Top Brand LLC v. Cozy Comfort Co.

688 F.Supp.3d 924

TOP BRAND LLC, et al., Plaintiffs, v. COZY COMFORT COMPANY LLC, et al., Defendants.

No. CV-21-00597-PHX-SPL

United States District Court, D. Arizona

Filed August 25, 2023

Signed August 24, 2023

Eric Michael Fraser, Phillip Winston Londen, Osborn Maledon PA, Phoenix, AZ, Matthew L. DePreter, Pro Hac Vice, William L. Niro, Pro Hac Vice, Aronberg Goldgehn, Chicago, IL, for Plaintiffs Top Brand LLC, Sky Creations LLC.

Eric Michael Fraser, Phillip Winston Londen, Osborn Maledon PA, Phoenix, AZ, Matthew L. DePreter, Pro Hac Vice, Aronberg Goldgehn, Chicago, IL, for Plaintiffs E. Star LLC, Flying Star LLC.

Amish Ashok Shah, Pro Hac Vice, Messner Reeves LLP, Los Angeles, CA, Gregory Phillip Sitrick, Isaac Scott Crum, Sharif Ahmed, Messner Reeves LLP, Phoenix, AZ, for Defendant Cozy Comfort Company LLC.

Gregory Phillip Sitrick, Isaac Scott Crum, Messner Reeves LLP, Phoenix, AZ, for Defendants Brian Speciale, Michael Speciale.

ORDER

Steven P. Logan, United States District Judge

Before the Court are the parties' respective motions for summary judgment: Plaintiffs' Motion for Partial Summary Judgment (Doc. 213) and Defendants' Motion for Summary Judgment (Doc. 216). Both Motions are fully briefed and ready for review. (See Docs. 213, 222, & 227; Docs. 216, 234, & 228). The Court's ruling is as follows.¹

I. BACKGROUND

This case arises out of a series of alleged patent infringements. Plaintiffs Top Brand LLC, E-Star LLC, and Flying Star LLC (collectively "Plaintiffs," along with Sky Creations LLC and John Ngan) are companies who produce and sell clothing, "including hooded sweatshirts and wearable blankets."² (Doc. 122 at 4). Defendant Cozy Comfort Company LLC ("Defendant" or "Cozy") is an Arizona company selling products similar to Plaintiffs' products. (Id. at 5). Defendants Brian and Michael Speciale are the co-founders and sole members of Cozy Comfort LLC. (Id.). There are five patents primarily at issue in this case (all held by Defendants)—four design patents and one utility patent³:

(i) U.S. Design Patent No. D859,788 (the '788 patent);

(ii) U.S. Design Patent No. D905,380 (the '380 patent);

(iii) U.S. Design Patent No. D886,416 (the '416 patent);

(iv) U.S. Design Patent No. D903,237 (the '237 patent);

(v) U.S. Patent No. 10,420,431 (the '431 utility patent).

(Id. at 2-3). Plaintiffs allege Defendants contacted certain third-party retailers (e.g., Amazon) where both parties sell or sold their products and accused Plaintiffs' products of patent infringement. (Id. at 6, 9). The third parties conducted their own internal reviews, resulting in Plaintiffs' products being barred from sale on their retail websites. (Id. at 6, 15-16). Plaintiffs maintain their products do not infringe on Defendants' products and brought this action seeking, among other forms of relief, declaratory judgments of non-infringement, invalidity, and unenforceability. (Id. at 2-3, 6).

On February 20, 2020, Plaintiffs filed a Complaint in the Northern District of Illinois. (Doc. 1). On April 8, 2021, the case was transferred here. (Docs. 40-42). Plaintiffs have filed three Amended Complaints (Docs. 26, 62, & 122), and assert twenty claims⁴:

Counts 1-12: Requests for declaratory judgments of non-infringement, invalidity, and unenforceability of the '788, '380, '416, and '237 design patents;

Counts 13-16: False marking; state-law unfair competition; tortious interference with contract; tortious interference with prospective economic advantage;

Counts 17-18: Requests for declaratory judgments of non-infringement and invalidity of the '431 utility patent;

Counts 19-20: Cancellation of U.S. Trademark Registrations 5,608,347 and 5,712,456.

(Doc. 122 at 20-61). In their Answer to Third Amended Complaint (Doc. 128), Defendants assert ten infringement-related counterclaims:

Counterclaims 1, 2, 9, 10: Infringement of the '788, '380, '237, and '416 design patents;

Counterclaim 3: Federal trade dress infringement and unfair competition, in violation of 15 U.S.C. § 1125(a);

Counterclaim 4: Common law trade dress infringement and unfair competition;

Counterclaim 5: Requests for declaratory judgment of non-infringement of the '900 patent;

Counterclaims 6-8: Trademark infringement under federal and Arizona law; common law trademark infringement and unfair competition.

(Doc. 128 at 71-81).⁵ On November 8, 2021, Plaintiffs filed an Answer to Defendants' Counterclaims. (Doc. 139). The parties filed their claim construction briefing between October and December 2021. (See Docs. 135, 137, 142, & 143). On May 20, 2022, the parties appeared before the Court for a Markman Hearing, pursuant to Markman v. Westview Instruments, Inc., 517 U.S. 370, 116 S.Ct. 1384, 134 L.Ed.2d 577 (1996). (Doc. 167). On August 8, 2022, the Court entered an Order (Doc. 182) construing the disputed claims in the '788, '380, '416, '237, and '431 patents. In February 2023, the parties filed their respective Motions for Summary Judgment, the Motions that are presently before the Court. (See Docs. 213 & 216).

II. LEGAL STANDARD

A court must grant summary judgment "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Material facts are those facts "that might affect the outcome of the suit under the governing law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A genuine dispute of material fact arises if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id.

The party moving for summary judgment bears the initial responsibility of presenting the basis for its motion and identifying those portions of the record, together with affidavits, which it believes demonstrate the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323, 106 S.Ct. 2548. If the movant fails to carry its initial burden of production, the nonmovant need not produce anything. Nissan Fire & Marine Ins. Co., Ltd. v. Fritz Co., Inc., 210 F.3d 1099, 1102-03 (9th Cir. 2000). But if the movant meets its initial responsibility, the burden shifts to the nonmovant to demonstrate the existence of a factual dispute and that the fact in contention is material. Anderson, 477 U.S. at 250, 106 S.Ct. 2505. In other words, the nonmovant "must do more than simply show that there is some metaphysical doubt as to the material facts," and, instead, must "come forward with 'specific facts showing that there is a genuine issue for trial.' " Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).

When considering a motion for summary judgment, the judge's function is not to weigh the evidence and determine the truth but to determine whether there is a genuine issue for trial. Anderson, 477 U.S. at 249, 106 S.Ct. 2505. In its analysis, the court must view the factual record and draw all reasonable inferences in the non-movant's favor. Leisek v. Brightwood Corp., 278 F.3d 895, 898 (9th Cir. 2002). The court need consider only the cited materials, but it may consider any other materials in the record. Fed. R. Civ. P. 56(c)(3).

III. DISCUSSION

A. Alter Ego Issue

As a general matter, the owner of a corporation or limited liability company is not liable for the obligations of that entity. See U.S. Bank Nat'l Assoc. v. Starr Pass Resort Devs. LLC, No. 2 CA-CV 2018-0030, 2019 WL 2237471, at *15 (Ariz. Ct. App. May 22, 2019) (citing Dietel v. Day, 16 Ariz. App. 206, 208, 492 P.2d 455 (1972)). However, "[i]mposing alter-ego liability—commonly referred to as 'piercing the corporate veil'—breaks from [this] general principle[ ] and holds . . . an owner liable for corporate debts." Id. (citing Dietel, 16 Ariz. App. at 208, 492 P.2d 455). "The alter-ego status is said to exist when there is such unity of interest and ownership that the separate personalities of the corporation and owners cease to exist." Dietel, 16 Ariz. App. at 208, 492 P.2d 455. To establish alter-ego liability, a plaintiff "must prove both (1) unity of control and (2) that observance of the corporate form would sanction a fraud or promote injustice." Gatecliff v. Great Republic Life Ins. Co., 170 Ariz. 34, 37, 821 P.2d 725 (1991).

The alter-ego determination is "highly fact-based" and "require[s] considering the totality of the circumstances." Pimal Prop., Inc. v. Cap. Ins. Grp., Inc., No. CV11-02323-PHX-DGC, 2012 WL 608392, at *5 (D. Ariz. Feb. 27, 2012) (quotations marks and citation omitted). Factors considered include, but are not limited to, "failure to maintain formalities of separate corporate existence; . . . plaintiff's lack of knowledge of separate corporate existence; owners' making of interest-free loans to corporation; maintaining of corporate financial records; commingling of personal and corporate funds; diversion of corporate property for shareholders' personal use; observance of formalities of corporate meetings; . . . and filing of corporate income tax returns." Deutsche Credit Corp. v. Case Power & Equip. Co., 179 Ariz. 155, 160-61, 876 P.2d 1190 (Ct. App. 1994) (citations omitted). Additionally, "[u]ndercapitalization, where it is clearly shown, is an important factor in determining whether the doctrine of alter ego should be applied." Ize Nantan Bagowa, Ltd. v. Scalia, 118 Ariz. 439, 443, 577 P.2d 725 (Ct. App. 1978).

Defendants request that John Ngan be found "ultimately liable for any claims asserted and damages awarded in this case, as he is the alter ego of Plaintiffs." (Doc. 216 at 9). The Court finds that material factual disputes exist precluding summary judgment in Defendants' favor on the alter-ego issue. The parties dispute the application of virtually every factor. For example, the parties dispute how the Plaintiff companies record their sales revenues and other financial data, including whether and how the companies...