Orchard Supply Hardware LLC v. Home Depot United States, Inc.

• Decision Date: 19 September 2013
• Docket Number: Case No. 12–cv–06361–JST
• Citation: 967 F.Supp.2d 1347
• Parties: Orchard Supply Hardware LLC, Plaintiff, v. Home Depot USA, Inc., et al., Defendants.
• Court: U.S. District Court — Eastern District of California

967 F.Supp.2d 1347

Orchard Supply Hardware LLC, Plaintiff,

v.Home Depot USA, Inc., et al., Defendants.

Case No. 12–cv–06361–JST

United States District Court, N.D. California.

Filed September 19, 2013

Dorn Graham Bishop, William A. Markham, Law Offices of William Markham, San Diego, CA, for Plaintiff.

Andrew Dale Lanphere, Roxane Alicia Polidora, Erica Turcios, Lindsay A. Lutz, Pillsbury Winthrop Shaw Pittman LLP, San Francisco, CA, for Defendants.

ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS THE SECOND AMENDED COMPLAINT

Re: ECF No. 54

JON S. TIGAR, United States District Judge

I. INTRODUCTION

Plaintiff Orchard Supply Hardware (“Plaintiff” or “Orchard”) brings a Second Amended Complaint (“SAC”) against Defendants Home Depot USA, Inc., (“Home Depot”), Milwaukee Electric Tool Corporation(“METCo”) and Makita USA, Inc. (“Makita”) (collectively, “Defendants”) for violations of Section 1 of the federal Sherman Act (“Sherman Act”), 15 U.S.C. § 1, violation of California's Cartwright Act, Cal. Bus. & Prof. Code §§ 16720 & 16726, violations of California's Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Code §§ 17200 et seq., tortious interference with existing contracts, tortious interference with prospective economic relations, and false advertising in violation of both the federal Lanham Act, 15 U.S.C. § 1125, and California Business & Profession Code § 17500. ECF No. 53. Defendants have filed a joint motion to dismiss the SAC. ECF No 54. After considering the papers, and the arguments of the parties at oral argument in response to the Court's tentative order, the Court GRANTS IN PART and DENIES IN PART the motion to dismiss.

II. BACKGROUNDA. Factual Background

For the purposes of a motion to dismiss, the Court adopts the following factual allegations from the SAC.

Plaintiff owns and operates a chain of 92 all-purpose general hardware stores throughout California and Oregon, and is a retail competitor of Defendant Home Depot.¹ SAC, ¶¶ 1 & 13. Defendant Home Depot is currently the largest, and dominant, seller of hardware products in the United States. Id., ¶ 105. Defendants METCo and Makita are each suppliers of power tools that distribute their products to consumers through retail hardware stores such as Plaintiff Orchard and Defendant Home Depot. Id., ¶¶ 14 & 17. Collectively, Defendants METCo and Makita control between 31 and 50 percent of the market share of various power tools, and are specially regarded among tradesmen and other professional customers. Id., ¶¶ 15 & 26. Plaintiff Orchard and Defendant Home Depot both do business with these two suppliers. Id., ¶¶ 14 & 17. METCo and Makita account for two of the three product lines that account for a “predominate [sic] share of the sales of professional power tools in the United States.” Id. ¶ 3 1. A retail hardware seller cannot remain a viable business in the power tool or related markets if it lacks tools made by both METCo and Makita. Id. ¶ 15.²

On June 7, 2012, Home Depot executive Craig Menear publicly announced that Defendant Home Depot “would take appropriate measures to answer competitive threats ... [and] lock down the supply of professional power tools.” Id. ¶ 139. Within a week, Defendant Makita gave notice that it would stop selling power tools to Orchard. Id., ¶¶ 18, 140. Two weeks later, Defendant METCo also informed Orchard that it “would cease to make further sales of any of its products to Orchard.” Id., ¶¶ 18, 142. Another power tool supplier, Black & Decker Dewalt (“Black & Decker”), disclosed to Plaintiff that Defendant Home Depot had also requested that Black & Decker refuse to deal with Orchard, but that Black & Decker had refused. Id. ¶ 144. In response, Black & Decker claims that Defendant Home Depot has lessened its purchases of Black & Decker products and begun placing them in disadvantageous locations in its retail outlets. Id. Around the same time, Defendants Makita and METCo each also informed Amazon that it would no longer make further sales to that company, and instructed its distributors not to fill any orders placed by Amazon. Id., ¶ 145. Defendants Makita and METCo also instructed national wholesale cooperatives to have their members “cease to fill ‘third-party orders' ” of their products. Id. In the 1990s, METCo and Makita ended their relationships with other companies, such as Lowes and Menards, in relatively simultaneous fashion. Id., ¶¶ 44 & 128.

In the “spring or early summer of 2012” Home Deport “stated or implied” to each of the three major suppliers that it was conferring with the other suppliers about ceasing sales to Orchard and other companies. Id., ¶ 129. Defendants METCo and Makita acceded to Home Depot's demand to supply products exclusively to Home Depot, despite having previously indicated they wished to continue and expand their sales to Orchard and other suppliers. Id., ¶¶ 18, 20. Both companies “cannot afford to cross” Home Depot, their principal trading partner.³Id., ¶ 22. However, most professional customers will consider a hardware provider “deficient” if it does not carry the products of either of these two companies. Id., ¶ 32. Therefore, Home Depot's threats to remove suppliers' products were hollow unless at least one supplier agreed to the requested arrangement. Id., ¶ 48. Similarly, no supplier would voluntarily give up their relationship with Orchard if there was no true risk to its relationship with Home Depot. Therefore, Orchard alleges upon information and belief that Home Depot “made clear by express and/or implied statements to Makita and [METCo]” that it was conferring with the other company, and Defendants METCo and Makita understood from Home Depot that the other company would also abandon sales to Orchard and Amazon around the same time. Id., ¶ 43, 199. Two of Orchard's officers were formerly executives at Home Depot, and they claim the company would never make explicit illegal threats, but rather “adroitly suggest or insinuate” to the suppliers that it was conferring with the company's other suppliers. Id., ¶ 47.

Finally, Plaintiff alleges that Defendant Home Depot engaged in false advertising. Id., ¶¶ 244 & 257. “Several of Home Depot's stores at various locations in Southern California” displayed promotions and advertisements suggesting that Orchard charges more than Home Deport for the same products. Id. ¶ 244. In fact, the products depicted were not actually the same, and differed in quality and manufacturer. Id. ¶¶ 246–249.

B. Procedural History

Plaintiff filed a complaint in December 2012, asserting causes of action for violation of the Sherman Act, the Cartwright Act and the UCL, and for tortious interference with existing contracts and tortious interference with prospective economic relations. “Original Complaint,” ECF No. 1. The Court granted Defendants' motion to dismiss the initial complaint in April 2013, and granted Plaintiff leave to file an amended complaint to allege additional facts to support the claims in the Original Complaint. Order Granting Motion to Dismiss without Prejudice (“Order”), ECF No. 42.

In May, Plaintiff filed a first amended complaint re-asserting its initial claims, and the Court granted the parties' stipulated request to allow Plaintiff leave to file a second amended complaint adding claims for false advertising. ECF Nos. 45 & 51. Defendants then filed a motion to dismiss the SAC, which the Court now considers. Motion.

C. Jurisdiction

Plaintiff's first two causes of action arise under federal law, Section 1 of the Sherman Antitrust Act. 15 U.S.C. § 1. The Court has exclusive jurisdiction over those claims pursuant to Section 4 of the Clayton Act. 15 U.S.C. § 15. Since the third through seventh causes of action arise from the same “nucleus of operative fact” as the Sherman Act claims, this Court can, and hereby does, exercise supplemental jurisdiction over those claims pursuant to 28 U.S.C. § 1367(a).

Plaintiff's eighth cause of action arises under federal law, the Lanham Act, and therefore subject-matter jurisdiction is proper pursuant to 28 U.S.C. § 1331. Since the ninth cause of action arises from the same “nucleus of operative fact” as that claim, supplemental jurisdiction is also appropriate.

D. Legal Standard

“Dismissal under Rule 12(b)(6) is appropriate only where the complaint lacks a cognizable legal theory or sufficient facts to support a cognizable legal theory.” Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th Cir.2008). Dismissal is also proper where the complaint alleges facts that demonstrate that the complaint is barred as a matter of law. SeeBalistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir.1990); Jablon v. Dean Witter & Co., 614 F.2d 677, 682 (9th Cir.1980).

For purposes of a motion to dismiss, “all allegations of material fact are taken as true and construed in the light most favorable to the nonmoving party.” Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337–38 (9th Cir.1996). However, “[w]hile a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a Plaintiffs' obligation to provide the ‘grounds' of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). To survive a motion to dismiss, a pleading must allege “enough fact to raise a reasonable expectation that discovery will reveal evidence” to support the allegations. Id. at 556, 127 S.Ct. 1955.

III. DISCUSSIONA. Sherman Act

Section 1 of the Sherman Act prohibits “unreasonable restraints” of trade. State Oil Co. v. Khan, 522 U.S. 3, 10, 118 S.Ct. 275, 139 L.Ed.2d 199 (1997). “[T]he accepted standard for testing whether a practice restrains trade in violation of § 1” is the “rule of reason.” Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877, 885, 127 S.Ct. 2705, 168 L.Ed.2d 623 (200...