Southern Telecom Inc. v. ThreeSixty Brands Group, LLC

Background

Southern Telecom Inc. (STI) and ThreeSixty Brands Group, LLC had a license agreement concerning the trademarks “THE SHARPER IMAGE” and “SHARPER IMAGE.” The agreement gave STI a nonexclusive right to use the marks on consumer electronics, required STI to pay royalties and quarterly minimum payments, and established procedures for obtaining approval of products and retail outlets.

The agreement gave ThreeSixty “sole and absolute” discretion over product approvals. It also required STI to sell through retail outlets approved by ThreeSixty and stated that approvals could be withheld in ThreeSixty’s sole discretion. The agreement allowed STI, after termination, to sell existing inventory for a 120-day period, subject to the agreement’s other provisions.

STI alleged that, after ThreeSixty acquired the marks and became affiliated with MerchSource, ThreeSixty used its contractual powers to benefit MerchSource. According to STI, ThreeSixty delayed or denied STI’s product applications, used information from those applications to develop competing MerchSource products, restricted STI from selling through certain retailers while allowing MerchSource to sell there, and refused to extend the 120-day sell-off period after the COVID-19 pandemic disrupted STI’s business. STI asserted 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. It accepted the complaint’s factual allegations as true and drew reasonable inferences for STI, considering only the pleadings and incorporated documents.

Under New York law, every contract includes an implied promise that neither party will undermine the other party’s right to receive the benefits of the agreement. That promise cannot be used to contradict an express contract term. The court therefore examined whether applying the implied promise would conflict with the agreement or was necessary to prevent the agreement from becoming effectively meaningless.

Product approvals

The court denied ThreeSixty’s motion as to STI’s product-approval theory. Although the agreement gave ThreeSixty broad discretion, the agreement also created a three-stage application process requiring STI to submit product information for ThreeSixty’s consideration. The court held that ThreeSixty could decide whether to approve a product based on the application and could reject a genuine application for reasons that were not reasonable, correct, or consistent with past standards.

But ThreeSixty could not disregard an application entirely or reject it solely because STI submitted it. STI alleged that ThreeSixty accepted STI’s minimum royalty payments and product ideas while denying applications to divert the resulting business to MerchSource. Accepting those allegations as true, the court concluded that STI had adequately alleged that ThreeSixty deprived it of the benefits of the agreement and acted in bad faith. This theory therefore survived the motion.

Retail-outlet approvals

The court granted ThreeSixty’s motion as to STI’s freestanding theory that ThreeSixty had to consider STI’s requests for additional retail outlets in good faith. The agreement included a list of pre-approved retailers, and STI did not allege that ThreeSixty barred it from selling through those listed accounts. The agreement also gave ThreeSixty discretion to approve or deny additional outlets, and the court concluded that this discretion was not limited to aesthetic considerations.

The court held that the implied promise did not restrict ThreeSixty from denying STI access to additional outlets for self-interested reasons, including reasons related to allowing MerchSource to sell there. STI’s rights were not exclusive, and the agreement allowed ThreeSixty to grant other parties licenses to use the marks. The court distinguished this theory from STI’s allegation that ThreeSixty appropriated STI’s product ideas and gave them to MerchSource: to the extent the retail-outlet allegations were tied to that alleged appropriation, the court stated that the motion was denied for the reasons applicable to the product-approval theory.

Sell-off period

The court rejected STI’s claim concerning the sell-off period and granted ThreeSixty’s motion on that issue. The agreement expressly provided for a 120-day period after termination for STI to sell its inventory. The court concluded that ThreeSixty had no obligation to extend that specifically negotiated period, even though STI alleged that pandemic-related disruptions prevented it from fully using the 120 days.

Disposition

The conclusion states that ThreeSixty’s motion for judgment on the pleadings was granted with respect to retail outlet approvals and the Sell-Off Period and denied with respect to product approvals. The opinion does not state that the motion or the case was granted or denied with prejudice.