Southern Telecom Inc. v. ThreeSixty Brands Group, LLC

Background

Southern Telecom Inc. sued ThreeSixty Brands Group, LLC over a license agreement involving the trademarks “THE SHARPER IMAGE” and “SHARPER IMAGE.” Southern Telecom manufactures consumer electronics and accessories. The agreement gave it a non-exclusive license to use the marks on specified products and allowed sales through approved retail channels. It required Southern Telecom to pay royalties and quarterly minimum payments.

The agreement gave ThreeSixty broad discretion over product approvals and retail outlets. Southern Telecom had to submit products through three stages—concept, pre-production, and production—and ThreeSixty had “sole and absolute approval” authority over products and related materials. The agreement also allowed ThreeSixty to control approval of additional retailers and provided a 120-day period to sell existing inventory after termination, subject to specified conditions.

ThreeSixty acquired the marks in 2016. The opinion states that MerchSource, LLC, another licensee of the marks, and ThreeSixty then came under common ownership. Southern Telecom alleged that ThreeSixty used its authority to favor MerchSource by delaying or denying Southern Telecom’s product applications, using information from those applications to develop competing products, restricting Southern Telecom’s access to certain retailers, and refusing to extend the sell-off period after the COVID-19 pandemic disrupted its business. Southern Telecom brought one claim for breach of the implied covenant of good faith and fair dealing and sought at least $20 million in damages.

Motion and legal standard

ThreeSixty moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c). The court applied the same standard used for a motion to dismiss for failure to state a claim. At this stage, the court accepted the complaint’s factual allegations as true, drew reasonable inferences for Southern Telecom, and considered whether the complaint alleged enough facts to make the claim plausible. The court generally limited its review to the pleadings and documents attached to or incorporated into them.

Under New York law, every contract includes an implied promise of good faith and fair dealing. That promise prevents a party from acting in a way that destroys or injures the other party’s right to receive the benefits of the contract. But the implied promise cannot contradict an express contract term or give a party a benefit it never bargained for.

Product approvals

The court denied ThreeSixty’s motion concerning Southern Telecom’s product-approval allegations. Although the agreement granted ThreeSixty broad discretion, the court concluded that the agreement required ThreeSixty to receive and consider Southern Telecom’s submissions through the stated approval process. ThreeSixty could reject a product based on the application’s content, and its decision did not have to be reasonable, correct, or consistent with past standards if it was genuine and not a pretext. But ThreeSixty could not disregard an application solely because Southern Telecom submitted it.

The court found that Southern Telecom plausibly alleged that ThreeSixty accepted its minimum royalty payments and product submissions while refusing to consider the submissions, appropriating product ideas, and giving them to MerchSource. According to the court, allowing ThreeSixty to deny every Southern Telecom submission based only on its source could deprive Southern Telecom of the benefit of the agreement and make the agreement effectively meaningless. Those allegations therefore survived the motion.

Retail-outlet approvals

The court granted ThreeSixty’s motion concerning the broader retail-outlet theory. The agreement pre-approved many retailers through Schedule B, and the complaint did not allege that ThreeSixty barred Southern Telecom from those listed outlets. For additional retailers, the agreement gave ThreeSixty discretion to withhold approval, including for reasons based on its own subjective standards.

The court held that the implied promise of good faith did not require ThreeSixty to approve Southern Telecom’s requests for additional retailers or prevent ThreeSixty from favoring MerchSource in access to those retailers. Southern Telecom retained the right to sell through the retailers listed on Schedule B, and the agreement did not contain a detailed retail-approval process that would become meaningless if ThreeSixty’s discretion were unrestricted.

The court made an important distinction: to the extent Southern Telecom alleged that ThreeSixty took its product designs and gave them to MerchSource to sell through other retailers, the motion was denied for reasons similar to those supporting the product-approval claim. The motion was granted only as to the separate theory that ThreeSixty had an independent duty to consider Southern Telecom’s retail-outlet requests in good faith.

Sell-off period

The court rejected Southern Telecom’s claim concerning the sell-off period and granted ThreeSixty’s motion on that issue. The agreement provided a specific 120-day period after termination for selling existing inventory. The court treated that time limit as a negotiated contractual term and held that ThreeSixty had no obligation to extend it, even though Southern Telecom alleged that pandemic-related disruptions prevented it from fully using the period.

Disposition

The court’s conclusion states that ThreeSixty’s motion for judgment on the pleadings was granted in part and denied in part. It was granted with respect to retail-outlet approvals and the sell-off period, and denied with respect to product approvals.