The Best Label Company v. Custom Label & Decal, LLC

Background

The Best Label Company, LLC sued Custom Label & Decal, LLC, Daniel Crammer, Scott McKean, Gareth Cole, and Travis Gilkey. The complaint asserted claims involving trade secrets, employee loyalty, defamation and disparagement, unfair competition, interference with prospective economic advantage, claim and delivery, conversion, California Penal Code section 502, and trademark infringement.

The plaintiff alleged that it acquired Best Label Company, Inc. in November 2018. It further alleged that former employees engaged in misconduct after leaving or in connection with joining Custom Label, including soliciting employees, taking confidential information and a laptop, making false statements to customers, and attempting to present Custom Label as the plaintiff. The plaintiff alleged that it merged with Resource Label Group, LLC on September 30, 2019, after the lawsuit began.

Requests for Judicial Notice

The plaintiff asked the court to take judicial notice—officially recognize certain public or readily verifiable documents—of a Delaware certificate of merger and a California certificate of registration. The defendants asked the court to take judicial notice of an application to register a foreign limited liability company and a certificate of cancellation. The court granted both requests because the documents were matters of public record, while noting that disputed factual assertions in such documents would not be judicially noticed.

Substitution of Plaintiff

The plaintiff moved under Federal Rule of Civil Procedure 25(c) to substitute Resource Label Group as plaintiff. Rule 25(c) permits substitution or joinder when an interest in a lawsuit has been transferred, but substitution is discretionary and is intended to let the case continue when the litigation interest changes hands.

The defendants argued that the plaintiff had not shown a qualifying transfer of interest. The court explained that such a transfer requires evidence that both assets and liabilities were transferred. The plaintiff relied on a certificate of merger, fictitious-business-name records, a certificate of cancellation, and Resource Label Group’s California registration. It argued that these documents showed that the merger occurred and that the plaintiff’s interest transferred automatically under California and Delaware law.

The court rejected the request because the plaintiff had not provided an asset purchase agreement, merger agreement, or other evidence showing the terms of the merger and transfer of the lawsuit. It also noted that the plaintiff had not cited a case establishing that a certificate of merger alone was enough to prove the required transfer of interest. The court therefore denied the motion to substitute Resource Label Group as plaintiff.

Leave to Amend

The plaintiff also sought leave to file a first amended complaint adding a claim under the federal Defend Trade Secrets Act. Although amendments are generally allowed when justice requires, the court held that Federal Rule of Civil Procedure 16 governed because the deadline to amend pleadings or add parties had passed. Under that rule, the plaintiff had to show good cause, which primarily requires diligence.

The deadline was April 24, 2020, but the plaintiff did not file the motion until October 15, 2020. The plaintiff cited counsel’s extended absences, work on discovery and mediation, a protective order, discovery disputes, and its earlier decision not to burden the court with an amendment request. The court found that these explanations showed a lack of diligence rather than good cause. The court also noted that counsel had signed multiple filings between the amendment deadline and the motion, which undermined the argument that counsel’s absences justified the delay.

The court denied leave to amend the complaint to add the federal trade-secrets claim. In its conclusion, the court denied the plaintiff’s motion to substitute plaintiff and for leave to file a first amended complaint.