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Delivermed Holdings, LLC v. Michael L Schaltenbrand

May 27, 2011

DELIVERMED HOLDINGS, LLC, PLAINTIFF,
v.
MICHAEL L SCHALTENBRAND,
JOE D. SIDDLE AND MEDICATE PHARMACY, INC., DEFENDANTS. MARK A SWIFT, PLAINTIFF,
v.
MEDICATE PHARMACY, INC. AND MICHAEL SCHALTENBRAND, DEFENDANTS.



The opinion of the court was delivered by: J. Phil Gilbert District Judge

MEMORANDUM AND ORDER

I. Background

This case arose from a business venture between plaintiff DeliverMed Holdings, LLC ("DeliverMed") and defendant Medicate Pharmacy, Inc. ("Medicate") for home pharmaceutical delivery that went awry. As part of that business venture, DeliverMed alleges it agreed to transfer its marks (specifically, the name "DeliverMed," the tag line "Right at Home," and a "house and pestle" logo) to Medicate for use by the joint venture entity. DeliverMed alleges that after the venture fell apart, Medicate continued to use DeliverMed's marks to promote its own business. Specifically, DeliverMed alleges that Medicate's use included enclosing a card bearing DeliverMed's marks with every prescription sent to its customers and using the DeliverMed logo on its public webpage. DeliverMed claims, among other things, that this use violated § 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), which prohibits false advertising as to the origin of a service that is likely to confuse or deceive consumers. It brought these claims in a suit in the District Court for the Northern District of Illinois and rested its claim of original federal jurisdiction on the Lanham Act claim, see 28 U.S.C. §§ 1331 & 1338(a), with its other state law claims falling under the Court's supplemental jurisdiction, see 28 U.S.C. § 1367(a).

In a separate lawsuit, plaintiff Mark A. Swift alleges that at some point in the relationship between the parties he was employed by Medicate on a salary basis with additional compensation from commissions based on Medicate's net income. He claims that in late 2007, he negotiated a new arrangement with Medicate and defendant Michael Schaltenbrand, an officer of Medicate, under which he would receive a lower commission in exchange for an ownership interest in Medicate. Swift claims Medicate failed to pay him the salary and commissions he was due and failed to transfer any Medicate stock to him. He believes this violated the Fair Labor Standards Act ("FLSA"), 29 U.S.C. § 201 et seq., and various state wage payment and contract laws. He brought these claims in a suit in the District Court for the Northern District of Illinois and rested its claim of original federal jurisdiction on the FLSA claim, see 28 U.S.C. § 1331, with his other state law claims falling under the Court's supplemental jurisdiction, see 28 U.S.C. § 1367(a).

The cases were consolidated pursuant to Federal Rule of Civil Procedure 42(a) while they were pending in the Northern District, and then they were transferred to this Court.

The Medicate Parties ask the Court to dismiss DeliverMed's Lanham Act claim for lack of subject matter jurisdiction (Doc. 36) and to dismiss Swift's wage claims for failure to state a claim (Doc. 57). In the absence of claims over which the Court has original federal jurisdiction, the Medicate Parties argue, the Court must dismiss the related state court claims. Alternatively, the Medicate Parties ask the Court to dismiss the plaintiffs' claims for forum non conveniens or to abstain from hearing them pursuant to Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976).

After reviewing the parties briefing on the motion to dismiss DeliverMed's Lanham Act claim, the Court issued an order to show cause (Doc. 90) why DeliverMed's claim under the Lanham Act, 15 U.S.C. §§ 1051 et seq. (Count II), should not be dismissed for lack of subject matter jurisdiction in light of International Armor & Limousine Co. v. Moloney Coachbuilders, Inc., 272 F.3d 912 (7th Cir. 2001). International Armor held that a dispute over the ownership of a trademark that turned on contract law did not present a federal question over which a federal court has original jurisdiction. Id. at 915-16.

In response to the order to show cause, DeliverMed and Swift (collectively, "the DeliverMed Parties") filed a motion for leave to file an amended complaint (Doc. 92). The motion does not address whether the Court has subject matter jurisdiction over the currently-pled Lanham Act claim in light of International Armor.

II. Analysis

As a preliminary matter, the Court notes that, although it has consolidated DeliverMed's case with Swift's case for common disposition pursuant to Federal Rule of Civil Procedure 42(a), those cases remain separate. Consolidation under Rule 42(a) does not merge two actions into one case. Cella v. Togum Constructeur Ensembleier en Industrie Alimentaire, 173 F.3d 909, 912 (3d Cir. 1999) (citing Johnson v. Manhattan R. Co., 289 U.S. 479, 496-97 (1933)). On the contrary, each consolidated case retains its separate identity and must have its own independent jurisdictional basis. Cella, 173 F.3d at 913. It is against this background that the Court turns to the numerous intertwined matters at issue in this case.

A. DeliverMed Action

1. Subject Matter Jurisdiction over Trademark Claim In its motion to dismiss (Doc. 36), the Medicate Parties argue that the Court does not have subject matter jurisdiction over DeliverMed's trademark claim in Count II because it does not arise under the Lanham Act and thus presents no federal or trademark question under 28 U.S.C. §§ 1331 or 1338(a).*fn1 They argue, among other things, that DeliverMed's claim is really a dispute over the ownership of the marks in question.

In its response to the motion to dismiss (Doc. 59), DeliverMed argues that the issue of federal subject matter jurisdiction was already decided in a September 3, 2010, order when Judge Grady, a District Judge in the Northern District of Illinois, noted before transferring this case to this district that subject matter jurisdiction was not really in doubt because DeliverMed's Lanham Act claim is not frivolous. Judge Grady cited Avila v. Pappas, 591 F.3d 552, 553 (7th Cir. 2010), for the proposition that "[w]hen the federal theories [upon which federal question jurisdiction is based] are insubstantial in the sense that prior decisions inescapable render the claims frivolous, there is no federal jurisdiction" (internal quotations omitted). In that case, the plaintiff had asserted a constitutional claim under 42 U.S.C. § 1983 that was foreclosed as a matter of law by prior caselaw. Id.

The Court believes Judge Grady's preliminary determination of jurisdiction may have been mistaken in light of International Armor & Limousine Co. v. Moloney Coachbuilders, Inc., 272 F.3d 912 (7th Cir. 2001). In International Armor, Maloney, the owner of a limousine business, sold the business, including its name "Maloney Coach Builders," to another party and essentially agreed not to compete with that party for five years. Id. at 913. A dispute arose over the terms of the transaction, but that dispute was settled. Id. Later, when the second business objected to Maloney's use of the name "Maloney" in his new limousine business, Maloney's new business sued under the Lanham Act for a declaration that its use of "Maloney" did not violate the act by making a confusingly false claim of origin, and the second business countersued under the Lanham Act for trademark infringement. Id.

The Court of Appeals held that the parties did not state claims under the Lanham Act because the dispute was really a contract dispute about ownership of the name under the sales contract and later settlement agreement, not a trademark dispute. Id. at 916. It noted, "Whichever side owns the marks may use them, and whichever side does not own them is at risk under the Lanham Act as well as the law of contract." Id. at 914. Thus, the right to relief did not at all turn on resolution of questions under the Lanham Act and therefore did not state a federal claim under the act. Id. at 916. In the absence of a trademark claim, the Court of Appeals concluded that the Court did not have federal jurisdiction over the case under trademark or federal question jurisdiction. Id. Compare Gaiman v. McFarlane, 360 F.3d 644, 652-53 (7th Cir. 2004) (suit for declaration of joint ownership in copyright of comic book characters, not just to enforce licensing agreement or contract for profit distribution, involves questions under the Copyright Act and therefore arises under federal copyright law).

The Lanham Act claim DeliverMed pleads in its original complaint is really a contract dispute over the existence and meaning of a joint venture agreement. This dispute over the use of the marks cannot be principally distinguished from the dispute in International Armor. If the joint venture agreement existed and transferred DeliverMed's marks to Medicate, Medicate owns the marks. If the agreement did not exist or did not transfer the marks, DeliverMed owns them, and Medicate's use of those marks violates the Lanham Act. The existence and effect of a joint venture agreement is a matter of contract, not trademark, law. In this way, the case at bar is just like International Armor and, as with International Armor, presents no Lanham Act question.

The fact that the Medicate Parties may assert a defense raising issues under the Copyright Act, Title 17, United States Code, does not convert Count II into a claim over which the Court has subject matter jurisdiction. In their response to the motion to dismiss, the Medicate Parties suggest Schaltenbrand owns a copyright on the "house and pestle" logo at issue in this case and that that provides a defense to DeliverMed's trademark ownership claim. However, when determining whether a federal court has subject matter jurisdiction over a case "arising under" federal or copyright law, see 28 U.S.C. §§ 1331 & 1338(a), the Court relies on the well-pleaded complaint rule. See Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 807-08 (1988) (patent defense asserted). Under this rule, the Court's jurisdiction only extends to cases where federal law or, in this case, copyright law creates the cause of action in the complaint or is a necessary element of a claim pled in the complaint. See Christianson, 846 U.S. at 808-09 (citing Franchise Tax Bd. of Cal. v. Construction Laborers Vacation Trust, 463 U.S. 1, 13, 27-28, (1983)). Whether a case "arises under" copyright law "must be determined from what necessarily appears in the plaintiff's statement of his own claim in the bill or declaration." Christianson, 846 U.S. at 809 (internal quotations omitted). See also Holmes Group v. Vornado Air Circulation Sys., Inc., 535 U.S. 826, 830-31 (2002) (similarly, federal counterclaim cannot serve as basis for federal or patent jurisdiction).

It is clear that copyright law did not create the contract law claim DeliverMed has pled in Count II of the complaint and is not a necessary element to prove that claim. Thus, under the well-pleaded complaint rule, the assertion of the Copyright Act as a defense does not create federal subject matter jurisdiction over DeliverMed's claim.

As a consequence of the foregoing, the Court does not have original jurisdiction over Count II or over the state law claims that relied on jurisdiction supplemental to Count II. Thus, the Court will have jurisdiction over those claims, if at all, only under the supplemental jurisdiction provisions of 28 U.S.C. § 1367(a) if it allows DeliverMed to amend its complaint to allege a bona fide federal question or copyright claim, as it proposes to do.

2. Amendment

The DeliverMed Parties ask for leave to amend the complaint to add several new claims (Doc. 92). In keeping with the fact that the DeliverMed Action and the Swift action are separate actions only consolidated for the convenience of the Court, the Court will consider separately the various portions of the motion for leave to amend depending on the particular amendments they seek to make. With respect to the DeliverMed action, the Court construes the motion to amend as seeking to make the following changes:

* to add the proposed Count I by Deeter, Deeter and Associates and Delivermed and against Schaltenbrand for a declaratory judgment that Schaltenbrand's copyright in the "house and pestle" logo is invalid because the copyright belongs to Deeter and Deeter Associates and has been or will be assigned to DeliverMed; and

* to remove all allegations of a failed joint venture agreement as it relates to the right to use DeliverMed's name, tag line and logo.

The Court will consider the other requests in the motion for leave to amend later in this order.

The Medicate Parties have responded to the motion as a whole (Doc. 95), arguing that the Court should not allow an amended pleading in light of the February 23, 2011, deadline to amend pleadings as set forth in the Court's November 23, 2010, scheduling order (Doc. 62). They also argue amendment is not justified under Federal Rules of Civil Procedure 15(a), 20(a) or 21 because the plaintiffs knew about the claims they seek to add well in advance of the motion and of the February deadline for amending the pleadings. The Medicate Parties argue they will be prejudiced by an amended pleading because the new claims will require additional discovery (which is scheduled to close in this case on June 1, 2011) and substantial changes to the scheduling order. They also argue the claims of the proposed new plaintiffs do not arise out of the same transactions or occurrences as the current claims and do not share any common issues of fact or law with those claims.

a. Rules for Amendment

Amendment of a pleading is governed by various rules. Where a party seeks to amend a pleading that does not add a new party, Rule 15(a) governs. Under that rule, a party may amend its complaint once as a matter of course within:

(A) 21 days after serving it, or (B) if the pleading is one to which a responsive pleading is required, 21 days after service of a responsive pleading or 21 days after service of a motion under Rule 12(b) [to dismiss], (e) [for a more definite statement], or (f) [to strike], whichever is earlier.

Fed. R. Civ. P. 15(a)(1). This period for amendment as a matter of right has long since passed in this case, so the DeliverMed Parties must obtain either the opposing parties' written consent or the Court's leave, which the Court should freely give when justice requires. See Fed. R. Civ. P. 15(a)(2). Although the text of the rule has changed in recent years, the rule still "reflects a policy that cases should generally be decided on the merits and not on the basis of technicalities." McCarthy v. Painewebber, Inc., 127 F.R.D. 130, 132 (N.D. Ill. 1989); see Diersen v. Chicago Car Exch., 110 F.3d 481, 489 (7th Cir. 1997); Woods v. Indiana Univ.-Purdue Univ., 996 F.2d 880, 883 (7th Cir. 1993). Generally, the decision whether to grant a party leave to amend the pleadings is a matter left to the discretion of the district court. Orix Credit Alliance v. Taylor Mach. Works,125 F.3d 468, 480 (7th Cir. 1997); Sanders v. Venture Stores, 56 F.3d 771, 773 (7th Cir. 1995). A court should allow amendment of a pleading except where there is undue delay, bad faith, dilatory motive on the part of the movant, repeated failure to cure deficiencies by ...


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