Telebrands Corp. v. My Pillow, Inc., Case No. 18-CV-06318

TELEBRANDS CORP., Plaintiff, v. MY PILLOW, INC., Defendant.

Case No. 18-CV-06318

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

April 30, 2019

Judge Sharon Johnson Coleman

MEMORANDUM OPINION AND ORDER

Plaintiff Telebrands Corporation filed a five-count complaint against defendant My Pillow, Inc., alleging breach of contract, breach of implied contract, tortious interference with business expectancy, unjust enrichment, and quantum meruit. My Pillow filed a six-count counterclaim against Telebrands alleging false advertising in violation of the Lanham Act, violations of the Illinois Uniform Deceptive Trade Practice Act ("IUDTPA") and the Illinois Consumer Fraud and Deceptive Business Practices Act ("ICFA"), unfair competition, fraud, and breach of contract. Telebrands moves to dismiss the entire counterclaim pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6). For the reasons outlined below, Telebrands' motion to dismiss [17] is granted in part and denied in part.

Background

My Pillow is a manufacturer and seller of its patented pillow product online and in retail stores, and Telebrands is a consumer products marketing company. The counterclaim alleges that My Pillow and Telebrands entered into a May 20, 2012 License Agreement, under which My Pillow had the right to market its pillows directly to consumers and Telebrands had the exclusive right to "advertise, promote, market, distribute, and sell" the My Pillow pillows in certain stores. (Dkt. 1-1 §§ 1-2.) The License Agreement required Telebrands to comply with all applicable laws in performing under the License Agreement, including complying with the FTC Act. (Id. § 9(b).) The License Agreement further provided for a one-year term and would automatically renew for successive one-year terms if Telebrands ordered at least 1,000,000 units in the immediate prior year. (Id. § 13.) My Pillow alleges that the License Agreement automatically terminated by its terms in 2014, but the parties continued their business relationship through a series of purchase orders.

Following the termination of the License Agreement, Telebrands represented and agreed not to engage in false advertising of the My Pillow product and to prevent its retail clients from engaging in false advertising. My Pillow alleges as an example that in September 2018 Walgreens.com listed My Pillow's product as "Telebrands My Pillow" and showed a box image that contained an endorsement of the product as "National Sleep Foundation Official Pillow." At that time My Pillow was subject to a consent decree that prohibited My Pillow from making any health claims about its product or advertising it as an "official" product of any organization. My Pillow alleges that it informed Telebrands of the decree, and Telebrands agreed to ensure that its retail clients remove from its advertisements all health claims and/or statements that My Pillow is the "official" pillow; however, Telebrands failed to monitor its retail clients' advertisements to ensure the retailers complied with My Pillow's directives. My Pillow includes similar allegations regarding several other retail clients of Telebrands. During an in-person meeting at Telebrands' office in New Jersey on August 21, 2018, My Pillow CEO Mike Lindell met with Telebrands representative Bala Iyer, and Lindell showed Iyer examples of false advertising from Telebrands' retailers. Iyer then offered to indemnify My Pillow for any damages incurred from the false advertising.

My Pillow further alleges that Telebrands represented and agreed to prohibit and prevent its retail clients from purchasing "ad words" on Google and other search engines. Telebrands has a profit motivation to continue to allow its retailers to purchase "ad words," as each "ad word"purchase drives a customer to purchase a pillow from a Telebrands' retailer and not from My Pillow directly. Despite numerous demands from My Pillow to Telebrands for its retail clients to stop purchasing "ad words," Telebrands has not taken sufficient corrective actions to stop the improper conduct from several of its retailers.

On August 21, 2018, My Pillow informed Telebrands of its decision to discontinue its business relationship with Telebrands. Telebrands sued My Pillow on September 17, 2018. My Pillow brought this counterclaim on October 9, 2018. Telebrands now moves to dismiss the counterclaim in full.

Legal Standard

When considering a Rule 12(b)(6) motion, the court accepts all of the plaintiff's allegations as true and views them "in the light most favorable to the plaintiff." Lavalais v. Vill. of Melrose Park, 734 F.3d 629, 632 (7th Cir. 2013). A complaint must contain allegations that "state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). The plaintiff does not need to plead particularized facts, but the allegations in the complaint must be sufficient to "raise a right to relief above the speculative level." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Threadbare recitals of the elements of a cause of action and allegations that are merely legal conclusions are not sufficient to survive a motion to dismiss. Iqbal, 556 U.S. at 678.

Moreover, allegations of fraud must be pleaded in conformance with Rule 9(b). See Pirelli Armstrong Tire Corp. Retiree Med. Benefits Tr. v. Walgreen Co., 631 F.3d 436, 441 (7th Cir. 2011) (ICFA); Cardionet, Inc. v. Lifewatch Corp., No. 07 C 6625, 2008 WL 567031, at *2 (N.D. Ill. Feb. 27, 2008) (Conlon, J.) (Lanham Act and IUDTPA); Desmond v. Chi. Boxed Beef Distribs., Inc., 921 F. Supp. 2d 872, 884-85 (N.D. Ill. 2013) (Castillo, J.) (unfair competition). Under Rule 9(b), a plaintiff alleging fraud "must state with particularity the circumstances constituting fraud." Fed. R. Civ. P. 9(b). Thecomplaint must allege "the who, what, when, where, and how of the fraud." Pirelli Armstrong, 631 F.3d at 441-42 (internal quotations and citation omitted).

Analysis

The parties disagree as to the pleading standard that should be applied to My Pillow's counterclaims. Telebrands argues that the heightened pleading standard of Rule 9(b) should apply to all claims. My Pillow responds that Rule 9(b) only applies to those claims that sound in fraud. A claim "sounds in fraud" when it "is premised upon a course of fraudulent conduct." Borsellino v. Goldman Sachs Grp., Inc., 477 F.3d 502, 507 (7th Cir. 2007). Here, underlying each of the claims is a purported scheme to defraud My Pillow in order to maximize Telebrands own profits. The claims, which encompass false advertising under the Lanham Act, violations of the IUDTPA and the ICFA, unfair competition, fraud, and breach of contract, all arise out of this fraudulent scheme. They all are premised on a course of fraudulent conduct, and so Rule 9(b) applies to each of them. See Pirelli, 631 F.3d at 441; Cardionet, Inc., 2008 WL 567031 at *2; Desmond, 921 F. Supp. 2d at 884.

Regarding false advertisement under the Lanham Act, Telebrands contends that My Pillow has not stated this claim with particularity for the circumstances constituting the alleged fraud. My Pillow responds that to support the false advertisement claim it need only allege the specifics regarding the false advertisement itself. My Pillow admits that it does not allege that Telebrands itself falsely advertised, but emphasizes that Telebrands' clients falsely advertised My Pillow's products with Telebrands' encouragement and facilitation. My Pillow alleges the dates and language of several of these alleged false advertisements. However, without alleging that Telebrands was responsible for these violations, this claim cannot proceed. Indeed, Telebrands further argues that My Pillow's Lanham Act claim fails to state a claim because it is based entirely on statements appearing on the websites of third-party retailers. My Pillow states that it is irrelevant thatTelebrands itself did not place the advertisements because Telebrands is subject to contributory liability.

To state a claim of false advertising claim under the Lanham Act, My Pillow must establish that: (1) Telebrands made a material false statement of fact in a commercial advertisement; (2) the false statement actually deceived or had the tendency to deceive a substantial segment of its audience; and (3) My Pillow has been or is likely to be injured as a result of the false statement. Eli Lilly & Co. v. Arla Foods, Inc., 893 F.3d 375, 381-82 (7th Cir. 2018). My Pillow does not dispute that it does not allege that Telebrands itself did not make a material false statement, pivoting in its opposition instead to a theory of contributory liability without relying on any Seventh Circuit authority.

In Lexmark Int'l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 134 S.Ct. 1377, 188 L.Ed.2d 392 (2014), the Supreme Court addressed the limits of who may sue for false advertising under the Lanham Act, holding that a cause of action is "limited to plaintiffs whose injuries are proximately caused by violations of the statute." 572 U.S. at 132. The Supreme Court's formulation of proximate cause requires My Pillow to plead and prove "economic or reputational injury flowing directly from the deception wrought by [Telebrands'] advertising." Lexmark, 572 U.S. at 133.

The only relevant, post-Lexmark authority that My Pillow points to is Duty Free Americas, Inc. v. Estee Lauder Companies, Inc., 797 F.3d 1248 (11th Cir. 2015). The Eleventh Circuit recognized that whether a plaintiff may bring a claim for contributory false advertising under § 43(a) of the Lanham Act was a matter of first impression in that circuit. Id. at 1274. Analogizing to contributory trademark infringement actions, the court found that a plaintiff could assert a claim for contributory false advertising. Id. at 1277. To prove contributory negligence in the Eleventh Circuit, the "plaintiff must show that a third party...