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North Atlantic Operating Co. Inc. v. Ebay Seller Dealz _For_You

United States District Court, E.D. Michigan, Southern Division

June 19, 2018

NORTH ATLANTIC OPERATING COMPANY, INC.; NATIONAL TOBACCO COMPANY, L.P. Plaintiffs,
v.
EBAY SELLER DEALZ _FOR_YOU, et al., Defendants.

          OPINION AND ORDER GRANTING, IN PART, AND DENYING, IN PART, PLAINTIFFS' MOTION FOR CONTEMPT [ECF NO. 102]

          LINDA V. PARKER U.S. DISTRICT JUDGE

         On March 28, 2017, Plaintiff North Atlantic Operating Company, Inc. (“NAOC”) and Plaintiff National Tobacco Company, L.P. (“NTC”) (collectively “Plaintiffs”) filed this lawsuit against ninety-nine defendants. In their Complaint, Plaintiffs claim that Defendants have been manufacturing, distributing, and selling counterfeit versions of Plaintiffs' ZIG-ZAG® brand cigarette paper products in Michigan and nationwide. Plaintiffs allege that the products are inferior cigarette paper products, “sold without any known quality control or authorization.” (ECF No. 1 at Pg ID 5.) The Complaint includes the following counts: (1) federal trademark infringement; (2) false designation of origin, unfair competition, and trademark and trade dress infringement; (3) copyright infringement; (4) improper use under Mich. Comp. Laws § 429.42; (5) unfair competition under Mich. Comp. Laws § 445.903; and (6) common law unfair competition. (Id. at Pg ID 75-85.)

         On March 28, 2017, Plaintiffs filed an Emergency Ex Parte Motion for Temporary Restraining Order (“TRO”), Preliminary Injunction, and Other Relief. (ECF No. 3.) The hearing on the TRO occurred on April 26, 2017, and this Court granted Plaintiffs' TRO on May 3, 2017. (ECF No. 16.) After proper notice and service, on June 13, 2017, this Court held a hearing on the preliminary injunction. On June 14, 2017, this Court entered a Preliminary Injunction Order enjoining the remaining Defendants[1] from buying, selling, distributing or manufacturing counterfeit ZIG-ZAG® products. (ECF No. 58.)

         Presently before the Court is Plaintiffs' motion for contempt against Defendants Sam Chawla and eBay Seller schawla5 (“Chawla Defendants”) for “willfully selling at least 50 cartons of confirmed counterfeit ZIG-ZAG® Orange[2], in counterfeit packaging that states: “Distributed by North Atlantic Operating Company, Inc.'” (ECF No. 102 at Pg ID 2827.) A hearing on the motion for contempt was held on February 26, 2018. Defendant Chawla appeared by telephone. At the conclusion of the hearing, the Court instructed Plaintiffs to provide a brief in support of its claim for damages and permitted Defendant Chawla to respond. On March 12, 2018, Plaintiffs filed their supplement brief for damages, and Defendant Chawla filed his response[3] on March 27, 2018. (ECF Nos. 112 & 116.)

         I. Factual & Procedural Background

         Plaintiffs are the exclusive U.S. licensees of the ZIG-ZAG® brand cigarette paper products. (Id. at ¶ 13.) The ZIG-ZAG® brand cigarette paper products are offered in different varieties, based on factors such as thickness, quality of paper, and size. (Id. at ¶ 218.) One of the ZIG-ZAG® products that Plaintiffs distribute in the U.S. are ZIG-ZAG® 1 ¼ Size French Orange (“ZIG-ZAG® Orange”). (Id. at ¶ 219.) ZIG-ZAG® Orange products are subjected to high quality control stands when manufactured in France and imported into the U.S. (Id. at ¶ 221-23.) After a rigorous inspection, NAOC sells the ZIG-ZAG® Orange products to their direct accounts, which are mostly wholesale distributors throughout the U.S. (Id. at ¶ 224.)

         All authentic ZIG-ZAG® Orange cigarette paper products distributed by NAOC display the following valid and subsisting trademarks that are used on all ZIG-ZAG® products: U.S. Registration Nos. 610, 530; 1, 127, 946; 2, 169, 540, and 2, 169, 549. (Id. at ¶ 227.) Only NAOC has the rights to distribute cigarette paper products with the ZIG-ZAG® trademarks in the U.S. (Id. at ¶ 228.) NAOC also adds its own trademarks for products distributed in the U.S.: U.S. Registration Nos. 2, 664, 694; 2, 664, 695; 2, 610, 473; and 2, 635, 446. Similarly, NAOC owns the federal copyright registration for the NAOC copyright. (Id. at ¶ 234.) This copyright appears on all authentic ZIG-ZAG® Orange products distributed in the United States by NAOC. Also appearing on the packaging of ZIG-ZAG® products distributed in the United States are the ZIGZAG® and NAOC trademarks; gold-fill lettering and design elements; particular French phrases such as “Qualite superieure”; and the statements “Made in France” or “Imported French.” (Id. at ¶ 238.) NAOC alleges that it has developed substantial goodwill and reputation due to the high quality of the ZIG-ZAG® brand cigarette paper products in the United States. (Id. at ¶ 231.)

         NAOC began investigating the distribution of counterfeit ZIG-ZAG® Orange products in 2016. (Id. at ¶ 243.) During the course of the investigation, Plaintiffs determined upon information and belief that Defendants have been selling counterfeit ZIG-ZAG® Orange products “over the Internet to wholesalers, retailers, and to individual consumers for significant profits, at prices that distributors of authentic products cannot possibly compete with.” (Id. at ¶ 253.) Plaintiffs allege that Defendants are not authorized or licensed to sell any products with the ZIG-ZAG® or NAOC® trademarks. (Id. at ¶ 257.)

         Plaintiffs learned of the counterfeit sales through the use of investigators working on behalf of NAOC. (Id. at ¶ 263.) These purchases were made with various sellers on online marketplaces such as eBay.com (“eBay”), Amazon.com (“Amazon”), and Bonanza.com (“Bonanaza”). (Id.) Payments with the eBay and Bonanza sellers was made through PayPal. (See Id. at ¶¶ 267, 271.) Plaintiffs allege that the sale of counterfeit products constitutes willful conduct by the Defendants. Further, Plaintiffs allege this reputation has been damaged by the manufacturing and distribution of counterfeit products by Defendants.

         After the issuance of the TRO on May 3, 2017, Plaintiffs served all Defendants on May 10, 2017. (ECF No. 23.) Specifically, Plaintiffs served the Chawla Defendants at support@nririshtay.com and schawla5@yahoo.com and through FedEx at 4324 Main Street, Bridgeport, CT 06606, an address listed for Liberty Tax Service, Defendant Sam Chawla's business. (Victoria Danta Decl., at ¶ 10, ECF No. 103-3 at Pg ID 2866.)

         According to Plaintiffs, service was effective because Defendant Chawla contacted Plaintiffs' counsel from his email account, schawla5@yahoo.com. (Id.) In the email, Defendant Chawla referred to the lawsuit by case number and inquired as to the status of his frozen accounts. (Id.) He later contacted Plaintiffs' counsel by phone, from the same phone number associated with his eBay and Amazon accounts, inquiring as to the allegations in the complaint and upcoming deadlines. (ECF No. at Pg ID 2847; Danta Decl., at ¶ 12, ECF No. 103 at Pg ID 2867.)

         On June 13, 2017, the Court held a hearing on the preliminary injunction. The Chawla Defendants did not appear or oppose the motion, despite receiving notice. (ECF NO. 25.) The Court granted Plaintiffs' request for preliminary injunction on June 13, 2017. The Preliminary Injunction Order stated as follows:

IT IS HEREBY ORDERED that, pursuant to Federal Rule of Civil Procedure 65, the remaining Defendants, their respective agents, servants, employees, and officers, and all other persons in active concert or participation with them, who receive actual notice of this order by personal service or otherwise, are hereby enjoined and restrained, pending the final resolution of this action, from directly or indirectly, anywhere in the world:
1. Manufacturing, making, buying, purchasing, importing, shipping, delivering, advertising, marketing, promoting, offering to sell, selling, or otherwise distributing or disposing of, in any manner, any counterfeit or infringing ZIG-ZAG® brand cigarette paper products, including but not limited to ZIG-ZAG® 1 ¼ Size French Orange (“ZIG-ZAG® Orange”), or any cigarette paper products bearing:
a. Infringing or counterfeit versions of the ZIG-ZAG® Trademarks[4], the NAOC® Trademarks[5], the NAOC© Copyright[6], and/or the ZIG-ZAG® Orange Trade Dress[7], which appear alone or in combination on all cartons and booklets of ZIG-ZAG® Orange cigarette paper products distributed by North Atlantic in the United States; or
b. The false statement that such products are “Distributed by North Atlantic Operating Company, Inc.” or otherwise under the control or supervision of North Atlantic, when they are not;
2. Manufacturing, making, buying, purchasing, importing, shipping, delivering, advertising, marketing, promoting, offering to sell, selling, or otherwise distributing or disposing of, in any manner, any purported North Atlantic products that are not actually produced, imported, or distributed under North Atlantic's control or supervision, or approved for sale in the United States by North Atlantic in connection with the ZIG-ZAG® Trademarks, the NAOC® Trademarks, the NAOC© Copyright, or the ZIG-ZAG® Orange Trade Dress;
3. Committing acts calculated to cause purchasers to believe that counterfeit or infringing ZIG-ZAG® cigarette paper products, including counterfeit ZIG-ZAG® Orange, originate with North Atlantic when they do not;
4. In any way infringing or damaging the ZIG-ZAG® or NAOC® Trademarks, the NAOC© Copyright, or the ZIG-ZAG® Orange Trade Dress, or the value or goodwill associated therewith;
5. Otherwise unfairly competing with North Atlantic;
6. Attempting, causing, or assisting in any of the above-described acts, including but not limited to, enabling others in the above-described acts or passing on information to allow them to do so;
7. Destroying, altering, deleting, or otherwise disposing of any documents, records, or electronically stored information concerning the manufacturing, making, buying, purchasing, importing, shipping, delivering, advertising, marketing, promoting, offering to sell, selling, or other distribution or disposal of any product that has been, or is intended to be, sold in packaging containing, displaying, or bearing the ZIG-ZAG® or NAOC® Trademarks, the NAOC© Copyright, or the ZIG-ZAG® Orange Trade Dress;
8. Forming or causing to be formed any corporation or other entity that engages in the above-described acts;
9. Accessing, using, linking to, transferring, selling, exercising control over, or otherwise owning the eBay seller accounts, Amazon seller accounts, or Bonanza seller accounts shown in T.R.O. Attachment 1, or any other online marketplace, e-commerce, or merchant account that is, or could be, the means by which Defendants manufacture, make, buy, purchase, import, ship, deliver, advertise, market, promote, offer to sell, sell, or otherwise distribute or dispose of, in any manner, any counterfeit or infringing ZIG-ZAG® Orange products;
10. Accessing, using, linking to, transferring, selling, exercising control over, or otherwise owning the PayPal accounts associated with the names and e-mail addresses shown in T.R.O. Attachment 1, or any other online payment processing or financial account that is, or could be, the means by which Defendants manufacture, make, buy, purchase, import, ship, deliver, advertise, market, promote, offer to sell, sell, or otherwise distribute or dispose of, in any manner, any counterfeit or infringing ZIG-ZAG® Orange products; and
11. Accessing, transferring, or disposing of any assets, subject to any Defendant's provision of an accounting of assets over $1, 000 and uncontradicted, documentary proof that such particular assets are not proceeds of such Defendant's counterfeiting activities.

(ECF No. 58 at Pg ID 2488-92.) The Chawla Defendants were served with the Preliminary Injunction Order on June 15, 2017. (ECF No. 63.)

         According to Plaintiffs, the Chawla Defendants have continued to buy and sell counterfeit ZIG-ZAG® Orange. (ECF No. 102 at Pg ID 2830.) In November 2017, Plaintiffs' investigators contacted Defendant Chawla, at the phone number associated with the eBay and PayPal accounts, to purchase counterfeit ZIG-ZAG® Orange. (John Hood Decl., at ¶ 11, ECF No. 104 at Pg ID 28881.) On December 7, 2017, Plaintiffs' investigators contacted Defendant Chawla to purchase additional counterfeit ZIG-ZAG® Orange. (Hood Decl., at ¶ 25, ECF No. 104 at Pg ID 2890.) Upon receipt of the counterfeit goods, Plaintiffs' investigators shipped the product to NAOC's headquarters for a quality control inspection. (ECF No. 104 at Pg ID 2889, 2891.) Steve Gnadinger, Manager of Product Integrity at NTC, concluded that the products received from Defendant Chawla were counterfeit. (Steve Gnadinger Decl., at ¶ 7-8, ECF No. 105 at Pg ID 2908-09.)

         At the time of the filing of the motion, the Chawla Defendants had sold at least fifty (50) cartoons and twelve hundred (1, 200) booklets of counterfeit ZIGZAG® Orange to Plaintiffs' undercover investigators. (Id.; see also Hood Decl., at ¶¶ 11, 19, 21, 25, & 31, ECF No. 104 at Pg ID 2888-91.) On November 9, 2017, the Chawla Defendants sold ten (10) cartons containing two hundred and forty (240) booklets, and on December 12, 2017, they sold forty (40) cartons containing nine hundred and sixty (960) booklets. (Id.; see also Gnadinger Decl. at ¶¶ 6-7, 30-33 ECF No. 105 at Pg ID 2908.) Also, Defendant Chawla stated to the undercover investigators that he could get as many counterfeit cartons as needed. Additionally, he sold these counterfeit products for prices below $34.00 per carton-authentic cartons cannot be purchased for less than $34.00. (Id.; see also Gnadinger Decl., at ¶ 29, ECF No. 105 at Pg ID 2912.)

         On February 5, 2018, Defendant Sam Chawla sent a letter to the clerk's office informing that he was unable to appear at the February 7, 2018 hearing. (ECF No. 108.) On February 8, 2018, this Court issued an order rescheduling the hearing to February 26, 2018 and permitted Defendant Chawla to participate by telephone. (ECF No. 109.) At the February 26, 2018 hearing, this Court found the Chawla Defendants in contempt of this Court's June 13, 2017 Preliminary Injunction Order. Plaintiffs filed a supplemental brief for damages on March 12, 2018, and on March 27, 2018, Defendant Chawla filed a response stating that he cannot afford to pay the damages Plaintiffs seek.

         II. Applicable ...


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