Fashion Grp. v. Johnny's Signature, Inc.

• Decision Date: 20 September 2019
• Docket Number: 18 Civ. 2959 (PGG)
• Parties: FASHION GROUP, LLC and FUNGYUN, INC., Plaintiffs, v. JOHNNY'S SIGNATURE, INC., JOHNNY'S SIGNATURE INT'L, INC., DEEPAK SAJNANI, BILCO IMPORT & EXPORT, INC., BILCO INDUSTRIES, INC., BURTON CHEN (a/k/a Billy Chen, a/k/a William Chen, a/k/a Zhiquan Chen), JERRY LAU, and DOUBLE TOP INTERNATIONAL, INC., Defendants.
• Court: U.S. District Court — Southern District of New York

FASHION GROUP, LLC and FUNGYUN, INC., Plaintiffs, v. JOHNNY'S SIGNATURE, INC., JOHNNY'S SIGNATURE INT'L, INC.,DEEPAK SAJNANI, BILCO IMPORT & EXPORT, INC.,BILCO INDUSTRIES, INC., BURTON CHEN (a/k/a Billy Chen,a/k/a William Chen, a/k/a Zhiquan Chen),JERRY LAU, and DOUBLE TOP INTERNATIONAL, INC., Defendants.

18 Civ. 2959 (PGG)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

September 20, 2019

ORDER

PAUL G. GARDEPHE, U.S.D.J.:

This is an action for false advertising under the Lanham Act. Plaintiffs allege that Defendants - clothing manufacturers and their owners - misrepresent the fabric of their garments, enabling them to sell tens of millions of dollars' worth of clothing to retailers at a lower price than their competitors. (Am. Cmplt. (Dkt. No. 46) ¶¶ 1-7, 30) Pending before the Court is Plaintiffs' motion to file a Second Amended Complaint. (Dkt. No. 73) For the reasons stated below, Plaintiffs' motion will be granted.

BACKGROUND

I. FACTS

Plaintiff Fashion Group, LLC is a Delaware limited liability company with offices in New York. (Am. Cmplt. (Dkt. No. 46) ¶ 13) Plaintiff Fungyun, Inc. is a Delaware corporation with offices in California, and is the "corporate parent" of Fashion Group. (Id. ¶ 14) Plaintiffs bring this action "on behalf of themselves and their affiliated and related companies." (Id. at 1) Plaintiffs "seek[] to directly and indirectly market, commercialize[,] and sell textile goods, apparel[,] and accessories to retailers and wholesalers," and have "direct and indirect stakes in the market in which Defendants sell mislabeled goods." (Id. ¶¶ 30-31)

Defendants Johnny's Signature, Inc., Johnny's Signature International, Inc., Bilco Import & Export, Inc., Bilco Industries, Inc., and Double Top International, Inc. are New York corporations with offices in New York. (Id. ¶¶ 15-16, 18-19, 21) Defendant Deepak Sajnani owns the Johnny's Signature entities; Defendant Burton Chen owns the Bilco entities; and Defendant Jerry Lau owns Double Top. (Id. ¶¶ 17, 20, 22)

The Amended Complaint alleges that Defendants affix labels to their clothing that misrepresent the fabric that the clothing is made of. (Id. ¶ 1) Defendants' labels state that their clothing is a blend of 78% rayon and 22% nylon, which Plaintiffs characterize as a "relatively high[-]quality fabric." (Id. ¶¶ 42, 52, 68) Defendants' clothing is not actually made of this fabric, however: Between January and March 2018, Plaintiffs randomly purchased twenty-seven samples of Defendants' clothing, and had the fiber content tested by a textile testing service. (Id. ¶¶ 66-69) The textile tester reported that none of the garments tested contained the advertised fabric blend ("Textile Report"). (Id. ¶ 70)

According to the Amended Complaint, Defendants conspired to "profit from the sale of mislabeled goods" to retailers such as Ross, Burlington, Boscovs, Amazon, and Gabriel Brothers ("Retailers"). (Id. ¶¶ 2, 23) As a result, Defendants have sold tens of millions of dollars' worth of clothing to Retailers using "different, cheaper[,] and inferior" fabric. (Id. ¶¶ 2, 3, 99, 131) Plaintiffs complain that "Retailers that would have ordered from Plaintiffs or Plaintiffs' customers instead order from Defendants based on Defendants['] unfair practices and false advertising." (Id. ¶ 103) "For example, when Retailers place their orders with Defendants(instead of Fungyun, Inc. or Fungyun Inc.'s customers), Fungyun, Inc. directly and indirectly loses out on revenues, profits, market share, market profile and prestige, relationships with Retailers, manufacturing volume[,] and other benefits that accompany securing such orders." (Id. ¶ 104)

The Amended Complaint pleads claims for (1) false advertising, false description, and unfair competition in violation of the Lanham Act; (2) deceptive acts and practices in violation of N.Y. Gen. Bus. Law § 349(h); (3) false advertising in violation of N.Y. Gen. Bus. Law § 350; (4) unfair competition; (5) unjust enrichment; and (6) tortious interference with prospective economic advantage. (Id. ¶¶ 120-190)

II. PROCEDURAL HISTORY

The Complaint was filed by Plaintiff Fashion Group on April 4, 2018. (Dkt. No. 1) On April 6, 2018, Judge Kimba Wood - sitting in Part One - signed a temporary restraining order that, inter alia, (1) enjoined Defendants from advertising or selling garments that incorrectly state their fabric content; (2) directed Defendants to preserve certain mislabeled garments; and (3) directed Defendants to identify the location and amount of any remaining inventory of certain mislabeled garments in their control. (TRO (Dkt. No. 24) at 2-3)

On April 16, 2018, this Court held a hearing on Plaintiffs' request for a preliminary injunction (1) barring Defendants from advertising or selling garments that incorrectly state their fabric content; (2) directing Defendants to institute testing protocols to ensure that their goods do not misstate their fabric content; and (3) directing Defendants to preserve and maintain their inventory of mislabeled garments. (See id. at 1; Pltf. PI Br. (Dkt. No. 28) at 5) At that hearing, the parties informed the Court that they had nearly reached an agreement as to injunctive relief, and requested that the temporary restraining order remain in place while the parties completed their negotiations. (See Dkt. Nos. 29, 35, 36, 37)

Plaintiffs filed the Amended Complaint on June 13, 2018, adding Fungyun as a named Plaintiff. (Dkt. No. 46)

On July 11, 2018, this Court entered a Consent Order resolving Plaintiffs' application for a preliminary injunction. (Dkt. No. 50) In that Order, Defendants (1) conceded that Plaintiffs' Textile Report is accurate, and that all of the inventory enjoined by the temporary restraining order is mislabeled; (2) agreed to stop selling mislabeled garments, and agreed to have "future production runs of garments tested by a reputable, widely-accepted testing service"; (3) agreed to pay $75,000 toward Plaintiffs' attorney's fees; and (4) agreed to maintain records concerning the enjoined inventory. (Id. at 2-3) The Consent Order permits Defendants to relabel and sell the enjoined inventory. (Id. at 3)

On July 16, 2018, Defendants filed Answers to the Amended Complaint. (Dkt. Nos. 51, 54-55)

On July 30, 2018, Plaintiffs informed the Court that they seek to file a Second Amended Complaint ("SAC") that adds a new plaintiff - NYC Alliance Co. LLC. (Dkt. No. 61) On August 13, 2018, this Court entered a Case Management Plan providing that "Defendants shall indicate whether they consent to the filing of a Second Amended Complaint no later than August 17, 2018." (Dkt. No. 62)

On August 20, 2018, Plaintiffs informed the Court that Defendants would not consent to the filing of the SAC, and requested leave to file it. (Dkt. No. 63) On November 29, 2018, this Court held a conference concerning Plaintiffs' proposed motion for leave to amend, and set a briefing schedule. (Dkt. No. 71) On January 3, 2019, Plaintiffs moved to file a SAC. (Dkt. No. 73)

III. PROPOSED SECOND AMENDED COMPLAINT

The SAC does not alter the allegations or causes of action in the Amended Complaint - it only seeks to add NYC Alliance as a Plaintiff. (Compare Am. Cmplt. (Dkt. No. 46) with SAC (Dkt. No. 75-1))

According to Plaintiffs, NYC Alliance is the entity that noticed Defendants' "impossibly low pricing" in the first place: "NYC Alliance contacted Fungyun about its concerns because Fungyun was NYC Alliance's logistical provider and supplier. . . . After failing to identify legitimate grounds for Defendants' continuing price advantages, the decision was made to have an industry standard laboratory test the Defendant[s'] goods." (Lowney Aff. (Dkt. No. 74) ¶¶ 4-6) After discovering that Defendants had mislabeled their garments, NYC Alliance and Fungyun "discussed how to proceed":

The officials involved in these discussions for Fungyun and NYC Alliance expressed literal fear for their personal safety. Having uncovered a multi-million dollar, international conspiracy involving possibly hundreds of millions [of] dollars, Fungyun and NYC Alliance were worried that the Defendants might be serious criminals who might stop at nothing to protect their enterprise.

In addition to the perceived risk of physical harm, Fungyun and NYC Alliance feared becoming industry pariahs. The companies discussed the fact that unmasking Defendants' mislabeling scheme would cause problems for the large Retailers who are essential to Fungyun's and NYC Alliance's businesses.

. . . .

NYC Alliance expressed particular concern and reluctance to proceed, because it dealt directly with Retailers such that its relationships seemed most directly at risk.

. . . .

Accordingly, Fungyun had one of its wholly owned subsidiaries (Fashion Group) commence this action.

(Id. ¶¶ 8-10, 14, 16) "[A]fter the above-listed risks appeared to subside, Fungyun agreed to join the lawsuit," and Plaintiffs filed the Amended Complaint - which added Fungyun as a named Plaintiff - on June 13, 2018. (Id. ¶ 17; Am. Cmplt. (Dkt. No. 46)) NYC Alliance was "still reluctant to join the suit due to lingering concerns" at that time, but by late July 2018 NYC Alliance informed Plaintiffs that "it was willing to join the suit." (Lowney Aff. (Dkt. No. 74) ¶¶ 18, 20)

DISCUSSION

I. LEGAL STANDARDS

A party may amend a pleading with the court's leave, and the court "should freely give leave when justice so requires." Fed. R. Civ. P. 15(a)(2); see also Rachman Bag Co. v. Liberty Mut. Ins. Co., 46 F.3d 230, 234 (2d Cir. 1995) ("The Supreme Court has emphasized that amendment should normally be permitted, and has stated that refusal to grant leave without justification is 'inconsistent with the spirit of the Federal Rules.'") (quoting Foman v. Davis, 371 U.S. 178, 182 (1962)). "Under this liberal standard, a motion to amend should be denied only if the moving party has unduly delayed or acted in bad faith, the opposing party will be unfairly prejudiced if leave is granted, or the proposed amen...