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Seat Sack, Inc. v. Childcraft Education Corp.

January 22, 2010

SEAT SACK, INC., PLAINTIFF,
v.
CHILDCRAFT EDUCATION CORP., AND SCHOOL SPECIALTY, INC., DEFENDANTS.



The opinion of the court was delivered by: Douglas F. Eaton, United States Magistrate Judge

(This is an ECF case.)

OPINION AND ORDER

Plaintiff Seat Sack, Inc. has alleged thirteen causes of action against the two defendants: Childcraft Education Corp. ("Childcraft") and School Specialty, Inc. ("School Specialty").

In February 2008, I denied Plaintiff's motion for a preliminary injunction. On January 27, 2009, the defendants filed a motion for summary judgment. (Docs. ##50-58.) On February 13, 2009, Plaintiff filed a cross-motion for summary judgment. (Docs. ##59-63.) On February 26, 2009, the defendants filed reply papers. (Docs. ##64-66.) On March 5, 2009, Plaintiff filed additional papers. (Docs. ##67-69.) On March 12, 2009, the defendants filed a motion to strike Doc. #67 and Doc. #69. (Docs. #70-71.) On March 13, 2009, Plaintiff filed papers opposing the motion to strike. (Docs. ##72-73.)

For the reasons set forth in today's Opinion and Order, I deny the defendants' motion to strike (Doc. #70), I grant the defendants' motion for summary judgment (Doc. #50), and I deny Plaintiff's cross-motion for summary judgment (Doc. #59). I am today entering a Judgment in favor of the defendants.

The Parties

Childcraft is a New York corporation headquartered in Pennsylvania. At all relevant times, it has been a wholly-owned subsidiary of School Specialty, a Wisconsin corporation. (SOF ¶1.)*fn1 School Specialty markets and sells educational products, programs and services to schools through various brands, including the "Childcraft" brand. (SOF ¶¶2-3.) Childcraft markets and sells thousands of various educational products through its catalog, website, and sales staff. (SOF ¶4.)

Plaintiff is Florida corporation wholly owned by Anne McAlear. In the early 1980's, she owned a company called The Nursery Collection, which manufactured infant bedding. Its number of employees grew from 3 to 38, and she sold the company around 1994. (4/4/08 McAlear Depo. Tr. 9-10.) In 1993, she designed the Seat Sack. In 1995, she retained a patent attorney and the U.S. Patent Office issued a design patent to her. The Seat Sack is a sack that drapes across the back of a student's chair and holds school supplies. She began manufacturing it and selling it in 1995. In 1998, she started selling it to schools in large cities, including New York City. In 1999, she incorporated the business and hired one employee. (McAlear Depo. Tr. 14-25.)

The Contractual Relationship Between Plaintiff and Childcraft

At her deposition, Ms. McAlear vaguely recalled having conversations with Childcraft's Liz Plotkin prior to late January 2000: "I agreed to send samples and literature and pricing to her to see -- - she was going to see about putting it [the Seat Sack] in the catalogue. That's pretty much all of our first conversation." (McAlear Depo. Tr. 23-24.)

Q: .... Do you recall the substance of any other conversations with her other than your initial conversation?

A: Not really.

Q: Did you ever make any notes of conversations with Ms. Plotkin?

A: No.

(McAlear Depo. Tr. 41-42.)

In late January 2000, Childcraft's Liz Scott sent Ms. McAlear a one-page form entitled "Childcraft Education Corp. Exclusives -- - Growing Years Catalog" (the "Agreement"). On January 28, 2000, after the word "Vendor," Ms. McAlear wrote "Seat Sack Inc." (the name of her corporation), and she signed the form as President. (SOF ¶6.) Childcraft has entered into this type of agreement with hundreds of vendors for the sale of thousands of products that are featured in Childcraft's catalogs. (SOF ¶8.) The document said, in pertinent part:

EXCLUSIVITY: We [Childcraft] are requesting information on the items listed below which are featured in Childcraft Education Corp.'s Growing Years Catalog. Terms of exclusivity include:

CODE A. EXCLUSIVE PRODUCTS UNDER CHILDCRAFT LABEL: Products manufactured for Childcraft by other manufacturers/vendors and labeled with the Childcraft name.

CODE B. EXCLUSIVE PRODUCTS NOT BEARING CHILDCRAFT LABEL but manufactured by a vendor who has given Childcraft the exclusive right to be the "sole source" of the product. .....

CODE C. EXCLUSIVE COLLECTIONS: .....

Please sign this page (or respond in writing if items are not exclusive to Childcraft) and return AS SOON AS POSSIBLE to Liz Scott at the fax number below.

Thank you for your prompt response to this request.

Product Childcraft Vendor Exclusivity Description Item # Item # Code

SEAT SACK #370631 seatsack3 A

This letter is to confirm exclusivity of the vendor's product(s) listed created for Childcraft Education Corp. .....

It is undisputed that the Seat Sack was classified under "Exclusivity Code A." Ms. McAlear testified as follows:

Q: Isn't it true that when the idea of exclusivity came up, your belief was that Childcraft was asking that you sell to Childcraft and to no one else?

A: Yes, it was.

Q: And then you called Liz Scott to talk about that, right?

A: Yes. And that's where all of this conversation came from.

Q: What Ms. Scott told you in that conversation is no, that's not accurate, we're asking for the right to exclusively sell only those Seat Sacks that have the Childcraft name on them, isn't that true?

A: Right.

(McAlear Depo. Tr. 73.)

On those Seat Sacks which Plaintiff manufactured for Childcraft, the name "Seat Sack" was written in large print on the outside of the product; inside the product, Plaintiff placed a small Childcraft label with instructions about how to re-order the product from Childcraft. (McAlear Depo. Tr. 47-48.) Plaintiff added this label only to those Seat Sacks that were sold to Childcraft. (Id.; Pl's Resp. to Interrog. No. 2, attached as Exh. C to Doc. #56.)

Ms. McAlear testified as follows. The Agreement did not require Childcraft to buy Seat Sacks from Plaintiff. Childcraft never committed to buy a minimum number of Seat Sacks. (McAlear Depo. Tr. 53.) Plaintiff was free to sell Seat Sacks to other customers, provided that those Seat Sacks did not bear a Childcraft label. (Id. Tr. 73, 77.) At any time, Plaintiff could have told Childcraft that Plaintiff was no longer interested in selling to Childcraft, and Plaintiff could have requested that the Seat Sack not be placed in the Childcraft catalog. (Id. Tr. 90-91.)

The Course-of-Dealing Relationship Between Plaintiff and Childcraft

During the years from 2000 to 2005, Childcraft purchased thousands of Seat Sacks from Plaintiff. (Doc. #57, 8/23/07 Murphy Decl. ¶¶5, 16, 18.) The purchases were made as follows. Childcraft would send a purchase order to Plaintiff, which would then manufacture and ship the requested Seat Sacks to Childcraft, together with an invoice. Childcraft always paid the invoices, and Plaintiff admits that Childcraft owes no money on any of Plaintiff's invoices. (McAlear Depo. Tr. 83-84, 99.)

The Seat Sacks purchased by Childcraft became part of the inventory of Childcraft, which in turn sold the Seat Sacks through Childcraft's website and catalog. (Murphy Decl. ¶¶6, 19.) Once Childcraft paid Plaintiff's invoice, it is undisputed that Childcraft was free to resell the Seat Sacks at any price it chose. And Plaintiff was not entitled to any more payments, such as a percentage of Childcraft's retail sales. (McAlear Depo. Tr. 37, 84, 88-89.)

Prior to Childcraft, Ms. McAlear had marketed through Babies R Us (it appears that this was only in connection with her prior company The Nursery Collection). (McAlear Depo. Tr. 39.) Starting in 2000, Childcraft was Plaintiff's largest customer. Plaintiff started a small website in 2000, but it did not have the capacity to take an on-line order until around the end of 2003. Plaintiff's annual sales increased from roughly $10,000 in 1999 to more than $20,000 in 2000. In each of the next four years, Plaintiff's sales increased by 49% or more. By contrast, the annual growth was only about 8% in 2005 and 2006, and Plaintiff's sales declined 5% in 2007. (McAlear Depo. Tr. 26-32.)

For the year 2004, Plaintiff's top four customers were: Childcraft (approx. $90,000), School Specialty (approx. $66,000), School Specialty's other divisions (approx. $10,000) and a company named Demco (approx. $6,000). Plaintiff's sales to Childcraft declined in 2004 and stopped in 2005. (2/12/09 McAlear Aff. ¶9.) However, for the year 2007, School Specialty (the parent company of Childcraft, named as a defendant in the Complaint filed 3/5/07) was "probably" Plaintiff's top customer, and it was still a customer as of 2008. As of 2008, Plaintiff had 3,000 customers, by Ms. McAlear's rough estimate. (McAlear Depo. Tr. 159-62.)

Around 2000, Ms. McAlear's attorney invoked her design patent and sent a cease-and-desist letter to a company that was selling a similar product called the "Aussie Pouch." That company's attorney declined to stop, and Ms. McAlear decided not to sue. (McAlear Depo. Tr. 65-66.)

Significantly, Ms. McAlear knew that Childcraft's parent company (the co-defendant School Specialty) was the distributing agent for the Aussie Pouch. She did not object to that, and her company continued to sell the Seat Sack to School Specialty as well as to Childcraft. "Aussie Pouch and School Specialty were together long before I sold to Childcraft. Why would I dispute that?" (McAlear Depo. at Tr. 58.)

At Tr. 60, Ms. McAlear answered the following question:

Q: Let's think then about 2002. Just pluck a year out of the air before the Seat Pocket ever became an issue. According to your understanding of Seat Sack's relationship with Childcraft, if the 2002 Childcraft catalogue had included both the Seat Sack and the Aussie Pouch would that have violated any agreement between Childcraft and Seat Sack?

A: No. ....

However, at Tr. 61, there was a lunch break in the deposition. After lunch, she recanted the "No" answer she had given at Tr. 60. At Tr. 63, she said: "We had more of a fiduciary type of relationship." At Tr. 69, she said that she had mixed up the "right to sell" with "my relationship with Childcraft." (Tr. 69.) At Tr. 66, she asserted that Childcraft's Liz Scott had said "that there would be no competition." Ultimately, however, Ms. McAlear could not recall Ms. Scott ever saying that Childcraft would not sell competing products. Ms. McAlear testified:

Q: .... Without regard to the Aussie Pouch or any other specific competitor, what did Ms. Scott say to you that led you to believe that Childcraft would not sell competing products?

A: That they would just do - - it was an agreement that they would do their best to sell my product, and I would do my best to manufacture my product and get it to them in a timely manner. (Tr. 67.)

Q: I want to be very clear here. What I'm asking about right now is any conversations that you had with Ms. Scott. What did she say in those conversations that led you to believe that Childcraft would not sell a competing product?

A: The exclusivity, when we talked about the exclusive right to sell. That was when we discussed whether they would sell another product that was the same as mine.

Q: Did you ask about that?

A: Well, I asked her - - I said to her, "If I'm selling these to you and you want to be exclusive, why would I do that?" And she told me the team of salespeople they had, the amount of catalogues they had going out, how they would do their best to sell my product.

She didn't say I'm going to do my best to sell your product and I'm going to bring in the Aussie Pouch. Sometime it's the things you don't say. (Tr. 67-68, emphasis added.)

Q: Did she ever say to you, again not in these words but in effect, we won't sell a competing product?

MR. CARROLL: Do you understand the question?

A: I understand the question. I'm thinking about the answer.

MR. CARROLL: That's fine.

A: Whether she actually said it or it was implied, I'm sorry, I can't even tell you if it was actually said or implied. (Tr. 70-71, emphasis added.)

Central to many of Plaintiff's claims is Ms. McAlear's assertion that there was a "special relationship" between Childcraft and Plaintiff. She may have believed that such a relationship existed, but such belief was not based on anything that Childcraft said or did. She testified:

Q: You said that if customers would contact you, you would refer them to Childcraft?

A: Yes.

Q: Is that something Ms. Scott asked you to do?

A: Also maybe it was implied if you have a customer like that that you had a relationship with. (Tr. 71, emphasis added.)

Q: You were free to sell Seat Sacks without the Childcraft name to anyone you wanted, correct?

A: Without the Childcraft name[.] But we didn't promote them to other companies ...


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