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Knitting Fever, Inc. and Kfi, Inc v. Coats Holding Ltd.

March 19, 2012


The opinion of the court was delivered by: Hurley, Senior District Judge:


Plaintiffs Knitting Fever, Inc. and KFI, Inc. ("plaintiffs" or "KFI") commenced this breach of contract action against defendants Coats Holding, Ltd., Coats PLC, Coats GMBH, Coats Opti NV, Coats North America Consolidated, Inc., and Westminster Fibers, Inc. ("defendants" or "Coats") in February 2005. The parties proceeded to discovery and entered into a confidentiality agreement, which was endorsed by the Court on September 29, 2005 (the "Confidentiality Order"). (See Docket No. 26.) Ultimately, plaintiffs filed a stipulation of discontinuance and this case was closed on September 26, 2007. Almost three years later, on July 28, 2010, Cascade Yarns, Inc. ("Cascade") moved to intervene in this closed matter for the purpose of modifying the Confidentiality Order and "access[ing] information relevant to [a] collateral litigation." (Not. of Mot., dated July 28, 2010.) This Court referred the matter to Magistrate Judge William D. Wall for report and recommendation. On December 15, 2010, Judge Wall issued a Report and Recommendation recommending that Cascade's motion to intervene be granted, but deferred ruling on Cascade's motion to modify the Confidentiality Order pending further briefing by the parties. By Order dated January 10, 2011, this Court adopted Judge Wall's Report and Recommendation.*fn1

Presently before the Court is plaintiffs' motion seeking sanctions pursuant to Federal Rule of Civil Procedure ("Rule") 11 against Cascade and its counsel, the law firm of Squire, Sanders & Dempsey, LLP ("Squire Sanders"). Plaintiffs claim that Cascade's reply brief, which was filed as part of Cascade's motion to intervene, contained a false statement of fact that was included to harass KFI and its counsel. For the reasons set forth below, plaintiffs' motion is denied.


The Coats Case

The present case (the "Coats Case"), which is now closed, stemmed from allegations that defendants breached their exclusive distribution agreement with plaintiffs. Plaintiffs claimed that although Coats granted KFI the exclusive right to distribute certain of Coats's yarns in the United States, Coats circumvented the agreement by selling identical yarns under different labels directly to U.S. retailers. (Decl. of Roy A. Klein, Esq., dated Apr. 5, 2011 ("Klein Decl.") ¶ 3.)

Following a discovery dispute regarding KFI's alleged failure to turn over certain material, the parties appeared for a status conference before Magistrate Judge Michael L. Orenstein,*fn2 who issued an Order directing the following: (1) that Roy Klein, attorney for KFI, submit to a deposition, and that (2) Sion Elalouf, KFI's principal, "produce his desktops, laptops, PDA and cell phone . . . for pick-up by defendant's forensic expert [for an] examination of all [ ] memory drives and [metadata] [and other] material re: transmissions of e-mail or other communications re: yarns." (Minute Entry, dated Oct. 25, 2005.) Klein and Elalouf complied with Judge Orenstein's Order. (See Klein Decl. ¶ 11.)

By letter dated February 13, 2006, Coats requested a pre-motion conference in anticipation of moving for sanctions against KFI, arguing that KFI and its counsel had acted improperly by failing to produce certain documents during discovery. The letter stated, in relevant part:

Additionally, and after commencement of this action . . . Mr. Elalouf and Mr. Klein obtained new computers and discarded their old ones, both of which contained discoverable information. Mr. Elalouf did not and does not currently maintain backup tapes for his desktop or laptop.

Mr. Klein was unclear [during his deposition] as to whether he maintained backup tapes and does not know if any tapes are available.

Because many of the known communications [at issue] were not contained on Mr. Elalouf's existing computers, it is likely that the missing communications and . . . other relevant evidence[ ] were either contained on Mr. Elalouf's prior computer or destroyed by him. (Feb. 13, 2006 Letter at 3 (footnote omitted).) In response, Klein submitted a February 17, 2006 letter that vehemently denied Coats's assertions and stated: "Given my [deposition] testimony, Coats' inference that I discarded my computer to destroy evidence in this case is offensive and unprofessional." (Feb. 17, 2006 Letter at 2-3 (footnote omitted).)

The parties subsequently settled the matter and, as such, the Court did not have the opportunity to rule on Coats's request for a pre-motion conference, and Coats never filed its proposed motion for sanctions.

The Cascade Case

In 2010, approximately three years after the Coats Case closed, Cascade initiated an action in the Western District of Washington against KFI, alleging that KFI engaged in unfair competition by marketing and selling "yarns labeled as containing cashmere with knowledge that the yarns contained no cashmere." (Klein Decl. ΒΆ 17.) According to Klein, the Complaint in the Cascade ...

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