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Crafty Productions, Inc. v. The Michaels Companies, Inc.

United States District Court, S.D. California

December 5, 2019

CRAFTY PRODUCTIONS, INC., et al., Plaintiffs,
v.
THE MICHAELS COMPANIES, INC., et al., Defendants.

          ORDER GRANTING DEFENDANTS' MOTION TO DISMISS THIRD AMENDED COMPLAINT AND DISMISSING CASE WITH PREJUDICE [ECF NO. 246]

          Hon. Cynthia Bashant, United States District Judge

         Plaintiffs Crafty Productions, Inc. (“CPI”) and Crafty Productions, LLC (“CPL”) (collectively “Plaintiffs”) commenced this action against numerous defendants alleging copyright infringement of CPI's original craft designs and products, trade dress infringement, intentional interference with prospective business advantage, unfair competition, breach of contract, and fraud. Many parties were listed as defendants in the first complaint, but various defendants have been dismissed for lack of personal jurisdiction. (ECF No. 213.) As relevant here, Defendants The Michaels Companies, Inc. and Michaels Stores, Inc. (collectively, “Michaels”) and Hobby Lobby Stores, Inc. moved to dismiss Plaintiffs' complaint for failure to state a claim. (ECF No. 90.) The Court granted the motion to dismiss and granted Plaintiffs leave to amend. (ECF No. 214.) Plaintiffs filed a second amended complaint against Michaels; Plaid Enterprises, Inc.; Hobby Lobby Stores, Inc.; Party City Holdings, Inc.; and Party City Corporation. (“SAC, ” Second Amended Complaint, ECF No. 232.) Plaintiffs alleged trade dress infringement, intentional interference with prospective business advantage, and unfair competition. Defendants filed a motion to dismiss the second amended complaint, which the Court granted in its entirety and dismissed the SAC without prejudice. (“Prior Order, ” ECF No. 241.) Plaintiffs filed their Third Amended Complaint, again alleging trade dress infringement, intentional interference with prospective business advantage, and unfair competition. (“TAC, ” Third Amended Complaint, ECF No. 245.) Michaels moves to dismiss the TAC, (“Mot., ” ECF No. 246), and the rest of the Defendants join the Motion, (ECF Nos. 247-249). Plaintiffs filed an Opposition to the Motion, (“Opp'n, ” ECF No. 250), to which Michaels replied, (“Reply, ” ECF No. 251).

         The Court held oral argument on this Motion on December 4, 2019. For the reasons stated below, the Court GRANTS Defendants' Motion and dismisses Plaintiffs' Third Amended Complaint with prejudice.

         I. FACTUAL BACKGROUND[1]

         Plaintiff CPI has created various “original product concepts and designs, including many creative, decorative wood products.” (TAC ¶ 10.) Sometime in 1995, CPI hired Michelle Faherty as a sales representative for some of its products. (Id. ¶ 12.) Ms. Faherty asked permission to take samples of certain products so she could obtain a manufacturing cost estimate from a factory she knew in China. (Id.) She did so, and then CPI began using a Chinese manufacturer owned by Kevin Xiao and/or Tony Zhu for cost-saving purposes. (Id.)[2]

         In 2009 or 2010, CPI learned that replicas of its products were being sold in a crafts and toys product catalog from Zhejiang Hongye Art & Craft Co., Ltd. (hereinafter, “Hongye”). (Id. ¶ 14.) CPI had not approved these sales and had never heard of Hongye. (Id.) CPI learned that the Hongye factory was shipping CPI's wood products to Michaels and Plaid Enterprises, Inc. (“Plaid”). (Id. ¶ 15.) Plaid is CPI's competitor that supplies products to retailers including Hobby Lobby and Michaels. (Id. ¶ 18.)

         CPI insisted on visiting China to meet Zhu and see his manufacturing facilities. (Id. ¶ 15.) On this trip, CPI first visited the Hongye factory, where it saw on display many of CPI's “original designs and products.” (Id. ¶ 16.) Faherty allegedly had to lie to the Hongye representative to arrange a tour of the factory for CPI. (Id.) “There appeared to be no effort by the manufacturer to disguise the fact that they were producing unauthorized CPI products.” (Id.) CPI alleges it saw a frame at the factory that was “substantially similar to one of CPI's designs” but had the name “Plaid” on the back. (Id. ¶ 18.) CPI then visited Zhu's manufacturing facility, which contained only a few of CPI's products, and CPI was surprised that Hongye appeared to have more of CPI's designs in its factory than were in Zhu's factory. (Id. ¶ 17.) Faherty told CPI that Zhu's factory was only manufacturing CPI's products, not competitors' products. (Id. ¶ 18.)

         Plaintiffs allege Faherty and Zhu arranged the manufacture of “knock offs” of CPI's original designs and products to sell to Plaid and other retailers. (Id. ¶¶ 29, 30.) Plaintiffs allege the only way the Hongye factory would have access to CPI's products is if a retail buyer or Faherty provided the designs to the factory. (Id.) Plaintiffs allege Michaels was buying the knock-off products from the Hongye factory. (Id.) In support, Plaintiffs allege Michaels purchased products from CPI for many years, but as of October 2014, “was buying very little from CPI” yet still selling products. (Id. ¶ 44; see, e.g., ECF No. 245-1, at 11, 16, 17 (images of products being sold in Michaels' stores in 2014 and 2015).) Plaintiffs also allege CPI never sold wood alphabets to Michaels, yet Michaels has sold CPI's wood alphabets in its stores. (Id. ¶ 44.) Similarly, Plaintiffs allege Hobby Lobby purchased knock-offs of CPI's products through Faherty. (Id. ¶ 49.)

         Now, Plaintiffs allege trademark infringement, intentional interference with prospective economic advantage, and unfair competition causes of action against Michaels, Plaid, Hobby Lobby, and Party City.

         II. LEGAL STANDARD

         A complaint must plead sufficient factual allegations to “state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks and citations omitted). “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.” Id.

         A motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure tests the legal sufficiency of the claims asserted in the complaint. Fed.R.Civ.P. 12(b)(6); Navarro v. Block, 250 F.3d 729, 731 (9th Cir. 2001). The court must accept all factual allegations pleaded in the complaint as true and must construe them and draw all reasonable inferences from them in favor of the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). To avoid a Rule 12(b)(6) dismissal, a complaint need not contain detailed factual allegations, rather, it must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A Rule 12(b)(6) dismissal may be based on either a ‘lack of a cognizable legal theory' or ‘the absence of sufficient facts alleged under a cognizable legal theory.'” Johnson v. Riverside Healthcare Sys., LP, 534 F.3d 1116, 1121 (9th Cir. 2008) (quoting Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990)).

         III. ANALYSIS

         Defendants move to dismiss all three causes of action in the Third Amended Complaint.

         A. Trade Dress Infringement / False Designation of Origin

         “Trade dress refers generally to the total image, design, and appearance of a product and ‘may include features such as size, shape, color, color combinations, texture or graphics.'” Clicks Billiards, Inc. v. Sixshooters, Inc., 251 F.3d 1252, 1257 (9th Cir. 2001) (quoting Int'l Jensen, Inc. v. Metrosound U.S.A., Inc., 4 F.3d 819, 822 (9th Cir. 1993)). To plead a claim for trade dress infringement, a plaintiff must allege: (1) that its claimed dress is non-functional; (2) that its claimed dress serves a source-identifying role either because it is inherently distinctive or has acquired secondary meaning; and (3) that the defendant's product or service creates a likelihood of consumer confusion. Id.

         1. Collateral Estoppel

         Defendants first move to dismiss the trade dress claim on collateral estoppel grounds. (Mot. at 14.) Defendants point out that Plaintiffs were parties to an arbitration in February 2018, and they argue the arbitrator's findings prevent Plaintiff from arguing trade dress infringement here. (Id.) The arbitrator analyzed Plaintiffs' trade dress claim and found “no protectable trade dress in this matter.” (Ruling After Full Arbitration, ECF No. 217-1, at 8.) The Defendants here were not parties to the arbitration.

         Collateral estoppel “bars the relitigation of issues actually adjudicated in previous litigation between the same parties.” Clark v. Bear Stearns & Co., 966 F.2d 1318, 1320 (9th Cir. 1992). Here, Defendants assert non-mutual defensive collateral estoppel, which arises “wherein a litigant not a party to a prior case seeks to preclude relitigation of an issue by its current opponent who was a party to the prior case and lost on the very issue which the opponent seeks to relitigate in the current action.” Scott v. Snelling & Snelling, Inc., 732 F.Supp. 1034, 1038 (N.D. Cal. 1990) (citing Blonder-Tongue Labs. v. Univ. of Illinois, 402 U.S. 313 (1971)). To prevail on an assertion of non-mutual defensive collateral estoppel, Defendants must show:

1) the issue decided in a prior adjudication is identical with that presented in the action in question; and 2) there was a final judgment on the merits; and 3) the party against whom the plea is asserted was a party or in privity with a party to the prior adjudication.

Clemmer v. Hartford Ins. Co., 22 Cal.3d 865, 874 (1978).

         Turning to the first prong, Defendants assert that the issues decided in arbitration are identical to those here, as Plaintiffs sought trade dress protection in arbitration for the same products at issue here. In response, Plaintiffs allege “there is nothing in the arbitration ruling that established as law of the case that the same product trade dress rights asserted against these Defendants were assessed in any way by Judge McCurine.” (Opp'n at 4.) Notably, Plaintiffs do not say in any conclusive manner that the arbitrator analyzed trade dress protection for products different than the ones shown in the exhibits attached to Plaintiffs' Complaint here. And while it is very likely that at least some of the products analyzed by the arbitrator are the same products before the Court now, this detail is not specified in the record. The arbitrator notes that ...


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