Kentex Asia Limited v. ATT Southern Inc.

Filing 34

MEMORANDUM ORDER) - IT IS HEREBY ORDERED THAT: 1. Plaintiffs Motion to Dismiss, (Doc. 21), is DENIED. 2. Defendants Motion for Leave to Amend, (Doc. 27), is GRANTED. 3. Defendant shall refile its proposed Second Amended Answer,Affirmative Defenses, and Counterclaims, (Doc. 28), within FIVE (5) BUSINESS DAYS of this Order. 28 21 27 Signed by Honorable John E. Jones, III on 9/14/17. (sc)

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
KENTEX ASIA LIMITED,
Plaintiffs/Counter-Defendant,
v.

1:17-cv-273
Hon. John E. Jones III

ATT SOUTHERN INC.,
Defendant/Counterclaimant.
MEMORANDUM & ORDER
September 14, 2017
Presently before the Court are two pending motions. The first motion is
Plaintiff Kentex Asia Limited’s (“Kentex”) Motion to Dismiss Defendant’s
Amended Counterclaims. (Doc. 21). Subsequent to Kentex’s Motion, Defendant
ATT Southern Inc. (“ATT”) filed a Motion for Leave to File a Second Amended
Answer, Affirmative Defenses, and Counterclaims. (Doc. 27). ATT proposes to
allege two additional counterclaims but does not propose any changes to the
counterclaims challenged in Kentex’s Motion. For the reasons that follow, we shall
deny Kentex’s Motion and grant ATT’s Motion.
I.

PROCEDURAL HISTORY
Kentex initiated this diversity action by filing of a Complaint on February

14, 2017. (Doc. 1). The Complaint alleges, in the alternative, breach of contract,
quantum meruit, and unjust enrichment. ATT filed its Answer and Counterclaim
1

on April 10, 2017. (Doc.11). On May 22, 2017, ATT filed an Amended Answer
and Counterclaims. (Doc. 18). ATT asserted six counts in its Amended
Counterclaims, including four counts of breach of contract, false advertising under
the Lanham Act,1 and tortious interference with contractual relations. Kentex filed
a Motion to Dismiss all of ATT’s Amended Counterclaims, except for the Lanham
Act claim, on June 19, 2017. (Doc. 21). Kentex’s Motion has been fully briefed
and is ripe for our review. (Docs. 22, 25, 26). While Kentex’s Motion was pending,
ATT filed its motion seeking to leave to file a Second Amended Answer and
Counterclaims with the addition of new counterclaims. (Doc. 27). ATT’s Motion
also has been fully briefed and is ripe for our review. (Docs. 31, 32, 33).
We will dispose of both pending Motions in this Memorandum and Order.
We will first outline the facts pertinent to both Motions and will then address
Kentex’s Motion followed by ATT’s Motion.
II.

FACTUAL BACKGROUND
We draw facts from ATT’s Amended Counterclaims and assume them to be

true. This case involves agreements between ATT, Kentex, and Dongguan Sunland
Technology Co., Ltd. (“Sunland”) for the manufacture of custom planters using
ATT’s proprietary molds. ATT and Sunland entered a Manufacturing Agreement
and an Agreement of Title and Ownership of Molds, Covenants of Confidentiality,

1

15 U.S.C. §1125(a)
2

and Release and Disclaimer (“Mold Agreement”). (Doc. 18, Am. Countercl. ¶¶ 7,
8). Sunland later instructed ATT to direct purchase orders, invoices, and payment
to Kentex. (Id. at ¶ 9). Original shipping documents bore Kentex’s name. (Id. at ¶
10). The shipping documentation was later changed to show Sunland as shipper
because Kentex did not meet overseas shipping regulations. (Id. at ¶ 11). Invoices
also showed Sunland as shipper and Kentex as beneficiary of the purchase. (Id. at ¶
12).
In early 2015, Kentex delivered planters directly to ATT’s customers. (Id. at
¶ 32). Shortly after receiving the planters, several of ATT’s customers complained
to ATT of the planters’ poor quality. (Id. at ¶ 33). As a result of the complaints,
ATT was required to buy back more than $1.5 million in defective planters from its
customers. (Id. at ¶ 38). ATT contacted Kentex to inform Kentex of the defective
planters and demanded reimbursement for charge-backs pursuant to the
Manufacturing Agreement. (Id. at ¶ 40). Kentex, in response, demanded immediate
payment for amounts due. (Id. at ¶ 41). ATT did not pay Kentex, and Kentex
instructed Sunland to refrain from producing any planters for ATT. (Id. at ¶ 44).
The production stoppage forced ATT to source other manufacturers to fulfill
ATT’s obligations to its customers, which resulted in increased costs to ATT. (Id.
at ¶¶ 45, 46). Thereafter, ATT ended its relationship with Kentex. (Id. at ¶ 47).

3

Kentex has not returned samples that belong to ATT. (Id. at ¶¶ 49, 50). In
addition, Kentex has displayed products made using ATT’s proprietary molds at
trade shows. (Id. at ¶ 51).
III.

ANALYSIS
1.

Kentex’s Motion to Dismiss
A.

Standard of Review

In considering a motion to dismiss pursuant to Rule 12(b)(6), courts “accept
all factual allegations as true, construe the complaint in the light most favorable to
the plaintiff, and determine whether, under any reasonable reading of the
complaint, the plaintiff may be entitled to relief.” Phillips v. Cty. of Allegheny, 515
F.3d 224, 231 (3d Cir. 2008) (quoting Pinker v. Roche Holdings, Ltd., 292 F.3d
361, 374 n.7 (3d Cir. 2002)). In resolving a motion to dismiss pursuant to Rule
12(b)(6), a court generally should consider only the allegations in the complaint, as
well as “documents that are attached to or submitted with the complaint,…and any
matters incorporated by reference or integral to the claim, items subject to judicial
notice, matters of public record, orders, [and] items appearing in the record of the
case.” Buck v. Hampton Twp. Sch. Dist., 452 F.3d 256, 260 (3d Cir. 2006).
A Rule 12(b)(6) motion tests the sufficiency of the complaint against the
pleading requirement of Rule 8(a). Rule 8(a)(2) requires that a complaint contain a
short and plain statement of the claim showing that the pleader is entitled to relief,
4

“in order to give the defendant fair notice of what the claim is and the grounds
upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)
(quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). While a complaint attacked by
Rule 12(b)(6) motion to dismiss need not contain detailed factual allegations, it
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). To
survive a motion to dismiss, a civil plaintiff must allege facts that “raise a right to
relief above the speculative level….” Victaulic Co. v. Tieman, 499 F.3d 227, 235
(3d Cir. 2007) (quoting Twombly, 550 U.S. at 555). Accordingly, to satisfy the
plausibility standard, the complaint must indicate that defendant’s liability is more
than “a sheer possibility.” Iqbal, 556 U.S. at 678. “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.’” Id. (quoting
Twombly, 550 U.S. at 557).
Under the two-pronged approach articulated in Twombly and later
formalized in Iqbal, a district court must first identify all factual allegations that
constitute nothing more than “legal conclusions” or “naked assertions.” Twombly,
550 U.S. at 555, 557. Such allegations are “not entitled to the assumption of truth”
and must be disregarded for purposes of resolving a 12(b)(6) motion to dismiss.
Iqbal, 556 U.S. at 679. Next, the district court must identify “the ‘nub’ of the …
5

complaint – the well-pleaded, nonconclusory factual allegation[s].” Id. Taking
these allegations as true, the district judge must then determine whether the
complaint states a plausible claim for relief. See id.
However, “a complaint may not be dismissed merely because it appears
unlikely that the plaintiff can prove those facts or will ultimately prevail on the
merits.” Phillips, 515 F.3d at 231 (citing Twombly, 550 U.S. at 556-57). Rule 8
“does not impose a probability requirement at the pleading stage, but instead
simply calls for enough facts to raise a reasonable expectation that discovery will
reveal evidence of the necessary element.” Id. at 234.
B.

Discussion

ATT states six counterclaims against Kentex: four counts of breach of
contract, false advertising under the Lanham Act, and tortious interference with
contractual relations. Kentex moves to dismiss only the four counts of breach of
contract and the claim for tortious interference with contractual relations. We begin
with the breach of contract claims.
i.

Breach of contract

ATT bases its breach of contract claims against Kentex on the
Manufacturing Agreement and the Mold Agreement. Although both agreements
were between ATT and Sunland, and Kentex was never a party to either
agreement, ATT alleges that Kentex, as Sunland’s agent, assumed the obligations
6

of both agreements. Under Pennsylvania law, an agent is not liable for the
obligations of a disclosed principal unless the agent agrees to assume liability. See
Vernon D. Cox Co., Inc. v. Giles, 406 A.2d 1107, 1110 (Pa. Super. Ct. 1979). ATT
has alleged that purchase orders between Kentex and ATT incorporate the
manufacturing and mold agreements and, thus, Kentex assumed Sunland’s
obligations under the agreements. (Doc. 18, Am. Countercl. ¶¶ 16-23). While we
acknowledge that ATT’s assumption argument is thin, the relationship between
Kentex and Sunland is unclear at this early stage.2 It appears that Kentex and
Sunland could be interchangeable for invoicing purposes. (Id. at ¶ 12). To that end,
it is plausible that Kentex would have, at some point, assumed the obligations of
the agreements between Sunland and ATT. We therefore find that ATT has pled
sufficient facts to state plausible claims for breach of contract.
ii.

Tortious interference with contractual relations

ATT claims that Kentex interfered with ATT’s contractual relationship with
Sunland when Kentex instructed Sunland to stop producing planters for ATT.
Tortious interference with contractual relations occurs when one “intentionally and
improperly interferes with the performance of a contract … between another and a
third party by inducing or otherwise causing the third person not to perform the

2

ATT’s breach-of-contract claims survive this motion to dismiss by the thinnest of margins. On
summary judgment, ATT will need to provide clearer evidence that Kentex assumed Sunland’s
contractual obligations.
7

contract…” Binns v. Flaster Greenberg, P.C., 480 F.Supp.2d 773, 778 (E.D. Pa.
2007) (quoting Adler, Barish, Daniels, Levin and Creskoff v. Epstein, 482 Pa. 416,
431 (Pa. 1978)). To prove tortious interference with contractual relations, a
plaintiff must satisfy four elements: (1) the existence of a contract; (2) purposeful
action by defendant, with intent to harm the existing relation; (3) the absence of a
privilege or justification; and (4) damage resulting from defendant’s conduct.
Brokerage Concepts, Inc. v. U.S. Healthcare, Inc., 140 F.3d 494, 530 (3d Cir.
1998) (quoting (Pelagatti v. Cohen, 536 A.2d 1337, 1343 (Pa. Super. Ct. 1988)).
The contractual relationship between ATT and Sunland is clear from the
contracts attached to ATT’s counterclaims. (Ex. A & Ex. B to Am. Countercl.).
The first element, therefore, is met. Regarding the second element, ATT alleges
that Kentex instructed Sunland to stop producing planters, indicating purposeful
conduct. The question, however, is whether Kentex’s purpose was specifically
intended to harm ATT. At this early stage, we find ATT’s allegation of intentional
harm sufficient. “It would be difficult for [ATT] to allege more facts related to
[Kentex’s] state of mind … without the benefit of discovery.” Cincinnati Ins. Co.
v. Markey Builders, Inc., No. 1:15-cv-62, 2015 WL 4715249, at *4 (M.D. Pa. Aug.
7, 2015). We find that ATT’s allegations raise a reasonable expectation that
discovery may reveal evidence of intent to harm.

8

Kentex challenges the third element, as well, by suggesting that Kentex was
privileged to mitigate its damages when ATT did not pay outstanding invoices.
However, Kentex’s argument presumes that ATT breached the terms of the
purchase orders with Kentex. ATT has alleged that it was entitled to a set-off of its
payment obligations based on the charge-backs ATT incurred in having to
repurchase defective planters. (Doc. 18, Am. Countercl. ¶ 43). Assuming ATT’s
allegations to be true, it is plausible that ATT did not breach its contractual
obligations to Kentex, and Kentex, therefore, was not privileged to direct Sunland
to stop production. Accordingly, at this stage of the litigation, we find that ATT
sufficiently pled facts to satisfy the third element. Finally, the fourth element is
evident from the pleadings, as ATT has alleged that the production stoppage forced
ATT to find another manufacturer at a higher cost to fulfill its obligations to its
customers. Thus, we find that ATT satisfied the fourth element. Therefore, we find
that ATT sufficiently stated a claim for tortious interference with contractual
relations.
2.

ATT’s Motion for Leave to Amend
A.

Standard of Review

Rule 15(a)(2) of the Federal Rules of Civil Procedure provides that “a party
may amend its pleading only with the opposing party’s written consent or the
court’s leave. The court should freely give leave when justice so requires.” Fed. R.
9

Civ. P. 15(a)(2). “‘If the underlying facts or circumstances relied upon by a
plaintiff may be a proper subject of relief, he ought to be afforded an opportunity
to test his claims on the merits.’” Lorenz v. CSX Corp., 1 F.3d 1406, 1413 (3d Cir.
1993) (quoting Foman v. Davis, 371 U.S. 178, 182 (1962)). “‘[T]he grant or denial
of an opportunity to amend is within the discretion of the District Court, but
outright refusal to grant the leave without any justifying reason appearing for the
denial is not an exercise of discretion; it is merely an abuse of that discretion and
inconsistent with the spirit of the Federal Rules.’” Id. (quoting Foman).
“‘[P]rejudice to the non-moving party is the touchstone for the denial of an
amendment.’” Id. at 1414 (quoting Cornell & Co. v. Occupational Safety & Health
Review Comm’n, 573 F.2d 820, 823 (3d Cir. 1978)). “In the absence of substantial
or undue prejudice, denial instead must be based on bad faith or dilatory motives,
truly undue or unexplained delay, repeated failures to cure the deficiency by
amendments previously allowed, or futility of amendment.” Id. (citing Heyl &
Patterson Int’l, Inc. v. F.D. Rich Housing of the Virgin Islands, Inc., 663 F.2d 419,
425 (3d Cir. 1981), cert. denied, 455 U.S. 1018 (1982)).
B.

Discussion

ATT requests leave to amend its first amended answer and counterclaims
with information gained after its filing. ATT argues that Kentex was improperly
selling “knock off” products using ATT’s proprietary molds. Based on this belief,
10

ATT has proposed amending its answer to include new factual allegations and two
additional claims: reverse passing off under the Lanham Act, 15 U.S.C. §1125(a),
and common law unfair competition. Kentex argues that leave to amend should be
denied on grounds of futility.
“‘Futility means that the complaint, as amended, would fail to state a claim
upon which relief could be granted. In assessing “futility,” the District Court
applies the same standard of legal sufficiency as applies under Rule 12(b)(6).’”
Holst v. Oxman, 290 Fed. Appx. 508, 510 (3d Cir. 2008) (quoting Shane v. Fauver,
213 F.3d 113, 115 (3d Cir. 2000)). Thus, we must apply the standard of review
appropriate for a Rule 12(b)(6) motion, as detailed above. For purposes of this
motion, we look only to the possible futility of the two new counterclaims
proposed by ATT. We begin with the claim of reverse passing off under the
Lanham Act.
i.

Reverse Passing Off under the Lanham Act

Section 1125(a) of the Lanham Act provides for civil liability when
[a]ny person … on or in connection with any goods or
services … uses in commerce any word, term, name,
symbol, or device, or any combination thereof, or any
false designation of origin, false or misleading
description of fact, or false or misleading representation
of fact, which
(A) is likely to cause confusion, or to cause
mistake, or to deceive as to the affiliation, connection, or
association of such person with another person, or as to
11

the origin, sponsorship, or approval of his or her goods,
services, or commercial activities by another person, or
(B) in commercial advertising or promotion,
misrepresents the nature, characteristics, qualities, or
geographic origin of his or her or another person’s goods,
services, or commercial activities.
15 U.S.C. §1125(a). To establish a claim under the Lanham Act, a plaintiff must
show “‘1) the involvement of goods or services; 2) an effect on interstate
commerce; 3) a false description or designation of origin with respect to the goods
or service involved; and 4) a reasonable basis for the belief that one has been
injured.’” Allen-Myland, Inc. v. International Business Machines Corp., 746
F.Supp. 520, 553 (E.D. Pa. 1990) (quoting Manufacturers Technologies, Inc. v.
Cams, Inc., 706 F.Supp. 984, 1003 (D. Conn. 1989)).
ATT’s proposed counterclaims clearly satisfy the first two elements, as the
claims pertain to the interstate sale of planters in Georgia. With regard to the third
element, ATT alleges that Kentex engaged in “reverse passing off.” A defendant
engages in reverse passing off “by selling or offering for sale another’s product
that has been modified slightly and then labeled with a different name.” Roho, Inc.
v. Marquis, 902 F.2d 356, 359 (5th Cir. 1990). Reverse passing off may also be
accomplished “by ‘remov[ing] or obliterate[ing] the original trademark, without
authorization, before reselling the goods produced by someone else.’” Id. (quoting
Smith v. Montoro, 648 F.2d 602, 605 (9th Cir. 1981)). “[E]very Circuit to consider

12

the issue found [15 U.S.C. §1125(a)] broad enough to encompass reverse passing
off.” Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23, 30 (2003).
ATT alleges that it provided or paid for proprietary molds to be used in
manufacturing their custom-designed planters. (Doc. 29, Second Amended
Counterclaims, ¶ 31). ATT further alleges that Kentex was not authorized to use
the molds without ATT’s consent. (Id. at ¶ 33). During a routine inspection, ATT
employees identified planters for sale at an Old Time Pottery retail store in Georgia
that were manufactured using ATT’s molds. (Id. at ¶ 65). The underside of the
planters had been modified to grind down marks that would identify the product as
ATT’s. (Id. at ¶ 70). On some of the planters sold at Old Time Pottery, the
identifying marks were not completely ground down, revealing some remnants of
ATT trademarks “Southern Patio” and “HDR.” (Id. at ¶ 74). Assuming these
factual allegations to be true, as we must, we find it plausible that Kentex engaged
in reverse passing off by producing planters using ATT proprietary molds,
attempting to obliterate their identifying marks, and then selling the planters to at
least the Old Time Pottery store in Georgia.
Finally, we find it plausible that ATT has suffered injury if Kentex is selling
“knock off” ATT planters. At this early stage, ATT has alleged sufficient facts to
plausibly support a claim of reverse passing off under the Lanham Act and an
amendment adding such a counterclaim would not be futile.
13

ii.

Common Law Unfair Competition

We turn now to ATT’s proposed counterclaim for common law unfair
competition. “The elements of an unfair competition claim under Pennsylvania
common law are identical to those required under the Lanham Act, except that no
showing regarding interstate commerce is necessary under Pennsylvania law.”
Allen-Myland, 746 F.Supp. at 553 (citing Moore Push-Pin Co. v. Moore Business
Forms, Inc., 678 F.Supp. 113, 116 (E.D. Pa. 1987)). For the same reasons stated
above, we find that ATT has alleged sufficient facts to plausibly state a claim for
common law unfair competition.
IV.

CONCLUSION
For the foregoing reasons, we find that ATT pled sufficient facts to plausibly

support its amended counterclaims. In addition, we find that ATT’s proposed
amendments are not futile. Accordingly, we shall deny Kentex’s Motion to
Dismiss and grant ATT’s Motion for Leave to Amend.
NOW, THEREFORE, IT IS HEREBY ORDERED THAT:
1.

Plaintiff’s Motion to Dismiss, (Doc. 21), is DENIED.

2.

Defendant’s Motion for Leave to Amend, (Doc. 27), is GRANTED.

3.

Defendant shall refile its proposed Second Amended Answer,
Affirmative Defenses, and Counterclaims, (Doc. 28), within FIVE (5)
BUSINESS DAYS of this Order.
14

s/ John E. Jones III
John E. Jones III
United States District Judge

15