IMG FRAGRANCE BRANDS, LLC v. Houbigant, Inc.

• Decision Date: 18 December 2009
• Docket Number: No. 09 Civ. 3655 (LAP).,09 Civ. 3655 (LAP).
• Citation: 679 F. Supp.2d 395
• Parties: IMG FRAGRANCE BRANDS, LLC, Dana Classic Fragrances, Inc. Zohar CDO 2003-1 Limited, Zohar II 2005-1 Limited, Zohar III Limited, and IMG Holdings, Inc., Plaintiffs, v. HOUBIGANT, INC., Etablissement Houbigant, and Michael J. Sherman, Defendants. Houbigant, Inc. & Etablissement Houbigant, Counter-Plaintiffs, v. IMG Fragrance Brands, LLC, Dana Classic Fragrances, Inc. Zohar CDO 2003-1 Limited, Zohar II 2005-1 Limited, Zohar III Limited, IMG Holdings, Inc., Patriarch Partners, LLC, and Lynn Tilton, Counter-Defendants.
• Court: U.S. District Court — Southern District of New York

679 F.Supp.2d 395

IMG FRAGRANCE BRANDS, LLC, Dana Classic Fragrances, Inc. Zohar CDO 2003-1 Limited, Zohar II 2005-1 Limited, Zohar III Limited, and IMG Holdings, Inc., Plaintiffs, v. HOUBIGANT, INC., Etablissement Houbigant, and Michael J. Sherman, Defendants.

Houbigant, Inc. & Etablissement Houbigant, Counter-Plaintiffs, v. IMG Fragrance Brands, LLC, Dana Classic Fragrances, Inc. Zohar CDO 2003-1 Limited, Zohar II 2005-1 Limited, Zohar III Limited, IMG Holdings, Inc., Patriarch Partners, LLC, and Lynn Tilton, Counter-Defendants.

No. 09 Civ. 3655 (LAP).

United States District Court, S.D. New York.

December 18, 2009.

George G. Mahfood, Broad and Cassel, Miami, FL, Charles Anthony Michael, Hillary Richard, Brune & Richard LLP, Maryann Jungmin Sung, Cleary Gottlieb Steen & Hamilton, LLP, New York, NY, Richard Lawrence Rosenbaum, for Plaintiff's and Counter-Defendants.

John W. Schryber, Patton Boggs LLP, Washington, DC, Todd R. Harrison, Patton Boggs LLP, Mary E. Flynn, Morrison Cohen, LLP, New York, NY, for Defendants and Counter Claimants.

MEMORANDUM & ORDER

LORETTA A. PRESKA, Chief Judge.

Defendants and Counter-Plaintiffs Houbigant, Inc. and Etablissement Houbigant bring various counterclaims arising out of alleged breaches of a trademark licensing agreement and other collateral agreements. Plaintiffs and Counter-Defendants move to dismiss Counterclaims II-IX pursuant to Fed.R.Civ.P. 12(b)(6). For the reasons set forth below, Counter-Defendants' motion is GRANTED in part and DENIED in part.

I. BACKGROUND¹

A. The Parties

Counter-Plaintiffs Houbigant, Inc. and Etablissement Houbigant (collectively, "Houbigant" or "Plaintiffs") are engaged in the business of licensing fragrance product trademarks. (Countercl. ¶ 63.) Counter-Defendant IMG Fragrance Brands, LLC ("IMG Brands"), a wholly-owned subsidiary of Counter-Defendant IMG Holdings, Inc. ("IMG Holdings"), licenses certain fragrance product trademarks owned by Houbigant pursuant to a License Agreement dated December 19, 2003 (the "License Agreement"). (Id. ¶¶ 64-65.) Counter-Defendant Dana Classic Fragrances, Inc. ("DCF") is a sub-licensee of IMG Brands that manufactured and promoted various fragrance products. (Id. ¶ 67.) Counter-Defendants Zohar CDO 2003-1 Limited ("Zohar I"), Zohar II 2005-1 Limited ("Zohar II"), and Zohar III Limited ("Zohar III," and together with Zohar I and Zohar II, the "Zohar Funds") are private equity funds with each holding the following percentage of IMG Holdings' stock: Zohar I-13%; Zohar II-51%; and Zohar III-11%. (Id. ¶¶ 68-70.) Counter-Defendant Patriarch Partners, LLC ("Patriarch") is the collateral manager for the Zohar Funds, and Counter-Defendant Lynn Tilton ("Tilton") is the Chief Executive Officer of Patriarch. (Id. ¶¶ 71-72.)

B. The License Agreement

On December 19, 2003, Houbigant entered into a License Agreement with IMG Brands whereby IMG Brands, as Licensee, was given the exclusive right to use various trademarks including Chantilly®, White Chantilly®, and Demi-Jour among others (the "Products"). (Id. ¶ 80-81.) Although the License Agreement was scheduled to expire on December 31, 2008, Houbigant maintains that it terminated the agreement by notifying IMG Brands on December 28, 2008. (Id. ¶ 82.)

The License Agreement set forth several conditions with which IMG Brands had to comply in order to receive Houbigant's continuing consent to use the trademarks. Some of these conditions included:

(a) IMG Brands had the ability to manufacture and promote the sales of the Products (Countercl., Ex. A § 3);

(b) Any sub-licensee would need to be preapproved by Houbigant and would have to abide by the terms of the License Agreement (id.);

(c) Facilities used to manufacture the Products must be disclosed to Houbigant, and Houbigant reserved the right to inspect those facilities (id. § 7(b), (e));

(d) IMG Brands would pay periodic royalties to Houbigant on the first day of each month throughout the duration of the License Agreement (id. § 9);

(e) Upon termination of the agreement, IMG Brands would be permitted to sell Products for an additional 135 days, known as the "Relevant Period" (id. § 18);

(f) Either party could enforce an amendment to the License Agreement so long as the amendment was in writing and signed by both parties (id. § 28); and

(g) On the thirtieth day after termination of the License Agreement, IMG Brands had the option to purchase the trademarks for $1,000, so long as IMG Brands made payment for any outstanding Royalty Payments on or before the twenty-ninth day following termination. (Id. § 9)

In January 2004, IMG Brands appointed DCF as a sublicensee. (Compl. ¶ 88.) In October 2008, Houbigant alleges that IMG Brands and DCF engaged several subcontractors to manufacture the Products and that the manufacturing facilities the subcontractors used were not specified in the License Agreement. (Id. ¶ 90; Ex. A § 7(e).)

C. The Supplemental Royalty Agreement

The Supplemental Royalty Agreement ("SRA") was executed on December 19 2003 by Houbigant and IMG Holdings. (Id. ¶ 135.) Under the terms of the SRA, IMG Holdings was required to provide Houbigant with notice should there be any inquiry, offer, or plan by an entity to acquire 50% or more of the stock of IMG Holdings. (Id. ¶ 137.) If a non-affiliate of IMG Holdings acquired 50% or more of IMG Holdings' stock, the SRA provided that IMG Holdings would pay Houbigant a supplemental royalty. (Id. ¶¶ 141-43.) Houbigant alleges that on or about October 10, 2008, the Zohar funds, which had loaned money to DCF, issued an "Acceleration Notice," which if not rescinded would force DCF, and its guarantors-IMG Holdings and IMG Brands-to turn over their assets to DCF's lenders. (Id. ¶ 145.) On October 17, 2008, the Zohar Funds agreed to rescind the Acceleration Notice in exchange for a 75% shareholder interest in IMG Holdings. (Id. ¶ 146.) Houbigant further alleges that in order to gain the approval of Isaac Cohen, IMG Holdings' majority shareholder, IMG Holdings caused the Zohar Funds to release Cohen's personal guarantees valued at over $20 million. (Id.)

D. Subsequent Agreements

i. The Fifth Deferral Agreement

On August 27, 2008, Houbigant and IMG Brands entered into a Fifth Deferral Agreement ("FDA") which set forth a payment schedule for IMG Brands to pay the past due royalty payments owed pursuant to the License Agreement. (Id. ¶¶ 154-55.) The FDA contained several other conditions and also incorporated the previous four deferral agreements. (Id. ¶¶ 158-164.) Some of the amendments made by the prior deferral agreements included: (1) reducing the cure period from thirty days to five days (id. ¶ 164); (2) requiring IMG Brands to pay a Deferral Fee of $350,000 no later than the date of expiration of the License Agreement (id. ¶ 165); and (3) requiring yet another deferral fee of $175,000 (id. ¶ 166.).

Houbigant alleges that IMG Brands represented that it had obtained all of the necessary approvals from its lenders to enter into the FDA. (Id. ¶ 171.) Houbigant further claims that IMG Brands, the Zohar Funds, and Tilton knew of the FDA and performed pursuant to its terms until December 31, 2008. In fact, Houbigant received at least one scheduled payment from Wells Fargo, one of IMG Brands lenders. (Id. ¶ 177.) It was not until December 31, 2008 that IMG Brands, through Patriarch, informed Houbigant that the FDA was unenforceable because it modified the terms of the License Agreement without the consent of Wells Fargo. (Id. ¶ 190.) Therefore, IMG Brands did not make the remaining payments. (Id. ¶ 188.)

ii. The Consulting and Product Development Agreement

In order to assist DCF's sale of Houbigant products, the parties entered into a Consulting and Product Development Agreement ("CPDA"). (Id. ¶ 192.) Under the terms of the agreement, Houbigant was to provide consulting services in exchange for a fee that equaled the outstanding royalty payments. (Id.) Houbigant alleges that, although its services were never requested, DCF confirmed that its obligation to Houbigant under the CPDA was $1,139,736. (Id. ¶ 195.)

E. The Alleged Breaches

Houbigant alleges that IMG Brands and DCF caused Products to be manufactured at unauthorized locations (Id. ¶¶ 92, 196.) Houbigant further alleges that IMG Brands and DCF, both under the direction of Patriarch and Tilton, breached the License Agreement in myriad ways, including: selling Products after December 31 2008; failing to pay additional royalties; failing to make final payments under the FDA; failing to disclose or to provide notice to Houbigant of default notices received from lenders; failing to provide Houbigant with financial reports and statements; and failing to honor its account-stated debt under the CPDA. (Id. ¶ 196.)

II. ANALYSIS

A. Motion to Dismiss Standard

To survive a motion to dismiss under Rule 12(b)(6), "a complaint must contain sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, ___ U.S. ___, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). A pleading that offers "labels and conclusions" or "a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555, 127 S.Ct. 1955. Nor does a complaint suffice if it tenders "naked assertions" devoid of "further factual enhancement." Id. at 557, 127 S.Ct. 1955.

In Iqbal, the Supreme Court set forth a "two-pronged" approach for analyzing a motion to dismiss. Iqbal, 129 S.Ct. at 1950. First, a court must accept a plaintiff's factual allegations as true and draw all reasonable inferences from those allegations in plaintiff's favor. Id. at 1949-50. The court may then proceed to identify "pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth." Id. at 1950. Once the court has stripped away the conclusory allegations, it...