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P&G v. QUALITY KING DISTRIBS.

September 3, 1997

THE PROCTER & GAMBLE COMPANY, Plaintiff, against QUALITY KING DISTRIBUTORS, INC., NEAL ROSE, OMNI SOURCE INTERNATIONAL, INC., ALLOU HEALTH & BEAUTY CARE, INC., SALVATORE "SAL" ARZILLO, JR., RAPID AIR & OCEAN, INC., SOUTHERN TRADING INTERNATIONAL, INC., BEVERLY ZOELLER, ERICA WEBER, ZOELLER INTERNATIONAL TRADING, INC., FRANK PANDULLO, DEREK MA, CHRIS A. SCHNEYDERBERG, RAINBOW SOAP COMPANY, ABE GRUDA, PAUL DOUBILET, A. GRUDA PRODUCTS CO., AYESHA ALAM, PHILIP KALIFON, IANCO ENVIROTECH INC. and JOHN DOES 1-10, Defendants. OMNISOURCE INTERNATIONAL, INC., Third-Party Plaintiff, -against- RAPID AIR & OCEAN, INC. and SOUTHERN TRADING INTERNATIONAL, INC., Third-Party Defendants. QUALITY KING DISTRIBUTORS, INC., and OMNISOURCE INTERNATIONAL, INC., Counterclaim Plaintiffs, -against- THE PROCTER & GAMBLE COMPANY, Counterclaim Defendant, and PROCTER & GAMBLE, INC., Additional Defendant on Counterclaim.

Hon. Arthur D. Spatt, United States District Court Judge.


The opinion of the court was delivered by: SPATT

SPATT, District Judge.

 This case involves the alleged misuse of the waste products of a shampoo called Head & Shoulders. The action arises from the claims of the plaintiff-counterclaim defendant, Procter & Gamble Company ("P&G"), against numerous parties, including Quality King Distributors, Inc. ("Quality King") and Omnisource International, Inc. ("Omni"), who it alleges were mixing, bottling, selling and distributing potentially harmful, counterfeit Head & Shoulders shampoo, in violation of the Lanham Trade-Mark Act, 15 U.S.C. § 1051, et seq. Presently before the Court is a motion by plaintiff-counterclaim defendant, P&G, and its Canadian affiliate, counterclaim defendant Procter & Gamble, Inc. ("P&G Canada", collectively, the "P&G companies"), to dismiss the counterclaims by defendants-counterclaim plaintiffs Quality King and Omni, pursuant to Fed. R. Civ. P. 12(b)(6) and 9(g).

 I. BACKGROUND

 The Court has taken these facts from the counterclaims. P&G is a corporation organized and existing under the laws of the state of Ohio. Upon information and belief, P&G owns or controls P&G Canada, a corporation organized and existing under the laws of Ontario, Canada. P&G Canada owns and operates a manufacturing facility located in Hamilton, Ontario, Canada (the "Hamilton facility").

 P&G Canada manufactured Head & Shoulders brand products at the Hamilton facility for distribution in Canada and the United States. At the Hamilton facility, P&G Canada would: (a) upon completion of a product run or termination of the production of certain P&G products, such as Head & Shoulders, dispose of the surplus product; (b) dispose of waste resulting from the periodic clean out of its production equipment; and (c) dispose of those products which did not meet its specifications or quality control criteria (collectively, the "waste products").

 In or about early 1992, Ianco Envirotech, Inc. ("Ianco") offered to be the exclusive agent for disposal of P&G Canada's waste products. P&G Canada then appointed Ianco as its exclusive agent for the disposal of waste products from the Hamilton facility. Commencing in 1992, on approximately a monthly basis, P&G Canada delivered large volumes of waste products to Ianco. The shipments included hair shampoos, hair conditioners, detergents and other personal care products. P&G Canada allegedly saved approximately $ 300,000.00 that it would otherwise have spent on landfill costs by delivering its waste products to Ianco, free of charge.

 Pursuant to the agreement between Ianco and P&G Canada, Ianco was to dispose of such surplus product and waste by mixing it with water, dye, salt, perfume and/or other ingredients before reselling it to retailers or consumers as a non-Procter & Gamble product. These were referred to as "bastard products."

 P&G Canada did not impose upon Ianco any restrictions or requirements as to testing, storage location, storage duration, storage temperature, humidity, additives or ingredients, quality of bastard products, container size or shape of the bastard products, price of or profit from Ianco's sale of the bastard products, means of disposal or geographic location of disposal or resale or any other conditions. P&G Canada did, however, require that the bastard products not be identified as Procter & Gamble products.

 Furthermore, upon information and belief, P&G Canada occasionally also delivered to Ianco waste products that were not in bulk but which were in individual or retail containers or bottles. Upon information and belief, if Ianco did not debottle those units and create bastard products, but instead sold them in the individual containers, P&G Canada would merely charge Ianco the wholesale price for that product. Ianco was not prohibited from reselling such products to consumers even though they were waste products.

 Alam manufactured several thousand 15 oz. bottles of Head & Shoulders-type products, and sold them to A. Gruda Products ("Gruda"), a company in the Toronto area. The 15 oz. bottles were then sold to an individual who called himself Frank Pandullo, whose real identity and residence remain a mystery. Apparently, the 15 oz. bottles were then labeled as Head & Shoulders and sold to Zoeller International Trading, Inc., which sold them to Rapid Air & Ocean, Inc. and Southern Trading International, Inc. in Florida, which in turn sold them to Omni, a Florida corporation. Omni sold these products to Quality King, which is distributor of health and beauty aid products. Quality King is a New York corporation having its principal place of business in Suffolk County, N.Y. After receiving the counterfeit products from Omni, Quality King sold them to its wholesaler and retailer customers around the United States, including the Kroger Co., which operates approximately 1,200 supermarkets.

 On August 3, 1995, P&G filed the complaint against Quality King. The complaint has since been amended twice to add numerous parties, including Omni, and to add other claims. In its Second Amended Complaint, P&G seeks, pursuant to the Trade-Mark Counterfeiting Act of 1984, 15 U.S.C. §§ 1116-17, the seizure of counterfeit Head & Shoulders, the equipment used to manufacture the counterfeit Head & Shoulders, and the records documenting the manufacture, sale, or receipt of the counterfeit Head & Shoulders, as well as treble damages, costs and attorney fees. P&G additionally sought injunctive and monetary relief for false descriptions and representations in commerce under Section 43 of the Lanham Trade-Mark Act, 15 U.S.C. § 1125, for trademark infringement in violation of Sections 32 and 43 of the Lanham Trade-Mark Act, 15 U.S.C. §§ 1114 and 1125, for injury to business reputation and dilution of mark in violation of N.Y. General Business Law § 368-d, for unfair competition in violation of New York common law and for contempt of court in connection with the violation of a prior court order.

 In addition to the filing of the complaint: (1) P&G's Chief Executive Officer, John E. Pepper, sent a letter dated August 11, 1995 to retailers (the "Letter"); (2) P&G issued a press release dated August 11, 1995 (the "Press Release"); and (3) P&G distributed a nationwide advertisement (the "Advertisement"). The Advertisement warned the public of the potentially harmful counterfeit shampoo. In addition to warning the public, the Letter and the Press Release also stated that P&G had initiated an action against Quality King for selling counterfeit goods, as well as for trademark and package design infringement.

 Two of the defendants, Omni and Quality King, filed counterclaims against the P&G companies. Quality King asserted the following four claims against P&G: (1) trade libel; (2) prima facie tort; (3) tortious interference with business relations; and (4) unfair competition. In addition, Quality King alleges the following three claims against the P&G companies: (1) breach of express warranty; (2) deceptive trade practices; and (3) contributory infringement. In its counterclaim, Omni reiterated three of those claims: (1) breach of express warranty; (2) deceptive trade practices; and (3) contributory infringement. The P&G companies now move to dismiss all counterclaims, pursuant to Fed. R. Civ. P. 12(b)(6) and 9(g).

 II. DISCUSSION

 A. Fed. R. Civ. P. 12(b)(6) standard

 On a motion to dismiss for failure to state a claim, "the court should not dismiss the complaint pursuant to Rule 12(b)(6) unless it appears 'beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief'". Goldman v. Belden, 754 F.2d 1059, 1065 (2d Cir. 1985) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)); see also IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1052-53 (2d Cir. 1993), cert. denied, 513 U.S. 822, 115 S. Ct. 86, 130 L. Ed. 2d 38 (1994). The Second Circuit stated that in deciding a Rule 12(b)(6) motion, a court may consider "only the facts alleged in the pleadings, documents attached as exhibits or incorporated by reference in the pleadings and matters of which judicial notice may be taken." Samuels v. Air Transport Local 504, 992 F.2d 12, 15 (2d Cir. 1993); see also Paulemon v. Tobin, 30 F.3d 307, 308-09 (2d Cir. 1994); Rent Stabilization Ass'n of the City of New York v. Dinkins, 5 F.3d 591, 593-94 (2d Cir. 1993) (citing Samuels, 992 F.2d at 15).

 It is not the Court's function to weight the evidence that might be presented at a trial; the Court must merely determine whether the counterclaim itself is legally sufficient, see Goldman, 754 F.2d at 1067, and in doing so, it is well settled that the Court must accept the allegations of the counterclaims as true, see Leeds v. Meltz, 85 F.3d 51 (2d Cir. 1996); LaBounty v. Adler, 933 F.2d 121, 123 (2d Cir. 1991); Procter & Gamble Co. v. Big Apple Indus. Bldgs., Inc., 879 F.2d 10, 14 (2d Cir. 1989), cert. denied, 493 U.S. 1022, 110 S. Ct. 723, 107 L. Ed. 2d 743 (1990), and construe all reasonable inferences in favor of the counterclaim plaintiff. See Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S. Ct. 1683, 40 L. Ed. 2d 90 (1974); Leeds, supra, 85 F.3d at 51; Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1099 (2d Cir. 1988), cert. denied, 490 U.S. 1007, 109 S. Ct. 1642, 104 L. Ed. 2d 158 (1989).

 The Court is mindful that under the modern rules of pleading, a counterclaim plaintiff need only provide "a short and plain statement of the claim showing that the pleader is entitled to relief", Fed. R. Civ. P. 8(a)(2), and that "all pleadings shall be so construed as to do substantial justice," Fed. R. Civ. P. 8(f).

 The issue before the Court on a Rule 12(b)(6) motion "is not whether a plaintiff will ultimately prevail, but whether the claimant is entitled to offer evidence to support the claim." Villager Pond, Inc. v. Town of Darien, 56 F.3d 375, 378 (2d Cir. 1995), cert. denied, U.S. , 117 S. Ct. 50, 136 L. Ed. 2d 14 (1996) (citing Scheuer, supra, 416 U.S. at 235-36). Recovery may appear remote and unlikely on the face of the pleading, but that is not the test for dismissal ...


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