Opinion
Civil No. 02-2733(CCC).
July 30, 2004
Jesús E. Cuza-Abdala, Greenberg Traurig, P.A., Fort Lauderdale, Florida, Ina M. Berlingeri-Vincenty, Goldman, Antonneti and Córdova, San Juan, Puerto Rico, Attorney for plaintiff.
Raymond Cabrera, Luis G. Salas-González, Cabrera Rico, San Juan, Puerto Rico, Attorney for defendants.
REPORT AND RECOMMENDATION
Perfumania, Inc., Perfulandia, Inc. and Zahatiel Zeballos, stipulated to the entry of a permanent injunction following an evidentiary hearing held in February 2003 ( Docket No. 22). Perfumania, Inc. now moves the Court for provisional remedies to secure the effectiveness of judgment ( Docket No. 42). Defendants oppose said request ( Docket No. 50). Zahatiel Zeballos also seeks prejudgment attachment, request that remains unopposed by plaintiff ( Docket Nos. 49, 51). The motions were referred to the undersigned for Report and Recommendation. An evidentiary hearing was held at the parties' requests on January 21 and 22, 2004 ( Docket Nos. 93, 94).
After considering the facts presented and the law regarding provisional remedies, it is RECOMMENDED that the Perfumania, Inc.'s motion be GRANTED ( Docket No. 42) and that Zahatiel Zeballos' motion be DENIED ( Docket No. 49).
I. Procedural Background
A complaint was filed on November 26, 2002, by Perfumania, Inc. (hereafter "Perfumania") against defendants Perfulandia, Inc., (hereafter "Perfulandia"), Zahatiel Zeballos (hereafter "Zeballos"), Jane Doe, wife of Zeballos and the Conjugal Partnership between them, Richard Roe and ABC Corporation ( Docket No. 1). The original complaint alleged that the use of the mark Perfulandia by defendants infringed and diluted plaintiff's registered service mark Perfumania, Inc., in violation of federal trademark laws, 15 U.S.C. § 1114(1), 1125(c), 1125(d), 1117 (2002), and constituted unfair competition in violation of Section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a) and the laws of Puerto Rico. The complaint also included a breach of contract claim against defendant Zeballos and requested damages, costs and attorneys' fees.
Perfumania sought injunctive relief and following an evidentiary hearing held in February 2003 the parties stipulated to the issuance of a permanent injunction. Upon concluding the hearing the Court issued an Order for injunctive relief on June 27, 2003, and at that time advised the parties that an Opinion and Order would be issued setting forth what was stipulated and established at the hearing ( Docket No. 22). The Opinion and Order was issued on August 14, 2003 ( Docket Nol. 36). In the meantime, ignoring the facts it had stipulated to, Perfulandia filed for protection through the bankruptcy courts by means of a petition for bankruptcy which was followed by entry of an automatic stay ( Docket No. 30). On October 10, 2003, upon being placed on notice of the procedural background of this case, the Bankruptcy Court modified the automatic stay as to Perfulandia so that the case at bar could proceed until a final and unappealable judgment is entered ( Docket No. 78, Ex. A). However, the execution of any judgment against Perfulandia remains stayed. Id. The Bankruptcy Court also found that the Opinion and Order issued on August 14, 2003, which in essence set forth in detail the Order previously issued in February 2003, was not entered in violation of the automatic stay. Id.
Perfumania filed an amended complaint on September 30, 2003, which added as defendants Rafael Almonte (hereafter "Almonte"), Jane Roe Almonte, and the Conjugal Partnership between them ( Docket No. 54). Unlike the original complaint, the amended complaint does not contain claims of trademark dilution, cyberpiracy and domain name dilution, but it added claims against all the defendants alleging unfair competition under Puerto Rico law. Additionally, a claim was brought against Almonte for tortuous inference of a business contract. Almonte and Zeballos then moved to dismiss the claims brought against them in the amended complaint on the basis that Perfumania, Inc. is not the real party in interest and, as a result, it lacks standing to file its complaint ( Docket Nos. 55, 56). A Report and Recommendation was issued recommending that the motions be denied, but to date the Report and Recommendation remains pending consideration of the Court ( Docket No. 85).
II. Prejudgment Attachment
Perfumania moves for a prejudgment attachment to secure the satisfaction of a judgment that it contends will ultimately be entered against Zeballos, Almonte and Perfulandia. Perfumania advises the Court that pursuant to the automatic stay by the Bankruptcy Court, at this time it is not seeking the attachment of Perfulandia's assets. As to defendants Zeballos and/or Almonte, Perfumania requests the attachment and garnishment of properties, real and/or personal, and other assets or credits in an amount of $800,000.
The defendants also argue that Perfulandia, Inc. property should not be the subject of any attachment. During the evidentiary hearing, Almonte testified that stores were no longer operating under the name Perfulandia, Inc. but that the bankruptcy court had not yet made a liquidation determination.
The Federal Rules of Civil Procedure guides the Court in this regard. Rule 64 of the Federal Rules of Civil Procedure provides that:
At the commencement of and during the course of an action, all remedies providing for seizure of person or property for the purpose of securing satisfaction of the judgment ultimately to be entered in the action are available under the circumstances and in the manner provided by the law of the state in which the district court is held, existing at the time the remedy is sought, subject to the following qualifications: (1) any existing statute of the United States governs to the extent to which it is applicable; (2) the action in which any of the foregoing remedies is used shall be commenced and prosecuted or, if removed from a state court, shall be prosecuted after removal, pursuant to these rules. The remedies thus available include arrest, attachment, garnishment, replevin, sequestration, and other corresponding or equivalent remedies, however designated and regardless of whether by state procedure the remedy is ancillary to an action or must be obtained by an independent action.
The purpose of a prejudgment attachment is to allow a plaintiff to secure the judgment that could be entered in due time. García v. The Commonwealth Ins. Co., 18 P.R. Offic. Trans. 454 (1987). In order to secure a prejudgment attachment of defendants' properties, Perfumania must demonstrate its probability to prevail on the merits. Rivera-Rodríguez Co. v. Stowell-Taylor, 133 D.P.R. 881, 897 (1993). The applicable Puerto Rico law for provisional remedies is found at Rule 56, and provides in pertinent part as follows:
56.1. General principles. In every action, before or after entering judgment, and on motion of claimant, the court may issue any provisional order it may deem necessary to secure satisfaction of the judgment. The court may order the attachment, garnishment, the prohibition to alienate, claim and delivery of personal property, receivership, an order to do or to desist from doing any specific act, or it may order any other measure it deems necessary, according to the circumstances of the case. In every case in which a provisional remedy is sought, the court shall consider the interests of all the parties and shall adjudicate as substantial justice may require.
Rule 56.3 Bond
A provisional remedy may be granted without the filing of a bond in any of the following cases:
(1) If it appears from public or private documents, as defined by law, signed before a person authorized to administer oaths, that the obligation may be legally enforced; or
(2) If the party is indigent and expressly exempted by law from the payment of filing fees, and in the court's opinion the complaint adduces facts sufficient to establish a cause of action which may evidently succeed, and there are reasonable grounds to believe, after a hearing to that effect, that if such provisional remedy is not granted the resulting judgment would be academic since there would be no property over which to execute it; or
Whenever the court grants the provisional remedy without the filing of a bond in accordance with the provisions of this rule, it may exclude certain property from its order.
In all other cases, the court shall require the filing of a bond sufficient to secure all the damages arising from the remedy. However, a defendant or respondent may retain the possession of the personal property attached by plaintiff or claimant by filing a bond for the amount the court deems sufficient to secure the value of said property. If the defendant furnishes a bond for the amount attached, the attachment will be left without effect. 32 P.R. Laws Ann. App. III, R. 56.3.
If the requirements of Rule 56.3 have been met, the court shall issue, on motion ex parte of a claimant, an order of attachment or of prohibition to alienate. The attachment and prohibition to alienate real property shall be effected by recording them with the Registry of Property and notifying the defendant. In case of personal property, the order shall be carried out by depositing the personal property in question in court or with the person designated by it under the claimant's responsibility. On petition of any of the parties the court may order the auction and sale of fungible goods whose attachment or prohibition to alienate has been issued and the proceeds thereof shall be deposited in the manner provided by the court.
The party requesting the designation of a depository of the property to be attached shall furnish his address and telephone number, if any, of his residence or of his place of employment or business. The designated depository shall immediately notify the court, under the title of the case, any change of address or telephone number, or of place or conditions of the property attached. 32 P.R. Laws Ann. App. III, R. 56.4.
No order shall be made under Rule 56 to do or to desist from doing any specific act without serving notice upon the adverse party, unless from specific facts supported by affidavit it clearly appears that the petitioner will sustain irreparable injury, damage or loss before notice and hearing on the petition. Such order ex parte shall be effective upon service of notice thereof. Any party affected thereby may at any time file a motion to modify or to set aside the order and said motion shall be heard at the earliest possible date, but not later than five (5) days after the filing thereof and shall have preference over all other matters. A two-day notice upon the party obtaining the order, or the shortest notice the court may prescribe, shall be sufficient for the purposes of the hearing. 32 P.R. Laws Ann. App. III, R. 56.5.
(a) No receiver shall be appointed unless it is established that no other provisional remedy would be effective to secure satisfaction of the judgment. Unless otherwise ordered by the court, a receiver shall proceed in accordance with the rules for the judicial administration of estates.
(b) No party, or its attorney, or person interested in the action shall be appointed receiver therein, without the written consent of the affected parties filed with the court.
(c) The court may require that the receiver furnishes a bond to secure strict compliance with his duties, and, in that case, the receiver shall not take office until the bond has been approved. 32 P.R. Laws Ann. App. III, R. 56.5.
32 P.R. Laws Ann. App. III, R. 56.1.
56.2. Notice. No provisional remedy shall be granted, modified, set aside, nor shall any action be taken thereon without notice upon the adverse party and a hearing, except as provided in Rules 56.4 and 56.5.
32 P.R. Laws Ann. App. III, R. 56.2.
In the case at bar, pursuant to Rule 56.2, the parties were provided with proper notice prior to the hearing held on January 21 and 22, 2004. See also HMG Property Investors v. Parque Indus. Río Canas, 847 F.2d 908, 915 (1st Cir. 1988) (Rule 56.2 "requires notice and a fair chance to marshal supporting facts and theories — nothing more"). It is within the Court's discretion to determine whether to issue a provisional order to secure satisfaction of a judgment that could be entered. Rivera-Rodríguez Co. v. Stowell-Taylor, 133 D.P.R. 881, 897 (1993); Ramos de Szendrey v. Colón-Figueroa, 2001 JTS 33, 2001 WL 242595 at *4 (March 6, 2001). The undersigned now turns to the testimony elicited at the prejudgment attachment hearing.
A. Facts Elicited at Evidentiary Hearing
Mr. Donovan Chin (hereafter "Chin"), Mr. Zahatiel Zeballos and Mr. Rafael Almonte testified at the prejudgment attachment hearing. Chin is the Chief Financial Officer for Perfumania; Zeballos is the former District Manager of Perfumania in Puerto Rico and was also hired by co-defendant Almonte to manage all of his Perfulandia stores. Almonte is the President and sole shareholder of Perfulandia. Chin and Almonte also testified at the previous hearing on injunctive relief. During the prejudgment attachment hearing both Zeballos and Almonte claimed difficulty in remembering issues and matters as to which they had previously attested. Also, both were evasive in their answers. Indeed, Almonte was only able to answer certain questions after his testimony was impeached/and or his memory was refreshed by means of the transcript of his testimony at the hearing on injunctive relief. Also of note is that on several occasions during the hearing the translator and even occasionally defendant's counsel even confused the names Perfumania and Perfulandia. The witnesses' testimony is summarized as follows:
This, of course, goes to stress the significant similarity between the names Perfumania and Perfulandia, fact which the defendants have tried to underscore.
Donovan Chin: Chin is on the Board of Directors for Perfumania, is an Executive Officer of Perfumania and holds the position of the Chief Financial Officer of Perfumania. As Chief Financial Officer his duties include financial reporting, budgeting, working with the Securities and Exchange Commission, relating with auditors, and forecasting and do sales projections in conjunction with the operations department.
Also, one of Chin's general responsibilities is to protect the goodwill of Perfumania, Inc. as well as its trademark. Chin testified that he was not aware of any action taken at Puerto Rico State Department with regard to the name Perfulandia or any attempt to have such name registered. He learned that Perfulandia was a registered corporation while preparing for the injunctive relief evidentiary hearing. Prior to that time Chin was unaware of said fact.
Chin testified that Perfumania heard from its customers in Puerto Rico and learned they were confused as to the names Perfumania and Perfulandia. He personally had received no direct statements from customers saying they were actually confused, but learned of the confusion generated by the similarity of the names and the Perfulandia stores from sales associates and some Regional Managers for the Perfumania stores. Chin testified that Perfumania did not give instructions to its employees to exaggerate allegations of confusion nor is he aware that any manager ever gave such instructions to Perfumania personnel. He further testified that, corroborating the customers' assertions, internal memoranda had been generated by district managers, supervisors and some store associates, depicting and describing different episodes in which customers understood or believed Perfulandia was either the same or a subsidiary of Perfumania.
Chin testified that the use of the name Perfulandia by defendants disrupted the Perfumania business. For example, Chin described that Perfumania sales were negatively affected once a Perfulandia store opened near a Perfumania store. This event repeated itself, inasmuch as Perfulandia placed its stores within the same shopping centers and at walking distance from the Perfumania stores. Also, Perfumania personnel and human resources department spent a considerable amount of time providing explanations to customers and advising its personnel on how to eliminate or deal with the confusion generated by the names of the stores. This negative impact also included time spent in preparing the case and changing marketing strategy to correct and modify clients' confusion and perception. Also, legal fees and costs were incurred.
With regard to the sales that were effected, Chin testified he and his staff analyzed the sales trend of each store at the location prior to and after the opening of a Perfulandia store in the same mall as a Perfumania store. The four stores affected were those located at Plaza Carolina, Plaza Las Américas, Plaza del Sol and Centro Gran Caribe. In each case the sales trend decreased after the opening of a Perfulandia store. Chin testified that the sales were not forecast, but that the trend is a pattern of sales based on historical results. Charts admitted into evidence displayed each store's sales performance (Pl.s' Exs. 1, 2, 3, 4). The charts are reflective of the scenario generated by having a Perfulandia and a Perfumania store in the same mall. Chin did not gather data or prepare charts in areas where only Perfumania was located in a mall and, as a result, there are no charts depicting such sales trend.
Upon being questioned in regards to other factors that may have prompted a decrease in sales by Perfumania, Chin testified that following the September 11th World Trade Center tragedy, some Perfumania stores, such as stores in airports, were affected. Thereafter, a complete sales analysis was conducted to determine if there was a significant decrease in sales and the analysis revealed that a Pittsburgh store, no other, had experienced such a decrease.
The analysis of the four Puerto Rico Perfumania stores was prepared by Chin's accounting staff while under his supervision. The statistical data for the reports submitted by Perfumania was obtained from Perfumania's internal financial records. Chin testified that Perfumania is audited every year by an outside accounting firm and that he and his staff used the same statistical data provided to and used by the accounting company. He testified that the figures or numbers regarding sales volume he considered were very reliable and that he had no doubts regarding the accuracy of the data used in preparing the charts submitted at the hearing as to each of the four Perfumania stores (Pl.'s Exs. 1, 2, 3, 4).
Chin testified that the sales trend of the Perfumania store at Centro Grand Caribe prior to the opening of the Perfulandia store reflected a 22 percent increase. After the Perfulandia store opened, the sales trend decreased to 12 percent. This resulted in a net decrease in trend of 10 percent (Pl.'s Ex. 1). The other stores also had a net decrease in trend after the opening of Perfulandia stores as follows: Plaza Las Americas, 12 %; Plaza del Sol, 3%; and Plaza Carolina 22 % (Pl.'s Exs. 2, 3, 4).
Perfumania also prepared an analysis of sales loss due to the decline in sales at locations where Perfulandia opened stores in the same mall as Perfumania (Pl.'s Ex. 5). This analysis was also prepared by Chin's staff. The information used in the analysis was retrieved from accounting records, and similarly, Chin testified that the underlying data was very reliable. The evidence submitted to the Court pertains to Perfumania's market in Puerto Rico. The amount of loss of sales totaled $403,824 when assuming that loss in trends are accounted from the opening date of Perfulandia stores. From this number Perfumania determined its economic damages or total gross profit by deducting the cost of merchandise as well as freight related cost to ship goods. The total gross profit or economic damage amount is $174,048 (Pl.`s Ex. 5).
Chin explained that the analysis of lost sales showed a decrease in trend for each of the four stores; that is, what Perfumania expected to sell but did not. He further testified that each store listed was making a profit that year, but he was unaware if every store was making more than in the previous year.
Chin strongly emphasized throughout his testimony that the opening of the Perfulandia stores negatively impacted the sales trend at each of the Perfumania stores. He could not point to any other factor that impacted sales other than the opening of the Perfulandia stores. Chin, as Chief Financial Officer, indicated that the methodology used in preparing the analysis and final reports regarding the net decrease on sales and economic damages he considered extremely reliable, inasmuch as he knew of no other way to determine or calculate said damages. Also, he testified that he believed this was the most accurate method to determine economic loss.
The record contains evidence indicating that the confusion caused by the Perfulandia stores had a disruptive effect on Perfumania's operation and impacted the use of human resources. As an example, it was highlighted that since the initial stages, once Perfulandia's identity and doings were known, the heads of various departments and personnel within these departments at Perfumania were involved, including Chin, the President, District Manager, the Real Estate Manager in Florida and personnel at the operations department. The President of Perfumania was involved as he directs marketing and it was necessary to modify and restructure promotional and advertising campaigns in order to address the issue of confusion. Chin estimated that at least 15 employees were involved, in what resulted a time consuming process.
For example, Chin has been required to travel to Puerto Rico in five different occasions for such matters as reviewing documents and meeting with attorneys and staff in Puerto Rico.
Chin also provided testimony regarding the marketing efforts of Perfumania in response to the opening of the Perfulandia stores and the confusion it caused among customers. He specifically alluded to the time of the Christmas 2002 advertising campaign when most of the Perfulandia stores had opened. As a result, the Perfumania ads included additional language to explain to consumers the difference between Perfulandia and Perfumania. Approximately $122,000 to $123,000 was spent on television and radio advertising. Chin had no way to allocate how much of that cost was incurred because of the confusion generated by the use of the name Perfulandia in Almonte's stores. He explained that each ad campaign included language similar to "beware of imitators" and that this was designed to alert consumers to distinguish Perfulandia from Perfumania. To Chin's knowledge the campaign ads in the United States have not used the "beware of imitators" language. He did not know how much it cost to make this change, noting that the change was made at a time when the ad campaign was already in progress. However, the entire rephrasing of radio ads and restructuring of ads for television was necessary. He also testified that Perfumania generally does not use television or radio ads in the United States, only in Puerto Rico.
Chin next provided testimony regarding travel expenses incurred by Perfumania and that directly relate to litigation of the case at bar (Pl.'s Ex. 6). The amount of expenses incurred through November 22, 2003, totaled $5,678.20. Chin testified that the data and total expenses reflected at Exhibit 6 is correct, inasmuch as he had personally reviewed the documents and receipts supporting the depicted data. Chin also gave testimony regarding his review of the data reflecting the expenses for attorneys' fees incurred as a result of the Perfumania/Perfulandia litigation. The statement of accounts for litigation is current as of December 2002. The total amount of attorneys' fees and expenses totaled $163,048.47 (Pl.'s Ex. 7). Chin also testified that as Chief Financial Officer he is responsible for the payment of said fees and that most of the fees have been paid, with a small balancing owing.
Plaintiff's Exhibit 6 was prepared by Chin's assistant and under his supervision.
Mr. Chin testified that all amounts paid in attorney's fees were paid based on invoices submitted by the law firm detailing the nature or type of legal work performed. This underlying data which Chin personally reviewed, although not submitted in evidence, remains available within Perfumania's records.
Chin testified that since the initial stages of this case, as it openly expressed in February 2003, Perfumania has offered to and tried to settle the case so that it could be free from legal fees, provided it also received a reasonable amount to compensate for damages caused. Chin testified that Perfumania has made efforts to settle the case, and that the court has encouraged settlement, but that defendants have not responded to settlement efforts. Along this theory and in support of this factual contention, Perfumania asked the court to take judicial notice of the following orders: February 26, 2003 "parties will try to settle the remaining aspects of litigation" ( Docket No. 18); June 27, 2003 "issued in accordance with the parties' stipulation and is intended to have the parties meet and discuss viable settlement alternatives . . ." ( Docket No. 22); August 13, 2003, "At this time the Court had already referred the case for an assessment of damages and this Magistrate-Judge being privy to the parties' previous conversation regarding settlement, proceeded to have the case set for settlement conference" ( Docket No. 34); January 13, 2004, "Attorney Cuza states that his client has been willing to negotiate a settlement, however the defendant has been unwilling to do so" ( Docket No. 83).
Being privy to the pleadings thus far filed, the parties' contentions and attitudes throughout the litigation period, this Magistrate-Judge attaches credibility to plaintiff's assertions. At the same time, it is noted that defendants withdrew from its original stipulations which were adopted in the February 2003 and June 2003 Opinion and Orders and have resorted to all possible technical and legal approaches, even when not supported by the facts, in order to delay final disposition of this case. By so doing, defendants have deliberately compelled plaintiff to litigate matters previously stipulated to, discovery, motions for sanctions and several other unfounded legal contentions such as the one regarding "interested party" and legal standing.
Chin also provided testimony on the organizational structure of Perfumania and its subsidiaries. Perfumania, Inc. has three wholly owned subsidiaries: Perfumania Puerto Rico, Inc., Ten Kesef II, and Magnifique Parfumes and Cosmetics (Pl.'s Ex. 8). Chin is the Chief Financial officer of Perfumania, Inc. and of each of the three subsidiaries. He is also a member of the Board of Directors. Perfumania Puerto Rico, Inc. and Magnifique Parfumes and Cosmetics both operate in Puerto Rico. Perfumania Puerto Rico, Inc. has retail stores while Magnifique Parfumes and Cosmetics has employees in Puerto Rico.
Inasmuch as defendants have challenged Perfumania's capacity to bring suit against defendants, Chin explained that a one dollar loss for Perfumania Puerto Rico would also be a one dollar loss to Perfumania, Inc. since Perfumania Puerto Rico is wholly owned. The same effect occurs in the reverse. If Perfumania Puerto Rico makes one dollar, then Perfumania, Inc. also gains one dollar. Plaintiff also submitted into evidence the Ratification and/or Assignment of Perfumania, Inc., Perfumania Puerto Rico, Inc. and Magnifique Parfumes and Cosmetics, Inc., wherein both entities take full responsibility for actions undertaken in the case at bar (Pl.'s Ex. 9). Chin's signature as a Board member appears within said Ratification Agreement.
Chin has no personal knowledge of the Perfulandia sales volume in Puerto Rico during the period of time they operated as Perfulandia. Said information, though requested in discovery, has not been provided. Perfulandia provided to Perfumania a single document regarding Perfulandia sales from June 2002 to March 2003. The same reflects total sales of $975,011.36. Chin did not know if the amount was accurate and could not say if it included cash sales. The defendants did not provide Perfumania with any documentation to confirm or support the accuracy of the data within said document (Pl.'s Ex. 10).
Zahatiel Zeballos. Zeballos was terminated by Perfumania on February 19, 2002. He began working for the company in 1986 and in 1995 became its Regional Director. As Regional Director he managed the operations of Perfumania in Puerto Rico, developed the business, recruited personnel, checked merchandise prices, set up stores and scouted for store sites and rental fees. He also checked prices in large department stores and compared them with the Perfumania prices to be certain the prices were correct. Zeballos, however, did not deal with suppliers. Perfumania's business at the time consisted of every day walk-in clients as well as wholesale clients.
Following his employment with Perfumania, Zeballos briefly worked at his in-law's store. The store was known as Party Land and was located in Plaza Carolina. Party Land sells party supplies. He was next employed by Perfulandia, Inc. and was hired by Almonte, the President of the Perfulandia, Inc. corporation. Unlike Perfumania, Perfulandia did not sell merchandise wholesale. Perfulandia sells only perfumes.
There is evidence on record that demonstrates that Zeballos and Almonte had a 20-year relationship, they knew each other well and, although unclear from Zeballos's testimony exactly when Almonte became aware of Zeballos' termination of employment with Perfumania, this fact was known or made known to Almonte at the time they both reunited. Initially Zeballos provided a time frame ranging from April, May, or June 2002 as to possible time when this encounter took place. Afterwards, Zeballo's testimony changed and indicated that by either May, September or October 2002 he had spoken to Almonte about the Perfulandia project. He did not recall if by May he was already assisting Almonte in the set up of the new stores. After having testified at the injunctive relief hearing, now at hindsight Zeballos testified and attempts to clarify that when Almonte asked him to help with Perfulandia, Almonte was asking for help in his personal capacity not help for Perfulandia, Inc. This distinction was not initially drawn at the hearing on injunctive relief.
Presumably, Zeballos and Almonte's conversations took place by April or May 2002, inasmuch as of early June 2002 plans were made to form the Perfulandia corporation. The Articles of Incorporation for Perfulandia, Inc. were executed on June 12, 2002, and the corporation was registered with the Puerto Rico Department of State on the same date (Pl.'s Ex. 12). Zeballos could not recall if his name appeared in said Articles of Incorporation. Despite this memory lapse, it is undisputed that Zeballos is listed in the Certificate of Incorporation as the Registered agent for Perfulandia, Inc. ( see Article Second) as well as a Director for Perfulandia, Inc. ( see Article Ninth). Additionally, the Fifth Article, while erased in part, and the Court not having the benefit of a certified copy as requested, appears to also list Zeballos as an incorporator ( Docket No. 95). Almonte is also listed as an incorporator as well as a director. Id. Zeballos testified that the sole shareholder of Perfulandia is Almonte and that Almonte is the President of Perfulandia.
Inasmuch as defendants never complied with the instructions to produce a certified copy of the Articles, doubts continue to exist as to why what appears to be Zeballos' name appears almost totally deleted (Pl's. Ex. 12).
When confronted with the fact that his name appeared as the registered agent of Perfulandia, Inc. Zeballos explained that the resident agent of a corporation had nothing to do with the operations of a corporation; that anyone can act as a resident agent. While admitting that Almonte was the sole shareholder of Perfulandia, Zeballos testified he did not remember or recall who asked him to be or act as the resident agent of Perfulandia nor did he remember if Almonte asked him to be the registered agent of Perfulandia. When asked if he was named as an incorporator within the original document, Zeballos replied, "not to my understanding."
On the date of his discharge by Perfumania on February 19, 2002, Zeballos had received a termination letter offering him an amount of money and giving him one month to respond to the severance offer. Thereafter Zeballos and Perfumania were involved in negotiations for almost five months, and the negotiations concluded on June 27, 2002, with the signing of an Agreement and General Release (hereafter "the Agreement") entered into between the parties (Pl.'s Ex. 11). Zeballos engaged in these negotiations in order to receive a better severance package, however, he testified and claimed that it was not until Perfumania had financially strangled him that the Agreement was signed.
Zeballos did not recall being able to change items, phrases or terms within the Agreement and General Release and expressed he considered that he either signed the proposed agreement as presented to him or he would not get a severance payment (Pl.'s Ex. 11). However, in cross-examination Zeballos came to acknowledge that during the negotiation process some portions of the contract were changed and modified. He recalled that the "no competition" term was one of the terms so modified and was finally set at six months. Based on his testimony, it was ascertained that during this negotiation stage, Zeballos was assisted by counsel with whom he stated to be satisfied.
The Agreement provided that Zeballos was to receive payment of $28,000 in exchange for his promise that he would not compete with Perfumania for a period of six months. However, evidence on record shows that prior to the date in which Zeballos signed the agreement he had already been approached by Almonte and was involved in the opening of the first Perfulandia store which was located in Plaza Carolina. The Agreement contained a no-compete clause and provided that the term for no competition would be six months, term that was to commence "on the effective date of his termination" (i.e., presumably from February 27 to August 27, 2002). Zeballos did not advise Perfumania during the five-month negotiation process of what he was doing for Perfulandia nor did he tell Perfumania of the projected opening of the Perfulandia store. Zeballos explained his conduct by asserting he considered that he was not doing anything directly for Perfulandia, was not affecting Perfumania and was not earning a salary. Zeballos further explained that he considers Almonte a long time friend and that since Almonte had asked for personal help, he decided to help him (Almonte) in the same way he helped other people who are his friends. However, Zeballos recognized Almonte as a businessman with experience that would not need help or his assistance to do business.
Evidence on record shows that Zeballos signed a lease agreement, dated June 13, 2002, for the first Perfulandia store and it opened in Plaza Carolina one day prior to Father's Day in 2002. Father's Day 2002 occurred two weeks prior to June 27, 2002, the date in which Zeballos signed an Agreement and General Release with Perfumania which constituted part of his severance package (Pl.'s Ex. 11).
Zeballos claims that the Agreement and General Release was challenged by his previous attorney as not being a legal contract as it was a unilateral contract contrary to the laws of Puerto Rico. However, aside from his allegations, there is not evidence supporting his contention. Zeballos further testified that he did not remember promising that he would not solicit business for a period of one year but that if the Agreement states that he would not solicit Perfumania clients, then that is correct. More so, when asked if he had agreed not to solicit clients directly or indirectly, Zeballos replied that it could not be answered with a yes or no because he would have to be told which clients of Perfumania he was not supposed to solicit. When asked if he was personally involved in Perfulandia operations at the time he signed the Agreement and General Release, Zeballos responded that if looking over and checking personnel or negotiating rental contracts meant he was involved then he would have to admit he was involved.
The Agreement provides for a "non-solicitation" period of twelve months. The term was to begin on "the date of signing" the Agreement (Pl.'s Ex. 11).
Zeballos testified that he was not paid anything by Perfulandia until September 2002. At that time Almonte began paying the medical insurance for Zeballos and his family in the amount of $297 per month and Zeballos's car payment in the amount of $408. Nonetheless, Zeballos is reluctant to admit this constituted a salary or compensation for his work. At some point in time Zeballos also became the Manager for the first Perfulandia store. Zeballos also testified that to this day he is not engaged in the business of selling perfume as a business, but that he is an employee of Perfulandia.
At the time the Perfulandia store opened in Carolina, Zeballos operated the Party Land store. The latter was located across from the Perfulandia store. The evidence on record as corroborated by Almonte's testimony is that Zeballos would go to the Perfulandia store "to make sure everything was alright," to "make sure the employees had sufficient petty cash and change," to help with matters, and generally "to be there for them." He also allowed the employees at the Perfulandia store to use the bathroom at the Party Land store. Zeballos also testified that it was in September of October 2002 that Almonte asked him to help develop the store. He explained, that at first Almonte said, "if you're in your store come by this store and look around to see if everything is OK." Zeballos claims this is something he did with other people, too. In spite of Almonte's request, Zeballos also asserted that he went by the Perfulandia store because of his own motivation and initiative.
Zeballos did not recall when he first learned that the Perfulandia logo would use the same color as the Perfumania logo, but indicated it was possibly before the first store opened. Zeballos testified that Almonte came up with the name and told him that the store would be called Perfulandia. Zeballos testified that he had nothing to do with the design of the Perfulandia logo and claims that Almonte did not tell him that the colors to be used in the logo would be the same. Rather, Almonte told him that the color used would be red. Zeballos did not remember who told him that the font for Perfulandia and Perfumania would be the same. Zeballos testified that he believed it was Almonte's idea to use the red color on the signs and the font. When questioned on the similarities (color, font and size) with Perfulandia's logo and that of Perfumania, Zeballos evaded a conclusive response by asserting and arguing that Perfumania uses or has used different colors and fonts on its signs and not a specific one, this referring to the purple signs at a Perfumania store in Bayamón, Plaza Humacao and Río Piedras. Zeballos also indicated he knew that Perfumania had also used green, white, and blue in its signs. He also noted that a neon red is used in Plaza Carolina, but with a different font style. Also, the font in the sign in the Humacao store is different from the font used in the Río Piedras store. He testified that Perfumania used different kinds of signs in different stores and that he can identify which store it is by looking at a picture of it. Zeballos was asked to review two photographs which were used at the hearing for injunctive relief and noted that the signs and colors on the logo, as depicted, were actually different from the ones at issue (Exhibit B-8). However, he acknowledged the fact that the stores in which these different colors and fonts are used in the Perfumania signs are not those recently opened.
There is also evidence on record, submitted at the hearing on injunctive relief, that shows this averment is factually correct. However, the same evidence shows that Perfumania's signs with different fonts and colors were old ones that Perfumania, over time, had moved to change and uniform into the red logo.
Zeballos acknowledged that within the Agreement and Release signed by him he had promised "not to file any claim to or charge. . . ." against Perfumania (Pl.'s Ex. 11, Sec. 4, para. A). Nonetheless, he admitted having filed a civil suit claiming unjustified dismissal from employment. Zeballos testified that to the best of his understanding he complied with the terms within the Agreement, despite the fact the he also sued Perfumania by filing a counterclaim on February 18, 2003 (Docket No. 14). In this regard, Zeballos explained and now asserts that Perfumania sued him first, that the agreement he signed is illegal, that the document was "impeached" and, therefore, he sued Perfumania. His position, at this stage, is that he was discriminated against because of his age and that is one of the reasons he was terminated, among other things. Zeballos testified that since the date in which he was terminated, February 19, 2002, he has known that he was discriminated against on the basis of age and that Perfumania persecuted and harassed him.
This statement Zeballos made alluding to the alleged challenge presented by his previous attorney to the Agreement.
The evidence elicited establishes that on the date that Zeballos signed the Agreement and Release he also signed a sworn statement (Pl.'s Ex. 13). Contained in the Sworn Statement is a sentence that states that Zeballos's termination by Perfumania was not based on discriminatory animus. ( Id. at par. 4.) Regardless, Zeballos now contends that when the statement was signed it was a set up and is, thus, illegal. More so, he testified that there was persecution as he was called an "old man," and that Perfumania brought in "new people to help in the store because he was getting old and needed someone to help him." Zeballos also testified that the discrimination occurred when Perfumania company officers stated, in a joking manner, that he was getting on in years, and that he needed help in handling the district, as he could not handle it alone. Zeballos testified that supposedly Perfumania was going to hire someone under his tutelage to help him. Zeballos also believes that he was discriminated against as the persons who were recruited for his position are all younger than he.
Zeballos asserted that the signing of the Sworn Statement was required in order to enable the signature of the Agreement and General Release. Zeballos did not recall discussing with his attorney the contents of the sworn statement and indicated that it was handed to him on the same day he signed it. Zeballos also testified that at the time of the signing of the Agreement and General Release he understood that if he had complaints of discrimination he could file these before the Commonwealth Department of Labor.
This last contention is hard to believe, inasmuch as the Sworn Statement contained a provision clearly indicating he had not been discriminated against (Pl.'s Ex. 13 at par. 4).
Within the Sworn Statement it is indicated that Zeballos negotiated the settlement agreement; that he was allowed seven days in which to cancel the same; that he had 21 days to consult with an attorney; and that the agreement was entered into freely and voluntarily (Pl.'s Ex. 13, paras. 6, 8, 9). Zeballos agreed that he signed the statement under oath but asserted that he did so under financial duress.
Zeballos then proffered his opinion as a fact witness as to the allegations of lost business by Perfumania due to the proximity of Perfulandia stores. Zeballos testified that Perfumania still does a good business and that, based on his past employment experience with Perfumania, it is his understanding that the Perfumania business in Puerto Rico is 15 to 20 percent of what Perfumania does or sells nationwide and that business has never decreased or faltered significantly. He is still a stockholder of Perfumania, Inc. and receives corporate earnings statements every three to six months. These are general reports on how business is going for the company. Zeballos asserts that as a shareholder he has not received any information reflecting that Perfumania's sales in Puerto Rico have decreased.
In spite of said allegations and the availability of these reports to Zeballos, it is to be noted that the defendants presented no such evidence or any other evidence to counter Perfumania's evidence.
When he was employed by Perfumania he also received reports regarding the income generated. His responsibilities with Perfumania included marketing and discussing projects with persons at Retail Net, the advertising company. Zeballos, as former Regional Director for Perfumania in Puerto Rico, claims he was also aware of the statistical data regarding the sales volume generated by the Puerto Rico stores. Among the possible factors which may influence a decrease or increase of sales, Zeballos mentioned the available inventory (amount of merchandise in stores), the financial situation in the United States, the weather (i.e., rain), and the effect of September 11th on Puerto Rico and the United States market. Also, Zeballos indicated that in Puerto Rico there was a competitive market, inasmuch as while employed by Perfumania there was no Perfumania store that he managed that did not have another perfume store nearby. Generally these stores were department stores such as J.C. Penney and Sears. Zeballos also testified and recalled that other perfume discount stores existed near Perfumania stores, such as HJ Quality and Gran Store. Nonetheless, there is no indication on whether the latter stores opened prior to or after the Perfumania stores.
Although acknowledging the competitiveness of the Puerto Rico market, Zeballos also claimed that Perfumania, being an extremely large company, has its own market and "has no competition." He was adamant in this regard despite admitting to the existence of other businesses within the perfume industry, acknowledging that one of the things that affects profitability is when the competition opens nearby a store and that to counter balance competition Perfumania used to implement a plan of action which called for lower prices. When this happened, of course, Zeballos admitted that the net income came down. Zeballos testified that Perfumania and other stores use the same techniques or strategies to counter competition. Zeballos also testified that in a competitive market it is normal that the bottom line regarding sales and income is affected. This also resulted in an adjustment of sales goals in that in certain situations the goal would be lowered. Zeballos testified that as part of its business activity Perfumania set goals. If a goal was not met, it did not mean the store was not doing business; rather the percentage of doing business was adjusted.
Rafael Almonte. Almonte previously testified before this Court in February 2003. At that time he stated that in the Spring of 2002, some time between February and May, he began thinking about expanding his perfume business and identifying a name for his new business. The expanded business ultimately was called Perfulandia. Perfulandia never sold perfume wholesale and the nature of the Perfulandia stores was the retail perfume business. In 2002 Almonte had two other fragrance stores named Fragrance Designer and Mona Lisa.
At the time the injunction hearing was held in February 2003, Almonte was the President and sole owner of Perfulandia. Almonte testified that he was the only incorporator of Perfulandia. Today Perfulandia no longer exists and is under the protection of the Bankruptcy court. At the time of the prejudgment attachment hearing the bankruptcy court had yet to make a determination regarding the liquidation of Perfulandia's assets. When asked if any action had been taken to dissolve the corporation, Almonte evasively responded indicating he did not believe that the corporate reports had been rendered; that he would have to check with his accountant.
Article Five of the Certificate of Incorporation lists Almonte as an incorporator and, while erased in part, it appears that Zeballos' name was actually included or intended to be included as an incorporator. Clearly, under that section a "Ze . . ." appears with the remaining of the word being erased. The attorneys for defendants were instructed to submit a certified copy of the original but failed to comply.
Throughout his examination, Almonte's recollection was refreshed in numerous instances. Once Almonte's recollection was refreshed, he testified and admitted that by April 2002 he had already met with Zeballos and was told that Zeballos no longer worked at Perfumania. Almonte then testified that, although he could not specify the date in which he asked Zeballos to come and work for him, he recalled it was in either April, May or September 2002. After his memory was once again refreshed by means of the transcript of his previous in-court testimony, he agreed that it was, actually, either late April or May 2002 when he had asked Zeballos to help him. At the time Almonte had known for at least ten years that Zeballos had been the general manager of Perfumania.
When he talked to Zeballos, Perfulandia had yet to be incorporated. Almonte did not recall if in May 2002 he was still trying to define the name of the new business. After his memory was refreshed Almonte admitted that by May 2002 he had already consulted with and asked for Zeballos' opinion in regards to the name "Perfulandia."
Almonte claims it was his idea that of opening a perfume discount store, the use of the name Perfulandia, and use of the red color and type of fonts in the logo; though he believed there was another person who helped in designing the label. This person's name he did not recall. When selecting the name "Perfulandia" and the color and font for its logo, Almonte knew that Perfumania existed. Almonte further claimed that he was in charge of all marketing and advertising decisions. Further Almonte claimed he had the final word regarding marketing strategies, he approved the radio spots and claimed he was the person who structured Perfulandia's slogan. However, when confronted with his prior in-court testimony Almonte had to admit that Zeballos was the person who suggested the structure and wording for the slogan. Still, Almonte asserts that the slogan was used because he approved it.
Almonte claims he did not recall if Perfulandia used more than one design to make signs for stores. He further testified that some may have not looked like Perfumania stores signs, because it depended on the space available for the sign. However, upon examining photographs submitted in evidence, it is determined that while one photograph may depict a booth and most other photographs may depict a store, the font and color of the logo is the same though the size of the sign may be different.
While in the perfume industry it is common for a perfume company to hand out scent strips, it appears the scent strips used by Perfulandia are manufactured in the same special paper as those of Perfumania. While the evidence reflects that Almonte did not use a scent strip with the name Mona Lisa at his other store, he did design and approve the use of the scent strip for Perfulandia. In cross-examination Almonte recalled that Zeballos had once told him that the Perfulandia scent strip was similar to Perfumania's scent strip. Although questioned who was responsible for ordering and preparing the scent strips, Almonte reluctantly answered he did not recall if Zeballos had arranged to have the scent strip prepared on his behalf or if Zeballos had undertaken said actions on Perfulandia's behalf. Either way, it appeared Zeballos was in charge of ordering the preparation of the scent strips used by Perfulandia.
Almonte testified that as a result of the May 2002 conversation, Zeballos helped him with the structuring or development of the perfume discount business. Zeballos helped Almonte by supervising employees at the Perfulandia store in Plaza Carolina and negotiated lease agreements and acting as the resident manager. Almonte eventually hired Zeballos as a full-time employee and Regional Manager of Perfulandia.
The first Perfulandia store opened on June 14, 2002, the day before Father's Day. By the time Perfulandia opened Almonte claimed it was already stocked with different perfumes and the employees had been hired. Almonte alleges the store was set up in one night. When questioned regarding the time frame in which the employees' recruitment process had begun, Almonte indicated that he could not remember if the employees were hired "a few days before" the date in which the store opened or that the employees could have been hired as they "went along." Almonte does not remember how many other employees besides Zeballos were at the opening. He recalled being there and that one other person (named not recalled) was also there. He indicated he remembered having seen Zeballos there, running up and down with the rush in his Party Land store because many people were at the Party Land store for gift wrapping.
Almonte claims he identified the site for the store, nonetheless, he could not remember who negotiated the lease contract, though finally admitted it could have been Zeballos. Almonte could not recall if he saw the lease contract prior to it being signed, but admitted having approved the lease. He testified that he trusted Zeballos to do the proper thing on his behalf. Also, Almonte could not remember if it was Zeballos who signed the lease agreement on his behalf, nor did he believe that the lease was under Zeballos's name. Almonte did acknowledge it was Zeballos the one who signed the lease agreement for the premises of Perfulandia at Plaza Carolina. The day the lease was approved the Perfulandia corporation was not operating but the store opened using the Perfulandia name. The lease agreement was provided to the Court and it appears signed by Zahatiel Zeballos: Perfulandia ( Docket No. 95, Ex.) The lease term commenced on June 13, 2002. Id. The lease for the Perfulandia Plaza Carolina store was a short-term lease and thereafter was renewed once. The premises are no longer being used.
The use of the Perfulandia name was approved by the Commonwealth State Department and a Certificate of Approval was issued on June 12, 2002 (Plaintiff.'s Ex. 12). Thus, it is clear there was no legal action undertaken at the State Department regarding the corporation's name prior to it being sued by Perfumania. Perfumania stipulated that it did not file any opposition before the Commonwealth State Department because it did not have knowledge of the Perfulandia name being so registered.
Because of the parties' stipulation and the injunction relief granted by this Court in March 2003, Almonte ceased to operate stores under the Perfulandia corporation or name. Actually, as a result of the injunction no Perfulandia stores are operating. After entry of the court Order, the names of the Perfulandia stores changed and now operate under a new name: "Essence Planet." Although Almonte asserted he could not remember the exact number of Perfulandia stores operating at the time of the hearing for injunctive relief, after being questioned and after discussing the stores' location one by one, Almonte agreed that five stores were operating at the following locations: Plaza Carolina, Plaza Gran Caribe, Plaza Las Américas, Plaza del Sol, Dr. Vives Street in Bayamón.
The Perfulandia store in Carolina now operates in the same location under the name Essence Planet. There are also Essence Planet stores operating in the former Perfulandia premises in Gran Caribe, Plaza Las Américas and Plaza del Sol. The Perfulandia located in Dr. Vives Street in Bayamón is no longer operational. All four stores operating sell perfume at discount retail.
It has been suggested by plaintiffs that defendants continue to operate using the same assets and inventory.
Almonte owns Essence Planet as its sole shareholder and President and, as such, has the final word in all decisions regarding Essence Planet. Almonte is the only officer and/or director for Essence Planet. Essence Planet has more than four or five stores which successfully operate as to enable Almonte to expand operations.
Similar projections existed for Perfulandia.
At the close of hearing the undersigned ordered defendants to submit to the Court a certified copy from the Department of State of the Certificate of Incorporation for Perfulandia, Inc. The defendants were specifically advised that a photocopy of same would not suffice, but that a certified copy was required. In derogation of the Court's admonishment, defendants provided the Court a photocopy of the documents of incorporation, the same not being certified ( Docket No. 95). Defendants were also to provide a copy of the lease agreement for the Perfulandia store that was opened in Carolina and it was provided to the Court. Finally, defendants were to provide to the Court the name of the attorney who represented Zeballos during his employment severance negotiations with Perfumania and a copy of the transcript of Almonte's testimony from the February 2003 hearing ( Docket No. 94). These last two items were not provided by defendants as the Court requested.
B. Analysis
Perfumania argues that a prejudgment attachment should issue because it has proven more than a "mere probability of success" on the issue of damages. After reviewing the facts and the law, this Magistrate-Judge finds Perfumania's position well-taken.
Perfumania brings this action under the Lanham Act and also raises a claim against the defendants alleging unfair competition under Puerto Rico law. Also, a claim is brought against Zeballos for breach of contract and a claim is brought against Almonte for tortuous inference of a business contract.
The elements of a cause of action for breach of contract are (1) a valid contract and (2) a breach by one of the parties to the contract. See, e.g., F.C. Imports, Inc. v. First Nat'l Bank of Boston, 816 F. Supp. 78, 93 (D.P.R. 1993) ( citing Unisys P.R., Inc. v. Ramallo Bros. Printing, Inc., 91 J.T.S. 69 (P.R. 1991)). Puerto Rico law provides that contracting parties are free to establish the clauses and conditions they deem advisable, "provided they are not in contravention of law, morals or public order." Article 1207, Puerto Rico Civil Code, 31 P.R. Laws Ann. §§ 3372 (1990). As an aside, it is observed that in order for a non-competition agreement to be valid: (1) The employer must have a legitimate interest in the agreement; (2) the scope of the prohibition must fit the employer's interest but not exceed twelve months; (3) the employer shall offer a consideration in exchange for the employee signing the non-competition covenant other than mere job tenure; (4) the non-competition agreement must be valid a contract; and, (5) the non-competition covenants must be in writing. Arthur Young Co. v. Vega III, 136 D.P.R. 157, 175-76, P.R. Offic.Trans. at 16-17 (1994).
Article 1802 of Puerto Rico's Civil Code, 31 P.R. Laws Ann. § 5141, establishes a cause of action for tortious interference by third parties with contractual obligations. To establish a tortious interference claim, Perfumania must show: 1) the existence of a contract; 2) that the interfering party acted with intent and knowledge of the existence of a contract; 3) that plaintiff suffered damages; and 4) that there exists a causal link between the injury and the interfering party's actions. Loepoldo Fontanilias, Inc., Co. v. Luis Ayala-Colón Sucesores, Inc., 284 F. Supp.2d 579, 588 (citing General Office Products Corp. v. A.M Capen's Sons, Inc., 115 D.P.R. 553, 558-559 (1984)).
Under the Lanham Act, "a plaintiff seeking damages must show actual harm to its business". See Cashmere Camel Hair Mfrs. Inst. v. Saks Fifth Ave., 284 F.3d 302, 311 (1st Cir. 2002). Additionally, the Act provides that both, injunctive relief, 15 U.S.C. § 1116(a), and monetary damages, 15 U.S.C. § 1117(a), are available. However, damages are specifically made available "subject to the principles of equity," id.
Damages are awarded under the Lanham Act as follows:
(a) Profits; damages and costs; attorney fees
When a violation of any right of the registrant of a mark registered in the Patent and Trademark Office, a violation under section 1125(a) or (d) of this title, or a willful violation under section 1125(c) of this title, shall have been established in any civil action arising under this chapter, the plaintiff shall be entitled, subject to the provisions of sections 1111 and 1114 of this title, and 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. The court shall assess such profits and damages or cause the same to be assessed under its direction. In assessing profits the plaintiff shall be required to prove defendant's sales only; defendant must prove all elements of cost or deduction claimed. In assessing damages the court may enter judgment, according to the circumstances of the case, for any sum above the amount found as actual damages, not exceeding three times such amount. If the court shall find that the amount of the recovery based on profits is either inadequate or excessive the court may in its discretion enter judgment for such sum as the court shall find to be just, according to the circumstances of the case. Such sum in either of the above circumstances shall constitute compensation and not a penalty. The court in exceptional cases may award reasonable attorney fees to the prevailing party.15 U.S.C. § 1117(a).
The Lanham Act also provides that plaintiffs may recover damages subject to the principles of equity, provided that such award is compensatory and not a penalty. See 15 U.S.C. § 1117(a). The First Circuit has delineated four rules that apply to the award of monetary damages under the Lanham Act as follows:
1) a plaintiff seeking damages must prove actual harm, such as the diversion of sales to the defendant; 2) a plaintiff seeking an accounting of defendant's profits must show that the products directly compete, such that defendant's profits would have gone to plaintiff if there was no violation; 3) the general rule of direct competition is loosened if the defendant acted fraudulently or palmed off inferior goods, such that actual harm is presumed; and 4) where defendant's inequitable conduct warrants bypassing the usual rule of actual harm, damages may be assessed on an unjust enrichment or deterrence theory.Aktiebolaget Electrolux v. Armatron Intern., Inc., 999 F.2d 1, 5 (1st Cir. 1993).
Accordingly, to be entitled to receive monetary relief based upon its damages, the plaintiff must show actual harm, which may be lost sales or loss of good will. To show actual harm, plaintiff must show both that the defendant's deceptive act created consumer confusion and that the plaintiff's injury was caused by consumer reliance on the misleading act. See Schutt Mfg. Co v. Riddell, Inc., 673 F.2d 202, 206 (7th Cir. 1982).
Perfumania contends that Almonte should be held personally liable for the acts of Perfulandia's trademark infringement, inasmuch as he was the "guiding spirit" behind the previously depicted factual scenario. Almonte argues that because he was joined as a party after the injunction, Perfumania must prove its case from the time that the Amended Complaint was filed. Hence, he contends his properties should not be attached. Alternatively, it is argued that if the Court finds attachment appropriate, the foregoing should be taken into account when determining the amount of any bond to be fixed.
Perfumania also asks that the Court take into consideration that Perfulandia, Zeballos and Almonte are jointly and severally liable for the damages caused by their infringing acts. More so, Perfumania asks the Court to consider the intentional nature of defendants' infringement, and the vexatious nature of defendants' litigation conduct. Perfumania asks for a prejudgment attachment and garnishment of properties, real and/or personal and other assets or credits in the amount of $800,000 belonging to Zeballos and/or Almonte.
Defendants contend that at the time of the prejudgment attachment hearing they were in a "defenseless state" because Perfumania had not provided advanced discovery of the evidence they submitted at the hearing, although it had agreed to make such discovery at the status conference held on January 13, 2004. The defendants also argue that Perfumania failed to produce the documents requested in the First Request for Production of Documents, many of which were pertinent and necessary for an adequate defense. Defendants contend that it sent a letter to Perfumania on January 20, 2004, regarding the need for disclosure of these documents and that receipt of said letter was confirmed by telephone.
Initially, the undersigned notes that at the status conference held on January 13, 2004, Perfumania's attorney had indicated that the documents in question he would attempt to produce by January 19, 2004 ( Docket No. 83). Also, the court minutes indicate that plaintiff's counsel had proffered that the documents in question or purported evidence were mostly the same as those previously used at the evidentiary hearing on injunctive relief. Id. These documents did not, however, include documents to be used for impeachment purposes. Id.
A review of the Court Docket Sheet indicates that defendants did not file any motion seeking the Court's assistance in compelling the documents in question. Indeed, the court docket indicates that a motion to compel was not filed by defendants until May 27, 2004, some three months after the prejudgment attachment hearing ( Docket No. 106). Finally, it is noted that most of the exhibits used at the injunctive relief evidentiary hearing were part of the Court's record and remained available for review prior to and during the attachment hearing held in January 2004.
More so, the defendants' assertions of being "defenseless" totally ignores the fact that Zeballos and Almonte, on behalf of Perfulandia, stipulated and agreed to be permanently enjoined from infringing on plaintiff's mark — Perfumania. At that time, the parties stipulated to the factors of intent, the likelihood of confusion, changes to the Perfulandia mark including the type of lettering, color and structure, as well as the slogan used by Perfulandia. More, the defendants agreed to change the name Perfulandia. At the time, when the extent of the stipulation was outlined for the defendants in open Court, the Court queried, "Mr. Almonte, Mr. Zeballos, the terms and conditions to which you have agreed are clear to you both?," and they responded in the affirmative. (Transcript Feb. 2003, p. 295)
Despite the stipulation at the prejudgment attachment hearing, counsel for defendants has attempted to re-litigate the issue of confusion. Defendants have further argued that at the time of the stipulation they did not have the benefit of an interpreter. This appears to be an attempt to deny full knowledge of the scope of their stipulation. In this regard, the record clearly shows that at the time, although the extent of the parties' stipulation was initially conveyed to this Magistrate-Judge at an in-chambers conference, immediately thereafter, in concluding the evidentiary hearing, the parties were called into the courtroom where an interpreter was present and assisted the defendants while the terms and conditions within the parties' stipulation were consigned on record. (Transcript Feb. 2003, pp. 293-296) This posturing by defendants is merely an attempt to re-litigate or undo what has already been determined by the Court as discussed below. At this stage of the proceedings, when transcripts of the evidentiary hearing have been available to the new attorney of record, the parties' argument are unsubstantiated and contrary to the evidence on record. Last, but not least, defendants have failed to comply with numerous orders demanding they provide disclosure of certain documents or evidence to plaintiff and/or the Court.
In its order for injunctive relief the Court previously determined that Perfumania and Perfulandia compete in the discount perfume market as their products directly compete. Perfumania, Inc. v. Perfulandia, Inc., 279 F. Supp.2d 86, 88 (D.P.R. 2003). Perfumania sells its goods at both wholesale and retail, while Perfulandia sold only retail. Nevertheless, the perfume market of Perfumania overlaps the market of Perfulandia.
In addition, it has been concluded that:
Defendants began to use the name Perfulandia in commerce on or about June, 2002. As of December, 2002, defendant operated six perfume retail stores in Puerto Rico. Not only does the name Perfulandia have a similar sound, appearance, and meaning to Perfumania; but its name appears in the same font, letter size and color as that of Perfumania. More so, Perfulandia provides identical services and utilizes an identical marketing concept as that of Perfumania. Both Perfumania and Perfulandia target the same market.
The evidence specifically demonstrates that defendants' stores bear the name Perfulandia, in exactly the same stylized form and color used in connection with plaintiff's registered mark Perfumania. Furthermore, defendants use the same basic store design and window displays as does plaintiff. Defendants also use signs and merchandise displays similar to the ones used in plaintiff's stores, which includes price tags comparing the manufacturers' suggested retail prices with Perfulandia's prices. The layout design of the tags is almost identical to the ones used by plaintiff and are displayed in the same colors (red and white). Reportedly, to advertise its discounts, defendants uses similar posters to the ones used by plaintiff, including the same basic layout and the placement of the store name in the same segment of the poster and in the same stylized format.
Finally, it must be noted that Perfulandia's scent strip and advertising slogan are almost identical to those of Perfumania. Also, as is the case with plaintiff's stores, the Perfulandia stores are "full-service" with similar number of employees providing similar types of services to its clientele. . . .
[E]vidence on record establishing that defendants' use of the mark Perfulandia has caused actual confusion among purchasers. For example,
a. customers who have entered the Perfumania stores in the shopping centers where there are also Perfulandia stores, have asked about the "other" Perfumania store (referring to the Perfulandia store); b. customers have left a Perfumania store commenting that if they chose to purchase a certain item later, they could go to the "other" store, referring to the "Perfulandia" store; c. customers have gone to Perfumania to return items they have purchased at Perfulandia; d. customers have complained of being treated in a discourteous manner at the "other Perfumania store" while actually referring to the Perfulandia store located within the same shopping mall; e. a customer inquiring about a Perfumania employee while visiting a Perfulandia store; and f. customers inquiring as to why both of "these" stores within the same mall had different prices (usually being higher at Perfulandia). . . .
Almonte could not provide a coherent explanation on how he decided to choose the name "Perfulandia." He limited himself to state he had considered the name "Perfuland," though he could not recall exactly when and then having considered Perfulandia "looked nice." Almonte also enrolled defendant Zeballos who used to be employed by plaintiff as District Manager for Perfumania in the District of Puerto Rico area. Now, as District Manager for Perfulandia, Zeballos was in charge of supervising all aspects of Perfulandia's daily operations, sales and advertising strategies, operational structures and functioning. Furthermore, defendant Zeballos was privy to plaintiff's marketing and operational strategies, including store layout, use of comparative pricing tags, poster and flyer design, and general operational plans and guidelines. Indeed, during his employment as district manager, Zeballos had access to plaintiff's confidential and proprietary information crucial to the competitive advantage achieved by plaintiff. The evidence shows that Perfumania's promotional slogan was the result of at least one week of team work, with Zeballos being part of the team. In turn, it was Zeballos who in "minutes" came up with Perfulandia's slogan which highly resembles (inasmuch as it uses synonyms) Perfumania's slogan. Stores opened under a similar mark and used the same font and color and implemented a highly similar marketing concept, similar scent strip and business card. More so, it was Zeballos who negotiated the rental contracts with landlords on behalf of Perfulandia. Certainly, the methodology of doing so he had acquired while acting as District Manager for Perfumania.
It is apparent that Zeballos began to assist Almonte in establishing his first store at a time in which the "no competition agreement" was still in force. Curiously, there is no explanation provided on market studies, advertising research that could have led Almonte to elect the exact location for his retail stores. However there is evidence showing that Zeballos was the one negotiating the lease contract with the landlords where the main Perfulandia stores are located. In this area Zeballos obviously had expertise, inasmuch as said tasks he had performed in the past as Perfumania's District Manager.
The record also reflects that between June and December 2002 Almonte and Zeballos managed to have implemented a complete structural (layout), operational, promotional and advertising system while having opened six different stores. While Almonte's expertise in the wholesale business is not at issue, his ability to develop and establish a six-store chain of retail stores goes unexplained except for the fact that defendant Zeballos was acting as a principal and District Manager for Perfulandia. This as well constitutes the most plausible explanation as why the Perfulandia stores opened one after another (six stores in six months) under a similar mark used in exactly the same font and color and under a similar structural and organizational fashion.
In view of these facts, the Court can draw an inference of intentional infringement and likelihood of confusion for purposes of the injunctive relief.Perfumania, Inc., 279 F. Supp.2d at 97-98, 100-103.
On or about February 19, 2002, plaintiff terminated Zeballos' employment. Upon termination, Zeballos signed a release whereby he agreed not to engage in any competitive activity in Puerto Rico within a period of six months after termination. He also agreed not to solicit plaintiff's employees or clients within a period of 12 months (Plaintiff.'s Ex. 11). The evidence shows that defendants opened the doors to its first perfume retail stores within the six months after Zeballos was terminated. Those stores were opened in shopping centers where plaintiff operates its stores and/or in premises where plaintiff used to operate (near other existing Perfumania stores). Similarly, the Certificate of Incorporation for Perfulandia was filed (June 12, 2002) prior to the signing of the Agreement and Waiver with Perfumania (June 27, 2002). Perfumania, Inc. 279 F. Supp.2d at 102 n. 27.
The facts outlined above clearly demonstrate that Perfumania had met its burden for its claim against Zeballos. More so, in light of the fact that he stipulated to the issuance of a permanent injunction.
The undersigned is mindful that Almonte was not a party to this action or to the stipulation at the time injunctive relief was ordered. Regardless, the facts elicited are such that Perfumania has demonstrated as well its probability to prevail on the merits as to its claims against Almonte, individually. Corporate officers have been found personally liable in situations where they directed, sanctioned, or actively participated in the challenged corporate activity. Pomales v. Beckton Dickinson Co., 649 F. Supp. 913, 918 (D.P.R. 1986) (citing Lobato v. Pay Less Drug Stores, 261 F.2d 406, 408-409 (10th Cir. 1958); Marks v. Polaroid Corp., 237 F.2d 428, 435 (1st Cir. 1956)). In this case, there is significant evidence pointing to the existence of a concerted action between Zeballos and Almonte in order to develop a business similar in structure to that which was well known to Zeballos: Perfumania.
Here, Almonte testified that he was the sole shareholder of Perfulandia. He was the President of Perfulandia. It was he who hired Zeballos knowing of his prior employment experience with Perfumania. He also knew of the Agreement and no competition clause. It could be reasonably inferred that initially, because of their knowledge of this clause, Zeballos was not paid a salary or included in a payroll but Almonte paid for Zeballos' insurance premiums and car loan. The evidence also shows and allows for the reasonable inference that while Almonte claims he was the person who made all the decisions for Perfulandia, including its name, the colors and font used, he took those decisions in conjunction with Zeballos. Although Almonte had the final word on approving the slogan suggested by Zeballos and approved the lease signed by Zeballos, there is no doubt that rephrasing the slogan and the "working-out" of the lease contracts, were tasks accomplished by Zeballos. Almonte also claims to be the person who designed the scent strip for Perfulandia. Nonetheless, in spite of prior experience in the perfume industry and in spite of the fact he owned two perfume stores, he had never used scent strips. It appears to have been a practice adopted after coming in contact with Zeballos who, in turn, was entirely familiar with Perfumania's methodology of doing business. More so, the stores under the Perfulandia corporation were located and opened nearby a Perfumania store, used the same type of media (radio, press) and signs to display promotional campaigns, discount sales, layout and window displays. In addition, the Certificate of Incorporation for Perfulandia was filed identifying Zeballos as resident agent, prior to signing the no competition agreement. Whether a strategy to obtain competitive advantage in the market or not, it appears to have been a strategy or business development plan in which Zeballos had key and significant participation; Almonte knew of and, Almonte having the decision-making authority, did approve and has benefitted from.
As noted above Perfumania seeks a prejudgment attachment in the amount of $800,000. At the prejudgment attachment hearing it presented sufficient evidence to sustain a loss of profits award. Nonetheless, defendants argue that no documents or testimony was presented of actual losses sustained by Perfumania. More so, they argue that there must be a determination as to the allegation that a "loss of trend" equals damages. Defendants also argue that the evidence portrayed in the charts submitted in evidence by Perfumania regarding sales trend and lost profits are unreliable because they were created by Perfumania personnel, specifically by Mr. Chin and his accounting staff. At this juncture of the proceedings, Perfumania is not required to produce each and every document to support its claim. The hearing provided Perfumania with an opportunity to marshal supporting facts and theories and it did so. Chin, as the Chief Financial Officer for Perfumania, testified that the sales trend declination for each of the Perfumania stores coincided with the corresponding opening of a Perfulandia store. He also provided sufficient evidence and rationale as to the methodology employed to determine the total amount of sales lost which amounts to $174,048. Defendants were able to cross-examine on the subject.
Perfumania also presented evidence of sustained losses due to the opening of the Perfulandia stores as it was forced to lower prices in order to compete with Perfulandia. While Perfumania did not submit a specific amount or total loss attributable under this item, this evidence lends support to plaintiff's entitlement to a judgment of damages pursuant to the principles of equity.
In support of plaintiff's request, evidence was also presented by Perfumania regarding the costs incurred in advertising during the 2002 Christmas season in order to clarify customer's confusion regarding the existence of "impostors." Perfumania seeks 25 percent of its total advertising spent of $122,000; that is, $30,500. The undersigned finds said amount reasonable in light of the fact that the evidence was that Perfumania was required to either change and/or modify its advertising campaign in order to alert its customers to the infringement of Perfulandia.
It is noted that Zeballos even recognized that Perfumania sales in Puerto Rico consitute a significant percentage (15% — 20%) of the Perfumania national sales.
Perfumania also presented sufficient evidence regarding the total expenses already incurred during this litigation: $5,678.20. The undersigned takes into consideration the litigation related costs which includes travel and lodging for Mr. Chin and other corporate officers who have been compelled to travel to Puerto Rico to attend Court proceedings or settlement conferences. Perfumania also asks the Court to consider the time, effort and resources expended by its personnel in activities related to the infringement.
Finally, Perfumania asks for prejudgment attachment as to attorney's fees, although noting that it is to be awarded in exceptional cases. Perfumania presented evidence at the hearing that it had incurred $163,048.47 in attorneys' fees. It advises the Court that it anticipates incurring in at least $100,000 more in attorney's fees. Accordingly, Perfumania asks that the Court include within the total sum subject to attachment a total of $263,048.47 as it relates to attorneys' fees, expenses and costs. Defendants argue Perfumania did not provide sufficient evidence to support its claim. Defendants argue that Perfumania is required to provide the amount expended as it relates to the litigation of each claim, the defendants, the lawyers providing the service, hours spent and "other crucial information."
It is noted that the Lanham Act further provides that "[t]he court in exceptional cases may award reasonable attorneys fees to the prevailing party." 15 U.S.C. § 1117(a). Under the statute, the decision to award fees is committed to the district court, not the jury. Tamko Roofing Products, Inc. v. Ideal Roofing Co., Ltd. 282 F.3d 23, 31 (1st Cir. 2002) (citations omitted). In exceptional cases, attorneys' fees may be appropriate in circumstances where the acts of infringement were "`malicious,' `fraudulent,' `deliberate,' or `willful.'" Id. (citations omitted). Attorneys' fees may also be awarded "when equitable considerations justify such awards." Id. (citations omitted).
The evidence elicited at the injunctive relief hearing and prejudgment attachment hearing is adequate to make a case of deliberate or willful behavior. Notably, Zeballos, a former Perfumania employee, who was privy to its marketing and operating strategies and to confidential and proprietary information, was employed by Perfulandia. In this regard Perfulandia opened stores at the same locations as Perfumania stores. The mark and names Perfumania and Perfulandia were similar, as were the slogans of each. Also, Perfulandia competed with the Perfumania market. Based upon the foregoing, Perfumania has demonstrated a probability that attorneys' fees in this case are appropriate.
Nevertheless, Perfumania seeks prejudgment attachment on attorneys' fees actually incurred as well as attorneys' fees it anticipates it will incur. While prejudgment attachment is appropriate as to the actual attorneys' fee incurred, the undersigned is not inclined to recommend prejudgment attachment on attorneys' fees yet to be incurred as same are speculative. Accordingly, the undersigned finds appropriate to extend the prejudgment attachment order to include attorneys' fees in the amount of $163,048.47.
Perfumania also asks that the Court, in its discretion, to include the amount of treble damages as allowed under § 1117(a). Perfumania points to the intentional and willful nature of the infringement, the initial denial of liability defendants, and the insistence on re-litigating the merits of the case as support for a treble damages award.
The facts of this case are supportive of a treble damages award. Without repeating the factors listed above, suffice it to say that the facts lend to a finding that defendants intentionally infringed the Perfumania mark. More so, defendants' posturing in repeatedly attempting to reopen already litigated issues, their inconsistencies in testimonies provided, their failure to comply with Court orders, the evasiveness of their conduct and responses in Court, lends support to such an award. Accordingly, it is RECOMMENDED that the lost of sales amount of $174,048 be trebled to $522,144 for purposes of prejudgment attachment.
Perfumania also asks that prejudgment interest be included, noting this is an exceptional case and that allowing same is within the discretion of the trial court. Although § 1117(a) does not provide for prejudgment interest, such an award is within the discretion of the trial court and is normally reserved for "exceptional" cases. See EFCO Corp. v. Symons Corp, 219 F.3d 734 (8th Cir. 2000); American Honda Motor Co., Inc. v. Two Wheel Corp., 918 F.2d 1060 (2d Cir. 1990). The rationale for awarding attorneys' fees and treble damages also lends support and makes reasonable awarding prejudgment interest. The main factors the undersigned considers are the intentional use of the Perfumania mark as well as the defendants repeated attempts to re-litigate or invalidate previously decided issues. Accordingly, it is RECOMMENDED that Perfumania's request for prejudgment attachment of prejudgment interest be GRANTED.
This to include the filing for bankruptcy. Though, this Magistrate-Judge is cognizant that any legal challenges to such procedures remain under the province of the Bankruptcy Court.
Based on the foregoing, it is RECOMMENDED that Perfumania's Motion for Provisional Remedies to Secure the Effectiveness of Judgment ( Docket No. 42) be GRANTED in the amount of $721,370 based on the foregoing:
Lost sales $522,144 Advertising 30,500 Expenses 5,678 Attorneys' fees 163,048 ________ Total $721,370 --------IT IS ALSO RECOMMENDED that property of Zeballos and Almonte be attached in an amount up to $721,370 in order to secure the effectiveness of the judgment that may in its day be entered in favor of plaintiff and against defendants.
IT IS ALSO RECOMMENDED that Mr. Ovidio Canet, Avenida Américo Miranda No. 1415, Caparra Terrace, Río Piedras, PR 00921, telephone number 787-783-4808, be appointed as custodian of the property to be attached and/or recovered. Also, that it be Perfumania's responsibility to provide adequate facilities to conserve and store the attached property.
IT IS FURTHER RECOMMENDED that pursuant to Puerto Rico Rule of Civil Procedure 56.3 bond be fixed in the amount of $721,370.
FINALLY, IT IS RECOMMENDED that defendants be restrained from selling any of their assets.
Zeballos also seeks prejudgment attachment against Perfumania with regard to his counterclaim alleging age discrimination. Perfumania has not filed an opposition to the motion. The facts elicited at the prejudgment hearing do not lend to a finding of Zeballos's probability to prevail on the merits. The undersigned bases this finding on the discrepancy in Zeballos's testimony and his signed sworn statement. Zeballos testified that he was discriminated against by Perfumania on the basis of age discrimination as of the date he was terminated, February 19, 2002. Despite this knowledge, Zeballos did not see fit to file an age discrimination claim until he had been sued. More significantly, at the evidentiary hearing held in early 2003, Zeballos testified regarding his termination from employment and the Agreement he had signed and there was not even an indicia of such a claim. Notably, Zeballos signed a sworn statement on June 27, 2002, indicating that his termination by Perfumania was not due to any discriminatory animus. Now, however, Zeballos claims that any documents he signed or issues he agreed with was because of "financial distress." Zeballos's flip-flopping on the issue of age discrimination certainly does not lend support to a finding of his probability to prevail on the merits, much less his generalized and vague allegations on how he was discriminated. As such, prejudgment attachment is inappropriate.
Therefore, it is RECOMMENDED that Zeballos's Motion Requesting Provisional Remedies to Secure the Effectiveness of Judgment ( Docket No. 49) be DENIED.
III. Sanctions
In their "closing statement" Zeballos and Almonte make reference to "Preliminary Legal Matters" and argue that Perfumania has no standing to sue or claim economic loss due to the alleged decrease in sales. They argue that until their motion to dismiss is ruled upon the issue of prejudgment attachment cannot be considered by the Court. Their position as to standing is that Perfumania is not the real party in interest.
The undersigned will not again address this issue, but instead refers to the Report and Recommendation issued on January 21, 2004. Of note, however, is that during the testimony of Zeballos he testified that he was hired by Perfumania, Inc. not Perfumania Puerto Rico, Inc. He also testified that he was later hired by Magnifique Parfumes and Cosmetics and he received paychecks from Magnifique Parfumes and Cosmetics.
More so, the evidence on record shows that within the Agreement Zeballos signed he stipulated that he agreed "not to file a claim, suit, or charge of any kind against Perfumania or any other Magnifique Perfumes, Inc., or Perfumania subsidiary in any court, administrative agency of forum." (Plaintiff.'s Ex. 12). This agreement Zeballos did not keep.
As a result, at the prejudgment attachment hearing Perfumania asked the Court to impose sanctions on defendants arguing that the defendants' position that Perfumania is not the proper party is clearly without merit. Indeed, Perfumania refers to the defendants' posturing as "outrageous" noting that the defendants filed motions arguing that Perfumania, Inc. has no standing in this matter, and then provide testimony that clearly is contrary to their position in the previously filed motion to dismiss.
At said hearing the Court gave Perfumania leave to file a written motion requesting the imposition of sanction and stated that defendants could respond to same. Perfumania has yet to file a motion for sanctions. As a result, at this juncture an Order for sanctions would be premature. More so, in light of the fact that it is unclear if Perfumania seeks Rule 11 sanctions or some other form of sanctions. Therefore, at this time the Court cannot rule on any oral motion for sanctions. Perfumania, however, is given leave to file a motion for sanctions if it so desires, being mindful that there must be compliance with the Federal Rules of Civil Procedure.
See: Section Seven: Covenant Not to Compete; Subsection 3(I): remedies for breach of the Agreement. (Plaintiff.'s Ex. 11)
It is therefore RECOMMENDED that Perfumania's oral motion for Sanctions be DENIED, without prejudice.
IV. Fraud upon the Court
Perfumania also asks the Court to have Zeballos referred and certified for investigation to the United States Attorney's Office, inasmuch as Zeballos' contradictory testimony regarding the contents and scope of his sworn statement, wherein he initially alleges that his employment termination by Perfumania was not based upon discriminatory animus and the contents of his counterclaim asserting that he is the victim of age discrimination by Perfumania. These actions, Perfumania contends, constitute fraud upon the Court.
"The inherent powers of the federal courts are those which `are necessary to the exercise of all others.'" Roadway Express, Inc. v. Piper, 447 U.S. 752, 764 (1980) (quoting United States v. Hudson, 7 Cranch 32, 34, 3 L.Ed. 259 (1812)). It is well settled that a district court may use its inherent powers to sanction a party who has "acted in bad faith, vexatiously, wantonly, or for oppressive reasons." Chambers v. NASCO, Inc., 501 U.S. 32, 45-46 (1991); see Whitney Bros. Co. v. Sprafkin, 60 F.3d 8, 13 (1st Cir. 1995). The court may exercise its inherent powers to sanction a party for committing a fraud on the court where "it can be demonstrated, clearly and convincingly, that a party has sentiently set in motion some unconscionable scheme calculated to interfere with the judicial system's ability impartially to adjudicate a matter by improperly influencing the trier or unfairly hampering the presentation of the opposing party's claim or defense." See Aoude v. Mobile Oil, Corp., 892 F.2d 1115, 1117-1118 (1st Cir. 1989).
During the hearing Zeballos explained that Perfumania sued him first, that he considers the Agreement and Release he signed with Perfumania illegal, and claims the Agreement "was impeached" (challenged) and, therefore, he could and did sue Perfumania. His position is that he was discriminated against because of his age and that this is one of the reasons among others for which he was terminated from employment. Zeballos testified that as of the date he was terminated, February 19, 2002, he has known that he was discriminated against on the basis of age, and that Perfumania persecuted and harassed him. This, despite the fact that, while effectively assisted by counsel, he signed a sworn statement on June 27, 2002, which states that his termination from Perfumania was not based on discriminatory animus and despite all evasive and contradictory responses and evidence previously summarized.
The undersigned is not inclined to have Zeballos referred to the United States Attorney's Office for criminal prosecution basically because the resources of said office are better utilized to prosecute more serious charges. That is not to say that the actions taken by Zeballos during this litigation are not what one would consider clear, forthcoming or candid. Indeed, throughout this litigation Zeballos has attempted to manipulate the judicial and legal proceedings in any manner possible so as eliminate any liability on his part. Zeballos and his attorney, as in previous instances, are once again forewarned that similar litigation tactics in the future could warrant a different result and may still prompt significant consequences. See: Hull v. Municipality of San Juan, 356 F.3d 98 (1st Cir. 2004) (upon finding that a party had committed fraud in the litigation, dismissal of the complaint was an appropriate sanction); Model Rules of Professional Conduct, adopted by the American Bar Association on August 2, 1983; Rules 1.2(d): Scope of Representation; 1.16(a)(1) and (b): Declining or Terminating Representation; 3.1: Meritorious Claims; 3.2: Expediting Litigation; 3.3: Candor Towards the Tribunal; and 3.4: Fairness to Opposing Party and Counsel.
Co-defendant Almonte is similarly situated.
Therefore, it is RECOMMENDED that Perfumania's oral motion to have Zeballos referred to the United States Attorney's Office for investigation for fraud upon the Court be at this time DENIED.
V. Conclusion
Based upon the foregoing analysis, this Magistrate-Judge RECOMMENDS that:
• Perfumania's Motion for Provisional Remedies to Secure the Effectiveness of Judgment ( Docket No. 42) be GRANTED;
• Zeballos's Motion Requesting Provisional Remedies to Secure the Effectiveness of Judgment ( Docket No. 49) be DENIED.
• Perfumania's oral motion for Sanctions be DENIED, without prejudice, and that Perfumania be given leave to file a written motion, if it so desires; and,
• Perfumania's oral motion to have Zeballos certified to the U.S. Attorney's Office for investigation and possible prosecution for having committed fraud upon the Court be DENIED.
This Report and Recommendation is filed pursuant to 28 U.S.C. § 636(b)(1)(B) and Rule 72(a) of the Local Rules of Court. Any objections to the same must be specific and must be filed with the Clerk of Court within ten (10) days of notice. Rule 72(d), Local Rules of Court; Fed.R.Civ.P. 72(b). Failure to timely file specific objections to the Report and Recommendation waives the right to review by the District Court, and waives the right to appeal the District Court's order. United States v. Valencia-Copete, 792 F.2d 4, 6 (1st Cir. 1986); Park Motor Mart, Inc. v. Ford Motor Co., 616 F.2d 603 (1st Cir. 1980). The parties are advised that review of a Magistrate-Judge's Report and Recommendation by a District Judge does not necessarily confer entitlement as of right to a de novo hearing and does not permit consideration of issues not raised before the Magistrate-Judge. Paterson-Leitch v. Massachusetts Elec., 840 F.2d 985 (1st Cir. 1988).