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Food Market Merchandising, Inc. v. California Milk Processor Board

United States District Court, E.D. California

May 30, 2018

FOOD MARKET MERCHANDISING, INC., Plaintiff,
v.
CALIFORNIA MILK PROCESSOR BOARD, Defendant. CALIFORNIA MILK PROCESSOR BOARD, Counterclaimant,
v.
FOOD MARKET MERCHANDISING, INC.; MAGIC STRAWS, LLC; REACH COMPANIES, LLC; JON TOLLEFSON; DIVERSIFIED CONSUMER GOODS, LLC DIVERSIFIED FLAVOR, LLC and PAUL HENSON, Counterdefendants.

          ORDER

          TROY L. NUNLEY UNITED STATES DISTRICT JUDGE

         This matter is before the Court pursuant to Plaintiff and Counterdefendant Food Market Merchandising, Inc. (“FMMI”) and Counterdefendants Magic Straws, LLC (“Magic Straws”), Reach Companies, LLC (“Reach”), and Jon Tollefson's (collectively, with FMMI, “Counterdefendants”) Motions to Dismiss, or in the alternative, a more definite statement. (ECF Nos. 75 & 76.) Defendant and Counterclaimant California Milk Processor Board (“CMPB”) opposes both motions. (ECF Nos. 79 & 80.) Counterdefendants filed replies. (ECF Nos. 81 & 82.) After carefully considering the parties' arguments, the Court hereby GRANTS Magic Straws's Motion to Dismiss (ECF No. 75) and GRANTS IN PART AND DENIES IN PART FMMI, Reach, and Tollefson's Motion to Dismiss. (ECF No. 76.)

         I. FACTUAL AND PROCEDURAL BACKGROUND[1]

         Plaintiff and Counterdefendant FMMI is a Minnesota Corporation, with a principal place of business located at 6401106th Street, Bloomington, MN 55438. (FMMI's Amended Compl., ECF No. 11 ¶ 5.) FMMI was the licensee of the GOT MILK? trademark for flavored drinking straws, toys, novelties, household products, confections, and personal care items (“Products”). (ECF No. 11 ¶ 6.) Defendant and Counterclaimant CMPB is an advisory board of the California Department of Food and Agriculture, which has a principal place of business located in Sacramento, California. (ECF No. 11 ¶ 7.) CMPB owns the federally-registered service mark and trademark GOT MILK? (the “Mark”). (ECF No. 11 ¶ 8.)

         In November 2009, CMPB and FMMI entered into a written License Agreement effective from November 3, 2009 through November 2, 2011 (“2009 License Agreement”). (CMPB's Second Amended Answer, ECF No. 53 ¶ 65.) In the 2009 License Agreement, CMPB granted FMMI a non-exclusive, non-transferable license to create, distribute, and sell Products bearing the Mark. (ECF No. 53 ¶ 65.)

         In November 2010, a class action lawsuit was filed against FMMI. (ECF No. 53 ¶ 66.) CMPB alleges that the class action lawsuit prompted FMMI to set up two new entities (Magic Straws and Reach) so that it could transfer FMMI's assets bearing the Mark to the new entities. (ECF No. 53 ¶ 66.)

         Around November 17, 2011, CMPB and FMMI entered into a new License Agreement effective from November 3, 2011 through November 2, 2015 (“2011 License Agreement”). (ECF No. 53 ¶ 68.) In the 2011 License Agreement, CMPB granted FMMI a non-exclusive, non-transferable license to create, distribute, and sell Products bearing the Mark. (ECF No. 53 ¶ 68.) FMMI agreed to pay CMPB 7% in royalties for every product it sold bearing the Mark. (Ex. F, ECF No. 48-2 at 25.) FMMI also agreed to pay CMPB royalties for any product bearing the Mark that sold six months after the 2011 License Agreement ended. (ECF No. 48-2 at 30.) The 2011 License Agreement did not contain a prohibition on FMMI selling GOT MILK? products to other entities who would not be bound to pay CMPB royalties. (See generally ECF No. 48-2 at 25-33.)

         On November 18, 2011, Bryan Munkirs, an FMMI employee, allegedly helped set up Magic Straws as a limited liability company in the State of Minnesota. (ECF No. 53 ¶ 69.) CMPB alleges FMMI directed its employee Mr. Munkirs to set up Magic Straws so that FMMI could transfer its assets, including the GOT MILK? flavored drinking straws to Magic Straws. (ECF No. 53 ¶ 69.) CMPB alleges that FMMI's main purpose in doing so was to transfer its assets to Magic Straws in case a large monetary judgment was entered against FMMI in the class action lawsuit. (ECF No. 53 ¶ 69.)

         CMPB alleges that sometime in 2012, FMMI requested that Magic Straws's name replace FMMI's name on retail vendor agreements. (ECF No. 53 ¶ 70.) CMPB alleges FMMI made this request so Magic Straws could invoice and receive payment from retailers instead of FMMI who was in the thick of a class action lawsuit and needed to get rid of its assets in case it lost the lawsuit. (ECF No. 53 ¶ 70.)

         On December 27, 2012, Ryan Simafranca, an employee at a Minnesota law firm, which represents FMMI and Magic Straws, allegedly helped set up Reach as a limited liability company in the State of Minnesota. (ECF No. 53 ¶ 73.) CMPB alleges that FMMI and/or Magic Straws directed Mr. Simafranca to set up Reach so that Magic Straws and/or FMMI could transfer assets including the GOT MILK? flavored drinking straws to Reach. (ECF No. 53 ¶ 73.) CMPB alleges FMMI's main purpose was to transfer it assets to Reach in case a large monetary judgment was entered against FMMI in the class action lawsuit. (ECF No. 53 ¶ 73.)

         CMPB alleges that around December 2012, in line with its plan to transfer its assets to Magic Straws and/or Reach to avoid its creditors, FMMI dismantled its website and put up an “under construction” notice and directed visitors to call Magic Straws's phone number to inquire about the GOT MILK? flavored drinking straws. (ECF No. 53 ¶ 74.) CMPB also alleges that sometime in 2013, FMMI changed its employees' dental insurance plans and 401(k) plans so that Reach was listed as the employer instead of FMMI. (ECF No. 53 ¶ 75.)

         Around August 2013, CMPB engaged in discussions with FMMI regarding the possibility of amending the 2011 License Agreement. (ECF No. 53 ¶ 76.) At that time, FMMI had not paid any royalties to CMPB under the 2011 License Agreement for about one and a half years. (ECF No. 53 ¶ 76.) FMMI and CMPB decided to negotiate an early termination of the 2011 License Agreement. (ECF No. 53 ¶ 76.)

         CMPB alleges that during the August 2013 negotiations, Jon Tollefson and Paul Henson, who purportedly hold a type of controlling interest in FMMI, Reach, and Magic Straws, both agreed that Henson would try to convince CMPB that: (1) it should heavily discount the remaining royalty payments FMMI owed to CMPB so FMMI would not file bankruptcy even though this representation was not true; (2) Henson was going to leave FMMI to start a new company unrelated to FMMI even though Henson would continue his former positions with FMMI, Magic Straws, and Reach; and (3) CMPB should license its Mark to Henson's new company for use on flavored drinking straws and other milk modifier products. (ECF No. 53 ¶¶ 43-44, 77, 81.)

         Around March 27, 2014, Henson allegedly informed CMPB that he was dissatisfied with how the negotiations were going with FMMI and he asked CMPB if he could enter into a new License Agreement with CMPB to sell GOT MILK? flavored drinking straws and other products once FMMI and CMPB finalized the termination of the 2011 License Agreement. (ECF No. 53 ¶ 79.) Henson allegedly informed CMPB that he was going to go off on his own to start a new company called “Diversified Consumer Goods, LLC” (“DCG”). (ECF No. 53 ¶ 79.)

         Around April 17, 2014, Henson allegedly asked CMPB to list DCG as the licensee under the new proposed License Agreement. (ECF No. 53 ¶ 80.) At the time, CMPB believed Henson was no longer an officer, director, or employee of FMMI or that he was in the process of terminating his relationship with FMMI before entering into a new licensing relationship with CMPB. (ECF No. 53 ¶ 80.) CMPB alleges that it has since discovered that Henson never disassociated himself from FMMI and its “alter egos” Reach and Magic Straws. (ECF No. 53 ¶ 80.)

         In June 2014, CMPB and FMMI entered into a First Amendment to License Agreement (the “FALA”). (Ex. G, ECF No. 48-2 at 35-36; ECF No. 53 ¶ 82.) In the FALA, CMPB and FMMI agreed to terminate the 2011 License Agreement and post-date the termination to December 31, 2013. (ECF No. 48-2 at 35.) FMMI agreed to no longer distribute or sell Products bearing the Mark. (ECF No. 48-2 at 35.) FMMI also agreed it no longer had the right to dispose of any GOT MILK? products it had on hand or which were in the process of being manufactured as of December 31, 2013. (ECF No. 48-2 at 35.)

         Around July or August 2014, CMPB and DCG entered into a written License Agreement effective from August 2, 2014 through December 31, 2017 (“DCG License Agreement”). (Ex. H, ECF No. 48-2 at 38-68; ECF No. 53 ¶ 84.) In the DCG License Agreement, CMPB granted DCG a non-exclusive, non-transferable license to use CMPB's Mark in connection with flavored drinking straws and other enumerated products. (ECF No. 48-2 at 40; ECF No. 53 ¶ 84.) Unlike in the 2011 License Agreement, CMPB added a prohibition in the DCG License Agreement that prevented DCG from selling CMPB's products to other entities without its consent. (ECF No. 48-2 at 40-41.)

         Around October or December 2014, CMPB and DCG entered into a Trademark License Assignment and Assumption Agreement (the “TLAAA”). (ECF No. 53 ¶ 86.) In the TLAAA, CMPB and DCG agreed that DCG could assign its rights and obligations under the DCG License Agreement to Diversified Flavor, which is purportedly a Delaware limited liability company. (ECF No. 53 ¶¶ 42, 86.)

         On February 26, 2015, CMPB discovered FMMI was continuing to use the Mark in violation of the FALA and so CMPB's attorney wrote to Tollefson, who CMPB alleges is FMMI's Chief Executive Officer. (ECF No. 53 ¶ 87.) This letter demanded that FMMI cease all use of the Mark. (ECF No. 53 ¶ 87.) On March 3, 2015, FMMI's attorney wrote to CMPB's attorney and denied all unauthorized use of the Mark. (ECF No. 53 ¶ 88.) On March 5, 2015, CMPB's attorney wrote to FMMI's attorney to request that FMMI comply with the demands that CMPB's attorney wrote in the February 26, 2015 letter. (ECF No. 53 ¶ 89.) On March 10, 2015, FMMI filed a lawsuit against CMPB in the United States District Court for the Southern District of New York for trademark abandonment. (ECF No. 11; ECF No. 53 ¶ 90.) On April 17, 2015, CMPB's counsel wrote to FMMI's attorney to request an audit of FMMI's books and records, but FMMI's attorney allegedly refused this request on April 28, 2015. (ECF No. 53 ¶ 185.) On May 7, 2015, FMMI's case against CMPB was transferred to this Court pursuant to the forum-selection clause contained in the 2011 License Agreement. (ECF No. 53 ¶ 91.)

         On August 4, 2015, CMPB notified Diversified Flavor that CMPB was immediately terminating DCG's License Agreement with CMPB due to DCG's material breach of that Agreement. (ECF No. 53 ¶ 92.) On September 28, 2015, CMPB filed fourteen counterclaims against FMMI, Reach, Magic Straws, DCG, Diversified Flavor, Henson, and Tollefson because CMPB believes Counterdefendants are alter egos of each other. (ECF No. 53 ¶¶ 101, 120-221.)

         CMPB alleges Counterdefendants have a unity of interest and ownership such that they no longer exist as separate entities/individuals. (ECF No. 53 ¶ 102.) For instance, CMPB alleges Tollefson and Henson hold all the key positions in FMMI, Reach, Magic Straws, DCG, and Diversified Flavor. (ECF No. 53 ¶ 103.) CMPB alleges Tollefson is the Chief Executive Officer of FMMI and Magic Straws, Reach's Registered Agent and Manager, and holds other key positions in DCG and Diversified Flavor. (ECF No. 53 ¶ 104.) CMPB also alleges Henson is Magic Straws's Vice President, DCG's President, Diversified Flavor's Manager, and holds other key positions in FMMI and Reach. (ECF No. 53 ¶ 105.)

         CMPB alleges FMMI, Reach, and Magic Straws use the same toll-free phone number. (ECF No. 53 ¶ 109.) FMMI's website, Magic Straws's website, and Reach's website all list the same phone number to contact each company. (ECF No. 53 ¶ 109.) CMPB alleges calls for FMMI, Reach, and Magic Straws go to Tollefson's desk. (ECF No. 53 ¶ 110.) FMMI, Reach, and Magic Straws share the same office address and the building located at that address has the name “Reach Companies” on the main sign in front of the building. (ECF No. 53 ¶ 111.) The building also contains multiple doors with the name “FMMI” on them. (ECF No. 53 ¶ 111.)

         CMPB alleges that FMMI's accountant/bookkeeper sends daily emails to all Counterdefendants' employees to provide sales updates of Counterdefendants' products, including the flavored drinking straws bearing the Mark. (ECF No. 53 ¶ 113.) CMPB alleges Counterdefendants are usually represented by the same attorneys. (ECF No. 53 ¶ 114.) Magic Straws's name was allegedly used in commerce for an FMMI package bearing the Mark before Magic Straws was federally registered as a trademark. (ECF No. 53 ¶ 115.)

         CMPB alleges the incorporators and/or organizers of Reach, Magic Straws, DCG, and Diversified Flavor formed those entities with fraudulent intent to avoid creditors like CMPB and the class action plaintiffs. (ECF No. 53 ¶ 116.) CMPB alleges Counterdefendants believed that by selling the GOT MILK? flavored drinking straws to Reach and Magic Straws for little or no consideration, FMMI would have to pay fewer royalties to CMPB than in a normal arms-length transaction. (ECF No. 53 ¶ 116.) CMPB alleges that the incorporators formed DCG and Diversified Flavor to have “new” companies in place that could license GOT MILK? from CMPB for use with flavored drinking straws and other milk modifier products after Henson fraudulently induced CMPB into believing that these entities were unrelated to FMMI. (ECF No. 53 ¶ 117.)

         CMPB alleges Counterdefendants failed to observe corporate formalities and disregarded the corporate form by setting up 401(k) plans for FMMI employees under Reach and transferring FMMI's employee health plan to Reach. (ECF No. 53 ¶ 118.) CMPB alleges that failing to disregard the corporate existence of FMMI, Reach, Magic Straws, DCG, and Diversified Flavor would result in fraud or injustice as follows: (1) if FMMI transferred some or all of its remaining inventory of GOT MILK? flavored drinking straws to Reach and/or Magic Straws prior to December 31, 2013, then CMPB may be precluded under the first sale doctrine[2] from recovering trademark infringement damages for ongoing sales of those drinking straws if the Court determines Reach and Magic Straws are distinct from FMMI; (2) CMPB may be preventing from recovering additional monies owed to it by FMMI relating to the ongoing sales of the GOT MILK? flavored drinking straws because FMMI transferred some or all of its assets to Reach, Magic Straws, DCG, Diversified Flavor, Tollefson and/or Henson; and (3) CMPB may be prevented from recovering additional monies owed to it by DCG and/or Diversified Flavor under the parties' terminated License Agreement if DCG and/or Diversified Flavor transferred some or all of their assets to Reach, Magic Straws, FMMI, Tollefson, and/or Henson. (ECF No. 53 ¶ 119.)

         II. STANDARD OF LAW

         A. Motion to Dismiss

         A motion to dismiss for failure to state a claim under Rule 12(b)(6) tests the legal sufficiency of a complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). Federal Rule of Civil Procedure 8(a) requires that a pleading contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” See Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009). Under notice pleading in federal court, the complaint must “give the defendant fair notice of what the claim . . . is and the grounds upon which it rests.” Bell Atlantic v. Twombly, 550 U.S. 544, 555 (2007) (internal quotations omitted). “This simplified notice pleading standard relies on liberal discovery rules and summary judgment motions to define disputed facts and issues and to dispose of unmeritorious claims.” Swierkiewicz v. Sorema N.A., 534 U.S. 506, 512 (2002).

         On a motion to dismiss, the factual allegations of the complaint must be accepted as true. Cruz v. Beto, 405 U.S. 319, 322 (1972). A court is bound to give plaintiff the benefit of every reasonable inference to be drawn from the “well-pleaded” allegations of the complaint. Retail Clerks Int'l Ass'n v. Schermerhorn, 373 U.S. 746, 753 n.6 (1963). A plaintiff need not allege “‘specific facts' beyond those necessary to state his claim and the grounds showing entitlement to relief.” Twombly, 550 U.S. at 570. “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. 544, 556 (2007)).

         Nevertheless, a court “need not assume the truth of legal conclusions cast in the form of factual allegations.” United States ex rel. Chunie v. Ringrose, 788 F.2d 638, 643 n.2 (9th Cir. 1986). While Rule 8(a) does not require detailed factual allegations, “it demands more than an unadorned, the defendant-unlawfully-harmed-me accusation.” Iqbal, 556 U.S. at 678. A pleading is insufficient if it offers mere “labels and conclusions” or “a formulaic recitation of the elements of a cause of action.” Twombly, 550 U.S. at 555; see also Iqbal, 556 U.S. at 678 (“Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.”). Moreover, it is inappropriate to assume that the plaintiff “can prove facts that it has not alleged or that the defendants have violated the . . . laws in ways that have not been alleged[.]” Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 526 (1983).

         Ultimately, a court may not dismiss a complaint in which the plaintiff has alleged “enough facts to state a claim to relief that is plausible on its face.” Iqbal, 556 U.S. at 697 (quoting Twombly, 550 U.S. at 570). Only where a plaintiff has failed to “nudge[] [his or her] claims . . . across the line from conceivable to plausible[, ]” is the complaint properly dismissed. Id. at 680. While the plausibility requirement is not akin to a probability requirement, it demands more than “a sheer possibility that a defendant has acted unlawfully.” Id. at 678. This plausibility inquiry is “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. at 679.

         If a complaint fails to state a plausible claim, “‘[a] district court should grant leave to amend even if no request to amend the pleading was made, unless it determines that the pleading could not possibly be cured by the allegation of other facts.'” Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000) (en banc) (quoting Doe v. United States, 58 F.3d 484, 497 (9th Cir. 1995)); see also Gardner v. Marino, 563 F.3d 981, 990 (9th Cir. 2009) (finding no abuse of discretion in denying leave to amend when amendment would be futile). Although a district court should freely give leave to amend when justice so requires under Rule 15(a)(2), “the court's discretion to deny such leave is ‘particularly broad' where the plaintiff has previously amended its complaint[.]” Ecological Rights Found. v. Pac. Gas & Elec. Co., 713 F.3d 502, 520 (9th Cir. 2013) (quoting Miller v. Yokohama Tire Corp., 358 F.3d 616, 622 (9th Cir. 2004)).

         “For purposes of a motion to dismiss, we accept all well-pleaded allegations of material fact as true and construe them in the light most favorable to the nonmoving party.” Sateriale v. R.J. Reynolds Tobacco Co., 697 F.3d 777, 783 (9th Cir. 2012).

[Further, ] the court need not accept as true conclusory allegations, nor make unwarranted deductions or unreasonable inferences. But so long as the plaintiff alleges facts to support a theory that is not facially implausible, the court's skepticism is best reserved for later stages of the ...

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