Factory Direct Wholesale, LLC v. iTouchless Housewares & Products, Inc.

Background

Factory Direct Wholesale and iTouchless Housewares & Products were competing sellers on Amazon. Factory Direct alleged that iTouchless asked Amazon to make false or unauthorized changes to Factory Direct’s product listings, including changes to descriptions, product categories, images, reviews, and brand information. Factory Direct also alleged that iTouchless used Factory Direct’s BESTOFFICE trademark without authorization or a license.

Factory Direct had previously sued iTouchless in a Georgia federal court over earlier conduct involving Amazon listings. That court dismissed all claims with prejudice. Factory Direct then filed this Northern District of California action, alleging conduct beginning or renewing in February 2019 and adding a trademark-infringement claim.

Claim Preclusion

Claim preclusion is a rule that can bar a later lawsuit when an earlier lawsuit involved the same claim, ended in a final judgment on the merits, and involved the same parties or their legal equivalents. Judge Koh held that claim preclusion did not bar the Lanham Act false-advertising claim because the alleged February 2019 conduct occurred after the earlier action was filed and therefore created new claims.

The court reached the opposite conclusion for Factory Direct’s California Unfair Competition Law claim and its three tortious-interference claims: intentional interference with contract, intentional interference with prospective economic advantage, and negligent interference with prospective economic advantage. The court held that those claims had accrued before the earlier Georgia action and were therefore barred by claim preclusion. Because amendment would be futile, the court granted the motion to dismiss those claims with prejudice.

The court also held that claim preclusion did not bar the trademark-infringement claim. Although both cases involved advertising on Amazon, the earlier action concerned alleged misrepresentations to Amazon that led to product-listing changes, while the trademark claim concerned the alleged unauthorized use of Factory Direct’s registered trademark. The court therefore denied the motion to dismiss the trademark claim.

Issue Preclusion

Issue preclusion can prevent a party from relitigating an issue that was identical to an issue in an earlier case, actually litigated and decided there, fully and fairly litigated, and necessary to the earlier judgment. The court held that issue preclusion did not bar the Lanham Act claim. The earlier complaint did not specifically allege the false and misleading statements about Factory Direct’s listings that were alleged in the current case, so those issues were not actually litigated or decided in the earlier action. The court denied the motion to dismiss to the extent it relied on issue preclusion.

Failure to State a Claim

The court separately considered whether the Lanham Act false-advertising allegations stated a legally sufficient claim. A Lanham Act false-advertising claim generally requires a false statement of fact in a commercial advertisement, deception or a tendency to deceive consumers, materiality, interstate commerce, and injury or likely injury. Because the allegations sounded in fraud, they also had to identify the alleged misconduct with particularity, including the who, what, when, where, and how.

For the 4ZB4 Listing, the court held that Factory Direct adequately alleged a claim. Factory Direct alleged that iTouchless caused Amazon to change the listing so that Factory Direct’s product was falsely presented as manufactured and branded by iTouchless. The court denied the motion to dismiss the Lanham Act claim to the extent it was based on the 4ZB4 Listing.

For the FQWE and JYK7 Listings, the court held that Factory Direct had not adequately alleged that the attempted merger produced a false statement in a commercial advertisement or that the statement reached consumers. The court granted the motion to dismiss that portion of the Lanham Act claim, but granted Factory Direct leave to amend.

The court also dismissed the remaining allegations of false and deceptive conduct because Factory Direct offered conclusions without explaining why the changes or unfavorable review were false or deceptive, and did not adequately allege that the conduct occurred in a commercial advertisement. The court granted the motion to dismiss that portion of the claim with leave to amend.

Disposition

The court granted in part and denied in part iTouchless’s motion to dismiss. It granted the motion to dismiss with prejudice as to Factory Direct’s California Unfair Competition Law claim and its intentional-interference-with-contract, intentional-interference-with-prospective-economic-advantage, and negligent-interference-with-prospective-economic-advantage claims. It granted the motion with leave to amend as to the portions of the Lanham Act claim based on the attempted FQWE and JYK7 listing mergers and the conclusory allegations of false and deceptive conduct. It denied the motion as to the Lanham Act claim based on the 4ZB4 Listing and as to the trademark-infringement claim. Factory Direct had 30 days to file an amended complaint; failure to amend or cure the identified deficiencies would result in dismissal of the deficient claims with prejudice.