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Liqwd, Inc. v. L'oreal USA, Inc.

United States District Court, D. Delaware

April 30, 2019

LIQWD, INC. and OLAPLEX LLC, Plaintiffs,
v.
L'ORAL USA, INC., L'OREAL USA PRODUCTS, INC., L'OREAL USA SID, INC., and REDKEN 5TH A VENUE NYC, L.L.C., Defendants.

          REPORT AND RECOMMENDATION

          SHERRY R. FALLON UNITED STATES MAGISTRATE JUDGE

         I. INTRODUCTION

         Presently befre the court in this patent infingement action is the motion to dismiss the counterclaims of defendats L'Oreal USA, Inc., L'Oreal USA Products, Inc., L'Oreal USA SID, Inc., and Redken 5th Avenue NYC, LLC (collectively, "L'Oreal") pursuant to Rule 12(b)(6) of the Federal Rule of Civil Procedure, fled by plaintiffs Liqwd, Inc. and Olaplex LLC (together, "Olaplex").[1] (D.I. 665) For the following reasons, I recommend that the court grant-in-part Olaplex's motion to dismiss.

         II. BACKGROUND

         A. Patents

         1. The '419 patent

         On November 22, 2016, the United States Patent and Trademark Ofce (the "USPTO") issued United States Patent No. 9, 498, 419 (''the '419 patent"), entitled "Keratin Treatment Formulations and Methods." The '419 patent was filed on March 31, 2016 on a fast track, and claims priority to United States Provisional Application No. 61/994, 709, which was filed on May 16, 2014. The '419 patent is a continuation of parent Application No. 14/713, 885, which was filed on May 15, 2015, published on November 19, 2015, and issued as U.S. Patent No. 9, 326, 926 on May 3, 2016. The '419 patent lists as inventors Eric D. Pressly and Craig J. Hawker ("the inventors"), and identifies Liqwd, Inc. as the assignee. The '419 patent describes "[f]ormulations, kits, and methods for rebuilding the disulfide bonds in keratin" to be applied in conjunction with a hair coloring treatment. ('419 patent, Abstract)

         While the '419 patent was pending before the United States Patent and Trademark Office ("USPTO") as Application No. 15/087, 415, the USPTO received a series of anonymous submissions on August 25, 2016, August 29, 2016, September 14, 2016, and September 23, 2016 alleging that the pending claims were not allowable. (D.I. 636 at ¶ 83) Olaplex alleges that L'Oreal made one or more of the third-party submissions to the USPTO to prevent the issuance of the '419 patent. (Id. at ¶ 84) The third-party submissions were rejected, and the '419 patent was issued on November 22, 2016. (Id. at ¶ 85)

         On January 13, 2017, L'Oreal filed a petition for post-grant review ("PGR") challenging the patentability of all asserted claims of the '419 patent. (D.I. 354 at 4) The Patent Trial and Appeal Board ("PTAB") instituted review of the challenged claims of the '419 patent on July 19, 2017. (Id. at 4-5) On June 27, 2018, the PTAB issued a final written decision finding all asserted claims of the '419 patent unpatentable. (D.I. 339, Ex. A) Olaplex appealed the final written decision to the Federal Circuit. (D.I. 373) The appeal remains pending.

         2. The'954 patent

         United States Patent No. 9, 668, 954 ("the '954 patent") (together with the '419 patent, the "patents-in-suit") was filed on January 25, 2017 and issued on June 6, 2017. The '954 patent is a continuation of United States Patent Application No. 15/290, 593, which is a continuation of the '419 patent. The '954 patent has the same title, inventors, and specification as the '419 patent. The active agent element of claim 1 of the '954 patent requires application of a bleaching mixture containing an active agent of maleic acid to the hair. ('954 patent, col. 25:58-67)

         In late January and early February 2018, L'Oreal filed three PGR petitions challenging the patentability of all claims of the '954 patent. (D.I. 354 at 5) On August 10, 2018, the PTAB instituted PGR proceedings on one of the petitions, and denied institution on the remaining two PGR petitions. (D.I. 366, Exs. A-C) A final written decision on the instituted petition regarding the '954 patent is anticipated in August 2019. (D.I. 385 at 6-13)

         3. The'518 patent[2]

         Liqwd, Inc. is the owner by assignment of United States Patent No. 9, 095, 518 ("the '518 patent"). (D.I. 650 at ¶ 214) In October 2016, Liqwd, Inc. assigned exclusive license rights to the '518 patent to Olaplex LLC to facilitate joint enforcement of the patent rights. (Id. at ¶ 215) Olaplex markets and sells three products, including Bond Multiplier No. 1, Bond Perfector No. 2, and Bond Perfector No. 3 (collectively, "the Olaplex products"), which include the active ingredient bis-aminopropyl diglycol dimaleate, and which are marked as patented under the '518 patent. (Id. at ¶¶ 216-17)

         The claims of the '518 patent require "applying to the hair a formulation comprising a binding agent of formula I

         (Image Omitted)

         wherein A, B, C, and D are reactive moieties ... wherein each of A, B, C, and D independently contains a moiety selected from the group consisting of... a maleate group ... R is a linker that contains two or more charges, wherein the charges are opposite to the charges on the reactive moieties ... wherein the reactive moieties are ionically bound to the linker." (D.I. 650 at ¶ 221; Ex. B, col. 35:66-36:24) According to L'Oreal, the Olaplex products do not fall within the scope of the '518 patent despite their markings. (Id. at ¶¶ 239-40) In support of its assertion, L'Oreal references Olaplex's representations that Olaplex's products do not include ionically bound reactive moieties. These representations were made in litigation in the United Kingdom (the "U.K. Litigation") involving a corresponding U.K. patent related to the patents-in-suit (Id. at ¶¶ 227-40)

         B. Parties

         Olaplex LLC is a California start-up that discovered, developed, and sells the Olaplex products, which purportedly protect hair during and after bleaching treatments. (D.I. 636 at ¶¶ 2, 31) Olaplex LLC is the exclusive licensee of the patents-in-suit pursuant to a May 20, 2014 licensing agreement. (Id. at ¶ 26; D.I. 68, Ex. A at 57:4-58:11 and Ex. 13) Olaplex LLC formally launched in June 2014 via its website. (D.I. 636 at ¶ 32) Liqwd, Inc. is a California company which is the alleged owner of the patents-in-suit. (Id. at ¶¶ 6, 26)

         L'Oreal USA Products, Inc., L'Oreal USA S.D., Inc., and Redken 5th Avenue NYC L.L.C. are subsidiaries of co-defendant L'Oreal USA, Inc. (D.I. 636 at ¶¶ 8-11) L'Oreal develops and manufactures hair care, skin care, cosmetics, and fragrances distributed through nearly thirty brands. (D.I. 650 at ¶ 26) Three lines of L'Oreal's products, each of which comprises three products, are accused of infringement by Olaplex in the present case: Matrix Bond Ultim8, Redken pH-Bonder, and L'Oreal Professionnel Smartbond products (collectively, the "Accused Products"). (D.I. 636 at ¶¶ 60-61)

         C. Facts[3]

         In June 2014, Olaplex launched its three products that were intended to protect hair during and after chemical treatments. (D.I. 650 at ¶¶ 2, 30) Prior to launching the Olaplex products, Olaplex's co-founder, Dean Christal, implemented a social media campaign to market the products, emphasizing their ability to "rebuild broken disulfide bonds." (Id. at ¶¶ 3, 36) Mr. Christal allegedly offered to pay industry insiders to make claims about the Olaplex products while concealing their affiliation with Olaplex. (Id. at ¶¶ 3, 37) Olaplex allegedly created fake "burner" social media accounts to promote the scientific effectiveness of its products and attack the products of its competitors. (Id. at ¶¶ 3-4) Olaplex also allegedly threatened competitors with infringement lawsuits and pressured its distributors to carry the Olaplex products exclusively. (Id. at ¶ 4)

         Following the launch of the Olaplex products, L'Oreal reviewed the Material Safety Data Sheets ("MSDS") for Olaplex No. 1 and Olaplex No. 2, which identified Bis-(Maleimidoethoxy) Ethane as a primary active ingredient in the products. (Id. at ¶ 32) L'Oreal performed a chemical analysis of the Olaplex products and determined that Bis-(Maleimidoethoxy) Ethane could not be detected in the Olaplex products. (Id.) In August 2014, L'Oreal contemplated the use of maleic acid in its own products based on its previous independent work on hair treatment formulations. (Id. at ¶ 33) L'Oreal tested the Olaplex products for the presence of maleic acid, which revealed the presence of a maleic acid solution in Olaplex No. 1 and Olaplex No. 2, despite the fact that maleic acid was not listed as an ingredient in the Olaplex products. (Id.)

         In January 2015, Mr. Christal was contacted by a L'Oreal executive regarding a potential acquisition of Olaplex. (D.I. 636 at ¶ 40; D.I. 650 at ¶ 5) In an April 2015 meeting, Mr. Christal indicated that he was interested in selling Olaplex for $1 billion. (D.I. 650 at ¶¶ 7, 82) On May 18, 2015, Olaplex LLC and L'Oreal USA entered into a nondisclosure agreement (the "First NDA") to govern the parties' acquisition discussions. (Id. at ¶¶ 9, 84-85, 176-92; Ex. A) On May 19, 2015, Olaplex and L'Oreal held another meeting in which Mr. Christal allegedly withheld the financial information required by L'Oreal to make an offer of acquisition. (Id. at ¶¶ 10, 86) On May 23, 2015, L'Oreal USA entered into a nondisclosure agreement with Liqwd, Inc. (the "Second NDA;" together with the First NDA, the "NDAs"), which mirrored the terms of the First NDA. (Id. at ¶¶ 195-211, D.I. 636, Ex. C) The parties subsequently met on September 1, 2015, and a representative of L'Oreal informed Mr. Christal that L'Oreal was no longer interested in the acquisition. (D.I. 650 at ¶¶ 11, 94) Following the cessation of negotiations, L'Oreal continued the work it began in 2013 to develop the Accused Products. (Id. at ¶¶ 12, 27)

         D. Procedural History

         On November 22, 2016, Olaplex publicly filed a complaint against L'Oreal for infringement of the '419 patent and false advertising in the Central District of California (the "California Action"). (D.I. 650 at ¶ 11; D.I. 636 at ¶ 86; CD. Cal. C.A. No. 16-8708-R-AFM, D.I. 1) L'Oreal alleges that the complaint disclosed information regarding L'Oreal USA's potential acquisition, which was subject to the confidentiality provisions of the NDAs. (Id. at ¶ Ill) Olaplex publicized the filing of the lawsuit by sending the complaint to media outlets, revealing L'Oreal's confidential information therein. (Id. at ¶¶ 112-113)

         Olaplex filed the present action on January 5, 2017 against L'Oreal after dismissing the California Action. (D.I. 2) On January 31, 2019, Olaplex filed its third amended complaint. (D.I. 636) L'Oreal filed its answer and amended counterclaims to the third amended complaint on February 8, 2019. (D.I. 650) Olaplex filed the instant motion to dismiss seven of L'Oreal's eleven counterclaims on February 22, 2019. (D.I. 665)

         III. LEGAL STANDARD

         "[C]ourts use the same standard in ruling on a motion to dismiss a counterclaim under Rule 12(b)(6) as they do in assessing a claim in a complaint." Identix Pharms., Inc. v. Gilead Sciences, Inc., C.A. No. 13-1987-LPS-CJB, 2014 WL 4222902, at *5 (D. Del. Aug. 25, 2014) (citing Tyco Fire Prods. LP v. Victaulic Co., Ill. F.Supp.2d 893, 898-99 (E.D. Pa. 2011)). Rule 12(b)(6) permits a party to move to dismiss a complaint for failure to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). When considering a Rule 12(b)(6) motion to dismiss, the court must accept as true all factual allegations in the complaint and view them in the light most favorable to the plaintiff. Umland v. Planco Fin. Servs., 542 F.3d 59, 64 (3d Cir. 2008).

         To state a claim upon which relief can be granted pursuant to Rule 12(b)(6), a complaint must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). Although detailed factual allegations are not required, the complaint must set forth sufficient factual matter, accepted as true, to "state a claim to relief that is plausible on its face." Bell Ail. Corp. v. Twombly, 550 U.S. 544, 570 (2007); see also Ashcroft v. Iqbal, 556 U.S. 662, 663 (2009). A claim is facially plausible when the factual allegations allow the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Iqbal, 556 U.S. at 663; Twombly, 550 U.S. at 555-56.

         The court's determination is not whether the non-moving party "will ultimately prevail," but whether that party is "entitled to offer evidence to support the claims." United States ex rel. Wilkins v. UnitedHealth Grp., Inc., 659 F.3d 295, 302 (3d Cir. 2011). This "does not impose a probability requirement at the pleading stage," but instead "simply calls for enough facts to raise a reasonable expectation that discovery will reveal evidence of [the necessary element]." Phillips v. County of Allegheny, 515 F.3d 224, 234 (3d Cir. 2008) (quoting Twombly, 550 U.S. at 556). The court's analysis is a context-specific task requiring the court "to draw on its judicial experience and common sense." Iqbal, 556 U.S. at 663-64.

         A heightened pleading standard applies to allegations of fraud under Rule 9: "In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." Fed.R.Civ.P. 9(b). Nonetheless, "[m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Id. Rule 9(b) requires a plaintiff to plead "all of the essential factual background that would accompany the first paragraph of any newspaper story-that is, the who, what, when, where and how of the events at issue." In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d 198, 217 (3d Cir. 2002) (internal quotation marks omitted). If the pleading is sufficient "to place the defendants on notice of the precise misconduct with which they are charged, and to safeguard defendants against spurious charges of immoral and fraudulent behavior," then specific date, place, and time allegations are not required to satisfy Rule 9(b). Seville Indus. Mack Corp. v. Southmost Mach. Corp., 742 F.2d 786, 791 (3d Cir. 1984); Van Roy v. Sakhr Software Co., C.A. No. 11-00863 (LPS), 2014 WL 3367275, at *3 (D. Del. July 8, 2014). The purpose of Rule 9(b) is to provide defendants with notice of the precise nature of the claim against them, not to test the factual allegations of the claim. See Seville, 742 F.2dat791.

          IV. ANALYSIS

         A. Lanham Act (Count I)[4]

         The Lanham Act establishes civil liability for "[a]ny person who, on or in connection with any goods or service . . . uses in commerce any . . . false or misleading description of fact, or false or misleading representation of fact which ... is likely to cause confusion." 15 U.S.C. § 1125(a)(1)(A). To plead a false advertising claim under the Lanham Act, the counterclaimant must allege: "(1) the [counterclaim] defendant made false or misleading statements as to its own product or another's; (2) the statements actually deceive or at least [have] a tendency to deceive a substantial portion of the intended audience; (3) the deception is material in that it is likely to influence purchasing decisions; (4) the advertised goods traveled in interstate commerce; and (5) there is a likelihood of injury to the plaintiff in terms of declining sales, loss of good will, etc." Incarcerated Entm't, LLC v. CNBCLLC, 331 F.Supp.3d 352, 362 (D. Del. 2018) (internal quotation marks and citations omitted). "Only statements of fact capable of being proven false are actionable under the Lanham Act because, when personal opinions on nonverifiable matters are given, the recipient is likely to assume only that the communicator believes the statements, not that the statement is true." Parker v. Learn Skills Corp., 530 F.Supp.2d 661, 679 (D. Del. 2008) (citations omitted). "[M]isdescriptions or false representations of specific characteristics of a product, which are actionable under the Lanham Act, are distinguished from puffery, which is not actionable." Robert Bosch LLC v. Pylon Mfg. Corp., 632 F.Supp.2d 362, 366 (D. Del. 2009) (citing Castrol, Inc. v. Pennzoil Co., 987 F.2d 939, 945 (3d Cir. 1993)).

         L'Oreal's counterclaim under the Lanham Act is based on eleven allegedly false and deceptive statements by Olaplex:

(i) L'Oreal USA "knocked off the Olaplex products and tried to replicate Olaplex's technology, when in fact, L'Oreal USA independently developed its own products;

         (ii) That Craig Hawker invented Olaplex in one night and handed it to Dean Christal after Christal told him what he wanted, when Counterclaim Defendants' witnesses admitted this did not happen;

(iii) The Olaplex products will "never break a client's hair again" when Christal admitted that this claim could not be made since the Olaplex products cannot prevent hair breakage;
(iv) The Olaplex No. 1 product "rebuilds broken disulfide bonds and begins the process of preventing damage and repairing hair" when the evidence shows that the product does not perform this function;
(v) The Olaplex No. 2 product "continues to rebuild and restore any remaining broken bonds ensuring the strongest, shiniest, and healthiest hair possible" when the evidence shows that the product does not perform this function;
(vi) That maleic acid was "a component of [Counterclaim Defendants'] unique chemistry" when the chemistry in the Olaplex products is not;
(vii) The L'Oreal USA products do not perform as well as the Olaplex products when in fact, the L'Oreal USA products perform superior to Olaplex;
(viii) Stylists should be "careful" using any products other than the "Olaplex technology" because they may not protect the hair like Olaplex chemistry does;
(ix) Olaplex repairs and multiplies the disulfide bonds of the hair, when in fact, the evidence shows that the products do not perform these functions;
(x) Olaplex links and multiplies the bonds of the hair ... Olaplex is reconstructive surgery, the other [L'Oreal USA] a band aid at best, when the evidence shows that the ...

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