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Sobba v. Elmen

January 30, 2007

LEE SOBBA, INDIVIDUALLY AND DERIVATIVELY PLAINTIFF IN THE NAME OF AND ON BEHALF OF SOBEL, INC., BELSO, INC., AND ELSOB, INC.
v.
SPENCER ELMEN; SODAKCO, LLC; SUITE 107, LLC; SOBEL, INC.; BELSO, INC.; AND ELSOB, INC. DEFENDANTS



The opinion of the court was delivered by: J. Leon Holmes United States District Judge

OPINION AND ORDER

Lee Sobba brought this shareholder derivative action on behalf of Sobel, Inc., Belso, Inc., and Elsob, Inc., against Spencer Elmen, Sodakco, LLC, and Suite 107, LLC. The complaint alleges that Elmen breached his fiduciary duties. The complaint also alleges that Sodakco and Suite 107 have infringed a trademark in violation of § 43 of the Lanham Act, 15 U.S.C. § 1125, and have engaged in unfair competition in violation of the Arkansas Deceptive Trade Practices Act, Ark. Code Ann. § 4-88-101 et seq., and the common law. Sobba filed a motion for temporary restraining order and preliminary injunction in which he seeks preliminarily to restrain the defendants from using the Cupids tradename, trademark, and trade dress, and from making false representations that there is an association between stores operated by corporations the shareholders of which are Elmen and Sobba and stores operated by limited liability companies of which Sobba is not an owner. The motion further sought to enjoin alleged financial abuses, but Sobba has conceded that money damages are adequate as to those claims, so the Court will not address them in this opinion. By agreement, the Court temporarily restrained the defendants from opening a store in Jacksonville using the Cupids tradename, trademark, and trade dress. The Court conducted an evidentiary hearing on January 25, 2007. All parties were present in person and through their attorneys. For the reasons stated hereinafter, the motion for preliminary injunction is denied.

I.

Sobel, Belso, and Elsob are Arkansas corporations that operate three stores named Cupids. Sobel operates a store on 65th Street in Little Rock. Belso operates a store on Rodney Parham in Little Rock. Elsob operates a store in Hot Springs. According to the complaint, the stores sell "lingerie and adult-themed products." Sobba and Elmen are officers and directors of all three of the corporations. A.W. Bailey, an accountant, is also a director of all three corporations. Sobba owns 46% of Sobel; his wife owns 4% of Sobel; and Elmen owns 50% of Sobel. Sobba and Elmen each own 50% of Belso and Elsob.

Sobel opened the first Cupids store on 65th Street in Little Rock in October 2002. The store was originally called "Adult Arcade" but changed its name in December 2002 to Cupids Lingerie & More. Belso opened Cupids Lingerie on Rodney Parham Boulevard in Little Rock in 2004. Elsob opened Cupids Lingerie and More in Hot Springs, Arkansas, in May 2005.*fn1 Elmen manages the two stores in Little Rock. Sobba manages the store in Hot Springs.

All three stores use the tradename Cupids, as well as the trademark and trade dress. No one has registered the tradename, trademark or trade dress. However, Sobel is the senior user of the tradename, trademark, and trade dress used by all three companies. Belso and Elsob are licensees.

Sodakco and Suite 107 are limited liability companies controlled by Elmen. Suite 107 operates a store in Conway, Arkansas,*fn2 named Cupids Lingerie. Jackie, LLC,*fn3 an entity affiliated with Elmen, has constructed and plans to open a store in Jacksonville, Arkansas,*fn4 named Cupids Lingerie. Sobba has no ownership interest in Sodakco, Suite 107, or Jackie, LLC.

The two Cupids stores in Little Rock and the one in Hot Springs have commonly used the same tradename, trademark, and trade dress. They have advertised collectively.

Elmen has included the Conway store in the collective advertising since late January 2006, shortly before the store opened in February 2006. He has also included the to-be-opened Jacksonville store in collective advertising. Both the Conway store and the to-be-opened Jacksonville store use the same tradename, trademark, and trade dress as the two stores in Little Rock and the one in Hot Springs.

Elmen says that in the fall of 2005 he and Sobba agreed that the two of them separately could open new stores using the name Cupids Lingerie or Cupids Lingerie & More. He says that in January 2006 he and Sobba agreed upon a list of cities and areas into which each could expand with new stores. He says that he and Sobba agreed that Conway and Jacksonville would be his territory. He says pursuant to this agreement that he went forward through Suite 107 to open the store in Conway, and he went forward through Jackie, LLC, to open the store in Jacksonville. Sobba agrees that the possibility was discussed that the two of them might open Cupids stores separately, but he denies that any agreement was reached.

Neither Elmen's testimony nor Sobba's is entirely convincing. Elmen testified that the Cupids tradename, trademark, and trade dress and the associated goodwill are the most important assets of the three corporations. He testified that he and Sobba reached their agreement to operate separate stores using the Cupids tradename, trademark, and trade dress at a meeting of the board of directors on January 11, 2006. However, no minutes exist of that meeting, nor is there any written agreement that would impose any control on how the separate stores might use the tradename, trade mark, and trade dress. The only documentation consists of two scribbled lists of cities with Elmen's or Sobba's initials next to some of the cities. One list was made by Elmen during the conversation on January 11, while the other list was made by Sobba. Elmen says that these two lists constitute the agreement as to which cities would be his territory and which cities would be Sobba's territory. Sobba testified that the two lists reflect a discussion of which cities might be Elmen's territory and which cities might be his, but that no agreement was reached. On the face of it, up to this point, the evidence would seem to be in favor of Sobba. The two handwritten lists look like lists that were scribbled down during a conversation; they lack the form and the substance that would be expected of an agreement of two owners of a valuable trademark to go their separate ways and separately use their commonly-owned trademark.

However, from sometime shortly after January 11, 2006, until the summer of 2006, both parties proceeded as though they had reached an agreement that would allow each of them to open Cupids stores separately. An advertisement published on January 26, 2006, includes advertisement for the two Cupids stores in Little Rock and the store in Hot Springs. It then adds:

NOW IN CONWAY! 2585 Donaghey ...


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