California Expanded Metal Products Company et al v. James A Klein et al

Filing 105

ORDER GRANTING PLAINTIFFS MOTION FOR PRELIMINARY INJUNCTION, IN PART [Dkt. 54, 61] by Judge Dean D. Pregerson: Plaintiffs Motion for a Preliminary Injunction is GRANTED, in part. An injunction shall issue by separate Order of this Court. (lc). Modified on 5/9/2017 .(lc).

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UNITED STATES DISTRICT COURT

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CENTRAL DISTRICT OF CALIFORNIA

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CALIFORNIA EXPANDED METAL
PRODUCTS COMPANY, ET AL.,

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Plaintiff,
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v.
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JAMES A. KLEIN, ET AL.,
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Defendants.
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Case No. CV 16-05968 DDP (MRWx)
ORDER GRANTING PLAINTIFFS’ MOTION
FOR PRELIMINARY INJUNCTION, IN
PART
[Dkt. 54, 61]

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Presently before the court is Plaintiffs’ Motion for
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Preliminary Injunction.

Having considered the submissions of the

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parties and heard oral argument, the court grants the motion in
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part, denies the motion in part, and adopts the following Order.
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I.

Background

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Defendant James Klein (“Klein”) is the named inventor on
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several patents for building materials.

(Complaint ¶ 9.)

Klein

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assigned some of those patents to a company he helped form,
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Defendant Blazeframe Industries, Ltd.

(“Blazeframe”).

(Id. ¶ 10.)

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Klein, Blazeframe, and Plaintiffs California Expanded Metal
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Products Company (“CEMCO”) and ClarkWestern Dietrich Building
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Systems LLC (“Clark”) litigated several questions regarding the

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ownership, licensing, and alleged infringement of the patents in a

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prior case before this court.

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DDP(MRWx) (“the prior case”).

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(Compl. ¶ 11.)

See No. CV 12-10791-

The parties settled all claims in the prior case.

(Compl. ¶

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12.)

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settlement agreement.1

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agreement required Blazeframe to assign the patents to CEMCO in

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consideration for an up-front payment.

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retained a royalty-free license to “commercialize the Patents in a

The transcript of a settlement conference constitutes the
Plaintiffs allege that the settlement

(Id. ¶ 16.)

Blazeframe

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restricted territory” spanning six states.”

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also agreed to grant a license to Clark in exchange for royalty

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payments, a portion of which would be paid to Blazeframe.

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The settlement transcript includes the following colloquy:

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(Id. ¶¶ 16-17.)

CEMCO

(Id.)

[CEMCO]: CEMCO shall grant Blazeframe the right to continue
to sell under the Blazeframe patents in the territory of
Washington, Alaska, Idaho, Montana and Wyoming. And that
license shall be royalty free for the remaining life of the
patents. . . .

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[Clark]: The license to [Clark] is an exclusive license as
to the Blazeframe patents but for the six states to Klein
and Blazeframe; is that correct?

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[CEMCO]: Correct. . . .

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[Clark]: . . . And the limitations on MR. Klein –or on
Blazeframe to the – six state region is that Blazeframe
will only make no sales that will basically cross outside
that six-state region. It will all – the sales and the
delivery of the products will all be within that six-state
region; is that correct?

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[Blazeframe]:
That’s
not
my
understanding.
My
understanding is that that’s defined as it is in the
current licensing agreement – the same agreements as exist
now – same agreements as exist now –

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The
settlement
agree on a
settlement

parties agreed to the terms of a settlement at the
conference and further agreed that if they failed to
memorialization of those terms, the transcript of the
conference would constitute the settlement agreement.
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[Clark]: Well . . . But – but Klein – Blazeframe has some
rights . . . to sell outside of the six-state region right
now.
[CEMCO]: [I]f you’ll recall, Mr. Klein specifically wanted
to sell to dealers outside of this area.
And we
specifically said no to that and he came back and said
that’s okay. So he’s aware of that. That was put on the
table, and we didn’t accept it and then [Blazeframe] agreed
that it was off the table. So he had no dealers since
those dealers are outside of this area; the sales are
within the – these – this geographic region. That’s his
territory.
[Blazeframe]: See . . . . That’s my understanding too that
all sales have to be within the region.

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[CEMCO]: Correct.
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[Clark]: Okay.

How did I say something different?

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[Blazeframe]: I don’t know.

Maybe I wasn’t – I –

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[Clark]: The sales are all with – confined within that sixstate region. There can’t be any sales by Blazeframe that
go outside that region.

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[Blazeframe]: I understand that he can’t sell to anyone
outside that region. That’s what [CEMCO] said; that’s what
I heard.

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(Declaration of R. Joseph Trojan In Support of Motion, Ex. 1 at
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9:24-12:5.)
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Plaintiffs allege that Blazeframe is breaching the settlement
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agreement by, among other things, selling licensed products outside
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the agreed-upon six state area.

(Compl. ¶¶ 27, 38.)

Plaintiffs

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further allege that these sales have been “orchestrated by Klein.”
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(Id. ¶ 37.)

Blazeframe also allegedly sells licensed product to

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Big Mountain Materials Supply LLC, a company controlled by Klein or
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his family members, which then re-sells the product throughout the
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country.

(Id. ¶ 25.)

Plaintiffs further allege that Blazeframe

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has sold component parts of the licensed products to buyers outside
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Blazframe’s territory so that the buyers can manufacturer licensed
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product on-site.

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selling licensed products outside of the agreed-upon geographical

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area, Blazeframe is infringing upon the patents owned by CEMCO, to

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which Clark has an exclusive license outside of Blazeframe’s

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territory.

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(Id. ¶ 26.)

Plaintiffs also allege that by

(Id. ¶¶ 44-45.)

Plaintiffs now move for a preliminary injunction enjoining

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Defendants from advertising, offering for sale, or shipping

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Blazeframe products, or component parts for manufacturing purposes,

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outside the six-state restricted territory, including to third

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parties within the restricted territory that Blazeframe knows will

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then ship or use the products outside the territory.

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II.

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Legal Standard
A private party seeking a preliminary injunction must show

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that: (i) it is likely to succeed on the merits; (ii) it will

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suffer irreparable harm in the absence of preliminary relief; (iii)

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the balancing of the hardships and equities between the parties

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that would result from the issuance or denial of the injunction

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tips in its favor; and (iv) an injunction will be in the public

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interest.

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(2008).

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shows a combination of probable success on the merits and the

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possibility of irreparable harm; or (ii) raises serious questions

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on such matters and shows that the balance of hardships tips in

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favor of an injunction.

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Inc., 819 F.2d 935, 937 (9th Cir. 1987). “These two formulations

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represent two points on a sliding scale in which the required

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degree of irreparable harm increases as the probability of success

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decreases.”

Winter v. Natural Res. Defense Counsel, 555 U.S. 7, 20

Preliminary relief may be warranted where a party: (i)

Id.

See Arcamuzi v. Continental Air Lines,

Under both formulations, the party must
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demonstrate a “fair chance of success on the merits” and a

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“significant threat of irreparable injury” absent the issuance of

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the requested injunctive relief.2

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III. Discussion

Id.

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A.

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Plaintiffs have demonstrated that they are likely to succeed

Likelihood of Success on the Merits

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on the merits of some aspects of their breach of contract claim.

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Plaintiffs have submitted evidence that Defendants have made direct

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sales to a dozen different buyers in ten different states outside

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Blazeframe’s six-state territory.3

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Plaintiffs have also submitted evidence of numerous sales to Big

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Mountain Materials Supply LLC, a Washington corporation with no

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employees or payroll that lists “Serina Klein,” who Plaintiffs

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represent is Klein’s wife, as its registered agent and an

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individual Plaintiffs represent to be Klein’s mother-in-law as

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governor.

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sales to Big Mountain are shipped to addresses outside the six-

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state region.4

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appears to have sold significant quantities of intumescent tape, a

(Trojan Decl., Exs. 3-10.)

(Trojan Decl., Exs. 12-13, 22.)

Many of Blazeframe’s

(Trojan Decl., Ex. 12 at 8-26.)

Blazeframe also

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Even under the “serious interests” sliding scale test, a
plaintiff must satisfy the four Winter factors and demonstrate
“that there is a likelihood of irreparable injury and that the
injunction is in the public interest.” Alliance for the Wild
Rockies v. Cottrell, 632 F.3d 1127, 1135 (9th Cir. 2011).
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Plaintiffs also submitted evidence of sales made within
Blazeframe territory, but shipped to addresses outside Blazeframe’s
region, discussed further below. (Trojan Decl., Ex. 11.)
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Plaintiffs further assert, albeit without specific
evidentiary support, that Big Mountain “resells” Blazeframe product
without any markup.
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component part of the licensed products, to out-of-area buyers.5

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(Trojan Decl., Exs. 15-18.)

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Although Defendants take issue with Plaintiffs’ computation of

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Blazeframe’s extra-territorial sales, Defendants do not dispute

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that they made direct sales outside of Blazeframe’s six-state

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region.

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warranted because Defendants no longer make direct extra-

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territorial sales and because the settlement agreement allows

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Blazeframe to make sales to distributors who may then re-sell

Defendants nevertheless contend that an injunction is not

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licensed products outside Blazeframe territory.6

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matter, it appears that Blazeframe’s significant sales to Big

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Mountain are a sham, made solely for purposes of circumventing the

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settlement agreement’s territorial restrictions.

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therefore not persuaded by Defendants’ claims that direct extra-

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territorial sales have ceased, and Plaintiffs have made a strong

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showing of a likelihood of success on the merits of the breach of

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contract claim based upon direct sales.

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As an initial

The court is

The question remains, however, whether the settlement

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agreement forbade the type of sales Blazeframe apparently intends

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to continue making to in-territory distributors who then ship

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licensed product out of Blazeframe territory.

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sale of a patented device exhausts the patentee’s right to control

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the purchaser’s use of that item thereafter . . . .”

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v. Sturm Foods, Inc., 732 F.3d 1370, 1373 (Fed. Cir. 2013); see

“[A]n unconditional

Keurig, Inc.

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Although Plaintiffs acknowledge that some tape sales may be
for legitimate repair purposes, the quantities shipped suggest some
other purpose, such as on-site manufacture of licensed products.
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Defendants’ counsel represented at oral argument that Big
Mountain has been defunct since mid-January 2017.
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also Monsanto Co. v. Scruggs, 459 F.3d 1328, 1335-36 (Fed. Cir.

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2006) (“The first sale/patent exhaustion doctrine establishes that

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the unrestricted first sale by a patentee of his patented article

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exhausts his patent rights in the article.”).

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doctrine, however, does not apply to an expressly conditional sale

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or license.”

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F.3d 1419, 1426 (Fed. Cir. 1997).

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whether the settlement agreement expressly placed any downstream

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restrictions upon Blazeframe’s sales of licensed products.

“This exhaustion

B. Braun Medical, Inc. v. Abbott Laboratories, 124
The question here, therefore, is

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At the settlement hearing, the transcript of which constitutes

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the settlement agreement, Clark’s counsel specifically stated, “And

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the limitations on Mr. Klein –or on Blazeframe to the – six state

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region is that Blazeframe will only make no sales that will

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basically cross outside that six-state region.

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sales and the delivery of the products will all be within that six-

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state region; is that correct?”

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unambiguously forbade Blazeframe from making any sales that would

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ultimately leave Blazeframe’s territory, even through in-territory

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distributors other than Big Mountain.

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It will all – the

This framing of the question

Blazeframe’s counsel did not, however, agree to Clark’s

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counsel’s characterization.

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Klein specifically wanted to sell to dealers outside of this area.

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And we specifically said no to that and he came back and said

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that’s okay.

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So he had no dealers since those dealers are outside of this area;

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the sales are within the – these – this geographic region.

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his territory.”

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initially stated interpretation, that “[t]he sales are all with –

CEMCO’s counsel then explained, “Mr.

. . . [Blazeframe] agreed that it was off the table.

(Emphases added).

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That’s

Clark’s counsel reiterated her

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confined within that six-state region.

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Blazeframe that go outside that region.”

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There can’t be any sales by

Blazeframe’s counsel then acknowledged, “I understand that he

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can’t sell to anyone outside that region.

That’s what [CEMCO]

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said; that’s what I heard.”

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an agreement regarding “sales” within Blazeframe territory, he did

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so in the context of discussing Klein’s frustrated desire to sell

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to dealers extraterritorially, and did not expressly mention in-

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territory sales to dealers who would then sell extraterritorially.

Although CEMCO’s counsel referred to

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As a result of the ambiguity of this characterization of the

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agreement, to which Blazeframe acceded and which arguably

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contrasted with Clark’s interpretation, Plaintiffs have not, at

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this stage, shown a likelihood of success on the merits with

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respect to extraterritorial downstream sales.

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Defendants also argue that Plaintiffs are not likely to

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succeed on the merits because their actions violate antitrust law.

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(Opposition at 20.)

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length, Defendants assert that Clark and CEMCO entered into a

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“supplemental settlement agreement” after the settlement agreement

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at issue here as part of a conspiracy to horizontally restrain

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trade and divide a market.

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market division agreements, in which competitors agree to divide

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the market for a product, are indeed per se antitrust violations.

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See California ex rel. Harris v. Safeway, Inc., 651 F.3d 1118, 1137

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(9th Cir. 2011).

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settlement agreement arising out of an unrelated disparagement

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action in Ohio state court.

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this Court, however, how that agreement constitutes an

Although the argument is not developed at

(Opp. at 14, 20.)

“Classic” horizontal

Plaintiffs acknowledge that they entered into a

(Reply at 15-16.)

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It is unclear to

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impermissible restraint of trade, particularly given Blazeframe’s

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continuing market position within its six-state area and its

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acceptance of a monetary payment in exchange for the relevant

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patents, or otherwise insulates Defendants from Plaintiffs’ claims

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here.

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“supplemental settlement agreement” does not diminish the

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likelihood that Plaintiffs will succeed on the merits.7

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Barring further elaboration from Defendants, the

To the extent that Plaintiffs seek to enjoin Blazeframe from
advertising outside its six-state territory, Plaintiffs did not

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initially submit any evidence that Blazeframe makes any offers to

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sell outside the restricted area.

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declaration states that Blazeframe’s website does not list any

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territorial restrictions, that is not sufficient to establish that

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Blazeframe solicits extraterritorial sales via its website.

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(Trojan Decl., ¶ 22.)

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Although CEMCO’s counsel’s

The court sought supplemental briefing, however, on Klein’s

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role in soliciting extraterritorial sales through distributors.

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is undisputed that Klein travels the country to promote Blazeframe

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products, including, but not limited to, the licensed products at

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issue here.

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“identical” to that listed on the Blazeframe website.

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(Supplemental Declaration of James Klein ¶ 15.)

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extraterritorial potential customers “initiate a sales activity” by

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calling or e-mailing Blazeframe.

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“facilitates the sale” of the requested products.

Upon request, Klein provides pricing information

(Id. ¶ 17.)

Klein states that

Blazeframe then
(Id.)

When the

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It

Defendants also argue, without any citation to the record,
that both Plaintiffs have breached the settlement agreement at
issue here. The court declines to address these unsupported
assertions.
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requested products are licensed products covered by the patents at

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issue here, Klein or Blazeframe “refers the potential sale/sales

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lead to . . . authorized dealer/distributors . . . .”

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Decl. ¶ 18.)

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and that one Washington distributor in particular, SteelTec, “now

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receives and handles a majority of sales of ‘licensed product’ to

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buyers located outside BlazeFrame’s six-state territory.”

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territory “now only sell and distribute non-licensed products[.]”

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(Supp. Klein

Klein represents that these distributors are “local,”

(Id ¶

Klein further asserts that distributors outside Blazeframe

(Id.)
Klein’s representations appear to conflict with evidence

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submitted by Plaintiffs.

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contractor, Klein states that Blazeframe “can sell through any

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local distribution yard.”

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Although it is not entirely clear whether licensed products are at

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issue in the e-mail exchange, Klein’s representation to the

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contractor casts some doubt upon his assertion that no extra-

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territorial distributor deals in licensed products.

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submits e-mail exchanges between Klein and a New York distributor,

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Studco, and a Colorado distributor, Heartz Building Supply, in

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which Klein appears to provide pricing strategies and information

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for licensed products.

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to parties in Nebraska and Maryland listing prices for licensed

In one e-mail to an extraterritorial

(Declaration of Ann Schoen, Ex. 2.)

(Id., Exs. 3, 4.)

Clark also

Klein also sent e-mails

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As discussed above, it remains to be seen whether
extraterritorial downstream sales by independent distributors are
permitted by the settlement agreement. It is unclear, however,
whether Klein’s reference to “a majority of sales of ‘licensed
product’ to buyers located outside BlazeFrame’s six-state
territory[,]” is best characterized as referring to distributor
sales or to Blazeframe’s sales.
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products shipped via resellers.

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1, 2.)

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appear to be “identical” to those listed on Blazeframe’s website.

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(Id.; Supp. Klein Decl. ¶ 15.)

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(Declaration of Francis Wong, Exs.

Contrary to Klein’s declaration, the prices quoted do not

Despite the inconsistencies between Klein’s representations

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and the evidence submitted by Defendants, it remains unclear

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whether Klein engages in conduct that constitutes extraterritorial

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advertising for sale, as opposed to product education or promotion.

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It is unclear, for example, whether Klein’s reference to “any local

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distribution yard” refers to in-territory yards or out-of-territory

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yards local to the end user.

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unclear whether Klein and that end user discussed licensed or

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unlicensed Blazeframe products.

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communications regarding distributor pricing strategies and end-

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user price quotes, including shipping costs, raise some questions

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about his relationship to, and the independence of, distributors,

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the evidence is insufficient at this stage to establish that these

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distributors are similar to Big Mountain or otherwise fall under

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Klein’s control.

Even if the latter, it is also

Furthermore, although Klein’s

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B.

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Plaintiffs argue that Blazeframe’s extraterritorial sales are

Irreparable Harm

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causing irreparable harm in the form of price erosion and loss of

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market share.

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damage to reputation, and loss of business opportunities are all

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valid grounds for finding irreparable harm.”

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Dynamics, Inc. v. Ridge Corp., No. CV 15-1877 BRO (MANx), 2015 WL

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12516692 at *24 (C.D. Cal. Aug. 24, 2015) (quoting Celsis in Vitro,

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Inc. v. CellzDirect, Inc., 664 F.3d 922, 930 (Fed. Cir. 2012)

(Motion at 9-12.)

“Price erosion, loss of goodwill,

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Advanced Transit

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(internal quotation marks omitted).

Plaintiffs have submitted

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evidence that buyers of licensed products outside of Blazeframe’s

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territorial area have stated that Clark “needed to get in line with

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[its] ‘Blazeframe pricing[,]’” after getting price quotes for

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licensed products directly from Blazeframe.

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of Gregg A. Stahl, Ex. 6 at 1)

(Dkt. 39, Declaration

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Defendants argue that there is no irreparable harm because

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Blazefram’s direct extraterritorial sales have ceased, and harm

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resulting from any such prior sales can be compensated by money

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damages.

As discussed above, the court is not persuaded that

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Blazeframe’s extraterritorial sales have ceased.

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Plaintiffs argue, Blazeframe may be judgment-proof, limiting the

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deterrent effect of money damages.

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Farms, Inc. v. Agropecuaria La Finca, S.P.R. de R.L., No. 08 CV

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2301 JM (CAB), 2009 WL 249790 at *3 (S.D. Cal. Feb. 2, 2009); Wang

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Laboratories Inc. v. Chip Merchant Inc., No. 93-893-K (POR), 1993

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WL 42820 at *7 (S.D. Cal. Sept. 3, 1993).

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adequately shown a risk of irreparable harm.

Furthermore, as

See, e.g., Aviara Parkway

Plaintiffs have

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C.

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Defendants are correct that, as a “one man operation with few

Balance of the Equities and the Public Interest

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resources,” Blazeframe can less “readily withstand hardship” than

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Plaintiffs, which are both large, well-capitalized organizations.

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Nevertheless, it does not appear to the court that issuance of an

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injunction would negatively affect Defendant in any way.

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an injunction were to issue, Blazeframe would be free to continue

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selling licensed product within its six-state territory.

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Furthermore, the public interest in upholding principles of

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contract law appear to outweigh any countervailing considerations.
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Even if

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Indeed, it is unclear to the court how, as Defendants argue, an

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injunction “would substantially reduce competition in an emerging

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market,” considering the fact that Blazeframe is contractually

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prohibited from competing, and claims not to compete, outside of

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its six-state area.

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IV.

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Conclusion
For the reasons stated above, Plaintiffs’ Motion for a

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Preliminary Injunction is GRANTED, in part.

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issue by separate Order of this Court.

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An injunction shall

IT IS SO ORDERED.

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Dated: May 9, 2017
DEAN D. PREGERSON
United States District Judge

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