Sourdough & Co., Inc. v. WCSD, Inc., 2:20-cv-01226

Background

Plaintiff Sourdough & Co. is a fast-casual sandwich shop and owner of the "Sourdough & Co." trade name and trade dress since 2013.
Multiple defendants, including GSD Foods and entities controlled by the Bhatia and Uppal families, operated sandwich shops under license agreements with Plaintiff.
In early 2020, these Licensee Defendants terminated their agreements and, led by Gurmeet Bhatia, opened competing shops under the "West Coast Sourdough" brand, allegedly using a similar trade dress.
Plaintiff claims to have become aware of the allegedly infringing conduct in February 2020, several months before answering in an overlapping state court franchise dispute.
State court litigation between some parties (over franchise/trademark issues) began first; Plaintiff did not bring counterclaims there and later sued in federal court on related trade dress and unfair competition grounds.
Defendants moved for judgment on the pleadings in federal court, arguing Plaintiff’s claims are barred as compulsory counterclaims that should have been brought in the state action under California Code of Civil Procedure § 426.30.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Are Plaintiff's federal claims compulsory counterclaims in the earlier state action under § 426.30?	The claims are not "related" for § 426.30 purposes and/or the parties are not identical; did not know about the claims when answering in state court.	The federal and state claims arise from the same licensing transactions and should have been brought as counterclaims in the state action; parties are functionally the same.	Plaintiff’s federal claims are compulsory counterclaims that should have been brought in the state action; dismissal required.
Did Defendants waive the § 426.30 defense by not raising it earlier?	Yes, failure to raise as an affirmative defense in their Answer waives it.	Not waived; can raise in Rule 12(c) motion if no prejudice to Plaintiff.	Not waived; Defendants can raise § 426.30 at this stage with no prejudice shown.
Does § 426.30 require exact identity of parties between the actions?	Yes, and not all parties are the same.	No, sufficient overlap where entities are controlled by the same individuals and function as a single enterprise.	Sufficient identity exists based on control and operation of entities; the requirement is satisfied.
Does Plaintiff's alleged lack of knowledge of its federal claims at time of state answer matter?	Yes, the claims were not "ripe" until after answering.	No, § 426.30 does not require actual knowledge; Plaintiff had at least constructive knowledge.	The statute has no knowledge requirement; Plaintiff knew or should have known of claims.

Key Cases Cited

In re Crown Vantage, Inc., 421 F.3d 963 (9th Cir. 2005) (federal courts will not allow claims that should have been compulsory counterclaims in prior actions)
Pochiro v. Prudential Ins. Co. of Am., 827 F.2d 1246 (9th Cir. 1987) (state law determines whether claims are compulsory counterclaims)
Flickinger v. Swedlow Eng’g Co., 45 Cal. 2d 388 (Cal. 1955) (liberal construction of counterclaim statutes to prevent piecemeal litigation)
Owens v. Kaiser Found. Health Plan, Inc., 244 F.3d 708 (9th Cir. 2001) (affirmative defenses may be raised in a Rule 12(c) motion if not prejudicial)
Russo v. Scrambler Motorcycles, 56 Cal. App. 3d 112 (Cal. Ct. App. 1976) (party identity requirement in compulsory cross-claim analysis)