By Colin Dean
The United States Court of Appeals for the Fourth Circuit in a recent decision, Rainbow School v Rainbow Early Education, affirmed the power of the district courts to award damages in excess of those provided for in contractual liquidated damages provisions.
The case involved a pair of Fayetteville-based daycare facilities battling over the use of the trademarked word and image for “rainbow.” The plaintiff, Rainbow School, Inc., had operated in Fayetteville for 20 years under the trademarked name “Rainbow School” and associated brand marks. After Rainbow School had operated in this relatively small market for over two decades, another company began operating a similar business utilizing rainbow in its name and logos. Rainbow School, sensing a threat to its brand, sued Rainbow Early Education Holding, LLC for trademark infringement and secured a preliminary injunction.
The two parties eventually settled the suit, with Rainbow School set to receive $30,000 in liquidated damages if Rainbow Early Education violated the terms of the injunction. In accordance with the terms of the settlement, the district court entered a consent judgment and enjoined Rainbow Early Education from using the word “rainbow” in its name or images of rainbows in connection with its business.
While this is all pretty typical of trademark infringement litigation, what happened next is where this case transcends the world of intellectual property and trademarks and becomes of note for all businesses. In violation of both the settlement agreement and the consent judgment, Rainbow Early Education continued to use the rainbow name and symbol to market its facility. The district court, in response, found Rainbow Early Education in contempt of court and awarded Rainbow School $60,000 — an amount equal to twice the parties’ agreed-upon liquidated damages amount.
The Fourth Circuit Court of Appeals affirmed the trial court’s decision, finding that the district court did not err in awarding Rainbow School damages in excess of the liquidated damages amount in the parties’ contract because the district court determined that Rainbow Early Education had committed multiple, repeated violations of the court’s injunction.
This case serves as a warning for all businesses – liquidated damages provisions may not provide a definitive cap on liability, particularly when violating a settlement agreement and court order.