Samsung Elecs. Am., Inc. v. Chung

• Decision Date: 16 February 2017
• Docket Number: Civil Action No. 3:15-CV-4108-D
• Parties: SAMSUNG ELECTRONICS AMERICA, INC., Plaintiff, v. YANG KUN "MICHAEL" CHUNG, et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

SAMSUNG ELECTRONICS AMERICA, INC., Plaintiff, v. YANG KUN "MICHAEL" CHUNG, et al., Defendants.

Civil Action No. 3:15-CV-4108-D

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION

February 16, 2017

MEMORANDUM OPINION AND ORDER

In this action by plaintiff Samsung Electronics America, Inc. ("Samsung")¹ alleging claims related to a scheme involving the distribution of service parts for Samsung devices, defendant All Pro Distributing, Inc. ("All Pro") moves under Fed. R. Civ. P. 12(b)(6) to dismiss Samsung's first amended complaint ("amended complaint") for failure to state a claim on which relief can be granted. For the reasons that follow, the court grants the motion in part and denies it in part, and grants Samsung leave to replead.

I

Samsung is the U.S. subsidiary of Samsung Electronics Co., Ltd., a Korean company.² Samsung produces and sells, among other things, cell phone replacement parts for use by third parties in servicing and refurbishing Samsung devices. Samsung enters into agreements with these third-party servicers and distributors to sell the replacement parts, which it does not authorize for sale on the open market. In 2008 Samsung and All Pro entered into an agreement under which All Pro purchased parts for service. In 2011 the companies entered into a distributor agreement for certain Samsung products. And in 2013 All Pro signed an accessory distribution agreement authorizing it to sell accessory products to authorized Samsung retailers. No agreement permitted unauthorized use of trademarks or unauthorized distribution of Samsung products.

Samsung alleges that All Pro and four Samsung employees whose employment involved the management and sale of Samsung parts, and who Samsung alleges exerted control over Samsung's Services Operations Department—Michael Chung ("Chung"), Thomas Porcarello ("Porcarello"), Yoon-Chul "Alex" Jang, and Jin-Young Song (collectively, the "Employee Defendants")—were involved in an unlawful scheme centeringon service parts. As it relates to All Pro, the scheme had two main components: (1) providing "build kits"—a collection of all replacement parts necessary to construct a Samsung phone—to All Pro and other third parties; and (2) designing and rigging an auction process to allow select companies, including All Pro, to obtain Samsung parts at a significant discount. According to Samsung, All Pro compensated some of the Employee Defendants through bribes and kickbacks, including $10,000 in payments to Chung. Samsung alleges that this scheme operated from 2012 until 2015.

Regarding the first aspect of the scheme, Samsung asserts that Chung, Porcarello, and other employees directed build kits to All Pro through a third party. The build kits included, among other things, PBAs (the "brains" of Samsung cell phones) and OCTAs (the touch screens used on the devices.). Samsung intended the parts to be used for servicing, and it did not authorize either part to be resold. The OCTA also bore Samsung's registered trademark. Samsung alleges that the third party constructed phones from the build kits and then routed them to All Pro for distribution.

The second aspect of the scheme involved an auction process to dispose of extra or obsolete parts. According to Samsung, Porcarello and Chung played a role in establishing the process, and they rigged auctions to favor All Pro. Samsung alleges that Chung and Porcarello suppressed competition and provided All Pro with confidential information about the process before giving it to other bidders. This allowed All Pro to pre-sell parts that it would buy at auction and undercut the market.

After Samsung filed this lawsuit, All Pro moved to dismiss Samsung's complaint, andSamsung moved for leave to amend. The court denied both motions without prejudice, and it granted Samsung leave to file an amended complaint. Samsung then filed its amended complaint, asserting these claims against All Pro: federal and state trademark infringement; violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(a), (c), and (d); breach of fiduciary duties; aiding and abetting breach of fiduciary duties; tortious interference with contract; civil conspiracy; and misappropriation of confidential information under Texas law. All Pro now moves under Rule 12(b)(6) to dismiss the amended complaint. Samsung opposes the motion.

II

Under Rule 12(b)(6), the court evaluates the pleadings by "accept[ing] 'all well-pleaded facts as true, viewing them in the light most favorable to the plaintiff.'" In re Katrina Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir. 2007) (quoting Martin K. Eby Constr. Co. v. Dall. Area Rapid Transit, 369 F.3d 464, 467 (5th Cir. 2004)). To survive All Pro's motion to dismiss, Samsung must allege enough facts "to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U. S. 544, 570 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant[s] [are] liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). "The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id.; see also Twombly, 550 U.S. at 555 ("Factual allegations must be enough to raise a right to relief above the speculative level [.]"). "[W]here the well-pleaded facts donot permit the court to infer more than the mere possibility of misconduct, the complaint has alleged—but it has not 'show[n]'—'that the pleader is entitled to relief.'" Iqbal, 556 U.S. at 679 (quoting Rule 8(a)(2)). Furthermore, under Rule 8(a)(2), a pleading must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Although "the pleading standard Rule 8 announces does not require 'detailed factual allegations,'" it demands more than "'labels and conclusions.'" Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 555). And "'a formulaic recitation of the elements of a cause of action will not do.'" Id. (quoting Twombly, 550 U. S. at 555).

To obtain a Rule 12(b)(6) dismissal based on an affirmative defense, the "successful affirmative defense [must] appear[] clearly on the face of the pleadings." Cochran v. Astrue, 2011 WL 5604024, at *1 (N.D. Tex. Nov. 17, 2011) (Fitzwater, C.J.) (quoting Clark v. Amoco Prod. Co., 794 F.2d 967, 970 (5th Cir.1986)). In other words, All Pro is not entitled to dismissal under Rule 12(b)(6) based on an affirmative defense unless Samsung "'has pleaded [it]self out of court by admitting to all of the elements of the defense.'" Id. (quoting Sivertson v. Clinton, 2011 WL 4100958, at *3 (N.D. Tex. Sept. 14, 2011) (Fitzwater, C.J.)).

III

The court first considers whether Samsung has sufficiently pleaded trademark infringement claims under the Lanham Act, 15 U.S.C. § 114(a), and under the Texas Trademark Act ("TTA"), Tex. Bus. & Comm. Code Ann. § 16.102 (West 2015), and unfair competition by false designation claims under the Lanham Act, 15 U.S.C. § 125(a).

A

"To succeed on a trademark infringement claim, a plaintiff first must show ownership of a legally protectable mark, and then it must establish infringement of the mark." TGI Friday's, Inc. v. Great Nw. Rest., Inc., 652 F.Supp.2d 763, 767 (N.D. Tex. 2009) (Fitzwater, C.J.) (citing Am. Rice, Inc. v. Producers Rice Mill, Inc., 518 F.3d 321, 329 (5th Cir. 2008)). Under the Lanham Act, infringement exists if a person

uses (1) any reproduction, counterfeit, copy, or colorable imitation of a mark; (2) without the registrant's consent; (3) in commerce; (4) in connection with the sale, offering for sale, distribution, or advertising of any goods; (5) where such use is likely to cause confusion, or to cause mistake or to deceive.

Id. (internal quotation marks and citations omitted). A device built from genuine parts can still qualify as a "reproduction, counterfeit, copy, or colorable imitation" if the process used to construct it was different than that which the mark holder used to construct its genuine products. Mary Kay, Inc. v. Weber, 601 F.Supp.2d 839, 853 (N.D. Tex. 2009) (Fish, J.). In these circumstances, "the mark holder [needs] to show only that '(i) it has established legitimate, substantial, and nonpretextual quality control procedures, (ii) it abides by these procedures, and (iii) the non-conforming sales will diminish the value of the mark.'" Id.

A finding of "likelihood of confusion" requires "a probability of confusion" rather than a mere possibility. See Xtreme Lashes, LLC v. Xtended Beauty, Inc., 576 F.3d 221, 226 (5th Cir. 2009). These factors are used to determine the likelihood of confusion: (1) the strength of the plaintiff's trademark, (2) mark similarity, (3) product similarity, (4) outlet and purchaser identity, (5) advertising media similarity, (6) defendant's intent, (7) actualconfusion, and (8) care exercised by potential purchasers. Am. Rice, 518 F.3d at 329. "The digits are a flexible and nonexhaustive list. They do not apply mechanically to every case and can serve only as guides, not as an exact calculus." Paulsson Geophysical Servs., Inc. v. Sigmar, 529 F.3d 303, 311 (5th Cir. 2008) (quoting Scott Fetzer Co. v. House of Vacuums Inc., 381 F.3d 477, 485 (5th Cir. 2004)).

B

All Pro maintains that Samsung's claims must be dismissed because the allegations of the amended complaint, taken as true, do not demonstrate that All Pro sold, offered for sale, distributed, or advertised infringing products, or that any devices All Pro sold would likely cause confusion in the marketplace, and because the first sale doctrine precludes recovery.³ Samsung responds that All Pro misunderstands its contention under the Lanham Act as asserting that the devices that All Pro constructed and distributed are genuine.Samsung contends that, even though All Pro used genuine parts to build the devices...