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United States v. Zen Magnets, LLC

United States District Court, D. Colorado

March 22, 2016

UNITED STATES OF AMERICA, Plaintiff,
v.
ZEN MAGNETS, LLC, and SHIHAN QU, Defendants.

ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT

CHRISTINE M. ARGUELLO UNITED STATES DISTRICT JUDGE

This case arose in March of 2015, when Plaintiff, the Consumer Product Safety Commission (the CPSC or the Commission), initially discovered that Defendants were selling sets of small, powerful magnets to consumers, despite the Commission’s warnings that such sales were in violation of the Consumer Product Safety Act (CPSA). Specifically, the Commission alleged that Defendants were violating the CPSA because the magnets - which Defendants had purchased from another magnet distributor, Star Networks, USA LLC (Star) - were subject to a recall, following a settlement between the Commission and Star. (Doc. # 1.)

On May 14, 2015, this Court granted the Commission’s Motion for Preliminary Injunction, enjoining Defendants from “directly or indirectly selling, offering for sale, or distributing in commerce small magnets with a flux index greater than 50 that Defendants purchased from Star Networks, USA LLC . . . .” (Doc. # 12 at 12.) The CPSC now requests that the Court grant summary judgment in its favor and issue a permanent injunction in this matter. (Doc. # 20.) As discussed in greater detail below, because there are no genuine issues of material fact regarding whether Defendants violated the CPSA, the Court grants the instant Motion.

I. BACKGROUND

A. FACTS

Shihan Qu founded, owns, and operates Zen Magnets, LLC (Zen), a Boulder-based company that imports, packages, and sells sets of hundreds of small, powerful magnets through its websites. (Doc. ## 12 at 1, 2-13 ¶¶ 5-6.) These magnets, which are marketed and commonly used as so-called “sculptural” desk toys, have been the subject of considerable attention from federal safety regulators. (Doc. # 1, ¶ 1.) In 2010, the CPSC began receiving reports of serious injuries caused by small magnets, particularly in young children. 79 Fed. Reg. 59, 962, 59, 964 (Oct. 3, 2014). When multiple magnets are ingested, they are powerful enough to attract rapidly and forcefully in the gastrointestinal tract, causing tissue perforations and/or blockage of the intestines. See 16 C.F.R. § 1240.5(a)(2). If these injuries are not treated immediately, often with surgery, they can be fatal. Id.

In 2012, the CPSC filed administrative complaints against Zen and Star, after both companies refused to voluntarily cease their sales of small magnet sets and to recall those magnet sets they had already sold. (Doc. # 28-1 at 2-26, 29-54.) The CPSC attempted to settle both complaints. On July 10, 2014 - during the settlement negotiations between the CPSC and Star - Zen purchased 917, 000 individual, small 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, or approximately 88%. (Doc. # 20-1 at 18.) This purchase included approximately 114, 000 magnetic cubes that Star had previously marketed as “Magnicube Magnet Cubes” and approximately 803, 000 magnetic spheres that Star had previously marketed as “Magnicube Magnet Balls.” (Doc. ## 20-1 at 30, 55-56; 28, ¶ 2.) For ease of reference, the Court will refer to the 917, 000 magnets Defendants purchased in this July 10, 2014 transaction as “the Star Magnets.”

Although the CPSC was unable to settle its complaint with Zen, [1] on July 17, 2014 - just seven days after Zen’s purchase of the Star Magnets - Star signed a Consent Agreement settling its administrative complaint with the CPSC. That Agreement provided that Star would stop selling the “Subject Products, ” which it defined as “small, individual magnets with a flux index greater than 50 sold under the brand name Magnicube Magnet Balls (Magnicube Spheres) and Magnicube Magnet Cubes (Manicube Cubes) . . . ”; recall the Subject Products it had already sold; and destroy Subject Products still in its possession. (Doc. # 20-1 at 3-14.) The Consent Agreement also defined Star as a “manufacturer, importer and distributor, as those terms are defined in . . . the CPSA, 15 U.S.C. Section 2052(a)[(11)] . . . of Magnicube Spheres and Magnicube Cubes (collectively, the Subject Products), ” and noted that the “Subject Products are offered for sale to consumers for their personal use in or around a permanent or temporary household or residence, in recreation or otherwise.” (Id. at 4.)

Almost immediately after receiving them from Star, Defendants mixed the sphere-shaped Star Magnets with other, indistinguishable sphere-shaped magnets from Zen’s existing magnet inventory. (Doc. # 28, ¶ 3; Doc. # 20-1 at 56.) Zen placed this mixture of Star Magnets and other magnets in its own packaging and began selling the intermixed magnetic spheres as “Neoballs.” Zen also repackaged the cube-shaped Star Magnets in its own packaging and sold them as “NewbCubes” (no mixture occurred with the cube-shaped Star Magnets because Zen had no cube-shaped magnets in its existing inventory). (Doc. ## 2-9, 2-12; 20-1 at 57; 28, ¶ 4.) However, Zen made no physical changes - such as changes to size, shape, or magnetic flux[2] - to any of the “raw” Star Magnets themselves, prior to placing them in new packaging for sale. (Doc. # 20-1 at 55.)

On August 4, 2014, the CPSC announced its settlement with Star by posting a press release on its website. (Id. at 34.) The CPSC’s press release also contained a link to the Consent Agreement. (Id.) 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.” (Id. at 21.) Zen’s statement also vowed to “continue this legal, awareness, and lobbying battle, until our very last drop of cash-flow blood. We will combat the CPSC’s magnet prohibition until triumph, or until a glorious death of insolvency on the legal battlefield.” (Id. at 22.) Additionally, Zen posted a link to the Star settlement and recall announcement on the CPSC’s website, as well as a link to the Consent Agreement. (Id. at 21.)

On December 1, 2014, Zen’s website posted a statement declaring that “We have Cube Magnets, not by popular demand, but inheritance from fallen comrade. We’ll call them NewbCubes. . . Find and purchase at excellent prices at the bottom of neoballs.com.” (Doc. # 20-1 at 25.)

After learning that Defendants had purchased the Star Magnets and were selling them to consumers, on March 4, 2015, the CPSC sent a notice of noncompliance to Qu, requesting that he and Zen immediately stop their sales of Star Magnets and recall those Star Magnets already sold. (Id. at 27.) This notice specifically stated that the 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 CPSA, respectively. (Id. at 28.) 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.” (Doc. # 2-8.) 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 clarified that Zen had already sold all of the cube-shaped Star Magnets, but that it was continuing to sell the “Neoballs, ” i.e., the intermixed sphere-shaped Star Magnets comingled with other, indistinguishable magnetic spheres. (Doc. # 20-1 at 31.)

On April 3, 2015, the CPSC responded to Qu, and reiterated its position that notwithstanding Zen’s actions in purportedly “un-brand[ing]” and “convert[ing]” the Star Magnets, Zen was still violating the law by continuing to sell the Star Magnets. (Doc. # 20-1 at 32, 33.) It also explicitly warned Defendants that the CPSC intended to pursue all available legal options, including injunctive relief, to prevent the continued sale of the Star Magnets, and also noted that Defendants’ actions “may result in civil and criminal penalties.” (Id.) In his reply, dated April 7, 2015, Mr. Qu’s attorney reiterated his position that because Zen had repackaged 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 CPSA. (Doc. # 2-11.)

B. PROCEDURAL BACKGROUND

On May 5, 2015, the CPSC filed a Complaint in this Court against Defendants alleging violations of the CPSA. On the same day, it filed a Motion for Preliminary Injunction, arguing that the Court should stop Defendants from selling the Star Magnets, as well as order Defendants to destroy the Star Magnets still in their possession and recall any Star Magnets already sold to consumers. (Doc. ## 1, 2, 2-14.) On May 11, 2015, the Court held a half-day evidentiary hearing regarding Plaintiff’s Motion for a Preliminary Injunction; as of that day, Defendants were still selling the sphere-shaped Star Magnets (i.e., the “Neoballs.”) (Doc. ## 11, 28, ¶ 5.) At that hearing, Qu admitted that he understood that Star and the CPSC were in the process of negotiating a settlement when he purchased the magnets from Star (indeed, “It was that understanding which made the price low for us”). (Doc. # 20-1 at 48.) He also admitted that when he agreed to purchase the Star Magnets, he was “aware” that Star was “going to enter into a Consent Agreement” with the CPSC and “it was likely that it would soon illegal to sell Magnicube products.” (Id. at 52.) Additionally, Qu testified that he had “responsibility” for Zen’s website’s postings, and he also acknowledged that he received the CPSC’s letters from March 4, 2015 and April 3, 2015. (Id. at 53-54.)

On May 14, 2015, the Court granted in part Plaintiff’s Motion for Preliminary Injunction. (Doc. # 12.) Although the Court did not order Defendants to recall the Star Magnets from consumers, [3] it did order Defendants to “segregate and quarantine all of the Star Magnets in the [Zen] distribution chain and in inventory in a timely manner, ” and also enjoined Defendants from “directly or indirectly selling, offering for sale, or distributing in commerce small magnets with a flux index greater than 50 that Defendants purchased from Star Networks, USA LLC (‘Star’) on or about July 10, 2014, ” including the indistinguishable magnets Zen comingled with the Star Magnets during its repackaging. (Doc. # 12 at 12-13.) On June 12, 2015, the Court entered an Order preserving the preliminary injunction until this case is decided on the merits. (Doc. # 18.)

The instant Motion requests permanent injunctive relief with respect to the Star Magnets as well as the indistinguishable magnets that Defendants mixed with the Star Magnets when it repackaged the Star Magnets. For ease of reference, the Court will refer to this group of “intermixed” magnets as the “Repackaged Star Magnets.” Specifically, the CPSC requests that the Court (1) permanently enjoin Defendants from selling the Repackaged Star Magnets, offering them for sale, or distributing them in commerce; (2) order Defendants to recall the Repackaged Star Magnets sold prior to May 14, 2015 (i.e., the date of the Court’s preliminary injunction) and provide full refunds to consumers who return those magnets pursuant to the recall; and (3) destroy any Repackaged Star Magnets in Defendants’ current inventory as well as any Repackaged Star Magnets that are returned in the recall. (Doc. # 20 at 11-12.) The Motion also requests that the Court enter summary judgment on its claim that Defendants “knowingly” violated the CPSA in continuing to sell the Repackaged Star Magnets, such that, at a later juncture, the CPSC can recommend a civil penalty and the Court can ultimately impose a penalty pursuant to 15 U.S.C. § 2069(a)(1) & (b). (Id. at 7-11, 15-16.)

II. STANDARD OF REVIEW

Summary judgment is proper when “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). A fact is “material” if it is essential to the proper disposition of the claim under the relevant substantive law. Wright v. Abbott Labs., Inc., 259 F.3d 1226, 1231-32 (10th Cir. 2001). A dispute is “genuine” if the evidence is such that it might lead a reasonable jury to return a verdict for the nonmoving party. Allen v. Muskogee, Okl., 119 F.3d 837, 839 (10th Cir. 1997). When reviewing motions for summary judgment, a court must view the evidence in the light most favorable to the non-moving party. Id. However, conclusory statements based merely on conjecture, speculation, or subjective belief do not constitute competent summary judgment evidence. Bones v. Honeywell Int’l, Inc., 366 F.3d 869, 875 (10th Cir. 2004).

The moving party, the CPSC in the instant case, bears the initial burden of demonstrating an absence of a genuine dispute of material fact and entitlement to judgment as a matter of law. Id. In attempting to meet this standard, a movant who does not bear the ultimate burden of persuasion at trial does not need to disprove the other party’s claim; rather, the movant need simply point out to the Court a lack of evidence for the other party on an essential element of that party’s claim. ...


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