Ergowerx International LLC v. Maxell Corporation of America
Filing
48
OPINION & ORDER re: 24 MOTION to Dismiss (Notice of Partial Motion to Dismiss First Amended Complaint) filed by Maxell Corporation of America, 9 MOTION to Dismiss (Notice of Partial Motion to Dismiss) filed by Maxell Corporation of America, 13 LETTER MOTION for Conference re: 9 MOTION to Dismiss (Notice of Partial Motion to Dismiss) addressed to Judge Paul A. Engelmayer from Hilary L. Preston dated October 8, 2013. LETTER MOTION for Conference re: 9 MOTION to Dism iss (Notice of Partial Motion to Dismiss) addressed to Judge Paul A. Engelmayer from Hilary L. Preston dated October 8, 2013 filed by Maxell Corporation of America, 28 LETTER MOTION for Conference re: 24 MOTION to Dismiss (Notice of Par tial Motion to Dismiss First Amended Complaint) addressed to Judge Paul A. Engelmayer from Hilary L. Preston dated November 19, 2013. LETTER MOTION for Conference re: 24 MOTION to Dismiss (Notice of Partial Motion to Dismiss First Amended C omplaint). addressed to Judge Paul A. Engelmayer from Hilary L. Preston dated November 19, 2013 filed by Maxell Corporation of America. For the foregoing reasons, Maxells partial motion to dismiss is granted. Counts Two through Thirteen are dism issed. With respect to Count One, Maxell's motion to dismiss certain damages claims is granted. Specifically, the Court dismisses the FAC's claim for $3.6 million in additional damages for breaches of Maxell's alleged minimum-purc hase obligation during the two 18-month periods that followed the initial 18-month period commencing December 22, 2009. The Clerk of Court is directed to terminate the motions pending at docket numbers 9, 13, 24, and 28. Because the Court has dismiss ed the FAC's federal statutory claims, an issue arises as to whether the Court retains subject matter jurisdiction over this lawsuit. The parties are directed to meet and confer by April 28, 2014, and to submit to the Court, by May 2, 2014, a jo int letter setting out, in detail, their respective views as to whether there is diversity jurisdiction over this matter; and if not, whether the Court should nevertheless exercise supplemental jurisdiction over the sole remaining claim, for breach of contract, and as further set forth in this document. (Signed by Judge Paul A. Engelmayer on 4/23/2014) (cd)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
ERGOWERX INTERNATIONAL, LLC
:
d/b/a/ SMARTFISH TECHNOLOGIES, LLC,
:
:
Plaintiff,
:
:
-v:
:
MAXELL CORPORATION OF AMERICA,
:
:
Defendant.
:
:
---------------------------------------------------------------------- X
13 Civ. 5633 (PAE)
OPINION & ORDER
PAUL A. ENGELMAYER, District Judge:
This lawsuit involves claims, including breach of contract, brought by a manufacturer of
ergonomic computer keyboards and mice against its distribution agent. The plaintiff, Ergowerx
International, LLC, doing business as Smartfish Technologies, LLC (“Smartfish”), asserts 13
claims against distribution agent Maxell Corporation of America (“Maxell”). In addition to (1)
breach of contract; these claims are for (2) promissory estoppel; (3) intentional interference with
economic advantage; (4) fraud in the inducement; (5) fraud; (6) conversion; (7) patent
infringement; (8) trademark infringement; (9) violations of the Lanham Act; (10) violations of
N.Y. General Business Law § 360; (11) breach of the implied covenant of good faith and fair
dealing; (12) unjust enrichment; and (13) equitable accounting. Maxell now moves to dismiss all
claims but the breach of contract claim, casting Smartfish’s case as “a contract case that
Smartfish attempts to dress up as something more.” Dkt. 25 (“Def. Br.”) at 1. And, as to the
breach-of-contract claim, Maxell moves to dismiss Smartfish’s demand for damages stemming
from the alleged breach of the contract’s minimum purchase requirement, to the extent that these
arise out of events outside the distribution agreement’s 18-month period of exclusivity. Id. For
the reasons that follow, Maxell’s motions to dismiss are granted.
I.
Background1
A.
The Contract
Smartfish, a New York corporation, sells a line of “injury avoidance” ergonomic
computer keyboards and mice. FAC ¶¶ 2, 10. These products are “designed to eliminate risks of
repetitive stress injury and carpal tunnel syndrome for the user.” Id. ¶ 10. The technologies
underlying these products are patent-protected, and the “Smartfish” name is trademarked. Id.
¶ 15.
In early to mid-2009, Smartfish began meeting with Maxell, a New Jersey corporation, to
explore an exclusive distribution agreement. Id. ¶¶ 3, 18. On July 8, 2009, Maxell told
Smartfish that it had “worldwide distribution opportunities and current channels of sales
opportunities in the U.S., Latin America and Canadian markets.” Id. ¶ 19. During the last three
months of 2009, Maxell told Smartfish that it had “numerous existing worldwide distribution
relationships and channels,” which would allow Maxell to “automatically augment its existing
product lines with retailers by adding Smartfish products.” Id. ¶¶ 19–20. Maxell also stated that
it had met with “its 10 key accounts and confirmed the market for Smartfish products existed.”
Id. ¶ 21. Finally, Maxell claimed that it would make “a ‘financial commitment’ to Smartfish” of
over “$3,000,000 [and to] stand by that financial commitment to the end.” Id. ¶ 22. Based on
these and other assurances, Smartfish concluded that it would “benefit from Maxell’s existing
relationships and resources.” Id. ¶ 19.
1
The Court assumes all facts pled in the First Amended Complaint, Dkt. 21 (“FAC”), to be true,
drawing all reasonable inferences in the plaintiff’s favor. See Koch v. Christie’s Int’l PLC, 699
F.3d 141, 145 (2d Cir. 2012).
2
On December 22, 2009, Smartfish and Maxell entered into a distribution agreement. Id.
¶ 24; see Dkt. 1, Ex. A (“Agreement”).2 The agreement made Maxell, for a period of 18 months,
the exclusive distributor of Smartfish’s computer keyboards and mice within the United States,
Mexico, Canada, and Latin America. FAC ¶ 24; see Agreement § 3.10. Maxell was exclusively
authorized to distribute to brick-and-mortar customers in those markets, mail order and nononline catalog customers, and 28 specified educational and business-to-business (“B2B”)
accounts. See Agreement § 3.10. But the agreement reserved certain distribution channels for
Smartfish, including e-Tailers,3 Smartfish.com, Amazon, catalogs of e-Tailers, and the remaining
education and B2B accounts. Id.; FAC ¶ 24.
In return for the exclusive distribution rights granted in § 3.10, Smartfish, in turn, agreed
to convey to Maxell “good and clear title to the Products, free and clear of all liens,
encumbrances, restrictions, and other claims against title or ownership (including, without
limitation, claims of patent, copyright or trademark infringement or violations or
misappropriations of trade secrets or other intellectual property rights).” Agreement § 7.1(a).
The Agreement provided that the Smartfish products distributed by Maxell would be customized
to Maxell’s specifications, and that the packaging and product casings would bear both the
Smartfish and Maxell logos (e.g., “Maxell with ErgoMotion Inside”). Id. § 5. Maxell agreed to
pay “additional costs associated with such packaging and shipping specifications,” id. § 5.1, as
2
The Agreement contains a clause which states: “Each party to this Agreement hereby
irrevocably agrees to Jurisdiction and Venue in an appropriate court in New Jersey Superior
Court in Bergen County, NJ.” Agreement § 11.2. At argument, both sides stated that they had
decided to waive this clause. Dkt. 41 (Oral Argument Transcript (“Tr.”)) at 3, 11.
3
The term “e-Tailer” is not defined in the Agreement, but the Court understands that it refers,
generally, to a retailer who sells goods via electronic transactions on the Internet. e-Tailer
Definition, oxforddictionary.com,
http://www.oxforddictionaries.com/us/definition/american_english/e-tailer (last visited Apr. 22,
2014).
3
well as the cost “of any and all artwork, including but not limited to Packaging, Instruction
Booklets, Product Labels, Product Graphics, Packaging Contents, etc. to be used in connection
with the Products,” id. § 4.1.
In exchange for the exclusive right to distribute Smartfish’s products in these markets,
Maxell agreed to “use good faith efforts to purchase” certain quantities of keyboards and mice
“during an eighteen (18) month period beginning on the execution date.” Id. § 3.4(a).
Specifically, Maxell committed that its “total Product purchases (measured by the aggregate
purchase price)” would not “be less than $1,804,800 during such eighteen (18) month period.”
Id. The agreement defined good faith, or commercially reasonable, efforts to include Maxell’s
“educating its sales force on the Products, actively seeking distribution with its partners, and
actively marketing the Products.” Id. § 3.11.
Finally, the contract contained both renewal and termination provisions. First, if Maxell
was able to sell a certain volume of Smartfish products—specifically, 50,000 keyboards, 80,000
laser mice, and 175,000 optical mice—it would receive “a second (2nd) year of exclusivity for
each product as outlined in Section 3.10.” 4 Id. at § 3.8. However, Smartfish reserved “the right
to grant a second (2nd) year of exclusivity even if the thresholds are not achieved.” Id. Either
party had the right to terminate the contract, “with or without cause, upon ninety (90) days prior
written notice to the other party.” Id. § 10.1. Moreover, if either party failed to comply with any
obligations under the Agreement, and “such failure [was] not remedied within thirty (30) days
after receipt of written notice of such failure, the non-breaching party” could terminate the
Agreement “immediately upon written notice to such (breaching) party.” Id. § 10.2.
4
The Agreement states that the “Vendor”—Smartfish—will be granted a second year of
exclusivity, but at argument, Smartfish acknowledged that that this was a typographical error.
See Tr. at 19. Section 3.8 of Agreement only makes sense if Maxell was the party granted 18
months of additional exclusivity in exchange for meeting a sales benchmark.
4
B.
The Alleged Breach
The FAC alleges that Maxell committed multiple breaches of the Agreement. It alleges
that Maxell: (1) imposed an extra-contractual condition on its purchase of Smartfish’s
products—namely, by requiring Smartfish to purchase Maxell brand batteries, FAC ¶ 27;
(2) failed to reimburse Smartfish for the costs associated with product re-packaging, in violation
of § 4 of the Agreement, FAC ¶ 29; (3) distributed Smartfish’s products through “unauthorized
distribution channels,” such as its own online shop, www.shopmaxell.com, which caused
Smartfish to close its own website, www.smartfish.com, FAC ¶¶ 30–31; (4) failed to use
commercially reasonable efforts to market Smartfish’s products, in violation of § 3.11 of the
Agreement, FAC ¶ 32; and (5) failed to satisfy the minimum purchase requirement of $1,804,800
worth of Smartfish products during the 18-month period, in violation of § 3.4(a) of the
Agreement, FAC ¶ 34.
Smartfish asserts that these breaches of the Agreement have harmed its ability to “survive
as an ongoing concern.” Id. ¶¶ 40–42.
C.
Procedural History
On August 12, 2013, Smartfish filed its initial Complaint. Dkt. 1. On October 8, 2013,
Maxell moved to dismiss. Dkt. 9. On October 29, 2013, Smartfish filed the FAC. Dkt. 21. On
November 19, 2013, Maxell submitted a new motion to dismiss, Dkt. 24, and a supporting
memorandum of law, Dkt. 25 (“Def. Br.”). On December 5, 2013, an initial conference was
held, in which the Court ordered a period of document-based fact discovery, which ended on
April 11, 2014. Dkt. 45. On December 20, 2013, Smartfish submitted an opposition to Maxell’s
motion to dismiss. Dkt. 36 (“Pl. Br.”). On January 6, 2014, Maxell filed a reply brief. Dkt. 37
(“Def. Rep. Br.”). On February 5, 2014, the Court heard argument.
5
II.
Applicable Legal Standards
To survive a motion to dismiss under Rule 12(b)(6), a complaint must plead “enough
facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S.
544, 570 (2007). A claim will only have “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). A complaint is properly
dismissed, where, as a matter of law, “the allegations in a complaint, however true, could not
raise a claim of entitlement to relief.” Twombly, 50 U.S. at 558. Accordingly, a district court
must accept as true all well-pleaded factual allegations in the complaint, and draw all inferences
in the plaintiff’s favor. ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir.
2007). However, that tenet “is inapplicable to legal conclusions.” Iqbal, 556 U.S. at 678. A
pleading that offers only “labels and conclusions” or a “formulaic recitation of the elements of a
cause of action will not do.” Twombly, 550 U.S. at 555. “Where a complaint pleads facts that
are merely consistent with a defendant’s liability, it stops short of the line between possibility
and plausibility of entitlement to relief.” Iqbal, 556 U.S. at 678 (citation omitted).
6
III.
Discussion5
A.
Count One: Breach of Contract
Maxell has not moved to dismiss the FAC’s breach-of-contract claim in its entirety.
Instead, it moves to dismiss certain damages that Smartfish claims under that cause of action.
Specifically, in the FAC, Smartfish seeks from Maxell $4,653,028 in damages due to the
alleged failure to make the minimum product purchases required by the Agreement. FAC ¶ 38.
According to Smartfish, Maxell was obliged to make $1.8 million in purchases every 18 months
until the termination of the Agreement. See id. ¶ 34 (the Agreement “imposed a purchase
obligation on Maxell that required it to . . . purchase Smartfish products with a minimum dollar
value of $1,804,800 every 18 months that the Agreement was in effect”); Pl. Br. at 25 (“[T]he
contract imposed a continuing purchase obligation that was not limited to a single 18 month
period but rather imposed a purchase obligation during each 18 month period the contract was in
effect.”). Because Maxell, in the first 18 months, purchased “$751,561 worth of products
covered by the Agreement,” FAC ¶ 36, Smartfish claims damages of “$1,053,028 during the
initial 18-month period that the Agreement was in effect,” id. Smartfish also seeks “an
5
The Agreement has a choice of law clause, which states: “The provisions of this Agreement
shall be governed, construed and enforced solely in accordance with the laws of New Jersey
without regard to the principles thereof relating to conflicts of law.” Id. § 11.1. “The validity of
a contractual choice-of-law clause is a threshold question that must be decided not under the law
specified in the clause, but under the relevant forum’s choice-of-law rules governing the
effectiveness of such clauses.” Fin. One Pub. Co. Ltd. v. Lehman Bros. Special Fin., Inc., 414
F.3d 325, 332 (2d Cir. 2005). New York courts will generally “enforce a choice-of-law clause so
long as the chosen law bears a reasonable relationship to the parties or the transaction.”
Welsbach Elec. Corp. v. MasTec N. Am., Inc., 7 N.Y.3d 624, 629 (2006). Maxell is a New
Jersey corporation, as was Smartfish at the time the Agreement was negotiated; New Jersey law
therefore bears a reasonable relationship to the parties and the transaction. In its briefs, Maxell
accordingly applies New Jersey law. For its part, Smartfish notes that, in practice, “federal
procedural law,” “federal substantive law,” or “New York [s]tatutory law” must also be used, as
to certain claims and issues. Pl. Br. 4 n.1. Smartfish does not, however, meaningfully challenge
the choice-of-law provision. The Court therefore applies New Jersey law to the state-law claims
alleged in the FAC.
7
additional outstanding purchase obligation of $3,600,000,” covering the two ensuing 18-month
periods. Id. ¶ 38. In total, then, the FAC seeks damages for the “unsatisfied purchase obligation
[of] $4,653,028.” Id.
Maxell, by contrast, interprets the Agreement to have imposed on it a minimum purchase
obligation covering only a single 18-month period, that beginning on December 22, 2009. See
Def. Br. at 21. Maxwell therefore argues that the damages arising from its purported breach of
the minimum-purchase obligation are capped at $1,053,028—the balance outstanding from the
first 18-month period. Maxell moves to dismiss Count One, to the extent that it seeks an
additional $3.6 million in damages for this alleged breach.
As to this issue, Maxell is correct. In general, “[d]ismissal of a breach of contract claim
is appropriate where a contract’s clear, unambiguous language excludes a plaintiff’s claim.”
Beth Israel Med. Ctr. v. Verizon Bus. Network Servs., Inc., No. 11 Civ. 4509 (RJS), 2013 WL
1385210, *2 (S.D.N.Y. Mar. 18, 2013) (citing Advanced Mktg. Grp., Inc. v. Bus. Payment Sys.,
LLC, 300 F. App’x 48, 49 (2d Cir. 2008)); see also Photopaint Techs., LLC v. Smartlens Corp.,
335 F.3d 152, 160 (2d Cir. 2003) (“[J]udgment as a matter of law is appropriate if the contract
language is unambiguous.”). A contract is unambiguous when it has a “definite and precise
meaning, unattended by danger of misconception in the purport of the contract itself, and
concerning which there is no reasonable basis for a difference of opinion.” Id., 335 F.3d at 160
(citations omitted). “Whether or not a writing is ambiguous is a question of law to be resolved
by the courts.” Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375 F.3d
168, 178 (2d Cir. 2004).
8
Here, the clear, unambiguous language of the Agreement contradicts Smartfish’s claim
that Maxell was required to purchase $1.8 million in products every 18 months, in perpetuity,
until the Agreement was terminated. The relevant section reads:
Maxell will use good faith efforts to purchase from Vendor the following during an
eighteen (18) month period beginning on the execution date:
Product
Smartfish Keyboard Model MAX2418B
Smartfish Mouse Model MAX2218B
Smartfish Mouse Model MAX2018B
Totals
Min
10,000
40,000
60,000
110,000
FOB Price
$48.60
$17.97
$10.00
Total
$486,000
$718,800
$600,000
$1,804,8000
Agreement § 3.4(a) (emphasis added).
Smartfish’s claim that the purchase obligation should be read to perpetually renew itself
turns entirely on its assertion that the indefinite article “an,” which comes before “eighteen (18)
month period” must be “read as one or more or any or every, and is not to be read in the
singular.” Tr. at 22. In so claiming, Smartfish relies on cases in which courts have held that the
word “an” should be read as plural. See Pl. Br. at 22–25. This principle of construction—that an
indefinite article should be read as more than one—certainly applies in some contexts. But it
does not apply here, because the last clause of the operative provision firmly points in the other
direction, and towards a single, distinct period.
Specifically, in the Agreement, the term “an” is coupled with a fixed period of time—18
months—which is modified by the clause, “beginning on the execution date.” See § 3.4. The
“execution date,” in turn, is defined in the Agreement as December 22, 2009. See Agreement at
1. Therefore, read in full, § 3.4 simply defines the minimum purchases Maxell must make over
an 18-month period beginning on December 22, 2009. Despite the use of “an” to modify that
period, there can be only one 18-month period that begins on that fixed date—namely, the period
9
between December 22, 2009 and approximately June 22, 2011. Read in the context of these
surrounding words, the Agreement’s text—and the word “an” within it—is unambiguous.
Smartfish’s reading of the Agreement to require Maxell to purchase $1.8 million worth of
products over two additional 18-month periods is, therefore, not plausible, because, by
definition, these two additional periods could not also have begun on December 22, 2009.
Furthermore, although the Agreement contains a provision for renewing the minimum purchase
obligation for periods after the expiration of the initial 18-month period, Smartfish does not
argue that there was ever such a renewal. And by its terms, the renewal provision would have
been triggered only if Maxell had achieved certain sales thresholds set forth in § 3.8. Because
these thresholds were higher than those mandated in § 3.4(a), and because both sides agree that
Maxell did not reach the sales figures set out in § 3.4(a), the Agreement could not logically have
been renewed under § 3.8.
The FAC’s claim for $3.6 million in additional minimum-purchase-obligation damages is
therefore dismissed. The contract claim survives, but the damages attributable to the asserted
breach of the contract’s minimum-purchase obligation are limited to such damages incurred in
connection with the 18-month period, beginning December 22, 2009.
B.
Four of the FAC’s Claims Are Precluded by the Breach of Contract Claim
Four state-law tort and quasi-contract claims brought in the FAC duplicate the breach of
contract claim, and are thus precluded under New Jersey’s economic loss doctrine. That doctrine
“prohibits plaintiffs from recovering in tort economic losses to which their entitlement only
flows from a contract.” State Capital Title & Abstract Co. v. Pappas Bus. Servs., LLC, 646 F.
Supp. 2d 668, 676 (D.N.J. 2009) (citing Bracco Diagnostics Inc. v. Bergen Brunswig Drug Co.,
226 F.Supp.2d 557, 562 (D.N.J. 2002)). “In other words, whether a tort claim can be asserted
10
alongside a breach of contract claim depends on whether the tortious conduct is extrinsic to the
contract between the parties.” Id. (citation omitted). Four such counts in the FAC—Count Two,
for promissory estoppel; Count Three, for intentional interference with prospective economic
advantage; Count Six, for conversion; and Count Twelve, for unjust enrichment—fail to allege
conduct extrinsic to the contract. These counts are therefore dismissed.
Count Two asserts a claim of promissory estoppel. To state such a claim, Smartfish
must establish that “(1) there was a clear and definite promise; (2) the promise was made with
the expectation that the promisee would rely upon it; (3) the promisee reasonably did rely on the
promise; and (4) incurred a detriment in said reliance.” Martin v. Port Auth. Transit Corp., No.
09–3165 (NLH), 2010 WL 1257730, at *5 (D.N.J. Mar. 25, 2010); see also Ilowite v. Diopsys,
Inc., No. 04-2368 (HAA), 2008 WL 305267, at *14 (D.N.J. Jan. 31, 2008).
Generally, however, “an equitable claim cannot lie where a contract governs the
relationship between the parties that gives rise to the equitable claim.” Ready & Motivated
Minds, LLC v. Ceridian Corp., No. 10–1654 (JLL), 2010 WL 2989986, at *7 (D.N.J. July 26,
2010); see also Ctr. for Special Procedures v. Connecticut Gen. Life Ins. Co., No. 09-6566
(MLC), 2010 WL 5068164 (D.N.J. Dec. 6, 2010). Although Smartfish argues that it should be
permitted to plead in the alternative under Federal Rule of Civil Procedure 8(d), see Pl. Br. 4,
here, an express contract governs Smartfish’s claims, and Maxell concedes that the Agreement is
valid and enforceable, see Def. Rep. Br. 1. Further, Count Two, as pled, is devoid of facts that
would distinguish it from the breach of contract claim; it merely alleges that Maxell promised
Smartfish that it would make certain investments in the joint venture and purchase a certain
number of “products custom produced by Smartfish for Maxell.” FAC ¶ 55. Because Maxell’s
11
failure to meet those promises is encompassed by the FAC’s breach of contract claim, the
promissory estoppel claim is duplicative. Accordingly, Count Two is dismissed.
Count Three asserts a claim for intentional (or tortious) interference with prospective
economic advantage. To adequately plead such a claim, Smartfish must “set forth facts alleging
(1) some protectable right—a prospective economic or contractual relationship, (2) the
interference was done intentionally and with malice, (3) the interference caused the loss of the
prospective gain, and (4) the injury caused damage.” Ctr. for Special Procedures, 2010 WL
5068164, at *7 (citing Printing Mart–Morristown v. Sharp Elec. Corp., 116 N.J. 739, 751–52
(1989)). It is “fundamental to a cause of action for tortious interference with a prospective
economic relationship that the claim be directed against defendants who are not parties to the
relationship.” Printing Mart–Morristown, 116 N.J. at 752. “Where a person interferes with the
performance of his or her own contract, the liability is governed by principles of contract law.”
Id. at 753.
Maxell originally claimed that Count Three should be dismissed on the ground that
Maxell is a party to the contractual relationship giving rise to the claim, and thus could not have
interfered with its own contract. Def. Br. 10–11. However, as Maxell acknowledged at
argument, that position misapprehended Smartfish’s claim in Count Three. See Tr. 6. Maxell
now understands, as does the Court, that Smartfish intended Count Three to allege that Maxell
sold products outside of its contractually designated zones of distribution, and that these sales
interfered with Smartfish’s relationships with other parties within those markets. See FAC ¶ 64
(alleging that Maxell engaged in “unauthorized sales of products through channels reserved to
Smartfish and forbidden to Maxell,” and that these actions “cannibalized sales” that Smartfish
12
expected to keep for itself); see also Pl. Br. at 7 (“In the present case, Smartfish has alleged that
Defendant interfered with Smartfish’s prospective relationships with third parties.”).
If Count Three is thus construed, however, Smartfish’s claim there is precluded under
New Jersey’s economic loss doctrine. The harm alleged in Count Three is fairly encompassed
by the breach of contract claim, and therefore duplicates Count One. At argument, counsel for
Maxell acknowledged that Count One, as pled, is broad enough to permit Smartfish to pursue
multiple alleged breaches of the Agreement. These included not only that Maxell failed to
purchase $1.8 million worth of products, but also, pivotal here, that it sold products to other
parties in “unauthorized distribution channels.” See Tr. at 10–11 (“Q: In other words, to the
extent that plaintiffs are trying to be made whole, if they’re right on the facts, for your exceeding
the bounds that you’re authorized by contract, you’re not disputing that that area of conduct is
properly captured by the currently existing contract claim. A: Correct. We are not disputing
that.”). Counsel for Smartfish similarly acknowledged at argument that its breach of contract
claim was broad enough to capture the harm alleged in Count Three. Id. at 16 (“Q: As to that
area of conduct, Maxell selling in distribution channels that it was not contractually authorized to
sell in, is that captured by your breach of contract claim? A: I think it is captured by our breach
of contract claim.”). Smartfish’s counsel later attempted to qualify that acknowledgment, but did
not do so persuasively.
Because the harms alleged in Count Three are intrinsic to the Agreement, Smartfish may
not recover “in tort economic losses to which their entitlement flows from a contract.” State
Capital, 646 F. Supp. 2d at 676. Accordingly, Count Three is dismissed.
Count Six asserts a claim of conversion; it makes the bare-bones claim that Maxell
converted “Smartfish property such as Smartfish artwork.” FAC ¶ 93. Under New Jersey law,
13
conversion “is the wrongful exercise of dominion and control over property owned by another in
a manner inconsistent with the owner’s rights.” StrikeForce Technologies, Inc. v. WhiteSky, Inc.,
No. 13-1895 (SRC), 2013 WL 3508835, *8 (D.N.J. July 11, 2013) (citing Advanced Enters.
Recycling, Inc. v. Bercaw, 376 N.J. Super. 153, 161 (App. Div. 2005)). This claim is dismissed
for two reasons.
First, to the extent that the FAC alleges conversion of artwork covered by the Agreement,
that claim would be precluded under the economic loss doctrine. The FAC does not specify the
nature of the artwork allegedly converted, but it appears, from the FAC, to refer to promotional
artwork related to Smartfish’s products. However, conversion of such artwork would constitute
an independent breach of the Agreement. See Agreement § 4.1 (Maxell is responsible for paying
the cost “of any and all artwork, including but not limited to Packaging, Instruction Booklets,
Product Labels, Product Graphics, Packaging Contents, etc. to be used in connection with the
Products”). As such, Count Six seeks recovery through a claim of conversion, where Smartfish’s
“alleged entitlement to the monies flowed from a contract.” Titan Stone, Tile & Masonry, Inc. v.
Hunt Const. Grp., Inc., No. 05-3362 (GEB), 2007 WL 174710 (D.N.J. Jan. 22, 2007). The
economic loss doctrine precludes such a claim.
Second, if the FAC instead meant to allege the conversion of other, unnamed artwork, as
Smartfish contended in its brief opposing dismissal, it must be dismissed for failure to state a
claim upon which relief may be granted. See Pl. Br. 6 (asserting that the “conversion claim
arises from Smartfish artwork not covered by the contract that was converted by Defendant,” and
that this “artwork was separate from the artwork and other materials to be used in connection
with the products that Maxell commissioned but failed to pay for that is part of Plaintiff’s breach
of contract claim”). The FAC does not specify the artwork that Smartfish claims was converted
14
by Maxwell, but makes the claim only generically (and even if Smartfish’s “clarification” in its
brief could add the necessary clarity, it does not do so). This deficiency requires dismissal of the
conversion claim. See Iqbal, 556 U.S. at 678 (a claim will only have “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”); accord Calcutti v. SBU, Inc., 224 F. Supp. 2d
691, 702-03 (S.D.N.Y. 2002) (because plaintiff’s conversion claim “is devoid of facts that would
put [defendant] on notice, the Court must dismiss it”).
Accordingly, for both reasons, Count Six is dismissed.
Finally, Count Twelve asserts a quasi-contractual claim of unjust enrichment. This
claim, too, is based on allegations that are fairly encompassed within the FAC’s breach of
contract claim. “Both federal and state courts in New Jersey routinely hold that, under New
Jersey law, a party cannot seek to recover on a quasi-contract theory, e.g., for unjust enrichment,
when an actual contract exists governing the relationship between the parties.” Schweikert v.
Baxter Healthcare Corp., No. 12-5876 (FLW), 2013 WL 1966114, *6 (D.N.J. May 10, 2013);
see also Van Orman v. Am. Ins. Co., 680 F.2d 301, 310 (3d Cir. 1982) (under New Jersey law,
“recovery under unjust enrichment may not be had when a valid, unrescinded contract governs
the rights of the parties”); Moser v. Milner Hotels, Inc., 6 N.J. 278, 280–81 (1951) (“An implied
contract cannot exist when there is an existing express contract about the identical subject.”). In
short, “recovery based on a quasi-contract theory is mutually exclusive of a recovery based on
contract theory.” Duffy v. Charles Schwab & Co., Inc., 123 F. Supp. 2d 802, 814 (D.N.J. 2000).
Smartfish responds by asserting that it should be permitted to plead in the alternative.
See Pl. Br. 4–6 (citing Fed. R. Civ. Pro. 8(d)). But the cases on which Smartfish relies all
involved defendants who challenged the validity of the underlying contract. Here, by contrast,
15
Maxell concedes that the Agreement is valid and enforceable. See Def. Rep. Br. 1. Accordingly,
the motion to dismiss Count Twelve is granted.
C.
The FAC’s Fraud-Based Claims
Counts Four and Five assert claims of fraud in the inducement and common-law fraud.
In New Jersey, the elements of both claims are identical. See TekDoc Servs., LLC v. 3i-Infotech
Inc., No. 09-6573 (MLC), 2013 WL 2182565, at *21 (D.N.J. May 20, 2013) (citing Microbilt
Corp. v. L2C, Inc., No. A–3141–09T3, 2011 WL 3667645, at *3 (N.J. App. Div. Aug. 23, 2011))
(“Under New Jersey law, a claim for fraud in the inducement seeking legal relief sounds in
common-law fraud.”). As to both, Smartfish must show: “(1) a material representation of a
presently existing or past fact, (2) made with knowledge of its falsity and (3) with the intention
that the other party rely thereon, (4) resulting in reliance by that party (5) to his detriment.”
Jewish Ctr. of Sussex Cty. v. Whale, 86 N.J. 619, 624 (1981).
Federal Rule of Civil Procedure 9(b) imposes a heightened pleading standard on claims
alleging fraud or mistake. “In all averments of fraud or mistake, the circumstances constituting
fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other
condition of mind of a person may be averred generally.” Fed. R. Civ. P. 9(b). Rule 9(b) serves
the goal of putting the party accused of a fraudulent act on notice as to the “precise misconduct”
with which it is charged; accordingly, the complaint must allege facts that give rise to a strong
inference of fraudulent intent. Seville Indus. Mach. Corp. v. Southmost Mach. Corp., 742 F.2d
786, 791 (3d Cir. 1984); accord Berman v. Morgan Keenan & Co., 455 F. App’x 92, 95 (2d Cir.
2012). A party pleading fraud must “specify the statements contended to be fraudulent, identify
the speaker, state when and where the statements were made, and explain why the statements
were fraudulent.” Institutional Investors Grp. v. Avaya, Inc., 564 F.3d 242, 253 (3d Cir. 2009)
16
(citation omitted). “In other words, allegations of fraud must contain ‘the who, what, when,
where, and how: the first paragraph of any newspaper story.’” TBI Unlimited, LLC v. Clear Cut
Lawn Decisions, LLC, No. 12-3355 (RBK) (JS), 2013 WL 6048720, at *4 (D.N.J. Nov. 14,
2013) (quoting Institutional Investors, 564 F.3d at 253).
1.
Count Four: Fraud in the Inducement
Count Four is not plead with the requisite specificity and therefore fails to state a claim.
The FAC recounts several allegedly fraudulent statements made by Maxell, but these, for the
most part, were merely promises by Maxell to honor the parties’ Agreement. See FAC ¶¶ 67–86.
Promising to abide by a contract’s terms, and then allegedly breaching the contract, does not of
itself constitute fraud; it constitutes breach of contract. See State Capital Title, 646 F. Supp. 2d
at 676 (fraud claims may only proceed alongside contract claims if “the underlying allegations
involve misrepresentations unrelated to the performance of the contract”).
Of the statements the FAC alleges were made by Maxell, only three are fairly claimed to
involve misrepresentations unrelated to the performance of the contract; each preceded formation
of the Agreement. These are that: (1) Maxell would invest more than $3 million into the venture
with Smartfish and “stand by that financial commitment to the end”; (2) “Maxell possessed
domestic and international distribution capabilities”; and (3) Maxell had “the unfettered power to
ensure the placement of Smartfish products on the shelves of retailers with whom Maxell did
business without requiring those retailers to approve.” FAC ¶¶ 22, 68(e)–(f).
In considering whether these claims are viable, the Court is mindful that “predictions of
the future, which were believed when made, cannot serve as a basis for a fraud claim just
because they subsequently turned out not to be true.” Alexander v. CIGNA Corp., 991 F. Supp.
427, 436 (D.N.J. 1998) aff’d, 172 F.3d 859 (3d Cir. 1998); see also Middlesex Cnty. Sewer. Auth.
17
v. Borough of Middlesex, 74 N.J. Super. 591, 605 (Ch. Div. 1962); Lo Bosco v. Kure Eng’g Ltd.,
891 F. Supp. 1020, 1031 (D.N.J. 1995) (“A showing of simple non-performance of the promise
will not satisfy plaintiff’s burden to show that the promise was fraudulent when made.”). In
short, fraud and fraudulent inducement claims must pleads facts that could support the plausible
inference that the speaker did not believe his or her statements to be true at the time he or she
made them.
Here, the FAC fails to plead any facts that could lead to such a plausible inference. To be
sure, Smartfish asserts, repeatedly, that the statements alleged were “false and untrue and known
by Maxell to be so at the time the statement was made.” See, e.g., FAC ¶ 71. But Smartfish
does not cite any concrete facts on which one could conclude that Maxwell—at the time it
promised, for example, to invest more than $3 million into the venture—did not intend to keep
such promises. Such conclusory pleadings are inadequate. See Iqbal, 556 U.S. at 678–79
(claims “supported by mere conclusory statements do not suffice . . . [w]hile legal conclusions
can provide the framework of a complaint, they must be supported by factual allegations”). Such
is true not only under Rule 9(b), but also under Rule 8. Id. at 686–87; see also Pullman v. Alpha
Media Pub., Inc., No. 12 Civ. 1924 (PAC) (SN), 2013 WL 1290409 (S.D.N.Y. Jan. 11, 2013)
report and recommendation adopted, No. 12 Civ. 1924 (PAC) (SN), 2013 WL 1286144, at *23
(S.D.N.Y. Mar. 28, 2013) (dismissing New Jersey fraud claim because, inter alia, statement that
defendant “knew” statements were false “lack[ed] allegations to support it”); Minutto v. Genesis
Advisory Servs., Inc., No. 11-3391 (ES), 2012 WL 1085807, at *6 (D.N.J. Mar. 29, 2012)
(dismissing fraud claim because complaint did not adequately plead defendant’s knowledge of
statement’s falsity).
18
Because the FAC fails to plead facts that would permit the plausible inference that
Maxell’s agents or employees acted with the intent to defraud Smartfish, Count Four must be
dismissed.
2.
Count Five: Common-Law Fraud
For the same reasons, Count Five, alleging common-law fraud, fails to state a claim
under Rule 9(b).
Count Five is, separately, deficient based on the economic loss doctrine. Under that
doctrine, as noted, a fraud claim may proceed alongside a contract claim only if “the underlying
allegations involve misrepresentations unrelated to the performance of the contract.” State
Capital, 646 F. Supp. 2d at 676. Count Five fails to allege a fraud that is separate and distinct
from the non-performance of the Agreement. Smartfish’s fraud claim instead arises out of the
manner in which Maxell performed—or, more precisely, failed to perform—that Agreement.
The FAC states that Maxell “defrauded Smartfish by falsely representing that it was ordering
products for distribution [within] Maxell’s areas of exclusivity,” when in reality, Maxell was
“diverting those products to unauthorized sales channels.” FAC ¶¶ 89–90. This claim therefore
effectively repackages Count Three’s claim that Maxell sold products outside of its areas of
exclusivity, and therefore harmed Smartfish. This claim is fairly encompassed within Count
One, for breach of contract. Accordingly, Count Five is dismissed.
D.
Count Eleven: Breach of the Implied Covenant of Good Faith and Fair
Dealing
Count Eleven asserts a claim for breach of the implied covenant of good faith and fair
dealing. “All contracts in New Jersey contain an implied covenant of good faith and fair
dealing.” TBI Unlimited, LLC, 2013 WL 6048720, at *2 (citing Fields v. Thompson Printing
Co., Inc., 363 F.3d 259, 270 (3d Cir. 2004) and Wade v. Kessler Inst., 172 N.J. 327, 340–41
19
(2002)). To establish that Maxell breached this covenant, Smartfish “must prove that the breach
was conducted under a bad motive or intention.” Id. (citing Wilson v. Amerada Hess Corp., 168
N.J. 236, 251 (2001)). Such conduct is defined as that which violates “community standards of
decency, fairness or reasonableness.” Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping
Ctr. Assocs., 182 N.J. 210, 224 (2005).
Significant here, “[a] breach of the covenant of good faith and fair dealing must not arise
out of the same conduct underlying an alleged breach of contract action.” TBI Unlimited, 2013
WL 6048720, at *2 (citing Wade, 172 N.J. at 344–45). “[W]hen a party breaches a duty set forth
explicitly in a contract, the remedy exists pursuant to those express terms, and not pursuant to
some implied obligation arising out of the contract.” Id. (citation omitted). The covenant is to
be construed narrowly and used “only when gaps exist as to the parties’ intentions.” Id. (citing
Cargill Global Trading v. Applied Dev. Co., 706 F. Supp. 2d 563, 580 (D.N.J. 2010)).
Here, Count Eleven’s claim that Maxell breached the implied covenant of good faith and
fair dealing is rooted in the allegations that underlie the breach of contract claim. The FAC does
not allege facts that would support an inference of a “bad motive or intention” independent of the
fact of Maxell’s alleged breaches; instead, it merely alleges that Maxell, in various ways, failed
“to perform its obligations under the Agreement,” including that it breached “the Agreement’s
restrictions of the distribution channels Maxell was authorized to utilize,” and promoted its own
competing computer accessories by “using Smartfish’s products as a higher priced straw man.”
FAC ¶ 130. Finally, in its brief opposing dismissal, Smartfish asserts, vaguely, that Maxell
engaged in “subterfuges and evasions in the performance of [the] contract,” Pl. Br. 14, but this
general assertion, even if made in the FAC, would be too conclusory and insubstantial to sustain
Count Eleven.
20
Maxell’s alleged failure to perform its obligations or to abide by the Agreement’s
restrictions, if true, would represent breaches of the Agreement, but that same failure, without
more, cannot give rise to a separate cause of action. See Rivera v. Washington Mut. Bank, 637 F.
Supp. 2d 256, 269 (D.N.J. 2009) (“[M]ere failure to fulfill obligations encompassed by the
parties’ contract, including the implied duty of good faith and fair dealing, is not actionable in
tort.”). Because the FAC does not assert concrete facts that could plausibly support an inference
that these breaches were “conducted under a bad motive or intention,” Count Eleven is
dismissed.
E.
Count Seven: Patent Infringement
Count Seven is of a different nature. It asserts a claim of patent infringement. It is based
on the claim that Maxell sold the products it purchased from Smartfish in unauthorized markets.
FAC ¶ 96.
Maxell asserts that this count should be dismissed under the doctrine of patent
exhaustion. Maxell relies on, among other authority, the Supreme Court’s decision in Quanta
Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617 (2008), which states that the “longstanding
doctrine of patent exhaustion provides that the initial authorized sale of a patented item
terminates all patent rights to that item,” id. at 625. “The law is well settled that an authorized
sale of a patented product places that product beyond the reach of the patent.” Intel Corp. v.
ULSI Sys. Tech., Inc., 995 F.2d 1566, 1568 (Fed. Cir. 1993); see also Bowman v. Monsanto Co.,
133 S. Ct. 1761, 1764 (2013) (“Under the doctrine of patent exhaustion, the authorized sale of a
patented article gives the purchaser, or any subsequent owner, a right to use or resell that
article.”). In this case, Smartfish owned the patent on the products it sold directly to Maxell, so
those sales were, by definition, authorized. Maxell asserts that these sales exhausted the
21
products’ patents, and that Smartfish therefore does not have a cognizable patent infringement
claim, regardless of whether Maxell resold the products in markets not authorized by the
Agreement. Although Smartfish may still assert a breach of contract claim, under this theory, its
patent infringement claim would fail, as a matter of law, to state a claim upon which relief may
be granted.
In response, Smartfish argues that patent exhaustion does not bar its claims here because
its sales to Maxell were expressly conditioned upon Maxell’s compliance with the terms of the
distribution agreement. Because Maxell allegedly violated those conditions, including by selling
Smartfish’s products outside of the authorized markets, Smartfish asserts, it may pursue claims
for patent infringement. To support its claim that a “conditional sale” does not give rise to patent
exhaustion, Smartfish relies primarily on two Federal Circuit cases decided before the Supreme
Court’s decision in Quanta. See B. Braun Med., Inc. v. Abbott Labs., 124 F.3d 1419, 1426 (Fed.
Cir. 1997) (“an unconditional sale of a patented device exhausts the patentee’s right to control
the purchaser’s use of the device thereafter”); Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700,
709 (Fed. Cir. 1992) (“If the sale of the [patented device] was validly conditioned under the
applicable law such as the law governing sales and licenses, and if the restriction on reuse was
within the scope of the patent grant or otherwise justified, then violation of the restriction may be
remedied by action for patent infringement.”).
Smartfish’s reliance on these cases is unavailing. First, there is a substantial argument
that Quanta sub silentio overruled Mallinckrodt. One district court has held, in a thoughtful
opinion, that Quanta did so. See Static Control Components, Inc. v. Lexmark Int’l, Inc., 615 F.
Supp. 2d 575, 585 (E.D. Ky. 2009) (“The Supreme Court’s broad statement of the law of patent
exhaustion simply cannot be squared with the position that the Quanta holding is limited to its
22
specific facts.”); accord JVC Kenwood Corp. v. Arcsoft, Inc., 966 F. Supp. 2d 1003, 1010 n.1
(C.D. Cal. 2013) (“After Quanta . . . it is unclear to what extent the Mallinckrodt decision
applies.”). Arguing to the contrary, Smartfish relies on a single law review article. See Pl. Br.
18–20 (citing William LaFuze, Justin Chen, and Lavonne Burke, The Conditional Sale Doctrine
in A Post-Quanta World and Its Implications on Modern Licensing Agreements, 11 J. Marshall
Rev. Intell. Prop. L. 295, 305 (2011)). But that article is in the minority: “[A] majority of
commentators” have adopted the view that Quanta overturned the conditional sales doctrine. See
Alfred C. Server and William J. Casey, Contract-Based Post-Sale Restrictions on Patented
Products Following Quanta, 64 Hastings L.J. 561, 596 (Apr. 2013). As these commentators
note, the basis for claiming that Quanta overruled Mallinkrodt is easily put. The portfolio of
computer technology patents at issue in Quanta, owned by LG Electronics, Inc. (LGE), were the
subject of an agreement under which Intel was authorized to manufacture and sell
microprocessors and chipsets that practiced the LGE patents. These agreements placed specific
conditions on Intel’s sales, including requiring that Intel’s customers be given written notice that
Intel’s license from LGE did not extend to any products the customers might make by combining
an Intel product with a non-Intel product. Quanta purchased these goods from Intel but then
violated that term, leading LGE to sue Quanta for patent infringement.
The Supreme Court, however, held that LG Electronics’ patent infringement claim had
been exhausted by the authorized sale of its device by its licensee, Intel, to third-party Quanta.
In so holding, the Quanta Court stated: “Because Intel was authorized to sell its products to
Quanta, the doctrine of patent exhaustion prevents LGE from further asserting its patent rights
with respect to the patents substantially embodied by these products.” 553 U.S. at 637. More
generally, the Court stated: “The authorized sale of an article that substantially embodies a patent
23
exhausts the patent holder’s rights and prevents the patent holder from invoking patent law to
control postsale use of the article.” Id. at 638. As Server and Casey note, “from the Court’s
perspective, once it had been determined that Intel was authorized to sell the Licensed Intel
Products to Quanta, patent remedies were exhausted by the sale and a post-sale restriction placed
on Quanta could not preserve such remedies. This interpretation supports a conclusion that the
Supreme Court’s decision in Quanta overruled Mallinckrodt.” 64 Hastings L.J. at 583.
Even assuming the Federal Circuit’s reasoning in Mallinckrodt remains good law, such
that an exception to the patent exhaustion doctrine may remain for some form of “conditional
sales,” Quanta controls this case. Quanta precludes the argument that any failure by a party to
abide by any contractual condition in an agreement involving a patented device will revive an
otherwise exhausted patent so as to permit the patentholder to sue for infringement, as opposed
to, e.g., breach of contract. Here, Smartfish argues that Maxell’s alleged contract breach should
enable it to treat its sales to Maxell as “conditional” under Mallinckrodt, and thereby revived.
But exactly the same could be said of the breach in Quanta; indeed, the argument for reviving
patent claims in Quanta was stronger, inasmuch as the breaching party (Quanta) was two steps
removed from the patent holder (LGE), whereas here, Smartfish and the alleged breaching party,
Maxwell, are in contractual privity.
Put differently, even assuming that the conditional sale doctrine of Malllinkrodt has some
remaining vitality, Quanta precludes any claim that it applies to garden-variety breaches by a
licensed distributor (or its downstream customer) such as those alleged here. It is undisputed that
Smartfish’s sale of its patented products to Maxell was authorized, and that Section 7.1(a) of the
Agreement conveyed “good and clear title to the Products, free and clear of all . . . claims against
title or ownership (including, without limitation, claims of patent, copyright or trademark
24
infringement or violations or misappropriations of trade secrets or other intellectual property
rights).” Because the authorized sale of these products to Maxell exhausted Smartfish’s patents,
Smartfish may not, consistent with Quanta, invoke patent law to control or seek damages from
Maxell’s post-sale use or resale of these products. Such claims here, instead, sound in contract.
Accordingly, Count Seven is dismissed.
F.
The FAC’s Trademark-Related Claims
The FAC next asserts three trademark-related claims: Count Eight, alleging trademark
infringement; Count Nine, alleging a violation of the Lanham Act; and Count 10, alleging a
violation of N.Y. General Business Law § 360. All three claims are dismissed.
Count Eight asserts a trademark infringement claim. It alleges that Maxell “has utilized
Smartfish’s mark and marks confusingly similar thereto to sell its merchandise.” FAC ¶ 106.
However, the products at issue were all sold to Maxell under the terms of the Agreement,
meaning that “the only products sold or marketed by Maxell bearing Smartfish’s trademarks
originated with Smartfish itself.” Def. Br. 18. Smartfish’s own complaint is not to the contrary.
See FAC ¶¶ 34–35.
“[A]s a general rule, trademark law does not reach the sale of genuine goods bearing a
true mark even though the sale is not authorized by the mark owner.” Polymer Tech. Corp. v.
Mimran, 975 F.2d 58, 61–62 (2d Cir. 1992) (citing NEC Electronics v. Cal Circuit Abco, 810
F.2d 1506, 1509 (9th Cir.), cert. denied, 484 U.S. 851 (1987)). “Thus, a distributor who resells
trademarked goods without change is not liable for trademark infringement.” Id. (citing 2 J.
Thomas McCarthy, Trademarks and Unfair Competition, § 25:11 (2d ed. 1984)); see also
Original Appalachian Artworks, Inc. v. Granada Electronics, Inc., 816 F.2d 68, 76 (2d Cir.
25
1987) (“[T]rademark rights are exhausted once the trademarked goods have been duly placed
into the market.”).
Here, Maxell purchased Smartfish’s products “free and clear of all . . . claims against title
or ownership (including . . . copyright or trademark infringement . . . ).” Agreement § 7.1(a).
Therefore, even if Maxell sold the Smartfish products it purchased in unauthorized markets, the
FAC’s trademark infringement claim would fail as a matter of law. See Dan-Foam A/S v. Brand
Named Beds, LLC, 500 F. Supp. 2d 296, 326 (S.D.N.Y. 2007) (the first sale doctrine “ensures
that an unauthorized distributor of a trademarked item is not liable for trademark infringement or
dilution when the distributor resells a branded item in an unchanged state”). Accordingly, Count
Eight is dismissed.
Count Nine asserts a violation of the Lanham Act. The FAC claims that Maxell, by
“misappropriating and using Smartfish’s mark,” has “misrepresented and falsely described to the
general public the source of origin of the merchandise so as to create the likelihood of confusing”
the ultimate purchase as to the source of the merchandise. FAC ¶ 118. A trademark owner
attempting to use the Lanham Act to prevent an infringement “must establish that the products
sold by the alleged infringer are not ‘genuine.’” Iberia Foods Corp. v. Romeo, 150 F.3d 298, 302
(3d Cir. 1998) (citing Weil Ceramics and Glass, Inc. v. Dash, 878 F.2d 659, 671–73 (3d Cir.
1989) and El Greco Leather Prod. Co. v. Shoe World, Inc., 806 F.2d 392, 395–99 (2d Cir.
1986)). A product is not genuine if there are “‘material differences’ between the products sold
by the trademark owner and those sold by the alleged infringer.” Id. at 302–03 (citations
omitted).
Here, the products in question were all manufactured by Smartfish and sold directly to
Maxell; they are therefore genuine. They were also sold “free and clear . . . of all claims against
26
ownership.” Agreement § 7.1(a). Count Nine therefore fails for the same reason as Count Eight,
and is dismissed.
Count Ten asserts a claim under N.Y. General Business Law § 360. Smartfish alleges
that “Maxell’s activities are likely to dilute the distinctive quality of Smartfish’s mark and/or
trade name and injure [its] business reputation.” FAC ¶ 125. The relevant provision of § 360
states:
Likelihood of injury to business reputation or of dilution of the distinctive quality
of a mark or trade name shall be a ground for injunctive relief in cases of
infringement of a mark registered or not registered or in cases of unfair
competition, notwithstanding the absence of competition between the parties or
the absence of confusion as to the source of goods or services.
N.Y. Gen. Bus. Law § 360-l.6
Smartfish seeks an injunction to prevent Maxell from continuing to sell the products
Maxell has already purchased. To succeed on such a claim, a plaintiff “must prove (1) that the
trademark is truly distinctive or has acquired secondary meaning, and (2) a likelihood of dilution
either as a result of ‘blurring’ or ‘tarnishment.’” Strange Music, Inc. v. Strange Music, Inc., 326
F. Supp. 2d 481, 496 (S.D.N.Y. 2004) (citation omitted). “Blurring occurs when the defendant
uses a mark that is the same or similar to the plaintiff’s mark to identify its goods, causing a
potential loss of distinctiveness of the plaintiff’s mark to the plaintiff's product.” Hearts on Fire
Co., LLC. v. L.C. Int’l Corp., No. 04 Civ. 2536 (LTS) (MHD), 2004 WL 1724932, at *3 n.2
(S.D.N.Y. July 30, 2004) (citing New York Stock Exchange, Inc. v. New York, New York Hotel,
LLC, 293 F.3d 550, 558 (2d Cir. 2002)). “Tarnishment occurs when the defendant uses the mark
6
In its brief, Smartfish claims to also raise claims under N.Y. Gen. Bus. Law § 360-k
(infringement). See Pl. Br. 22. The FAC, however, alleges only that Maxell’s activities
“dilute[d] the distinctive quality” of the trademark, and “injure[d] the business reputation of
Smartfish.” FAC ¶ 125. Fairly read, these assertions only plead claims under N.Y. Gen. Bus.
Law § 360-l. In any event, were Smartfish to plead an infringement claim under § 360-k, that
claim would be dismissed for the same reasons as the claims discussed supra.
27
in a way that dilutes the quality or prestige associated with the plaintiff’s mark because of
confusion between the two marks.” Id. at *3 n.3 (citation omitted).
As noted, Smartfish concedes that Maxell is selling genuine Smartfish products. And as
with the other trademark claims, blurring and tarnishment cannot exist under N.Y. Gen. Bus.
Law § 360-l when the products at issue are genuine. See, e.g., Krasnyi Oktyabr, Inc. v. Trilini
Imports, 578 F. Supp. 2d 455, 471 (E.D.N.Y. 2008). Accordingly, Count Ten is dismissed.
G.
Count 13: Equitable Accounting
Count Thirteen seeks an accounting of Maxell’s “sales, collections, receipts,
disbursements, charges, payments, and profits in specific detail with respect to the products
which were the subject of the Agreement.” FAC ¶ 139. Under New Jersey law:
An accounting in equity cannot be demanded as a matter of right or of course.
The exercise of the equitable jurisdiction to compel an account rests upon three
grounds—first, the existence of a fiduciary of trust relation; second, the
complicated nature or character of the account; and third, the need of discovery.
Wiatt v. Winston & Strawn LLP, 838 F. Supp. 2d 296, 323 (D.N.J. 2012) (citing Borough of
Kenilworth v. Graceland Mem’l Park Ass’n, 124 N.J. Eq. 35, 37 (Ch. 1938)) (emphasis added).
In short, unless there was a fiduciary relationship between Smartfish and Maxell, Count Thirteen
must be dismissed. Id.
The FAC’s assertion that “Maxell was a fiduciary of Smartfish” is based solely on the
fact that “Maxell repeatedly represented to Smartfish and the public that it was entering into a
‘partnership’ with Smartfish and that it was Smartfish’s partner.” FAC ¶ 138. But, even taking
this claim as true, it does not allege facts sufficient to give rise to a fiduciary relationship. Under
New Jersey law, “characterizing the relationship between the parties as a ‘special partnership’ is
insufficient to create a legal partnership, giving rise to fiduciary obligations.” Alexander, 991 F.
Supp. at 438 (citing Coca–Cola Bottling Co. of Elizabethtown v. Coca–Cola Co., 696 F. Supp.
28
57, 74 (D. Del. 1988) aff’d, 988 F.2d 386 (3d Cir. 1993)). A fiduciary relationship exists only
“where one party has the power and opportunity to take advantage of the other, because of that
other’s susceptibility or vulnerability.” Id. (citations omitted).
Here, based on the allegations in the FAC, Smartfish and Maxell are business entities that
undertook an arms-length relationship pursuant to a distribution agreement; the FAC does not
allege facts indicating that either party had special power over the other. Such an ordinary
commercial transaction does not give rise to a fiduciary relationship. See id. (“[F]iduciary duties
are not imposed in ordinary commercial business transactions.”); International Minerals and
Min. v. Citicorp, North America, 736 F. Supp. 587, 597 (D.N.J. 1990) (“Where a party does not
owe another a duty of care absent the existence of a contract, a separate duty of care cannot arise
simply by virtue of the existence of the contract.”).
Because the FAC has not plausibly alleged a fiduciary relationship between Smartfish
and Maxell, Count Thirteen is dismissed.
CONCLUSION
For the foregoing reasons, Maxell’s partial motion to dismiss is granted. Counts Two
through Thirteen are dismissed. With respect to Count One, Maxell’s motion to dismiss certain
damages claims is granted. Specifically, the Court dismisses the FAC’s claim for $3.6 million in
additional damages for breaches of Maxell’s alleged minimum-purchase obligation during the
two 18-month periods that followed the initial 18-month period commencing December 22,
2009. The Clerk of Court is directed to terminate the motions pending at docket numbers 9, 13,
24, and 28.
29
Because the Court has dismissed the FAC's federal statutory claims, an issue arises as to
whether the Court retains subject matter jurisdiction over this lawsuit. 7 The parties are directed
to meet and confer by April28, 2014, and to submit to the Court, by May 2, 2014, a joint letter
setting out, in detail, their respective views as to whether there is diversity jurisdiction over this
matter; and if not, whether the Court should nevertheless exercise supplemental jurisdiction over
the sole remaining claim, for breach of contract. In the event that either party concludes either
that there is diversity jurisdiction or that the exercise of supplemental jurisdiction is merited, the
joint letter should also address the timetable by which the parties wish to proceed in this
litigation; Maxwell must also file its Answer within one week of this submission. Upon any
such submission, the Court will promptly resolve whether it intends to retain jurisdiction over
this matter. 8
SO ORDERED.
p~~n~~a~
United States District Judge
Dated: April23, 2014
New York, New York
7
See Tr. at 4 ("Q: In other words, in the event that the federal statutory claims, intellectual
property claims are dismissed, then we need to drill down to see ifthere is, in fact, diversity
following the LLC down to the real people. A: Yes, we would certainly agree with that.").
8
The parties recently submitted letters regarding a dispute over the protective order that will
cover a subset ofthe documents exchanged in discovery. See Dkt. 46--47. The Court reserves on
this issue, pending resolution ofthe Court's jurisdiction and of next steps in this litigation.
30
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