Commercial Division Blog
Posted: December 28, 2017 / Categories Commercial, Conversion
No Conversion Claim When Plaintiff Was Not Deprived of Use of Property
On December 18, 2017, Justice Kornreich of the New York County Commercial Division issued a decision in MLB Advanced Media, L.P. v. Big League Analysis, LLC, 2017 NY Slip Op. 32617(U), rejecting an attempt to use a cause of action for conversion to recover for the alleged theft of confidential information, explaining:
These cases concern a failed business relationship between BLA and the MLB Parties. BLA was to develop a suite of youth-oriented baseball services on websites operated by the MLB Parties. The reasons why the parties' relationship deteriorated, while at the heart of these cases, is not at issue on the conversion claims. Rather, dismissal turns on the answer to a discrete, arguably unsettled question of law - whether intangible property (here, confidential business information) allegedly improperly used by defendant may give rise to a cause of action for conversion if, at the same time, plaintiff had complete and unfettered use of its property.
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A conversion takes place when someone, intentionally and without authority, assumes or exercises control over personal property belonging to someone else, interfering with that person's right of possession. Two key elements of conversion are (1) plaintiff's possessory right or interest in the property and (2) defendant's dominion over the property or interference with it, in derogation of plaintiffs rights. It is now settled law that intangible property may be converted.
In Appellate Division cases following Thyroff, conversion claims have withstood motions to dismiss where the plaintiff alleged that defendant wrongfully withheld, or otherwise wrongfully barred access to, the plaintiffs files and records. Conversion is the unauthorized assumption and exercise of the right of ownership over another's property to the exclusion of the owner's rights. By contrast, the Appellate Division, citing Thyroff, has dismissed conversion claims where plaintiff does not allege that defendants wrongfully exercised dominion over those funds in derogation of plaintiffs ownership. Relying on Thyroff's recitation of the well settled formulation that conversion is "the unauthorized assumption and exercise of the right of ownership over goods belonging to another to the exclusion of the owner's rights, the First Department has not permitted a conversion claim absent an allegation that defendants interfered with plaintiffs ownership rights.
It is clear, therefore, that a conversion claim must be predicated on the plaintiff's loss of its ability to exercise at least some of its ownership rights in the subject property. Here, that essential predicate is not alleged. While BLA claims that the documents it gave the MLB Parties were improperly used by the MLB Parties to wrongfully compete with BLA, BLA does not contend that, at any point, BLA lacked access to its documents or that it could not exploit its trade secrets. Nor does BLA allege that it gave the MLB Parties its only copy of the documents, or that it was prevented from developing its own products due to the MLB Parties' possession of its documents or awareness of its intangible trade secrets. Simply put, BLA has not explained how it was precluded, in any way, from accessing or exploiting the property that was allegedly converted.
Instead, BLA contends that it is not required to make this allegation. It argues that it may prevail even if its ability to utilize the allegedly converted materials was not hindered during the period of the alleged conversion. The court disagrees. As Justice Scarpulla has explained, Thyroff did not purport to abrogate the requirement that plaintiff plead interference its rights in the converted property. Rather, Thyroff permitted a claim for conversion of intangible property where Defendants wrongfully possessed and denied Plaintiffs their right to a tangible piece of property. Thyroff, thus, was a case where the plaintiff was actually deprived of its property. By contrast, here, as in Hyperlync, BLA has not alleged that it was deprived of access to its information.
While one New York state trial court has held to the contrary, Justice Bransten, in a case cited favorably in Hyperlync, persuasively explained why she declined to follow that holding:
Plaintiff argues that in the digital age, intangible property such as computer files are subject to an action for conversion regardless of exclusivity. Relying on Thyroff, plaintiff contends that the Court of Appeals has recognized that the tort of conversion can apply to electronic records and cites the recent case of New York Racing Association v Nassau Regional Off-Track Betting Corp., 29 Misc. 3d 539, 546 (Sup. Ct. Nassau Cnty. 2010). In New York Racing Association, the court denied the Defendants' motion to dismiss a conversion claim even though the plaintiff was not excluded from access to the electronic data. In so finding, the court stated that the Court of Appeals in Thyroff suggested that a plaintiff could maintain a cause of action for conversion when its electronically stored data was misappropriated, regardless of whether the plaintiff was excluded from access to that intangible property.
The facts of this case, however, are not in accord with Thyroff. In Thyroff the plaintiff alleged that he no longer had access to his computer files and could establish the element of deprivation of his property. Further, in discussing the applicability of the tort of conversion to intangible property, the Court of Appeals specifically pointed to the situation where a thief transfers shares of stock from a person's financial account to the account controlled by the thief and the situation where electronic documents are converted by a third party by pressing the delete button - thereby depriving the owner of access to its documents. Plaintiffs do not allege such a deprivation here.
This Court therefore concludes that the element of deprivation of property still applies to the tort of conversion, and that Plaintiffs' ninth cause of action therefore must be dismissed since no deprivation is asserted.
This court agrees with Justice Bransten.
This view of the law is reinforced by a pre-Thyroff Court of Appeals case cited by BLA, State v Seventh Regiment Fund, Inc., 98 NY2d 249 (2002). There, the Court explained that:
the wrongful exercise of dominion need not consist of a manual taking, on the defendants' part. Thus, while it is not necessary for a defendant to take or destroy goods to constitute a conversion, it is also not sufficient for a defendant secretly to declare ownership, when that declaration does nothing to inform the owner or any other interested party that an interference with ownership is intended. Some affirmative act-asportation by the defendant or another person, denial of access to the rightful owner or assertion to the owner of a claim on the goods, sale or other commercial exploitation of the goods by the defendant-has always been an element of conversion.
The Court in Seventh Regiment held that while the act of interference may leave the goods physically undisturbed, yet still impair the owner's rights, there still must be some exclusion of plaintiff from its right to access and exploit its property. The Court did not, contrary to what BLA suggests, abrogate the rule that a defendant who, though having custody of goods, does not exclude the owner from the exercise of his rights is not liable for conversion. To this court's knowledge, no New York appellate court has expressly abrogated this rule.
To be sure, as Thyroff indicates, a plaintiff may maintain an action for conversion of trade secrets, such as a confidential client list. That said, this court holds that the deprivation element of a conversion claim has not been abrogated. Indeed, the Appellate Division continues to require a plaintiff to show that the defendant exercised an unauthorized dominion over the thing in question to the exclusion of the plaintiff's rights, in order to establish a conversion claim. In Lerner, where some of the property converted by defendants was the sort of electronic records at issue in Thyroff, the court found a triable issue of fact because plaintiffs disputed that the materials were ever returned. Hence, while intangible property may be the subject of a conversion claim, dispossession of plaintiff is essential to the claim.
In sum, here, where BLA was not deprived of its ability to use its confidential information, it has not stated a claim for conversion. There is no controlling authority that suggests that a defendant may be held liable for conversion if it wrongfully possesses a copy of documents when the originals are in plaintiff's possession. In such a case, there simply is no derogation of plaintiff's ability to access or exploit its property.
Commercial litigation often involves conversion claims. As this decision shows, conversion can involve much more than physical objects. It can involve money (in certain circumstances) as well as intangible property. As this decision shows, there are limits to the law of conversion. Contact Schlam Stone & Dolan partner John Lundin at firstname.lastname@example.org if you or a client have a question regarding one person depriving another of her property, whether that property is tangible or intangible, or even involves a discrete fund of money.