Elements Spirits, Inc. et al v Iconic Brands, Inc

Filing 46

ORDER DENYING IN PART AND GRANTING IN PART MOTION TO DISMISS COUNTERCLAIMS 34 by Judge Dean D. Pregerson: Plaintiffs Motion to Dismiss is DENIED as to counterclaims (2) fraudulent inducement, (5) account stated, and part of (6) accounting. The Motion is GRANTED with prejudice as to the part of claim (6) accounting that is preempted by the Copyright Act. (lc). Modified on 9/17/2015 .(lc).

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UNITED STATES DISTRICT COURT

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CENTRAL DISTRICT OF CALIFORNIA

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ELEMENTS SPIRITS, INC., a
California corporation;
FABRICA DE TEQUILAS FINOS
S.A. De C.V., a Mexican
corporation; WORLDWIDE
BEVERAGE IMPORTS, LLC, a
Nevada limited liability
company,

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Plaintiffs,
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v.
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ICONIC BRANDS, INC., a
California corporaiton;
GRACE KIM BRANDI, an
individual,
Defendants.
___________________________

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Case No. CV 15-02692 DDP (AGRx)
ORDER DENYING IN PART AND
GRANTING IN PART MOTION TO
DISMISS COUNTERCLAIMS
[Doc. No. 34]

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Presently before the Court is Plaintiffs and Counterdefendants

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Elements Spirits, Inc., Fabrica de Tequilas Finos S.A. de C.V., and

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Worldwide Beverage Imports, LLC’s Motion to Dismiss certain

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counterclaims from Defendants and Counterclaimants Iconic Brands,

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Inc. and Grace Kim Brandi’s First Amended Counterclaim.

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heard oral arguments and considered the parties’ submissions, the

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Court adopts the following order.

Having

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I.

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BACKGROUND
Plaintiff and Counterdefendant Elements Spirits, Inc.

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(“Elements”) sells KAH brand tequila.

(First Am. Countercl. at 5.)

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The tequila is bottled in painted, skull-shaped glass bottles meant

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to resemble “‘calaveras,’ the decorated sugar skulls associated

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with ‘Dia de los Muertos.’”

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counterclaimant Grace Kim Brandi (“Brandi”) formed Elements in

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November 2009, and Elements launched KAH Tequila in 2010.

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4-5.)

(Id. at 4-5.)

Defendant and

(Id. at

In March 2010, Elements and Brandi were sued by Globefill,

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Inc. for trade dress infringement over the skull-shaped bottles.

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(Id. at 5.)

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In June 2010, Elements sold 51% of its shares to Worldwide

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Spirits, a company Defendants describe as “closely related to”

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Plaintiff and Counterdefendant Worldwide Beverage Imports, LLC

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(“Worldwide”).

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an officer and director of Elements, but she remained a minority

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shareholder of the company.

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registered copyrights to the tequila bottle designs in her name.

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(Id. at 6, exs. 1-5.)

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(Id. at 5.)

In April 2011, Brandi was removed as

(Id. at 5-6.)

In August 2011, Brandi

In November 2013, during a mediation ordered in the Globefill

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trademark litigation, Elements and Brandi entered into a “Binding

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Agreement” in which “Brandi agreed to license her copyrighted

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designs to Elements.”

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pay for the defense of the Globefill suit, acknowledge Brandi as an

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Elements shareholder, “conduct a proceeding to determine who [were]

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the shareholders of Elements,” “acknowledge Brandi as the creator

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of KAH tequila brand and bottles,” “acknowledge the validity of

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Brandi’s copyrights,” and “provide annual statements of the

(Id. at 7.)

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In exchange, Elements agreed to

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distribution status for the Elements shareholders.” (Id. at 7-8.)

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Sometime after entering into the agreement, relations

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deteriorated between Brandi and Plaintiffs.

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Defendants allege that Plaintiffs failed to follow through with the

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Binding Agreement.

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company, Defendant and Counterclaimant Iconic Brands, Inc.

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(“Iconic”), and began selling another tequila using her copyrighted

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designs.

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C.V. (“Finos”), and Worldwide (collectively, “Plaintiffs” and

(Id. at 8-10.)

(Id. at 11.)

(See id. at 8-11.)

So Brandi started a new

Elements, Fabrica de Tequilas Finos S.A. de

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“Counterdefendants”) then brought this case against Iconic and

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Brandi (collectively, “Defendants” and “Counterclaimants”) for

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various claims, including trademark and trade dress infringement,

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breach of contract, and business torts.

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Iconic and Brandi responded with a counterclaim (now First

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Amended Counterclaim or “FAC”) against Plaintiffs, two of

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Plaintiffs’ corporate officers (Luz Maria Cabo Alvarez and Delia

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Rodriguez Cabo), and two distributors of Plaintiffs’ tequila,

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Aveniu Brands, Inc. and Wine Warehouse.

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(1) federal copyright infringement; (2) fraud in the inducement;

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(3) breach of contract; (4) declaratory relief for rescission of

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the Binding Agreement; (5) account stated; and (6) accounting.

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The counterclaims allege

Plaintiffs have now filed a Motion to Dismiss counterclaims

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(2) fraud in the inducement, (5) account stated, and (6)

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accounting.

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II.

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LEGAL STANDARD
A 12(b)(6) motion to dismiss requires a court to determine the

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sufficiency of the plaintiff's complaint and whether or not it

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contains a “short and plain statement of the claim showing that the
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pleader is entitled to relief.”

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Rule 12(b)(6), a court must (1) construe the complaint in the light

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most favorable to the plaintiff, and (2) accept all well-pleaded

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factual allegations as true, as well as all reasonable inferences

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to be drawn from them.

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F.3d 979, 988 (9th Cir. 2001), amended on denial of reh’g, 275 F.3d

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1187 (9th Cir. 2001); Pareto v. F.D.I.C., 139 F.3d 696, 699 (9th

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Cir. 1998).

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Fed. R. Civ. P. 8(a)(2).

Under

See Sprewell v. Golden State Warriors, 266

In order to survive a 12(b)(6) motion to dismiss, the

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complaint must “contain sufficient factual matter, accepted as

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true, to ‘state a claim to relief that is plausible on its face.’”

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Ashcroft v. Iqbal, 556 U.S. 662, 663 (2009) (quoting Bell Atl.

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Corp. v. Twombly, 550 U.S. 544, 570 (2007)).

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“[t]hreadbare recitals of the elements of a cause of action,

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supported by mere conclusory statements, do not suffice.”

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678.

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legal theory or sufficient facts to support a cognizable legal

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theory.”

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1104 (9th Cir. 2008); see also Twombly, 550 U.S. at 561-63

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(dismissal for failure to state a claim does not require the

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appearance, beyond a doubt, that the plaintiff can prove “no set of

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facts” in support of its claim that would entitle it to relief).

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complaint does not suffice “if it tenders ‘naked assertion[s]’

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devoid of ‘further factual enhancement.’”

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(quoting Twombly, 550 U.S. at 556).

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plausibility when the plaintiff pleads factual content that allows

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the court to draw the reasonable inference that the defendant is

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liable for the misconduct alleged.”

However,

Id. at

Dismissal is proper if the complaint “lacks a cognizable

Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097,

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A

Iqbal, 556 U.S. at 678

“A claim has facial

Id.

The Court need not accept

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as true “legal conclusions merely because they are cast in the form

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of factual allegations.”

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F.3d 1136, 1139 (9th Cir. 2003).

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III. DISCUSSION

Warren v. Fox Family Worldwide, Inc., 328

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A.

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Plaintiffs argue that the fraudulent inducement counterclaim

Fraudulent Inducement Counterclaim

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should be dismissed because the FAC fails to meet Rule 9(b)’s

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particularity requirement by not pleading sufficient facts to

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support the claim.

(Mot. Dismiss at 5-6.)

Defendants argue the

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FAC alleges that Elements induced Brandi to agree to the “Binding

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Agreement” but had no intention of performing the terms of the

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agreement, thus sufficiently pleading fraud under Rule 9(b).

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(Opp’n Mot. Dismiss at

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pleading is conclusory and fraudulent intent cannot be proven by

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mere subsequent nonperformance of a contract. (Reply Supp. Mot.

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Dismiss at 2-3.)

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6:1-3.)

Plaintiffs respond that the

Federal Rule of Civil Procedure 9(b) requires a party to state

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with “particularity the circumstances constituting fraud or

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mistake.”

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must identify the who, what, when, where, and how of the misconduct

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charged, as well as what is false or misleading about [the

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purportedly fraudulent] statement, and why it is false.”

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v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1055 (9th Cir.

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2011) (internal quotation marks and citations omitted).

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purpose of Rule 9(b)’s requirements is to provide the defending

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party with notice of the particular averment of fraud so as to

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allow the party to fully defend against the claim.

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v. California, 236 F.3d 1014, 1019 (9th Cir. 2001).

Fed. R. Civ. P. 9(b).

“To satisfy Rule 9(b), a pleading

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Cafasso

The

See Bly-Magee

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Here, Brandi’s theory for her fraud in the inducement claim is

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that Elements, acting through its president and officer Timothy

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Owens, convinced Brandi to enter into the Binding Agreement so

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Elements could continue using Brandi’s copyrighted designs in the

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tequila bottles, but that Elements never intended to perform the

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terms of the Agreement.

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Opp’n Mot. Dismiss at 5-6.)

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allegations that support a claim of fraud against Elements.

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Am. Countercl. at ¶¶ 22-27.)

(First Am. Countercl. at 8-10, 13-14;
Section IV of the FAC details Brandi’s
(First

Brandi claims that after she licensed

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her copyrights to Elements in the Binding Agreement, Elements

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“ceased acknowledging Brandi as the creator of KAH . . .; . . .

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failed to conduct the promised proceeding to determine the

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shareholder status of the company; and . . . failed to provide any

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annual statements of shareholders’ distribution status for 2013 or

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2014,” all in violation of the Binding Agreement.

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Countercl. at ¶ 26.)

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(First Am.

Additionally, the FAC points to Mr. Owens’ declaration to this

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Court in a prior preliminary injunction hearing, where Mr. Owens

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stated that “Elements did not believe Brandi’s copyrights were

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valid” at the time Mr. Owens signed the Binding Agreement on

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Elements’ behalf.

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that this statement demonstrates that Elements entered into the

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Binding Agreement without intending to perform its end of the

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bargain.

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(First Am. Countercl. at 13.)

Brandi argues

Whether this argument ultimately succeeds is not the question

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in a motion to dismiss based on Rule 9(b); instead, Brandi need

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only put Elements on notice of the specific averment of fraud.

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Here, the FAC contains sufficient pleading to put Elements on
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notice of Brandi’s specific averment of fraud against the company

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in terms of who (Elements and Owens), what (not intending to follow

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through on the Binding Agreement and abide by the terms), where (in

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the Binding Agreement), when (at the Globefill mediation), why (to

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get licenses to the copyrights), and how (promising to perform the

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Binding Agreement), which is all the rule requires.

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Elements also contends that Brandi’s claim must fail because

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she has not alleged any actions that constitute fraud.

The “mere

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failure to perform a contract does not constitute fraud,” but “a

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promise made without the intention to perform can be actionable

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fraud.”

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CRB, 2000 WL 284211, at *4 (N.D. Cal. Mar. 9, 2000) (internal

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quotations and citations omitted).

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Elements merely failed to perform the contract. Rather, Brandi

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pleads facts to show that Elements entered into the Binding

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Agreement with no intention of actually performing its side of the

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agreement.

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Brandi has pled sufficient facts to support her claim that Elements

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entered into the Binding Agreement without the intention to perform

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its obligations, which constitutes a proper allegation of fraud.

Richardson v. Reliance Nat’l Indem. Co., No. C 99-2952

Brandi’s theory is not that

Altogether, the FAC’s allegations demonstrate that

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B.

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Iconic has an account stated counterclaim against Finos,

Account Stated Counterclaim

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alleging that Finos did not pay a Chinese manufacturer of the KAH

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tequila bottles for the manufacturer’s work.

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at 16; Opp’n Mot. Dismiss at 7:11-14.)

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manufacturer, Qingdao ABAC Glass Co., Ltd. (“ABAC Glass”), assigned

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its claim against Finos for $564,000 to Iconic.

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Countercl. at 16; Opp’n Mot. Dismiss at 7:21-22.)
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(First Am. Countercl.

Iconic alleges that the

(First Am.
Finos argues the

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Court lacks jurisdiction over this counterclaim because the

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counterclaim does not arise out of the same transaction or

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occurrence as the claims in the complaint.

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In response, Iconic argues that the “complaint’s principal issues

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all relate to the KAH tequila bottle,” so the Court should exercise

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jurisdiction over the counterclaim as it arises out of the same

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transactions and occurrences as the complaint.

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at 8.)

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economy.”

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(Mot. Dismiss at 8-9.)

(Opp’n Mot. Dismiss

Further, doing so “best serves the interests of judicial
(Id.)
1.

Compulsory Counterclaim

A counterclaim may be either compulsory or permissive.

Fed.

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R. Civ. P. 13.

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occurrence that is the subject matter of the opposing party’s

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claim,” the counterclaim is compulsory.

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13(a)(1)(A).

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same transaction as the related claim, the two can be viewed as

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part of the same case or controversy.

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Servs., Inc., 404 F. Supp. 2d 1164, 1167 (N.D. Cal. 2005).

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courts do have supplemental jurisdiction over compulsory

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counterclaims.

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If a counterclaim “arises out of the transaction or

Fed. R. Civ. P.

Because a compulsory counterclaim arises out of the

Campos v. Western Dental
Thus,

To determine whether the claim and counterclaim arise out of

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the same transaction, the court applies a “logical relationship”

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test to “analyze whether the essential facts of the various claims

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are so logically connected that considerations of judicial economy

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and fairness dictate that all issues be resolved in one lawsuit.”

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Pochiro v. Prudential Ins. Co. of America, 827 F.2d 1246, 1249 (9th

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Cir. 1987) (citation omitted).

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The account stated counterclaim requires the Court to inquire

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into an agreement between Finos and ABAC Glass regarding the

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manufacturing of the KAH tequila bottles and the alleged subsequent

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failure to pay.

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complaint is the Binding Agreement between Brandi and Elements,

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which is an independent transaction and occurrence from the

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agreement between Finos and ABAC Glass.

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counterclaim is not compulsory and is instead permissive.

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2.

The pertinent agreement to the claims in the

Therefore, the

Permissive Counterclaim

Having determined that Iconic’s account stated counterclaim is

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permissive, the question remains whether this Court may exercise

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supplemental jurisdiction over the counterclaim.

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has yet to express an opinion on whether permissive counterclaims

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require an independent jurisdictional basis beyond 28 U.S.C. §

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1367(a)’s “same case and controversy” requirement.

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Mazda American Credit, 385 F. Supp. 2d 1063, 1066-67 (E.D. Cal.

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2005).

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U.S.C. § 1367(a) allows district courts to exercise supplemental

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jurisdiction over either compulsory or permissive counterclaims.

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Jones v. Ford Motor Credit Co., 358 F.3d 205, 212-13 (2d Cir.

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2004);

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(7th Cir. 1996).1

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supplemental jurisdiction under 28 U.S.C. § 1367(a) requires only a

The Ninth Circuit

Sparrow v.

The Second and Seventh Circuits, however, have held that 28

Channell v. Citicorp Nat'l Servs., Inc., 89 F.3d 379, 384
The “same case and controversy” requirement for

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As other courts have noted, the extension of supplemental
jurisdiction to both compulsory and permissive counterclaims
renders the compulsory/permissive analysis somewhat redundant. See
Sparrow, 385 F. Supp. 2d at 1070 n.4. Those circuits which have
approved the exercise of supplemental jurisdiction have also
dispensed with the compulsory/permissive counterclaim inquiry. Id.
at 1067.
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“loose factual connection between the claims.”

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at 385.

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Channell, 89 F.3d

Courts in this circuit have found they have discretion to

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exercise supplemental jurisdiction over certain permissive

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counterclaims.

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1:09cv0192 AWI DLB, 2009 WL 1405196, *4 (E.D. Cal. May 19,

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2009)(finding the court had discretion to exercise supplemental

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jurisdiction over a breach of contract counterclaim on an

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underlying debt in a Fair Debt Collection Practices Act case, but

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See, e.g., Marlin v. Chase Cardmember Servs., No.

declining to exercise such discretion).
Here, the complaint and counterclaim do share a loose factual

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connection: the claims and counterclaims all revolve around the KAH

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tequila bottles.

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economy to keep all the claims related to the parties and the KAH

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tequila bottles together in one case.

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discretion will exercise supplemental jurisdiction over this claim.

Further, it is in the interest of judicial

Therefore, the court in its

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C.

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Brandi seeks an accounting against all Plaintiffs for profits

Accounting Counterclaim

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earned by the use and sale of Brandi’s copyrights, the sales of KAH

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tequila to determine the amount of royalties that should have been

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paid to Elements, the attorney fees that are offsets against any

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royalties earned by Elements, and the value of Brandi’s stock in

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Elements.

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Copyright Act preempts Brandi’s accounting claim.

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10:20-21.)

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preempted because the accounting claim is not based solely on her

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claim for copyright infringement but is also based on her breach of

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contract and fraud claims.

(First Am. Countercl. at 17.)

Plaintiffs argue that the
(Mot. Dismiss at

Brandi responds that the accounting claim is not

(Opp’n Mot. Dismiss at 10.)
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The Copyright Act preempts rights under common law or state

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statutes that “are equivalent to any of the exclusive rights within

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the general scope of copyright as specified by section 106.”

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U.S.C. § 301(a).

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copyright preemption.

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‘subject matter’ of the state law claim falls within the subject

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matter of copyright as described in 17 U.S.C. §§ 102 and 103.”

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Laws v. Sony Music Ent’mt, Inc., 448 F.3d 1134, 1137 (9th Cir.

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2006) (footnotes omitted).

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The Ninth Circuit has adopted a two-part test for
First, the court “determine[s] whether the

Second, if the court determines the

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subject matter is within copyright, then the court “determine[s]

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whether the rights asserted under state law are equivalent to the

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rights contained in 17 U.S.C. § 106, which articulates the

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exclusive rights of copyright holders.”

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1.

Id. at 1137-38.

Subject Matter of Copyright

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First, the accounting claim must relate to subject matter

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within the scope of the Copyright Act for preemption to apply.

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Section 102 of the Copyright Act extends copyright protection to

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“original works of authorship fixed in any tangible medium of

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expression,” including “sculptural works.”

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17 U.S.C. § 102(a).

Here, the first accounting claim in the FAC is for “all of

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counterdefendants’ profits earned as a result of their use and

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sale, authorized and unauthorized, of counterclaimant Brandi’s

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copyrights.”

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claim relates to copyrightable subject matter—namely, Brandi’s

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copyrights in her sculptural works, the calavera-esque tequila

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bottles.

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(First Am. Countercl. at 17).

By its terms, this

The other three accounting claims are for the “sales of KAH
tequila, internationally, to determine what royalties should have
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been paid to Elements”; the “attorney fees incurred and paid by

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Elements or on its behalf that are being claimed as offsets against

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royalties earned”; and “Elements’ value and the value of

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counterclaimant Brandi’s stock in Elements.”

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at 17).

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matter of copyright because their subject matters are tequila

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sales, attorneys fees, and values of a company and its stocks, none

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of which are copyrightable.

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within the scope of the Copyright Act, but the accounting for the

(First Am. Countercl.

These latter three claims are not grounded in the subject

Thus, these three claims are not

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Plaintiffs’ use of Brandi’s copyrights is within the subject matter

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of copyright.

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2.

Exclusive Rights of Copyright

Second, the right asserted in the state law action must be

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equivalent to a right protected under the Copyright Act for

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preemption to apply.

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exclusive rights of a copyright owner, including reproduction of

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the copyrighted work, preparation of derivative works, distribution

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of the work, and public performance and display of the work.

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U.S.C. § 106(1)-(5).

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action must protect rights that are qualitatively different from

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the rights protected by copyright: the complaint must allege an

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‘extra element’ that changes the nature of the action.”

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Miramax Film Corp., 383 F.3d 965, 968 (9th Cir. 2004), amended on

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denial of reh’g 400 F.3d 658 (9th Cir. 2004).

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Section 106 in the Copyright Act outlines the

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“To survive preemption, the state cause of

Grosso v.

An accounting claim under California law requires a plaintiff

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to show (1) a fiduciary relationship between the parties or (2)

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complicated accounts such that “an ordinary legal action demanding

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a fixed sum is impracticable.”

Meixner v. Wells Fargo Bank, N.A.,

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–F. Supp. 3d–, 2015 WL 1893514 (E.D. Cal. 2015).

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An accounting between co-owners of a copyright is not

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preempted by the Copyright Act because co-owners cannot sue each

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other for infringement as they each have equal right to exploit the

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work.

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But where the cause of action for accounting is “rooted primarily

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on contentions that [the other party] infringed on [the claimant’s]

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copyrighted work,” then the Copyright Act does preempt the state

See Oddo v. Ries, 743 F.2d 630, 633, 635 (9th Cir. 1984).

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law claim.

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Supp. 1236, 1241 (C.D. Cal. 1987).

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Motown Record Corp. v. George A. Hormel & Co., 657 F.

Here, Brandi’s first accounting claim is based on Plaintiffs’

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use of her copyrights.

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as the existence of a valid licensing relationship is disputed in

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the complaint as well as the counterclaim.

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First Am. Countercl. at 11-13, 15.)

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for this accounting claim is that Brandi makes a copyright

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infringement claim against Plaintiffs, claiming that any license to

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use her works was “cancelled” and that Plaintiffs “have made and

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will make substantial profits and gains to which they are not

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entitled” from such infringing use.

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Therefore, the accounting claim for profits derived from using

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Brandi’s copyrighted material is preempted by the Copyright Act

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because it depends upon the resolution of the copyright

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infringement claim.

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3.

The validity of Brandi’s copyrights as well

(See Compl. at 19-22;

But what is most problematic

(First Am. Countercl. at 12.)

Lack of Legal Basis for Accounting

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Plaintiffs also argue that Brandi lacks a “legal basis” for

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her accounting claims to determine the value of Elements and its
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shares of stock.

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further argue that the valuation claim and the other accounting

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claims for attorneys fees and tequila sales are “derivative” and so

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cannot be brought by Brandi as a direct suit.

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Dismiss at 6-7.)

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responds by pointing to the counterclaims for breach of contract

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and fraud that are based in part on Plaintiffs’ failure to provide

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the requested information as promised in the Binding Agreement.

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(Opp’n Mot. Dismiss at 10-11.)

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(Mot. Dismiss at 11.)

In their Reply, Plaintiffs

(Reply Supp. Mot.

To support her need for an accounting, Brandi

Plaintiffs’ argument is without merit because Brandi need not

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bring these claims as a shareholder derivative suit.

Brandi

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alleges fraud in the inducement and breach of contract in relation

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to Plaintiffs’ actions after entering into the Binding Agreement.

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It is upon these grounds that Brandi brings the accounting claims

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for attorneys fees, tequila sales, and valuation of Elements and of

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the shares in Elements.

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account as requested is a material breach of the Binding Agreement,

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thus leading to Brandi’s cancellation of any copyright licenses in

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that Agreement.

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Further, the lack of Plaintiffs’ financial information prevents

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Brandi from calculating any damages that could be owed for that

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alleged breach and fraud.

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1893514; Teselle v. McLoughlin, 173 Cal. App. 4th 156, 180

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(2009)(“[T]he purpose of the accounting is, in part, to discover

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what, if any, sums are owed to the plaintiff.”)

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alleges a direct injury that is not required to be brought as a

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derivative suit and that does have a legal basis at this motion to

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dismiss stage.

Brandi alleges that Plaintiffs’ failure to

(See First Am. Countercl. at 10-11, 14, 17.)

See Meixner, –F. Supp. 3d–, 2015 WL

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Thus, Brandi

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IV.

CONCLUSION
For the reasons stated above, Plaintiffs’ Motion to Dismiss is

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DENIED as to counterclaims (2) fraudulent inducement, (5) account

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stated, and part of (6) accounting.

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prejudice as to the part of claim (6) accounting that is preempted

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by the Copyright Act.

The Motion is GRANTED with

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IT IS SO ORDERED.

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Dated: September 17, 2015
HON. DEAN D. PREGERSON
United States District Judge

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