false advertising as compulsory counterclaim

Creative Impact Inc. v. MGA Entertainment, Inc., 2019 WL 7906430, No. CV 19-07009 AG (ASx) (C.D. Cal. Nov. 4, 2019)

The parties compete in the toy business. Creative Impact makes 5 Surprise, while MGA makes a similar toy called L.O.L. Surprise! In July 2019, MGA sued plaintiff Zuru in California state court alleging state law trade dress and trademark infringement claims.

Six days later, MGA’s CEO posted several messages on LinkedIn, such as, “ZURU Toy Company #Thieves of the Year of others #IP. Just look at the pictures. WHY are retailers supporting these thieves? I don’t get it.” Plaintiffs then sued for false advertising under the Lanham Act and other claims based on these posts, as well as on the IP issues in the state court dispute.

Under the circumstances, the Lanham Act claim was a compulsory counterclaim in the earlier-filed state court action.  Under California law, a “related” cause of action has to be alleged in a cross-complaint. A claim is “related” if it “arises out of the same transaction, occurrence, or series of transactions or occurrences” as the claims asserted in the earlier-filed complaint; this is to be “liberally construed” to accomplish the statute’s purpose “of avoiding a multiplicity of actions” through “piecemeal” litigation.

Here, the thrust of the state court complaint was that plaintiffs’ 5 Surprise toys infringe MGA’s trademark and trade dress in L.O.L. Surprise! Toys. The false advertising claim was “logically interrelated” because it was based on statements that “reiterate the core allegations of Defendant’s state court complaint—namely, that Plaintiffs are infringing on Defendant’s trademark and trade dress rights.” There were some additional relevant facts, but perfect factual overlap isn’t necessary. The Lanham Act claim “shares enough of a logical relationship with Defendant’s state law claims to be considered part of the same series of transactions or occurrences,” especially given the proximity in time between the state court suit and the statements and given that Creative can only win its false advertising claim by also defeating MGA’s infringement claim; otherwise the challenged statements aren’t false. That legal relationship speaks directly to the purpose of avoiding piecemeal litigation.

The presence of an additional plaintiff didn’t help in these circumstances, where the two plaintiffs were part of the same group of companies and constitute a single larger entity together. Fortunately for plaintiffs, they probably can still add a counterclaim, given California’s liberal approach to amending to add compulsory counterclaims.