H&C Animal Health, LLC v. Ceva Animal Health, LLC

• Decision Date: 30 October 2020
• Docket Number: Case No. 20-2271-JWB
• Citation: 499 F.Supp.3d 920
• Court: U.S. District Court — District of Kansas
• Parties: H&C ANIMAL HEALTH, LLC, Plaintiff, v. CEVA ANIMAL HEALTH, LLC, Defendant.

499 F.Supp.3d 920

H&C ANIMAL HEALTH, LLC, Plaintiff,

v.CEVA ANIMAL HEALTH, LLC, Defendant.

Case No. 20-2271-JWB

United States District Court, D. Kansas.

Signed October 30, 2020

Brandon T. Christensen, Pro Hac Vice, Eric G. Maxfield, Pro Hac Vice, Holland & Hart LLP, Salt Lake City, UT, David R. Schapker, Colin N. Gotham, Evans & Mullinix, PA, Shawnee, KS, James E. Hartley, Pro Hac Vice, Holland & Hart LLP, Boulder, CO, Paul D. Swanson, Pro Hac Vice, Holland & Hart LLP, Denver, CO, for Plaintiff.

Bryce Langford, Sean William Colligan, Victoria L. Smith, Stinson, LLP, Kansas City, MO, for Defendant.

MEMORANDUM AND ORDER

JOHN W. BROOMES, UNITED STATES DISTRICT JUDGE

This matter comes before the court on Defendant's motion to dismiss (Doc. 20). The motion has been fully briefed and the court is prepared to rule. (Docs. 21, 27, 33.) For the reasons stated herein, Defendant's motion is GRANTED IN PART and DENIED IN PART.

I. Facts

The facts set forth herein are taken from the allegations in the complaint, including the attached exhibits. Plaintiff H & C Animal Health, LLC, is a distributor of over-the-counter pet products. Plaintiff does not manufacture the products but sells them to brick-and-mortar stores and through the online marketplace. Plaintiff is a distributor for Defendant Ceva Animal Health, LLC. Defendant develops and manufactures animal pharmaceuticals and provides related services and equipment. Defendant's products are pheromone-based pet-behavior products that are used to calm or modify anxious behavior in pets. Defendant's products comprise 75 to 90 percent of the domestic market for pheromone-based pet-behavior products. (Complaint at ¶¶ 1, 2.) The complaint identifies several different lines of products that have been developed by Defendant for dogs and cats. Many of these products have been patented by Defendant. (Id. at ¶ 33.) Defendant's trademarks include the following: Adaptil; Catego; Feliway; Senilife; and Urine Away. (Doc. 1, Exh. 1, App. B.) Defendant's products make their way to consumers through brick-and-mortar stores, online platforms, and veterinarians.

In 2017, the parties entered into a distribution and supply agreement (the "agreement"). (Doc. 1, Exh. 1)(cited throughout as "Agmt.") That agreement allows Plaintiff to sell Defendant's products, which were identified in an appendix to the agreement, through certain channels. (Id. at 4, App. A.) Under the agreement, Plaintiff held exclusive distribution rights for pet stores and their online sales platforms, which is referred to as the "Pet Specialty Channel" and "Independent Retail Channel." (Id. at 4-5.) The complaint refers to these channels as the "Pet Store Channel."¹ (Complaint at ¶ 38.) Plaintiff's territory under the agreement specifically excluded sales through veterinarians or veterinary distributors. (Agmt. at § 1.38.) With respect to online platforms, which the complaint refers to as the "Ecommerce Channel," the agreement authorized Plaintiff to sell and advertise in that channel, but it did not provide exclusivity. Rather, Plaintiff had to compete with other distributors and Defendant in the Ecommerce Channel. (Complaint at ¶ 42.)

The agreement requires Plaintiff to market Defendant's products. (Agmt. at Art. 6.) Plaintiff alleges that it invested more than seven million dollars in promoting and selling the products. Plaintiff developed relationships with product sub-distributors and retailers, including entering into separate contracts to supply those entities. (Complaint at ¶ 55.)

The agreement requires Plaintiff to provide Defendant with a twelve-month forecast (the "forecast") for product sales. Plaintiff is to update the forecast every month. The first four months of the forecast constitute a "binding order and may not be subsequently revised (‘Binding Forecast’)." (Agmt. at § 3.1.) The forecasts specify product stock keeping unit ("SKU") and do not differentiate between products for the Pet Store Channel or the Ecommerce Channel. (Id. ) Plaintiff is also required to maintain at least a three-month supply of products based on sales during the preceding ninety days. (Id. at § 7.4.) The agreement further requires Plaintiff to purchase a minimum annual quantity of the product, which is approximately five million dollars. (Id. at § 3.4; Complaint at ¶ 50.) Plaintiff is also required to report sales data upon request from Defendant. (Agmt. at § 7.5.) The agreement terminates on December 31, 2020. Both parties represented that they would not assume or undertake any obligation or commitment that is inconsistent with the obligations under the agreement. (Id. at §§ 12.1.5, 12.2.6.)

After execution of the agreement, Plaintiff invested in promoting the products and selling the products. Plaintiff complied with its obligation to submit the Binding Forecasts and purchase orders. Defendant pressured Plaintiff to order, distribute, and sell more products, telling Plaintiff that it should sell up to thirty million dollars of products each year. This plan was pressed until early 2019. Also, up to the spring of 2019, Defendant confirmed Plaintiff's purchases orders via email without delay. Until that time, Defendant supplied the products to meet Plaintiff's Binding Forecasts and purchase orders. (Complaint at ¶¶ 57-61.)

At some point in 2019, Defendant purchased ThunderWorks, a manufacturing competitor. ThunderWorks sold its own line of pheromone-based pet-behavior products that were branded as ThunderEase and also sold a ThunderShirt for pets to wear that would increase their sense of security and calm. Plaintiff and Defendant's relationship turned acrimonious after Defendant acquired ThunderWorks. (Id. at ¶ 63.) Plaintiff initiated a call with Defendant to address this issue. Defendant's representative, Phil Blizzard, told Plaintiff's representatives that the call "will not go well for you." (Id. at ¶ 64.) On the call, Blizzard stated that Defendant was not satisfied with the pricing on its products and "wanted to avoid a race to the bottom." (Id. at ¶ 66.) Blizzard told Plaintiff's representatives that it could not win a price war with Defendant and Defendant was going to control sales and raise prices for products sold in the Ecommerce Channel. Plaintiff was also told that it would be excluded from distributing in the Ecommerce Channel in future arrangements. (Id. at ¶ 67.)

Plaintiff alleges that Defendant breached the agreement in mid-2019 by disregarding Binding Forecasts, reducing purchase orders, and shorting purchase orders. To the detriment of Plaintiff and its customers, Defendant failed to deliver products that were ordered even though Defendant had accepted the purchase orders. (Id. at ¶ 72.) Defendant also began requiring that Plaintiff identify where its products were going to be sold, in the Pet Store or Ecommerce Channel, although the agreement does not require Plaintiff to report this information. (Id. at ¶ 88.)

With respect to Defendant's alleged failure to fulfill purchase orders, Plaintiff alleges that the number of products supplied to it fell precipitously after the purchase of ThunderWorks. Between January 2018 and March 2019, Defendant filled more than 90 percent of Plaintiff's purchase orders. That percentage continued to fall. From April 2019 through August, the fulfillment rate fell to 77.7 percent. From September 2019 through March 2020, the fulfillment rate was 44.6 percent. (Id. at ¶ 75.) In the first three weeks of March 2020, Defendant reduced Plaintiff's orders to 20 percent of the product ordered. As a result, Plaintiff was unable to maintain a three-month inventory as required by the agreement. (Id. at ¶ 77.) The drastic reduction of product supply has also reduced Plaintiff's sales in the Pet Store Channel by over 50 percent. (Id. at ¶ 138.) Plaintiff alleges that Defendant refused to deal with Plaintiff - by not supplying product - so that Defendant could gain monopoly power and raise prices.

Moreover, this forced Plaintiff to direct all inventory to Pet Store Channel customers due to Plaintiff's contracts with those customers which substantially hindered Plaintiff's ability to compete in the Ecommerce Channel. (Id. at ¶ 81.) This also caused Plaintiff to default on its obligations to its customers resulting in more than one million dollars in penalties and fines under those agreements. Defendant has asserted a lack of products as the basis for the failure to provide Plaintiff with products. Plaintiff alleges that this assertion is a "specious justification" and that Defendant has been marketing and selling products in the Pet Store Channel. (Id. at ¶ 85.)

Plaintiff further alleges a breach of the agreement due to product price increases. Defendant increased the prices on its products by up to 95%. In doing so, Defendant also initiated a rebate program and offered a rebate to Plaintiff to cover "nearly the entire price increase" if the products were sold in the Pet Store Channel. (Complaint at ¶ 89; Exh. 2.) Plaintiff alleges that the rebate is not tied to any increase in cost to sell in the Pet Store Channel as opposed to the Ecommerce Channel. Essentially, Plaintiff contends that this rebate is pretextual and offered to cover price discrimination so that it cannot compete against Defendant in the Ecommerce Channel. (Complaint at ¶ 90.) In selling in the Ecommerce Channel, Plaintiff alleges that Defendant has been selling its products to and through online retailers, such as Amazon.com, for a price that is lower than the price charged to Plaintiff after the price increase. (Id. at ¶¶ 157-58.) Plaintiff alleges that Defendant has raised the prices in order to "edge out competition from" Plaintiff. (Id. at ¶ 91.) As a result, Plaintiff is unable to compete on price in the Ecommerce Channel and its revenues and profits have been reduced.

With respect to the Pet Store Channel, Plaintiff alleges that Defendant has entered the channel and is marketing and promoting sales of products without involving Plaintiff. D...