Opinion
Case No. 1:10-cv-00411 LJO JLT.
September 14, 2011
ORDER GRANTING MOTION TO AMEND ANSWER TO COUNTERCLAIMS (Doc. 103)
Counter defendants E. J. Gallo Winery and Tequila Supremo, S.A. de C.V., and Ecco Domani USA, Inc., filed a motion to amend their answer to counterclaims asserted by Proximo Spirits, Inc. and Agavera Camichines, S.A. de C.V. Gallo has filed an opposition to the motion, to which Proximo/Agavera have filed a reply. The Court has carefully considered the parties' submitted papers and the parties' arguments made during hearing on this matter. For the reasons set forth below, the Court GRANTS the motion to amend.
Hereafter, referred collectively as "Gallo."
Hereafter referred collectively as "Proximo/Agavera."
I. BACKGROUND
This case concerns the efforts of Gallo to launch a line of tequila. (Doc. 1 at ¶ 1.) Gallo initiated this action on March 8, 2010 against Proximo/Agavera seeking declaratory judgment that its "Familia Camerena" tequila bottle and packaging does not infringe on the trademark or trade dress of "1800 Tequila," which is manufactured and distributed by Proximo/Agavera. (See id. at ¶¶ 20-24.) Gallo also asserts a claim for unfair competition, under California Business and Professions Code Section 17200. (Id. at ¶¶ 25-28.)
On July 22, 2010, Proximo/Agavera moved to dismiss this action for lack of jurisdiction and for failure to state a claim. (Doc. 26.) After permitting Gallo to conduct limited discovery on the issue of jurisdiction, the Court denied the motion to dismiss. (Docs. 39, 80.) Proximo/Agavera subsequently filed an answer on January 20, 2011, which included counterclaims for, among other things, trademark infringement. (Doc. 85.) Gallo, in turn, moved to dismiss the counterclaims for failure to state a claim on February 10, 2011. (Doc. 87.) The Court denied that motion, and Gallo filed its answer to the counterclaims on March 28, 2011. (Docs. 94 95.)
The Court concluded that Gallo had alleged sufficient facts to demonstrate that both Agavera and Proxmio had legal interests that were adverse to Gallo and that they were affiliates of Casa Cuervo and shared common ownership. (Doc. 70 at 8.) The Court did not find that they were not separate legal entities.
On July 6, 2011 and July 7, 2011, Gallo conducted depositions pursuant to Federal Rule of Civil Procedure 30(b)(6). (Doc. 108 at 3.) In light of the testimony garnered during the Rule 30(b)(6) depositions, Gallo filed the instant motion to amend its answer on August 8, 2011. (Doc. 103.) Gallo seeks to include "naked" licensing and trademark abandonment as an affirmative defense. (Doc. 103-1.) Proximo/Agavera filed an opposition to the motion on September 1, 2011. (Doc. 114.) Gallo replied a day later, on September 2, 2011. (Doc. 117.) The parties appeared for hearing on this matter on September 12, 2011.
II. LEGAL STANDARD
Pursuant to Federal Rule of Civil Procedure 15, a court "should freely give leave [to amend] when justice so requires." Fed.R.Civ.P. 15(a)(2). The policy favoring leave to amend pleadings "is to be applied with extreme liberality." Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1051 (9th Cir. 2003) (citations omitted). Indeed, "the underlying purpose of Rule 15 is to facilitate decision on the merits, rather than on the pleadings or technicalities." United States v. Webb, 655 F.2d 977, 979 (9th Cir. 1981).
Factors to be considered by a court in determining the propriety of a motion to amend include: undue delay, bad faith or dilatory motive, prejudice to the opposing party, and futility of amendment. Eminence Capital, 316 F.3d at 1051-52 (citing Foman v. Davis, 371 U.S. 178, 182 (1962)). "[N]ot all of the[se] factors merit equal weight," however. Eminence Capital, 316 F.3d at 1052. For example, undue delay by itself is insufficient to justify denying a motion to amend. Bowles v. Reade, 198 F.3d 752, 757 (9th Cir. 1999). "[P]rejudice to the opposing party," on the other hand, "carries the greatest weight." Eminence Capital, 316 F.3d at 1052. "Absent prejudice, or a strong showing of the . . . [other] factors, there exists a presumption under Rule 15(a) in favor of granting leave to amend. Id. (citation omitted) (emphasis in the original).
Courts also consider whether the pleading has already been amended. See Ascon Properties, Inc. v. Mobile Oil Co., 866 F.2d 1149, 1160 (9th Cir. 1989). However, because there has been no amendment to the pleading at issue here, this factor does not apply.
III. ANALYSIS
A. Futility of the Amendment
The parties expend considerable energy on the issue of whether amendment of the answer to include "naked" licensing and abandonment as an affirmative defense is futile. "Futility of amendment can, by itself, justify the denial of a motion for leave to amend." Bonin v. Calderon, 59 F.3d 815, 845 (9th Cir. 1995). The Court therefore analyzes this factor first.
Naked licensing occurs when a trademark owner grants a license to its trademark but "fails to exercise adequate quality control over the licensee." FreecycleSunnyvale v. Freecycle Network, 626 F.3d 509, 515 (9th Cir. 2010) (quoting Barcamerica Int'l USA Trust v. Tyfield Importers, Inc., 289 F.3d 589, 596 (9th Cir. 2002)). "As a general matter, trademark owners have a duty to control the quality of their trademarks." FreecycleSunnyvale, 626 F.3d at 515 (citation omitted). Thus, where a trademark licensor fails to exercise adequate quality control over a licensee, the Ninth Circuit has recognized that "a court may find that the trademark owner has abandoned the trademark, in which case the owner [is] estopped from asserting rights to the trademark." Id. at 516 (internal quotation marks and citations omitted). See Moore Business Forms, Inc. v. Ryu, 960 F.2d 486, 489 (5th Cir. 1992) (failure to control quality of a trademark by a licensor works a forfeiture of the trademark).
Gallo contends that there are sufficient facts to support abandonment due to "naked" licensing in this case. Plaintiffs allege that: _____ (Doc. 108 at 3-5; 8.)
For their part, Proximo/Agavera argue that Gallo cannot meet the stringent burden of proving a "naked" license. See Moore Business Forms, 960 F.2d at 489 ("[T]he proponent of a naked license theory faces a stringent standard of proof.") (internal quotation marks and citations omitted). Proximo/Agavera maintain that _____ (Doc. 115 at 6.) Furthermore, Proximo/Agavera maintain that _____ (Id. at 7.)
In the alternative, Proximo/Agavera contend that a "close working relationship" exists between them such that Agavera could justifiably rely on Proximo to satisfy adequate quality control in the absence of a formal agreement. See e.g., Taco Cabana Int'l, Inc. v. Two Pesos, Inc., 932 F.2d 1113, 1121 (5th Cir. 1991) (where a close working relationship exists between the parties, they may justifiably rely on each other to maintain adequate quality). Proximo/Agavera point once again to _____. (See Doc. 115 at 8-9.)
_____
In taking this position, Proximo/Agavera seem to argue also that because Gallo has previously argued that these entities are affiliated via Casa Cuervo, that this interrelationship means that Agavera exercised sufficient control over Proximo such that, as a matter of law, that the naked license defense cannot apply. (Doc. 115 at 9 n. 3.) This presumes too much. First, Proximo and Agavera are separate corporate entities, even if both are owned, ultimately, by the same shareholders. Second, even if they are alter egos of Casa Cuervo, the ownership of the mark held by Agavera has not been disputed by Proximo and, instead, for at least one year, _____. This indicates, not common control over the mark but, to the contrary, a clear delineation as to which legal entity, indeed, owns the mark. Moreover, Proximo/Agavera do not argue here to the contrary, but iterate that Proximo is a "mere" distributor. (Doc. 115 at 9.)
In Great Seats, Ltd. v. Great Seats, Inc., 2007 TTAB LEXIS 68, 22-23 (Trademark Trial App. Bd. June 14, 2007), the TTAB held, "Even though Mr. Matta, like the individual principal inDaltronics, may have treated both corporations as his alter egos, the `410 corporation's use of the mark prior to the filing date did not constitute use of the mark by the `660 corporation, a separate and distinct legal entity. Moreover, even though Mr. Matta could have merely changed the name of the `410 corporation from Premier Entertainment, Inc. to Great Seats, Inc. prior to the application filing date, leaving only the one corporation in existence to be the owner of the mark and proper applicant, no such name change occurred until July 7, 1997, well after the application filing date. Instead of merely changing the name of the `410 corporation prior to the application filing date, Mr. Matta formed the new `660 corporation, an entity separate and distinct from the earlier `410 corporation. There was no transfer of rights in the mark from the `410 corporation to the new `660 corporation prior to the application filing date. [Footnote.] It therefore was the `410 corporation, not the `660 corporation, that was the owner of the mark as of the filing date." (Footnote omitted).
Finally, Proximo/Agavera dismiss the relevance of _____ (Doc. 115 at 9.) As such, Proximo/Agavera maintain that _____. (Id.)
The arguments of Proximo/Agavera are well-taken but ultimately miss the mark. As Gallo correctly explains in the reply, the question before the Court regarding the futility of the proposed amendment is not whether the allegations presented ultimately have merit, but whether " no set of facts can be proved under the amendment to the pleadings that would constitute a valid and sufficient . . . defense." Miller v. Rykoff-Sexton, Inc., 845 F.2d 209, 214 (9th Cir. 1988) (emphasis added). But see Cal. v. Neville Chem. Co., 358 F.3d 661, 673 (9th Cir. 2004) ("Futility includes the inevitability of a claim's defeat on summary judgment."). At this juncture, the Court cannot say that Gallo will undoubtedly fail to prove any set of facts showing that Proximo/Agavera abandoned the trademarks and trade dress now in dispute. Instead, Gallo has alleged facts that are sufficient to raise a colorable defense. Specifically, Gallo alleges facts demonstrating that there was _____ The Court is not free, on this motion, to decide otherwise.
Accordingly, the Court concludes that the proposed amendment is not plainly futile and leave to amend should not be denied for that reason. See Bd. of Trustees of the Auto. Indus. Welfare Fund v. Groth Oldsmobile/Chevrolet, Inc., No. C 09-0465 PJH, 2010 U.S. Dist. LEXIS 24809, at *7 (N.D. Cal. Mar. 4, 2010) ("This court normally will not rule on the futility of an amendment at the motion to amend stage of the litigation unless the proposed amendment is clearly and unambiguously futile. In general, the futility of an amendment is better tested in a motion to dismiss . . . or a summary judgment motion."); Schwarzer, California Practice Guide: Federal Civil Procedure Before Trial at 8:422 (The Rutter Group, 2002) (ordinarily courts will defer challenges to the merits of a prosed amended pleading until after leave to amend is granted).
B. Other Factors
The Court also finds that the other relevant factors — undue delay, prejudice, and bad faith — are not present here and do not warrant the denial of the instant motion to amend.
In Howey v. United States, 481 F.2d 1187, 1191 (9th Cir. 1973), the Ninth Circuit Court of Appeals observed, "The purpose of the litigation process is to vindicate meritorious claims. Refusing, solely because of delay, to permit an amendment to a pleading in order to state a potentially valid claim would hinder this purpose while not promoting any other sound judicial policy." Thus, by itself, undue delay is insufficient to prevent the Court from granting leave to amend. DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir. 1986).
When evaluating undue delay, the Court must consider whether "permitting an amendment would . . . produce an undue delay in the litigation." Jackson v. Bank of Hawaii, 902 F.2d 1385, 1387 (9th Cir. 1990). In addition, a Court should examine "whether the moving party knew or should have known the facts and theories raised by the amendment in the original pleading." Id. at 1388;see also Eminence Capital, 316 F.3d at 1052 ("As this circuit and others have held, it is the consideration of prejudice to the opposing party that carries the greatest weight.")
Here, the parties disagree as to whether Gallo could have raised "naked" licensing and abandonment as an affirmative defense sooner. Proximo/Agavera suggest that Gallo became aware of at least some of the facts that allegedly support this defense as early as October 28, 2010. (See Doc. 115 at 2 n. 1.) Gallo counters by indicating that the full import of these earlier facts were not known until July 2011, when _____
Nevertheless, in their written documents Proximo/Agavera provided no analysis regarding how this untimeliness, even if true, resulted in any prejudice. See Bowles, 198 F.3d at 757 (undue prejudice in of itself is insufficient to deny leave to amend); Eminence Capital, 316 F.3d at 1052 ("As this circuit and others have held, it is the consideration of prejudice to the opposing party that carries the greatest weight."); DCD Programs, Ltd., 833 F.2d at 187 (the burden of showing prejudice rests on the party opposing amendment). However, at the hearing, counsel noted that because fact discovery closed on September 2, 2011, if the amendment was granted, it would be left without the ability to discover, at a minimum, Gallo's factual basis for this affirmative defense. Notably, Fed.R.Civ.P. 26(b) permits that "parties may obtain discovery regarding any nonprivileged manner that is relevant to any party's claim or defense." Because Gallo had not yet plead as an affirmative defense "naked" licensing/trademark abandonment, Proximo/Agavera had no reason to conduct discovery on this topic.
Nevertheless, the question remains whether extending time to conduct this discovery would cause an undue delay in the litigation. As noted above, lay discovery ended on September 2, 2011 and expert discoveryis scheduled to complete on October 21, 2011. Thus, there is some time available to complete the needed discovery without unduly delaying the litigation.
Finally, the Court finds that any delay, to the extent there is one, was not the product of bad faith or gamesmanship.
IV. CONCLUSION
Accordingly, for all the reasons set forth above, it is HEREBY ORDERED that:
1. Gallo's August 8, 2011 motion to amend their answer (Doc. 103) is GRANTED;
2. Within two days of the date of this order, Gallo shall file and serve the amended answer as proposed in the motion to amend; and
3. Proximo/Agavera is granted leave to conduct discovery on the newly added affirmative defense. All such discovery SHALL be completed no later than October 21, 2011 but the deadlines related to nondispositive motions SHALL NOT be modified. NO OTHER DEADLINES set forth in the scheduling order, as amended, are modified.
IT IS SO ORDERED.