North Atlantic Operating Company, Inc. et al v. ZZSS, LLC

Filing 17

MEMORANDUM AND OPINION by Senior Judge Charles R. Simpson, III on 3/20/2018 - Defendant's partial motion to dismiss will be denied. An order will be entered in accordance with this memorandum.cc:counsel (DAK)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
AT LOUISVILLE
NORTH ATLANTIC OPERATING
COMPANY, INC.
and
NATIONAL TOBACCO
COMPANY, L.P.

PLAINTIFFS

v.

CIVIL ACTION NO. 3:17-CV-00214-CRS

ZZSS, LLC, d/b/a ZIG ZAG
SMOKE SHOP

DEFENDANT

MEMORANDUM OPINION
I.

Introduction

This case is before the court on defendant ZZSS, LLC d/b/a Zig Zag Smoke Shop’s
(hereinafter “defendant”) motion to dismiss the amended complaint pursuant to Fed. R. Civ. P.
12(b)(6). ECF No. 15. Plaintiffs North Atlantic Operating Company (“NAOC”) and National
Tobacco Company (“NTC”) (collectively “plaintiffs”) responded. ECF No. 16. This matter is
now ripe for review. Because defendant’s motion only contests three of plaintiffs’ claims, the
court will treat it as a partial motion to dismiss. For the reasons set forth below, defendant’s
motion will be denied.
II.

Factual Background

On April 7, 2017, Plaintiffs filed a complaint against defendant in this court, alleging that
defendant “has and continues to use the designation ‘Zig Zag’ in connection with its ongoing
business in violation of plaintiffs’ rights in a portfolio of Zig-Zag trademarks,” and in violation
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of “the Settlement Agreement executed by the parties to this action.” ECF No. 1, ¶ 2. Plaintiffs
asserted claims for breach of contract, breach of the implied duty of good faith and fair dealing,
injunctive relief, federal trademark infringement, federal unfair competition, specific
performance and indemnification, unjust enrichment, promissory estoppel, and declaratory
judgment. Id. at ¶¶ 28-86. Defendant subsequently filed a motion to dismiss. ECF No. 11.
Plaintiffs then filed an amended complaint pursuant to Fed. R. Civ. P. 15(a)(1)(B). ECF No. 13.
According to plaintiffs’ amended complaint, plaintiff NAOC “owns or is the exclusive
licensee of a portfolio of trademarks incorporating the words ‘Zig-Zag’ with or without other
words, hyphens, stylizations, and design components (the “Zig-Zag Marks”) for use in
connection with tobacco products, cigarette rolling papers, electronic cigarettes, vaping products,
and accessories.” ECF No. 13, ¶ 11. Plaintiff NTC is the distributor for plaintiff NAOC, and
owns the domain name www.zigzag.com, which it uses to market ‘Zig-Zag’ smoking products.
Id. at ¶¶ 12-13.
The amended complaint alleges that in March 2012, plaintiffs discovered that defendant
was using the words ‘Zig Zag’ “in its business of selling retail smoking and tobacco related
products.” Id. at ¶ 17. Specifically, defendant was using the words ‘Zig Zag’ in the name of its
business—Zig Zag Smoke Shop—and in its advertisements and internet domain name,
www.zigzagsmokeshop.com. Id. Plaintiffs sent defendant a cease and desist letter to prevent it
from continuing to use its protected marks. Id. at ¶ 18.
In response to the cease and desist letter, plaintiffs and defendant entered into a
settlement agreement. ECF 13-1. Defendant agreed to limit its use of the words ‘Zig Zag’ in the
following ways:

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1) [defendant’s] use of the words ‘Zig Zag’ is always, at least, immediately
followed by the words ‘Smoke Shop,’ and all four of those words appear in
the same or similar font, style, size, color, and the like;
2) [defendant’s] advertisements, marketing materials, and promotional materials
are of a local nature and are directed to the local Houston, Texas market;
3) all of [defendant’s] advertisements, marketing materials, and promotional
materials clearly and conspicuously display the address of [defendant’s] sole,
existing retail store in close proximity to the words ‘Zig Zag Smoke Shop;’
4) all of [defendant’s] advertisements, marketing materials, and promotional
materials clearly and conspicuously display the following disclaimer in close
proximity to the words ‘Zig Zag Smoke Shop’: ‘Zig Zag Smoke Shop is not
affiliated with or endorsed by National Tobacco Company, L.P. or North
Atlantic Operating Company, Inc.’” ECF No. 13-1, p. 2.
Additionally, defendant agreed to discontinue its use of the internet domain name,
www.zigzagsmokeshop.com, and to cease any other use of the words ‘Zig Zag’ in connection
with its business on the internet. Id. at 3. In exchange for defendant’s compliance with the terms
of the agreement, plaintiffs agreed to “release [defendant] from any claim . . . for damages
resulting from [defendant’s] use of ‘Zig Zag’ prior to” the date of the agreement. Id. at 4.
Plaintiffs’ amended complaint further alleges that in late 2016, they discovered that
defendant had breached the terms of the settlement agreement “through its improper use of the
words, ‘Zig Zag,’ in its signage and advertising and in other ways evident from the review of the
terms of the settlement agreement.” ECF No. 13, ¶ 26. On January 12, 2017, plaintiffs sent
defendant a cease and desist letter “demanding full compliance with the settlement agreement
and requesting written confirmation that any and all violations of its terms and conditions . . . had
been permanently remedied. Id. at ¶ 30. Plaintiffs provided photographs showing defendant’s
improper use of the words ‘Zig Zag’ on its business sign and on its internet posts. Id. On January
19, 2017, defendant sent a response letter with photographs showing that the violations on the
business signs had been modified.

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On February 3, 2017, Plaintiffs sent another letter to defendant “demanding full
compliance with the settlement agreement and requesting written confirmation that any and all
violations of the terms and conditions . . . had been permanently remedied.” Id. at ¶ 32. Plaintiffs
included “internet screenshots showing [defendant’s] continued violation of the settlement
agreement.” Id. Defendant never responded to this letter. Id. at ¶ 35. Plaintiffs allege that
defendant continues to breach the terms of the settlement agreement.
Defendant now moves to dismiss plaintiffs’ claims for breach of the implied duty of good
faith and fair dealing, declaratory judgment, and promissory estoppel pursuant to Fed. R. Civ. P.
12(b)(6).
III.

Legal Standard

Under Fed. R. Civ. P. 12(b)(6), a party may move to dismiss a cause of action for “failure
to state a claim upon which relief can be granted.” To survive a motion to dismiss, a complaint
must contain sufficient facts to state a claim that is “plausible on its face.” Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A complaint states a
plausible claim for relief when the court may “draw the reasonable inference that the defendant
is liable for the misconduct alleged. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173
L.Ed.2d 868 (2009). A court is not required to accept as true legal conclusions or “threadbare
recitals of the elements of a cause of action.” Id. When resolving a motion to dismiss, however,
the court must “construe the complaint in the light most favorable to the plaintiff, accept its
allegations as true, and draw all reasonable inferences in favor of the plaintiff.” Wesley v.
Campbell, 779 F.3d 421, 428 (6th Cir. 2015) (quoting Directv, Inc. v. Treesch, 487 F.3d 471, 476
(6th Cir. 2007)).

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IV.

Discussion

Defendant contends that plaintiffs’ claims for breach of the implied duty of good faith
and fair dealing, declaratory judgment, and promissory estoppel should be dismissed.
Specifically, defendant argues that plaintiffs fail to allege sufficient facts to support these claims.
Moreover, defendant asserts that these claims are duplicative of plaintiffs’ breach of contract
claim. These arguments will be addressed in further detail below.
A. Whether Sufficient Facts Have Been Alleged to Support Claims
i. Breach of the Implied Duty of Good Faith and Fair Dealing
Defendant asserts that plaintiffs fail to state a claim for breach of the implied duty of
good faith and fair dealing. Under Kentucky law, a covenant of good faith and fair dealing is
implicit in all contracts. Rainer v. Mt. Sterling Nat’l Bank, 812 S.W.2d 154, 156 (Ky. 1991).1
Although it is not an independent cause of action, breach of this implied covenant can
“potentially serve as a valid basis for a breach of contract claim. James T. Scatuorchio Racing
Stable, LLC v. Walmac Stud Management, 941 F.Supp.2d 807, 817 (E.D. Ky. April 19, 2013);
Peacock v. Damon Corp., 458 F.Supp.2d 411, 419 (W.D. Ky. Sept. 20, 2016). To demonstrate a
breach of the implied duty of good faith and fair dealing, a plaintiff must provide evidence that
“the party alleged to have acted in bad faith . . . engaged in some conduct that denied the benefit
of the bargain originally intended by the parties.” O’Kentucky Rose B. Ltd. P’Ship v. Burns, 147
Fed. Appx. 451, 458 (6th Cir. 2005); see also Sumner v. Armstrong Coal Co., 2014 WL 4063492
(W.D. Ky. Aug. 15, 2014).

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Defendant’s motion to dismiss argues that Kentucky law only recognizes the tort of breach of the duty of good
faith and fair dealing in the context of insurance contracts. Because it is clear that plaintiffs allege this claim under
contract law, this argument will be disregarded. ECF No. 16, p. 9 (“Plaintiffs pled their claim for the breach of the
covenant of good faith and fair dealing in the parties’ Settlement Agreement as a contract claim, not a tort.”).

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Plaintiffs state a plausible claim for breach of contract based on breach of the implied
duty of good faith and fair dealing. Plaintiffs’ amended complaint states that the purpose of the
settlement agreement between plaintiffs and defendant was to “restrict the use by [defendant] of
the words, Zig Zag.” Pl. Complaint, ECF No. 13, ¶¶ 21-25. Plaintiffs further allege that
defendant “breached the terms of the settlement agreement through its improper use of the
words, Zig Zag, in signage and advertising . . .” Id. at ¶ 26. In support of this allegation, plaintiffs
provide photographs of the improper use. ECF Nos. 13-4, 13-7. These facts create the plausible
inference that defendant denied plaintiffs the benefit of their bargained for settlement agreement
by acting in direct contravention to its terms.
Defendant further argues that because plaintiffs already allege a breach of contract claim
in their amended complaint, they cannot separately allege breach of contract based on breach of
the implied duty of good faith and fair dealing. Defendant is correct that breach of the implied
duty of good faith and fair dealing is technically a breach of contract claim. However, plaintiffs’
contract claims in this case are based on different types of breach. The first breach of contract
claim is based on defendant’s alleged breach of the express terms of the settlement agreement.
The second breach of contract claim is based on defendant’s alleged breach of the implied
covenant. Plaintiffs are permitted to allege claims in the alternative, as discussed in further detail
below. Therefore, plaintiffs’ amended complaint alleges sufficient facts to support a claim for
breach of contract based on breach of the implied duty of good faith and fair dealing.
ii. Declaratory Judgment
Defendant next asserts that plaintiffs fail to state a claim for declaratory judgment. Under
the Declaratory Judgment Act, “[i]n a case of actual controversy . . . any court of the United
States, upon the filing of an appropriate pleading, may declare the rights and other legal relations

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of any interested party seeking such declaration, whether or not further relief is or could be
sought.” 28 U.S.C. § 2201(a). To determine whether there is an ‘actual controversy,’ the court
must ask “whether the facts alleged, under all the circumstances, show that there is a substantial
controversy, between parties having adverse legal interests, of sufficient immediacy and reality
to warrant the issuance of a declaratory judgment.” Maryland Cas. Co. v. Pacific Coal & Oil
Co., 312 U.S. 270, 272, 61 S.Ct. 510, 85 L.Ed. 826 (1941). Such a controversy does not become
moot by the defendant’s cessation of the allegedly wrongful behavior, unless it can be shown that
such “wrongful behavior could not reasonably be expected to recur.” Friends of the Earth, Inc. v.
Laidlaw Environmental Servs., Inc., 528 U.S. 167, 190, 120 S.Ct. 693, 145 L.Ed.2d 610 (2000).
Plaintiffs state a plausible claim for declaratory judgment. Plaintiffs’ amended complaint
alleges that defendant violated the March 2012 settlement agreement between the parties by
improperly using the words ‘Zig Zag’ in its signage and advertisements, as well as its activity on
the internet. It further states that these actions are violations of plaintiffs’ trademark rights. This
constitutes an ‘actual controversy’ under the Declaratory Judgment Act. Therefore, plaintiffs’
amended complaint alleges sufficient facts to support a claim for declaratory judgment.
iii. Promissory Estoppel
Finally, defendant argues that plaintiffs fail to state a claim for promissory estoppel. A
claim for promissory estoppel includes the following elements: “(1) a promise; (2) the promisee
reasonably relies upon the promise by acting or forbearing to act upon the strength of it; (3) the
promisor, at the time of making his promise, foresees or expects that the promisee would act or
forbear in reliance upon it; (4) enforcement of the promise is necessary to avoid an injustice.”
Davis v. Siemens Medical Solutions USA, Inc., 399 F.Supp.2d 785, 795 (W.D. Ky. Nov. 8, 2005)

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(citing Meade Const. Co., Inc. v. Mansfield Commercial Elec., Inc., 579 S.W.2d 105, 106 (Ky.
1979)).
Plaintiffs state a plausible claim for promissory estoppel. Plaintiffs allege that defendant
agreed to limit its use of the words ‘Zig Zag’ in relation to its smoke shop business, and that in
exchange for that promise, plaintiffs agreed not to pursue legal action against defendant for its
prior use of the protected mark. Plaintiffs further allege that defendant violated the terms of the
settlement agreement through its improper use of the words ‘Zig Zag,’ and that this was likely to
cause confusion for customers. Although promissory estoppel “cannot be the basis for a claim if
it represents the same performance contemplated under a written contract,” the validity of the
settlement agreement between the parties has not yet been determined. Tractor and Farm Supply,
Inc. v. Ford New Holland, Inc., 898 F. Supp. 1198, 1205 (W.D. Ky March 15, 1995). Thus,
plaintiffs are permitted to plead promissory estoppel as an alternative to breach of contract.
Plaintiffs have alleged sufficient facts to support their claim for promissory estoppel.
B. Whether Claims are Duplicative
Additionally, defendant contends that plaintiffs’ claims for breach of the implied duty of
good faith and fair dealing, declaratory judgment, and promissory estoppel are all duplicative of
plaintiffs’ breach of contract claim. Fed. R. Civ. P. 8(d) specifically states that a complaint may
contain alternative or inconsistent claims. Therefore, this argument has no merit.

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V.

Conclusion

For the aforementioned reasons, defendant’s partial motion to dismiss pursuant to Fed. R.
Civ. P. 12(b)(6) will be denied. An order will be entered in accordance with this memorandum.

March 20, 2018

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