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ABRO Industries, Inc. v. 1 New Trade, Inc.

United States District Court, N.D. Indiana

October 30, 2017

ABRO INDUSTRIES, INC., Plaintiff,
v.
1 NEW TRADE, INC., et al., Defendants.

          OPINION AND ORDER

          THERESA L. SPRINGMANN, CHIEF JUDGE UNITED STATES DISTRICT COURT.

         These matters come before the Court on Plaintiff ABRO Industries' (“ABRO”) Motion for Summary Judgment [ECF No. 166], filed on April 19, 2017; Defendants 1NEW Trade, Igor Zorin, Vadim Fishkin, and Boris Babenchik's (collectively “the Defendants”) Motion for Summary Judgment [ECF No. 175], filed on May 1, 2017; and Third Party Defendant Peter Baranay's Motion for Summary Judgment [ECF No. 168] filed on April 19, 2017. The Defendants have also filed a Motion to Strike ABRO Industries' Copyright Office Registration Certificates [ECF No. 204] and a Motion to Strike ABRO Industries' Expert Report on Damages [ECF No. 205]. ABRO filed a Motion to Strike Portions of the Joint Declaration Submitted by Defendants [ECF No. 195] and a Motion for Leave to File a Motion to Strike Declarations Filed by the 1NEW Defendants [ECF No. 212]. These matters are fully briefed and ripe for review.

         PROCEDURAL HISTORY

         On November 4, 2014, ABRO filed its Amended Complaint [ECF No.7], claiming that the Defendants and Quest Specialty Coatings, LLC (“Quest”) infringed on ABRO's copyrights relating to carburetor and choke cleaner packaging. On December 31, 2014, the Defendants filed their Answer to ABRO's Amended Complaint [ECF No. 23], asserting a series of counterclaims against ABRO, including breach of fiduciary duty, breach of contract, and tortious interference with prospective and/or existing business relationships, requesting both monetary and injunctive relief. Also on December 31, 2014, Zorin and Babenchik filed a Third Party Complaint [ECF No. 24] against Peter Baranay, president of ABRO, asserting tortious interference with business relationships. On February 21, 2017, ABRO filed a Consent Motion to Dismiss all claims as to Quest [ECF No. 27], which the Court granted on March 1, 2017 [ECF No. 159].

         FACTUAL BACKGROUND

         ABRO manufactures automotive parts and supplies and consumer hardware goods for sale internationally, including a carburetor and choke cleaner product called “Carb & Choke Cleaner.” At all relevant times, Peter Baranay has been the president of ABRO. As president, Baranay has ultimate authority over all aspects of the business, including forming and terminating business relationships, growing sales, and developing strategies for the management of distribution channels. Michael Molnar is ABRO's purchasing and sales manager for Western Europe, Eastern Europe, and Eurasia.

         ABRO and Igor Zorin began their business relationship in 1994, which started out as a buyer-seller relationship: Zorin pre-paid for ABRO goods, and ABRO shipped the goods to Zorin or his companies. Neither party disputes that, at this time, there was no sharing of profits.

         In October 1995, ABRO and Zorin entered into various agreements to promote the sale of ABRO products in Russia. To this end, and with Baranay's approval, Zorin created a company called ABRO Rus, specifically for the sale of ABRO products. The parties dispute the compensation arrangement, with ABRO arguing that it did not share in ABRO Rus's profits and Zorin arguing that ABRO was the revenue collecting and profit distributing partner and, thus, the only one in a position to account for and distribute profits. There is no written record of these agreements.

         Boris Babenchik's relationship with ABRO began in 1996 when Babenchik began to sell and distribute ABRO goods. Babenchik's primary responsibility in that relationship was to locate distributors, for which he was to be compensated based on the purchases of those distributors. ABRO argues that this was a commission arrangement, pointing to Babenchik's deposition testimony that referred to it as such. However, other pieces of Babenchik's testimony from this deposition call ABRO's conclusion into doubt. For example, Babenchik testified that he was unsure of the meaning of commission, as he was testifying through a translator and could understand only about a tenth of what was being said in English, and he was unsure that “commission” was an accurate characterization of the arrangement.

         In 1996, the parties collectively set various sales goals. Baranay was responsible for developing new products; Zorin and Babenchik were responsible for developing new products, advertising, and seeking new distributors in Russia. ABRO never added any new distributors to its network in Russia without Zorin's approval. Babenchik was also to help distributors develop and advertise in their respective territories. Although Babenchik's company, Krepost, could sell ABRO products throughout Russia, it was not permitted to sell ABRO products in the cities in which these distributors were located. Zorin and Babenchik agreed to act as guarantors of payments for the distributors each recruited. None of these distributors ever defaulted, and, therefore, neither Zorin nor Babenchik were ever called upon to satisfy that guarantee.

         The parties disagree as to the compensation terms of this arrangement. ABRO characterizes the arrangement as commission-based, wherein Zorin would receive a commission on sales generally, and Babenchik would receive a commission on the sales of distributors he brought to ABRO. The Defendants argue that ABRO's established practice was to refer to profit-sharing as “commissions” and that there were regular payments, offsets, and credits, which were all part of a profit sharing relationship.

         Compensation based on sales by one of these distributors-Orient Invest-were paid into a Krepost account, instead of directly to Babenchik. According to Babenchik, ABRO directed the funds to the Krepost account at Babenchik's instruction. As the owner of Krepost, Babenchik testified that he never saw any difference between Krepost and himself individually, testifying that the agreement was between he-not Krepost-and ABRO. At one point during their business relationship, Babenchik suggested that ABRO forgo compensating him based on a Kazakhstan distributor's sales in order to develop the business.

         The parties revised their Russian strategy in either 2007 or 2008 (the parties dispute at what point the strategy was proposed), which included a “percentage system” for Russian distributors, which Zorin characterizes as a system to stop price wars between Russian distributors and incentivize focus on growing business instead of poaching customers. The parties also divided responsibility concerning policing counterfeit products and product promotion. Zorin and Babenchik were responsible for the development of advertising campaigns for their respective companies, including participation in trade shows, although the Defendants argue that ABRO was also involved in these campaigns.

         In October 2007, Zorin informed ABRO of his intent to retire in 2017. Zorin claims that at this time, the parties agreed that, until Zorin's retirement, ABRO would pay him 3% of the profits on Russian sales when the sales exceeded $25 million dollars so long as ABRO continued to do business with the distributors that Zorin recruited. If the goods were manufactured outside of the United States, Zorin would receive 1.5% of the profits instead of 3%. The amount of money that resulted from the 40% profit Zorin earned based on his distribution efforts exceeded the percentage he was to receive out of the profits under this arrangement.

         In 2012, tension developed between Zorin and Molnar. Zorin believed that Molnar's involvement with arranging new products with distributors and creating product design without Zorin's knowledge violated Zorin's agreement with ABRO and placed ABRO and the ABRO-Zorin relationship at risk. Zorin would not provide to Molnar all of the information Molnar requested, but Zorin disputes Molnar's authority to request such information. This tension culminated in an altercation between Zorin and Baranay during a 2012 meeting in Frankfort, for which Zorin later apologized to ABRO. Zorin now argues that the apology was insincere and that he was forced to lie in order to avoid losing ABRO's business.

         In February 2013, ABRO ceased the direct shipment of goods, other than spray paint, to both Zorin and Babenchik. Zorin's relationship with ABRO was officially terminated in December 2013. In 2014, Babenchik decided to transfer his ownership in Krepost in order to discontinue his relationship with ABRO, but he retained ownership until the divestiture was completed. After ABRO's formal termination in 2017 of the ABRO-Krepost sales agreement, Babenchik rescinded that decision and returned to an active role in the company.

         The Defendants allege that the reason for the termination of their relationships with ABRO was due to their refusal to participate in a criminal, tax-evasion enterprise. Specifically, ABRO kept two sets of transportation documents and invoices with altered prices, shippers, sellers, and buyers. The Defendants allege that this was a regular practice and that this practice was expressly sanctioned and directed by Baranay. ABRO does not deny the existence of altered documents, but rather argues that such documents were produced only at customer request and that ABRO never knew-and never asked-about the purpose for which they were requested.

         In December 2012, the Defendants allege that ABRO decided that Zorin and Babenchik must participate in its scheme so that the declared pricing on imported ABRO goods would be consistent to avoid unwelcome attention from customs officials. The Defendants state that they asked ABRO to begin shipping goods directly to them so they did not have to participate in this “grey scheme.” However, ABRO refused to ship any product directly to the Defendants except for spray paint-the only product, so the Defendants allege, for which there were no price discrepancies. When Zorin refused to participate in ABRO's activities, Zorin alleges that ABRO terminated his relationship without notice and without explanation.

         In October 2013, Zorin and Babenchik incorporated 1NEW Trade, Inc., to import and sell products in Russia. ABRO characterizes the creation of this company as a direct attempt to compete with ABRO and argues that Zorin falsely apologized for his quarrel with Baranay to buy himself time to set up this competing company. Zorin and Babenchik dispute this characterization and state that the initial purpose of the company was to import and sell wallpaper and glues and adhesives for hardwood floors-products ABRO did not sell. They claim that they decided to use 1NEW Trade to compete with ABRO only after ABRO breached their agreements.

         Also in the fall of 2013, Zorin met with Steve Hughes of Quest Specialty Coatings to discuss replacing products currently supplied by ABRO with competing products supplied by Quest. Quest was an affiliate of one of ABRO's suppliers. At this time, Zorin was still selling ABRO's products. Quest did not want to sell to Zorin the same products it sold to ABRO because Quest did not want to sour its relationship with ABRO. However, Quest was interested in targeting ABRO's Russian business through Zorin and began researching ABRO's top products.

         One of the Defendants' competing products was a “Carb & Choke Cleaner.” ABRO argues that, with Quest's aid, 1NEW Trade intentionally released a product that looked nearly identical to ABRO's product. 1NEW Trade additionally reached out to ABRO's spray paint supplier in China, Shenzhen Rainbow Fine Chemical Industry Company (“Shenzhen Rainbow”), and ABRO's gasket maker in China, Join Leader Adhesives Co. (“Join Leader”). ABRO admitted that none of the 1NEW Trade products manufactured in China looked anything like any of ABRO's products. Nevertheless, ABRO asked both suppliers to refrain from doing any business with 1NEW Trade at the risk of ABRO's complete withdrawal of its own business. Neither Quest, Shenzhen Rainbow, nor Join Leader currently do business with 1NEW Trade.

         STANDARD OF REVIEW

         Summary judgment is warranted when “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). Summary judgment is the moment in litigation in which the nonmoving party is required to marshal and present the court with evidence on which a reasonable jury could rely to find in that party's favor. Goodman v. Nat'l Sec. Agency, Inc., 621 F.3d 651, 654 (7th Cir. 2010). A court should deny a motion for summary judgment only when the nonmoving party presents admissible evidence that creates a genuine issue of material fact. Luster v. Ill. Dep't of Corrs., 652 F.3d 726, 731 (7th Cir. 2011) (first citing United States v. 5443 Suffield Terrace, 607 F.3d 504, 510 (7th Cir. 2010); then citing Swearnigen-El v. Cook Cty. Sheriff's Dep't, 602 F.3d 852, 859 (7th Cir. 2010)). A court's role in deciding a motion for summary judgment “is not to sift through the evidence, pondering the nuances and inconsistencies, and decide whom to believe. The court has one task and one task only: to decide, based on the evidence of record, whether there is any material dispute of fact that requires a trial.” Waldridge v. Am. Heochst Corp., 24 F.3d 918, 920 (7th Cir. 1994). Material facts are those that are outcome determinative under the applicable law. Smith v. Severn, 129 F.3d 419, 427 (7th Cir. 1997). Although a bare contention that an issue of material fact exists is insufficient to create a factual dispute, a court must construe all facts in a light most favorable to the nonmoving party, view all reasonable inferences in that party's favor, see Bellaver v. Quanex Corp., 200 F.3d 485, 491-92 (7th Cir. 2000), and avoid “the temptation to decide which party's version of the facts is more likely true, ” Payne v. Pauley, 337 F.3d 767, 770 (7th Cir. 2003).

         DISCUSSION

         ABRO asserts copyright infringement against all Defendants. ABRO also asserts personal liability and/or vicarious liability for copyright infringement against Defendants Zorin, Babenchik, and Fishkin. Defendants Zorin and Babenchik each counterclaim against ABRO for breach of fiduciary duty and breach of contract. Collectively, the Defendants counterclaim for tortious interference with prospective and/or existing business relationships with third parties, seeking both monetary damages and injunctive relief. Defendants Zorin and Babenchik further assert a third-party claim against Baranay for tortious interference with existing business relationships.

         A. ABRO's Claim for Copyright Infringement

         The Defendants have moved for summary judgment as to ABRO's copyright infringement claims. A plaintiff claiming copyright infringement must show both “(1) ownership of a valid copyright, and (2) copying of constituent elements of the work that are original.” Feist Publ'ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 361 (1991); Wildlife Express Corp. v. Carol Wright Sales, Inc., 18 F.3d 502, 507 (7th Cir. 1994). “A certificate of registration from the U.S. Register of Copyrights constitutes prima facie evidence of the validity of a copyright, ” entitling the registrant to a rebuttable presumption of validity. Wildlife Express Corp., 18 F.3d at 507.

         1. Presumption of Validity

         The Defendants argue that ABRO has no admissible evidence of certificates of registration because ABRO did not produce the certificates on which it now relies until it filed its Response to the Defendants' Motion for Summary Judgment. The Defendants argue that the Court should strike the certificates from the record for ABRO's failure to disclose them during discovery. ABRO argues that the failure to produce the registrations was an excusable oversight. Further, ABRO argues that evidence of the copyright registration was publically available and within the Defendants' possession. In short, ABRO seems to argue that it was the Defendants' obligation to secure the certificates from the Copyright Office or compel ABRO to produce them because the Defendants were on notice that such certificates existed based on other discovery. However, under the Federal Rules, it was ABRO's affirmative obligation “to produce, without being asked” copies of all documents that it “may use to support its claims or defenses.” Pruet v. Fayette Reg'l Health Sys., No. 1:12-CV-635, 2013 WL 5236609, at *2 (S.D. Ind. Sept. 17, 2013) (emphasis in original) (finding that where a party “submits as evidence in support of its motion for summary judgment [documents] that [it] did not produce during discovery, ” the court will not consider those documents).

         ABRO argues that failure to produce documents is excusable where the “the failure was substantially justified or is harmless.” Fed.R.Civ.P. 37(c)(1). Factors for the Court to evaluate when considering whether a failure to disclose was substantially justified or harmless include: “(1) the prejudice or surprise to the party against whom the evidence is offered; (2) the ability of the party to cure the prejudice; (3) the likelihood of disruption to the trial; and (4) the bad faith or willfulness involved in not disclosing the evidence at an earlier date.” Tribble v. Evangelides, 670 F.3d 753, 760 (7th Cir. 2012). ABRO argues there was no prejudice or surprise because the Defendants were aware that such certificates existed and knew the scope of protection afforded to the subject material. The Court disagrees. The failure to produce these certificates directly affected the Defendants' arguments in their summary judgment motion. The Defendants argued that there was no presumption of validity because they concluded that, because ABRO had not produced these fundamental documents, the certificates did not exist. Without the certificates in hand, the Defendants were unable to evaluate them and argue about their relevance and weight in their opening brief. Instead, the Defendants were forced to make such arguments in their reply brief. It is disingenuous for ABRO to argue that its failure to produce these certificates was not prejudicial when it now argues that the Defendants have waived any argument attacking the substance or usefulness of the certificates by not making said argument prior to receiving the certificates. (See ABRO Mot. for Leave to file Mot. to Strike at 2 n.1, ECF No. 212.)

         The Court need not determine whether to strike the certificates from the record because, even if admissible, the certificates do not establish what subject matter is actually registered.[1] Nowhere in the record does the Court find a depiction of what ABRO submitted to the Copyright Office or for what subject matter the Copyright Office issued certificates. The Court notes that copies of the deposit materials are not per se required to prove validity. See, e.g., Thomas v. Artino, 723 F.Supp.2d 822, 830 (D. Md. 2010) (“Defendant has not cited any cases that state that Plaintiff must provide the application, file, deposit, or a ‘certified copy' of the registered work to prove that he holds the copyright.”); but see Alaska Stock, LLC v. Pearson Educ., Inc., 975 F.Supp.2d 1027, 1040 (D. Alaska 2013) (“[T]he certificates of registration in this case do not provide the details necessary to confirm that the image or images relating to Alaska Stock's claims are the same images underlying the certificates of registration” and are therefore “not covered by the presumption of validity.”).

         A party is entitled to a presumption of validity only if the copyright is registered “before or within five years after first publication of the work.” 17 U.S.C. § 410(c). There is no dispute that ABRO did not register its works with the United States Copyright Office before or within five years after first publication of the work. ABRO, however, points out that when a work is registered beyond the allotted five years, there is no per se bar to the presumption of validity. Rather, “[t]he evidentiary weight to be accorded the certificate of a registration made thereafter shall be within the discretion of the court.” 17 U.S.C. § 410(c). “Most courts conclude that untimely certificates constitute prima facie evidence of validity of copyrights.” Brighton Collectibles, Inc. v. RK Tex. Leather Mfg., No. 10-CV-419, 2012 WL 6553403, at *2 (S.D. Cal. Dec. 13, 2013). Thus, ABRO argues, the Court should grant a presumption of validity to its registered copyrights. The Defendants disagree and argue that “ABRO fails to even explain why and on what basis this Court should exercise such discretion.” (Def. Reply Br. 6, ECF No. 202.)

         Because the copyrights were registered more than five years after the first publication of the works, ABRO is not entitled to a presumption of validity. The Court is not inclined to exercise its discretion to grant such a presumption in light of ABRO's failure to produce any deposit materials that would aid the Court in confirming the scope of the registrations. See Lanard Toys Ltd. v. Novelty, Inc., No. CV 05-8406, 2007 WL 2439505, at *6-7 (C.D. Cal. Mar. 17, 2006) (refusing to grant presumption where deposit materials were not produced). Because the Court declines to grant ABRO a presumption of validity as to any of its claimed copyrights, the Defendants' motion to strike ABRO's registration certificates is moot.

         2. Existence of Copyrightable Material

         Even if ABRO was entitled to a presumption of validity, it is a presumption, not a guarantee, and the Court must still address the copyrightability of the claimed material. “The sine qua non of copyright is originality.” Feist, 499 U.S. at 345. The Copyright Act protects “original works of authorship fixed in any tangible medium of expression . . . from which they can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.” Schrock v. Learning Curve Int'l, Inc., 586 F.3d 513, 517 (7th Cir. 2009) (quoting 17 U.S.C. § 102(a)). Originality means that “the work was independently created by the author . . . and that it possesses at least some minimal degree of creativity . . . . [T]he requisite level of creativity is extremely low; even a slight amount will suffice.” Id. (quoting Feist, 499 U.S. at 345). A fundamental principle of copyright law is that the expression of an idea, process, or concept can be copyrighted, but not the idea, process, or concept itself. 17 U.S.C. § 102(b); see also Feist, 499 U.S. at 349-50; Bucklew v. Hawkins, Ash, Baptie & Co., 329 F.3d 923, 933 (7th Cir. 2003); Publ'ns Int'l, Ltd. v. Meredith Corp., 88 F.3d 473, 481 (7th Cir. 1996).

         a. The Carb & Choke Label

         “[L]abels are subject to copyright protection if the label manifests the necessary modicum of creativity.” Sebastian Int'l, Inc. v. Consumer Contract (PTY) Ltd., 664 F.Supp. 909, 913 (D.N.J. 1987) (vacated on other grounds, 847 F.2d 1093 (3d Cir. 1988)) (citations omitted). The Copyright Office refused to issue a registration for ABRO's label, stating that ABRO's claim “appear[ed] to amount to a claim in layout or format, ” which “[t]he Copyright Office regards . . . as ideas or concepts, which cannot be protected by copyright. (Def. Br. Exh. 12b 4-5, ECF No. 177-15.) ABRO objected to the Copyright Office's characterization of its submission and argued that the label was a protectable compilation, the selection and arrangement of which exhibited the requisite minimal degree of creativity. The Copyright Office affirmed its refusal, maintaining that that ABRO's “selection and arrangement consist[ed] of putting a photograph next to text on a page which amounts to layout which copyright does not protect.” (Id. at 1.) As such, the Copyright Office could register the “text” and the “photos, ” but required ABRO to remove from its application “the references to 2-D artwork . . . and arrangement of text and images.” (Id.) ABRO consented to the removal of the objectionable language, choosing to move forward with registration only of the “text” and “photo.” (Def. Br. Exh. 12d 1, ECF No. 177-17.)

         The Court agrees with the Copyright Office. A layout may be copyrightable only if the “arrangement or layout [is] original and unique.” ABRO's label as a whole, and regardless of its individual elements, simply does not meet this requirement. There is nothing unique about placing the name of the company and the name of a product at the top of a product's packaging with a descriptive image below that text and with instructions and legally mandated warnings wrapped around the remainder of a product's packaging. In fact, as the parties' submissions show, this is a common layout. (See Def. Br. Exh. 17, 21-22, ECF Nos. 22, 26-27.) This is unsurprising as such layouts are a “natural result of [the] chosen subject matter.” Fooey Inc. v. Gap, Inc., No. 12 C 5713, 2013 WL 2237515, at *2 (N.D. Ill. May 17, 2013). “[W]here a particular expression is common to the treatment of a particular idea, process, or discovery, it is lacking in the originality that is the sine qua non for copyright protection.” Gates Rubber Co. v. Bando Chem. Indus., Ltd., 9 F.3d 823, 838 (10th Cir. 1993) (citing Feist, 499 U.S. at 348). Cf. Design Basics, LLC v. Lexington Homes, Inc., 858 F.3d 1093, 1103 (7th Cir. 2017) (“Lexington's accused plans resemble Design Basics' plans, but only because both sets resemble common home designs . . . . There are only so many ways to arrange a few bedrooms, a kitchen, some common areas, and an attached garage . . . .” (internal quotations omitted)). Thus, ABRO's label as a whole is not copyrightable.

         b. Individual Elements of the Carb & Choke Label

         The Court must now consider whether any of the individual elements on ABRO's label are copyrightable. It appears that ABRO is claiming that the image of a carburetor, the name “Carb & Choke Cleaner, ” and the instructions and warnings are individually protected. The Court will consider each in turn.

         i. Carburetor Image

         The Court finds that the image of a carburetor displayed on ABRO's label for Carb & Choke Cleaner is copyrightable. The Copyright Act extends copyright protection to pictorial and graphic works. 17 U.S.C. § 102(a)(5). “Federal courts have historically applied a generous standard of originality in evaluating photographic works for copyright protection.” Schrock, 586 F.3d at 519. “[I]n many cases, the photographer does not invent the scene or create the subject matter depicted in it.” Id. Rather, “the original expression he contributes lies in the rendition of the subject matter-that is, the effect created by the combination of his choices of perspective, angle, lighting, shading, focus, lens, and so on.” Id. ABRO did not create the subject matter of the photograph (the carburetor), but ABRO did choose other reflections of expression such as the perspective, angle, lighting, etc. Therefore, the image of the carburetor on ABRO's label satisfies the originality and creativity requirements for copyright protection.

         ii. “Carb & Choke Cleaner”

         The Court finds that ABRO's product name “Carb & Choke Cleaner” is not copyrightable. The Copyright Act explicitly excludes short phrases. 17 U.S.C. § 102(b) (“Copyright does not protect . . . words and short phrases such as names, titles, and slogans . . . .”). Even so, ABRO argues that “Carb & Choke Cleaner” is copyrightable because the decision to use “carb” instead of “carburetor” is a design feature that exhibits originality and creativity. But, ABRO and the Defendants are not the only ones who abbreviate “carburetor” as “carb” to describe the function of the cleaner. In fact, this seems to be a common practice in the industry, as the manner in which a company can ...


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