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QUALITY KING DISTRIBS. v. KMS RESEARCH

November 16, 1996

QUALITY KING DISTRIBUTORS, INC., Plaintiff,
v.
KMS RESEARCH, INC., Defendant.



The opinion of the court was delivered by: SPATT

 SPATT, District Judge:

 This declaratory judgment action arises from the claims of the plaintiff, Quality King Distributors, Inc. ("Quality King" or the "plaintiff"), that the defendant, KMS Research, Inc. ("KMS" or the "defendant"), is posturing itself to commence a lawsuit for intentional interference with the defendants' contractual relationships with unspecified third parties. The plaintiff seeks a judgment declaring that its business activities are lawful and not in violation of any common law tort theories. KMS moves to dismiss the Complaint, or in the alternative to stay this litigation, pursuant to 28 U.S.C. § 2201 governing declaratory judgment actions, based on an ongoing related lawsuit in California. The plaintiff opposes the defendant's motion arguing that this Court is an appropriate forum in which to litigate its claim.

 I. Background

 The following facts are taken from the Complaint. Quality King is a New York corporation with its principal place of business in Suffolk County. The plaintiff is a wholesale distributor of consumer goods of, among other things, pharmaceuticals and health and beauty aids. Quality King pleads upon information and belief, that KMS is a California corporation with its principal place of business in Redding, California. The defendant is a manufacturer and distributor of professional hair care products including shampoos, conditioners and hair sprays, a portion of which it sells in the state of New York.

 As part of its operation, Quality King purchases hair care products, including those manufactured by KMS, from certain unspecified "reputable supply sources" which it then "resells . . . to reputable customers including large well-known retail chains." According to the Complaint, KMS prefers to sell its products through the "limited salon market" in order to maintain higher prices.

 On August 22, 1996, as the result of Quality King's practice of selling KMS products at lower prices, KMS sent a "demand letter" to Quality King claiming that the plaintiff "'has diverted KMS products from the authorized channels of distribution and sold those KMS products' in unauthorized retail outlets." The demand letter further advises that KMS "prohibits its authorized distributors from reselling to anyone other than 'hair salons, barber shops, beuauty [sic] schools and barber schools for resale'" and quotes from a form agreement which the defendant has entered into with its authorized distributors. According to the Complaint however, Quality King is not a party to any such agreement, and as a result, is not bound by its terms. Notwithstanding the absence of a contractual relationship, the letter accuses the plaintiff of "interfering with KMS' contractual rights with its distributors and salon customers by selling KMS products" and demands that Quality King "'cease and desist'" its purchase and resale of KMS products on or before September 13, 1996. The demand letter further seeks a written response agreeing to these terms.

 As a result of the foregoing, the plaintiff alleges that it is in the position of "continuing its lawful business of purchasing and selling KMS [products] under the cloud and threat of a lawsuit from KMS, notwithstanding that Quality King's continued purchase and sale of such products is lawful and not restricted either by contract or at common law." According to the plaintiff, the demand letter was sent to put Quality King on notice of the defendant's distribution policy so that KMS can maintain a cause of action for intentional interference with contract, and prohibit the plaintiff from further distribution of its products.

 Quality King filed its Complaint in New York Supreme Court, Suffolk County on August 29, 1996. Quality King Distributors, Inc. v. KMS Research, Inc., Index No. 96-22135 (Sup. Ct. Suffolk Cty, August 28, 1996). The case was then removed by the defendant pursuant to this Court's diversity jurisdiction. The notice of removal was filed on September 27, 1996. The Complaint contains a single cause of action for a judgment:

 
declaring that Quality King is entitled to continue to purchase and sell KMS products, notwithstanding that KMS has notified Quality King that it has a corporate policy that restricts its authorized distributors from selling to anyone other than hair salons, barber shops, beauty schools and barber schools for resale and that some of such salons may have arrangements with their distributors restricting resale only to salon customers for personal use.

 Also on September 27, 1996, the defendant filed a related action in the California Superior Court captioned KMS Research, Inc. v. Quality King Distributors, Inc., No. BC 158155 (Cal. Sup. Ct. Sept. 27, 1996). The complaint in that action alleges claims against Quality King and other named defendants, seeking damages and injunctive relief for: (1) intentional interference with contract and conspiracy; (2) intentional interference with prospective business advantage and conspiracy; (3) inducing breach of contract and conspiracy; (4) negligent interference with prospective economic advantage and conspiracy; and (5) unfair competition and conspiracy.

 The defendant moves to dismiss the Complaint or stay this action pursuant to 28 U.S.C. § 2201 based on the ongoing California lawsuit.

 II. Discussion

 A. Declaratory Judgment Act

 At the outset, the Court finds that this lawsuit is governed by federal rather than state law because the Declaratory Judgment Act addresses procedural as opposed to substantive rights. See Haagen-Dazs Shoppe Co. v. Born, 897 F. Supp. 122, 126 & n.2 (S.D.N.Y. 1995) (holding that the Declaratory Judgment Act, as opposed to state law, governs cases removed on the basis of diversity jurisdiction under an Erie analysis); DeFeo v. Proctor & Gamble Co., 831 F. Supp. 776, 779 (N.D. Cal. 1993) (same); see also Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671, 94 L. Ed. 1194, 70 S. Ct. 876 (1950) (recognizing that the Declaratory Judgment Act is procedural in nature and not an extension of federal court jurisdiction).

 Declaratory judgment actions in the federal courts are governed by 28 U.S.C. § 2201, which ...


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