United Safeguard Distribs. Ass'n, Inc. v. Safeguard Bus. Sys., Inc., 2:15-CV-03998 RSWL (AJW)

UNITED SAFEGUARD DISTRIBUTORS ASSOCIATION, INC.,a Georgia corporation; GREG SCHOB, an individual; VICKI SCHOB, an individual;and SCHOB AND SCHOB, INC., a California corporation, Plaintiffs, v. SAFEGUARD BUSINESS SYSTEMS, INC., a Delaware corporation; SAFEGUARD ACQUISITIONS, INC.,a Delaware corporation; DELUXE CORPORATION,a Minnesota corporation; and DOES 1-10, Defendants.

2:15-CV-03998 RSWL (AJW)

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

May 17, 2016

ORDER re: UNITED SAFEGUARD DISTRIBUTORS ASSOCIATION, INC.'S MOTION FOR RECONSIDERATION OF THE COURT'S NOVEMBER 17, 2015 ORDER [49]

Currently before the Court is Plaintiff United Safeguard Distributors Association, Inc.'s ("Plaintiff" or "USDA") Motion for Reconsideration of the Court's November 17, 2015 Order ("Motion") [49]. Plaintiff

seeks reconsideration of this Court's November 17, 2015 Order (hereinafter "November 17 Order") [41] pursuant to Federal Rules of Civil Procedure Rule 60(a), 60(b), and Local Rule 7-18.

Plaintiff is correct in arguing that this Court's previous Order dismissing Plaintiff's declaratory judgment claim was erroneously predicated on the misunderstanding that Plaintiff joined with the remaining Plaintiffs in a breach of contract claim in their First Amended Complaint. However, for reasons discussed below, the Court DENIES Plaintiff's Motion for Reconsideration [49].

I. BACKGROUND

A. Factual Background

1. The Parties

Plaintiff USDA is incorporated in Georgia and has an office in La Mirada, California. FAC ¶ 27. USDA is a membership organization composed of Safeguard franchises and distributors, founded in April 1997. FAC ¶ 27. Plaintiff Schob & Schob, Inc. is incorporated in California with its principal office in Fresno, California. Id. at ¶ 29. Plaintiffs Vicki and Greg Schob are individuals residing in or near Fresno, California. Id. at ¶¶ 30-31.

Defendant SBS is a Delaware corporation with its principal place of business in Dallas, Texas. Id. at ¶ 32. Defendant SAI is a Delaware corporation with its principal place of business in Dallas, Texas. Id. at ¶33. Defendant Deluxe is a Minnesota corporation with its principal place of business in Shoreview, Minnesota. Id. at ¶ 34. Deluxe, SBS, and SAI are sellers of Safeguard products, including business forms and systems, apparel, and other business services to small businesses. Id. at ¶ 1. Deluxe acquired SBS in 2004. Id. at ¶ 6. SAI is a wholly-owned subsidiary of Deluxe. Id. at ¶ 12.

2. The SBS Distributor Agreements

Since 1972, various distributors ("SBS Distributors") such as the Schobs have engaged in the sale of Safeguard products and thereby entered into SBS Distributor Agreements with SBS. Id. at ¶ 2. The SBS Distributor Agreements are uniform with respect to many, but not all, of their provisions. Id. The material provisions of the SBS Distributor Agreements that are uniform throughout are those provisions that grant the SBS Distributors protection against competition for sales of Safeguard products to prior customers by "(1) Safeguard itself, (2) all Safeguard Distributors and franchisees, and (3) any other third party engaged in the offer and sale of Safeguard products." Id. at ¶ 3. Specifically, pursuant to the SBS Distributor Agreements, SBS Distributors are granted thirty-six months of exclusive rights to all commissions from customers they solicit. Id. Additionally, when an SBS Distributor solicits a subsequent order from that customer, the Distributorhas an additional thirty-six months of exclusive rights to commissions from that customer. Id. Further, SBS Distributors have the "unqualified right" to participate in commissions generated through sales to that customer for up to five years after the termination of their contracts with SBS - whether they have been terminated with or without cause. Id. at ¶ 4. These rights (referred to by Plaintiffs throughout their First Amended Complaint and their Opposition to Defendants' Motion to Dismiss as "Customer Protection") apply to all of the SBS Distributors' customers for Safeguard products ("the Protected Customers"). Id.

Prior to Deluxe's acquisition of SBS, SBS Distributors took part in the "Sourced Products Program," in which SBS Distributors placed wholesale purchase orders for Safeguard products with vendors approved by SBS ("Approved Vendors") to supplement the Distributors' Safeguard product offerings to customers. Id. at ¶¶ 55-56. In 1997, SBS implemented the Billing Only Distributor Paid ("BODP") Program so that SBS Distributors would pay Approved Vendors directly, instead of SBS paying them. Id. at ¶¶ 61-62. In 2008, Deluxe, having acquired SBS, launched its Business Acquisitions and Mergers ("BAM") Program. Id. at ¶ 12. Under the BAM Program, Deluxe acquires independent non-SBS distributor businesses in the small business forms, supplies, and services product market. Id. at ¶ 13. The BAM program is "designed to maximize Deluxeinsourcing (the percentage of products sold or manufactured by Deluxe), [and thereby] increase the amount of revenue Deluxe obtains from rebates and cross-sell[ing] Deluxe products to new customers, who used to buy from Deluxe's competitors. The BAM Program is also designed to expand Deluxe's range of products." Id.

3. Plaintiffs' Allegations in their FAC

a. USDA's Standing

Plaintiffs allege that USDA has standing to maintain this action because its members have suffered injury-in-fact by conduct of each of the Defendants. FAC ¶ 41. USDA asserts that neither its claim nor request for relief requires the participation of USDA's individual members. FAC ¶ 44.

b. Plaintiffs' Declaratory Judgment Claim against all Defendants

In their First Amended Complaint, Plaintiffs seek a declaratory judgment against all Defendants, while the remaining ten claims are brought specifically by the Schobs against various Defendants. Id. at ¶¶ 253-261.

Plaintiffs allege that Defendants implemented a "scheme" to drive SBS Distributors out of business by effectively eliminating Defendants' competition for the sale of Safeguard products. Id. at ¶¶ 1, 107. Plaintiffs allege that Deluxe increased fees, threatened SBS Distributors, and implemented policies designed to reduce SBS Distributors' sales commissions.Id. at ¶¶ 9-11, 72, 77, 91, 95, 101, 105-106, 110, 115. Plaintiffs allege that Deluxe forced SBS Distributors to implement a "percentage schedule" for the BODP Program which tripled fees for products sourced from Approved Vendors other than Deluxe, effectively discouraging SBS Distributors from using Approved Vendors. Id. at ¶¶ 6, 9. Plaintiffs allege that the increased fees are designed to encourage SBS Distributors to source products from Deluxe, or where Deluxe doesn't manufacture the product, to source from what Deluxe and SBS characterize as "Preferred Supplies" or "Preferred Vendors." Id. Plaintiffs allege that the "Preferred Suppliers" pay Deluxe "kick-backs" or "rebates" which exceed 7% of the Preferred Suppliers gross sales. Id.

Additionally, Plaintiffs assert that Deluxe has recently implemented a new policy of revenue enhancement which gives Deluxe a 2% rebate from Distributors when Deluxe makes payments to "Approved Vendors" ("2% Net 30"), rather than "Preferred Suppliers." Id. at ¶¶ 160-166. Plaintiffs allege that the 2% rebate to Deluxe is unreasonable and not reflected in SBS Distributors' invoices. Plaintiffs argue that the rebate inflates the overall wholesale prices for the SBS Distributors, thereby making sales to Approved Vendors even more difficult. Id.

Plaintiffs further allege that Defendant Deluxe used Defendant SAI to acquire non-SBS Distributorbusinesses through the BAM Program to compete with and take customers from SBS Distributors, in direct violation of the alleged Customer Protection policies. Id. at ¶¶ 12-16, 140-154, 156, 159, 180, 183, 187. Plaintiffs allege that these acquisitions were made in an effort to terminate their SBS Distributor Agreements. Id. Plaintiffs further allege that Defendants allow the newly acquired distributors to sell products at prices below what SBS Distributors are charged. Id. at ¶¶ 17, 189.

Next, Plaintiffs contend that Defendants will not allow SBS Distributors to acquire other distributors nor sell their business to another distributor without executing a general release of claims against Deluxe and its subsidiaries (the "General Release"). Id. at ¶¶ 19-22, 220, 223. Plaintiffs allege that as a result of Defendants' actions, SBS Distributors' customer relationships have been harmed and Plaintiffs have suffered losses of prospective contracts and prospective economic advantages. Id. at ¶¶ 23, 288-298, 308-314.

As a remedy for these alleged harms, Plaintiffs seek a judicial declaration as follows: (a) The BODP fees violate the SBS Distributor Agreements; (b) SBS Distributors can purchase from any otherwise qualified Approved Vendors and are not contractually mandated to purchase from Deluxe; (c) Deluxe and SBS have no right to inflate shipping and handling costs under the SBSDistributor Agreements; (d) SBS Distributors are not required to purchase products from Preferred Suppliers; (e) SBS and Deluxe are required to enforce the Customer Protection provisions of the SBS Distributor Agreements; (f) SBS and Deluxe cannot require a general release as a condition to the transfer of a SBS Distributor franchise; (g) under the SBS Distributor Agreements, Deluxe and SBS have no right to retain "rebates" from the Preferred Supplier Program or demand payment terms of 2% Net 30. Id. at ¶¶ 97, 108, 128, 152, 191, 225, 252; see also id. at ¶¶ 253-261. Plaintiffs Greg Schob, Vicki Schob, and Schob and Schob, Inc. ("the Schob Plaintiffs") brought a separate breach of contract claim against Defendants based on nearly identical grounds as those supporting Plaintiffs' declaratory judgment claim.¹

B. Procedural History

Plaintiff USDA filed its initial Complaint on May 27, 2015 [1]. On July 2, 2015, USDA filed its First Amended Complaint including the Schob Pl...