Peloton Interactive, Inc. v. Heath

PELOTON INTERACTIVE, INC., Plaintiff, v. ICON HEATH & FITNESS, INC., Defendant.

Civil Action No. 20-662-RGA

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE

May 28, 2021

MEMORANDUM OPINION

Michael J. Flynn, Andrew M. Moshos, MORRIS, NICHOLS, ARSHT & TUNNEL LLP, Wilmington, DE; Steven N. Feldman, Douglas J. Dixon, Christina V. Rayburn, Karen Younkins, Haoxiaohan Cai, Joseph W. Crusham, HUESTON HENNIGAN LLP, Los Angeles, CA, Attorneys for Plaintiff.

Frederick L. Cottrell, III, Christine D. Haynes, RICHARDS, LAYTON & FINGER, P.A., Wilmington, DE; David R. Wright, MASCHOFF BRENNAN GILMORE ISRAELSEN & WRIGHT PLLC, Salt Lake City, UT; Tyson K. Hottinger, MASCHOFF BRENNAN GILMORE ISRAELSEN & WRIGHT PLLC, Irvine, CA, Attorneys for Defendant. /s/ Richard G. Andrews

ANDREWS, U.S. DISTRICT JUDGE:

Before the Court is Peloton's Partial Motion to Dismiss ICON's First Amended Counterclaims. (D.I. 39). The motion has been fully briefed. (D.I. 40, 46, 47). For the reasons set forth below, Peloton's motion is GRANTED in part and DENIED in part.

I. BACKGROUND

Peloton and ICON compete in the at-home fitness market and offer products that allow consumers to attend live and on-demand fitness classes from home. (D.I. 1 at ¶ 4; D.I. 27 at ¶ 9). The parties vigorously dispute their rights to the technology underlying the availability of live, at-home fitness classes and have three actions pending before this Court.

Peloton instituted the current action alleging that ICON infringed U.S. Patent Nos. 10,486,026 and 10,639,521, and violated the Delaware Deceptive Trade Practices Act (DTPA), the Lanham Act, and California's Unfair Competition Law. (See D.I. 1 at ¶¶ 117-160). ICON counterclaimed for infringement of its own patents, U.S. Patent Nos. 6,601,016 ('016 Patent) and 7,556,590 ('590 Patent), violations of the Lanham Act and the DTPA, and declarations of noninfringement and invalidity of Peloton's patents. (D.I. 27 at ¶¶ 95-178).

In the instant motion, Peloton moves to dismiss ICON's infringement counterclaims and a subset of its Lanham Act and DTPA allegations. (See D.I. 39). In its briefing, Peloton argues that it has an express license to practice the '016 and '590 Patents (the "iFit License") from a 2017 settlement with ICON. (D.I. 40 at 1). Peloton also challenges ICON's Lanham Act and DTPA claims concerning its music-based advertisements and statements focused on "innovation" and "competition." (Id. at 1-2).

II. LEGAL STANDARD

Rule 8 requires a complainant to provide "a short and plain statement of the claim showing that the pleader is entitled to relief...." FED. R. CIV. P. 8(a)(2). Rule 12(b)(6) allows the accused party to bring a motion to dismiss the claim for failing to meet this standard. A Rule 12(b)(6) motion may be granted only if, accepting the well-pleaded allegations in the complaint as true and viewing them in the light most favorable to the complainant, a court concludes that those allegations "could not raise a claim of entitlement to relief." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 558 (2007).

"Though 'detailed factual allegations' are not required, a complaint must do more than simply provide 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action.'" Davis v. Abington Mem'l Hosp., 765 F.3d 236, 241 (3d Cir. 2014) (quoting Twombly, 550 U.S. at 555). I am "not required to credit bald assertions or legal conclusions improperly alleged in the complaint." In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d 198, 216 (3d Cir. 2002). A complaint may not be dismissed, however, "for imperfect statement of the legal theory supporting the claim asserted." See Johnson v. City of Shelby, 574 U.S. 10, 11 (2014).

A complainant must plead facts sufficient to show that a claim has "substantive plausibility." Id. at 12. That plausibility must be found on the face of the complaint. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). "A claim has facial plausibility when the [complainant] pleads factual content that allows the court to draw the reasonable inference that the [accused] is liable for the misconduct alleged." Id. Deciding whether a claim is plausible will be a "context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 679.

III. DISCUSSION

A. The Court May Consider the 2017 Settlement Agreement

Under Rule 12(b)(6), "a document integral to or explicitly relied upon in the complaint may be considered without converting the motion to dismiss into one for summary judgment." U.S. Express Lines Ltd. v. Higgins, 281 F.3d 383, 388 (3d Cir. 2002) (internal quotations and emphasis omitted). As the Third Circuit explained, "the primary problem raised by looking to documents outside the complaint—lack of notice to the plaintiff—is dissipated '[w]here plaintiff has actual notice ... and has relied upon these documents in framing the complaint.' " In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997) (quoting Watterson v. Page, 987 F.2d 1, 3-4 (1^st Cir. 1993)).

In evaluating its motion to dismiss, Peloton argues that the Court may consider the 2017 Settlement Agreement (D.I. 41-1, Ex. 1). (D.I. 40 at 4). Peloton contends that ICON's counterclaims are premised on the contents of the Settlement Agreement (containing the disputed iFit License), which permits the Court to consider the document. (Id.). ICON's answering brief addresses only the merits of Peloton's arguments and does not challenge the validity of the Settlement Agreement as attached or its consideration at the Rule 12(b)(6) stage. (See, e.g., D.I. 46 at 2).

ICON's counterclaims reference the iFit License several times. For example, the counterclaims state, "ICON licensed Peloton to practice a limited scope of the '016 Patent for only its Peloton Bike. Peloton does not have any license to the '016 Patent for its Tread, nor does Peloton have any right or authority to license others to practice the '016 Patent for its Peloton Bike or its Tread." (D.I. 27 at ¶ 73). ICON's counterclaims repeatedly characterize Peloton'slicense as having a "limited scope" (id. at ¶¶ 8, 19, 62, 73, 74) and reference the iFit License in both its infringement and false advertising allegations. (See id. at ¶¶ 62, 73-74).

I agree with Peloton that the language in ICON's counterclaims is sufficient to indicate that it relied on the Settlement Agreement in framing its claims. The fact that ICON did not attach the Settlement Agreement to its claims does not preclude the Court from considering it in connection with the instant Rule 12(b)(6) motion. See In re Horsehead Holding Corp. Sec. Litig., 2018 WL 4838234, at *9 (D. Del. Oct. 4, 2018).

B. A Choice of Law Analysis is Not Required

In a footnote, Peloton explains that the Settlement Agreement lacks a choice of law provision. Peloton states, "New York law likely applies" based on Peloton's principal place of business and the fact that the settlement resolved litigation occurring in New York. (D.I. 40 at 5 n.1). Peloton's brief cites both Delaware and New York law for principles of contract interpretation. The principles do not appear to conflict. ICON's briefing does not address the choice of law issue, but also cites to both Delaware and New York caselaw.

When exercising supplemental jurisdiction pursuant to 28 U.S.C. § 1367, a federal court must apply the choice-of-law rules of the forum state in which it sits. Chin v. Chrysler LLC, 538 F.3d 272, 278 (3d Cir. 2008); Sys. Operations, Inc. v. Sci. Games Dev. Corp., 555 F.2d 1131, 1136 (3d Cir. 1977). Thus, Delaware's choice-of-law rules govern the Court's analysis.

Delaware's choice-of-law rules require a two-pronged approach. Pennsylvania Emp., Benefit Trust Fund v. Zeneca, Inc., 710 F. Supp. 2d 458, 466 (D. Del. 2010) (citing In re Teleglobe Commc'ns Corp., 493 F.3d 345, 358 (3d Cir. 2007)). First, the court must identify whether an actual conflict exists through "an examination of the competing laws proposed by the parties." Id. at 467. If the end result under the competing laws is the same, the choice presents a"false conflict" and the court should avoid conducting a conflicts analysis. Id. at 466-67. Second, if a conflict exists, Delaware applies the "most significant relationship" test per the Restatement (Second) of Conflict of Laws. Id. at 467.

Delaware and New York apply very similar rules of contractual interpretation. In New York,

A written agreement that is clear and complete on its face must be enforced according to the plain meaning of its terms. Extrinsic evidence may be considered to discern the parties' intent only if the contract is ambiguous, which is a question of law for the court to resolve. In determining whether an ambiguity exists, '"[t]he court should examine the entire contract and consider the relation of the parties and the circumstances under which it was executed. Particular words should be considered, not as if isolated from the context, but in the light of the obligation as a whole and the intention of the parties as manifested thereby."'

Warner v. Bd. of Educ., 968 N.Y.S.2d 714, 716 (N.Y. App. Div. 2013) (internal citations omitted). And, in Delaware,

Delaware law adheres to the objective theory of contracts, i.e., a contract's construction should be that which would be understood by an objective, reasonable third party. When interpreting a contract, this Court will give priority to the parties' intentions as reflected in the four corners of the agreement, construing the agreement as a whole and giving effect to all its provisions. Contract terms themselves will be controlling when they establish the parties' common meaning so that a reasonable person in the position of either party would have no expectations inconsistent with the contract language. Under standard rules of contract interpretation, a court must determine the intent of the parties from the language of the contract.

Salamone v. Gorman, 106 A.3d 354, 367-68 (Del. 2014) (internal...