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Eastern District of New York Dorset Industries, Inc., Long Island Office v. Unified Grocers

September 27, 2012

EASTERN DISTRICT OF NEW YORK DORSET INDUSTRIES, INC., LONG ISLAND OFFICE PLAINTIFF,
v.
UNIFIED GROCERS, INC., DEFENDANT.



The opinion of the court was delivered by: Spatt, District Judge.

FILED

CLERK

9/27/2012 11:02 am

MEMORANDUM OF DECISION AND ORDER

This case arises from a commercial dispute between Dorset Industries, Inc. ("Dorset" or "the Plaintiff") and Unified Grocers, Inc. ("Unified" or "the Defendant"). Presently before the Court is a motion by the Defendant to dismiss the complaint in its entirety pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. For the reasons set forth below, the Defendant's motion is granted in part and denied in part.

I.BACKGROUND

The following facts are drawn from the complaint and the documents incorporated by reference in the complaint. As required on a motion to dismiss, the Court construes the facts in the light most favorable to the Plaintiff.

A. The Parties and the Initial Relationship

Dorset is a Delaware corporation based in Albertson, New York, which is in the business of manufacturing merchandising equipment and providing certain marketing and merchandising services in connection with the development and implementation of merchandising programs known as "checkout programs". Unified is a California corporation, and is a cooperative that is owned by its member grocers, which are independent grocery retailers. In addition to allegedly being one of the largest retailer-owned grocery cooperative in the Western United States, Unified is allegedly the largest wholesale grocery distributor in the Western United States, selling goods to both its own members and other retailers.

In or about 2000, Dorset alleges that Unified requested that Dorset create and develop a checkout program for Unified's members, using Dorset's "know-how, experience and intellectual property" ("the Program" or "the Dorset Program"). (Compl., ¶ 6.) Subsequently, the parties entered into an agreement to effectuate the Program.

The business model was as follows: Dorset, as "the Supplier", agreed to plan and design checkout display units that retail grocers, or "Customers", would place at or near the cash registers or checkout counters. (Compl., ¶ 8.) In addition, Dorset would enter into agreements with manufacturers or "Participants", who would lease space in the displays. (Compl., ¶ 8.) The Participants were manufacturers or distributors of beverages, magazines, candy, general merchandise, health and beauty care products, snack foods, and other products. (Compl., ¶ 8.)

In turn, Unified, "the Wholesaler", entered into contracts with the retailer, prepared by Dorset, that governed the retailers participation in the Program ("subscription agreements"). (Compl., ¶ 8.) Unified would then sell and distribute the products manufactured by the "Participants" to each member grocer who participates in this Program. (Compl., ¶ 8.)

Although Dorset claims that it generally dealt directly with Unified's member grocers, Dorset alleges that it agreed to create the Program for Unified based on the agreement that Unified would "solicit its member grocers to join the Program and Dorset and Unified would share the income stream". (Compl., ¶ 9.) According to Dorset, the Program "gave Unified a unique marketing tool at no cost, providing tremendous benefit to Unified and its member grocers, as they were able to utilize and maximize this retail space at the checkout counter to generate revenues and profits through their participation in the Program, and to maximize sales by Unified." (Compl., ¶ 12.)

The parties operated under this initial agreement until 2006, when they entered into two agreements that modified the Program, which are the subject of the instant litigation.

B. The New Installation Agreement and the Extension Agreement

According to Dorset, the Program had two parts: a New Installation Program and an Extension Program. (Compl., ¶ 13.) On April 25, 2006, Unified and Dorset modified the terms of the Program through two related contracts: a New Installation Program Agreement ("New Installation Agreement" or "NIPA") (Compl., Ex. 1), and an Extension Program Agreement ("Extension Agreement" or "EPA") (Compl., Ex. 2) (collectively "the Agreements").

Under the New Installation Agreement, each participating grocer would be placed into the Program for a three-year period and would enter into a subscription agreement with Unified. (Compl., ¶ 14.) Dorset, as the "exclusive manufacturer" for the Program, (NIPA, ¶ 19), would design and manufacture each unit for a particular grocer, and Unified would install those units at the grocers various stores. Under the New Installation Agreement, Dorset would pay Unified a "per unit allowance" for each installation. (NIPA, ¶ 6) In turn, Dorset had the exclusive right to solicit and enter into contracts with the distributors or manufacturers of the goods displayed on the checkout display units. (NIPA, ¶ 5.) Dorset would then enter into contracts with the manufacturers where the manufacturer agreed to pay Dorset "rent" to have its goods displayed and retailed in the units. (Compl., ¶ 15.)

At the end of the three-year subscription, Dorset alleges that Unified was responsible for identifying participating grocers and signing them up for the Extension Program, which had a one-year term. (Compl., ¶ 16.) The terms of the Extension Program were governed by the Extension Agreement. (Compl., Ex. 2) The purpose of the Extension Program was for Dorset to continue providing services to Unified's member grocers after the initial 3-year period. Under the Extension Program, Unified received 66% of the "rent" owed to Dorset by the manufacturers, thereby providing an incentive to Unified to encourage its member grocers to participate in the initial New Installation Program and the Extension Program. (Compl., ¶ 17.) The Extension Agreement requires Dorset to develop a "modified" checkout program for the Unified grocers who were enrolled in the Extension Program. (EPA, ¶ 1(c).)

On June 2, 2008, Unified and Dorset entered into an "Addendum" to the Extension Agreement. The Addendum provides that the Term of the Extension Agreement "commencing as of April 25, 2007 and continuing thereafter (a) for so long as there is any agreement in force by and between [Unified] and any Customer [ie., the grocers].operating under this Agreement plus (b) an additional six (6) months after such time that there is no longer any such agreement in force by and between [Unified] and any such customer." (Compl., Ex. 2.)

Both the New Installation Agreement and the Extension Agreement contained Confidentiality and Non-Disclosure Provisions, whereby both Unified and Dorset mutually agreed not to use or divulge confidential information obtained through their participation in the Program. (NIPA, ¶ 21; EPA, ¶ 14.)

C. The Termination of the Relationship

In late 2010, a dispute arose between the parties over the terms of and the expectations under the Agreements. Specifically, the parties disagreed with respect to whether Unified could enroll a new grocer, referred to as "Cardenas #20" directly into the Extension Program rather than the New Installation Program by utilizing "used" racks that Unified had in storage. According to Dorset, Unified's attempt to enroll Cardenas #20 into the Extension Program constituted a breach of the Agreements, depriving Dorset of a three-year New Installation Program customer whose revenue would flow to Dorset.

Although Dorset alleges that the parties initially agreed that Cardenas #20 would be placed in the New Installation Program, Dorset contends that, on February 16, 2011, Unified retracted its view of Cardenas #20 as a New Installation customer. According to Dorset, Unified "recognized that if it stopped sharing the 'rental' revenue stream with Dorset, it could keep even more revenue for itself, and that it could accomplish this by cutting Dorset out of the Program". (Compl., ¶ 63 (emphasis in original).)

On February 20, 2011 Unified advised Dorset by email that it was "terminating both our New Installation Program and Extension Agreements effective immediately" and that Unified intended to follow up and give Dorset "official Notice" of the termination pursuant to the notice requirements in the Agreements ("the February Notice"). (Compl., Ex. 5.) The "notice provisions" of the Agreements stated as follows:

Notices. For the purpose of this Agreement, any notices and demands required to be given shall be given to the parties in writing and by Certified Mail, return receipt requested, or reliable overnight courier at the addresses set forth above, or to such other addresses as the parties may hereafter substitute by written notice. (NIPA, ¶ 26; EPA, ¶ 18.)

On March 9, 2011 Dorset contends that Unified advised Dorset that Unified had been having internal discussions "'for a long time' concerning 'taking the Program --in-house,' because Unified realized 'how much money Dorset was getting.' " (Compl., ¶ 74.) Dorset further alleges that Unified's representative stated that it had recruited its own team to handle the Program without Dorset since "you've had a good run[,] [w]e just want to take it over now." (Id.) On April 7, 2011, Unified's representative allegedly told Dorset that it was enrolling several customers in a "new" checkout program rather than into the Dorset New Installation Program. (Compl., ¶ 75.)

No new customers were added by Unified to the Extension Program in 2011. (Compl., ¶ 77.) According to Dorset, prior to 2011, there had been a steady addition of customers to the Extension Program averaging 24 locations per year. (Compl., ¶ 76.) At the same time, Unified ordered dozens of cases of supplies from Dorset to use for the alleged competitive program. (Compl., ¶ 92.) Specifically, Unified purchased 31 cases of supplies in February 2011, 20 cases in April, 40 cases in May 2011, and an additional 17 cases in June 2011. (Compl., ¶ 93.)

On August 29, 2011, Dorset provided Unified with a "Notice of Default", advising Unified that it was in material breach of the Agreements, with an opportunity to cure. (Compl., ¶ 95.) On October 10, 2011, Unified sent a second letter by mail to Dorset entitled "Notice of Termination of New Installation Agreement" notifying Dorset that the February 20, 2011 email terminated the New Installation Agreement, effective May 21, 2011 ("the October Notice").

(Compl., ¶ 97.) To the extent that the February 20, 2011 email "was insufficient", Unified stated that the October Notice "constitute[d] such notice and the [New Installation Agreement] shall be deemed terminated on the date ninety days from the date of this letter". (Compl., Ex. 10.) The October Notice did not reference the termination of the Extension Agreement. (Id.)

D. The Instant Action

According to Dorset, before and after the purported termination of the Agreements, Unified misappropriated Dorset's confidential information to create a competing checkout program that it marketed to its member grocers, instead of the Dorset Program, in violation of Unified's express and implied obligations under the Agreements. As a result, on November 22, 2011, Dorset commenced the present action against Unified in New York State Court, which was subsequently removed to this Court based on diversity jurisdiction.

Dorset alleges five causes of action against Unified. First, Dorset seeks a declaratory judgment that the New Installation Agreement and the Extension Agreement were not effectively terminated by Unified, and therefore remain in full force and effect. Dorset's second cause of action is based on Unified's alleged breach of the express termination and confidentiality provisions of the contract as well as Unified's breach of the implied covenant of good faith and fair dealing. Finally, Dorset's third, fourth and fifth causes of action are for breach of the confidentiality provisions, unfair competition, and usurpation of corporate opportunities respectively. They are based on Unified's alleged misappropriation and use of Dorset's confidential information to create and market to its customers a competing checkout program instead of the Dorset Program.

On January 12, 2012, Unified filed the instant motion to dismiss the complaint in its entirety pursuant ...


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