CREATIVE SNACKS CO., LLC v. HELLO DELICIOUS BRANDS, LLC et al
Filing
44
MEMORANDUM OPINION AND ORDER signed by JUDGE N. C. TILLEY, JR on 9/12/2017, that Defendants' Motion to Dismiss be GRANTED IN PART AND DENIED IN PART. It is granted in part as to the allegation that Hello Delicious breached the restrictive covenant in Section 2.5 of the Supply Agreement, the allegations that supply chain information and distribution information are trade secrets to the extent that those terms do not incorporate the other alleged trade secrets, and the sixth claim for relief as a freestanding cause of action. It is otherwise denied. Re 23 MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM filed by PETER D. GRUMHAUS, JR., DOUGLAS M. WEISS, HELLO DELICIOUS BRANDS, LLC. (Butler, Carol)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
CREATIVE SNACKS, CO., LLC, a
North Carolina limited liability
company,
Plaintiff,
v.
HELLO DELICIOUS BRANDS LLC, a
Delaware limited liability company,
PETER D. GRUMHAUS, and
DOUGLAS M. WEISS,
Defendants.
)
)
)
)
)
)
)
)
)
)
)
)
)
1:17CV50
MEMORANDUM OPINION AND ORDER
This matter is before the Court on a Motion to Dismiss [Doc. #23] by
Defendants Hello Delicious Brands, LLC (“Hello Delicious”), Peter D. Grumhaus,
and Douglas M. Weiss (collectively “Defendants”). For the reasons explained
below, the Motion is GRANTED IN PART as to the allegation that Hello Delicious
breached the restrictive covenant in Section 2.5 of the Supply Agreement, the
allegations that supply chain information and distribution information are trade
secrets to the extent that those terms do not incorporate the other alleged trade
secrets, and the sixth claim for relief as a freestanding cause of action, but is
otherwise DENIED IN PART.
I.
The facts of this case, stated in the light most favorable to Plaintiff Creative
Snacks, Co., LLC (“Creative Snacks”), are as follows. Creative Snacks creates,
develops, manufactures, distributes, and sells snack products throughout the
United States, Canada, Mexico, South Korea, Japan, China, and the Caribbean.
(Compl. ¶ 16 [Doc. #1].) In 2015, Creative Snacks developed its organic Toasted
Coconut Clusters product (the “Coconut Clusters Product” or “Product”) in
cooperation with a Canadian company, Park’s Bread ‘n Buns Factory, Ltd. (“Park’s
Bread”). (Id. ¶ 18.) In November of that year, Creative Snacks sent samples of the
Coconut Clusters Product to Grumhaus, a manager and owner of Belmont Foods,
LLC and an officer, director, and shareholder of Belmont Partners, Inc. which had
served as a food broker for Creative Snacks since 2014 in connection with the sale
to Costco Wholesale Corporation (“Costco”) of Creative Snacks’ Organic Coconut
Chips under the Creative Snacks brand. (Id. ¶¶ 7, 8, 17, 19.) Grumhaus was so
enthusiastic about the Coconut Clusters Product that he and Weiss, also a
manager and owner of Belmont Foods, LLC and an officer, director, and
shareholder of Belmont Partners, Inc., met with Marius Andersen, President of
Creative Snacks, at the Creative Snacks facility in Greensboro, North Carolina on
November 24, 2015 to discuss the possibility of a partnership on the Coconut
Clusters Product. (Id. ¶¶ 7, 8, 22, 24.)
At the start of the November 24, 2015 meeting, Andersen made clear that
the information shared about the Coconut Clusters Product was highly confidential
and required Grumhaus and Weiss each to execute a Confidentiality Agreement
before any discussion, which they did. (Id. ¶ 25; Exs. A & B to Compl.) The
Confidentiality Agreement required Grumhaus and Weiss to keep business plans,
2
formulas, products, technologies, and processes developed by Creative Snacks
(referred to as “Confidential Information”) secret and confidential and prohibited
them from disclosing the Confidential Information to anyone without Creative
Snacks’ written permission. (See Confidentiality Agreement.)
Subject to those agreements, Andersen discussed the possibility of
developing closer working relationships between Creative Snacks and the Belmont
Companies, and Grumhaus and Weiss proposed a joint venture but it never came
to fruition. (Compl. ¶¶ 26, 27, 32.) However, Andersen, Grumhaus, and Weiss
continued discussions about marketing the Coconut Clusters Product, including
potential customer conflicts and marketplace confusion if the Product were
marketed to retailers other than Costco. (See id. ¶¶ 29-31, 33-34.)
In May 2016, Creative Snacks entered into a Supply Agreement with Hello
Delicious, an affiliate of Belmont Foods, LLC and Belmont Partners, Inc. (Id. ¶¶ 6,
10, 39; Ex. C to Compl.) Pursuant to the Supply Agreement, Creative Snacks
agreed to sell its Coconut Clusters Product to Hello Delicious during the term of the
Supply Agreement solely for the purpose of resale to Costco through its United
States retail stores. (Compl. ¶ 40.) Creative Snacks does not have product rights
in the Product outside of the United States. (Id. ¶ 41.) The Supply Agreement,
among other things, also restricted Hello Delicious’s manufacture, sale, or
distribution of the Product (defined as “the coconut cluster snack food product
now manufactured, developed, produced, sold and distributed by” Creative
Snacks); prohibited Hello Delicious’s use and disclosure of Confidential Information
3
(defined as “any and all trade secrets or other confidential or proprietary
information . . . which derives economic value . . . from not being generally known
without reverse engineering, decompiling, or disassembly to the public or to other
persons who can obtain economic value from its disclosure or use”); and protected
Creative Snacks’ Product Rights (defined as “all proprietary, intellectual property,
or other rights in . . . the Products . . .”). (See, e.g., Supply Agreement §§ 1.2,
1.6, 1.7, 2.5, 3.1, 4.1, 4.2, 4.3.)
More specifically, Creative Snacks alleges that its Confidential Information,
“at least some of which constitutes trade secrets” and “virtually all of” which it
provided to Defendants, includes:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
the specific, detailed recipe for the Coconut Clusters Product;
the ingredient specifications for the Coconut Clusters Product;
ingredient origin related to the Coconut Clusters Product;
the cost breakdown as to the manufacture of the Coconut Clusters
Product;
access to manufacturing and packaging facilities, methods of
manufacture, and packaging of the Coconut Clusters Product;
ingredient costs, packaging costs, and other costs as to the
Coconut Clusters Product;
detailed profit and profit margin information as to the Coconut
Clusters Product;
lead times as to supply of the Coconut Clusters Product;
supply chain information;
distribution information; and,
pricing information concerning the sale by Creative Snacks of the
Coconut Clusters Product under its brand to its customers[.]
(Compl. ¶¶ 50, 53.) Creative Snacks has taken reasonable efforts to maintain the
secrecy and confidentiality of this information, including providing the information
to a limited number of employees on a “need to know” basis, limiting access to
4
some information in computer files to certain personnel, maintaining the
information mostly within its North Carolina facilities’ secured office spaces, and
requiring written confidentiality agreements when the need to share information
arises, as it did with Grumhaus and Weiss and included in its Supply Agreement
with Hello Delicious. (Id. ¶¶ 45, 51.)
Pursuant to the terms of the Supply Agreement, on October 5, 2016,
Creative Snacks gave written notice to Hello Delicious of termination of the Supply
Agreement, effective January 3, 2017. (Id. ¶ 55.) On or about January 9, 2017,
Hello Delicious “informed and represented to Costco that, going forward, Hello
Delicious would continue to supply Costco with a coconut cluster type product
identical or similar to the Coconut Clusters Product, but from a different facility
and at a lower cost.” (Id. ¶ 59.) According to Creative Snacks, “upon information
and belief,” Hello Delicious has violated various sections of the Supply Agreement,
including Section 2.5 by manufacturing a coconut cluster type product and selling
or contracting to sell it to Costco and others, Section 4.1 by disclosing to others
some or all of the Confidential Information and using the Confidential Information
to develop or sell a competing coconut clusters type product, and Section 4.3 by
copying, altering, or modifying the Coconut Clusters Product or having another do
so on Defendants’ behalf. (Id. ¶¶ 60-63; see also id. ¶¶ 66-74.) In addition, “upon
information and belief,” Grumhaus and Weiss have used, disclosed, or otherwise
misappropriated the Confidential Information in violation of the Confidentiality
Agreements. (Id. ¶¶ 75, 76.)
5
Creative Snacks requested that Hello Delicious provide written assurances
that it would comply with the terms of the Supply Agreement, to which Hello
Delicious responded expressly refusing to provide such written assurances and
stating that Section 2.5 of the Supply Agreement was unenforceable. (Id. ¶¶ 64,
65.)
On January 20, 2017, Creative Snacks filed the instant action alleging a
breach of the Supply Agreement against Hello Delicious (Claim 1), breach of the
Confidentiality Agreements against Grumhaus and Weiss (Claim 2), fraud against
Hello Delicious and Grumhaus (Claim 3), misappropriation of trade secrets against
all Defendants (Claim 4), and unfair competition and unfair and deceptive trade
practices against all Defendants (Claim 5). (See generally Compl.) Creative Snacks
also styled its “Motion for Preliminary and Permanent Injunctive Relief” as its sixth
claim for relief. (See id. ¶¶ 128-31.) Defendants moved to dismiss each of these
claims.
II.
A.
Defendants present a two-pronged attack of the breach of contract claims –
(1) that the complaint fails to allege sufficient facts to support a breach and (2)
that, even if the factual allegations were sufficient, the non-compete provision in
the Supply Agreement is too broad to be enforceable. (See Defs.’ Br. in Supp. of
Mot. to Dismiss at 5-11 [Doc. #24].) Because the enforceability of the non-
6
compete provision impacts the analysis of whether Creative Snacks has sufficiently
alleged a breach of the agreements, it is addressed first.
In North Carolina, an enforceable covenant not to compete must, among
other things, be reasonable as to terms, time, and territory. See, e.g., Triangle
Leasing Co., Inc. v. McMahon, 393 S.E.2d 854, 857 (N.C. 1990). The party
seeking enforcement of the covenant bears the burden of proving that it is
reasonable. Hartman v. W.H. Odell & Assocs., Inc., 450 S.E.2d 912, 916 (N.C. Ct.
App. 1994). A reasonable territorial restriction is no greater than necessary to
protect the promisee’s legitimate business interests. Id. at 917. “Ordinarily, a
covenant’s geographic scope will be found reasonable if it encompasses the area
served by the business that the covenant protects, or, more specifically, if the
protected business had clientele in the area covered by the covenant.” Beverage
Sys. of the Carolinas, LLC v. Associated Beverage Repair, LLC, 784 S.E.2d 457,
461 (N.C. 2016) (internal citation omitted).
Here, Section 2.5 of the Supply Agreement not only provides that “[d]uring
the Term [of the Agreement], Buyer [Hello Delicious] shall not sell or distribute,
directly or indirectly, any Products to anyone other than the Sole Customer
[Costco]”, but also that “during the Term of [the] Agreement and for a period of
one year following the conclusion of the Term, Buyer and its Affiliates will not
manufacture, sell or distribute a coconut cluster type product unless approved in
writing by Supplier [Creative Snacks].” Hello Delicious contends that this latter
covenant (also referred to as “the second sentence of Section 2.5”) is
7
unenforceable because both the term “coconut cluster type product” and the
territory are too broad. Because the Court agrees that the territory is overly broad,
there is no need to evaluate whether the term “coconut cluster type product” is, as
well.
Conspicuously absent from the second sentence of Section 2.5 of the
Supply Agreement is any specific geographic region within which its prohibitions
exist. Because there is no limitation, the geographic restriction is worldwide.
Although the time period during which Hello Delicious would be restrained is only
one year, see Hartman, 450 S.E.2d at 916 (“[i]n evaluating reasonableness, the
time and territory restrictions must be read in tandem”), the worldwide geographic
restriction is too broad for the restriction to be reasonable.
Worldwide geographic limitations are not per se unenforceable. See Static
Control Components, Inc. v. Darkprint Imaging, Inc., 200 F. Supp. 2d 541, 547
(M.D.N.C. 2002) (citing Market Am., Inc. v. Christman-Orth, 520 S.E.2d 570, 578
(N.C. Ct. App. 1999)). The problem here is that, as alleged in the Complaint,
Creative Snacks is itself limited to selling the Coconut Clusters Product to retailers
in the United States, because it does not have the product rights outside of the
United States. (See Compl. ¶¶ 36, 37 (referring to Creative Snacks’ sales and
distribution of the Coconut Clusters Product under its own brand and product name
to grocery distributors, Sam’s Club, and other retailers for resale “throughout the
United States”), ¶ 41 (“Creative Snacks does not have product rights in the
Coconut Clusters Product outside of the United States and its territories”.).)
8
Instead, its co-developer of the Coconut Clusters Product, Park’s Bread, “has such
rights for the rest of the world outside of the United States and its territories.” (Id.
¶ 41.) Creative Snacks does not have a legitimate business interest in protecting
its sales of the Product worldwide. Accordingly, the Supply Agreement provides
that Hello Delicious would purchase the Product from Creative Snacks “for resale
solely and exclusively to Costco Wholesale Corporation’s chain of retail stores
located in the United States”. (Supply Agreement at 1; see also id § 1.9 (defining
“Sole Customer” as “Costco Wholesale Corporation for resale by it solely through
its retail stores located in the United States of America”).) Nothing in the
Complaint suggests that a worldwide restraint on Hello Delicious is necessary to
protect Creative Snacks’ legitimate business interests in its rights in the Coconut
Clusters Product.
Creative Snacks’ strongest argument in response is its suggestion that the
covenant “is likely not even properly characterized as a non-compete” but is,
instead, more appropriately characterized as a non-disclosure provision. (See Pl.’s
Br. in Opp’n to Mot. to Dismiss at 10-12 [Doc. #33].) When an agreement “seeks
to prevent the disclosure or use of confidential information” and “does not seek to
prevent a party from engaging in a similar business in competition with the
promise,” it is “not in restraint of trade.” Chemimetals Processing, Inc. v.
McEneny, 476 S.E.2d 374, 376 (N.C. Ct. App. 1996). Such an agreement “may,
therefore, be upheld even though the agreement is unlimited as to time and area
upon a showing that it protects a legitimate business interest of the promisee.” Id.
9
at 377 (internal citation omitted). This Court applied Chemimetals to a
Confidentiality Agreement executed as a part of a business relationship in which
the plaintiff used the defendant to manufacture custom chemical products and
necessarily shared with the defendant its proprietary and confidential chemical
formulas. McElmurry v. Alex Fergusson, Inc., No. 1:04CV389, 2006 WL 572330,
at *2 (M.D.N.C. Mar. 8, 2006). According to the terms of the agreement, the
defendant agreed to provide chemical compounds to the plaintiff for resale to its
customers, the plaintiff agreed to furnish the defendant with certain formulations,
and both parties agreed that the plaintiff was dependent on the defendant for an
ongoing supply of the defendant’s formulations. Id. at *3. Both parties agreed that
neither would use the other’s formulas learned as a result of their business
relationship to an unfair advantage or with the purpose of selling the same or
similar products to the other’s customers and that neither party would share the
formulas with any third party. Id. When the plaintiff sued the defendant for breach
of the agreement, the defendant argued that the agreement was really an
unenforceable non-compete agreement. Id. at *13. The court disagreed. It found
that the agreement did not prohibit either party from competing with the other in
the chemical manufacturing or marketing business. Id. at *15. For example, the
defendant could sell its own chemicals to another distributor in competition with
the plaintiff. Id. The agreement only precluded the parties from using each other’s
confidential formulas to manufacture and sell chemicals. Id. Such is not the case
here.
10
Applying the Chemimetal court’s distinction between a restraint on
competition and a non-disclosure agreement proves to be difficult. But, it is clear
that the second sentence of Section 2.5 of the Supply Agreement is not merely a
non-disclosure agreement, as other sections of the Supply Agreement surely are,
but is, instead, a covenant not to compete. It prohibits Hello Delicious from
manufacturing, selling, and distributing a coconut cluster type product. Even if the
prohibition on manufacturing a coconut cluster type product could be deemed more
akin to an agreement not to use Creative Snacks’ confidential information to
produce a product similar to the Coconut Clusters Product, Section 2.5 also
precludes Hello Delicious from selling and distributing any coconut cluster type
product even if it is manufactured by an entity other than Hello Delicious or one of
its affiliates without the use of any confidential information Creative Snacks
provided to Hello Delicious. In fact, according to the Complaint, Hello Delicious
and its affiliates “primarily” engage in “the sale and/or distribution of various food
and snack products manufactured by others.” (Compl. ¶ 12.) The second
sentence of Section 2.5 restrains Hello Delicious’s primary business – the sale and
distribution of food and snack products manufactured by others.
Because the covenant in Section 2.5 is more appropriately characterized as a
covenant not to compete rather than a non-disclosure agreement, its time and
territory restrictions must be reasonably related to the protection of Creative
Snacks’ legitimate business interests, and, as explained above, the territorial
restriction is not. Therefore, Section 2.5’s covenant not to compete is
11
unenforceable; however, because Creative Snacks alleges that Hello Delicious also
violated other provisions of the Supply Agreement, Hello Delicious’s other
challenge to the contract claim against it – a failure to allege sufficient facts of a
breach – is addressed next, along with Grumhaus’s and Weiss’s similar challenge.
B.
Defendants argue that Creative Snacks has failed to state a claim for both
breach of the Supply Agreement and breach of the Confidentiality Agreements
because Creative Snacks’ allegations are conclusory recitations of the elements of
a breach and that, to the extent Creative Snacks has “buttress[ed] its claims on a
bare allegation” that Hello Delicious would continue to supply Costco a coconut
cluster type product, Creative Snacks has failed to allege any facts to support its
belief that such activity is actually occurring. (Defs.’ Br. in Supp. of Mot. to
Dismiss at 6-8.) Defendants contend that in eleven consecutive paragraphs,
Creative Snacks alleges that “upon information and belief” Defendants violated the
agreements but fails to provide any underlying facts to support that conclusion.
(Id. at 7-8.)
To survive a Rule 12(b)(6) motion, the complaint “must contain sufficient
factual matter, accepted as true, to ‘state a claim to relief that is plausible on its
face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 570 (2007)). “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.” Id. (citing
12
Twombly, 550 U.S. at 556); see also McCleary-Evans v. Md. Dep’t of Transp.,
State Highway Admin., 780 F.3d 582, 585 (4th Cir. 2015) (noting that a
complaint must “contain[] sufficient factual matter, accepted as true, to state a
claim to relief that is plausible on its face in the sense that the complaint’s factual
allegations must allow a court to draw the reasonable inference that the defendant
is liable for the misconduct alleged”). When evaluating whether the complaint
states a claim that is plausible on its face, the facts are construed in the light most
favorable to the plaintiff and all reasonable inferences are drawn in its favor. U.S.
ex rel. Oberg v. Pa. Higher Educ. Assistance Agency, 745 F.3d 131, 136 (4th Cir.
2014). Nevertheless, “labels and conclusions[,]” “a formulaic recitation of the
elements of a cause of action[,]” and “naked assertions . . . without some further
factual enhancement” are insufficient. Twombly, 550 U.S. at 557.
The elements of a breach of contract claim are (1) the existence of a valid
contract and (2) a breach of its terms, Poor v. Hill, 530 S.E.2d 838, 843 (N.C. Ct.
App. 2000), only the latter of which is at issue. Here, Creative Snacks has alleged
that Hello Delicious agreed not to engage in any sales of the Product except as
expressly authorized in the Supply Agreement, to maintain as confidential and not
to disclose or use for any purpose other than as expressly permitted any
Confidential Information it acquired or learned from Creative Snacks, to respect
Creative Snacks’ exclusive ownership of the Product Rights, and not to copy, alter,
modify, disassemble, reverse engineer or decompile the Product or the Confidential
Information. (Compl. ¶ 44 (citing Supply Agreement § 3.1), ¶ 45 (citing Supply
13
Agreement § 4.1), ¶ 47 (citing Supply Agreement § 4.2), ¶ 49 (citing Supply
Agreement § 4.3); see also id. ¶ 56 (alleging that §§ 3.1, 4.1, 4.2, and 4.3
survive the termination of the Supply Agreement).)
Creative Snacks alleges that, despite having made these promises, after the
termination of the Supply Agreement effective January 3, 2017, Hello Delicious
“informed and represented to Costco [on or about January 9, 2017] that, going
forward [it] would continue to supply Costco with a coconut cluster type product
identical or similar to the Coconut Clusters Product, but from a different facility
and at a lower cost.” (Id. ¶ 59.) In so doing, upon Creative Snacks’ information
and belief, Hello Delicious violated Sections 4.1 and 4.3 of the Supply Agreement
by copying, altering, or modifying the Product or having another do so on
Defendants’ behalf and by disclosing to another food manufacturer acting as
Defendants’ co-packer some or all of the Confidential Information, and using the
Confidential Information to develop or sell a competing coconut clusters type
product. (Id. ¶¶ 60, 62; see also id. ¶ 81.) In addition, Grumhaus and Weiss,
alleged to be managers and owners of Belmont Foods, LLC which allegedly
manages Hello Delicious, breached the terms of their Confidentiality Agreements
by using or disclosing Confidential Information. (Id. ¶¶ 75, 87, 88.)
Defendants argue that “[f]or a breach to occur, Plaintiff must allege that
Hello Delicious actually proceeded to manufacture, sell, or distribute the Product to
Costco or some other entity – not that it merely proposed to do so.” (Defs.’ Br. in
Supp. of Mot. to Dismiss at 7.) Not only does this argument focus on the
14
restrictive covenant in Section 2.5 of the Supply Agreement, now determined to be
unenforceable, but the Court interprets Creative Snacks’ breach allegation
differently. A reasonable inference from the allegation that Hello Delicious would
continue supplying Costco with a similar or identical Coconut Clusters Product at a
lower cost from a different facility is that Defendants had already breached and
were continuing to breach at least their promises not to disclose or use
Confidential Information.
While Creative Snacks has asserted many of its allegations of breach “upon
information and belief”, it has also alleged the Confidential Information that the
agreements protect, the statements made by Hello Delicious to Costco after the
termination of the Supply Agreement, and, by reasonable inference, the provisions
of the agreements that Defendants had to have violated in order for Hello Delicious
to make its representations to Costco after the termination of the Supply
Agreement. At this stage, these factual allegations are sufficient to state a claim
against Hello Delicious for breach of the Supply Agreement and against Grumhaus
and Weiss for breach of the Confidentiality Agreements. See Kotane, Inc. v.
Banish, No. 5:10-cv-90, 2011 WL 3804181, at *1-3 (W.D.N.C. Aug. 29, 2011)
(finding that the plaintiff sufficiently alleged facts of a breach of a non-disclosure
agreement even though some of the allegations were made “upon information and
belief” of the plaintiff).
Therefore, Hello Delicious’s motion to dismiss the breach of Supply
Agreement claim against it is granted in part as to Section 2.5’s covenant not to
15
compete, but is denied in part as to the remainder of the claim that Hello Delicious
breached the Supply Agreement. Grumhaus’s and Weiss’s motion to dismiss the
breach of Confidentiality Agreements claim against them is denied.
III.
In addition to alleging contract claims, Creative Snacks has alleged that Hello
Delicious and Grumhaus fraudulently induced it to agree to Section 2.5 of the
Supply Agreement and ultimately to enter into the Supply Agreement with Hello
Delicious. Hello Delicious and Grumhaus challenge the sufficiency of the fraud
allegations, arguing that they are general and conclusory, made “upon information
and belief”, and lack any information on the “how, when, and in what manner” the
fraud was committed and any facts of Hello Delicious’s and Grumhaus’s specific
intent not to perform at the time they made their promises. (Defs.’ Br. in Supp. of
Mot. to Dismiss at 11-15.)
In North Carolina, “[t]he essential elements of fraud [in the inducement] are:
(1) False representation or concealment of a material fact, (2) reasonably
calculated to deceive, (3) made with the intent to deceive, (4) which does in fact
deceive, (5) resulting in damage to the injured party.” TradeWinds Airlines, Inc. v.
C-S Aviation Servs., 733 S.E.2d 162, 168 (N.C. Ct. App. 2012) (alteration in
original). Stated another way, in order for a defendant’s failure to carry out its
contractual promise to constitute fraudulent inducement of the contract, the
defendant’s promise “must have been made (1) with the present intent not to carry
it out and (2) with the purpose to induce the plaintiff to [carry out its promises
16
while the defendant did not intend to fulfill its promises].” Hoyle v. Bagby, 117
S.E.2d 760, 762 (N.C. 1961) cited in Strum v. Exxon Co., U.S.A., 15 F.3d 327,
331 (4th Cir. 1994). Because fraud in the inducement is subject to the heightened
pleading standards of Rule 9(b) of the Federal Rules of Civil Procedure, which
requires a party alleging fraud to “state with particularity the circumstances
constituting fraud”, a plaintiff’s generalities and conclusory allegations that a
defendant never intended to honor its contractual obligations are insufficient. See
Strum, 15 F.3d at 331.
Hello Delicious and Grumhaus contend that Creative Snacks’ fraud
allegations are no different than those made in Norman v. TradeWinds Airlines,
Inc., 286 F. Supp. 2d 575 (M.D.N.C. 2003), adopted (Osteen, J. Aug. 21, 2003).
In Norman, the plaintiff former employee alleged that the defendant former
employer never intended to comply with the employee handbook, but the court
found that the plaintiff “failed to allege with requisite particularity that TradeWinds
never intended to follow, or knew that it would not follow, the outlined policies in
the Handbook.” Id. at 595. The plaintiff had alleged that TradeWinds “never
intended to comply with the [handbook] as evidenced by their reckless procedure
in the termination of [the plaintiff,] . . . its reckless disregard of the promises in the
handbook.” Id. As the court explained, “in order to be liable for fraud, the
promisor must do something more than just disregard or break its promises.” Id.
Here, unlike the plaintiff in Norman, Creative Snacks has alleged that Hello
Delicious and Grumhaus did more than just breach their agreements. Grumhaus
17
was initially so interested in the Coconut Clusters Product samples that he
“suggested that Creative Snacks act as a co-packer for the Belmont Companies by
manufacturing and selling the product to [them] for resale under a private label
[they] owned.” (Compl. ¶¶ 19, 20.) After Creative Snacks rejected this idea,
Grumhaus “suggested to Andersen that he fly to Greensboro to visit Creative
Snacks at its facility to discuss a possible partnership opportunity with Creative
Snacks as to the Coconut Clusters Product.” (Id. ¶¶ 21, 22.) Grumhaus and
Weiss came to Greensboro to meet with Andersen who was interested in
developing a closer working relationship between the companies. (Id. ¶¶ 24, 26.)
“Grumhaus and Weiss pitched to Andersen an opportunity to enter into a joint
venture dedicated to selling the Coconut Clusters Product.” (Id. ¶ 26) As the joint
venture failed to develop, Grumhaus and Weiss continued their efforts to establish
a marketing and distribution relationship with Creative Snacks. (See id. ¶¶ 27-35.)
Grumhaus was “primarily responsible for negotiating the Supply Agreement
with Creative Snacks on behalf of Hello Delicious” and “executed the Supply
Agreement on [its] behalf.” (Compl. ¶ 93.) “To induce Creative Snacks to enter
into the Supply Agreement and to provide Hello Delicious with the benefits
afforded thereunder”, including access to Confidential Information, Hello Delicious
and Grumhaus “made and agreed to the promises set forth in Section 2.5, 3.1,
4.1, 4.2, and 4.3 of the Supply Agreement” having, at the time they made those
promises, no intent of performing those promises. (Id. ¶¶ 94, 95.)
18
As factual support, Creative Snacks then provides alleged details of the
negotiations of Section 2.5. Creative Snacks had initially proposed Section 2.5
read as follows:
Sales by Buyer; Restrictions. During the Term, Buyer shall not sell or
distribute, directly or indirectly, any Products to anyone other than the
Sole Customer. Additionally, Buyer covenants and agrees that,
except for Buyer’s resale of Products to the Sole Customer during the
Term consistent with the terms of this Agreement, neither Buyer nor
any of its Affiliates shall, during the Term and for a period of one (1)
year immediately following the conclusion of the Term, manufacture,
sell or distribute within the United States any Products or any
coconut-based products which are directly competitive with the
Products. Buyer acknowledges that but for Buyer’s covenants
contained in this Section 2.4 [eventual Section 2.5], Supplier would
not have entered into this Agreement.
(Id. ¶ 96 (emphasis added).)
Hello Delicious and Grumhaus responded with the following proposal:
Sales by Buyer; Restrictions. During the Term, Buyer shall not sell or
distribute, directly or indirectly, any Products to anyone other than the
Sole Customer. Buyer acknowledges that but for Buyer’s covenants
contained in this Section 2.4 [eventual Section 2.5], Supplier would
not have entered into this Agreement.
(Id. ¶ 97.) Creative Snacks objected to the wholesale removal of the posttermination obligations. (Id.) Hello Delicious and Grumhaus then proposed:
Sales by Buyer; Restrictions. During the Term, Buyer shall not sell or
distribute, directly or indirectly, any Products to anyone other than the
Sole Customer. Buyer agrees that during the term of this Agreement
and for a period of one year following the conclusion of the [sic] they
will not manufacture a coconut cluster type product unless approved
by Seller. Buyer acknowledges that but for Buyer’s covenants
contained in this Section 2.4 [eventual Section 2.5], Supplier would
not have entered into this Agreement.
19
(Id. ¶ 98 (emphasis added).) While this proposal included a post-termination
obligation, it did not incorporate the geographic restriction of the United States
that Creative Snacks initially proposed and, instead, included no territorial
restriction. In addition, instead of incorporating the term “coconut-based products”
as proposed by Creative Snacks, Hello Delicious’s and Grumhaus’s proposal used
an entirely new phrase, “a coconut cluster type product”. As Creative Snacks
alleges, these proposals “formed the foundation of the final language set forth in
Section 2.5 of the Supply Agreement”, (id. ¶ 100), which reads:
Sales by Buyer; Restrictions. During the Term, Buyer shall not sell or
distribute, directly or indirectly, any Products to anyone other than the
Sole Customer. Buyer agrees that during the Term of this Agreement
and for a period of one year following the conclusion of the Term,
Buyer and its Affiliates will not manufacture, sell or distribute a
coconut cluster type product unless approved in writing by Supplier.
Buyer acknowledges that but for Buyer’s covenants contained in this
Section 2.5, Supplier would not have entered into this Agreement.
After Creative Snacks learned of Hello Delicious’s January 9, 2017
communication with Costco, it requested written assurances from Hello Delicious
that it would comply with the terms of the Supply Agreement. (Id. ¶ 64.) In
response, Hello Delicious stated that Section 2.5 of the Supply Agreement was
unenforceable, (id. ¶¶ 65, 101), an argument that it successfully made in its
motion to dismiss.
Creative Snacks’ detailed allegations of the negotiation of Section 2.5 of the
Supply Agreement, the specific section of the agreement that Hello Delicious
challenges in its Motion to Dismiss as unenforceable, make plausible its allegation
20
that Hello Delicious and Grumhaus “proposed . . . Section 2.5 language in an
attempt . . . to render Section 2.5 of the Supply Agreement unenforceable,
because they had no intention of having Hello Delicious (or its Affiliates) abide by
such provision or any other post-termination obligations in the event of termination
of the Supply Agreement.” (Id. ¶ 102.) The fact that Creative Snacks, and not
Hello Delicious, terminated the Supply Agreement does not “negate the inference
of fraudulent inducement” as Defendants argue. (See Defs.’ Br. in Supp. of Mot. to
Dismiss at 14.) Hello Delicious and Grumhaus allegedly made the promises in
Section 2.5 with the intent to deceive Creative Snacks and induce it to enter the
Supply Agreement and provide Hello Delicious with benefits including the receipt of
Confidential Information. (Compl. ¶ 104.) Creative Snacks allegedly was in fact
deceived and reasonably relied on Hello Delicious’s and Grumhaus’s
representations. (Id. ¶¶ 105-07.) Creative Snacks has plausibly alleged that Hello
Delicious and Grumhaus committed fraud, and, therefore, their motion to dismiss
this claim is denied.
IV.
Defendants next challenge Creative Snacks’ misappropriation of trade
secrets claim, arguing that Creative Snacks has failed to identify its trade secrets
with sufficient particularity or to allege specific acts of misappropriation. (Defs.’ Br.
in Supp. of Mot. to Dismiss at 15.) The elements of an action for misappropriation
of trade secrets are (1) the defendant “[k]nows or should have known of the trade
secret” and (2) the defendant “[h]as had a specific opportunity to acquire it for
21
disclosure or use or has acquired, disclosed, or used it without the express or
implied consent or authority of the owner.” N.C. Gen. Stat. § 66-155.
A trade secret is defined as
Business or technical information, including but not limited to a
formula, pattern, program, device, compilation of information,
method, technique, or process that:
a. Derives independent actual or potential commercial value from not
being generally known or readily ascertainable through independent
development or reverse engineering by persons who can obtain
economic value from its disclosure or use; and
b. Is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy.
N.C. Gen. Stat. § 66-152. “Misappropriation” is the “acquisition, disclosure, or
use of a trade secret of another without express or implied authority or consent,
unless such trade secret was arrived at by independent development, reverse
engineering, or was obtained from another person with a right to disclose the trade
secret.” Id.
Here, Creative Snacks has alleged that “[i]n connection with the
development of the Coconut Clusters Product (called the ‘Products’ in the Supply
Agreement because there are variations of the product), Creative Snacks created
and amassed valuable confidential business information, at least some of which
constitutes trade secrets”. (Compl. ¶ 50.) “Creative Snacks took reasonable steps
to protect against [the] disclosure” of this information that “was not generally
known or readily ascertainable” and “gave Creative Snacks a significant business
advantage over and against its competitors.” (Id.)
22
This confidential information includes:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
the specific, detailed recipe for the Coconut Clusters Product;
the ingredient specifications for the Coconut Clusters Product;
ingredient origin related to the Coconut Clusters Product;
the cost breakdown as to the manufacture of the Coconut Clusters
Product;
access to manufacturing and packaging facilities, methods of
manufacture, and packaging of the Coconut Clusters Product;
ingredient costs, packaging costs, and other costs as to the
Coconut Clusters Product;
detailed profit and profit margin information as to the Coconut
Clusters Product;
lead times as to supply of the Coconut Clusters Product;
supply chain information;
distribution information; and
pricing information concerning the sale by Creative Snacks of the
Coconut Clusters Product under its brand to its customers[.]
(Id.) Creative Snacks refers to this information collectively as “CS Trade
Secrets and Confidential Information”. (Id.)
Prior to the termination of the Supply Agreement,
Creative Snacks provided to [D]efendants virtually all of the CS Trade
Secrets and Confidential Information, namely, the specific detailed
recipe for the Coconut Clusters Product, the ingredient specifications
for the Coconut Clusters Product, ingredient origin related to the
Coconut Clusters Product, the cost breakdown as to manufacture of
the Coconut Clusters Product, access to the manufacturing and
packaging facilities, methods of manufacture and packaging of the
Coconut Clusters Product, ingredient costs, packaging costs, and
other costs as to the Coconut Clusters Product, detailed profit and
profit margin information as to the Coconut Clusters Product, lead
times as to the supply of the Coconut Clusters Product, supply chain
information, distribution information, and pricing information
concerning the sale by Creative Snacks of the Coconut Clusters
Product sold by Creative Snacks under its brand to its customers.
(Id. at 53.) Defendants argue that this is a “list of broad and, in large part, vague
categories of information” and that Creative Snacks fails “to demarcate its alleged
23
trade secrets from information it considers confidential”. (Defs.’ Br. in Supp. of
Mot. to Dismiss at 17.)
Depending on the context of the business and the allegations, there are
cases finding as sufficient and other cases finding as too broad allegations that
trade secrets include product information, operating policies, pricing information,
costs, and confidential information. Compare, e.g., Jacobs Vehicle Sys., Inc., No.
1:12CV181, 2013 WL 4833058, at *9 (M.D.N.C. Sept. 10, 2013) (finding
“business or technical information”, “customer specifications, formulas, patterns,
programs, devices, compilations of information, methods or techniques, as well as
information embodied in documentation relating to the invention, design,
manufacture, formulation, research, development, or production of engine retarding
systems, valve actuation systems, and/or engine brakes . . . for sale by JVS” to be
general allegations that did not notify the defendant of what the plaintiff alleged to
be a misappropriated trade secret) with Philips Elecs. N. Am. Corp. v. Hope, 631 F.
Supp. 2d 705, 721-22 (M.D.N.C. 2009) (finding that the plaintiff forecast
evidence of the existence of trade secrets when it alleged its trade secrets to be a
particular business plan, customer preferences, a profitability calculator, new
packaging plans, product costs, customer pricing information, and market share
data).
Although Defendants base their challenge on North Carolina’s “sufficient
particularity” standard for pleading claims of misappropriation of trade secrets, (see
Defs.’ Br. in Supp. of Mot. to Dismiss at 15-19 (citing Washburn v. Yadkin Valley
24
Bank & Trust Co., 660 S.E.2d 577 (N.C. Ct. App. 2008); VisionAIR, Inc. v. James,
606 S.E.2d 359 (N.C. Ct. App. 2004))), they have cited no law, and the Court is
aware of none, in support of applying North Carolina’s pleading requirement to the
instant action. Defendants in Great Northern Insurance Co. v. Recall Total
Information Management, Inc., No. TDC-13-1829, 2014 WL 3845891, at *4 (D.
Md. Aug. 1, 2014), made a similar argument as Defendants do here. They argued
that “under Maryland law, gross negligence must be pled with specificity”, but the
court explained that “federal courts sitting in diversity must apply . . . federal
procedural law.” Id. (citing Hanna v. Plumer, 380 U.S. 460, 471-42 (1965)).
Although gross negligence was a matter of state law, federal pleading standards
applied. Id. “Because there is no heightened pleading standard for gross
negligence under federal procedural law,” the Court applied the notice pleading
standard in Federal Rule of Civil Procedure 8. Id. Similarly, here, because there is
no heightened pleading standard for misappropriation of trade secrets under federal
procedural law, Rule 8’s notice pleading standard, as interpreted by Iqbal and
Twombly, applies.
Creative Snacks has sufficiently pled facts to set out a plausible claim of
misappropriation of trade secrets. It has alleged that it provided Defendants with
information specific to the Coconut Clusters Product. This includes the Product’s
specific detailed recipe, the Product’s ingredient specifications, origins, and costs,
the Product’s packaging costs, the Product’s manufacturing cost breakdown,
manufacturing and packaging methods for the Product, access to the Product’s
25
manufacturing and packaging facilities, the Product’s supply lead times, detailed
Product profit and profit margin information, and pricing information related to
Creative Snacks’ sale of the Product under its own brand to its customers. (See
Compl. ¶¶ 50, 53.) This information is alleged to be both trade secrets and
confidential, which Defendants contend is problematic, but if it were not also
confidential, it likely would not be a trade secret. See N.C. Gen. Stat. § 66-152.
In addition, to the extent that Creative Snacks’ allegations of “supply chain
information” and “distribution information” incorporate its other alleged ingredient,
manufacturing, cost, profit, supply lead time, and pricing trade secrets, these
allegations are also sufficient. To the extent that those terms do not incorporate
Creative Snacks’ other alleged trade secrets, they are not.
In addition to challenging the sufficiency of Creative Snacks’ trade secrets
allegations, Defendants argue that Creative Snacks failed to allege sufficiently how
the trade secrets were misappropriated. (See Defs.’ Br. in Supp. of Mot. to Dismiss
at 18-19.) First, Defendants once again take issue with Creative Snacks’ use of
“upon information and belief” in its allegations such as “[u]pon information and
belief, Defendants have tortiously and without authorization used, disclosed,
and/or otherwise misappropriated the CS Trade Secrets and Confidential
Information for their own benefit and to the detriment of Creative Snacks.”
(Compl. ¶ 117; see also ¶¶ 66-76.) Next, Defendants argue that “[s]ignificantly,
Plaintiff has not alleged any concrete facts indicating that Defendants have
developed a snack food item similar to the Product – much less that they used
26
Plaintiff’s confidential information to do so.” (Defs.’ Br. in Supp. of Mot. to Dismiss
at 19 (citing Compl. ¶¶ 66-76); see also id. (citing ¶ 118).)
After alleging the trade secrets provided to Defendants, which included the
Product’s recipe, ingredient specifications, manufacturing, ingredient, and packing
costs, supply lead times, and profit margin, and access to the Product’s
manufacturing and packaging facilities, (see, e.g., Compl. ¶ 53), Creative Snacks
specifically alleges that Hello Delicious informed Costco within one week of the
effective termination of the Supply Agreement that it would continue to supply “a
coconut cluster type product identical or similar to the Coconut Clusters Product,
but from a different facility and at a lower cost”, (id. ¶ 59). Furthermore, Creative
Snacks alleges that without Defendants’ knowledge of Creative Snacks’ trade
secrets, they would not have been able to make this representation to Costco.
(See id. ¶ 118.) At this stage, Creative Snacks has sufficiently alleged that
Defendants misappropriated its trade secrets. Cf. Byrd’s Lawn & Landscaping, Inc.
v. Smith, 542 S.E.2d 689, 693 (N.C. Ct. App. 2001) (recognizing that
misappropriation of trade secrets can be proven by circumstantial evidence).
Therefore, Defendants’ motion to dismiss this claim is granted in part to the extent
that the terms “supply chain information” and “distribution information” do not
incorporate the other alleged trade secrets, but denied in part as to the remainder
of the allegations.
27
V.
Defendants next argue that the unfair and deceptive trade practices claim
should be dismissed because Creative Snacks bases this claim on the same alleged
conduct – breach of contract, fraud, and misappropriation of trade secrets – as
discussed above. (Defs.’ Br. in Supp. of Mot. to Dismiss at 19; see Compl.
¶¶ 122-123.) The elements of a claim for unfair and deceptive trade practices are
(1) the commission of an unfair or deceptive act or practice (2) in or affecting
commerce (3) that proximately caused the injury to the plaintiff. Dalton v. Camp,
548 S.E.2d 704, 711 (N.C. 2001). “Proof of fraud would necessarily constitute a
violation of the prohibition against unfair and deceptive acts”, Bhatti v. Buckland,
400 S.E.2d 440, 442 (N.C. 1991), and Creative Snacks has sufficiently alleged
fraud against Hello Delicious and Grumhaus. Misappropriation of trade secrets may
also constitute unfair and deceptive trade practices, GE Betz, Inc. v. Conrad, 752
S.E.2d 634, 650 (N.C. Ct. App. 2013) (citing Drouillard v. Keister Williams
Newspaper Servs., Inc., 423 S.E.2d 324, 326 (N.C. Ct. App. 1992)), and Creative
Snacks has sufficiently alleged misappropriation of trade secrets against all
Defendants. Therefore, Creative Snacks has sufficiently alleged unfair and
deceptive trade practices against Defendants, and their motion to dismiss this
claim is denied.
VI.
Creative Snacks concedes that Defendants correctly challenge the sixth
claim for relief entitled “Motion for Preliminary and Permanent Injunctive Relief” as
28
one not recognized as “a freestanding cause of action”. (Defs.’ Br. in Supp. of
Mot. to Dismiss at 20; Pl.’s Br. in Opp’n to Mot. to Dismiss at 19-20.) Creative
Snacks asks the Court to treat the request as part of its fifth prayer for relief
seeking an injunction, and it has separately filed a motion for preliminary injunction
[Doc. #6] for which a hearing is scheduled. Therefore, Defendants’ motion to
dismiss the sixth claim for relief is granted to the extent that the claim is not
recognized as a freestanding cause of action, but this ruling does not affect the
availability of this relief, which will be addressed as part of the separately filed
motion for preliminary injunction.
VII.
For the reasons stated herein, IT IS HEREBY ORDERED that Defendants’
Motion to Dismiss be GRANTED IN PART AND DENIED IN PART. It is granted in
part as to the allegation that Hello Delicious breached the restrictive covenant in
Section 2.5 of the Supply Agreement, the allegations that supply chain information
and distribution information are trade secrets to the extent that those terms do not
incorporate the other alleged trade secrets, and the sixth claim for relief as a
freestanding cause of action. It is otherwise denied.
This the 12th day of September, 2017.
/s/ N. Carlton Tilley, Jr.
Senior United States District Judge
29
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?