Wag Hotels, Inc. v. Wag Labs, Inc.

Background

This case concerns an alleged breach of a settlement agreement resolving earlier trademark litigation between Wag Hotels, Inc. and Wag Labs, Inc. The agreement required Wag Labs to use specified branding and to give Wag Hotels 28 days’ written notice before materially changing that branding. Wag Hotels would then have 14 days to comment or object, although it could not unreasonably object. Wag Hotels alleged that Wag Labs applied for and used a different text mark without notifying Wag Hotels.

Wag Hotels’ complaint asserted claims including breach of contract, breach of the implied duty of good faith and fair dealing, cancellation of the text mark, federal trademark infringement, violation of California’s Unfair Competition Law, and declaratory relief. Wag Labs filed a second amended answer containing ten affirmative defenses and two counterclaims. The challenged defenses alleged that the settlement agreement was invalid or unenforceable because it was illusory and because it imposed an illegal restraint of trade under California Business and Professions Code section 16600. The first counterclaim sought a declaration that the agreement was invalid on those grounds. The second sought reformation of the agreement based on mutual or unilateral mistake.

Court’s analysis

The court granted Wag Hotels’ request for judicial notice of three records from the earlier action and treated the settlement agreement as incorporated into the pleadings because both sides extensively referenced it.

The court struck Wag Labs’ ninth affirmative defense, which alleged that the agreement was illusory. The court reasoned that the agreement did not give Wag Hotels unlimited power to block branding changes because it prohibited unreasonable objections. The court also concluded that Wag Labs could sue for breach if Wag Hotels unreasonably objected. The defense was struck with leave to amend.

The court also struck Wag Labs’ tenth affirmative defense under California Business and Professions Code section 16600. The court stated that an unreasonable restraint requires allegations of competitive harm. It found that Wag Labs had alleged only speculative harm, such as being unable to freely compete or choose any branding it wanted, and had not alleged that the agreement adversely affected its business. This defense was also struck with leave to amend.

Because the first counterclaim relied on the same grounds as the two challenged defenses, the court dismissed that counterclaim with leave to amend. The court dismissed the second counterclaim for reformation under Federal Rule of Civil Procedure 12(b)(6), which addresses legally insufficient claims, because Wag Labs had not adequately pleaded mutual or unilateral mistake. For unilateral mistake, Wag Labs had not alleged facts showing that Wag Hotels knew or suspected Wag Labs’ mistake when the agreement was made. For mutual mistake, Wag Labs had not alleged facts showing the parties’ shared understanding from which the written agreement departed. The court found that statements about the marks’ similarity and the parties’ later conduct were insufficient. The second counterclaim was dismissed with leave to amend.

Because the court dismissed the second counterclaim under Rule 12(b)(6), it declined to reach Wag Hotels’ alternative motion for a more definite statement under Rule 12(e), which concerns pleadings that are too vague or ambiguous to answer.

Order

The court ordered that Wag Labs’ ninth and tenth affirmative defenses be stricken with leave to amend, that Wag Labs’ counterclaims be dismissed with leave to amend, and that Wag Labs file an amended answer within 21 days from the date of the order. The order addressed whether the defenses and counterclaims were adequately pleaded; it did not resolve the ultimate merits of the parties’ underlying contract and trademark dispute.