Food Mkt. Merch., Inc. v. Cal. Milk Processor Bd., 2:15-cv-01083-TLN-CKD

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.

No. 2:15-cv-01083-TLN-CKD

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF CALIFORNIA

May 30, 2018

ORDER

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 BACKGROUND¹

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 (MagicStraws 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 assetsincluding 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 newcompany 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...