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Fujifilm North America Corp. v. Geleshmall Enterprises LLC,

United States District Court, E.D. New York

March 9, 2017

FUJIFILM NORTH AMERICA CORPORATION, Plaintiff,
v.
GELESHMALL ENTERPRISES LLC, et al., Defendant.

          MEMORANDUM DECISION AND ORDER

          M. Cogan U.S.D.J.

         Before me is the motion of plaintiff FUJIFILM North America Corporation (“FUJI”) to dismiss the counterclaims of defendant Geleshmall Enterprises LLC (“Geleshmall”) for breach of contract and breach of the covenant of good faith and fair dealing. FUJI initiated the main action by filing suit against approximately 15 defendants, as well as unnamed XYZ companies, for violations of the Lanham Act and state law through the alleged sale of gray market FUJI and INSTAX products (the “FUJI Gray Market Products”).[1] Geleshmall, previously a contractually-bound distributor of Genuine U.S. FUJI Products, alleged in its counterclaims that FUJI had breached the distribution agreement under which the parties had previously operated. FUJI argues that Geleshmall's counterclaims are subject to an arbitration clause that requires the Court to dismiss (or stay) the counterclaims pending arbitration. Geleshmall cross-moved to compel arbitration as to the gray market claims. For the following reasons, FUJI's motion is granted in part and denied in part, and Geleshmall's cross-motion is denied.

         BACKGROUND

         I. FUJI's Amended Complaint

         FUJI is a New York corporation with its principal place of business in New York. It alleges that, at least as early as June 2016, it learned that the named defendants, including Geleshmall, were distributing and selling FUJI Gray Market Products to U.S. consumers in brick-and-mortar stores and on the internet. Gray market products are generally defined as goods that the trademark holder has authorized for manufacture and sale outside of the United States, but which are legally purchased outside the United States from authorized distributors and sold within the United States without the trademark holder's permission. Under the Lanham Act, the sale of gray market products is prohibited under certain circumstances. FUJI alleges that the FUJI Gray Market Products are physically and materially different from Genuine U.S. FUJI Products, which are authorized for United States distribution and sale in numerous ways.

         FUJI alleges that the gray market sales are likely to result in consumer confusion, lost profits, and interference with FUJI's quality control efforts. Moreover, FUJI alleges that defendants' conduct also results in substantial reputational harm to FUJI, where, for example, a consumer of a FUJI Gray Market Product has no warranty recourse in the United States because his product is not a Genuine U.S. FUJI Product, which are the only products that have valid U.S. warranties.

         II. Geleshmall's Counterclaims

         Geleshmall is a California LLC and its sole member is a California citizen. Geleshmall had previously purchased Genuine U.S. FUJI Products from FUJI prior to the alleged 2016 conduct outlined in FUJI's amended complaint. Specifically, beginning in 2010, Geleshmall began to buy limited quantities of certain Genuine U.S. FUJI Products from FUJI. This informal relationship was not memorialized in any contract. It continued until approximately August 2011, at which point FUJI approached Geleshmall about the pricing of those Genuine U.S. FUJI Products. The parties negotiated pricing terms, and for the remainder of 2011 and 2012, Geleshmall bought as many Genuine U.S. FUJI Products as it could. However, FUJI could not always fill the orders that Geleshmall placed.

         In 2013, FUJI again approached Geleshmall regarding its distributor relationship, explaining that, in order to ensure adequate product delivery of Genuine U.S. FUJI Products, FUJI and Geleshmall should enter into a contractual agreement with sales forecasts. Under this new agreement, FUJI would sell Genuine U.S. FUJI Products to Geleshmall for certain prices per pack or per case, and as a result, if Geleshmall met certain buying minimums, it would be eligible for rebates on those products.

         The agreement between FUJI and Geleshmall went into effect in approximately November 2013 and was to continue until the end of 2014 (the “2014 Agreement”). The contract required Geleshmall to purchase a minimum of $4.2 million worth of Genuine U.S. FUJI Products.

         Three paragraphs from the 2014 Agreement are important here:

¶ 1: “[Geleshmall] Appointment and Obligations. . . . [Geleshmall] will purchase all of its requirements of the Instax Products from FUJIFILM. . . . [Geleshmall] will not knowingly sell, offer to sell, promote, market, or transfer the Instax Products outside the [United States]. . . . [Geleshmall] and its agents will comply with applicable federal, state, local and other government laws and regulations relating to its resale of the Instax Products and its business operations as applicable to the Products.”
¶ 7: “Indemnities. [Geleshmall] shall indemnify, defend [and] hold harmless (“Indemnify”) FUJIFILM and its affiliates from and against any damages, losses, actions, liabilities and costs . . . incurred or arising in connection with (i) any use of the Instax Products which is inconsistent with the uses permitted hereunder; (ii) any advertising, promotion, representations or warranties made by [Geleshmall] relating to the Instax Products which are not wholly consistent with the Instax Product documentation and applicable Instax Product warranties as expressly stated hereunder; (iii) [Geleshmall's] material breach of this Agreement or its actual or alleged breach of its obligations under rules or regulations; (iv) [Geleshmall's] business activities and operations; and (v) otherwise the actual or alleged acts or omissions of [Geleshmall], its employees, agents, customers, business partners, or contractors directly or indirectly relating to the Instax Products.
Subject to the exclusive remedy and liability limitation provisions thereof, FUJIFILM shall Indemnify [Geleshmall] and its affiliates from and against any and all Costs incurred or arising in connection with (i) FUJIFILM's material breach of this Agreement or of its obligations under applicable laws, rules or regulations . . . .”
¶ 10: “Miscellaneous. “All claims and disputes arising out of / pertaining to this Agreement shall be resolved by way of arbitration before the American Arbitration Association and the rules of such association applicable to commercial disputes. Such remedy shall be sole [sic] and exclusive remedy of the parties.”

         FUJI was unable to fill all of the orders that Geleshmall placed pursuant to the 2014 Agreement. Regarding the orders that FUJI was able to fill, Geleshmall accepted and paid for all deliveries. Geleshmall continued to place purchase orders with FUJI so it could try to meet the minimum purchase requirements of the 2014 Agreement. Geleshmall made repeated requests to FUJI regarding the unfilled purchase orders, and FUJI responded with assurances like, “we are working on it, ” or other comments indicating that shipments would be forthcoming.

         In the end, during the term of the 2014 Agreement, FUJI did not fill approximately $1.8 million of Geleshmall orders. By not filling these orders, ...


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