United Studios of Self Defense, Inc. v. Rinehart

          FINDINGS OF FACT AND CONCLUSIONS OF LAW AND ORDER GRANTING IN PART MOTION FOR TERMINATING SANCTIONS [221]

          DAVID O. CARTER UNITED STATES DISTRICT JUDGE

         I. INTRODUCTION

         A bench trial on this matter was held on October 29-31, 2019.

         This action arises out of a dispute between United Studios of Self Defense (“USSD” or “Plaintiff”) over alleged franchise and license agreements with Kristopher Rinehart (“Rinehart”), Brent Murakami (“Murakami”) and entities owned wholly or partly by Rinehart and Murakami including Los Angeles Studios of Self Defense (“LASSD”), South Bay Studios of Self Defense (“SBSSD”), S.B. Ninja, LLC (“S.B. Ninja”), and Rolling Hills USSD (“RHSSD”) (collectively, “Defendants”).

         Plaintiff alleges the following eight claims:

1. Breach of Contract as to the Redondo Beach Franchise Agreement

2. Breach of Contract as to the Beverly Hills Franchise Agreement

3. Declaratory relief as to the Redondo Beach Franchise Agreement

4. Intentional interference with contract against Murakami and S.B. Ninja

5. False designation/unfair competition under the Lanham Act

6. Unfair business practices under Cal. Bus. & Prof. Code §§ 17200 et. seq. (“UCL”)

7. Accounting of profits made from Lanham Act violation

8. Declaratory relief as to rights and obligations under the Redondo Beach and Beverly Hills Franchise Agreements

         Defendants allege the following three counterclaims:

1. Declaratory relief as to lack of formation of the Redondo Beach Franchise Agreement

2. Declaratory relief as to right to rescind Rolling Hills License Agreement

3. Breach of contract as to Beverly Hills Franchise Agreement

         Defendants also request the Court allow them to amend their counterclaims to include the following three counterclaims they allege have been proven at trial:

4. Declaratory relief as to illegality of Redondo Beach License Agreement

5. Breach of contract as to Torrance and Rolling Hills License Agreements

6. Declaratory relief as to illegality of Beverly Hills Franchise Agreement

         During trial, Defendants also requested terminating sanctions for alleged bad faith behavior of Charles Mattera. See Motion for Terminating Sanctions (“Motion”). Dkt. 221.

         The Court issues the following findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52. To the extent that any findings of fact are included in the conclusions of law section, they shall be deemed findings of fact, and to the extent that any conclusions of law are included in the findings of fact section, they shall be deemed conclusions of law. The Court incorporates its findings to GRANT IN PART Defendants' Motion, as explained below.

         II. FINDINGS OF FACT

         A. Background

         1. Plaintiff USSD is a corporation duly organized under the state of California, with its principal place of business in Irvine, California. USSD's owner and CEO is Charles Mattera (“Mattera”).

         2. Defendants are Rinehart, an individual; Murakami, an individual; SBSSD, a California limited liability company; LASSD, a California limited liability company; S.B. Ninja, a California limited liability company; and Counterclaimant RHSSD, a California limited liability company.

         3. SBSSD and Archie Currin are members of LASSD. S.B. Ninja and Rinehart are members of SBSSD. Murakami is the sole member of S.B. Ninja. S.B. Ninja and Tomas Orzco are members of RHSSD.

         4. At trial there was a factual dispute as to whether Murakami was a member of SBSSD individually, or whether S.B. Ninja was a member of SBSSD. The evidence at trial was that SBSSD had an operating agreement dated July 1, 2011 listing Murakami as the member of SBSSD rather than S.B. Ninja. [Ex. 652]. Murakami testified at trial that there was another operating agreement dated August 5, 2011 [Ex. 653] for SBSSD postdating the July 1, 2011 SBSSD operating agreement [Ex. 652]. The August 5 agreement changed the membership in SBSSD from Murakami to S.B. Ninja. [10/30/2019 Trans. Vol. III at 86:3-89:14], [10/31/2019 Trans. Vol. III at 15:24-16:11]. The Court acknowledges that the information on file with the California Secretary of State contradicts Murakami's testimony of the purported August 5, 2011 operating agreement because it reflects Murakami being a member of SBSSD individually. [10/30/2019 Trans. Vol. II at 76:5-8]. However, the Court finds Mr. Murakami's testimony and Exhibit 653 credible and determines that S.B. Ninja is a member of SBSSD along with Rinehart.

         B. Charles Mattera

         5. Charles Mattera has no credibility with this Court.

         6. The Court finds Mattera lied under oath in his responses to interrogatories wherein he claimed not to know about a critical witness, namely, Alejandro Corrales. [Exs. 508-509]. It was subsequently learned that Mattera knew exactly who Alejandro Corrales was because Mattera later admitted Alejandro Corrales is an alias of Luis Auza. [10/29/2019 Trans. Vol. III at 63:1-64:5], [10/29/2019 Trans. Vol. IV at 46:20- 49:4]. Mattera's explanation, namely that he “forgot, ” is not credible.

         7. Mattera was not forthright in a May 19, 2019 declaration to this Court when he said that he thought that all the information provided to him by Luis Auza regarding the “Jessica Allegations” up through Auza's February 6, 2019 deposition was genuine. [Ex. 503 at 12]. Mattera later admitted he “stopped believing in Luis at the end of the year [2018] and into January [2019].” [10/29/2019 Trans. Vol. III at 79:24-80:9].

         8. The Court finds that Mattera knowingly lied on the stand when he testified that he did not state that his attorneys were going to bury evidence in this case. [10/29/2019 Trans. Vol. IV at 86:1-24], [10/29/2019 Trans. Vol. V at 39:21-23].

         9. Exhibit 561 shows Mattera speaking to Auza about how the “Jessica Allegations” can be used to leverage a settlement in this case because Rinehart would not want to lose his license to practice medicine.

         10. Exhibit 566 shows Mattera discussing how he wants to go “all-in” on the allegations to “destroy” Rinehart.

         11. Exhibit 573 shows Mattera discussing with Auza how Auza should testify at his deposition including implying Auza should perjure himself.

         12. Exhibit 575 shows Mattera discussing with Auza how Auza should testify at his deposition including implying Auza should perjure himself.

         13. The Court finds that the Plaintiff through Mattera suborned perjury of Luis Auza and witness tampered with Luis Auza prior to Luis Auza's February 6, 2019 deposition. [See Exs. 561, 566, 573, 575]. The audio recordings capturing the conversations between Mr. Auza and Mattera referenced above confirm such.

         14. The Court cannot make a finding that Mattera knew that the “Jessica Allegations” were false with certainty before the February 2019 deposition of Luis Auza. However, the Court finds that Mattera's actions in the months leading to the February 2019 deposition show, at minimum, a reckless disregard for the truth of the allegations given their extremely serious nature and given that Mattera was actively using the allegations as leverage to get Rinehart to settle the action.

         15. The Court also finds that Mattera acted in reckless disregard to Rinehart's livelihood, family life, and personal and professional reputation.

         16. Finally, the Court makes no adverse findings on the actions of Plaintiff's counsel.

         17. Given the above actions, the Court will make all relevant factual findings requiring a credibility determination of Mattera against the Plaintiff.

         C. USSD's Business

         18. USSD is a franchisor of martial arts franchised studios. [10/29/2019 Trans. Vol. II at 8:22-24]. Its franchisees provide martial arts training and instruction in USSD's system of “Shaolin Kempo Karate.” [10/29/2019 Trans. Vol. II at 9:1-4]. The franchisees also sell retail martial arts supplies approved by USSD at their USSD's franchised studios. [10/29/2019 Trans. Vol. II at 9:5-7]. The services and goods provided by USSD's franchisees are associated with USSD's brand name, service marks, and registered trademarks (the “USSD Marks”) and its system of Shaolin Kempo Karate. [Ex. 52].

         19. USSD has the following trademarks on the principal register with the United States Patent and Trademark Office in which the USSD brand name and the USSD Logo have been registered as both trademarks and service marks:

Registration No. 4232409, USSD, October 30, 2012;

Registration No. 3470475, USSD, July 22, 2008;

Registration No. 1758349, USSD, March 16, 1993; and

Registration No. 175295, USSD, February 16, 1992. [Ex. 52].

         These registrations are part of the USSD Marks and are used by USSD and USSD's franchisees and USSD's trademark licensees in connection with the sale of martial arts goods and services.

         20. USSD was registered to offer and sell franchise offerings in California with the Department of Corporations between approximately 1993 and 1998. [10/29/2019 Trans. Vol. II at 26:20-27:20]. USSD sold franchises in California during this time. [10/29/2019 Trans. Vol. II at 27:21-23]. USSD did not re-register to sell franchises in California thereafter until 2012. [10/29/2019 Trans. Vol. II at 39:12-17].

         21. USSD and Mattera are subject to a 1996 permanent injunction by the state of California, which states the following, in relevant part:

“IT IS THEREFORE ORDERED as follows: THE UNITED STUDIOS OF SELF DEFENSE, INC. and CHARLES A. MATTERA and their directors, successors in interest, controlling persons, agents, employees, attorneys in fact, and all other persons acting in concert or participating with them, or any of them, are permanently enjoined from directly or indirectly:

1. Offering to sell, selling, arranging for the sale, issuing, engaging in the business of selling, negotiating for the sale of, or otherwise in any way dealing or participating in the offer or sale of any franchise whether as part of the scheme complained of in the complaint or otherwise, which is not exempt from the registration requirements under the California Franchise Investment Law, unless and until they shall have first applied for and secured from the Commissioner, a registration pursuant to California Corporations Code Section 11111 authorizing the offer and sale of such franchises.

2. Filing with the Commissioner any application, notice or report which contain an untrue statement of a material fact or omitting to state in such application, notice or report any material fact which is required to be stated therein, including, but not limited to the applications complained of in the complaint…” [Exs. 525, 526]

         22. USSD re-registered to offer and sell franchises in the State of California in 2012, and USSD renewed its registrations each year thereafter until 2017. [10/29/2019 Trans. Vol. II at 39:12-40:20]. USSD was registered with the State of California to offer and sell franchises at all times between 2012 and 2017. Id.

         D. Alleged Franchisees and Licensees

         The Torrance and Rolling Hills License Agreement

         23. On May 28, 2009, Max J., Inc., entered into a trademark license agreement with USSD (the “Torrance License Agreement”). [Ex. 633]. The Torrance License Agreement had a 20-year term. [Ex. 633 at 5, § 12; 10/29/2019 Trans. Vol. III at 54:6-15; 56:11-15].

         24. Max J., Inc. thereafter transferred the Torrance License Agreement to S.B. Ninja, and USSD consented to the transfer on October 1, 2009. [Ex. 634].

         25. Murakami, without any formal written agreement, operated the RHSSD location with express permission from USSD from 2016 until March of 2018. [10/30/2019 Trans. Vol. I at 56:22-58:16]. In March of 2018, the relationship as to the operation of the RHSSD location was formalized via the “Torrance and Rolling Hills License Agreement.” [Ex. 38].

         26. The Torrance License Agreement was amended by the March 2018 Torrance and Rolling Hills License Agreement. [Ex. 38]. On March 19, 2018, Murakami signed the Torrance and Rolling Hills License Agreement on behalf of S.B. Ninja as it relates to Torrance, and on behalf of RHSSD as it relates to Rolling Hills. Therefore, S.B. Ninja is the licensee for the operation of a Torrance USSD location and RHSSSD is the licensee for a USSD location in Rolling Hills. Mattera signed the agreement on behalf of the licensor, USSD. The governing agreement for the Torrance and Rolling Hills locations is the Torrance and Rolling Hills License Agreement. [Ex. 38].

         27. Exhibit 38 has a three-year term set to expire on March 19, 2021.

         28. The agreement requires Murakami to administer all brown and black belt testing at USSD headquarters and share the revenue with USSD. [Ex. 38].

         29. On September 7, 2018, Murakami appeared on behalf of LASSD at the USSD headquarters and was advised by counsel for USSD that Murakami was required to leave USSD premises due to the pending litigation or be charged with trespassing. [Ex. 580], [10/31/2019 Trans. Vol. II at 39:11-40:05].

         30. The Court finds that asking Murakami to leave USSD premises due to pending litigation may have seemed reasonable given the circumstances. However, given that the underlying agreement required Murakami to conduct all testing for brown and black belts at headquarters, refusing Murakami access to headquarters may have breached the agreement.

         31. USSD was not authorized to sell franchises in 2018. [10/29/2019 ...