Farouk Systems, Inc. v. Costco Wholesale Corporation

Filing 105

MEMORANDUM AND ORDER DENYING 92 MOTION for Judgment.(Signed by Judge Keith P Ellison) Parties notified.(sloewe)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
FAROUK SYSTEMS, INC.,
Plaintiff,
v.
COSTCO WHOLESALE
CORPORATION,
Defendant.

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§ CIVIL ACTION NO. 4:09-cv-3499
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MEMORANDUM AND ORDER

Plaintiff Farouk Systems, Inc. (“Farouk”) brought this action against Defendant
Costco Wholesale Corporation (“Costco”) alleging trademark infringement and false
designation of origins under the Lanham Act, as well as unfair competition. Pending
before the Court is Costco’s Motion for Judgment. (Doc. No. 92.) After considering the
motion, all responses thereto, and the applicable law, the Court finds that Costco’s
motion must be DENIED.
I.

BACKGROUND
This case involved Farouk’s allegation that Costco was selling a counterfeit

version of Farouk’s “CHI” hair iron. After a seven day jury trial, the jury found that one
of the 61 CHI irons that Farouk challenged was counterfeit. The jury awarded statutory
damages for that iron in the amount of $200,000. (Jury Verdict, Doc. No. 86.) After trial,
Farouk moved for an entry of judgment on the jury’s verdict and sought an injunction.
Farouk proposed two alternative injunctions: the first would have enjoined Costco from
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selling CHI irons not purchased directly from Farouk, and would have fixed the amount
of liquidated damages for such sales at $1,000 per iron. (Doc. No. 87.) The second,
narrower, option would have permanently enjoined Costco from the sale of counterfeit
irons. (Id.) In response, Costco asked the Court to deny injunctive relief, and argued that
both options were unnecessary and improper in light of the jury’s finding that only one
iron was counterfeit. (Doc. No. 88.) Costco also reurged its argument, rejected by the
Court prior to trial,1 that Farouk was not entitled to a jury trial at all. (Id.) On this basis,
Costco urged the Court to set aside the jury verdict. Costco also asked the Court to reduce
the $200,000 statutory damages award on the basis that “Farouk presented no evidence at
trial regarding its actual damages, the monetary value of the CHI trademark, or the harm
(if any) caused to Farouk by the sale of a single non-genuine iron.” (Id.)
On November 15, 2010, the Court issued its Amended Final Judgment and
Permanent Injunction. (Doc. No. 91.) In this Order, the Court upheld the jury’s findings
and reiterated its earlier conclusion that Farouk was entitled to a jury trial. While the
Court found Farouk’s first proposed injunction overbroad, it found the second
appropriate, and granted it. Specifically, the Court held that “[e]njoining Costco from
selling counterfeit irons simply traces the Lanham Act’s restrictions, and does little to
burden Costco. On the other hand, it offers Farouk protection of its trademarks.” (Doc.
No. 91.) Costco now moves for judgment under Rule 50(b).
II.

LEGAL STANDARD
Pursuant to Federal Rule of Civil Procedure 50(a), “[i]f a party has been fully

heard on an issue during a jury trial and the court finds that a reasonable jury would not
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See Memorandum and Order Denying Motion to Strike Jury Demand, Doc. No. 73.

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have a legally sufficient evidentiary basis to find for the party on that issue,” the court
may grant a motion for judgment as a matter of law. Fed. R. Civ. P. 50(a). “The decision
to grant a directed verdict . . . is not a matter of discretion, but a conclusion of law based
upon a finding that there is insufficient evidence to create a fact question for the jury.”
Omnitech Int’l v. Clorox Co., 11 F.3d 1316, 1323 (5th Cir. 1994) (citations omitted)
(internal quotation marks omitted). There is insufficient evidence to create a fact question
for the jury when “the facts and inferences point so strongly and overwhelmingly in favor
of one party that the Court believes that reasonable men could not arrive at a contrary
verdict.” Rubinstein v. Adm’rs of the Tulane Educ. Fund, 218 F.3d 392, 401 (5th Cir.
2000) (internal quotation marks omitted). If a party’s Rule 50(a) motion is denied, the
party may renew its motion following trial. Pursuant to Rule 50(b), a party may file,
within 28 days, a renewed motion for judgment as a matter of law. Fed. R. Civ. P. 50(b).
III.

ANALYSIS
A. Motion for Judgment on Injunctive Relief
Costco moves for judgment that the injunction entered by the Court is improper as

a matter of law. At the outset, the Court notes that Rule 50(b) is not the appropriate
procedural mechanism for challenging the Court’s grant of injunctive relief. Rule 50
allows a court to rule as a matter of law on questions of fact when “a reasonable jury
would not have a legally sufficient evidentiary basis to find for the party on that issue.”
Fed. R. Civ. P. 50(a)(1). It therefore specifically governs the submissions of fact
questions that would otherwise go to the jury. See 9B Fed. Prac. & Proc. § 2521 (“[Rule
50] allows the court to remove from the jury’s consideration cases or issues when the
facts are sufficiently clear that the law requires a particular result.”). Injunctions, in
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contrast, are questions of law adjudicated by the court. Accordingly, Rule 50 plays no
role in the review of injunctions. Rather, Costco’s concerns about the injunction should
have been asserted through a Rule 60(b) motion for relief from a final judgment or order.
Notwithstanding this procedural error, the Court briefly considers Costco’s argument for
reversing the Court’s grant of injunctive relief.
1. Failure to cite reasons for the injunction
Federal Rule of Civil Procedure 65(d) requires, among other things, that an
injunction “state the reasons why it issued.” Costco argues that the injunction issued by
the Court is improper because the Court failed to cite the reasons why the injunction was
issued. In support of its position, Costco cites Knox v. Salinas, 193 F.3d 123, 128-29 (2d
Cir. 1999), which vacated an injunction for failure to set forth the reasons for its issuance.
As a preliminary matter, the Court notes that Costco did not cite Knox until after the entry
of judgment, and that, as it comes from the Second Circuit, Knox is not controlling here.
More importantly, though, the Court finds Knox to be distinguishable from this case.
First, the court in Knox based its findings on Rule 65(d) and Rule 52(a), which requires
special findings of fact and conclusions of law in actions tried upon the facts and without
a jury. While the Knox opinion certainly mentions Rule 65(d), it focuses far more on
52(a) and the lower court’s failure to meet the Rule 52(a) standard. As Rule 52(a) does
not apply in this case, the analysis in Knox is not directly on point.
Knox is also distinguishable because the district court in that case indicated no
reason at all for its issuance of an injunction. Here, although the Court did not offer an
analysis of each factor required for injunctive relief, the Amended Final Judgment and
Permanent Injunction did indicate that the injunction “simply traces the Lanham Act’s
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restrictions, and does little to burden Costco. On the other hand, it offers Farouk
protection of its trademarks.” (Doc. No. 91.) Costco has not cited any cases that require
the Court to explicitly address all of the factors required for injunctive relief.
2. Injunctive relief factors
The impropriety of Costco’s motion and the inapplicability of Knox
notwithstanding, the Court now makes clear, in the interest of complete transparency, its
conclusion that Farouk has satisfied the four criteria required for injunctive relief. To be
entitled to a permanent injunction under the Lanham Act, a party must demonstrate: “(1)
that it has suffered an irreparable injury; (2) that remedies available at law, such as
monetary damages, are inadequate to compensate for that injury; (3) that, considering the
balance of hardships between the plaintiff and defendant, a remedy in equity is
warranted; and (4) that the public interest would not be disserved by a permanent
injunction.” Flowserve Corp. v. Hallmark Pump Co., 2011 WL 1527951, at *9 (S.D. Tex.
Apr. 20, 2011) (quoting eBay, Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006)).
Costco disputes the presence of the first, third, and fourth factors.
The Court finds that there is sufficient evidence directly supporting a finding of
irreparable injury. Costco’s procedures for inspecting CHI hair irons resulted in the sale
of at least one counterfeit product. (See Jury Verdict, Question 1, Doc. No. 86.) Despite
having sold a counterfeit, Costco maintains that its procedures—which include
employing only two inspectors to inspect $300-400 million of diverted product per
year—are reasonable. (See Fox Test. at Tr. 1097, 1162-63.) Similarly, despite its
knowledge that its vendors supplied forged invoices, Costco unflinchingly protects its
diverted-market vendors’ confidentiality. (Id. at 1093-94; see also Miller Test. at Tr..
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563-64.) Finally, Costco’s intentions are evidence by its assertions, made as recently as
its Motion for Judgment (Doc. No. 92), that changing its procedures would be contrary to
the public interest. In light of Costco’s insufficient procedures—which resulted in a
trademark violation and which Costco will not agree to abandon or improve going
forward—Farouk is at risk of irreparable injury stemming from future violations of its
trademark rights.
As to the third and fourth factors, Costco argues that, while the injunction
purports to prohibit Costco only from selling counterfeit irons, its practical effect is
broader. Costco explains that the practical effect of the injunction is to discourage Costco
from buying CHIs in the diverted market altogether, as purchasing them through this
channel exposes Costco to perpetual risk. Costco urges that the Court’s conclusion that
this injunction “does little to burden Costco” is incorrect, and that the practical
consequences are both serious and punitive. Costco then contends that customers will be
negatively impacted by the injunction, because Costco will be unable to sell CHIs at its
traditional low prices.
The Court cannot agree. While Costco’s costs might go up as a result of this
injunction, and consumers might have to pay higher prices, such an outcome does not
excuse violations of the Lanham Act. Free competition and lower prices for consumers
are laudable goals, but they do not outweigh the importance of preventing trademark
infringement. Thus, the Court concludes that Costco can, and should, be enjoined from
violating Lanham Act.
B. Motion for Judgment on Farouk’s Right to a Jury Trial

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Costco’s motion for judgment reiterates, for the third time, its argument that
Farouk did not have a statutory right to a jury trial. The Court notes the procedural
impropriety of Costco’s motion: Rule 50 is not the appropriate vehicle for reurging a
legal position rejected prior to trial. Nonetheless, the Court finds that there is no basis for
modifying or even reconsidering its previous ruling on this issue. Costco does not assert
new law or facts, but simply argues that the Court was incorrect in finding that Farouk
had the right to a jury trial. While the question of whether the jury or the court considers
statutory damages under the Lanham Act admittedly is a close one, the Court has already
weighed, and rejected, Costco’s arguments on this issue, and declines Costco’s invitation
to do so again.
C. Motion for Judgment on the Size of the Jury Award
Finally, Costco asserts that, even if the Court is correct that the jury determines
statutory damages, the jury’s $200,000 award of statutory damages in this case is
excessive and unsupported by the evidence. The Court notes that Costco has forgone the
right to raise this argument in a Rule 50(b) motion, as Costco did not move to limit the
amount of statutory damages under Rule 50(a) at trial. In the Fifth Circuit, “[i]f a party
fails to raise an issue in its Rule 50(a)(1) motions at trial it may not do so in it post-trial
Rule 50(b) motion.” Arsement v. Spinnaker Exploration Co., 400 F.3d 238, 247 (5th Cir.
2005); Smith v. Louisville Ladder Co., 237 F.3d 515, 525 (5th Cir. 2001) (“It is wellsettled in this circuit that a motion for JMOL filed post verdict cannot assert a ground that
was not included in the motion for JMOL made at the close of the evidence.”).2

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Costco contends that it could not have moved for judgment on this issue at the close of trial, because it
could not have known then that the jury would find only one infringing iron and award statutory damages
at the high end of the spectrum based on that one iron. The Court is not persuaded by this argument.

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Again, putting aside the procedural impropriety of Costco’s motion, the Court
finds that the motion is substantively flawed, as well. Although the trial exhibits included
only one iron that the jury found to be counterfeit, there was ample evidence, from both
sides, from which the jury could have concluded that Costco may have sold many
counterfeit irons. In particular, evidence demonstrated that Costco had taken only the
most minimal efforts to ensure that the unauthorized sellers from whom Costco was
buying were, in truth, selling genuine CHI irons. The Court concludes that the testimony
offered at trial was sufficient to demonstrate substantial damages to Farouk’s reputation
and brand identity. It thus finds sufficient support, in the evidence, for the jury’s verdict.
IV.

CONCLUSION
In light of the foregoing, the Court finds that Costco’s Motion for Judgment must

be DENIED.
IT IS SO ORDERED.
SIGNED this the 2nd day of February, 2012.

KEITH P. ELLISON
UNITED STATES DISTRICT JUDGE

Parties never know what the jury is going to award; however, if a party wishes to contend that the jury is
constrained to a particular decision as a matter of law, that party must move for such a finding before the
entry of judgment. Costco is not relieved of this requirement simply because the jury came back with an
unexpected verdict.

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