Hearst Communications, Inc. v. Rugs America Corp.

Background

Hearst Communications, Inc. and Hearst Magazine Media, Inc. sued Rugs America Corp., Rugs America Holdings LLC, and Aaron Hakimian. The complaint asserts federal trademark infringement, federal unfair competition, common-law unfair competition, and breach of contract.

The dispute concerns a license for the COSMO marks, including COSMOPOLITAN and COSMOPOLITAN BY COSMOPOLITAN. In 2018, HCI and Rugs Corp. entered into a license agreement covering area rugs, scatter rugs, and welcome mats. The agreement required royalty payments and included a guaranteed minimum annual royalty. HCI later assigned the agreement to HMMI. HMMI and Rugs Corp. entered into a 2020 first amendment, and a 2022 second amendment extended the agreement through December 31, 2024. The second amendment was signed for Rugs Holdings, which was identified as formerly known as Rugs America Corporation.

The plaintiffs alleged that defendants failed to pay royalties from 2022 through March 2024. After notices of default and termination, defendants allegedly continued using the COSMO marks in connection with rugs.

Motion and arguments

The opinion states that Rugs Holdings moved under Federal Rule of Civil Procedure 12(b)(6) to dismiss the breach-of-contract claim. The defendants argued that Rugs Corp. could not be liable for a breach based on the second amendment because Rugs Corp. was not a signatory to that amendment. They argued that the unpaid royalties related only to the period covered by the second amendment.

The plaintiffs alleged that the breached contract was the original 2018 license agreement, as amended by the 2020 and 2022 amendments. They therefore treated the amendments as changes to one continuing contract, rather than as separate contracts.

Court’s analysis

A Rule 12(b)(6) motion tests whether the complaint contains enough factual allegations to state a plausible claim. At this stage, the court accepts well-pleaded factual allegations as true and draws reasonable inferences for the plaintiffs. The court may also consider a contract that the complaint refers to or incorporates.

The court rejected the defendants’ assumption that the second amendment alone was the contract at issue. The complaint alleged that the original license agreement, as amended twice, was the contract that had been breached, and that Rugs Corp. was a party to that agreement. The court concluded that the complaint plausibly supported a breach-of-contract claim against Rugs Corp.

The court also considered the second amendment’s language identifying Rugs Holdings as formerly known as Rugs America Corporation. The court stated that, at most, the agreement’s language was ambiguous about whether the parties had been substituted. Because a claim based on a materially ambiguous contract term cannot be dismissed on the pleadings, dismissal was not appropriate at this stage.

Disposition

The court denied the motion to dismiss and directed the Clerk of Court to terminate ECF No. 29. The opinion does not state that the court resolved the ultimate merits of the breach-of-contract claim. The opinion’s opening identifies Rugs Holdings as the moving defendant, while the argument and analysis focus on whether the complaint states a claim against Rugs Corp.; this creates some ambiguity about the precise alignment of the motion and the claim discussed.