SLS Brands, LLC v. Authentic Brands Group, LLC

Background

SLS Brands, LLC (SLS) sued Authentic Brands Group, LLC (ABG), Spyder Active Sports, Inc. (Spyder), and CBD Universe, LLC (CBDU). SLS alleged breach of contract and breach of the covenant of good faith and fair dealing against ABG and Spyder, and tortious interference with contract against CBDU and ABG.

SLS alleged that it entered a licensing agreement with ABG and Spyder on September 1, 2017. The agreement allowed SLS to sell skincare products using Spyder’s trademark through December 31, 2022, and prohibited ABG and Spyder from making a competing agreement for those products during the agreement’s term. SLS alleged that it spent approximately $405,000 developing and marketing new Spyder products.

According to the complaint, ABG and Tilray announced a revenue-sharing deal in January 2019 under which Tilray would become ABG and Spyder’s preferred supplier of certain cosmetic products. SLS alleged that CBDU had an undisclosed relationship with Tilray and could produce, manufacture, and sell the resulting “Spyder Powered by Tilray” products. After ABG and Spyder asked SLS to amend its agreement to reflect their partnership with Tilray and CBDU, SLS declined. ABG then sent SLS a termination notice based on allegedly late payments. SLS alleged that ABG and Spyder had accepted those payments without issue, had not allowed SLS to cure, and that SLS was current on its payment obligations. ABG and Spyder later entered a licensing agreement with CBDU.

Motion and Legal Standard

CBDU moved under Rule 12(b)(6), which permits dismissal when a complaint does not adequately state a legal claim. The court had to accept the complaint’s factual allegations as true and decide whether they plausibly supported relief. The court also considered that facts about CBDU’s knowledge and intent could be primarily within CBDU’s possession and control.

Tortious Interference with Contract

Under New York law, a tortious-interference claim requires allegations of: (1) a valid contract between the plaintiff and a third party; (2) the defendant’s knowledge of that contract; (3) intentional procurement of the third party’s breach without justification; (4) an actual breach; and (5) resulting damages. The plaintiff must also allege that the defendant’s conduct was the “but-for” cause of the breach.

CBDU argued that SLS had not adequately alleged CBDU’s knowledge of the agreement. The court agreed that some of SLS’s allegations were conclusory when considered alone. But, considering the alleged sequence of events—including the announcement involving Tilray, CBDU’s relationship with Tilray, the request to amend SLS’s agreement, the termination of that agreement, and CBDU’s subsequent licensing agreement with ABG and Spyder—the court found a plausible inference that CBDU had at least some knowledge of SLS’s agreement.

CBDU also argued that SLS had not adequately alleged intent to interfere. The court concluded that the alleged circumstances plausibly supported an inference that CBDU knew about the agreement, nevertheless entered a contractual relationship with ABG and Spyder, and encouraged or induced a breach in order to become the replacement licensee. The court emphasized that the ultimate proof of intent would require further factual development.

As to causation, CBDU argued that SLS had identified only actions by ABG and Spyder. The court found that SLS plausibly alleged that CBDU negotiated with ABG and Spyder to take over rights that SLS held under the agreement. On the complaint’s allegations, the court found it plausible that, without those negotiations, ABG and Spyder would not have had a replacement for SLS and the alleged breach would not have occurred.

Punitive Damages

CBDU also moved to dismiss SLS’s demand for punitive damages. Under New York law, punitive damages may be available for conduct that is grossly and morally reprehensible and shows extreme indifference to civil obligations. When the alleged tort is closely connected to a contract, additional requirements may apply, including that the conduct be directed at the public in certain circumstances.

The court stated that CBDU’s conduct might ultimately prove not to meet those standards. But without additional facts and evidence, the court found it premature to decide that issue. SLS’s demand for punitive damages therefore remained at this stage.

Disposition

Judge Oetken denied CBDU’s motion to dismiss. The court directed CBDU to file an answer to the operative complaint within 14 days and directed the Clerk of Court to close the motion at Docket Number 47. The ruling allowed SLS’s claims against CBDU addressed by the motion to proceed; it did not determine whether SLS would ultimately prevail.