Wag Hotels, Inc. v. Wag Labs, Inc., No. 5:2020cv01326 - Document 49 (N.D. Cal. 2022)
Court Description: ORDER GRANTING IN PART 38 PLAINTIFF WAG HOTELS, INC.'S MOTION TO DISMISS, STRIKE, AND/OR FOR MORE DEFINITE STATEMENT RE: 32 DEFENDANT WAG LABS, INC.'S SECOND AMENDED ANSWER AND COUNTERCLAIMS WITH LEAVE TO AMEND. Signed by Judge Beth Labson Freeman on 4/25/2022. (blflc4, COURT STAFF) (Filed on 4/25/2022)
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Wag Hotels, Inc. v. Wag Labs, Inc. Doc. 49 Case 5:20-cv-01326-BLF Document 49 Filed 04/25/22 Page 1 of 15 1 2 3 UNITED STATES DISTRICT COURT 4 NORTHERN DISTRICT OF CALIFORNIA 5 SAN JOSE DIVISION 6 7 WAG HOTELS, INC., 8 Plaintiff, 12 ORDER GRANTING IN PART PLAINTIFF WAG HOTELS, INC.’S MOTION TO DISMISS, MOTION FOR MORE DEFINITE STATEMENT, AND/OR MOTION TO STRIKE DEFENDANT WAG LABS, INC.’S SECOND AMENDED ANSWER/COUNTERCLAIM 13 [Re: ECF No. 38] 9 v. 10 WAG LABS, INC., 11 United States District Court Northern District of California Case No. 20-cv-01326-BLF Defendant. 14 15 Before the Court is Plaintiff Wag Hotels, Inc.’s (“Wag Hotels”) motion to dismiss, motion 16 for a more definite statement, and/or motion to strike affirmative defenses and counterclaims in 17 Defendant Wag Labs, Inc.’s (“Wag Labs”) Second Amended Answer. See Motion, ECF No. 38. 18 This is an action for breach of contract, trademark infringement, and unfair competition arising from 19 Wag Labs’ alleged breach of a settlement agreement resolving prior trademark litigation between 20 the parties in the Central District of California—Wag Hotels, Inc. v. Wag Labs, Inc., 21 No. 2:15–cv–04408 (the “Prior Action”). The settlement agreement includes a provision requiring 22 Wag Labs to use a particular image in branding its services. If Wag Labs seeks to materially change 23 its branding, it is required to notify Wag Hotels, and Wag Hotels can object within a two-week 24 timeframe. Two months after the settlement agreement was executed, Wag Labs filed a trademark 25 application for a mark different from the one authorized by the settlement agreement and began 26 using it in its branding without notifying Wag Hotels. Upon learning of this branding change, Wag 27 Hotels filed the present action. 28 Wag Labs filed a second amended answer asserting two affirmative defenses (the ninth and Dockets.Justia.com United States District Court Northern District of California Case 5:20-cv-01326-BLF Document 49 Filed 04/25/22 Page 2 of 15 1 tenth) based on the alleged invalidity of the settlement agreement. In its ninth affirmative defense, 2 Wag Labs asserts the contract is illusory. In the tenth, Wag Labs asserts that the contract is an illegal 3 restraint of trade under California Business & Professions Code § 16600. Further, Wag Labs asserts 4 two counterclaims—one seeking a declaration that the settlement agreement is invalid under the 5 same grounds as the above affirmative defenses, and the other seeking to reform the contract under 6 the doctrines of mutual or unilateral mistake. Wag Hotels now seeks to strike or dismiss the 7 affirmative defenses and dismiss the counterclaims. In the alternative to dismissing Wag Labs’ 8 second counterclaim for reformation, Wag Hotels moves for a more definite statement. Wag Labs 9 opposes. See Opposition, ECF No. 39. 10 Based on the below reasoning, the Court hereby STRIKES Wag Labs’ ninth and tenth 11 affirmative defenses WITH LEAVE TO AMEND. Further, the Court DISMISSES Wag Labs’ 12 counterclaims WITH LEAVE TO AMEND. 13 I. BACKGROUND 14 Wag Labs is a Delaware corporation with its principal place of business in California. See 15 Complaint, ECF No. 1-1 ¶ 2. Wag Labs offers a mobile app for coordinating pet care services, 16 including dog walking and pet sitting. See id. ¶ 14. Wag Hotels is a Delaware corporation that 17 operates in California. See id. ¶ 1. Wag Hotels offers kennel and pet care services including 18 boarding, training, grooming, bathing, dog-walking, and other exercise. See id. ¶ 10. 19 The present action arises out of a settlement agreement resulting from the Prior Action. In 20 2014, Wag Hotels received U.S. Trademark Registration No. 3,465,083 for use of the following 21 mark in connection with kennel services: 22 23 24 25 26 27 28 See id. ¶ 9. Around January 2014, Wag Labs began offering dog-walking services using the brand name “Wag.” See id. ¶ 13. Wag Hotels filed its complaint in the Prior Action on June 10, 2015, 2 Case 5:20-cv-01326-BLF Document 49 Filed 04/25/22 Page 3 of 15 1 alleging federal trademark infringement and breach of California’s Unfair Competition Law 2 (“UCL”). See id. ¶ 17. The parties settled the Prior Action, resulting in the June 15, 2016 settlement 3 agreement. See RJN, Ex. D (the “Settlement Agreement”). Section 4 of the Settlement Agreement 4 reads as follows: 5 6 7 8 On or before October 31, 2016, Wag Labs will implement branding materially consistent with the following image in all channels it controls including its website, mobile application (including splash page, and home page), social media home pages, outbound emails, billboards, bandanas and other “swag”: 9 10 United States District Court Northern District of California 11 12 13 14 15 16 17 18 19 20 21 22 23 (the “Image”). Wag Labs shall not be required to use the Image as its app icon in any app store, phone and social media icon, or profile photo where the use of the Image would be graphically impractical. Wag Labs shall not be required to use the Image in connection with goods or services outside the scope of dog walking. Notwithstanding the foregoing, for all uses in word format, Wag Labs will consistently use “Wag!”. In the event that Wag Labs seeks to materially change its branding, Wag Labs will provide Wag Hotels with written notice of the proposed branding changes 28 days prior to the implementation of any changes. Wag Hotels shall have 14 days from the date the notice is sent to provide any written comments or objections to Wag Labs. If Wag Hotels does not provide comments or objections within the 14 day period, Wag Hotels [sic] silence will be construed as acceptance of the branding changes. Wag Hotels shall not unreasonably object to any proposed branding changes. In the event that Wag Labs acts in breach of this Section 4 of the Agreement, Wag Hotels shall be entitled to a remedy of specific performance in addition to any other applicable remedy in equity or law. 24 Settlement Agreement § 4. Wag Labs applied for a trademark on the mark shown in Section 4 of 25 the Settlement Agreement on August 18, 2016. See Complaint, ECF No. 1-1 ¶ 18. It received a 26 trademark on May 2, 2017—U.S. Trademark Registration No. 5,194,829 (the “Wag Labs Image 27 Mark”). See id. 28 Around late 2018 or early 2019, Wag Hotels alleges that it discovered that Wag Labs was 3 Case 5:20-cv-01326-BLF Document 49 Filed 04/25/22 Page 4 of 15 1 offering services under another mark it had applied for in 2016 concurrently with the Wag Labs 2 Image Mark—U.S. Trademark Registration No. 5,194,828 (the “Wag Labs Text Mark”). See id. 3 ¶¶ 29–31; Motion, ECF No. 38 at 4–5. The Wag Labs Text Mark is shown below: 4 5 6 7 United States District Court Northern District of California 8 9 U.S. Trademark Registration No. 5,194,828. Wag Hotels alleges that by using this mark, Wag Labs 10 materially changed its branding without notifying Wag Hotels in breach of Section 4 of the 11 Settlement Agreement. See Complaint, ECF No. 1-1 ¶¶ 27–31. Based on this conduct and alleged 12 violations of some other provisions of the Settlement Agreement, Wag Hotels asserts claims for 13 (1) breach of contract; (2) breach of the implied duty of good faith and fair dealing; (3) cancellation 14 of the Wag Labs Text Mark; (4) federal trademark infringement; (5) violation of the UCL; and 15 (6) declaratory relief regarding Wag Hotels’ rights under the Settlement Agreement. See id. 16 ¶¶ 26–63. 17 On October 8, 2021, Wag Labs filed an amended answer, which included ten affirmative 18 defenses and two counterclaims. See Second Amended Answer, ECF No. 32. Wag Hotels moved 19 to dismiss, strike, or for a more definite statement as to two of the affirmative defenses and both 20 counterclaims. See Motion, ECF No. 38. Wag Hotels moves to dismiss or strike Wag Labs’ ninth 21 and tenth affirmative defenses. Wag Hotels argues that Wag Labs’ ninth and tenth affirmative 22 defenses—for invalidity of the Settlement Agreement as illusory and an illegal restraint of trade 23 under California Business & Professions Code § 16600—are inadequately pled, so they should be 24 dismissed or struck. Additionally, Wag Hotels moves to dismiss Wag Labs’ counterclaims. Wag 25 Hotels argues that Wag Labs’ first counterclaim—for invalidity of the Settlement Agreement—and 26 second counterclaim—for reformation of the Settlement Agreement based on mutual or unilateral 27 mistake—should be dismissed as inadequately pled. In the alternative, Wag Hotels moves for a 28 4 Case 5:20-cv-01326-BLF Document 49 Filed 04/25/22 Page 5 of 15 1 more definite statement as to Wag Labs’ second counterclaim. Wag Labs opposes. See Opposition, 2 ECF No. 39. United States District Court Northern District of California 3 II. LEGAL STANDARD 4 A. 5 “A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a 6 claim upon which relief can be granted ‘tests the legal sufficiency of a claim.’” Conservation Force 7 v. Salazar, 646 F.3d 1240, 1241–42 (9th Cir. 2011) (quoting Navarro v. Block, 250 F.3d 729, 732 8 (9th Cir. 2001)). When determining whether a plaintiff has stated a claim, the Court accepts as true 9 all well-pled factual allegations and construes them in the light most favorable to the plaintiff. Reese 10 v. BP Exploration (Alaska) Inc., 643 F.3d 681, 690 (9th Cir. 2011). However, the Court need not 11 “accept as true allegations that contradict matters properly subject to judicial notice” or “allegations 12 that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” 13 In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008) (internal quotation marks and 14 citations omitted). While a complaint need not contain detailed factual allegations, it “must contain 15 sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” 16 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 17 (2007)). A claim is facially plausible when it “allows the court to draw the reasonable inference 18 that the defendant is liable for the misconduct alleged.” Id. On a motion to dismiss, the Court’s 19 review is limited to the face of the complaint and matters judicially noticeable. MGIC Indem. Corp. 20 v. Weisman, 803 F.2d 500, 504 (9th Cir. 1986); N. Star Int’l v. Ariz. Corp. Comm’n, 720 F.2d 578, 21 581 (9th Cir. 1983). Rule 12(b)(6) 22 B. 23 Rule 12(f) permits a court to “strike from a pleading an insufficient defense or any redundant, 24 immaterial, impertinent, or scandalous matter.” Fed.R.Civ.P. 12(f). Motions to strike are “generally 25 viewed with disfavor, and will usually be denied unless the allegations in the pleading have no 26 possible relation to the controversy, and may cause prejudice to one of the parties.” Sliger v. 27 Prospect Mortg., LLC, 789 F.Supp.2d 1212, 1216 (E.D. Cal. 2012) (citations omitted); see also 28 United States v. Wang, 404 F.Supp.2d 1155, 1156 (N.D. Cal. 1991) (“[M]otions to strike should not Rule 12(f) 5 United States District Court Northern District of California Case 5:20-cv-01326-BLF Document 49 Filed 04/25/22 Page 6 of 15 1 be granted unless it is clear that the matter to be stricken could have no possible bearing on the 2 subject matter of the litigation.”). If a claim is stricken, “[i]n the absence of prejudice to the 3 opposing party, leave to amend should be freely given.” Wyshak v. City Nat’l Bank, 607 F.2d 824, 4 826 (9th Cir. 1979) (citations omitted). 5 C. 6 Rule 12(e) provides that “[a] party may move for a more definite statement of a pleading to 7 which a responsive pleading is allowed but which is so vague or ambiguous that the party cannot 8 reasonably prepare a response.” Fed. R. Civ. P. 12(e). “Although generally viewed with disfavor, 9 the proper test in evaluating a Rule 12(e) motion is whether the complaint provides the defendant Rule 12(e) 10 with a sufficient basis to frame his responsive pleadings.” 11 No. 12–cv–00942–YGR, 2012 WL 1747844, at *3 (N.D. Cal. May 16, 2012) (internal quotation 12 marks and citation omitted). Zody v. Microsoft Corp., 13 D. 14 In deciding whether to grant leave to amend, the Court must consider the factors set forth by 15 the Supreme Court in Foman v. Davis, 371 U.S. 178 (1962), and discussed at length by the Ninth 16 Circuit in Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048 (9th Cir. 2003). A district court 17 ordinarily must grant leave to amend unless one or more of the Foman factors is present: (1) undue 18 delay, (2) bad faith or dilatory motive, (3) repeated failure to cure deficiencies by amendment, 19 (4) undue prejudice to the opposing party, or (5) futility of amendment. Eminence Capital, 20 316 F.3d at 1052. “[I]t is the consideration of prejudice to the opposing party that carries the 21 greatest weight.” Id. However, a strong showing with respect to one of the other factors may 22 warrant denial of leave to amend. Id. 23 III. Leave to Amend DISCUSSION 24 A. 25 Wag Hotels requests that the Court take judicial notice of four exhibits. See Request for 26 Request for Judicial Notice Judicial Notice (“RJN”), ECF No. 38-1. Wag Labs does not oppose Wag Hotels’ request. 27 There are two doctrines that permit district courts to consider material outside the pleadings 28 without converting a motion to dismiss into a motion for summary judgment: judicial notice under 6 Case 5:20-cv-01326-BLF Document 49 Filed 04/25/22 Page 7 of 15 1 Federal Rule of Evidence 201 and incorporation by reference. See Khoja v. Orexigen Therapeutics, 2 Inc., 899 F.3d 988, 998 (9th Cir. 2018), cert. denied sub nom. Hagan v. Khoja, 139 S. Ct. 2615 3 (2019). The judicial notice doctrine permits a court to take judicial notice of matters that are “not 4 subject to reasonable dispute.” Fed. R. Evid. 201(b). A fact is “not subject to reasonable dispute” 5 if it is “generally known,” or “can be accurately and readily determined from sources whose 6 accuracy cannot reasonably be questioned.” Fed. R. Evid. 201(b)(1)–(2). However, “[j]ust because 7 the document itself is susceptible to judicial notice does not mean that every assertion of fact within 8 that document is judicially noticeable for its truth.” Khoja, 899 F.3d at 999. For instance, though 9 public records are generally subject to judicial notice, a court may not take judicial notice of disputed United States District Court Northern District of California 10 facts within public records. See id. 11 “[I]ncorporation-by-reference is a judicially created doctrine that treats certain documents 12 as though they are part of the complaint itself.” Khoja, 899 F.3d at 1002. This doctrine permits a 13 court to consider a document “if the plaintiff refers extensively to the document or the document 14 forms the basis of the plaintiff’s claim.” United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003). 15 A court generally “may assume an incorporated document’s contents are true for purposes of a 16 motion to dismiss under Rule 12(b)(6).” Khoja, 899 F.3d at 1003 (internal quotations omitted). 17 Because all inferences must still be drawn in the nonmoving party’s favor, however, “it is improper 18 to assume the truth of an incorporated document if such assumptions only serve to dispute facts 19 stated in a well-pleaded complaint.” Id. Wag Hotels requests judicial notice of four exhibits: 20 21 • providing a list of docket entries. See RJN, Ex. A. 22 23 Exhibit A is a PACER report indicating the parties and law firms in the Prior Action and • Exhibit B is a Joint Stipulation of Dismissal with Prejudice Pursuant to Federal Rules of 24 Civil Procedure 41(a)(1)(A)(ii) filed at ECF No. 48 on June 20, 2016 in the Prior Action. 25 See id., Ex. B. 26 • 2015 in the Prior Action. See id., Ex. C. 27 28 Exhibit C is a Joint Scheduling Conference Statement filed at ECF No. 24 on December 31, • Exhibit D is a copy of the Settlement Agreement. See id., Ex. D. 7 United States District Court Northern District of California Case 5:20-cv-01326-BLF Document 49 Filed 04/25/22 Page 8 of 15 1 Wag Hotels argues that the exhibits are subject to judicial notice under Rule 201 of the 2 Federal Rules of Evidence, since they are “sources whose accuracy cannot be reasonably questioned, 3 . . . including the contents of court files in other lawsuits.” See RJN, ECF No. 38-1 at 1–2. The 4 Court agrees as to Exhibits A, B, and C, which are filings in and records from a government website 5 regarding the Prior Action. See Mullis v. United States Bankruptcy Ct., 828 F.2d 1385, 1388 n.9 6 (9th Cir. 1987); Kater v. Church Downs Incorp., 886 F.3d 784, 788 n.3 (9th Cir. 2018). As to 7 Exhibit D, the Court finds that this document—the Settlement Agreement—is incorporated by 8 reference into the complaint and answer, since both extensively reference this document. Ritchie, 9 342 F.3d at 908. 10 Based on the above reasoning, the Court GRANTS Wag Hotels’ request for judicial notice. 11 B. 12 Wag Hotels moves to dismiss or strike Wag Labs’ ninth affirmative defense that Section 4 13 of the Settlement Agreement is invalid or unenforceable as illusory. Generally, “[a] contract is 14 unenforceable as illusory when one of the parties has the unfettered or arbitrary right to modify or 15 terminate the agreement or assumes no obligations thereunder.” Harris v. TAP Worldwide, LLC, 16 248 Cal.App.4th 373, 385 (2016). Ninth Affirmative Defense – Invalid or Unenforceable Contract 17 In its ninth affirmative defense, Wag Labs alleges that the Settlement Agreement is invalid 18 or unenforceable, because (1) Section 4 does not specify a time period, rendering it illusory and 19 (2) Section 4 offers an objection process for Wag Labs’ branding changes without offering a 20 standard—other than the ambiguous prohibition on “unreasonabl[e]” objections—or any available 21 recourse. See Second Amended Answer, ECF No. 32 at 11–12. Wag Labs further alleges that by 22 commencing this litigation, Plaintiff breached the implied covenant of good faith and fair dealing 23 by arbitrarily exercising its discretion under the Settlement Agreement without good faith, thereby 24 rendering the contract illusory. See id. at 12. Wag Labs also alleges that Wag Hotels’ conduct 25 indicates that it would have objected to Wag Labs’ use of the Wag Labs Text Mark in bad faith if 26 Wag Labs had provided notice to Wag Hotels of its use of that mark. See id. 27 Wag Hotels argues that Wag Labs has not adequately alleged that Section 4 of the Settlement 28 Agreement is illusory. Wag Hotels argues that the Settlement Agreement provides an objective 8 United States District Court Northern District of California Case 5:20-cv-01326-BLF Document 49 Filed 04/25/22 Page 9 of 15 1 standard for Wag Hotels’ objections to Wag Labs’ branding changes: “Wag Hotels shall not 2 unreasonably object to any proposed branding changes.” See Reply, ECF No. 40 at 5 (citing 3 Settlement Agreement § 4); Motion, ECF No. 38 at 10. Further, to the extent Wag Labs’ ninth 4 affirmative defense is based on Wag Hotels’ conduct, Wag Hotels argues that (1) filing a lawsuit is 5 privileged and not a proper factual predicate for a claim for relief and (2) what Wag Hotels would 6 have done if Wag Labs had properly notified it of its branding change is mere speculation. See 7 Motion, ECF No. 38 at 10–11. In response, Wag Labs argues that it has adequately pled that 8 Section 4 of the Settlement Agreement is illusory. See Opposition, ECF No. 39 at 6–8. Wag Labs 9 argues that Section 4 is illusory because it is conditional on an event wholly under Plaintiff’s control, 10 which courts have found to indicate an illusory contract. See id. at 6 (citing Asmus v. Pacific Bell, 11 23 Cal.4th 1, 15 (2000)). Further, Wag Labs argues that Section 4 provides no recourse for Wag 12 Labs in the event that Wag Hotels objects to a branding change. See id. at 8. 13 The Court agrees with Wag Hotels. Section 4 of the Settlement Agreement “do[es] not leave 14 an unlimited option” for Wag Hotels to object to Wag Labs’ branding changes. Asmus, 23 Cal.4th 15 at 4. Rather, it prohibits Wag Hotels from “unreasonably object[ing]” to Wag Labs’ branding 16 changes. Settlement Agreement § 4. Accordingly, Section 4 does not render the Settlement 17 Agreement illusory. See Asmus, 23 Cal.4th at 4. Wag Labs argues that Section 4 provides “no 18 recourse for [Wag Labs] in the event of an objection by [Wag Hotels].” See Opposition, ECF No. 39 19 at 8. But this is incorrect—if Wag Hotels unreasonably objects to Wag Labs’ branding change, then 20 Wag Labs can file a breach of contract action against Wag Hotels for violating the Settlement 21 Agreement. See Gilead, 536 F.3d at 1055 (courts need not “accept as true allegations that contradict 22 matters properly subject to judicial notice or by exhibit”). 23 Wag Labs argues that Wag Hotels’ conduct—filing the present lawsuit—shows that Wag 24 Hotels would have objected in bad faith if Wag Labs had notified it of its branding change, thereby 25 rendering Section 4 of the Settlement Agreement illusory. See Opposition, ECF No. 39 at 8. 26 However, if Wag Labs had notified Wag Hotels and Wag Labs had objected in bad faith, then Wag 27 Labs still could have sued Wag Hotels for an “unreasonabl[e]” objection. Settlement Agreement 28 § 4. Accordingly, Wag Labs has failed to adequately plead that Wag Hotels’ conduct indicates the 9 Case 5:20-cv-01326-BLF Document 49 Filed 04/25/22 Page 10 of 15 1 2 United States District Court Northern District of California 3 illusory nature of the Settlement Agreement. Based on the above reasoning, the Court hereby STRIKES Wag Labs’ ninth affirmative defense WITH LEAVE TO AMEND. See Wyshak, 607 F.2d at 826. Tenth Affirmative Defense – Illegal Restraint of Trade 4 C. 5 Wag Hotels moves to dismiss or strike Wag Labs’ tenth affirmative defense that Section 4 6 of the Settlement Agreement is unenforceable as an illegal restraint of trade under California 7 Business & Professions Code § 16600. See Motion, ECF No. 38 at 11–13; Reply, ECF No. 40 8 at 6–9. Under § 16600, “every contract by which anyone is restrained from engaging in a lawful 9 profession, trade, or business of any kind is to that extent void.” Cal. Bus. & Prof. C. § 16600. The 10 parties agree that unreasonable contractual restraints on business operations and commercial 11 dealings can violate § 16600. See Opposition, ECF No. 39 at 9 (citing Ixchel Pharma LLC v. Biogen 12 Inc., 9 Cal.5th 1130, 1160 (2020)); Reply, ECF No. 40 at 7 (same). The parties also agree that the 13 unreasonableness of a contractual restraint is determined by weighing its harm to competition in a 14 relevant market against its procompetitive effects. See Opposition, ECF No. 39 at 9 (citing Flagship 15 Theatres of Palm Desert LLC v. Century Theatres Inc., 55 Cal.App.5th 381, 396 (2020)); Reply, 16 ECF No. 40 at 8 (same). 17 In its tenth affirmative defense, Wag Labs alleges that Section 4 of the Settlement Agreement 18 is unreasonable and anticompetitive. See Second Amended Answer, ECF No. 32 at 12–13. Wag 19 Labs claims that Section 4 “deprives [Wag Labs] of the ability and freedom, for eternity” to make 20 its own branding decisions or to freely use non-infringing branding of Wag Labs’ choice without 21 being subject to Wag Hotels’ “absolute unfettered discretion.” See id. at 13. 22 Wag Hotels argues that Wag Labs fails to plead competitive harm resulting from Section 4 23 of the Settlement Agreement. See Reply, ECF No. 40 at 8–9; Motion, ECF No. 38 at 13. Wag 24 Hotels argues that Wag Labs merely alleges that Section 4 restricts Wag Labs’ use of a trademark 25 and logo deceptively and confusingly similar to Wag Hotels’ mark, which is an insufficient factual 26 predicate for competitive harm. See Motion, ECF No. 38 at 13. In response, Wag Labs argues that 27 it has adequately pled its tenth affirmative defense, because it alleges that Section 4 of the Settlement 28 Agreement “deprives [Wag Labs] of the ability to freely engage in a lawful business under any non10 United States District Court Northern District of California Case 5:20-cv-01326-BLF Document 49 Filed 04/25/22 Page 11 of 15 1 infringing branding of Defendant’s choice and to freely compete in the relevant market place.” See 2 Opposition, ECF No. 39 at 9–10. 3 The Court agrees with Wag Hotels. Wag Labs has not adequately pled competitive harm. 4 Wag Labs has failed to plead that Section 4 of the Settlement Agreement resulted in any adverse 5 effect on its business. Instead, Wag Labs merely alleges speculative harm like being unable to 6 “freely compete” in the relevant market. See Opposition, ECF No. 39 at 9–10. Such speculative 7 harm is insufficient to plead an unreasonable restraint of trade under § 16600. See Ixchel Pharma, 8 LLC v. Biogen Inc., No. 2:17–00715 WBS EFB, 2018 WL 558781, at *4 (E.D. Cal. Jan. 25, 2018). 9 Even if Wag Labs is not free to pick whatever branding it wants, that does not mean it was per se 10 competitively harmed. Wag Labs must plead competitive harm with more particularity if it wishes 11 to proceed with its § 16600 defense. Accordingly, the Court hereby STRIKES Wag Labs’ tenth affirmative defense WITH 12 13 LEAVE TO AMEND. See Wyshak, 607 F.2d at 826. Wag Labs’ First Counterclaim 14 D. 15 In its first counterclaim, Wag Labs seeks declaratory judgment that Section 4 of the 16 Settlement Agreement is invalid and unenforceable for the reasons outlined in support of its ninth 17 and tenth affirmative defenses. See Second Amended Answer, ECF No. 32 at 16. Since Wag Hotels 18 moves to strike Wag Labs’ ninth and tenth affirmative defenses, Wag Hotels argues that Wag Labs’ 19 first counterclaim should be dismissed as well. See Reply, ECF No. 40 at 9–10. In response, Wag 20 Labs argues that its first counterclaim “closely relates” to its ninth and tenth affirmative defenses, 21 and since those defenses are adequately pled, so too is its first counterclaim. See Opposition, 22 ECF No. 39 at 11–12. 23 Since the Court strikes Wag Labs’ ninth and tenth affirmative defenses with leave to amend, 24 it also DISMISSES Wag Labs’ first counterclaim WITH LEAVE TO AMEND.1 See Eminence 25 26 27 28 The Court notes that Wag Hotels did not move to dismiss Wag Labs’ first counterclaim in its motion—only raising this argument on reply. See Reply, ECF No. 40 at 9–10. However, since Wag Labs’ first counterclaim is based on the same grounds as its inadequately pled ninth and tenth affirmative defenses, the Court finds that dismissal of the first counterclaim is appropriate. Further, Wag Hotels’ failure to move to dismiss Wag Labs’ first counterclaim in its opening brief did not prejudice Wag Labs, since Wag Labs opposed dismissal of the first counterclaim in its Opposition. 11 1 Case 5:20-cv-01326-BLF Document 49 Filed 04/25/22 Page 12 of 15 United States District Court Northern District of California 1 Capital, 316 F.3d at 1052. Wag Labs’ Second Counterclaim 2 E. 3 Wag Hotels moves to dismiss or in the alternative for a more definite statement as to Wag 4 Labs’ second counterclaim for reformation of the Settlement Agreement based on mutual or 5 unilateral mistake. Under California Civil Code § 3399, “[w]hen, through fraud or a mutual mistake 6 of the parties, or a mistake of one party, which the other at the time knew or suspected, a written 7 contract does not truly express the intention of the parties, it may be revised on the application of a 8 party aggrieved, so as to express that intention[.]” 9 In its second counterclaim, Wag Labs asserts a claim for contract reformation based on 10 mutual or unilateral mistake. See Second Amended Answer, ECF No. 32 at 16–18. Wag Labs 11 alleges that it did not intend for its use of the Wag Labs Text Mark to be considered a material 12 change to its branding under Section 4 of the Settlement Agreement. See id. at 17. Wag Labs further 13 alleges that its intent is evidenced by the fact that it filed its Wag Labs Text Mark application only 14 two months after signing the Settlement Agreement. See id. Additionally, Wag Labs alleges that 15 Wag Hotels’ conduct since the agreement was signed—filing this lawsuit based on Wag Labs’ use 16 of the Wag Labs Text Mark in spite of express language of the Settlement Agreement allowing such 17 use—further evidences unilateral or mutual mistake. See id. at 18. Wag Labs seeks declaratory 18 judgment reforming Section 4 of the Settlement Agreement to reflect that (1) Wag Labs’ use of the 19 Wag Labs Text Mark is not a material change from its use of the Wag Labs Image Mark in its 20 branding; (2) the Wag Labs Text Mark is permissible branding use in word format under Section 4 21 of the Settlement Agreement; and (3) the parties did not intend to deprive Wag Labs of its ability to 22 use branding or marks that are not confusingly similar to the Wag Labs Image Mark. See id. 23 Wag Hotels argues that Wag Labs has failed to adequately allege mutual or unilateral 24 mistake. See Motion, ECF No. 38 at 13–18. Under a unilateral mistake theory, Wag Hotels argues 25 that Wag Labs must show that it was mistaken about a basic assumption underlying the Settlement 26 Agreement and that Wag Hotels used that knowledge to take advantage of Wag Labs. See id. at 16. 27 28 See Opposition, ECF No. 39 at 11–12. 12 United States District Court Northern District of California Case 5:20-cv-01326-BLF Document 49 Filed 04/25/22 Page 13 of 15 1 Wag Hotels argues that Wag Labs has not pled sufficient facts, especially under the particularized 2 pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure. See id. at 16–17; Reply, 3 ECF No. 40 at 11–12. Further, under a mutual mistake theory, Wag Hotels argues that Wag Labs 4 has failed to adequately plead how Section 4 of the Settlement Agreement deviates from the parties’ 5 mutual understanding. See Reply, ECF No. 40 at 12–13. Additionally, Wag Hotels argues that 6 reforming Section 4 of the Settlement Agreement as Wag Labs requests would defeat the whole 7 purpose of the provision. See Motion, ECF No. 38 at 17; Reply, ECF No. 40 at 13. Doing so would 8 allow Wag Labs to use the Wag Labs Text Mark in its branding—even though it is confusingly 9 similar to Wag Hotels’ mark. See id. In response, Wag Labs argues that it has adequately pled that 10 the parties intended for the Wag Labs Text Mark not to be a material branding change from the Wag 11 Labs Image Mark. See Opposition, ECF No. 39 at 12–14. In support, Wag Labs points, inter alia, 12 to Wag Hotels’ failure to object to Wag Labs’ public use of the Wag Labs Text Mark for an extended 13 period of time. See id. at 13 (citing Second Amended Answer, ECF No. 32 ¶¶ 50–51, 61). 14 The Court agrees with Wag Hotels. Wag Labs has failed to adequately plead mutual or 15 unilateral mistake. A unilateral mistake theory under California law requires a plaintiff to plead a 16 “mistake of one party, which the other at the time knew or suspected[.]” Cal. Civ. C. § 3399. Wag 17 Labs has not pled any facts to support that Wag Hotels “knew or suspected” any mistake on Wag 18 Labs’ part at the time the contract was executed—let alone particularized facts under Rule 9(b). 19 Further, Wag Labs has not pled sufficient facts to support a mutual mistake theory. Under California 20 law, a plaintiff must plead “a mutual mistake of the parties” such that “a written contract does not 21 truly express the intention of the parties[.]” Cal. Civ. C. § 3399. 22 facts sufficient to indicate the mutual understanding of the parties from which the Settlement 23 Agreement deviated. Wag Labs has failed to allege 24 Each of the allegations Wag Labs points to in support of its mutual mistake theory is 25 inadequate. First, Wag Labs points to the language of the contract itself: “Notwithstanding the 26 foregoing, for all uses in word format, Wag Labs will consistently use ‘Wag!’.” See Opposition, 27 ECF No. 39 at 13 (citing Settlement Agreement § 4). The Court does not see how the language of 28 the contract itself can show an intent of the parties that the “written contract does not truly 13 United States District Court Northern District of California Case 5:20-cv-01326-BLF Document 49 Filed 04/25/22 Page 14 of 15 1 express[.]” Cal. Civ. C. § 3399. Second, Wag Labs asserts that the Wag Labs Text Mark is not “a 2 material change” to its branding or “confusingly similar” to Wag Hotels’ mark, so the parties cannot 3 have intended to require Wag Labs to provide notice of its use of the mark. See Opposition, 4 ECF No. 39 at 13 (citing Second Amended Answer, ECF No. 32 ¶ 48; Motion, ECF No. 38 at 5 19:13–16). Conclusory statements and attorney argument about similarity and materiality are 6 insufficient to plead the parties’ true intention at the time the Settlement Agreement was formed. 7 Third, Wag Labs points to the fact that it started publicly using the Wag Labs Text Mark shortly 8 after entering into the Settlement Agreement, and Wag Hotels did not object for an extended period 9 of time. See Opposition, ECF No. 39 at 13 (citing Second Amended Answer, ECF No. 32 ¶¶ 50–51, 10 61). Wag Labs did not file an application for the Wag Labs Text Mark until two months after the 11 parties executed the Settlement Agreement. Further, Wag Labs did not even notify Wag Hotels of 12 the application or its use of the Wag Labs Text Mark. Accordingly, the Court does not find it to be 13 a reasonable inference that Wag Labs’ and Wag Hotels’ post-execution conduct expresses their 14 intention that use of the Wag Labs Text Mark would not constitute a material branding change under 15 the Settlement Agreement. Wag Labs needs to plead more facts regarding the parties’ mutual 16 intention at the time the Settlement Agreement was executed if it wishes to proceed with its 17 counterclaim for reformation based on mutual mistake. Based on the above reasoning, the Court DISMISSES Wag Labs’ second counterclaim 18 19 WITH LEAVE TO AMEND. See Eminence Capital, 316 F.3d at 1052. 20 In the alternative, Wag Labs moves for a more definite statement as to Wag Hotels’ second 21 counterclaim under Federal Rule of Civil Procedure 12(e). Since the Court dismisses Wag Labs’ 22 second counterclaim under Rule 12(b)(6) with leave to amend, the Court declines to reach Wag 23 Hotels’ motion for a more definite statement under Rule 12(e). 24 /// 25 /// 26 /// 27 /// 28 /// 14 Case 5:20-cv-01326-BLF Document 49 Filed 04/25/22 Page 15 of 15 1 IV. ORDER 2 For the foregoing reasons, IT IS HEREBY ORDERED that: 3 1. 4 Wag Labs’ ninth and tenth affirmative defenses are STRICKEN WITH LEAVE TO AMEND; 5 2. Wag Labs’ counterclaims are DISMISSED WITH LEAVE TO AMEND; and 6 3. Wag Labs SHALL have until 21 days from the date of this order to file an amended 7 answer. 8 9 10 United States District Court Northern District of California 11 Dated: April 25, 2022 ______________________________________ BETH LABSON FREEMAN United States District Judge 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 15
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