Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: June 23, 2017

Tolling Provision of CPLR 205(a) Does Not Apply to Out-of-State Actions

On June 15, 2017, the First Department issued a decision in Deadco Petroleum v. Trafigura AG, 2017 NY Slip Op. 04887, holding that claims timely brought in California but later dismissed were time-barred because the tolling provision of CPLR 205(a) does not apply to out-of-state actions, explaining:

The breach of partnership/strategic partnership, breach of implied covenant of good faith and fair dealing, breach of fiduciary duty, and fraud claims, which arose under the PSA, are time-barred pursuant to the PSA’s two-year limitations provision. These claims accrued, at the latest, in February 2012, when plaintiff alleges that it discovered them. While the California action was timely commenced, the tolling provision of CPLR 205(a) does not avail plaintiff, because an out-of-state action is not a prior action within the meaning of that provision.

(Internal quotations and citations omitted).

Posted: June 22, 2017

Court Refuses to Enforce No-Challenge Clause in Patent License

On June 14, 2017, Justice Kornreich of the New York County Commercial division issued a decision in Island Intellectual Property LLC v. Reich & Tang Deposit Solutions, LLC, 2017 NY Slip Op. 27199, holding that the provision of a patent license prohibiting the licensee from challenging the validity of the licensed patents was unenforceable, explaining:

With respect to no-challenge clauses, such as section 6.4 of the ALA, plaintiffs note that the Second Circuit opined in dicta on their enforceability in Warner-Jenkinson, and has since recognized that the Federal Circuit has held that a no-challenge clause in a settlement of a patent dispute is valid under Lear.

This line of cases, however, is not controlling. Flex-Foot is not on point because it involved a settlement agreement. Flex-Foot held that:

Once an accused infringer has challenged patent validity, has had an opportunity to conduct discovery on validity issues, and has elected to voluntarily dismiss the litigation with prejudice under a settlement agreement containing a clear and unambiguous undertaking not to challenge validity and/or enforceability of the patent in suit, the accused infringer is contractually estopped from raising any such challenge in any subsequent proceeding.

As more recently explained by the Federal Circuit:

In Lear, the Supreme Court eliminated the doctrine of licensee estoppel, citing the important public interest in permitting full and free competition in the use of ideas. Under Lear, a licensee of a patent is not estopped from challenging the validity of the licensed patent by virtue of the license agreement. In subsequent cases, our court and our predecessor court have confronted the question of whether consent decrees and settlement agreements may at one and the same time provide for a patent license while barring challenges to patent invalidity and unenforceability. We have held that Lear does not render such agreements unenforceable, because of the strong policy in favor of settlement of litigation and, in the case of consent decrees, the policy in favor of res judicata.

These circumstances are not present in this case. Rates Tech. is somewhat more relevant, as it addressed how to apply Lear to pre-litigation patent disputes. There, the Second Circuit held that covenants barring future challenges to a patent’s validity entered into prior to litigation are unenforceable, regardless of whether the agreements containing such covenants are styled as settlement agreements or simply as license agreements.

After weighing this authority, the court finds that this case is not sufficiently analogous to Flex-Foot, Rates Tech., or any of the cases cited by the parties, and, therefore, a clear justification to enforce section 6.4’s no-challenge clause does not exist.

(Internal quotations and citations omitted).

Posted: June 21, 2017

Failure to Set Standards For Award of Stock Options Breach of Implied Covenant of Good Faith

On June 15, 2017, the First Department issued a decision in Zakrzewski v. Luxoft USA, Inc., 2017 NY Slip Op. 04906, holding that allegations that the defendant failed to set standards by which the plaintiff could earn stock options stated a claim for breach of the implied covenant of good faith and fair dealing, explaining:

The complaint states a cause of action for breach of the implied covenant of good faith and fair dealing. It alleges that defendant’s representative, acting with authority, sent plaintiff a letter offering him employment, with an email saying that plaintiff would have the ability to earn up to $250,000 worth of defendant’s restricted stock, pending defendant’s acquisition of plaintiff’s former employer and provided that plaintiff met certain goals; it further alleges that defendant failed to set goals. Based upon the language of the email, a reasonable person in plaintiff’s position would be justified in understanding that defendant was obligated to set goals for plaintiff to enable him to receive the fruits of the offer. Defendant’s alleged failure to set goals had the effect of destroying or injuring plaintiff’s right to earn the stock.

(Internal quotations and citations omitted).

Posted: June 20, 2017

Dissolved Corporation May Sue or be Sued Until its Affairs are Fully Adjusted

On June 14, 2017, the Second Department issued a decision in Greater Bright Light Home Care Services, Inc. v. Jeffries-El, 2017 NY Slip Op. 04821, holding that a corporation that had been dissolved by proclamation had standing to sue, explaining:

A dissolved corporation may not carry on new business and no longer has the right to commence an action in the courts of this State, except in specific circumstances permitted by statute. Business Corporation Law § 1006 provides, in relevant part, that a dissolved corporation may continue to function for the purpose of winding up the affairs of the corporation, and that the dissolution of a corporation shall not affect any remedy available to or against such corporation, its directors, officers or shareholders for any right or claim existing or any liability incurred before such dissolution. A corporation therefore continues to exist after dissolution for the winding up of its affairs, and a dissolved corporation may sue or be sued on its obligations, including contractual obligations and contingent claims, until its affairs are fully adjusted. Here, the MMIS checks at issue were allegedly transferred in or around July 1999 and August 1999, and El Equity asserted its cross claims against SDS and HSBC in or about May 2000. El Equity is permitted to pursue its cross claims against SDS and HSBC in the course of winding up its affairs. Additionally, under the circumstances presented, including that El Equity had previously attempted to settle its counterclaims against GBL and the causes of action asserted by GBL against it, SDS failed to demonstrate that El Equity no longer maintained the capacity to assert its cross claims in 2013, when El Equity moved for summary judgment.

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

Posted: June 19, 2017

Undertaking Vacated Because Not Related to Potential Damages That Might Result from Injunction

On June 14, 2017, the Second Department issued a decision in Olympic Ice Cream Co., Inc. v. Sussman, 2017 NY Slip Op. 04852, vacating an undertaking and remitting for determination of the amount of undertaking that would compensate for damages suffered if the injunction was improvidently issued, explaining:

The fixing of the amount of an undertaking is a matter within the sound discretion of the Supreme Court, and its determination will not be disturbed absent an improvident exercise of that discretion. The amount of the undertaking, however, must not be based upon speculation and must be rationally related to the damages the nonmoving party might suffer if the court later determines that the relief to which the undertaking relates should not have been granted.

Here, the Supreme Court improvidently exercised its discretion in fixing the amount of the undertaking at $2,500,000, the amount equal to the value of the estate’s shares as set by the agreement, which was not rationally related to the potential damages the estate might suffer if it is later determined that the preliminary injunction should not have been granted. Since the estate did not submit any evidence as to the amount of damages which it might sustain in that event, and the plaintiffs suggested an amount which was not rationally related to the potential damages the estate might sustain if the preliminary injunction was improvidently granted, we remit the matter to the Supreme Court, Queens County, for a new determination as to the amount of the undertaking reflective of the amount of potential damages to the estate in the event that the preliminary injunction was improvidently granted.

(Internal quotations and citations omitted).

Posted: June 18, 2017

Fraud Claim Can Be Based on Breach of Contractual Warranties

On May 31, 2017, Justice Scarpulla of the New York County Commercial Division issued a decision in Aegean Marine Petroleum Network Inc. v. Hess Corp., 2017 NY Slip Op. 31179(U), holding that a claim for fraud can be based on breach of a contractual warranty, explaining:

Under New York law, the plaintiff may plead a fraud claim, as well as a contract claim, if it alleges a misrepresentation of present fact, unlike a misrepresentation of future intent to perform under the contract. Hess argues that Aegean’s fraud claim must be dismissed as duplicative of its breach of contract claim because the alleged misrepresentation is a breach of an express representation in the PSA between the parties. Aegean opposes, arguing that, in understating costs and overstating revenues in Schedule 8, Aegean’s express representation was false and misleading, and under New York law, that alleged misrepresentation may form the basis of a separate fraud claim. Recently, in Wyle Inc. v ITT Corp., 130 A.D.3d 438 (1st Dep’t 2015), the First Department held that a plaintiff may assert a fraudulent inducement claim and a breach of contract claim, even where a fraud claim is based on a breach of contractual warranties notwithstanding the existence of a breach of contract claim. In reaching this conclusion, the court cited First Bank of Americas v Motor Car Funding, Inc., 257 A.D.2d 287, 292 (lst Dep’t 1999), in which plaintiff claimed that defendant intentionally misrepresented material facts about various present facts so that they would appear to satisfy these warranties. Similarly, here, Aegean alleges that in Schedule 8, Hess made several fraudulent representations about its business, i.e., omitting certain costs and/or including Port Reading in Schedule 8. These alleged misrepresentations may form both a claim for breach of the warranties in the PSA, and fraud in the inducement.

(Internal quotations and citations omitted).

Posted: June 17, 2017

Claim Fails Heightened Tortious Interference Pleading Standard for Corporate Officers

On June 5, 2017, Justice Oing of the New York County Commercial Division issued a decision in TC Tradeco, LLC v. Karmaloop Europe, AG, 2017 NY Slip Op. 31217(U), holding that a claim failed to meet the heightened pleading standard applied to a claim of tortious interference with a corporation’s contract made against a corporate officer, explaining:

A claim for tortious interference with contract requires the following allegations: the existence of an enforceable contract, defendant’s knowledge of the contract, defendant’s intentional procurement of the breach of that contract, a breach of that contract, and resultant damages to plaintiff. Further, there is an enhanced pleading standard when a claim seeks to hold a corporate officer liable for inducing a breach of contract between a corporation and a third party. There must be more than just a plausible claim for inducing a breach of contract against the officer. Thus, to plead liability for tortious interference with contract against a corporate officer, the complaint must allege that the individual officer’s acts were either outside the scope of his or her employment, or, if within the scope of employment, that the officer personally profited from these acts in contravention of the corporation’s interests. Moreover, a pleading must allege that the acts complained of, whether or not beyond the scope of the defendant’s corporate authority, were performed with malice and were calculated to impair the plaintiff’s business for the personal profit of the defendant.

Here, plaintiff has failed to plead sufficient facts to show that Davies acted for personal profit, independent of any benefit bestowed on CRS Capstone as a corporate entity. In its second proposed amended complaint, plaintiff merely alleges that both defendant Capstone Partners and/or Defendant CRS agreed in [the PPA] that it shall not pre-approve or authorize Karmaloop to make any payment to any person or entity if Karmaloop is not then current on any and all sums then owed. Such an allegation, standing alone, is insufficient to subject defendant Davies to a tortious interference claim. Plaintiff’s allegation that Davies personally profited from his procurement of the breach of the [PPA] does not eliminate the above-noted pleading deficiency. Without more, the proposed pleading is palpably insufficient.

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

Posted: June 16, 2017

Insurer Denied Summary Judgment for Failure to Show Material Misrepresentations by Insured

On June 7, 2017, the Second Department issued a decision in Indian Harbor Insurance Co. v SP&K Construction, 2017 NY Slip Op. 04427, denying an insurer’s motion for summary judgment for failure to show material misrepresentations by the insured in applying for insurance, explaining:

To establish the right to rescind an insurance policy, an insurer must show that its insured made a material misrepresentation of fact when securing the policy. A misrepresentation is material if the insurer would not have issued the policy had it known the facts misrepresented. To establish materiality as a matter of law, the insurer must present documentation concerning its underwriting practices, such as underwriting manuals, bulletins, or rules pertaining to similar risks, that show that it would not have issued the same policy if the correct information had been disclosed in the application.

Here, the Supreme Court properly denied the plaintiff’s motion for summary judgment on the complaint. The plaintiff failed to establish its prima facie entitlement to judgment as a matter of law on the issue of the materiality of the alleged misrepresentations. Since the plaintiff failed to meet its prima facie burden, its motion for summary judgment was properly denied, regardless of the sufficiency of the defendants’ papers in opposition.

(Internal quotations and citations omitted).

Posted: June 15, 2017

Exchange of E-mails Did Not Create Binding Contract

On June 7, 2017, the Second Department issued a decision in Saul v. Vidokle, 2017 NY Slip Op. 04485, holding that an exchange of e-mails did not create a binding contract, explaining:

The emails relied upon by the plaintiff to establish the alleged agreement among the parties for the purchase of the defendant’s apartment were insufficient to satisfy the statute of frauds, as they left for future negotiations essential terms of the contemplated contract, such as a down payment, the closing date, the quality of title to be conveyed, the risk of loss during the sale period, and adjustments for taxes and utilities, and were subject to the execution of a more formal contract of sale. Contrary to the plaintiff’s contention, in the emails exchanged by and between the parties and the defendant’s attorney, the parties expressly anticipated the execution of a formal contract. Accordingly, the Supreme Court should have granted the defendant’s motion to dismiss the complaint.

(Internal quotations and citations omitted).

Posted: June 14, 2017

Insurance Policy Covering Injury Caused by Insured Requires Proximate Causation

On June 6, 2017, the Court of Appeals issued a decision in Burlington Insurance Co. v. NYC Transit Authority, 2017 NY Slip Op. 04384, holding that “where an insurance policy is restricted to liability for any bodily injury ’caused, in whole or in part’ by the ‘acts or omissions’ of the named insured, the coverage applies to injury proximately caused by the named insured.”

At issue in Burlington Insurance Co. was the interpretation of a commercial general liability policy issued to a contractor, which named the New York City Transit Authority, the MTA and the City of New York as additional insureds, but “only with respect to liability for ‘bodily injury,’ ‘property damage’ or ‘personal and advertising injury’ caused, in whole or in part, by” the named insured. The insurance company refused coverage to NYCTA and the MTA for claims arising from an accident for which the named insured was not legally liable. The Court of Appeals, in a decision written by Judge Rivera, reversed the First Department’s holding that coverage was triggered, explaining:

[T]he Burlington policy endorsement states that the injury must be “caused, in whole or in part” by BSI. These words require proximate causation since “but for” causation cannot be partial. An event may not be wholly or partially connected to a result, it either is or it is not connected. Stated differently, although there may be more than one proximate cause, all “but for” causes bear some connection to the outcome even if all do not lead to legal liability. Thus, these words — “in whole or in part” — can only modify proximate cause. Defendants’ interpretation would render this modification superfluous, in contravention of the rule that requires us to interpret the language in a manner that gives full force and effect to the policy language and does not render a portion of the provision meaningless . . . .

The endorsement’s reference to “liability” caused by BSI’s acts or omissions further confirms that coverage for additional insureds is limited to situations where the insured is the proximate cause of the injury. Liability exists precisely where there is fault. . . . That the policy extends coverage to an additional insured “only with respect to liability” establishes that the “caused, in whole or in part, by” language limits coverage for damages resulting from [the named insured’s] negligence or some other actionable “act or omission.”

(Citations omitted).

Judge Fahey dissented in a decision joined by Judge Stein. The dissenters found no basis for interpreting “caused, in whole or in part” as limited by the legal concept of proximate cause, since “[i]nsurance contracts are to be viewed through the eyes of the average consumer and deciphered not through ‘legalese,’ but by means of plain and common speech.”