Case Name: NC3 Systems, Inc. v. Toast Holdings, Inc., et al.
Case No: 19CV343016

I. Background

NC3 Systems, Inc., d.b.a. Caliva (“Plaintiff”) brings this action against Toast Holdings, and We Toast, Inc. (“Defendants”) for damages associated with trademark infringement and unfair competition.

According to the allegations of the first amended complaint (“FAC”), Plaintiff produces, distributes and sells cannabis consumer products in California. (FAC, ¶ 9.) “Toasties” is one of its products, so named because its production involves the heating or “toasting” of the cannabis. (FAC, ¶ 12.) Plaintiff has also developed and continuously uses the phrase “Toast. Chill. Repeat” in marketing its products. (FAC, ¶ 14.) Plaintiff acquired common law rights in its “Toasties” and “Toast. Chill. Repeat.” trademarks and they are also registered. (FAC, ¶ 14.)

At the same time, Defendants distribute and sell cannabis products, including the “Toast” branded product, referred to as “Toast Slices.” (FAC, ¶ 16.) Their products are distributed in California by QX Ventures (“QX”). (FAC, ¶ 17.) They started distributing and selling in California in 2018, a year after Plaintiff began distributing Toasties. (FAC, ¶ 19.) Defendants subsequently improperly obtained a California trademark registration for “Toast” applicable to cannabis cigarettes. (FAC, ¶ 21.)

In response to the present action and a request for preliminary injunction by Plaintiff, Defendants purported to assign the registered trademarks to QX in May, 2019. (FAC, ¶ 23.) Defendants are unlawfully trading on, and profiting from the goodwill that Plaintiff has developed in its trademarked products and used the “Toast. Chill. Repeat” mark in a social media promotion. (Ibid.) This has led to consumer confusion. (FAC, ¶ 24.)

Simultaneously, Defendants have not obtained any licenses to manufacture, distribute or sell cannabis products in the state and their operations violate the statutes regulating the sale and distribution of cannabis products. (FAC, ¶¶ 32, 38, 69.)

Plaintiff asserts seven causes of action for (1) statutory trademark infringement; (2) cancellation of trademark registration No. 303617; (3) cancellation of trademark registration No. 303620; (4) common law trademark infringement; (5) statutory unfair competition; (6) common law unfair competition; and (7) declaratory relief.

Before the Court is Defendants’ motion to strike and request for judicial notice in support, as well as Plaintiff’s request for judicial notice in support of its opposition.

II. Request for Judicial Notice

Judicial notice may be taken of any matter authorized or required by law. (Fremont Indemnity Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 113, citing Evidence Code §§ 451 & 452.) A matter is subject to judicial notice only if it is reasonably beyond dispute. (Ibid.) Furthermore, any matter judicially noticed must be relevant to a material issue. (People ex rel. Lockyer v. Shamrock Foods Co. (2000) 24 Cal.4th 415, 422, fn. 2.)

A. Defendants’ Request for Judicial Notice

In support of their motion to strike, Defendants request judicial notice of two regulatory documents issued by the Bureau of Cannabis Control: (1) the January 15, 2019 “Addendum to the Final Statement of Reasons”; and (2) “Guidance on Commercial Cannabis Activity.” The request is made pursuant to Evidence Code section 452, subdivisions (b), which allows for judicial notice of regulations and legislative enactments and subdivision (h) which otherwise allows for judicial notice of facts and propositions that are not reasonably subject to dispute and are capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy.

A court may take judicial notice of documents generated by an administrative body providing guidance on its rules and regulations. (See e.g. City and County of San Francisco v. Uber Technologies, Inc. (2019) 36 Cal.App.5th 66, 76, fn. 4.) Each of the matters requested by Defendants is available at the Bureau of Cannabis Control’s website: www.bcc.ca.gov. The Court observes that Plaintiff similarly seeks judicial notice of one of these matters, so their relevance or accuracy as regulatory statements seems not in dispute. Therefore, Defendants’ request for judicial notice is granted.

B. Plaintiff’s Request for Judicial Notice

Plaintiff requests judicial notice of five documents including (1) a copy of the California Cannabis Portal Cannabis Legislation informational webpage; (2) excerpts of the Bureau of Cannabis Control’s Addendum to the Final Statement of Reasons; (3) transcripts from the hearing on Plaintiff’s motion for preliminary injunction; (4) excerpts from Defendants’ opposition to preliminary injunction; and (5) a correspondence from the California Department of Public Health.

Pursuant to Defendants’ request, the Court has taken judicial notice of the Bureau of Cannabis Control “Addendum to Final Statement of Reasons.” The Court finds the remaining matters to be unnecessary to disposition of the motion to strike and declines to take the requested judicial notice. (See e.g. Jordache Enterprises, Inc. v. Brobeck, Phleger & Harrison (1998) 18 Cal.4th 739, 748, fn. 6. [“[T]he request presents no issue for which judicial notice of these items is necessary, helpful, or relevant. Accordingly we deny the request…”].)

III. Motion to Strike

Defendants move to strike several paragraphs from the FAC, three of which are allegations regarding statutory and regulatory language and the remainder which allege Defendants’ violations of the same.

The motion to strike is made pursuant to Code of Civil Procedure section 436 subdivision (a) which allows a court in its discretion to strike any irrelevant, false, or improper matter inserted in any pleading. The grounds for a motion to strike shall appear on the face of the challenged pleading or from matters of which the court may take judicial notice. (§437, subd. (a).) In ruling on a motion to strike, the court reads the pleading as a whole, all parts in their context, and assuming the truth of all well-pleaded allegations. (Turman v. Turning Point of Central California, Inc. (2010) 191 Cal.App.4th 53, 63 citing Clauson v. Super. Ct. (1998) 67 Cal.App.4th 1253, 1255.)

A. Statutory and Regulatory Language

Defendants move to strike paragraphs 29 and 31 in their entirety, and the last sentence of paragraph 30. The two paragraphs and the sentence are statements of law found in Business and Professions Code section 26000, et. seq., also known as the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”). Defendants include each in a list of matters they consider to be “improper and legally invalid language,” (Def. MTS, p. 2 at 2-3.) or “improper assertions.” (Def MTS, p. 7 at 12-13.) However, beyond these statements and including them in their list of items to be stricken, there are no substantive arguments as to their impropriety, falsity or irrelevance.

These matters are statements of law regarding the regulation of cannabis, including requirements for licensing of those who produce, distribute and sell or otherwise profit from or have ownership interest in cannabis businesses. Given that one of Plaintiff’s causes of action relates to unfair business practice by a cannabis business not licensed in California, the statutory language is not irrelevant, false or improper.

Consequently, the motion to strike paragraph 29, 31 and the last sentence of paragraph 30 is DENIED.

B. Factual Allegations

Defendants also move to strike paragraph 32, 33, 34, 35, 36, 37 and 69 in their entirety as well as lines 3-4 of paragraph 38 and lines 20-22 of paragraph 72, which each contain factual allegations in support of Plaintiff’s unfair competition claim.

Preliminarily, the Court notes that each item is not independently discussed for its relevance, falsity or impropriety. Instead, Defendants globally argue that Plaintiff has failed to plead facts sufficient to allege that Defendants are not properly licensed for the cannabis-related activities in which they engage. Furthermore, Defendants do not only rely on facts in the complaint and matters judicially noticeable, but instead attempt to persuade the Court with their own factual allegations regarding their limited operations and interest in the cannabis industry and the applicability of the licensing scheme to their business. However, in ruling on a motion to strike, the Court considers only the face of the complaint and matters judicially noticed and assumes all well-pleaded facts as true. (Ibid.)

Certainly, a complaint must contain a statement of facts constituting a cause of action, and pleading conclusions of law will not suffice. (Perkins v. Superior Court (1981) 117 Cal.App.3d 1, 6; § 425.10, subd. (a).) However, courts have permitted allegations which include conclusions of law, provided the complaint as a whole contains sufficient facts to apprise the defendant the basis upon which relief is being sought. (Ibid.) Consequently, the Court considers each item in a motion to strike both individually and in the context of the entire pleading.

Paragraph 32 is a statement of facts regarding Defendants’ admission that they have not obtained licenses to manufacture, distribute, or sell cannabis products, or to otherwise conduct commercial cannabis activity in the state. Defendants concede this point in their own papers. (Def. MTS, p. 8 at 6-8.) Therefore, it is not susceptible to a motion to strike on any basis as it is not improper, false or irrelevant.

Paragraph 33 is an allegation that Defendants participate in the direction, control, and management of cannabis licensees, citing Defendants’ representations about the quality, nature and contents of the products distributed by QX. Defendants argue that this is an improper legal conclusion, however it is supported by other facts in the complaint. Specifically that “Defendants engage in the business of distributing and selling cannabis products” including their proprietary brand “Toast Gold Slices” which are distributed in California by QX. (FAC, ¶¶ 16, 17, 18.) Thus, the overall complaint portrays Defendants as directing sales of its proprietary products through a distributor, in support of paragraph 33. Therefore, the paragraph is not an improper unsupported legal conclusion or otherwise false or irrelevant.

Paragraph 34 further alleges that Defendants are “owners” as defined by MAUCRSA and state regulations so they must be disclosed as such, though they are not. The regulations for which the Court has taken judicial notice specify that “owners” for purposes of commercial cannabis businesses include those entitled to a share of 20 percent of the profits. (BCC, Fin. St. of Reas. Pp 8-9.) In fact, the statement goes on at length regarding the need for disclosure of ownership interests suggesting it is an important part of the regulatory scheme. (Id. at p. 9.) Therefore, facts in support of allegations that Defendants operate as unlicensed owners of a cannabis business are not improper or irrelevant. And while Defendants may dispute it, nothing on the face of the complaint suggests it is false.

Similarly, paragraph 35 alleges that Defendants receive a portion of the profits from QX’s cannabis business. Since pursuant to the regulations, one who profits from a cannabis business must be disclosed if their share is 20 percent or more (Ibid.), this is not an irrelevant or improper fact inserted in the cause of action, nor is there evidence on the face of the complaint or in matters judicially noticeable that it is false.

Paragraph 36 alleges that Defendants are “financial interest holders” under the regulations and they must be disclosed accordingly, but the state has no records of Defendants’ status as such. Again, the regulatory statements make clear that the Bureau requires disclosure of individuals with whom cannabis businesses are sharing profits. (Id. at p. 10.) By way of examples, the regulatory guidance includes landlords, consultants, or even accountants and attorneys who take a share of profits from a cannabis business as payment. (Ibid.) Furthermore, Defendants’ arguments parsing the statutory language requiring the disclosure of “individuals” rather than corporate entities is not persuasive to the Court, as it is directly contradicted by the regulatory guidance. Specifically, “The new subsection clarifies that if an entity has a financial interest in a commercial cannabis business, then all individuals who are owners of that entity shall be considered to have a financial interest in the commercial cannabis business.” (Ibid.) Therefore, there is no requirement that a financial interest holder be an individual and an allegation that Defendants are financial interest holders is not improper.

Furthermore, while paragraph 36 taken by itself may be a bare legal conclusion, the subsequent paragraph (37) which alleges that “QX publicly represents that it has two existing operating contracts in place [including Toast Holdings] with projected 2019 revenue of +4MM” supports the claim that Defendants are “financial interest holders.” While Defendants take issue with the allegation, nothing on the face of the complaint shows that it is false, improper or irrelevant. Therefore, neither paragraph 35 or 36 will be stricken.

Defendants also move to strike the phrase “violation of MAUCRSA and the Cannabis Regulations” from paragraph 38. While Defendants’ motion to strike this phrase is consistent with their overall denial of their status as non-owners and non-financial interest holders, nothing on the face of the complaint shows that this is a false, improper or irrelevant statement.

The motion to strike a portion of paragraph 69, which is a summary of the allegations in support of the unfair competition cause of action likewise fails. Defendants take issue with the allegation that Defendants “participate in the direction, control, and management of the California cannabis licensees with whom they conduct business, including QX, but the Toast Defendants and persons with financial interests therein have not been disclosed as ‘owners’ in connection with any cannabis license.” This allegation is supported throughout the pleading in among other things the prior paragraphs which Defendants sought to strike. It is also alleged that “QX distributes Toast-branded products in California.” (FAC, ¶ 17.) It is also alleged that “Defendants are engaged in the business of distributing and selling cannabis products.” (FAC, ¶ 16.) Therefore, there is nothing improper, irrelevant or false that can be detected from the face of the complaint about these allegations.

Finally, Defendants move to strike the line from paragraph 72 which states “and its violations of MAUCRSA and the Cannabis Regulations.” As already detailed by the Court, the pleading alleges that Defendants operate as an unlicensed cannabis business, or alternatively hold ownership or financial interests in a cannabis business though they are undisclosed as such, so Plaintiff has sufficiently alleged its complaint. Therefore, this allegation is not improper, irrelevant or false based on the face of the complaint.

Consequently, the motion to strike paragraph 32, 33, 34, 35, 36, 37 and 69 in their entirety as well as lines 3-4 of paragraph 38 and lines 20-22 of paragraph 72 is DENIED.