United States District Court, S.D. New York
OPINION AND ORDER
KATHERINE POLK FAILLA, District Judge.
Plaintiffs Tiffany (NJ) LLC and Tiffany and Company (collectively, "Tiffany") have presented the Court with a Proposed Default Judgment against all Defendants in this action. Tiffany alleges that Defendants committed trademark violations by selling knock-off Tiffany products over the internet. Tiffany seeks, inter alia, an accounting of Defendants' profits, with $52 million awarded as a proxy for these profits, and a postjudgment freeze of Defendants' assets worldwide, including assets held in various Chinese bank accounts. Defendants, having not appeared in this action since its inception more than four years ago, offer no opposition. In marked contrast, the Court has heard at length from several non-party banks - Bank of China ("BOC"), Industrial and Commercial Bank of China, Ltd. ("ICBC"), and China Merchants Bank ("CMB") (collectively, the "Non-Party Banks"). Each of the Non-Party Banks holds assets belonging to Defendants, and each argues that the Court lacks the authority to issue the postjudgment asset freeze that Tiffany proposes.
For the reasons set forth herein, although Tiffany's application for a default judgment will be granted, the Court will modify the Proposed Default Judgment in two significant ways: first, the Court will award statutory damages instead of an accounting of profits; and second, the Court will strike the requested postjudgment asset freeze.
A. Factual Background
The Court assumes familiarity with facts of this case, as set forth in the Opinions written by Magistrate Judge Henry B. Pitman. See Tiffany (NJ) LLC v. Qi A ndrew, No. 10 Civ. 9471 (RA) (HBP), 2012 WL 5451259 (S.D.N.Y. Nov. 7, 2012); Tiffany (NJ) LLC v. Qi Andrew, 276 F.R.D. 143 (S.D.N.Y. 2011). In brief, this is a trademark counterfeiting case in which Tiffany alleges that Defendants sold counterfeit Tiffany products through U.S.-based websites such as TiffanyStores.org. (Dkt. #76 ("Am. Compl.") ¶¶ 1-17). Tiffany claims that Defendants used PayPal, Inc. ("PayPal") to process customers' credit card transactions, and then transferred the proceeds of the sales to accounts held by the Non-Party Banks. (Am. Compl. ¶¶ 53-70).
B. Procedural Background
Tiffany filed this action on December 21, 2010. (Dkt. #1). On January 3, 2011, District Judge William H. Pauley III, after holding a preliminary injunction hearing at which Defendants failed to appear, entered a preliminary injunction that enjoined the Defendants' counterfeiting operation, froze their assets, and provided for expedited discovery from Defendants and third-parties. ( See Dkt. #4, 6, 7).
Tiffany thereafter obtained documents from non-party PayPal; the documents showed that Defendants had wired in excess of $250, 000 from their PayPal accounts into specific accounts held by the Non-Party Banks. (Dkt. #73 at 4). Tiffany received additional information regarding Defendants from the Non-Party Banks through the Hague Convention. ( See Dkt. #59 at 8-10). On June 14, 2013, this case was reassigned to this Court. (Dkt. #71).
On August 22, 2013, with leave of the Court, Tiffany amended the Complaint to add new Defendants. (Dkt. #76). On November 18, 2013, the Court issued an Order to Show Cause as to why a Default Judgment should not be entered. (Dkt. #79). None of the Defendants responded; however, prior to the Order to Show Cause Hearing, the Non-Party Banks submitted letters to the Court, requesting an opportunity to submit briefing on the issues raised by Plaintiffs' Proposed Default Judgment, and highlighting for the Court two appeals pending before the Second Circuit in similar trademark actions. (Dkt. #83, 84 (citing Gucci Am., Inc. v. Li, No 11-3934-cv, and Tiffany (NJ) LLC v. Forbse, No. 12-2317-cv)). In Gucci and Forbse, the Non-Party Banks appealed orders following the district courts' issuance of prejudgment asset freeze injunctions similar in scope to the one issued in the instant action, and similar to the postjudgment asset freeze contained in the Proposed Default Judgment. The Court adjourned the Order to Show Cause Hearing sine die, and directed Plaintiff and the Non-Party Banks to submit letter briefs following the issuance of the Second Circuit's decisions in Gucci and Forbse. (Dkt. #86).
C. The Second Circuit's Decisions in Gucci and Forbse
On September 17, 2014, the Second Circuit issued an Opinion in Gucci Am., Inc. v. Weixing Li, 768 F.3d 122 (2d Cir. 2014). Because "[t]he legal issues decided in Gucci substantially overlap[ped] with the legal issues presented [in Forbse ], " the Second Circuit "incorporate[d] the legal analysis in Gucci " into a Summary Order in the Forbse action, captioned on appeal as Tiffany (NJ) LLC v. China Merchants Bank, 589 F.Appx. 550 (2d Cir. 2014) (summary order).
In Gucci, after District Judge Richard J. Sullivan issued a preliminary injunction freezing the defendants' assets, plaintiffs filed a motion to compel the compliance of non-party BOC with the asset freeze and with various requests for documents. The court granted the motion, and, when BOC failed to comply, the court held the Bank in civil contempt and imposed civil monetary penalties.
The Second Circuit affirmed the district court's issuance of the prejudgment asset freeze injunction because "[t]he [district] court had personal jurisdiction over the defendants, as well as the equitable authority to issue the prejudgment freeze." 768 F.3d at 129. The Court first addressed the issue of whether personal jurisdiction of the non-party bank was a prerequisite to the injunction. It rejected the argument, advanced by the non-party bank,
that personal jurisdiction over the Bank was required for the district court to issue the... Asset Freeze Injunction restraining the defendants' assets. BOC does not argue that the defendants are not subject to personal jurisdiction in New York State. And personal jurisdiction over the defendants, not the Bank, is all that was needed for the district court to restrain the defendants' assets pending trial.
Gucci, 768 F.3d at 129 (emphasis in original) (citing United States v. First Nat'l City Bank, 379 U.S. 378, 384 (1965)).
Relying on its decision in NML Capital, Ltd. v. Republic of Argentina, 727 F.3d 230 (2d Cir. 2013), cert. denied, 134 S.Ct. 2819 (2014), the Second Circuit made clear that because the asset freeze injunction did not directly enjoin BOC, it was "irrelevant" whether the district court had personal jurisdiction over the non-party bank when issuing the injunction. Gucci, 768 F.3d at 129 (citing NML Capital, 727 F.3d at 243). The Court acknowledged, echoing NML Capital, that Federal Rule of Civil Procedure 65(d) automatically forbids others - who are not directly enjoined but who act "in active concert or participation" with an enjoined party - from assisting in a violation of the injunction. It reiterated that such injunctions "do not directly restrain the conduct of nonparties. Instead, they provide these nonparties with notice that they could become liable through Rule 65 if they assist... in violating the district court's orders.'" Id. at 130 (quoting NML Capital, 727 F.3d at 243). Although questions of personal jurisdiction over non-parties must be addressed before the determination of a non-party's liability or the issuance of sanctions against a non-party, the Second Circuit made clear that "the district court need not have personal jurisdiction over nonparties to issue a preliminary injunction requiring a party before it to refrain from moving assets during the pendency of the proceedings." Id.
The Court next addressed the issue of whether the district court had the equitable authority under Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308 (1999), to issue a prejudgment asset freeze. In Grupo Mexicano, the Supreme Court held that the district court "had no authority [under Rule 65] to issue a preliminary injunction preventing [defendants] from disposing of their assets pending adjudication of [plaintiffs]' contract claim for money damages. " 527 U.S. at 333 (emphasis added). Parsing Grupo Mexicano, the Second Circuit explained that, while "district courts have no authority to issue a prejudgment asset freeze pursuant to Rule 65 where such relief was not traditionally accorded by courts of equity[, ]... they maintain the equitable power to do so where such relief was traditionally available: where the plaintiff is pursuing a claim for final equitable relief, and the preliminary injunction is ancillary to the final relief." Gucci, 768 F.3d at 131 (emphasis in original, internal quotation marks and citations omitted). Applying this principle to the plaintiffs' complaint alleging trademark infringement, the Second Circuit held that the injunction withstood scrutiny:
Plaintiffs are seeking an accounting of the defendants' profits, in addition to injunctive relief and monetary damages, under the Lanham Act.... [T]he common law action of "account" is one of the earliest examples of a restitutionary action in equity, imposing on a defendant the obligation to disclose and return profits from the use of the plaintiff's property, and founded in the Chancellor's equitable power to compel an accounting of wrongly gained assets.
Id. (emphasis in original, internal citations omitted).
The Second Circuit also addressed BOC's argument that the plaintiffs' accounting claim was "illusory" - specifically, that they were simply including the prayer for an accounting of profits in order to obtain an asset freeze, in the hope of eventually securing a statutory damages ...