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Aaron MacGregor & Associates, LLC v. Zhejiang Jinfei Kaida Wheels Co., Ltd.

United States District Court, N.D. Indiana, South Bend Division

June 20, 2018

AARON, MACGREGOR & ASSOCIATES, LLC, Counter-defendant, and AARON ZOU, Third-Party Defendant.


          Michael G. Gotsch, Sr. United States Magistrate Judge

         This case stems from a business relationship gone bad in the world of vehicle parts sales. Aaron Zou (“Zou”), president and founder of Aaron, MacGregor & Associates, LLC (“AMA”), met the Chairman of Zhejiang Jinfei Kaida Wheels Co., Ltd. (“Jinfei”), Bingzao Ge (“Ge”), on a trip to China in 2011 for a business conference. Zou and Ge began discussions that continued after Zou returned to Indiana about forming a new company in Elkhart through which AMA could assist Jinfei as it expanded into the recreational vehicle market in Elkhart. The two companies executed agreements to govern their new business relationship. Jinfei sought approval from the Chinese government to invest in the new American company. Zou hosted Jinfei employees in Indiana and facilitated meetings between Jinfei and prospective American clients.

         Ultimately, things went south and the AMA-Jinfei relationship, as embodied in the creation of Future International, LLC (“Future International”), deteriorated. Jinfei decided to launch a separate business entity for its work, Future Industrial & Trading, Inc. (“FIT”). AMA and Zou claim Jinfei employed subterfuge to circumvent the parties' contractual relationship related to Future International while Defendants allege Zou misrepresented what he and AMA could do on Jinfei's behalf in Indiana before the contracts were executed. Through competing claims in this lawsuit, the parties allege damages arising from the demise of the business relationship that started with Zou and Ge's introduction at that 2011 business conference in China.

         Now the Court has been presented with two motions for partial summary judgment, filed within a day of each other at the end of December 2017, that seek to eliminate all but the primary breach of contract claims between the parties. In their motion filed on December 28, 2017, Counterdefendant AMA and Third-Party Defendant Zou ask the Court to grant summary judgment as to all counterclaims by Jinfei. [DE 69]. Specifically, AMA and Zou challenge Jinfei's counterclaims of breach of fiduciary duty against AMA only and unjust enrichment, conversion, fraud against AMA and Zou. Through their motion filed on December 29, 2017, Defendants Jinfei, FIT, and Ge, seek summary judgment on Plaintiffs AMA's and Future International's claims of unjust enrichment; unfair competition under state and federal law; federal trademark infringement and false designation of origin; as well as all claims against Ge. [DE 73].

         These are not clean motions for summary judgment, however. This case has been contentious throughout as evidenced by Defendants' previous motion for sanctions under Fed.R.Civ.P. 11, 28 U.S.C. § 1927, and the Court's inherent authority to manage its docket (“the Original Motion for Sanctions”), alleging that Plaintiffs had not conducted reasonable pre-complaint inquiry into their claims. The Court denied Plaintiffs' Original Motion for Sanctions without prejudice on October 30, 2017. [DE 64]. However, the parties' frustrations with each other did not subside as became clear through two motions filed within two days of the motions for summary judgment, both of which arguably seek to punish the nonmovants for their approach to this litigation.

         First, Defendants renewed their motion for sanctions (“the Renewed Motion for Sanctions”), seeking once again dismissal of all Plaintiffs' claims with prejudice citing additional evidence in support of allegation that Plaintiffs did not conduct reasonable pre-complaint inquiry into their claims. [DE 72]. Second, Plaintiffs filed a motion to compel seeking (1) complete discovery responses from Defendants related to requests made in 2016; (2) additional discovery related to the key issue of “use in commerce” on Plaintiffs' federal trademark infringement and false designation of original claim to support their opposition to Defendants' motion for summary judgment; and (3) discovery of Defendants' computers not ever requested before. [DE 75].

         Lastly, Defendants have filed multiple objections to evidence Plaintiffs submitted in support of the Renewed Motion for Sanctions and the two motions for summary judgment. [DE 85, 90, 92, 98]. The Court heard oral argument on all these outstanding matters on April 26, 2018. The undersigned now issues the following opinion and order with jurisdiction conferred by the consent of the parties and 28 U.S.C. § 636(c).

         I. Relevant Background

         A. Factual Background

         As part of their joint efforts to sell vehicle parts in Indiana, AMA and Jinfei agreed to form Future International. In December 2011, Zou, on behalf of AMA, registered Future International as an LLC with the State of Indiana. Three contracts were executed between AMA and Jinfei to govern the funding, development, and management of Future International.

         The first two contracts[1], executed on February 26, 2012, (“the February 2012 Contracts”) provided that AMA and Jinfei would both invest money to form Future International, an Indiana business entity that would purchase automotive parts from Jinfei for resale to American customers. The contracts more specifically provided that Jinfei would invest 90% of the funds in the amount of $270, 000, while AMA would invest 10% of the funds in the amount of $30, 000. The contracts also divided profits 90% to Jinfei and 10% to AMA.

         In the contracts, AMA agreed to use his legal, tax, and business expertise in the American RV and automotive industries to help Jinfei's Chinese representatives build a warehouse for its products and conduct and solicit business in the United States. AMA was expected to lease a vehicle and an apartment as well for the Jinfei's representatives to use while visiting from China. In return, Jinfei agreed to fund the leases and to participate jointly with AMA in meetings with prospective American customers. The parties agreed that any results of their joint efforts would become the property of Future International.

         Both AMA and Jinfei took steps to develop Future International. AMA facilitated the leases of the vehicle and apartment. Jinfei provided AMA with $30, 000 for that purpose. Jinfei expended time and resources seeking Chinese approval of their investment in Future International. Yet by October 2012, neither company had invested in Future International. AMA chose not to invest before Jinfei did and Jinfei was waiting to invest until it received approval from the Chinese government. By October 2012, Jinfei had repeatedly told AMA that the approval had not yet been granted.

         Therefore, AMA and Jinfei executed a new contract in October 2012 changing the parameters of their business relationship. The October 2012 Contract provided that AMA would transfer its 10% ownership in Future International to Jinfei while Jinfei would pay a consulting fee to AMA to compensate for its work for Future International back to February 2012. Jinfei also agreed to pay AMA a monthly consulting fee through November 2013. At the same time and at Jinfei's request, AMA canceled the apartment lease but maintained the vehicle lease for Jinfei. Yet AMA never transferred its ownership in Future International to Jinfei and Jinfei allegedly never paid AMA the consulting fees.

         However, on January 31, 2013, Jinfei and Ge registered FIT as a corporation without AMA's knowledge. Through the complaint in this action filed in 2015, AMA and Future International allege that FIT is still operating and retaining all the profits generated as the result of AMA's work with Jinfei for Future International. The operative amended complaint includes claims for breach of the three contracts, breach of fiduciary duty, unjust enrichment, unfair competition, and trademark infringement. Jurisdiction for this action arises from 28 U.S.C. § 1331 and AMA and Future International's Lanham Act (15 U.S.C. § 1051 et seq.) claim for federal trademark infringement.

         II. Analysis

         A. Defendants' Evidentiary Objections

         As a preliminary matter, Defendants filed objections to assorted evidence Plaintiffs submitted in support of the instant motions. Despite Defendants' multiple objections, the Court only needed to rely upon one piece of evidence that Defendants' challenged-Zou's Affidavit about how he spent the $30, 000 Jinfei wired to AMA and whether he or AMA received any benefit from the $30, 000-to resolve the relevant motions. [SeeDE 92 at 3 (citing DE 69-2 at ¶¶ 32-33)]. As to Zou's Affidavit, Defendants argue that Zou is making improper legal conclusions about the definition of the term “benefit” in connection with various claims in this action. Additionally, Defendants contend that Zou's accompanying chart of expenditures lacks foundation because the chart is not the best evidence of the alleged use of monies and Jinfei disputes whether Zou actually spent the money as he claims.

         Defendants' grounds for objection are not enough to justify exclusion of these statements in Zou's Affidavit in consideration of AMA and Zou's motion for partial summary judgment. First, Defendants cite only to Fed.R.Evid. 701/702 in support of their objection of improper legal opinion without directing the Court to any further interpretation to show that the term “benefit” in the relevant claims requires a legal conclusion. Second, Mr. Zou is allowed to testify by affidavit as to his personal knowledge about expenditures and the concept of benefit. Third, AMA and Zou did present documentation related to the apartment and vehicle leases. And lastly, any dispute as to Zou's actual expenditures was not supported with any evidence from Jinfei. Thus, the Court is not persuaded that Zou's Affidavit statements should be excluded from consideration.

         The remaining objections have no effect on the outcome of the motions below and need not be considered. Accordingly, the Court OVERRULES all of Defendants' evidentiary objections. [DE 85, 90, 92, 98].

         B. Defendants Jinfei, FIT, and Ge's Renewed Motion for Sanctions

         The Court can also dispense quickly with Defendants' Renewed Motion for Sanctions. Defendants' instant motion, filed on December 29, 2017 [DE 72], requests the same relief that this Court denied without prejudice in an order dated October 30, 2017 (“the October 2017 Order”) [DE 64]. The Court need not repeat the substance of that order in full. Yet as relevant here, parties filing a motion for Rule 11 sanctions must make a prima facie showing of sanctionable conduct based on non-frivolous allegations. Vandeventer v. Wabash Nat'l Corp., 893 F.Supp. 827, 840 (N.D. Ind. 1995) (citing Shrock v. Altru Nurses Registry, 810 F.2d 658 (7th Cir. 1987). Once the prima facie showing is made, “the burden of proof shifts to the non-movant to show it made a reasonable pre-suit inquiry into its claim.” Digeo, Inc. v. Audible, Inc., 505 F.3d 1362, 1368 (Fed. Cir. 2007). In applying this two-step analysis, the Court found that neither Defendants nor Plaintiffs met their respective burdens. [DE 64 at 12]. First, the Court found “Defendants' allegations of Rule 11 sanctionable misconduct to be unreasonable, and therefore, frivolous making them insufficient to establish a prima facie case of sanctionable conduct.” [Id. at 11]. The Court then found “nothing in the record describing Plaintiffs' pre-filing investigation” of the claims in their complaint and consequently stated that Plaintiffs had not met their burden to show reasonable pre-complaint inquiry into their claims. [Id. at 12].

         Here in their Renewed Motion for Sanctions, Defendants once again ask the Court to dismiss with prejudice any and all claims in the First Amended Complaint and to award them monetary sanctions in the form of reasonable attorney fees incurred in this action since removal to this Court. [DE 72 at 2]. In support, Defendants merely attach, without explanation, excerpts from the deposition testimony of Mr. Zou, both in his individual capacity and as a Rule 30(b)(6) deponent for AMA. Defendants then baldly assert that “Mr. Zou's deposition testimony supports, and confirms, the grounds under which Defendant brought the original motion. (See Dkt. 60, 61, and 63).” [Id.]. In so doing, Defendants successfully incorporate the briefing on their original motion for sanctions, but fail to specify exactly what parts of the excerpts of Mr. Zou's deposition testimony they are relying upon or which arguments from the original briefing are confirmed by the same deposition testimony.

         As a result, Defendants have left Plaintiffs and this Court unclear as to how the additional evidence of Mr. Zou's deposition testimony should change the outcome of the Court's Rule 11 sanctions analysis in its October 2017 Order. Defendants seem to expect both Plaintiffs and this Court to study the deposition excerpts and their previous briefing and infer the effect of the additional evidence on their arguments. This is not the Court's job. Indeed, “[j]udges are not like pigs, hunting for truffles buried in [the record].” United States v. Dunkel, 927 F.2d 955, 956 (7th Cir.1991); see also Friend v. Valley View Cmty. Unit Sch. Dist. 365U, 789 F.3d 707, 711 (7th Cir. 2015) (“[The court is] not required to scour through . . . deposition transcript[s] in order to verify an assortment of facts, each of which could be located anywhere within the . . . depositions cited.”); Corley v. Rosewood Care Ctr., Inc. of Peoria, 388 F.3d 990, 1001 (7th Cir. 2004) (“[The court] will not root through the hundreds of documents and thousands of pages that make up the record here to make his case for him.”). As such, the Court sees nothing new in the record that would change its previous conclusion that Defendants have not met their burden to make a prima facie showing of sanctionable conduct based on non-frivolous allegations, thus still precluding sanctions.

         The Court acknowledges that Defendants present arguments in their reply brief related to the Renewed Motion that rely upon Mr. Zou's deposition testimony. However, Defendants' arguments in their reply brief still fail to show a prima facie case of sanctionable conduct based upon non-frivolous allegations. Defendants rely on Mr. Zou's deposition testimony as uncontroverted evidence that contradicts Plaintiffs' claim in its trademark infringement and unfair competition claims that the Future International and FIT marks were used in commerce. Again, Defendants' arguments comment on the substantive merit of Plaintiffs' claims in light of evidence acquired during discovery rather than showing unreasonable pre-complaint inquiry into the claims. [SeeDE 64 at 11].

         In the end, the mere addition of Mr. Zou's deposition testimony to the record did not-and could not-help Defendants satisfy their burden under Rule 11 standards even if they had not waived such arguments by failing to develop any arguments in their Renewed Motion. Therefore, the Court DENIES Defendants' Renewed Motion for Sanctions. [DE 72].

         Lastly, Defendants filed their Renewed Motion for Sanctions with a complete understanding of the Court's Rule 11(b)(2) analysis of Plaintiffs' pre-complaint inquiry as presented in the October 2017 Order. Therefore, Defendants' Renewed Motion appears frivolous as they had insight from which to anticipate accurately the Court's approach to the “new” evidence included with the Renewed Motion. Moreover, Defendants' counsel would have-or at least should have-understood the effect of failing to specify evidence and argument in their Renewed Motion. In light of these two realities, Defendants and their counsel have also caused the Court to question whether they violated Fed.R.Civ.P. 11(a) by filing the Renewed Motion. Accordingly, the Court invokes Fed.R.Civ.P. 11(c)(3) and ORDERS Defendants' counsel to show cause by June 29, 2018, why the Court should not find that the renewed motion for sanctions was presented for an improper purpose as prohibited under Fed.R.Civ.P. 11(b)(1) and should not impose monetary sanctions accordingly.

         C. Plaintiffs' AMA and Future International's Motion to Compel

         Plaintiffs' Motion to Compel Discovery and Enforce the Court's October 30, 2017 Order filed on December 30, 2017, is not persuasive either even after review in light of the standards of both Fed.R.Civ.P. 37 related to discovery and Fed.R.Civ.P. 56(d) related to summary judgment.

         1. Relevant Background

         The instant discovery dispute grew largely out of Request 1-1 in Plaintiffs' First Request for Production of Documents served on Jinfei on July 13, 2016. Request 1-1 sought “all Communications and Documents exchanged between [Defendants] and any third party relating to or discussing the sale or potential sale of any automobile parts in Indiana.” [DE 75-1 at 4, Document Request 1-1]. Premised on AMA's belief that Jinfei had no presence in Indiana before it began working with AMA, Request 1-1 was designed to elicit evidence from Jinfei showing that AMA was entitled to a portion of the profits resulting from Jinfei's and FIT's business in Indiana.

         On October 30, 2016, Jinfei provided responses to Plaintiffs' document requests, but Plaintiffs found them deficient. Based on AMA's belief that more information existed as to third party companies, Plaintiffs served non-party requests for production of documents on three companies doing business with Jinfei and with whom AMA had a previous relationship. Despite Jinfei's objections to all three non-party subpoenas, two of the companies-Tredit Tire & Wheel Co. and Lionshead Specialty Tire & Wheel, LLC-produced a large number of documents related to Request 1-1 in December 2016 that Plaintiffs thought Jinfei should have produced themselves.

         With Tredit's and Lionshead's documents in hand, Plaintiffs began a series of communications with Jinfei seeking supplemental responses to Request 1-1. On January 23, 2017, Plaintiffs first requested the supplemental responses. On February 3, 2017, Jinfei requested that Plaintiffs produce the Tredit and Lionshead documents first. Jinfei also argued that the non-party information Plaintiffs sought was not all relevant because some of the customer meetings occurred before the parties signed the February 2012 contracts. Jinfei had especially objected to producing documents evidencing their relationship with the third non-party Plaintiffs had subpoenaed, Americana Development, Inc., because Jinfei and Americana had a business relationship before Jinfei and AMA began working together such that AMA could not have introduced Jinfei to Americana. Plaintiffs responded by letter on March 30, 2017, explaining why they believed all the requested non-party information to be relevant under the standards of Fed.R.Civ.P. 26.

         On April 6, 2017, before Jinfei had produced any of the supplemental responses, Americana produced hundreds of pages of documents regarding its business relationship with Jinfei back to 2012. On April 21, 2017, Jinfei served its supplemental responses on Plaintiffs including documents dating back to 2011 related to its business relationships with Tredit and Lionshead, but nothing reflective of the relationship with Americana. On the same day, Plaintiffs provided Defendants with all documents they had received from Tredit, Lionshead, and Americana. Plaintiffs sent three additional letters to Jinfei about the outstanding responses to Request 1-1 on April 21, April 28, and May 2, 2017.

         With the dispute over Request 1-1 unresolved, Defendants filed their Original Motion for Sanctions. Plaintiffs' response brief included references to their ongoing dissatisfaction with Jinfei's responses to Request 1-1. The Court resolved the Original Motion by order dated October 30, 2017. In addition to addressing the sanctions issue raised in Defendants' Original Motion, the Court ordered all parties to supplement all existing discovery responses by November 6, 2017. Before the Court issued its order, however, the parties had scheduled the depositions of AMA and Zou for November 16, 2017, and of Jinfei and FIT, on November 17, 2017.

         None of the parties filed a supplemental response by the November 6th deadline. Yet on the night of November 15th, less than a day before the scheduled depositions were set to begin, Jinfei served some supplemental responses, including a 4-page spreadsheet of sales figures relevant to Request 1-1, on Plaintiffs. Jinfei located the documents for the first time after November 6th while preparing for its deposition. Jinfei did not, however, produce any Americana documents.

         The depositions proceeded as scheduled. As relevant here, Zou testified that Jinfei had arranged the meeting he attended with Americana unlike many, or possibly all, of the other customer meetings where Zou and AMA had initiated meetings with Jinfei. Additionally, Plaintiffs' counsel did not review the spreadsheet Jinfei had produced on November 15th before deposing its Rule 30(b)(6) witness, its Deputy General Manager, Hongxing (Kevin) Ren, on November 17th. As a result, Plaintiffs' counsel did not ask Ren about the newly produced information. Jinfei then supplemented its discovery responses again on November 21, 2017, with Jinfei's application to ...

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