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Safe Step Walk-In Tub Co. v. CKH Industries, Inc.

United States District Court, S.D. New York

March 16, 2017


          OPINION & ORDER


         Plaintiff Safe Step Walk In Tub Co. ("Safe Step") manufactures walk-in bathtubs and purportedly holds trademarks for the marketing of such tubs. Through a series of agreements executed by the parties, Defendant CKH Industries, Inc. ("CKH"), was able to use those trademarks when marketing, selling, and installing Safe Step's tubs in particular geographic areas. Safe Step initiated this action claiming nonpayment of certain marketing fees by CKH, and CKH counter-claimed-alleging that Safe Step was violating the franchise laws of various states, breaching the agreements between the parties, and engaging in other unfair business practices including fraud. Safe Step now seeks to dismiss CKH's counter-claims pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. For the following reasons, the motion to dismiss is GRANTED in part and DENIED in part.


         I. Overview

         Safe Step initiated this action on September 23, 2015, for non-payment of fees associated with one of the agreements entered into between the parties, which was attached to Safe Step's complaint. (See Compl., Ex. A (“Marketing Addendum”), ECF No. 1.) The agreement at issue, an addendum related to marketing, purports to modify a pre-existing “Dealership/License Agreement” between the parties, which was not attached to the complaint even though it was referenced therein. (Compl. ¶¶ 9-10, 12-13.) Safe Step presents the business relationship between itself and CKH as a licensor-licensee, or supplier-dealer, arrangement: Safe Step granted CKH license to use its trademarks and to deal in its bathtub products. (Id. ¶¶ 5, 7.)

         When CKH answered Safe Step's complaint and asserted its own counter-claims, it provided one of the underlying agreements, which CKH alternatively refers to as a Franchise Dealership Agreement. (See, e.g., Answer ¶ 5 & Ex. A, ECF No. 13.) CKH filed its amended answer with counter-claims on November 4, 2015, which serves as Defendant's operative counter-complaint, attaching more of the underlying agreements. (Am. Answer (“AACC”), Exs. 1-5, ECF No. 33.)

         II. The Agreements[1]

         Reviewing the agreements provided by the parties and incorporated into their pleadings, it is evident that Safe Step and CKH entered into base or “regional” agreements, based on sales regions, with addendums specifying components of the business relationship. For example, the base agreement for the New York and New Jersey area is styled as a “Dealership/License Agreement” between Safe Step (as licensor) and CKH (as licensee) and covers specific counties in both states. (See AACC, Ex. 1 (“NY/NJ Agreement”) ¶ 26 (defining the “territory” for the agreement).) It includes a list of “[t]rademarks, [m]arks, [s]logans and [n]ames” that CKH could use within the designated territory. (NY/NJ Agreement at 13; id. ¶ 7.) CKH was to be the “exclusive Licensee” allowed to market Safe Step's products in the region, and Safe Step was obligated to “[s]end all relevant sales leads in [CKH's] [t]erritory” that it garnered “through customer inquiry, advertising, website, trade shows, or any other type of media lead generation” to CKH. (Id. ¶¶ 2, 8(b).) CKH, in turn, was required to achieve either the minimum sales requirements or the advertising budget outlined in one of the agreement's addendums. (Id. ¶ 5.) The agreement also provided for the contemporaneous payment of a $10, 000 “licensing” fee. (Id. at 16.)[2] The parties expressly agreed, however, that “Licensee [CKH] [was] an independent contractor and [had] not been granted a franchise.” (Id. ¶ 14.) The agreement took effect on May 10, 2009. (AACC ¶ 86.)

         The agreement also specified a number of items relevant to issues in this action, including areas where Safe Step could direct CKH to make changes to its business model (e.g., NY/NJ Agreement ¶ 10), the term of the agreement (id. ¶ 2 (five-years subject to renewal terms)), grounds for termination of the agreement and the effect of termination (id. ¶ 3), a mandatory arbitration clause (id. ¶ 18), and a forum selection clause in the event either party sought injunctive relief (id. ¶ 24). Finally, the provisions of the agreement specified that it, along with the attached or referenced schedules, constituted the entire agreement between the parties, that any changes to the agreement had to be made in writing, and that each provision was intended to be severable in case any particular provision or set of provisions were deemed invalid. (See Id. ¶ 23.)

         The other regional agreements contain the same base terms for different regions, incorporating the same trademarks that CKH could use when selling and marketing Safe Step's tubs in the region, similar minimum sales requirements or advertising contributions to be made by CKH, and the same “license fee” that CKH would pay in order to enter into a given regional agreement. (See AACC, Ex. B (“Mass./NH/VT Agreement”), Ex. C (“Albany Agreement”), Ex. D (“Hartford Agreement”), Ex. E (“Boston Agreement”).) Defendant also alleges the existence of an oral agreement under the same terms covering the counties of Hampshire and Bristol in Massachusetts (“Hampshire/Bristol Agreement”). (AACC ¶ 82.) The Mass./NH/VT Agreement took effect on June 10, 2009, the Albany and Hartford Agreements on July 15, 2009, and the Boston and Hampshire/Bristol Agreements on February 10, 2010. (Id. ¶ 86.)

         The Marketing Addendum, which serves as the basis for Plaintiff's action, ostensibly modified all of the regional agreements to provide a fee schedule for Safe Step's national and regional advertising efforts, and to require CKH to pay Safe Step on a monthly basis “for the unique leads received” as a result of the advertising, but left the remaining terms intact. (Marketing Addendum at 1, 3-4.) The addendum took effect January 1, 2014. (Id. at 1.)

         III. Defendant's Allegations

         Defendant brings twenty-two counter-claims against Plaintiff for breach of contract, breach of the implied covenant of good faith and fair dealing, promissory estoppel, unjust enrichment, violations of various state franchise laws, violations of state laws prohibiting unfair or deceptive business practices, and fraud. Defendant seeks damages (AACC ¶ 294) and injunctive relief (id. ¶¶ 288-93).

         The crux of Defendant's position is that Plaintiff was in fact a franchisor who attempted to structure the agreements between Safe Step and CKH to avoid federal and state franchise laws. (Id. ¶¶ 67, 75, 97, 100.) Defendant alleges that Plaintiff has defaulted under the agreements by refusing to honor its obligations and by terminating the agreements, or failing to renew them, despite Defendant's performance of its side of the bargains. (Id. ¶¶ 101-03, 108, 110, 119.) Defendant contends that these acts violate either state franchise laws or state laws prohibiting unfair or deceptive business practices, and constitute a fraud perpetrated by Plaintiff designed to intentionally escalate CKH's costs in order to constructively terminate the alleged franchises and unlawfully compete directly against CKH. (Id. ¶¶ 114, 116, 118.)

         IV. Current Posture

         Plaintiff's motion to dismiss Defendant's counter-claims was fully submitted as of March 11, 2016. (ECF No. 49.)


         Under Rule 12(b)(6), the inquiry is whether the complaint “contain[s] sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)); accord Hayden v. Paterson, 594 F.3d 150, 160 (2d Cir. 2010). “While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations.” Id. at 679. To survive a motion to dismiss, a complaint must supply “factual allegations sufficient ‘to raise a right to relief above the speculative level.'” ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (quoting Twombly, 550 U.S. at 555). The Court must take all material factual allegations as true and draw reasonable inferences in the non-moving party's favor, but the Court is “‘not bound to accept as true a legal conclusion couched as a factual allegation, '” or to credit “mere conclusory statements” or “[t]hreadbare recitals of the elements of a cause of action.” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 555).

         In determining whether a complaint states a plausible claim for relief, a district court must consider the context and “draw on its judicial experience and common sense.” Id. at 662. A claim is facially plausible when the factual content pleaded allows a court “to draw a reasonable inference that the defendant is liable for the misconduct alleged.” Id. at 678.


         Defendant's claims arise out of the relationship allegedly formed via the agreements executed by the parties. As such, the law to apply when interpreting those agreements is a threshold issue before turning to the viability of any of Defendant's causes of action. Although Plaintiff brought this diversity action[3] in New York and asserts New York law applies, Defendant argues that Tennessee law governs the contract disputes based on the parties' agreements. (Compare Pl. Mem. at 9-13, ECF No. 50, with Def. Opp'n at 16-20, ECF No. 53.) Defendant additionally argues that the law of each state where an alleged tort occurred governs the tort and statutory claims. (Def. Opp'n at 20-21.)

         I. Choice of Law

          “A federal court sitting in diversity applies the choice-of-law rules of the state in which it sits.” McPhee v. Gen. Elec. Int'l, Inc., 736 F.Supp.2d 676, 679 (S.D.N.Y. 2010), aff'd, 426 F. App'x 33 (2d Cir. 2011); see Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941).[4]“Generally, [New York] courts will enforce a choice-of-law clause so long as the chosen law bears a reasonable relationship to the parties or the transaction.” Fireman's Fund Ins. Co. v. Great Am. Ins. Co. of N.Y., 822 F.3d 620, 641 (2d Cir. 2016) (quoting Welsbach Elec. Corp. v. MasTec N. Am., Inc., 7 N.Y.3d 624, 629 (2006)).[5] “Where a choice of law clause is not dispositive, ‘[t]he first step . . . is to determine whether there is an actual conflict between the laws of the jurisdictions involved.'” Fireman's Fund, 822 F.3d at 641 (quoting In re Allstate Ins. Co. (Stolarz), 81 N.Y.2d 219, 223 (1993)). If a conflict exists, then “the controlling law would be the contract's ‘center of gravity, ' which typically is the place of contracting or performance.” TCA Television Corp. v. McCollum, 839 F.3d 168, 188 (2d Cir. 2016) (quoting Lazard Freres & Co. v. Protective Life Ins. Co., 108 F.3d 1531, 1539 (2d Cir. 1997)).

         The regional agreements contain mandatory arbitration clauses that cover “[a]ny controversy, dispute or claim arising out of, in connection with or otherwise relating to any provision of [the] Agreement[s], or to the breach, termination or validity” of the Agreements. (See, e.g., NY/NJ Agreement ¶ 18.) As a preliminary matter, Plaintiff is mistaken that the arbitration clause was extinguished when the regional agreements purportedly expired. (See Pl. Reply Mem. at 2, ECF No. 56.) In New York,

a broad arbitration clause in an agreement survives and remains enforceable for the resolution of disputes arising out of that agreement subsequent to the termination thereof and the discharge of obligations thereunder, irrespective of whether the termination and discharge resulted from the natural expiration of the term of the agreement, a unilateral termination under a notice of cancellation provision[, ] or the breach of the agreement by one of the parties.

Primex Int'l Corp. v. Wal-Mart Stores, Inc., 89 N.Y.2d 594, 598-99 (1997). The same is true in Tennessee. Samson. v. Hartsville Hosp., Inc., No. 01A01-9609-CH-00430, 1997 WL 107167, at *3 (Tenn. Ct. App. Mar. 12, 1997). See also Huffman v. Hilltop Companies, LLC, 747 F.3d 391, 398 (6th Cir. 2014) (there is a strong presumption that arbitration clauses survive the expiration of an agreement); Nolde Bros. v. Local No. 358, Bakery & Confectionery Workers Union, AFL-CIO, 430 U.S. 243, 251 (1977).[6]

         Furthermore, the arbitration clauses provide that “[a]ny arbitration held” is to be “governed by the substantive law of the State of Tennessee.” (Id. (the clauses also set venue in Tennessee).) When read in conjunction, the provisions mandate arbitration pursuant to Tennessee law of any claims, contract or tort, related to the regional agreements. See McPhee, 426 F. App'x at 34 (choice-of-law clause will apply to contract and tort claims where “express language of the provision [is] ‘sufficiently broad' as to encompass the entire relationship between the contracting parties”) (citations omitted); English Mountain Spring Water Co. v. AIDCO Int'l, Inc., No. 07 Civ. 0324 (TWP), 2008 WL 2278627, at *3 (E.D. Tenn. May 30, 2008) (“Tennessee will apply a choice-of-law provision to the entirety of the dispute between two parties, especially when the clause purports to govern disputes between the parties”).[7]

         The only exception to mandatory arbitration under the agreements is in instances where a party is seeking injunctive relief. (See, e.g., NY/NJ Agreement ¶ 24 (“Notwithstanding the provisions of paragraph 18, each party shall have the right and may apply to a court of competent jurisdiction for equitable relief from any violation or threatened violation of the covenants of this Agreement in addition to any other rights or remedies available at law or in equity.”).) In that case, although venue and “exclusive jurisdiction” is again fixed as Tennessee at “the appropriate state or federal court located in Nashville, ” there is no competing choice-of-law provision. (Id.) Viewed in context, this provision acts as a modification to the controlling arbitration clause, allowing either party to proceed to court in Tennessee to seek emergency injunctive relief.

         What the agreements do not allow for is the possibility of non-injunctive litigation brought outside of the context of arbitration, which is what has taken place in this case. But, “[t]he fact that [Plaintiff] chose to ignore the forum selection clause” contained in both the arbitration clause and the injunctive relief carve-out, and to instead “bring[] suit in New York[, ] does not otherwise alter the [C]ourt's choice-of-law analysis.” Ackerley Media Group, Inc. v. Sharp Electronics Corp., 170 F.Supp.2d 445, 451 (S.D.N.Y. 2001).[8]

         It is apparent that the parties-particularly Plaintiff, a Tennessee corporation-intended for Tennessee law to govern the multiple agreements at issue in this litigation wherever a legal action was initiated. Town of Smyrna, Tenn. v. Mun. Gas Auth. of Georgia, 723 F.3d 640, 646-47 (6th Cir. 2013) (“Tennessee would interpret this provision to ascertain the intent of the parties, according to the natural meaning of the words, giving effect to every term, and construing any ambiguity against the drafter”); Shah v. Racetrac Petroleum Co., 338 F.3d 557, 576 n.15 (6th Cir. 2003) (quoting Hanover Ins. Co. v. Haney, 425 S.W.2d 590, 592 (Tenn. 1968)) (“Another well-established rule of contract construction points toward the same conclusion: ‘the language of the contract, where ambiguous, will be construed most strongly against the party who drew it.'”).

         Since Tennessee bears a close relationship and has a material connection to Safe Step, and to the parties' agreements, New York choice-of-law principles require this Court to enforce the choice-of-law provisions. Cf. LaGuardia Assocs. v. Holiday Hosp. Franchising, Inc., 92 F.Supp.2d 119, 127 (E.D.N.Y. 2000) (party that drafted agreements selecting law of Tennessee was located in that state when the parties entered into the contracts, thus the Court assumed Tennessee had a “reasonable relationship” to the parties at that time). And, contrary to Defendant's argument, those broadly framed provisions apply to all of its claims. Therefore, Tennessee law governs Defendant's causes of action.

         II. Defendant's Claims

         Defendant's counter-claims fall into three general categories: contract-related claims, fraud claims, and statutory franchise and unfair or deceptive practices claims. Because the franchise-based claims could impact the nature of the parties' contractual relationship, the Court will address those first. See Robert W. Emerson, Franchise Encroachment, 47 Am. Bus. L.J. 191, 209 (2010) (“If a franchisee's exclusive territorial rights are violated, it not only has contractual remedies, but also, in some states, statutory rights against the offending franchisor.”).

         a. Franchise-based Claims

         Defendant argues that the regional agreements constitute franchise agreements between Safe Step and CKH under both federal law and corollary state law provisions.

         i. Federal Franchise Regulations

         Under the Federal Trade Commission Act (“FTCA”), 15 U.S.C. §§ 41-58, and rules promulgated thereunder, a franchise is defined as “any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify”:

(1) The franchisee will obtain the right to operate a business that is identified or associated with the franchisor's trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor's trademark; (2) The franchisor will exert or has authority to exert a significant degree of control over the franchisee's method of operation, or provide significant assistance in the franchisee's method of operation; and (3) As a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment or commits to make a required payment to the franchisor or its affiliate.

16 C.F.R. § 436.1(h) (“FTC Rule”). Thus, it has long been recognized that what the parties call their relationship is irrelevant to the question of whether it constitutes a franchise. Cf. Shah, 338 F.3d at 575 (“If the relationship between [the parties] qualifies as a ‘franchise relationship' under the terms of the [statute] . . . how the parties describe their relationship is irrelevant.”) (citation omitted). Rather, should a supplier seek “to structure a distribution relationship which falls outside the FTC Rule, ” it can avoid one of these three talismans-i.e., “prohibit the use of its trademarks . . ., refrain from providing any marketing assistance or exerting any control over its dealers, or choose not to collect a franchise fee . . . .” Kim A. Lambert & Charles G. Miller, The Definition of A Franchise: A Survey of Existing State Legislative and Judicial Guidance, 9 Franchise L. J. 3, 4 (1989).

         Looking at the NY/NJ Agreement as an example, it: (1) allows Defendant to use Safe Step's “[t]rademarks, [m]arks, [s]logans and [n]ames” within the contracted territory (id. ¶¶ 7, 26); (2) allows Safe Step to set minimum sales requirements (id. ¶ 5), to assist CKH in a marketing plan (id. ¶ 8; see also Marketing Addendum), to direct CKH to make changes to its business model (id. ¶ 10), to terminate the agreement for failure to “complete training” on Safe Step's products or for failure to provide potentially monthly “sales reports, income statements and balance sheets” (id. ¶ 3(a)(i), (viii)), and prohibits CKH from marketing or selling “any products that are competitive” with Safe Step's tubs (id. ¶ 6); and (3) required Defendant to pay at minimum a $5, 000 fee[9] to enter into the agreement (id. at 16). Therefore, the first prong of the FTC Rule is undoubtedly met at this stage: CKH “distribute[s] goods . . . that are identified or associated with [Safe Step's] trademark[s].” See FTC Rule. The second prong is also met, since the alleged involvement by Safe Step in CKH's business operations may amount to the “authority to exert a significant degree of control” or “provide significant assistance in [CHK's] method of operation.” Id.; (see also AACC ¶¶ 94-97, 99).[10] And, the third prong is satisfied based on CKH's alleged payment of a non-nominal fee “[a]s a condition of obtaining or commencing [its Safe Step related] operation[s].” (AACC ¶ 83); FTC Rule.[11] Safe Step has embraced, rather than avoided, the telltale marks of a franchise.

         For these reasons on the basis of Defendant's allegations and the plain terms of the regional agreements, this Court has little difficulty finding that the parties' relationship may plausibly constitute a franchisor-franchisee relationship under the FTC Rule. Nevertheless, finding an alleged franchise under the FTC Rule and accepting Defendant's allegations that Safe Step did not provide CKH with the disclosures required under the FTCA, (see, e.g., AACC ¶ 155), does not in and of itself provide Defendant with an actionable claim. G&R Moojestic Treats, Inc. v. Maggiemoo's Int'l, LLC, No. 03 Civ. 10027 (RWS), 2004 WL 1110423, at *9 (S.D.N.Y. May 19, 2004) (citing Alfred Dunhill Ltd. v. Interstate Cigar Co., 499 F.2d 232, 237 (2d Cir. 1974) (“there is no private right of action to enforce the Disclosure Requirements of § 436, or any other regulation promulgated under the [FTCA]”); see also Olivieri v. McDonald's Corp., 678 F.Supp. 996, 1000 n.2 (E.D.N.Y. 1988) (“Several courts have concluded that there is no private right of action under the [FTC] Rule.”); Mon-Shore Mgmt., Inc. v. Family Media, No. 83 Civ. 5550, 1985 WL 4845, at *1 (S.D.N.Y. Dec. 23, 1985) (“this Court declines to recognize a private cause of action under the FTCA”). This is why Defendant turns to state franchise law and “Little FTC” statutes, as discussed below.

         ii. Franchise Law of Connecticut, New Jersey, New ...

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