Lumber Liquidators, Inc. v. Cabinets To Go, LLC

Decision Date08 November 2019
Docket NumberCivil Action No. 3:19cv153
CourtU.S. District Court — Eastern District of Virginia
Parties LUMBER LIQUIDATORS, INC., Plaintiff, v. CABINETS TO GO, LLC, Defendant.

Michael Edward Lacy, David Edward Constine, III, Massie Payne Cooper, Sarah Warren Howlett, Troutman Sanders LLP (Richmond), Richmond, VA, for Plaintiff.

Angela Hope France, Sharon Ann Coburn Roach, Potter & Murdock PC(Maple), Falls Church, VA, Melanie E. Damian, Pro Hac Vice, Patricia Baloyra, Pro Hac Vice, Damian & Valori LLP, Miami, FL, for Defendant.

MEMORANDUM OPINION

M. Hannah Lauck, United States District Judge This matter comes before the Court on Defendant Cabinets to Go, LLC's ("CTG") Motion to Dismiss brought pursuant to Federal Rule of Civil Procedure 12(b)(6).1 (ECF No. 3.) Plaintiff Lumber Liquidators responded, (ECF No. 9), and CTG replied, (ECF No. 13). The matter is ripe for disposition. The Court dispenses with oral argument because the materials before it adequately present the facts and legal contentions, and argument would not aid the decisional process. The Court exercises jurisdiction pursuant to 28 U.S.C. § 1332.2 For the reasons that follow, the Court will deny CTG's Rule 12(b)(6) Motion to Dismiss.

I. Factual and Procedural Background

This breach of contract action arises out of CTG's alleged violation of a covenant not to compete in the sale of hardwood flooring with Lumber Liquidators.

A. Factual Allegations 3

In 1994, Thomas D. Sullivan founded Lumber Liquidators—a retailer of hardwood flooring—and served for a number of years as its "chairman of the Board of Directors, its chief executive officer, and its president." (Compl. ¶ 6, ECF No. 1-A.) In early 2010, the Lumber Liquidators Board of Directors (the "Board") learned that Sullivan "owned and operated CTG," a company that sold "kitchen and bath fixtures and building supplies."4 (Id. ¶¶ 7–8.) CTG did not, however, sell flooring products. (Id. ¶ 8.) At that time, Sullivan served as the "Chairman of [the Board], was a full-time employee ... and was Lumber Liquidators' largest shareholder." (Id. ¶ 7.) According to the Complaint, the Board, concerned that Sullivan might "usurp corporate opportunities from Lumber Liquidators" or otherwise use "confidential information" to benefit his new company, entered into several agreements with CTG. (Id. ¶ 9.)

On June 1, 2010, Lumber Liquidators and CTG's owners executed an agreement allowing Lumber Liquidators "the option to purchase the owner's interest in CTG for a period of ten (10) years (the "Option Agreement")." (Id. ¶ 11.) As part of the Option Agreement, Lumber Liquidators agreed to deliver "advertising and marketing consultation services, to [CTG] to assist [CTG] in the development and implementation of a marketing strategy as set forth in a Memorandum of Understanding." (Id. ¶ 12.) The Memorandum of Understanding, ("MOU"), executed the same day as the Option Agreement, "sets forth the specific marketing and sales services that Lumber Liquidators was able to provide to CTG." (Id. ¶ 15.) These services included "the rental of Lumber Liquidators' customer lists; use of Lumber Liquidators' commercial sales team; media buying services; and cross-promotional marketing." (Id. )

Given the close ties between the management of Lumber Liquidators and CTG, both companies also agreed to enter into "reciprocal restrictive covenants." (Id. ¶ 16.) Relevant here, CTG agreed to not "engage in the sale of [hardwood] flooring or similar flooring products worldwide" during the term of the MOU and for two years following its termination. (Id. ¶ 17.) Lumber Liquidators similarly agreed to refrain from selling kitchen cabinets. (Id. ¶ 18.)

Following the enactment of the MOU, CTG utilized Lumber Liquidators marketing and sales services "to generate internet traffic, assist in the graphic design of CTG's promotional catalog ... and assist with direct mail marketing, production services, and media buying." (Id. ¶ 21.) As a result of these services, Lumber Liquidators alleges that CTG was able to "grow its market base and opportunities" and thus received "substantial economic benefit." (Id. ¶ 22.)

Lumber Liquidators now claims that CTG has failed to live up to its side of the bargain. Specifically, despite the fact that the MOU "remains in force," CTG "advertises, markets, and sells hardwood flooring and similar flooring products in e-commerce and in its approximately 60 retail stores" in contravention of Section 2.7.1 of the MOU. (Id. ¶¶ 20, 23.)

B. Procedural Background

Lumber Liquidators originally filed its Complaint in the Circuit Court for Henrico County, Virginia. (Not. Removal ¶ 9, ECF No. 1.) CTG properly removed the action to this Court pursuant to 28 U.S.C. §§ 1332, 1441, and 1446.5 (Id. 1.)

Lumber Liquidators' eight-page Complaint brings a single breach of contract claim against CTG. CTG filed the Motion to Dismiss alleging that the underlying MOU "violates both federal antitrust and Virginia law." (Mem. Supp. Mot. Dismiss 1, ECF No. 4.) Lumber Liquidators filed its response, and CTG replied.

II. Standard of Review: Rule 12(b)(6)

"A motion to dismiss under Rule 12(b)(6) tests the sufficiency of a complaint; importantly, it does not resolve contests surrounding the facts, the merits of a claim, or the applicability of defenses." Republican Party of N.C. v. Martin , 980 F.2d 943, 952 (4th Cir. 1992) (citing 5A Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure § 1356 (1990) ). To survive Rule 12(b)(6) scrutiny, a complaint must contain sufficient factual information to "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ; see also Fed. R. Civ. P. 8(a)(2) ("A pleading that states a claim for relief must contain ... a short and plain statement of the claim showing that the pleader is entitled to relief."). Mere labels and conclusions declaring that the plaintiff is entitled to relief are not enough. Twombly , 550 U.S. at 555, 127 S.Ct. 1955. Thus, "naked assertions of wrongdoing necessitate some factual enhancement within the complaint to cross the line between possibility and plausibility of entitlement to relief." Francis v. Giacomelli , 588 F.3d 186, 193 (4th Cir. 2009) (internal quotation marks omitted).

A complaint achieves facial plausibility when the facts contained therein support a reasonable inference that the defendant is liable for the misconduct alleged. Twombly , 550 U.S. at 556, 127 S.Ct. 1955 ; see also Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). This analysis is context-specific and requires "the reviewing court to draw on its judicial experience and common sense." Francis , 588 F.3d at 193. The Court must assume all well-pleaded factual allegations to be true and determine whether, viewed in the light most favorable to the plaintiff, they "plausibly give rise to an entitlement to relief." Iqbal , 556 U.S. at 676–79, 129 S.Ct. 1937 ; see also Kensington , 684 F.3d at 467 (finding that the court in deciding a Rule 12(b)(6) motion to dismiss ‘must accept as true all of the factual allegations contained in the complaint’ and ‘draw all reasonable inferences in favor of the plaintiff " (quoting Kolon Indus., Inc. , 637 F.3d at 440 )). This principle applies only to factual allegations, however, and "a court considering a motion to dismiss can choose to begin by identifying the pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth." Iqbal , 556 U.S. at 679, 129 S.Ct. 1937.

"Although a motion pursuant to Rule 12(b)(6) invites an inquiry into the legal sufficiency of the complaint, not an analysis of potential defenses to the claims set forth therein, dismissal nevertheless is appropriate when the face of the complaint clearly reveals the existence of a meritorious affirmative defense." Occupy Columbia v. Haley , 738 F.3d 107, 116 (4th Cir. 2013) (quoting Brockington v. Boykins , 637 F.3d 503, 506 (4th Cir. 2011) ).

III. Analysis

CTG does not dispute that it entered into the Option Agreement and the MOU with Lumber Liquidators, nor does it dispute that it now sells hardwood flooring in contravention of the MOU. Rather, it contends that the "MOU is unenforceable on its face" because it: (1) violates Section 1 of the Sherman Antitrust Act (the "Sherman Act"); and (2) constitutes an invalid and unreasonable restraint of trade under Virginia law.6 (Mem. Supp. Mot. Dismiss 4-5.) The Court addresses these contentions in turn.

A. The Court Will Deny the Motion to Dismiss on the Sherman Act Ground
1. Legal Standard: Sherman Antitrust Act

Section 1 of the Sherman Act prohibits "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce." 15 U.S.C. § 1. Because nearly every contract restrains trade in some manner, the Supreme Court of the United States has made clear that "Congress intended to outlaw only unreasonable restraints" on trade. Texaco Inc. v. Dagher , 547 U.S. 1, 5, 126 S.Ct. 1276, 164 L.Ed.2d 1 (2006). To determine whether the challenged restraints are "unreasonable," the court must first examine whether the challenged restraints should be evaluated under the "rule of reason" or the "per se "7 standard. See Leegin Creative Leather Prods. v. PSKS, Inc. , 551 U.S. 877, 885, 127 S.Ct. 2705, 168 L.Ed.2d 623 (2007).

The rule of reason "is the accepted standard for testing whether a practice restrains trade in violation of § 1," Id. at 885, 127 S.Ct. 2705, and "presumptively applies." Texaco , 547 U.S. at 5, 126 S.Ct. 1276. Under this standard, a factfinder must analyze "all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition." Continental T. V, Inc. v. GTE Sylvania Inc. , 433 U.S. 36, 49, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977). By taking into account "specific...

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