Looks like the United States Tennis Association (“USTA”) met its match, but this time not on its own court, but rather in another, the Appellate Division,  Second Department.   The court in Matter of Bravado Intl. Group Merchandising Servs., Inc. v United States Tennis Assn. Inc., recently affirmed the judgment of Westchester Commercial Division Justice Linda S. Jamieson which granted a petition in a CPLR Article 52 proceeding to recover damages for violation of a restraining notice served pursuant to CPLR 5222(b).

Once a judgment is obtained, among the available enforcement devices is the “restraining notice” authorized by CPLR 5222(b).  The procedure is explained well in Doubet, LLC v. The Trustees of Columbia Univ.:

“Although CPLR 5222(a) permits an attorney for the judgment creditor to issue a restraining notice without the court’s involvement, it is legal process nonetheless. In that circumstance, the restraining notice is issued by the attorney ‘as an officer of the court.’ CPLR 5222(a). Like any legal process, it is an assertion of the court’s, and the state’s, power. Although valid service is required, legal process is not effective, notwithstanding valid service, unless the state, and the court, has a sufficient jurisdictional basis over the person served. ‘The restraining notice operates like an injunction. Indeed, it is an injunction, issued by the attorney acting as an officer of the court.’ Siegel, Practice Commentaries, McKinney’s Cons Laws of NY, Book 7B, CPLR C5222:4. Thus, the effect of a restraining notice is in the nature of a provisional remedy, like an injunction or an attachment; it is an assertion of state court jurisdiction over the garnishee.”

That tool allows a judgment creditor to serve a restraining notice upon a third party effectively prohibiting the transfer of any property held by the third party in which the third party “knows or has reason to believe the judgment debtor . . . has an interest.”  The courts have long recognized that simply because the judgment debtor itself may not come into physical possession of the property does not vitiate the mandate of a restraining notice (Ray v. Jama Prods.).  That is, the third party served, must ensure funds are not transferred.  The key to the analysis is whether the judgment debtor will “directly benefit from the payment” of the funds (Id.).

So what happened in this case?  Bravado Int’l Group Merchandising Servs., Inc. (“Bravado”) obtained a judgment in the amount of $1,357,458.43 against Facility Merchandising, Inc. (“FMI”).  Bravado sold merchandise to FMI.  FMI sells the merchandise throughout the US at various arenas and sporting venues.  In short, FMI purchased goods from Bravado, for which it did not pay.  FMI had transacted business with the USTA.  Specifically, during the US Open in September 2014, FMI was selling goods through various concessions at the US Open.   FMI and the UTA’s agreement provided, however, that all funds received by FMI from the sale of goods would be placed into an account that FMI had no access.  USTA would, in turn, be responsible for paying FMI’s obligations.  This arrangement was done apparently because FMI had certain financial problems.

Armed with a $1.3 million judgment, Bravado then served a restraining notice upon USTA during the 2014 Open.  Notwithstanding the service of the restraining notice, USTA apparently transferred funds to vendors and licensees in which it was claimed that FMI had an interest.  Bravado then brought a CPLR Article 52 proceeding against USTA.

Although most of the court file is sealed,  Justice Jamieson’s decision and order on the petition is not. Reviewing the parties’ submissions, the court concluded that USTA transferred funds to vendors in violation of the restraining notice, thus obligating the USTA to pay the remaining judgment amount to Bravado.  The Appellate Division affirmed.

When a client is served with a restraining notice, care must be taken to determine whether any property within the possession of the third party (your client) is for the benefit of the judgment debtor or the judgment debtor will somehow obtain a direct benefit by the third party’s payment of the funds to another.  Remember, simply because the funds or property don’t pass through the hands of the judgment debtor doesn’t mean the funds are not subject to the mandate of a restraining notice.

 

 

 

Know the Rules

As readers of this blog know by now, we here at New York Commercial Division Practice frequently post on new, proposed, and/or amended rules of practice in the Commercial Division.  Just last month, for example, my colleague Viktoriya Liberchuk posted on the Advisory Council’s recent proposal to amend ComDiv Rule 6 (“Form of Papers”) to mandate hyperlinks in legal briefs, allowing adversaries, judges, and other court personnel immediate electronic access to cited cases, statutes, and other supporting documentary evidence.

We’ve also reported on ComDiv decisions taking lawyers to task for failing to comply with the particularities of practicing in the Commercial Division — both with respect to noncompliance with the Rules themselves, as well as noncompliance with the individual practice rules of this or that ComDiv judge.

In one of the first ComDiv decisions of 2020, Manhattan Commercial Division Justice Andrea Masley addressed the propriety of a post-argument submission by a defendant under ComDiv Rule 18 on a motion to dismiss.

Hawk Mtn. LLC v Ram Capital Group LLC involved statute-of-limitations issues vis-à-vis a promissory note and the validity of a related release.  Following oral argument on its dismissal motion, the defendant submitted a recent federal-court decision out of the Eastern District of Pennsylvania, apparently in an effort to resolve a dispute over whether the parties in the Hawk Mtn. case qualified as “affiliates” under, and therefore were covered by, the release in question.  Citing the exception to ComDiv Rule 18’s general prohibition against “sur-reply and post-submission papers” — namely, that “counsel may inform the court by letter of the citation of any post-submission court decision that is relevant to the pending issues, but there shall be no additional argument” — Judge Masley allowed the defendant to supplement the record on its dismissal motion but made perfectly clear that she would “disregard any arguments made in [the defendant’s] accompanying letter.”

Having seen the Hawk Mtn. decision, and given the recent turn of year, we thought it a worthwhile exercise to take a quick look back at 2019 for other decisions addressing issues of (non)compliance with the ComDiv Rules.  What follows are a couple of notable examples from the Manhattan Commercial Division last year — both from Justice Joel M. Cohen as it just so happens — addressing ComDiv Rules 13 and 14 concerning expert disclosure and pre-motion conferences respectively.

In 30-32 W. 31st LLC v Heena Hotel LLC, Judge Cohen granted the defendants’ motion to strike an expert rebuttal report submitted by the plaintiffs in a dispute over the development and sale of a hotel.  Judge Cohen found that the report did not comply with ComDiv Rule 13 in a number of important respects, including primarily the expert’s failure to provide a “complete” statement of his opinions and to identify any documentation he relied upon to support his opinions.  The incompleteness of the expert’s report was perhaps captured best in his own words — to wit:

At this time and on a preliminary basis I find that I do not concur with the conclusion reached by [the defendants’ expert].  Additional forensic accounting work is required, and I reserve the right to amend and supplement this draft.

The draft report also made repeated references to “disputed factual assertions” and “significant intercompany transactions” but altogether failed to specify the facts in dispute or the transactions at issue.  Such a report, according to Judge Cohen, “provides insufficient notice of any opinions [the expert] proposes to offer or the bases for those opinions” and thus offends the fundamental purpose behind expert disclosure — namely, “No Sandbaggers Allowed!”

In Village Green Mishawaka Holdings, LLC v Romanoff, Judge Cohen shot down a red-herring argument and related “barbed references” in an attorney affirmation when denying a non-party’s motion to quash a subpoena.  Judge Cohen attacked the motion as “procedurally improper” as well, citing ComDiv Rule 14’s prohibition on filing motions without first requesting a pre-motion conference and finding that “there [wa]s no indication that [the non-party] ever requested such a conference prior to filing this motion.”  Judge Cohen also took issue with the form of the attorney affirmation, citing his own practice rules prohibiting so-called “brief-irmations” and “brief-adavits” submitted in lieu of a proper memo of law:  “All motion papers … must include a Memorandum of Law,” and “Affidavits or Affirmations of counsel containing legal argument should not be submitted.”

Check the rules, folks.  Always check the rules.

As we continue to see increased litigation over electronic programs, apps, and algorithms, courts are increasingly called to consider discovery requests for the coding behind that technology.  These requests highlight the tension between the need for broad discovery and the litigant’s proprietary interest in secret, commercially valuable source code.  And as a recent First Department decision highlights, Courts are acutely protective of this source code.

The First Department, in BEC Capital v. Bistrovic, recently reversed the trial court’s ordering a coder to either produce his trading algorithm subject to the Commercial Division’s standard confidentiality order or abandon his claims, holding instead that the trial court should have ordered the algorithm produced “for Attorneys and Experts’ Eyes Only.”

The discovery dispute in BEC Capital arose from a failed high-frequency trading joint venture.  The defendant Bojan Bistrovic, through his company MCM, entered into an agreement with Plaintiff BEC where Bistrovic would integrate his proprietary trading algorithm into BEC’s trading platform, and he and BEC would share in the gains or losses of Bistrovic’s algorithm.  Bistrovic’s trading algorithm was built for speed: executing trades in a fraction of second to exploit fleeting market trends and inefficiencies.  Consequently, the algorithm required an efficient trading platform—every process, line of code, or mile of cable that a trade order had to traverse increased the time between when Bistrovic’s algorithm directed the trade and the time it was executed, and that lag gutted the efficiency of Bistrovic’s algorithm.

Less than six months into their agreement, the parties’ venture had performed so poorly that both effectively abandoned the agreement.  BEC pinned the poor performance on Bistrovic’s algorithm; Bistrovic blamed serious problems in BEC Capital’s trading platform.  When a dispute arose about the allocation of trading losses, Bistrovic allegedly told others in the high-frequency trading industry that Plaintiffs were fraudsters who had stolen money from him.

When BEC and its principals sued for defamation and breach of their NDA, Bistrovic brought counterclaims for breach of contract, alleging that BEC breached their agreement because they failed to provide Bistrovic with a satisfactory high-frequency trading platform into which his algorithm could have been properly integrated.

In light of Bistrovic’s counterclaims, Plaintiffs demanded the coding behind Bistrovic’s high-frequency trading algorithm in discovery.  The coding was necessary, Plaintiffs argued, to rebut Bistrovic’s counterclaims that the failure resulted from BEC’s platform—i.e., to show that the poor performance resulted from Bistrovic’s algorithm itself, not BEC’s platform.  When Bistrovic objected to the discovery of his trading algorithm, the trial court (Ramos, J.) held that Bistrovic must either (i) disclose the algorithm subject to the standard Commercial Division confidentiality order, or (ii) face the risk of having his counterclaims and defenses based on his algorithm stricken.

In November, the First Department reversed the trial court, holding that:

The production of defendants’ source code, which is a trade secret . . . should have been ordered to be produced for ‘attorneys and expert eyes only.’  Plaintiffs’ assertion that they have the expertise to review and opine on the source code and should not be subjected to retaining an expert, does not support unfettered access to defendants’ confidential algorithm.

The First Department’s ruling constitutes a rare reversal of the discretion afforded to the trial courts to oversee the discovery process.  See Don Buchwald & Assoc. v Marber.

In so holding, the First Department continues to show its interest in ensuring that confidential source code be produced according to appropriate terms and limitations, including, where necessary, an “attorneys and experts’ eyes only” designation.  See MSCI Inc. v. Jacob (reversing trial courts’ denial of discovery into confidential source code and ordering production “for attorneys’ eyes only”).  More generally, the First Department remains actively protective over confidential source code and—in this area more than others—willing to substitute its own discretion for the trial court’s, ensuring the deliberate development of legal authority over issues relating to confidential source code.  See also, e.g., People v. Aleynikov (reinstating the tossed conviction of the now-infamous Goldman Sachs programmer Sergey Aleynikov for uploading portions of Goldman’s high-frequency trading code to a German code repository).

Practical Considerations

BEC Capital provides some welcome guidance on how the First Department views the interplay between proprietary computer code and the need for “open and full disclosure as a matter of policy.”  MSCI.  Going forward, litigants can expect trial courts to take a thorough and critical look at requests for discovery into proprietary source code, including analysis of the following considerations:

  • How central is the source code to the claims? Not all requests for disclosure of proprietary code are created equal, and, of course, the more central the disputed source code is to the issues in the case, the more compelling the argument for disclosure.  For instance, a copyright case concerning the disputed code (where the party asserting the claim must prove the originality of the work) might favor disclosure, see Fonar Corp. v. Magnetic Resonance Plus, Inc., 93-cv-2220, 1997 WL 689462 (S.D.N.Y. Nov. 3, 1997), but only where the claim directly concerns the specific code requested, see Abarca Health, LLC v. PharmPix Corp. (denying discovery of portions of source code that were not at issue in infringement claims).  Likewise, a federal court has granted discovery of a carmaker’s proprietary code in a products liability action alleging harm directly caused by the code, Burnett v. Ford Motor Co., while another has denied discovery into proprietary source code in a false advertising case where plaintiffs claimed that the code created the misleading content, Congoo, LLC v. Revcontent LLC.
  • Is the code needed offensively or defensively? In Viacom Int’l Inc. v. YouTube Inc., the Court denied plaintiff’s request for discovery of defendants’ source code based in part upon the fact that Viacom sought YouTube’s source code offensively—to support its own claims.  The Court observed that defendant “should not be made to place this vital asset in hazard merely to allay speculation.”
  • What are the parties up to? Where the parties are in the same industry—such that the disclosure of the source code even subject to strict confidentiality restrictions may result in a competitive disadvantage—the case for non-disclosure or an “attorneys and experts’ eyes only” designation is stronger.  See MSCI (attorneys and experts’ eyes only designation appropriate where employee left plaintiff company to build a competing platform for defendant-company); ABC Rug & Carpet Cleaning Serv. Inc. v. ABC Rug Cleaners, Inc. (“Ample precedent exists for limiting disclosure of . . . proprietary information to attorneys and experts, particularly when there is some risk that a party might use the information . . . to gain a competitive advantage over the producing party.”).
  • Have other creative disclosure frameworks been considered? In addition to an “attorneys eyes only” designation, litigants should consider whether some other discovery framework is appropriate.  See RGIS, LLC v. A.S.T., Inc. (appointing special master to review confidential source code); Princeton Mgt. Corp. v. Assimakopoulos, 1992 WL 84552 (S.D.N.Y. April 10, 1992) (limiting disclosure to two designated individuals within plaintiff’s organization).
  • Is the code uniquely ill-suited to an “attorneys’ eyes only” designation? While the First Department in BEC Capital rejected the plaintiffs’ argument that BEC (and not its experts) needed to view the source code because they had the expertise to review it, other courts have favored this argument in holding that an “attorneys’ eyes only” designation was inappropriate.  See Metropolitan Life Ins. Co. v. Bancorp. Servs. LLC, 2000 WL 1644488 (S.D.N.Y. Nov. 2, 2000).  It remains to be seen how the First Department would view a case where the code sought is so particularized that an “attorneys eyes only” designation would be effectively useless.

While courts will continue to consider the discoverability of proprietary source code on a case-by-case basis (and subject to their broad discretion to oversee discovery), recent First Department guidance suggests that litigants would be well-advised to prepare for a deeply thorough, fact-specific inquiry focused not only on the necessity of the source code to the claims or defenses, but also on the commercial value of the source code and the appropriateness of alternative discovery frameworks.

 

Our parents taught us to think before we speak.  That lesson is especially important when words or conduct could cost you hundreds of thousands of dollars beyond what was previously agreed upon in a subcontract agreement.

In a recent case before Justice Andrea Masley, Corporate Electrical Technologies, Inc. v. Structure Tone, Inc. et al., Plaintiff Corporate Electrical Technologies, Inc. (“CET”), a subcontractor, was hired by Structure Tone, Inc. (“STI”), a general contractor, to perform electrical work on a multi-million dollar renovation project at a Macy’s flagship store in Herald Square, in anticipation of the holiday shopping season.

CET argued that soon after the renovation work commenced, the project was delayed to the point that Macy’s took over the day-to-day running of the renovation project. Once Macy’s took over, it directly negotiated with CET and requested that CET perform extra work beyond CET’s subcontractor agreement with STI. Based on the additional work performed, CET submitted numerous unpaid change orders and brought this action against STI and Macy’s, alleging that it was owed over a million dollars for the project.

With respect to CET’s cause of action for quantum meruit, Macy’s moved for summary judgment under the theory that Macy’s, as an owner, was not in contractual privity with CET, and therefore, could not be held liable to the subcontractor.

Typically, an owner is not liable to a subcontractor and the subcontractor’s quasi contract claims against a property owner are precluded where the owner contracts with a general contractor and does not expressly consent to pay for a subcontractor’s performance (DL Marble & Granite Inc. v. Madison Park Owner, LLC).

However, a property owner can be equitably bound to pay the reasonable value of the work it directed where, as in this case, Macy’s project manager emailed CET directly and seemed to implicate that Macy’s would pay costs that CET incurred as an incentive to completing the required work on time.

The Court noted that even where a contract provides that any extra work must be supported by a written authorization signed by the owner, an owner’s conduct can constitute a waiver of that requirement where the owner orally directs work and knowingly receives and accepts the benefits of that extra work.  In that instance, the owner can be found liable to pay the reasonable value of the extra work, notwithstanding the provisions of the subcontract.

CET also moved for spoliation sanctions against Macy’s, arguing that Macy’s should have reasonably anticipated litigation based on its disagreements with CET.  CET asserted that Macy’s neglected to place a hold on its automatic email destruction policy which resulted in the destruction of hundreds, and perhaps thousands, of critical internal emails related to CET’s work on the project during the time when the project was planned and constructed.  CET argued that these destroyed emails would have supported its theory that STI’s poor management caused the numerous project delays and would have disproved STI’s and Macy’s allegations that CET was to blame for the delays.

The Court held that CET failed to show that Macy’s had an obligation to preserve relevant emails because Macy’s could not reasonably anticipate litigation.  Mere delays of work, engagement of another subcontractor, and disagreements about the project could not have placed Macy’s on notice of a credible probability that it would become involved in litigation.  Rather, there needed to be something more amounting to repeated threats to terminate the agreement, transmissions of breach letters, or a formal termination of the agreement.

Takeaway:  (1) Property owners should be wary of solely relying on the explicit terms of a subcontract agreement when it comes to payment for a subcontractor’s work.  Ultimately, an owner’s words or actions can be interpreted as express consent to pay for a subcontractor’s performance; and (2) In the commercial context, run of the mill disagreements during construction are not enough to place a party on notice of a credible probability of litigation.  Even so, a company that routinely engages in business that has the potential of developing into litigation should review and be aware of its email retention/destruction policy in this new age of electronic discovery.

 

 

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Most litigators know that a preliminary injunction is a “drastic remedy” which is not “routinely granted.”  Reading these words on paper, however, does not adequately convey the high threshold that a party must meet when seeking this extraordinary relief.  Seeking an injunction – especially in the Commercial Division – is usually an uphill battle for most practitioners, since satisfaction of the tripartite test for injunctive relief requires a showing of “irreparable harm” – that is, imminent harm that is not compensable by money damages alone.

The Commercial Division has once again reaffirmed that irreparable harm is the “most critical” prong of the tripartite test for injunctive relief.  In CGI Technologies and Solutions, Inc. v New York State Office of Mental Health (2019 NY Slip Op 52129[U] [Sup Ct, Albany County Dec. 31, 2019] [Platkin, J.]), plaintiff CGI Technologies and Solutions, Inc. (“CGI”) and the New York State Office of Mental Health (“OMH”) entered into a contract (the “Contract”) whereby CGI agreed to upgrade and replace OMH’s Electronic Medical Record (“EMR”) System for $51 million.  Although OMH initially sought to procure “off-the-shelf software” (i.e., ready-made software), it ultimately required, and CGI developed, a highly-customized system tailored to OMH’s unique needs.

Several months into the project, however, OMH suspended the Contract, citing delays allegedly caused by CGI.   At the time, OMH claimed the suspension was intended as a “pause” and assured CGI the project would restart.  During this “pause,” CGI granted OMH access to, and OMH downloaded, CGI’s intellectual property.  Ultimately, the parties were unable to resolve their issues, and OMH terminated the Contract.

CGI thereafter filed a claim against OMH in the New York State Court of Claims seeking declaratory relief and $35 million in damages.  After the Court of Claims declined to exercise subject matter jurisdiction over CGI’s declaratory judgment claims, CGI commenced an action in Supreme Court seeking declaratory and Article 78 relief.  Several of CGI’s claims for money damages are still pending in the Court of Claims.

CGI then moved in the Supreme Court, by Notice of Motion, for a preliminary injunction: (i) restraining OMH from continuing to use CGI’s proprietary software and intellectual property (“IP”) until it was paid in full, (ii) restraining OMH from altering, modifying or allowing third parties to access CGI’s software and IP, and (iii) compelling OMH to return the software and IP.

The Albany County Commercial Division (Platkin, J.) engaged in an extensive preliminary injunction analysis, ultimately concluding that CGI had failed to sufficiently demonstrate imminent and irreparable harm.  As an initial matter, the Court held that CGI had an adequate remedy at law in light of its pending Court of Claims action for money damages against OMH.

The Court also concluded that CGI had only demonstrated the possibility of irreparable harm – not that it was imminent and likely. CGI had not established that its intellectual property was likely to be lost to business competitors by reason of OMH allowing CGI’s former subcontractor continued access to the custom work.  The Court also rejected CGI’s argument that its former subcontractor, who later contracted with OMH, became CGI’s “competitor.”  In the Court’s view, CGI had failed to demonstrate that it had lost, or was likely to lose, business opportunities to third-parties.

By contrast, the Court found that a preliminary injunction restraining OMH from continuing to use or maintain the EMR system would irreparably harm OMH and the patients who receive care and treatment in OMH facilities.  The Court held that OMH’s continued use of the EMR software was necessary to (i) ensuring safe use of prescription medicines, (ii) allowing prescriptions to be filled electronically, and as required by New York State law, (iii) facilitating regulatory compliance, and (iv) ensuring that OMH clinicians have ready access to its patients’ medical records.  The Court concluded that it would be inappropriate “for a court to enter a preliminary injunction restraining a State agency from using critically important software for months or even years while the parties’ financial disputes are being adjudicated.”

So when is harm “irreparable”?  Unfortunately, there is no magic formula to demonstrating irreparable harm. Each case is different, so whether or not a party can demonstrate irreparable injury is inherently a fact specific determination.  Although no list can be all inclusive, the following cases illustrate situations where courts have found irreparable injury:

The Takeaway:  Whether a party will be irreparably harmed is a very fact intensive determination and each case is different.  But, there are a few things a practitioner can do to improve his or her argument for irreparable harm.

  • Know your client’s business.  In addition to being familiar with the law, counsel should have a detailed understanding of his or her client’s business and the industry in which it operates. Counsel should understand the nuances of the business so that he or she can persuasively argue that, absent a preliminary injunction, the client will suffer harm that is not compensable by money damages.
  • Do not delay in seeking relief (and move by Order to Show Cause).  Even if there is only a short delay, counsel should be prepared to explain why the motion, which should be filed by Order to Show Cause, was not filed sooner (see Barbes Restaurant Inc. v ASRR Suzer 218 LLC, 140 AD3d 430 [1st Dept 2016] [court found irreparable harm, even where the plaintiff waited more than five months after receiving a demolition notice to seek injunctive relief, since plaintiff offered a compelling explanation as to why it did not move sooner]; but see Hakim v James, 2017 WL 958399 [Sup Ct, NY County Mar. 13, 2017] [court found no irreparable harm where plaintiffs offered no explanation for why they waited more than a year to obtain injunctive relief]).
  • Think twice about your claim for money damages.  Of course you should include a claim for money damages if it is warranted, but keep in mind that a request for money damages may undercut a claim of irreparable harm (Mar v Liquid Management Partners, LLC, 62 AD3d 762 [2d Dept 2009]).

Following the lead of several federal courts, hyperlinks in legal briefs in the Commercial Division appear to be well on the way!  The Commercial Division Advisory Council (“Advisory Council”) has announced a new proposal, which was put out for public comment, mandating hyperlinks.  The proposed amendment to Rule 6 of the Commercial Division Rules would require legal memoranda to include hyperlinks [a feature in an electronic document that permits a reader to jump to another location or file with just one click] to other sources and would grant judges discretion in determining whether to require hyperlinking and to what extent the benefit of hyperlinking outweighs the burdens.

The proposed amendment to Rule 6 would include the following:

  • “require hyperlinking to a cited docket entry already available on NYSCEF;
  • give Justices discretion to require hyperlinking cited legal authorities to Lexis/Nexis or Westlaw, or a government website;
  • encourage hyperlinking cited legal authorities even if not required; and
  • permit exemptions from required hyperlinking for parties that certify an inability to comply with the requirement without undue burden.”

This amendment hopes to advance Chief Judge DiFiore’s Excellence Initiative, which seeks to “ensure the just and expeditious resolution of all matters.” This amendment would also be in theme with the Commercial Division’s latest efforts to implement technology in the courts for purposes of improving efficiency and productivity.

Hyperlinking to external sources cited in legal memoranda, similar to bookmarking – internal hyperlinks – will enable judges and their clerks to access cited materials more quickly and with greater ease. The Advisory Council states that hyperlinks are particularly helpful in complex cases i.e., like those within the jurisdiction of the Commercial Division.

The Advisory Council explains that other courts have encouraged and even required hyperlinking. For example,  the Second Department now requires that briefs contain bookmarks or hyperlinks to legal authorities to permit the judges and their staff to access the referenced authorities more efficiently:  “electronically-filed briefs should contain bookmarks or hyperlinks to the authorities cited in those briefs. If utilized bookmarks should take the reader to a copy of the cited authority, that is, the case, statute or rule, which will be part of the briefs submitted.”

In addition, certain Commercial Division Justices, including Justice Saliann Scarpulla already encourage the use of hyperlinks in electronically-submitted memoranda.  Similarly, Justice Andrea Masley currently requires hyperlinks to actual NYSCEF documents. Interestingly, the Second, Third, and Fourth Circuit’s local rules, to name a few, permit the use of hyperlinks.

Notably, if a party certifies in good faith that it cannot include hyperlinks without undue burden as a result of “limitations in its office technology or other showing of good cause,” the court may excuse the party from compliance.

This is a long-awaited and welcome rule change.  The Administrative Board of the Courts is now seeking public comment on the proposal set forth in the Advisory Council’s Memorandum.  Those wishing to comment should e-mail their submissions to rulecomments@nycourts.gov or write to: Eileen D. Millet, Esq., Counsel, Office of Court Administration, 25 Beaver Street, 11th Floor, New York, New York 10004.  The public comment period is open through February 24, 2020.

Blacklisted

The line between aggressive business competition and unlawful conduct can sometimes be difficult to determine. Many different theories of tort liability have developed over the years to address the variations of unlawful conduct and competitive practices that are frequently presented to the courts. A recent decision in the case Caldera Holdings Ltd., et al. v. Apollo Global Management, LLC, (652175/2018), explored the interplay and strict plead requirements involved in these business torts.

Background Allegations. According to Caldera Holdings Ltd.’s complaint against private equity giant Apollo Global Management and its affiliate Athene Asset Management, Caldera is an investment firm founded and owned by former Athene employee Imran Siddiqui. Caldera planned to acquire a company that Apollo and Athene had years earlier discussed acquiring; however, Apollo and Athene believed that this business would violate the non-compete provisions of Mr. Siddiqui’s employment contract with Athene and sought to prevent it through arbitration, only to enter into a settlement a month later releasing Mr. Siddiqui from the non-compete provisions.

Notwithstanding this release, Caldera alleged that Leon Black, Apollo’s CEO, subsequently attempted to scuttle Caldera’s proposed acquisition by uncovering the identities of Caldera’s investors and warning those investors with whom he had a relationship that the proposed transaction violated Mr. Siddiqui’s contract and would be tied up in litigation for a considerable time period.  Caldera further alleged that Apollo told these investors that Apollo would not do further business with them unless they ceased their relationship with Caldera.

Hon. Andrea Masley of the Supreme Court, New York County, Commercial Division, granted Apollo’s and Athene’s motion to dismiss the myriad business tort claims asserted against them. The court found that none of the following causes of action had been pled adequately by Caldera:

Defamation. This cause of action requires “a false statement, published without privilege or authorization to a third party, constituting fault as judged by, at a minimum, a negligence standard, and it must either cause special harm or constitute defamation per se.” (Frechtman v Gutterman, 115 AD3d 102, 104 [1st Dept 2014]). The alleged statements to “investors” did not adequately identify the persons to whom that allegedly false statements were made.

Disparagement & Injurious Falsehood. “Disparagement” is “a subcategory of the tort of injurious falsehood,” which “requires the knowing publication of false and derogatory facts about the plaintiffs business of a kind calculated to prevent others from dealing with the plaintiff, to its demonstrable detriment.” (Banco Popular N. Am. v Lieberman, 75 AD3d 460, 462 [1st Dept 2010]). A plaintiff must allege “special damages.” (Christopher Lisa Matthew Policano, Inc. v North Am. Precis Syndicate, 129 AD2d 488 [1st Dept 1987].). Because Caldera alleged that it sought “damages in an amount to be determined at trial, but no less than $1.5 billion,” and Caldera made no attempt at itemization, the Court held that Caldera had pled only general damages.

Unfair Competition. “Allegations of a ‘bad faith misappropriation of a commercial advantage belonging to another by exploitation of proprietary information’ can give rise to a cause of action for unfair competition.” (Macy’s Inc. v Martha Stewart Living Omnimedia, Inc., 127 AD3d 48, 56 [1st Dept 2015]). However, such claims must allege that the plaintiff took sufficient precautionary measures to ensure the secrecy of the misappropriated data. Here, the Court found that Caldera had not alleged that its investor list had been “stolen” or that it had undertaken any precautionary measure to ensure secrecy, or that there was anything “secret” about the investor list in the first place.

Tortious Interference with Prospective Business Relations and Economic Advantage. This cause of action requires “(1) the defendant’s knowledge of a business relationship between the plaintiff and a third party; (2) the defendant’s intentional interference with the relationship; (3) that the defendant acted by the use of wrongful means or the sole purpose of malice; and (4) resulting injury.to. the business relationship.” (534 E. 17th St. House. Dev. Fund Corp. v Hendrick, 90 AD3d 541, 542 [1st Dept 2011 ]). To satisfy this “wrongful means” requirement, the plaintiff must allege that the claimed interference constituted a crime or an independent tort.” (Mitzvah Inc. v Power, 106 AD3d 485, 487 [1st Dept 2013]). Because Caldera’s other causes of action for defamation and disparagement were dismissed, they could not form the basis for “wrongful means,” and therefore the Court dismissed the tortious interference claims. Nor did Apollo’s alleged threats to withhold future business if the investors did not cease their support for Caldera—“persuasion alone is not enough to constitute wrongful means.” (Ahead Realty LLC v India House, Inc., 92 AD3d 424, 425 [1st Dept 2012]).

Civil Conspiracy. Finally, the Court dismissed the causes of action alleging a civil conspiracy between Apollo and its affiliates to commit the above-reference business torts. However, the Court dismissed this claim on the grounds that no such claim exists under New York law. (Capin & Assoc., Inc., v 599 W. 7 88th St. Inc., 139 AD3d 634, 635 [1st Dept 2016) [“New York does not recognize an independent cause of action for conspiracy to commit a civil tort”]).

When buying a business, purchasers must take into consideration the possibility of “successor liability” – that is, the buyer’s assumption of the seller’s liabilities and prior conduct upon purchasing a corporation.

In New York, the general rule is that a purchaser of the assets of another corporation is not liable for the seller’s liabilities (TBA Global, LLC v. Fidus Partners, LLC). However, there are exceptions.

Justice Emerson recently laid out these exceptions in Marcum LLP v. Fazio, Mannuzza, Roche, Tankel, Lapilusa, LLC where she decided plaintiff’s motion, seeking leave to amend a complaint to add a new party defendant corporation, PKF O’Connor, based on the theory of successor liability.

A corporation that purchases the assets of another corporation can be held liable for the seller’s liabilities where:

  1. the buyer expressly or impliedly assumed the predecessor’s tort liability;
  2. there was a consolidation or merger of seller and purchaser;
  3. the purchasing corporation was a mere continuation of the selling corporation; or
  4. the transaction is entered into fraudulently to escape such obligations.
    Schumacher v. Shear Co.

Plaintiffs argued that there was a consolidation or merger of the seller (“FMRTL”) and PKF O’Connor’s predecessor in interest, O’Connor Davies, whereby O’Connor Davies expressly and impliedly assumed its predecessor’s tort liability.

The Court examined the recitals page of the corporations’ Business Combination Agreement which transferred FMRTL’s assets to O’Connor Davies in consideration of O’Conner Davies assuming FMRTL’s liabilities, which were defined as those liabilities “arising in the ordinary course” of the business. The Court further reviewed the corporations’ bill of sale which further included that O’Connor Davies agreed to assume FMRTL’s liabilities.

The Court found that according to the Agreement, O’Connor Davis only assumed liability for FMRTL’s liabilities arising in its ordinary course of business and did not impose liability for FMRTL’s litigation.

Interestingly, the Court looked to the bankruptcy courts to define “transactions in the ordinary course of business” and determined that such transactions are those “recurring, customary credit transactions that are paid in the ordinary course of debtor’s business” (Marcum LLP, citing Matter of Quebecor World [USA], Inc.).

Ultimately, the Court held that because litigation is not a recurring or customary transaction, O’Connor Davis did not assume liability for FMRTL’s litigation and any references to FMRTL’s litigation in the Agreement was merely a disclosure that did not create any assumption of liability.

Not all agreements need to be in writing to be enforced.  Indeed, unless there is an applicable Statute of Frauds, oral agreements are enforceable.  But what if the parties to an agreement — a formal contract — don’t sign?  Is it enforceable?  Maybe.

We last wrote about a case enforcing an unsigned agreement in our blog back in May 2018.  This time, the Appellate Division, First Department, recently held in Lerner v. Newmark & Co. Real Estate, Inc., that an unsigned Termination Agreement between a licensed real estate broker and Newmark was enforceable even though it was never signed.  The court focused its analysis on two questions:  is there evidence supporting a finding of an intent to be bound?, and if so, is there evidence that the parties “positive[ly] agree[d] that it should not be binding until so reduced to writing and formally executed”?

In considering these factors, the court looked to a separate agreement that the parties had executed that contained language to the effect that an unsigned form could not form an agreement.  The court then concluded that “defendants knew how to draft an agreement that could be accepted only by signature, but they did not so draft the Termination Agreement”.  The court also looked  to the “months-long email exchanges” among the parties which supported a finding that the parties indeed had the intent to be bound, whether or not the Termination Agreement was ultimately signed.

The takeaway?   The Appellate Division is reminding us all once again that written agreements without the “not bound until signed or executed” clause is risky business.  A pitfall easily avoided by careful drafting.  A further caution lies in the parties’ conduct and exchanges, as the court there looked to emails seemingly confirming the intent to be bound.  To the extent there are exchanges following negotiation of an agreement not yet signed, those too should indicate that all rights are reserved and that there is no agreement until formally executed.

 

 

State courts have long exercised discretionary power to stay proceedings where a suit involving the same parties and issues is already under way in another forum (see Asher v. Abbott Laboratories, 307 AD2d 211, 211-212 [1st Dept. 2003]).

A New York Commercial Division practitioner seeking to avoid duplicative litigation can either move the court pursuant to CPLR 3211 (a) (4) to dismiss an action where “there is another action pending between the same parties for the same cause of action in a court of any state or the United States” or seek a stay of the state court action, pursuant to CPLR 2201, pending the resolution of the other action. CPLR 3211 (a) (4) specifically states “the court need not dismiss upon this ground but may make such order as justice requires.” Therefore both CPLR 3211 (a) (4) and CPLR 2201 may help a practitioner obtain a stay of a state court action depending on the stage of litigation.

Newly appointed New York County Commercial Division Judge Borrok recently opted to stay an action brought before him in Mahar v General Elec. Co., 2019 NY Slip Op 29322 based on an earlier-filed Federal Action. Judge Borrok candidly gave New York practitioners insight into the considerations that New York Commercial Judges weigh when determining whether a stay should be granted as well as shedding light on two nuances relating to these elements.

New York Courts generally follow the “first-in-time” rule which provides that the court which has taken jurisdiction first, is the one in which the matter should be determined (see Matter of PPDAI Group Sec. Litig. at *5 (2019 NY Slip Op 51075(U)).

The first nuance that Judge Borrok shared is that the “First Department has held that the two actions need not be identical. Rather, a stay is warranted where there is ‘a substantial identity of parties’ and both actions arose out of the ‘same subject matter or series of alleged wrongs’ (Syncora Guarantee Inc. v JP Morgan Sec., LLC, 110 AD3d 87, 95 [1st Dept 2013]).

New York Courts also consider whether granting a stay will further the principles of comity, orderly proceedings (e.g., coordinating discovery), judicial economy by avoiding the risk of inconsistent rulings in the different actions, and avoidance of prejudice to the plaintiffs (See Mook v. Homesafe America, Inc., 144 AD3d 1116, 1117 (2d Dept. 2016).

The second nuance that Judge Borrok shared with respect to staying an action is that “it is inconsequential that different legal theories or claims are set forth in the two actions” (Shah v RBC Capital Mkts. LLC, 115 AD3d 444 [1st Dept 2014]). First Department law simply requires that “both actions seek to recover for the same alleged harm based on the same underlying events” (Syncora, 110 Ad3d at 96).

Takeaway: CPLR 3211(a)(4) and CPLR 2201 are strong and effective litigation tools that are available for a practitioner to utilize in order to avoid duplicative litigation.