Opinion
Case No. 2:21-cv-02659-MCS-JPR
2021-12-20
NESTLE USA, INC., et al., Plaintiffs, v. BEST FOODS LLC, Defendant.
Dale J. Giali, Daniel David Queen, Mayer Brown LLP, Los Angeles, CA, Adam L. Hudes, Pro Hac Vice, Stephen M. Cohen, Pro Hac Vice, Mayer Brown LLP, Washington, DC, for Plaintiff Nestle USA, Inc. Daniel David Queen, Dale J. Giali, Mayer Brown LLP, Los Angeles, CA, for Plaintiff Societe Des Produits Nestle S.A. Diego F. Duran de la Vega, Pro Hac Vice, Hughes Hubbard and Reed LLP, Washington, DC, Michael M. Polka, Pro Hac Vice, Hughes Hubbard and Reed LLP, New York, NY, Rita M. Haeusler, Hughes Hubbard and Reed LLP, Los Angeles, CA, for Defendant.
Dale J. Giali, Daniel David Queen, Mayer Brown LLP, Los Angeles, CA, Adam L. Hudes, Pro Hac Vice, Stephen M. Cohen, Pro Hac Vice, Mayer Brown LLP, Washington, DC, for Plaintiff Nestle USA, Inc.
Daniel David Queen, Dale J. Giali, Mayer Brown LLP, Los Angeles, CA, for Plaintiff Societe Des Produits Nestle S.A.
Diego F. Duran de la Vega, Pro Hac Vice, Hughes Hubbard and Reed LLP, Washington, DC, Michael M. Polka, Pro Hac Vice, Hughes Hubbard and Reed LLP, New York, NY, Rita M. Haeusler, Hughes Hubbard and Reed LLP, Los Angeles, CA, for Defendant.
ORDER DENYING MOTION TO DISMISS (ECF NO. 54)
MARK C. SCARSI, UNITED STATES DISTRICT JUDGE
Following an earlier grant of a motion to dismiss, ECF No. 49, Defendant Best Foods LLC moves to dismiss the First Amended Complaint of Plaintiffs Nestlé USA, Inc. ("NUSA") and Société des Produits Nestlé S.A. ("SPN"). Mot., ECF No. 54. Plaintiffs opposed the motion, Opp'n, ECF No. 56, and Defendant replied, Reply, ECF No. 59. The Court heard argument on November 15, 2021.
I. BACKGROUND
SPN owns Nestlé trademarks in the United States and Mexico. First Am. Compl. ("FAC") ¶¶ 2, 14, ECF No. 52. NUSA and Nestlé México, S.A. de C.V., SPN subsidiaries in the United States and Mexico, are responsible for the marketing, distribution, and sale of Nestlé goods in the United States and Mexico, respectively. Id. ¶ 14. NUSA labels these goods to ensure compliance with United States customer expectations and regulations. Id. ¶ 3. Nestlé Mexico's products do not conform with the same United States customer expectations and regulations. Id. ¶ 6.
Defendant Best Foods, LLC, a specialty grocery importer and wholesaler that distributes Hispanic brands to independent retailers in the United States, buys Nestlé Mexico products intended for sale and distribution in Mexico and imports them into the United States. Id. ¶¶ 3–4. Plaintiffs NUSA and SPN brought several claims against Best Foods to stop further distribution and sale of these gray-market goods and to recover damages resulting from this distribution and sale. Id. ¶ 7. These claims are: (i) trademark infringement under the Lanham Act; (ii) false designation of origin under the Lanham Act; (iii) trademark dilution under the Lanham Act; (iv) a state law claim for trademark dilution; (v) a state law claim for unfair competition; (vi) a state law claim for false advertising; and (vii) a state law claim for tortious interference with contractual relations. Id. ¶¶ 56–120. II. LEGAL STANDARD
"A gray-market good is a foreign-manufactured good, bearing a valid United States trademark, that is imported without the consent of the United States trademark holder." K Mart Corp. v. Cartier, Inc. , 486 U.S. 281, 285, 108 S.Ct. 1811, 100 L.Ed.2d 313 (1988).
Federal Rule of Civil Procedure 12(b)(6) allows an attack on the pleadings for "failure to state a claim upon which relief can be granted." "To survive a motion to dismiss, a 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, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (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." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937.
The determination of whether a complaint satisfies the plausibility standard is a "context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 679, 129 S.Ct. 1937. Generally, a court must accept the factual allegations in the pleadings as true and view them in the light most favorable to the plaintiff. Park v. Thompson , 851 F.3d 910, 918 (9th Cir. 2017) ; Lee v. City of Los Angeles , 250 F.3d 668, 679 (9th Cir. 2001). But a court is "not bound to accept as true a legal conclusion couched as a factual allegation." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937 (quoting Twombly , 550 U.S. at 555, 127 S.Ct. 1955 ).
III. DISCUSSION
Defendant moves to dismiss the four trademark claims because the "common control" doctrine precludes Plaintiffs from suing under the Lanham Act. Mot. 4–11. Defendant moves to dismiss the remaining state law claims to the extent they depend on the Lanham Act claims. Defendant also provides separate grounds to dismiss the state law claims. Mot. 11–13.
A. The Common Control Exception
Defendant argues that common control doctrine prevents Plaintiffs from pursuing their trademark claims. Mot. 5. Defendant cites NEC Electronics v. CAL Circuit Abco , 810 F.2d 1506 (9th Cir. 1987), as the source of this doctrine. NEC held that whenever there is no "real independence" from a foreign manufacturer of trademarked goods, "trademark law does not offer [a plaintiff] a vehicle for establishing a worldwide discriminatory pricing scheme simply through the expedient of setting up an American subsidiary with nominal title to its mark." Id. at 1508, 1511. One district court in the Central District of California has followed this approach. Coca-Cola Co. v. V.R. Produce , No. 2:09-cv-00783 RGK (RZx), 2010 WL 11596744, at *3–4 (C.D. Cal. Aug. 23, 2010). Under Defendant's reasoning, because NUSA and SPN exercise common control over Nestlé trademarks, NUSA cannot sue for trademark infringement of gray-market goods. Mot. 9–11.
Were NEC Electronics the only statement of the law in gray-market goods cases, Defendant would have a compelling argument. The Ninth Circuit, however, has clarified the law since NEC Electronics . In Hokto Kinoko Co. v. Concord Farms, Inc. , 738 F.3d 1085 (9th Cir. 2013), the court held that a plaintiff adequately stated a claim for trademark infringement where the defendant allegedly "violated [plaintiff's] trademarks by importing legitimately produced goods sold under those same marks." Id. at 1092. The important question under Hokto was whether the goods were "genuine goods." Id. at 1093. Gray-market goods are genuine when they do not materially differ from a trademark owner's products. Id. If the goods are not genuine, then a trademark owner can sue an importer under trademark law. Id. Defendant argues that Hokto does not modify the holding in NEC Electronics , Reply 6, but the Hokto court expressly read NEC Electronics as applying the genuine goods test fully articulated in Hokto. Hokto , 738 F.3d at 1092–93. Moreover, district courts addressing gray-market goods claims since Hokto have applied the genuine goods test without mention of the real independence test in NEC Electronics. See, e.g., Knature Co., Inc. v. Duc Heung Grp., Inc. , No. CV 20-3877-DMG (AFMx), 2021 WL 3913194, at *3 (C.D. Cal. July 2, 2021) ; Food Mkt. Merch., Inc. v. Cal. Milk Processor Bd. , No. 2:15-cv-01083-TLN-CKD, 2020 WL 2194013, at *6 (E.D. Cal. May 6, 2020) ; Huf Worldwide, LLC v. Wal-Mart Stores, Inc. , No. 16cv751-LAB (WVG), 2017 WL 766794, at *2 (S.D. Cal. Feb. 28, 2017) (only addressing NEC in the context of its holding that customers’ confusion about warranties is not cognizable trademark injury); MJC Am., Ltd. v. Gree Elec. Appliances, Inc. of Zhuhai , No. CV 13-04264 SJO (CWx), 2015 WL 12777382, at *4 (C.D. Cal. Feb. 2, 2015) ; Cisco Sys., Inc. v. Tsai , No. ED CV14-00791 JAK (ASx), 2015 WL 12732459, at *7 (C.D. Cal. Jan. 9, 2015) ; Moreno v. UMG Recordings, Inc. , No. CV 13-2879 SVW, 2014 WL 12469917, at *1 (C.D. Cal. Apr. 24, 2014). The Court has found no district court case since Coca-Cola citing the real independence language in NEC Electronics .
Thus, following the straightforward command of Hokto and the practice of district courts in the Ninth Circuit, the Court applies the genuine goods test to determine the viability of Plaintiffs’ claims.
B. Applying the Genuine Goods Test
"[A] gray-market good is ‘genuine’ only if it does not materially differ from the U.S. trademark owner's product." Hokto , 738 F.3d at 1093. "The key question" in determining whether two goods are materially different "is whether a consumer is likely to consider a difference relevant when purchasing a product." Id. Factors that govern this analysis include "differences in language, quality control, and packaging." Id. at 1094. Any one factor may be "sufficiently material to render imported goods not ‘genuine.’ " Id.
Plaintiffs plead several material differences between the NUSA and Nestlé Mexico products. For example, the labels are in different languages, with the NUSA products having English-language labels and the Nestlé Mexico products having Spanish-language labels. FAC ¶¶ 33, 35, 39. The Spanish-language labels for Nestlé Mexico products violate FDA regulations that require products sold in the United States to be labeled in English. Id. ¶ 36; see 21 C.F.R. § 101.15(c)(1). The NUSA and Nestlé Mexico products list different websites for customer service related to the products. FAC ¶ 37. The information available on the nutrition labels is different for NUSA and Nestlé Mexico products. Id. ¶¶ 39–40. The NUSA labels list weight in U.S. customary and metric units, while the Nestlé Mexico labels list weights only using metric units. Id. ¶ 41. The sugar and fat content of the NUSA and Nestlé Mexico products differ. Id. ¶¶ 42–43. And NUSA offers several customer service features for NUSA products that are not available for Nestlé Mexico products. Id. ¶ 46.
Under Hokto , any one of these material differences alone would suffice for Plaintiffs to plead that the Nestlé Mexico goods are gray-market goods. 738 F.3d at 1094. Taken together, these allegations easily demonstrate the NUSA and Nestlé Mexico goods are materially different. Accordingly, the Court denies Defendant's motion to dismiss claims one, two, three, and four. C. Remaining State Law Claims
1. Unfair Competition Law Claim
Defendant argues the Unfair Competition Law claim fails because the predicate trademark claims fail, because the predicate false advertising claim fails, and because Plaintiffs did not adequately allege the trademarked goods are normally accompanied by an express warranty. Mot. 11–12. Because the Court denies the motion to dismiss the trademark and false advertising claims, the Court denies the motion to dismiss the Unfair Competition Law claim to the extent it derives from those claims.
Plaintiffs base their claim in part on Defendant's violation of California Civil Code sections 1797.8 – .86. FAC ¶ 103. Civil Code section 1797.8(a) states:
As used in this section, the term "grey market goods" means consumer goods bearing a trademark and normally accompanied by an express written warranty valid in the United States of America which are imported into the United States through channels other than the manufacturer's authorized United States distributor and which are not accompanied by the manufacturer's express written warranty valid in the United States.
Defendant argues this section is inapplicable because Plaintiffs cannot allege grocery products are "normally accompanied by an express written warranty." Mot. 11–12. Plaintiffs respond by arguing that statements on a food label can create an express warranty, citing Krommenhock v. Post Foods, LLC , 255 F. Supp. 3d 938 (N.D. Cal. 2017). Opp'n 15 n.9. Krommenhock rejected a similar claim on the basis that "plaintiffs fail[ ] to identify which products contain which warnings." 255 F. Supp. 3d at 966. The Court reaches the same conclusion. While Plaintiffs may be correct about the law, Plaintiffs identify no statements on the food labels that constitute warranties. Thus, the Court dismisses the Unfair Competition Law claim insofar as it pleads a violation of California Civil Code sections 1797.8 – .86. This defect appears readily curable, so the Court will give Plaintiffs an opportunity to amend the claim. See Brown v. Stored Value Cards, Inc. , 953 F.3d 567, 574 (9th Cir. 2020).
2. False Advertising Claim
Defendant argues Plaintiffs failed to state a false advertising claim under California Business and Professions Code section 17500 because Plaintiffs failed to plead Defendant falsely designated the origin of the goods. Mot. 12. To the extent Defendant's argument relies on Plaintiffs failing to plead a false designation of origin, the Court rejects this argument.
Plaintiffs argue that a product designation that would confuse a consumer is an actionable statement under California's False Advertising Law. Opp'n 15–16. The Ninth Circuit follows this approach. Faberge, Inc. v. Saxony Prods., Inc. , 605 F.2d 426, 428 (9th Cir. 1979) ("[A] plaintiff must show that the defendant used a trademark or trade dress likely to cause confusion between the parties’ products" to state a claim under Cal. Bus. & Prof. Code § 17500.); see also Simpson Strong-Tie Co. v. MiTek Inc. , No. 20-cv-06957-VKD, 2021 WL 1253803, at *3, 7 (N.D. Cal. Apr. 5, 2021). Thus, Plaintiffs alleged an actionable statement under section 17500 because they have pleaded actionable trademark infringement.
Defendant argues this statement should only be attributable to SPN, not to Best Foods, but "use" of the products and of the product names is sufficient for attribution. Faberge , 605 F.2d at 428 ; Simpson Strong-Tie , 2021 WL 1253803, at *3. Defendant uses the products by selling them, so Defendant's argument lacks merit. Thus, the Court denies the motion to dismiss the false advertising claim.
3. Tortious Interference with Contractual Relations Claim
A tortious interference with contractual relations claim under California law has five elements: "(1) a valid contract between plaintiff and a third party; (2) defendant's knowledge of the contract; (3) defendant's intentional acts designed to induce breach or disruption of the contract; (4) actual breach or disruption; and (5) resulting damage." Fam. Home & Fin. Ctr., Inc. v. Fed. Home Loan Mortg. Corp. , 525 F.3d 822, 825 (9th Cir. 2008). Defendant challenges the intentional act and actual breach elements. Mot. 13.
To adequately plead the intentional element of a tortious interference claim, a plaintiff must allege that the defendant desired to interfere with the plaintiff's contractual arrangement or that "the defendant knew that the interference was certain or substantially certain to occur as a result of its action." Kor. Supply Co. v. Lockheed Martin Corp. , 29 Cal. 4th 1134, 1153, 131 Cal.Rptr.2d 29, 63 P.3d 937 (2003). Mere "disruption of the contractual relationship" is all Plaintiffs must show to demonstrate the disruption element. Ixchel Pharma, LLC v. Biogen, Inc. , 9 Cal. 5th 1130, 1141, 266 Cal.Rptr.3d 665, 470 P.3d 571 (2020). Plaintiffs allege that Defendant was directly aware of NUSA's existing contracts with authorized distributors by virtue of its contact with those distributers and its familiarity with selling food and beverage products in the United States. FAC ¶ 118. By importing Nestlé Mexico products into the United States, FAC ¶ 70, Defendant interfered with these contractual rights and NUSA's exclusive license to sell Nestlé products in the United States. See TriPharma, LLC v. First Fruits Bus. Ministry , No. SACV 12-404 JVS (ANx), 2012 WL 12887079, at *16 (C.D. Cal. Aug. 21, 2012) (finding the inability to exclusively market products sufficiently alleges the interference element of a tortious interference claim). Plaintiffs have adequately pleaded a claim for tortious interference with contractual relations.
IV. CONCLUSION
The motion is granted in part and denied in part. The Court dismisses the Unfair Competition Law claim to the extent it is premised on a violation of California Civil Code sections 1797.8 – .86. The motion is denied in all other respects.
Plaintiffs may file an amended complaint no later than 14 days from the date of this Order, if they can do so consistent with Federal Rule of Civil Procedure 11(b) and this Order. Failure to file a timely amended complaint will waive the right to do so. Leave to add new defendants or claims must be sought by a separate, properly noticed motion.