DJ Direct, Inc. v. Margaliot

512 F.Supp.3d 396

DJ DIRECT, INC., Plaintiff,

v.Yaakov N. MARGALIOT, Tovah S. Margaliot, JCB Max LLC, JBI Imports LLC, Lisse USA LLC, and Does 1-5, Defendants.

20-CV-2477 (MKB)

United States District Court, E.D. New York.

Signed January 8, 2021

Filed January 11, 2021

Penina Green, Brooklyn, NY, Richard S. Schurin, Steven Stern, Stern & Schurin LLP, Garden City, NY, for Plaintiff DJ Direct, Inc.

Lee Goldberg, Merchant & Gould P.C., Morris E. Cohen, Goldberg Cohen LLP, New York, NY, for Plaintiffs JCB Max LLC, JBI Imports LLC, Lisse USA LLC.

Christopher D. Warren, Warren Law Group, New York, NY, for Defendants.

MEMORANDUM & ORDER

MARGO K. BRODIE, United States District Judge:

Plaintiff DJ Direct Inc. commenced the above-captioned action on June 3, 2020, against Defendants Yaakov N. Margaliot and Tovah Margaliot (the "Margaliots") alleging that Yaakov fraudulently registered Plaintiff's "KaraoKing" trademark in his own name while employed for Plaintiff. (Compl., Docket Entry No. 1.) On September 10, 2020, Plaintiff filed an Amended Complaint adding Defendants JCB Max LLC, JBI Imports LLC, and Lisse USA LLC (the "Lisse Defendants") and John or Jane Does 1–5 and alleging that these Defendants, with the help of the Margaliots, have been selling Plaintiff's KaraoKing karaoke machines by relabeling them with their "Amasing" mark and passing them off as their own. (Am. Compl., Docket Entry No. 15.) On September 17, 2020, Plaintiff moved for a preliminary injunction pursuant to Rule 65 of the Federal Rules of Civil Procedure and pursuant to its claims for trademark infringement and reverse passing off under section 43(a) of the Lanham Act, 15 U.S.C. 1125(a), to enjoin Defendants from using the KaraoKing mark and from passing off Plaintiff's products as their own, and the Margaliots and the Lisse Defendants opposed the motion.¹ On November 5, 2020, the Court held a hearing on Plaintiff's motion. (Min. Entry dated Nov. 5, 2020.)

For the reasons set forth below, the Court grants in part and denies in part Plaintiff's motion.

I. Background

Plaintiff sells consumer goods "primarily through e-commerce channels such as Amazon.com." (Decl. of Joel Jacobowitz in Supp. of Pl.’s Mot. ("Jacobowitz Decl.") ¶ 2, Docket Entry No. 26.) On March 30, 2017, Plaintiff purchased the Margaliots’ company "Interest J" and hired the Margaliots to work for Plaintiff expanding its business, designing and finding new products for it to sell, dealing with its overseas suppliers, and managing its Amazon.com listings. (Id. ¶¶ 6–8; Suppl. Decl. of Joel Jacobowitz in Supp. of Pl.’s Mot. ("Jacobowitz Suppl. Decl.") ¶ 6, Docket Entry No. 45.)²

In December of 2017, Shenzhen, a Chinese factory that had previously sold karaoke microphones to Plaintiff, approached Yaakov regarding the sale of karaoke machines. (Decl. of Yaakov Margaliot in Supp. of Defs.’ Opp'n ("Yaakov Decl.") ¶ 6, Docket Entry No. 42.) Shenzhen offered Yaakov the design of the machines at issue in this case, (id. ¶ 7; Jacobowitz Decl. ¶ 9), which uniquely incorporate several karaoke features into a single, self-contained apparatus, including a disco ball, ceiling lights, and speakers, (Jacobowitz Decl. ¶ 11; Pl.’s Mem. 1–2). Plaintiff and Shenzhen exchanged plans and drawings for the machines, (Jacobowitz Decl. ¶ 10), and Plaintiff ultimately made several design contributions, including redesigning the function board and providing the voice recordings that users hear when they operate the machine, (Jacobowitz Suppl. Decl. ¶¶ 19, 27). At the Margaliots’ suggestion, Plaintiff named the products "KaraoKing." (Jacobowitz Decl. ¶ 9.) Plaintiff ordered the machines to be manufactured with the KaraoKing mark permanently etched on the front, (Jacobowitz Suppl. Decl. ¶ 30), and began selling them under an exclusivity agreement with Shenzhen, (Yaakov Decl. ¶ 9; Jacobowitz Suppl. Decl. ¶ 33). To date, Plaintiff has sold more than 20,000 KaraoKing machines, generating over $4,000,000 in revenue. (Jacobowitz Decl. ¶ 11.)

a. Yaakov's registration of the mark

On February 25, 2018, Plaintiff paid the fees for Yaakov to register the KaraoKing trademark. (Yaakov Decl. ¶¶ 16–17; Jacobowitz Decl. ¶ 25.) Although Plaintiff was the only entity using and selling goods under the KaraoKing mark and Yaakov was Plaintiff's employee, Yaakov represented in the application to the U.S. Patent and Trademark Office (the "USPTO") that he was personally using the mark in U.S. commerce in connection with karaoke machines. (Jacobowitz Decl. ¶ 25.) On April 30, 2019, the mark was registered in Yaakov's name. (Registration, annexed to Yaakov Decl. as Ex. C, Docket Entry No. 42-3.)

b. 2019 shipment of karaoke machines

In June of 2019, Plaintiff ordered seventeen containers of KaraoKing machines from Shenzhen and paid a $235,000 deposit. (Jacobowitz Decl. ¶¶ 17–18.) In November of 2019, after accepting delivery of ten of the containers, Plaintiff decided that it did not require additional inventory and instructed Shenzhen to delay manufacture of the remaining products. (Id. ¶ 20; Decl. of Johnson Xu in Supp. of Defs.’ Opp'n ("Xu Decl.") ¶ 5, Docket Entry No. 41.) Plaintiff maintains that Yaakov knew of these instructions but told Shenzhen to continue production. (Jacobowitz Decl. ¶¶ 21–22.) In January of 2020, Shenzhen advised Plaintiff that the remaining containers were ready to be shipped. (Id. ¶ 23.) When asked who gave the instructions to go ahead with production, Shenzhen confirmed that Yaakov had given the instructions.³ (Id. ) Around this same time, Plaintiff also discovered that when Yaakov had applied to register the KaraoKing trademark in 2018, he had done so in his own name. (Id. ¶¶ 24–25.)

After discovering the above acts, Plaintiff terminated the Margaliots on March 5, 2020. (Id. ¶ 26.) Plaintiff maintains that, around this same time, it sought to acquire the balance of containers from Shenzhen to restock its inventory, but Shenzhen became unresponsive. (Id. ¶ 27.) Shenzhen maintains that it unsuccessfully tried to contact Plaintiff in March of 2020 via WhatsApp and email regarding the unpaid balance for the remaining containers but that Plaintiff never responded to Shenzhen's calls or emails, including a March 11, 2020 dunning letter to one of Plaintiff's employees informing Plaintiff that "without the balance payment of all [seven] containers in [two] days, ... we will need to change the logo ... and sell to other clients." (Xu Decl. ¶¶ 13–14; Dunning Letter, annexed to Xu Decl. as Ex. A, Docket Entry No. 41-1.)

c. Shenzhen's resale of Plaintiff's products to the Lisse Defendants

On March 17, 2020, Shenzhen emailed JCB Max stating that it had ended its business relationship with Plaintiff due to Plaintiff's delay in paying the balance on the seven containers of KaraoKing-branded machines and offering to change the logo on the machines and sell them to JCB Max. (Shenzhen Email to JCB Max LLC, annexed to Decl. of Avi Kraminer in Supp. of Defs.’ Opp'n ("Kraminer Decl.") as Ex. A, Docket Entry 43-1.) In addition, Shenzhen sent JCB Max an invoice for the machines and a letter granting JCB Max the exclusive right to sell the machines in the U.S. market. (Id. ) On March 18, 2020, JCB Max purchased the seven containers of machines. (Kraminer Decl. ¶ 6, Docket Entry No. 43.)

On April 8, 2020, Plaintiff contacted Shenzhen regarding the remaining seven containers. (See Jacobowitz Suppl. Decl. ¶¶ 44–51; Xu Decl. ¶ 18.) As part of the discussion, Shenzhen listed terms to continue doing business with Plaintiff and indicated "if you do not [meet] the above points, we can not [sic] ship." (Jacobowitz Suppl. Decl. ¶ 47; WhatsApp Messages, annexed to Jacobowitz Suppl. Decl. as Ex. L, Docket Entry No. 45-12.) Plaintiff agreed to pay the balance on the seven containers but did not agree to Shenzhen's other terms.⁴ (WhatsApp Messages.) Plaintiff never cancelled or suggested that it wanted to cancel its order for the products, which had already been manufactured with the KaraoKing mark. (Jacobowitz Suppl. Decl. ¶ 50.)

d. Alleged reverse passing off

In June of 2020, Plaintiff became aware of an Amazon.com listing for "Amasing"-branded karaoke machines that looked identical to Plaintiff's KaraoKing machines. (Jacobowitz Decl. ¶ 31.) After purchasing one of the machines in August, Plaintiff discovered that Defendants were in fact selling Plaintiff's machines rebranded as their own by hot gluing a metallic "Amasing" label directly over Plaintiff's "KaraoKing" mark. (Id. ¶ 34.)

(Am. Compl. 3; Pl.’s Mem. 2.)

Plaintiff contends that the Margaliots assisted the Lisse Defendants in procuring the machines in question and executing plans to pass off KaraoKing machines under their Amasing mark. (Jacobowitz Decl. ¶ 30.) As a result, Defendants’ actions left Plaintiff without inventory on a successful product, ruined Plaintiff's relationship with its supplier, and "severely impacted" Plaintiff's sales of KaraoKing machines. (Id. ¶¶ 35–36.) Plaintiff seeks a preliminary injunction based on its claims of trademark infringement and reverse passing off to enjoin Defendants from using the KaraoKing mark and from passing off KaraoKing products as Amasing products. (Pl.’s Mem. 3.)

II. Discussion

a. Standard of review

"[A] preliminary injunction is ‘an extraordinary remedy never awarded as of right.’ " Benisek v. Lamone , 585 U.S. ––––, ––––, 138 S. Ct. 1942, 1943, 201 L.Ed.2d 398 (2018) (per curiam) (quoting Winter v. Nat. Res. Def. Council, Inc. , 555 U.S. 7, 24, 129 S.Ct. 365, 172 L.Ed.2d 249 (2008) ). The purpose of a preliminary injunction is to "preserve the relative positions of the parties until a trial on the merits can be held." Id. (quoting Univ. of Texas v. Camenisch , 451 U.S. 390, 395, 101 S.Ct. 1830, 68 L.Ed.2d 175 (1981) ). "A party seeking a preliminary injunction must demonstrate: (1) ‘a likelihood of success on the merits or ... sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping...