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Lacks Enterprises, Inc. v. HD Supply, Inc.

United States District Court, E.D. Michigan, Southern Division

October 18, 2016

HD SUPPLY, INC. and HOME DEPOT U.S.A., INC., Defendants.


          Denise Page Hood Chief Judge.


         Plaintiffs Lacks Enterprises, Inc. and Lacks Home Products, LLC (collectively, “Plaintiff”) have filed suit against Defendants HD Supply, Inc. and Home Depot U.S.A., Inc. (collectively, “Defendant”). This case arises out of a Settlement Agreement between Plaintiff and HD Supply, Inc. that governs the resolution of a patent infringement suit previously brought by Plaintiff against HD Supply, Inc. in this Court. See Case No. 12-14472. On March 24, 2016, Defendant filed a Motion to Dismiss Plaintiff's First Amended Complaint (“, or in the Alternative, Motion for Judgment on the Pleadings. (Doc. No. 5). Defendant's Motion has been fully briefed.[1]The Court, having concluded that the decision process would not be significantly aided by oral argument, previously ordered that the motion be resolved on the motion and briefs submitted by the parties. E.D. Mich. L.R. 7.1(f)(2). [Dkt. No. 15] The Court grants in part and denies in part Defendant's Motion.


         Pursuant to the Settlement Agreement, Plaintiff granted HD Supply (through a subsidiary, Crown Bolt) a license to sell “Faux Garage Door Windows” (this is a defined term in the Settlement Agreement and the FAC). In exchange, HD Supply agreed to pay Plaintiff royalties according to the terms of the Settlement Agreement. In the event of any payment dispute, the Settlement Agreement allows Plaintiff to have an independent certified public accountant audit HD Supply's records. Article 4.5 of the Settlement Agreement provides, in relevant part:

The Lacks Companies may hire an independent certified public accountant (hereinafter “CPA”) to inspect or audit all of the HD Supply Companies' records pertaining to the manufacture, sale and return or repurchase of Faux Garage Door Windows for purposes of verifying the HD Supply Companies' compliance with the terms of this Agreement. . . . The Lacks Companies shall give the HD Supply Companies written notice of its election to inspect and audit its compliance with this Agreement no less than fourteen (14) days prior to the proposed date of review of the HD Supply Companies' records by the CPA. . . . In the event of the identified deficiency, the HD Supply Companies shall have the opportunity to cure said deficiency and a single event of deficiency if timely cured shall not be deemed a material breach of this Agreement for the purpose of termination under Article VII.

         The Settlement Agreement includes a provision to address Plaintiff's perceived quality control concerns about HD Supply's products, and it governs products manufactured after January 1, 2014. Article 9.2 of the Settlement Agreement states:

The Parties agree to work together to seek a solution for the Quality Concerns for future manufacture and production runs of the Faux Garage Door Windows occurring after the Effective Date that does not add to the cost of The HD Supply Companies' Faux Garage Door Windows (“Solution”). If the Parties identify a Solution, The HD Supply Companies agree to implement such Solution.

         The Settlement Agreement also contains a merger clause that provided:

This Agreement constitutes the entire agreement and understanding among the Parties with respect to the matters contained herein, and there are no prior oral or written promises, representations, conditions, provisions, or terms related thereto other than those set forth in this Agreement.

         Article 10.1 (the “Merger Clause”). After the parties executed the Settlement Agreement, Home Depot U.S.A., Inc. acquired substantially all of the assets of HD Supply's Crown Bolt subsidiary, along with the license Plaintiff granted HD Supply.

         Plaintiff's original complaint in this suit alleged that Defendant: (a) failed to pay required royalties in breach of the Settlement Agreement; and (b) had defrauded Plaintiff by providing false sales reports to underpay the royalties due on HD Supply products. Defendant filed an answer to the original complaint. On February 12, 2016, Plaintiff filed a First Amended Complaint (“FAC”), and it includes six counts: (1) Count I - Breach of Settlement Agreement; (2) Count II - Fraudulent Misrepresentation; (3) Count III - Declaratory Relief; (4) Count IV - Patent Infringement; (5) Count V - Unfair Competition in Violation of the Lanham Act, 15 U.S.C. § 1125(a); and (6) Count VI - Unfair Competition in Violation of Michigan Common Law. On March 10, 2016, this case was transferred to the Eastern District of Michigan from the Western District of Michigan.


         A. Standard of Review

         A Rule 12(b)(6) motion to dismiss tests the legal sufficiency of the plaintiff's complaint. Accepting all factual allegations as true, the court will review the complaint in the light most favorable to the plaintiff. Eidson v. Tennessee Dep't of Children's Servs., 510 F.3d 631, 634 (6th Cir. 2007). As a general rule, to survive a motion to dismiss, the complaint must state sufficient “facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). The complaint must demonstrate more than a sheer possibility that the defendant's conduct was unlawful. Id. at 556. Claims comprised of “labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Id. at 555. Rather, “[a] claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

         B. Analysis

         1. Fraud Claim

         Defendant asserts that Plaintiff's fraud claims should be dismissed: (a) for failure to plead with particularity, as required under Federal Rule of Civil Procedure 9(b); and (b) pursuant to the Merger Clause.[2] Defendant first contends that Plaintiff fails to satisfy the pleading standards of Rule 9(b) because Plaintiff did not allege the time, place and contents of the misrepresentation(s) upon which it relies - or who made the misrepresentations. See, e.g., Republic Bank & Tr. Co. v. Bear Stearns & Co., 683 F.3d 239, 253 (6th Cir. 2012) (holding that to comply with Rule 9(b), “the plaintiff must: (1) point to a particular allegedly fraudulent statement; (2) identify who made the statement; (3) plead when and where the statement was made; and (4) explain what made the statement fraudulent”).

         Defendant's argument is based on four paragraphs of the FAC it identifies. See Doc. No. 5, PgID 176 at n. 11 and 12. Defendant argues that Plaintiff's allegations do not identify any particular fraudulent statement(s) and there is not identification of the individual(s) (or even entity(ies) who made the alleged representations. Citing Anderson v. Pine S. Capital, LLC, 177 F.Supp.2d 591, 596-97 (W.D. Ky. 2001) (“When the complaint involves multiple ...

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