Juul Labs, Inc. v. 4X Pods

• Decision Date: 22 December 2020
• Docket Number: Civ. No. 18-15444 (KM) (MAH)
• Citation: 509 F.Supp.3d 52
• Parties: JUUL LABS, INC., Plaintiff, v. 4X PODS, Eonsmoke, LLC d/b/a 4X PODS, Gregory Grishayev, Michael Tolmach, and John Does 1–50, Defendants.
• Court: U.S. District Court — District of New Jersey

509 F.Supp.3d 52

JUUL LABS, INC., Plaintiff,

v.4X PODS, Eonsmoke, LLC d/b/a 4X PODS, Gregory Grishayev, Michael Tolmach, and John Does 1–50, Defendants.

Civ. No. 18-15444 (KM) (MAH)

United States District Court, D. New Jersey.

Signed December 22, 2020

Liza M. Walsh, Katelyn O'Reilly, Marc D. Haefner, William T. Walsh, Jr., Walsh Pizzi O'Reilly Falanga LLP, Newark, NJ, Dennies Varughese, Sterne, Kessler, Goldstein & Fox, Washington, DC, for Plaintiff.

Mark Aaron Kriegel, Ewing, NJ, for Defendants 4X PODS, Eonsmoke, LLC, Michael Tolmach.

Dwayne Franklin Stanley, Husch Blackwell, LLP, St. Louis, MO, Mark Aaron Kriegel, Ewing, NJ, for Defendant Gregory Grishayev.

KEVIN MCNULTY, U.S.D.J.:

Juul Labs, Inc. makes e-cigarettes, one component of which is an insertable pod of nicotine and flavoring. Eonsmoke, LLC¹ also makes pods and has marketed them with the word "Juul" in social media posts and advertising, while at least sometimes using packaging similar to Juul's. Juul sued Eonsmoke, alleging, among other things, trademark and trade dress infringement. In response, Eonsmoke began moving funds to avoid having to pay Juul any judgment. To freeze Eonsmoke's assets, Juul moved for injunctive relief, namely an asset freeze in anticipation of the equitable remedy of disgorgement. I denied the motion, concluding that some limited claims had a likelihood of success on the merits, that it was too early to assess others, and that an asset freeze was too broad a remedy. Juul Labs, Inc. v. 4X PODS , 439 F. Supp. 3d 341, 360–61 (D.N.J. 2020), appeal dismissed , 2020 WL 5240430 (3d Cir. July 24, 2020) (" Juul I "). Following an amendment to the complaint, more discovery, and further development of the factual record, Juul renews its motion. (DE 232.)² For the following reasons, the motion is GRANTED .

I. BACKGROUND³

A. Facts

Juul developed an e-cigarette device and now dominates that market. Juul I , 439 F. Supp. 3d at 345. One component of that device is a pod filled with a proprietary blend of, among other things, liquid nicotine and flavoring. Id. A user inserts the pod into the device (which resembles a USB stick) and inhales. The device then vaporizes the liquid in the pod, allowing the user to "smoke" or "puff" the vapor (hence the term "vaping"). (Am. Compl. ¶ 2; see generally Food & Drug Admin., "Vaporizers, E-Cigarettes, and other Electronic Nicotine Delivery Systems (ENDS)" (Sept. 17, 2020), https://www.fda.gov/tobacco-products/products-ingredients-components/vaporizers-e-cigarettes-and-other-electronic-nicotine-delivery-systems-ends.) Juul makes pods, which it sells either as a component of Juul kits that include a device, or separately. (Thomas Rep. at 7.) Juul trademarked the word "Juul" and its logo and uses a distinctive packaging with those trademarks. (Am. Compl. ¶¶ 24, 26, 28, 30, Ex. 1, 2.)

Eonsmoke, an e-cigarette company ran by Gregory Grishayev and Michael Tolmach, developed its own pods, which are compatible with Juul devices.⁴ To market those pods, Eonsmoke relied mostly on social media like Instagram, Twitter, Facebook, and Tumblr. (Tolmach Tr. at 74:6–8, 166:1–6, 184:1–7; Grishayev Tr. at 283:16–23.) Eonsmoke's posts mostly used the same format: (1) an image of the Eonsmoke product, which often included a label that the pod was "Juul compatible," accompanied by (2) a short caption describing the product or inviting the viewer to purchase it, followed by (3) hashtags. (Thomas Rep. at 14–21.)

A hashtag consists of the pound/number symbol (#), followed by text. When a social media user adds a hashtag to a post, the hashtag, which is hyperlinked, acts as a tag. This tagging has two consequences: First, if a viewer of the post clicks the hashtag, the social media platform will take the viewer to a page containing any other posts with that hashtag. Second, if a user searches that hashtag through the platform's search engine, the platform will take the user to the page containing any posts with that hashtag. Hashtags thus have an indexing or cataloguing function, "allow[ing] people to easily follow topics they are interested in" and "discover content and accounts based on [their] interests." Twitter, "How to use hashtags," https://help.twitter.com/en/using-twitter/how-to-use-hashtags (last visited Dec. 12, 2020). In other words, hashtags provide a way to link individual posts to larger topics and conversations.

When Eonsmoke entered the market, it included hashtags of other e-cigarette brands in its posts. It used "Juul" the most. Tolmach and Grishayev explained that they used "Juul" in hashtags to "promote" Eonsmoke. (E.g. , Tolmach Tr. at 74:6–8; Grishayev Tr. at 283:16–23.) Indeed, Eonsmoke recognized that, given the function of a hashtag, the hashtags would allow Eonsmoke's posts to be found via the Juul name. (Tolmach Tr. at 214:8–22.)

To illustrate the form of Eonsmoke's social media posts, I reproduce two representative examples, one from Instagram and one from Facebook, which I will call Post 1 (DE 231-2, Ex. 14, at 3 (sour berry flavor)) and Post 2 (Thomas Rep. at 19 (grape flavor)):

Not long after Eonsmoke began this marketing strategy, its revenues shot up—from $2.3 million in 2017, to $30 million in 2018, to $90 million in 2019. (Thomas Rep. at 26.) Also during this time, Eonsmoke developed packaging that resembled Juul's and had retailers display the Juul and Eonsmoke products near one another. Juul I , 439 F. Supp. 3d at 346.

B. Juul I

Juul sued Eonsmoke. Juul's original complaint asserted claims for, among other things, trademark infringement of the Juul logo under 15 U.S.C. § 1114 (Count 1) and false designation of origin under § 1125(a) based on infringement of the Juul logo trademark and packaging trade dress (Count 2). (DE 1 ¶¶ 57–72.) Discovery revealed communications between Tolmach and Grishayev "express[ing] in no uncertain terms that they will never pay any judgment that may ultimately be entered in this action." Juul I , 439 F. Supp. 3d at 347. Juul also found out that Tolmach and Grishayev jointly opened a brokerage account, which they called the "family office account," and had moved funds from the Eonsmoke business checking account to that account. Id. at 348.

Concerned that Eonsmoke was dissipating its assets to avoid paying any judgment, Juul moved for injunctive relief to freeze Eonsmoke's assets, estimated to be in the tens of millions of dollars. Id. at 349. Before I ruled, Juul moved to amend its complaint. The (then-proposed) Amended Complaint, among other things, added a more specific claim that Eonsmoke committed trademark infringement by using the Juul wordmark in social media posts. (Am. Compl. ¶¶ 85–94.) I held a hearing on Juul's motion for an injunction in January 2020.

I issued a decision in Juul I the next month, holding as follows:

• Juul was likely to succeed on its trademark infringement and trade dress claims based on the logo and packaging. 439 F. Supp. 3d at 356, 360.

• Irreparable harm was not established because (1) there was not proof that Eonsmoke was dissipating—as opposed to just moving—assets; and (2) few Eonsmoke products with Juul-like packaging or using the Juul logo were sold, with resulting estimated profits of less than $500,000, so freezing tens of millions of dollars in assets was not warranted. Id. at 358–59.

• The proposed wordmark claim could potentially recover profits on all Eonsmoke products sold, but Juul had not yet actually asserted or produced evidence on the merits of that claim or the resulting profits. Id. at 358, 360.

• Although an asset freeze was not yet warranted, Eonsmoke was to report its finances quarterly to the Court. Id. at 360–61.

C. New Developments

Since Juul I , some new facts have developed that are the subject of Juul's renewed motion for an asset freeze. They can be summarized as follows:

First, Judge Hammer granted Juul's motion to amend, so the wordmark claim is now a part of the case. (DE 185.)

Second, more assets have been expended or moved. In particular, Tolmach purchased a $2.3 million property in Los Angeles, for which he spent $250,000 on renovations/construction and $91,000 on furniture. (DE 223-1; 227-6; 231-2, Ex. 11, 12.) Next, there was an unexplained $50,000 transfer to an unidentified account. (DE 227-2.) Less significantly, there has been some unexplained smaller-scale consumption, like a $6,500 credit card payment. (DE 227-1.)

Third, Tolmach and Grishayev opened new accounts with a different bank, which they call "substitute accounts," and moved around 90% of assets from the "family office" account to the new accounts. (DE 167-2, at 16–17; 181; 223.) (These movements occurred in January 2020, prior to the issuance of my decision in Juul I , but Eonsmoke did not reveal these movements until after that decision.) Eonsmoke explains that the bank for the previous accounts changed its management and investment policies; the new accounts, it says, were opened simply because they provided "more advantageous account management and investment income." (DE 167, at 1.)

It is important to note that the defense has at all times conceded that these are Eonsmoke's funds; indeed it has insisted that they are Eonsmoke's funds in connection with arguing that they have not been dissipated, arguing that any withdrawals for the benefit of the individual defendants are simply routine distributions of profits.

Fourth, discovery has continued. Of note are two expert reports submitted by Juul. One is a survey of e-cigarette users conducted by Dr. Melissa Pittaoulis, PhD, who specializes in surveying and sampling, to test whether social media-literate consumers were confused by Eonsmoke's social media posts as to the origin of their products. (Pittaoulis Rep. at 3, 13.) The second is a report by Vincent A. Thomas, an accountant, which relied on financial data produced by Eonsmoke to estimate Eonsmoke's sales and profits. (Thomas Rep. at 1–2.)

Fifth, Eonsmoke is no longer in business, as of April 2020. (DE 231-1; 182-1 ¶ 6; Tolmach Tr. at...