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Goldwell of New Jersey, Inc. v. KPSS

March 31, 2009

GOLDWELL OF NEW JERSEY, INC., T/A GOLDWELL MID-ATLANTIC, PLAINTIFF,
v.
KPSS, INC., D/B/A GOLDWELL, DEFENDANT.



The opinion of the court was delivered by: Katharine S. Hayden, U.S.D.J.

OPINION

I. INTRODUCTION

This contract dispute arose out of a series of exclusive regional distributorship agreements between a manufacturer of hair care products, defendant KPSS, Inc. ("KPSS"), and one of its distributors, plaintiff Goldwell of New Jersey, Inc., d/b/a Goldwell Mid-Atlantic ("Mid-Atlantic"). The agreements, which by their terms would expire on December 31, 2007, granted Mid-Atlantic exclusive sales rights (and imposed corresponding obligations) for certain territories, one of which was the State of New Jersey. Six months before the agreements‟ expiration date, KPSS notified Mid-Atlantic that it would not renew the agreements, citing poor sales figures. Mid-Atlantic thereafter disavowed its obligation to perform under the not-yet-expired agreements, and eventually filed this action under the New Jersey Franchise Practices Act ("NJFPA"), N.J.S.A. § 56:10-5, et seq., claiming that KPSS unlawfully signaled its intent not to renew the distributorship agreements. KPSS counterclaimed, alleging, inter alia, breach of contract and trademark infringement. Now before the Court are the parties‟ cross-motions for summary judgment.

II. JURISDICTION

The Court has diversity and federal question jurisdiction. Mid-Atlantic is a corporate citizen of New Jersey and is headquartered in this state; its amended complaint alleges a claim in excess of $75,000 against KPSS, which is incorporated in Delaware and headquartered in Maryland. Am. Compl. ¶¶ 3-4 [D.E. # 16]; 28 U.S.C. § 1332. KPSS‟s amended counterclaim also invokes diversity jurisdiction and in addition alleges a federal cause of action under the Lanham Act. Am. Counterclaim ¶¶ 3 [D.E. # 17], 76-78; 28 U.S.C. §§ 1331; 15 U.S.C. § 1121. Venue is proper since a substantial part of the events giving rise to the claims asserted occurred in this district. 28 U.S.C. § 1391(a).*fn1

III. FACTS & PROCEDURAL HISTORY*fn2

A. The Parties

KPSS is a domestic subsidiary of KPSS GmbH ("Goldwell Germany"), a German corporation that markets professional hair care and other beauty products around the world. Pl. Facts ¶¶ 3-4. Goldwell Germany, itself a subsidiary of a Japanese parent corporation ("KPSS Japan"), entered the United States hair product market in 1982, and established KPSS in 1986 in furtherance of that endeavor. Id. ¶ 4; Aff. of Aaron Frankel ("Frankel Aff.") ¶¶ 9-10; Def. Resp. ¶ 4. KPSS, through Goldwell Germany, has the exclusive right in the United States to use and license certain registered trademarks (the "Goldwell marks" or the "trademarks") related to the Goldwell brand name. Def. Facts. ¶ 5; Pl. Facts ¶ 5. The Goldwell name, created in 1948, is widely known to the public as a source of high-quality hair care products ("Goldwell products"), and the Goldwell marks carry with them a substantial amount of goodwill. Def. Facts ¶¶ 6-7; Pl. Facts ¶ 9. As of 2005, KPSS claimed to be the eighth largest provider (by revenue) of hair care products to North American salons and day spas, with revenues in 2006 of $102 million. Pl. Facts ¶ 13.

Mid-Atlantic was at all times relevant here an exclusive regional distributor of Goldwell products under a series of regional buying agreements ("RBAs"). Pl. Facts ¶ 6. It began selling Goldwell products under an RBA with Goldwell Germany in 1982, and thereafter entered into similar agreements with KPSS upon its 1986 formation. Pl. Facts ¶ 6; Frankel Aff. ¶ 12. Throughout most of its contractual relationship with KPSS (and before that, Goldwell Germany), Mid-Atlantic had sold Goldwell products only in the State of New Jersey. Pl. Facts ¶ 6; Frankel Aff. 17; Def. Resp. ¶ 6. More recently, however, KPSS and Mid-Atlantic expanded their relationship to cover a number of other territories, discussed below.

B. The Agreements

As briefly referenced above, KPSS and Mid-Atlantic entered into a series of exclusive RBAs in 1986. Most recently, the parties operated under three RBAs covering certain territories throughout the eastern seaboard. These agreements, known as the "New Jersey RBA," the "North Carolina RBA," and the "Multi-State RBA," granted Mid-Atlantic exclusive distributorship rights of Goldwell products in the territories covered by the agreements (the "covered territories"). Def. Facts. ¶¶ 10; Pl. Facts ¶ 8. Each RBA was comprised of a roughly 20 page standardized agreement, followed by two schedules explicating detailed prescriptions and covenants binding upon the parties. The material portions of the agreements are reproduced below.

1. Standardized Provisions

The New Jersey and North Carolina RBAs granted exclusive distribution rights to Mid-Atlantic for those states, and the Multi-State RBA granted substantially similar rights in Delaware, Maryland, Virginia, Bermuda, North Carolina, Washington, D.C., and portions of West Virginia. Pl. Facts ¶¶ 6, 8; Frankel Aff. ¶ 17; Def. Facts ¶ 10; Decl. of Paul R. Marino ("Marino Decl.") Exhs. B, C, D.*fn3 The parties executed the New Jersey RBA on January 1, 2003 and the North Carolina and Multi-State RBAs on January 1, 2005; all three RBAs would expire on December 31, 2007. Def. Facts ¶¶ 10, 21; NJ RBA at 1-2, 22.

Sections 2.1 and 2.2 of the RBAs prohibited Mid-Atlantic from selling (or seeking to sell) Goldwell products outside the respective territory, and prohibited KPSS from selling (or allowing anyone other than Mid-Atlantic to sell) its own products within the specified territories, except under limited circumstances appearing enumerated in the agreements. NJ RBA at 2, 4. These provisions state:

2.1 For the term of this Agreement, and subject to the terms and conditions hereof, [KPSS] agrees to sell [Goldwell] Products to [Mid-Atlantic] for the purpose of [Mid-Atlantic‟s] sale and distribution of [Goldwell] Products solely to Customers located in the Territory.

2.2 Provided [Mid-Atlantic] is not in default hereunder, [KPSS] shall not intentionally makes sales or intentionally allow others to makes sales of [Goldwell] Products to Customers located in the Territory, except as may otherwise be permitted pursuant to Section [3] of this Agreement, or as otherwise provided below

NJ RBA at 2.*fn4

Section 3(b) of the New Jersey RBA specifies the operative term of the agreements; it states in full:

No later than six (6) months prior to the last day of the initial term or, if applicable, any subsequent term (the "Ending Date"), [Mid-Atlantic] shall notify [KPSS] in writing of whether or not [it] desires an extension of the term of this Agreement beyond the Ending Date. If [Mid-Atlantic] notifies [KPSS] that it desires such an extension and [KPSS] is willing to grant an extension, [KPSS] may propose to [Mid-Atlantic] the terms of an extension acceptable to [KPSS] and such extension shall be effective only if both parties, by their duly appointed officers, sign a written extension agreement providing for such an extension. If [KPSS] elects not to extend the term of this Agreement (which it may do at its sole and absolute discretion), or if the parties have not signed such a written extension agreement at least four (4) months prior to the Ending Date, this Agreement shall expire as scheduled on [December 31, 2007]. In such event, during the ninety (90) days immediately preceding the Ending Date (the "Transition Period"), [KPSS] shall have the right to sell and distribute, either directly or through its designee, Products in the Territory, notwithstanding that [Mid-Atlantic] shall have the (non-exclusive) right during the Transition Period to sell and distribute [Goldwell] Products in the Territory.

NJ RBA at 4 (emphasis added).*fn5 This provision is self-explanatory: KPSS had the unfettered discretion under the contracts to renew or not renew the parties‟ relationship. If KPSS opted not to renew (or Mid-Atlantic did not request such a renewal), the agreements prescribe a transition period under which the parties each have the right to distribute Goldwell products until they go about their separate ways.

Section 4 of the RBAs enumerates certain restrictive covenants upon Mid-Atlantic. Relevant here, Mid-Atlantic was prohibited, without KPSS‟s prior written consent, from:

4.2 Mak[ing] or assist[ing] in any sale, exchange or other transfer of [Goldwell] Products to any other Goldwell distributor;

4.3 Seek[ing] any customers, establish[ing] any branch, or maintain[ing] any distribution facility, with respect to the [Goldwell] Products, outside of the Territory; . . .

4.5 Engag[ing] (either directly or indirectly) in any other line of business other than as permitted by and contemplated in th[e] Agreement, including, but not limited to the retail hair or beauty salon business;

4.6 Sell[ing] or market[ing] (either directly or indirectly) any goods in the Territory other than [Golwell] Products except to the extent, if any, specifically authorized [elsewhere in the RBA].

NJ RBA at 5. Section 4.6 of each RBA states that Mid-Atlantic would be permitted to sell nonGoldwell product lines as authorized in Schedule B (for the New Jersey RBA) and Schedule A (for the North Carolina and Multi-State RBAs). Specifically, § II on Schedule B to the New Jersey RBA permitted Mid-Atlantic to do the following with respect to marketing non-Goldwell items:

A. Notwithstanding section 4.5 of the Agreement, [Mid-Atlantic] may engage in the Territory in other lines of business that do not, in the reasonable judgment of [KPSS], reflect adversely on the name or reputation of Goldwell.

B. Notwithstanding section 4.6 of the Agreement, [Mid-Atlantic] (a) may sell and market in the territory products not part of another hair product line that are related to hair care of skin care and do not otherwise violates nay provision or restriction of this Agreement; and (b) may carry for sale in the territory other lines of hair products, other than the [Goldwell] Products, that are sold by an entirely separate sales force, so long as such lines are approved by [KPSS] in its sole discretion. . . .

NJ RBA at 25. Section XIII on Schedule A to the North Carolina and Multi-State RBAs are more permissive; they contain substantially the same language (though not identical) as the New Jersey RBA, but also state the following:

B. In addition to [Goldwell] Products, [Mid-Atlantic] shall be permitted to sell in the Territory the following brands of hair care products (the "Other Brands"):

KMS, Tahe[,] and Repechage. NC & MS RBAs at 27.

Section 5 of the RBAs, entitled "Sale and Purchase of Products," prescribes a protocol for ordering, pricing, and shipment of the Goldwell products. As is relevant here, § 5.3.1 states that KPSS "shall invoice [Mid-Atlantic] for Products delivered hereunder not earlier than the date of shipment, and payment of the entire purchase price and all other charges associated with the purchase order shall be due upon receipt of such invoice." NJ RBA at 6.

Section 6 sets forth other sundry obligations upon Mid-Atlantic. The relevant provisions here read as follows:

6.1 Best Efforts. [Mid-Atlantic] shall continuously exercise its best efforts to promote the sale and distribution of [Goldwell] Products throughout the Territory in compliance with all applicable laws.*fn6

6.2 Minimum Purchase, Sales, and/or Buying Account Requirements. [Mid-Atlantic] agrees to achieve all of the minimum purchase, sales, and/or buying account requirements which are set forth on Schedule A.

6.3 Facilities and Staff. [Mid-Atlantic] shall maintain a suitable place of business, a separate qualified full-time sales staff devoted exclusively to the sale of [Goldwell] Products, and a qualified technical staff to sell and support the [Goldwell] Products in the Territory. Requirements for sales and technical staff are as set forth on Schedule A.

6.4 Activity Reports. On or before the tenth (10th) day of every month, [Mid-Atlantic] shall submit to [KPSS] a sales report . . . showing the sales of each [Goldwell] Product and of each Product category made by [Mid-Atlantic] during the preceding month, in total within the Territory. . . .

6.7 Training and Instruction. [Mid-Atlantic] shall provide adequate and appropriate training and instruction to Customers in Goldwell‟s recommended application and use of the [Goldwell] Products. In this connection, [Mid-Atlantic] shall not permit the sale of any [Goldwell] Products except by adequately trained and competent sales personnel, qualified to train Customers in the application and use of the [Goldwell] Products. . . .

NJ RBA at 7-9.*fn7

Section 7 places certain obligations on KPSS:

7.1 Sales Materials. [KPSS] shall provide to [Mid-Atlantic] reasonable quantities of Sales information, literature, materials and aids concerning the [Goldwell] Products and the sale, maintenance and repair thereof, and the prices for such items shall not exceed those charged by [KPSS] to other distributors, for similar quantities.

7.2 Technical Guidance. [KPSS] shall provide, upon request of [Mid-Atlantic], such additional technical services as [KPSS] deems necessary to assist [Mid-Atlantic] in the use of the [Goldwell] Products.

NJ RBA at 10.

Section 11*fn8 concerns the permissible use of the Goldwell marks. The section‟s lengthy subparagraphs read in part:

11.1 [Mid-Atlantic] and [KPSS] expressly acknowledge that all industrial and intellectual property rights in and to the packages and labels used in connection with the [Goldwell] Products and the trademarks, trade names, services marks, services names and logos and copy used on the [Goldwell] Products, including but not limited to the name "Goldwell" (the "Goldwell Trademarks") are the sole and exclusive property of [KPSS] and its affiliates. During the term of this Agreement (including any renewal hereof) and at all times thereafter [Mid-Atlantic] shall not assert or claim any rights in, or use other than pursuant to written agreement with [KPSS], or take any action which may prejudice or impair the validity of, or title by [KPSS] or its affiliates to, the Goldwell Trademarks (or any marks similar thereto, including similar marks on goods unrelated to the [Goldwell] Products) or trade material appearing on, or used in connection with, the [Goldwell] Products or the advertising, promotion or packaging thereof. [Mid-Atlantic] shall cooperate with [KPSS] and its affiliates in safeguarding the Goldwell Trademarks and shall promptly notify [KPSS] of any actual or threatened infringement thereof which may come to [Mid-Atlantic‟s] attention. . . .

11.2 [Mid-Atlantic] shall not use, make reference to, publish, copy or otherwise designate, either orally, in writing, or in any matter whatsoever, any Goldwell Trademarks in connection with [Mid-Atlantic‟s] advertising, promotion or sale of the [Goldwell] Products or for any other reason whatsoever except (a) when done for the benefit of [KPSS], and (b) in a manner that has been either provided by [KPSS] in writing or approved in advance in writing by [KPSS]; provided, however, that references to the Goldwell Trademarks in non-public communications in the course of [Mid-Atlantic‟s] business need not be so approved. The "Goldwell" mark may continue to be used as part of [Mid-Atlantic‟s] business name as long as this Agreement is in effect, subject to [KPSS‟s] right to require [Mid-Atlantic] to cease such use on not less than six (6) months prior written notice to do so. . . . [Mid-Atlantic] shall discontinue and refrain from all such advertising or representation in any use whatsoever of said Marks or of simulations thereof upon the termination of this Agreement.

NJ RBA at 11-12. Mid-Atlantic agreed in a related provision that post-termination use of the Goldwell marks would "result in confusion to the public and irreparable damage to [KPSS] such that money damages [would] be an inadequate remedy and injunctive relief . . . [would be] justified and appropriate." NJ RBA at 25-26.

Section 15*fn9 sets forth the grounds upon which either party may terminate the Agreement.

The relevant termination events are as follows:

15.1 [Termination] At [KPSS‟s] Option. Except as otherwise required by law, and notwithstanding any other provision contained herein, to the contrary, this Agreement, and the relationship hereby created, may be terminated by [KPSS] with respect to any or all [Goldwell] Products and/or any or all parts of the Territory immediately upon written notice to [Mid-Atlantic] and without opportunity to cure in the event that:

15.1.2 Any indebtedness owing to [KPSS] by [Mid-Atlantic] becomes more than thirty (30) days past due;

15.1.3 [Mid-Atlantic] fails to comply with any term of Section 2.1 of this Agreement*fn10 ;

15.1.4 [Mid-Atlantic] fails to comply with any term of Section 4 [(unauthorized sale of nonGoldwell products)] of this Agreement; . . .

15.1.6 [Mid-Atlantic] fails to satisfy any minimum purchase, sales volume, and/or buying account requirement referred to in Section 6.2 of this Agreement;

15.1.7 [Mid-Atlantic] fails to satisfy and facilities, sales, or technical staff requirement referred to in Section

6.3 of this Agreement; . . .

15.1.9 [Mid-Atlantic] fails to comply with any term of Section 11 of this Agreement;

15.1.11 [Mid-Atlantic] materially fails to perform any obligation under this Agreement, or materially breaches any covenant required to be performed by [Mid-Atlantic] hereunder which is not referred to in Section 15.1.1 through 15.1.10 above, which failure is not cured by [Mid-Atlantic] within thirty (30) days after written notice from [KPSS].

NJ RBA at 13-14 (underline in original). Under § 15, KPSS also had the right to repurchase any unsold inventory in Mid-Atlantic‟s possession upon termination of the agreement. Id. at 15.

Unlike its counterpart, Mid-Atlantic had the option to terminate the RBAs only if KPSS ceased to function as a going concern or if KPSS "materially fail[ed] to perform any of its obligations" and did not cure the breach within ninety days of Mid-Atlantic‟s written notice. NJ RBA at 14.

Section 17*fn11 sets forth several miscellaneous provisions. Section 17.2 states in relevant part that "[t]he failure of either party to enforce at any time or for any period of time any provision of this Agreement shall not be construed to be a waiver of such provision or of the right of such party thereafter to enforce each and every such provision." NJ RBA at 15. Section 17.4 stipulates that the RBAs "shall be ...


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