Marlow Industries, Inc. v. Sealy, Inc.

Filing 57

MEMORANDUM OPINION & ORDER: It is hereby ORDERED that Marlow Industries, Inc's 27 MOTION to Dismiss is GRANTED. Count 3 of Defendant Sealy, Inc's Counterclaim 24 is DISMISSED. Signed by Judge Danny C. Reeves on 8/3/2017.(GLD)cc: COR

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION
(at Lexington)
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MARLOW INDUSTRIES, INC.,
Plaintiff,
V.
SEALY, INC.,
Defendant.
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Civil Action No. 5: 17-056-DCR

MEMORANDUM OPINION
AND ORDER

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Plaintiff Marlow Industries, Inc. (“Marlow”) filed a Complaint on February 6, 2017, in
which it raises claims against Sealy, Inc. (“Sealy”) based on Sealy’s alleged wrongful
termination of the parties’ contract. [Record No. 1] Sealy filed an Answer to the Complaint
with accompanying counterclaims, alleging that Marlow provided nonconforming goods in
breach of the parties’ agreement. [Record No. 24] One of Sealy’s counterclaims seeks a
declaratory judgment regarding a provision of the parties’ contract. [Id.] Marlow then moved
to dismiss this claim because it is redundant of issues raised in Marlow’s Complaint. [Record
No. 27] Marlow is correct regarding this assertion. As a result, its motion will be granted.
I.
Sealy contracted with Marlow to supply engines for Sealy’s IdealTemp mattress.
[Record No. 24, ¶ 8] The parties’ agreement obligated Marlow to supply products that
conformed to the product specifications outlined in Section 3.2 and were free from defects.
[Id. at ¶ 9; Record No. 31, Ex. 1, p. 7]

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The agreement provided Sealy with the right to cancel a purchase order for default or
for convenience. [Record No. 31, Ex. 1, p. 8]1 Under Section 4.5.a of the agreement, Sealy
was authorized to cancel a purchase order for cause “immediately upon written notice should
an Event of Default occur and be occurring . . . .” [Id.] The agreement defines an event of
default to include any breach of the contract. [Id. at 19] Marlow would be financially
responsible for any costs incurred in connection with a cancellation for cause. [Id. at 8]
Section 4.5.b provided Sealy with the right to cancel a purchase order, or any portion thereof,
for convenience. [Id.] However, Sealy would be required to pay Marlow the costs of any
products that had been completed, or were in the process of being completed, in response to
the purchase order. [Id. at 8-9]
The agreement also defined the circumstances under which Sealy was authorized to
cancel the entire agreement for cause or for convenience. Sections 15.1 and 15.2 gave Sealy
the right to terminate the agreement for cause if Marlow either allowed an event of default and
failed to cure or allowed three or more events of default within any 12-month period, regardless
of whether it subsequently cured the default. [Id. at 18-19] Under section 15.3, Sealy could
terminate the agreement for convenience, without cause. [Id.] In the event that Sealy
terminated for convenience, Marlow would be entitled to full payment for all completed
products and any products in the process of being completed to fill a purchase order. [Id.]

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Sealy attached the parties’ agreement to its response to Marlow’s motion to dismiss.
[Record No. 31, Ex. 1] A court deciding a motion to dismiss is permitted to consider exhibits
without converting the motion into one for summary judgment “so long as they are referred to
in the complaint and are central to the claims therein . . . .” Rondigo, L.L.C. v. Twp. of
Richmond, 641 F.3d 673, 680-81 (6th Cir. 2011) (internal quotation marks and citation
omitted). Because the parties’ contractual agreement is discussed at length in the Complaint
and is central to the parties’ claims, the Court will consider it in addressing the motion to
dismiss.
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In late 2015, Sealy placed 11 orders for 12,110 products. [Record No. 24, ¶ 18] Marlow
delivered 6,720 products to Sealy between September 2015 and June 2016, for which Sealy
paid Marlow $2,654,400.00. [Id. at ¶¶ 18, 19] Between January and September of 2016, Sealy
conducted a market test of the IdealTemp mattress containing Marlow’s products. [Id. at ¶ 20]
Sealy received multiple retailer and customer complaints regarding the products, which led it
to conclude that the products were defective and failed to comply with the parties’ agreed
product specifications. [Id. at ¶ 21] On November 4, 2016, Sealy notified Marlow that it was
terminating the agreement for cause based on Marlow’s events of default. [Id. at ¶ 28]
Marlow’s Complaint includes three claims for relief. Marlow’s first claim asserts that
Sealy breached the parties’ agreement. [Record No. 1, ¶ 51] This claim is partially based on
Marlow’s allegation that Sealy cancelled the purchase orders for convenience rather than for
cause under Sections 4.5.a and 4.5.b of the agreement. [Id. at ¶¶ 68-70] The second claim is
that Sealy breached its duty of good faith and fair dealing, in part, by fabricating continuing
defaults to cancel the agreement for cause rather than for convenience. [Id. at ¶¶ 84-85]
Marlow’s third claim requests a declaratory judgment. [Id. at ¶ 95]
Sealy asserts three counterclaims against Marlow. [Record No. 24] Sealy’s first two
claims seeks remedies for Marlow’s provision of nonconforming goods. [Id. at ¶¶ 33-50]
Sealy seeks a declaratory judgment through its third claim, contending that it canceled the
purchase orders for cause within the meaning of Section 4.5.a rather than for convenience
under Section 4.5.b. [Id. at ¶¶ 51-55]
II.
Marlow moves to dismiss Sealy’s third counterclaim seeking a declaratory judgment.
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) must be construed in the
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light most favorable to the counter-plaintiff and all allegations must be accepted as true. See
Lambert v. Hartman, 517 F.3d 433, 439 (6th Cir. 2008). The counter-complaint must allege
“enough facts to state a claim for relief that is plausible on its face” to survive a motion to
dismiss. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).
Marlow contends that Sealy’s counterclaim for declaratory relief is subject to dismissal.
According to Marlow, Sealy’s counterclaim does no more than raise an issue of contractual
interpretation that is addressed in Marlow’s Complaint. In other words, it argues that, because
resolving Marlow’s claims will conclusively resolve the issue raised in Sealy’s counterclaim,
the counterclaim is duplicative and should be dismissed. Sealy responds that its counterclaim
deals with a specific contractual issue that will not be resolved by deciding Marlow’s claims.
Moreover, Sealy claim that it would be premature to dismiss Sealy’s counterclaim at this stage
of the litigation because it is too early to ascertain whether the parties’ claims are identical.
Courts have discretion to grant or deny a request for declaratory judgment. Grand
Trunk Western R. Co. v. Consolidated Rail Corp., 746 F.2d 323, 325 (6th Cir. 1984) (citation
omitted). Generally, a declaratory judgment is only appropriate when it would either “serve a
useful purpose in clarifying and settling the legal relations in issue” or “terminate and afford
relief from the uncertainty, insecurity, and controversy giving rise to the proceeding.” Id.
(citation omitted). The court should decline to grant declaratory judgment when neither of
these results would be accomplished. Id.
Under the mirror image rule, a counterclaim that does no more than restate issues raised
in a complaint may be dismissed as redundant. The basis of the rule is that, “when a
counterclaim merely restates the issues as a ‘mirror image’ of the complaint, the counterclaim
serves no purpose.” Federal Deposit Ins. Corp. v. Project Development Corp., 819 F.2d 289
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(6th Cir. 1987) (citation omitted). And a counterclaim serves no purpose when the claim
“exactly corresponds” to the plaintiff’s claim “such that resolution of one claim would entirely
dispose of the other claim.” Stryker Corp. v. Ridgeway, No. 1: 13-CV-1066, 2014 WL
3704284 (W.D. Mich. July 24, 2014). Accordingly, a counterclaim will be dismissed under
the mirror image rule “where it is clear that there is a complete identity of factual and legal
issues between the complaint and the counterclaim.” Aldens, Inc. v. Packel, 524 F.2d 38, 5152 (3rd Cir. 1975). However, the counterclaim should only be dismissed if “there is no doubt
that it will be rendered moot by adjudication of the main action.” Pettrey v. Enterprise Title
Agency, Inc., No. 1: 05-cv-1504, 2006 WL 3342633, at *3 (N.D. Ohio November 17, 2006).
If there is any doubt whether the claims are identical, the “safer course” is to deny the motion
to dismiss and resolve the claim at a later stage of the litigation. Id.
Here, Sealy’s counterclaim is redundant because it does no more than restate an issue
raised in Marlow’s Complaint. Marlow’s first claim is for breach of contract. [Record No. 1,
¶ 54] Marlow claims that Sealy “concocted” events of default to allow Sealy to cancel the
purchase orders for cause under Section 4.5.a of the parties’ agreement and avoid any financial
obligations to Marlow. [Id. at ¶ 70] However, Marlow argues that it had not defaulted under
the parties’ agreement and that Sealy’s cancellation of the purchase orders was actually for
convenience under Section 4.5.b. [Id.] Marlow thus alleges that Sealy breached the agreement
by cancelling purchase orders without cause and is now liable for damages.

Deciding

Marlow’s breach of contract claim will require the Court to determine whether Sealy canceled
pending purchase orders for cause under 4.5.a or for convenience under 4.5.b.
Likewise, Sealy’s counterclaim discusses Sections 4.5.a and 4.5.b and “requests a
declaration that its cancellation of the pending purchase orders was for cause under Section
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4.5.a. of the Agreement.” [Record No. 24, ¶¶ 51-55] This counterclaim merely restates factual
and legal issues that are addressed by Marlow’s Complaint: that is, whether Sealy canceled the
pending purchase orders for cause or for convenience. As a result, resolving Marlow’s breach
of contract claim will dispose of Sealy’s counterclaim.
Sealy relies on a patent infringement case, Dominion Electrical Mfg. Co. v. Edwin L.
Wiegand Co., 126 F.2d 172 (6th Cir. 1942), in support of its position. There, the court
concluded that it was not appropriate to dismiss a counterclaim for a declaratory judgment
under the mirror image rule because “a counter-claim for a declaratory judgment in a suit for
infringement of a patent, serves a useful purpose.” Id. at 174. This is because, in a patent
infringement case, “mere dismissal of a plaintiff’s bill does not always adjudicate every aspect
of the controversy or give the defendant all the relief to which he may be entitled.” Id. In this
way, the counterclaim served a useful purpose and was not subject to dismissal under the
mirror image rule.
The court’s holding in Dominion does not compel a different result in this case. In
Dominion Electrical, the mirror image rule did not apply to the counterclaim addressing the
parties’ rights under the patent because it served a useful purpose—it raised legal issues
between the parties beyond the scope of those addressed by the plaintiff’s complaint. In
contrast, Sealy has not demonstrated that its counterclaim concerns any issues beyond those
addressed by Marlow’s Complaint. Instead, Sealy’s counterclaim deals only with the factual
issue of its cancellation of particular pending purchase orders and the legal issue of whether
cancellation was for cause or for convenience under the contract. This issue is squarely
addressed by Marlow’s Complaint and Sealy’s counterclaim reiterating those questions does
not serve a useful purpose.
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III.
For the reasons outlined above, it is hereby
ORDERED that Marlow Industries, Inc.’s motion to dismiss [Record No. 27] is
GRANTED.

Count 3 of Defendant Sealy, Inc.’s Counterclaim [Record No. 24] is

DISMISSED.
This 3rd day of August, 2017.

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