My colleague Matt Donovan recently wrote about the requirements of Commercial Division Rule 13(c) and highlighted certain decisions in which expert reports were precluded for non-compliance. This week’s post looks at a decision by newly-appointed Manhattan Commercial Division Justice Nancy M. Bannon, who denied a motion to preclude expert reports despite non-compliance with the rule. In the decision, Justice Bannon sheds light on the boundary between admissible and impermissible expert opinions, particularly when reports encroach on the court’s authority to opine on legal conclusions, while also imposing specific limitations on the expert’s testimony.

Background

In 2497 Realty Corp. v. Fuertes, the plaintiff sold a contaminated property to the defendant, which had been impacted by an oil spill from a nearby gas station owned by non-party, ExxonMobil. Plaintiff and defendant entered into an agreement under which the defendant agreed to take on property remediation and settlement negotiations with ExxonMobil, and the parties agreed on a distribution plan for any proceeds resulting from any settlement reached with ExxonMobil (the “Distribution Plan”).

ExxonMobil settled with the defendant in 2011, but three years later the plaintiff filed suit alleging that the defendant breached the contract by violating the Distribution Plan. The court (Justice Charles E. Ramos [Ret.]) stayed the action until the remediation process was completed. In 2022, when the plaintiff successfully established that remediation was finished, the case was restored to resolve the issue of whether, under the contract, the property was remediated to “its highest and best use under applicable zoning laws, as the [defendant] shall determine in its sole and absolute discretion.” The parties submitted expert reports regarding the remediation, including the plaintiff who submitted two reports.

Motion to Exclude Expert Reports and Testimony

The defendant moved to exclude the plaintiff’s environmental expert testimonies and reports, arguing that:

  • the reports contain impermissible legal conclusions that reach the ultimate issue;
  • the plaintiff’s experts lack qualifications to opine on the “highest and best use” of the property; and
  • the reports do not meet the disclosure requirements of Commercial Division Rule 13(c).

Justice Bannon denied the motion.

Scope of Expert Testimony

The court concluded that the experts’ opinions were well within their environmental remediation specialty, stating specifically:

“[the experts] do not opine on the issue of what is or is not the theoretical highest and best use of the Property. Rather, they opine on the environmental remediation of the Property—an appropriate issue for expert testimony that is within their area of expertise—taking as their starting point the First Department’s aforementioned analysis of the Contract’s terms, the Property’s current zoning for commercial use, and the defendants’ current use of the land for commercial purposes.”

Despite this conclusion, the court nonetheless observed that the defendant correctly pointed out that the plaintiff’s experts’ reports contained opinions that improperly delved into contract interpretation and legal conclusions, such as whether the remediation of the property was completed in accordance with the settlement agreement and the contract. The court ruled that the defendants may object to specific inquiries when justified, particularly concerning sections of the reports related to contract interpretation or legal conclusions. Ultimately, the court determined that experts are prohibited from testifying on matters of contract interpretation or purely legal issues and should exclusively focus on the environmental condition of the property.

Rule 13(c) Disclosure Obligations

The defendants also argued that the plaintiff’s experts’ reports failed to include their recent publications and experience as expert witnesses. The defendants also took issue with the joint authorship of the second report.

Under Commercial Division Rule 13(c), “expert disclosure must be accompanied by a written report, prepared and signed by the witness,” which must include:

(A) a complete statement of all opinions the witness will express and the basis and the reasons for them;

(B) the data or other information considered by the witness in forming the opinion(s);

(C) any exhibits that will be used to summarize or support the opinion(s);

(D) the witness’s qualifications, including a list of all publications authored in the previous 10 years;

(E) a list of all other cases at which the witness testified as an expert at trial or by deposition during the previous four years; and

(F) a statement of the compensation to be paid to the witness for the study and testimony in the case.

The court rejected the defendants’ arguments regarding the experts’ qualifications and alleged non-compliance with Commercial Division Rule 13(c). First, the court clarified that there is no prohibition against jointly-authored reports.  Second, the court emphasized that preclusion of expert testimony for non-compliance with Rule 13(c) is at the court’s discretion and noted that the defendants had not shown any prejudice resulting from the disclosure issues, particularly since the experts had already been deposed and questioned about their qualifications (see Taxi Tours Inc. v Go N.Y. Tours Inc., 227 AD3d 530, 531 [1st Dept. 2024]).

Upshot

While courts may not outright preclude expert reports, they can impose restrictions on testimony, particularly barring experts from addressing matters of contract interpretation or purely legal issues.

In addition, while experts must adhere to Commercial Division Rule 13(c) when submitting their reports, non-compliance does not always result in the exclusion of the expert’s testimony, as the court may exercise discretion to evaluate whether any potential prejudice has occurred.

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As readers of this blog are aware, the most contentious battles during a lawsuit are fought during discovery. Among the various discovery battles is scheduling depositions. In many cases, parties tend to reschedule depositions, which typically drags out the length of a litigation. The worst decision a party can make is failing to appear for a deposition. As a recent decision from Manhattan Commercial Division Justice Margaret Chan shows, New York courts will dispose of a case (i.e., striking of a pleading) for a party’s repeated failure to appear for a scheduled deposition.

In O’Rourke v Hammerstein Ballroom,  Defendants moved separately, pursuant to CPLR §§ 3124 and 3126, requesting several forms of discovery sanctions against Plaintiff, including (i) dismissal and/or striking of the complaint; (ii) precluding Plaintiff from offering testimony or evidence in support of his claims; and (iii) monetary sanctions, for Plaintiff’s repeated failure to appear at court-ordered depositions. Specifically, between November 19, 2021, to January 24, 2024, the Court held eight discovery conferences with the parties and scheduled Plaintiff’s deposition each time. However, Plaintiff failed to appear for each of his eight separate court-ordered depositions.

On or about May 1, 2024, the Court held a ninth discovery conference with the parties. During the conference, Plaintiff’s counsel advised the Court that certain “extrinsic issues” caused him and his firm to “continuously drop the ball.” As a result, the Court ordered the Plaintiff to appear for a deposition on or before June 28, 2024, and gave Defendants permission to file for sanctions should Plaintiff fail to appear.

Following the May 1, 2024, discovery conference, Plaintiff failed to appear for his deposition on two additional, separate occasions. As a result, on July 10, 2024, the parties appeared for a status conference, during which the Court advised Plaintiff’s counsel that Plaintiff had until the return of Defendants’ motion to appear for a deposition. Rather than appear, on August 1, 2024, Plaintiff filed his opposition to Defendants’ motion.

Analysis:

In its decision, the Court examined the standard for issuing discovery sanctions. Specifically, CPLR § 3126 (3)  provides that if a party “refuses to obey an order for disclosure or willfully fails to disclose information which the court finds ought to have been  disclosed pursuant to this article, the court may make such orders with regard to  the failure or refusal as are just,” including “an order striking out pleadings or parts  thereof, or staying further proceedings until the order is obeyed, or dismissing the  action or any part thereof, or rendering a judgment by default against the  disobedient party.” In addition, the Court noted that “[t]he drastic sanction of striking pleadings is justified only when the moving party shows conclusively that the failure to disclose was willful, contumacious or in bad faith” (Roman v City of New York, 38 AD3d 442 [1st Dept 2007], [citations omitted]).

In applying the standard under CPLR § 3126 , the Court held that the appropriate sanction for Plaintiff’s repeated failure to appear for a deposition was to dismiss Plaintiff’s complaint. Specifically, the Court stated that:

[P]laintiff’s counsel’s story is so wildly unrealistic that [it] can only imply that plaintiff was never ready for deposition on June 28 or any date and was never set to be prepared.  Plaintiff’s counsel’s actions and representations smack of gamesmanship, which this court does not condone. In view of plaintiff’s counsel’s lack compliance with the most recent order giving him one more opportunity to move this case forward, coupled with his longstanding non-compliance with nine orders equaling nine other opportunities to move this case forward, plaintiff’s counsel’s inaction shows the lack of seriousness in the prosecution of this case. The sanction befitting the lackadaisical handling of this case is dismissal of plaintiff’s complaint.

Takeaway:

The message from the O’Rourke decision, like dozens of other rulings, seems clear. The Commercial Division will enforce a strict, no-tolerance approach in disposing of cases for willful discovery violations. Against this background, a party’s repeated negligence, as in O’Rourke, will meet the criterion to strike a pleading under CPLR § 3126 (3). As such, counsel should heed the words of President Lincoln, who stated “[l]eave nothing for tomorrow which can be done today.”

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As recently highlighted by this blog, on September 12, 2024, the Justices of the Commercial Division gathered in the offices of Kelley & Drye to discuss new updates and happenings in the world of the Commercial Division (“ComDiv”). The night was filled with lively discussion – leaving those fortunate enough to attend with valuable insights on key practice points within the ComDiv. Based on our desire to keep all our readers updated on all the happenings in the ComDiv, we would be remiss to not share with you some important takeaways and insights from this event.

Change in the ComDiv Monetary Threshold?

The ComDiv Justices led an intriguing discussion about whether or not the monetary threshold for the ComDiv should be raised. In true judicial fashion, the Justices were a split bench. Some Justices opined that an increase in the monetary threshold could allow the ComDiv to better utilize its resources to focus on more nuanced, complex commercial cases – cases for which the ComDiv was specifically designed. Other Justices felt that the current threshold was sufficient and should not be raised to bar deserving litigants from the resources of the ComDiv.  Although no change is imminent, it is clear that the monetary threshold is on the minds of these Justices.

Trials and ComDiv Rule 9(b)

The ComDiv Justices also led a discussion surrounding the various avenues litigants have in adjudicating their claims within the ComDiv. While taking pride in their ability to get trial dates on the calendar, the ComDiv Justices also took time to highlight the recently added ComDiv Rule 9(b). On consent of all parties, this rule allows litigants to appoint any person to act in place of the Court and “determine any or all issues” or “perform any act, with all the powers of the Supreme Court.” The Justices suggested that this rule could be an effective alternative for litigants and enhance the Court’s efficiency in the disposition of cases.

Ultimately, in deciding between these different paths, the ComDiv Justices stressed that the more practitioners can be realistic about their trial needs, the better they will be able to decide which course of action is best for their respective cases.

Interested in learning more about ComDiv Rule 9(b)? Check out our blog post about it:

Courtroom of the Future / AI Issues

The ComDiv Justices were also excited to discuss new and exciting technology that has helped shaped ComDiv courtrooms into “those of the future.” Specifically, the Justices highlighted NYSCEF’s virtual evidence room, an online space where parties can submit evidence and exhibits in preparation for trial. The Justices discussed how NYSCEF’s virtual evidence room has transformed courtrooms – making it easier to display and share evidence in trials. To learn more about the virtual evidence room, check out this link:

Despite these exciting technological advancements in the courtroom, the ComDiv Justices also warned about some potential dangers – specifically focusing on AI. The Justices discussed how AI could create evidentiary issues, especially with its ability to create “deep fakes” or enhance certain images. Although these issues have not yet substantively arisen in in the ComDiv, the Justices warned that these issues may be imminent.

ComDiv Justices’ Pet Peeves

Finally, the ComDiv Justices concluded the night by sharing their “pet peeves” when dealing with litigants. To nobody’s surprise, the ComDiv Justices were very excited (and prepared) to share these pet peeves. Here are a few things to keep in mind:

  • Make sure to read each Judge’s individual rules before appearing before them.
  • Do not overwrite – be clear, accurate, and concise in your filings with the Court.
  • Meet and confer.
  • Use your microphone while speaking in the courtroom.
  • Don’t submit affirmations or affidavits in place of briefs when making legal arguments.
  • Get your court reporter’s information.
  • Do not cite to the Justices’ cases, unless they apply.
  • Utilize your fact section – but do not overstate or convolute the facts.
  • Be prepared and professional.

Thank you to the ComDiv Justices and everyone who put together such an amazing event! We look forward to more in the future!

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Giorgio Trovato, Unsplash

Under CPLR 7502(c), a court in “the county in which an arbitration is pending…[is permitted to] entertain an application…for a preliminary injunction in connection with an arbitration that is pending or that is to be commenced inside or outside this state.”

A recent decision from Justice Anar R. Patel of the Manhattan Commercial Division in Conlon Holdings LLC v Chanos & Company demonstrates that mere threats of imminent dissipation of funds are insufficient grounds for the issuance of a preliminary injunction under CPLR 7502(c).

Background

Petitioners Conlon Holdings LLC and ConlonBeithir LLC (“Petitioners”) moved by Order to Show Cause seeking injunctive relief in aid of arbitration under CPLR 7502(c). Petitioners sought recovery for breach of contract and promissory estoppel, among other claims, in connection with a loan agreement (“Loan Agreement”) executed by James S. Chanos and Chanos & Company LP (the “Company”) (together, the “Respondents”).

This arbitration was precipitated by Mr. Chanos’s sale of a residential property located in Miami Beach, Florida (“Miami Residence”). Petitioners, who were investors in the Company, claimed that Mr. Chanos failed to disclose the sale of the Miami Residence to them notwithstanding the terms of the Loan Agreement requiring Mr. Chanos to identify the Miami Residence as security for the loan. Petitioners sought to enjoin Respondents from “transferring the proceeds of the sale of the [Miami Residence]”; to remove Kynikos Associates Ltd as a General Partner of the Company; and to appoint a temporary receiver until a new general partner was selected. Ultimately, the court denied Petitioners’ application.

Analysis

“[T]he party who seeks a preliminary injunction in aid of arbitration must show, in addition to the potential ineffectiveness of the award, the usual three requirements for equitable relief: (1) likelihood of success on the merits of the claim; (2) irreparable injury in the absence of the injunction, and (3) a balance of equities in favor of the moving party” (emphasis added).

First, the court denied Petitioners’ request to freeze all proceeds from the sale of the Miami Residence while the parties engaged in arbitration. The court found that that Petitioners were misguided in arguing that, in order to establish that the potential arbitration award would be ineffective, “they must only show…the purported violation of their rights [under the Loan Agreement].”  Justice Patel noted that Petitioners cited no authority for that proposition. Further, the court noted that, in making their argument, Petitioners “have misapprehended and/or conflated the appropriate standard of review” because it was for the arbitration panel to decide whether there was purported breach. The court declined to rely on Petitioners allegations alone, absent any evidence, that Respondents intended to “transfer the funds outside of the jurisdiction or make poor investment decisions to yield substantial losses, which would adversely impact Respondents themselves” and render the potential arbitration award ineffective.

Second, the court found that Petitioners did not demonstrate a sufficient likelihood of success in arbitration because they did not have standing to enforce the Loan Agreement. The court found that Petitioners failed to (1) demonstrate that their “status as aggrieved parties as investors in the Company affords them standing to enforce the Loan Agreement”; (2) allege the necessary elements of a promissory estoppel claim because there were no allegations that “they reasonably relied upon Mr. Chanos’s…promise to repay the loan in deciding to invest in the Company, and sustained a resulting injury”; and (3) demonstrate that they were parties to the Loan Agreement because “Petitioners were not limited partners [of the Company at the execution of the] Loan Agreement on December 31, 2018.”

Third, the court held that Petitioners would not be irreparably injured absent the grant of injunctive relief, reasoning that monetary damages were otherwise available to Petitioners. The court also noted that Petitioners did not argue that they would suffer irreparable harm, but instead adopted a “standard of urgency,” claiming that Mr. Chanos would likely dissipate the funds. The court, however, highlighted the fact that the alleged “urgency” – i.e. breach of the Loan Agreement –occurred way back in June 2023, thereby undermining “the sense of urgency that ordinarily accompanies a motion for injunctive relief.”

Finally, the court found that given “the Petitioners’ failure to establish a likelihood of success on the merits and the availability of money damages, the balance of equities is in Respondents’ favor.”

The court also found that the Petitioners’ request for the removal of the general partner of the Company and the appointment of a receiver were premature as the relief hinged on the ultimate findings in the pending arbitration proceeding.

Takeaway

Demonstrating the “potential ineffectiveness of the award” within the meaning of CPLR 7502(c), requires substantial evidence. Courts are hesitant to grant preliminary injunctions in aid of arbitration seeking to freeze assets based solely on vague allegations of threats of imminent dissipation of funds.

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Lawyers practicing in the Commercial Division are keenly aware of issues related to attorneys’ fee awards in commercial cases.  Commercial agreements commonly contain a provision awarding attorneys’ fees to a prevailing party in a manner sufficient to satisfy entitlement to an award under the contractual exception to “American Rule.”  However, entitlement to a fee award is only the beginning of the battle.  Fee applications are oftentimes met with ardent objection, attacking both the reasonableness of services and the reasonable value of those services in various ways. 

One such application was recently decided by the Commercial Division in Core Group Marketing LLC v. MIP One Wall Street Acquisition LLC, where Manhattan Commercial Division Justice Reed granted both motions for an award of attorneys’ fees.

The Dispute and Litigation

The genesis of the dispute in Core Group concerns the termination by MIP One Wall Street Acquisition LLC (“MIP”) of Core Group Marketing LLC (“CGM”) as its broker in selling units of MIP’s Wall Street property.  CGM initiated the suit seeking a $750,000 “Termination Fee” it alleges was owed under the Co-Exclusive Sales and Marketing Agreement (the “Agreement”) between the parties.  Included in the Agreement was an attorneys’ fee provision that permitted the prevailing party in enforcement litigation to be awarded “reasonable attorneys’ fees and costs, including any fees and costs incurred in enforcing any judgment.”   

On July 25, 2022, MIP was granted summary judgment dismissing CGM’s complaint in its entirety.  MIP was also granted summary judgment on its attorneys’ fees counterclaim.  MIP thereafter filed two motions seeking a total award of attorneys’ fees and costs in the sum of $268,569.62. 

The Parties Positions

In support of the fee application, MIP submitted an affirmation from its attorney that affirmed that the fees were (1) reasonable; (2) in line with rates commonly charged; and that (3) the time spent was reasonable given CGM’s insistence on proceeding with discovery.  MIP included detailed invoices issued by its counsel in further support of the application. 

CGM opposed the application.  CGM argued that the amount sought was unreasonable on its face, ­­­­­­­­­­­contending in sum that a substantial amount of the fees sought for the first motion included time for unnecessary discovery ($36,000), including the retention of an ESI vendor ($30,000).  Specifically, CGM argued that it was MIP’s delay in bringing its summary judgment motion that caused the referenced discovery costs, and that those costs therefore were not reasonable.  As to the second motion, CGM argued that MIP’s fees incurred on appeal ($80,000) in successfully defending its grant of summary judgment were excessive because the issue involved was not novel, and that additional appellate staff therefore was not required.     

The Court Holds that the Fees Are Reasonable in Their Entirety

Over CGM’s objections, the Court determined that given “‘(1) the time and labor required, the difficulty of the questions involved, and the skill required to handle the problems presented; (2) the lawyer’s experience, ability, and reputation; (3) the amount involved and benefit resulting to the client from the services; (4) the customary fee charged for similar services; (5) the contingency or certainty of compensation; (6) the results obtained; and (7) the responsibility involved’” that all of MIP’s fees for litigation expenses ($157,026.51) were reasonable.  In doing so, the Court made a couple of observations that are noteworthy for Commercial Division litigators. 

First, the Court upheld the fees sought for discovery-related services and costs incurred for retaining an ESI vendor, even though the ESI results were never sent to CGM.  MIP’s affirmation set forth with some specificity the various discovery-related services provided, and the Court was not persuaded that those services were unnecessary or unreasonable.  In fact, the Court held that the fact that CGM was not provided the ESI documents was immaterial, as CGM did not dispute that the costs were incurred in gathering the documents.

Second, the Court did not adopt CGM’s reasoning that MIP should not be awarded the fees incurred for discovery because it delayed in brining a motion for summary judgment insofar as CGM failed to show how the costs were caused by any delay.  Notably, the Court did not take CGM up on its attempt to shift the cost for routine discovery-related services on its opponent. 

Lastly, the Court noted that the fees incurred in bringing a fee application are properly recoverable if encompassed by the applicable attorney-fee provision or statute.   The Court also granted MIP’s second motion for fees incurred post-summary judgment, including the fees incurred in successfully defending its award of summary judgment on appeal.  While CGM contended that the fees incurred ($80,000) were unreasonable because the issues involved were not novel, the Court held that CGM provided “no authority for arguing that, depending on the types of issues involved, the involvement of certain attorneys in the appellate process is inherently unreasonable.”  The Court therefore found $80,000 to be a reasonable amount of fees for litigating an appeal. 

The Takeaway

While entitlement to attorneys’ fees under agreement or statute is usually straightforward, a party seeking an award of fees would do well to provide the detail MIP provided in Core Group to assist the Court in determining that the fees sought are reasonable.  Parties opposing such an award should be similarly on notice, as the Commercial Division will require specificity and authority to uphold any objection.   

Back to school with a bullet journal
Estée Janssens, Unsplash

As summer winds down, ComDiv practitioners no doubt will soon be gearing up for the upcoming fall and winter months.  Time again to trade in your flip-flops for legal pads.  The year-end push will soon be upon us.   

As practitioners start to populate their calendars with various litigation deadlines, we take this opportunity to save one date in particular – September 12, 2024 – when the Commercial & Federal Litigation Section of the New York State Bar Association will be hosting program entitled, “An Evening With New York’s Commercial Division Justices 2024”

For commercial litigators, especially those who find themselves in the Commercial Division, this is simply a must-attend event.  This event will offer practitioners valuable insight about key practice points in the Commercial Division.  Attendees will have the opportunity to learn about exciting new updates and happenings in the Commercial Division, as well as to tune into and even participate in what promises to be a lively discussion on discovery issues, motion practice, ADR, ethical concerns, trials, the lasting impact of the pandemic, and more.

As with all ComFed events, the September 12 evening with the ComDiv judges will present a great opportunity for practitioners to meet, listen to, and network with the judges, as well as their friends and colleagues in the bar.   

The following Commercial Division Justices will speak at this event:

  • Hon. Nancy Bannon
  • Hon. Andrew Borrok
  • Hon. Margaret Chan
  • Hon. Joel M. Cohen
  • Hon. Melissa A. Crane
  • Hon. Andrea Masley
  • Hon. Anar Rathod Patel
  • Hon. Robert Reed
  • Hon. Jennifer G. Schecter

Interested?  Register through the link below:

An Evening With New York’s Commercial Division Justices 2024 – New York State Bar Association (nysba.org).

The event will be held at Kelley Drye, 3 World Trade Center 175 Greenwich Street, New York, NY at 6 pm.

But act fast, as this event has limited space!  Meanwhile, keep frequenting our blog to keep up to date with the latest happenings of the Commercial Division.  We are excited to see you all at this event!

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As readers of this blog no doubt are aware, clients sometimes take a “shoot first, ask questions later” approach during the early stages of litigation. This is especially true when bringing a CPLR 3213 motion for summary judgment in lieu of complaint, which, under narrow circumstances, provides an accelerated procedure for litigants to obtain a monetary judgment. But with the streamlined process of obtaining this relief comes potentially fatal penalties for failing to provide sufficient advance notice of the motion, as a recent decision from Manhattan Commercial Division Justice Margaret Chan demonstrates.

Background:

In SD Stability SDIRA, LLC, et al. v Maxben Holdings, LLC, plaintiffs (“Plaintiffs”) entered into a $500,000 loan agreement with defendant (“Defendant”) providing that the loan would be repaid by April 21, 2022. Six months later, Plaintiffs entered into a second $500,000 loan agreement with Defendant, whereby Defendant agreed to remit monthly interest payments of 10% in addition to the $500,000 principal sum by August 23, 2022. According to Plaintiffs, Defendant defaulted under the terms of both Notes.

On March 19, 2024, Plaintiffs commenced a CPLR 3213 motion-action, setting the return date for April 9. According to Plaintiffs’ counsel, the process server was not able to personally serve Defendant’s representative until March 21.

In opposition, Defendant argued that the motion for summary judgment in lieu of complaint should be denied for lack of personal jurisdiction due to Plaintiffs’ failure to give Defendant sufficient advance notice of the motion (a “fatal jurisdictional defect,”) as the return date was set for 19 days after the date of service rather than 20 days as required under CPLR 320 (a).

On reply, Plaintiffs argued that the shortened return date was not a fatal jurisdictional defect because Defendant made a timely appearance and therefore was not prejudiced.

Analysis:

Justice Chan rejected Plaintiffs’ argument.

First, the Court explained that Plaintiffs’ reliance on Blue Lagoon, LLC v Reisman, 214 AD3d 938, 939 [2d Dept 2023]  – a case that overlooked the defective return date where plaintiff amended its notice of motion to provide sufficient time to respond, and where the motion was adjourned several times – was misplaced because, unlike in Blue Lagoon, the parties in Maxben Holdings did not adjourn the motion at any point, and Plaintiffs never amended their defective notice of motion to revise the return date of the motion.

Second, the Court rejected Plaintiffs’ contention that Defendant suffered no prejudice because it made a timely appearance. Notably, Plaintiffs relied on ICICI Bank UK PLC Antwerp Branch v Manilal, 2020 WL 2747793 [Sup Ct NY County 2020], for the proposition that “where a defendant appears and opposes the motion on the merits, the court may disregard the fact that the return date did not satisfy the time requirements set forth in CPLR 3213.” The Court found that the Manilal case was inapplicable to the circumstances in Maxben Holdings because Defendant did not oppose Plaintiffs’ motion “on the merits,” but rather, opposed it solely on the basis of lack of personal jurisdiction. Given these circumstances, the Court denied Plaintiffs’ motion for summary judgment in lieu of complaint for lack of jurisdiction.

Upshot:

The Maxben Holdings decision is a reminder that while a motion for summary judgment in lieu of complaint is a powerful tool, failure to follow the basic requirements for filing the requisite motion papers have fatal penalties. Counselors should be mindful of providing sufficient time in the notice of motion to account for potential issues with service of process. Otherwise, litigating with a “full speed ahead, take no prisoners” approach can lead to many sleepless nights over losing this type of motion on jurisdictional grounds.

New York law generally does not favor non-compete agreements, viewing them as unreasonable restraint of trade. As a result, New York courts apply a rigorous standard when deciding whether to enforce these restrictive agreements. The strict standard was demonstrated in Multiplier Inc. v. Moreno, et al. In Multiplier Inc., the Manhattan Commercial Division considered a request to enforce a non-compete provision against a former employer, while scrutinizing the provision in question to determine whether it was reasonable and necessary to protect legitimate business interests.

Defendant-Employee Joins Plaintiff-Company and Signs Non-Compete Agreement

Plaintiff Multiplier Inc. d/b/a Harness Wealth (“Harness”) is a startup company that focuses in providing financial and tax strategies for equity stock options, business ownership, and equity partnerships. Defendant Laura Moreno joined the team as a Senior Tax Manager in the summer of 2020. Moreno was instrumental in developing and administrating the “Harness for Employers” program, which offers startup companies with valuable resources and assistance in educating their employees on strategies to maximize the value of their equity ownership.

When Moreno joined Harness, she executed a Proprietary Information and Assignment Agreement (“Agreement”). This Agreement included a non-compete covenant, which provided in pertinent part:

“[i]n order to protect the Company’s Proprietary Information and good will, during my Service Relationship and for a period of one (1) year following the termination of my position of as a Service Provider for any reason (the ‘Restricted Period’), I will not directly or indirectly, whether as owner, partner, shareholder, director, manager, consultant, agent, employee, co-venturer or otherwise, engage, participate or invest in any business activity anywhere in the United States that develops, manufactures or markets any products, or performs any services, that are otherwise competitive with or similar to the products or services of the Company (including its subsidiaries (including joint ventures)), or products or services that the Company (including its subsidiaries (including joint ventures)) has under development or that are the subject of active planning at any time during my Service Relationship [], or products or services that the Company [] has under development or that are the subject of active planning at any time during [Moreno’s] Service Relationship[.]”

In the fall of 2021, Moreno resigned from her position at Harness and joined defendant eShares, Inc. (“Carta”), a software company that was offering the same services and products as the Harness for Employers program.

Harness Files Lawsuit Alleging Breach of Non-Compete Agreement

In September 2022, Harness commenced a lawsuit against Moreno and Carta for violating the non-compete covenant of the Agreement. The lawsuit included claims for declaratory judgment, tortious interference with contract, and unjust enrichment. Harness also sought attorneys’ fees, costs, and compensatory and punitive damages.

Defendants moved to dismiss the breach of contract claim, arguing that the non-compete provision was unreasonable and unenforceable. They argued that the non-compete covenant was unreasonable and thus, unenforceable. They contended that because the remaining claims were also based on the non-compete provision, these claims should also be dismissed.

Under New York law, the test for determining the reasonableness of a non-compete agreement consists of a three-prong test. A restraint on employee competition is considered reasonable if it: 

  1. “is no greater than is required for the protection of the legitimate interest of the employer,
  2. does not impose undue hardship on the employee, and
  3. is not injurious to the public”

(BDO Seidman v Hirshberg).

New York courts strictly apply this rule to limit enforcement of “broad restraints on competition” (see id.).  With respect to agreements not to compete with professionals, courts give “greater weight to the interests of the employer in restricting competition within a confined geographical area” (id.). But to avoid overly broad restraints on competition, courts limit such interests “to the protection against misappropriation of the employer’s trade secrets or of confidential customer lists, or protection from competition by a former employee whose services are unique or extraordinary” (Harris v Patients Med., P.C.). To establish that the former employee performed unique or extraordinary services, the employer must show that the employee was “irreplaceable” and that their departure resulted in “special harm to the employer” (Pure Power Boot Camp, Inc. v Warrior Fitness Boot Camp, LLC). Courts will find restrictive covenants to be unenforceable when the services are not extraordinary or unique (Harris v Patients Med., P.C.).

The New York Court of Appeals also has recognized that employers have a legitimate interest in preventing former employees from “exploiting or appropriating the goodwill of a client or customer, which had been created and maintained at the employer’s expense, to the employer’s competitive detriment” (BDO Seidman v Hirshberg).

In their motion to dismiss, Defendants argued that Harness failed to allege that (1) Moreno’s services were unique or extraordinary, and (2) Moreno misappropriated Harness’ trade secrets or confidential customer lists.

Court Finds that Former Employer Was Not Unique and the Non-Compete Provision Was Overbroad

Applying the test for determining the reasonableness of a non-compete provision, Manhattan Commercial Division Justice Andrea Masley sided with the Defendants, granting their motion to dismiss the cause of action for breach of the non-compete covenant.

Justice Masley found that “there are no allegations that Moreno was ‘irreplaceable and that [her] departure caused some special harm to’ Harness.” Justice Masley further found that Harness’s Complaint contained “no allegations that Moreno had special value to Harness because of any relationships she developed with the clients or that she specifically developed a special or unique relationship with Harness’ clients.” Justice Masley determined that Harness’s allegations that Moreno was the “face of the [Harness for Employers program]” were insufficient because direct interaction with clients alone does not automatically result in the creation of a unique relationship.

Justice Masley also found that Harness failed to allege a legitimate interest in protecting its goodwill. The Court found Harness’s conclusory allegations that Moreno’s breach caused harm to Harness’ goodwill and its relationship with existing and prospective clients insufficient.

The Court also determined that the non-compete clause was overbroad and its geographical scope unreasonable. The Court ruled that the clause’s expansive language was “unrestrained by any limitations keyed to uniqueness, trade secrets, confidentiality or even competitive unfairness” (citing Columbia Ribbon & Carbon Mfg. Co. v A-1-A Corp.).

Takeaway

New York courts impose an “overriding limitation of reasonableness” on non-compete provisions (Pure Power Boot Camp, Inc. v Warrior Fitness Boot Camp, LLC). While wider latitude is given to provisions between professionals, enforcing such a provision requires a demonstration that enforcement is necessary to protect against misappropriation of the employer’s trade secrets or of confidential customer lists or that the former employer was unique or extraordinary. If you are considering entering into or drafting a non-compete agreement, you must be mindful of these limitations.

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Kyle Glenn, Unsplash

Sections 3102 and 3108 of the CPLR outline methods for conducting discovery, including discovery “outside” or “without” the state.  But what about demands for discovery and inspection of documents located outside the country?  A recent decision from Justice Robert Reed of the Manhattan Commercial Division in Bagatelle Little W. 12th LLC v. JEC II, LLC demonstrates the substantial burden that parties must overcome in seeking international discovery.

The conflict in Bagatelle stemmed from a joint restaurant venture between plaintiff Bagatelle Little West 12th LLC, its affiliated companies (the “Bagatelle Entities”), and defendants JEC II, LLC and The One Group LLC.  Defendants brought counterclaims against Plaintiff and its affiliates alleging that the Bagatelle Entities improperly transferred funds from Plaintiff around the same time Plaintiff received a significant investment from NextStage, a European-based private equity firm.  Defendants alleged that the improper transfers limited Plaintiff’s ability to pay management fees and distributions to Defendants as part of the joint venture.

Defendants moved under CPLR 3102 and 3108 for the issuance of letters rogatory to the relevant authority in France to compel the nonparty European investor, NextStage, to produce documents that purportedly would provide information regarding the nature of NextStage’s investment in Plaintiff and/or the Bagatelle Entities and/or its involvement in the improper transfers.

Justice Reed began his analysis by noting that “in all cases involving international discovery, the court should take into account: the importance of the information sought to the litigation, the degree of specificity of the request, the availability of alternative means of securing the information, the extent to which noncompliance with the request would undermine important interests of the United States, or whether compliance with the request would undermine important interests of the state where the information is located.”  Justice Reed also noted that New York courts routinely employ a heightened standard for international discovery in comparison to a purely domestic discovery dispute.  That is, parties seeking discovery from international entities must “establish that the sought information is crucial to the resolution of a key issue in [the] case.”

Defendants argued that the information sought from NextStage purportedly would demonstrate the nature of allegedly improper intercompany transfers made by the Bagatelle Entities and NextState’s involvement therein.  Specifically, Defendants contended that “[i]t is necessary and convenient to issue a letter rogatory because NextStage is a hostile witness headquartered in France and cannot be compelled to produce documents in the State of New York,” and because “many of the requested documents are likely NextStage internal communications so there is no other source from which counterclaimants can obtain this information.”

In opposition, Plaintiff contended that Defendants failed to meet the heightened burden for international discovery because they did not demonstrate how the NextStage investment was connected to the alleged intercompany transfers made by the Bagatelle Entities.  Further, Plaintiff contended that the issuance of letters rogatory prior to the completion of discovery would only serve to delay discovery in the case.

Justice Reed, siding with Plaintiff, refused to issue letters rogatory for international discovery, stating that “convenience is not the standard.”  Justice Reed also found that Defendants were unable to demonstrate how their requests to NextStage differed from those they could make directly to Plaintiff or how Plaintiff’s production was otherwise deficient, justifying the need for additional nonparty discovery from NextStage.  The court further found that Defendants’ motion failed to establish how the information sought from NextStage was “crucial to the resolution of a key issue in this case.”

Takeaway

In seeking international discovery, a party must clearly establish the nexus between the information sought from an international entity and any key issues in the case.  Blanket statements regarding the alleged materiality, necessity, and/or convenience of information sought are insufficient bases to overcome the stringent standard for international discovery.

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It’s been a minute since our last installment of our “Check the Rules” series here on New York Commercial Division Practice, in which we occasionally highlight decisions from Commercial Division judges holding litigants and practitioners to account for noncompliance with either the Rules of the Commercial Division or the individual practice rules of the judges themselves. 

Way back in 2017, for example, we highlighted a decision from former Manhattan ComDiv Justice Eileen Bransten (may she rest in peace), striking an expert’s reply report under ComDiv Rule 13(c) because it included new data and opinions that were available to the expert when his initial report was submitted.  ComDiv Rule 13(c), noted Justice Bransten, was “promulgated so no party will be ‘sandbagged’ or surprised by another expert’s opinion,” not for an expert to “correct the deficiencies and omissions made in an initial expert report,” or for an expert to “say what he neglected to say in his opening report.”

Several years ago, we highlighted a decision from Manhattan ComDiv Justice Joel M. Cohen striking an expert rebuttal report under ComDiv Rule 13(c) because of its self-described “preliminary” conclusions and vague references to “disputed factual assertions” and “significant intercompany transactions,” which, according to Justice Cohen, constituted “insufficient notice of any opinions [he] propose[d] to offer or the bases for those opinions.”    

It turns out that ComDiv Rule 13(c) has played a prominent role in a few Manhattan court decisions this year as well.  But before we dive in those decisions, let’s remind ourselves of what Rule 13(c) actually says:

Unless otherwise stipulated or ordered by the court, expert disclosure must be accompanied by a written report ….  The report must contain:

(A) a complete statement of all opinions the witness will express and the basis and the reasons for them;

(B) the data or other information considered by the witness in forming the opinion(s);

(C) any exhibits that will be used to summarize or support the opinion(s);

(D) the witness’s qualifications, including a list of all publications authored in the previous 10 years;

(E) a list of all other cases at which the witness testified as an expert at trial or by deposition during the previous four years; and

(F) a statement of the compensation to be paid to the witness for the study and testimony in the case.

In January of this year, Manhattan ComDiv Justice Melissa A. Crane in Moghtaderi v Apis Capital Advisors, LLC granted the defendants’ motion in limine, precluding the plaintiff’s expert under ComDiv Rule 13(c) in a case involving a dispute over the amounts paid to the plaintiff under the parties’ operating agreement after he voluntarily withdrew from their investment-advisory firm. 

According to the decision, the plaintiff was particularly aggressive throughout the course of discovery, having “no trouble asking the court to award discovery throughout the course of this acrimonious litigation” and “no problem reaching out to the court for every trivial discovery dispute.”  Yet eight months after filing his Note of Issue and filing two post-NOI motions to compel, the plaintiff for the first time disclosed in his list of trial witnesses that he intended to call an expert. 

The defendants moved to preclude the plaintiff’s expert from testifying.  Citing the language in ComDiv Rule 13(c) that provides that “the note of issue and certificate of readiness may not be filed until the completion of expert disclosure,” and that “[e]xpert disclosure provided after these dates without good cause will be precluded,” the court had little problem granting the motion:

Never, during the midst of all this motion practice (or at any other point) did plaintiff reveal they intended to call an expert at trial,” the court stated.  Instead, plaintiff waited until the eve of trial.  This is prejudicial to defendants who have been diligently preparing for a trial without an expert for months.   

In May of this year, the First Department in Taxi Tours Inc. v Go N.Y. Tours Inc. unanimously affirmed a trial-court decision handed down by Manhattan ComDiv Justice Jennifer G. Schecter a year ago, which precluded under ComDiv Rule 3(c) the defendant’s expert report and testimony in a case involving allegations of deceptive trade practices and unfair competition between competing New York City tour-bus operators. 

In Taxi Tours, the defendant alleged that the plaintiff fabricated thousands of online customer posts positively reviewing its own services and negatively reviewing the plaintiff’s services.  The reviews themselves – which by the time the parties were engaged in expert disclosure were no longer available on the internet – were not produced in the course of discovery.  Instead, the defendant and its proffered expert relied on an internet consultant’s summary of the reviews. 

The plaintiff moved to preclude the expert’s report.  Citing ComDiv Rule 13(c), the court similarly had no difficulty in granting the relief requested:

[T]he court does not understand how [the defendant] intends to prove that [the plaintiff] posted the allegedly fake reviews and that they are deceptive … without actually introducing them into evidence.  [The defendant] did not disclose those reviews during discovery and now there is no way they will be able to introduce them at trial.  It cannot seek to avoid this evidentiary problem by effectively seeking to admit the reviews through testimony.  Nothing could possibly be more prejudicial than admitting core evidence that a [party] has not seen based only on testimony from an expert that did not even personally review it.

On appeal, the First Department agreed, holding that “[t]he review data had been gathered years earlier by a nonparty entity and [the defendant] should have known about its rule 13(c) obligation to supply that data while submitting the expert disclosure.”

Finally, just last month, Manhattan Supreme Court Justice David B. Cohen in Smartmatic USA Corp. v Fox Corp. vacated a decision rendered by a Judicial Hearing Officer who had been appointed to adjudicate on consent the parties’ discovery disputes under the ComDiv Rules (including ComDiv Rule 13[c]) in a case involving allegations by the plaintiff, an election-technology and software company, that defendant Fox News defamed and disparaged it by publicly stating or implying on broadcasts that its election technology was “rigged” to “steal” the 2020 Presidential election. 

After receiving a lengthy rebuttal report from Fox’s “journalism” expert, which referenced several deposition transcripts from a similar but separate defamation action against Fox venued in Delaware (for which the same expert also had submitted a report), the plaintiff demanded production of the transcripts and related exhibits.  Fox responded by amending the report to eliminate the references to the transcripts and submitting an affirmation from the expert stating that she “inadvertently” referenced the transcripts, which she had not considered in the preparation of her report. 

The plaintiff made a motion to compel before the JHO, who ultimately ruled in favor of Fox, finding that “it did not appear that [the expert] has read or reviewed the documents at issue here as they were not specifically mentioned in [the] report.” 

The plaintiff then made a motion to vacate before the court, which found for the plaintiff and effectively reversed the JHO for his failure to consider the issue under ComDiv Rule 13(c):

[The] JHO … erred by failing to discuss Commercial Division Rule 13, which governs the production of the documents here, and his focus on whether [the expert] explicitly mentioned the deponents’ names in her report was also erroneous as the Rule requires disclosure of anything provided to and reviewed by an expert, whether or not it is thereafter mentioned in an expert report. 

Citing relevant precedent, the court specifically noted that, in the context of expert disclosure, “[t]he term ‘considered’ has been interpreted to mean documents ‘provided to and reviewed by the expert.’”  And because it was undisputed that the expert had read, reviewed, and considered the transcripts in connection with her report in the Delaware action, reasoned the court, “there [w]as no basis for defendants to argue that she never read or reviewed the documents.”