S. Telecom Inc. v. Threesixty Brands Grp., LLC

SOUTHERN TELECOM INC., Plaintiff, v. THREESIXTY BRANDS GROUP, LLC, Defendant.

20-cv-2151 (LJL)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

January 12, 2021

ORDER AND OPINION

LEWIS J. LIMAN, United States District Judge:

Defendant, ThreeSixty Brands Group, LLC ("ThreeSixty" or "Defendant") moves for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c). For the following reasons, Defendant's motion is granted in part and denied in part.

BACKGROUND

This case arises out of a license agreement between Plaintiff Southern Telecom Inc. ("STI" or "Plaintiff") and Defendant ThreeSixty Brands Group ("ThreeSixty" or "Defendant"). STI is a manufacturer of consumer electronics and accessories. Dkt. No. 21 ("Compl.") ¶ 6. STI sells its products to consumers through third-party retailers. ThreeSixty is a limited liability corporation that owns the brand and trademarks THE SHARPER IMAGE and SHARPER IMAGE. Dkt. No. 20 ¶ 2.

In 2008, STI entered into a license agreement to use the trademarks "THE SHARPER IMAGE" and "SHARPER IMAGE" (the "Marks") in connection with its products. Id. ¶ 7. STI renewed the license agreement several times, most recently in 2013 (the "Agreement"). Id. Under the Agreement, STI was granted the non-exclusive right to use the Marks in connection with multiple categories of consumer electronics. Id. ¶ 9. STI was licensed to sell its products under the Marks in multiple retail channels, including through stores such as Bed, Bath and Beyond, Best Buy, Office Depot, Costco, and Sam's Club. The Agreement required STI to pay royalties on its sale of products sold under the Marks at rates between 3-6%. Id. ¶ 11. STI was also required to make quarterly minimum payments based on the amounts it projected it would earn. Id. The Agreement provided:

Licensee acknowledges that the rights granted pursuant to this Agreement are non-exclusive and that nothing in this Agreement shall be construed to prevent or restrict Licensor from granting licenses to any third party to use the Licensed Mark in any manner or for any purpose, including, without limitation, the use of the Licensed Mark in connection with the Products in the Territory.

Dkt. No. 31 § 1.1(b).

The Agreement additionally provided for an application process by which STI could seek approval from the Licensor to use the Marks in connection with its products. The process proceeded in three stages: the "Concept Stage," at which STI was required to submit to the licensor a "drawing, storyboard or rendering of each product"; the "Pre-Production Stage," at which STI was required to submit an "'off-tool' working prototype of each Product"; and the "Production Stage," at which STI was required to submit "three (3) samples of such product from the first production run together with all final materials . . . to be used in connection therewith." Id. § 3.2(a). According to the Agreement, throughout this application process "Licensor shall have the sole and absolute approval, in Licensor's sole and absolute discretion, over all Products and all materials throughout the . . . three (3) stages of development and production." Id. Licensor promised to "use its commercially reasonable best efforts to respond within ten (10) business days after its receipt of any approval request." Id. § 3.2(b).

The Agreement also granted to the Licensor discretion over the retail channels throughwhich STI could distribute the products it sold under the Marks:

In order to maintain the reputation, image and prestige of the Licensed Mark, Licensee's distribution patterns shall consist solely of those retail outlets in the Territory whose location, merchandising and overall operations are consistent with the high quality of Articles and the reputation, image and prestige of the Licensed Mark and which have been approved by Licensor in writing.

Id. § 5.1. Appended to the Agreement was Schedule B, a list of retailers who were pre-approved by the Licensor. The Agreement went on to state:

Licensor may disapprove of any customer, even if such customer is listed as an approved account on Schedule B (or has otherwise been approved by Licensor in writing), if such customer diverts Articles or Licensor otherwise determines that such customer does not meet its standards.

Id. § 5.3.

The Agreement included a general provision under the heading "Approvals":

Licensor's approvals pursuant to this Agreement may be based solely on its subjective standards as to aesthetics based upon its requirements for and the reputation and prestige of products bearing the Licensed Mark and may be withheld in Licensor's sole discretion. Also, Licensor's approval of any Articles for inclusion in, or of any materials of any kind for use in connection with, any particular collection of Articles shall constitute approval for inclusion or for such use in connection with such collection only.

Id. § 6.1

Finally, the Agreement included a term under which STI could terminate the contract at any time, resulting in a "Sell-Off Period:"

In addition, upon Termination, Licensee immediately shall deliver to Licensor a complete and accurate schedule of Licensee's inventory of Articles and of related work in process then on hand ("Inventory"). Provided that this Agreement is not terminated by Licensor pursuant to ¶¶ 17.1-17.3, Licensee shall be permitted, for a period of 120 days following Termination, to sell-off the Inventory (the "Sell-Off Period"), provided that all such sales are made subject to all of the provisions of this Agreement. All Sales Royalty due for sales of Inventory during the Sell-Off Period shall be accounted for and paid to Licensor monthly.

Id. § 18.2

The term of the Agreement was three years, until December 31, 2016. Compl. ¶ 12. By amendment, the term was extended through December 31, 2019, with STI granted a right to renew the Agreement at its sole option for an additional three-year term, until December 31, 2022, provided that STI: (1) notified the Licensor of its intent to renew by April 30, 2019; (2) had achieved sales at levels necessary to pay the minimum guaranteed royalties; and (3) was otherwise compliant with its contractual obligations. Id.

At the time Plaintiff entered into the Agreement, Icon NY Holdings LLC ("Icon") owned the Marks. Id. ¶ 8. On or about December 30, 2016, ThreeSixty assumed ownership of the Marks. Id. Since that time, ThreeSixty has functioned as the Licensor of the Marks with respect to STI and has assumed the rights and obligations of the "Licensor" as defined in the Agreement. Id.

Prior to ThreeSixty's acquisition of the Marks, a company named MerchSource, LLC ("MerchSource") was the other licensee of the Marks in connection with the Products. Id. ¶ 15. When Icon owned the Marks, both STI and MerchSource used the Marks on consumer electronics, but their respective product offerings did not overlap. Id. In 2016, the principals of MerchSource decided to acquire the Marks from Icon. Id. ¶ 16. MerchSource established 360 Holdings II-A LLC as an acquisition vehicle for MerchSource to obtain the Marks. Id. 360 Holdings II-A was later renamed ThreeSixty. Id. ThreeSixty never has had an active business beyond owning the Marks and other intellectual property assets, and it has no practical existence separate from that of MerchSource. Id. The ThreeSixty personnel with whom STI interacts operate out of MerchSource offices and use MerchSource email. Id. Thus, whereas previously the owner of the Marks was independent of the licensees for the Marks, after 2016 ThreeSixty—as owner—and MerchSource—as licensee are now under common ownership. Only STI isindependent of the owner of the Marks.

The acquisition of the Marks by a licensee of the Marks is the source of the ills of which STI complains. Once ThreeSixty acquired the Marks, according to STI, it embarked upon a course of conduct to deprive STI of the business it had built under the Marks and to transfer that business to its affiliate, MerchSource. Id. ¶ 17. STI alleges that ThreeSixty breached its obligations to benefit MerchSource in several ways. First, ThreeSixty repeatedly delayed and then denied for arbitrary reasons STI's product approval requests and used the information that STI submitted in its approval requests to develop competitive products to be sold by MerchSource under the Marks. Id. ¶ 18-19. It alleges that: "MerchSource is now selling under the Marks Products, including massagers, speakers, headphones, lighting and multiple other products that were directly copied from successful SHARPER IMAGE products developed and sold successfully by STI." Id. ¶ 19. It further alleges: "upon information and belief, ThreeSixty did not decline to approve various products developed by STI for sale under the Marks for aesthetic reasons, or to protect the SHARPER IMAGE brand, as it claimed, but to enable MerchSource to sell the very same products exclusively." Id. ¶ 20.

Second, STI alleges that "ThreeSixty abused its right to approve the customers to which STI was permitted to sell Products under the Marks to accomplish the same ends." Id. ¶ 21. STI updated products at ThreeSixty's request and sold them to the retailers that ThreeSixty approved but reserved for MerchSource "other retailers to which STI could have and would have sold this product." Id. ¶ 21. "[O]n multiple occasions, STI was told by ThreeSixty that sales of Products bearing the Marks were not permitted to certain retailers like CVS, Dollar General, Kmart, Rite Aid, PCH and Morningsave, . . . supposedly because the image of SHARPER IMAGE would be harmed were goods bearing the Marks to be carried in such stores." Id. ¶ 22. But, STIcomplains, MerchSource was permitted to sell goods bearing the Marks to those stores. Id. ¶ 22. STI complains that on at least one occasion, a longtime STI customer was told by ThreeSixty that it could supply Products bearing the Marks more cheaply if the customer purchased the products from MerchSource rather than STI. Id. ¶ 23.

Third,...