PRIM Limited Liability Company et al v. Pace-O-Matic, Inc.

Filing 244

ORDER Granting In Part And Denying In Part Defendant/Counterclaimant's Motion For Partial Summary Judgment As To Counts III, IV, VI, And VII re 199 . Signed by JUDGE SUSAN OKI MOLLWAY on 12/13/12. (gls, )CERTIFICATE OF SERVICEParticipants registered to receive electronic notifications received this document electronically at the e-mail address listed on the Notice of Electronic Filing (NEF). Participants not registered to receive electronic notifications were served by first class mail on the date of this docket entry

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
PRIM LIMITED LIABILITY
COMPANTY, ET AL.,

)
)
)
)
Plaintiffs,
)
vs.
)
)
PACE-O-MATIC, INC.;
)
)
Defendant.
)
_____________________________ )

CIVIL NO. 10-617 SOM/KSC
ORDER GRANTING IN PART AND
DENYING IN PART
DEFENDANT/COUNTERCLAIMANT’S
MOTION FOR PARTIAL SUMMARY
JUDGMENT AS TO COUNTS III,
IV, VI, AND VII

ORDER GRANTING IN PART AND DENYING IN PART
DEFENDANT/COUNTERCLAIMANT’S MOTION FOR PARTIAL
SUMMARY JUDGMENT AS TO COUNTS III, IV, VI, AND VII
I.

INTRODUCTION.
Plaintiffs Prim LLC and Prim Ltd. (collectively,

“Prim”) contracted to purchase and act as the distributor of
electronic games such as “Island Fruit” supplied by
Defendant/Counterclaimant Pace-o-Matic (“Pace”).

After Pace

terminated the exclusive distributorship provision of Prim’s
contract, Prim brought suit.

Currently before the court is

Pace’s motion for partial summary judgment on Counts III, IV, VI,
and VII.

The court grants Pace’s motion with respect to Counts

IV, VI, and VII, and denies the motion with respect to Count III.
II.

STATEMENT OF FACTS.
On November 7, 2008, Pace and Prim entered into an

agreement under which Prim became Pace’s exclusive distributor
for certain “amusement devices” in an area that included Hawaii.

Agreement Letter, ECF No. 237-5, PageID #3042.1

While the

agreement was in effect, Prim purchased electronic “Island Fruit”
games and “fills” from Pace.2

Second Amended Compl. ¶ 2.

On October 18, 2010, Pace sent Prim a letter alleging
that Prim was in default and terminating the exclusivity portion
of the agreement between Pace and Prim.
Letter, ECF No. 202-4, PageID # 2459.
filed the instant lawsuit.

Pace’s October 28, 2010

On October 22, 2010, Prim

See ECF Nos. 1.

At a hearing on October 26, 2010, the court questioned
the legality of the Island Fruit machines under the Hawaii
Revised Statutes’ restrictions on gambling devices.

ECF No. 22.

On February 25, 2011, the court repeated that concern.
¶ 22; Pl.’s CSM ¶ 22.

Def’s CSM

On March 2, 2011, Pace sent Prim a letter

saying that, “given the concerns that Judge Susan Mollway
expressed about the legality of the Island Fruit game,” Pace “is
withdrawing the sale of its skill-based amusement products from
the State of Hawaii.”

Pace’s March 2, 2011 Letter, ECF No. 202-

1

The parties have failed to follow LR 56.1(c), which
requires a party referring to a document in its Concise Statement
of Facts to “have relevant portions highlighted or otherwise
emphasized.” In addition, the parties have not consistently
followed LR 10.2(d), which requires appropriately labeled tabs
for exhibits. These oversights created extra burdens on the
court.
2

“Fills” are electronic codes that “permit a certain
number of plays” on an Island Fruit game “before an owner needs
to input a fill to permit the game to continue operating.”
Second Am. Compl. ¶ 14, ECF No. 79.
2

2.

Pace continued: “To the extent Prim disagrees with Pace’s

conclusion and wants to continue operating the Island Fruit game
in Hawaii at its own risk, Pace is willing to provide Prim with
an unlimited fill for its existing games in Hawaii, at cost.”
Id.
On August 30, 2011, Prim filed its Second Amended
Complaint.

ECF No. 79.

Prim asserted the following eight causes

of action: (1) breach of contract; (2) tortious interference with
prospective business advantage; (3) unfair methods of competition
in violation of section 480-2 of the Hawaii Revised Statutes; (4)
violation of Hawaii franchise law under chapter 482E of the
Hawaii Revised Statutes; (5) breach of express warranty; (6)
breach of the implied warranty of merchantability; (7) breach of
the implied warranty of fitness for a particular purpose; and (8)
a right to indemnification.

Id.

On August 8, 2012, Pace filed a motion for partial
summary judgment on Prim’s unfair competition (Count III),
franchise (Count IV), and implied warranty claims (Counts VI and
VII).

ECF No. 199.

The court grants the motion as to Counts IV,

VI, and VII, but not as to Count III.
III.

SUMMARY JUDGMENT STANDARD.
Summary judgment shall be granted when “the pleadings,

the discovery and disclosure materials on file, and any
affidavits show that there is no genuine issue as to any material

3

fact and that the movant is entitled to judgment as a matter of
law.”

Fed. R. Civ. P. 56(c).

One of the principal purposes of

summary judgment is to identify and dispose of factually
unsupported claims and defenses.
U.S. 317, 323-24 (1986).

Celotex Corp. v. Catrett, 477

Accordingly, “[o]nly admissible

evidence may be considered in deciding a motion for summary
judgment.”

Miller v. Glenn Miller Prods., Inc., 454 F.3d 975,

988 (9th Cir. 2006).

Summary judgment must be granted against a

party that fails to demonstrate facts to establish what will be
an essential element at trial.

See Celotex, 477 U.S. at 323.

A

moving party has both the initial burden of production and the
ultimate burden of persuasion on a motion for summary judgment.
Nissan Fire & Marine Ins. Co. v. Fritz Cos., 210 F.3d 1099, 1102
(9th Cir. 2000).

The burden initially falls on the moving party

to identify for the court “those portions of the materials on
file that it believes demonstrate the absence of any genuine
issue of material fact.”

T.W. Elec. Serv., Inc. v. Pac. Elec.

Contractors Ass’n, 809 F.2d 626, 630 (9th Cir. 1987) (citing
Celotex Corp., 477 U.S. at 323); accord Miller, 454 F.3d at 987.
“A fact is material if it could affect the outcome of the suit
under the governing substantive law.”

Miller, 454 F.3d at 987.

When the moving party fails to carry its initial burden
of production, “the nonmoving party has no obligation to produce
anything.”

In such a case, the nonmoving party may defeat the

4

motion for summary judgment without producing anything.
Fire, 210 F.3d at 1102-03.

Nissan

On the other hand, when the moving

party meets its initial burden on a summary judgment motion, the
“burden then shifts to the nonmoving party to establish, beyond
the pleadings, that there is a genuine issue for trial.”
454 F.3d at 987.

Miller,

This means that the nonmoving party “must do

more than simply show that there is some metaphysical doubt as to
the material facts.”

Matsushita Elec. Indus. Co. v. Zenith Radio

Corp., 475 U.S. 574, 586 (1986) (footnote omitted).

The

nonmoving party may not rely on the mere allegations in the
pleadings and instead “must set forth specific facts showing that
there is a genuine issue for trial.”

Porter v. Cal. Dep’t of

Corr., 419 F.3d 885, 891 (9th Cir. 2005) (quoting Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 256 (1986)).

“A genuine

dispute arises if the evidence is such that a reasonable jury
could return a verdict for the nonmoving party.”

California v.

Campbell, 319 F.3d 1161, 1166 (9th Cir. 2003); Addisu v. Fred
Meyer, Inc., 198 F.3d 1130, 1134 (9th Cir. 2000) (“There must be
enough doubt for a ‘reasonable trier of fact’ to find for
plaintiffs in order to defeat the summary judgment motion.”).
On a summary judgment motion, “the nonmoving party’s
evidence is to be believed, and all justifiable inferences are to
be drawn in that party’s favor.”

Miller, 454 F.3d at 988

(quotations and brackets omitted).

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IV.

ANALYSIS.
A.

Summary Judgment is Denied with Respect to Count
III.

Count III alleges that Pace engaged in unfair
competition in violation of section 480-2 of the Hawaii Revised
Statutes.

Second Am. Compl. ¶¶ 76-80, ECF No. 79.

With respect

to Count III, Pace’s motion appears to be a combination of a
motion for judgment on the pleadings and a motion for summary
judgment.
Pace’s first argument—that Prim fails to sufficiently
plead the nature of the alleged unfair competition—in essence
seeks dismissal rather than summary judgment.

Pace’s Motion for

Partial Summary Judgment (“Motion”) at 23-24, ECF No. 199.

The

court is not persuaded that Count III should be dismissed under
the circumstances.
Section 480-2(a) of the Hawaii Revised Statutes
provides that “[u]nfair methods of competition and unfair or
deceptive acts or practices in the conduct of any trade or
commerce are unlawful.”
Prim relies on the unfair competition prong of the
statute, which, unlike the unfair or deceptive practices prong,
is not limited to claims by consumers or public enforcers.

Davis

v. Four Seasons Hotel Ltd., 2010 WL 3946428, at *6 (D. Haw. Sept.
30, 2010).

A claim for unfair methods of competition must

adequately “allege the nature of the competition.”
6

Davis v. Four

Seasons Hotel Ltd., 122 Haw. 423, 446, 228 P.3d 303, 326 (2010).
This requirement “is consistent with the federal requirement that
a plaintiff allege that his or her injury reflects the
anticompetitive effect either of the violation or of the
anticompetitive acts made possible by the violation.”
(internal citations and alterations omitted).

Id.

Simply put, the

plaintiff’s complaint must present “the principles of causation”
for the alleged injury.

Id. at 438, 228 P.3d at 318.

Prim’s pleading alleges that “Pace’s actions and
conduct have caused damage to Prim’s business or property and are
likely to continue to result in damage to Prim in an amount
exceeding $75,000, exclusive of interest and cost.”
Compl. ¶ 80, ECF No. 79.

Second Am.

The only allegations about the nature

of the unfair competition that caused damage to Prim are
contained in paragraphs 42 and 43, which state:
42. Also on or about October 19, 2010,
Pace terminated PRIM’s exclusive access to
fills within the territory, and advised that
Pace would henceforth sell directly to PRIM’s
customer, Nickels & Dimes.
43. On information and belief, on or
after October 19, 2010, Pace sold game fills
directly to Nickels & Dimes.
Id.

These allegations are not expressly referred to in Count

III, but Prim incorporates by reference paragraphs 1 through 75
in Count III.

7

This court has previously complained about “puzzle”
pleadings that require the court to figure out which of many
allegations incorporated by reference actually “fit” into a
particular count.

See Order Granting Prim’s Motion to Dismiss

Counts IV and V of Pace’s Amended Counterclaim at 12-14, ECF No.
137.

To the extent Count III is based on paragraphs 42 and 43,

it clearly is a prime example of the very format this court was
complaining about.

Nevertheless, on this purported summary

judgment motion, the court, out of fairness to Prim, declines to
make a ruling applicable only to motions to dismiss (such as a
determination that “puzzle” pleadings are inherently defective,
which, despite this court’s complaints, would be a broader ruling
than this court has previously announced).
Pace also challenges Count III on the true summary
judgment ground of a lack of evidence indicating that Pace
engaged in unfair competition that caused damage to Prim.

But

Prim does submit evidence that Pace was marketing games directly
to Nickels & Dimes, a Prim customer.
evidence.

Pace does not dispute this

Instead, citing Kapunakea Partners v. Equilon

Enterprises, LLC, 679 F. Supp. 2d 1203, 1211 (D. Haw. 2009), Pace
claims that this is nothing more than a breach of the exclusive
distributorship agreement, and that a mere breach of contract
does not support a section 480-2 claim.

8

Kapunakea says that, when a section 480-2 claim is
based on a breach of contract, that breach must be accompanied by
substantial aggravating circumstances to justify the treble
damages recoverable for a section 480-2 violation.

Id. at 12.

Pace does not address the issue of whether the necessary
aggravating circumstances are present when the way an exclusive
distributorship agreement is allegedly breached is by a
supplier’s direct sale to the exclusive distributor’s customer.
There are many ways in which an exclusive distributorship
agreement could be breached; the supplier could, for example,
supply a competing distributor.

When the supplier itself takes

on the role of a competitor and seeks to do business with the
exclusive distributor’s customer, it may indeed be that that is
an aggravating circumstance sufficient to support a claim under
section 480-2.

The court need not determine that here.

It was

Pace’s burden as the movant to establish otherwise, and Pace did
not address that issue at all, much less meet that burden.

The

summary judgment motion is denied as to Count III.
B.

Pace is Entitled to Summary Judgment on Count IV.

Count IV alleges that Pace violated Hawaii’s Franchise
Investment Law by failing to deal with Prim in good faith and by
terminating Prim’s franchise without good cause.
Compl. ¶¶ 81-95.

Second Am.

Prim asserts that Pace granted Prim a license

to distribute Pace’s games in its territory.

9

Opp’n at 11.

Prim

says, “While the 2008 Distribution Agreement was not specifically
called a license agreement, it allowed PRIM to use Pace’s name,
trademarks and propriety software which are the hallmarks of a
licensing agreement.”

Id.

Prim also says that it paid a

franchise fee to Pace because it paid for fills to “license the
Island Fruit games and keep the Island Fruit games operating.”
Id. at 12.

Pace argues that it is entitled to summary judgment

because there was never a franchise between Prim and Pace and
that Prim never paid a franchise fee.

Motion at 14-19.

Concluding that there was neither a franchise agreement nor a
franchise fee, the court grants Pace summary judgment on Count
IV.
Before the “court can consider whether any franchise
was terminated, the court must determine if there was any
franchise at all.”

JJCO, Inc. v. Isuzu Motors America, Inc.,

2009 WL 1444103, at *3 (D. Haw. 2009), aff’d, 2012 WL 2584294
(9th Cir. July 5, 2012).

Under Hawaii law, a franchise consists

of an agreement “in which a person grants to another person, a
license to use a trade name, service mark, trademark, logotype or
related characteristic . . . and in which the franchisee is
required to pay, directly or indirectly, a franchise fee.”

Haw.

Rev. Stat. § 482E-2.
Prim has failed to show that there is a triable issue
as to whether there was a franchise between Prim and Pace.

10

Id.

Prim’s characterization of the 2008 Distribution Agreement as
allowing “PRIM to use Pace’s name, trademarks and propriety
software,” Opp’n at 11, is at odds with the actual text of the
2008 Distribution Agreement.

The 2008 Distribution Agreement

nowhere provides that Prim may use Pace’s name.
3, PageID # 290.

See ECF No. 49-

Nor does any of the text in the 2008

Distribution Agreement suggest that Pace was authorizing Prim to
“use” Pace’s trademarks or proprietary software.

Id.

Rather,

the 2008 Distribution Agreement, which is tellingly titled, “Re:
Distributorship,” makes clear that Pace was only authorizing Prim
to “purchase games and fills from Pace and exercise its best
efforts to develop markets for the games and distribute the
games.”

Id.
A distributorship is not the same thing as a franchise

relationship.

The Ninth Circuit has distinguished the right to

distribute or make wholesale sales of a product from the right to
use a company’s trademarks.

Gabana Gulf Distribution, Ltd. v.

Gap Int’l Sales, Inc., 343 Fed. App’x 258, 259 (9th Cir. 2009)
(“The undisputed facts show that Gabana was merely a distributer
or wholesaler of Gap products, but not substantially associated
with Gap's trademarks.”).

The 2008 Distribution Agreement

allowed Prim to distribute Pace’s products; it did not
“substantially associate” Prim with Pace’s trademarks.

Id.

The

very essence of a franchise relationship is that the franchisee

11

represents the franchise to the public; a franchise is not
created whenever one company purchases and distributes another
company’s products.

Thus, a drug store may sell brand name

products manufactured by many pharmaceutical companies without
being a franchisee of any pharmaceutical company.
Nor is the court persuaded by Prim’s assertions that it
paid a franchise fee to Pace.

A franchise fee “means any fee or

charge that a franchisee or subfranchisor is required to pay or
agrees to pay for the right to enter into a business or to
continue a business under a franchise agreement.” Haw. Rev. Stat.
§ 482E-2.

A franchise fee does not include, however, “the

purchase or agreement to purchase goods at a bona fide wholesale
price.”

Id.

As this court has explained, “The guiding principle

is that, unless the expenses result in an unrecoverable
investment in the franchisor, they should not normally be
considered a fee.”

JJCO, Inc., 2009 WL 1444103, at *4 (citations

and quotations omitted).
There is no evidence in the record that Prim paid Pace
a franchise fee.

Prim contends that its payment for “fills”

constituted a franchise fee because “the price of the fills far
exceeds the cost of a few keystrokes to generate a fill.”
at 13.

Opp’n

Pace’s profit margin is not proof that Prim’s payment for

fills constituted a franchise fee.

Hawaii law does not provide

that a distributor’s profit on a distributorship agreement

12

transforms a relationship into a franchise.

Moreover, there is

no evidence that the cost of the fills constituted an
“unrecoverable investment” in Pace.
1444103, at *4.

See JJCO, Inc., 2009 WL

The court therefore concludes that the record

does not show that there is a question of fact as to whether Prim
paid a franchise fee.
C.

Prim’s Count IV fails.

Pace is Entitled to Summary Judgment on Counts VI
and VII.

Counts VI and VII allege that Pace breached implied
warranties when it sold the Island Fruit machines to Prim.
Second Am. Compl. ¶¶ 104-18.

Counts VI and VII are pled in the

alternative, and, as Prim itself notes, will come into play only
if Island Fruit is found to be illegal under Hawaii law.
Opp’n at 15.

See

If Island Fruit is illegal, however, it is not

clear why this court should enforce any implied warranty with
regard to Island Fruit.

See, e.g., Inlandboatmen's Union of the

Pac. v. Sause Bros., Inc., 77 Haw. 187, 881 P.2d 1255 (Ct. App.
1994) (noting that illegal contracts are generally
unenforceable).
Prim is not arguing that the game is illegal.
repeatedly punted on this question.

Prim has

Nor does Prim identify how

Counts VI and VII add anything to the contract claim asserted in
Count I.
Prim does not explain how it could ever prevail on
Counts VI and VII.

If the items in issue are legal, Counts VI

13

and VII become irrelevant.

Prim does not show that, if the items

are illegal, the implied warranties on which Counts VI and VII
are based will be enforceable.

Pace’s argument is that the

implied warranties either are inapplicable or were not breached
even if the game is illegal.

Prim’s response is that, even if

illegal, the game still came with implied warranties of
merchantability and fitness for a particular purpose.

But Prim,

which has the burden of proving the viability of its implied
warranty claims, does not sufficiently address the issue of
whether implied warranties are applicable if the product is
illegal.

Prim instead pivots to an off-topic discussion of

express warranties of legality it says Pace provided.
17.

Opp’n at

That is, Prim simply asserts or assumes that its breach of

implied warranty claims are viable.

Prim’s assumption would

allow an implied warranty claim by a drug user who paid for
cocaine but received “bunk.”

Because Prim fails to meet its

burden as the claimant of establishing a right to enforce any
implied warranty concerning an illegal game, the court grants
summary judgment to Pace on Counts VI and VII.3
V.

CONCLUSION.

3

Because it is basing this ruling on Prim’s failure to
meet its burden, the court need not determine whether implied
warranties may or may not apply to illegal goods or services.
14

The court grants Pace’s motion for summary judgment as
to Counts IV, VI, and VII, and denies the motion as to Count III.
//
IT IS SO ORDERED.
DATED: Honolulu, Hawaii, December 13, 2012.

/s/ Susan Oki Mollway
Susan Oki Mollway
United States District Judge

Prim, et al. v. Pace-o-Matic, CIV. NO. 10-00617 SOM/KSC; ORDER GRANTING IN PART AND
DENYING IN PART DEFENDANT/COUNTERCLAIMANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AS TO
COUNTS III, IV, VI, AND VII.

15