Certified Nutraceuticals Inc. v. The Clorox Company et al

Filing 25

ORDER Denying 22 Defendants' Motion to Dismiss. Signed by Judge Thomas J. Whelan on 1/17/2019. (jao)

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UNITED STATES DISTRICT COURT

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SOUTHERN DISTRICT OF CALIFORNIA

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CERTIFIED NUTRACEUTICALS, INC.,

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Plaintiff,

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ORDER DENYING DEFENDANTS’
MOTION TO DISMISS [DOC. 22]

v.

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Case No.: 18-CV-0744 W (KSC)

THE CLOROX COMPANY, et al.,
Defendants.

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Pending before the Court is a motion to dismiss Plaintiff’s Second Amended

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Complaint (“SAC”) brought by Defendants the Clorox Company, Nutranext, and Neocell

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Holding Company. [Doc. 22.] The Court decides the matters on the papers submitted

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and without oral argument pursuant to Civil Local Rule 7.1(d)(1). For the reasons that

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follow, the Court DENIES the motion.

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18-CV-0744 W (KSC)

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I.

BACKGROUND
According to the Second Amended Complaint (“SAC”), “[t]his lawsuit arises from

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Defendants[’] deceptive marketing practices selling inferior chicken carcasses . . . .”

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(SAC [Doc. 21] ¶ 1.) The SAC alleges that Defendants the Clorox Company, Neocell

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Holding Company, and Nutranext are retailers that sell dietary supplements using the raw

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materials provided by Plaintiff’s competitor, Avicenna Nutraceutical, LLC (“Avicenna”).

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(See SAC [Doc. 21] ¶¶ 20–32.)
The SAC alleges that Clorox, Neocell, and Nutranext “have been falsely passing

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off inferior products as Chicken Sternum Collagen Type II[,]” which is contained in

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Plaintiff’s product. (SAC [Doc. 21] ¶¶ 16, 20, 32.) “Avicenna sells chicken collagen

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which it passes off as Chicken Sternum Collagen Type II, but, in reality, is derived from

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Chicken ‘full frames.’ ” (Id. [Doc. 21] ¶ 22.) “Avicenna sold its raw materials to

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[Clorox, Neocell, and Nutranext] at the price of $22[/]kg, however the market rate for

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Chicken Sternum Collagen Type II is $85/kg, which provides [Clorox, Neocell, and

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Nutranext] with an unfair competitive advantage. Avicenna and [Clorox, Neocell, and

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Nutranext] knew, or should have known that their practices were deceptive.” (Id. [Doc.

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21] ¶ 23.)
The SAC further alleges that “[Clorox, Neocell, and Nutranext, among others]

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purchase Avicenna’s products and in turn pass them off as Chicken Sternum Collagen

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Type II so that they can market their respective retail products as containing the benefits

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of Chicken Sternum Collagen Type II, when they know this is false.” (SAC [Doc. 21] ¶

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25.) It alleges that this gives them an unfair competitive advantage in the marketplace

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and decreases the demand for Chicken Sternum Collagen Type II. (Id. [Doc. 21] ¶ 32.)

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II.

LEGAL STANDARDS

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A.

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The Court must dismiss a cause of action for lack of subject matter jurisdiction.

Motion to Dismiss for Lack of Standing

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Fed. R. Civ. P. 12(b)(1). “The party asserting federal subject matter jurisdiction bears the

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burden of proving its existence.” Chandler v. State Farm Mut. Auto. Ins. Co., 598 F.3d

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1115, 1122 (9th Cir. 2010) (citing Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375,

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377 (1994)). Article III of the United States Constitution limits the subject matter

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jurisdiction of federal courts to “Cases” and “Controversies.” See Lujan v. Defs. of

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Wildlife, 504 U.S. 555, 559 (1992). This limitation forms “the core component of

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standing[,]” a doctrine that ensures federal courts decide only those cases “that are of the

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justiciable sort referred to in Article III[,]” those that are “ ‘appropriately resolved

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through the judicial process[.]’ ” Id. (quoting Whitmore v. Arkansas, 495 U.S. 149, 155

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(1990)).

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As an “irreducible constitutional minimum[,]” standing is a fundamental part of

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every federal case, a limitation on subject matter jurisdiction. See Chandler, 598 F.3d at

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1122; Lujan, 504 U.S. at 560. It consists of three elements—all of which the party

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asserting federal jurisdiction must establish: (i) injury; (ii) causation; and (iii)

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redressability. See id.

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First, the plaintiff must prove that he suffered an “injury in fact”, i.e., an “invasion of a
legally protected interest which is (a) concrete and particularized, and (b) actual or
imminent, not conjectural or hypothetical.”
Second, the plaintiff must establish a causal connection by proving that [his] injury is fairly
traceable to the challenged conduct of the defendant.
Third, the plaintiff must show that [his] injury will likely be redressed by a favorable
decision.

Chandler, 598 F.3d at 1122 (quoting and citing Lujan, 504 U.S. at 560–61).

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B.

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The Court must dismiss a cause of action for failure to state a claim upon which

Motion to Dismiss Pursuant to Rule 12(b)(6)

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relief can be granted. Fed. R. Civ. P. 12(b)(6). A motion to dismiss under Rule 12(b)(6)

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tests the legal sufficiency of the complaint. See Parks Sch. of Bus., Inc. v. Symington, 51

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F.3d 1480, 1484 (9th Cir. 1995). A complaint may be dismissed as a matter of law either

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for lack of a cognizable legal theory or for insufficient facts under a cognizable theory.

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Balisteri v. Pacifica Police Dep’t., 901 F.2d 696, 699 (9th Cir. 1990). In ruling on the

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motion, a court must “accept all material allegations of fact as true and construe the

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complaint in a light most favorable to the non-moving party.” Vasquez v. L.A. Cnty.,

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487 F.3d 1246, 1249 (9th Cir. 2007).
A complaint must contain “a short and plain statement of the claim showing that

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the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). The Supreme Court has

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interpreted this rule to mean that “[f]actual allegations must be enough to raise a right to

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relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 554, 555

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(2007). The allegations in the complaint must “contain sufficient factual matter, accepted

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as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 556

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U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570).

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Well-pled allegations in the complaint are assumed true, but a court is not required

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to accept legal conclusions couched as facts, unwarranted deductions, or unreasonable

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inferences. See Papasan v. Allain, 478 U.S. 265, 286 (1986); Sprewell v. Golden State

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Warriors, 266 F.3d 979, 988 (9th Cir. 2001).

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C.

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“In alleging fraud or mistake, a party must state with particularity the

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circumstances constituting fraud or mistake. Malice, intent, knowledge, and other

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conditions of a person’s mind may be alleged generally.” Fed. R. Civ. P. 9(b).

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“Averments of fraud must be accompanied by ‘the who, what, when, where, and how’ of

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the misconduct charged.” Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir.

Pleading Fraud per Rule 9(b)

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18-CV-0744 W (KSC)

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2003) (quoting Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997)) Plaintiffs must

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plead enough facts to give defendants notice of the time, place, and nature of the alleged

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fraud together with an explanation of the statement and why it was false or misleading.

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See id. at 1107.

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Fraud pleading must be sufficient to give defendants notice of the circumstances

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surrounding an allegedly fraudulent statement. See In re GlenFed, Inc. Sec. Litig., 42

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F.3d 1541, 1547 (9th Cir. 1994) (superseded by statute on other grounds as stated in

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Ronconi v. Larkin, 253 F.3d 423, 429 n.6 (9th Cir. 2001)). Those circumstances must

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“be ‘specific enough to give defendants notice of the particular misconduct . . . so that

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they can defend against the charge and not just deny that they have done anything

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wrong.’ ” Vess, 317 F.3d at 1106 (quoting Bly-Magee v. California, 236 F.3d 1014,

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1019 (9th Cir. 2001)) (internal quotation marks omitted). “The complaint must specify

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such facts as the times, dates, places, benefits received, and other details of the alleged

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fraudulent activity.” Neubronner v. Milken, 6 F.3d 666, 672 (9th Cir. 1993).

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III.

DISCUSSION

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A.

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Defendants argue that the SAC does not sufficiently allege injury in fact that could

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Article III Standing

confer Article III standing. (Defs.’ Mot. [Doc. 22-1] 10–12.)

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The SAC alleges that Plaintiff is a supplier of health products and that Defendants

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deceptively labeled an inferior product purchased from Avicenna, Plaintiff’s competitor.

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According to Defendants, any damages suffered by Plaintiff are speculative because

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Plaintiff does not compete with Defendants, and no Defendants have any obligation to

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buy from Plaintiff. (Id.) This overlooks allegations in the SAC that Defendants’ false

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advertisements decreased demand for Plaintiffs’ products, thereby causing economic

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harm. (SAC [Doc. 21] ¶ 32 (“Passing off chicken collagen derived from chicken whole

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frame carcasses puts the Retail Defendants at a distinct advantage in the marketplace,

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because they can purchase the raw ingredients at a much lower cost and in turn have
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dramatically higher profit margins. The Retail Defendants’ ability to pass off inferior

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products decreases the demand for [Plaintiff’s product], and impacts Plaintiff’s

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commercial interests . . . .”).) Whether Plaintiff and Defendants are direct competitors is

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immaterial to the Article III injury in fact analysis.

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The motion to dismiss for lack of Article III standing will be denied.

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“Prudential Standing” and the Lanham Act

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B.

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Defendants also argue that the SAC does not sufficiently allege statutory standing

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pursuant to the Lanham Act. (Defs.’ Mot. [Doc. 22-1] 10–12.) They appear to conflate

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this issue with Article III standing, which is discussed supra.
In addition to the doctrine of Article III standing, the Supreme Court has

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recognized the concept of “a ‘prudential’ branch of standing, a doctrine not derived from

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Article III and ‘not exhaustively defined’ but encompassing . . . at least three broad

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principles: ‘the general prohibition on a litigant’s raising another person’s legal rights, the

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rule barring adjudication of generalized grievances more appropriately addressed in the

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representative branches, and the requirement that a plaintiff’s complaint fall within the

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zone of interests protected by the law invoked.’ ” Lexmark Int’l, Inc. v. Static Control

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Components, Inc., 572 U.S. 118, 126 (2014) (quoting Elk Grove Unified School Dist. v.

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Newdow, 542 U.S. 1, 12 (2004) (internal quotations omitted)). This case implicates the

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third principle—whether Plaintiff’s interests are in the zone protected by the statute under

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which it brings suit.

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The question, then, is whether Plaintiff falls within “the class of plaintiffs whom

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Congress has authorized to sue under § 1125(a).” Lexmark Int’l, 572 U.S. at 128. “[A]

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plaintiff suing under § 1125(a) ordinarily must show economic or reputational injury

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flowing directly from the deception wrought by the defendant’s advertising; and that that

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occurs when deception of consumers causes them to withhold trade from the plaintiff.”

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Id. at 133. “That showing is generally not made when the deception produces injuries to

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a fellow commercial actor that in turn affect the plaintiff.” Id. at 133–34. However, it is
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not necessary that Plaintiff and Defendants be direct competitors for the harm to be direct

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and actionable. See id. at 139–40.

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Defendants focus chiefly on the fact that Plaintiff and Defendants are not direct

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competitors. (Defs.’ Mot. [Doc. 22-1] 10–12.) However, as the Supreme Court

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explained in detail in Lexmark Int’l, direct competition is not a prerequisite for direct

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commercial harm to a fellow commercial actor caused by a deception. 572 U.S. at 133–

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34. Defendants are essentially taking the position that a retailer selling a cheap knockoff

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product and deceptively labeling it as a more expensive one could not cause direct

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economic harm to a supplier of the authentic item. This is irrational.
Defendants’ motion to dismiss on this ground will be denied.

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C.

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Plaintiff’s Lanham Act claims are grounded in fraud and must meet Rule 9(b)’s

Rule 9(b)

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pleading requirements. (SAC [Doc. 21] ¶¶ 33, 41.) See 15 U.S.C. § 1125(a); Fed. R. Civ.

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P. 9(b); Bobbleheads.com, LLC v. Wright Brothers, Inc., 259 F. Supp. 3d 1087, 1095

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(2017) (Sammartino, J.); Vess, 317 F.3d at 1106.
The SAC’s introductory paragraphs allege misrepresentation with particularity as

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to Defendants’ Collagen2 Joint Complex product. (SAC [Doc. 21] ¶¶ 24–26; 26–29; 30.)

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These paragraphs state that all three Defendants are responsible for that mislabeled

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product. (Id. [Doc. 21] ¶ 26.) They identify three retail outlets in which the allegedly

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mislabeled product were sold, when they were sold, and they describe the nature of the

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deception in some detail. (SAC [Doc. 21] ¶¶ 26–29; 30.) This is sufficient to comply

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with Rule 9(b).

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The motion to dismiss for failure to comply with Rule 9(b) will be denied.

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IV.

CONCLUSION AND ORDER
For the foregoing reasons, Defendants’ motion to dismiss is DENIED. [Doc. 22.]

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IT IS SO ORDERED.

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Dated: January 17, 2019

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