On May 18, 2018, Justice Kornreich of the New York County Commercial Division issued a decision in NexBank, SSB v. Soffer, 2018 NY Slip Op. 30974(U), rejecting a request to file an expert report over a year after the deadline for exchanging reports, explaining:

Commercial Division Rule 13 requires a plaintiff who intends to call an expert at trial to submit a report after the close of fact discovery, but before the filing of the Note of Issue. Expert disclosure provided after the filing of the Note of issue without good cause will be precluded from use at trial.

Here, plaintiff proposes serving new expert reports more than a year after the deadline. Whether the court should grant leave to do so is a matter of discretion. As defendants correctly observe, this court and others in the Commercial Division have precluded expert reports served well after the court ordered deadline. The Appellate Division has approved of this practice.

The court agrees with defendants that plaintiff has not proffered good cause to justify its service of late expert reports. The facts, record evidence, and the parties’ legal theories were clearly established prior to the filing of the Note of Issue. Plaintiff made the calculated decision to attempt to prove damages exclusively through its credit bid and the unencumbered value of the Property (the latter of which is res judicata). In fact, plaintiff has argued extensively in this action that expert testimony would be unreliable and inappropriate. Plaintiff instead has argued that its lay witness testimony and documentary evidence is sufficient to prove its damages and in fact is a better, more reliable method of proof than expert testimony.

Plaintiffs’ strategy ran into a brick wall after the court issued the October 2017 Decision, which made it quite clear that expert testimony was required to prove the Property’s encumbered value. The court’s holding was foreseeable and, frankly, unremarkable. New York case law is clear that expert appraisal evidence is the method for proving the value of real property in litigation. It is simply implausible to believe that plaintiff and its counsel, who are extremely sophisticated, were unaware of this rule. Instead, for strategic reasons, they chose not to rely on expert testimony. Now that the court has squarely rejected that approach, plaintiff seeks a second bite at the apple and proffers new expert reports. Plaintiff cites no commercial case in which such a tactic was approved or found to constitute good cause. This court sees no reason to permit parties to preview the court’s view of their trial strategy at summary judgment, and then abandon that strategy if the court signals.that it is unlikely to prevail. To hold otherwise would severely prejudice defendants. Summary judgment is an exercise in issue spotting for trial. It is not, for the unsuccessful movant, an opportunity to reformulate its case.

Plaintiffs stark pivot in its proposed proof is simply too great to permit at this late stage. There is a significant difference between proving encumbered value merely with a credit bid rather than with robust expert evidence. Moreover, the proposed expert who seeks to address the effects of the Nevada litigation is opining on matters well beyond the scope of plaintiffs’ original expert disclosure. To force defendants to now counter these new expert opinions, which require further rebuttal reports and depositions, is extremely prejudicial on the eve of trial. Under these circumstances, it is simply too late for plaintiff to deviate from the course it has charted.

(Internal quotations and citations omitted).

An issue that arises in almost all complex commercial litigation is the use of experts to explain evidence that is unfamiliar to a typical juror (or judge). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the admission of expert evidence.

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On May 29, 2018, the First Department issued a decision in Gottwald v. Sebert, 2018 NY Slip Op. 03819, holding that communications with press agents were not privileged, explaining:

The court properly granted plaintiffs’ motion to compel Kesha to produce documents. The communications between her counsel and press agents do not reflect a discussion of legal strategy relevant to the pending litigation but, rather, a discussion of a public relations strategy, and are not protected under the attorney-client privilege. Kesha also failed to satisfy her burden to establish that the documents sought were protected work product.

(Internal citations omitted).

An issue that arises in almost all complex commercial litigation is identifying evidence that should be withheld from production in evidence because it is subject to the attorney-client or other privilege. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the attorney-client, common interest, work product or other privileges or exemptions from production of evidence.

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On May 23, 2018, the Second Department issued a decision in Notaro v. Performance Team, 2018 NY Slip Op. 03692, holding that the IAS court erred in striking the defendant’s answer for failure to appear at a court conference where there was no evidence that the defendant had notice of the conference, explaining:

Generally, to vacate an order striking a defendant’s answer based upon his or her default in appearing for a scheduled conference before the court, the defendant is required to demonstrate both a reasonable excuse for his or her failure to appear and a potentially meritorious defense. However, in the absence of actual notice of a conference date, a defendant’s failure to appear at that conference cannot qualify as a failure to perform a legal duty, the very definition of a default. In that situation, the defendant’s default is considered a nullity and vactur of the default is required as a matter of law and due process, and no showing of a potentially meritorious defense is required.

Here, in support of that branch of his motion which was to vacate his default, Arcell submitted his own affidavit, wherein he stated that he did not appear at any of the court conferences because he did not receive notice of the conferences. In opposition, the plaintiff did not allege or offer evidence that Arcell received notice of the conferences. Therefore, vacatur of his default was required as a matter of law and due process, and no showing of a potentially meritorious defense was required.

(Internal quotations and citations omitted).

If you are served with a complaint and fail timely to answer, or if you answer and do not appear at schedule court appearances, the court can enter judgment against you: a default judgment. 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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On May 22, 2018, the First Department issued a decision in Shawe v. Elting, 2018 NY Slip Op. 03644, holding that misstatements that were not material and a single act of deceit were an insufficient basis for a malicious prosecution claim, explaining:

[O]ur rulings in Elting v Shawe (129 AD3d 648 [1st Dept 2015]) and Elting v Shawe (136 AD3d 536 [1st Dept 2016]), in which we held that the payroll access and corporate ownership assertions, made in support of the TRO and preliminary injunction applications in the 2014 action, were not material, collaterally estop Shawe from relying on those misstatements. Since those misstatements form the entire basis of Shawe’s current malicious prosecution claim, collateral estoppel constitutes a second, independent basis for dismissal of that cause of action.

The payroll access misstatements likewise form a substantial portion of Shawe’s current claim for violation of Judiciary Law § 487. Given especially that Elting was granted a TRO, the payroll access misstatements, which we have determined to be immaterial, were not sufficiently egregious to support this claim of § 487 violation. Shawe’s allegations that the attorney defendants deceptively backdated a retainer agreement primarily relates to privilege assertions in the Delaware action, and not in New York, and, as such, is not actionable under § 487. The remaining basis of Shawe’s claim under § 487 — the allegedly knowing filing of a baseless defamation counterclaim — is a single alleged act of deceit not sufficiently egregious to support a claim under.

(Internal quotations and citations omitted).

New York courts are tolerant of litigants would advance claims or defenses that ultimately are found to be meritless. However, if a litigant brings claims that are completely without a legal or factual basis in bad faith, they can be subject to sanctions and can be held liable for the tort of malicious prosecution. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether you have recourse against someone who has brought baseless claims against you.

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Justice James Hudson of the Suffolk County Commercial Division recently updated his part rules.

Justice Jerry Garugilo of the Suffolk County Commercial Division recently updated his part rules.

On May 24, 2018, the First Department issued a decision in Korangy v. Malone, 2018 NY Slip Op. 03767, holding that a breach of contract claim was barred by a contract’s mandatory mediation provision, explaining:

The motion court correctly dismissed the breach of contract cause of action, as under the plain language of the operating agreement, namely, paragraph 3.3.3, when the members are deadlocked on an issue, they are to submit to mediation, and the decision of the mediator shall be final and binding. Taking the allegations in the complaint as true, plaintiff admitted the parties were deadlocked and the dispute was submitted to mediation.

(Internal quotations and citations omitted).

This decision illustrates one the many rules for interpreting contracts: if a contract contains a pre-suit dispute resolution provision, the failure to comply with that provision likely will bar a claim for breach of the contract. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a dispute over the interpretation of a contract.

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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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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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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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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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