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UL, LLC v. American Energy Products, LLC

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

January 13, 2018

UL, LLC, Plaintiff,
v.
AMERICAN ENERGY PRODUCTS, LLC and JUDE J. SHAO, Defendants.

          MEMORANDUM OPINION AND ORDER

          MATTHEW F. KENNELLY, DISTRICT JUDGE

         UL LLC has sued American Energy Products, LLC (AEP) and its chief executive officer Jude Shao, alleging violations of the federal Lanham Act and parallel state law claims. UL's claims arise from defendants' allegedly unauthorized use of UL's certification and service marks on gas fuel containers.

         The Court takes the facts as they are alleged in UL's complaint, which it filed on October 4, 2017. UL, an Illinois-based company, tests and certifies products as meeting applicable safety standards. In its complaint in this case, UL alleges that AEP requested from UL a quote for testing AEP's canisters. UL and AEP entered into a series of written agreements under which AEP agreed to submit representative samples of its canisters to UL for testing so that UL could determine whether the canisters were eligible for use of its certification marks. AEP was authorized to place UL's marks on its products only after UL performed various procedures to verify compliance. AEP was prohibited from distributing products bearing the UL marks before these procedures were completed.

         In October 2014, UL issued AEP a preliminary certificate of compliance but advised AEP, through Shao, that it could not ship products bearing UL's mark until it passed an initial product inspection; Shao acknowledged this requirement. UL representatives visited AEP's facility, located in Texas, in November 2014, and then advised Shao that there were several issues that had to be resolved before AEP could distribute canisters with UL's mark. Shao later advised UL that it was not producing any product that required inspection, and still later confirmed that he would contact UL for a follow-up inspection when AEP began to produce product bearing the UL mark. He did not, however, contact UL after this to advise that AEP was producing products with the UL mark.

         In October 2015, UL representatives visited AEP's facility and learned that the company had canisters in its inventory bearing the UL mark. UL advised Shao that this was unauthorized, and it issued notices stating that the canisters were not in compliance with UL standards for various reasons and that the UL mark could not be used and any shipment of UL-marked product had to be suspended. In November 2015, there was another visit to the Texas plant that resulted in yet another notice of non-compliance (a "variation notice, " in UL lingo).

         Despite all of this, UL contends, AEP shipped products with UL's certification mark, evidently both before and after the October and November 2015 site visits. This happened, UL alleges, despite Shao's acknowledgment that AEP had not passed the contractually required product inspection. UL issued another variation notice in April 2016, and that same month, it conducted another inspection at AEP's Texas facility and found 23, 000 canisters bearing what UL calls an "incomplete UL mark" that were boxed up and ready to ship, along with another 56, 000 unfilled canisters with the same mark in stock. At the end of April 2016, UL terminated its agreement with AEP and told AEP, in connection with the termination notice, that it could not use any UL marks on or in connection with its products. According to UL, however, Shao and AEP continued to sell and ship the improperly marked canisters. These were sold at retail outlets in Texas and were also shipped to customers in other states, including Illinois, to which AEP shipped over 20, 000 canisters.

         UL alleges that AEP violated the Lanham Act and state law by using UL's mark- which it characterizes as a "counterfeit mark"-in connection with its products, thereby falsely suggesting that UL had certified AEP's canisters as compliant with safety standards. In its Lanham Act claims, UL seeks damages, including treble damages for intentional infringement, disgorgement of AEP's profits, and attorney's fees and costs as provided under the Lanham Act, and it also seeks an injunction barring AEP and Shao from using its marks.

         AEP and Shao have filed four motions that are before the Court for determination. First, each defendant separately moved to dismiss, AEP arguing that personal jurisdiction is lacking in this district, and Shao arguing both the absence of personal jurisdiction and failure to state a claim against him as an individual. Next, the defendants filed a motion asking the Court to stay this case pending resolution of a lawsuit they filed in Texas state court. More recently, the defendants moved to dismiss for lack of federal subject matter jurisdiction.

         Discussion

         1. Subject matter jurisdiction

         Defendants contend that UL's lawsuit is a breach of contract claim dressed up as a Lanham Act claim and that, as a result, federal subject matter jurisdiction is lacking (the parties agree that complete diversity of citizenship does not exist). Defendants rely on International Armor & Limousine Co. v. Moloney Coachbuilders, Inc., 272 F.3d 912 (7th Cir. 2001). The defendant in that case, a maker of limousines and armored cars, acquired by contract from Earle Moloney, who had started and built the business, the right to use the name "Moloney Coach Builders" as well as other rights, including the right to use the business's history. Later, Earle reentered the armored stretch limousine business under the name International Armor & Limousine Co. International Armor's ads emphasized that Earle was its owner, he had been the industry's pioneer, and that the company was a "Moloney owned entity." When Moloney Coachbuilders protested, International Armor filed suit seeking a declaratory judgment that it was not violating the Lanham Act. The court of appeals ruled that this was a breach of contract suit, not a suit arising under federal law. The court relied on T.B. Harms Co. v. Eliscu, 339 F.2d 823 (2d Cir. 1964), in which the Second Circuit, in a decision authored by Judge Friendly, concluded that a dispute about ownership of a copyright does not arise under federal law. Int'l Armor, 272 F.3d at 915-16. The court acknowledged that the contracts between Earle and Moloney Coachbuilders were about trademarks and that whichever side did not own the marks risked liability under the Lanham Act. Id. at 914. But that, the court concluded, did not mean that the claim arose under the Lanham Act: "[t]he dispute arises under the law of contracts; any trademark claims are entirely derivative of the contract issues." Id. at 916. Defendants say this case is no different and that the suit is really about whether AEP complied with, or breached, its agreement with UL and that any trademark infringement claims are entirely derivative of the contract dispute.

         The Court disagrees. As the Seventh Circuit noted in International Armor, "[a] claim might arise under federal law even though all dispositive issues depend on state law if the remedies differ." Id. This was not the case in International Armor: "the parties' supplemental briefs [did] not contend that the Lanham Act affords any remedy that is unavailable under the state law of contract, or makes that remedy easier to obtain . . . ." Id. Here matters are different; UL expressly contends that it is entitled to treble damages for intentional misconduct, a remedy that does not exist under Illinois contract law (not to mention attorney's fees).

         More broadly, International Armor does not stand for the proposition that whenever a trademark infringement claim is intertwined with a contractual relationship, there is no federal jurisdiction over a resulting Lanham Act claim. Both International Armor and the Second Circuit decision on which it was premised, Eliscu, involved disputes over ownership of a trademark or copyright. That is not at issue in this case; the dispute involves authorized use of a mark. UL alleges that it owns a valid trademark; it contends that AEP and Shao used it without authority; and it seeks damages, disgorgement, attorney's fees, and an injunction, all under the Lanham Act. "That is enough to show that this case arises under the Act." Nova Design Build, Inc. v. Grace Hotels, LLC, 652 F.3d 814, 816 (7th Cir. 2011); see also, Edgenet v Home Depot, U.S.A., Inc., 658 F.3d 662, 664 (7th Cir. 2011). See generally Fed. Treas. Enter. Sojuzplodoimport v. Spirits Int'l, N.V., 623 F.3d 61 (2d Cir. 2010), in which the same circuit that decided Eliscu concluded that so long as the complaint alleges a claim or seeks a remedy provided by the federal statute, a federal court has subject matter jurisdiction, "even if the plaintiff . . . is only entitled to that remedy on a prior showing of contractual entitlement." Id. at 69 (internal quotation marks omitted). "To adopt a contrary rule would leave plaintiffs who seek the remedies Congress created under the Lanham Act with two unappealing options"-engaging in piecemeal litigation (first, a state court suit to determine ownership, then a federal suit under the Lanham Act) or litigating everything in state court, thereby eliminating the Congressionally-provided choice of a federal forum. Id. at 69-70.

         For these reasons, the Court denies defendants' motion to dismiss for ...


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