United States v. Zen Magnets, LLC, Civil Action No. 15–cv–00955
| Citation | 104 F.Supp.3d 1277 |
| Decision Date | 14 May 2015 |
| Docket Number | Civil Action No. 15–cv–00955 |
| Parties | United States of America, Plaintiff, v. Zen Magnets, LLC, and Shihan Qu, Defendants. |
| Court | United States District Courts. 10th Circuit. United States District Court of Colorado |
Jamie L. Mendelson, U.S. Attorney's Office, Denver, CO, for Plaintiff.
ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR A PRELIMINARY INJUNCTION
This matter is before the Court on the United States of America's1Motion for a Preliminary Injunction. (Doc. # 2.) The Court received evidence and testimony on this matter in a half-day evidentiary hearing, held on May 11, 2015.2For the following reasons, the Court grants the Motion in part.
A. PROCEDURAL HISTORY
Shihuan Qu founded, owns, and operates Zen Magnets, LLC (Zen), a company incorporated in Boulder, Colorado. Zen imports and sells small, powerful balland cube-shaped magnets through its website. These magnets, which are marketed and commonly used as “sculptural” desk toys, have been the subject of considerable attention from federal safety regulators. In 2010, the Consumer Product Safety Commission (CPSC) began receiving reports of serious injuries caused by small magnets, particularly to young children. 79 Fed.Reg. 59,962, 59,964 (Oct. 3, 2014). When more than one magnet is ingested, they can interact rapidly and forcefully in the gastrointestinal tract, attracting across intestinal tissues. 16 C.F.R. § 1240.5(a)(2). The magnets can cause perforations and/or blockage, which, if not treated immediately (often with surgery), can be fatal. Id.
In 2012, the CPSC filed administrative complaints against Zen and Star Networks (Star), after each company refused to voluntarily cease sales of magnet sets and to recall those already sold. The CPSC attempted to settle both complaints. On July 10, 2014—during the settlement negotiations between the CPSC and Star—Defendants purchased 917,000 magnets from Star at a substantial discount (the invoice indicates that by paying $5,500 for these magnets, Zen received a “discount” of $40,350). (Ex. 4.) The purchase included magnetic cubes that Star marketed as “Magnicube Magnet Cubes” and magnetic spheres that Star marketed as “Magnicube Magnet Balls.” (Id.) For ease of reference, the Court will refer to the magnets purchased in this transaction as “the Star Magnets.”
Although the CPSC was unable to settle its complaint with Zen,3it did settle with Star, and on July 17, 2014—just seven days after Zen's purchase of the Star Magnets—Star signed a Consent Agreement providing that it would stop selling magnet sets, recall the magnets it had already sold, and destroy magnets still in its possession. (Ex. 1.)
On August 4, 2014, the CPSC posted a press release on its website, announcing its settlement with Star and containing a link to the Consent Agreement. (Ex. 13.) That same day, Qu posted a statement on Zen's website, noting that “news of Magnicube's settlement comes today,” and describing Zen as the “last surviving magnet sphere company still standing, selling, and fighting in the United States.” (Ex. ## 5, 5–A.) Zen also posted a link to the Star recall announcement on the CPSC's website. (Id.)
Almost immediately after receiving them from Star, Zen repackaged the Star Magnets in its own packaging and rebranded the Magnicube Magnet Cubes as “NewbCubes,” and the Magnet Balls as “Neoballs.” Additionally, Zen intermixed the Star magnetic balls with its already-existing magnet inventory. (Ex. # 9.) Zen's new packaging for the intermixed magnets contained a warning label on the bag for the magnet tins, a printed warning leaflet inside of the tin itself, and a small warning on the side of the magnet tin. (Exs.# 18, Ex. F.) On December 1, 2014, Qu posted a statement on Zen's website, stating that (Doc. # 26.)
After learning that Zen had purchased magnets from Star and was selling them to consumers, on March 4, 2015, the CPSC sent a notice of noncompliance to Qu, requesting that Zen immediately stop its sale of Star Magnets and recall those Star Magnets it had already sold. (Ex. # 7.) The notice specifically stated that sale of the Star Magnets violated 15 U.S.C. § 2068(a)(2)(B) and (C), which prohibit the sale of any products that are subject to voluntary corrective action in consultation with the CPSC, or subject to an order issued under the Consumer Product Safety Act, respectively. (Id.) The notice also stated that continuing to sell or distribute the Star Magnets could result in penalties pursuant to 15 U.S.C. §§ 2068and 2070. (Id.)
On March 6, 2015, Qu responded to the CPSC's notice through counsel, stating that Zen “cannot” confirm that it had ceased selling the Star Magnets because “the subject product was destroyed, un-branded, and converted to the raw magnets which are a fungible commodity and which are not prohibited as yet to Zen.” (Ex. # 8.) Qu also asserted that “it is not the commodity magnets themselves that are the subject product of Star Networks, but in fact the combination of magnicube packaging, magnicube advertising, and the high powered commodity magnets that constitute the subject products.” (Id.) In a follow-up letter dated March 20, 2015, Qu's counsel further stated that Zen had already sold the magnetic cubes, but that it was continuing to sell the magnetic balls after commingling them with other magnetic balls. (Ex. # 9.)
On April 3, 2015, the CPSC responded and reiterated its position that notwithstanding Zen's actions in “un-branding” the Star Magnets, Zen was still violating the law, and warned that the CPSC intended to pursue all available legal options, including injunctive relief, to prevent the continued sale of the Star Magnets. (Ex. # 10.) In his reply, dated April 7, 2015, Mr. Qu's attorney restated his position that because Zen had repackaged and rebranded the Star Magnets and “[t]he only component of the product Zen used were the actual magnets that Zen would have received from the magnet factory itself,” Zen was not in violation of the Consent Agreement. (Ex. # 11.)
On May 5, 2015, the CPSC filed a Complaint against Defendants, as well as a Motion for Preliminary Injunction. The latter argued that the Court should stop Zen from selling Star Magnets, as well as order Defendants to destroy the Star Magnets in its possession and recall the Star Magnets which were already sold to customers. (Doc. ## 1, 2, 2–14.) This Court held a half-day evidentiary hearing on May 11, 2015.
The Consumer Product Safety Act (CPSA) empowers the CPSC to bring administrative complaints and conduct rulemaking procedures to protect the public from unreasonable risks of injury from consumer products. 15 U.S.C. §§ 2051(b)(1), 2053. Upon the Commission's request, this Court has jurisdiction to enjoin violations of the CPSA, including by issuing preliminary injunctions “to restrain the distribution in commerce” of products which the Commission has reason to believe present substantial hazards to consumers. 15 U.S.C. §§ 2064(g)(1), 2071(a)(1).
The CPSA explicitly authorizes injunctive relief; thus, the CSPC need not prove all four of the elements traditionally required for a preliminary injunction,4because the Act's violation is presumed to cause, for example, irreparable harm. SeeAtchison, T. & S.F. Ry. Co. v. Lennen,640 F.2d 255, 260 (10th Cir.1981)(internal citation omitted) (“Where an injunction is authorized by statute it is unnecessary for plaintiff to plead and prove the existence of the usual equitable grounds, irreparable injury and absence of an adequate remedy at law”); see alsoUnited States v. Rx Depot, Inc.,290 F.Supp.2d 1238, 1246 (N.D.Okla.2003)(citing cases). Rather, to obtain a preliminary injunction under these circumstances, the United States has a two-part burden: it must establish that 1) defendants have violated the statute and 2) there exists “some cognizable danger of recurrent violation.” SeeRoe v. Cheyenne Mountain Conference Resort, Inc.,124 F.3d 1221, 1231 (10th Cir.1997)(citing United States v. W.T. Grant Co.,345 U.S. 629, 633, 73 S.Ct. 894, 97 L.Ed. 1303 (1953)).
In determining whether there is a danger of recurrence, a court may consider the bona fidesof the expressed intent to comply, the effectiveness of the discontinuance, and, in some cases, the character of past violations. W.T. Grant Co.,345 U.S. at 633, 73 S.Ct. 894. Although past misconduct does not lead necessarily to the conclusion that there is a likelihood of future misconduct, it is “highly suggestive of the likelihood of future violations.” Commodity Futures Trading Comm'n v. Wall St. Underground, Inc.,281 F.Supp.2d 1260, 1273 (D.Kan.2003)(citing Commodity Futures Trading Comm'n v. Hunt,591 F.2d 1211, 1220 (7th Cir.1979)). The Court may also consider a defendant's voluntary cessation of challenged practices, the genuineness of a defendant's efforts to conform to the law, and the defendant's progress towards improvement. Rx Depot, Inc.,290 F.Supp.2d at 1246(internal citations omitted).
The CPSC has met its burden to show that a preliminary injunction is warranted in the instant case: there is a substantial likelihood that Defendants have violated the statute as well as a cognizable danger of recurring violations in the future.
15 U.S.C. § 2068(a)(2)(B)prohibits the sale or distribution of any product that is subject to voluntary corrective action in consultation with the CPSC. Accordingly, as a preliminary matter, the Court must decide whether the Star Magnets that Zen repackaged, rebranded and sold as “NewbCubes” and “Neoballs,” were “subject to a voluntary corrective action”—that is, whether they constituted “subject products” under the Consent Agreement that CPSC signed with Star. The Consent Agreement defined the “subject products” as “small, individual magnets with a flux index greater than 50 sold under the name Magnicube...
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