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Artec Group, Inc. v. Klimov

United States District Court, N.D. California

November 22, 2017

ARTEC GROUP, INC., Plaintiff,
ANDREY KLIMOV, et al., Defendants.


          EDWARD M. CHEN, United States District Judge

         Plaintiff Artec Group, Inc. is a company that produces 3D scanning and recognition technology. Its flagship facial recognition product is the “Broadway 3D” line of devices. Artec filed suit against multiple companies and individuals, the majority of which were affiliated with Andrey Klimov, Artec's former CEO. According to Artec, Mr. Klimov, along with other “rogue” Artec employees, misappropriated Artec trade secrets and then set up two companies to compete with Artec. Those companies are ID-Wise SIA and A-Star LLC. Artec has settled its claims with the Klimov Defendants (i.e., Mr. Klimov, the rogue employees, and ID-Wise and A-Star). Thus, the only claims remaining in this case are against a company not affiliated with Mr. Klimov - namely, Axon Business Systems.

         Axon is a UAE company with whom Artec had a distribution agreement. Under the agreement, Axon would purchase Artec product from Artec and then resell the product to end users in the UAE. According to Artec, Axon bought Artec product (specifically, Broadway 3D devices) from A-Star, one of the Klimov Defendants. Axon also bought a competing facial recognition product (known as EnterFace) from ID-Wise, one of the Klimov Defendants. It is primarily these two actions that underlie Artec's claim that Axon breached the distribution agreement between the two companies.

         Currently pending before the Court is a motion to reconsider filed by Axon. More specifically, Axon asks this Court to reconsider Judge Whyte's previous order denying Axon's motion to dismiss for lack of personal jurisdiction. Having considered the parties' briefs, the oral argument of counsel, and all other evidence of record, the Court hereby GRANTS the motion to reconsider and further dismisses Axon from the case for lack of personal jurisdiction.


         Judge Whyte was the original judge assigned to this case. In February 2016, Axon asked Judge Whyte to dismiss the claims against it for lack of personal jurisdiction. See Docket No. 85 (motion). In May 2016, Judge Whyte denied the motion. See Docket No. 104 (order). After Judge Whyte denied the motion, Axon filed a 12(b)(6) motion to dismiss. See Docket No. 125 (motion). Judge Whyte held a hearing on the motion, see Docket No. 143 (minutes), but the case was subsequently reassigned to this Court. In December 2016, this Court granted in part and denied in part Axon's 12(b)(6) motion. See Docket No. 157 (amended order). In essence, the non-contract claims against Axon were dismissed and the contract claims against Axon (i.e., claims for breach of contract and breach of the implied covenant of good faith and fair dealing) were allowed to proceed.

         Subsequently, in February 2017, Axon's counsel's moved to withdraw. See Docket No. 176 (motion). The Court ultimately granted the motion, see Docket No. 254 (order), and, in doing so, warned Axon that it would need to find new counsel to represent it and that, if it did not, then Artec could seek an entry of default and a default judgment. See, e.g., Docket No. 225 (order). Axon did not find new counsel to represent it and thus its default was entered in June 2017. See Docket No. 259 (clerk's notice). Two months later, Artec filed its motion for entry of default judgment against Axon. See Docket No. 295 (motion).

         In response, Axon asked for permission to file an opposition to the default judgment motion. (Axon's request was made by its former counsel.) The Court held that, before Axon could oppose the request for default judgment, it would have to first move to set aside the entry of default. See Docket No. 315 (order). Axon thus moved to set aside default (again, represented by former counsel), see Docket No. 320 (motion), and the Court granted the motion in September 2017. See Docket No. 327 (order). In that order, the Court took note of Axon's potentially meritorious defense on lack of personal jurisdiction. The Court added that, even if personal jurisdiction could not be contested, there appeared to be other potentially meritorious defenses.

         Following the Court's order setting aside the default, the Court held a status conference in September 2017. At the conference, the Court set a schedule for Axon's motion to reconsider Judge Whyte's personal jurisdiction order. See Docket No. 329 (minutes). Artec and Axon subsequently had a settlement conference with Judge Laporte but the case did not settle. See Docket No. 334 (minutes). This Court must proceed with the motion for reconsideration.

         Although personal jurisdiction is the issue before the Court, it is worthwhile to briefly touch on the substantive claims being brought by Artec against Axon.

         The contract claims against Axon are based on the parties' distribution agreement, which they entered into in August 2012. The agreement specified that it “shall remain in effect for a period of one (1) year. Thereafter, the Agreement may be renewed for successive one (1) year terms, which renewal must be acknowledged in writing by ARTEC and [Axon].” Dist. Agmt. § 7.1. In its complaint, Artec does not dispute that the agreement was never renewed. Thus, the distribution agreement terminated in or about August 2013. Artec, however, claims breach of contract based on provisions of the agreement that it contends survive contract termination.[1]According to Artec, those provisions are: §§ 2.9, 2.11, and 7.5 of the agreement.

(1) Section 2.9. Section 2.9 has two relevant provisions. First, Axon was barred from “distribut[ing] equipment or products similar to or competitive with [Artec's products] without ARTEC's prior written consent.” Dist. Agmt. § 2.9 (emphasis added). Second, Axon had the duty to “keep ARTEC informed of [Axon's] current or future sales of equipment or products similar to or competitive with [Artec's products].” Dist. Agmt. § 2.9 (emphasis added).
(2) Section 2.11. Section 2.11 provides in relevant part as follows: “[Axon] shall notify ARTEC promptly of any and all infringements, limitations, simulations, illegal uses, or misuses of the ARTEC Marks, patents, and other intellectual property rights.” Dist. Agmt. § 2.11 (emphasis added).
(3) Section 7.5. Section 7.5 of the distribution agreement provides as follows: “Upon termination of this Agreement, Distributor shall immediately cease all use of the ARTEC Marks.” Dist. Agmt. § 7.5 (emphasis added).

         Artec claims that Axon breached the above provisions because, e.g., after the contract terminated, Axon purchased Artec product (Broadway 3D devices) from A-Star (one of the Klimov Defendants); Axon did not inform Artec about A-Star's selling of Artec product; Axon purchased a competing product (EnterFace) from ID-Wise (another Klimov Defendant); and Axon did not inform Artec about the competing product.[2]

         Per its motion for default judgment, Artec seeks both damages and injunctive relief based on the alleged misconduct by Axon. More specifically, Artec seeks: (1) $341, 061.30 in compensatory damages (representing the profit that Artec would have made if Axon had bought the Broadway 3D product from Artec itself rather than A-Star) and (2) interest at the rate of $93.4415 per day (starting from the date of the distribution agreement, i.e., January 7, 2015, and ending the date of judgment). As for injunctive relief, Artec seeks specific enforcement of the three contract provisions above (i.e., §§ 2.9, 2.11, and 7.5).


         A. Le ...

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