Atallah Group US Inc. v. GMA Accessories Inc.

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

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:

ATALLAH GROUP US INC., :

Plaintiff, :

: 22 Civ. 7438 (LGS)

-against- :

: OPINION & ORDER

GMA ACCESSORIES INC., :

Defendant. :

:

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LORNA G. SCHOFIELD, District Judge:

Plaintiff Atallah Group US Inc. (“Atallah”) brings this action against GMA Accessories

Inc. (“GMA”), alleging that GMA enters into trademark settlement agreements with competitors

in violation of § 1 of the Sherman Act, 15 U.S.C. § 1. Defendant moves to dismiss the

Complaint under Federal Rule of Civil Procedure 12(b)(6). For the reasons below, the motion is

granted in part and denied in part.

I. BACKGROUND

The following facts are taken from the Complaint or are matters of which judicial notice

may be taken, including public filings. See Dixon v. von Blanckensee, 994 F.3d 95, 101-02 (2d

Cir. 2021); United States v. Am. Soc’y of Composers, Authors & Publishers, 627 F.3d 64, 69 n.2

(2d Cir. 2010). The Complaint’s allegations are assumed to be true for purposes of this motion

and are construed in the light most favorable to Plaintiff as the non-moving party. See Hu v. City

of New York, 927 F.3d 81, 88 (2d Cir. 2019).

Atallah owns an online e-commerce platform named SSENSE that specializes in the sale

of designer fashion and streetwear, including products by a designer named Charlotte Knowles.

GMA owns several trademark registrations for the mark “CHARLOTTE” for certain clothing,

footwear and accessories (“Charlotte Registrations”). The Complaint alleges that, in 2018, GMA

entered into an improper trademark settlement agreement with Charlotte Olympia Holdings, Ltd.

(“Reinstatement Agreement”) that reinstated certain Charlotte Registrations that the Trademark

Trial and Appeal Board (“TTAB”) had deemed abandoned. GMA has sued Atallah for

infringement of one of these reinstated Charlotte Registrations in a related trademark

infringement lawsuit before this Court. The Complaint alleges without further detail that GMA

has entered into similar agreements with other competitors, thus preserving GMA’s abandoned

trademarks.

The Complaint also alleges that GMA has pursued sham trademark litigation against

many clothing companies that use the word Charlotte, then settled the claims via settlement

agreements (“Settlement Agreements”) that go on to fund further vexatious litigation, including

against Atallah. The Complaint alleges that both the Settlement Agreements and GMA’s

reinstatement agreements with various competitors have increased clothing prices in the market.

For example, Charlotte Knowles has needed to increase the price of her company’s clothing to

reimburse Atallah for the costs incurred by these lawsuits. The Complaint also alleges that these

agreements have forced other shops to discontinue sales of their products because they cannot

afford to litigate against GMA.

After Defendant moved to dismiss the Complaint, Plaintiff filed an unsuccessful motion

to amend the Complaint. The memorandum of law Plaintiff filed in support of its motion to

amend is construed as an opposition to Defendant’s motion to dismiss. Plaintiff also filed a letter

supplementing its construed opposition. Defendant filed replies responding to the arguments in

both the construed opposition and Plaintiff’s supplemental submission, and requested leave to

file a Rule 11 motion and sought costs and fees.

II. LEGAL STANDARD

On a motion to dismiss, a court accepts as true all well-pleaded factual allegations and

draws all reasonable inferences in favor of the non-moving party but does not consider

“conclusory allegations or legal conclusions couched as factual allegations.” Dixon, 994 F.3d at

101.1 “In order to survive a motion to dismiss under Fed. R. Civ. P. 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.’” Kaplan v. Lebanese Canadian Bank, SAL, 999 F.3d 842, 854 (2d Cir. 2021) (quoting

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). “Threadbare recitals of the elements of a cause of

action, supported by mere conclusory statements, do not suffice.” Iqbal, 556 U.S. at 678; accord

Dane v. UnitedHealthcare Ins. Co., 974 F.3d 183, 189 (2d Cir. 2020). It is not enough for a

plaintiff to allege facts that are consistent with liability; the complaint must “nudge[] [plaintiff’s]

claims across the line from conceivable to plausible.” Bell Atl. Corp. v. Twombly, 550 U.S. 544,

570 (2007); accord Bensch v. Est. of Umar, 2 F.4th 70, 80 (2d Cir. 2021). To survive dismissal,

“plaintiffs must provide the grounds upon which their claim rests through factual allegations

sufficient to raise a right to relief above the speculative level.” Rich v. Fox News Network, LLC,

939 F.3d 112, 121 (2d Cir. 2019).

III. DISCUSSION

A. Section 1 of the Sherman Act Pleading Requirements

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 among the several States . . . .”

15 U.S.C. § 1. To plead a violation of § 1, a plaintiff must allege facts showing (1) “a

combination or some form of concerted action between at least two legally distinct economic

entities,” and (2) the agreement’s objective was an “unreasonable restraint of trade either per se

or under the rule of reason.” See Anderson News, L.L.C. v. Am. Media, Inc., 899 F.3d 87, 97 (2d

1 Unless otherwise indicated, in quoting cases, all internal quotation marks, alterations,

emphases, footnotes and citations are omitted.

Cir. 2018) (stating requirements at summary judgment stage so that a § 1 violation was required

to be shown rather than alleged).

Trademark settlement agreements are analyzed under the rule of reason to determine if

they are unreasonable restraints on trade, because they “implicate trademark policy” and “could

plausibly be thought to have a net procompetitive effect.” 1-800 Contacts, Inc. v. Fed. Trade

Comm’n, 1 F.4th 102, 117 (2d Cir. 2021). “Rule of reason analysis seeks to determine if the

alleged restraint is unreasonable because its anticompetitive effects outweigh its procompetitive

effects.” Madison 92nd St. Assocs., LLC v. Courtyard Mgmt. Corp., 624 F. App’x 23, 28 (2d

Cir. 2015) (summary order). In rule of reason cases, the legality of a challenged restraint is

ultimately evaluated under a three-step, burden-shifting framework. See Ohio v. Am. Express

Co., 138 S. Ct. 2274, 2284 (2018). However, at the pleading stage, a plaintiff needs only to

allege facts that, if assumed to be true, show the first step -- “that the challenged action has had

an actual adverse effect on competition as a whole in the relevant market.” Edmar Fin. Co. v.

Currenex, Inc., No. 21 Civ. 6598, 2023 WL 3570017, at *12 (S.D.N.Y. May 18, 2023) (quoting

1-800 Contacts, 1 F.4th at 114).

A complaint can plead an actual adverse effect on competition either directly by pleading

“an actual adverse effect on competition as a whole in the relevant market,” or indirectly by

pleading that “the defendant has sufficient market power to cause an adverse effect on

competition” plus “other grounds for believing the challenged restraint harms competition” such

as “price increases, reduced output or market quality, significantly heightened barriers to entry,

or reduced consumer choice.” See N. Am. Soccer League LLC v. U.S. Soccer Fed’n, Inc., 883

F.3d 32, 42 (2d Cir. 2018) (describing the first step of the rule of reason analysis for a

preliminary injunction so that the requirements needed to be shown rather than alleged).

B. Analysis

The antitrust claim is sufficiently pleaded to the extent it arises out of the Reinstatement

Agreement, but does not state a claim based on the Settlement Agreements. Both types of

agreements satisfy the first element of a § 1 Sherman Act claim because they are “undeniably

contracts between [Defendant] and its competitors.” See 1-800 Contacts, 1 F.4th at 114. As to

the second element, the Complaint sufficiently alleges that the Reinstatement Agreement had an

actual adverse effect on competition as a whole in the relevant market, but the allegations about

the Settlement Agreements do not satisfy this element.

1. The Reinstatement Agreement

The Complaint pleads facts sufficient to show that the Reinstatement Agreement had a

direct anticompetitive effect on competition as a whole in the relevant market. The Complaint

alleges, and Defendant does not dispute, that the relevant market is the market for women’s

clothing. According to the Complaint, the Reinstatement Agreement improperly reinstated two

of GMA’s abandoned marks, which GMA then used to bring a series of bad-faith lawsuits

alleging infringement of the Charlotte Registrations, thus increasing costs and stifling

competition in the market for women’s clothing.

Specifically, the Complaint alleges that GMA opposed the registration of the mark

“Charlotte Olympia.” This caused the TTAB to examine and ultimately cancel two of GMA’s

Charlotte Registrations as abandoned because GMA had made no showing that it had used those

Charlotte Registrations in commerce from 2011 to 2015. One of the cancelled registrations listed

GMA as the owner of the mark CHARLOTTE for “clothing, footwear and headgear, namely

hats, scarves, gloves and socks.” GMA nevertheless then sued Charlotte Olympia Holdings, Ltd.

for use of the same marks that had just been held to be abandoned. GMA then settled the suit

against Charlotte Olympia Holdings, Ltd. pursuant to the Reinstatement Agreement, under which

the parties agreed to vacate the TTAB abandonment order. The TTAB, on consent and

agreement between the parties, vacated its order. The Complaint plausibly alleges that the

Reinstatement Agreement was improper.

“Anticompetitive effects in a relevant market may be shown through direct evidence of

output reductions, increased prices, or reduced quality in the relevant market.” 1-800 Contacts, 1

F.4th at 118. “Intellectual property protections inherently confer the power to exclude others

from the use of intellectual property. Thus, it is plausible that attempts to enforce fraudulently

obtained intellectual property rights would result in the exclusion of products and competitors

from the market, particularly through threats or prosecution of infringement suits, and also result

in supracompetitive pricing. These injuries are quintessential injuries that the antitrust laws are

intended to prevent.” LEGO A/S v. ZURU, Inc., No. 18 Civ. 2045, 2020 WL 13145135, at *4 (D.

Conn. Apr. 22, 2020).

The Complaint describes GMA as a “trademark troll,” which uses the Charlotte

Registrations primarily to engage in vexatious litigation, causing some competitors to stop

competing with GMA and others to pay a “settlement tax” to GMA that ultimately is paid by

consumers. The Complaint alleges that some boutique shops have been forced to discontinue

sales of their products because they cannot afford to litigate against GMA. The Complaint also

alleges increased prices to cover litigation costs, citing the example of Charlotte Knowles’

clothing line price increase. This price increase directly flowed from litigation enabled by the

Reinstatement Agreement. GMA’s infringement claim against Atallah in a separate action is

based on one of GMA’s Charlotte Registrations revived by the Reinstatement Agreement. The

Complaint asserts that Charlotte Knowles had to increase her prices to reimburse Atallah for its

litigation costs from GMA’s infringement suit against Plaintiff. The Complaint sufficiently

pleads that the Reinstatement Agreement had a direct anticompetitive effect on competition in

the relevant market.

Defendant argues in response that “‘[t]he protection of Petitioner’s trademark interests

constitutes a valid procompetitive justification’ for its settlement agreements,” citing 1-800-

Contacts. That statement is tempered by the Second Circuit’s additional comment, omitted by

Defendant, that “not . . . every trademark agreement has a legitimate procompetitive

justification.” 1-800-Contacts, 1 F.4th at 120. The Circuit explained, “If the provisions relating

to trademark protection are auxiliary to an underlying illegal agreement between competitors, or

if there were other exceptional circumstances, we would think twice before concluding the

challenged conduct has a procompetitive justification.” Id. The Complaint pleads such

exceptional circumstances in alleging that the Reinstatement Agreement improperly revived

abandoned marks, and in pleading throughout that those abandoned marks are the basis for

GMA’s infringement suits. Moreover, Defendant’s introduction of a procompetitive justification

for the challenged agreement is the second step of the rule of reason analysis and is premature at

the motion to dismiss stage. See Edmar Fin. Co., 2023 WL 3570017, at *12; cf. 1-800 Contacts,

1 F.4th at 120-22 (engaging in full rule of reason analysis after a trial on the Federal Trade

Commission’s administrative complaint).

2. The Settlement Agreements

The Complaint fails to plead that the Settlement Agreements caused an anti-competitive

effect. The Complaint alleges that the Settlement Agreements enable restraint of trade through

the use of the settlement payments to fund additional trademark infringement lawsuits by GMA.

This funding argument is too attenuated to plead causation. If GMA financed its litigation with

money from another source, such as a bank loan, the loan agreement between GMA and the bank

would not be considered an illegal, anti-competitive agreement under the Sherman Act.

Similarly, here, the Settlement Agreements are not anti-competitive agreements. The Complaint

does not allege that the Settlement Agreements contain anti-competitive terms, as in the

Reinstatement Agreement or in the trademark settlement agreements at issue in other antitrust

cases. See, e.g., 1-800-Contacts, 1 F.4th at 109; Clorox Co. v. Sterling Winthrop, Inc., 117 F.3d

50, 52 (2d Cir. 1997). Instead, the Complaint challenges the monetary payments GMA obtained,

which are typical of settlement agreements and do not raise anticompetitive concerns. See /-800

Contacts, 1 F.4th at 113 (acknowledging that “certain commonplace forms of settlement

agreements did not, by the nature of their existence alone, create antitrust liability”).

IV. CONCLUSION

For the foregoing reasons, Defendant’s motion to dismiss the Complaint is GRANTED as

to the Settlement Agreements but DENIED as to the Reinstatement Agreement. Defendant’s

requests to file a Rule 11 motion and for costs and fees are DENIED.

Dated: September 7, 2023

New York, New York

UNITED STATES DISTRICT JUDGE