became
a member of the board of directors of NorthStar and received almost fourteen
percent of its stock. In his new position at NorthStar, Harris oversaw seven or eight
regional sales managers, four of whom came to NorthStar from Vision Security.
He testified that “[t]he leadership of the sales organization report directly to
[him.]” But he also testified that his “primary role at NorthStar is involved in
recruiting people to come work for NorthStar” and that he did not “personally do
any sales training at NorthStar.” NorthStar also hired between thirty and thirty-five
of the 250 sales representatives of Vision Security. But there was high turnover in
the sales staff of Vision Security from year to year because most of the sales agents
were seasonal independent contractors.
Vision Security terminated its sales force after it executed the agreement,
consistent with a clause that prohibited Vision Security and Harris from competing
with NorthStar for five years. But Paletz remained employed by Vision Security to
service between 1,500 and 2,000 accounts that Vision Security retained. Another
company provided monitoring services for those accounts.
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About one year after the entry of the injunction against Vision Security,
ADT determined that NorthStar was violating the terms of the injunction. It moved
the district court for an order to show cause why NorthStar and Harris should not
be held in contempt of the injunction. ADT argued that that the injunction against
Vision Security bound NorthStar because NorthStar had purchased part of the
alarm business of Vision Security.
After a hearing, a magistrate judge recommended that NorthStar and Harris
be bound by the injunction. The magistrate judge determined that NorthStar and
Vision Security were not in privity, but that NorthStar was bound by the injunction
as a successor to Vision Security under a state-law theory of de facto merger. The
magistrate judge also determined that Harris was bound “because in his capacity as
CEO and sole managing member of Vision [Security], his liability is the same as if
he had been a named party in the underlying lawsuit.” The district court adopted
the recommendation of the magistrate judge, and only NorthStar appealed.
II. STANDARDS OF REVIEW
We review an order that grants, continues, or modifies an injunction for
abuse of discretion. Siegel v. LePore, 234 F.3d 1163, 1178 (11th Cir. 2000) (en
banc). “We review the underlying findings of fact for clear error and conclusions
of law de novo.” Common Cause/Ga. v. Billups, 554 F.3d 1340, 1349 (11th Cir.
2009). Whether a party is in privity with another party is a question of fact that we
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review for clear error. See E.E.O.C. v. Pemco Aeroplex, Inc., 383 F.3d 1280, 1285
(11th Cir. 2004).
III. DISCUSSION
Federal Rule of Civil Procedure 65 governs who may be bound by a federal
injunction:
(2) Persons Bound. The order binds only the following who receive
actual notice of it by personal service or otherwise:
(A) the parties;
(B) the parties’ officers, agents, servants, employees, and
attorneys; and
(C) other persons who are in active concert or participation
with anyone described in Rule 65(d)(2)(A) or (B).
Fed. R. Civ. P. 65(d)(2) (second and third emphases added). The rule “does not
really add or detract from the range of persons that were bound by a decree under
basic equity practice and due-process principles applied on the equity side of the
federal courts prior to 1938.” 11A Charles Alan Wright, Arthur R. Miller, et al.,
Federal Practice and Procedure § 2956 (3d ed.), 11A Fed. Prac. & Proc. § 2956,
Westlaw (database updated Jan. 2017) (citation omitted). That is, Rule 65(d)
“embod[ies] rather than . . . limit[s]” the common law powers of the district court.
United States v. Hall, 472 F.2d 261, 267 (5th Cir. 1972) (Wisdom, J.). At common
law, an injunction bound “not only . . . the parties defendant but also those
identified with them in interest, in ‘privity’ with them, represented by them or
subject to their control.” Regal Knitwear Co. v. N.L.R.B., 324 U.S. 9, 14 (1945).
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“Broadly speaking, both [Rule 65] and the common-law doctrine
contemplate two categories of nonparties potentially bound by an injunction.”
Nat’l Spiritual Assembly of Bahá’ís of the U.S. under the Hereditary
Guardianship, Inc. v. Nat’l Spiritual Assembly of the Bahá’ís of the U.S., 628 F.3d
837, 848 (7th Cir. 2010) (Sykes, J.). The first category is comprised of parties that
aid and abet the party bound by the injunction in carrying out prohibited acts. See
F.T.C. v. Leshin, 618 F.3d 1221, 1236 (11th Cir. 2010). The second category,
“captured under the general rubric of ‘privity,’” includes “nonparty successors in
interest” and nonparties “otherwise ‘legally identified’ with the enjoined party.”
Nat’l Spiritual Assembly, 628 F.3d at 848–49 (citation omitted); see also Wright &
Miller, supra, at § 2956. This appeal concerns the second category.
We divide our discussion in two parts. We first explain that NorthStar and
Vision are not in privity. We then explain that NorthStar may not be bound by the
injunction under the theory of de facto merger because NorthStar lacked notice of
the injunction.
A. NorthStar and Vision Security Are Not in Privity.
“‘[P]rivity’ denotes a legal conclusion rather than a judgmental process.”
Sw. Airlines Co. v. Tex. Int’l Airlines, Inc., 546 F.2d 84, 95 (5th Cir. 1977)
(Wisdom, J.). It “represents a legal conclusion that the relationship between the
one who is a party on the record and the non-party is sufficiently close” to bind the
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nonparty to the injunction. Id. (citation omitted). But “[t]he concept of privity . . .
is ultimately bounded by due process.” Nat’l Spiritual Assembly, 628 F.3d at 849.
An injunction may not extend to “persons who act independently and whose rights
have not been adjudged according to law.” Chase Nat’l Bank v. City of Norwalk,
291 U.S. 431, 437 (1934) (citations omitted); see also Wright & Miller, supra,
§ 2956 (explaining that a court may not bind a party that is not “so identified in
interest with those named in the decree that it would be reasonable to conclude that
their rights and interests have been represented and adjudicated in the original
injunction proceeding” (citations omitted)). A similar requirement governs when
res judicata may bind a nonparty to a prior judgment. See Pemco Aeroplex, 383
F.3d at 1286 (explaining that the rule that “a party cannot be bound by a judgment
in a prior suit in which it was neither a party nor in privity with a party” is “part of
our deep-rooted historic tradition that everyone should have his own day in court”
(internal quotation marks and citations omitted)).
The district court determined that NorthStar and Vision Security are not in
privity because there was “insufficient evidence to conclude that NorthStar’s
interests are so intertwined with Vision’s that NorthStar should be bound by the
injunction.” The district court found that NorthStar “was a much larger alarm
company” that “existed for fourteen years before acquiring some of Vision’s
assets” and that “NorthStar’s sales tactics were clearly established prior to, and
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independent of, NorthStar’s relationship with Vision.” The district court explained
the lack of any evidence that NorthStar had a relationship with Vision before the
agreement or that NorthStar and Vision Security controlled each other. And,
“[m]ost importantly,” the district court found that “NorthStar did not have any
involvement in the underlying litigation, and its interests were not represented
when the injunction was negotiated.”
ADT argues that NorthStar and Vision Security are in privity based on the
decision in Golden State Bottling Co., Inc. v. N.L.R.B., 414 U.S. 168 (1973). ADT
contends that Golden State stands for the proposition that privity “is shown where
the successor buys the predecessor’s business, in circumstances where the
successor may fairly be charged with knowledge of the injunction at the time of the
purchase.” But the facts of this appeal are distinguishable from Golden State.
Golden State held that “a bona fide purchaser, acquiring, with knowledge
that the wrong remains unremedied, [an] employing enterprise which was the locus
of [an] unfair labor practice, may be considered in privity with its predecessor for
purposes of Rule 65(d).” 414 U.S. at 180 (citations omitted). All American
Beverages, Inc. purchased the soft drink bottling and distribution business of
Golden State after the National Labor Relations Board ordered Golden State to
reinstate an employee with back pay. Id. at 170. Later, the Board “found that All
American continued after the acquisition to carry on the business [of Golden State]
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without interruption or substantial changes in method of operation, employee
complement, or supervisory personnel.” Id. at 171. The Board also found that All
American purchased Golden State with knowledge of the unfair labor practice that
was the subject of the order entered against Golden State. Id. at 173. The trial
examiner discredited the testimony of the manager and the president of Golden
State that they did not inform All American of the litigation before the completion
of the sale and “inferred from the unexplained failure of All American to produce
its negotiators as witnesses that their testimony would not have supported All
American’s disclaimer of knowledge.” Id. at 174 (citations omitted). The Supreme
Court affirmed the determination that All American knew about the unfair labor
practice and held that All American could be considered “in privity” with Golden
State under Rule 65(d). Id. at 173, 180. The Court also explained that its decision
did not “contravene[ ] the policy underlying Rule 65(d)[ ] of not having ‘order(s)
or injunction(s) so broad as to make punishable the conduct of persons who act
independently and whose rights have not been adjudged according to law’”
because “[t]he tie between the offending employer and the bona fide purchaser of
the business, supplied by a . . . finding of a continuing business enterprise,
establishe[d] the requisite relationship of dependence.” Id. at 180 (quoting Regal
Knitwear, 324 U.S. at 13).
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In contrast with Golden State, the record before us contains no evidence that
NorthStar knew about the injunction before it acquired assets from or hired
employees of Vision Security. Golden State explained that a successor “may” be
considered in privity with a predecessor where it acquires an entity that is the
subject of the injunction “with knowledge that the wrong remains unremedied.” Id.(emphasis added); see also Brunswick Corp. v. Chrysler Corp., 408 F.2d 335, 337
(7th Cir. 1969) (binding the successor of a business to an injunction that bound its
predecessor where it purchased the predecessor with knowledge of the injunction).
But the district court made no finding that NorthStar knew about the injunction
when it entered the asset purchase agreement with Vision Security, and ADT offers
no evidence that NorthStar knew about the injunction.
ADT argues that Golden State stands for the proposition that “the acquirer’s
knowledge may be inferred where the manager of the predecessor business
continues as its manager and ‘president’ after the sale,” but Golden State does not
hold that knowledge must be inferred when the head of a company bound by an
injunction takes a job with another company. In Golden State, the trier of fact drew
an inference of knowledge after hearing testimony and reviewing the record.
Golden State, 414 U.S. at 173. But the district court drew no such inference about
NorthStar. The chief executive officer of NorthStar never testified that he knew
about the injunction, and Harris never testified that he informed anyone else at
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NorthStar about the injunction. And the asset purchase agreement did not disclose
the injunction in its schedule of litigation. As a court of appellate review, we
cannot say, based on this record, that NorthStar knew of any wrongdoing by Vision
Security when they entered into their agreement.
B. NorthStar Cannot Be Bound as a Successor in Interest.
The district court determined that, although NorthStar and Vision Security
were not in privity, NorthStar could be bound as a successor in interest to Vision
Security under the theory of de facto merger. De facto merger is a state-law
exception to the general rule that a “corporation that purchases or otherwise
acquires the assets of a second corporation does not assume the debts and liabilities
of the second corporation.” Bud Antle, Inc. v. E. Foods, Inc., 758 F.2d 1451, 1456–
57 (11th Cir. 1985). It applies “where a sale is really a merger [of] one corporation
absorbing the other, the absorbed corporation going out of existence and losing its
identity to the absorbing corporation that remains.” Atlas Tool Co., Inc. v.
Commissioner, 614 F.2d 860, 870 (3d Cir. 1980).
Even if Vision Security and NorthStar de facto merged, that NorthStar is a
successor to Vision Security under state law does not mean that NorthStar is bound
by a federal injunction issued against Vision Security. “[T]he question of the extent
to which a federal injunction applies to non-parties is governed by Federal Rule of
Civil Procedure 65(d), not by state law.” Additive Controls & Measurement Sys.,
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Inc. v. Flowdata, Inc., 154 F.3d 1345, 1355 (Fed. Cir. 1998); accord Hall, 472
F.2d at 266–67. Rule 65 requires that a party have notice of an injunction before
that party may be bound by the injunction. See Rule 65(d)(2) (stating that an
injunction binds only enumerated parties “who receive actual notice” of the
injunction “by personal service or otherwise”); see also Brunswick Corp., 408 F.2d
at 337 (binding a nonparty to a consent decree where the nonparty was in privity
with a party to the consent decree and had knowledge of the consent decree);
Interstate Commerce Comm’n v. Rio Grande Growers Coop., 564 F.2d 848, 849
(9th Cir. 1977) (binding a nonparty to an injunction where the nonparty was a
successor to a party to the injunction and the incorporator of the successor had
knowledge of the injunction); New York v. Operation Rescue Nat’l, 80 F.3d 64,
70–71 (2d Cir. 1996) (binding a nonparty to an injunction where the nonparty was
a successor of a party to the injunction and had notice of the injunction). An order
may not be “so broad as to make punishable the conduct of persons who act
independently and whose rights have not been adjudged according to law.” Regal
Knitwear, 324 U.S. at 13.
The district court made no finding that NorthStar had knowledge of the
injunction against Vision Security, as required by Rule 65(d). The district court
found that the interests of NorthStar were not represented when the injunction was
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negotiated, and it found that the sales practices at issue in this appeal developed
“prior to, and independent of, NorthStar’s relationship with Vision [Security].”
ADT counters that “successorship liability do[es] not distinguish between
so-called ‘independent’ actions of the successor, as opposed to continued acts by
agents or assets of the predecessor,” but the caselaw cited by ADT addresses
factors that apply in the context of employment discrimination. Criswell v. Delta
Air Lines, Inc., 868 F.2d 1093, 1094 (9th Cir. 1989). And even in that context, one
factor that is “critical to the imposition of successor liability” requires “notice to
the successor employer of its predecessor’s legal obligation.” Id. (quoting
Musikiwamba v. Essi, Inc., 760 F.2d 740, 750 (7th Cir. 1985)).
In the absence of a finding that NorthStar knew about the injunction against
Vision Security, the district court erred when it ruled that NorthStar was bound by
the injunction under a theory of de facto merger. A court cannot bind a party
whose “rights have not been adjudged according to law.” Regal Knitwear, 324
U.S. at 13. The record does not support a ruling that NorthStar is bound by the
injunction.
IV. CONCLUSION
We VACATE the order that NorthStar is bound by the injunction.
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