Lorillard Tobacco Co. v. R.J. Reynolds Tobacco Co.

Lorillard Tobacco Co. v. R.J. Reynolds Tobacco Co., 2011 NCBC 30.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE

COUNTY OF GUILFORD SUPERIOR COURT DIVISION

10 CVS 11471

LORILLARD TOBACCO COMPANY and )

LORILLARD LICENSING COMPANY, )

LLC, )

)

Plaintiffs, )

)

v. ) ORDER

)

R.J. REYNOLDS TOBACCO )

COMPANY, )

)

Defendant. )

)

{1} THIS MATTER is before the Court on Plaintiffs’ Motion to Dismiss Count

III of Counterclaim Pursuant to Rule 12(b)(6) And To Strike Portions of Defendant’s

Prayer for Relief (“Motion”). For the reasons stated below, the Motion is GRANTED

in part and DENIED in part.

Brooks, Pierce, McLendon, Humphrey & Leonard, LLP, by Jim W. Phillips,

Jr. and Clint S. Morse, and Locke Lord Bissell & Liddell LLP, by Harry C.

Marcus and Jason Nardiello, pro hac vice, for Plaintiffs Lorillard Tobacco

Company and Lorillard Licensing Company, LLC.

Kilpatrick Townsend & Stockton LLP, by Daniel R. Taylor, Jr., Adam H.

Charnes, and Chad D. Hansen, for Defendant R.J. Reynolds Tobacco

Company.

I. INTRODUCTION

{2} The North Carolina Court of Appeals has held that a plaintiff who files

an “objectively reasonable” lawsuit cannot be held liable for an unfair trade practice

under N.C. Gen. Stat. § 75–1.1 regardless of the plaintiff’s subjective intent and

even if the suit was instituted for “no legitimate purpose.” Reichold Chems., Inc. v.

Goel, 146 N.C. App. 137, 157, 555 S.E.2d 281, 293 (2001). The Motion requires the

Court to determine whether Count III of Defendant’s Counterclaim alleges facts

adequate to state a claim for an unfair trade practice that falls within the “sham

litigation” exception to the Noerr-Pennington immunity doctrine on which the

Reichold opinion rests. That inquiry, in turn, requires the Court to consider

whether, accepting the allegations of the Counterclaim as true and allowing all

favorable factual inferences from those facts, the Court can and should make that

determination as a matter of law without need for further discovery. The

controlling ultimate issue is whether Plaintiffs’ Complaint is “objectively

reasonable.” If it is, Plaintiffs’ subjective intent in filing the suit is irrelevant, and

further inquiry into that intent is not necessary. Plaintiffs contend that the inquiry

is pursuant to an objective standard that can be satisfied on the face of the

pleadings; Defendant contends that the inquiry necessarily includes fact

considerations which must at least await summary judgment.

{3} The controversy centers on the provisions of the “Settlement Agreement,”

which was entered into between Plaintiffs Lorillard Tobacco Company and Lorillard

Licensing Company, LLC (collectively, “Lorillard”) and Defendant R.J. Reynolds

Tobacco Company (“RJRT”) to resolve inter partes litigation before the United

States Patent and Trademark Office (“USPTO”) and which relates to the use of the

term “pleasure” in connection with the advertisement and sale of tobacco products.

The Settlement Agreement provides restrictions on both RJRT’s use of the term in

some respects and on Lorillard’s right to challenge RJRT’s use of the term in other

respects. The Settlement Agreement by its release language resolved claims

regarding uses prior to its effective date. Lorillard complains that RJRT has used

the term inconsistently with the Settlement Agreement. RJRT counterclaims that

Lorillard has brought a suit it promised not to bring, and that its doing so was a

deliberate and willful effort to restrain competition. That is, Count III of RJRT’s

Counterclaim asserts that the suit is “sham litigation” outside of any protection

afforded by the Noerr-Pennington doctrine.

{4} The Motion does not require the Court to determine whether Lorillard

may ultimately prevail on the issue of whether RJRT’s uses of which it complains

are proscribed by the Settlement Agreement. The Court need only decide whether

the pleadings demonstrate that Lorillard’s claim is objectively reasonable. The

Court concludes that it is.

II. PROCEDURAL HISTORY

{5} Plaintiffs filed their action in Guilford County Superior Court on

November 5, 2010, after which the matter was designated as a Complex Business

Case. Plaintiffs assert three claims: 1) breach of contract based on the Settlement

Agreement; 2) common law unfair competition; and 3) unfair and deceptive trade

practices under N.C. Gen. Stat. Section 75–1.1 (“Section 75–1.1”). On January 10,

2011, RJRT answered and asserted three Counterclaims: 1) Declaratory Judgment

seeking to interpret the Settlement Agreement; 2) Breach of Contract by reason of

Plaintiffs filing the Complaint in contravention of promises in the Settlement

Agreement; and 3) a Section 75–1.1 claim that Lorillard’s filing of its Complaint was

an unfair trade practice. On May 23, 2011, Lorillard filed its Motion. The Motion

has been fully briefed, the Court heard oral argument, and the matter is ripe for

disposition.

III. STATEMENT OF FACTS 1

{6} Lorillard Tobacco Company and Lorillard Licensing Company, LLC are

corporations organized and existing under the laws of the State of North Carolina,

based in Greensboro, North Carolina. (Countercl. ¶¶ 6–7.) The former

manufactures and sells tobacco products, including NEWPORT brand cigarettes;

1 The statement of facts assumes all the allegations of the Counterclaim are true and construes

inferences from such facts in Defendant-Counterclaimant’s favor. See Regions Bank v. Reg’l Prop.

Dev. Corp., 2008 NCBC ¶¶40–41 (N.C. Super. Ct. Apr. 21, 2008).

the latter owns all relevant trademark and trade dress rights associated with the

NEWPORT cigarette brand. (Id.) RJRT is a corporation organized and existing

under the laws of the State of North Carolina, with its principal place of business in

Winston-Salem, North Carolina. RJRT 2 is engaged in the business of

manufacturing and selling tobacco products, including CAMEL brand cigarettes and

CAMEL brand snus, a smokeless tobacco product. (Id. ¶ 5.)

{7} In 2005, Lorillard applied to the USPTO to register the mark,

PLEASURE 3 for use in connection with its cigarette products, which application

RJRT opposed. (Id. ¶ 13.) In 2007, while Lorillard’s application was pending, RII

applied to the USPTO to register certain phrases that included the word “pleasure”

in connection with smokeless tobacco products, which application Lorillard opposed.

(Id. ¶ 14.) The parties resolved this inter partes litigation by the Settlement

Agreement with an effective date of July 16, 2009.4 (Id. ¶ 16.)

{8} The Settlement Agreement provided that RJRT agreed to withdraw with

prejudice its opposition to Lorillard’s application (Id. ¶ 17), and Lorillard agreed to

withdraw with prejudice its opposition to RII’s application. (Id. ¶ 18.) The

Settlement Agreement had several provisions regarding RJRT’s future use of the

term “pleasure.” RJRT agreed that it “will not use the term PLEASURE alone or in

conjunction with any other words as the name of a brand of a tobacco product.” (Id.

¶ 19.) RJRT further agreed that it “will not use the term PLEASURE alone in the

advertising or promotion of any tobacco product, or in any manner creating a

commercial impression associating the term PLEASURE alone with the brand

name of a tobacco product.” (Id. ¶ 20.) The Settlement Agreement elaborated that

2 The Settlement Agreement defined RJRT to include Reynolds Innovations Inc. (“RII”), a trademark

holding company and subsidiary of RJRT. Likewise, this Order includes RII within the term RJRT

where appropriate.

3 The parties variously use the terms “pleasure” and “PLEASURE.” The Court understands that the

distinction between the two is not relevant to the current controversy.

4 RJRT incorporated the Settlement Agreement into its Counterclaim by attaching as an “Exhibit 1”

so it is properly considered as part of the pleadings for purposes of this Motion. See Oberlin Capital,

L.P. v. Slavin, 147 N.C. App. 52, 60, 554 S.E. 2d 840, 847 (2001).

“by ‘the term PLEASURE alone,’ the Parties mean that RJRT will only use the term

PLEASURE as part of a composite phrase and not in a way that creates a

commercial impression in the term PLEASURE separate and apart from such

composite phrase.” (Id. ¶ 21.) The Parties further provided that “[b]y way of

example, RJRT will not significantly distinguish the term PLEASURE from other

words in a composite phrase in a way that makes the term PLEASURE

significantly more prominent than the other words in the composite phrase.” (Id. ¶

22.) The Parties specified an example of an advertisement that would not be

permitted because of the comparative emphasis on the term “PLEASURE.” (Id. ¶

23.)

{9} In return for these restrictions on RJRT’s use, Lorillard agreed that “[it]

will not assert its rights under any registration issuing from the Lorillard

PLEASURE Application, or any other alleged federal or state statutory or common

law rights in the term PLEASURE alone . . . against: (a) the use by RJRT of any

permitted composite phrase incorporating the term PLEASURE . . . .” 5 (Id. ¶ 24.)

Lorillard further released RJRT from any liability for the use of the term “pleasure”

up to the date of the Settlement Agreement. (Id. ¶ 25.) RJRT alleges that it has

used the term “pleasure” since the Settlement Agreement, but only consistently

with the uses permitted by that agreement. (Id. ¶¶ 26−29.) Some of the uses of

which Lorillard complains were in use by RJRT before the Settlement Agreement,

although Lorillard denies having knowledge of those uses at that time.

Particularly, Lorillard catalogs some of RJRT’s internet domain and sub-domain

names which incorporate the term “pleasure” such as, for example,

“camel.tobaccopleasure.com.” (Compl. ¶¶19−20; Countercl. ¶¶ 27−28.)

5 The Court has accepted for purposes of the present Motion that each of RJRT’s uses of the term

“pleasure” of which Lorillard complains is as a part of a “composite phrase.” However, this does not

necessarily end the inquiry. The Settlement Agreement provides that the use of “the term

PLEASURE alone” means that it is both in a composite phrase and not in a manner creating a

commercial impression associating the term alone with the brand name of a tobacco product.

(Countercl. ¶ 21.)

{10} Lorillard and RJRT now each contend that the other has breached the

Settlement Agreement. Lorillard contends that RJRT has, since the date of the

Settlement Agreement, used the term “pleasure” in ways that it undertook not to do

by the Settlement Agreement. RJRT contends that it has only used the term as

expressly permitted by the Settlement Agreement, and Lorillard has breached the

Settlement Agreement by bringing a suit that it promised not to bring. RJRT, in

Count II of its Counterclaim, asserts that Lorillard breached its contractual promise

not to assert a trademark claim because of an RJRT use permitted by the

Settlement Agreement. (Id. ¶ 37.) In Count III, RJRT amplifies its claim by

asserting that Lorillard committed an unfair trade practice by deliberately and

willfully filing the complaint to stifle competition. (Id. ¶ 46.)

{11} RJRT’s prayer for relief seeks punitive damages, treble damages, and

attorneys’ fees. In addition to its request to dismiss Count III, Lorillard seeks to

strike each of these elements of damages from RJRT’s prayer for relief. RJRT

concedes that the prayers for punitive damages and treble damages depend on

Count III of the Counterclaim, but it contends that the prayer for attorneys’ fees

may be supported by other claims. 6

IV. STANDARD OF REVIEW

{12} The appropriate inquiry upon a motion to dismiss pursuant to Rule

12(b)(6) of the North Carolina Rules of Civil Procedure is “whether, as a matter of

law, the allegations of the complaint, treated as true, are sufficient to state a claim

upon which relief may be granted under some legal theory, whether properly

labeled or not.” Crouse v. Mineo, 189 N.C. App. 232, 237, 658 S.E.2d 33, 36 (2008);

Harris v. NCNB Nat’l Bank of N.C., 85 N.C. App. 669, 670−71, 355 S.E.2d 838,

840−41 (1987). “The complaint is to be liberally construed, and the court should not

dismiss the complaint ‘unless it appears beyond a doubt that [the] plaintiff could

prove no set of facts in support of his claim which would entitle him to relief.’”

6( See Defendant’s Mem. In Opp’n to Pls.’ Mot. to Dismiss and Mot. to Strike 20 n.6.)

Holloman v. Harrelson, 149 N.C. App. 861, 864, 561 S.E.2d 351, 353 (quoting Dixon

v. Stuart, 85 N.C. App. 338, 340, 354 S.E.2d 757, 758 (1987)), disc. review denied,

355 N.C. 748, 565 S.E.2d 665 (2002). The Court need not determine that the

plaintiff will ultimately prevail in order to deny the motion to dismiss; it need only

determine whether plaintiff has adequately pled a claim that allows plaintiff to

introduce evidence in support of the claim. Johnson v. Bollinger, 86 N.C. App. 1, 4,

354 S.E.2d 378, 381 (1987) (citation omitted). However, dismissal is warranted

when the complaint “may consist . . . of facts which will necessarily defeat the claim

as well as where there is an absence of law or fact necessary to support a claim.”

Sutton v. Duke, 277 N.C. 94, 102−03, 176 S.E.2d 161, 166 (1970). “When

considering a motion under Rule 12(b)(6), the court is not required to accept as true

any conclusions of law or unwarranted deductions of fact in the complaint.” Branch

Banking & Trust Co. v. Lighthouse Fin. Corp., 2005 NCBC 3 ¶ 8 (N.C. Super. Ct.

July 13, 2005).

V. ANALYSIS

{13} Lorillard’s Motion asserts that RJRT cannot state a claim for an unfair

trade practice based on the filing of the Complaint which is, on its face, “objectively

reasonable,” and that further discovery seeking to determine Lorillard’s subjective

intent in bringing the suit or its belief in its chances for success are irrelevant.

That is, Lorillard claims that it is immune from any Section 75–1.1 claim grounded

on its having brought the litigation.

{14} If immunity does not apply, Count III of RJRT’s Counterclaim alleges

the essential elements of a Section 75−1.1 claim, which are: 1) an unfair or

deceptive act or practice; 2) affecting commerce; and 3) which proximately causes

actual injury. Poor v. Hill, 138 N.C. App. 19, 27, 530 S.E.2d 838, 844 (2000); see

also, Strickland v. Lawrence, 176 N.C. App. 656, 665, 627 S.E.2d 301, 307 (2006).

“[A] practice is unfair when it offends established public policy” and “when the

practice is immoral, unethical, oppressive, unscrupulous, or substantially injurious

to consumers.” Eastover Ridge, L.L.C. v. Metric Constructors, Inc., 139 N.C. App.

360, 367, 533 S.E.2d 827, 832 (2000) (quoting Warfield v. Hicks, 91 N.C. App. 1, 8,

370 S.E.2d 689, 693, disc. review denied, 323 N.C. 629, 374 S.E.2d 602 (1988))

(citations omitted). “The fair or unfair nature of particular conduct is to be judged

by viewing it against the background of actual human experience and by

determining its intended and actual effects upon others.” McDonald v. Scarboro, 91

N.C. App. 13, 18, 370 S.E.2d 680, 684 (1988). For a practice to be deceptive, it must

“possess the tendency or capacity to mislead.” Forsyth Mem’l Hosp. v. Contreras,

107 N.C. App. 611, 614, 421 S.E.2d 167, 170 (1992). Whether a particular

commercial act or practice constitutes an unfair or deceptive trade practice is a

question of law. Norman Owen Trucking, Inc. v. Morkoski, 131 N.C. App. 168, 177,

506 S.E.2d 267, 273 (1998); see also, First Union Nat'l Bank v. Brown, 166 N.C.

App. 519, 603 S.E.2d 808, 819 (2004).

{15} Consistent with the Rule 12(b)(6) standard of review, the Court must

assume that Lorillard had an anti-competitive intent in bringing the suit. Likewise,

the Court for purposes of the present Motion, assumes that RJRT will ultimately

prove that Lorillard breached the Settlement Agreement by filing its Complaint.

Proof of that breach of contract would not alone mean that RJRT would have proven

an unfair trade practice. “It is well recognized . . . that actions for unfair or

deceptive trade practices are distinct from actions for breach of contract, and that a

mere breach of contract, even if intentional, is not sufficiently unfair or deceptive to

sustain an action under [Chapter 75].” Eastover Ridge, L.L.C., 139 N.C. App. at 367,

533 S.E.2d at 832; Branch Banking and Trust Co. v. Thompson, 107 N.C. App. 53,

62, 418 S.E.2d 694, 700, disc. review denied, 332 N.C. 482, 421 S.E.2d 350 (1992)

(citations omitted). To become an unfair trade practice, the breach of contract must

be “characterized by some type of egregious or aggravating circumstance.” Norman

Owen Trucking, Inc., 131 N.C. App. at 177, 506 S.E.2d at 273. Here, the alleged

egregious or aggravating circumstance is Lorillard’s alleged anti-competitive intent.

The inquiry, then, is whether an unfair practice has been proven based on such

breach coupled with anti-competitive intent, or whether Lorillard is immunized

from such a finding.

{16} The North Carolina Court of Appeals in Reichold held that a litigant

can be sheltered from liability under Section 75–1.1 by application of the federal

Noerr-Pennington doctrine. 146 N.C. App. at 156−57, 555 S.E.2d at 293 (referring

to E. R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 81 S.

Ct. 523 (1961) and Prof'’l Real Estate Investors, Inc. v. Columbia Pictures Indus.,

Inc., 508 U.S. 49, 113 S. Ct. 1920 (1993)). Noting that Chapter 75 was modeled on

federal antitrust law, the court held that “federal decisions may provide guidance in

determining [its] scope and meaning” and then applied the Noerr-Pennington

doctrine to Section 75–1.1. 7 Id. The court upheld dismissal of the Section 75–1.1

claim, affirming the trial court’s conclusion that “though filed for no legitimate

purpose, the lawsuit was not utterly baseless.” Id. at 157, 555 S.E.2d at 293.

Because it was not utterly baseless, the suit was “objectively reasonable, and thus . .

. did not constitute an unfair trade practice under N.C.G.S. § 75–1.1.” 8 Id. In so

holding, the Court implicitly agreed with the plaintiff’s assertion “that a reasonably

objective lawsuit can never be an unfair trade practice, under the reasoning of

Noerr and PRE.” Id. at 156, 555 S.E.2d at 293. The court explained that a lawsuit

is objectively reasonable “[i]f an objective litigant could conclude that the suit is

reasonably calculated to elicit a favorable outcome.” Id. at 146 N.C. App. at 157,

555 S.E.2d at 293 (citation omitted). The court’s adoption of PRE’s reasoning to

control Section 75–1.1 means that it conversely follows that the “sham litigation”

exception to the Noerr-Pennington doctrine would apply to claims under that

section when 1) the claim asserted is “objectively meritless” and 2) the court finds

“the litigant’s subjective motivation” was an unlawful intent to “interfere directly

7 The federal Noerr-Pennington Doctrine arose under the federal Sherman Act, on which certain

provisions of Chapter 75 are modeled, whereas Chapter 75–1.1 was based on Section 5 of the FTC

Act.

8 However, because the suit was not filed for a legitimate purpose, the court found that the defendant

remained exposed to liability for tortious interference with contract claims because there is “no

relation” between the state tort and “legislative intent behind federal anti-trust law.” Reichold

Chems., Inc., 146 N.C. App. at 148, 555 S.E.2d at 288.

with the business relationships of a competitor.” See Prof’l Real Estate Investors,

Inc., 508 U.S. at 60, 113 S. Ct. at 1928 (describing “sham litigation” as that which is

“objectively baseless in the sense that no reasonable litigant could realistically

expect success on the merits”). However, the inquiry into subjective intent only

follows a finding that the suit is objectively baseless and does not inform that initial

objective determination. Id.; see also United States v. Ward, 618 F. Supp. 884, 907

(E.D.N.C. 1985), Sunbelt Rentals, Inc. v. Head & Engquist Equip., L.L.C., 2003

NCBC 4 ¶ 333 (2003).

{17} The Court then turns to the controlling inquiry: whether

Lorillard’s suit is “objectively reasonable” as a matter of law or whether that

determination must await further factual development. While it is true that

Reichold arose upon review of rulings made on a motion for summary

judgment and at trial, Reichold was later followed by a North Carolina

federal district court opinion which resolved the immunity issue upon a Rule

12(b)(6) motion. See GoldToeMoretz, LLC v. Implus Footcare, LLC, No.

5:09−CV−0072, 2010 WL 3474792 (W.D.N.C. Aug. 31, 2010.) 9 RJRT cites

federal cases from other circuits for the proposition that the determination of

whether the plaintiff’s complaint is a sham or a genuine effort to seek judicial

redress is inherently a fact question. Aydin Corp. v. Loral Corp., 718 F.2d

897, 903 (9th Cir. 1983); Scooter Store, Inc. v. SpinLife.com LLC, No.

2:10−CV−18, 2011 WL 1460438, at *8 (S.D. Ohio Apr. 18, 2011); Pactiv Corp.

v. Perk-Up, Inc., No. 08−05072 (DMC), 2009 WL 2568105, at *14 (D.N.J. Aug.

18, 2009). However, here, the critical “fact” is a determination of the

language of the Settlement Agreement compared to the alleged uses of the

term “pleasure” complained challenged in the Complaint. The Court

concludes that the Reichold standard of whether Lorillard’s lawsuit is

9 Without citing Reichold, another North Carolina federal district court held that “parties bringing

or threatening to bring meritorious, good faith claims cannot by definition be subject to liability

under [Section 75–1.1]. As such, parties bringing good faith claims . . . do not need the protections of

the Noerr-Pennington doctrine.” DIRECTTV, Inc. v. Cephas, 294 F. Supp. 760, 767 (M.D.N.C.

2003).

“utterly baseless” can be determined from the face of the Counterclaim and

its incorporated Settlement Agreement. Even if the Court assumes that the

suit was otherwise brought “for no legitimate purpose” and with a subjective

anti-competitive intent, it can still conclude that the suit is “objectively

reasonable” because it is not “utterly baseless.”

{18} The issue is to be determined by looking through a lens of reasonable

objectivity. That objective perspective demonstrates that Lorillard has a reasoned

basis from which to argue that RJRT’s use of the term “pleasure” after the

Settlement Agreement are not permitted, even though they are used only in

composite phrases, because the Settlement Agreement also proscribes a use “in any

manner creating a commercial impression associating the term PLEASURE alone

with the brand name of a tobacco product.” The language of the Settlement

Agreement does not so clearly foreclose an argument that the uses catalogued in the

pleadings are outside these proscriptions so as to render the Complaint “utterly

baseless.” Lorillard’s subjective intent does not change that initial objective

determination.

{19} The Motion would present a much more difficult challenge to Lorillard if

Lorillard’s claim rested entirely on claimed liability for acts taken by RJRT before

the date of the Settlement Agreement. RJRT correctly notes that the release

language of the Settlement Agreement would extend to such acts whether or not

Lorillard was aware of them when entering the Settlement Agreement. But

Lorillard counters that by releasing past liability it did not ratify such acts in the

future, and a claim based on acts after the Settlement Agreement are not then

“utterly baseless.” The Court can agree that this position is not baseless without

also concluding that Lorillard’s position should ultimately prevail. It need only

conclude that asserting the claim is “objectively reasonable.” Because it is, liability

under Section 75–1.1 based on the “sham litigation” exception is foreclosed. The

Motion to dismiss Count III should be granted.

{20} As to the Motion’s request to strike portions of RJRT’s prayer for relief,

RJRT has conceded that it has no claim for punitive damages or treble damages if

Count III is dismissed. RJRT does not make the same concession as to attorneys’

fees, and the Court concludes that it is premature to determine whether there is

any basis to award attorneys’ fees other than pursuant to this Count III. Therefore,

that prayer for attorneys’ fees in the Counterclaim will not be stricken at this time.

{21} IT IS THEREFORE ORDERED that:

1. Lorillard’s Motion to Dismiss Count III of RJRT’s Counterclaim

pursuant to Rule 12(b)(6) is GRANTED.

2. Lorillard’s Motion to Strike RJRT’s prayer for punitive damages and

treble damages is GRANTED.

3. Lorillard’s Motion to Strike the prayer for attorneys’ fees is DENIED

without prejudice to the Court’s later consideration of the issue of

whether either party is entitled to an award of attorneys’ fees.

It is so ORDERED this 8th day of August, 2011.