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T-Mobile Usa, Inc. v. Au Electronics, Inc.

United States District Court, Seventh Circuit

January 23, 2014

T-Mobile USA, Inc., a Delaware corporation, Plaintiff,
v.
AU Electronics, Inc. d/b/a A-U Electronics, Inc., an Illinois corporation; Global Mobile Trading, Inc. d/b/a AU Express Cash 4 Electronics d/b/a A-U Express d/b/a AU, Inc., an Illinois corporation; Umair Yasin, individually; and Adnan Vadria, individually, Defendants.

MEMORANDUM OPINION AND ORDER

THOMAS M. DURKIN, District Judge.

Plaintiff T-Mobile USA, Inc. ("T-Mobile") brings this action against defendants AU Electronics, Inc. ("AU"), Global Mobile Trading, Inc. ("GMT"), Umair Yasin ("Yasin"), and Adnan Vadria ("Vadria"), alleging that defendants are engaged in a pattern of unlawful business practices involving the bulk purchase and resale of T-Mobile cellular phones.[1] On August 20, 2013, the parties signed a settlement agreement which provides for a complete resolution of the lawsuit. R. 119. Defendants later notified the Court that they were repudiating the agreement, R. 116, which prompted a dispute between the parties over whether the agreement was enforceable. Presently before the Court are T-Mobile's motion to enforce the settlement agreement, R. 124, and defendants' motion to reform the settlement agreement to include an unintended omission, R. 143. For the reasons explained below, the Court grants defendants' motion to reform the settlement agreement, and further grants T-Mobile's motion to enforce the settlement agreement.

Background

On December 18, 2012, T-Mobile filed a thirteen-count complaint alleging that defendants were "defraud[ing] and willfully infring[ing] upon T-Mobile's trademark and other rights" through an elaborate "Subsidy Theft and Activation Fraud Scheme." R. 1 ¶ 1. According to the complaint, defendants instigated the scheme by acquiring large quantities of phones from T-Mobile and its authorized retailers. Id. ¶ 3. Defendants then removed the phones from their original packaging and sold the phones' Subscriber Identity Module ("SIM") cards "for fraudulent activation on the T-Mobile network through the use of improperly acquired confidential codes that illegally access T-Mobile's computers." Id. With the SIM cards removed, defendants "ship[ped] the [p]hones overseas, unlocked or to be unlocked, " to be sold for a substantial profit. Id. As a result of this alleged scheme, T-Mobile brought numerous claims under federal and state law, including violations of the Lanham Act, 15 U.S.C. § 1051 et seq., and the Computer Fraud and Abuse Act, 18 U.S.C. § 1030. R. 1 ¶¶ 97, 128.

Due to the continuing nature of the alleged conduct, the Court ordered expedited discovery. R. 35. While discovery was ongoing, defendants filed two motions to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6). R. 37; R. 40. Then, during the week of August 12, 2013, counsel for T-Mobile took depositions of Vadria and Yasin at the offices of defendants' counsel. R. 124 at 2-3. At that point, the parties began discussing the possibility of settlement.[2] Id. at 3. Settlement discussions continued throughout the week, and on August 16, 2013, the parties reached an agreement. Id. The settlement agreement was memorialized in writing, and the parties exchanged notarized signature pages on August 20, 2013. Id. at 4.

The settlement agreement provides for a complete resolution of the lawsuit and includes provisions that are highly favorable to all parties. Section 9(A) of the agreement provides for entry of Final Judgment against defendants in the amount of $[redacted]. R. 119 at 6. T-Mobile is barred from executing on the Final Judgment, however, if defendants pay four installments of $[redacted], with each installment separated by several months:

Defendants stipulate and agree that the amount of the Final Judgment entered in this Lawsuit in favor of T-Mobile and against Defendant AU Electronics, Inc. d/b/a A-U Electronics, Inc., shall be $[redacted] in the form attached hereto as Exhibit A to Exhibit 1. T-Mobile agrees not to execute on the Final Judgment provided Defendants (a) fully and timely comply with all of their obligations under this Agreement and the Permanent Injunction; and (b) fully and timely make payment in the amount of $[redacted] to T-Mobile... in four equal installments of $[redacted] each, paid no later than January 31, 2014, May 1, 2014, August 1, 2014, December 29, 2014, respectively.

Id. In exchange, defendants are required to cease "any conduct related to... the Subsidy Theft and Activation Fraud Scheme [including] the purchase, sale, unlocking, reflashing, altering, advertising, soliciting, using, and/or shipping of any... wireless product sold by T-Mobile." Defendants are also prohibited from using third parties to engage in such conduct. Id. at 4.

At the center of this dispute is a provision that prohibits the parties from disclosing T-Mobile's forbearance in executing on the Final Judgment. Under Section 9(C) of the agreement:

Any forbearance by T-Mobile in executing on the Final Judgment shall remain STRICTLY CONFIDENTIAL and [both T-Mobile and][3] Defendants are strictly prohibited from disclosing such forbearance or filing with the Court any document reflecting such forbearance under all circumstances except in defense of an action to enforce the terms of this Agreement. In that event, Defendant(s) may file a copy of this Agreement with the Court under seal, pursuant to the applicable Rules of Civil Procedure and the Local Rules of Court.

Id. The agreement also contains a provision that delayed filing of the stipulation for entry of Final Judgment and Permanent Injunction for 60 days, until October 21, 2013. R. 124 at 1. The purpose of this provision was to give defendants time to pursue claims against their insurers. See R. 124 at 1 n.1; R. 137 at 11. Specifically, Section 10 of the agreement provides that:

No earlier than sixty (60) days from the full execution of this Agreement, or at another time of T-Mobile's choosing, T-Mobile will file a Stipulation for the entry of a Final Judgment and Permanent Injunction against Defendants in the Lawsuit in substantially the form attached hereto as Exhibit 1.

R. 119 at 7. As a result of these two provisions, the parties did not immediately inform the Court that they had executed a settlement agreement on August 20, 2013. To the Court's knowledge, defendants' motions to dismiss were still pending on that date and for some time thereafter.

On September 4, 2012, just two weeks after the settlement agreement had been signed, an undercover law enforcement agent attempted to sell Yasin five new cellular phones. R. 142 at 2. According to a report of the incident, Yasin refused to personally purchase the phones after learning that they were T-Mobile phones. R. 137, Exh. J. Instead, Yasin told the agent that he knew someone who would purchase the phones, and shortly thereafter, the agent received a call from a phone number which appeared on AU's business card. Id. The agent returned the call and arranged to sell the phones to an individual, later determined to be Sohaib Sakaria, at a gas station on the north side of Chicago. Id. Later that day, Sakaria arrived at the gas station on a motorcycle and bought the five T-Mobile phones from the agent in exchange for $700. Id. After the deal had concluded, a surveillance team stationed at AU's corporate offices observed Sakaria drive up on a motorcycle and enter the building. Id. The next evening, federal agents intercepted a package bound for Hong Kong containing the same five T-Mobile phones that were sold to Sakaria. Id.

Defendants acknowledge this incident and claim that it was designed by law enforcement to test whether they were complying with the settlement agreement, which was still unknown to the Court at the time of these events. R. 137 at 7. Nevertheless, defendants fault the report for omitting "a few critical details." Id. For example, defendants claim that Sakaria came to AU and told its employees that the five phones were "factory unlocked, " "which was consistent with the types of devices that... Sakaria had sold to AU in the past." Id. at 8. Defendants also point out that they were charged $500 per phone, which is consistent with the market price. Id. Additionally, defendants produced a draft invoice which shows that they marked the phones purchased from Sakaria not as T-Mobile phones, but rather as Verizon phones. Id. T-Mobile responds by asserting "defendants attempted to conceal their improper purchase and sale of the [phones] by creating a purchase order and invoice that [falsely] stated they were Verizon [phones]." R. 142 at 3.

On September 11, 2013, federal and state law enforcement agents executed search warrants at AU's offices for alleged violations of 18 U.S.C. §§ 1956(a)(2)(A) and (h) (money laundering), 2314 (transportation of stolen goods), and 2315 (sale or receipt of stolen goods). R. 124 at 4; R. 137 at 10. The agents seized all of defendants' inventory and records and placed a $9, 999, 999.00 lien against AU's bank account. R. 137 at 10.

On September 16, 2013, defendants filed a motion to advance a hearing or decision on the pending motions to dismiss, or in the alternative, for a summary judgment conference. Sprint Nextel Corp., et al. v. AU Elecs., Inc., et al., No. 12 C 9095, R. 129.[4] In their motion, defendants advised the Court of the September 11, 2013 raid on AU's offices and accused T-Mobile of instigating it. Id. ¶¶ 1-2. Defendants then demanded a ruling on the pending motions to dismiss, noting that the Court had provided "no explanation for why [it] ha[d] chosen to delay in ruling." Id. ¶¶ 6, 15. In the alternative, defendants requested an in-chambers hearing to discuss a potential motion for summary judgment. Id. ¶ 16. Inexplicably, defendants made no mention of the fact that the parties had already signed a settlement agreement which had, at least on its face, completely resolved the lawsuit nearly four weeks earlier.

Defendants' September 16, 2013 motion to advance a hearing or decision prompted two filings later that day. First, T-Mobile filed a notice of settlement which, for the first time, informed the Court that "all parties to this case have reached a comprehensive settlement." R. 115 at 1. T-Mobile noted that the agreement contained a 60-day delay for filing the stipulation for entry of Final Judgment and Permanent Injunction but explained that it could not "wait any longer to inform the Court of the parties' settlement, " given defendants' filing earlier that day that "request[ed] the Court to needlessly expend judicial resources on a case that has been settled in all respects." Id. at 2. Shortly thereafter, defendants informed the Court that they were repudiating the settlement agreement due to allegations that T-Mobile had caused or contributed to the governmental raid on AU's offices and T-Mobile's disclosure of "strictly confidential" terms of the settlement agreement by filing its notice of settlement. R. 116 ¶¶ 4, 7. In response, the Court held a telephonic status hearing on September 17, 2013. R. 120. The Court heard arguments from all parties and then instructed T-Mobile to submit a brief explaining why the settlement agreement should be enforced. Id. An accompanying briefing schedule on the issue was set. Id.

On September 19, 2013, defendants filed a motion for expedited discovery, asking the Court to compel T-Mobile to produce "any and all communications with government authorities regarding [d]efendants." R. 121 at 1. This request was based on defendants' allegation that T-Mobile had affirmatively represented during settlement negotiations that it "had [not] previously communicated or shared information with law enforcement[, ] and to its knowledge, there was no active investigation of [d]efendants." Id. ¶ 8. Defendants asserted that they would be entitled to rescission and repudiation of the settlement agreement if it was shown that T-Mobile had committed fraud in making these statements. Id. ¶ 12.

The Court granted defendants' motion in part and ordered T-Mobile to provide affidavits from individuals who had contact with law enforcement personnel between August 16, 2013 and September 18, 2013. R. 125. The Court did not require disclosure of communications predating the settlement agreement, however, due in part to an integration clause which provides that "[t]his Agreement expresses the entire agreement between the [p]arties with respect to the compromise of the claims described herein." R. 119 at 11.

In response to the discovery order, T-Mobile produced affidavits from Senior Corporate Counsel Marian Vetro, Senior Manager of Major Investigations Aran January, Illinois Division Loss Prevention Manager Marisol Martinez, and attorney James Baldinger, its counsel in this case. R. 126-129. Although these affidavits referenced several email communications with law enforcement, each affidavit maintained that during the relevant dates, T-Mobile's employees and agents had "not provided any information to law enforcement regarding [defendants] in this case, except in response to a request by a member of law enforcement." R. 126 ¶ 4; R. 127 ¶ 4; R. 128 ¶ 5; R. 129 ¶ 4. T-Mobile notes that such communications are expressly permitted by Section 17 of the settlement agreement, which provides that:

T-Mobile shall not disclose Defendants' information beyond what is reasonably necessary to investigate and pursue claims of participation in the Subsidy Theft and Activation Fraud Scheme, or upon request by a member of law enforcement.

R. 119 at 11. The Court later expanded the discovery order and required T-Mobile to produce the emails referenced in the affidavits, which are discussed in greater depth below. R. 132. However, the Court again declined to allow discovery of materials which predate the settlement agreement. R. 136.

T-Mobile's motion to enforce the settlement agreement was fully briefed as of October 18, 2013. R. 124. On that date, defendants also moved to reform the settlement agreement to include an unintended omission regarding whether T-Mobile is permitted to ...


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