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Perfetti Van Melle USA Inc. v. Midwest Processing, LLC

United States District Court, D. South Dakota, Southern Division

February 26, 2016




Plaintiffs Perfetti Van Melle USA, Inc. and Perfetti Van Melle Benelux B.V. (collectively, "Perfetti") arranged through a third party for Defendants Midwest Processing, LLC ("Midwest") and Dexter Jorgensen ("Jorgensen") to recycle candy that Perfetti had manufactured but deemed unsalable. Perfetti sued Defendants in this Court after learning that Defendants wrongfully had diverted the candy to retail stores for sale rather than recycling it. This Court entered a default judgment against Defendants under Federal Rule of Civil Procedure 55(b)(2), Doc. 43, and set a briefing schedule on the issue of Perfetti's recoverable damages, Doc. 44. Perfetti filed a brief and supporting evidence concerning its damages, and the time for Defendants to respond has long passed.[1] For the reasons explained below, this Court grants in part Perfetti's request for damages and permanent injunction.

I. Facts

Perfetti is a global manufacturer of candy and chewing gum whose brands include Airheads®, Airheads Xtremes®, and Mentos®. Doc. 1 at ¶¶ 1, 12. All Perfetti products manufactured in the United States are sold through authorized distribution channels to retailers around the country. Doc. 1 at ¶ 13. Perfetti introduced a new product in 2014 called "Airheads Xtremes® Bites" ("Xtremes® Bites"). Doc. 1 at ¶ 20; Doc. 18-1 at 1; Doc. 18-2 at 1. Xtremes® Bites were initially imported from Italy, but Perfetti USA began manufacturing the candy in the United States in July 2014. Doc. 1 at ¶ 23; Doc. 18-1 at 1; Doc. 18-2 at 1.

Between November 2014 and February 2015, Perfetti USA determined that certain Xtremes® Bites production runs did not meet specifications and would therefore be withheld as unsalable product. Doc. 1 at ¶ 25; Doc. 18-2 at 1-2. The sanding sugar on some of the product did not adhere correctly, causing the product to become harder than usual, and individual pieces showed signs of clumping together in the package. Doc. 1 at ¶ 25. Other problems arose with packaging of the product, including sealing defects. Doc. 1 at ¶ 25. Although posing no health or safety risk to consumers, the withheld product had defects in quality or packaging that are common when calibrating a new production line and that would make the product less appealing to consumers. Doc. 1 at ¶ 26; Doc. 18-2 at 2.

Perfetti USA contacted an environmental services broker, Advanced Environmental, Inc. ("Advanced Environmental"), to arrange for the recycling of the unsalable Xtremes® Bites. Doc. 1 at ¶ 28; Doc. 18-2 at 2. Perfetti USA specifically instructed Advanced Environmental that the candy was not to be sold out on the market. On Perfetti USA's behalf, Advanced Environmental engaged Midwest, a South Dakota company operated by Jorgensen, to haul away and recycle the unsalable Xtremes® Bites. Doc. 1 at ¶¶ 7, 8, 28; Doc. 18-2 at 2. Midwest and Jorgensen agreed with Advanced Environmental to recycle the unsalable Xtremes® Bites. Doc. 18-3 at 2. Advance Environmental never told Jorgensen or Midwest that they could sell the candy. Doc. 18-3 at 3.

Between November 2014 and February 2015, Midwest, through a logistics company, picked up fifteen truckloads of unsalable Xtremes® Bites and candy slurry from Perfetti USA's facility in Kentucky. Doc. 1 at ¶¶ 29, 30, 31; Doc. 18-2 at 3. Rather than recycling the loads, Midwest had the majority of them shipped to Silver Dollar Sales, Inc. ("Silver Dollar"), a Mississippi wholesaler. Doc. 1 at ¶¶ 30, 31; Doc. 45-1 at 2; Docs 38, 39. Midwest provided falsified certificates of disposal to Perfetti USA attesting to the recycling of the individual loads. Doc. 1 at ¶ 33. The certificates of disposal came attached to bills of lading showing that the ultimate destination of the loads was Midwest's business address in Burbank, South Dakota. Doc. 1 at ¶ 31; Doc. 18-2 at 6-7; Doc. 18-3 at 16-29.

In mid-April 2015, Perfetti USA first learned that an independent grocery sales broker, Tray Harrison ("Harrison"), had approached JONS International Markets ("JONS"), a Southern California-based grocer, with sample 3.8 ounce bags of Xtremes® Bites. Doc. 1 at ¶ 34; Doc. 18-2 at 2. Harrison had offered to sell JONS multiple pallets of Xtremes® Bites for well below the average wholesale price. Doc. 1 at ¶ 36; Doc. 18-2 at 2. Suspicious of the low price and the fact that Harrison was not affiliated with Crossmark, Perfetti's authorized sales broker, JONS contacted a Crossmark representative about the offer, who in turn contacted Perfetti USA. Doc. 1 at ¶¶ 37, 38; Doc. 18-2 at 2. Perfetti USA traced the lot code on a sample bag that Harrison left with JONS to a production run of Xtremes® Bites that Midwest received in February 2015 for recycling. Doc. 1 at ¶ 39; Doc. 18-2 at 2-3.

Perfetti hired two law firms-Frost Brown Todd LLC and Carrington, Coleman, Sloman & Blumenthal, LLP-to sue Harrison after he refused to cooperate with Perfetti's attempt to determine how its unsalable product reached the marketplace. Doc. 45-1 at 1-2. At a hearing in late April 2015, Harrison revealed that he had obtained the Xtremes® Bites from Silver Dollar Sales. Doc. 1 at ¶ 41. Around the same time, Perfetti learned that another independent sales representative, Timothy Avers ("Avers"), was attempting to sell a large quantity of Xtremes® Bites at a price well below wholesale. Doc. 45-1 at 2. Perfetti engaged an Illinois firm, Schopf & Weiss LLP, to investigate Avers, who eventually cooperated and revealed that Silver Dollar was his supplier. Doc. 45-1 at 2.

Diverted Xtremes® Bites also have appeared in Alabama. Doc. 1 at ¶ 46. A grocery store in Hartford, Alabama offered to sell Crossmark representatives a bin of two-ounce Xtremes® Bites packages for $800.00. Doc. 1 at ¶ 46. The store was selling the two-ounce packages individually for well below the suggested retail price. Doc. 1 at ¶ 46; Doc. 18-2 at 3. The bin was gone when a Crossmark employee returned to purchase it on April 22, 2015, but the employee was still able to obtain twenty-five leftover packages of two-ounce Xtremes® Bites. Doc. 1 at ¶ 47; Doc. 18-2 at 3. The lot codes on the twenty-five packages matched with product that Perfetti USA had provided to Midwest for recycling in November 2014. Doc. 1 at ¶ 48; Doc. 18-2 at 3.

Perfetti filed the present complaint on May 22, 2015, alleging, among other things, that Defendants committed fraud and deceit, violated the Lanham Act, and engaged in unfair competition. Doc. 1. This Court set a hearing on Perfetti's motion for a temporary restraining order that same day, notifying the Defendants by email of the time and place of the hearing and inviting them to participate in person or by telephone. Doc. 33 at 6. Perfetti alone appeared at the hearing, after which this Court granted Perfetti's motion. Doc. 33 at 6. This Court set a second hearing for May 28, 2015, to consider Perfetti's motion for a preliminary injunction. Doc. 33 at 6. Although Defendants received notice of the hearing via email from this court and personal service by Perfetti, they did not participate. Doc. 33 at 6. On June 4, 2015, this Court entered a preliminary injunction enjoining Defendants from distributing or selling Xtremes® Bites and giving Defendants ten days to produce an accounting explaining to whom they had sold the candy and the amount of profits they received from doing so. Doc. 24.

On June 22, 2015, Perfetti moved for an order to show cause because Defendants had failed to produce the accounting. Doc. 25. Perfetti also applied for an entry of default judgment, which the Clerk of Court granted on June 25, 2015, because Defendants had not answered or otherwise responded to the complaint. Doc. 30. Thereafter, this Court granted Perfetti's motion to show cause, Doc. 33, held a hearing at which both Perfetti and counsel for Defendants appeared, and issued an order finding Defendants in contempt of court and giving them until July 17, 2015, to produce the previously-ordered accounting, Doc. 36.

Defendants submitted two responses to this Court's order for an accounting. Docs. 38, 39. In the first response, Defendants stated that they sold eight truckloads of Airheads Xtremes® Bites to Silver Dollar for $6, 000 a truckload. Doc. 38 at 1. Defendants explained that the $6, 000 per a truckload price "was reduced by amount Defendants had to pay Advanced for the product or the transportation cost. After all costs were deducted, Defendants net profit per load was $2, 000, for a total profit of $16, 000.00." Doc. 38 at 1. Defendants further explained that they paid Advanced Environmental "approximately $4, 000.00 per load of packaged product." Doc. 38 at 1. In their second response, Defendants again stated that they made $16, 000 in total profit but gave a different accounting of their costs. Doc. 39. Specifically, Defendants said that they paid Advanced Environmental $2, 000 per load[2] of candy and then sold the loads to Silver Dollar for $6, 000 a load, minus $2, 000 per load for shipping costs borne by Silver Dollar. Doc. 39 at 1.

Because of the discrepancy in Defendants' accountings, this Court granted Perfetti leave to subpoena Silver Dollar. Doc. 42. Silver Dollar's response and documentation established that Defendants' calculations were at best unreliable and at worst fraudulent. Silver Dollar responded that it had paid Defendants a total of $93, 200.00 for the Xtremes® Bites and that it had paid the shipping for each load. Doc. 45-3 at 1-5, 17. Perfetti eventually purchased Silver Dollar's remaining inventory of Xtremes® Bites for $42, 554.45. Doc. 45-1 at 2. Through January ...

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