Sterling Computers Corporation v. International Business Machines Corporation
Filing
71
ORDER denying 29 Motion to Dismiss. Signed by U.S. District Judge Camela C. Theeler on 11/5/2024. (CR)
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
STERLING COMPUTERS
CORPORATION,
4:23-CV-04150-CCT
Plaintiff,
ORDER DENYING PLAINTIFF’S
MOTION TO DISMISS
vs.
INTERNATIONAL BUSINESS
MACHINES CORPORATION,
Defendant.
Sterling Computers Corporation moves pursuant to Federal Rules of Civil
Procedure 12(b)(6) and 12(f) to dismiss all counterclaims brought by
International Business Machines Corporation (IBM). Docket 29. IBM opposes
the motion. Docket 32.
BACKGROUND
On September 28, 2023, Sterling Computers brought an action against
IBM alleging trademark infringement and unfair competition under the
Lanham Act and common law and trademark infringement and deceptive trade
practices under South Dakota law. Docket 1 at 11–14. 1 Sterling Computers
also sought a declaratory judgment. Id. at 14–15.
In its complaint, Sterling Computers related that it “was founded in 1996
and is an award-winning leader in the provision of information technology and
1 Page numbers, rather than paragraph numbers, are used throughout.
1
computer services, including the resale of both software and hardware, to both
public sector and private companies.” Id. at 2. Sterling Computers also
described itself as “a value-added technology reseller, solution and service
provider, and trusted advisor for government, commercial, and educational
sectors.” Id.
According to Sterling Computers, it uses certain marks in its service
offerings and in advertising, promoting, and marketing its services. Id. Relevant
to this lawsuit, Sterling Computers asserted it “has continuously used the term
STERLING [ ] in commerce at common law as a service mark in connection
with information technology services since at least as early as April 30, 2011.”
Id. Sterling Computers further asserted that it has continuously used a specific
design mark it labeled as “the STERLING & Design mark” as a service mark in
commerce at common law “in connection with the Sterling Services since at
least as early as April 30, 2011.” Id. at 4. Finally, Sterling Computers claimed
that it “has continuously used the name STERLING COMPUTERS [ ] in
commerce at common law as a service mark in connection with information
technology and computer products and services since at least as early as
1996.” Id. at 5. The above marks will be collectively referred to as the “Sterling
Marks.”
Sterling Computers argued that it has spent considerable time, effort,
and money in advertising, promoting, and marketing its services under the
Sterling Marks over many years and that these marks have “come to be
recognized by consumers as an indication of the source and quality of
2
Sterling’s information technology services.” Id. at 3, 4, 6. It also claimed that its
“advertising and substantial sales of the Sterling Services under” the Sterling
Marks has “resulted in extensive valuable goodwill and widespread recognition
of” these marks and of Sterling Computers’ “services throughout this District
and the United States.” Id. at 4, 6. Sterling Computers noted that it “has
applied for registration of the standard character mark STERLING,” id. at 4,
and “is the owner of an application for registration for the STERLING & Design
mark [ ] with the United States Patent and Trademark Office,” id. at 5 (bold
omitted).
IBM has also been using marks that incorporate the name “Sterling.” Id.
at 6–7. According to Sterling Computers, those marks include: STERLING; IBM
STERLING; STERLING COMMERCE; STERLING COMMERCE & Design;
STERLING INTEGRATOR; and STERLING INFORMATION BROKER. Id. at 7–11.
However, Sterling Computers clarified in its complaint that it challenges only
IBM’s use of the IBM STERLING and STERLING marks because it believes
IBM’s other Sterling marks are “recognizably distinct” from Sterling Computers’
Sterling Marks and further that IBM’s other Sterling marks are used in
connection with services different from Sterling Computers’ services and
different from IBM’s services using the IBM STERLING and STERLING marks.
Id. Sterling Computers labeled IBM’s other, nonchallenged Sterling Marks as
“Unaccused IBM Marks.” Docket 30 at 4.
For the challenged IBM STERLING and STERLING marks, Sterling
Computers claimed that IBM did not begin to use these marks “in connection
3
with services and products that compete with, or are related to, Sterling’s
services and products until at least 2020” and that it did so without Sterling
Computers’ consent. Docket 1 at 6, 7. According to Sterling Computers, “[t]he
names IBM STERLING and STERLING, as used by IBM in connection with its
information and technology and computer products and services, are
confusingly similar to” Sterling Computers’ use of its Sterling Marks. Id. at 7.
And it claimed that IBM’s use of these marks “in connection with its products
and services is likely to cause confusion, mistake, or deception.” Id.
Sterling Computers argued that “IBM’s use of the IBM STERLING and
STERLING marks is causing irreparable harm to Sterling’s business and
goodwill and will continue to cause such irreparable harm if not enjoined.” Id.
at 12. Sterling Computers also alleged that IBM’s conduct has caused it
damages and that IBM has been unjustly enriched “by virtue of its deception of
consumers and misappropriation of Sterling’s goodwill.” Id. at 13–14. Sterling
Computers requested, among other things, damages for IBM’s conduct, an
injunction enjoining IBM from using the IBM STERLING and STERLING marks,
and a declaratory judgment related to the disputed trademark rights. 2 Id. at
14–16.
2 Sterling Computers noted that IBM “sought to register marks,” namely the IBM
STERLING and STERLING marks, “for use in connection with information technology
and computer products and services” and identified an October 1, 2019 priority date
on its applications. Docket 1 at 7. As part of its request for relief, Sterling Computers
sought a declaratory judgment canceling IBM’s applications for registration of the IBM
STERLING and STERLING marks and a declaratory judgment holding that the
registration obtained by IBM for the IBM STERLING mark is invalid and
unenforceable. Id. at 15.
4
IBM filed an answer on November 30, 2023, and asserted multiple
affirmative defenses. Docket 18. Relevant to Sterling Computers’ motion to
dismiss, IBM alleged in its second affirmative defense that Sterling Computers’
“claims fail, in whole or in part, because there is no likelihood of confusion,
mistake, or deception between IBM’s use of its STERLING and IBM STERLING
marks, on the one hand, and [Sterling Computers’] alleged STERLING,
STERLING & Design, and STERLING COMPUTERS marks, on the other hand.”
Id. at 13. Also relevant to Sterling Computers’ motion to dismiss, IBM alleged in
its third affirmative defense that Sterling Computers’ “claims are barred, in
whole or in part, by IBM’s priority of rights.” Id.
IBM also brought seven counterclaims against Sterling Computers
premised on the view that IBM’s use of what it regards as the “STERLINGformative marks” predates Sterling Computers’ use of its Sterling Marks by 20
years. Id. at 15. In support of its counterclaims, IBM related the history leading
up to its use of the STERLING-formative marks, noting that the name
“STERLING” as a mark was first used by Sterling Software, Inc.—a company
that “was founded in 1981 in Dallas, Texas by Sam Wyly; Charles Wyly, Jr.;
Sterling Williams; and Philip Moore as an information technology and computer
software company.” Id. at 16. IBM also related that this company, Sterling
Software, registered its Sterling Software mark in 1987 “in connection with
‘consulting and engineering design services for computer systems and
software’” and, in 1989, registered the domain name . Id. at 16–
17. According to IBM, Sterling Software continued to grow into the 1990s and,
5
by 1993, “was among the top three largest mainframe systems software
providers in the country.” Id. at 17. IBM alleged that “[i]n the fall of 1994,
Sterling Software re-organized its business into multiple business groups[,]”
including the Electronic Commerce Group that provided “software and services
to facilitate electronic commerce, defined by Sterling as the worldwide
electronic interchange of business information.” Id. In 1995, Sterling Software
incorporated this business group as Sterling Commerce, Inc., and according to
IBM, “all goods and services offered as part of this [group’s] business were
marketed under at least one STERLING-formative mark.” Id. at 18.
IBM further alleged that “[i]n 1995 and 1996, Sterling Commerce’s
worldwide market presence in the information technology and computer goods
and services industry was supreme.” Id. According to IBM, in 1996, “Sterling
Software completed an initial public offering of Sterling Commerce and
completed a spin-off of the entity in September of that year.” Id. Then, “[i]n
2000, Sterling Commerce was acquired by SBC Communications, Inc., which
later merged with AT&T Inc in 2005.” Id. at 19. IBM claimed that “[t]hroughout
this time, Sterling Commerce continued to grow and expand its products and
services, remaining a headliner in the software industry” and that it used the
STERLING mark in connection with many of its new offerings. Id. IBM
particularly noted Sterling Commerce’s launch of STERLING INFORMATION
BROKER in July 2001 and STERLING INTEGRATOR in October 2001. Id.
IBM related that it acquired Sterling Commerce in August 2010, when
“Sterling Commerce was worth more than $1.4 billion[,]” and that its
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acquisition included “the rights in the IBM STERLING Marks associated
therewith.” Id. at 20. IBM claimed that after it acquired Sterling Commerce, it
“continued to market information technology and computer products and
services under the STERLING mark, including the STERLING COMMERCE
mark.” Id. IBM further asserted that it offered a suite of business integration
products and solutions and a suite of sales and fulfillment products and
solutions using the STERLING mark. Id. at 20–21. It noted that its use of the
STERLING-formative marks, as well as its predecessors’ use, resulted in
various trademark registrations. Id. at 25–32. And it claimed that “the IBM
STERLING Marks are extremely valuable to IBM and its business.” Id. at 32.
In addition to relating the above history, IBM described the “longstanding business partnership” between IBM and the plaintiff, Sterling
Computers. Id. at 32 (bold omitted). IBM claimed that Sterling Computers has
since 2001 been a reseller of IBM products, id. at 33, and has “promoted IBM
as a brand partner on its homepage as early as 2001[,]” id. 32. IBM also
claimed that in April 2009, Sterling Computers “executed IBM’s PartnerWorld
Agreement, which memorialized the parties’ business partnership.” Id. at 33.
This partnership, IBM alleged, made Sterling Computers eligible to resell IBM
products, including “products marketed under the IBM STERLING Marks.” Id.
IBM further asserted that Sterling Computers was notified in 2010 of IBM’s
acquisition of Sterling Commerce and that Sterling Computers knew since at
least 2010 of IBM’s use of the IBM STERLING and STERLING marks. Id. at 34.
7
Relying on these allegations and others, IBM requested, in its first
counterclaim, a declaratory judgment “that IBM has prior rights to use
STERLING-formative marks in connection with information technology and
computer products and services as compared to [Sterling Computers].” Id. at
43. IBM’s remaining counterclaims, which it brought in the alternative to its
second affirmative defense, alleged that “[i]f a likelihood of confusion is found,”
Sterling Computers is liable for trademark infringement under the Lanham Act
and common law, for false designation of origin under the Lanham Act, for
trademark infringement and deceptive trade practices under South Dakota law,
and for unfair competition under common law. Id. at 43–47.
On January 22, 2024, Sterling Computers filed this motion to dismiss
and motion to strike IBM’s counterclaims. Docket 29. It seeks to strike IBM’s
first counterclaim pursuant to Federal Rule of Civil Procedure 12(f) as
redundant, contending that IBM’s request for a declaratory judgment “merely
restates, and is wholly duplicative of, IBM’s Third Defense (Priority), which
asserts that Sterling’s claims regarding IBM’s use of IBM STERLING and
STERLING in connection with information technology and computer products
and services ‘are barred, in whole or in part, by IBM’s priority of rights.’”
Docket 30 at 19 (quoting Docket 18 at 13). In Sterling Computers’ view, IBM’s
first counterclaim “will necessarily be addressed in the adjudication of
Sterling’s affirmative claims[,]” and litigating IBM’s counterclaim seeking “a
declaratory judgment would serve no useful purpose.” Id. at 20.
8
As it pertains to IBM’s remaining counterclaims, Sterling Computers
argues that dismissal under Federal Rule of Civil Procedure 12(b)(6) is
warranted because IBM, by not making an affirmative allegation of a likelihood
of confusion—a necessary element of counterclaims two through seven—has
failed to state a claim upon which relief may be granted. Docket 30. Sterling
Computers directs this Court to IBM’s conditional language in counterclaims
two through seven, namely:
Counterclaim II
Trademark Infringement under the Lanham Act
•
To the extent that a likelihood of confusion, deception, or mistake is
found between IBM’s use of the Registered Sterling Marks, on the
one hand, and SCC’s use of the SCC Marks, on the other hand, it
would be because consumers who encounter SCC’s goods and
services are likely to think that they are provided by, sponsored by,
associated with, or otherwise affiliated with IBM.
•
SCC knows that, if a likelihood of confusion is found, it is SCC’s use
of the SCC Marks that would be infringing, giving it a reason to
know the use is infringing, and/or has been recklessly indifferent
to the fact that the use is infringing.
•
If a likelihood of confusion is found, it is SCC’s acts that would have
caused or are likely to cause IBM and the public to suffer
irreparable damage and injury. IBM has no adequate remedy at
law.
Counterclaim III
False Designation of Origin under the Lanham Act
•
To the extent that IBM’s use of the IBM STERLING Marks, which
have been promoted, distributed, and used in commerce, are [sic]
found to be confusingly similar to the SCC Marks, then SCC’s use of
the SCC Marks implies to consumers that its services come from
the same source as IBM’s goods and services. Such implications
are false, confusing to consumers, and material to consumers’
purchasing decisions.
9
•
If IBM’s use of the IBM STERLING Marks are [sic] found to be
confusingly similar to the SCC Marks, then SCC’s unauthorized use
of the SCC Marks in connection with the promotion or sale of its
services falsely suggests that these services are connected with,
sponsored by, affiliated with, or related to, IBM.
•
If IBM’s use of the IBM STERLING Marks are [sic] found to be
confusingly similar to the SCC Marks, then SCC’s unauthorized use
of the SCC Marks constitutes a false designation of origin in
violation of 15 U.S.C. § 1125(a).
•
If IBM’s use of the IBM STERLING Marks are [sic] found to be
confusingly similar to the SCC Marks, then SCC’s conduct has
damaged IBM and, unless enjoined by the Court, will further
impair the value of the IBM STERLING Marks’ name, reputation,
and goodwill. This harm constitutes an injury for which IBM has
no adequate remedy at law.
Counterclaim IV
Trademark Infringement under SDCL chapter 37-6
•
If a likelihood of confusion is found, SCC’s conduct, as set forth
above, constitutes trademark infringement under SDCL Chapter
37-6 et seq.
•
SCC knows that, if a likelihood of confusion is found, it is SCC’s use
of the SCC Marks that would be infringing, giving it a reason to
know that its use of the SCC Marks is intended to be used to cause
confusion or mistake or to deceive.
•
If a likelihood of confusion is found, it is SCC’s acts that would have
caused or are likely to cause IBM and the public to suffer
irreparable damage and injury. IBM has no adequate remedy at
law.
Counterclaim V
Deceptive Trade Practices under SDCL chapter 37-24
•
If a likelihood of confusion is found, SCC’s conduct, as set forth
above, constitutes deceptive trade practices under SDCL Chapter
37-24 et seq., including 37-24-6.
•
SCC knows that, if a likelihood of confusion is found, SCC’s
conduct was knowing and intentional.
10
•
If a likelihood of confusion is found, IBM has suffered, and will
continue to suffer, actual damages, including in the form of a lost
profits.
•
If a likelihood of confusion is found, SCC’s acts have also caused
IBM to suffer irreparable damage and injury by causing a loss of
IBM’s valuable goodwill and business reputation in the IBM
STERLING Marks, for which IBM has no adequate remedy at law.
Counterclaim VI
Common Law Trademark Infringement
•
If a likelihood of confusion is found, SCC’s conduct, as set forth
above, constitutes trademark infringement under South Dakota
common law.
•
If a likelihood of confusion is found, it is SCC’s acts that would have
caused or are likely to cause IBM and the public to suffer
irreparable damage and injury. IBM has no adequate remedy at
law.
Counterclaim VII
Common Law Unfair Competition
•
If a likelihood of confusion is found, SCC’s conduct, as set forth
above, constitutes unfair competition under South Dakota
common law.
•
If a likelihood of confusion is found, SCC’s conduct has damaged
IBM and, unless enjoined by the Court, will further impair the
value of IBM’s IBM STERLING Marks, reputation, and goodwill.
This harm constitutes an injury for which IBM has no adequate
remedy at law.
Docket 30; see also Docket 18 at 42–47 (emphasis added).
Sterling Computers acknowledges that pleading in the alternative is
permitted under Federal Rule of Civil Procedure 8(d)(2). Id. at 15. However, it
argues that to survive a motion to dismiss pursuant to Rule 12(b)(6), IBM was
required to plead sufficient facts to support a reasonable inference that
11
consumers are likely to be confused by Sterling Computers’ use of its Sterling
Marks. Docket 30 at 15–16; Docket 33 at 2–6.
IBM disagrees that dismissal of its counterclaims is warranted in any
respect. 3 Docket 32. In this regard, IBM does not view its first counterclaim as
duplicative of its third affirmative defense. Id. at 7. Rather, IBM contends that
because Sterling Computers’ affirmative claims relate to a narrow set of marks,
and IBM’s request for a declaratory judgment concerns all of its STERLINGformative marks, “resolution of [its] counterclaim will serve the useful purpose
of clarifying for the parties that IBM is the senior user of STERLING-formative
marks.” Id. at 2; see also id. at 10–12. IBM further argues that the motion to
strike should be denied because “if, for example, this Court finds that [Sterling
Computers] is unable to establish the likelihood-of-confusion element of its
claims[,]” IBM’s priority to use to the STERLING marks challenged by Sterling
Computers might not be reached. Id. at 2.
On its remaining counterclaims, which are brought in the alternative to
its second affirmative defense, IBM contends that Sterling Computers’
argument “is inconsistent with the Federal Rules, which expressly allow for
alternative pleadings.” Id. at 3. In its view, it properly pled these counterclaims
contingent on the outcome of Sterling Computers’ infringement claims. Id. at 2,
13. It also argues that despite not affirmatively alleging that a likelihood of
confusion exists, its counterclaims “contain allegations concerning
3 IBM alternatively requests that if dismissal is granted against any of IBM’s
counterclaims, the Court order it to be without prejudice to allow IBM to amend its
counterclaims to address any deficiencies found therein. Docket 32 at 3 n.1, 16–17.
12
confusion[,]” id. at 14, and further that it pled sufficient facts on the
“likelihood-of-confusion factors” to survive a motion to dismiss, id. at 15.
DISCUSSION
Motion to Strike under Rule 12(f)
“The court may strike from a pleading an insufficient defense or any
redundant, immaterial, impertinent, or scandalous matter.” Fed. R. Civ. P.
12(f). The court’s authority to strike “enjoys ‘liberal discretion’”; however,
“striking a party’s pleading is an extreme measure, and, as a result, [the Eighth
Circuit has] previously held that ‘[m]otions to strike under Fed. R. Civ. P. 12(f)
are viewed with disfavor and are infrequently granted.’” Stanbury Law Firm v.
Internal Revenue Servs., 221 F.3d 1059, 1063 (8th Cir. 2000) (citations
omitted). “Thus, motions to strike ‘should be denied unless the challenged
allegations have no possible relation or logical connection to the subject matter
of the controversy and may cause some form of significant prejudice to one or
more of the parties to the action.’” Walsh v. Dept. of Navy, 4:23-CV-04164-ECS,
2024 WL 4043657, at *2 (D.S.D. Sept. 4, 2024) (quoting Poulos v. Summit Hotel
Props., LLC, No. CIV 09-4062-RAL, 2010 WL 2034634, at *3 (D.S.D. May 21,
2010)); see also Hobbs v. Emps. Mut. Cas. Co., 5:17-CV-05040-JLV, 2018 WL
1221166, at *2 (D.S.D. March 8, 2018).
Sterling Computers relies on the redundancy ground in Rule 12(f) as a
basis to strike IBM’s counterclaim seeking a declaratory judgment. Sterling
Computers focuses particularly on its view that because this counterclaim is
redundant, resolution of it would serve no useful purpose. But Sterling
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Computers does not identify how allowing IBM’s first counterclaim to remain
will cause it “some form of significant prejudice[.]” See Walsh, 2024 WL
4043657, at * 2; see also Bjornson v. Soo Line R.R. Co., Civil No. 14-4596
(JRT/SER), 2015 WL 5009349, at *9 (D. Minn. Aug. 24, 2015) (“Where material
in the pleadings is objected to as redundant, courts often decline to strike the
redundancy in the absence of prejudice to the moving party.” (citations
omitted)); Stark v. City of Omaha, 4:23-CV-3242, 2024 WL 3398926, at *7 (D.
Neb. July 11, 2024) (“A motion to strike will usually be denied unless the
allegations have no possible relation to the controversy and may prejudice one
of the parties.” (citation omitted)); Sierra Club v. Tri-State Generation and
Transmission Ass’n, Inc., 173 F.R.D. 275, 285 (D. Col. 1997) (“Even where the
challenged allegations fall within the categories set forth in the rule, a party
must usually make a showing of prejudice before the court will grant a motion
to strike.” (citation omitted)).
Setting aside Sterling Computers’ failure to allege some form of
significant prejudice, Sterling Computers has not shown that IBM’s first
counterclaim is redundant to or duplicative of IBM’s third affirmative defense.
IBM’s third affirmative defense alleges that Sterling Computers’ claims—which
challenge IBM’s right to use the IBM STERLING and STERLING marks—are
barred, in whole or in part, by IBM’s priority rights to those same marks.
Docket 18 at 13. In contrast, IBM’s first counterclaim seeks a declaratory
judgment on IBM’s priority to use a broader number of marks labeled by IBM
as “STERLING-formative” marks. Id. at 42–43. Thus, resolution of Sterling
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Computers’ claims or IBM’s third affirmative defense does not perforce resolve
all questions raised by IBM’s first counterclaim. 4 See, e.g., Gratke v. Andersen
Windows, Inc., Civil No. 10-CV-963 (PJS/LIB), 2010 WL 5439763, at *3 (D.
Minn. December 8, 2010) (When considering whether to strike a declaratory
judgment counterclaim as redundant, a court may consider “whether
resolution of the plaintiff’s claim, along with the affirmative defenses asserted
by the defendants, would resolve all questions raised by the counterclaim.”).
The Court denies Sterling Computers’ motion to strike IBM’s first counterclaim
seeking a declaratory judgment.
Motion to Dismiss under Rule 12(b)(6)
A motion to dismiss a counterclaim under Rule 12(b)(6) implicates the
same standards applied to a motion to dismiss a complaint under Rule 12(b)(6).
4 In its reply brief, Sterling Computers argues for the first time that “to the extent
IBM’s declaratory judgment counterclaim relates to IBM’s prior rights to use other
IBM STERLING marks, Counterclaim I seeks an advisory opinion and should be
dismissed for lack of subject matter jurisdiction.” Docket 33 at 11–12. Sterling
Computers notes that the Article III case and controversy requirement applies with
equal force to a request for a declaratory judgment. Id. at 12. It then argues that no
actual case or controversy exists regarding infringement of IBM’s other IBM STERLING
marks because Sterling Computers “has given no indication that it intends to accuse
any other IBM marks of trademark infringement.” Id. at 14. “This court and the Eighth
Circuit typically decline to address arguments raised for the first time in a reply brief.”
Auto Owners Ins. v. Jones Manf. Co., 4:19-CV-04134-KES, 2022 WL 5247147, at *5
n.2 (D.S.D. July 26, 2022) (citing Lauing v. Rapid City, Pierre & E. R.R., Inc., 3:19-CV03006-RAL, 2022 WL 2542063, at *4 (D.S.D. July 8, 2022); Liscomb v. Boyce, 954
F.3d 1151, 1154 (8th Cir. 2020)). This general ruling is particularly sound when the
opposing party did not have an opportunity to respond. See Bird v. Mertens-Jones,
4:21-CV-04917-KES, 2023 WL 1785572, at *6 (D.S.D. February 6, 2023); Aga v.
Meade Cnty., CIV. 21-5059-JLV, 2022 WL 3716000, at *8 (D.S.D. August 29, 2022).
Because Sterling Computers raised this argument for the first time in its reply brief
and IBM has not had an opportunity to respond, the Court does not consider it. See
Auto Owners, 2022 WL 524717, at *5 n.2 (declining to consider an argument on the
basis that it was raised for the first time in a reply brief).
15
Am. Dist. & Manf. Co. LLC v. NP Acquisition, LLC, No. 23-cv-3250 (SRN/DTS),
2024 WL 2748350, at *1 (D. Minn. May 29, 2024) (citing Reis v. Walker, 491
F.3d 868, 870 (8th Cir. 2007)). Therefore, to survive a motion to dismiss, IBM
was required to plead “sufficient factual matter, accepted as true, to ‘state a
claim to relief that is plausible on its face.’” See Ashcroft v. Iqbal, 556 U.S. 662,
678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)).
“Stating an adequate claim for relief requires more than ‘a formulaic recitation
of the elements of a cause of action.’” Delker v. MasterCard Int’l, Inc., 21 F.4th
1019, 1024 (8th Cir. 2022) (quoting Twombly, 550 U.S. at 555). The
counterclaim “‘must contain either direct or inferential allegations respecting
all the material elements necessary to sustain recovery under some viable legal
theory.’” Id. (quoting Twombly, 550 U.S. at 562).
As Sterling Computers notes, a likelihood of confusion is a required
element for each of IBM’s counterclaims two through seven. See Flamagas, S.A.
v. Shenzhen Yocan Tech. Ltd., 4:22-CV-4035-LLP, 2023 WL 246878, at *1
(D.S.D. January 18, 2023) (quoting Two Pesos, Inc. v. Taco Cabana, Inc., 505
U.S. 763, 781 (1992) (Stevens, J., concurring) (“Whether we call the violation
infringement, unfair competition, or false designation of origin, the test is
identical—is there a likelihood of confusion?”)). Because this is a required
element, Sterling Computers argues that IBM’s use of conditional language
related to this element necessarily means IBM has failed to adequately plead all
elements attendant to these counterclaims. Docket 30 at 15–16; Docket 33 at
5. Sterling Computers then likens IBM’s contingent allegations in
16
counterclaims two through seven to that deemed insufficient and dismissed in
Conopco Inc. v. Wells Enterps., Inc., No. 14 Civ. 2223 (NRB), 2015 WL 2330115
(S.D.N.Y. May 14, 2015). Docket 30 at 16; Docket 33 at 4–5.
In Conopco, the plaintiff, Unilever, brought suit against the defendant,
Wells, asserting trademark infringement and other state and federal claims
based on its view that Wells’ packaging of its “Bomb Pop” is confusingly similar
to the Unilever’s “trade dress for [its] ‘Firecracker’ products.” 2015 WL
2330115, at *1. Wells counterclaimed for false advertising, trademark
infringement, and related state law claims. Id. The district court described
Wells’ contingent assertion in its trademark infringement counterclaim as: “if a
likelihood of confusion does exist between the products, it does so as a ‘result of
Unilever’s infringement of Wells’ trademarked Bomb Pop design”; and “[i]n
other words, if consumers are likely to believe that Wells’ Bomb Pop product
comes from the same source as Unilever’s Firecracker—which they are not—
this belief would be caused by Unilever’s adoption of a product configuration
for its Firecracker product that is nearly identical to Wells’ trademarked Bomb
Pop design.’” Id. (emphasis added).
Like Sterling Computers here, Unilever moved to dismiss the
counterclaim under Rule 12(b)(6), arguing that Wells failed to adequately plead
a likelihood of confusion by pleading only a conditional claim and “deliberately
refrain[ing] from affirmatively alleging any likelihood of confusion.” Id. at *7.
The district court recognized that Wells was free to bring its counterclaim using
conditional or contingent language. Id. However, in the district court’s view, to
17
satisfy the requirements of Rule 8, Wells was required to make “an affirmative
allegation of consumer confusion[.]” Id. at *8. The lack of such allegation
rendered the counterclaim defective, the court held, and required “dismissal of
the counterclaim as pled.” Id. However, the court explained that “this defect
can be easily cured” because “Wells can allege consumer confusion while
retaining the contingent posture of the counterclaim by simply denoting that
any allegations of consumer confusion are limited solely to this particular
counterclaim.” Id. Ultimately, the court dismissed Wells’ counterclaim without
prejudice and granted Wells leave to amend its counterclaim. Id.
While IBM’s counterclaims two through seven are pled contingently like
the trademark infringement counterclaim in Conopco, the Conopco decision is
not controlling in this district. See Jumping Eagle v. Warren, CIV 18-4131,
2021 WL 462644, at *9 (D.S.D. Feb. 9, 2021) (“This Court is not bound to apply
the law of another circuit.”). More importantly, however, the district court’s
reasoning for dismissing Wells’ contingent counterclaim is not compelling.
First, the district court did not cite authority for the proposition that
Wells’ contingent counterclaim was defective under Rule 8 when hypothetical
pleading is expressly permitted under Rule 8(d)(2). In fact, the court cited two
cases supporting that Wells was free to assert its counterclaim contingent on
the outcome of Unilever’s claim. See 2015 WL 2330115, at *7 (citing Macia v.
Microsoft Corp., 335 F.Supp.2d 507 (D. Vt. 2004); Barr v. Dramatists Guilt, Inc.,
573 F. Supp. 555 (S.D.N.Y. 1983)). In Macia, the district court dismissed a
contingent counterclaim as moot after a finding of no likelihood of confusion to
18
support the plaintiff’s claim, not before like Sterling Computers is seeking here.
See 335 F. Supp.2d at 522. And in Barr, the district court held, after noting
that “the defendants have denied that they engaged in any illegal conduct
under the antitrust laws, but have alleged hypothetically that if they engaged in
any illegal conduct then similar conduct of the counterclaim defendants is
unlawful as well,” that “[t]he counterclaim is properly framed as a hypothetical
pleading.” 573 F. Supp. at 560.
Second, the district court’s view in Conopco that the alleged defect could
be cured by pleading an affirmative allegation of a likelihood of consumer
confusion expressly limited to the particular counterclaim misses the forest
through the trees. “The essential function of a complaint under the Federal
Rules of Civil Procedure is to give the opposing party ‘fair notice of the nature
and basis or grounds for a claim, and a general indication of the type of
litigation involved.’” Topchain v. JPMorgan Chase Bank, N.A., 760 F.3d 843, 848
(8th Cir. 2014) (quoting Hopkins v. Saunders, 199 F.3d 968, 973 (8th Cir.
1999)). Combine that function with the ability to plead hypothetically, the
amended counterclaim, as suggested by the district court, would not provide
Unilever with different or better notice of the nature and basis or grounds for
Wells’ counterclaim than Unilever already had via Wells’ if-then counterclaim.
In fact, Wells’ counterclaim, as originally pled, put Unilever on notice that Wells
does not intend to assert that a likelihood of confusion exists unless it is
necessary to prosecute the counterclaim and, further, that if such likelihood of
19
confusion is found to exist on Unilever’s claims, then Wells intends to prove
that it was from Unilever’s use of the disputed marks, not Wells’ use.
Sterling Computers directs this Court to cases other than Conopco
purporting to support dismissal here. But those case are neither on point nor
from this district. Rather, a review of the cases relied on by IBM, along with
this Court’s independent research, reveals that district courts, including those
in this circuit, have declined to dismiss contingent counterclaims structured,
as IBM’s are here, to reflect a defendant’s decision not to admit to a fact (e.g.,
that a likelihood of confusion exists) that might lead to liability the defendant
does not believe it has. 5 See, e.g., Charles Rubenstein, Inc. v. Columbia Pictures
Corp., 14 F.R.D. 401, 403 (D. Minn. 1953) (allowing a pleading that denies the
existence of a conspiracy as a defense while also asserting an if-then allegation
related to the existence of a conspiracy in a counterclaim); Barr, 573 F. Supp.
at 560 (upholding pleading wherein defendant denied engaging in illegal
conduct under the antitrust laws, while alleging hypothetically in a
counterclaim that if they so engaged, then similar conduct of the other party is
likewise unlawful). See also In re Sunrise Securities Litigation, 793 F. Supp.
1306, 1312 (E.D. Pa. 1992) (upholding pleading alleging fraud as a
hypothetical if-then allegation).
5 In Noasha LLC v. Nordic Group of Co., Ltd., the defendants alleged a likelihood of
confusion in their counterclaims, and the plaintiff asserted that such allegation
constituted an admission to the existence of a likelihood of confusion. 630 F.Supp.2d
544, 550 (E.D. Pa. 2009). The district court “reasonably inferred” the allegation of a
likelihood of confusion in the counterclaims “to be alternative pleadings[,]” not binding
judicial admissions. Id. at 551.
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Here, IBM’s contingent counterclaims two through seven are clearly
stated, and the allegations contained therein sufficiently place Sterling
Computers on notice of the nature of IBM’s counterclaims. Further, although
IBM did not make an affirmative allegation of consumer confusion, IBM’s
counterclaims adequately state claims upon which relief may be granted. See
Ashcroft, 556 U.S. at 678; Delker, 21 F.4th at 1024 (noting that there must be
“either direct or inferential allegations respecting all the material elements
necessary to sustain recovery under some viable legal theory’” (emphasis
added) (quoting Twombly, 550 U.S. at 562)). In particular to the element at
issue, IBM alleged that a confusion, if one is found between IBM’s use of its
Registered Sterling marks, on the one hand, and Sterling Computer’s use of its
Sterling Marks on the other, “would be because consumers who encounter
[Sterling Computers’] goods and services are likely to think that they are
provided by, sponsored by, associated with, or otherwise affiliated with IBM.”
Docket 18 at 43. IBM also alleged in relevant part that to the extent that IBM’s
use of the IBM STERLING marks “are found to be confusingly similar to the
[Sterling Marks], then [Sterling Computers’] use of the [Sterling Marks] implies
to consumers that its services come from the same source as IBM’s goods and
services” and that “[s]uch implications are false, confusing to consumers, and
material to consumers’ purchasing decisions.” Id. at 44.
Sterling Computers alternatively requests that this Court nevertheless
dismiss IBM’s counterclaims two through seven to the extent they challenge
marks other than the specific marks—the IBM STERLING and STERLING
21
marks—challenged by Sterling Computers. Docket 30 at 17. Sterling
Computers argues that dismissal is warranted because the contingency (a
finding of a likelihood of confusion) can only apply to the IBM STERLING and
STERLING marks challenged in Sterling Computers’ affirmative claims and is
otherwise impossible with respect to there being any likelihood of confusion
between Sterling Computer’s marks and IBM’s other STERLING-formative
marks. Docket 33 at 9.
Sterling Computers too narrowly reads IBM’s counterclaims two through
seven. While these counterclaims are contingent on a finding of a likelihood of
confusion between Sterling Computers’ use of its Sterling Marks and IBM’s use
of its IBM STERLING and STERLING marks, so too are IBM’s counterclaims as
it pertains to its other STERLING-formative marks. As IBM alleges, if a
likelihood of confusion is found between Sterling Computers’ use of its Sterling
Marks and IBM’s use of the IBM STERLING and STERLING marks, then IBM
will also be harmed by such confusion in connection with its STERLINGformative marks. Docket 18 at 42.
In one final argument, limited to counterclaim six alleging common law
trademark infringement, Sterling Computers requests this Court dismiss that
counterclaim because IBM failed to identify any IBM trademarks allegedly
infringed. Docket 30 at 17–18. In response, IBM argues it identified the marks
in paragraphs 29, 30, 34, and 35 of its pleading and incorporated those
paragraphs in counterclaim six. Docket 32 at 3, 17. Sterling Computers, in its
reply, alleges a new basis for dismissal—it should not be “required to guess
22
which of the dozens of purported trademarks to which IBM claims ownership
form the basis of its common law infringement claim.” Docket 33 at 11. While
Sterling Computers noted that incorporation-by-reference pleading is an
acceptable practice in the Eighth Circuit, it argues that such practice is
permissible “where the pleading style does not make understanding the claims
more burdensome.” Id. (quoting Campbell v. Lake Regional Med. Mang., Inc.,
No. 2:19-cv-04124-NKL, 2019 WL 4228894, at * 3 (W.D. Mo. September 5,
2019)). 6
Even if the manner in which IBM pled counterclaim six makes Sterling
Computers’ understanding of IBM’s sixth counterclaim more burdensome,
Sterling Computers has not directed this Court to authority mandating
dismissal of the counterclaim as opposed to a less drastic remedy. Also,
Sterling Computers raised this argument for the first time in its reply brief, and
IBM has not had an opportunity to respond. Therefore, this Court will not
address at this juncture whether Sterling Computers has established that it is
overly burdened by how IBM styled counterclaim six. See Auto Owners Ins.,
2022 WL 5247147, at *5 n.2 (declining to consider an argument on the basis
that it was raised for the first time in a reply brief). The Court denies Sterling
Computers’ motion to dismiss IBM’s counterclaims two through seven.
Accordingly, it is hereby
6 Notably, the district court Campbell examined whether to grant a motion by the
defendant for a more definite statement pursuant to Federal Rule of Civil Procedure
12(e), not a motion to dismiss. See 2019 WL 4228894, at *3–4.
23
ORDERED that Sterling Computers’ Motion to Dismiss and Strike
Counterclaims, Docket 29, is denied.
Dated November 5, 2024.
BY THE COURT:
CAMELA C. THEELER
UNITED STATES DISTRICT JUDGE
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