BioZone Laboratories, Inc. v. Next Step Laboratories Corp.

Filing 45

ORDER GRANTING IN PART 36 DEFENDANTS' MOTION TO DISMISS IN PART FIRST AMENDED COMPLAINT. Any amended complaint to be filed by 12/11/2017. Signed by Magistrate Judge Nathanael Cousins on 11/27/2017. (ofr, COURT STAFF) (Filed on 11/27/2017)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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BIOZONE LABORATORIES, INC.,

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Plaintiff,

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United States District Court
Northern District of California

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v.
NEXT STEP LABORATORIES CORP.,
RICHARD RIGG,
Defendants.

Case No. 17-cv-02768-NC
ORDER GRANTING IN PART
DEFENDANTS’ MOTION TO
DISMISS IN PART FIRST
AMENDED COMPLAINT
Re: Dkt. No. 36

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NEXT STEP LABORATORIES CORP.,
Counter-Claimant,

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v.
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BIOZONE LABORATORIES, INC.,
RICHARD FISCHLER,
Counter-Defendants.

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This business dispute pits two beauty product suppliers against each other in a
pageant of contractual interpretation, dubious online marketing, and inflammatory emails
between executives. Plaintiff BioZone Laboratories, Inc. accuses defendant Next Step
Laboratories Corporation (NSL) of breaching a 2005 distribution agreement for two
cosmetics products, and alleges that NSL and defendant Richard Rigg illegally advertised
the products online. After the parties’ longtime business relationship fell apart in 2016,
BioZone asserts that Rigg, NSL’s CEO, made defamatory comments about BioZone that
cost BioZone a prized customer and sales.
Before the Court is NSL and Rigg’s motion to dismiss BioZone’s breach of contract

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and trade libel claims in their entirety, and to dismiss BioZone’s trademark infringement,

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false advertising, and unfair competition claims against Rigg. Based on the facts alleged,

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BioZone has laid out plausible claims for breach of contract and trade libel. It has not,

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however, pled facts that support its claims of trademark infringement, false advertising, or

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unfair competition against Rigg. NSL and Rigg’s motion is GRANTED IN PART and

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DENIED IN PART.

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I.

BACKGROUND
a. Factual Background1

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BioZone owns patents to two proprietary cosmetic ingredients, called “QuSomes”

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and “Inflacin.”2 Dkt. No. 25 (First Amended Complaint ¶¶ 7–9). Under a now-terminated

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United States District Court
Northern District of California

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2005 Technology Distribution Agreement, BioZone and NSL agreed on terms for the

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supply, distribution, and marketing of QuSomes and Inflacin. FAC ¶¶ 11–18; FAC Ex. A.

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The agreement required BioZone to produce “complexes” developed and specified by NSL

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consisting of QuSomes or Inflacin plus other chemicals, which NSL would then market

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and sell. FAC Ex. A. By its plain terms, the agreement did not require BioZone to provide

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NSL with bare QuSomes or Inflacin, just complexes of these ingredients. FAC Ex. A. A

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key provision stated that “NSL agrees to mark-up the Complexes no more than 100% of

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BioZone’s price.” FAC Ex. A.
The agreement also granted NSL “exclusive distribution rights for selling QuSomes

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and Inflacin Complexes” to specified customer accounts. BioZone and NSL agreed to

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BioZone attaches several documents to its complaint supporting its factual allegations.
See Dkt. Nos. 25-1–25-4. “As a general rule, ‘a district court may not consider any
material beyond the pleadings in ruling on a Rule 12(b)(6) motion.’” Lee v. City of Los
Angeles, 250 F.3d 668, 688 (9th Cir. 2001), overruled on other grounds by Galbraith v.
Santa Clara, 307 F.2d 1119, 1125 (9th Cir. 2002) (quoting Branch v. Tunnell, 14 F.3d 449,
453 (9th Cir. 1994). However, courts may consider “material which is properly submitted
as part of the complaint.” Id. The Court does so here.
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QuSomes are self-forming liposomes that improve dermal penetration of accessory
topical active ingredients by encapsulating them and rendering them soluble in water or
oil. Dkt. Nos. 25-1 (FAC Ex. A), 25-2 (FAC Ex. B). Inflacin reduces skin inflammation
by blocking two enzymes in the inflammatory response pathway. FAC Ex. A, Ex. B.
Case No. 17-cv-02768-NC
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establish “mutually agreeable sales objectives for its exclusive reserved accounts,” and

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failure to achieve these objectives for an account was “considered a breach of the exclusive

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territory terms of the Agreement for the exclusive reserved account.” FAC Ex. A.

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The agreement’s intellectual property clause granted NSL the right to patent unique

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combinations of chemicals that incorporate QuSomes, and “BioZone confers the right to

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NSL to exercise use of the patent.” FAC Ex. A. The agreement did not address NSL’s use

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of BioZone’s trademarks for the QuSomes and Inflacin products. FAC ¶ 17, Ex. A.

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BioZone was permitted to terminate the agreement with twelve months’ notice to
NSL. FAC ¶ 16, Ex. A. In case of termination, “BioZone will continue to supply NSL’s

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customers at the existing price and compensate NSL . . . .” FAC Ex. A. The agreement

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United States District Court
Northern District of California

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was signed by Rigg on behalf of NSL as its president, and by Daniel Fisher for BioZone as

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its president. FAC Ex. A.

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After the 2005 agreement was executed, BioZone sold bare QuSomes and Inflacin

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materials to NSL. FAC ¶ 20. NSL allegedly resold the bare products for more than 100%

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of the price it paid to BioZone, which BioZone asserts is a violation of the agreement.

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FAC ¶ 20–21.

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In the lead up to this dispute, NSL advertised QuSomes and Inflacin products on its

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website. According to the amended complaint, NSL used the QUSOME mark to describe

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products that BioZone did not produce, stating for example that NSL “develops custom

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and exclusive QuSomesTM ingredients for specific customer needs.” FAC ¶ 24, Ex. B.

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NSL also allegedly made statements that it was the exclusive supplier of QuSomes and

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Inflacin products, stating it “exclusively offers active ingredients prepared in QuSomesTM”

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and prefixing product names with “NS” for “Next Step.” FAC ¶ 24, Ex. B. According to

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BioZone, these advertisements violated BioZone’s trademarks and falsely represented that

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NSL was the sole and exclusive source of these products. FAC ¶¶ 23–29.

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Because BioZone believed NSL’s online advertisements violated its intellectual

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property rights, BioZone sent NSL a notice on August 16, 2016, terminating the 2005

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agreement and demanding that NSL cease and desist from further use of the QuSomes and
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Inflacin products. FAC ¶¶ 30–31. Since BioZone sent the notice, NSL allegedly

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continued to market and sell the products. FAC ¶ 33.

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On April 4, 2017, BioZone received two purchase orders from NSL for bare

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QuSomes and Inflacin materials, which BioZone declined to accept. FAC ¶ 34. Non-party

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Estee Lauder, the client for whom NSL placed the QuSomes purchase order, then

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contacted BioZone to discuss establishing a direct supply relationship. FAC ¶¶ 35–36.

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While awaiting Estee Lauder’s supplier certification process, BioZone offered to supply

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Estee Lauder with QuSomes through NSL, for a limited time period. FAC ¶ 37.

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During these negotiations, Rigg allegedly sent a message to Fischler and an Estee
Lauder executive criticizing BioZone and its products. The statement reads, “I will

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United States District Court
Northern District of California

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strongly recommend that all materials from BioZone get flagged: ‘Do not use in any new

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development’ because you will con[ti]nue to pose a problem.” FAC Ex. C. Rigg rejected

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BioZone’s offer to supply Estee Lauder with QuSomes through NSL, saying the 2005

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agreement would be “legally enforce[d] until termination date.” FAC ¶ 39, Ex. C.

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b. Procedural History

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BioZone brought this action against NSL alleging (1) breach of contract; (2)

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trademark infringement under the Lanham Act, 15 U.S.C. § 1114(1) and California

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common law; (3) false advertising under 15 U.S.C. § 1125 and California common law;

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(4) unfair competition passing off under 15 U.S.C. § 1125; (5) trade libel; and (6)

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declaratory relief. NSL filed a counterclaim against BioZone and Fischler, alleging breach

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of contract and related claims. Dkt. No. 12. BioZone and Fischler moved to dismiss the

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counterclaim, Dkt. No. 22, which the Court granted as to the misappropriation of trade

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secrets counterclaim and otherwise denied. Dkt. No. 32. BioZone filed an amended

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complaint against NSL, adding Rigg as a defendant on the trademark infringement, false

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advertising, unfair competition, and trade libel claims. Dkt. No. 25. NSL and Rigg now

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move to dismiss in part the amended complaint. Dkt. No. 36. The Court has subject

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matter jurisdiction over the action pursuant to 28 U.S.C. §§ 1331, 1367. All parties have

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consented to the jurisdiction of a magistrate judge. Dkt. Nos. 7, 9, 27, 44.
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II.

LEGAL STANDARD
A motion to dismiss for failure to state a claim under Rule 12(b)(6) tests the legal

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sufficiency of a complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). On a

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motion to dismiss, all allegations of material fact are taken as true and construed in the

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light most favorable to the non-movant. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-

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38 (9th Cir. 1996). The Court, however, need not accept as true “allegations that are

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merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” In re

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Gilead Scis. Secs. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008). Although a complaint need

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not make detailed factual allegations, it must contain sufficient factual matter, accepted as
true, to “state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly,

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United States District Court
Northern District of California

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550 U.S. 544, 570 (2007). A claim is facially plausible when it “allows the court to draw

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the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft

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v. Iqbal, 556 U.S. 662, 678 (2009).

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If a court grants a motion to dismiss, leave to amend should be granted unless the

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pleading could not possibly be cured by the allegation of other facts. Lopez v. Smith, 203

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F.3d 1122, 1127 (9th Cir. 2000).

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III. DISCUSSION

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NSL and Rigg’s motion seeks to dismiss BioZone’s first cause of action for breach

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of contract against NSL in its entirety; its second, third, and fourth causes of action for

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trademark infringement, false advertising, and unfair competition, as against Rigg only;

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and its fifth cause of action for trade libel against both defendants in its entirety.

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a. BioZone States a Claim for Breach of Contract.
BioZone claims NSL breached two contractual duties. First, it alleges NSL marked

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up “materials received from BioZone” by more than 100%, in violation of the 2005

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distribution agreement’s limitation on markups to “no more than 100% of BioZone’s

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price.” FAC ¶ 46, Ex. A. Second, it alleges NSL “fail[ed] to achieve mutually agreeable

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sales objectives,” in violation of the terms granting NSL exclusive territory rights over

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reserved accounts. FAC ¶ 47, Ex. A. NSL moves to dismiss BioZone’s breach of contract
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claim, arguing that the distribution agreement does not apply to bare QuSomes or Inflacin

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materials, which is what NSL marked up, and that BioZone has not and cannot identify

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any sales objectives that NSL failed to meet.

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The first alleged breach depends on whether the 2005 distribution agreement or any

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other contract set a markup limit on bare QuSomes and Inflacin materials, as opposed to

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“complexes” of these ingredients. BioZone’s complaint contradicts itself on this issue.

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BioZone specifically alleges that the distribution agreement barred NSL from “mark[ing]

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up the price of the Complexes by ‘more than 100% of BioZone’s price.’” FAC ¶ 14

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(emphasis added). In the same breath, BioZone asserts that “the Agreement prohibits
Defendants from marking up materials received from BioZone by more than 100% of the

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United States District Court
Northern District of California

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price BioZone charges,” including bare materials. FAC ¶ 20 (emphasis added). In its

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response to NSL and Rigg’s motion to dismiss, BioZone points to language in the

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complaint referring to “subsequent contracts for the sale of goods” other than the 2005

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agreement, and it argues that the 2005 agreement “was ‘modified’ over a course of over

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ten years” of business practices to include bare QuSomes and Inflacin. Dkt. No. 39 at 4–5.

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BioZone argues these “subsequent contracts” or the modified 2005 agreement provide the

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contractual basis for its breach of contract claim.

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Perhaps because they are impervious to self-forming liposomes, contracts may age

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with time. See Subsequent Conduct of Parties, 1 Witkin, Summary 11th Contracts § 772

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(2017) (“Acts of the parties, subsequent to the execution of the contract and before any

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controversy has arisen as to its effect, may be looked to in determining the meaning.”). By

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pleading the existence of “subsequent contracts for the sale of goods” and claiming that the

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parties modified the 2005 distribution agreement through subsequent conduct, BioZone

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offers a sufficient factual basis to infer that NSL was contractually prohibited from

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marking up bare QuSomes and Inflacin products by more than 100% of BioZone’s price.

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Taking as true BioZone’s allegation that NSL sold QuSomes to Estee Lauder for more than

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100% of Biozone’s price, BioZone plausibly states a breach of contract claim. At the

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motion to dismiss stage, factual allegations need only be skin-deep, so BioZone satisfies its
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pleading requirements.
The Court need not address the second alleged breach based on sales objectives,

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because BioZone sufficiently states a claim based on the markup provision. NSL’s motion

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to dismiss BioZone’s breach of contract claim is DENIED.

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b. BioZone Does Not State a Claim Against Defendant Rigg for Trademark
Infringement, False Advertising, or Unfair Competition.

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BioZone’s second, third, and fourth causes of action assert trademark infringement,

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false advertising, and unfair competition (passing off) under 15 U.S.C. §§ 1114, 1125 and

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California state common law. The claims are based on NSL’s online marketing of
QuSomes and Inflacin products, and are directed at both NSL and Rigg. NSL moves to

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United States District Court
Northern District of California

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dismiss these claims against Rigg, arguing that Rigg’s role as CEO alone does not subject

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him to liability, and that BioZone has not alleged additional facts that could give rise to

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personal liability.

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To state a claim for trademark infringement and unfair competition against Rigg

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personally, BioZone must plead facts showing that Rigg was a “moving, active conscious

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force” behind NSL’s infringement. Monsanto Co. v. Haskel Trading, 13 F. Supp. 2d 349,

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354 (E.D.N.Y. 1998) (interpreting claims under 15 U.S.C. §§ 1114, 1125); accord

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Microsoft Corp. v. Suncrest Enter., No. 03-cv-5424-JF, 2006 WL 1329881, at *7 (N.D.

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Cal. May 16, 2006). Mere authority to direct the infringing behavior is not enough;

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personal involvement is necessary. See Microsoft Corp., 2006 WL 1329881, at *7.

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BioZone’s complaint does not plead facts indicating that Rigg was personally

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involved in NSL’s online marketing. Instead, the complaint more superficially asserts that

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“Defendants” violated the QuSomes and Inflacin marks and advertised illegally. In its

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opposition brief, BioZone contends that the plural reference to “Defendants” adequately

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implicates Rigg, and offers to amend the complaint with “more verbose allegations.” Dkt.

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No. 39 at 7. BioZone also points out that Rigg “personally signed” the 2005 distribution

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agreement and that Rigg was the one who made the “unprovoked and libelous attack on

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BioZone’s business and reputation.” Dkt. No. 39 at 8.
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It is not cosmetic verbiage that is lacking, but relevant facts. Rigg may indeed have

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signed the distribution agreement and sent Inflacin-proof inflammatory statements, but

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neither of these acts bear on trademark infringement, false advertising, or passing off. The

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complaint offers no other specific facts showing that Rigg was a “moving, active conscious

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force” behind NSL’s online marketing decisions, meaning it fails to state a claim for relief

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that is plausible on its face. See Monsanto, 13 F. Supp. 2d at 354. NSL and Rigg’s motion

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to dismiss BioZone’s second, third, and fourth causes of action against Rigg is

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GRANTED. BioZone may eliminate the blemishes and reinvigorate the luster of its

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complaint by amending it with additional facts about Rigg’s personal involvement in

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United States District Court
Northern District of California

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NSL’s allegedly illegal online marketing.
c. BioZone States a Claim for Trade Libel.

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The last component of NSL and Rigg’s motion seeks to dismiss BioZone’s trade

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libel claim against both defendants. Unlike the classic tort of libel, which is designed to

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protect the plaintiff’s reputation, trade libel is based on pecuniary damage arising from a

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defendant’s disparagement of a plaintiff’s property. Leonardini v. Shell Oil Co., 216 Cal.

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App. 3d 547, 573 (1989).

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Details are key. “To successfully state a claim for trade libel or defamation, a

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plaintiff must allege: (1) who made the statements, (2) to whom the statements were made,

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(3) the time and place of publication, and (4) the substance of the statements.” NPK Indus.

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v. Hunter, No. 15-cv-00811-SI, 2015 WL 5461667, at *4 (N.D. Cal. Sept. 16, 2015). The

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plaintiff must also allege specific pecuniary harm by identifying “particular customers and

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transactions of which it was deprived as a result of the libel.” Mann v. Quality Old Time

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Serv., Inc., 120 Cal. App. 4th 90, 109 (2004).

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Read in context, BioZone’s amended complaint satisfies these requirements. The

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complaint alleges that Rigg, on behalf of NSL, sent an email to Fischler and an Estee

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Lauder executive on May 3, 2017 threatening to flag “all materials from Biozone” with the

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label “Do not use in any new development.” FAC ¶ 39. These facts apply the foundation

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of who, what, when, and where.
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NSL protests that Rigg’s statement strikes at BioZone’s reputation rather than the

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quality of its products, and it challenges whether BioZone adequately pleads pecuniary

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harm. The first argument misses the mark, because trade libel includes false or derogatory

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statements that target the plaintiff’s “product or business,” which Rigg’s statement does.

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Hartford Cas. Ins. Co. v. Swift Distribution, Inc., 59 Cal. 4th 277, 291 (2014). The second

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argument fails because the facts give rise to a reasonable inference of pecuniary harm. On

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its face, the complaint makes only general allegations, but context bolsters its complexion.

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The complaint states that BioZone suffered “lost sales and profits, lost customers, and

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damage to its relationship with customers.” FAC ¶ 97. This alone is not sufficiently
specific. See NPK Indus., 2015 WL 5461667, at *4 (dismissing trade libel claim where the

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United States District Court
Northern District of California

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plaintiff did not identify the particular customers or transactions it lost). However, the

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complaint describes Rigg’s statement in the broader context of BioZone’s efforts to sell

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QuSomes material to Estee Lauder, and it alleges that Rigg intended to induce Estee

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Lauder and other customers not to do business with BioZone. These allegations permit a

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reasonable inference that Rigg’s statement deprived BioZone of a particular transaction

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with Estee Lauder. This is enough. See Mann, 120 Cal. App. 4th at 109. NSL and Rigg’s

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motion to dismiss BioZone’s trade libel claim is DENIED.

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IV. CONCLUSION

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NSL and Rigg’s motion to dismiss is DENIED as to BioZone’s breach of contract

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and trade libel claims. The motion is GRANTED as to BioZone’s trademark infringement,

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false advertising, and unfair competition claims against defendant Rigg only. These claims

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are DISMISSED, with leave to amend. If BioZone wishes to give its complaint a

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makeover, it must do so within 14 days, by December 11, 2017. No new claims or parties

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may be added without leave of court.

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IT IS SO ORDERED.

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Dated: November 27, 2017

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_____________________________________
NATHANAEL M. COUSINS
United States Magistrate Judge

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Case No. 17-cv-02768-NC

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