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, Travis Gilkey, and others. The complaint alleged misappropriation of trade secrets, breach of the duty of loyalty, defamation and disparagement, unfair competition, interference with prospective economic advantage, claim and delivery, conversion, violation of California Penal Code § 502, and state and federal trademark infringement.

The plaintiff alleged that it acquired Best Label Company Inc. in November 2018 and acquired that company’s intellectual property, confidential information, assignments, and contractual rights. The plaintiff alleged that former employees engaged in misconduct involving employee recruitment, confidential information, a laptop, false statements to customers, and passing off Custom Label as the plaintiff. The plaintiff also alleged that it merged with Resource Label Group, LLC, referred to as RLG, on September 30, 2019, after this lawsuit began.

The court’s deadline to amend the pleadings or add parties was April 24, 2020. The plaintiff previously sought to substitute RLG as plaintiff under Federal Rule of Civil Procedure 25, but the court denied that request on March 16, 2021, finding that the plaintiff had not adequately shown that an interest had transferred between the plaintiff and RLG. RLG later filed a separate lawsuit involving the same facts and circumstances and naming the three proposed new defendants.

The Motion

The plaintiff again sought to substitute RLG as plaintiff and requested leave to file a first amended complaint. It relied on Rules 15, 16, and 17 of the Federal Rules of Civil Procedure, sought reconsideration of the March 16 order, and asked the court to certify that order for an immediate appeal under 28 U.S.C. § 1292(b). The plaintiff also sought to add three new defendants.

Substitution and Adding Defendants Under Rules 15 and 16

Because the plaintiff filed its requests after the court’s amendment deadline, Rule 16 governed. That rule required the plaintiff to show “good cause,” which primarily depends on the diligence of the party seeking the amendment.

The court found that the plaintiff did not act diligently. The merger occurred in September 2019, months before the amendment deadline. The plaintiff did not seek to modify the schedule before the deadline, did not seek substitution when it informed the court of the merger in August 2020, and waited until October 2020 to file its first substitution motion. After that motion was denied in March 2021, the plaintiff waited approximately three more months before filing the current motion. The court found no compelling justification for the delays.

The court also found that the plaintiff did not show good cause to add three new defendants. The plaintiff received discovery in November 2020 but waited until June 2021 to seek amendment. The court found that the existing and proposed defendants would need additional discovery and time to adjust their litigation strategies and defenses. It concluded that adding the defendants under the existing schedule would cause extreme prejudice and undue delay.

Rule 17 Substitution

Rule 17 generally requires an action to be prosecuted in the name of the real party in interest—the person or entity legally entitled to enforce the claim. The court held that Rule 17 did not apply because RLG allegedly acquired its interest after the lawsuit began. The lawsuit was filed on May 3, 2019, while the merger occurred on September 30, 2019. The court therefore held that Rule 25, which addresses transfers of interest during a lawsuit, controlled instead.

Reconsideration

The court denied the request for reconsideration under Civil Local Rule 7-9. The plaintiff argued that the merger agreement was a new material fact and that the court had failed to consider important evidence. But the plaintiff acknowledged that the merger agreement was not newly discovered evidence, so it could not satisfy the rule’s requirement that the party did not previously know the relevant fact or law.

The court also found that it had considered the Certificate of Merger and the other materials submitted with the earlier motion. It explained that a Certificate of Merger was not the same as an asset-merger agreement and that the plaintiff had not provided an asset-purchase agreement or supporting case law establishing a transfer of interest under Rule 25.

The court further stated that, even if it reconsidered the earlier ruling, substitution would not facilitate the litigation. The discovery dispute that the plaintiff identified as a reason for substitution had already been resolved when Magistrate Judge Virginia DeMarchi allowed the plaintiff to seek discovery of responsive documents created after October 9, 2019. The court concluded that substitution would instead further delay discovery, summary-judgment motions, and trial.

Interlocutory Appeal

The court denied the request to certify the March 16, 2021 order for an interlocutory appeal. Certification under 28 U.S.C. § 1292(b) requires, among other things, a controlling legal question with substantial grounds for disagreement and an immediate appeal that could materially advance the litigation. The court found that the plaintiff had not identified any conflicting case law and that disagreement with the court’s ruling was not enough to establish substantial grounds for a difference of opinion. Because that requirement was not met, the court did not address the remaining certification requirements.

Disposition

The court denied the plaintiff’s motion to substitute RLG as plaintiff and for leave to file a first amended complaint. It also denied the request to certify the earlier order for interlocutory appeal and found reconsideration unwarranted. The order addressed procedural requests and did not decide the merits of the underlying claims.