Spice Jazz LLC v. Youngevity International, Inc.

[7] 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA [10] SPICE JAZZ LLC, Case No. 19-cv-583-BAS-WVG [11] Plaintiff, ORDER GRANTING MOTION 12 TO DISMISS COUNTERCLAIM 13 v. [ECF No. 39] 14 YOUNGEVITY INTERNATIONAL, INC. et al., [15] Defendants. [17] 18 Presently before the Court is Plaintiff Spice Jazz LLC’s Motion to Dismiss 19 Counterclaim. (“Mot.,” ECF No. 29.) Defendant Youngevity International, Inc. 20 filed an opposition to the Motion, (“Opp’n,” ECF No. 45), to which Spice Jazz 21 replied, (“Reply,” ECF No. 58). The Court finds resolution of this matter is suitable 22 without the need for oral argument. See Civ. L.R. 7.1(d)(1). For the reasons 23 discussed below, the Court GRANTS the Motion. 24 I. FACTUAL ALLEGATIONS 25 Plaintiff Spice Jazz sold culinary recipes and spices to customers using a multi26 level marketing (“MLM”) sales force composed of individual sales representatives. 27 (Second Amended Complaint, “SAC,” ECF No. 20, ¶ 2.) Sales force members were 1 recipes, and encouraged to sell the products throughout Australia and the United 2 States. (Id.) Spice Jazz hired Colleen Walters to be its CEO, and Walters 3 successfully recruited sales team members and ran the company’s operation. (Id. 4 ¶¶ 19, 21.) But during her employment with Spice Jazz, Walters worked with 5 Defendant Youngevity, a competitor also running an MLM sales force. (Id. ¶¶ 21, 6 27.) Walters “hatched a scheme” to steal Spice Jazz’s business and bring it to 7 Youngevity. (Id. ¶¶ 27, 28.) Walters then left Spice Jazz, taking with her all of its 8 sales force and “a treasure trove of proprietary recipes and products.” (Id. ¶ 31.) 9 Youngevity allegedly “look[ed] the other way” when Walters brought over a wealth 10 of valuable information, or maybe conspired with her in a plan to “sabotage Spice 11 Jazz’s business operation.” (Id. ¶¶ 66, 71.) The subject of the present Motion is 12 Youngevity’s counterclaim against Spice Jazz for violation of the Lanham Act, 15 13 U.S.C. § 1125 (a). (“Counterclaim,” ECF No. 36.) 14 II. LEGAL STANDARD 15 A complaint must plead sufficient factual allegations to “state a claim to relief 16 that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal 17 quotation marks and citations omitted). “A claim has facial plausibility when the 18 plaintiff pleads factual content that allows the court to draw the reasonable inference 19 that the defendant is liable for the misconduct alleged.” Id. 20 A motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil 21 Procedure tests the legal sufficiency of the claims asserted in the complaint. Fed. R. 22 Civ. P. 12(b)(6); Navarro v. Block, 250 F.3d 729, 731 (9th Cir. 2001). The court 23 must accept all factual allegations pleaded in the complaint as true and must construe 24 them and draw all reasonable inferences from them in favor of the nonmoving party. 25 Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336 , 337–38 (9th Cir. 1996). To avoid a Rule 26 12(b)(6) dismissal, a complaint need not contain detailed factual allegations, rather, 27 it must plead “enough facts to state a claim to relief that is plausible on its face.” Bell 1 be based on either a ‘lack of a cognizable legal theory’ or ‘the absence of sufficient 2 facts alleged under a cognizable legal theory.’” Johnson v. Riverside Healthcare 3 Sys., LP, 534 F.3d 1116, 1121 (9th Cir. 2008) (quoting Balistreri v. Pacifica Police 4 Dep’t, 901 F.2d 696, 699 (9th Cir. 1990)). 5 III. ANALYSIS 6 A. The Entities 7 Spice Jazz first takes issue with Youngevity’s inclusion of Spice Jazz’s 8 “Australian sister company,” Your Inspiration At Home Pty. Ltd (“YIAH”) as a 9 counterclaimant. (Mot. at 2.) Spice Jazz contends that it and YIAH are separate 10 legal entities and YIAH, an Australian company, cannot be liable for Lanham Act 11 violations. (Id.) Youngevity does not disagree that YIAH is an Australian company, 12 but instead argues the Court should apply the Lanham Act extraterritorially. (Opp’n 13 at 21.) 14 While the Lanham Act does not explicitly limit its scope to domestic conduct, 15 like all statutes, it is subject to the presumption against extraterritoriality, which 16 reflects the principle that, in general, “United States law governs domestically but 17 does not rule the world.” RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090 , 18 2100 (2016) (citation omitted). The Ninth Circuit has held that this presumption has 19 been rebutted in part with regard to the Lanham Act, and therefore the Act can be 20 applied to foreign conduct when 21 (1) the alleged violations . . . create some effect on American foreign commerce; (2) the effect [is] sufficiently great to present a cognizable [22] injury to the plaintiffs under the Lanham Act; and (3) the interests of 23 and links to American foreign commerce [are] sufficiently strong in relation to those of other nations to justify an assertion of extraterritorial [24] authority. [25] 26 Trader Joe’s Co. v. Hallatt, 835 F.3d 960, 969 (9th Cir. 2016) (alterations in original) 27 (citation omitted). 1 Entities” and claims their advertisements caused American consumers to buy Spice 2 Jazz’s products; therefore, the ads had an effect on American commerce. (Opp’n at 3 22.) But, Youngevity lumping the two parties together does not sufficiently allege 4 that YIAH, an Australian-based entity, was taking any action that affected American 5 commerce. Youngevity states in one portion of its counterclaims that “YIAH is a 6 now defunct Australian proprietary limited company that sold food products in 7 Australia.” (Counterclaim ¶ 6.) Youngevity later alleges that YIAH sold food 8 products in the United States, (id. ¶ 16); but this contradictory assertion is 9 unsupported. There are no allegations that YIAH, as opposed to Spice Jazz, sold 10 food products or advertised in this country. “Rule 9(b) does not allow a complaint 11 to merely lump multiple defendants together but ‘requires plaintiffs to differentiate 12 their allegations when suing more than one defendant . . . and inform each defendant 13 separately of the allegations surrounding his alleged participation in the fraud.’” 14 Swartz v. KPMG LLP, 476 F.3d 756 , 764–65 (9th Cir. 2007) (citation omitted).1 15 Youngevity has not done so and therefore has not established that the Lanham Act 16 should apply to YIAH. The Court dismisses YIAH as a counterclaimant without 17 prejudice. 18 B. Lanham Act 19 Youngevity brings a false advertising claim under 15 U.S.C. § 1125 (a). The 20 counterclaim has two parts. First, Youngevity claims that Spice Jazz advertised that 21 all of its products were available for purchase, but Spice Jazz did not have “many of 22 their products” available for purchase and shipment. (Counterclaim ¶ 23.) Second, 23 Youngevity claims Spice Jazz advertised that individuals would earn “extra income” 24 by becoming consultants, but Spice Jazz has not paid its consultants all commissions 25 owed. (Id. ¶ 35.) Youngevity claims it was injured because customers could have [27] 1 As noted below, Federal Rule of Civil Procedure 9(b) applies to Youngevity’s false advertising claims. 1 purchased its products, and individuals could have worked as its consultants, but 2 instead chose to buy from or work for Spice Jazz due to this advertising. 3 1. Claim 1: Products are Available for Purchase and Shipment 4 Spice Jazz moves to dismiss this counterclaim for a variety of reasons, the first 5 being that Youngevity does not have standing to bring the claim. 6 a. Standing 7 The Lanham Act “authorizes suit by ‘any person who believes that he or she 8 is likely to be damaged’ by a defendant’s false advertising.” Lexmark Int’l, Inc. v. 9 Static Control Components, Inc., 572 U.S. 118 (2014) (quoting 15 U.S.C. § 10 1125(a)(1)). The Supreme Court has determined that a statutory cause of action 11 extends only to plaintiffs “whose interests ‘fall within the zone of interests protected 12 by the law invoked,’” id. (quoting Allen v. Wright, 468 U.S. 737, 751 (1984)), and 13 “whose injuries are proximately caused by violations of the statute,” id. at 1390. 14 Therefore, to allege statutory standing under the Lanham Act, a party must first meet 15 the “zone of interest” test. Id. Second, a party must sufficiently allege that the 16 injuries were proximately caused by a violation of the statute. Id. 17 The “zone of interest” test is not a particularly demanding one, and the benefit 18 of the doubt goes to the one alleging the cause of action. Lexmark, 134 S. Ct. at 1389 19 (citing Match–E–Be–Nash–She–Wish Band of Pottawatomi Indians v. Patchak, 567 20 U.S. 209, 225 (2012) (“[W]e have always conspicuously included the word 21 ‘arguably’ in the test to indicate that the benefit of any doubt goes to the plaintiff.”)). 22 “[T]he test forecloses suit only when a [party’s] interests are so marginally related to 23 or inconsistent with the purposes implicit in the statute that it cannot reasonably be 24 assumed that Congress authorized the plaintiff to sue.” Id. (citation omitted). In the 25 false advertising context, Congress’ goal was to protect persons engaged in 26 commerce against unfair competition. Id. Thus, “to come within the zone of interests 27 in a suit for false advertising under § 1125(a),” a party must show an injury to a 1 To establish proximate cause under section 1125(a), a party “ordinarily must 2 show economic or reputational injury flowing directly from the deception wrought 3 by the . . . advertising; and that that occurs when deception of consumers causes them 4 to withhold trade from the plaintiff.” Lexmark, 134 S. Ct. at 1391 . Although it may 5 be more difficult to establish proximate causation when the parties do not directly 6 compete, there need not be an allegation that the parties are in direct competition 7 with each other. Id. at 1392. 8 Spice Jazz contends Youngevity lacks standing to bring this claim because it 9 did not sell competing products within the relevant time frame. Youngevity claims 10 from June 2016 through at least June 2017, it competed with Spice Jazz for customers 11 and distributors of food products. (Counterclaim ¶ 17.) At this point, the Court 12 cannot determine whether Youngevity has standing to bring this claim because its 13 allegations lack the necessary specificity. Youngevity claims that Spice Jazz 14 advertised that all of its products were available for purchase, (Id. ¶ 21, 22) but in 15 fact “did not have many of [its] products available for sale and shipment.” (Id. ¶ 23.) 16 It claims that customers purchased Spice Jazz’s products instead of Youngevity’s 17 products. (Id. ¶ 31.) A broad allegation that the two “competed” for customers is 18 insufficient. Youngevity does not specify which products were allegedly 19 unavailable, nor that Youngevity was selling a similar product at the time, such that 20 the Court could determine that Youngevity was injured by this claim. See 21 ThermoLife Int’l LLC v. Am. Fitness Wholesalers LLC, No. CV-18-4189-PHX-JAT, [22] 2019 WL 3840988 , at *4 (D. Ariz. Aug. 15, 2019) (finding the plaintiff did not 23 sufficiently allege a concrete and particularized injury because it did “not point to 24 any specific licenses or ingredients for which sales decreased as a result of 25 Defendant’s alleged misconduct”).2 [26] 27 2 Youngevity points to Spice Jazz’s complaint wherein it alleges the two companies were direct 1 Youngevity attached an exhibit to its counterclaim, but the document does not 2 cure the lack of specificity. The exhibit appears to be screenshot of consumer 3 reviews regarding “Your Inspiration at Home Spice Blends” which are three jars of 4 spices sold in a pack.3 (ECF No. 36-1.) The screenshot shows comments by 5 individuals claiming they did not receive their product after purchase. This exhibit, 6 which Youngevity does not describe or refer to in the counterclaim, provides little 7 clarity into the claim. First, the time period of the reviews is unclear, as the 8 comments were published anywhere from “3 years ago” to “3 months ago” but the 9 date the exhibit itself was screenshotted is unknown. (Id.) There is no indication 10 that when Spice Jazz was advertising it had products in stock, the individuals were 11 complaining they did not receive the product. Second, as noted above, Youngevity 12 does not specify that it sold something similar to this spice blends, such that it was 13 injured by Spice Jazz’s advertising of the product’s availability. In sum, Youngevity 14 has not sufficiently alleged it has standing to bring this claim. 15 b. Whether Youngevity States a Claim 16 Assuming Youngevity can allege standing, the next issue is whether the claim 17 Spice Jazz made regarding the availability of its products may constitute false 18 advertising. 19 A claim for false advertising requires that a plaintiff show that (1) a statement 20 made in an advertisement is false or misleading; (2) that “it actually deceives or has 21 the tendency to deceive a substantial segment of its audience”; (3) that it is “likely to 22 influence purchasing decisions”; and (4) that the “plaintiff has been or is likely to be [23] had a “Wasabi Dukkah” spice blend, and Youngevity “suddenly developed, overnight, a ‘Japanese [24] Inspired Dukkah’” using Spice Jazz’s trade secrets. (Id. ¶ 44.) Spice Jazz does not contend that 25 the two companies were selling similar products before the alleged trade secret theft. 3 As a general rule, “a district court may not consider any material beyond the pleadings in ruling 26 on a Rule 12(b)(6) motion.” Branch v. Tunnell, 14 F.3d 449, 453 (9th Cir. 1994) (citation omitted). But the court may consider “material which is properly submitted as part of the complaint” which [27] means the documents are “physically attached to the complaint.” Lee v. City of Los Angeles, 250 1 injured by the false advertisement.” TrafficSchool.com v. Edriver Inc., 653 F.3d 820 , 2 828–29 (9th Cir. 2011). Federal Rule of Civil Procedure 9(b) applies to Lanham Act 3 claims that are grounded in fraud. Julian Bakery, Inc. v. Healthsource Int’l, Inc., No. 4 16CV2594-JAH (KSC), 2018 WL 1524499 , at *4 (S.D. Cal. Mar. 28, 2018); 5 23andMe, Inc. v. Ancestry.com DNA, LLC, 356 F. Supp. 3d 889, 908 (N.D. Cal. 6 2018) (“Although the Ninth Circuit has not definitively spoken as to whether Rule 7 9(b) applies to Lanham Act claims, the better reasoned [district court] authority is 8 that, where a Lanham Act claim is predicated on the theory that the defendant 9 engaged in a knowing and intentional misrepresentation, then Rule 9(b) is 10 applicable.”). As detailed below, the allegations in support of Youngevity’s Lanham 11 Act claims are based upon Spice Jazz’s intentional misrepresentations, thus they are 12 grounded in fraud and Rule 9(b) applies. See Julian Bakery, 2018 WL 1524499 , at 13 *4 (finding same). 14 Youngevity alleges Spice Jazz claimed all of its products were available for 15 sale and shipment from July 2016 through June 2017. (Counterclaim ¶ 19.) These 16 claims were made in Spice Jazz’s catalogue, on its Facebook page, and by its 17 President. (Id. ¶¶ 21–26.) Youngevity claims Spice Jazz actually did not have “many 18 of their products” available for purchase and shipment. (Id. ¶ 23.) 19 First, a false advertising claim must misrepresent “the nature, characteristics, 20 qualities, or geographic origin” of the product. 15 U.S.C. § 1125 (a)(1)(B). Spice 21 Jazz argues that a claim regarding the quantity or availability of a product does not 22 qualify under this section. In response, Youngevity points to a few out-of-district 23 cases that support its position. (Opp’n at 14); see, e.g., Gristede’s Foods, Inc. v. 24 Unkechauge Nation, No. 06-CV-1260 (CBA), 2008 WL 3334032 , at *4 (E.D.N.Y. 25 Aug. 8, 2008) (“[W]hen an advertisement contains a representation regarding 26 stocking and availability of products, and a defendant fails to stock the advertised 27 goods, Lanham Act claims for literal falsity or misleading advertising may be 1 misrepresenting the quantity of goods in stock can support a Lanham Act claim. 2 (Mot. at 11 (citing Surdyk’s Liquor, Inc. v. MGM Liquor Stores, Inc., 83 F. Supp. 2d 3 1016 (D. Minn. 2000) and Tire Kingdom v. Morgan Tire & Auto, 915 F. Supp. 360 , 4 368 (S.D. Fla. 1996).) 5 As both parties acknowledge, this issue does not appear to be definitively 6 decided in this circuit, as there is no binding authority either way on whether 7 misrepresenting the quantity or availability of a product can form a false advertising 8 claim. And Spice Jazz points to no authority from outside this circuit that supports 9 its position on this specific issue. The Court agrees with the courts that have held a 10 product’s availability goes to that product’s characteristics. As the Surdyk’s Liquor 11 court points out, this position is supported by the Federal Trade Commission 12 (“FTC”)’s advertising regulations. The FTC, 13 the administrative agency charged by Congress with preventing unfair competition, see 15 U.S.C. §§ 45 , 46, has promulgated a regulation [14] stating that “no advertisement containing an offer to sell a product 15 should be published when the offer is not a bona fide effort to sell the advertised product.” 16 C.F.R. § 238.1 . The FTC suggests that an [16] advertised offer will not be considered bona fide when it “fail[s] to have 17 available at all outlets listed in the advertisement a sufficient quantity of the advertised product to meet reasonably anticipated demands, [18] unless the advertisement clearly and adequately discloses that supply is 19 limited and/or the merchandise is available only at designated outlets.” Id. § 238.3(c). Thus, under the plain language of the statute and the [20] FTC’s advertising regulations, [defendant’s] alleged conduct would 21 appear to fall squarely within the ambit of the Lanham Act. 22 Surdyk’s Liquor, 83 F. Supp. 2d at 1021 . The Court agrees that whether or not a 23 product is available is a characteristic of that product. Thus, this claim may form a 24 Lanham Act false advertising claim. 25 However, this claim still suffers from the deficiency noted above—lack of 26 specificity. Youngevity provides no detail as to what products Spice Jazz advertised 27 as available but were in fact not available. Allegations of fraud must be “specific 1 constitute the fraud charged so that they can defend against the charge and not just 2 deny that they have done anything wrong.” Semegen v. Weidner, 780 F.2d 727 , 731 3 (9th Cir. 1985). Particularity requires the party to allege the “who, what, when, 4 where, and how” of the alleged fraudulent conduct, Cooper v. Pickett, 137 F.3d 616 , 5 627 (9th Cir. 1997), and in this case, the “what” is missing. 6 For these reasons, the Court DISMISSES this portion of the false advertising 7 counterclaim, but grants Youngevity leave to amend. 8 2. Claim 2: Individuals Could Earn Income by Becoming 9 Consultants 10 The next claim is that Spice Jazz advertised through its catalogue that 11 individuals could earn “extra income” by becoming consultants, and as a result, 12 people enrolled as Spice Jazz consultants. (Counterclaim ¶¶ 32, 38.) Youngevity 13 claims this advertisement was false because Spice Jazz “did not pay the Consultants 14 all commissions owed.” (Id. ¶ 34.) 15 The Court takes issue with the allegation that the claim is false or misleading. 16 The claim as alleged is broad: people can make money by becoming a consultant. If 17 Spice Jazz did not pay the consultants every dollar they earned, this does not mean 18 that the consultants did not make “extra income”—thus, the advertisement is not 19 alleged to be false or misleading. The Court therefore GRANTS the Motion to 20 Dismiss the false advertising counterclaim as it relates to the consultants. 21 Youngevity is granted leave to amend. 22 IV. CONCLUSION 23 For the foregoing reasons, the Court GRANTS Spice Jazz’s Motion to 24 Dismiss Counterclaim. Filed concurrently with this order is an order dismissing 25 Spice Jazz’s second amended complaint (for unrelated reasons). The Court finds it 26 most logical to allow Spice Jazz to file an amended complaint and then allow 27 Youngevity to file an answer to that complaint with an amended counterclaim, if it 1 ||response to the amended complaint must be filed on or before August 17, 2020. If 2 || Spice Jazz does not file an amended complaint by said date, any amended answer to 3 ||the second amended complaint must be filed on or before July 31, 2020. 4 IT ISSO ORDERED. 5 /\ 6 || DATED: June 19, 2020 LY nLlg (Lashaak 7 United States District Judge