Cocona, Inc. v. Singtex Industrial Co., Ltd.
Filing
31
ORDER granting in part and denying in part 15 Motion to Dismiss, as set forth in the Order, by Magistrate Judge Michael J. Watanabe on 10/9/2014.(emill)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Civil Action 14-cv-01593-MJW
COCONA, INC., a Delaware corporation,
Plaintiff,
v.
SINGTEX INDUSTRIAL CO., LTD., a Taiwanese company,
Defendant.
ORDER ON
DEFENDANT’S MOTION TO DISMISS
(Docket No. 15)
MICHAEL J. WATANABE
United Stated Magistrate Judge
Cocona Inc. created a process for incorporating carbon particles from coconuts
into fabric. The fabric is used for outdoor gear, to enhance odor control, moisture
absorption, and UV protection without the use of synthetic chemicals. Singtex Industrial
Co. used to manufacture that fabric for Cocona, but has since gone into business selling
a competing product (called S.Café) made from coffee rather than coconut. In this
action, Cocona asserts claims against Singtex for breach of contract, unfair competition,
theft of trade secrets, and business torts—and Singtex now asks this Court to dismiss
the claims under Rule 12(b)(6) (Docket No. 15).
The parties have consented to have this case resolved in its entirety by a
magistrate judge under 28 U.S.C. § 636(c) (Docket Nos. 16, 17). The Court GRANTS
the motion in part and DENIES it in part.
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Cocona’s Legal Claims
Cocona asserts five claims for relief:
First, that Singtex breached the “Supplier Agreement,” a 2008 contract
between the parties;
Second, that Singtex breached the “Nondisclosure Agreement,” a 2005
contract between the parties;
Third, that Singtex has misrepresented its product and unfairly competed
against Cocona in violation of § 43(a) of the Lanham Act, 15 U.S.C. §
1125(a);
Fourth, that Singtex misappropriated Cocona’s trade secrets in violation of
Colorado’s Uniform Trade Secrets Act, C.R.S. §§ 7-74-101 et seq.; and
Fifth, that Singtex interfered with Cocona’s customer contracts, a common
law tort.
Analysis
Under Rule 12(b)(6), the Court must accept the facts Cocona alleged in the
Complaint as true; further, if there are inferences that must be drawn, the Court must
draw them in Cocona’s favor. Gee v. Pacheco, 627 F.3d 1178, 1183 (10th Cir. 2010).
Only factual allegations are to be accepted as true. Allegations of legal conclusions—
for example, that a contract was valid, that conduct was willful or bad faith, or that
measures were reasonable—are not included in the Court’s analysis. Kansas Penn
Gaming, LLC v. Collins, 656 F.3d 1210, 1214 (10th Cir. 2011). Generally speaking,
only the Complaint is to be considered. However, “if a plaintiff does not incorporate by
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reference or attach a document to its complaint, but the document is referred to in the
complaint and is central to the plaintiff’s claim, a defendant may submit an indisputably
authentic copy to the court to be considered on a motion to dismiss.” GFF Corp. v.
Associated Wholesale Grocers, Inc., 130 F.3d 1381, 1384 (10th Cir. 1997). The parties
agree that the contracts attached to Singtex’s motion to dismiss are true copies (see
Document No. 18, ¶ 4), and so the Court will consider the terms of those contracts.
Once the set of operative facts is established according to the foregoing rules,
the Court must decide whether those facts adequately state grounds for relief. It is not
necessary for Cocona to allege a prima facie case including every last element of its
legal claims—but it must put forward enough facts for the Court to infer that its claims
are at least plausible. Khalik v. United Air Lines, 671 F.3d 1188, 1191–92 (10th Cir.
2012).
I.
Statute of Limitations
Singtex first argues that all of the claims in the Complaint are barred by the
applicable statutes of limitations. As the Ninth Circuit recently explained:
Dismissal under Rule 12(b)(6) on the basis of an affirmative
defense is proper only if the defendant shows some obvious bar to
securing relief on the face of the complaint. If, from the allegations of the
complaint as well as any judicially noticeable materials, an asserted
defense raises disputed issues of fact, dismissal under Rule 12(b)(6) is
improper.
ASARCO, LLC v. Union Pac. R., ___ F.3d ___, 2014 WL 4211113, at *3 (9th Cir. Aug.
27, 2014) (internal citations omitted); accord Radil v. Sanborn Western Camps, Inc.,
384 F.3d 1220, 1224–27 (10th Cir. 2004) (deciding that where factual dispute exists as
to affirmative defense in workers’ comp statute, issue must be put to the trier of fact);
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Bullington v. United Air Lines, Inc., 186 F.3d 1301, 1311 n. 3 (10th Cir. 1999) (“Rule
12(b)(6) is a proper vehicle for dismissing a complaint that, on its face, indicates the
existence of an affirmative defense such as noncompliance with the limitations period”),
overruled on other grounds by Nat’l R.R. Passenger Corp. v. Morgan, 536 U.S. 101
(2002).
The parties agree that all of Cocona’s claims are subject to a three-year statute
of limitations except the tort claim, which is subject to a two-year statute (Document 15,
p. 9 nn. 6–7; Document 19, pp. 8–9). Because the Complaint was filed in June 2014,
Cocona’s suit is thus untimely as to any non-tort claims that accrued before June 2011
and any tort claims that accrued before June 2012. As to each of these claims, a claim
accrues only when the plaintiff knows, or should know in the exercise of reasonable
diligence, of facts establishing each element of the claim. See, e.g., Miller v. Armstrong,
817 P.2d 111 (Colo. 1991).
Singtex argues that, on the face of the Complaint, Cocona’s claims accrued in
2010 at the latest. To support this argument, Singtex points to the following allegation,
in Paragraph 27 of the Complaint:
In or around 2010, Singtex began marketing a composite yarn
technology it called “S.Café.” Singtex began targeting customers and
potential customers of Cocona’s proprietary products.
(Document 1, ¶ 27). From that language, Singtex asserts: “Cocona admits it has known
about its claims since 2010” (Document 15, p. 2; see also Document 15, pp. 9–11).
Obviously, Cocona’s allegation is not an admission of any such thing. It is an allegation
about the timing of Singtex’s conduct, and it says nothing at all about Cocona’s actual
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knowledge of that conduct. Likewise, Cocona included screenshots from Singtex’s
website as exhibits to the Complaint, and Singtex points out that those websites (as the
screenshots clearly show) are copyrighted in 2010. Again, these exhibits go to the
timing of Singtex’s conduct, and say nothing at all about Cocona’s actual knowledge of
that conduct.
Nothing else in the Complaint or its exhibits bears specifically on the timing of
Singtex’s conduct. Thus, as to constructive knowledge, Singtex asks the Court to
conclude that Paragraph 27 and the copyrighted website, together, establish that
Cocona would have known of its alleged injuries in 2010 had it been reasonably diligent.
But to so hold, the Court would need to infer (for example) that Singtex successfully
stole customers in 2010, or that the mere existence in 2010 of Singtex’s website should
have alerted Cocona that Singtex had stolen its trade secrets and that Singtex’s
marketing claims were false or misleading. At the 12(b)(6) stage, the Court must draw
these inferences in the opposite direction—in Conoca’s favor—if there is any
reasonable way to do so. And it is, ultimately, reasonable to infer the opposite. One
can read the Complaint and reasonably infer that no customers were successfully stolen
until some point after 2012. One can read the Complaint and reasonably infer that the
website would not have shown up on Cocona’s radar until sometime in 2011 despite all
due diligence. Accordingly, there is no “obvious bar to securing relief on the face of the
complaint,” ASARCO, LLC, 2014 WL 4211113, at *3, and Singtex’s affirmative defense
cannot prevail on a motion to dismiss.
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II.
Claim 1: Breach of the Supplier Agreement
Cocona alleges that Singtex breached the 2008 Supplier Agreement:
Upon information and belief, Singtex breached the terms of the
Supplier Agreement, including without limitation, by offering its S.Café and
other natural fabric products in direct competition with Cocona; by using
without permission Cocona’s intellectual property, technology, and other
proprietary materials; and by reverse engineering Cocona materials and
processes.
(Docket No. 1, ¶ 49). Singtex does not challenge the factual sufficiency of Cocona’s
pleadings on this claim. Singtex instead argues that under Colorado law the contract is
unenforceable in whole or in part, for two reasons: (1) the non-compete clause in the
contract is void as against public policy; and (2) in any event, the contract had been de
facto terminated by Cocona before any alleged breach occurred.
A.
Non-compete clauses under Colorado law
The 2008 Supplier Agreement contains a clause prohibiting Singtex from
competing against Cocona for the duration of their business relationship and for six
months thereafter:
[2](e) Non-compete.
Company acknowledges that Cocona will be
sharing certain confidential information and know-how with Company.
Other than with respect to the manufacture and sale of Certified Products
in accordance with the express terms herein, Company agrees that during
its engagement with Cocona and for a period of six (6) months after
provision of written notice of termination of Company’s engagement with
Cocona, Company will not engage directly or indirectly in the manufacture
or sale of fabric products (whether knit or woven) incorporating charcoal or
carbon particles (such as those derived from coconut, bamboo or similar
sources) or other active particles.
(Docket No. 15-2, p.3).
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Colorado has a strong public policy against non-compete clauses. By statute,
“[a]ny covenant not to compete which restricts the right of any person to receive
compensation for performance of skilled or unskilled labor for any employer shall be
void.” C.R.S. § 8-2-113(2). Such contracts are void ab initio, not merely voidable.
Mgmt. Recruiters of Boulder, Inc. v. Miller, 762 P.2d 763, 765 (Colo. App. 1988). The
statute has four exceptions, but they are narrowly construed. Nat’l Propane Corp. v.
Miller, 18 P.3d 782, 787 (Colo. App. 2000). Moreover, even where a non-compete
agreement is not barred by statute, it must still be reasonable in terms of both duration
and geographic scope. Nat’l Graphics Co. v. Dilley, 681 P.2d 546, 657 (Colo. App.
1984).
It is not clear that the statute applies in this context, however. On its face, the
statute refers only to a person’s “right to receive compensation” from “an employer.”
And while courts routinely apply it more broadly, see, e.g., Keller Corp. v. Kelley, 187
P.3d 1133, 1138–40 (Colo. App. 2008) (franchisor/franchisee); DBA Enters. Inc. v.
Findlay, 923 P.2d 298, 301–03 (Colo. App. 1996) (sale of franchise); Colo. Supply Co.
v. Stewart, 797 P.2d 1303, 1305 (Colo. App. 1990) (independent contractors); Smith v.
Sellers, 747 P.2d 15, 16–17 (Colo. App. 1987) (dental partner/independent contractor),
there are only two cases considering the statute in a context analogous to this case—
and they came to different conclusions. Compare Nutting v. RAM Southwest, 106 F.
Supp. 2d 1121, 1124–25 (D. Colo. 2000) (Babcock, J.) (statute applies to
manufacturer/distributor contract), with Energex Enterprises, Inc. v. Anthony Doors, Inc.,
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250 F. Supp. 2d 1278, 1281 (D. Colo. 2003) (Kane, J.) (statute does not apply to
licensee/licensor relationship).
At this stage, the Court need not determine whether the statute applies—
because even if it does, Cocona’s pleadings bring this case within the “protection of
trade secrets” exception under C.R.S. § 8-2-113(2)(b). See Energex, 250 F. Supp. 2d
at 1281–82 (applying trade-secret exception in the alternative); cf. Harvey Barnett, Inc.
v. Shidler, 338 F.3d 1125, 1133 (10th Cir. 2003) (reversing summary judgment against
plaintiff as to non-compete claim where question of fact existed as to related tradesecrets claim). For a covenant to fit that exception, “the purpose of the covenant must
be the protection of trade secrets, and the covenant must be reasonably limited in
scope to the protection of those trade secrets.” Gold Messenger, Inc. v. McGuay, 937
P.2d 907, 910–11 (Colo. App. 1997).
As discussed below, under Claim 4, the Complaint adequately pleads the
existence of protectable trade secrets. And as to the reasonableness of the limitation,
“a noncompete agreement must not be broader than necessary to protect the
promisee’s legitimate interests, and it must not impose hardship on the promisor.” Reed
Mill & Lumber Co. v. Jensen, 165 P.3d 733, 736 (Colo. App. 2006); see also Saturn
Sys., Inc. v. Militare, 252 P.3d 516, 526–28 (Colo. App. 2011) (comparing trade-secret
cases). Reasonableness turns on the facts of each case. Id. Here, the non-compete
clause does not prohibit Singtex from creating or selling fabrics that do not incorporate
“active particles.” That term will need to be defined over the course of this litigation, but
it is not unreasonably broad on its face. Further, given the non-compete clause’s
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prefatory sentence, the clause may allow Singtex to sell fabrics incorporating active
particles so long as Singtex does not use Cocona’s trade secrets to do so. See, e.g.,
Gold Messenger, 937 P.2d at 910–11 (reading non-compete narrowly in light of contract
preamble). Finally, the clause operates for only six months after the end of the 2008
Supplier Contract, a length of time that is unlikely to be excessive. Accepting the
allegations in the Complaint as true and drawing all factual inferences in Cocona’s
favor, the Court cannot say that this non-compete clause is unreasonable. Cocona has
stated a claim for an enforceable non-compete agreement under C.R.S. § 8-2113(2)(b). Thus, even if the statute applies, Singtex’s argument fails.
B.
De facto termination
The second argument, about de facto termination, can be resolved very quickly,
as there is literally no factual basis for it in the Complaint. Singtex cites no legal
authority for establishing de facto termination, and it cites to no factual allegations in the
Complaint from which it might be inferred that the unidentified legal requirements are
satisfied. Singtex correctly points out that the non-compete clause in the Supplier
Agreement prohibits competition for only six months after the termination of the
contract. But accepting the facts as alleged in the Complaint to be true, and drawing
inferences in Cocona’s favor, it is impossible to find that Cocona abandoned or
terminated the contract or in any way concluded business with Singtex—and more
specifically, it is impossible to find that Cocona abandoned the contract six months
before the breaching conduct occurred (allegedly, starting in 2010).
Singtex’s motion to dismiss Claim 1 is denied.
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III.
Claim 2: Breach of the Nondisclosure Agreement
Cocona alleges that Singtex also breached the 2005 Nondisclosure Agreement:
Upon information and belief, Singtex breached the terms of the
Nondisclosure Agreement, including without limitation, by failing to hold in
strict confidence confidential and proprietary information provided to it by
Cocona and by using Cocona’s confidential and proprietary Information, in
whole or in part, to develop, test, and fabricate its fiber products, including
its S.Café product.
(Docket No. 1, ¶ 55). Again, Singtex does not challenge the factual sufficiency of
Cocona’s pleadings on this claim. Singtex instead argues that the 2005 Nondisclosure
Agreement is unenforceable because the 2008 Supplier Agreement superseded it.
In Colorado, contract interpretation is a matter of law—unless the contract is
ambiguous. Pepcol Mfg. Co. v. Denver Union Corp., 687 P.2d 1310, 1313–14 (Colo.
1984). The interpretation of an ambiguous contract is a question of fact, as to what the
parties to the contract intended. Id. Whether a contract is, or is not, ambiguous is itself
a legal determination. Id. A contract is ambiguous if it is susceptible of more than one
reasonable interpretation. Moland v. Indus. Claim Appeals Office, 111 P.3d 507, 510
(Colo. App. 2004).
To show that the 2008 Supplier Agreement superseded the 2005 Nondisclosure
Agreement, Singtex points to the latter contract’s “entire agreement” clause:
20. ENTIRE AGREEMENT
This Agreement supersedes any course of dealing or usage of
trade and any previous understanding, oral or written, with respect to the
subject matter of this Agreement. Any modification of this Agreement
shall be effective only if in writing and executed by the parties.
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(Docket No. 15-2, p.8). According to Singtex, the two contracts cover the same subject
matter, and this clause thus voids the earlier contract. To rebut the point, though,
Cocona points to another clause in the latter contract—one expressly contemplating a
separate nondisclosure agreement:
[2](g) Nondisclosure. All Cocona information and materials will be
provided to [Singtex] only under strict terms of confidentiality prohibiting
disclosure and restricting use except as expressly set for herein and/or
under a separate Nondisclosure Agreement to be executed by
[Singtex]. . . .
(Docket No. 15-2, p.4). According to Cocona, this clause establishes either (1) that the
parties intended for the 2005 Nondisclosure Agreement to survive, or (2) that in any
event there is at least ambiguity on this point.
A contract must be interpreted “in its entirety with the end in view of seeking to
harmonize and to give effect to all provisions so that none will be rendered
meaningless.” Pepcol, 687 P.2d at 1313. “Each word in an instrument is to be given
meaning if at all possible.” U.S. Fid. & Guar. Co. v. Budget Rent–A–Car Sys., Inc., 842
P.2d 208, 213 (Colo. 1992). Here, there are at least two different ways—with two
different outcomes—to harmonize these two clauses.
First, Paragraph 2(g), as a literal matter, is forward-looking, allowing for a
separate agreement “to be” executed—whereas Paragraph 20 is backward-looking,
superseding only “previous” agreements. The two clauses can therefore be read
together in the way Singtex urges, operating to supersede all previous agreements
without barring contemporaneous or future nondisclosure agreements.
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Second, however, Paragraph 2(g) clearly contemplates that “strict terms of
confidentiality” exist somewhere, and there are no other clauses in the contract on point.
Further, the vast majority of the 2008 Supplier Agreement pertains to the production of
fabric—including three clauses restricting Singtex’s use of Cocona’s information, but
none restricting Singtex’s disclosure of that information. The two clauses can therefore
also be read together in the way Cocona urges, by interpreting the superseded “subject
matter” in Paragraph 20 to be previous agreements about manufacturing fabric but not
those about protecting confidential information.
Neither of these interpretations is unreasonable. And because the clauses are
susceptible of more than one reasonable interpretation, the contract is ambiguous as a
matter of law. Extrinsic evidence will be necessary to determine the intent of the parties
as to whether the 2008 Supplier Agreement superseded the 2005 Nondisclosure
Agreement. Singtex’s motion to dismiss Claim 2 is therefore denied.
IV.
Claim 3: Unfair Competition under the Lanham Act
Cocona alleges that Singtex unfairly competed in violation of the Lanham Act, 15
U.S.C. § 1051 et seq., under two theories—first, by misrepresenting the traits of its own
product, and second, by misrepresenting how its product stacks up next to Cocona’s:
Upon information and belief, Singtex has in commercial advertising
and/or promotion, including on its website, knowingly misrepresented the
nature, characteristics, and/or qualities of its S.Café fabric products,
including by claiming that the S.Café fabric provides the benefits of odor
absorption, ultraviolet protection, and moisture control.
Singtex has further misrepresented the capability of its S.Café
fabric products to perform in a manner comparable to Cocona’s
proprietary products despite its knowledge that the S.Café products do not
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have the same performance qualities as Cocona products due to use of
inferior materials and standards of processing.
(Docket No. 1, ¶¶ 58–59). Singtex argues that Lanham Act claims premised on
misrepresentations must be pleaded under the heightened standards of Federal Rule of
Civil Procedure 9(b), and in any event challenges the factual sufficiency of Cocona’s
pleadings under Ashcroft v. Iqbal, 556 U.S. 662 (2009), and Bell Atlantic Corp. v.
Twombly, 550 U.S. 544 (2007). Relatedly, Singtex argues that even if the pleadings are
plausibly and particularly alleged, Cocona has not stated an actionable claim because
the alleged misrepresentations are mere puffery.
A.
Pleading Under Federal Rule of Civil Procedure 8(a) or Rule 9(b)
The relevant portion of the Lanham Act provides:
(1) Any person who, on or in connection with any goods or services, or
any container for goods, uses in commerce any word, term, name,
symbol, or device, or any combination thereof, or any false designation of
origin, false or misleading description of fact, or false or misleading
representation of fact, which—
...
(B) in commercial advertising or promotion, misrepresents the
nature, characteristics, qualities, or geographic origin of his or her
or another person’s goods, services, or commercial activities,
shall be liable in a civil action by any person who believes that he or she is
or is likely to be damaged by such act.
15 U.S.C. § 1125(a)(1). It is not necessary for the misrepresentation to be knowing or
intentional; even wholly innocent statements, if literally false or tending to mislead, are
actionable. See Tempur-Pedic Int’l Inc. v. Angel Beds LLC, 902 F. Supp. 2d 958, 965–
66 (S.D. Tex. 2012).
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Federal Rule of Civil Procedure 8(a) prescribes the pleading requirements for
most claims. It requires a pleading to contain “a short and plain statement of the claim
showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). By contrast, Rule
9(b) requires that “a party must state with particularity the circumstances constituting
fraud or mistake.” Fed. R. Civ. P. 9(b) (emphases added). This standard requires the
complaint to “set forth the time, place and contents of the false representation, the
identity of the party making the false statements and the consequences thereof.”
Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1252 (10th Cir. 1997) (citation
omitted).
Courts are split on whether Rule 9(b) applies to false-advertising claims under
the Lanham Act. Some reason that Rule 9(b) applies because misrepresentation is a
species of fraud at common law and generally involves fraudulent conduct. See, e.g.,
Vertical Web Media, LLC v. Etailinsights, Inc., 2014 WL 2868789, at *3 (N.D. Ill. June 4,
2014); SKEDKO, Inc. v. ARC Prods., LLC, 2014 WL 585379, at *2–3 (D. Ore. Feb. 13,
2014); Volunteer Firemen’s Ins. Servs., Inc. v. McNeil & Co., 221 F.R.D. 388, 393 (W.D.
N.Y. 2004). Others reason that Rule 9(b) does not apply because the Lanham Act
requires no level of knowing, intentional, or even negligent behavior. See, e.g., United
States ex rel. Knisely v. Cintas Corp., Inc., 298 F.R.D. 229, 238–39 (E.D. Pa. 2014);
Canales v. ALM Media LLC, 2013 WL 5719476, at *9 (W.D. Tex. Oct. 18, 2013);
Tempur-Pedic Int’l, 902 F. Supp. 2d at 965–67; John P. Villano Inc. v. CBS, Inc., 176
F.R.D. 130, 131 (S.D. N.Y. 1997).
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Neither the Tenth Circuit nor the District of Colorado has previously ruled on the
question. Further, the District of Colorado has conflicting authority as to whether Rule
9(b) applies to the closely analogous common law tort of negligent misrepresentation.
Judges Brimmer, Blackburn, Kane, and Arraj have all applied Rule 9(b) to such claims.
Blixseth v. Cushman & Wakefield of Colo., Inc., Case No. 12-cv-00393-PAB-KLM, 2013
WL 5446791, at *8 (D. Colo. Sept. 30, 2013); Cunningham v. Standard Fire Ins. Co.,
Case No. 07-cv-02538-REB-KLM, 2009 WL 4377451, at *2 (D. Colo. Sept. 19, 2008);
Van Leeuwan v. Nuzzi, 810 F. Supp. 1120, 1123–24 (D. Colo. 1993); W. Gas
Processors, Ltd. v. Enron Gas Processing Co., Case No. 87-A-1472, 1988 WL 73307,
at *4–6 (D. Colo. July 7, 1988). Meanwhile, Judges Babcock and Daniel have held
otherwise. Denver Health & Hosp. Auth. v. Beverage Distribs. Co., 843, F. Supp. 2d
1171, 1177–78 (D. Colo. 2012); Conrad v. Educ. Res. Inst., 652 F. Supp. 2d 1172, 1183
(D. Colo. 2009) (adopting Magistrate Judge Tafoya’s report).
Despite the bottom-line differences in these cases, however, almost all of them
apply reasoning very similar to the Ninth Circuit’s leading case on Rule 9(b), Vess v.
Ciba–Geigy Corp. USA, 317 F.3d 1097, 1103–04 (9th Cir. 2003). The Ninth Circuit held
that Rule 9(b) can apply to either all of a claim or part of it, under three circumstances.
First, if fraud or its equivalent is an element of the claim, Rule 9(b) obviously applies.
See id. Second, if fraud is not an element of a claim but the plaintiff nonetheless
“allege[s] a unified course of fraudulent conduct and rel[ies] entirely on that course of
conduct as the basis of a claim,” Rule 9(b) applies to “the pleading of that claim as a
whole.” Id. Finally, if the plaintiff “choose[s] not to allege a unified course of fraudulent
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conduct in support of a claim, but rather to allege some fraudulent and some nonfraudulent conduct,” “only the allegations of fraud are subject to Rule 9(b)’s heightened
pleading requirements.” Id. This focus on discrete factual averments, rather than the
elements of the legal claim, also finds support in the Tenth Circuit. See Schwartz, 124
F.3d at 1251–52 (distinguishing Shapiro v. UJB Fin. Corp., 964 F.2d 272 (3d Cir. 1992),
and holding Rule 9(b) did not apply, despite identical legal claim, because case at bar
alleged facts for negligent rather than intentional misstatements).
This Court concludes that Rule 9(b) applies to false-advertising claims under the
Lanham Act only insofar as the factual averments allege intentional or knowing
misrepresentations. Such averments must be pled with particularity. To the extent the
Lanham Act claim is based entirely on “a unified course” of such conduct, the entire
claim must be pled with particularity.
Applying that standard to Cocona’s two theories of recovery, this Court holds that
Rule 9(b) applies to Cocona’s false-comparison claim (see Docket No. 1, ¶ 59). As to
that theory, Cocona alleges: “Singtex made these statements to Cocona’s customers
knowing that they were false and/or misleading as Singtex knew that the S.Café fabric
products do not have performance qualities that are equivalent to Cocona’s products”
(Docket No. 1, ¶ 40). Cocona alleges this claim as a knowing misrepresentation—a
species of fraud, subject to Rule 9(b) pleading.
Cocona’s second theory is based not on Singtex’s allegedly false comparisons to
Cocona’s products, but Singtex’s allegedly misleading statements of its products’ own
qualities (see Docket No. 1, ¶ 58). As to that theory, the only allegations bearing on
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Singtex’s level of knowledge or intent are those contained after the narrative portion of
the Complaint, in the specific legal claims. There, Cocona alleges that Singtex unfairly
competed in a “knowing, willful, intentional, and bad faith” violation of the Lanham Act
(Docket No. 1, ¶ 60). But in reviewing a Complaint, the Court disregards bare legal
conclusions. Kansas Penn Gaming, 656 F.3d at 1214. Further, these particular legal
conclusions have no bearing on liability under the Lanham Act; they relate to remedies.
See 15 U.S.C. § 1117(a). Looking to the factual allegations in the Complaint, Cocona
alleges that Singtex made representations about its product (Docket No. 1, ¶¶ 28–34,
39) and that by one specific measure those representations are misleading (Docket No.
1, ¶¶ 42–44). The factual allegations underlying this theory of recovery do not sound in
fraud in any way, and the Court holds that Rule 9(b) does not apply to these averments.
B.
Sufficiency of Cocona’s Pleadings
To state claim for unfair competition based on false advertising, under the
Lanham Act, a plaintiff must plead facts showing the following elements:
(1) that the defendant made material false or misleading representations
of fact in connection with the commercial advertising or promotion of its
product;
(2) in commerce;
(3) that are either likely to cause confusion or mistake as to (a) the origin,
association or approval of the product with or by another, or (b) the
characteristics of the goods or services; and
(4) injure the plaintiff.
NetQuote, Inc. v. Byrd, 504 F. Supp. 2d 1126, 1133–34 (D. Colo. 2007) (Ebel, J.). If the
plaintiff shows literal falsity, the third element is presumed established; for statements
that are not literally false, the plaintiff must show that they tend to mislead or confuse
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the relevant market. See Zoller Labs., LLC v. NBTY, Inc., 111 F. App’x. 978, 982 (10th
Cir. 2004).
As to Singtex’s allegedly false comparisons, which must be pled with particularity
under Rule 9(b), Cocona fails to meet these elements. To begin with, Cocona has not
identified any comparisons that were made “in connection with the commercial
advertising or promotion of its product.” Instead, Cocona alleges that “Singtex has
expressly compared S.Café products to Cocona’s proprietary yarn fabrics” and that
“[u]pon information and belief, Singtex informed Cocona’s customers that the S.Café
products provide the same performance qualities as Cocona’s proprietary products”
(Docket No. 1, ¶¶ 36, 39). Sporadic conversations do not constitute commercial
advertising. See Proctor & Gamble Co. v. Haugen, 222 F.3d 1262, 1273–74 (10th Cir.
2000); Synygy, Inc. v. Scott–Levin, Inc., 51 F. Supp. 2d 570, 577 (E.D. Penn. 1999);
Fashion Boutique of Short Hills v. Fendi USA, Inc., 942 F. Supp. 209, 216 (S.D. N.Y.
1996). Moreover, even if Cocona could show that the conversations reached enough of
the market to constitute “commercial advertising,” it has not alleged the “who, what,
when, where and how of the alleged” falsehoods, as required under Rule 9(b). U.S. ex
rel. Sikkenga v. Regence Bluecross Blueshield of Utah, 472 F.3d 702, 727 (10th Cir.
2006). Cocona’s false-comparison theory of recovery should be dismissed for failing to
state a claim.
As to Singtex’s allegedly misleading representations of its own products’
qualities, which must be pled under Rule 8(a), Cocona alleges facts establishing each
element of the claim. Cocona has identified specific statements, made on Singtex’s
19
website—unquestionably in connection with the commercial advertising or promotion of
its product—that it believes to be false or misleading (Docket No. 1, ¶¶ 28–34, 39). The
first two elements are therefore satisfied. Cocona has provided a basis for proving
those statements false or misleading under a specific measurement (Docket No. 1,
¶¶ 42–44) and alleged that some customers have chosen Singtex’s product over
Cocna’s as a result of the statements (Docket No. 1, ¶ 45). These allegations support
an inference as to third element, and directly support the fourth element. Considering
the factual allegations in as a whole, Cocona’s claim is eminently plausible.
Singtex also argues that, even if the claims are plausibly alleged, they fail as a
legal matter because the challenged statements are too subjective to be actionable.
Although Singtex does not use the word, this is an argument that Singtex’s
advertisements are mere puffery. “Essential to any claim under section 43(a) of the
Lanham Act is a determination of whether the challenged statement is one of fact—
actionable under section 43(a)—or one of general opinion—not actionable under
section 43(a).” Pizza Hut, Inc. v. Papa John’s Int’l, Inc., 227 F.3d 489, 495–96 (5th Cir.
2000) (Jolly, J.). “Bald assertions of superiority or general statements of opinion cannot
form the basis of Lanham Act liability. . . . Rather the statements at issue must be a
specific and measurable claim, capable of being proved false or of being reasonably
interpreted as a statement of objective fact.” Id. (internal citations and quotation marks
omitted).
Puffery is not actionable because courts assume that consumers aren’t actually
misled by slick sales talk. Id. As one treatise puts it, puffing is “a seller’s privilege to lie
20
his head off, so long as he says nothing specific, on the theory that no reasonable man
would believe him, or that no reasonable man would be influenced by such talk.” W.
Page Keeton, et al., PROSSER AND KEETON ON THE LAW OF TORTS § 109, at 757 (5th
ed.1984). Accordingly, courts have defined two categories of false or misleading
statements that are not actionable under the Lanham Act because they are mere
puffery: “(1) an exaggerated, blustering, and boasting statement upon which no
reasonable buyer would be justified in relying; or (2) a general claim of superiority over
comparable products that is so vague that it can be understood as nothing more than a
mere expression of opinion.” Pizza Hut, Inc., 227 F.3d at 496-97.
Here, the advertisements attached to Cocona’s Complaint meet neither test, and
in no way constitute puffing. They are expressions not of opinion, but of fact. As
summarized in Cocona’s Complaint:
Specifically, Singtex claims on the S.Café Website that S.Café
“utilizes coffee grounds’ natural ability to adsorb odors for a comfortable
wearing experience. It also provides UV protection, and is very fast
drying.” (See Exhibit 1.)
According to Singtex marketing information available on the S.Café
Website, S.Café relies on the spaces created within a green coffee bean
as it expands during the roasting process for these “high performance”
features.
With respect to odor absorption, Singtex states on the S.Café
Website: “[w]ith our coffee ground permanently imbedded in the fiber, the
particles work hard with controlling and absorbing odors. The trapped
odors are then released with the [sic] your next wash-and-dry cycle of your
S.Café clothing.” (Id.)
With respect to ultraviolet protection, Singtex states on the S.Café
Website: “[w]ith S.Café fabric coffee particles in the fabric, these particles
actually refract and diffuse the sun’s rays. This provides for a natural UV
protection throughout all the S.Café fabric collection.” (Id.)
21
(Docket No. 1, ¶¶ 31–34). These are specific factual statements. True, they do not on
their face provide any frame of reference. But Cocona alleges that the claims can be
measured by comparing Singtex’s performance against “a traditional polyester fiber that
has not been treated with chemicals” (Docket No. 1, ¶¶ 42–45). Cocona may or may
not ultimately persuade the trier of fact that, based on this measurement, Singtex’s
claims are misleading. Cf. Pizza Hut, Inc., 227 F.3d at 501–04 (finding actionable nonpuffery but reversing jury verdict due to insufficient evidence). But either way, the Court
finds that this suffices to state a claim.
Insofar as Cocona claims that Singtex knowingly misrepresented its product in
comparison to Cocona’s while soliciting customers, Cocona has failed to state a claim
and has failed to plead with particularity. Singtex’s motion to dismiss is granted as to
that theory of recovery. Insofar as Cocona claims that Singtex’s website contains
misleading statements of fact, Cocona has adequately pled its claim. Singtex’s motion
to dismiss is denied as to that theory of recovery.
V.
Claim 4: Misappropriation of Trade Secrets
Cocona alleges that Singtex also stole its trade secrets:
Singtex’s illicit use of Cocona’s confidential and proprietary
information in excess of authorization by Cocona and in violations of the
Agreements to, among other things, develop its own fabric products
offered in direct competition with Cocona’s products constitutes trade
secret misappropriation.
22
(Docket No. 1, ¶ 67). Singtex challenges the Complaint’s factual sufficiency under Iqbal
and Twombly.1
Colorado has adopted the Uniform Trade Secrets Act (“UTSA”), C.R.S. §§ 7-74101 to -110. Under that statute:
“Misappropriation” is defined broadly to include the “acquisition” of
a trade secret by anyone who has reason to know it was acquired by
improper means, as well as the “disclosure” or “use” of a trade secret
without consent by anyone who acquired it improperly . . . . See [C.R.S.]
§ 7–74–102(2). “Trade secret” is defined equally broadly to include all or
part of virtually any information that is of value, . . . as long as the owner
has taken measures to prevent it from becoming available beyond those
to whom he has given limited access. See [C.R.S.] § 7–74–102(4).
Gognat v. Ellsworth, 259 P.3d 497, 500–01 (Colo. 2011); see also Network
Telecomms., Inc. v. Boor-Crepeau, 790 P.2d 901, 903 (Colo. App. 1990) (applying
common-law factors to guide interpretation of “secret” and “of value” in statute). In
order to state a claim, then, Cocona must allege facts showing (i) that he or she
possessed a valid trade secret, (ii) that the trade secret was disclosed or used without
consent, and (iii) that the defendant knew, or should have known, that the trade secret
was acquired by improper means. Shell v. Am. Family Rights Ass’n, 899 F. Supp. 2d
1035, 1055 (D. Colo. 2012). To show a valid trade secret, Cocona must show that it
takes reasonable measures to protect the secrecy of the information at issue, and that
the information has economic value. See Hertz v. Luzenac Group, 576 F.3d 1106,
1108–12 (10th Cir. 2009) (vacating summary judgment where record showed genuine
1
Singtex suggests in its Reply that the heightened pleading standards under Rule 9(b)
apply to this claim. Singtex did not raise this argument in its initial motion. In any event,
Singtex has not cited any legal authority for the point, and the Court has previously
rejected Singtex’s argument. SBM Site Servs, LLC v. Garrett, Case No. 10-cv-00385WJM-BNB, 2012 WL 628619, at *10 (D. Colo. Feb. 27, 2012).
23
disputes of fact as to both value and secrecy of information allegedly constituting trade
secret).
Cocona’s allegations establish each of these elements. As to the confidential
information at issue, Cocona alleges:
During the course of the business discussions and pursuant to the
terms of the Nondisclosure Agreement, Cocona disclosed various
Confidential Information to Singtex, including but not limited to technical
descriptions of Cocona’s proprietary technology, production methods, the
chemical composition of certain Cocona proprietary products and
materials, Cocona’s proprietary testing methods, testing results, product
comparison information, and technical images.
(Docket No. 1, ¶ 13.) These are specific factual allegations, not bare legal conclusions.
Likewise, drawing inferences in Cocona’s favor, the Complaint plausibly alleges that the
information is of commercial value (see Docket No. 1, ¶¶ 6 – 9, 25, 38.) And Cocona
details a number of steps it takes to keep the information secret:
Cocona vigorously protects the confidential and proprietary aspects
of its business, including its technology, materials and product
development know-how, by, without limitation, entering into nondisclosure
agreements when engaging in discussions relating to possible business
relationships. . . .
The Supplier Agreement further provided that Cocona’s confidential
information and proprietary technology remained the sole property of
Cocona and that Singtex was prohibited from using Cocona’s confidential
information and proprietary technology other than for the benefit of
Cocona.
Singtex further agreed and acknowledged that all Cocona
information and materials were confidential and that it would not reverse
engineer any Cocona product or technology.
(Docket No. 1, ¶¶ 10, 19, 20.) Again, these are not bare legal conclusions; these are
specific facts raising a plausible claim that a valid trade secret exists.
24
As to the remaining elements, Cocona alleges—again, with facts, not legal
conclusions—that Singtex used Cocona’s confidential information in ways that breached
its contractual duties:
In the Supplier Agreement, Singtex acknowledged that it would be
receiving confidential and proprietary information from Cocona and agreed
not to sell fabric products that competed with Cocona products while the
Supplier Agreement remained in effect and for six months thereafter.
The Supplier Agreement further provided that Cocona’s confidential
information and proprietary technology remained the sole property of
Cocona and that Singtex was prohibited from using Cocona’s confidential
information and proprietary technology other than for the benefit of
Cocona.
Singtex further agreed and acknowledged that all Cocona
information and materials were confidential and that it would not reverse
engineer any Cocona product or technology.
Under the terms and protections of the Supplier Agreement and for
the express purpose of facilitating Singtex’s ability to produce Certified
Products for Cocona, Cocona provided Singtex with Cocona proprietary,
confidential information including, but not limited, to detailed technical
information related to Cocona’s proprietary active natural particle
technology and Cocona’s proprietary production methods and testing
procedures.
Under the terms and protections of the Supplier Agreement and
Nondisclosure Agreement, Cocona instructed Singtex on how to
manufacture yarns that incorporated active particles. . . .
After Singtex had received Cocona’s confidential and proprietary
information and had begun producing proprietary Cocona products,
including Cocona proprietary yarn, Singtex decided to use Cocona’s ideas
and other confidential and proprietary information to create a product that
would compete with Cocona’s products but at a lower price point. . . .
Upon information and belief, Singtex developed its products using
Cocona’s proprietary and confidential information, including, without
limitation, Cocona’s confidential technical and business information,
proprietary product design details, process and manufacturing methods,
testing methods, know-how, and sample products and components of
products.
25
(Docket No. 1, ¶¶ 18–22, 25, 37). Breaching a contractual duty of confidentiality is one
way to misappropriate a trade secret. See C.R.S. § 7–74–102(2)(b)(III)(B). Cocona
alleges that Singtex was under a contractual duty, and violated it by using Cocona’s
trade secrets to develop its own competing product. These allegations are plainly
sufficient to state the final two elements of a claim for trade secret misappropriation.
Singtex’s motion to dismiss Claim 4 is denied.
VI.
Claim 5: Intentional Interference with Contractual Relations
Finally, Cocona claims that Singtex intentionally interfered with Cocona’s
contractual relations with others:
Cocona maintains contractual relations with various entities that
license its technology and/or purchase fabrics incorporating Cocona’s
technology involving active natural particles.
Singtex knew or reasonably should have known of the contractual
business relationship between Cocona and these entities.
Singtex by words or conduct, or both, intentionally and improperly
interfered with one or more of these contractual relations.
(Docket No. 1, ¶¶ 74–76). Singtex challenges the factual sufficiency of the pleading.
First, Singtex argues that the tortious behavior must be pleaded with particularity under
Rule 9(b) and Cocona has failed to so do; second, Singtex argues that Cocona has
failed to plead the remaining elements of the claim with any plausibility.
Colorado recognizes the tort of intentional interference with contractual relations.
Mem’l Gardens, Inc. v. Olympian Sales & Mgmt. Consultants, Inc., 690 P.2d 207, 210
(Colo. 1984) (quoting Restatement (Second) of Torts § 766 (1977)). The tort comes in
two varieties: “intentional interference with contractual relations,” which goes to existing
26
contracts; and “intentional interference with prospective business relations” or
“prospective economic advantage,” which goes to potential future contracts. See Tara
Woods Ltd. P’ship v. Fannie Mae, 731 F. Supp. 2d 1103, 1119–20 (D. Colo. 2010). To
prove the tort, a plaintiff must show:
(1) a valid contract between plaintiff and a third party;
(2) the defendant had knowledge of the contract;
(3) the defendant interfered and induced the other party to breach the contract;
and
(4) the plaintiff was injured as a result.
Westfield Dev. Co. v. Rifle Inv. Assoc., 786 P.2d 1112, 1117 (Colo. 1990).2
As to the third element, the plaintiff must show that the interference was
intentional and improper. Amoco Oil Co. v. Ervin, 908 P.2d 493, 501 (Colo. 1996)
(relying on Restatement (Second) of Torts § 767 cmt. a). In the context of business
competitors, “improper” means conduct that is independently actionable and outside the
ordinary course of competition. Id. Singtex correctly argues that this element must be
pleaded under the heightened pleading standards of Rule 9(b). See Dawson v. Litton
Loan Servicing, LP, Case No. 12-cv-01334-CMA-KMT, 2013 WL 1283848, at *7–8 (D.
Colo. Mar. 28, 2013) (citing Duran v. Clover Cub Foods Co., 616 F. Supp. 790, 793 (D.
Colo. 1985)). However, Cocona has done so. Cocona has alleged theft of trade
secrets and false advertising; such conduct constitutes intentional and improper
interference. See Harris Group, Inc. v. Robinson, 209 P.3d 1188, 1195–1200 (Colo.
2
For prospective contracts, the first element is instead that defendant’s conduct
“prevented a contract from being formed.” Harris Group, Inc. v. Robinson, 209 P.3d
1188, 1195–1200 (Colo. App. 2009). However, Cocona identifies its claim as one for
interference with current, not prospective, contracts.
27
App. 2009). And as was detailed above, Cocona has set forth a sufficient factual basis
for its Lanham Act and UTSA theories. It necessarily follows that Cocona has
adequately pleaded the intentional-interference element of its tort claim.
Singtex further argues that Cocona has failed to allege facts plausibly stating the
remaining. The heart of Singtex’s argument is that Cocona hasn’t identified any specific
contract, nor any specific breach thereof—in other words, that Cocona has not named
names. Most business-tort cases do identify the specific contracts allegedly disrupted.
See, e.g., Dawson, 2013 WL 1283848 at *2–3 (mortgage contract); Otter Prods., LLC v.
Treefrog Devs., Inc., No. 11-cv-02180-WJM-KMT, 2012 WL 4478951, at *5 (D. Colo.
Sept. 28, 2012) (Best Buy distribution contract). That identification is important:
“[a]bsent notice to the defendants of some facts surrounding the type or nature of the
‘contracts’ their conduct allegedly interfered with,” a claim does not satisfy even Rule
8(a) pleading standards. AccuImage Diagnostics Corp v. Terarecon, Inc., 260 F. Supp.
2d 941, 956 (N.D. Cal. 2003). By contrast, although many cases go forward without
providing specific names, those are almost always claims for tortious interference with
prospective business relations—and Cocona does not purport to state a claim for
interference with prospective contracts. See, e.g., Bartch v. Am. Family Ins. Co., No.
13-cv-01931-RBJ, 2014 WL 3260932, at *4–5 (D. Colo. July 8, 2014) (unidentified
potential clients departing agent might have kept); Perkins v. Fed. Fruit & Produce Co.,
861 F. Supp. 2d 1285, 1291–92 (D. Colo. 2012) (disparaging remarks made by former
employer to unidentified potential future employers); Tara Woods, 731 F. Supp. 2d at
1119–20 (unidentified prospective purchasers of real estate).
28
Here, the only information Cocona provides as to the current contracts that
Singtex interfered with is this: “Singtex has approached a number of Cocona customers,
including customers that Singtex learned of through its provision of services to Cocona,
and attempted to sell them S.Café products in place of Cocona’s proprietary products”
(Docket No. 1 ¶ 38). As to breach or disruption, Cocona alleges only that “[i]n reliance
on Singtex’s false representations, companies have chosen to purchase the S.Café
product instead of Cocona’s proprietary products” (Docket No. 1, ¶ 45). The Complaint
provides no allegation of actual contracts (except in the formal claim for relief, which
contains bare legal conclusions that the Court ignores on a Rule 12(b)(6) motion).
Further, the Complaint provides no basis from which even the number of contracts at
issue can be reasonably inferred; Cocona does not state whether it has ten customers
or a thousand. There is insufficient information to infer that the contracts at issue are
readily discernible. And therefore, there is not enough information to put Singtex on
notice of the claim it must defend.
“While we do not mandate the pleading of any specific facts in particular, there
are certain details the Plaintiff should know and could properly plead to satisfy the
plausibility requirement.” Khalik, 671 F.3d at 1194. “While ‘[s]pecific facts are not
necessary,’ some facts are.” Id. at 1193 (quoting Erickson v. Pardus, 551 U.S. 89, 93
(2007)). Here, Cocona ought to be able to identify contracts that have been cancelled,
not renewed, disrupted, or diluted. These are not facts uniquely known by Singtex.
“[T]he Twombly/Iqbal standard recognizes a plaintiff should have at least some relevant
29
information to make the claims plausible on their face.” Id. Cocona’s fifth claim for relief
is dismissed.
Conclusion
For the foregoing reasons, it is hereby ORDERED that Defendants’ Motion to
Dismiss (Docket No. 15) is:
DENIED as to Claims 1, 2, 4, and as to Claim 3 insofar as it is based on
misrepresentations about Singtex’s products’ factual qualities;
GRANTED as to Claim 5 and as to Claim 3 insofar as it is based on
misrepresentations about Singtex’s products’ comparison to Cocona’s
products, which are hereby DISMISSED WITHOUT PREJUDICE.
Dated: October 9, 2014
Denver, Colorado
/s/ Michael J. Watanabe
Michael J. Watanabe
United States Magistrate Judge
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