United States District Court, D. Colorado
For USA, Plaintiff: Jamie L. Mendelson, LEAD ATTORNEY, U.S. Attorney's Office-Denver, Denver, CO; Patrick Glenn Jasperse, U.S. Department of Justice-DC-#386, Office of Consumer Protection Litigation, Washington, DC.
For Zen Magnets, LLC, Shihan Qu, Defendants: David C. Japha, David C. Japha, P.C., The Law Offices of, Denver, CO.
ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR A PRELIMINARY INJUNCTION
CHRISTINE M. ARGUELLO, United States District Judge.
This matter is before the Court on the United States of America's Motion 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. For 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 ball- and 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 gastointesinal 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, it 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 leaftlet 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 " We have Cube Magnets, not by popular demand, but inheritance from fallen comrade. We'll call them NewbCubes." (Doc. # 2-6.)
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. § § 2068 and 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 ...