Safe Step Walk-In Tub Co. v. CKH Industries, Inc.

Background

Safe Step manufactures walk-in bathtubs and purportedly holds trademarks used to market them. Through agreements with Safe Step, CKH was allowed to use those trademarks when marketing, selling, and installing Safe Step’s tubs in particular geographic areas. Safe Step sued CKH for allegedly failing to pay marketing and related fees. CKH asserted counterclaims alleging violations of various state franchise laws, breach of contract, fraud, and other unfair business practices.

The opinion reviewed CKH’s objections to two oral rulings by Magistrate Judge Lisa M. Smith. The first ruling denied CKH’s requests to compel production of documents about Safe Step’s July 2018 sale to Ferguson, plc; Safe Step’s financial records; and agreements and communications with other dealers in Safe Step’s National Marketing Program. It also denied CKH’s request for a ruling that Safe Step had broadly waived attorney-client privilege. The second ruling denied CKH’s request to file supplemental pleadings concerning the sale to Ferguson.

Legal standard

Because the challenged rulings concerned nondispositive pretrial matters, the district court reviewed them under Federal Rule of Civil Procedure 72(a). Under that rule, the court could set aside a magistrate judge’s decision only if it was clearly erroneous or contrary to law. The standard is highly deferential, and the party seeking reversal bears a heavy burden.

July 7, 2020 ruling

The court sustained CKH’s objection concerning documents about Safe Step’s sale to Ferguson. It concluded that Judge Smith had misunderstood CKH’s relevance theory. CKH was not seeking the sale documents merely to determine how much Safe Step received. CKH argued that the sale could show Safe Step’s motive to increase CKH’s costs, take back its exclusive franchise territories, constructively terminate the franchises, and compete directly against CKH. The court held that the sale therefore had some relevance to CKH’s claims.

The court nevertheless limited the discovery because of proportionality concerns and the late stage of discovery. CKH was entitled only to sale documents referring to CKH’s exclusive franchise territories. The court gave as an example communications in which Ferguson officials required Safe Step to terminate CKH’s exclusive territories as a condition of the sale. The court vacated Judge Smith’s ruling to the extent it denied this limited discovery.

The court overruled CKH’s objection concerning Safe Step’s financial records. CKH had not identified which financial records it wanted or explained how a decade of financial records would show that Safe Step lacked good cause to terminate the parties’ agreements. The court concluded that the request was at most indirectly relevant and was not proportional to the needs of the case.

The court also overruled CKH’s objection concerning attorney-client privilege. CKH argued that an email discussing counsel’s advice about dividing states among proposed agreements waived Safe Step’s privilege over all communications related to an alleged scheme to defraud. The court agreed with Judge Smith that the email did not show a broad intent to waive privilege or establish that Safe Step had committed a crime and was sharing legal advice in furtherance of it. The court therefore declined to authorize the requested broad waiver.

September 18, 2020 ruling

The court sustained CKH’s objection to Judge Smith’s denial of permission to file supplemental pleadings. The court explained that CKH’s fraud-based counterclaims were limited to conduct before the 2009 and 2010 agreements, but that CKH’s breach-of-contract and statutory franchise-law claims were not subject to the same limitation. The court had previously allowed those claims to proceed based on allegations that Safe Step escalated CKH’s costs, invaded its exclusive territories, and constructively terminated the parties’ relationship.

Applying Federal Rule of Civil Procedure 15(d), which permits supplemental pleadings concerning later events connected to the original pleading, the court found that CKH’s proposed allegations about the Ferguson sale were connected to its existing theory. CKH alleged that Safe Step took back exclusive territories, including CKH’s territories, to position itself for the sale. The court vacated Judge Smith’s September 18, 2020 ruling and permitted CKH to assert the supplemental pleadings as drafted at ECF No. 167-1.

The court stated that CKH was not entitled to additional discovery beyond the sale documents referring to CKH’s exclusive franchise territories.

Disposition

The court sustained CKH’s objections in part and overruled them in part. It vacated the July 7, 2020 ruling only insofar as that ruling denied the limited sale-related discovery, and overruled CKH’s other objections to that ruling. It sustained CKH’s objection to the September 18, 2020 ruling, vacated that ruling, and permitted the supplemental pleadings. The Clerk of Court was directed to terminate the motion at ECF No. 175.