Medicine Shoppe International, Inc. v. S.B.S. Pill Dr., Inc. Savannah B. Swartout

Citations: 336 F.3d 801; 2003 U.S. App. LEXIS 14620; 2003 WL 21692703Docket: 02-3856

Court: Court of Appeals for the Eighth Circuit; July 22, 2003; Federal Appellate Court

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On July 29, 2002, Medicine Shoppe International, Inc. filed a lawsuit against S.B.S. Pill Dr. and Savannah B. Swartout to enforce a contract with Cape Fear Apothecaries, Inc. Medicine Shoppe contended that Pill Dr. was either the corporate successor or alter ego of Cape Fear and was thus required to operate its pharmacy under the Medicine Shoppe name. The district court issued a preliminary injunction prohibiting Pill Dr. and Swartout from identifying the pharmacy as anything other than a Medicine Shoppe Pharmacy, which was affirmed by the appellate court.

The background reveals that Swartout’s father signed a license agreement with Medicine Shoppe in 1976, which was later assigned to Cape Fear. Cape Fear operated the pharmacy for twenty years and renewed its license in 1996. Swartout became the pharmacist-manager in 1996, took ownership of Cape Fear in 1998, and acquired the pharmacy property in 1999. 

In May 2002, Medicine Shoppe alleged that Cape Fear had under-reported revenues, leading to approximately $300,000 in unpaid fees. Following this, Swartout incorporated Pill Dr., removed Cape Fear's assets, and began operating the pharmacy under the new name "Hope Mills Drug," while misleadingly assuring patients that only the name changed. A temporary restraining order was issued against Cape Fear just prior to a preliminary injunction hearing, after which Cape Fear filed for Chapter 7 bankruptcy. Despite this, Swartout and Pill Dr. continued to operate the pharmacy as Hope Mills Drug, maintaining the same customer base and employees, while Pill Dr. covered Cape Fear's final expenses. Testimony during the hearing highlighted that Pill Dr. acquired significant assets from Cape Fear, including customer lists, without compensation.

A district court holds broad discretion in deciding requests for preliminary injunctions, with appellate review limited to instances of clearly erroneous factual findings, legal errors, or abuse of discretion. Four factors guide the court's decision on injunctive relief: (1) the threat of irreparable harm to the movant, (2) the balance of potential harm between the parties, (3) the likelihood of the movant's success on the merits, and (4) the public interest. The court's deferential review stems from its ability to assess witness credibility and weigh evidence. On appeal, Pill Dr. argues that Medicine Shoppe did not meet any of the four elements, primarily disputing the likelihood of success on the merits.

The license agreement between Medicine Shoppe and Cape Fear mandated that Cape Fear operate as a Medicine Shoppe Pharmacy. Since neither Pill Dr. nor Swartout signed this agreement, Medicine Shoppe's breach of contract claim hinges on whether Pill Dr. or Swartout can be deemed the alter ego or successor of Cape Fear. Although the pharmacy is in North Carolina, the license agreement specifies that Missouri law governs the case. 

Under Missouri law, a general rule states that a corporation's purchaser is not liable for the seller's debts unless certain exceptions apply, such as an agreement to assume liabilities, a merger, a continuation of the business, or a fraudulent transfer to evade debts. Missouri case law does not clearly address whether successor liability can arise from acquiring substantially all assets rather than all assets. However, the majority rule in other jurisdictions allows for liability with a transfer of all or substantially all of the predecessor's assets. In this case, despite some assets being stored separately under the control of a bankruptcy trustee, the district court concluded that a significant portion of Cape Fear's assets and business—such as patient files and store furnishings—was transferred to Pill Dr.

A factual finding regarding the transfer of Cape Fear's assets to Pill Dr. is reviewed for clear error. Testimony indicated that essential pharmacy assets include inventory, customer files, and location. Despite not immediately servicing Cape Fear's customers, Pill Dr. began operations at the same site with the same phone number, employees, and pharmacist-manager, facilitating customer prescription transfers under a new name. Appellants argued Cape Fear lacked a lease or enforceable property interest; however, the goodwill accrued over 25 years at the same location is likely significant. Missouri courts recognize going concern and goodwill values as intangible property interests. The district court found that a substantial portion of Cape Fear's assets was transferred to Pill Dr., leading to liability for Pill Dr. based on a determination of a de facto merger. However, the court concluded Pill Dr. is a mere continuation of Cape Fear, making a de facto merger finding unnecessary. Under Missouri law, a successor corporation is liable for a predecessor's obligations if it is merely a continuation. Several factors were considered for this determination: commonality of officers and shareholders, incorporation history, identical business operations, use of the same phone number and employees, and notice of transfer to customers. Swartout, the sole shareholder and director of both companies, incorporated Pill Dr. and maintained the same business type and location. Although Pill Dr. does not use the same equipment or trade name, it retained the same phone number and employees. Notification to customers and employees, while given, was minimal, indicating only a name change. All five factors support the conclusion that Pill Dr. is a mere continuation of Cape Fear, affirming the district court's finding of Pill Dr.'s successor liability.

Medicine Shoppe presented evidence to the district court indicating that the de-identification of its pharmacy would lead to consumer confusion and diminish consumer confidence in its franchise network, potentially resulting in irreparable harm. The loss of intangible assets such as reputation and goodwill, which are difficult to quantify monetarily, was highlighted as a significant concern. The court found no clear error in Medicine Shoppe's claim of imminent irreparable harm.

In evaluating the balance of harms, the district court determined that Medicine Shoppe faced a greater risk due to its established reputation over 25 years, compared to Pill Dr. and Swartout, who had recently commenced operations and faced only minor costs associated with licensing and re-identification. The court concluded that the balance of harms favored Medicine Shoppe.

The district court also noted that the public interest would be served by enforcing the licensing agreement to protect the integrity of the Medicine Shoppe trademark. It emphasized that allowing a party to evade contractual obligations by simply reincorporating under a new name would not benefit the public interest.

Ultimately, the court affirmed the decision to grant Medicine Shoppe a preliminary injunction and denied the appellants' motion to supplement the record on appeal. The ruling was made by Chief Judge Carol E. Jackson of the United States District Court for the Eastern District of Missouri.