Fed. Trade Comm'n v. Zaappaaz, LLC
| Docket Number | 4:20-cv-2717 |
| Decision Date | 09 June 2023 |
| Parties | FEDERAL TRADE COMMISSION, Plaintiff, v. ZAAPPAAZ, LLC., et al., Defendants. |
| Court | U.S. District Court — Southern District of Texas |
MAGISTRATE JUDGE'S REPORT AND RECOMMENDATION AND ORDER
This is a consumer fraud case.[1] The Federal Trade Commission (the “FTC”) alleges that Zaappaaz, LLC (“Zaappaaz”) and Azim Makanojiya (together “Defendants”) misled consumers regarding when personal protective equipment (“PPE”)[2] it sold during the COVID-19 pandemic would be delivered. Pending before the Court are the FTC's motion for summary judgment, ECF No. 99,[3] Defendants' motion for partial summary judgment on damages,[4] ECF No. 101 Defendants' objections to Plaintiff's summary judgment evidence, ECF No. 102, and Plaintiff's motion to exclude the testimony of Rosemary Coates, ECF No 112.[5]
In this action, the FTC alleges that Zaappaaz failed to timely ship PPE to consumers in violation of the Mail, Internet, or Telephone Order Merchandise Rule (the “Merchandise Rule”), 16 C.F.R. § 435, and made materially misleading statements to consumers in violation of Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45 (the “FTC Act”). The issues before the Court are whether the FTC has demonstrated that there is no genuine issue of material fact such that it is entitled to summary judgment as a matter of law and whether Defendants have established that they are entitled to partial summary judgement as a matter of law.
Based on thorough consideration of the briefing, the evidence, and the applicable law, the Court finds that the uncontroverted facts establish that Zaappaaz failed to timely deliver PPE to a large portion of its customers and further failed to notify them of the anticipated delay after their orders were placed or provide them with an option to cancel their orders. These acts violate the Merchandise Rule and the FTC Act. Thus, the Court recommends that the FTC's motion for summary judgment should be granted as to liability. However, the Court finds that issues of fact remain as to the appropriate remedy and therefore the FTC's motion should be denied as to damages and Defendant's motion for partial summary judgment on damages likewise should be denied. Because the pandemic is over, there is no showing of a danger of recurrent violations in the future with respect to PPE. Thus, the FTC's request for a permanent injunction to prevent Defendants from offering PPE for sale should be denied. Further, because the Court recommends that the FTC's motion for summary judgment be granted as to liability, the Court should deny Plaintiff's motion to exclude the testimony of Rosemary Coates as moot because her testimony was limited to the issue of liability.
Summary judgment is appropriate when the movant has established that the pleadings, affidavits, and other evidence available to the court demonstrate that no genuine issue of material fact exists, and the movant is thus entitled to judgment as a matter of law. FED. R. CIV. P. 56(c). “A genuine dispute of material fact exists when the ‘evidence is such that a reasonable jury could return a verdict for the nonmoving party.'” Zavala v. Texas Lehigh Cement Co., LP, No. 1:21-CV-00082-DAE, 2022 WL 18046467, at *2 (W.D. Tex. Oct. 12, 2022) (quoting Bennett v. Hartford Ins. Co. of Midwest, 890 F.3d 597, 604 (5th Cir. 2018)). A fact is material “if and only if proof of its existence might affect the outcome of the case.” Roy v. City of Monroe, 950 F.3d 245, 254 (5th Cir. 2020). The party moving for summary judgment “bears the initial responsibility of informing the district court of the basis for its motion and identifying those portions of [the record] which it believes demonstrate the absence of a genuine [dispute] of material fact.” MDK Sociedad De Responsabilidad Limitada v. Proplant Inc., 25 F.4th 360, 368 (5th Cir. 2022) (quoting Nola Spice Designs, L.L.C. v. Haydel Enterprises, Inc., 783 F.3d 527, 536 (5th Cir. 2015)).
“Once the moving party has initially shown ‘that there is an absence of evidence to support the non-moving party's cause,' the non-movant must come forward with ‘specific facts' showing a genuine factual issue for trial.” Houston v. Texas Dep't of Agric., 17 F.4th 576, 581 (5th Cir. 2021) (quoting TIG Ins. Co. v. Sedgwick James of Washington, 276 F.3d 754, 759 (5th Cir. 2002)). When ruling on a motion for summary judgment, the Court views all facts and inferences in the light most favorable to the nonmoving party and resolves all disputed facts in its favor. Rodriguez v. City of Laredo, 459 F.Supp.3d 809, 814 (S.D. Tex. 2020).
The Court “may not make credibility determinations or weigh the evidence” in ruling on a summary-judgment motion. Id. (quoting Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000)). “Summary judgment cannot be defeated through ‘[conclusory] allegations and denials, speculation, improbable inferences, unsubstantiated assertions, and legalistic argumentation.'” Acker v. Gen. Motors, L.L.C., 853 F.3d 784, 788 (5th Cir. 2017) (quoting Oliver v. Scott, 276 F.3d 736, 744 (5th Cir. 2002)). Rather, the non-movant must demonstrate specific facts identifying a genuine issue to be tried to avoid summary judgment. FED. R. CIV. P. 56(E). “THUS, ONCE IT IS SHOWN THAT A GENUINE ISSUE OF MATERIAL FACT DOES NOT EXIST, “[S]UMMARY JUDGMENT IS APPROPRIATE . . . IF THE NON-MOVANT ‘FAILS TO MAKE A SHOWING SUFFICIENT TO ESTABLISH THE EXISTENCE OF AN ELEMENT ESSENTIAL TO THAT PARTY'S CASE.'” Tri Invs., Inc. v. United Fire & Cas. Co., 553 F.Supp.3d 400, 404 (S.D. Tex. 2020) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986)).
Zaappaaz is a Texas corporation formed in 2008. Answer at ¶¶ 6-7, ECF No. 100-115. Mr. Makanojiya founded, owns, and operates the company. Id. Until March 2020, Zaappaaz primarily marketed and sold consumer promotional goods, such as wristbands, lanyards, keychains, and can coolers. Id. at ¶ 15. Zaappaaz sold these goods through its websites: www.Wrist-band.com, WBpromotion.com, and CustomLanyard.net. Makanojiya Dep. (Aug. 11, 2021) 107:3-108:14, ECF No. 10022. Although each of these websites has a different domain name, they are identical. Id. Zaappaaz's primary supplier was Chandler Liu, a vendor based in China. Id. at 61:15-62:17. Mr. Liu packaged Zaappaaz's products and drop-shipped[6] them directly to its customers. Id. at 74:24-75:6. Zaappaaz had similar drop-ship relationships with other vendors, including Yaoli, USKY, USB, and Skyee. Id. at 76:11-22.
When customers ordered products from one of Zaappaaz's websites, it recorded the order number, order date, delivery date, shipping days, and the ordered product. Makanojiya Dep. (Aug. 11, 2021) 84:15-85:13, ECF No. 100-22; Makanojiya Dep. (Aug. 12, 2021) 235:20-239:7, ECF No. 100-42. After customers ordered a product from Zaappaaz, Mr. Liu received the order information and fulfilled the customer's order. Makanojiya Dep. (Aug. 11, 2021) 82:21-83:1, ECF No. 100-22. After shipping the product, Mr. Liu provided Zaappaaz with the tracking number. Id. at 83:2-12.
In March 2020, during the early part of the pandemic in the United States, Zaappaaz began offering PPE to consumers, including face masks. Id. at 109:9-16. Zaappaaz sourced PPE through Mr. Liu, a broker named Yaoli, and a supplier in Malaysia. Id. at 111:11-113:5; Makanojiya Dep. (Aug. 12, 2021) 291:23-292:1, ECF No. 100-42. Prior to confirming their purchase of PPE from Zaappaaz, customers were provided the products' shipping time, production time, and promised delivery date. Rottner Decl. Attach. B at 31, ECF No. 100-73. After confirming their purchase, customers received an email from Zaappaaz with that same information. Rottner Decl. Attach. AM, ECF No. 100-73. Thereafter, when orders were assigned tracking numbers, Zaappaaz sent a second email to customers with their order's tracking number. Makanojiya Dep. (Aug. 12, 2021) 252:7-25, ECF No. 100-42.
Zaappaaz advertised its PPE as in stock and provided rush and same day shipment options. Defs.' Ans. ¶¶ 14-15, ECF No. 100-115; Faber Decl. ¶ 12, ECF No. 100-11. For example, on its websites, Zaappaaz stated the following:
Through email, Zaappaaz also communicated the following: “ALL OF THESE PRODUCTS ARE FULLY IN STOCK, READY TO SHIP SAME DAY AND DELIVER IN 24 HOURS.” Omnisend Advertisement Information at Sheet1, ECF No. 100-30.
In March 2020, Zaappaaz recognized that the pandemic had “slowed down” its production and disrupted its supply chain. May 1, 2020 email from riskteam@braintreepayments.com to azimm@wrist-band.com, ECF No. 100-50 (“Our production has slowed down and supply chain has been dis[rupted] due to corona virus [sic]”). Although it is not clear whether these issues affected PPE or were limited to Zaappaaz's promotional merchandise, by April 2020, Zaappaaz experienced issues filling PPE orders in a timely manner. Makanojiya Dep. (Aug. 11, 2021) 116:21-117:11, ECF No. 100-22. These problems are reflected in the increase in Zaappaaz customer complaints from zero in January 2020 to 820 in April 2020. Complaint Summary, ECF No. 100-54. New restrictions in China affected Zaappaaz's ability to acquire PPE and deliver it to consumers. Makanojiya Dep. (Aug. 11, 2021) 118:17-120:24, ECF No. 100-22. Furthermore, on April 1, 2020, FedEx announced weight limitations on the amount customers could ship per day. Id. 120:8-24, 135:4-9. These combined changes prevented Zaappaaz from...
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