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Desly International Corp. v. Otkrytoe Aktsionernoe Obshchestvo "Spartak"

United States District Court, E.D. New York

October 28, 2017




         With overtones of international intrigue, this is but a case about the right to market certain confectionary goods in the United States. In the last act of this litigation drama, trial to the Court was had on a counterclaim against plaintiff Desly International Corporation ("Desly") filed by defendant Otkrytoe Aktsionernoe Obshchestvo "Spartak" ("Spartak"). At an earlier stage in the case (almost a year ago), it had been found that Spartak was the rightful owner of the Spartak marks that were at dispute in the original trademark and contract action brought by Desly against Spartak.[1] See Desly Int'l Corp. v. Otkrytoe Aktsionernoe Obshchestvo "Spartak", 13-CV-2303(ENV)(LB), 2016 WL 4532113 (E.D.N.Y. Aug. 29, 2016) ("Desly F). Damages and a few other lingering counterclaims would be and were the subject of the trial. Id. at *1 n.2.[2]

         The demand for a jury having been dropped the day before, trial to the Court began on June 26, 2017 and concluded the following day. The spotlight was on Spartak's claim that it was entitled to the profits earned by. Desly resulting from Desly's sale of certain gingerbread and dried bread products (the "accused products"), which were sold in packaging bearing Spartak's trademark labeled packaging, though not manufactured by Spartak. Post-trial briefs were submitted by both sides. See Dkt. No. 186 ("Desly Br."); Dkt. No. 186-1; Dkt. No. 188 ("Spartak Br."); Dkt. No. 189 ("Desly Reply"); Dkt. No. 190; Dkt. No. 191 ("Spartak Reply"). Having considered the testimony, the exhibits received in evidence, and the arguments of counsel, this Memorandum Decision and Order, pursuant to Federal Rule of Civil Procedure 52, constitutes the Court's findings of fact and conclusions of law.

         Findings of Fact

         Since the late 1920s, Spartak, a Belarusian joint venture open-type joint stock company, has specialized in the production, manufacture, distribution, and sale of chocolate and confectionary goods, according to Marat Novikov ("Novikov"). Trial Transcript ("Tr.") at 20. Novikov, a counterclaim defendant, [3] the Court finds, provided entirely credible testimony about the relationships among the parties and their historical context. He was born in Belarus in 1949 and spent approximately 15 years in the Belarussian supermarket industry. Id. at 69-70. After leaving Belarus for the United States in 1989, around the time of the collapse of the Soviet Union-which would spell great change for former Soviet satellite states like Belarus-Novikov returned to his native country a few years later to pursue a business venture relating to the importation of food products into Belarus. Id. at 70-71. This entrepreneurship eventually led to Novikov's involvement with Spartak. In fact, Novikov would be asked to sit on Spartak's supervisory board. As a result, he would meet and work with the then general director of Spartak, Alesia Samsonava. Id. at 73, 79, 107-09; see also Dkt. No. 32 ¶ 28. All in all, Novikov credibly testified that he spent a significant amount of time in Belarus at the Spartak factory and became intimately familiar with Spartak's machinery, manufacturing processes, and production line. Tr. at 75-76, 80. With the assistance of his son and daughter, Novikov set out to build on his relationship with Spartak, to expand Spartak's business through the creation of a distribution network in his adopted American homeland for imported Spartak confectionary and baked good products. That new distribution company would be located in Brooklyn. The new company, of course, was Desly. Id. at 20, 32; DTX 63.[4] Desly identifies itself as a wholesaler for confectionary goods in targeting a Russian-speaking market. Tr. at 28-29.

         On September 1, 2001, Spartak entered into a non-exclusive supply agreement with Desly, under which Desly was authorized and did begin distributing Spartak's confectionary goods in the United States. On July 21, 2006, Spartak and Desly extended that business relationship, entering into a 25-year exclusive distributorship agreement (the "exclusive agreement"). See Exclusive Agreement, DTX 7; Tr. at 111. The latter agreement granted Desly the exclusive American distribution right to confectionary goods manufactured by Spartak. Exclusive Agreement § 2; Tr. at 32. In 2012, however, Spartak advised Desly of its discovery that Desly had registered the Spartak marks with the United States Patent and Trademark Office ("USPTO"), three years prior, in breach of the exclusive agreement. Exclusive Agreement §§ 2.4, 8.2; Desly I at *2. Beyond that breach, there is no dispute that both sides acted in general conformity with the contract. Desly, for instance, made payments to Spartak for the Spartak goods that it purchased from Spartak and sold in the United States. Tr. at 34-37, 42; DTX42-47.

         Desly's business, though, was not limited to the sale of Spartak-manufactured goods. Beginning in or around 2011, Desly also purchased certain bread-based products (the accused products) from the Lithuanian company, Javeine, and the Belarussian company, Minskhlebprom. Tr. at 25, 27, 38, 85. The accused products were packaged and then shipped from Eastern Europe to Desly in Brooklyn, occasionally in the same containers as Spartak products. Id. at 38-39. Spartak did not make or sell these or any similar type products, but, nevertheless, Desly sold these goods with Spartak marks and packaging.[5] And, it sold the accused products only in the United States. Id.

         By the time of Spartak's complaint about it, Desly's side business should not have come as a surprise to Spartak. As a member of Spartak's supervisory board, in or around 2011, Marat Novikov brought the accused products, actually bearing the Spartak label, to a board meeting and presented them to the other Spartak board members. Id. at 83-84. In fact, the general director of Spartak from 2008 to 2012, Alesia Samsonava, testified at trial that she knew that Desly was distributing such non-Spartak products in the United States under Spartak's mark. Id. at 118, 120. Put differently, despite the open and unhidden nature of Desly's side business, until it claimed breach, no representative of Spartak ever advised anyone at Desly not to sell the accused products or complained to Desly about such sale. Id. at 118. At the same time, however, Desly acknowledged that it did not receive explicit permission from Spartak to sell the accused products with Spartak's marks on the packaging. Id. at 117; Dkt. No. 187-3 at 164-65.

         There is, moreover, certainly no genuine dispute about Desly using the Spartak mark on the packaging of its non-Spartak produced goods. The packaging, reflected in the trial photo exhibits below, confirm that, during the relevant time, the gingerbread cookies, sold as part of the Desly's side business, displayed "Desly International Corp." in large blue and gold font and, then, "Spartak" in white and gold lettering on the clear wrapping:

See PTX 10 at DES000387-389; Dkt. No. 81-36; Tr. at 21-22, 25, 41. Similarly, photos of the dried bagel products show the words "Desly International Corp." in blue and gold lettering on the front label, with the word "Spartak" in gold and white lettering on the clear, cellophane-like wrapping. PTX 10 at DES000391-92.

         Simply, there is no quarrel on this trial record that the Desly name and logo, in addition to Spartak's name, appeared on all products that Desly purchased from Javeine and Minskhlebpfom. Tr. at 41. The accused products, since they were openly sold, appeared in a showcase in Desly's warehouse, where Spartak employees visited from time to time. Id. at 39, 53, 65. Desly also advertised the accused products on a website that it operated at PTX 155 (depicting sale of "Sushki" - dried bread products).[6]

         Desly stopped selling the gingerbread cookies and dried bagel products in packaging that bore the Spartak name in 2014. Tr. at 27, 48. Its records reflect that it profited in the amount of $572, 578.81 from the sale of these accused products, which covered a period from 2011 to the sales halt in 2014, see PTX 209, 210, 211. Spartak now seeks to disgorge Desly of these profits. See Spartak Br. at 10, 12. During this same period, Desly, of course, continued to sell the Spartak products it had acquired from Spartak under the exclusive agreement. Though it remains hotly contested by Spartak, as the Court previously determined, Desly had a plain right to distribute these products for up to two years after Spartak terminated that agreement, see Exclusive Agreement § 11.3, which it did terminate because Desly had unlawfully appropriated the Spartak mark when it registered it with USPTO. See Desly I at *3.

         The trial provided ample factual context about a good deal gone sour. Novikov was removed from the Spartak supervisory board in 2012, at some point after Belarusian President Alexander Lukashenko essentially seized control of the Spartak factory. Tr. at 82-83, 110; see also Desly I at *4. Samsonova was also replaced that same year. Tr. at 110. Indeed, there is little, if anything, in the record to rebut the torrent of testimony from Novikov and Samsonova that, in sum and substance, Lukashenko had "Putinized" Spartak, purged its corporate structure, turned it over to an oligarch and took steps to disrupt its existing business relationships. See Tr. at 110. With that handwriting on the wall, it made sense that Desly had to go. Notwithstanding the hand in glove relationship that Desly and Spartak had had in prior years, the new broom would sweep clean. Desly's misconduct in registering on its own the Spartak mark in the United States provided the new Spartak team with the contractual right to terminate the exclusive agreement. The point of trial, essentially, was to determine what damages, if any, were owed to Spartak on its counterclaim as a result of Desly's misconduct under the Lanham Act and/or under the contract.

         Conclusions of Law

         For all practical purposes, litigation of Spartak's counterclaim was bifurcated, with competing claims for the right to the Spartak mark in the United States resolved at summary judgment. See Desly I. More specifically, Spartak prevailed on its false designation of origin claim in contravention of § 43(a) of the Lanham Act. See 15 U.S.C. § 1125(a). Success on this sort of claim entitles a plaintiff, "subject to the principles of equity, to recover (1) defendant's profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action." 15 U.S.C. § 1117(a). Spartak, as a result, seeks an award based upon the profits generated by Desly's § 43(a) violation. See Spartak Br. at 8; Conf. Tr. at 49.

         Yet, § 43(a) is a mere gateway to determining the propriety of our award of damages. For example, § 1117(a) provides helpful guidance regarding the burdens of proof with respect to any assessment of relevant profits. Not surprisingly, it is the plaintiffs burden to prove a defendant's offending sales. The burden then shifts to that defendant to prove deductible costs and expenses included in the course of making the offending sales. Id. In the event of a finding that recovery based upon profits is "either inadequate or excessive, " the trial court also has discretion to enter judgment in an amount found to be just, according to the particular circumstances of the case. 15 U.S.C. § 1117(a). There is a further caution, too, that recovery for a violation of the Lanham Act "shall constitute compensation and not a penalty." 15 U.S.C. § 1117(a).

         I. An ...

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