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Playboy Enterprises International v. Smartitan (Singapore) Pte Ltd

August 26, 2011

PLAYBOY ENTERPRISES INTERNATIONAL,
INC.,A DELAWARE CORPORATION, PLAINTIFF/COUNTER-DEFENDANT,
v.
SMARTITAN (SINGAPORE) PTE LTD.,
A COMPANY ORGANIZED UNDER SINGAPORE LAW, ) ELTEX INTERNATIONAL, LTD.,
A COMPANY ORGANIZED UNDER HONG KONG LAW, DEFENDANTS/COUNTER-PLAINTIFFS.



The opinion of the court was delivered by: Marvin E. Aspen, District Court Judge

MEMORANDUM OPINION AND ORDER

Playboy Enterprises International, Inc. ("Playboy") filed a breach of contract claim against Smartitan (Singapore) Pte. Ltd. ("Smartitan") and Eltex International, Ltd. Smartitan filed its answer, as well as affirmative defenses and a counterclaim alleging that Playboy breached the implied covenant of good faith and fair dealing. The case is before us now on Playboy's motion to dismiss Smartitan's counterclaim. Because Illinois law does not recognize an independent cause of action for breach of the implied covenant of good faith and fair dealing, we grant the motion.

BACKGROUND

On March 1, 2006, Playboy entered into a Product License Agreement ("PLA") with Smartitan. (Compl. ¶¶ 1--3.) Under the PLA, Playboy granted Smartitan the right to use several of the Playboy trademarks for a narrowly defined group of products, such as apparel and women's bags, to be sold in Japan. (Id. ¶ 10.) Additionally, the PLA contains detailed procedures by which all products must be approved by Playboy before they can be offered for sale. (Id. ¶ 15.)

Sometime in 2008, Playboy learned that Smartitan was selling unapproved products bearing the Playboy logo into unauthorized channels of distribution in violation of the PLA. (Id. ¶¶ 15--16.) Smartitan was also frequently late with its sales reports and required payments. (Id. ¶ 17.) These payments consisted of guaranteed and earned royalties. (Id. ¶ 17.) The guaranteed royalties were owed regardless of Smartitan's actual sales, while the earned royalties were owed based on a percentage of Smartitan's net sales. (Reply at 9.) In August 2009, Playboy exercised its right under the PLA to audit Smartitan, resulting in findings that Smartitan owed Playboy more than $300,000. (Compl. ¶ 19.)

On July 30, 2010, Playboy filed its complaint against Smartitan alleging breach of the PLA. (Id. ¶¶ 1--42.) On April 28, 2011, Smartitan filed its answer, affirmative defenses and counterclaim alleging that Playboy breached the implied covenant of good faith and fair dealing. (Countercl. ¶ 3.) Specifically, Smartitan claims that Playboy unreasonably refused to approve certain designs for products under the PLA, and unreasonably required Smartitan to sell products in higher-end luxury stores. (Id. ¶ 3a--b.)

Playboy now brings this motion asking to dismiss Smartitan's counterclaim. Playboy asserts that Smartitan, without alleging breach of contract, has failed to state a claim upon which relief could be granted pursuant to Federal Rule of Civil Procedure 12(b)(6).

STANDARD OF REVIEW

We apply the same legal standard of review for motions to dismiss counterclaims as we do for motions to dismiss complaints. See McLaughlin v. Chi. Transit Auth., 243 F. Supp. 2d 778, 779 (N.D. Ill. 2003). The purpose of a motion to dismiss under Rule 12(b)(6) is to test the sufficiency of the complaint or counterclaim, not to decide the merits of the case. Gibson v. City of Chi., 910 F.2d 1510, 1520 (7th. Cir. 1990). Pursuant to Rule 8(a)(2), a complaint must include "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). Accordingly, a court may grant a motion to dismiss under Rule 12(b)(6) only if the complaint lacks "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 1974 (2007); see also Swanson v. Citibank, N.A., 614 F.3d 400, 404 (7th Cir. 2010). A sufficient complaint must provide more than "labels and conclusions, and a formulaic recitation of the elements of a cause of action." Twombly, 550 U.S. at 555, 127 S. Ct. at 1964--65; Killingsworth v. HSBC Bank Nev., N.A., 507 F.3d 614, 618--19 (7th Cir. 2007). The complaint must "present a story that holds together." Swanson, 614 F.3d at 404; see Smith v. Medical Benefit Adm'r Group, Inc., 639 F.3d 277, 281 (7th Cir. 2011). These requirements ensure that the defendant receives "fair notice of whatthe . . . claim is and the grounds upon which it rests." Twombly, 550 U.S. at 555, 127 S. Ct. at 1964 (quoting Conley v. Gibson, 355 U.S. 41, 47, 78 S. Ct. 99, 102 (1957)). In evaluating a motion to dismiss a counterclaim, we must accept all well-pleaded allegations as true and draw all reasonable inferences in the counter-plaintiff's favor. Erickson v. Pardus, 551 U.S. 89, 94, 127 S. Ct. 2197, 2200 (2007); Thompson v. Ill. Dep't of Prof'l Regulation, 300 F.3d 750, 753 (7th Cir. 2002).

ANALYSIS

Playboy correctly argues that Smartitan cannot seek relief for breach of the implied covenant of good faith and fair dealing because-with one exception not present here-the implied covenant of good faith does not provide an independent cause of action under Illinois law. Bank of America N.A. v. Shelbourne Dev. Group, Inc., 732 F. Supp. 2d 809, 822 (N.D. Ill. 2010) (quoting APS Sports Collectibles, Inc. v. Sports Time, Inc., 299 F.3d 624, 628 (7th Cir. 2002)).Under Illinois law, every contract contains an implied covenant of good faith and fair dealing. Beraha v. Baxter Health Care Corp., 956 F.2d 1436, 1443 (7th Cir. 1992). While all contracts contain this covenant, it is not "generally recognized as an independent source of duties giving rise to a cause action." Voyles v. Sandia Mortg. Corp., 196 Ill.2d 288, 296, 751 N.E.2d 1126, 1131 (Ill. 2001) (quoting Cramer v. Ins. Exch. Agency, 174 Ill.2d 513, 525, 675 N.E.2d 897, 903 (Ill. 1996)). Instead, the implied covenant of good faith and fair dealing is used as a tool to help courts interpret the terms of a contract and the intent of the parties. See Cromeens, Holloman, Sibert, Inc. v. AB Volvo, 349 F.3d 376, 395 (7th Cir. 2003); Zeidler v. A & W Rests., Inc.,301 F.3d 572, 575 (7th Cir. 2002).

Smartitan agrees that a claim for breach of the implied covenant does not exist as an independent cause of action under Illinois law apart from a breach of contract claim. (Resp. at 2.) Nonetheless, its counterclaim fails to allege that Playboy breached the PLA. In fact, Smartitan unequivocally states that "Playboy has not directly breached the PLA." (Id. at 3.) Without alleging that Playboy breached the PLA, Smartitan makes several failed attempts to circumvent this well-established rule in hopes that we will liberally construe the allegations and infer that it pled a breach of contract claim. First, Smartitan argues that its claim for breach of the implied covenant of good faith and fair dealing is subsumed within a breach of contract claim. Second, Smartitan contends that, by claiming a breach of the implied covenant, it subsequently alleged a breach of contract because its contractual obligations hinged upon a condition precedent. As discussed below, both of these arguments lack merit.

A. The Breach of the Implied Covenant Claim Is Not ...


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