Gaby's Bags, LLC v. Mercari, Inc.

Background

Mercari, Inc. operates the Mercari.com online marketplace. Gaby's Bags, LLC operated a seller account there and generated approximately $400,000 in handbag sales from January 2017 through May 2019. Mercari terminated the account, alleging that Gaby's Bags violated the marketplace's terms by operating as a business entity.

Gaby's Bags originally sued Mercari for false advertising and unfair competition. Mercari counterclaimed for breach of the terms of service. Mercari then sought permission under Federal Rule of Civil Procedure 15 to amend its counterclaim and add Kody Yates, described as Gaby's Bags' individual member or principal, along with Does 1–5, unidentified potential operators or account holders.

Mercari relied in part on correspondence in which Yates allegedly stated that the account was in his name, that he and his wife operated the business, and that he was considered a sole proprietor. Mercari sought to add Yates under an alter-ego theory, which can allow a party to hold an individual personally responsible for a company's obligations when the company and individual are not genuinely separate and failing to do so would produce an unfair result.

Analysis

Rule 15 generally requires courts to freely allow amendments when justice requires. Courts consider bad faith, undue delay, prejudice to the opposing party, and whether the proposed amendment would be futile. An amendment is futile if it would clearly be dismissed for failing to state a legally sufficient claim.

The court found no undue prejudice. The litigation and discovery were still at an early stage, and adding individuals who might be personally liable would not change the nature of the case or require substantial additional discovery. The court also found that adding the proposed counterdefendants would not create new jurisdiction or venue problems.

As to Yates, the court held that Mercari's proposed allegations, if accepted as true, plausibly stated an alter-ego claim. Mercari alleged that Yates failed to maintain separate business formalities and records, commingled personal and company funds and assets, controlled and used the company's finances as his own, and did not file separate corporate tax returns for Gaby's Bags. The court emphasized that it was not deciding whether those allegations were true or whether Yates would ultimately be liable; that issue would be addressed later, after discovery.

The court also allowed Mercari to add Does 1–5. Mercari had 63 calendar days to identify the unnamed people and serve them with a summons and complaint. Any Doe who was not identified or served within that period would be dismissed.

The court found no evidence that Mercari acted in bad faith, even though Mercari filed the motion eight months after its counterclaim and had possessed the relevant information before filing the counterclaim. The court concluded that the lack of prejudice and Rule 15's preference for allowing amendments outweighed Mercari's unexplained delay.

Disposition

Judge William Alsup granted Mercari's motion for leave to amend its counterclaim to add Kody Yates and Does 1–5 as counterdefendants. The court denied Mercari's motion for a unilateral 90-day extension of the case-management order's June 25, 2020 deadline. The counterdefendants were ordered to answer the amended complaint by August 17.