Southern Telecom Inc. v. ThreeSixty Brands Group, LLC

Background

Southern Telecom Inc. (STI) moved under Federal Rule of Civil Procedure 15(a) for permission to file a second amended complaint against ThreeSixty Brands Group, LLC. The dispute concerns a licensing agreement for THE SHARPER IMAGE and SHARPER IMAGE trademarks. ThreeSixty’s predecessor granted STI a non-exclusive license to manufacture and sell approved products bearing those marks to specified retail outlets and other outlets approved by the licensor.

STI alleged that, after ThreeSixty acquired the marks and was associated with MerchSource, LLC, ThreeSixty delayed or denied STI’s product submissions, took ideas from submissions it rejected, allowed MerchSource to sell allegedly identical products, and restricted STI’s sales to certain retailers while permitting MerchSource to sell to those outlets. STI claimed that this conduct breached New York’s implied covenant of good faith and fair dealing.

In an earlier ruling, the court granted in part and denied in part ThreeSixty’s motion for judgment on the pleadings. It held that STI failed to state a claim based on ThreeSixty’s denial of retailer approvals while allowing MerchSource to sell to the same outlets. But it allowed to proceed allegations that ThreeSixty rejected STI’s product submissions based solely on STI’s identity and then used STI’s product ideas for MerchSource. The court later denied STI’s motion for reconsideration concerning the retailer-approval claim and issued a corrected opinion.

Proposed Amendments

STI’s proposed second amended complaint would have added allegations that ThreeSixty and MerchSource executives directed the development of competing products while rejecting STI’s submissions; that MerchSource used STI’s designs and other submission information; and that ThreeSixty shared STI’s confidential financial, sales, and pricing information with MerchSource. STI also sought to remove allegations concerning the sell-off period after termination of the licensing agreement.

The proposed amendments presented two theories for breach of the implied covenant: misappropriation or use of confidential information, and misappropriation of product ideas for products that ThreeSixty approved.

Legal Standards

Rule 15(a)(2) generally provides that courts should freely allow amendments when justice requires. An amendment may be denied as futile if the proposed claim could not survive a motion to dismiss for failure to state a claim under Rule 12(b)(6). When a scheduling order sets a deadline for amendments, Rule 16(b)(4) also requires the party seeking an untimely amendment to show good cause.

Confidential-Information Theory

The court held that the proposed confidential-information allegations were futile. The implied covenant of good faith and fair dealing protects the substance of contractual rights; it does not create new contractual obligations that conflict with the agreement’s express terms.

The agreement specifically addressed confidentiality. Section 15.1 required STI, but not ThreeSixty, to keep confidential specified information relating to ThreeSixty and its affiliates, creative concepts provided by ThreeSixty, and certain sketches and designs. The agreement also treated approved designs and related intellectual-property rights as ThreeSixty’s property. Although STI had to provide sales reports and submit to audits, the agreement did not impose a corresponding confidentiality obligation on ThreeSixty for information obtained that way.

The court therefore declined to imply a restriction preventing ThreeSixty from sharing STI’s information. It reasoned that doing so would add a significant contractual restraint that STI had not obtained in the agreement and could conflict with ThreeSixty’s express rights, including rights concerning information, assignments, sales reports, and audits. The court also found the cases STI cited distinguishable because they involved express confidentiality obligations or claims duplicating express contract provisions.

Product-Idea Theory

The court distinguished between unapproved and approved product submissions. It had previously held that STI stated a claim where ThreeSixty allegedly rejected submissions solely because STI submitted them and then used the ideas for MerchSource. Without an implied duty to review those submissions based on their content, ThreeSixty’s contractual obligations could become illusory. The agreement also did not make unapproved designs ThreeSixty’s property.

The court reached a different conclusion for approved products. When ThreeSixty approved a product, STI received contractual benefits, including the right to sell the approved product at least to pre-approved retailers, the ability to set prices, and the opportunity to earn revenue. The agreement also gave ThreeSixty property and intellectual-property rights in approved designs. The court held that it did not need to imply a right allowing STI to prevent ThreeSixty from sharing approved product information with MerchSource in order to preserve STI’s contractual benefits.

Delay and Prejudice

The court separately denied the motion because STI did not show good cause for amending after the deadline in the case-management plan. The deadline for motions to amend was July 1, 2020. STI filed this motion on January 29, 2021, after substantially all fact discovery had been completed or was near completion.

STI argued that it learned in late 2020 and January 2021 that ThreeSixty had shared allegedly confidential information with MerchSource. The court found that STI knew earlier that its financial, sales, and pricing information was being sent to MerchSource through quarterly royalty reports. The court also found that STI offered no newly discovered information about MerchSource’s use of that information that it could not have known before the amendment deadline. As to product misappropriation, the court stated that STI did not claim to have discovered new evidence through formal discovery and had acknowledged regularly observing competitors’ products in stores.

The court further held that permitting the amendments would prejudice ThreeSixty. Because discovery was closed or nearly closed, ThreeSixty would need additional discovery concerning whether the information was confidential, STI’s intellectual-property rights, the alleged copied products, and similar products in the market.

Sell-Off Allegations and Disposition

The court also rejected STI’s request to remove the sell-off-period allegations. The parties agreed that the issue was no longer part of the case, and the court stated that it would not instruct a jury on it if the case proceeded to trial. But because the amendment deadline had passed, STI still needed to show good cause, which it did not do. The court also found no need for the amendment.

Judge Lewis J. Liman denied the motion to amend and directed the Clerk of Court to close the motion at docket entry 61.