ROBERTO A. LANGE, District Judge.
Plaintiffs Perfetti Van Melle USA, Inc. and Perfetti Van Melle Benelux B.V. (collectively, "Perfetti") arranged through a third party for Defendants Midwest Processing, LLC ("Midwest") and Dexter Jorgensen ("Jorgensen") to recycle candy that Perfetti had manufactured but deemed unsalable. Perfetti sued Defendants in this Court after learning that Defendants wrongfully had diverted the candy to retail stores for sale rather than recycling it. This Court entered a default judgment against Defendants under Federal Rule of Civil Procedure 55(b)(2), Doc. 43, and set a briefing schedule on the issue of Perfetti's recoverable damages, Doc. 44. Perfetti filed a brief and supporting evidence concerning its damages, and the time for Defendants to respond has long passed.
Perfetti is a global manufacturer of candy and chewing gum whose brands include Airheads®, Airheads Xtremes®, and Mentos®. Doc. 1 at ¶¶ 1, 12. All Perfetti products manufactured in the United States are sold through authorized distribution channels to retailers around the country. Doc. 1 at ¶ 13. Perfetti introduced a new product in 2014 called "Airheads Xtremes® Bites" ("Xtremes® Bites"). Doc. 1 at ¶ 20; Doc. 18-1 at 1; Doc. 18-2 at 1. Xtremes® Bites were initially imported from Italy, but Perfetti USA began manufacturing the candy in the United States in July 2014. Doc. 1 at ¶ 23; Doc. 18-1 at 1; Doc. 18-2 at 1.
Between November 2014 and February 2015, Perfetti USA determined that certain Xtremes® Bites production runs did not meet specifications and would therefore be withheld as unsalable product. Doc. 1 at ¶ 25; Doc. 18-2 at 1-2. The sanding sugar on some of the product did not adhere correctly, causing the product to become harder than usual, and individual pieces showed signs of clumping together in the package. Doc. 1 at ¶ 25. Other problems arose with packaging of the product, including sealing defects. Doc. 1 at ¶ 25. Although posing no health or safety risk to consumers, the withheld product had defects in quality or packaging that are common when calibrating a new production line and that would make the product less appealing to consumers. Doc. 1 at ¶ 26; Doc. 18-2 at 2.
Perfetti USA contacted an environmental services broker, Advanced Environmental, Inc. ("Advanced Environmental"), to arrange for the recycling of the unsalable Xtremes® Bites. Doc. 1 at ¶ 28; Doc. 18-2 at 2. Perfetti USA specifically instructed Advanced Environmental that the candy was not to be sold out on the market. On Perfetti USA's behalf, Advanced Environmental engaged Midwest, a South Dakota company operated by Jorgensen, to haul away and recycle the unsalable Xtremes® Bites. Doc. 1 at ¶¶ 7, 8, 28; Doc. 18-2 at 2. Midwest and Jorgensen agreed with Advanced Environmental to recycle the unsalable Xtremes® Bites. Doc. 18-3 at 2. Advance Environmental never told Jorgensen or Midwest that they could sell the candy. Doc. 18-3 at 3.
Between November 2014 and February 2015, Midwest, through a logistics company, picked up fifteen truckloads of unsalable Xtremes® Bites and candy slurry from Perfetti USA's facility in Kentucky. Doc. 1 at ¶¶ 29, 30, 31; Doc. 18-2 at 3. Rather than recycling the loads, Midwest had the majority of them shipped to Silver Dollar Sales, Inc. ("Silver Dollar"), a Mississippi wholesaler. Doc. 1 at ¶¶ 30, 31; Doc. 45-1 at 2; Docs 38, 39. Midwest provided falsified certificates of disposal to Perfetti USA attesting to the recycling of the individual loads. Doc. 1 at ¶ 33. The certificates of disposal came attached to bills of lading showing that the ultimate destination of the loads was Midwest's business address in Burbank, South Dakota. Doc. 1 at ¶ 31; Doc. 18-2 at 6-7; Doc. 18-3 at 16-29.
In mid-April 2015, Perfetti USA first learned that an independent grocery sales broker, Tray Harrison ("Harrison"), had approached JONS International Markets ("JONS"), a Southern California-based grocer, with sample 3.8 ounce bags of Xtremes® Bites. Doc. 1 at ¶ 34; Doc. 18-2 at 2. Harrison had offered to sell JONS multiple pallets of Xtremes® Bites for well below the average wholesale price. Doc. 1 at ¶ 36; Doc. 18-2 at 2. Suspicious of the low price and the fact that Harrison was not affiliated with Crossmark, Perfetti's authorized sales broker, JONS contacted a Crossmark representative about the offer, who in turn contacted Perfetti USA. Doc. 1 at ¶¶ 37, 38; Doc. 18-2 at 2. Perfetti USA traced the lot code on a sample bag that Harrison left with JONS to a production run of Xtremes® Bites that Midwest received in February 2015 for recycling. Doc. 1 at ¶ 39; Doc. 18-2 at 2-3.
Perfetti hired two law firms — Frost Brown Todd LLC and Carrington, Coleman, Sloman & Blumenthal, LLP — to sue Harrison after he refused to cooperate with Perfetti's attempt to determine how its unsalable product reached the marketplace. Doc. 45-1 at 1-2. At a hearing in late April 2015, Harrison revealed that he had obtained the Xtremes® Bites from Silver Dollar Sales. Doc. 1 at ¶ 41. Around the same time, Perfetti learned that another independent sales representative, Timothy Avers ("Avers"), was attempting to sell a large quantity of Xtremes® Bites at a price well below wholesale. Doc. 45-1 at 2. Perfetti engaged an Illinois firm, Schopf & Weiss LLP, to investigate Avers, who eventually cooperated and revealed that Silver Dollar was his supplier. Doc. 45-1 at 2.
Diverted Xtremes® Bites also have appeared in Alabama. Doc. 1 at ¶ 46. A grocery store in Hartford, Alabama offered to sell Crossmark representatives a bin of two-ounce Xtremes® Bites packages for $800.00. Doc. 1 at ¶ 46. The store was selling the two-ounce packages individually for well below the suggested retail price. Doc. 1 at ¶ 46; Doc. 18-2 at 3. The bin was gone when a Crossmark employee returned to purchase it on April 22, 2015, but the employee was still able to obtain twenty-five leftover packages of two-ounce Xtremes® Bites. Doc. 1 at ¶ 47; Doc. 18-2 at 3. The lot codes on the twenty-five packages matched with product that Perfetti USA had provided to Midwest for recycling in November 2014. Doc. 1 at ¶ 48; Doc. 18-2 at 3.
Perfetti filed the present complaint on May 22, 2015, alleging, among other things, that Defendants committed fraud and deceit, violated the Lanham Act, and engaged in unfair competition. Doc. 1. This Court set a hearing on Perfetti's motion for a temporary restraining order that same day, notifying the Defendants by email of the time and place of the hearing and inviting them to participate in person or by telephone. Doc. 33 at 6. Perfetti alone appeared at the hearing, after which this Court granted Perfetti's motion. Doc. 33 at 6. This Court set a second hearing for May 28, 2015, to consider Perfetti's motion for a preliminary injunction. Doc. 33 at 6. Although Defendants received notice of the hearing via email from this court and personal service by Perfetti, they did not participate. Doc. 33 at 6. On June 4, 2015, this Court entered a preliminary injunction enjoining Defendants from distributing or selling Xtremes® Bites and giving Defendants ten days to produce an accounting explaining to whom they had sold the candy and the amount of profits they received from doing so. Doc. 24.
On June 22, 2015, Perfetti moved for an order to show cause because Defendants had failed to produce the accounting. Doc. 25. Perfetti also applied for an entry of default judgment, which the Clerk of Court granted on June 25, 2015, because Defendants had not answered or otherwise responded to the complaint. Doc. 30. Thereafter, this Court granted Perfetti's motion to show cause, Doc. 33, held a hearing at which both Perfetti and counsel for Defendants appeared, and issued an order finding Defendants in contempt of court and giving them until July 17, 2015, to produce the previously-ordered accounting, Doc. 36.
Defendants submitted two responses to this Court's order for an accounting. Docs. 38, 39. In the first response, Defendants stated that they sold eight truckloads of Airheads Xtremes® Bites to Silver Dollar for $6,000 a truckload. Doc. 38 at 1. Defendants explained that the $6,000 per a truckload price "was reduced by amount Defendants had to pay Advanced for the product or the transportation cost. After all costs were deducted, Defendants net profit per load was $2,000, for a total profit of $16,000.00." Doc. 38 at 1. Defendants further explained that they paid Advanced Environmental "approximately $4,000.00 per load of packaged product." Doc. 38 at 1. In their second response, Defendants again stated that they made $16,000 in total profit but gave a different accounting of their costs. Doc. 39. Specifically, Defendants said that they paid Advanced Environmental $2,000 per load
Because of the discrepancy in Defendants' accountings, this Court granted Perfetti leave to subpoena Silver Dollar. Doc. 42. Silver Dollar's response and documentation established that Defendants' calculations were at best unreliable and at worst fraudulent. Silver Dollar responded that it had paid Defendants a total of $93,200.00 for the Xtremes® Bites and that it had paid the shipping for each load. Doc. 45-3 at 1-5, 17. Perfetti eventually purchased Silver Dollar's remaining inventory of Xtremes® Bites for $42,554.45. Doc. 45-1 at 2. Through January 1 of 2016, Perfetti has paid $1,611.00 for the unloading and storage of the Xtremes® Bites it purchased from Silver Dollar. Doc. 45-1 at 2.
Perfetti now seeks to recover as damages the cost of purchasing and storing Silver Dollar's remaining inventory of Xtremes® Bites and the profit Defendants made by selling the Xtremes® Bites to Silver Dollar. Perfetti requests that this Court treble the amount of Perfetti's actual damages as punitive damages against Defendants. Perfetti also seeks its attorney's fees for this action, the related pre-suit investigation, and the action Perfetti brought against Harrison. Finally, Perfetti asks this Court to grant Perfetti's previous motion for a permanent injunction prohibiting Defendants from engaging in the diversion and sale of Perfetti products.
After a default judgment, the factual allegations of the complaint are taken as true, except those concerning damages.
Perfetti contends that it may recover its actual damages under Count I of its complaint, which alleges that Defendants engaged in fraud and deceit under South Dakota law. Although Perfetti already has obtained a default judgment, this Court affirms here that the facts support recovery for fraud and deceit. Defendants agreed to recycle the unsalable Xtremes® Bites yet decided to sell the candy to Silver Dollar instead. Doc. 1 at ¶ ¶ 30, 55. Defendants issued false certificates of disposal to Perfetti attesting that Defendants had recycled the unsalable Xtremes® Bites. Doc. 1 at ¶¶ 33, 57. Defendants' intent in issuing the certificates was to deceive Perfetti. Doc. 1 at ¶ 59. Perfetti continued to supply the unsalable Xtremes® Bites based on Defendants' representation that the product was being recycled. Doc. 1 at ¶ 60. Had Perfetti known otherwise, it never would have provided unsalable product to Defendants and would have immediately ceased providing the unsalable Xtremes® Bites for Defendants to recycle. Doc. 1 at ¶ 60. These facts meet the elements of fraud and deceit under South Dakota law.
Under South Dakota law, a party is liable for damages resulting from its fraud and deceit. SDCL § 20-10-1 ("One who willfully deceives another, with intent to induce him to alter his position to his injury or risk, is liable for any damage which he thereby suffers.");
Perfetti argues that it is entitled to Defendants' profits from selling the unsalable Xtremes® Bites under Counts IV and VII of its complaint, which allege that Defendants violated section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a)(1). Section 1125(a)(1) imposes liability on
A plaintiff who proves a violation of§ 1125(a) is entitled "subject to the principles of equity, to recover (1) defendant's profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action." 15 U.S.C. § 1117(a). A plaintiff seeking profits under § 1117(a) bears the burden of proving the defendant's sales while the defendant is responsible for proving its costs or deductions.
This Court need not decide whether willfulness remains a prerequisite to the recovery of profits because Defendants, by virtue of their default, admitted Perfetti's allegations that their violations of § 1125(a) were willful.
Perfetti is entitled to recover Defendants' profits under the theories of unjust enrichment and deterrence of willful infringement. Perfetti has spent significant resources developing and promoting its products, which have garnered expansive goodwill within the United States. Doc. 1 at ¶¶ 14, 17-18, 79. When Defendants sold the Xtremes® Bites to Silver Dollar, they exploited Perfetti's goodwill and reputation to make a profit, despite not having any right to do so and not giving Perfetti anything in return. These circumstances justify disgorgement of Defendants' profits so that they are not unjustly enriched. There is also a need for deterrence in this case. Defendants have been sued on two prior occasions for taking possession of a company's unsalable goods, issuing falsified certificates of disposal, and then selling the goods into the stream of commerce. Doc. 1 at ¶ 49. Notwithstanding these two prior lawsuits, Defendants engaged in the same conduct in this case.
Requiring Defendants to disgorge their profits is consistent with the applicable principles of equity.
Having determined that Perfetti is entitled to an accounting, this Court must calculate the amount of profits Defendants made through their infringing conduct. Perfetti calculates that Defendants made $83,200 in profits by selling the Xtremes® Bites to Silver Dollar. Perfetti bases this calculation on Silver Dollar's response to its subpoena and a declaration from Advanced Environmental employee Amber Edwards ("Edwards"). Silver Dollar's response and an affidavit from Perfetti's counsel state that Silver Dollar paid Defendants a total of $93,200 for the unsalable Xtremes® Bites and that Silver Dollar covered the shipping for each load of the product. Doc. 45-3 at 1-5, 17. The $93,200 total that Silver Dollar paid for the unsalable Xtremes® Bites is based on a January 12, 2015 check from Silver Dollar to Defendants for $20,000, Doc. 45-3 at 4; a January 20, 2015 electronic payment to Defendants for $40,800, Doc. 45-3 at 3, Doc. 39-3; and a March 26, 2015 check from Silver Dollar to Defendants for $32,400, Doc. 45-3 at 5. Perfetti filed copies of the checks, Doc. 45-3 at 4-5, and Defendants themselves confirmed the $40,800 electronic payment in their second accounting, Doc. 39 at 1; Doc. 39-3. Perfetti relies on Edwards's declaration with respect to Defendants' costs. Edwards stated in her declaration that Defendants paid her a total of $10,000 for the unsalable Xtremes® Bites, at a price of $1,000 per a truckload of candy. Doc. 18-3 at 2. The $10,000 Defendants paid Advanced Environmental was the Defendants' only verifiable cost because Silver Dollar paid for the shipping.
Despite having ample opportunity to do so, Defendants failed to provide any response to Perfetti's calculation of the profits Defendants made by selling the Xtremes® Bites. Under these circumstances — where Perfetti has submitted detailed evidence concerning Defendants' profits and Defendants failed to file any evidence in response or otherwise object to Perfetti's calculation — this Court finds that Perfetti has established that Defendants made $83,200 in profits by selling the Xtremes® Bites to Silver Dollar.
Perfetti contends that it is entitled to its attorney's fees in this case under § 1117 and South Dakota law. Section 1117(a) provides that a "court in exceptional cases may award reasonable attorney fees to the prevailing party." 15 U.S.C. § 1117(a). A case may qualify as "exceptional" under § 1117(a) when the defendant acted willfully and deliberately.
The facts of this case justify an award of attorney's fees under § 1117(a). Defendants willfully violated the Lanham Act by diverting the unsalable Xtremes® Bites to Silver Dollar. Defendants' diversion scheme involved fraudulent and deceitful conduct, including accepting the Xtremes® Bites under the guise of recycling them, selling the Xtremes® Bites to Silver Dollar as merchantable product, and issuing falsified certificates of disposal to Perfetti. Defendants' unacceptable behavior continued in this Court. Defendants initially ignored the preliminary injunction requiring them to produce an accounting and failed to otherwise participate in the case until this Court issued an order to show cause threatening Jorgensen with temporary incarceration. Defendants then filed two accountings, the first of which provided a vague and incomplete calculation of profits and failed to include any documents evidencing the payments Defendants received for the Xtremes® Bites, and the second of which provided a different and obviously incomplete calculation of profits and included certain documents Defendants should have produced in the first accounting. Evidence Perfetti obtained from Silver Dollar and submitted in support of its request for damages demonstrated that Defendants' accountings were inaccurate and understated their actual profit. Defendants ultimately did not contest Perfetti's documented and supported damage calculations. This Court entered default judgment against Defendants because they failed to answer Perfetti's complaint. Taken as a whole, these facts make this an "exceptional" case under § 1117(a).
Perfetti also contends that South Dakota law entitles it to recover as compensatory damages the legal fees and expenses for the suit against Harrison and the investigation of Avers. Although South Dakota follows the American Rule for attorney's fees, the Supreme Court of South Dakota has held that attorney's fees are recoverable in tort actions if those fees are "incurred in other litigation which is necessitated by the act of the party sought to be charged."
Perfetti contends that it is entitled to damages in an amount three times its actual damages under 15 U.S.C. § 1117(a). Section 1117(a) provides that "[i]n assessing damages the court may enter judgment, according to the circumstances of the case, for any sum above the amount found as actual damages, not exceeding three times such amount."
Perfetti relatedly argues that it is entitled to punitive damages under South Dakota law because Defendants engaged in willful fraud and deceit.
A careful consideration of the factors relevant to this case shows that an award of punitive damages, while warranted, should not be large. First, Defendants' conduct was fraudulent and deceitful, but it did not put anyone's health or safety at risk.
Perfetti requests a permanent injunction enjoining Defendants from engaging in the diversion and sale of Perfetti products. The standard for determining whether a permanent injunction should issue "is essentially the same as for a preliminary injunction, except that to obtain a permanent injunction the movant must obtain success on the merits."
Here,
For the reasons stated above, it is hereby
ORDERED that Defendants pay Perfetti $139,242.88 in damages. This sum is the total of Defendants' profits, Perfetti's costs for buying back and storing Silver Dollar's remaining inventory of Xtremes® Bites, and Perfetti's legal fees for the Harrison action and the Avers investigation. It is further
ORDERED that Defendants pay Perfetti an additional $10,000.00 in punitive damages. It is further
ORDERED that Defendants shall pay Perfetti's reasonable attorney's fees and costs in this case. It is further
ORDERED that Perfetti submit an affidavit setting forth its attorney's fees and costs in this case and attaching all billing statements and itemizing its costs. It is further
ORDERED that Perfetti submit a calculation of the prejudgment interest it is seeking, if any. This calculation should include citations to the record and the relevant statutes and case law. It is finally
ORDERED that Defendants are permanently enjoined from engaging in the diversion and sale of Perfetti products including, but not limited to, any remaining Xtremes® Bites.
