BACKGROUND
Schedule A Defendants Scheme (the “SAD Scheme”) refers to a system of mass-defendant intellectual property litigation occurring most frequently in the Northern District of Illinois and the Southern District of New York, primarily targeting non-U.S. based online merchants (predominately located in China).1 This specific strategy of intellectual property litigation initiated by rightsowners is characterized by a joinder of many unrelated merchant storefronts listed as defendants on a separately filed “Schedule A” attachment to the complaint, which is typically sealed.2
Although the SAD Scheme provides an avenue for rightsowners to address the ongoing problem to cost-effectively remedy high volumes of intellectual property infringement rampant in the online marketplaces (e.g., Amazon, Wish.com, Temu, eBay, Alibaba.com) where alleged infringers may conceal their identities and profits through offshore financial accounts,3 most SAD scheme cases are characterized by the circumvention of intellectual property and civil procedure rules, including severely low bond amounts, ex parte (meaning, no notice is provided) injunctive relief granted by courts imposing blanket asset freezes on merchant defendants’ accounts requiring third party marketplaces to enforce based on a complaint with generic allegations against merchant defendants not properly joined.4, 5
PROBLEMS WITH EX PARTE INJUNCTIVE RELIEF
Merchant defendants are typically served with process through alternative means (e.g., by email or publication on the law firms’ website) only after their businesses have been completely shut down by the issued ex parte temporary restraining order (“TRO”) or preliminary injunction (“PI”), most often automatically granted by the court absent objections.6, 7 Although there may be a recent trend by the Northern District of Illinois courts to scrutinize these filings and procedural concerns,8 plaintiff rightsowners continue to abuse the SAD Scheme to obtain default judgments or forced settlements against merchant defendants through extrajudicial resolutions – specifically, the trend toward court enforcement of the TRO against third party marketplace platforms (e.g., Amazon.com, Wish.com, Alibaba, Walmart, etc.), requiring them to freeze the merchant defendants’ accounts without determining whether the profits obtained were from infringing sales, and without determining whether the court can properly exercise jurisdiction over the third party.9
This is especially problematic because Fed. R. Civ. P. 65(d)(2) provides that a TRO may only bind a third party upon notice who is shown to be in active concert or participation with the defendant or the defendant’s agents.10 Additionally, imposing the blanket asset freeze against merchant defendants’ accounts yields significant business losses to the third party platform, negatively impacting their relationship with customers and the merchant sellers.11 Furthermore, rightsowners receive a significant windfall at the government’s expense by improperly joining merchant defendants and posting low bond amounts.12
CONCLUSION
The reality of these cases is, that if no defendant or third party objects to the ex parte injunctive relief sought, which in every case seeks to impose an extraterritorial asset restraint on merchant defendants’ accounts with no capped amount, which may or may not have infringing sales, third party platforms generally acquiesce to the TRO requirements and plaintiff rightsowners typically obtain substantial judgments against the merchant defendants who, more often than not, default or settle in an attempt to unfreeze their accounts so their businesses do not lose any more money.
END NOTES:
1 | Goldman, Eric, A SAD Scheme of Abusive Intellectual Property Litigation (November 20, 2023), 123 Columbia Law Review Forum 183 (2023), Santa Clara Univ. Legal Studies Research Paper No. 4381824, Available at SSRN: https://ssrn.com/abstract=4381824 or http://dx.doi.org/10.2139/ssrn.4381824.
2 | Id. at 184 (In addition to “Schedule A”, plaintiffs have also used the titles “Exhibit 1,” Exhibit A,” “Annex A,” and others… The SAD Scheme complaint caption typically refers to the defendants as “the Individuals, Corporations, Limited Liability Companies, Partnerships, and Unincorporated Associations Identified on Schedule A Hereto.”).
3 | Id. at 185.
4 | Id.
5 | See Complaint filed in Toyota Motor Sales, U.S.A., Inc. v. The Partnerships and Unincorporated Associations Identified on Schedule A, Case No. 1:23-cv-4789 (N.D.Ill. 2023) (describing generic allegations against more than 100 unrelated merchant defendants alleged to reside or operate in foreign jurisdictions and target their business activities toward consumers in the state of Illinois without offering any corresponding evidence or specific facts thereto).
6 | Collegiate Licensing Company, LLC v. The Partnerships and Unincorporated Associations Identified on Schedule A, Case No. 1:23-cv-4533 (N.D.Ill. 2023) (In addition to granting the ex parte TRO and blanket asset restraint sought by the plaintiff without permitting any named defendant an opportunity to object, the Court granted the plaintiff’s motion for electronic service of process albeit plaintiff merely asserting “few, if any, provide a physical address on the e-commerce store” and therefore falsely concluded that these merchants must reside in foreign jurisdictions and therefore electronic service of process was appropriate).
7| Zuru Inc. v. The Individuals, Partnerships and Unincorporated Associations Identified on Schedule A, Case No. 1:24-cv-04468 (N.D.Ill. filed May 30, 2024) (Although plaintiff knew that 79 of the 119 eBay sellers listed as merchant defendants in the action were located in the United States from the discovery provided by eBay, which intervened to dissolve the PI to the extent of the blanket asset freeze, plaintiff successfully obtained leave from the Court to serve the defendants by electronic service of process under Fed. R. Civ. P. 4(f) instead of Fed. R. Civ. P. 4(e)).
8 | Alison Frankel, Chicago judges are starting to push back against ‘SAD’ scheme in IP cases, Reuters (Nov. 19, 2024) (On Nov. 4, U.S. District Judge John Blakely dismissed a copyright infringement case against 18 defendants that were not related to one another; On Nov. 12, U.S. District Judge Sunil Harjani denied a different copyright owner’s motion for a TRO against 59 defendants, holding that the plaintiff failed to allege a relationship among the defendants that would justify joinder; On December 20, 2023, U.S. District Judge Steven Seeger denied plaintiff Zorro Production’s request to litigate its motion for a TRO against 310 defendants in secret by requesting all filings to be sealed).
9 | Nike Inc. v. The Partnerships and Unincorporated Associations Identified on Schedule A, Case No. 1:24-cv-02026 (N.D.Ill. 2024) (U.S. District Judge Joan Gotschall presumed that the court held personal jurisdiction over the third party platform, Wish.com, and that a finding that the third party platform be in active concert or participation with the merchant defendants was not a required finding to enforce the blanket asset restraint imposed by the granted ex parte TRO).
10| Animaccord Ltd. v. The Individuals, Corporations, Partnerships and Unincorporated Associations Identified on Schedule “A”, Case No. 1:23-cv-00173 (D.Haw. Jan. 10, 2024) (the Court required third party eBay and plaintiff to confer rather than to rule on the motions to enforce the TRO against eBay where eBay argued its inapplicability because it could not be found to be in active concert or participation with the merchant defendants; eBay and plaintiff reached an agreement modifying the scope of the asset freeze as it applied to eBay merchant defendants, requiring eBay to restrain an amount equal to ten times (“10X”) the gross sales value (“GMV”) hitting on keywords related to the trademark at issue).
11 | See Non-Party eBay’s Opposition to Plaintiff’s Motion for Preliminary Injunction filed in ZAPF Creation AG v. The Individuals, Corporations, Limited Liability Companies, Partnerships and Unincorporated Associations Identified on Schedule A Hereto, Case No. 1:24-cv-04010 (N.D.Ill. filed May 16, 2024) (eBay explained that the blanket asset freeze would cause irreparable harm if continued, harming its relationship with the sellers, cultivating a reputation as a nonreliable platform, and by causing damage to the competitive position of the business by preventing the merchant sellers from ordering inventory, processing refunds, ship orders, or make investments in their businesses where many of those sellers had thousands of non-infringing product listings).
12 | Supra Note 1, at 199 (If 200 defendants are improperly joined in a single complaint, the government loses $80,000 in potential filing fees; with over 3,000 SAD Scheme cases, this has cost courts over $250 million so far; Justin Gaudio, an attorney at Greer, Burns & Crain, a pioneer for plaintiffs in SAD Scheme cases, has admitted that it is in rightsowners’ best interests to take advantage of joining the unrelated merchant defendants, stating that “brand owners cannot afford to pay a quarter-billion [dollars] in filing fees to enforce their trademark rights through the courts”).
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If you have any questions about the matters expressed in this article, or if you would like a copy of any of the materials mentioned in it, please do not hesitate to contact:
Hannah Jones
Email: hannah.jones@balancelawfirm.com
Phone: +1 646.493.3468