Court Opinion

ID: 4543907
Source: CourtListenerOpinion
Date Created: 2020-06-25 14:00:13.490753+00
Date Added: 2024-06-11T12:49:02.445825
License: Public Domain

19-2547-cv
     SM Kids, LLC v. Google LLC

 1                                           In the
 2                       United States Court of Appeals
 3                                 For the Second Circuit
 4
 5
 6                                      August Term 2019
 7
 8                                        No. 19-2547-cv
 9
10                     SM KIDS, LLC, AS SUCCESSOR-IN-INTEREST TO STELOR
11                                    PRODUCTIONS, LLC,
12
13                                                              Plaintiff-Appellant,
14
15                                              v.
16
17             GOOGLE LLC, ALPHABET INC., XXVI HOLDINGS INC., JOHN AND/OR
18                            JANE DOES 1-100, INCLUSIVE,
19
20                                                              Defendants-Appellees. *
21
22
23
24                         Appeal from the United States District Court
25                            for the Southern District of New York
26                                       No. 18-cv-2637,
27                         Lorna G. Schofield, District Judge, Presiding.
28                        (Argued March 12, 2020; Decided June 25, 2020)
29
30
31   Before:        PARKER and LOHIER, Circuit Judges, and EATON, Judge. †

     *The Clerk of Court is directed to amend the caption to conform to the above.
     †Richard K. Eaton, Judge of the United States Court of International Trade,
     sitting by designation.
 1          Plaintiff-Appellant SM Kids, LLC sued Google LLC and several related
 2   entities, seeking to enforce a 2008 agreement settling a trademark dispute.
 3   Defendants-Appellees moved to dismiss for lack of standing, pursuant to Fed. R.
 4   Civ. P. 12(b)(1), arguing that SM Kids did not own the subject trademark, as it
 5   had been improperly assigned by SM Kids’ predecessor, which had executed the
 6   settlement agreement. The United States District Court for the Southern District
 7   of New York (Schofield, J.) received evidence on the matter, found that the
 8   trademark assignment was invalid, and dismissed for lack of subject-matter
 9   jurisdiction. We hold that the validity of the trademark was not a jurisdictional
10   matter related to Article III standing but was instead a merits question properly
11   addressed on a motion under Fed. R. Civ. P. 12(b)(6), a motion for summary
12   judgment, or at trial. Accordingly, we VACATE the judgment of the district
13   court and REMAND for further proceedings consistent with this opinion.
14
15                                             JOHN M. MAGLIERY (Geoffrey S.
16                                             Brounell, L. Danielle Toaltoan, on the
17                                             brief), Davis Wright Tremaine LLP, New
18                                             York, NY, for Plaintiff-Appellant.
19
20                                             BRENDAN J. HUGHES (Rebecca Givner-
21                                             Forbes, Ian R. Shapiro, on the brief),
22                                             Cooley LLP, Washington, DC, for
23                                             Defendants-Appellees.
24
25
26   BARRINGTON D. PARKER, Circuit Judge:

27          SM Kids, LLC appeals from a judgment of the United States District Court

28   for the Southern District of New York (Schofield, J.) dismissing its complaint

29   alleging breach of a settlement agreement for lack of Article III standing. See Fed.

30 Rawle Civ. P. 12(b)(1). The district court concluded that it lacked jurisdiction because

31   SM Kids had not been validly assigned the trademark that was the subject of the

                                               2
 1   settlement by the trademark’s prior owner. We hold that the question of whether

 2   the trademark assignment was valid was a merits and not a jurisdictional

 3   question. Accordingly, we VACATE the judgment of the district court and

 4   REMAND for further proceedings consistent with this opinion.

 5         The facts as found by the district court are as follows. 1 In 1995, Steven

 6   Silvers created the Googles brand. Two years later, he registered the Googles

 7   trademark and the internet domain name www.googles.com. The website

 8   launched in 1998 as a children’s education and entertainment website. That year,

 9   the search engine Google adopted the Google name. Subsequently, in 2005,

10   Silvers sued Google for trademark infringement. In February 2007, Silvers

11   assigned all rights in Googles to Stelor Productions, LLC. In December 2008,

12   Google and Stelor settled the trademark infringement litigation.

13         As the trademark infringement litigation unfolded, in 2006 Stephen

14   Garchik invested in Stelor. The company soon defaulted on Garchik’s loans.

15   Following a bankruptcy proceeding, in 2011 Stelor assigned the “entire interest

16   and the goodwill” of the Googles trademark to Garchik, doing business as

     1Because Google brought its motion under Rule 12(b)(1), the district court relied
     on materials outside the pleadings and made factual findings. See Makarova v.
     United States, 201 F.3d 110, 113 (2d Cir. 2000). We address a question of law but
     refer to the district court’s findings for relevant background information.
                                               3
 1   Stelpro Loan Investors, LLC. Sp. App’x at 7. By that point, the Googles website

 2   remained operational, but there is some evidence that its content was static and

 3   quickly grew outdated. In January 2013, Garchik transferred the Googles assets

 4   to SJM Partners, a company of which he is the sole owner. Following this

 5   transfer, Garchik replaced the Googles website with a “coming soon” page,

 6   posted a solicitation for joint venture partners, and added some audiovisual

 7   content. Finally, in February 2018, SJM Partners transferred the Googles assets to

 8   Plaintiff-Appellant SM Kids, a newly formed firm owned by Garchik.

 9         In February 2018, SM Kids sued Google LLC, Alphabet Inc., XXVI

10   Holdings Inc., and 100 John and/or Jane Doe defendants (collectively, “Google”)

11   in New York County Supreme Court, alleging that Google had breached the 2008

12   settlement agreement. That agreement prohibited Google from “intentionally

13   mak[ing] material modifications to its [then-]current offering of products and

14   services in a manner that is likely to create confusion in connection with

15   [Googles].” J. App’x at 57-58. More specifically, Google agreed not to “create,

16   develop and publish children’s books, fictional children’s videos, or other

17   fictional children’s related content that have a title of ‘GOOGLE’ or a ‘GOOGLE-‘

18   formative title or mark.” Id. at 58.

                                              4
 1         The complaint alleged that Google had breached that agreement by

 2   creating Google Play and YouTube Kids, which publish and distribute children’s

 3   content. SM Kids further objected to Google’s acquisition of several children’s

 4   entertainment businesses, including Launchpad Toys and the “Toontastic”

 5   application.

 6          Google, invoking diversity jurisdiction, removed the lawsuit to the

 7   Southern District of New York, where it moved to dismiss the complaint

 8   pursuant to Rules 12(b)(1) and 12(b)(6). Principally, Google argued that SM Kids

 9   lacked standing to sue because it never validly acquired the Googles trademark,

10   and only the holder of that trademark could enforce the settlement agreement.

11   Before the motion was fully briefed, the district court denied it without prejudice

12   and ordered that discovery be stayed except as to the issues of standing and

13   subject-matter jurisdiction. SM Kids unsuccessfully objected to this procedure on

14   the ground that the validity of the trademark assignment was a merits rather

15   than a jurisdictional question.

16         Google took discovery from SM Kids and then renewed its motion to

17   dismiss, pursuant only to Rule 12(b)(1). Relying on materials outside the

18   complaint that had been generated during discovery, the district court found that

                                              5
 1   SM Kids had not shown by a preponderance of the evidence that it had validly

 2   acquired the trademark. The court held that a valid assignment requires that the

 3   mark be used in commerce and found that the mark was not used in commerce

 4   from 2010 to 2018, when it was assigned to SM Kids. Specifically, it found that

 5   the Googles website had not been used to identify goods or services sold to

 6   consumers because it was merely a “coming soon” page. Treating this deficiency

 7   as jurisdictional, the district court granted the motion to dismiss. This appeal

 8   followed.

 9                                      DISCUSSION

10         A motion to dismiss for lack of Article III standing challenges the subject-

11   matter jurisdiction of a federal court and, accordingly, is properly brought under

12   Fed. R. Civ. P. 12(b)(1). See Carter v. HealthPort Techs. LLC, 822 F.3d 47, 56 (2d Cir.

13   2016). When a motion under Rule 12(b)(1) is based solely on the complaint and

14   the attached exhibits, the plaintiff bears no evidentiary burden, and the district

15   court must evaluate whether those documents allege facts that plausibly suggest

16   that the plaintiff has standing to sue. Id. We review the grant of such a motion de

17   novo. Id. However, a motion under Rule 12(b)(1) may also rely on evidence

18   beyond the pleadings. Id. at 57. When a defendant makes such a fact-based

                                                6
 1   motion, the plaintiff may respond with evidence of its own. Id. We then review

 2   the district court’s legal conclusions de novo and its factual findings for clear

 3   error. Makarova, 201 F.3d at 113. In this case, the district court relied on evidence

 4   outside the pleadings. Nonetheless, the question we address on review is

 5   exclusively a question of law and, consequently, our review is de novo. See

 6   Kreisler v. Second Ave. Diner Corp., 731 F.3d 184, 187 n.3 (2d Cir. 2013).

 7                                              I.

 8         Article III, Section 2 of the Constitution limits the subject-matter

 9   jurisdiction of the federal courts to “Cases” and “Controversies.” E.g., Dhinsa v.

10   Krueger, 917 F.3d 70, 77 (2d Cir. 2019). The standing doctrine, which emerges

11   from Article III, is designed “to ensure that federal courts do not exceed their

12   authority as it has been traditionally understood.” Spokeo, Inc. v. Robins, 136 S. Ct.
13   1540, 1547 (2016). The doctrine imposes three requirements: “[t]he plaintiff must

14   have (1) suffered an injury in fact, (2) that is fairly traceable to the challenged

15   conduct of the defendant, and (3) that is likely to be redressed by a favorable

16   judicial decision.” Id.

17         In its motion to dismiss, Google argued that SM Kids lacked Article III

18   standing because it was not the holder of the Googles trademark. More

                                                7
 1   specifically, it contended that a trademark is assignable only “with the good will

 2   of the business in which the mark is used,” and the mark must be in “actual use

 3   in the marketplace” and “employed to identify goods or services sold to

 4   consumers in a given market.” 15 U.S.C. § 1060(a)(1); Cross Commerce Media, Inc.

 5   v. Collective, Inc., 841 F.3d 155, 167 (2d Cir. 2016); Berni v. Int’l Gourmet Rests. of

 6   Am., Inc., 838 F.2d 642, 646 (2d Cir. 1988).

 7          Google contended that the Googles mark had not been used in commerce

 8   and, therefore, could not be assigned to SM Kids. Because SM Kids was not the

 9   holder of the mark, Google reasoned, it had no rights under the settlement

10   agreement and did not have a legally protected interest whose impairment could

11   be redressed in a lawsuit. In other words, it had not suffered an injury in fact.

12   The district court agreed and concluded that, because SM Kids lacked Article III

13   standing, the court did not have subject-matter jurisdiction.

14          We do not agree that the validity of the assignment was a question of

15   Article III standing. Instead, the question was one of contractual standing, which

16   asks a different question: whether a party has the right to enforce a contract.

17   Contractual standing is distinct from Article III standing and does not implicate

18   subject-matter jurisdiction. Article III standing speaks to the power of a court to

                                                 8
 1   adjudicate a controversy; contractual standing speaks to a party’s right to relief

 2   for breach of contract. Although the question of whether Google breached a

 3   contract with SM Kids depends on whether SM Kids enjoyed a contractual

 4   relationship with Google, the existence of such a relationship is not a prerequisite

 5   to a court’s power to adjudicate a breach-of-contract claim.

 6         SM Kids produces content under the name Googles, and it alleges that

 7   Google confusingly produces similar content under its own name, in breach of a

 8   contract. SM Kids plausibly alleges that the availability of Google’s content—

 9   which allegedly violates the settlement agreement—has injured the popularity of

10   Googles content and thereby caused it economic injury. That injury could be

11   redressed by injunctive or monetary relief. As a result, the three requirements of

12   Article III standing are satisfied.

13         Whether Google might have a defense based on trademark or contract law

14   does not change this result. A contest between a plausibly alleged claim and a

15   defense exists in many, if not most, breach-of-contract lawsuits, and typically,

16   one party wins and the other loses. Under Google’s approach, courts would lack

                                              9
 1   jurisdiction in most instances where a breach-of-contract plaintiff failed to prove

 2   the existence of a contract.2

 3         The Supreme Court has confirmed that a challenge does not implicate

 4   Article III standing when it “simply presents a straightforward issue of contract

 5   interpretation.” Perry v. Thomas, 482 U.S. 483, 492 (1987). Whether the elements of

 6   breach of contract, including the existence of a contract, are satisfied, that Court

 7   has said, goes to the merits, not to a court’s power to resolve the controversy. In

 8   Perry, the petitioners invoked federal jurisdiction to compel arbitration. The

 9   respondent contended that two of the petitioners lacked standing because they

10   were not parties to the arbitration agreement. The Court rejected the contention

11   that resolving that issue was a prerequisite to Article III standing. Constitutional

12   standing, the Court reasoned, was not the threshold inquiry when a litigant’s

13   contention was that his opponents were not parties to an agreement. Because

14   contractual standing goes to the merits, and “[o]ur threshold inquiry into

     2 Under Fed. R. Civ. P. 12(h)(3), “[i]f the court determines at any time that it lacks
     subject-matter jurisdiction, the court must dismiss the action.” “Where a court
     lacks subject matter jurisdiction, it also lacks the power to dismiss with
     prejudice.” Hernandez v. Conriv Realty Assocs., 182 F.3d 121, 123 (2d Cir. 1999).
     Treating contract formation as jurisdictional would therefore call into question a
     federal court’s ability to issue a claim-preclusive judgment that a contract did not
     exist.
                                              10
 1   standing ‘in no way depends on the merits of the [plaintiff’s] contention that

 2   particular conduct is illegal,’” contractual standing is not a matter of

 3   constitutional standing. Whitmore v. Arkansas, 495 U.S. 149, 155 (1990) (quoting

 4   Warth v. Seldin, 422 U.S. 490, 500 (1975)); see also Bond v. United States, 564 U.S.
5   211, 219 (2011) ( “[T]he question whether a plaintiff states a claim for relief ‘goes

 6   to the merits’ in the typical case, not the justiciability of a dispute . . . .” (quoting

 7   Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 92 (1998))).

 8          Our cases reach the same conclusion. In Carver v. City of New York, 621 F.3d
9   221, 226 (2d Cir. 2010), we held that “[t]he standing question is distinct from

10   whether [a plaintiff] has a cause of action.” We have cautioned against

11   arguments that “would essentially collapse the standing inquiry into the merits,”

12   Baur v. Veneman, 352 F.3d 625, 642 (2d Cir. 2003), and attempts to “conflate the

13   threshold question of [the plaintiff’s] standing under Article III . . . with the

14   question of whether [he] has a valid claim on the merits,” Lerman v. Bd. of

15   Elections, 232 F.3d 135, 143 n.9 (2d Cir. 2000). 3 This body of law means that a

     3The other circuits are in accord that contractual standing goes to the merits of a
     claim rather than to the existence of subject-matter jurisdiction. Rocky Mountain
     Helium, LLC v. United States, 841 F.3d 1320, 1324-25 (Fed. Cir. 2016); Cotton v.
     Certain Underwriters at Lloyd’s of London, 831 F.3d 592, 594-96 (5th Cir. 2016);
     Cornhusker Cas. Co. v. Skaj, 786 F.3d 842, 851 (10th Cir. 2015); Lindsey v. Starwood
                                                  11
 1   party that alleges harm due to another’s breach of a contract has a justiciable

 2   controversy with the other party and that the courts have jurisdiction to resolve

 3   the controversy. See United States v. Cambio Exacto, S.A., 166 F.3d 522, 528 (2d Cir.

 4   1999).

 5                                             II.

 6            Additional support for this conclusion comes from the Supreme Court’s

 7   decisions cautioning lower courts from reading jurisdictional limitations into

 8   substantive statutory provisions. The relevant provision of the Lanham Act on

 9   trademark assignments, 15 U.S.C. § 1060, provides that a trademark is assignable

10   only “with the good will of the business in which the mark is used.” It requires

11   that the mark be used in commerce. Cross Commerce Media, 841 F.3d at 167. As

12   noted, the district court treated this section as a jurisdictional hurdle. It reasoned

13   that because the Googles mark was not used in commerce, SM Kids could not

14   have been validly assigned the trademark and consequently the court lacked

15   subject-matter jurisdiction.

     Hotels & Resorts Worldwide Inc., 409 F. App’x 77, 78 (9th Cir. 2010) (memorandum
     opinion); Novartis Seeds, Inc. v. Monsanto Co., 190 F.3d 868, 871 (8th Cir. 1999).

                                               12
 1         But § 1060 does not mention jurisdiction. The Supreme Court has

 2   emphasized that federal courts should not treat statutory provisions as

 3   jurisdictional thresholds when they do not speak in jurisdictional terms. Zipes v.

 4   Trans World Airlines, Inc., 455 U.S. 385, 394 (1982). Arbaugh v. Y&H Corp., for

 5   example, held that an element of a statutory claim was not jurisdictional when

 6   the plaintiff pleaded “a colorable claim ‘arising under’ the Constitution or laws

 7   of the United States,” absent a contrary indication of congressional intent. 4 546

 8 U.S. 500, 513 (2006). A statutory requirement should be treated as jurisdictional,

 9   the Court went on to say, only when Congress “clearly states” as much and

10   “duly instruct[s]” courts and litigants that the issue is jurisdictional. Id. at 515. If

11   this language is not present, and Congress does not rank a statutory limitation as

12   jurisdictional, courts should treat the restriction as nonjurisdictional in character.

13   This rule is designed to be a “readily administrable bright line” test. Id. at 516.

14   Nothing in § 1060 suggests that Congress intended to limit the broad grant of

15   federal question jurisdiction in § 1331 and diversity jurisdiction in § 1332 as to

     4 This result does not change because this case arises under diversity, rather than
     federal question, jurisdiction. Arbaugh articulates the general rule that “statutory
     limitations should not be understood to limit the subject matter jurisdiction of
     the courts unless that is the ‘clearly’ stated intention of the statute.” United States
     v. Prado, 933 F.3d 121, 135 (2d Cir. 2019). Congress must clearly state such an
     intention anytime it imposes a jurisdictional limitation.
                                                13
 1   exclude cases where trademarks were assigned without accompanying good

 2   will. See Fed. Treasury Enter. Sojuzplodoimport v. Spirits Int’l N.V., 623 F.3d 61, 71

 3   (2d Cir. 2010) (holding that when claims arise under the Lanham Act,

 4   “jurisdiction exists not only over the infringement claims but also over the

 5   antecedent issue of the validity of the assignment”); Berni, 838 F.2d at 645-46

 6   (treating “standing” under the Lanham Act as nonjurisdictional); cf. Reed Elsevier,

7    Inc. v. Muchnick, 559 U.S. 154, 161-62 (2010) (citing Arbaugh in holding that the

 8   Copyright Act’s registration requirement is not jurisdictional).

 9         In La Quinta Worldwide LLC v. Q.R.T.M., S.A. de C.V., 762 F.3d 867 (9th Cir.

10   2014), the court considered a “use in commerce” provision of the Lanham Act,

11   which is similar to the requirement of use in commerce in § 1060, the “good will”

12   provision at issue here. The court held that this provision was an element of a

13   Lanham Act claim rather than a jurisdictional requirement. Id. at 873. The court

14   explained that because the “use in commerce” element of claims under Sections

15   32 and 43(a) of the Act was not structurally connected to the statute’s

16   jurisdictional grant, 15 U.S.C. § 1121, “use in commerce” was a substantive

17   element and not a jurisdictional issue. La Quinta, 762 F.3d at 873. Section 1060

18   similarly lacks a structural connection to § 1121 and mentions no limitation on

                                                14
 1   the availability of jurisdiction under 28 U.S.C. § 1331 or § 1332. Consequently, it

 2   is not jurisdictional. Cf. Spokeo, 136 S. Ct. at 1549 (emphasizing that whether a

3    plaintiff has a cause of action under a statute does not determine whether it

4    possesses Article III standing); Lexmark Int’l, Inc. v. Static Control Components, Inc.,

5    572 U.S. 118, 128 (2014) (same).

6                                              III.

7          Google urges us that any error in the procedures used by the district court

8    was harmless because it reached a correct result. Maybe so, maybe not: but we

9    are not now at that point. Because the court resolved Google’s motion as a fact-

10   based motion under Rule 12(b)(1), it considered evidence beyond the complaint.

11   It also placed on SM Kids the burden of proving subject-matter jurisdiction. Had

12   the district court treated the motion as one under Rule 12(b)(6), its review would,

13   of course, have been limited to the complaint, to documents attached to the

14   complaint or incorporated by reference, and to documents of which the district

15   court could have taken judicial notice. In addition, the facts alleged in the

16   complaint would have been accepted as true and all factual inferences drawn in

17   SM Kids’ favor. SM Kids, on the other hand, would have been required to plead

                                               15
 1   only a plausible claim to relief and the burden to show otherwise would have

 2   fallen on Google. See Lerner v. Fleet Bank, N.A., 318 F.3d 113, 128 (2d Cir. 2003).

 3         In the alternative, if the district court received and elected not to exclude

 4   matters outside the pleadings, Rule 12(d) presented it with only two options:

 5   exclude the additional material or convert the motion to one for summary

 6   judgment. See Palin v. N.Y. Times Co., 940 F.3d 804, 810-11 (2d Cir. 2019). At that

 7   point, Google would have borne the burden under Rule 56(a) of demonstrating

 8   the absence of a genuine issue of material fact.

 9         We have no doubt that the able district judge’s approach was animated by

10   entirely understandable concerns of efficiency intended to save the time and

11   resources of the parties and the court. But rules matter, and procedural regularity

12   and evenhandedness matter, as well. “[D]espite the flexibility that is accorded

13   district courts to streamline proceedings and manage their calendars, district

14   courts are not free to bypass rules of procedure that are carefully calibrated to

15   ensure fair process to both sides.” Id. at 812.

16          Suffice it to say, we do not speculate about what results procedures not

17   followed might have yielded. Nor do we reach the questions of validity of the

                                               16
1   assignment of the Googles mark and whether SM Kids possesses contractual

2   standing. Instead, we remand to the district court.

3                                    CONCLUSION

4         For the foregoing reasons, the judgment of the district court is VACATED,

5   and the case is REMANDED for further proceedings consistent with this

6   opinion.

                                            17