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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: June 30, 2017

Court of Appeals Accepts Certified Questions Regarding Calculation of Damages and Prejudgment Interest in Trade Secret Cases

On June 27, 2017, the Court of Appeals accepted two certified questions from the Second Circuit in E.J. Brooks Co. v. Cambridge Sec. Seals, 2017 NY Slip Op 78277:

1. “[W]hether, under New York law, a plaintiff asserting claims of misappropriation of a trade secret, unfair competition, and unjust enrichment can recover damages that are measured by the costs the defendant avoided due to its unlawful activity”; and

2. “if the answer to the first questions is, ‘yes,’ whether prejudgment interest under CPLR § 5001(a) is mandatory where a plaintiff recovers damages as measured by the defendant’s avoided costs.”

The Second Circuit’s decision is available here.

Posted: June 30, 2017

Derivative Lawsuits Stayed In Favor of Related Suits in Federal Court

On June 7, 2017, Justice Singh of the New York County Commercial Division issued a decision in Reaves v. Kessler, 2017 NY Slip Op 31245(U), staying four derivative lawsuits in favor of related litigation in federal court.

At issue in Reaves were four derivative actions filed against directors of Resource Capital Corp. (“Resource Capital”), a real estate investment trust. The defendant directors and Resource Capital Corp., as nominal defendant, moved the Court to stay the state proceedings during the pendency of related derivative actions filed in the Southern District of New York. Justice Singh granted the motion, explaining:

A court has broad discretion to issue a stay particularly where the stay would avoid the risk of inconsistent adjudications, application of proof, and potential waste of judicial resources. A stay is appropriate even where there is not complete identity of parties and claims where there is a common question of law and fact.

Under appropriate circumstances, including the existence of an identity of issues and parties, an action in state court may be stayed where there is another action pending in federal court. In such a situation, the issuance of a stay is not a matter of right; rather it is a matter of comity, orderly procedure and judicial discretion. . . .

In addition to the claims asserted in the state cases, the federal shareholder derivative actions involve a proxy fraud claim under Section 14(a) of the Exchange Act. The federal court has exclusive jurisdiction over such claims (see 15 U.S.C. § 78aa). Accordingly, as the federal court is the only court that has jurisdiction over every claim asserted by the derivative plaintiffs, the federal court can provide a more complete disposition of the claims at issue.

(Citations omitted).

Justice Singh rejected the plaintiffs’ argument that a stay would result in undue prejudice because, they alleged, the allegations of demand futility in “the federal lawsuits are weaker than the complaint filed in the Reaves action.” The Court found “no New York case law explicitly stating that this Court must compare the federal action to the state action on the merits to make a preliminary determination as to which party is more likely to prevail.” Finally, Justice Singh declined plaintiff’s argument that the state court litigation should take precedence because it was the first filed, explaining:

[T]he first-filed rule, which gives precedence to the court in which an action is first commenced should not be mechanically applied. Rather the court may look to factors outside of the first-filed rule in making its determination as to whether this court should grant a stay. As discussed, supra, the federal courts have exclusive jurisdiction under Section 14(a) of the Exchange Act. Therefore, the federal courts can provide a more complete disposition of the claims at issue. This factual determination weighs heavily in favor of issuing a stay in this proceeding.

(Citations omitted).

NOTE: Schlam Stone & Dolan LLP represents the nominal defendant, Resource Capital in this case, and in the related federal litigation.

Posted: June 29, 2017

Telephone and E-mail Communications to New York Insufficient to Create Personal Jurisdiction

On June 22, 2017, the First Department issued a decision in Ripplewood Advisors, LLC v. Callidus Capital SIA, 2017 NY Slip Op. 05157, holding that telephone and e-mail communications with New York were insufficient to create personal jurisdiction, explaining:

New York does not have personal jurisdiction over defendants pursuant to CPLR 302(a)(1), as they did not avail themselves of the privilege of conducting activities within this State, thus invoking the benefits and protections of its laws. The telephone and email communications between the Latvian defendants and plaintiff’s office in New York, concerning a contemplated association in the acquisition of a Latvian bank (with no presence in New York) undergoing privatization, do not suffice to constitute the transaction of business in New York. In so concluding, we find it persuasive that defendants never entered New York in connection with their dealings with plaintiff, that the parties’ electronic communications also ran between defendants and plaintiff’s London office, that plaintiff traveled to Latvia in connection with this matter, and that the parties’ contemplated association (if the bank were acquired) would be centered in Latvia.

(Internal quotations and citations omitted).

Posted: June 28, 2017

Leave to Appeal Granted in Case Involving Effect of New York Choice of Law Clause on Applicability of Borrowing Statute

On June 22, 2017, the Court of Appeals granted leave to appeal in 2138747 Ontario, Inc. v. Samsung C&T Corp., 2017 NY Slip Op. 77845, a case concerning the effect of a broadly-worded New York choice-of-law clause on the applicability of New York’s ‘borrowing statute,” CPLR 202, which in certain circumstances mandates application of a foreign statute of limitations to claims brought by non-New York residents. See our previous post about the First Department’s decision, which held that the borrowing statute applied notwithstanding the New York choice of law clause in the parties’ agreement, here.

Posted: June 27, 2017

Dismissal for Failure to Prosecute Vacated Because No 90-Day demand to File Note of Issue Made

On June 21, 2017, the Second Department issued a decision in Atmara, Inc. v. Panoramic Ace Properties, Inc., 2017 NY Slip Op. 05060, vacating a dismissal for failure to prosecute because no 90-day demand to file a note of issue was made, explaining:

While the failure to comply with a court order directing the filing of a note of issue can, in proper circumstances, provide the basis for dismissal of a complaint under CPLR 3216, courts are prohibited from dismissing an action based on neglect to prosecute unless the CPLR 3216 statutory preconditions to dismissal are met. A 90-day demand to file a note of issue is one of the statutory preconditions.

Contrary to the defendants’ contentions, the so-ordered stipulation dated November 3, 2014, which extended the plaintiffs’ time to file the note of issue until January 8, 2015, superseded the compliance conference order dated July 11, 2012. As the so-ordered stipulation dated November 3, 2014, did not advise the plaintiffs that the failure to comply with that deadline would serve as a basis for a motion to dismiss the action, it cannot be deemed a 90-day demand. Furthermore, the complaint could not have properly been dismissed pursuant to CPLR 3126 based upon the plaintiffs’ failure to comply with court-ordered discovery since there was no motion requesting that relief. Accordingly, the plaintiffs’ motion to vacate the dismissal of the complaint and restore the action to the court’s calendar should have been granted.

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

Posted: June 26, 2017

Attorney for 50% Shareholder Had No Fiduciary Duty to Other Shareholder

On June 7, 2017, the Second Department issued a decision in Gall v. Colon-Sylvain, 2017 NY Slip Op. 04424, holding that the attorney for a 50% shareholder had no fiduciary duty to the other shareholder, explaining:

To recover damages for a breach of a fiduciary duty, a plaintiff must establish (1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant’s misconduct. A fiduciary relationship exists between two persons when one of them is under a duty to act for or give advice for the benefit of another upon matters within the scope of the relation. Such a relationship may exist where one party reposes confidence in another and reasonably relies on the other’s superior expertise or knowledge, but an arms-length business relationship does not give rise to a fiduciary obligation. . . . Determining whether a fiduciary relationship exists is a fact-specific inquiry and the essential elements are reliance by one party, and de facto control and dominance by the other.

Here, the Supreme Court erred in concluding that the plaintiff satisfied his burden of proof with respect to the elements necessary to prove a breach of fiduciary duty against Camisa. The evidence did not establish that Camisa, who was the attorney for the purchaser and the lender, had any duty to act or give advice for the benefit of the plaintiff.

(Internal quotations and citations omitted).

Posted: June 25, 2017

Claim Against Trust Dismissed for Lack of Jurisdiction Over Trustee

On June 9, 2017, Justice Singh of the New York County Commercial Division issued a decision in Deutsche Bank AG v. Vik, 2017 NY Slip Op. 31233(U), dismissing claims against a trust for lack of personal jurisdiction over the trustee, explaining:

Without a trustee, a trust cannot maintain or defend a lawsuit. As DB does not allege any connections between Santana and New York, the court cannot find that it has jurisdiction over him. DB argues that jurisdiction over the trust confers jurisdiction over the trustee, citing In re Deyette. That case is of no aid to DB, because jurisdiction over the trustee was based on the Surrogate’s Court Procedure Act § 210(2)(b).

(Internal quotations and citations omitted).

Posted: June 24, 2017

Summons With Notice Provided Sufficient Notice of Plaintiff’s Claims

On June 6, 2017, Justice Scarpulla of the New York County Commercial Division issued a decision in Lanmark Group, Inc. v. New York City School Construction Authority, 2017 NY Slip Op. 31244(U), rejecting an argument that a summons with notice did not provide sufficient notice of the plaintiff’s claims, explaining:

As to the sufficiency of the summons with notice, CPLR 305 (b) provides that a summons served without a complaint must include a notice stating the nature of the action and the relief sought, and the sum of money for which judgment may be taken in case of default. Failure to provide sufficient notice is a jurisdictional defect.

Lanmark’s summons with notice provides that in case of SCA’s failure to appear or answer, judgment will be taken against SCA by default for breach of contract in the sum of $891,231.44. SCA is correct that the notice does not specify that there are two causes of action for breach of contract, and that the stated damages amount does not cover the total dollar amount of both claims: $891,231.44 on the first cause of action and $36,899.77 on the second cause of action. However, since the purpose of the notice is simply to provide the defendant with at least basic information concerning the nature of plaintiff’s claim and the relief sought, absolute precision is not necessary. Here, the summons adequately specifies that this action is for breach of Lanmark’s contract with SCA, and requests money damages in a specified sum. This information is more than sufficient to apprise SCA of Lanmark’s claim. Indeed, the complete absence of a monetary amount in a notice served with a summons is a correctable irregularity.

Further, that the summons refers generally to a breach of contract without specifying each alleged breach is not fatal. The action remains fundamentally an action for breach of contract, as stated in the summons. Such a general description of the nature of the action has been found to be sufficient in other cases. A general description of the nature of the case has been found sufficient even where multiple theories of liability may arise out of the same fact pattern.

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

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).