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Grooms v. Legge

April 8, 2009

JAMES GROOMS; BRYCEMARIE PHELAN; KNUKLE, INC., A COLORADO CORPORATION, PLAINTIFFS,
v.
JOHN LEGGE; GWEN LEGGE; KNUKLE, INC., A CALIFORNIA CORPORATION; ARTILLERY DISTRIBUTION; SEAN MYERS; DEVIN MERCADO; DOES 1-50, DEFENDANTS.



The opinion of the court was delivered by: Irma E. Gonzalez, Chief Judge United States District Court

ORDER (1) GRANTING IN PART THE PRELIMINARY INJUNCTION; (2) DENYING PLAINTIFFS' MOTIONS FOR CONTEMPT, SANCTIONS, AND ATTORNEYS' FEES (3) DENYING DEFENDANTS' MOTIONS TO STRIKE [Doc. Nos. 4, 18]

Presently before the Court are (1) plaintiffs' motion for preliminary injunction and (2) plaintiffs' ex parte application for contempt, sanctions, and attorneys' fees. The parties have fully briefed these motions. Further, defendants filed two motions to strike evidence submitted in support of plaintiffs' motion and plaintiffs' reply. (Doc. Nos. 27-8, 43.) Based upon the parties' submissions, and for the reasons set forth below, the Court (1) GRANTS IN PART plaintiffs' motion for preliminary injunction; (2) DENIES plaintiffs' motion for contempt, sanctions, and attorneys' fees; and (3) DENIES defendants' motions to strike.

BACKGROUND

A. The Parties

Plaintiffs James Grooms and Brycemarie Phelan are individuals residing in Colorado. Plaintiff Knukle, Inc. ("Knukle One") is a Colorado corporation with its principal place of business in Colorado Springs, Colorado. Knukle One was incorporated on November 28, 2009, but began as an unincorporated business entity in May 2008.

Defendants John Legge and Gwen Legge (collectively the "Legges") are a married couple living in Orange County, California. The Legges are part owners of defendant Knukle, Inc. ("Knukle Two"), a California corporation formed on September 19, 2008 with a principal place of business in Orange County, California.

Defendants Sean Myers and Devin Mercado own and operate Artillery Distribution, which is a graphic design company. Myers, Mercado, and Artillery Distribution have not been served in, or appeared in, this action.

B. Factual Background

i. Formation

In May 2008, Grooms and Phelan created the name "Knukle Inc" ("Knukle" was deliberately misspelled by omitting the "c" and turning the second "k" backwards). They created the name and some initial drawings, which combined the name Knukle Inc and a symbol representing brass knuckles. The name and these drawings became the genesis of a line of apparel and accessories targeted at fans of extreme sports and mixed martial arts. Grooms and Phelan reserved the domain name www.knuckleinc.com ("Knukle website") using an internet provider www.1and1.com.

On June 12, 2008, Grooms and Phelan filed a federal "intent to use" trademark application for the mark "Knukle" (with the second "k" turned backwards), serial number 77497169.

On July 8, 2008, after contacting various other vendors, Grooms and Phelan approached Artillery Distribution, asked for its assistance refining the Knukle designs, and requested estimates for printing designs on apparel and accessories. Over the phone, Grooms informed defendants Myers and Mercado of his trademark application and his intent to form the company "Knukle Inc."

During July 2008, Grooms and Phelan acted to establish Knukle Inc. They ordered business cards, established a merchant services account with Wells Fargo, and created Facebook and MySpace pages.*fn1 Additionally Grooms, Phelan, Myers, and Mercado attended the X-games in Long Beach and distributed promotional "Knukle, Inc" apparel to event attendees.*fn2 On or about August 3, 2009, Grooms and Phelan made their first sale of Knukle, Inc apparel to Alicia Rogers: two t-shirts for $40.00 On August 7, 2008, Grooms and Phelan made their first internet sale of Knukle Inc apparel.

ii. The Business Relationship

During late August or early September of 2008, Grooms and Phelan placed an advertisement on www.craigslist.com, seeking investors for Knukle.*fn3 On September 9, 2008, Gwen Legge contacted Grooms and Phelan and expressed interest in investing in Knukle Inc. Grooms, Phelan, and the Legges agreed to meet on September 13, 2008.

On September 13, 2008, plaintiffs met with defendants at a restaurant in Dana Point, California. Grooms and Phelan brought sample Knukle Inc apparel to the meeting. The Legges orally agreed to invest $115,000, up-front, in exchange for 50% ownership of "Knukle Inc." The parties orally agreed to be "50-50 partners." (Def. Opp. at 4.)

The terms of this oral agreement are disputed. Plaintiffs assert the parties agreed to be 50-50 partners, with no mention of the formation of a corporation or the transfer of the trademark. The Legges claim the parties orally agreed to form a California corporation, with the Legges providing financing and plaintiffs transferring the trademark application to Knukle Two. On September 16, 2008, Grooms drafted an email memorializing the oral agreement between the Legges, Grooms, and Phelan. The email stated the parties agreed to set up a corporation, but did not mention the transfer of the trademark. (Grooms Decl., Ex. 10.)

After this meeting, John Legge established independent contact with Myers of Artillery Distribution. Together, John Legge and Myers informed Grooms they needed to change the Knukle website's webhost from Dreyson Solana to Bluehost in order to improve the site. Grooms agreed to the changes, but asserts he did not know the domain name was transferred to John Legge.

Based on the September oral agreement, on September 19, 2008, the Legges formed Knukle Two. At that point, the Legges began investing to build the Knukle brand, which included paying for designs, silkscreening, artwork, promotions, sponsorships, and a booth at a major trade show. The parties dispute the exact amount of the investment. Additionally, the Legges claim they provided office space free of charge in Santa Ana.

After the formation of Knukle Two, plaintiffs did not receive shares of Knukle Two and never transferred ownership of the Knukle mark. Defendants admit "Mr. Grooms and Ms. Phelan never transferred the mark but kept giving me assurances they would." (Decl. John Legge ¶ 15.) John Legge states, "I informed Mr. Grooms and Ms. Phelan that their 50% of the corporation will be issued to them upon them assigning the right to the mark to the corporation as per our agreement." (Decl. John Legge ¶ 16.) Legge admits he "did not issue Mr. Grooms and Ms. Phelan their 50% ownership [in Knukle Two]." From this, it is evident Grooms and Phelan never owned shares in Knukle Two and did not transfer their trademark to Knukle Two.

iii. The Fracture of the Relationship

During preparation for the Action Sports Retailers trade show ("ASR trade show") scheduled for January 2009, John Legge began meeting with Myers and Mercado without consulting plaintiffs.

On November 5, 2008, Gwen Legge told Grooms that the Legges had opened a merchant account. Grooms understood the Legges would need an Employer Identification Number (EIN) to open that account. When he inquired about the EIN, Gwen claimed the Legges were only thinking about opening a merchant account. At this point, Grooms and Phelan became nervous about the actions the Legges had taken. Gwen Legge asserts she never opened a merchant account on behalf of Knukle. On November 28, 2008, Grooms formed Knukle One, a Colorado corporation.

On December 16, 2008, Gwen Legge called Grooms to request that he and Phelan assign to her their individual interests in the Knukle marks. Further, she requested Grooms and Phelan agree to move the company headquarters to Orange County, California. Grooms declined both requests. Gwen Legge claims she never requested plaintiffs transfer the Knukle mark to her as an individual.

Later that evening, Myers and Mercado called Grooms and informed him that the Legges were covertly starting their own company around a line of apparel targeting fans of extreme sports and mixed martial arts. The Legges planned to market the apparel at the ASR trade show with the brand name "Knukle Inc" (with the second "k" turned forwards) (the "Knukle Two mark"). Both Myers and Mercado assert they never told Grooms that the Legges were "going behind [plaintiffs'] back." (Decl. Myers, ¶ 27; Decl. Mercado, ¶27.)

Still later on December 16, 2008, Grooms called John Legge to express his concern about the phone call he received from Artillery Distribution. Grooms explained that if the Legges left the company, they could not use the name "Knukle." John Legge replied with vulgarity and expletives. Grooms offered to assign his and Phelan's rights to the trademarks if he and Phelan retained 51% of the company. The Legges did not agree to those terms. Later that night, during a subsequent phone call, John Legge offered to allow Grooms and Phelan to buy him out for 120% of the initial investment. The following day, Grooms and Phelan offered to buyout the Legges for a percentage less than 120%, but John Legge said buyout was no longer an option.

On December 18, 2008, Knukle Two filed a federal "actual use" trademark application for the mark, "Knukle Inc" with the second "k" turned forwards, Serial Number 77636449. The Legges contend this occurred because they were concerned plaintiffs would never transfer the original Knukle mark. Knukle Two subsequently amended the filing basis to "intent to use" on March 4, 2009. On January 5, 2009, Knukle Two filed a second federal "actual use" trademark application under a different International Class. In these two applications, the Legges claim a first date of use as June 1, 2008 -- a claim plaintiffs assert is impossible.

On January 22-24, 2009, the Legges sent Myers and Mercado to the ASR trade show to procure orders for the sale of "Knukle Inc." designs and merchandise. Artillery Distribution and Abstrakt Printing provided the merchandise. Plaintiffs did not attend the ASR show because Artillery Distribution released all of the "Knukle, Inc." merchandise to the Legges. Further, a trade show representative informed Grooms that only the Legges were allowed to attend the show.

On January 30, 2009, Grooms noticed a new website had been posted at www.knukleinc.com. Grooms could not log onto the website as the site owner. At that time, Grooms noticed the Knukle Inc Facebook and MySpace pages began receiving postings calling Grooms and Phelan imposters. These postings contained information that could only be known by someone with intimate knowledge of the business relationship between the parties.

On February 5, 2009, Grooms received an email from a representative retailer based in Bakersfield named "Fatal Impact." Fatal Impact stated he was excited to receive his shipment of new "Knukle, Inc." apparel. Grooms and Phelan never received an order from Fatal Impact. Fatal Impact requested a status update via MySpace on March 8, 2009. Further, a retailer named "Skin" posted a MySpace message stating he enjoyed meeting Knukle representatives. Skin had only meet defendants' representatives.

On February 10, 2009, Grooms contacted Don Petro of Big League Graphics to fill an order. Petro contacted Independent Trading Company, a blank sweatshirt wholesaler. Independent Trading Co. informed Petro that an order from "Knukle, Inc" had already been made for a design "Knukle Up." The order was for more than $200,000 of sweatshirts imported from China.

Since the dissolution of the business relationship, Knukle Two has promoted its product using the Knukle Two mark and the Knukle website. In the exhibits attached to the Grooms Declaration, plaintiffs catalogue how defendants are selling exact replicas of plaintiffs' products and mark; the only difference is the orientation of the second "k" in Knukle. See (Grooms Decl., Ex. 26-1 though 26-44.) In each of these situations, the mark is presented on the same color merchandise, written in the same font, written in the same color, and accompanied by the same designs and symbols.

The Legges assert that, despite Grooms's inability to access the site and nonattendance at the ASR tradeshow, the Legges never attempted to exclude plaintiffs from Knukle Two. Instead, the Legges assert, plaintiffs effectively abandoned the business, moved to Colorado, and started a competing venture.

C. Procedural Background & Subsequent Conduct of Counsel and Parties

Plaintiffs filed a complaint alleging fifteen claims for relief: (1) unfair competition and false designation of origin of goods under 15 U.S.C. §1125; (2) cybersquatting, in violation of 15 U.S.C. § 1125(d); (3) violations of California Business & Professions Code §§ 17200, 17500; (4) unfair competition under California's common law; (5) trademark and trade name infringement; (6) conversion; (7) fraud; (8) intentional interference with prospective business advantage; (9) intentional interference with economic relationships; (10) defamation; (11) breach of oral/implied contract; (12) civil conspiracy; (13) declaratory relief; (14) accounting; and (15) constructive trust/ equitable lien.

In their TRO/preliminary injunction application, plaintiffs request a series of prohibitory injunctions and mandatory injunctions. Plaintiffs request the court prohibit defendants from: (1) holding themselves out as rightful owners of "Knukle, Inc." enterprise; (2) asserting ownership rights and control over plaintiffs' property and intellectual property rights including the trademarks "Knukle Inc," "Knukle, Inc.,"and "Knukle"(collectively "Knukle mark") and the domain name/website www. knukleinc.com ("Knuckle website"); (3) using the Knukle marks in commerce; (4) using "Knukle Inc," "Knukle, Inc.,"and "Knukle" trade names in commerce; (5) using the domain name and Knukle website; (6) using photographs, graphics, and designs bearing the Knukle marks in advertising; (7) marketing, selling, distributing any clothing, merchandise, or accessories bearing the Knukle marks; and (8) operating Knukle Two to compete with Knukle One.

Plaintiffs further request four mandatory injunctions, directing defendants to: (1) place all funds and accounts receivable from the sale of clothing, merchandise, and accessories bearing the Knukle marks in a Court controlled account; (2) transfer ownership and control of the domain name/website www.knukleinc.com to plaintiffs; (3) return the designs, silk screening, artwork, films, and other materials necessary to produce apparel and promotional materials to plaintiffs; and (4) provide names and contact information of third parties who have currently placed orders with Knukle Two.

On March 17, 2009, this Court issued an order granting the TRO and setting the preliminary injunction hearing for April 7, 2009 at 10:30 a.m. Defendants did not appear at the TRO hearing, but claim that plaintiffs' counsel misinformed them as to the date of the hearing.*fn4 On March 18, 2009, plaintiffs filed an undertaking of $10,000; thereby, triggering the TRO.

On March 20, 2009, plaintiffs learned defendants had not turned over ownership and control of the website and domain name, www.knukleinc.com. Plaintiffs' counsel then spent four days unsuccessfully attempting to contact defendants' counsel, Mr. Jain. Defendants assert Mr. Jain's unavailability was due to his uncle's illness, which forced him to travel out-of-town. On March 24, 2009, plaintiffs' counsel received a message from Mr. Jain, who asserted his clients had fully complied with the TRO and asked plaintiffs' counsel to clarify which portions of the order his clients had violated. Later that day, the Legges retained Michelle McCliman.

Later on March 24, 2009, Ms. McCliman contacted plaintiffs' counsel Chris Villasenor to explore stipulating to a preliminary judgment. The deal offered was a stipulated injunction that the Legges would cease using the Knukle name and website. The website would be blank and simply direct those looking for Plaintiffs' Knukle site to that site and those looking for defendants' new venture to that site (defendants fail to identify their "new venture"). The offer included a provision that Plaintiffs would agree to not sue the Legges new venture and would refrain from using the website design paid for by the Legges. The only point of contention was that plaintiffs wanted the transfer of the domain name. The parties disagreed as to the meaning of the portion of the TRO regarding the transfer of the domain name. Mr. Villasenor declined to seek clarification from the Court.

On March 25, 2009, Ms. McCliman confirmed that the website had been taken down and that the MySpace page was also taken down. Mr. Villasenor indicated he intended to file the ex parte application for contempt unless the Legges paid his clients $10,281 prior to the hearing.

On that date, plaintiffs' counsel filed the Ex Parte Motion for contempt, sanctions, and attorneys' fees. (Doc. No. 19.) Plaintiffs based this motion primarily on defendants failure to transfer ownership of the website. On March 27, 2009, this Court issued an order to show cause why defendants should not be held in contempt, subjected to sanctions, and ordered to pay attorneys' fees.

Also on March 27, 2009, Judge Battaglia held a Discovery conference with counsel for plaintiffs and counsel for the Legges present. At the Discovery conference, counsel discussed the language of the TRO, and Magistrate Judge Battaglia agreed the language was confusing. Per a minute order, entered on March 30, 2009, Judge Battaglia directed defendants to file an ex ...


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