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Wellnx Life Sciences Inc. v. Iovate Health Sciences Research Inc.

September 26, 2007

WELLNX LIFE SCIENCES INC., F/K/A NXCARE INC., PLAINTIFF,
v.
IOVATE HEALTH SCIENCES RESEARCH INC., IOVATE HEALTH SCIENCES GROUP INC., IOVATE HEALTH SCIENCES INC., IOVATE HEALTH SCIENCES U.S.A. INC., CANUSA PRODUCTS INC., MUSCLEMAG INTERNATIONAL CORPORATION (U.S.A.) INC., PAUL GARDINER, TERRENCE BEGLEY, ROBERT KENNEDY, JOHN CRAIG AND VINCENT SCALISI, DEFENDANTS.



The opinion of the court was delivered by: P. Kevin Castel, U.S.D.J.

MEMORANDUM AND ORDER

Plaintiff Wellnx Life Sciences Inc. ("Wellnx") brings this action against several defendants alleging violations of the Lanham Act, conspiracy to violate the Sherman Act, and various tort and statutory claims under New York State law. Wellnx manufactures and sells dietary supplements and is a direct competitor of Iovate Health Sciences Group Inc. and/or its subsidiaries Iovate Health Sciences Research Inc., Iovate Health Sciences Inc., and Iovate Health Sciences U.S.A. Inc. (collectively "Iovate"). Canusa Products Inc. and Musclemag International Corporation (U.S.A.) Inc. (collectively "Canusa") are affiliated corporations that publish bodybuilding periodicals in which dietary supplements are advertised. The individual defendants are agents or employees of the above-named corporate defendants.

This action was commenced on September 28, 2006. Plaintiff filed an amended complaint on November 17, 2006. Defendants have moved to dismiss the Lanham Act and Sherman Act claims -- Claims 1 and 2 in the amended complaint -- for failure to state a claim. Rule 12(b)(6), Fed. R. Civ. P. Defendants move to dismiss the state claims on the grounds that upon dismissal of the federal claims, the Court should decline to exercise supplemental jurisdiction.

For the reasons stated herein, defendants' motions are granted.

I. BACKGROUND

The following facts from the amended complaint are taken as true for the purposes of this motion. See Iqbal v. Hasty, 490 F.3d 143, 147 (2d Cir. 2007). All reasonable inferences are drawn in favor of the plaintiff, the non-movant. ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007).

Preliminarily, I note that in opposition to the motions to dismiss, plaintiff submitted declarations by fact witnesses with exhibits. These materials are referred to in plaintiff's brief. Defendants seek to have the declarations and exhibits excluded from consideration of the motions. Iovate has submitted a declaration by a fact witness in an effort to show that plaintiff's extrinsic materials relate to a non-party and are irrelevant. Canusa has not submitted declarations by fact witnesses or exhibits, although Canusa does make factual allegations in its brief that go beyond the amended complaint.

"'[W]hen matters outside the pleadings are presented in response to a 12(b)(6) motion,' a district court must either 'exclude the additional material and decide the motion on the complaint alone' or 'convert the motion to one for summary judgment under Fed. R. Civ. P. 56 and afford all parties the opportunity to present supporting material.'" Friedl v. City of N.Y., 210 F.3d 79, 83 (2d Cir. 2000) (quoting Fonte v. Bd. of Managers of Cont'l Towers Condo., 848 F.2d 24, 25 (2d Cir. 1988)) (alteration in Friedl). Conversion is not required unless the court's decision is affected by matters outside the pleadings. Amaker v. Weiner, 179 F.3d 48, 51 (2d Cir. 1999) (noting that "reversal [of the district court] for lack of conversion is not required unless there is reason to believe that the extrinsic evidence actually affected the district court's decision and thus was not at least implicitly excluded"). Thus the court "errs when it considers affidavits and exhibits . . . , or relies on factual allegations contained in legal briefs or memoranda . . . in ruling on a 12(b)(6) motion to dismiss." Friedl, 210 F.3d at 84-85 (internal citations and quotation marks omitted).

Defendants' Rule 12(b)(6) motions will not be converted into motions for summary judgment. The materials outside the amended complaint -- including declarations, exhibits and factual allegations made in the briefs -- are excluded from consideration by the Court. The universe of facts for the purposes of this motion is limited to those alleged in the amended complaint and all reasonable inferences to be drawn from those facts.

A. Relevant Product Markets in which Wellnx, Iovate and Canusa Operate

Plaintiff Wellnx and defendant Iovate manufacture, distribute, market and advertise dietary supplements, including sports nutrition/bodybuilding supplements ("bodybuilding supplements"). (Am. Compl. ¶¶ 18-19.) In the dietary supplement market, Wellnx and Iovate are direct competitors. (Id. ¶ 22.) While there is no indication of how many firms compete in this market, the amended complaint repeatedly states that the dietary supplement industry is "highly competitive." (Id. ¶¶ 21, 34, 107.)

The dietary supplement market is characterized, according to plaintiff, by three distinct submarkets: the markets for (1) bodybuilding supplements, (2) weight loss supplements, and (3) vitamins. (Id. ¶ 20.) The products in each submarket are not reasonably interchangeable with those in the other submarkets, but there is a high cross-elasticity of demand within each submarket. (Id. ¶ 102.) Wellnx and Iovate not only compete generally in the dietary supplement market, but also in the bodybuilding supplement submarket. (Id. ¶ 22.) Bodybuilding supplements are sold to end consumers directly by manufacturers and by retailers. (Id. ¶ 90.) Retailers purchase products from both manufacturers and distributors, the latter of which also purchase inventory from manufacturers. (Id. ¶¶ 54, 90.)

Canusa is a "leading publisher" of bodybuilding publications in the United States. (Id. ¶ 10.) Canusa is alleged to have approximately a 40% share of the consumer market for such publications. (Id. ¶ 124.) Bodybuilding publications in general feature editorial content and advertisements for various products. (Id. ¶ 23.) Canusa directly solicits advertising business from manufacturers and distributors of bodybuilding supplements. (Id. ¶ 38.)

There is considerable demand among bodybuilding supplement manufacturers and distributors for this advertising space. According to plaintiff, advertising in bodybuilding publications is the dominant method by which bodybuilding supplements are marketed to consumers. (Id. ¶ 45.) The amended complaint explains that consumers of bodybuilding supplements represent a niche market and that other advertising methods -- such as advertising in general audience publications, on the radio, television or the internet -- are not substitutes for or interchangeable with advertising in bodybuilding magazines. (Id. ¶¶ 45, 89. 108.) Consumer demand for bodybuilding supplements is alleged to be "substantially if not wholly generated through print advertisements" in these publications. (Id. ¶ 106.) This creates a specific market for advertising space in bodybuilding publications among manufacturers and distributors of bodybuilding supplements. (Id. ¶¶ 109, 112.)

Plaintiff's claims in this case concern both (1) the bodybuilding supplement submarket and (2) the market for advertising space in bodybuilding publications. The geographic scope of both markets is alleged to be the United States; each state and the District of Columbia is alleged to be a distinct submarket. (Id. ¶ 114-16.)

Wellnx, Iovate and Canusa play different roles in the distribution chains in each market. In the bodybuilding supplement market, Wellnx and Iovate are manufacturers who sell to distributors, retailers and end consumers. Canusa is not in the distribution chain for these products, but consumers of Canusa's bodybuilding publications overlap with consumers of bodybuilding supplements. (Id. ¶ 105.) In the market for advertising space in bodybuilding publications, Wellnx and Iovate, as advertisers of their products, are consumers. Canusa is a seller of advertising space and markets this space directly to advertisers.

B. The Agreement Between Iovate and Canusa

The amended complaint alleges that beginning in the year 2000 at the latest, Iovate and Canusa have maintained an exclusive agreement for advertising considerations (the "Agreement"). Under the Agreement, in addition to regular payments by Iovate to Canusa for advertising space, Iovate pays Canusa 10% of Iovate's gross receipts from direct purchases of Iovate products. (Am. Compl. ¶ 31.) Iovate receives:

(a) preferential anti-competitive advertising treatment in Canusa's bodybuilding periodicals; (b) review of competitors' advertisements before such advertisements are published in Canusa periodicals; (c) the right by Iovate to reject its competitors' advertisements or have the opportunity to disparage its competitors' new products or beat them to the market with the same or similarly formulated products; and (d) the right to publish in Canusa periodicals editorial content written by Iovate, but which falsely appeared to be written by the editors of such periodicals.

(Id.) The Agreement's termination provisions require that Iovate pay Canusa $2 million if the Agreement is discontinued. (Id.)

Plaintiff alleges that the existence of the Agreement was intentionally withheld from Iovate's competitors, including plaintiff, when Canusa solicited sales of advertising space in its bodybuilding publications. (Id. ¶ 38-40.) By failing to disclose the Agreement when Canusa presented its advertising rates, publication schedules and specifications for advertisements, Canusa allegedly misled its advertising customers into believing that its advertising space was sold on a "fair and equal basis." (Id. ¶ 41.) Plaintiff also alleges that the Agreement was undisclosed to consumers of Canusa's periodicals, which misrepresented Canusa's neutrality towards the products in the bodybuilding supplement market. (Id. ¶ 75.)

The amended complaint states that, as contemplated by the Agreement, Iovate has reviewed competitors' proposed advertisements and exercised veto power over some of those advertisements. This conduct allegedly injured Wellnx and at least 19 other companies that purchased advertising space from Canusa. (Id. ¶ 43.)

C. Iovate's Interference with Wellnx in the Market for Advertising Space

Wellnx alleges that its ability to purchase advertising space has been impeded by other conduct by Iovate, separate from its Agreement with Canusa. In or about June 2006, Iovate allegedly began contacting publishers of bodybuilding periodicals other than Canusa and caused them to cancel or reject Wellnx's advertisements. (Am. Compl. ¶¶ 44-53.) The publishers contacted were Chelo Publishing, Inc. ("Chelo"), Iron Man Magazine ("Iron Man"), Advanced Research Press, Inc. ("Advanced"), and Weider. The amended complaint speculates that the publishers "likely received financial enticements for their cooperation" or were threatened with discontinued advertising business from Iovate. (Id. ¶ 98.) The amended complaint states that the publishers each knew that Iovate had contacted or planned to contact other publishers to secure similar agreements.

The result of the conduct by Iovate and the named publishers has been to foreclose Wellnx's access to 70% of the market for advertising space in bodybuilding publications. Canusa, which possesses "dominant market power" in the market for advertising space, controls 40% of the market, and 30% is controlled by the other named publishers combined. (Id. ¶ 124-25.) While this leaves 30% of the market available to Wellnx, plaintiff alleges, without explanation, that "advertising space in bodybuilding publications that accept Wellnx's advertisements is not a substitute for and is not interchangeable with advertising space in the market foreclosed . . . ." (Id. ¶ 110.)

Plaintiff states that the refusal by these publishers to accept its business constitutes a conspiracy between and among Iovate and the publishers. (Id. ¶ 94.) To support the allegation of an of agreement between the publishers, Wellnx cites their parallel conduct together with purported "plus factors." (Id. ¶ 95.) Specifically, Wellnx states that (1) the refusal of its advertisements was a departure from prior practice (id. ¶ 96); (2) each publisher was aware that Iovate solicited similar agreements from other publishers (id. ¶ 97); (3) each publisher had a "substantial profit motive" for refusing Wellnx's advertising because Iovate had offered financial incentives or threatened to withdraw its own advertising business (id. ¶ 98); (4) the refusal to deal was uniformly the same by each publisher (id. ¶ 99); and (5) refusing Wellnx's business was against each publisher's self-interest because it caused them to reject valid offers for advertising space (id. ¶ 100). The amended complaint also speculates that "the publishers of bodybuilding publications that formed vertical agreements with Iovate, including Canusa, were likely made aware of the existence of the group boycott agreements with other [bodybuilding] publications and formed agreements with Iovate believing their horizontal competitors would follow suit." (Id. ¶ 101.)

This conduct allegedly has injured Wellnx as well as overall competition in the market for advertising space in bodybuilding publications. (Id. ¶ 117.) Because advertising space is integral to creating consumer demand for bodybuilding supplements, plaintiff also alleges that competition in the market for bodybuilding supplements has been harmed by the conspiracy. Plaintiff alleges that in the bodybuilding supplement market, the alleged boycott has created a significant barrier to entry and that prices have been maintained at supracompetitive levels. (Id. ¶¶ 117-119.)

D. Iovate's Interference with Wellnx's Distribution Agreements

In addition to interfering with Wellnx's ability to advertise its products, Wellnx claims that Iovate also interfered with its relationships with distributors of bodybuilding supplements. (Am. Compl. ¶¶ 54-71.) Beginning in or about January 2005, Iovate contacted the distributors Sportika Exports, Inc. ("Sportika"), Bob O'Leary Sports Science ("BOSS"), DNA Sports Nutrition Distributors ("DNA"), Dynamic Marketing, Inc. ("Dynamic"), Select Nutrition ("Select") and Tropicana Health and Fitness ("Tropicana"), and pressured them to terminate existing distribution agreements with Wellnx. (Id.) All of these firms are U.S. companies except for Tropicana, which is a British distributor. Iovate threatened to withdraw its business from the distributors, and advised them that Iovate "disagreed with Wellnx's marketing practices." (Id.) Wellnx alleges that Iovate contacted other unnamed distributors "in efforts to compel them not to carry or support Wellnx's products." (Id. ¶ 70.) With respect to the named distributors, Iovate succeeded in canceling Wellnx's distribution agreements. (Id. ¶ ¶ 58, 59, 61, 63, 65, 69.)

E. Plaintiff's Federal Claims

Plaintiff alleges that the foregoing conduct constitutes unfair competition in violation of section 43(a) of the Lanham Act, and a conspiracy to restrain trade in violation of section 1of the Sherman Act.

Plaintiff's claim under the Lanham Act principally rests on a "false advertising" theory. The false advertising claim is somewhat unusual in the sense that it does not involve a traditional advertising or promotional campaign in which allegedly false or misleading statements were made. Rather, plaintiff alleges that the following acts amounted to false advertising under the Lanham Act:

(1) That Iovate and Canusa published editorials in Canusa's publications that were authored by Iovate, but falsely attributed to Canusa's editors;

(2) that Iovate and Canusa failed to disclose the existence of the Agreement to consumers of (a) bodybuilding supplements, (b) Canusa publications, and (c) ...


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