Bon Aqua Int'l, Inc. v. Second Earth, Inc.

• Decision Date: 29 January 2013
• Docket Number: 1:10CV169
• Court: U.S. District Court — Middle District of North Carolina
• Parties: BON AQUA INTERNATIONAL, INC., CONSTANCE C. LOWENSTEIN, and GERALD H. LOWENSTEIN, Plaintiffs, v. SECOND EARTH, INC., et al., Defendants.

BON AQUA INTERNATIONAL, INC., CONSTANCE C. LOWENSTEIN, and GERALD H. LOWENSTEIN, Plaintiffs,

v.SECOND EARTH, INC., et al., Defendants.

1:10CV169

UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF NORTH CAROLINA

January 29, 2013

MEMORANDUM OPINION, ORDER, AND RECOMMENDATION

OF UNITED STATES MAGISTRATE JUDGE

This matter comes before the undersigned United States Magistrate Judge on three separate Motions to Dismiss filed by various groupings of Defendants (Docket Entries 16, 18, and 20), Plaintiffs' Motion for Leave to File Second Amended Complaint (Docket Entry 26), and Plaintiffs' Motion for Initial Pretrial Conference (Docket Entry 35). For the reasons that follow, Plaintiffs' Motion for Leave to File Second Amended Complaint and Motion for Initial Pretrial Conference will be granted and Defendants' Motions to Dismiss should be granted in part and denied in part.

I. Procedural Background

Plaintiffs' claims arise from what they allege was a scheme, effectuated by Defendants, to feign interest in the purchase of Plaintiffs' assets in order to obtain Plaintiffs' confidential information and to establish a competing entity. (See Docket Entry26-2.) Plaintiffs filed their Complaint (Docket Entry 3), and subsequently an Amended Verified Complaint (Docket Entry 7), in the District Court Division of the General Court of Justice of Guilford County, North Carolina. (See Docket Entry 1 at 1.) Defendants petitioned for removal to this Court on the basis that, "[a]lthough couched in terms of, inter alia, conversion, unfair competition, and breach of contract, many of the claims in Plaintiffs' Amended Verified Complaint are actually federal claims for which this Court has original jurisdiction pursuant to 28 U.S.C. §§ 1331 and 1338." (Docket Entry 1 at 2.)

After removal, Defendants filed three separate motions to dismiss: (1) the Motion to Dismiss (Docket Entry 16), filed by those Defendants considering themselves associated more closely with corporate-Defendant Second Earth, Inc. (i.e., Second Earth, Inc., Doug Frain, and Robert Haskin); (2) the JC Defendants' Motion to Dismiss (Docket Entry 20), filed by those Defendants considering themselves associated more closely with corporate-Defendant Joseph Charles, LLC (i.e., Joseph Charles LLC, Joseph Charles, Inc., Joseph Nazario, Charles Alexander, Rodney Shaffer, Elena Nazario, Tim Tucker and Christopher Hargett);¹ and (3) the Motion to DismissDefendants Tucker, Hargett and Ms. Nazario (Docket Entry 18), filed by a subset of those Defendants considering themselves associated more closely with Joseph Charles LLC (i.e., Tim Tucker, Elena Nazario and Christopher Hargett). Defendants' instant Motions all seek dismissal for failure to state a claim upon which relief can be granted under Federal Rule of Civil Procedure 12(b)(6). (Docket Entry 16 at 1; Docket Entry 18 at 1; Docket Entry 20 at 1.)

Plaintiffs subsequently filed a Notice of Partial Voluntary Dismissal (Parties) Without Prejudice (Docket Entry 24) in which Plaintiffs "dismiss[ed] all claims in the captioned action, without prejudice, against Defendants Tim Tucker [], Christopher Hargett [], and Elena Nazario [] only" (id. at 1).² Plaintiffs also filed their Motion for Leave to File Second Amended Complaint (Docket Entry 26), to which they attached a proposed Second Amended Complaint (Docket Entry 26-2).

Plaintiffs' proposed Second Amended Complaint alleges thefollowing sixteen claims for relief: (1) "Breach of Contract" (id., ¶¶ 122-26); (2) "Conversion" (id., ¶¶ 127-30); (3) "Fraud" (id., ¶¶ 131-41); (4) "Violation of N.C. Gen. Stat. § 75-1.1 for Fraud" (id., ¶¶ 142-48); (5) "Unfair Competition/Passing Off" (id., ¶¶ 149-53); (6) "Violation of N.C. Gen. Stat. § 75-1.1 for Unfair Competition/Passing Off" (id., ¶¶ 154-61); (7) "Violation of Chapter 66" (id., ¶¶ 162-72); (8) "Copyright Infringement - 17 U.S.C. § 501" (id., ¶¶ 173-86); (9) "Common Law Trademark" (id., ¶¶ 187-97); (10) "False Designation of Origin/False Description (15 U.S.C. § 1125(a))" (id., ¶¶ 198-202); (11) "Declaratory Judgment - Right to Use Mark" (id., ¶¶ 203-08); (12) "Declaratory Judgment - False Markings" (id., ¶¶ 209-13); (13) "Temporary, Preliminary, Permanent and Mandatory Injunction" (id., ¶¶ 214-16); (14) "Constructive Trust" (id., ¶¶ 217-24); (15) "Civil Conspiracy" (id., ¶¶ 225-29); and (16) "Fraudulent Transfer" (id., ¶¶ 230-46).

II. Motion for Leave to File Second Amended Complaint

By rule, "[t]he [C]ourt should freely give leave when justice so requires." Fed. R. Civ. P. 15(a)(2). Under this standard, the Court has some discretion, "but outright refusal to grant the leave without any justifying reason appearing for the denial is not an exercise of discretion." Foman v. Davis, 371 U.S. 178, 182 (1962). The United States Court of Appeals for the Fourth Circuit has explained that "[t]he law is well settled that leave to amend a pleading should be denied only when the amendment would beprejudicial to the opposing party, there has been bad faith on the part of the moving party, or the amendment would be futile." Edwards v. City of Goldsboro, 178 F.3d 231, 242 (4th Cir. 1999).

Plaintiffs seek to amend their Complaint in order to: "(i) assert claims they could not have brought prior to Defendants' removal of the matter to [this] Court[,] (ii) to better conform their allegations to the facts as discovered since filing the first amended complaint, and (iii) to address allegations and issues that had not occurred at the time Plaintiffs filed their initial pleadings . . . ." (Docket Entry 27 at 3.) Plaintiffs also note that, although they believe their original Complaint states their claims with sufficient particularity, "the proposed Second Amended Complaint addresses, at length, the issues raised by Defendants in their motions to dismiss." (Id.)

Defendants have not asserted that Plaintiffs bring their instant Motion in bad faith (see Docket Entries 31, 32) and, given the early stage of these proceedings, allowing the amendment would not prejudice the Defendants. As Plaintiffs note, "[n]o discovery has been done, no scheduling order has been entered, no Rule 26(f) Conference has been scheduled, and no trial date has been set." (Docket Entry 26, ¶ 14.) Accordingly, Plaintiffs' Motion for Leave to File Second Amended Complaint (Docket Entry 26) will begranted,³ and Defendants' arguments regarding futility (Docket Entry 31 at 8-19) will be addressed in conjunction with Defendants' Motions to Dismiss, in light of the facts as pled in the Second Amended Complaint (Docket Entry 26-2).

III. Motions to Dismiss

A. Factual Background

Plaintiffs' Second Amended Complaint, read in a light most favorable to Plaintiffs,⁴ alleges the following:

Bon Aqua International, Inc. ("Bon Aqua"), a North Carolina Corporation owned and operated in part by Gerald and Constance Lowenstein, manufactures and sells devices for the treatment of scale and corrosion in water-cooled heat exchange equipment (the"Bon Aqua Units"). (See Docket Entry 26-2, ¶¶ 2, 3, 13-16, 30.)⁵ Aquadyne, a company owned solely by the Lowensteins, is an authorized dealer of the Bon Aqua Units. (See id., ¶ 13.) At the time Bon Aqua began manufacturing the Bon Aqua Units, U.S. Patent Nos. 4,265,746, 4,265,754 and 4,265,755 protected them. (See id., ¶¶ 13, 21.) Each of the relevant patents expired on or before August 23, 1999. (Id.) As Bon Aqua still uses the original molds in its manufacturing process, the Bon Aqua Units continue to bear markings for the now-expired patents. (Id., ¶ 17.)

In late 2007 or early 2008, Joseph Charles LLC, through Joseph Nazario and Charles Alexander, expressed a desire to represent Bon Aqua in the sale, installation and service of Bon Aqua Units. (See id., ¶ 34.) Mr. Lowenstein met with Nazario and Tim Tucker (as representatives of Joseph Charles LLC) on January 23, 2008, to discuss this interest. (Id.)⁶ At that meeting, Joseph Charles LLC and Bon Aqua agreed to, but did not formally enter, a sales agency arrangement in which Joseph Charles LLC would receive 40% of therevenue from sales, service, installations and follow-ups with clients for which it was responsible. (Id.)

In late March 2008, Nazario, Alexander, Rodney Shaffer and Richard Newton, Shaffer's financial advisor, attended a meeting at Bon Aqua's office. (Id., ¶ 36.)⁷ At this meeting, Nazario and Joseph Charles LLC proposed a plan for the purchase of Bon Aqua and Aquadyne by Shaffer and persons related to Shaffer. (Id.) Plaintiffs rejected said proposal on the grounds that it relied on overly optimistic sales projections. (Id., ¶ 38.) At this meeting, Mr. Lowenstein made clear that no currently valid patents applied to the Bon Aqua Units. (Id., ¶ 37.)

Despite the failure of the foregoing meeting, a month later, Joseph Charles LLC and Bon Aqua formally executed the sales agency agreement to which they had previously agreed (the "Sales Agency Agreement"). (Id., ¶ 42.) Moreover, Nazario, Alexander, Shaffer and Joseph Charles LLC continued to express an interest in purchasing Bon Aqua and Aquadyne. (Id., ¶ 44.) Accordingly, in addition to the Sales Agency Agreement, Bon Aqua, Aquadyne and Joseph Charles LLC negotiated an option agreement (the "Option Agreement"), entered into on June 2, 2008, which granted Joseph Charles LLC the ability to purchase the assets of Bon Aqua and Aquadyne if Joseph Charles LLC met certain conditions regardingsales of Bon Aqua Units. (Id., ¶ 50; see also Docket Entry 26-3 at 49-52.) In furtherance of these conditions, Joseph Charles LLC acquired 2,500 Bon Aqua Units (the "Disputed Units") from Bon Aqua for later sale. (See Docket Entry 26-2, ¶ 50; see also Docket Entry 26-3 at 49-52.) In conjunction with the Option Agreement, Nazario, Alexander and Shaffer caused Joseph Charles LLC to enter into a confidentiality agreement with Bon Aqua (the "Confidentiality Agreement"), through which Plaintiffs sought to protect certain business information. (See Docket Entry 26-2, ¶ 53; see also ...