Innovative Health Technologies Limited v. Crawford

• Court: District Court, D. Arizona
• Decided: July 29, 2020
• Docket: 2:18-cv-03372
• Status: Unknown

Opinion

1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA

9 Innovative Health Technologies, No. CV-18-03372-PHX-ROS

10 Plaintiff, ORDER AND FINAL JUDGMENT

11 v.

12 Rustam Urmeev,

13 Defendant. 14 15 Plaintiff Innovative Health Technologies (“IHT”) seeks default judgment against 16 Defendant Rustam Urmeev. (Doc. 72). While IHT is entitled to default judgment, it is not 17 entitled to the full amount of monetary damages it seeks nor is it entitled to the full scope 18 of injunctive relief it requests. Thus, the motion for default judgment will be granted in 19 part. 20 BACKGROUND 21 “The general rule of law is that upon default the factual allegations of the complaint, 22 except those relating to the amount of damages, will be taken as true.” TeleVideo Sys., Inc. 23 v. Heidenthal, 826 F.2d 915, 917-18 (9th Cir. 1987). The second amended complaint sets 24 forth the following facts. (Doc. 38). “IHT is a market leader in innovative medical devices 25 for the consuming public.” (Doc. 38 at 5). After years of research, IHT developed its 26 “AVEOtsd apparatus” to treat snoring and sleep apnea. That apparatus is “a one-piece 27 tongue stabilizing device formed of a resiliently flexible material and comprises a body 28 having a hollow interior within which the end of a user’s tongue fits and is held by negative 1 pressure.” (Doc. 38 at 5). IHT obtained a patent covering that apparatus (“the ‘506 2 Patent”) and began selling the apparatus throughout the United States and internationally. 3 IHT advertises the apparatus on a nationwide and worldwide basis. 4 Sometime prior to 2017, Urmeev and his partners established a business known as 5 “ZenSleep.” As early as January 2017, Urmeev and his partners manufactured and sold a 6 variety of “snoring solutions” through ZenSleep. One of those “snoring solutions” was an 7 apparatus known as the “ZenGuard.” (Doc. 38 at 7). The ZenGuard reads on all the claims 8 of IHT’s patent. In fact, it appears to be a simple copy of the AVEOtsd apparatus. In 9 marketing the ZenGuard, Urmeev claimed he invented the ZenGuard and that there was 10 “nothing like [it] on the market.” (Doc. 38 at 7). And on the ZenSleep website, Urmeev 11 claimed ZenSleep was an “FDA Approved Facility” and that the facility had been featured 12 in publications such as Forbes and WebMD. (Doc. 38 at 8). All of these representations 13 by Urmeev were false. In addition, the ZenSleep website contained an instructional video 14 allegedly explaining how to use the ZenGuard. That video, however, “actually shows 15 IHT’s AVEOtsd devoice, and not the infringing ZenGuard product.” (Doc. 38 at 8-9). 16 Using a video showing IHT’s product to advertise the ZenGuard establishes Urmeev was 17 aware of IHT’s product and was consciously attempting to capitalize on that product’s 18 success. 19 IHT learned of Urmeev’s sale of the infringing apparatus and repeatedly informed 20 him that he was infringing the ‘506 Patent and engaged in false advertising. Urmeev 21 ignored those communications and continued to sell the infringing apparatus. Thus, 22 Urmeev had “actual knowledge and notice of IHT’s ownership of the ‘506 Patent” but 23 continued his infringing activities. (Doc. 38 at 10). 24 In October 2018, IHT filed the present suit against Urmeev’s business partners. 25 (Doc. 1). Later, IHT added Urmeev as a defendant. (Doc. 38). IHT alleged two claims 26 against Urmeev and his partners: 1) patent infringement; and 2) false advertising/unfair 27 competition under federal law. (Doc. 38 at 10-11). IHT alleged Urmeev’s conduct was 28 “willful, wanton, and deliberate” such that any damages for patent infringement or false 1 advertising should be trebled. (Doc. 38 at 13-14). 2 Urmeev avoided service but was eventually served through mail, email, publication, 3 and his attorneys for other matters. (Doc. 60). Urmeev never appeared and his default was 4 entered.1 (Doc. 73). As for his partners, they were served and they filed an answer. The 5 partners produced discovery indicating Urmeev and his partners had total profits in 2017 6 of $1,558,568 and total profits in 2018 of $406,735.89. No documentation was produced 7 regarding 2016 or 2019. Thus, Urmeev’s total profits during the relevant time of 2016 8 through 2019 were $1,965,303.89. That figure is established by documentation produced 9 by Urmeev’s own business partners and there is no reason to doubt the figure’s accuracy. 10 IHT and Urmeev’s business partners eventually settled, leaving Urmeev the sole 11 defendant.2 12 ANALYSIS 13 There are seven factors the Court must consider when determining whether to enter 14 default judgment: “(1) the possibility of prejudice to the plaintiff, (2) the merits of 15 plaintiff’s substantive claim, (3) the sufficiency of the complaint, (4) the sum of money at 16 stake in the action; (5) the possibility of a dispute concerning material facts; (6) whether 17 the default was due to excusable neglect, and (7) the strong policy underlying the Federal 18 Rules of Civil Procedure favoring decisions on the merits.” Eitel v. McCool, 782 F.2d 19 1470, 1471-72 (9th Cir. 1986). These factors support entry of default judgment. 20 First, given Urmeev’s refusal to appear or participate in this litigation, IHT has no 21 other means of obtaining redress for Urmeev’s behavior. Thus, absent a default judgment 22 IHT will suffer severe prejudice. 23 The second and third factors can be analyzed together as they involve the adequacy 24 of the complaint and the strength of IHT’s claims. The second amended complaint

25 1 In connection with the entry of default, IHT complied with the Servicemembers Civil Relief Act by submitting an affidavit stating “Defendant Urmeev is not in the military or 26 in military service.” (Doc. 71-1 at 2). 2 The docket also lists “Ecommerce Incubator LLC” as a defendant but that entity appears 27 to no longer exist and IHT does not request judgment be entered against it. Simiarly, the docket lists Urmeev’s spouse, “Jane Doe Urmeev,” as a party. There is no indication that 28 Urmeev is married or that his spouse was served. Therefore, all claims against Ecommerce Incubator LLC and Jane Doe Urmeev will be dismissed. 1 adequately alleges Urmeev has repeatedly and intentionally made false statements in 2 advertising the ZenGuard product. Those statements had a tendency to deceive a 3 substantial portion of the public and influence purchasing decisions. And IHT was injured 4 because Urmeev diverted sales from IHT. The second amended complaint also adequately 5 alleges that Urmeev has manufactured and sold products that infringe IHT’s patent. 6 Accordingly, IHT’s complaint and substantive claims are strong. 7 The fourth factor requires the Court consider the amount of money at stake. There 8 is a substantial sum at stake. Urmeev has enjoyed close to two million dollars in profits by 9 false advertising and infringing IHT’s patent. That sum of money, together with Urmeev’s 10 refusal to participate in this litigation, supports granting IHT default judgment, the only 11 form of relief available. 12 The fifth factor requires the Court evaluate whether there might be disputes 13 regarding material facts. There is no basis in the record for concluding disputes are 14 possible. Given Urmeev’s blatantly false advertising and his clear infringement of IHT’s 15 patent, it is unlikely that Urmeev’s involvement in this suit would have created any genuine 16 disputes regarding the material facts. 17 The sixth factor requires the Court assess why Urmeev failed to appear. There is no 18 indication that Urmeev’s failure to appear is because of excusable neglect. 19 The seventh and final factor requires the Court address the strong preference for 20 resolution of cases on their merits. In this case, however, it does not appear any such 21 resolution would be possible. Urmeev is aware of this suit but refuses to participate. 22 Therefore, this factor cannot overcome the other factors. 23 Entry of default judgment is appropriate. IHT requests two different forms of 24 monetary damages and a wide-ranging permanent injunction. IHT is entitled to only a 25 portion of what it seeks. 26 A. Monetary Damages3 27 IHT seeks monetary damages for willful patent infringement and false advertising.

28 3 IHT may have recovered some funds from Urmeev’s former business partners. It is unclear whether Urmeev would be entitled to a setoff against his liability in the amount of 1 In calculating both forms of damages, IHT uses Urmeev’s gross profits. Given the limited 2 discovery produced by the other defendants, IHT determined Urmeev had reaped a total of 3 $1,965,303.89 in gross profits for sales in 2017 and 2018. (Doc. 72 at 13). IHT now seeks 4 to recover those gross profits, trebled for Urmeev’s willful conduct, under its false 5 advertising claim. That is, IHT seeks a total of $5,895,911.67 in damages for false 6 advertising. As for its patent infringement claim, IHT seeks a “reasonable royalty” of “no 7 less than 50% profits from sales.” (Doc. 72 at 14). Thus, IHT seeks $982,651.95, trebled 8 for Urmeev’s willful conduct involving patent infringement, for a total of $2,947,955.83 9 in damages for patent infringement. These two allegedly separate types of damages, 10 however, arise from the same set of facts and cannot both be awarded. 11 “Generally, the double recovery of damages is impermissible.” Aero Prod. Int’l, 12 Inc. v. Intex Recreation Corp., 466 F.3d 1000, 1017 (Fed. Cir. 2006). In cases similar to 13 the present one, the Federal Circuit has instructed that when “determining whether there 14 has been an impermissible double recovery of damages, the inquiry focuses on whether the 15 damages issue arose from the same set of operative facts.” Id. Under that inquiry, damages 16 resulting from patent infringement and trademark infringement might be duplicative. Id. 17 at 1019. Similarly, awarding “damages resulting from patent infringement and from unfair 18 competition” can result in an impermissible double recovery. Id. at 1017 (citing CPG Prod. 19 Corp. v. Pegasus Luggage, Inc., 776 F.2d 1007, 1014 n.4 (Fed. Cir. 1985)). In general, 20 whenever multiple types of damages “flow[] from the same operative facts,” a court cannot 21 award more than one type. Aero, 466 F.3d at 1019. For example, if a party is compensated 22 for patent infringement through a “reasonable royalty,” that party cannot “also be awarded 23 defendants’ profits for trademark infringement based on the same sales of the same accused 24 devices.” Id. 25 Here, IHT’s patent infringement and false advertising claims both arise “from the 26 same set of operative facts” involving Urmeev’s advertising and sale of the ZenGuard

27 those funds. But it is clear that if setoff were allowed, it would be “an affirmative defense which must be pleaded or it is waived.” Glover v. Johnson, No. CIV-14-936-F, 2016 WL 28 5854282, at *1 (W.D. Okla. Oct. 6, 2016). Urmeev’s failure to appear has waived any possible entitlement to a setoff. 1 product. Id. at 1018. Given the shared factual background, IHT is not entitled to double 2 recovery in the form of approximately $9 million dollars. Instead, IHT is free to accept 3 whichever theory will result in higher damages award. Cf. Celeritas Techs., Ltd. v. 4 Rockwell Int’l Corp., 150 F.3d 1354, 1357 (Fed. Cir. 1998) (party stipulated it would accept 5 the highest award under three related theories to avoid “duplicative recovery”). In this 6 case, because IHT believes false advertising will result in a higher damages award, 7 presumably that is the type of damages IHT prefers to receive. That is the type of damages 8 the Court will analyze. 9 Pursuant to 15 U.S.C. § 1117(a), a party who prevails on a false advertising claim 10 is entitled “to recover . . . defendant’s profits.” That statute further provides that “[i]n 11 assessing profits the plaintiff shall be required to prove defendant’s sales only; defendant 12 must prove all elements of cost or deduction claimed.” 15 U.S.C. § 1117(a). And 13 “according to the circumstances of the case,” the Court may award up to treble damages. 14 Id. 15 IHT has provided documentation proving Urmeev’s total sales. While that was 16 enough to shift the burden to Urmeev to provide “all elements of cost or deduction[s],” 17 IHT concedes the same documentation also establishes some of Urmeev’s costs. Using 18 that documentation, IHT seeks a total award of $1,965,303.89 in profits. Because this 19 figure is merely the result of mathematical manipulation of Urmeev’s own records, no 20 evidentiary hearing is necessary. See Davis v. Fendler, 650 F.2d 1154, 1161 (9th Cir. 21 1981) (holding court must conduct a hearing to determine the appropriate amount of 22 monetary damages “unless the amount claimed is a liquidated sum or capable of 23 mathematical calculation”). Accordingly, IHT is entitled to that amount and the final issue 24 is whether that amount should be increased. 25 “[T]he Court has the discretion to award up to treble damages for a Lanham Act 26 violation.” A & M Records, Inc. v. Abdallah, 948 F. Supp. 1449, 1458 (C.D. Cal. 1996). 27 “If the violation is found to be willful,” the Court “should award treble damages unless it 28 finds extenuating circumstances.” Id. Given the allegations in the complaint that must be 1 accepted as true, Urmeev’s conduct was willful. He made a number of obviously false 2 statements in advertising the ZenGuard, such as that he invented it and there was “nothing 3 like [it] on the market.” (Doc. 38 at 7). IHT repeatedly informed Urmeev that he was 4 engaged in false advertising yet Urmeev continued his behavior. These facts establish 5 Urmeev’s behavior was willful and IHT is entitled to treble damages for a total award of 6 $5,895,911.67. Cf. Davis v. Koz, No. 218CV06597VAPJPRX, 2020 WL 2334119, at *6 7 (C.D. Cal. Apr. 14, 2020) (awarding treble damages in default judgment without hearing). 8 B. Permanent Injunction 9 IHT seeks a permanent injunction prohibiting Urmeev from making false, 10 misleading, or deceptive statements regarding the infringing products, IHT’s apparatus, or 11 the patent itself. The permanent injunction would also prohibit Urmeev from infringing or 12 inducing infringement of the patent. Finally, the permanent injunction would allow for 13 IHT to take numerous actions to enforce its monetary judgment, including the automatic 14 involvement of numerous non-parties that might have dealings with Urmeev. 15 IHT seeks a permanent injunction for both its patent infringement and false 16 advertising claims. While a permanent injunction is not mandatory in a patent infringement 17 action, it is commonly granted. See eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 18 (2006). Courts also “routinely grant permanent injunctions prohibiting deceptive 19 advertising.” TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 829 (9th Cir. 2011). 20 For either type of claim, IHT is entitled to a permanent injunction only upon satisfying the 21 four traditional criteria: “(1) that [IHT] has suffered an irreparable injury; (2) that remedies 22 available at law, such as monetary damages, are inadequate to compensate for that injury; 23 (3) that, considering the balance of hardships between [IHT and Urmeev], a remedy in 24 equity is warranted; and (4) that the public interest would not be disserved by a permanent 25 injunction.” eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006). All four factors 26 are met here. 27 Beginning with irreparable harm, it may consist of “price erosion, loss of goodwill, 28 damage to reputation, and loss of business opportunities.” Celsis in Vitro, Inc. v. 1 CellzDirect, Inc., 664 F.3d 922, 930 (Fed. Cir. 2012). Urmeev’s false statements are aimed 2 at diverting sales from IHT and also involve the sale of an apparatus that infringes on IHT’s 3 patent. IHT will suffer irreparable harm in the form of price erosion and the loss of business 4 opportunities if Urmeev is not enjoined from continuing his behavior. 5 Next, monetary damages are inadequate because such damages, at least in the form 6 of lost profits, cannot account for potential damage to IHT’s reputation or the loss of other 7 business opportunities. 8 As for the balance of hardships, it tips strongly in favor of protecting IHT’s patent 9 and forbidding Urmeev from making “false or misleading commercial statements.” The 10 public has an interest in protecting patent rights and not doing so would harm IHT. It 11 would not be a cognizable hardship to force Urmeev to cease his infringing and false 12 advertising activity. 13 Finally, the public interest is served by protecting IHT’s patent rights and 14 prohibiting Urmeev from misleading the public. Therefore, IHT is entitled to an injunction 15 prohibiting Urmeev from continuing his behavior. 16 Beyond prohibiting Urmeev from continuing his behavior, IHT also requests 17 injunctive relief in the form of provisions requiring non-parties to release, automatically, 18 any funds in their possession which belong to Urmeev. As noted by another court, the 19 proper way to obtain such relief is through the standard post-judgment collection 20 procedures. See Allstar Mktg. Grp., LLC v. 158, No. 1:18-CV-4101-GHW, 2019 WL 21 3936879, at *2 (S.D.N.Y. Aug. 20, 2019). Those procedures will allow for the possibility 22 that other creditors have superior claims to those funds. 23 IHT also requests the Court require other non-parties conducting business with 24 Urmeev to cease doing so. For example, IHT requests the Court prevent entities operating 25 websites from continuing to display Urmeev’s products. IHT has not cited any authority 26 allowing the Court to require such actions by non-parties. Therefore, that aspect of IHT’s 27 requested relief will not be given. 28 Accordingly, 1 IT IS ORDERED the Motion for Default Judgment (Doc. 72) is GRANTED IN 2|| PART as set forth above. Judgment is entered in favor of Plaintiff and against Defendant □ Rustam Urmeev in the amount of $5,895,911.67. 4 IT IS FURTHER ORDERED all claims against Ecommerce Incubator LLC and 5 || Unknown Urmeev are DISMISSED. The Clerk of Court shall close this case. 6 IT IS FURTHER ORDERED Defendants Rustam Urmeev and his companies, instrumentalities, agents, servants, officers, directors, employees, successors, shareholders, 8 || affiliates, assigns and attorneys, as well as all those in active concert or participation with 9|| him and/or those in privity with him (collectively, the “Urmeev Parties’’), are permanently 10 || enjoined and restrained from: 11 a. Infringing or inducing the infringement of the ‘506 Patent; and/or 12 b. Making false, misleading, and/or deceptive advertisements, letters, 13 promotional materials, articles or oral or written statements regarding the 14 nature, quality, characteristics, sponsorship or approval of Urmeev’s 15 ZenGuard products, IHT’s AVEOtsd device, and/or the ‘506 Patent. 16 IT IS FURTHER ORDERED this Court shall retain jurisdiction over the parties 17 || and the subject matter of this litigation for the purpose of interpretation and enforcement of this Judgment and Permanent Injunction Order. 19 Dated this 28th day of July, 2020. 20 fo = 21 C . ES 22 Honorable Ros yn ©. Silver 3 Senior United States District Judge 24 25 26 27 28

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