Lacks Enterprises, Inc. et al v. HD Supply, Inc. et al

Filing 16

ORDER Granting In Part and Denying In Part Defendants' 5 MOTION to Dismiss. (Scheduling Conference set for 11/14/2016 04:00 PM before District Judge Denise Page Hood) Signed by District Judge Denise Page Hood. (SBur)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
LACKS ENTERPRISES, INC. and
HOME PRODUCTS, LLC,
Plaintiffs,
v.

Case No. 16-10867
Honorable Denise Page Hood

HD SUPPLY, INC. and
HOME DEPOT U.S.A., INC.,
Defendants.
/
ORDER GRANTING IN PART AND DENYING IN PART
DEFENDANTS’ MOTION TO DISMISS [Dkt. No. 5]
I.

INTRODUCTION
Plaintiffs Lacks Enterprises, Inc. and Lacks Home Products, LLC (collectively,

“Plaintiff”) have filed suit against Defendants HD Supply, Inc. and Home Depot
U.S.A., Inc. (collectively, “Defendant”). This case arises out of a Settlement
Agreement between Plaintiff and HD Supply, Inc. that governs the resolution of a
patent infringement suit previously brought by Plaintiff against HD Supply, Inc. in
this Court. See Case No. 12-14472. On March 24, 2016, Defendant filed a Motion to
Dismiss Plaintiff’s First Amended Complaint (“, or in the Alternative, Motion for

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Judgment on the Pleadings. (Doc. No. 5). Defendant’s Motion has been fully briefed.1
The Court, having concluded that the decision process would not be significantly
aided by oral argument, previously ordered that the motion be resolved on the motion
and briefs submitted by the parties. E.D. Mich. L.R. 7.1(f)(2). [Dkt. No. 15] The
Court grants in part and denies in part Defendant’s Motion.
II.

BACKGROUND
Pursuant to the Settlement Agreement, Plaintiff granted HD Supply (through

a subsidiary, Crown Bolt) a license to sell “Faux Garage Door Windows” (this is a
defined term in the Settlement Agreement and the FAC). In exchange, HD Supply
agreed to pay Plaintiff royalties according to the terms of the Settlement Agreement.
In the event of any payment dispute, the Settlement Agreement allows Plaintiff to
have an independent certified public accountant audit HD Supply’s records. Article
4.5 of the Settlement Agreement provides, in relevant part:
The Lacks Companies may hire an independent certified public
accountant (hereinafter “CPA”) to inspect or audit all of the HD Supply
Companies’ records pertaining to the manufacture, sale and return or
repurchase of Faux Garage Door Windows for purposes of verifying the
HD Supply Companies’ compliance with the terms of this Agreement.
. . . The Lacks Companies shall give the HD Supply Companies written
notice of its election to inspect and audit its compliance with this
Agreement no less than fourteen (14) days prior to the proposed date of

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The Court GRANTS Defendant’s unopposed Motion for Leave to File Reply Brief [Dkt.
No. 11].
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review of the HD Supply Companies’ records by the CPA. . . . In the
event of the identified deficiency, the HD Supply Companies shall have
the opportunity to cure said deficiency and a single event of deficiency
if timely cured shall not be deemed a material breach of this Agreement
for the purpose of termination under Article VII.
The Settlement Agreement includes a provision to address Plaintiff’s perceived
quality control concerns about HD Supply’s products, and it governs products
manufactured after January 1, 2014. Article 9.2 of the Settlement Agreement states:
The Parties agree to work together to seek a solution for the Quality
Concerns for future manufacture and production runs of the Faux Garage
Door Windows occurring after the Effective Date that does not add to the
cost of The HD Supply Companies’ Faux Garage Door Windows
(“Solution”). If the Parties identify a Solution, The HD Supply
Companies agree to implement such Solution.
The Settlement Agreement also contains a merger clause that provided:
This Agreement constitutes the entire agreement and understanding
among the Parties with respect to the matters contained herein, and there
are no prior oral or written promises, representations, conditions,
provisions, or terms related thereto other than those set forth in this
Agreement.
Article 10.1 (the “Merger Clause”). After the parties executed the Settlement
Agreement, Home Depot U.S.A., Inc. acquired substantially all of the assets of HD
Supply’s Crown Bolt subsidiary, along with the license Plaintiff granted HD Supply.
Plaintiff’s original complaint in this suit alleged that Defendant: (a) failed to
pay required royalties in breach of the Settlement Agreement; and (b) had defrauded
Plaintiff by providing false sales reports to underpay the royalties due on HD Supply
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products. Defendant filed an answer to the original complaint. On February 12, 2016,
Plaintiff filed a First Amended Complaint (“FAC”), and it includes six counts: (1)
Count I - Breach of Settlement Agreement; (2) Count II - Fraudulent
Misrepresentation; (3) Count III - Declaratory Relief; (4) Count IV - Patent
Infringement; (5) Count V - Unfair Competition in Violation of the Lanham Act, 15
U.S.C. § 1125(a); and (6) Count VI - Unfair Competition in Violation of Michigan
Common Law. On March 10, 2016, this case was transferred to the Eastern District
of Michigan from the Western District of Michigan.
III.

APPLICABLE LAW & ANALYSIS
A.

Standard of Review

A Rule 12(b)(6) motion to dismiss tests the legal sufficiency of the plaintiff’s
complaint. Accepting all factual allegations as true, the court will review the
complaint in the light most favorable to the plaintiff. Eidson v. Tennessee Dep’t of
Children’s Servs., 510 F.3d 631, 634 (6th Cir. 2007). As a general rule, to survive a
motion to dismiss, the complaint must state sufficient “facts to state a claim to relief
that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570
(2007). The complaint must demonstrate more than a sheer possibility that the
defendant’s conduct was unlawful. Id. at 556. Claims comprised of “labels and
conclusions, and a formulaic recitation of the elements of a cause of action will not
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do.” Id. at 555. Rather, “[a] claim has facial plausibility when the plaintiff pleads
factual content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009).
B.

Analysis
1.

Fraud Claim

Defendant asserts that Plaintiff’s fraud claims should be dismissed: (a) for
failure to plead with particularity, as required under Federal Rule of Civil Procedure
9(b); and (b) pursuant to the Merger Clause.2 Defendant first contends that Plaintiff
fails to satisfy the pleading standards of Rule 9(b) because Plaintiff did not allege the
time, place and contents of the misrepresentation(s) upon which it relies - or who
made the misrepresentations. See, e.g., Republic Bank & Tr. Co. v. Bear Stearns &
Co., 683 F.3d 239, 253 (6th Cir. 2012) (holding that to comply with Rule 9(b), “the
plaintiff must: (1) point to a particular allegedly fraudulent statement; (2) identify who
made the statement; (3) plead when and where the statement was made; and (4)
explain what made the statement fraudulent”).
Defendant’s argument is based on four paragraphs of the FAC it identifies. See

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Defendant also argues Plaintiff’s fraud claim is inconsistent with its breach
of contract claim but this a motion on the pleadings. Plaintiff is entitled to plead in
the alternative.
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Doc. No. 5, PgID 176 at n. 11 and 12. Defendant argues that Plaintiff’s allegations
do not identify any particular fraudulent statement(s) and there is not identification of
the individual(s) (or even entity(ies) who made the alleged representations. Citing
Anderson v. Pine S. Capital, LLC, 177 F.Supp.2d 591, 596-97 (W.D. Ky. 2001)
(“When the complaint involves multiple defendants, then ‘each defendant’s role must
be particularized with respect to their alleged involvement in the fraud.’”).
Plaintiff response identifies 17 paragraphs that Plaintiff asserts contain
particularized allegations regarding Defendant’s fraudulent conduct. See Doc. No. 7,
PgID 206-08. Plaintiff alleges that the statements were made at a meeting in Grand
Rapids during December 2012, which satisfies element (3). The allegations identify
that statements were made by representatives of HD Supply and Crown Bolt, which
Plaintiff contends satisfies element (2), but those allegations do not identify an
individual(s) who made the statements. Plaintiff argues that element (1) (the allegedly
fraudulent statement) is satisfied because HD Supply and Crown Bolt representatives
“represented that they intended to address quality concerns as to their products in
good faith.” See FAC at ¶¶ 132-33. See also FAC at ¶¶ 34, 48.
Defendant contends that Plaintiff’s allegations that Defendant “made certain
representations” about the market/projected sales and “agreed to take certain steps”
to ensure product quality, FAC at ¶¶ 33, 34, are not specific enough because Plaintiff
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does not identify what those “certain” things were. Plaintiff alleges that element (4)
is satisfied because “Defendants never intended to be bound by the quality control
provisions.” See FAC at ¶¶ 80, 135.
Defendant also asserts that the Merger Clause precludes any fraud claim and
that Plaintiff’s reliance on extra-contractual representations is unreasonable as a
matter of law. Defendant relies on UAW-GM Human Resource Center v. KSL
Recreation Corp., 579 N.W.2d 411, 419 (Mich.Ct.App. 1998), where the Court stated:
[W]hen a contract contains a valid merger clause, the only fraud that
could vitiate the contract is fraud that would invalidate the merger clause
itself, i.e., fraud related to the merger clause or fraud that invalidates the
entire contract including the merger clause” and “the merger clause made
it unreasonable for plaintiff’s agent to rely on any representation not
included in the letter of agreement.
Id.
Plaintiff argues that its fraud claim is not barred by the merger clause because
Plaintiff has pled fraud in the inducement. Citing JAC Holding Enterprises, Inc. v.
Atrium Capital Partners, LLC, 997 F.Supp.2d 710, 730 (E.D. Mich. 2014) (citations
omitted) (“The presence of a merger clause in a written contract will not preclude a
claim for fraud in the inducement where the plaintiff can show that it would have
avoided the agreement entirely under the terms ostensibly agreed to, in the absence
of the defendant’s fraudulent representations”); Ramirez v. IBM Corp., 829 F.Supp.2d
555, 561 (E.D. Mich. 2011). The Court finds that Plaintiff has pled that Defendant
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induced Plaintiff to enter the Settlement Agreement by making misrepresentations to
Plaintiff. See Doc. No. 7, at PgID 211 (citing FAC at ¶ 143) (“[t]he very crux of [its]
fraud claim is that ‘but for Defendants’ representations that it would address quality
concerns as to their products, [Plaintiff] would not have entered into the Settlement
Agreement . . .’”). See also Doc. No. 2, PgID 138 (“WHEREFORE” ¶).
Defendant responds that the Settlement Agreement itself contains no
allegations that Defendant made any representations about inventory levels, the need
for additional product after the effective date of the Settlement Agreement, or that
Defendant would purchase any products from Plaintiff. Defendant asserts that there
can be no fraud in the inducement because the parties negotiated the terms of the
Settlement Agreement. Defendant argues that Plaintiff’s fraud claim must be
dismissed because, despite that negotiation, the Settlement Agreement provides only
that “the Parties agree to work together to seek a solution for the Quality Concerns”
and the Settlement Agreement does not include specific representations about quality
control that Defendant had to satisfy.
Defendant’s argument regarding the Merger Clause is rejected because Plaintiff
has pled fraud in the inducement—that Plaintiff would not have entered into the
Settlement Agreement but for Defendant’s misrepresentations. See JAC Holding
Enterprises; Ramirez, supra. However, Plaintiff does not plead with any particularity
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what the misrepresentations were. Plaintiff only generally alleges that Defendant
misrepresented its intentions concerning quality control when alleging that Defendant
had stockpiled inventory and never intended to comply with the quality control
provisions. See FAC, at ¶¶ 45-46, 48, 76-77, 79-82, 132-33, 135-36, 139. Plaintiff also
fails to identify the persons who made the misrepresentations, as Plaintiff only alleges
it was HD Supply, Inc. and Crown Bolt. See FAC, at ¶¶ 32-35. Defendant’s motion
is granted as it relates to Plaintiff’s fraud claim, which is dismissed for failure to
satisfy the pleading requirements of Rule 9(b).
2.

Breach of Contract Claim - Quality Control Provision

Defendant contends that Section 9.2 of the Settlement Agreement (the quality
control provision) is unenforceable because it requires only that Defendant negotiate
with Plaintiff. Defendant contends that Section 9.2’s obligation “to work together to
seek a solution . . . for future manufacture and production runs . . .” is simply an
agreement to negotiate, which is not enforceable. See, e.g., Trapp v. Vollmer, 2011
WL 2423884, at **1-2 (Mich.Ct.App. June 16, 2011) (“to be valid, a contract to
contract must contain all the essential elements that are to be incorporated into the
final contract. . . . agreements to negotiate have been held unenforceable for lack of
material terms.”); Ford Motor Co. v. Kahne, 379 F.Supp.2d 857, 869 (E.D. Mich.
2005) (“As long as the contract to enter into a future contract specifies the material
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and essential terms, leaving none to be agreed as a result of future negotiations, it[]
is legally enforceable.”). Defendant asserts that Defendant is not bound to take any
specific steps, just that it must “work together” with Plaintiff to “seek a solution”
regarding “future quality problems,” which means only an obligation to negotiate.
Liberto v. D.F. Stauffer Biscuit Co., 441 F.3d 318, 324 (5th Cir. 2006).
Plaintiff does not directly respond to Defendant’s argument. Plaintiff instead
suggests that Defendant is arguing that the unenforceability of the quality control
provision renders the entire Settlement Agreement void for lack of essential terms.
Plaintiff states that the quality control provision is an essential provision of the
Settlement Agreement. Plaintiff argues that it would not have entered the Settlement
Agreement without the provision and that if the provision is merely an “agreement to
agree,” the Settlement Agreement is unenforceable and void. Robinson v. A.Z. Shmina
and Sons Co., 96 Mich.App. 644, 649 (1980) (emphasis added) (“A general rule of
contract law is that a void section of an otherwise valid contract provision can be
severed if it is not an essential part of the whole”). In this case, Plaintiff asserts, the
quality control provision is essential to the Settlement Agreement and, as it is
unenforceable, the entire Settlement Agreement should be voided.
Defendant counters that it did not argue that the unenforceability of Section 9.2
rendered the entire Settlement Agreement void. Defendant responds that Section 9.2
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has no bearing on the rest of the Settlement Agreement and can be severed pursuant
to Section 10.5 of the Settlement Agreement, which provides:
If any provision or portion of a provision of this Agreement is held by
a court of competent jurisdiction to be invalid or unenforceable under
any applicable statute or rule of law, . . . the remaining provisions or
portions of provisions of this Agreement shall in no way be affected or
impaired thereby.
Defendant states that Plaintiff has offered no support for contending that the quality
control provision was an essential term, as: (1) no indication that the quality control
provision is essential was written into the Settlement Agreement; and (2) the quality
control provision applies only to products manufactured in the future.
Defendant also contends Plaintiff has not alleged a viable breach of Section 9.2
because Plaintiff has not specifically alleged that Defendant manufactured any product
after January 1, 2014, the effective date of the Settlement Agreement. Defendant
further contends that by simply alleging that “upon information and belief” Defendant
has manufactured and produced several different models of the Faux Garage Door
Windows since the effective date, Plaintiff does not satisfy the Iqbal standard.
Plaintiff argues that it sufficiently pled a breach of contract as it relates to the
quality control provision. Plaintiff contends that “parties may plead on the basis of
information and belief ‘where the facts are peculiarly in the possession and control of
the defendant or where the belief is based on factual information that makes the
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inference of culpability plausible.’”Wood v. Dow Chemical Co., 72 F.Supp.3d 777,
783 (E.D. Mich. 2014) (quoting Arista Records, LLC v. Doe 3, 604 F.3d 110, 120 (2d
Cir. 2010)). Plaintiff asserts that: (a) it attempted to gain such information from
Defendant but Defendant was uncooperative, and (b) it “understands” that subsequent
productions have occurred but can only actually determine that through discovery.
Defendant also asserts that, because Plaintiff does not allege that Plaintiff
proposed a solution that did not add to Defendant’s costs, Defendant could not have
violated Section 9.2. Plaintiff responds that the necessary information regarding the
impact of costs on Defendant is also within Defendant’s possession and control, to
which Plaintiff is not privy. Plaintiff contends that Defendant has withheld and failed
to provide information but then alleged that Plaintiff has not complied.
Defendant’s motion to dismiss is granted insofar as it argues that Section 9.2
is unenforceable because Defendant is not obligated to do anything other than
negotiate. The basis for that conclusion is that while Plaintiff and HD Supply, Inc.
“agree[d] to work together to seek a solution,” Section 9.2 does not require them to
reach a solution. Rather, as Section 9.2 expressly provides, Defendant is obligated to
do more than negotiate only if the parties agree on a solution: “If the Parties identify
a Solution, The HD Supply Companies agree to implement such Solution.” The Court
also finds that Section 9.2 can be severed from the Settlement Agreement, as there is
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no indication in the Settlement Agreement that it was based on that provision.
3.

Breach of Contract Claim - Breach of Royalty Provision

Defendant asserts that Plaintiff’s breach of contract claim regarding
underpayment of royalties is deficient because: (a) Plaintiff alleges only that “upon
information and belief” Defendant has not paid appropriate royalty payments since
December 2014; and (b) Plaintiff has not alleged that it has initiated audit procedures
pursuant to Section 4.5 of the Settlement Agreement. Defendant argues that condition
must be satisfied prior to alleging a breach because Defendant has the right to cure a
default before it can be found to have materially breached the Settlement Agreement.
Plaintiff again asserts that it had to plead “upon information and belief” because the
information is within the possession of Defendant. Plaintiff alleges that it utilized a
market analysis and used software program functions to verify that the volume of
Defendant’s Faux Garage Door Windows was much greater than Defendant was
reporting to Plaintiff. FAC at ¶¶ 95-99. Defendant contends that Plaintiff’s allegations
regarding the software program are meaningless because they do not measure the
appropriate sales.
Plaintiff also argues that Article 4.5 of the Settlement Agreement does not
require Plaintiff to utilize an independent audit before bringing a lawsuit, as it is
permissive: “[Plaintiff] may hire an independent certified public accountant . .
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.[Plaintiff] shall give [Defendant] written notice of its election to inspect and audit
[Defendant’s] compliance . . .” Id. (emphasis added). Plaintiff suggests that Section
7.2 and Section 7.5 also provide a mechanism by which to challenge the
underpayment of royalties and allow for termination of the Settlement Agreement
upon such material breach. Section 7.2 provides, in relevant part:
If any royalty, deficiency or other amounts due under this Agreement are
not paid by the Licensee to Licensor . . . within fifteen (15) days of the
date when due and at least seven (7) calendar days have passed after
notice to Licensee of lack of payment . . . and such failure continues for
a period of thirty (30) days after given written notice of such failure, then
such Party shall be in default whereupon the other Party may at its option
terminate the Agreement and License Agreement under Article IV by
written notice to the defaulting Party.
Section 7.5 provides the mechanism by which the parties must attempt to negotiate a
resolution of dispute (“The Parties will attempt in good faith to resolve . . . (emphasis
added)). Plaintiff argues that: (a) it has sufficiently alleged that Defendant failed to
make royalty payments as required under the Settlement Agreement; (b) it has
complied with its obligations pursuant to Sections 7.2 and 7.5; and (c) Defendant has
not cured the deficiency.
Defendant replies that Plaintiff’s acknowledgment that the Settlement
Agreement “allowed” it to inspect and audit Defendant’s records demonstrates that
Plaintiff evaded that mechanism by which Plaintiff could have obtained direct
evidence. Defendant contends that Section 4.5 and Sections 7.2 and 7.5 reference
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each other and no breach of royalty payments can be claimed absent the pursuit of an
independent audit – as evidenced by Section 7.5 requiring negotiation of “audit
results.”
Defendant’s motion to dismiss is denied as it relates to the breach of royalty
payment provision.

As Plaintiff argues, Defendant alone has the information

regarding whether any products have been produced after the effective date of January
1, 2014. For that reason, Plaintiff is entitled to plead “upon information and belief”
with respect to this claim. Plaintiff also is correct with regard to the permissive nature
of Section 4.5. Nothing in Section 4.5 requires Plaintiff to conduct an audit to
ascertain underpayments, nor does Article IV contain the only basis for asserting an
underpayment of royalties. Finally, Plaintiff has pled that it complied with its dispute
resolution obligations pursuant to Section 7.5. FAC, at ¶ 127.
4.

Patent Infringement and Unfair Competition Claims

Defendant argues that Plaintiff’s patent infringement and unfair competition
claims must be dismissed because they are contingent on a material breach of the
Settlement Agreement that would authorize Plaintiff to terminate the Settlement
Agreement and the license. Defendant states that, as there was no breach that would
support the termination of the Settlement Agreement under Article VII, the patent
infringement and unfair competition claims should be dismissed.
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Plaintiff responds that its breach of contract claims regarding both the quality
control provisions and the underpayment of royalties are viable. Plaintiff maintains
that, even if those claims are deficient, its patent infringement claim and unfair
competition claims are viable because the Settlement Agreement would be
unenforceable. If the Settlement Agreement is unenforceable, Defendant would have
no authorization to continue to use Plaintiff’s Patent and would damage Plaintiff’s
reputation by selling an inferior product. Plaintiff’s argument assumes that the
unenforceable provisions would void the entire Settlement Agreement.
As Plaintiff’s breach of contract claim regarding the underpayment of royalties
survives, Defendant’s basis for dismissing the patent infringement and unfair
competition claims lacks merit because there is a remaining claim. Defendant’s
motion is denied as it relates to Plaintiff’s patent infringement and unfair competition
claims.
5.

Declaratory Judgment Claim

Defendant argues that the declaratory judgment claim should be dismissed
because Plaintiff has not alleged any uncertainty or insecurity as to its rights, which
is required. Panhandle Eastern Pipe Line Co. v. MichCon Gas Co., 177 F.2d 942, 944
(6th Cir. 1949) (declaratory judgment available only “(1) when the judgment will
serve a useful purpose in clarifying and settling the legal relations in issue, and (2)
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when it will terminate and afford relief from the uncertainty, insecurity, and
controversy giving rise to the proceeding.”). Defendant suggests that the claims in
Plaintiff’s complaint are clear and there is no ambiguity to resolve. Defendant argues
that the Settlement Agreement should remain intact, except for the severed
unenforceable quality control provision, and Plaintiff’s claims should be dismissed.
Plaintiff counters that the parties’ differing views regarding the language of the
Settlement Agreement demonstrate that there is a need for the Court to declare the
legal rights and obligations of the parties. Plaintiff acknowledges that, if the Court
rules the Settlement Agreement unenforceable for lack of essential terms, its claim for
declaratory judgment is moot.
Defendant’s motion to dismiss is denied as it pertains to Plaintiff’s declaratory
judgment claim. Plaintiff’s breach of contract claim for underpayment of royalties
does not, as Defendant implies, fully award Plaintiff the relief it seeks; rather, a
finding for Plaintiff on that claim will simply award Plaintiff damages for any
underpayment of royalties. Plaintiff also is asking the Court to terminate the
Settlement Agreement based on that breach. Accordingly, Plaintiff’s declaratory
judgment claim survives Defendant’s motion to dismiss.
IV.

CONCLUSION
Accordingly,
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IT IS HEREBY ORDERED that Defendant’s Motion to Dismiss Plaintiff’s
First Amended Complaint, or in the Alternative, Motion for Judgment on the
Pleadings [Dkt. No. 5] is GRANTED IN PART and DENIED IN PART.
IT IS FURTHER ORDERED that:
A.

Count I remains before this Court, except that Plaintiff’s claim in
of Count I related to Section 9.2 of the Settlement Agreement is
DISMISSED;

B.

Count II is DISMISSED; and

C.

Counts III, IV, V, and VI remain before this Court.

IT IS SO ORDERED.

S/Denise Page Hood
Denise Page Hood
Chief Judge, United States District Court
Dated: October 18, 2016

I hereby certify that a copy of the foregoing document was served upon counsel of
record on October 18, 2016, by electronic and/or ordinary mail.
S/LaShawn R. Saulsberry
Case Manager

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