M&G Partners LLP v. K7 Design Group Inc

Filing 37

ORDER signed by Judge J.P. Stadtmueller on 5/30/2018. Counts IV-VI of 7 Plaintiff's Amended Complaint are DISMISSED from this action pursuant to Fed. R. Civ. P. 41(a). 21 Defendant K7 Design Group Inc.'s Motion to Dismiss is GRANTED. 36 Stipulation of DISMISSAL between Plaintiff and Defendant Walmart Inc. is ADOPTED; Plaintiff's claims against Defendant Walmart Inc. in this action are DISMISSED with prejudice and without costs or attorney's fees to any party. CASE DISMISSED without prejudice. See Order for further details. (cc: all counsel) (jm)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
M&G PARTNERS LLP, d/b/a
FASHION ANGELS ENTERPRISES,
Plaintiff,

Case No. 17-CV-1514-JPS

v.
K7 DESIGN GROUP INC. and
WALMART INC.,

ORDER

Defendants.
Plaintiff, M&G Partners LLP (“M&G”), filed this action on
November 3, 2017, alleging trademark infringement, unfair competition,
and contract-based claims against Defendants, K7 Design Group, Inc.
(“K7”) and Walmart Inc. (“Walmart”). (Docket #1). Two months earlier, K7
filed suit against M&G in the United States District Court for the Southern
District of New York, asserting breach of contract and various other claims
under federal and New York law. K7 believes that M&G’s claims in the
present action represent compulsory counterclaims that should have been
brought in the New York action. As such, it has moved to dismiss or stay
this case. (Docket #21). The motion is fully briefed and, for the reasons
stated below, it will be granted.1

K7 also moved in the alternative for dismissal of certain counts of the
complaint on the ground that they do not state viable claims for relief. (Docket #22
at 10–13). As explained below, the counts in question have been voluntarily
dismissed, so that portion of K7’s motion is now moot.
1

1.

LEGAL STANDARD
Federal Rule of Civil Procedure 13(a)(1)(A) defines a compulsory

counterclaim as one which the pleader has against his opponent at the time
of service and which “arises out of the transaction or occurrence that is the
subject matter of the opposing party’s claim” and “does not require adding
another party over whom the court cannot acquire jurisdiction.” Fed. R.
Civ. P. 13(a)(1). A party usually must state compulsory counterclaims or
else he will be precluded from doing so in later litigation. Ross ex rel. Ross v.
Bd. of Educ. of Twp. High Sch. Dist. 211, 486 F.3d 279, 284 (7th Cir. 2007). By
contrast, any counterclaim that is not compulsory is merely permissive, and
failing to join such a claim will not bar a subsequent action thereon. Fed. R.
Civ. P. 13(b).
If a defendant believes that the plaintiff’s claims are compulsory
counterclaims that should have been brought in another pending action,
the defendant may file a motion to dismiss under Rule 12(b). See Twin Disc,
Inc. v. Lowell, 69 F.R.D. 64, 66 (E.D. Wis. 1975); Pace v. Timmermann’s Ranch
& Saddle Shop Inc., 795 F.3d 748, 752 (7th Cir. 2015). Alternatively, the court
presiding over the second-filed action may enter a stay while the court
presiding over the first-filed action considers whether to enjoin the second
suit. See Harley-Davidson Motor Co. v. Chrome Specialties, Inc., 173 F.R.D. 250,
251 (E.D. Wis. 1997); Inforizons, Inc. v. VED Software Servs., Inc., 204 F.R.D.
116, 118 (N.D. Ill. 2001). Whatever the remedy, the court in this context
accepts as true all well-pleaded allegations in the complaint and draws all
reasonable factual inferences in the plaintiff’s favor. Camasta v. Jos. A. Bank
Clothiers, Inc., 761 F.3d 732, 736 (7th Cir. 2014).

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2.

RELEVANT FACTS
M&G is “a leading designer and manufacturer of tween girls’

lifestyle and activity products.” (Docket #7 ¶ 8). One of its brands is called
“Fashion Angels.” M&G owns federal registrations for the word mark
FASHION ANGELS and several permutations thereof, as well as logos
bearing the words “Fashion Angels.” Id. ¶ 10. Products sold under the
“Fashion Angels” marks include, for example, beauty products, costume
jewelry, and activity sets.
This case and the New York action filed by K7 arise from a sales and
distribution agreement that M&G entered into with K7 in December 2016
and the ensuing course of dealings between the parties. The relationship
revolved around building a showroom in New York City and selling
M&G’s products under the “Fashion Angel” trademarks to at least twelve
major vendors, including Walmart and Target.
K7 brokered several deals on behalf of M&G with major retailers in
early

2017.

One

such

deal

was

with

Walmart.

K7

facilitated

communications between M&G and Walmart starting in February 2017,
with an eye toward putting “Fashion Angels” products on store shelves by
the fourth quarter of that year. On April 28, 2017, K7 informed M&G that
Walmart had approved visuals of M&G’s products. M&G sent physical
samples and pricing documents to Walmart that same day.
The parties exchanged some emails in early and mid-June 2017
regarding the products. However, K7 did not notify M&G until June 26,
2017 that Walmart had selected two M&G products for sale at Walmart
stores. That day, M&G was told that its products were to be sold at 2,112
stores and had to be shipped by September 15, 2017.

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On June 30, 2017, M&G informed K7 that it could not meet that
shorty delivery timeline. Walmart cancelled the order. It then sourced very
similar products directly from K7 which were not genuine M&G products,
yet were sold under the “Fashion Angels” trademarks. For these reasons,
and others detailed in the complaint in the New York action, the parties’
relationship soured.
On September 12, 2017, K7 and its president, Isaac Kaplan, filed a
complaint against M&G and several of its executives, alleging claims for
breach of contract, unjust enrichment, fraudulent inducement, religious
discrimination, failure to accommodate, and an accounting, in the United
States District Court for the Southern District of New York, Case No. 1:17CV-06943. The complaint was subsequently amended to include a cause of
action for violation of the New York Labor Law, among other claims. The
New York action contemplates not only the failed Walmart deal, which K7
blames on M&G, but also numerous other problems that arose from the
parties’ relationship, including K7’s claim that M&G has not paid promised
sales commissions. See (Docket #23-1, #23-2).
Two months after K7 commenced the New York action, on
November 3, 2017, M&G filed this action against K7. (Docket #1). M&G
amended its complaint on December 12, 2017 to join Walmart as a
defendant. (Docket #7). The amended complaint states six separate counts:
(1) trademark infringement under 15 U.S.C. § 1114; (2) false designation of
origin under 15 U.S.C. § 1125(a); (3) common law unfair competition and
trademark infringement; (4) civil conspiracy; (5) breach of contract and the
implied duty of good faith and fair dealing, brought solely against K7; and
(6) tortious interference with prospective contracts, again brought solely
against K7. Id. at 14–20.
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After filing this action, M&G filed a motion in the New York case to
transfer it here. On February 7, 2018, the motion was denied.
3.

ANALYSIS
The present dispute centers on how to define a “transaction or

occurrence” for purposes of Rule 13. Specifically, the Court must decide
whether M&G’s claims in this case arise from the same transaction or
occurrence that underlies the New York action. If so, M&G’s claims should
be raised, if at all, as counterclaims in the New York case.
K7 urges the Court to view M&G’s case as a set of compulsory
counterclaims to its New York action, to promote federal policy against
fragmentation of litigation. M&G argues that its claims are factually and
analytically distinct from those in the New York action, despite the fact that
the parties’ business relationship undergirds both cases. Thus, in M&G’s
view, judicial economy would not be served by forcing the claims to be
heard together.
The Seventh Circuit gives Rule 13 a “generous reading.” Warshawsky
& Co. v. Arcata Nat’l Corp., 552 F.2d 1257, 1261 (7th Cir. 1977). “As a word of
flexible meaning, ‘transaction’ may comprehend a series of many
occurrences, depending not so much upon the immediateness of their
connection as upon their logical relationship.” Id. (citing Moore v. N.Y.
Cotton Exch., 270 U.S. 593, 610 (1926)). The purpose of the Rule is to “prevent
multiplicity of actions and to achieve resolution in a single lawsuit of all
disputes arising out of common matters.” Id.; Twin Disc, 69 F.R.D. at 68.
The Court of Appeals has expressly rejected as a test “whether the
issues or facts are so interwoven that resolution of the disputed issues in
one case will involve factual or legal conclusions affecting the
determination of issues in the other case.” Warshawsky, 552 F.2d at 1263. In
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the Seventh Circuit’s view, “such arguments represent merely an effort to
have this court apply the ‘identity of issues,’ ‘res judicata,’ or ‘same
evidence’ tests rather than the crucial ‘logical relationship’ test.” Id. Thus,
the question under Rule 13 is not solely whether some form of estoppel
might arise from separate adjudication of the two actions. The inquiry
instead focuses on the broader question of whether the actions are logically
related. See Harley-Davidson, 173 F.R.D. at 252 (that the legal claims are
different in each action “alone is not determinative where, as here, certain
core facts are common and material to both actions”); 6 Fed. Prac. & Proc.
Civ. § 1410 (3d ed. 2017) (discussing differences between logicalrelationship

test

and

other

tests

used

to

identify

compulsory

counterclaims).
Of course, some correspondence in the law or evidence will usually
exist between a claim and a compulsory counterclaim. This is because the
logical relationship test considers “the totality of the claims, including the
nature of the claims, the legal basis for recovery, the law involved, and the
respective factual backgrounds.” Burlington N. R.R. Co. v. Strong, 907 F.2d
707, 711 (7th Cir. 1990). In making this assessment, courts should avoid a
“wooden application of the common transaction label.” Gilldorn Sav. Ass’n
v. Commerce Sav. Ass’n, 804 F.2d 390, 397 (7th Cir. 1986).2

Colonial Penn Life Insurance Co. v. Hallmark Insurance Administrators, Inc., 31
F.3d 445, 448 (7th Cir. 1994), is often cited for the principle that the Seventh
Circuit’s formulation of the logical relationship test is “narrow,” focused primarily
on whether resolution of the first action would bar the purported counterclaim
under the principles of res judicata. But that is not what the decision says; it merely
repeats a law student’s suggestion that the test is a narrow one. Id. (quoting
Comment, Narrowing the Scope of Rule 13(a), 60 U. Chi. L. Rev. 141 (1993)). The
resolution of Colonial Penn did not turn on whether the test is broad or narrow,
since it was unmistakable that the claims at issue in that case lacked a logical
2

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As noted above, M&G’s first amended complaint contains six counts.
In its opening brief, K7 argued that all six constituted compulsory
counterclaims to its claims in the New York action. It also contended, in the
alternative, that Counts IV and VI, the civil conspiracy and tortious
interference claims, respectively, should be dismissed for failure to state a
claim. (Docket #22 at 10–13).
However, in response to K7’s motion, M&G voluntarily withdrew
both Count V, breach of contract against K7, and Count VI. (Docket #31 at
2–3). Further, M&G recently settled its claims against Walmart and, as a
result, also stipulated to the dismissal of Count IV. See (Docket #35, #36).
Thus, the Court’s analysis under Rule 13 is concerned only with Counts I–
III, which are all federal and common-law trademark and unfair
competition claims. See (Docket #7 at 14–16).
Although the only remaining claims here are for violation of M&G’s
intellectually property rights, the Court finds that these claims are
sufficiently related to K7’s claims in the New York action that they must be
brought there. True, as M&G points out, the elements of K7’s contract and
other claims in the New York action do not map neatly onto its federal and
common-law trademark claims in this case. For instance, it is not clear
whether K7’s desperation to fulfill the Walmart order would constitute a
legal defense to its alleged trademark infringement, which is generally a
strict-liability affair. Henri's Food Prods. Co. v. Kraft, Inc., 717 F.2d 352, 359
(7th Cir. 1983). But asking for identity of legal claims is just the sort of

relationship. See id. The Court of Appeals did not adopt the view that the logical
relationship test should be construed narrowly, in contravention of the holdings
in cases like Warshawsky. See also Burlington, 907 F.2d at 711 (noting that the
definition of “transaction or occurrence” in this Circuit is given a “liberal
construction”).

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rigidity that the Seventh Circuit has rejected in the Rule 13 context. Avante
Int’l Tech., Inc. v. Hart Intercivic, Inc., Civil No. 08–832–GPM, 2009 WL
2431993, at *5 (S.D. Ill. July 31, 2009) (“A claim may be logically related to
an action even though there is not complete identity of issues and parties
between the original claim and the counterclaim.”); Bd. of Regents of Univ. of
Wis. Sys. v. Phoenix Int’l Software, Inc., 653 F.3d 448, 471 (7th Cir. 2011) (the
logical relationship test “focuses on the facts of the case, rather than on the
technical elements of the claims in question”). Moreover, it is likely that at
least some legal overlap will occur. K7’s excuse for appropriating the
“Fashion Angels” marks might have more purchase as a defense to the
common-law claim of unfair competition, and K7’s justifications for
violating M&G’s trademark rights would probably inform any decision on
damages. See 15 U.S.C. § 1117(a) (providing that a court may in its discretion
adjust a compensatory damages award in a trademark infringement case as
it deems “just, according to the circumstances of the case”).
What matters here more than the operative legal theories is that the
core facts in both sets of claims are the same. In the New York action, one
of the primary questions will be whether M&G’s failure to satisfy the
Walmart order constituted a breach of its contract with K7, and, if so,
whether that breach justified K7’s use of the “Fashion Angels” marks.
(Docket #23-2 ¶ 56). This case is simply the other side of that coin, asking
whether K7’s use of M&G’s trademarks after the alleged breach constituted
infringement of M&G’s intellectual property rights. That M&G’s claims
concerning the Walmart saga arise from trademark statutes and common
law, whereas K7’s claims arise primarily from contract law, is not
determinative. Keith A Keisser Ins. Agency, Inc. v. Nationwide Mut. Ins. Co.,
246 F. Supp. 2d 833, 835 (S.D. Ohio 2003) (finding that breach of contract
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and federal trademark claims were logically related “even though [the
Lanham Act claim] is based on a federal statute and sounds in tort, rather
than in contract”).
This case is much like In re Price, 43 F.3d 1068, 1073 (7th Cir. 1994),
where the Seventh Circuit found that the IRS’ claim to the debtors’ unpaid
taxes was logically related to the debtors’ claim that the IRS violated the
automatic stay in bankruptcy by trying to collect those taxes. The legal
theories applicable to each claim were distinct, but the Court of Appeals
nevertheless concluded that “[t]he basis of both claims revolve around the
same aggregate core of facts—the debtors’ unpaid taxes.” Id. It was clear
that without the unpaid taxes, there would have been no collection attempt.
Id. So too, here, although M&G seeks to vindicate its trademark rights and
K7 its contractual rights, both fundamentally depend on what occurred in
connection with the Walmart deal. The two sets of claims are far more than
“technically” related. Gilldorn, 804 F.2d at 397.
An examination of the parties’ competing complaints reveals that the
two sets of claims arise from the same continuous course of dealing.
Warshawsky, 552 F.2d at 1262; Gilldorn, 804 F.2d at 397 (a logical relationship
can exist when the claims “spring from a continuous course of dealings
between the parties”). Indeed, unlike the Truth in Lending Act and debt
collection claims at issue in Valencia v. Anderson Brothers Ford, 617 F.2d 1278,
1291 (7th Cir. 1980), which were connected only by “the initial execution of
the loan document,” here the parties’ dispute finds its genesis in their
contract but depends as well upon the remainder of the course of dealing,
including the failure of the Walmart delivery and beyond. As such,
resolution of one action will likely depend upon factual development that
will be equally necessary to disposition of the other. Avoiding duplication
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of effort in each court counsels in favor of the two sets of claims being
adjudicated in the same proceeding. AMP Inc. v. Zacharias, No. 87 C 3244,
1987 WL 12676, at *1 (N.D. Ill. June 15, 1987). For all these reasons, the Court
finds that M&G’s present claims and K7’s claims in the New York action
are logically related and therefore arise from the same transaction or
occurrence within the meaning of Rule 13(a).3
This Court’s decision in Super Natural Distributors, Inc. v. MuscleTech
Research and Development, 140 F. Supp. 2d 970 (E.D. Wis. 2001), relied upon
by M&G, does not suggest a different result. There, a dietary supplement
manufacturer sued several individuals and entities in the Southern District
of New York for counterfeiting its goods. Id. at 972. Those counterfeits were
allegedly sold through a Wisconsin-based distributor that also distributed
the manufacturer’s genuine goods. Id. The manufacturer suspected that the
distributor played a part in the counterfeiting operation and terminated the
parties’ relationship. Id. at 973.
After the case in New York was instituted, the distributor filed suit
against the manufacturer in Wisconsin state court for illegally terminating
the parties’ relationship in violation of the Wisconsin Fair Dealership Law
(“WFDL”). Id. at 973. That case was removed to this Court. Id. Afterward,
the manufacturer filed an amended complaint in the New York lawsuit
which joined the distributor as a defendant. Id. The distributor asked this
Court to stay the claims against it in the New York case on the ground that

Similar to the Seventh Circuit’s decision in Phoenix, this Court does not
hold that all claims of intellectual property infringement are compulsory
counterclaims to an underlying contract dispute. See Phoenix, 653 F.3d at 471.
Instead, it is primarily the close factual congruence between this action and the
New York action that compels that conclusion in this particular instance.
3

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they were compulsory counterclaims that should have been raised in the
Wisconsin action. Id.
This Court disagreed, finding that the claims in the Wisconsin and
New York suits were not sufficiently related such that the New York claims
could be considered compulsory counterclaims in the Wisconsin action. Id.
The Court’s decision turned on the particular facts and circumstances
presented, as often happens in a Rule 13(a) inquiry. Phoenix, 653 F.3d at 471.
Critically, the Court had already found that the distributor’s assertion of a
dealership relationship as defined in the WFDL was dubious, having a
“significantly less than 50%” chance of being proven. Super Natural, 140 F.
Supp. 2d at 977. As such, the Court anticipated that resolving the Wisconsin
action would do little to advance the resolution of the counterfeiting claims
that were the focus of the New York action. Id. Moreover, the New York
action would inevitably have to resolve the question of whether
counterfeiting occurred, and who was responsible, whereas the Wisconsin
WFDL claim could be disposed of on statutory grounds by finding that the
manufacturer had some other “good cause” to terminate the dealership
relationship, even assuming one had been formed. Id.
M&G appeals to Super Natural for the proposition that the parties’
underlying contractual relationship is not enough to make all claims
stemming therefrom logically related. (Docket #31 at 4). Such a view
equates a logical relationship with having the “same basic origin story,”
which is not what Rule 13 looks for. Id. This is certainly true, but the factual
overlap between the two actions at issue here is more robust than the
underlying contract. Both cases will be concerned with the entire course of
dealing that led to the failed Walmart delivery and K7’s attempt to salvage
the situation. As a result, it cannot be said that the two actions have a
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“remote common origin.” Greene v. U.S. Dep’t of Educ., 770 F.3d 667, 670 (7th
Cir. 2014). Rather, they center on “a shared realm of genuine dispute.” Id.4
In sum, the Court finds that judicial economy would be best served
by trying M&G’s and K7’s claims together. The Court therefore finds that
M&G’s claims in this action are compulsory counterclaims that must be
brought, if at all, in K7’s New York action.5
4.

CONCLUSION
The Court has found that M&G’s claims of trademark infringement

and unfair competition are logically related to the contract and other claims
asserted against it by K7 in the New York action. As a result, they must be
deemed compulsory counterclaims under Rule 13(a).
M&G opposed K7’s motion but said nothing about whether the
Court should stay or dismiss the case if the motion was granted. Having no
reason to believe that M&G would be unable to raise the claims in this case
as counterclaims in the New York action, the Court finds that the better
utilization of its time and resources is dismissal rather than a stay. See
Inforizons, 204 F.R.D. at 120 (“The plaintiff bears the burden of showing a

For similar reasons, this case is unlike Multiut Corporation v. Dynergy, Inc.,
No. 04 C 8283, 2005 WL 1041324 (N.D. Ill. Apr. 13, 2005), cited by M&G. There, in
the first action a supplier of natural gas sued its sales agent for breach of contract.
Id. at *1. The second lawsuit, filed by the sales agent, alleged that the supplier
conspired with others to violate antitrust laws by manipulating gas prices. Id. at
*2. The court found that the two sets of claims were not compulsory counterclaims,
as the only thing tying the first and second lawsuits together was that the supplier
sold natural gas. Id. at *3. The operative conduct and legal theories were distinct.
Id. Here, while the legal claims and defenses may not overlap completely between
this and the New York action, the facts certainly do to a great extent.
4

Rule 13(a)(2) sets forth two exceptions to the compulsory counterclaim
rule, but neither apply here, and M&G does not argue otherwise. See Fed. R. Civ.
P. 13(a)(2); (Docket #22 at 9–10); (Docket #31).
5

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compelling circumstance or imbalance of convenience to overcome the
presumption that the second-filed case should be dismissed in favor of the
first-filed case.”).
Accordingly,
IT IS ORDERED that Counts IV, V, and VI of Plaintiff’s amended
complaint (Docket #7) be and the same are hereby DISMISSED from this
action pursuant to Federal Rule of Civil Procedure 41(a);
IT IS FURTHER ORDERED that Defendant K7 Design Group, Inc.’s
motion to dismiss (Docket #21) be and the same is hereby GRANTED;
IT IS FURTHER ORDERED that the stipulation of dismissal
between Plaintiff and Defendant Walmart Inc. (Docket #36) be and the same
is hereby ADOPTED; Plaintiff’s claims against Walmart Inc. in this action
be and the same are hereby DISMISSED with prejudice and without costs
or attorney’s fees to any party; and
IT IS FURTHER ORDERED that this case be and the same is hereby
DISMISSED without prejudice.
The Clerk of the Court is directed to enter judgment accordingly.
Dated at Milwaukee, Wisconsin, this 30th day of May, 2018.
BY THE COURT:

__________________
J. P. Stadtmueller
U.S. District Judge

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