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Engineered Abrasives, Inc. v. American MacHine Products & Service Inc.

United States District Court, N.D. Illinois, Eastern Division

March 18, 2015

ENGINEERED ABRASIVES, INC., Plaintiff,
v.
AMERICAN MACHINE PRODUCTS & SERVICE INC., EDWARD C. RICHERME, and EDWARD RICHERME, Defendants.

OPINION AND ORDER

SARA L. ELLIS, District Judge.

Plaintiff Engineered Abrasives, Inc. ("EA"), which designs, manufactures, and services automated shot peening and blast finishing equipment, filed suit against its former employees Defendants Edward Richerme and Edward C. Richerme, [1] and the company they now operate, Defendant American Machine Products & Service Inc. ("AMPS"). Claiming that Defendants were misrepresenting themselves as EA representatives and unfairly competing with EA, EA brought six claims against Defendants: (1) trademark infringement under the Lanham Act, 15 U.S.C. § 1114; (2) false advertising under the Lanham Act, 15 U.S.C. § 1125; (3) copyright infringement in violation of 17 U.S.C. § 106; (4) state law unfair competition; (5) violation of the Uniform Deceptive Trade Practices Act ("UDTPA"), 815 Ill. Comp. Stat. 510/1 et seq.; and (6) violation of the Illinois Consumer Fraud and Deceptive Business Practices Act ("ICFA"), 815 Ill. Comp. Stat. 505/1 et seq. After Defendants failed to answer the complaint, Judge Grady found Defendants to be in default. Docs. 12, 15. After extensive discovery on EA's damages, the case was reassigned to this Court, and an evidentiary hearing was held on November 21, 2014 on EA's request for relief.

Based on the evidence presented at that hearing and the parties' other submissions, the Court awards EA $207, 257 in monetary damages, $499, 088.80 in attorneys' fees, and $668.24 in costs. The Court also permanently enjoins Defendants from using any presently held EA trademark or any confusingly similar mark or imitation and orders Defendants to deliver all EA materials in their possession to EA for destruction. Additionally, because the Court finds Defendants' conduct during discovery warrants sanctions, the Court grants EA's motion for sanctions [56] and orders Defendants to reimburse EA for the cost of conducting the forensic computer examination.

BACKGROUND

In business since 1968, EA designs and manufactures automated shot peening[2] and blast finishing equipment. It also provides replacement parts and supplies and installation, maintenance, and repair services to its customers. EA's parts are modified and manufactured specifically for its machines. Mike Wern, EA's president and owner, estimated that EA provides approximately 95% of all high-volume shot peening equipment for American automotive companies. The Father began working at EA in October 1982, rising to be plant superintendent. He was a highly valued, trusted, and compensated EA employee. The Son began working at EA in February 1992.

EA's polyurethane parts, including knobs, tooling machine cabinet liner sheets, machine tables, and tooling sleeves, are manufactured in a distinctive red color. EA has been using this color in its products since at least 1983. EA has trademarked the use of the color red in its polyurethane table cover, sheets, knob-like cylinders, and cylinders (the "Red Trademarked Goods"). These trademarks have a registration date of September 9, 2014. EA also holds registered trademarks in the name "Engineered Abrasives, " the acronym "EA, " and its logo. EA's website and job shop services brochure are copyrighted, having been registered on October 9, 2013, only two days before this lawsuit was filed. But the brochure is registered with a creation date of 2004 and a publication date of December 12, 2008, and the website with a creation and publication date of 2011.

In 2009, Wern and the Father incorporated a new business, ER Parts, with the intention of having ER Parts provide parts to EA's customers if EA went into bankruptcy. To that end, EA delivered parts to the Richermes' property in Mokena, Illinois in February 2009. The Father prepared an inventory of the parts, dated February 2, 2009, which listed the total retail value of the inventory as $685, 602.96. EA then directed certain orders to ER Parts, which were filled from the inventory. Approximately $40, 000 worth of product was sold between February and April 2009. After April 2009, EA directed all parts business back to itself. Eventually, ER Parts was dissolved. Although Wern told the Father to bring the remaining inventory back to EA, the Father only returned a few parts to EA and kept the retained inventory at his Mokena property.[3] Neither ER Parts nor the Richermes ever paid EA for the parts that remained with the Richermes. EA also never requested payment for any sales that ER Parts made.

Two years later, the Richermes left EA and started AMPS. On September 12, 2011, two banking accounts were opened in AMPS' name at Fifth Third Bank. In late September 2011, the Father told Wern that he was taking a leave of absence. Then, on October 15, 2011, the Son was terminated from his job at EA. A few days later, on October 21, 2011, AMPS generated an invoice for repairs to a media valve at Borg Warner Automotive's Bellwood, Illinois facility. The Son had performed similar work at that facility as an EA employee only several months before. He testified that he obtained the work in October through a Borg Warner employee he contacted after being terminated from EA, who offered that the Son could service Borg Warner's equipment.

Defendants operated AMPS in direct competition to EA, representing that they could supply EA parts and service EA machines, often at less cost to the customer. Defendants used the ER Parts inventory at the Richermes' Mokena property as a starting point for their business, selling those products to EA customers while attempting to conceal that they were EA products by sanding off the EA name and part number from the product. Most of the ER Parts inventory has been sold, usually at a price less than that listed on the inventory sheet produced by the Father for ER Parts. The Son testified that he believed AMPS realized approximately $100, 000 to $130, 000 from selling the products remaining from the ER Parts inventory. He estimated that less than $20, 000 of inventory remained, with some of those products obsolete. The Father testified that approximately $10, 000 to $15, 000 worth of products had not been sold. But in his bankruptcy filing, he valued those products at only $750, which, he explained at the evidentiary hearing, reflected a discount from the retail value.

To advertise their new business, the Richermes produced a brochure for AMPS, which was available on the AMPS website and listed various services and products AMPS could provide. That brochure specifically stated that AMPS "can supply parts and components that will fit many applications, " listing several brands, including EA. Evidentiary Hearing Ex. 19 at EA 00030. Some of the parts depicted in the brochure were EA parts.

Defendants also sought to confuse customers by using product numbers similar to those used by EA. For example, an EA ¼" gunbody was identified as #10000C, but AMPS referred to the same gunbody as #10300C. This led IDG, a supplier to Borg-Warner Automotive, to request a quote from EA for the ¼" gunbody using the AMPS product number instead of the EA product number. See Evidentiary Hearing Ex. 48; Evidentiary Hearing Tr. 54:9-25.

But Defendants' actions did not always result in as innocent a mistake as having a purchase order reference the wrong product number. They also caused reputational problems for EA because of shoddy work performed by the Richermes. In one instance, for example, AMPS had installed a media valve at a Ford plant that malfunctioned. Because it was an EA part and machine, however, the customer called EA upset about the malfunction, requiring Wern and others to play damage control.

EA also had to address allegations made by the Son in a December 18, 2012 email he sent to numerous individuals at Ford, including its executive chairman and president and certain EA contacts there. In that email, the Son complained that Ford had not contacted AMPS about alleged defects in AMPS-supplied parts but instead complained to EA about them. The Son also claimed that EA violated Ford's ethics rules in its dealings with Ford employees. But this email was prompted by an email sent by Wern notifying Ford that EA was in litigation with Defendants and asking Ford to contact Wern if Defendants contacted anyone at Ford. Although Wern testified that he had to explain the Son's accusations, Wern admitted that EA did not suffer any repercussions from the Son's email.

In addition to having EA parts in their possession, the Richermes also left EA with a large amount of EA's proprietary information, including CAD drawings, proposals, and details about EA's parts system. Despite the fact that some of these documents are dated as late as October 2011, the Father testified that he took many of these documents when ER Parts was established with Wern's permission. Defendants have used these documents in several ways, including sending schematics of EA parts to a Forecast Sales representative in October 2013 in an attempt to manufacture replacement parts to sell to customers.[4] EA's parts lists, which included information about EA's pricing, allowed Defendants to quote prices lower than EA to common customers. With this list, for example, AMPS provided Chrysler with a comparison of the current price Chrysler was paying for EA parts compared to the lower prices it would pay if it ordered the same (or allegedly comparable) parts from AMPS. See Evidentiary Hearing Exs. 35-36.

Defendants also used EA's documents in an effort to submit a quote to Chrysler for a shot peening machine through a third party. The Richermes provided Dan Dickey, the owner of Innovative Peening Systems ("IPS"), with EA documents and recommended a target range for the quote. Although the idea was to submit the quote through RB Tools, which had a vendor number with Chrysler, the Richermes expected to receive a commission if RB Tools and IPS obtained the business.

In response to Defendants' actions, EA instituted this case and a parallel case against AMPS, the Father, and the Son in state court. A preliminary injunction was entered in the state court case on October 11, 2012 against Defendants, providing:

1) The Defendants will not make purchases parts or products directly from Axxiom/Schmidt, and;
2) provide either a hardened metal seat or spacer or a shot peened spring in any valve supplied to any of their customers; and
3) use part numbers of Plaintiff.
4) All parties shall not disparage the other in any communications with third parties or discuss details of the case other than to confirm its existence.

Evidentiary Hearing Ex. 5. On December 28, 2012, a second preliminary injunction was entered in the state court case:

A preliminary injunction is entered restraining the defendants from contacting any client or customer of Engineered Abrasives in any manner, except that the defendants may complete an outstanding order to Global to sell belts and send collection notices for unpaid invoices.

Evidentiary Hearing Ex. 6. On October 28, 2013, the state court entered an additional order restraining Defendants' actions:

1) The Defendants, their agents or assigns shall not:
A) Sell, or offer for sale, any media valve or product containing a metal seat or spacer or such other seat or spacer that is hardened in any manner;
B) Sell, or offer for sale, any media valve from or produced by AXXIOM/Schmidt.
2) The Defendants shall remove from their website:
A) Any reference to Engineered ...

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