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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: May 24, 2018

Order Vacating Default Judgment Reversed and Remanded for Traverse Hearing on Service

On May 17, 2018, the First Department issued a decision in Noah Bank v. Hudson Produce, Inc., 2018 NY Slip Op. 03630, reversing an order that vacated a default judgment and remanding for a traverse hearing, explaining:

Since defendant is a corporation, CPLR 311(a)(1) governs the method of service in this action. It is undisputed that both service of the complaint and of plaintiff’s motion papers seeking a default judgment were personally delivered to an employee of defendant, whom the corporate defendant’s principal asserts was not authorized to accept service. Thus an issue of fact is raised as to whether plaintiff validly served defendant pursuant to CPLR 311(a)(1). Accordingly, a traverse hearing should have been held to determine whether defendant was entitled to relief from the judgment pursuant to CPLR 5015(a)(4), before the court ruled on an excusable default and meritorious defense.

If, after the traverse hearing, the court finds that service was improper, then it must grant defendant’s motion to vacate the default judgment pursuant to CPLR 5015(a)(4) and dismiss the action. If, however, the court determines that service was proper under CPLR 311(a)(1), then the motion to vacate the default judgment must be denied pursuant to CPLR 5015(a)(1), as defendant failed to raise a meritorious defense.

(Internal citations omitted).

If you are served with a complaint and fail timely to answer, the court can enter judgment against you: a default judgment. Here, there was a question regarding whether the defendant was properly served, so the First Department ordered a traverse–an evidentiary hearing regarding service of the summons and complaint on the defendant. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether you have been properly served or if a default judgment has been entered against you.

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Posted: May 23, 2018

Summary Judgment Inappropriate Where Conflicting Inferences Can be Drawn from Evidence and Issues of Credibility Exist

On May 16, 2018, the Second Department issued a decision in UB Distributors, LLC v. S.K.I. Wholesale Beer Corp., 2018 NY Slip Op. 03559, holding that summary judgment is inappropriate where conflicting inferences can be drawn from the evidence and issues of credibility exist, explaining:

Here, the defendants failed to establish their prima facie entitlement to judgment as a matter of law. While the defendants submitted the deposition transcripts of their two principals and warehouse manager in which those witnesses denied that the defendants engaged in a double-redemption scheme, those witnesses also testified that the defendants kept no records of their container redemption transactions or records of a “cashbox” they used to pay some of their redemption expenses. Those witnesses offered vague and conflicting testimony as to why the defendants’ redemption volume fell so drastically around the time prosecutors acted on the double-redemption scheme on Long Island. Where, as here, conflicting inferences can be drawn from the evidence and issues of credibility exist, summary judgment is inappropriate.

(Internal citations omitted).

Cases in the Commercial Division of the New York courts usually involve a motion to dismiss at the outset and then a motion for summary judgment at the close of discovery, so such motions are a big part of our practice. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions about seeking or opposing a motion for pre-trial dismissal of a commercial lawsuit.

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Posted: May 22, 2018

Court Erred in Considering Extrinsic Evidence in Interpreting an Unambiguous Agreement

On May 16, 2018, the Second Department issued a decision in World Ambulette Transportation, Inc. v. Lee, 2018 NY Slip Op. 03560, holding that the trial court erred in considering extrinsic evidence in interpreting an unambiguous agreement, explaining:

[W]e disagree with the Supreme Court to the extent that it determined that the parties’ written agreement constituted nothing more than a profit-sharing agreement. A court’s fundamental objective in interpreting a contract is to determine the parties’ intent from the language employed and to fulfill their reasonable expectations. To this end, a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms. A contract is ambiguous if the terms are reasonably susceptible of more than one interpretation. Whether or not a writing is ambiguous is a question of law to be resolved by the courts. A court should determine the intent of the parties from within the four corners of the contract without looking to extrinsic evidence to create ambiguities.

Here, we disagree with the Supreme Court’s reliance upon extrinsic evidence to conclude that the parties had entered into nothing more than a profit sharing agreement, despite the wording of the agreement dated January 2, 2012. Contrary to the court’s conclusion, the written agreement was not ambiguous such that it could be construed as a profit-sharing agreement. The written agreement is entitled “Shareholder Agreement,” and it contains numerous provisions setting forth the rights and obligations of shareholders. In addition, the written agreement provides in paragraph 5, under the section entitled “Warranties,” that Chang owns 102 Class “A” shares and that the defendant owns 98 Class “A” shares. Accordingly, the plain language of the written agreement unambiguously demonstrates that the defendant was a shareholder.

(Internal quotations and citations omitted).

One reason that commercial parties all over the world choose to have their contracts governed by New York law is that the general rule in New York–as shown here–is if the contract is unambiguous, it is enforced as written despite what someone might later argue in a lawsuit. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.

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Posted: May 21, 2018

Court Of Appeals Rejects “Avoided Costs” As Proper Measure Of Damages For Misappropriation Of Trade Secrets

On May 3, 2018, the Court of Appeals issued an opinion, E.J. Brooks Co. v Cambridge Sec. Seals, 2018 NY Slip Op 03171, answering a question certified by the Second Circuit, namely whether a plaintiff can recover its competitor’s avoided costs as damages in a trade secrets action, whether as misappropriation, unfair competition, or unjust enrichment. A divided court answered in the negative.

Judge Feinman, writing for the majority, first noted that, in an action for unfair competition by misappropriation,

Damages must correspond to the amount which the plaintiff would have made except for the defendant’s wrong, not the profits or revenues actually received or earned by the defendant . . . . Under the ‘misappropriation theory’ of unfair competition, a party is liable if they unfairly exploit the skill, expenditures and labors of a competitor. The essence of the misappropriation theory is not just that the defendant has reaped where it has not sown, but that it has done so in an unethical way and thereby unfairly neutralized a commercial advantage that the plaintiff achieved through honest labor. Damages, therefore, must be measured by the loss of the plaintiff’s commercial advantage, which may not correspond to what the defendant has wrongfully gained . . . . the principle that a plaintiff’s losses may be measured practically and flexibly does not remove the requirement that damages be measured by the plaintiff’s actual losses.

To be sure, courts may award a defendant’s unjust gains as a proxy for compensatory damages in an unfair competition case . . . . but even in those cases it must first be shown that there is some approximate relation of correspondence, a causal relation not wholly unsubstantial and imaginary, between the gains of the aggressor and those diverted from his or her victim. Without evidence of that correspondence, there is no presumption of law or of fact that what a defendant has gained will competently measure what the plaintiff has lost.

The majority then held that nearly identical considerations applied to damages in trade secrets misappropriation action:

We agree that damages in trade secret actions must be measured by the losses incurred by the plaintiff, and that damages may not be based on the infringer’s avoided development costs. Authorities embracing the avoided cost method of damages almost universally consider them a measure of the defendant’s unjust gains, rather than the plaintiff’s losses. This calculation of damages, however, does not consider the effect of the misappropriation on the plaintiff. Because this figure is tied to the defendant’s gains rather than the plaintiff’s losses, it is not a permissible measure of damages.

It is true that, in trade secret cases, ‘loss’ is broadly defined and must account for the fact that trade secrets inherently derive their value from their confidentiality. The plaintiff’s injury in trade secret misappropriation cases includes the loss of competitive advantage over others by virtue of its exclusive access to the secret. Where disclosure of a trade secret has destroyed that competitive edge, the plaintiff’s costs of developing the product may be the best evidence of the (now-depleted) value that the plaintiff placed on the secret. However, it is neither automatically nor presumptively the case that the costs avoided by the defendant will be an adequate approximation of the plaintiff’s investment losses, any more than it can be presumed that the defendant’s sales would approximate those of the plaintiff.

Finally, the majority noted that a claim for unjust enrichment requires defendant to have profited at the plaintiffs expense, and development costs that defendant would have had to pay to third parties “do not constitute funds held by the defendant at the expense of the plaintiff” because the plaintiff had no pre-existing right to those funds.

In summary, therefore, the majority held that, although a defendant’s avoided costs could be used as a measure of unjust enrichment or trade secret misappropriation damages, the plaintiff must show that there is an “approximate relation of correspondence, a causal relation not wholly unsubstantial and imaginary” between its losses and the defendant’s avoided costs; availability of avoided costs as a measure of damages may not simply be presumed.

Judge Wilson, writing for the three dissenters, first stated the general point that:

Avoided costs are widely recognized as an available measure of damages in trade secret cases . . . . In both unfair competition actions and unjust enrichment actions, avoided-cost damages deprive the wrongdoer of its gain. As a policy matter, avoided-cost damages would often undercompensate plaintiffs, because no rational economic actor would spend $X to recover profits of merely $X. However, the calculation of avoided-cost damages is generally much simpler than, and less subject to challenge than, lost-profit damages, which makes them an attractive alternative for plaintiffs who are willing to forego a potentially larger recovery in favor of a smaller, more certain one. I do not suggest that avoided-cost damages will always be the best measure of damages. Rather, it is one of several measures of damages, subject to election by the plaintiff, challenge by the defendant, and acceptance by the trier of fact. Trade secret cases in particular require a flexible and imaginative approach to the problem of damages. Such flexibility and imagination have been, and should remain, a hallmark of our jurisprudence.

On the specific question of trade secrets damages, the dissent argued that

The majority claims that damages in trade secret actions must be measured by the losses incurred by the plaintiff. By ‘losses incurred by the plaintiff,’ the majority means ‘plaintiff’s lost profits,’ or perhaps ‘plaintiff’s development costs.’ That narrow interpretation flouts the above basic principles and fails to engage meaningfully with the unique nature of trade secrets, as well as the differences between profits and development costs. In a trade secret case, the plaintiff’s loss is the loss in value of the trade secret; that loss can be measured in several ways, but all correspond to the plaintiff’s loss, even though they may differ in amount . . . . Of course, plaintiffs will often want to prove lost profits as a measurement of damages, but that may be difficult or impossible to do, because factors exogenous to the theft (e.g., changes in demand, changes in costs, other competition, leak of the trade secret by the defendant to others) make the estimation of lost profits difficult or unreliable . . . . But a plaintiff’s costs of development or the costs a defendant avoided by stealing the secret are also appropriate measures, because those are reasonably related to the value of the trade secret. It is of no moment that they may not be the same dollar number as a lost-profits analysis might show: as anyone who has ever retained an expert to determine lost profits knows, no two experts are likely to arrive at the same figure. Again, the law does not require such exactitude in recompensing a wrong.

As to unfair competition, the dissent argued that the cases cited by the majority were inapt, only standing for the proposition

that defendants should be allowed to challenge the amount of damages claimed; for example, by showing that the defendant could have developed the same or an equivalent method through cheaper, legitimate means (thus challenging the claimed value of the secret) or that plaintiff retained some value in the secret that should be deducted from the claimed damage amount (e.g., when a court issues an injunction after defendant has made substantial sales). Those cases provide no basis whatsoever to announce that, as a matter of New York law, a plaintiff may never ‘recover damages that are measured by the costs the defendant avoided due to its unlawful activity.’ Rather, the answer to the second question asked by the Second Circuit must be yes — as one acceptable measure of damages for unfair competition, a plaintiff may sometimes recover defendant’s avoided costs as damages for its lost trade secret, because such avoided costs can be a reasonable approximation of the injury to the plaintiff, subject, of course, to evidentiary challenge by the defendant and acceptance by the trier of fact.

The dissent also pointed out that “common-law unfair competition is an action in equity and not one at law” where damages can be based upon the wrongdoer’s ill-gotten gains, and that “in an action for unfair competition, equity will treat the wrongdoer as a trustee for the plaintiff so far as the former has realized profits from its acts. Inability to prove damages would not preclude plaintiffs from recovering, on an accounting, profits realized from sales unlawfully made, together with interest thereon from the time of the commencement of the action.”

Finally, on unjust enrichment, the dissent argued that the majority had answered the wrong question, i.e. “whether TydenBrooks can state a claim for unjust enrichment at all. We lack the power to decide that question, which the federal district court has already decided.” The dissent also argued that the majority had improperly relied upon cases holding that an unjust enrichment action may not be brought if it is duplicative of a breach of contract claim, a point not applicable either to the general question posed by the Second Circuit or to the specific dispute that gave rise to it. As to the proper measure of damages, “it is not a necessary element of a cause of action for unjust enrichment to show that plaintiff suffered a loss corresponding to the gain received by the defendant. [Defendant] was unjustly enriched by stealing to avoid development costs, which injured [Defendant]. It would be against equity to allow the defendant to retain the value it received.”

As the dissent says, this opinion obscures more than it clarifies—subsequent decisions will be required to explain (a) the quantum of proof required to prove that the defendant’s avoided costs appropriately corresponds to the plaintiffs’ actual loss, and (b) how the majority’s holdings will affect—or not—the equitable rule that a defendant’s ill-gotten gains can be a proper measure of damages, regardless of whether they correlate to plaintiff’s actual losses.

The law protects intellectual property in a number of ways, but that protection is not unlimited; indeed, as this decision shows. We frequently litigate intellectual property claims, including trademark, copyright and trade secret claims. Contact Schlam Stone & Dolan of counsel attorney Niall D. O’Murchadha at nomurchadha@schlamstone.com if you or a client have questions about whether you have, or face, a claim for theft or infringement of intellectual property.

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Posted: May 20, 2018

Derivative Action Dismissed for Failure to Plead Demand or Demand Futility

On May 9, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Glaubach v. PricewaterhouseCoopers, LLP, 2018 NY Slip Op. 30875(U), dismissing a derivative action for failure to plead demand or demand futility, explaining:

Under Delaware law, and Delaware Chancery Court Rule 23.1, to have standing to pursue a derivative claim on behalf of a company, a plaintiff must make a pre-suit demand that the board pursue the contemplated action. Such a presuit demand may be excused, however, if such a demand would have been futile. Either presuit demand or demand futility must be pleaded with particularity in order for a derivative claim to survive a dismissal motion.

ln the instant case, the amended complaint fails to allege that Glaubach ever demanded that the Personal Touch board pursue an audit malpractice claim against PwC or that such a demand would have been futile. First, while Glaubach alleges demands that he made on the board of directors. His demands were for the Board to investigate alleged wrongdoing of certain company executives, not to investigate and commence an action against PwC for auditing malpractice. Specifically, he demanded that the Board take action against all parties who received monies fraudulently characterized as educational expenses. This fails to satisfy Delaware’s presuit demand requirement for the derivative accounting malpractice claim.

Moreover, the complaint fails to sufficiently allege demand futility. Where the subject of the derivative suit is not a business decision of the board but, instead, is a wrong committed against the company by a third party, or the board’s inaction, demand is only excused when the plaintiff alleges particularized facts raising a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand. A claim that the board failed to act, sometimes referred to as a lack of oversight claim, is possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment. In order to rebut the presumption of disinterestedness under the Ra/es test, the plaintiff must plead particularized facts that, if proved, would establish that a majority of the directors face a substantial likelihood of personal liability for the wrongdoing alleged in the complaint. Demand futility is examined with respect to the board’s membership at the time the amended complaint is filed, unless the alleged claims were validly being litigated at the time of the original pleading.

Here, the amended complaint fails to meet the requirements of demand futility. Glaubach’s claim is that the board violated their oversight duties. There are, however, no particular facts establishing that a majority of the board at the time plaintiffs commenced this action was interested or lacked independence. Plaintiffs fail to allege that any, much less a majority, of the directors faced a substantial likelihood of liability for PwC’s alleged malpractice. The complaint fails to allege that there were direct tics between PwC and Personal Touch’s board members, or any allegations that the board was dominated by a director or officer who condoned PwC’s alleged improper conduct. The amended complaint does not even detail the size of the board or its current composition, or that a majority of them were involved in, or even stood to gain by any alleged fraudulent conduct, or other improper conduct by PwC. It fails to meet the heightened pleading standard set forth in Delaware Chancery Court Rule 23.1, as it fails to plead in a director-by-director fashion, instead, asserting conclusory and speculative statements about the board. The Personal Touch executives Glaubach asserts were looting the company for their personal benefit, Slifkin, Balk and Marx, were not a majority. In fact, Slifkin resigned from the Board in July 2013 , and these executives were not alleged to have control over the board. Glaubach ‘s conclusory allegations that the board is populated by persons with ties to one of the alleged wrongdoers, falls far short of the requirement of particularized allegations that a majority of the board would face a substantial likelihood of personal liability. Accordingly, this first claim is dismissed for Glaubach’s lack of standing.

(Internal quotations and citations omitted).

This decision illustrates the special pleading requirements for derivative actions (where a shareholder brings an action on behalf of a corporation). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding bringing an action on behalf of a corporation or other business entity.

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Posted: May 19, 2018

Upcoming Arguments in the Court of Appeals in June 2018

Upcoming argument in the Court of Appeals in June 2018 that may be of interest to commercial litigators:

  1. Ambac Assurance Corporation v. Countrywide Home Loans (No. 79) (to be argued Wednesday, June 6, 2018) (“Fraud–Fraud in Inducement–Alleged fraudulent inducement to issue financial guaranty insurance policies for residential mortgage-backed securitizations–elements to establish cause of action for fraudulent inducement–justifiable reliance–applicability of Insurance Law § 3105; recovery of claims payments made by insurer–contractual repurchase protocol; recovery of attorneys’ fees; summary judgment.”)

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Posted: May 18, 2018

Unjust Enrichment Claim Dismissed Because Contracts Governed Claims

On May 9, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Pressley v. Ford Models, Inc., 2018 NY Slip Op. 30892(U), dismissing an unjust enrichment claim because contracts governed the claims, explaining:

The determination of whether a quasi-contractual claim such as unjust enrichment should be dismissed as duplicative looks only to whether there is a valid written agreement, the existence of which is undisputed, and the scope of which clearly covers the dispute between the parties, and not whether plaintiff may recover under that contract. Each of the contracts at issue contains provisions showing that the agreements apply, not just to compensation received during the term of the contract, but afterwards as well.

(Internal quotations and citations omitted) (emphasis added).

Unjust enrichment is a common claim in commercial litigation. It is used when there was not a contract between the litigants, but the defendant received an unfair benefit at the plaintiff’s expense. As this decision shows, it only applies when there was not a contract between the parties. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether you have, or are the subject of, a claim for unjust enrichment.

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Posted: May 16, 2018

Transcripts and Videos of Arguments in the Court of Appeals for April/May 2018 Now Available

On April 29, 2018, we noted a case of interest from the oral arguments before the Court of Appeals in April/May 2018:

  1. Ontario v Samsung (No. 57) (argued Tuesday, April 24, 2018) (“Conflict of Laws — Law Governing Contract Action — in breach of contract action brought by nonresident alleging economic claim that accrued outside New York, whether a contract provision specifying that the agreement is to be “governed by, construed and enforced” in accordance with New York law renders inapplicable New York’s borrowing statute, CPLR 202.”) See the transcript and the video.

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Posted: May 15, 2018

Invoking CPLR 3212 and Commercial Division Rule 9, Justice Scarpulla Conducts Immediate Hearing to Resolve Factual Dispute

On May 2, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in Overtime Partners, Inc. v. 320 W. 31st Assoc., LLC, 2018 NY Slip Op. 30807(U), invoking CPLR 3212 and Commercial Division Rule 9 in conducting an immediate hearing on the only factual issue in dispute in an action for, among other things, an injunction.

In Overtime Partners, a “commercial landlord-tenant action,” the plaintiff sought “a preliminary injunction to compel defendant 320 West 31st Associates, LLC to accept a proposed sublessee. After two-and-a-half days of hearings on the preliminary injunction motion,” the court “gave the parties notice that, pursuant to CPLR 3212(c), and because of the unique circumstances in this action and the exigency of the dispute,” the court “was converting the motion for preliminary injunction into one for summary judgment on the claims for a declaratory judgment and permanent injunction.”

The court explained: “Pursuant to CPLR 3212(c), a court may order an immediate trial of an issue of fact raised by a motion when appropriate for the expeditious disposition of the controversy. In this action, because I already held a hearing on the only factual issue in dispute, I now utilize the procedure set forth in CPLR 3212(c) to determine Overtime’s causes of action for declaratory judgment and permanent injunction on summary judgment.” In it footnote, it added: “See also Proposed Commercial Division Rule 9-a Immediate Trial or Pre-Trial Evidentiary Hearing, available at https ://www.nycourts.gov/rules/ comments/PDF /CDRule9-a.pdf (‘Subject to meeting the requirements of … 3212(c), parties are encouraged to demonstrate on a motion to the; court when a pre-trial evidentiary hearing or immediate trial may be effective in resolving a factual issue sufficient to effect the disposition of a material part of the case.’).”

New York procedural law (including the special rules applying to litigation in the Commercial Division of the New York courts) is not particularly complex. Still, there are situtations like the one described here where the court and/or the parties can take an action on a different procedural course. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding New York practice, and particularly regarding the rules governing practice in the Commercial Division.

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