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granting leave to amend, despite finding lack of diligence sufficient to support good cause under Rule 16(b)
Summary of this case from AT&T Corp. v. ATOS IT Sols. & Servs.Opinion
21-CV-7740 (JPC) (RWL)
03-23-2023
COVET & MANE, LLC, Plaintiff, v. INVISIBLE BEAD EXTENSIONS, LLC, Defendant.
ORDER AND DECISION, AND REPORT AND RECOMMENDATION TO HON. JOHN P. CRONAN: MOTION TO AMEND
ROBERT W. LEHRBURGER, UNITED STATES MAGISTRATE JUDGE
Plaintiff Covet & Mane, LLC (“Plaintiff” or “C&M”) brings this action against Defendant Invisible Bead Extensions, LLC (“Defendant” or “IBE”) for (i) declaratory judgment that C&M has not infringed any of IBE's intellectual property, (ii) cancellation of IBE's various intellectual property registrations, and (iii) damages for IBE's alleged violation of the Sherman and Clayton Acts, fraudulent inducement, unjust enrichment, breach of contract, misappropriation of trade secrets, breach of fiduciary duty, and unfair business practices in violation of state law. C&M now seeks leave to amend to add nine additional claims: three concerning a trademark obtained on February 9, 2021; five based on a patent issued to IBE on August 23, 2022; and one claim of product disparagement. C&M also seeks to add three additional defendants: McKenzie Turley (“Turley”), Cassadi Currier (“Currier”), and Kitsune Hair Co., LLC (“Kitsune”). For the following reasons, Plaintiff's motion to amend is GRANTED IN PART to allow leave to amend to include the three additional defendants and all proposed additional claims except the product disparagement claim. Further, the Court recommends DENYING leave to amend to include the product disparagement claim.
There is some debate in this Circuit whether a motion to amend is considered dispositive or non-dispositive for purposes of whether a Magistrate Judge's ruling should issue as a Report and Recommendation, subject to de novo review, or as a Decision and Order, subject to review for clear error. “The Second Circuit has referred to a motion to amend a complaint as a non-dispositive matter but has not explicitly decided so.” Wilson-Abrams v. Magezi, No. 20-CV-1717, 2022 WL 4545254, at *3 n.6 (W.D.N.Y. Sept. 29, 2022) (citing Fielding v. Tollaksen, 510 F.3d 175, 175 (2d Cir. 2007) and Kilcullen v. New York State Department of Transportation, 55 Fed.Appx. 583, 584-85 (2d Cir. 2003)); see also Marsh v. Sheriff of Cayuga County, 36 Fed.Appx. 10, 11 (2d Cir. 2002) (summary order) (“the magistrate judge acted within his authority in denying this motion to amend the complaint”). “Courts in this circuit generally treat motions to amend as non-dispositive pre-trial motions,” Prosper v. Thomson Reuters Inc., No. 18-CV-2890, 2021 WL 535728, at *1 n.1 (S.D.N.Y. Feb. 11, 2021) (collecting cases), although some courts have suggested that a magistrate judge's denial of a motion to amend a complaint should be treated as dispositive, while a grant of the same motion should be treated as non-dispositive. See Ashford Locke Builders v. GM Contractors Plus Corp., No. 17-CV-3439, 2020 WL 6200169, at *1 (E.D.N.Y. Oct. 22, 2020) (“unless the magistrate judge's decision effectively dismisses or precludes a claim, thereby rendering the motion to amend dispositive, motions for leave to amend are subject to review under the ‘clearly erroneous or contrary to law' standard of Rule 72(a).”). In this instance, the Court issues its decision as a decision and order insofar as it grants the motion to amend, and with a report and recommendation to deny leave to amend to add the product disparagement claim due to futility.
BACKGROUND
Plaintiff C&M designs, manufactures, and sells “proprietary cut-point hair wefts and related products.” (FAC ¶ 7.) C&M's hair wefts are installed using beads “to create seamless blending of the hair weft and the natural hair.” (FAC ¶ 16.) C&M's hair extensions are sourced from human hair, offered at a variety of lengths and colors, and exclusively sold to high-end stylists and salons who undergo an approval process and an education program on how to properly apply C&M's hair wefts. (FAC ¶¶ 14-15, 17-18.)
“FAC” refers to the First Amended Complaint at Dkt. 30.
Defendant IBE competes with C&M in the luxury hair weft industry. In 2019, prior to the launch of IBE's own line of hair extensions, C&M and IBE discussed entering into a partnership in which IBE would provide educational training to stylists and C&M would sell hair wefts and customized kits to those stylists. (FAC ¶ 35.) Based on representations made by Turley, which C&M alleges to be false, C&M provided confidential information to IBE, designed a special line of proprietary hair wefts for IBE to be sold to IBE stylists, and created customized training kits for IBE. (FAC ¶¶ 39-45.) In July 2020, however, Turley informed C&M that rather than partnering with C&M, IBE had decided to sell its own hair weft products and education kits. (FAC ¶ 54.) As a result, IBE now develops, markets, and sells hand-tied hair wefts, education programs, and training services to stylists. (FAC ¶¶ 56-60.)
On August 26, 2021, C&M received a cease-and-desist letter from IBE stating that IBE owned trademarks and other intellectual property, including a patent application and copyrights, that C&M was using without authorization, and threatening legal action if C&M did not cease do to so. (FAC ¶¶ 93-96; Dkt. 129-11.) C&M then commenced the instant action on September 15, 2021, seeking declaratory judgment that C&M did not infringe IBE's intellectual property, including IBE's federal trademark registrations for “Invisible Bead Extensions” with Registration No. 6,116,743 (the “'743 Trademark”) and “IBE” with Registration No. 6,266,446 (the “'446 Trademark”). (Dkt. 3 (Complaint) ¶ 1.) C&M also asserted claims for (1) cancellation of the '743 Trademark due to fraudulent misuse, fraud on the United States Patent and Trademark Office (“USPTO”), and on the grounds that it is descriptive and functional; and (2) compensatory and treble damages for IBE's alleged Sherman Act and Clayton Act violations premised on invalid intellectual property rights, including both the '743 and '446 Trademarks. (Compl. ¶ 1.)
IBE answered and asserted counterclaims on November 16, 2021. (Dkt. 16.) IBE's counterclaims allege (1) breach of contract based on C&M's failure to abide by the terms of the partnership agreement with IBE; (2) federal trademark infringement and false designation of origin with respect to the '743 and '446 Trademarks; and (3) trademark infringement, unfair competition, and dilution under New York common and statutory law. (Dkt. 16 at 15-16 ¶ 1.)
On December 21, 2021, the Court issued a Civil Case Management Plan and Scheduling Order setting January 20, 2022 as the deadline by which the parties could amend their pleadings or join additional parties. (Dkt. 24 at 1.) The Court also set April 21, 2022 as the deadline for completing fact discovery and July 25, 2022 as the deadline for completing expert discovery. (Dkt. 24 at 1-2.)
On January 10, 2022, C&M filed the FAC. Among other additions, the FAC asserted that IBE's pending patent application was invalid for multiple reasons, including that the claimed method was anticipated by prior art, was obvious, and was being secured by IBE's attempted fraud on the USPTO. (FAC ¶¶ 66-74.) C&M also included several additional claims for damages, including claims for fraudulent inducement, unfair business practices under New York law, unjust enrichment, breach of contract, misappropriation of trade secrets, and breach of fiduciary duty. (FAC ¶¶ 124-84.)
On March 3, 2022, the parties jointly requested, and the Court granted, an extension of fact discovery to June 24, 2022 and expert discovery to September 23, 2022. (Dkts. 50-51.) On June 16, 2022, the parties again jointly requested, and the Court granted, an extension of fact discovery to September 2, 2022 and expert discovery to December 2, 2022. (Dkts. 79-80.) At neither point did C&M seek to alter the date by which the parties were to amend their pleadings to add new claims or parties.
In July 2022, IBE deposed C&M's Chief Executive Officer, Dafina Smith (“Smith”). (Dkts. 98,99.) In mid-August 2022, C&M deposed Turley, founder and co-owner of both IBE and Kitsune, an IBE affiliate offering luxury hand-tied hair products (Dkts. 132-22, 132-23); Tyler Turley, Turley's husband as well as IBE's majority owner and corporate representative (Dkt. 132-21); and Currier, an IBE stylist and co-owner of Kitsune (Dkt. 132-26). On August 11, 2022, IBE produced 8,358 pages of documents to C&M. (Pl. Mem. at 17.)
“Pl. Mem.” Refers to Plaintiff Covet & Mane's Memorandum Of Law In Support Of Its Motion To Amend Its Complaint at Dkt. 131.
On August 23, 2022, IBE's pending patent application issued as Patent No. U.S. 11,419,376 B2 (the “'376 Patent” or “IBE Patent”). (Dkt. 108-1.) On August 29, 2022, C&M informed the Court of the '376 Patent having issued, requested an extension of fact discovery of at least 60 days, and previewed its forthcoming motion for leave to file a second amended complaint to include claims related to the '376 Patent as well as to add additional defendants based on information newly disclosed in the recently produced documents. (Dkt. 108.) IBE opposed both the length of the fact discovery extension requested and C&M's request for leave to amend. (Dkts. 111, 116.)
The Court held a discovery conference on September 12, 2022 to discuss discovery disputes and C&M's desire to amend its complaint. (See Dkts. 113, 117.) Following the conference, the Court ordered full briefing on C&M's application to file a Second Amended Complaint (“SAC”). The Court also extended fact discovery to October 31, 2022. (Dkt. 118.)
C&M moved for leave to file its SAC on September 29, 2022. (Dkts. 128-29, 13132, 138-39.) The proposed SAC includes nine additional claims that can be grouped into three categories: (1) cancellation of the '446 Trademark for “IBE” pursuant to 15 U.S.C. § 1119, cancellation of the '446 Trademark for false and fraudulent procurement thereof, and fraudulent misuse of the '446 Trademark (together, the “'446 Trademark Claims”); (2) declaration that the '376 Patent is invalid due to obviousness, declaration that the '376 Patent is invalid as anticipated by prior art, declaration that the IBE Patent is invalid due to an on-sale bar, cancellation of the '376 Patent due to inequitable conduct, and fraudulent misuse of the '376 Patent (together, the “Patent Claims”); and (3) product and brand disparagement. (See SAC ¶¶ 224-310, 373-79.) Based on information purportedly first learned during discovery in August 2022, C&M also seeks to add three defendants: Kitsune, Turley, and Currier (together, the “New Defendants”). C&M asserts that it acted diligently in seeking to amend, considering the recent issuance of the '376 Patent, newly discovered information, and IBE's alleged delay in producing requested documents.
C&M's proposed SAC is attached as Ex. 1 to the Affirmation Of Laura-Michelle Horgan In Support Of Plaintiff's Motion For Leave To Amend at Dkt. 139-1.
On October 11, 2022, IBE presented to C&M a release and covenant not to sue related to the '376 Patent (the “Covenant”) and asked that, in view of the Covenant, C&M withdraw its motion to add allegations regarding the '376 Patent. (Dkt. 145-1.) The language of the Covenant as initially proposed read:
IBE, on behalf of itself and any successors-in-interest to the '376 patent, hereby releases and covenants not to sue Covet & Mane, LLC (“C&M”) for infringement of the '376 patent for the use, sale, and/or offer for sale of any products or services, including methods employed by those products or services, that currently exist and have been used[,] sold, and/or offered for sale by C&M as of October 11, 2022.(Dkt. 145-1.) C&M rejected the Covenant and the request to withdraw its motion to amend. (Dkt. 145-2 at 2.) IBE then clarified that it was offering a covenant not to sue, not only for past conduct, but also “on a going-forward basis for any products or services that are being or have been offered by C&M as of the present date.” (Dkt. 145-2 at 1.) IBE offered to amend the Covenant to state:
IBE, on behalf of itself and any successors-in-interest to the '376 patent, hereby releases and covenants not to sue Covet & Mane, LLC (“C&M”) for infringement of the '376 patent for the past, present, or future use, sale, and/or offer for sale of any products or services, including methods employed by those products or services, that currently exist and have been used[,] sold, and/or offered for sale by C&M as of October 11, 2022.(Dkt. 145-2 at 2) (emphasis in original). C&M again rejected the Covenant, stating that it did not eliminate C&M's risk of being accused of patent infringement for providing both existing and future educational services. (Dkt. 145-2 at 1.)
On October 19, 2022, IBE filed its memorandum of law in opposition. (Dkts. 14445.) IBE argues that its proposed Covenant deprives the Court of a live controversy and thus the Court's jurisdiction to issue declaratory judgment as to C&M's patent-related claims, and, in the alternative, that the claims are futile. IBE also argues that C&M's proposed SAC relies on information C&M knew or should have known prior to the Court's deadline to amend; that accepting the SAC would delay proceedings; and that all Defendants would be severely prejudiced by the new amendments given the closure of fact discovery.
C&M replied on November 14, 2022. (Dkts. 157-58.) On December 13, 2022, IBE sent a letter brief to the Court in response. (Dkt. 160.) Although recognizing that IBE's brief was a belated and unauthorized sur-reply, the Court stated that it would consider the letter to the extent it deemed appropriate and permitted C&M to file a letter in response. (Dkt. 162.) C&M responded on December 22, 2022, at which time the motion was fully briefed. (Dkt. 163.) The Court heard oral argument, which both parties requested, on March 22, 2023.
LEGAL STANDARDS
Two Federal Rules of Civil Procedure may be implicated by a motion to amend. Generally speaking, Rule 15(a) applies to amendments made prior to a scheduling order's deadline to amend, while Rule 16(b) comes into play when amendments are sought to be made after a deadline to amend has expired. The distinction is important because under Rule 16(b), leave to amend requires “good cause” following expiration of the deadline, whereas the standards under Rule 15(a) are considered more flexible: “Where ... the Court sets a deadline for amendments to the complaint and a party moves to amend once the deadline has passed, the Court must balance the more liberal standard of Rule 15(a) against the requirements of Federal Rule of Civil Procedure 16(b).” Mohegan Lake Motors, Inc. v. Maoli, No. 16-CV-6717, 2018 WL 4278352, at *5 (S.D.N.Y. June 8, 2018), at * 5 (quoting Volunteer Fire Association of Tappan, Inc. v. County of Rockland, No. 09-CV-4622, 2010 WL 4968247, at *3 (S.D.N.Y. Nov. 24, 2010)).
Under Rule 15(a)(2), “[t]he court should freely give leave when justice so requires.” Fed.R.Civ.P. 15(a)(2); see Aetna Casualty & Surety Co. v. Aniero Concrete Co., 404 F.3d 566, 603 (2d Cir. 2005). A district court, however, “has discretion to deny leave for good reason.” McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 200 (2d Cir. 2007). The Second Circuit has held that a Rule 15(a) motion “should be denied only for such reasons as undue delay, bad faith, futility of the amendment, and perhaps most important, the resulting prejudice to the opposing party.” Aetna Casualty, 403 F.2d at 603-04 (quoting Richardson Greenshields Securities, Inc. v. Lau, 825 F.2d 647, 653 n.6 (2d Cir.1987)). Delay alone, however, is an insufficient justification for the denial of a motion to amend under Rule 15(a). Block v. First Blood Associates, 988 F.2d 344, 350 (2d Cir. 1993)).
“Prejudice to the nonmoving party may arise when the proposed amendment causes the nonmoving party to ‘expend significant additional resources to conduct discovery and prepare for trial,' or when the proposed amendment causes significant delay to the disposition of the original claim or claims.” Maoli, 2018 WL 4278352, at *5 (S.D.N.Y. June 8, 2018) (quoting Block, 988 F.2d at 350). “The degree of potential prejudice a motion to amend may cause is evaluated against the overall progress of the litigation: the closer to the end of discovery or the closer to trial a motion to amend is filed, the more likely that it will cause prejudice and delay to the nonmoving party.” Maoli, 2018 WL 4278352, at *5 (citing GEM Global Yield Fund, Ltd. v. Surgilight, Inc., 2006 WL 2389345, at *11 (S.D.N.Y. Aug. 17, 2006)).
The standards under Rule 16(b) are stricter. “Under Rule 16(b), a party moving to amend after the applicable deadline must demonstrate good cause. Whether good cause exists depends on the diligence of the moving party. In other words, the movant must show that the deadlines could not have been reasonably met despite its diligence.” Tappan, 2010 WL 4968247, at *3 (internal quotation marks, citations, and brackets omitted). The burden of showing diligence is borne by the moving party. Fresh Del Monte Produce, Inc. v. Del Monte Foods, Inc., 304 F.R.D. 170, 175 (S.D.N.Y. 2014). “A party is not considered to have acted diligently where the proposed amendment is based on information that the party knew, or should have known, in advance of the motion deadline.” Id. at 174-75 (internal quotation marks omitted). Although “the primary consideration is whether the moving party can demonstrate diligence,” it is “not ... the only consideration.” Kassner v. 2nd Avenue Delicatessen Inc., 496 F.3d 229, 244 (2d Cir. 2007). “[W]here a party's motion to amend would require altering a court's scheduling order, the party must satisfy both Federal Rules of Civil Procedure 15 and 16 to be permitted to amend.” International Technologies Marketing, Inc. v. Verint Systems, Ltd., 850 Fed.Appx. 38, 43 (2d Cir. 2021) (internal quotation marks omitted) (emphasis in original).
Here, the Court's scheduling order required that any motion to amend the pleadings be made by January 20, 2022. (See Dkt. 24.) Accordingly, the “good cause” standard of diligence applies, together with considerations of futility, bad faith, and prejudice.
DISCUSSION
The Court addresses below each of the three groups of proposed additional claims, followed by the three proposed additional defendants.
I. New Claims
As explained above, C&M seeks to add three groups of substantive claims to its complaint: the Patent Claims, the '446 Trademark Claims, and the Product Disparagement Claim. The Court concludes that C&M should be granted leave to amend to add the Patent Claims and the '446 Trademark Claims, but not the Product Disparagement Claim.
A. The Patent Claims
C&M states that is has good cause for seeking leave to add the Patent Claims now as they only matured upon the IBE Patent's issuance on August 23, 2022; that C&M has standing to assert these claims; and that the claims were anticipated by the FAC, are intertwined with existing claims, and have merit. C&M also asserts that adding the Patent Claims to the instant litigation would be in the interest of judicial economy. IBE counters that its proposed Covenant deprives the Court of subject matter jurisdiction to issue a declaratory judgment because the Covenant eliminates any immediate controversy and, otherwise, the Patent Claims are futile and prejudicial. IBE's contentions do not stand up to scrutiny.
1. The Covenant Neither Extinguishes The Live Controversy Nor Divests The Court of Subject Matter Jurisdiction
a. Applicable Law Governing Declaratory Judgment Jurisdiction and Covenants Not To Sue
The parties' briefs discuss the proposed Patent Claims in the context of C&M's request for declaratory relief. The Declaratory Judgment Act provides in relevant part: “In a case of actual controversy within its jurisdiction ... any court of the United States ... may declare the rights and other legal relations of any interested party seeking such declaration.” 28 U.S.C. § 2201(a).
While the relief sought in the proposed SAC with respect to the Patent Claims largely is declaratory in nature, it also includes other forms of requested relief. In particular, C&M's Eleventh Claim For Relief seeks cancellation of the '376 Patent due to inequitable conduct (see SAC at 55), while C&M's Twelfth Claim For Relief seeks damages for, inter alia, “fraudulent misuse,” which, based on the allegations, appears to refer to patent misuse. (SAC at 56-58.) Because the Covenant is insufficient to render moot C&M's Patent Claims for declaratory judgment, it is no more effective in mooting the Patent Claims seeking other relief.
“[T]he phrase ‘case of actual controversy' in the Act refers to the type of ‘Cases' and ‘Controversies' that are justiciable under Article III” of the United States Constitution. MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127, 127 S.Ct. 764, 771 (2007) (citing Aetna Life Insurance Co. v. Haworth, 300 U.S. 227, 240, 57 S.Ct. 461, 463-64 (1937)). An “actual controversy must be extant at all stages of review,” Alvarez v. Smith, 588 U.S. 87, 92, 130 S.Ct. 576, 580 (2009) (internal quotation marks omitted), and must, at all times, remain “definite and concrete.” MedImmune, 549 U.S. at 127, S.Ct. at 771. In short, “‘[t]hroughout the litigation,' the party seeking relief ‘must have suffered, or be threatened with, an actual injury traceable to the defendant and likely to be redressed by a favorable judicial decision.'” United States v. Juvenile Male, 564 U.S. 932, 936, 131 S.Ct. 2860, 2864 (2011) (quoting Spencer v. Kemna, 523 U.S. 1, 7, 118 S.Ct. 978, 983 (1998)).
When an actual controversy ceases to exist, the claim becomes moot. “A case becomes moot - and therefore no longer a ‘Case' or ‘Controversy' for purposes of Article III - ‘when the issues presented are no longer “live” or the parties lack a legally cognizable interest in the outcome.'” Already, LLC v. Nike, Inc., 568 U.S. 85, 91, 133 S.Ct. 721, 726-27 (2013) (quoting Murphy v. Hunt, 455 U.S. 478, 481, 102 S.Ct. 1181,1183 (1982)). “No matter how vehemently the parties continue to dispute the lawfulness of the conduct that precipitated the lawsuit, the case is moot if the dispute ‘is no longer embedded in any actual controversy about the plaintiffs' particular legal rights.'” Id., 568 U.S. at 91, 133 S.Ct. at 727 (quoting Alvarez, 558 U.S. at 93, 130 S.Ct. at 580).
One way in which a case can become moot is when the defendant issues a covenant not to sue. “As the Supreme Court has recognized, a covenant not to sue a declaratory judgment plaintiff can moot a controversy between the parties.” Organic Seed Growers and Trade Association v. Monsanto Co., 718 F.3d 1350, 1357 (Fed. Cir. 2013) (citing Already, 568 U.S. at 100, 133 S.Ct. at 732). Intellectual property cases such as this one are a prime example. “[W]hen a declaratory judgment plaintiff seeks a declaration that an asserted right is invalid or otherwise unenforceable and the declaratory defendant provides the plaintiff with a covenant not to sue for infringement of that right, that covenant can ‘extinguish any current or future case or controversy between the parties, and divest the district court of subject matter jurisdiction.'” Velvet Underground v. Andy Warhol Foundation for the Visual Arts, Inc., 890 F.Supp.2d 398, 404 (S.D.N.Y. 2012) (alterations omitted) (quoting Dow Jones & Co. v. Ablaise Ltd., 606 F.3d 1338, 1348 (Fed. Cir. 2010)).
Not all covenants not to sue, however, will moot a controversy; “[w]hether a covenant not to sue will divest the trial court of jurisdiction depends on what is covered by the covenant.” Revolution Eyewear, Inc. v. Aspex Eyewear, Inc., 556 F.3d 1294, 1297 (Fed. Cir. 2009). To determine “whether a covenant not to sue eliminates a justiciable case or controversy in a declaratory judgment action,” the Second Circuit has directed courts to consider the totality of the circumstances and “in addition to other factors: (1) the language of the covenant, (2) whether the covenant covers future, as well as past, activity and products, and (3) evidence of intention or lack of intention, on the part of the party asserting jurisdiction, to engage in new activity or to develop new potentially infringing products that arguably are not covered by the covenant.” Nike, Inc. v. Already,LLC, 663 F.3d 89, 96 (2d Cir. 2011), aff'd 568 U.S. 85, 133 S.Ct. 721 (2013) (footnotes omitted).
In affirming the Second Circuit's decision, the Supreme Court described the Second Circuit's holding regarding these factors and, while not expressly adopting or rejecting that formulation, proceeded to apply those same factors in evaluating the covenant not to sue at issue. See Already, 568 U.S. at 93-94, 133 S.Ct. at 727-28 (terms of covenant, and past-future products) and 568 U.S. at 94-95, 133 S.Ct. at 728-29 (intent to engage in uncovered activity).
The burden of establishing that a covenant not to sue extinguishes a controversy lies with the party providing the covenant. The burden is not a light one: a party “‘claiming that its voluntary compliance moots a case bears the formidable burden of showing that it is absolutely clear the allegedly wrongful behavior could not reasonably be expected to recur.'” Already, 568 U.S. at 91, 133 S.Ct at 727 (quoting Friends of the Earth, Inc. v. Laidlaw Environmental Services (TOC), Inc., 528 U.S. 167, 190, 120 S.Ct. 693, 709 (2000)). As the party attempting to moot C&M's proposed new Patent Claims, it is therefore “[IBE]'s burden to show that it ‘could not reasonably be expected' to [take] enforcement efforts against [C&M].” Id. (quoting Friends of the Earth, 528 U.S. at 190, 120 S.Ct. at 709)).
b. IBE's Covenant Does Not Eliminate The Controversy
Like covenants previously accepted by courts, IBE's Covenant, as amended, is unconditional and explicitly covers the “past, present, or future use, sale, and/or offer for sale” of any products or educational services that existed as of or before October 11, 2022, the date it was offered. See generally Nike, 663 F.3d 89; Lifeguard Licensing Corp. v. Kozak, 371 F.Supp.3d 114 (S.D.N.Y. 2019); Velvet Underground, 890 F.Supp.2d 398. Two factors, however, distinguish IBE's Covenant from those that have been found sufficient to moot a controversy. First, IBE's Covenant does not reach beyond C&M to protect C&M's customers or partners, leaving open the question of whether those stylists who C&M instructs on its methods are protected from suit and whether C&M will be exposed to claims of contributing to or inducing infringement. Compare with Commercial Recovery Corp. v. Bilateral Credit Corp., LLC, No. 12-CV-5287, 2013 WL 8350184, at *3 (S.D.N.Y. Dec. 19, 2013) (covenant not to sue that “reache[d] beyond ... to protect ... suppliers, distributors, customers, and partners” mooted case). Second, the Covenant does not cover future products and services that C&M may seek to make and sell.
At oral argument on March 22, 2023, IBE's counsel suggested willingness to modify the Covenant to address concerns about coverage of customers or partners, but then proceeded to equivocate. As such, the Covenant remains as presented in the evidence for the instant motion.
IBE argues that it “need not provide C&M with an open-ended covenant with respect to any future action taken by C&M.” (Def. Mem. at 12.) While that is true, “a court is not divested of jurisdiction where the declaratory judgment plaintiff has taken ‘meaningful preparatory steps' toward developing new or updated technology not covered by the [covenant].” ICOS Vision Systems Corp., N.V. v. Scanner Technologies Corp., 699 F.Supp.2d 664, 669 (S.D.N.Y. 2010) (quoting Diamonds.net LLC v. Idex Online, Ltd., 590 F.Supp.2d 593, 600 (S.D.N.Y. 2008) (finding a covenant that covered the product “‘as it currently exists as of the date of this covenant, or previously existed'” insufficient to divest court of declaratory judgment jurisdiction) (emphasis in original)). Since “information about [its] business activities and plans are uniquely within its possession,” it is “incumbent on [C&M] to indicate that it engages in or has sufficiently concrete plans to engage in activities not covered by the covenant.” Already, 568 U.S. at 94, 133 S.Ct. at 728-29. C&M has done so.
“Def Mem.” Refers To Defendant/Counterclaimant's Memorandum Of Law In Opposition To Plaintiff/Counterclaim Defendant's Motion For Leave To Amend Its Complaint, at Dkt. 144.
C&M represents that it has already developed plans to roll out broader educational programs and has held off on doing so only because of IBE's conduct. (Pl. Reply at 8.) Those plans are evidenced by (1) a “C&M Education Guide” to provide stylists with an overview of its education program regarding applying hair wefts using the invisible bead method; (2) a stylist education program called “The Experience”; and (3) two corporate entities to bring hair extension education to market. (SAC ¶¶ 48-52.) In support, C&M offers the Affidavit of its CEO Dafina Smith which includes a copy of a training presentation for the C&M Education Guide (along with its copyright registration), as well as certificates of formation in Delaware and New York for the corporate entities. (See Dkts. 129, 129-6, 129-7, 129-8, 129-9.)
“Pl. Reply” Refers To Plaintiff Covet & Mane's Reply Memorandum Of Law In Further Support Of Its Motion To Amend Its Complaint, at Dkt. 158.
IBE contends that C&M's plans are too speculative and non-specific. (Def. Sur-Reply at 4.) The Court disagrees. At oral argument, C&M's counsel represented that C&M already had rolled out the new educational initiative. But even if that had not yet happened, C&M's submissions go beyond “a single declaration from its [CEO] expressing the company's plans to make unspecified ‘improvements' to its system in the ‘near future.'” Commercial Recovery Corp., 2013 WL 8350184, at *4. Rather, C&M provides a PowerPoint presentation for stylists that details C&M's philosophy on training and outlines C&M's stylist training programs. The PowerPoint lists the responsibilities of and benefits for C&M-trained stylists, including hands-on trainings during live classes three times a year in New York or Los Angeles and an annual “Train the Trainers” event. It includes a slide providing various compensation details for stylists who attend trainings and provide coaching support. (Dkt. 129-6 at 5-6.) The presentation also includes guidance on the appropriate “tone of voice” to use when communicating with clients and how to optimize Instagram to engage with new and existing clients. (Dkt. 129-6 at 4, 1012.) Similarly, Smith's affidavit is specific; she states that, prior to receipt of IBE's cease-and-desist letter, C&M planned to hold a two-day stylist education program called “The Experience” on October 17 and 18, 2021 with a similar event planned for November 2021. (Dkt. 129 ¶ 82.) C&M has demonstrated that, “but for a finding that [its Education Guide or training programs] infringe[] .., [it] would and could begin production immediately.” Diamonds.net, 590 F.Supp.2d at 599 (quoting Sweetheart Plastics, Inc. v. Illinois Tool Works, Inc., 439 F.2d 871, 875 (1st Cir.1971)). (See Dkt. 129 ¶ 83.)
“Def. Sur-Reply” Refers To Defendant/Counterclaim Plaintiff's Letter at Dkt. 160.
In Already, the Supreme Court concluded that, given the covenant's breadth, Nike's enforcement of its trademark “cannot reasonably be expected to recur.” 568 U.S. at 100, 133 S.Ct. at 732. That is not the case here. Given C&M's significant and concrete preparatory activities, as well as the Covenant's omission of protection for C&M's customers and partners, it is not “hard to imagine a scenario” under which C&M could infringe the '376 Patent, or contribute to or induce infringement by others, and yet not fall under the proposed Covenant. Nike, 663 F.3d at 97. Since C&M's activities constitute “‘meaningful preparation to conduct potentially infringing activity,'” there is a live controversy supporting declaratory relief. Diamonds.net, 590 F.Supp.2d at 599 (quoting Cat Tech LLC v. TubeMaster, Inc., 528 F.3d 871, 880 (Fed. Cir. 2008).)
2. Futility
IBE next argues that C&M's Patent Claims are futile. “[L]eave to amend will be denied as futile only if the proposed new claim cannot withstand a 12(b)(6) motion to dismiss for failure to state a claim.” Milanese v. Rust-Oleum Corp., 244 F.3d 104, 110 (2d Cir. 2001) (citing Ricciuti v. N.Y.C. Transit Authority, 941 F.2d 119, 123 (2d Cir. 1991)). To survive a Rule 12(b)(6) motion, a plaintiff must plead sufficient facts “to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 1974 (2007). A claim is facially plausible “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949 (2009) (citing Twombly, 550 U.S. at 556, 127 S.Ct. at 1965-66).
IBE first argues that the Noerr-Pennington doctrine renders C&M's Patent Claims futile. The Noerr-Pennington doctrine - “a body of case law constituting a limitation on the scope of the Sherman [antitrust] Act” - originally granted immunity from liability to parties who petition the government for redress but has been extended by the Second Circuit to encompass all petitioning activity, including “concerted efforts incident to litigation, such as pre-litigation ‘threat letters,' and settlement offers.” Primetime 24 Joint Venture v. National Broadcasting, Co., Inc., 219 F.3d 92, 99-100 (2d Cir. 2000). “As the [Second Circuit] explained, litigation-related communications ‘are not literally petitions to the government,' but they are ‘a preliminary step to resort to litigation if necessary' and ‘therefore fall[ ] within the protection of the Noerr-Pennington doctrine.'” Singh v. NYCTL 2009-A Trust, No. 14-CV-2558, 2016 WL 3962009, at *4 (S.D.N.Y. July 20, 2016) (quoting Primetime 24 Joint Venture, 219 F.3d at 100). “The doctrine, however, does not shield a defendant from liability for instituting ‘sham' litigation ... or from a claim for damages where it has knowingly and willfully misrepresented facts to a government agency.” Barbarian Rugby Wear, Inc. v. PRL USA Holdings, Inc., No. 06-CV-2652, 2009 WL 884515, at *6 (S.D.N.Y. March 31, 2009) (internal quotation marks and citations omitted). Nor does it “protect the . procurement of patents by fraud.” Twin City Bakery Workers and Welfare Fund v. Astria Aktiebolag, 207 F.Supp.2d 221, 223 (S.D.N.Y. 2002) (citations omitted).
IBE contends that because the Patent Claims are based on IBE's cease-and-desist letter, which IBE categorizes as “activities incidental to litigation,” they are barred by the Noerr-Pennington doctrine. (Def. Mem. at 15.) But C&M's claims go well beyond the cease-and-desist letter. C&M alleges that IBE has engaged in patent misuse and, more broadly, a pattern of fraud and misrepresentation in filing for and obtaining invalid intellectual property rights - including the '376 Patent - from the USPTO. (See Compl. ¶¶ 65-66, 77, 85-100; FAC ¶¶ 65, 72, 82, 88-89, 100, 141; SAC ¶¶ 144, 192, 283-310.)
IBE next argues that C&M's claims are futile because the cease-and-desist letter is “not a threat to sue on IBE's Patent.” (Def. Mem. at 17.) The cease-and-desist letter states that IBE “is the owner of the ‘Invisible Bead Extensions' and ‘IBE' trademarks, including [the '743 and '446 Trademarks]” as well as “a patent application and copyrights covering its Invisible Bead Extensions method, published images, and related training materials.” (Dkt. 129-11.) The letter further states that “[i]t has come to [IBE's] attention that [C&M] is using IBE's Invisible Bead Extensions and IBE trademarks ... without authorization.” (Dkt. 129-11.) IBE requested that:
[C&M] remove any reference to Invisible Bead Extensions, Invisible Bead Method, and “IBE” from [its] website, social media, advertising, education, or other publications and communications, and that [C&M] cease all use of this and other similar terms. In addition, [IBE] ask[s] that [C&M] refrain from any indication that you are authorized by, affiliated with, or otherwise associated with Invisible Bead Extensions.(Dkt. 129-11.) The letter demanded that C&M provide a response by September 2, 2021 confirming that C&M will comply with the request. If not, IBE “[would] take the steps necessary to enforce [its] intellectual property rights, up to and including filing a lawsuit in federal court.” (Dkt. 129-11.)
C&M argues that the cease-and-desist letter created reasonable apprehension that IBE will sue for patent infringement upon issuance - which has now occurred - of the patent that is the subject of the application identified in IBE's letter. IBE contends that C&M misrepresents a request for C&M to avoid using IBE's trademarks as a threat to sue on the IBE patent. The Court disagrees. The cease-and-desist letter expressly refers to IBE's patent application covering its Invisible Beads Extension method of handtying hair wefts. (See also Dkts. 129-2 (patent application), 129-3 (issued patent).) IBE did not limit its threat to sue just to its registered trademarks. Rather, IBE more broadly stated that it will “take the steps necessary to enforce [its] intellectual property rights,” which include the method that is the subject of the patent application mentioned as among those rights. (Dkt. 129-11) (emphasis added).
And although the '376 Patent had not yet issued when IBE sent the cease-and-desist letter, “one can still be in reasonable apprehension of an infringement suit with respect to a patent that had not yet been issued . so long as that patent has issued at the time the complaint was filed.” In re Dr. Reddy's Laboratories, Ltd., No. 01-CV-10102, 2002 WL 31059289, at *8 (S.D.N.Y. Sept. 13, 2002). Here, the relevant patent application was filed on September 3, 2020 (Dkt. 129-3 at 1), and IBE sent its cease-and-desist letter to C&M on August 26, 2021, expressly referencing its “patent application” (Dkt. 129-11), which, by that time, had been pending for nearly a year. Now that the '376 Patent has issued - prior to filing of the SAC - C&M has reasonable apprehension that IBE will sue to enforce it. The Patent Claims are therefore ripe for inclusion in an amended pleading.
On March 15, 2023, C&M notified the Court that, on March 10, 2023, the USPTO issued a Notice of Allowance for a second method patent sought by IBE, identified as patent application No. 17/887,295 (the “'295 Application”). (See Dkt. 172.) C&M requested that the instant Motion to Amend be deemed to include claims challenging the validity and enforceability of the subject of the ‘295 Application. But, as acknowledged by all parties as of the time of oral argument on March 22, 2023, no patent for the ‘295 Application has yet been issued - an event that is distinct from a notice of allowance. Claims regarding the validity and enforceability of the second patent thus are premature. Of course, given the Notice of Allowance, and absent abandonment of the patent by IBE or another exceptional circumstance, registration is likely to occur in the near future when IBE pays the registration fee. See 35 U.S.C. § 151 (providing that patent shall issue upon payment of fee, which must be made within three months following notice of allowance). Accordingly, by separate order, the Court is directing the parties to include the ‘295 Application in discovery. If the patent issues, C&M may seek leave to add the patent to this action.
3. Undue Delay
C&M did not delay and has good cause in moving to amend now as its Patent Claims only ripened upon the IBE Patent's issuance on August 23, 2022. IBE argues that C&M cannot claim diligence in waiting to seek leave to amend until three days before fact discovery was set to close while simultaneously arguing that the Patent Claims were “foreshadowed in its earlier pleadings.” “[I]f the new allegations simply expand on subjects that have been included in this case from its inception,” IBE asserts, “then C&M was hardly diligent in waiting until the last days of fact discovery to seek to amend its FAC.” (Def. Mem. at 28 (internal quotation marks omitted).) That contention is without merit.
Although fact discovery was set to close on September 2, 2022, Plaintiffs requested, and the Court granted, an extension until October 31, 2022. (Dkt. 118.)
C&M's claims for invalidity, non-infringement, and misuse were not ripe until the '376 Patent issued on August 23, 2022. See In re Dr. Reddy's Laboratories, 2002 WL 31059289, at *8 (“It is axiomatic that [a party] cannot obtain a declaratory judgment of invalidity and/or noninfringement on a patent that has not yet been issued by the PTO at the time the complaint was filed”); GAF Building Material Corp. v. Elk Corp. of Dallas, 90 F.3d 479, 482 (Fed. Cir. 1996) (noting that there can be no claim “unless it is made with respect to a patent that has issued before a complaint is filed”); Ogindo v. DeFleur, No. 07-CV-1322, 2008 WL 5105157, at *1 (N.D.N.Y. Dec. 1, 2008) (“There is no claim for patent infringement unless a patent has issued”). IBE knows this - it explicitly rejected the suggestion that C&M could assert patent-related claims prior to issuance of the '376 Patent. (See Tr. at ECF 19, 22.) Even with the utmost diligence, C&M could not have met the amended pleadings deadline for asserting its Patent Claims seeking to invalidate or cancel the '376 Patent because those claims required the IBE Patent to first issue. C&M had good cause to wait until the '376 Patent issued to seek leave to amend and did not unduly delay in doing so on August 29, 2022, only six days after the patent had issued.
“Tr.” refers to the unofficial transcript of the parties' May 11, 2022 discovery hearing, filed at Dkt. 60. At that hearing, in reply to a question about potential disclosures related to patent applications, IBE's counsel said “we're talking about a pending application, no patent yet has been issued. So there's a ripeness issue I think.” (Tr. at ECF 19.) IBE's counsel later stated that, “to the extent that [C&M is] looking for ... grounds for invalidity or other things like that with respect to our patent that has [not been] issued yet that's not appropriate.” (Tr. at ECF 22.)
4. Prejudice
IBE argues that it will be prejudiced if C&M is permitted to add claims at this late stage of discovery because inclusion of the Patent Claims fundamentally changes the “entire framework” of the case and will demand “different and costly discovery.” (Def. Mem. at 27.) C&M argues that its proposed Patent Claims were anticipated by and are inextricably intertwined with its existing claims. Although IBE's contentions are true to a certain extent, they are not sufficient to bar addition of the Patent Claims.
The Patent Claims will expand the scope of the case and require additional time and expense for both parties. But that does not equate with undue prejudice for several reasons. See Duling v. Gristede's Operating Corp., 265 F.R.D. 91, 100-01 (S.D.N.Y. 2010) (collecting cases); see also Christians of California, Inc. v. Clive Christian New York, LLP, No. 13-CV-0275, 2014 WL 3605526, at *5 (S.D.N.Y. July 18, 2014) (finding that mere allegations that an amendment “will require the expenditure of additional time, effort, or money do not themselves constitute undue prejudice”) (internal quotation marks and brackets omitted).
First, C&M filed its motion before the close of discovery, albeit toward the end. See Agerbrink v. Model Service LLC, 155 F.Supp.3d 448, 454-55 (S.D.N.Y. 2016). While discovery has since closed, “[t]he mere fact that discovery is completed does not mean that the defendants will suffer undue prejudice.” Hampton Bays Connections, Inc. v. Duffy, 212 F.R.D. 119, 123 (E.D.N.Y. 2003). Second, there are no pending dispositive motions, and no trial date has been set. See Werking v. Andrews, 526 Fed.Appx. 94, 96 (2d Cir. 2013) (summary order) (stating that courts are more “likely to find prejudice where the parties have already completed discovery and the defendant has moved for summary judgment”); JP Morgan Chase Bank, N.A. v. IDW Group, LLC, No. 08-CV-9116, 2009 WL 1357946, at *5 (S.D.N.Y. May 12, 2009) (allowing amendment and citing lack of pending dispositive motions or trial date). Third, if leave to amend is denied, C&M still could file the Patent Claims in a separate action. That would create multiple litigations involving the same two parties related to the same products and services. The Court fails to see how that would be less prejudicial to IBE than proceeding more efficiently in a single litigation. Spectrum Dynamics Medical Limited v. General Electric Co., No. 18-CV-11386, 2023 WL 242721, at *3 (S.D.N.Y. Jan. 18, 2023) (recognizing that if leave to amend is denied, plaintiff “may be required to litigate a separate [and substantially similar] action ... which would result in an equal or greater expense for all parties”); Topps Co. v. Cadbury Stani S.A.I.C., No. 99-CV-9437, 2002 WL 31014833, at *3 (S.D.N.Y. Sept. 10, 2002) (“even where the non-movant demonstrates prejudice, that prejudice must be balanced against the court's interest in litigating all potential claims in a single action”).
“Whether a party had prior notice of a claim and whether the new claim arises from the same transaction as the claims in the original pleading are central to the undue prejudice analysis.” Agerbrink, 155 F.Supp.3d at 455. Prejudice occurs if, for example, “the opposing party would experience undue difficulty in defending a lawsuit because of a change of tactics or theories on the part of the movant.” Henry v. Murphy, No. M-82, 2002 WL 24307, at *2 (S.D.N.Y. Jan. 8, 2002), aff'd, 50 F. App'x. 55 (2d Cir. 2002). IBE argues that the new claims in the SAC are “entirely new,” “materially different from the FAC,” and “an attempt to reset its litigation and start again.” (Def. Mem. at 3, 26.) But, as C&M notes, the new Patent Claims were anticipated in both its initial Complaint and the FAC. (Pl. Mem. at 11-13.)
IBE filed the application for the '376 Patent on September 3, 2019. (Dkt. 129-3 at ECF 21.) C&M's initial Complaint not only identified that IBE had a patent application pending for its “IBE Method,” but also repeatedly alleged that IBE was wielding its trademark registrations as a surrogate for patent rights. (Compl. ¶¶ 59, 64, 77, 92, 96.) The FAC expanded on those allegations, identifying the pending patent's application number and including a copy of its abstract which states that the patent covers “[a] method of attaching hair extensions includ[ing] sectioning, beading, securing, and stitching hair extensions into a client's hair.” (FAC ¶¶ 66-67.) C&M alleged that the patent application was “invalid because the claimed invention is both anticipated by, and obvious under, the prior art” and that IBE “knew or should have known” that this method was well-known in the industry. (FAC ¶¶ 68-74.) The FAC further alleged that IBE was fraudulently seeking to induce the USPTO to issue an invalid patent, and that doing so was part of an illegal anticompetitive scheme. (FAC ¶¶ 87-88.) Those same allegations form the basis of C&M's now-proposed Patent Claims. (See SAC ¶¶ 140-71.)
The '376 Patent also has been the subject of discovery already taken. In its first set of document requests served on January 21, 2022, C&M sought information related to the patent application. (Dkt.139-4.) In response, IBE represented that it had provided the patent, the patent history, and everything else filed with the USPTO. (Dkt. 60 at 22.) Given that C&M repeatedly implicated the patent application at every stage of its pleadings, IBE cannot plausibly argue that it did not have notice of C&M's anticipated Patent Claims.
At the May 11, 2022 Discovery Hearing, the parties disputed whether IBE had in fact produced all of these materials. (Tr. at ECF 27-28.)
The Court is also unconvinced that including the Patent Claims amounts to an entirely different suit. To be sure, addition of the Patent Claims expands the litigation, but it does so in conjunction with the same underlying facts and claims upon which the existing claims are based. The '376 Patent describes a method of attaching hair wefts to natural hair through a process of sectioning, stitching, and using beads such that the beads are hidden under the hair extensions. (See Dkt. 129-3; see also SAC ¶¶ 149-50.) C&M alleges that IBE's trademarks for “Invisible Bead Extensions” and “IBE” are generic or at best descriptive as they merely describe the method used to attach hair extensions. In the FAC, C&M specifically alleged that “IBE's proposed mark did nothing more than describe [the] well-known technique [of applying hair extensions using invisible beads]” (FAC ¶ 78), the technique protected by the now-issued patent. Thus, although trademark and patent rights are distinct and require entirely different legal analysis, determining the validity of either IBE's trademarks or the IBE Patent requires analysis of the method implicated by both.
Finally, IBE argues that, even if the Court has jurisdiction and the Patent Claims are properly brought, the Court should exercise its discretion and decline to add the claims. (Def. Mem. at 13-14.) According to IBE, since it has never made a patent infringement allegation against C&M, “it would be imprudent and a potential waste of both the parties' and judicial resources for the Court to determine the validity of the [IBE Patent].” (Def. Mem. at 13-14, quoting WundaFormer, LLC v. Flex Studios, No. 15-CV-4802, 2015 WL 7181249, at *2 (S.D.N.Y. Nov. 10, 2015) (reversed on other grounds).) The Court disagrees. As explained above, C&M has reasonable apprehension that it will be exposed to a suit by IBE for infringement, be it direct, contributory, or induced. The Court concludes that it is in “the interests of justice [that] these related claims [are] tried together.” Olaf Soot Design, LLC v. Daktronics, Inc., 299 F.Supp.3d 395, 400 (S.D.N.Y. 2017).
For all the reasons stated above, C&M's motion to amend to add the Patent Claims should be granted.
B. The '446 Trademark Claims
The SAC includes three additional claims related to the '446 Registration: cancellation of the '446 Trademark for “IBE” pursuant to 15 U.S.C. § 1119, cancellation of the '446 Trademark for false and fraudulent procurement thereof, and fraudulent misuse of the '446 Trademark. In effect, those are but two claims: a damages claim for trademark misuse, and a claim for cancellation (15 U.S.C. § 1119 authorizes the Court to cancel a trademark registration; false and fraudulent procurement provides grounds for the court to exercise that authority). Regardless of their number, IBE argues that C&M does not have good cause to bring the additional '446 Trademark Claims because the '446 Trademark has been the subject of C&M's claims from the outset. C&M had all the information it needed to include the additional '446 Trademark Claims in its earlier pleadings and, therefore cannot demonstrate the diligence required to satisfy the Rule 16 standard. This is a case, however, where the Court should exercise its discretion to permit amendment.
The '446 Trademark has been included in the lawsuit from its inception. Indeed, IBE's cease-and-desist letter alleges C&M's infringement of both the '743 and '446 Trademarks. (Dkt. 129-11.) Consistent therewith, C&M's initial Complaint asserted allegations about the '446 Trademark along with the '743 Trademark. C&M sought declaratory judgment “that C&M has not violated any of Defendant IBE's intellectual property and, in particular” the '743 and '446 Trademarks. (Compl. ¶ 1 (emphasis added).) Elsewhere in the Complaint, C&M stated that IBE was “attempt[ing] to use trademark registrations, the '743 and '446 [Trademarks], as a surrogate for [then-unissued] patent rights.” (Compl. ¶¶ 77, 96 (emphasis added).) Yet, although C&M explicitly sought declaratory relief as to both the '743 and '446 Trademarks, cancellation of the '743 Trademark and damages for fraudulent misuse of the '743 Trademark, C&M did not include specific claims for cancellation and fraudulent misuse with respect to the '446 Trademark.
For the first time, although not pleading any new facts, C&M's proposed amendment includes specific claims for relief for cancellation of, and fraudulent misuse with respect to, the '446 Registration. (SAC ¶¶ 236-38 (Fifth Claim for Relief), 239-42 (Sixth Claim for Relief), 243-54 (Seventh Claim for Relief).) C&M's brief in support of its motion to amend does not address the three new claims related to the '446 Trademark. Nor does its reply, even though IBE, in its opposition brief, argued that C&M failed to demonstrate diligence in asserting those very claims. (Def. Mem. at 27-28.) For this reason alone, C&M could be deemed to have abandoned its bid to add claims for the '446 Trademark. See Felske v. Hirschmann, No. 10-CV-8899, 2012 WL 716632, at *3 (S.D.N.Y. March 1, 2012) (“A plaintiff effectively concedes a defendant's arguments by his failure to respond to them”); Rosenblatt v. City of New York, No. 05-CV-5521, 2007 WL 2197835, at *7 (S.D.N.Y. July 31, 2007) (“Plaintiff effectively concedes defendants' other arguments ... by her failure to respond to them”).
However, “[i]n appropriate circumstances, a district court has discretion to grant a motion to amend even where the moving party has not shown diligence in complying with a deadline for amendments in a Rule 16 scheduling order.” Fresh Del Monte Produce, 304 F.R.D. at 176; see also Kassner, 496 F.3d at 244 (“The district court, in the exercise of its discretion under Rule 16(b), also may consider other relevant factors including, in particular, whether allowing the amendment of the pleading at this stage of the litigation will prejudice defendants”); Anzovino v. Wingate of Dutchess, Inc., No. 21-CV-7625, 2022 WL 17076750, at *2 (S.D.N.Y. Nov. 18, 2022) (“‘the decision as to whether to let Rule 16(b) stand as a bar to amendment lies within the court's discretion'”) (quoting Qanouni v. D&H Ladies Apparel LLC, No. 18-CV-2763, 2021 WL 9036182, at *8 (S.D.N.Y. March 23, 2021); Shi Ming Chen v. Hunan Manor Enterprise, Inc., 437 F.Supp.3d 361, 365 (S.D.N.Y. 2020) (“we recognize that we have discretion to apply the more liberal standard that applies to motions to amend under Fed.R.Civ.P. 15 rather than the more exacting standard that applies to extending a deadline set under Fed.R.Civ.P. 16”). “Even when good cause is not shown,” as is the case here, “courts can still assess whether allowing further amendment of the pleadings would prejudice the defendants.” Alvarado v. 58 West LLC, No. 19-CV-7694, 2021 WL 9793332, at *1 (S.D.N.Y. May 28, 2021).
IBE does not suggest that futility, prejudice, or bad faith warrant prohibiting the addition of the '446 Trademark Claims, and the Court finds none. The '446 Trademark protects “IBE,” the acronymic abbreviation of “Invisible Bead Extensions” which is protected by the '743 Trademark. The '446 Trademark Claims do not add any new facts and do not appear to require new or more extensive discovery that could prolong the proceedings and prejudice IBE. Indeed, in its first set of document requests, C&M repeatedly asked for documents related to “the '446 Registration and/or the '743 Registration.” (See Dkt. 139-4 at 9-14.) “Where the amendment is not prejudicial,” as is the case here, the Court has the discretionary power to grant leave to amend “even where the moving party has not shown diligence in complying with a deadline for amendments.” Hadassah v. Hadassah Academic College, 19-CV-8953, 2021 WL 4459121, at *4 (S.D.N.Y. Sept. 29, 2021) (internal quotation marks omitted).
Finally, “any additional possible burdens created by the new claims must be viewed against the alternative of having [C&M] file a separate lawsuit raising these claims.” Fresh Del Monte Produce, Inc., 304 F.R.D. at 177. A separate lawsuit would be between the identical parties raising nearly identical issues under similar and related trademark registrations. Forcing C&M to seek relief for the '743 Trademark for “Invisible Bead Extensions” and the '446 Trademark for “IBE” in separate actions strikes the Court as illogical and unnecessarily duplicative. Thus, “there will be efficiencies achieved in having the amended [claims] included in this litigation.” Id.; see also Kleeberg v. Eber, 331 F.R.D. 302, 314 (S.D.N.Y. 2019) (granting leave to amend after considering “whether the amendment will promote judicial economy, particularly where denying leave to amend will cause there to be two separate proceedings in two different courts arising from the same operative facts”); Scott v. Chipotle Mexican Grill, Inc., 300 F.R.D. 193, 199 (S.D.N.Y. 2014) (“forcing plaintiffs to institute a new action against the defendant would run counter to the interests of judicial economy”) (internal quotation marks and brackets omitted); Guadagno v. M.A. Mortenson Co., 1:15-CV-00482, 2018 WL 4870693, at *7 (W.D.N.Y. Oct. 2, 2018) (“The judicial system benefits by efficient resolution in one proceeding of common issues of law and fact arising from the same alleged activity”) (quoting Hoffman-La Roche Inc. v. Sperling, 493 U.S. 165, 170, 110 S.Ct. 482, 486 (1989)).
The lack of diligence with respect to the additional Trademark Claims is not to be condoned. But it strikes the Court as unfair and unjust in the circumstances of this case - where there is no prejudice, discovery has been had on the matter, the amendments merely add express claims for additional legal theories and relief that parallel those already asserted to a related trademark, and do so without the addition of new facts - to visit on the client what likely was oversight by its attorneys. The Court therefore finds in its discretion that amendment to include the '446 Trademark Claims is warranted.
C. The Product Disparagement Claim
The proposed SAC includes a claim for product and brand disparagement stemming from allegedly false statements made by IBE and the proposed New Defendants to consumers and stylists in the industry, as well as in WhatsApp communications disclosed to C&M in IBE's August 2022 document production. IBE argues that the product disparagement claim is futile because C&M fails to plead essential elements and, in any event, is barred by New York's one-year statute of limitations. The Court agrees in part.
Product disparagement claims are subject to a one-year statute of limitations under New York law. N.Y. C.P.L.R. § 215(3). New York applies the single-publication rule to product disparagement; “the publication of a defamatory statement - however widespread its distribution - is in legal effect, one publication which gives rise to one cause of action, with the limitations period running from the date of publication.” Enigma Software Group USA, LLC v. Bleeping Computer LLC, 194 F.Supp.3d 263, 276 (S.D.N.Y. 2016) (internal quotation marks and citations omitted). The SAC, proposed as of September 28, 2022, alleges that IBE has published false and disparaging statements to third parties; the only message C&M identifies by date, however, is dated August 24, 2021. (SAC ¶ 377.) To have been properly plead within the one-year statute of limitations, C&M had to have brought this claim by August 24, 2022, which it did not do.
C&M's briefing makes scant mention of the product disparagement claim generally or the statute of limitations issue specifically. The product disparagement claim is wholly absent from C&M's brief in support of its motion, and nowhere in any of its papers does C&M provide a fulsome response to IBE's argument that the product disparagement claim is barred by the statute of limitations or otherwise futile. In asserting the statute of limitations bar, IBE's opposition rebuts an argument it anticipates C&M will make - “that the timing of its product disparagement claim should relate back to the date of its initial Complaint.” (Def. Mem. at 20.) In a footnote in its reply, C&M contends that, given IBE's failure to produce relevant documents for months, IBE's argument that the product disparagement claim is time-barred must be rejected. (Pl. Reply at 12 n. 19.) C&M seems to be attempting to invoke a “discovery” rule that would defer the start of the statute of limitations. Neither party has sufficiently briefed the statute of limitations issue, and the Court need not address it further.
Even if C&M were correct that its product disparagement claim is not time-barred, its claim is still futile. Under New York law, “‘[t]rade libel or product disparagement is an action to recover for words or conduct which tend to disparage or negatively reflect upon the condition, value or quality of a product or property.'” Enigma Software Group USA,, 194 F.Supp.3d at 291 (quoting Angio-Medical Corp. v. Eli Lilly & Co., 720 F.Supp. 269, 274 (S.D.N.Y. 1989). “To state a claim for trade libel [or product disparagement], a plaintiff must adequately plead ‘(1) falsity of the statement, (2) publication to a third person, (3) malice (express or implied), and (4) special damages.'” Enigma Software, 194 F.Supp.3d at 291 (quoting Angio-Medical Corp., 720 F.Supp. at 274); accord Computech International, Inc. v. Compaq Computer Corp., No. 02-CV-2628, 2002 WL 31398933, at *5 (S.D.N.Y. Oct. 24, 2002).
The proposed SAC identifies two specific statements that C&M alleges amount to product disparagement: (1) that Defendants said that C&M's hair wefts would “fade to puke green after six weeks” and (2) a message sent by Turley in a WhatApp chat saying, “Well I'm gonna let everybody know [at] the retreat what's going on with Covet so that'll squash that if anybody still uses it!” (SAC ¶¶ 374, 377.) IBE argues that these statements should not be considered disparagement as they do not denigrate the quality of C&M's services or products. (Def. Mem. at 18-19.)
Turley's statement about “what's going on with Covet” is not actionable. The assertion is vague, and it is unclear whether it concerns the quality of C&M's business services and products or C&M's general reputation, the latter of which “sound[s] more in a traditional claim for defamation than in one for [product disparagement].” Espire Ads LLC v. TAPP Influencers Corp., No. 21-CV-10623, 2023 WL 1968025, at *17 (S.D.N.Y. Feb. 13, 2023). That said, the statement that C&M's hair wefts would “fade to puke green after six weeks” plainly disparages the quality of C&M's products. The statement was also published to third parties, some of whom C&M lists in the SAC. (SAC ¶¶ 374-76.)
Yet, statements denigrating “the quality of the business' goods or services ... support an action for disparagement ... only if malice and special damages are proven.” Ruder & Finn Inc. v. Seaboard Surety Co., 52 N.Y.2d 663, 670-671, 439 N.Y.S.2d 858, 862 (1981). “Malice requires either a showing of ‘actual malice,' i.e., that the statements were knowingly false or made with reckless disregard as to their falsity; or ‘common law malice,' i.e., the statements were made solely out of spite or ill will.” Solmetex, LLC v. Dental Recycling of North America, Inc., No. 17-CV-860, 2017 WL 2840282, at *6 (S.D.N.Y. June 26, 2017) (citing Konikoff v. Prudential Insurance Co. of America, 234 F.3d 92, 98-99 (2d Cir. 2000). C&M does not expressly plead malice. Whether malice is implied is a thornier question, but one the Court need not answer since C&M's failure to plead special damages is, by itself, fatal to its product disparagement claim.
To plead special damages, C&M must name the individuals “who ceased to be customers, or who refused to purchase” their products, and itemize “the exact damages.” Fashion Boutique of Short Hills, Inc v. Fendi USA, Inc., 314 F.3d 48, 59 (2d Cir. 2002) (internal quotation marks omitted). “Courts considering product disparagement claims have ... applied [the requirement to plead special damages] strictly, granting motions to dismiss ... for failure to allege special damages with the requisite specificity.” Computech International, 2002 WL 31398933, at *6. C&M has failed to do so here. C&M alleges that, because of IBE's product disparagement, it has suffered “special damages” that “include, but are not limited to, lost sales,” but does not provide a dollar amount or any specific information about the losses sustained. (SAC ¶ 378.) C&M names several people and identifies three categories of third parties to whom IBE published its false and disparaging statements: “(i) consumers of C&M products; (ii) stylists that have used or were planning to use C&M's products; [and] (iii) stylists that are skilled in the art of installing hair extensions.” (SAC ¶¶ 375-76.) The proposed amendment does not, however, identity any of those individuals as lost customers. “[G]eneral allegations of lost sales from unidentified customers are insufficient” and “[r]ound figures or a general allegation of a dollar amount ... will not suffice.” Dentsply International Inc. v. Dental Brands for Less, LLC, No. 15-CV-8775, 2016 WL 6310777, at *6 (S.D.N.Y. Oct. 27, 2016) (internal quotation marks and citations omitted).
Failing to itemize its lost sales or identify their sources, C&M's allegations of special damages are far “too generalized to survive dismissal.” Kirby v. Wildenstein, 784 F.Supp. 1112, 1116, 1118 (S.D.N.Y. 1992) (finding plaintiff's claims of special damages “clearly inadequate” claim where plaintiff made a “vague allegation[]” that it sustained $250,000 in damages, without specifying losses underlying that figure or identifying any lost customers); see also Soter Technologies, LLC v. IP Video Corp., 523 F.Supp.3d 389, 410 (S.D.N.Y. Feb. 26, 2021) (dismissing product disparagement claim where plaintiff “neither pled its damages with particularity, nor plausibly alleged a causal connection between the alleged statements and a lost sale, nor named the customer it allegedly lost”). As such, C&M's product disparagement claim is futile, and leave to amend to add that claim should be denied.
II. PARTIES
C&M seeks to add the New Defendants to the action for claims of misappropriation of trade secrets, unfair business practices, unjust enrichment, and product disparagement. C&M alleges that Turley obtained trade secrets and other highly confidential information from C&M and passed that information to Currier so that the two could develop and sell their Kitsune line of hair extension products that copied C&M's products. (Pl. Reply at 10.)
For the reasons described above, leave to amend to add the product disparagement claim should be denied.
As justification for moving to add the three New Defendants after the passage of the deadline to amend, C&M asserts that IBE failed to turn over relevant discovery in a timely fashion. The facts supporting its amendment, C&M argues, were only revealed in documents received and testimony taken in August 2022. Those new facts include, among others, that Currier was a 50% partner in Kitsune and that Turley and Currier: (1) sought out the same factory that C&M used in China for their Kitsune hair weft (SAC ¶¶ 114-15); (2) discussed contacting “Dafina's girl” at C&M's factory and then communicated with her about the design for their Kitsune line (SAC ¶ 116); (3) discussed copying the popular “Sierra Blonde” color of hair weft sold by C&M (SAC ¶ 117); (4) developed a “Covet Color Key” that compared color matches of the Kitsune wefts to C&M's to be distributed to stylists (SAC ¶ 121); (5) discussed C&M's pricing and confidential cost structure (SAC ¶ 123); and (6) mirrored Kitsune's production schedule off of C&M's existing, and confidential, production schedule (SAC ¶ 124).
The “Dafina” referenced is ostensibly Dafina Smith, founder and Chief Executive Officer of C&M.
IBE contends that C&M did not exercise the requisite diligence and that amending now would prejudice IBE and the New Defendants. IBE's lament does not withstand analysis.
A. Diligence
“Courts have consistently recognized that if a party learns new facts through discovery that were unavailable prior to the applicable deadline and moves promptly to name new parties based on such facts, leave to amend is appropriate.” Port Authority Police Benevolent Association v. Port Authority of New York & New Jersey, No. 15-CV-3526, 2016 WL 6083956, at *5 (S.D.N.Y. Oct. 17, 2016) (collecting cases). But “[t]he Court must also examine whether Plaintiff had notice of, or was diligent in discovering, the alleged new facts.” Rococo Associates, Inc. v. Award Packaging Corp., No. 06-CV-0975, 2007 WL 2026819, at *3 (E.D.N.Y. July 9, 2007) (adopting report and recommendation).
C&M argues that it acted diligently, and, despite its diligence, did not learn the extent of Turley and Currier's partnership and details of their alleged misuse of trade secrets to create their Kitsune line until IBE produced more than 8,000 pages of documents on August 11, 2022 and Currier was deposed on August 24, 2022. (Pl. Mem. at 17-19.) “The new documents produced by [IBE] for the first time on August 11, 2022,” C&M asserts, “conclusively established that [] Turley obtained [C&M]'s trade secrets and other highly confidential information and then passed this information to Currier so they could develop and sell a line of hair extensions that exactly copied [C&M]'s products through their company, Kitsune.” (Pl. Reply at 10.) C&M notes several documents produced on August 11, 2022 that support C&M's contention that Currier and Turley were secretly designing a line of hair wefts and tools for their company Kitsune using confidential information from C&M. (Dkt. 139 ¶ 15.) C&M also says that it learned for the first time that Currier was a 50% partner in Kitsune from Currier's August 24, 2022 testimony. (Pl. Mem. at 18.)
C&M has demonstrated the requisite diligence. C&M served its initial discovery requests on IBE on January 21, 2022, which included requests for all communications and contracts between IBE and Kitsune. (Dkt. 139-4 at 7.) According to IBE's counsel, since March 2022, IBE made 11 separate document productions to C&M exceeding 11,000 pages in total. (Dkt. 145 at 3.) IBE's counsel states that, by June 15, 2022, IBE had produced to C&M more than 2,600 pages. (Id.) The remaining 8,000-plus pages, the vast majority of the total amount, were not produced to C&M until August 11, 2022. And although C&M issued deposition notices to IBE, Turley, and Tyler Turley on March 22, 2022 (Dkts. 139-4, 139-5, & 139-6), depositions did not take place until August 17 and 18, 2022. (Pl. Mem. at 17, see also Dkts. 132-21, 132-22.) C&M also asserts that IBE engaged in witness tampering by encouraging Currier to avoid service of a subpoena issued on April 14, 2022, a charge IBE denies. (Pl. Mem. at 19-21, citing subpoena at Dkt. 59.) The Court makes no finding in that regard; it is indisputable that Currier's testimony did not occur until August 24, 2022 and, thus, the new facts uncovered therein could not be acted upon until after that date.
IBE counters that C&M's prior knowledge of Turley, Currier, and Kitsune's identities demonstrates a lack of diligence on C&M's part. (Def. Mem. at 29.) However, although C&M knew the identities of all of the New Defendants as of March 22, 2022 (Dkt. 116-1), C&M did not know the extent of Turley, Currier, and Kitsune's actions until the August 2022 document production was made. (Dkt. 163 at 2.) C&M “reasonably waited until it could inquire further into the extent of [the New Defendants'] activities with respect to [Kitsune] before moving to add [them].” Bridgeport Music, Inc. v. Universal Music Group, Inc., 248 F.R.D. 408, 414 (S.D.N.Y. 2008).
IBE also represents that, on June 6, 2022, it produced to C&M a link to documents which included Kitsune's Certificate of Organization. (Dkt. 154-1.) IBE contends that the certificate put C&M on notice of Currier's interest in Kitsune, and C&M cannot claim now that it exercised due diligence. (Def. Mem. at 29.) C&M disputes that it received the Kitsune Certificate of Organization on June 6, 2022 and asserts that communications between the parties demonstrate a misunderstanding related to the June 6, 2022 production. (Pl. Reply at 12-13; Def. Sur-Reply at 1-2; Dkt. 160-1.)
An unredacted version of this document was filed under seal at Dkt. 148.
Again, the Court need not resolve that disagreement. Even if the Court accepts IBE's argument that C&M was sufficiently on notice of Currier's interest in Kitsune as of June 6, 2022, C&M was not yet in receipt of the information allegedly establishing the personal misconduct of the New Defendants. See Enzymotec Ltd. V. NBTY, Inc., 754 F.Supp.2d 527, 537 (E.D.N.Y. 2010) (finding good cause and no lack of diligence since “the relevant analysis is not whether [plaintiff] was aware of the February 2006 Agreement, but rather when [plaintiff] learned that [defendant] allegedly breached that agreement”).
Moreover, just under three months passed between then and August 29, 2022, when C&M filed its pre-motion conference letter seeking leave to amend. In some circumstances, the passage of three months without seeking leave to amend could reflect lack of diligence; in other circumstances, that passage of time may represent sufficient diligence. See, e.g., Gullo v. City of New York, 540 Fed.Appx. 45, 47 (2d Cir. 2013) (district court “acted well within its discretion in concluding that plaintiffs' three-month failure to move for amendment” after learning the names of John Doe defendants “failed to demonstrate the diligence necessary to satisfy Rule 16”); City of Almaty, Kazakhstan v. Ablyazov, No. 15-CV-5345, 2019 WL 2324587, at *2 (S.D.N.Y. May 29, 2019) (“courts in this District have found that a time period of less than three months satisfies the diligence standard under Rule 16”); Olaf Soot Design, 299 F.Supp.3d at 398-99 (finding motion to amend “within a few months” was a reasonable exercise of diligence). Here, in the context of the circumstances of this case, the Court finds that C&M was sufficiently diligent. Currier's involvement was but one of a constellation of new facts, most of them discovered later during discovery provided and depositions taken in August 2022, that form the basis for C&M's proposed amendments against the New Defendants. See generally Enzymotec Ltd., 754 F.Supp.2d at 537 (finding no lack of diligence when plaintiff “may have suspected” that defendant breached an agreement but only filed its motion to amend when its cause of action was “based on factual allegations, not factual speculation”).
The Court finds that C&M exercised sufficient diligence with respect to seeking leave to amend as to Currier and the other two New Defendants.
B. Prejudice
IBE claims that, if leave to amend to add Turley, Currier, and Kitsune is granted, all Defendants will be prejudiced because of expected additional motion practice and “insurmountable logistical hurdles.” (Def. Mem. at 26.) IBE predicts that Turley, Currier, and Kitsune will move to dismiss the claims against them, thus putting the litigation in the awkward posture of having a motion to dismiss decided after the close of both fact and expert discovery.
When evaluating whether prejudice is present, courts “consider the particular procedural posture of the case.” Agerbrink, 155 F.Supp.3d at 454 (citing Ruotolo v. City of New York, 514 F.3d 184, 192 (2d Cir. 2008)). Although IBE raises legitimate scheduling concerns, they are hardly “insurmountable” and do not amount to undue prejudice. The fact that amendment will lead to further expense and time is not sufficient, in this instance, to deny a motion to amend. See Middle Atlantic Utilities Co. v. S.M.W. Development Corp., 392 F.2d 380, 386 (2d Cir. 1968) (“The burden of further discovery and motions is not a satisfactory basis to deny the motion to amend. Such procedural aspects can be regulated and controlled by the trial court”). As explained above in the context of the proposed amended claims (as distinct from additional parties), no dispositive motions are pending at this time, and no trial date has been set. “It is not unusual in litigation for a motion to be re-briefed, or a new motion to be submitted, in response to later developments.” Duling, 265 F.R.D. at 101.
Any inefficiency created by adding the additional parties is outweighed by other concerns, particularly the interests of judicial economy. C&M's claims for misappropriation of trade secrets, unfair business practices, and unjust enrichment against Turley, Currier, and Kitsune all stem from the same broken partnership arrangement that is already at issue and that is at the heart of IBE's counterclaim for breach of contract. “Requiring [C&M] to file a separate action to pursue such claims against [Turley, Currier, and Kitsune] is not the most rational way to proceed." Danaher Corp. v. Travelers Indemnity Co., No. 10-CV-0121, 2013 WL 150027, at *4 (S.D.N.Y. Jan. 10, 2013). Amendment makes it possible to “dispose of all contentions between [the] parties on one lawsuit.” Kiarie v. Dumbstruck, Inc., 473 F.Supp.3d 350, 352 (S.D.N.Y. 2020) (internal quotation marks and citation omitted). The Court thus finds that the proposed amendment to add the New Defendants would not result in prejudice sufficient to deny leave to amend.
CONCLUSION
For the foregoing reasons, Plaintiff's motion for leave to amend the complaint is GRANTED with respect to the Patent Claims, the '446 Trademark Claims, and the New Defendants. The Court recommends DENYING the motion with respect to the Product Disparagement Claim. To the extent not discussed above, the Court has considered the non-prevailing party's arguments and finds them to be without merit.
Within 7 days of entry of this Order and Report and Recommendation, C&M shall file its Second Amended Complaint. Within 14 days of entry of this Order and Report and Recommendation, the parties shall meet and confer and file a joint proposed schedule for completing fact and expert discovery.
PROCEDURES FOR FILING OBJECTIONS
Pursuant to 28 U.S.C. § 636(b)(1) and Rules 72, 6(a), and 6(d) of the Federal Rules of Civil Procedure, the parties shall have fourteen (14) days to file written objections. Such objections shall be filed with the Clerk of Court, with extra copies delivered to the Chambers of the Honorable John P. Cronan, U.S.D.J., United States Courthouse, 500 Pearl Street, New York, NY 10007, and to the Chambers of the undersigned, United States Courthouse, 500 Pearl Street, New York, NY 10007. Failure to file timely objections will result in a waiver of objections and will preclude appellate review.
So Ordered