The New York Commercial Division was created in 1993 “to test whether it would be possible, by concentrating on commercial litigation, to improve the efficiency with which such matters were addressed by the court and, at the same time, to enhance the quality of judicial treatment of those cases.”  By implementing rules and procedures developed with efficiency in mind and after careful consultation with Judges and practitioners alike, the Commercial Division has become a resounding success; it is one of the most efficient and effective forums in the world for the litigation of complex civil disputes.

It should therefore come as no surprise that other New York courts have taken notice of the innovative rule changes contributing to the success of the Commercial Division.  As Chief Administrative Judge Marks observes: “through the work of the Commercial Division Advisory Council – a committee of commercial practitioners, corporate in-house counsel and jurists devoted to the Division’ s excellence – the Commercial Division has functioned as an incubator, becoming a recognized leader in court system innovation, and demonstrating an unparalleled creativity and flexibility in development of rules and practices.”

Now, by Administrative Order effective February 1, 2021, the Uniform Civil Rules for the Supreme Court (the “Uniform Rules”) will incorporate, in whole or in part, nearly 30 Commercial Division Rules.  Some of these changes were foreshadowed by my colleague Paige Bartholomew in 2018 when the Unified Court System’s Advisory Committee on Civil Practice requested public comment on whether to adopt nine of the Commercial Division’s Rules.   Continue Reading Innovation Becomes the Norm: Commercial Division Rules Shape Revised Uniform Rules for the Supreme Court and County Court

“Successor liability”, is it a theory or distinct claim or cause of action?

In a recent decision, Justice Sherwood analyzed the applicability of successor liability as a distinct cause of action, rather than merely a theory of liability in New York.  In Meyer v Blue Sky Alternative Investments LLC, plaintiff Meyer moved to amend his complaint to add a new party, RBP Partners, LLC as successor to defendant Blue Sky Alternative Investments, LLC and to assert a new claim of successor liability against defendant RBP.

To demonstrate the merits of the successor liability claim, plaintiff argued that RBP is a “mere continuation” of Blue Sky, whereby all of Blue Sky’s assets had been stripped and transferred to RBP and although RBP is not owned by exactly the same individuals as Blue Sky, Plaintiff believed that he would be able to show a continuity of ownership after discovery.

In opposition, RBP argued that successor liability is not a cognizable claim under New York law, but merely a theory for imposing liability on a defendant based on a predecessor’s conduct and that plaintiff failed to allege a transaction between Blue Sky and RBP such as a stock or asset purchase agreement which, defendant argued, is a requisite predicate for its successor liability claim.  Further, RBP opposed the allegation of successor liability by arguing that Blue Sky still exists, RBP and Blue Sky did not share corporate officers or directors, and there was no proof of any transfer of assets from Blue Sky to RBP or continuation of the same business.

In New York, the general rule is that a purchaser of the assets of another corporation is not liable for the seller’s liabilities.  However, this rule is not without exceptions.

In a previous blog post I wrote about the exceptions to this general rule and analyzed that a purchaser can be held liable for liabilities of the seller in the following circumstances:  (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 (Marcum LLP v Fazio, Mannuzza, Roche, Tankel, Lapilusa, LLC).  In Marcum, the Court analyzed whether a purchaser could be held liable for a seller’s liabilities under a theory of successor liability, not a separate cause of action.  Ultimately, the Court in Marcum found that, based on the parties’ Business Combination Agreement, the purchaser corporation only assumed liability for seller’s liabilities arising in the ordinary course of business and did not impose liability for seller’s litigations.

The Court considers a successor a “mere continuation” of its predecessor (under the third exception to the general rule) where:

(i) all of substantially all assets of the predecessor are transferred to the successor corporation;

(ii) only one corporation exists after the transfer,

(iii) assumption of an identical or nearly identical name,

(iv) retention of the same corporate officers or directors, and

(v) continuation of the same business

(Miot v Miot).

Here, the Court acknowledged the legitimacy of successor liability as a separate cause of action rather than a mere theory of liability and found that plaintiff’s proposed complaint successfully stated a claim of successor liability against RBP under a theory that RBP is a “mere continuation” of Blue Sky where plaintiff specifically alleged that Blue Sky ceased to exist and had its assets stripped and transferred to RBP, Blue Sky’s principals have become principals and corporate officers of RBP, RBP is located in the same building and office suite as Blue Sky, and RBP invests in the same sectors as Blue Sky.

Importantly, the Court also rejected RBP’s argument that plaintiff is required to allege a transaction between the successor and predecessor corporation as a necessary predicate to a finding of successor liability.

Ultimately, the Court’s decision further reinforces that “successor liability” as a separate and distinct cause of action, rather than a mere theory of liability, is here to stay (at least in New York County) as long as plaintiffs can meet their burden with respect to the “mere continuation” theory.

Recently, Justice James Hudson issued a decision testing the limits of New York’s Long Arm Statute. The Court was tasked with determining whether personal jurisdiction exists over an out-of-state defendant, based on a claim arising from an out-of-state contract, but where a portion of the work under the contract was performed in New York.

In Black Diamond Aviation Group LLC v Spirit Avionics, Ltd., plaintiff Black Diamond Aviation Group LLC (“Black Diamond”) brought a declaratory judgment action, asking the court to determine whether defendant Spirit Avionics, Ltd. (“Spirit) was obligated to pay non-party Aircraft Structures Engineering Solution (“ASES”) for work performed by ASES on Black Diamond’s aircraft.

Black Diamond, a company organized under Delaware Law with a principal place of business in Greenwich, Connecticut, offers airplanes for private charter. Spirit performs aircraft maintenance and refurbishment out of Ohio. ASES is an aerospace engineering service company domiciled and located in Illinois.

In 2018, Black Diamond contacted Spirit to perform work on its Dassault Falcon 7X Jet (“Falcon 7X”). In January, 2019, Black Diamond and Spirit signed a proposal for work to be performed on the Falcon 7X (i.e. installation of a speaker system, WIFI system, USB outlets, and modifications to windows and doors) which included a price estimate for work to be done by subcontractors–namely ASES. The agreement was modified in May, 2019, via email, which stated Spirit would perform a host of upgrades to the Falcon 7X for $91,000 (the “May 2019 Agreement”). Spirit then used ASES as the subcontractor to perform some of the work.

At first, work on the Falcon 7X took place in Columbus, Ohio. But it was soon after realized that some of the work would need to take place at Islip MacArthur Airport, in Suffolk County, New York. The Falcon 7X was transported to McArthur Airport under the condition that Black Diamond pay half of the $91,000 to Spirit at the time of transport, and the other half upon completion. Black Diamond paid half its balance to Spirit, the Falcon 7X was brought to McArthur Airport, and upon completion Black Diamond paid the remaining balance of the $91,000 to Spirit.

In October, 2019, Black Diamond requested Spirit perform additional work to the Falcon 7X, to which Spirit instructed Black Diamond to engage ASES directly. Black Diamond did so, and received a cost estimate invoice which included both the cost of the new work, as well as the cost of some of the work previously provided under the May 2019 Agreement. Black Diamond paid ASES an advance payment of $23,214 to cover the new work, but when ASES invoiced Black Diamond for the remaining $59,903, Black Diamond refused to pay. Black Diamond contends that Spirit is responsible for paying the balance to ASES, and brought the subject action seeking a declaratory judgment holding the same.

Spirit moved to dismiss, asserting, inter alia, lack of personal jurisdiction. In its complaint, Black Diamond alleged the court had jurisdiction over the matter because the action arose out of services performed in Ronkonkoma, New York, and because Spirit purposely availed itself of the privilege of transacting business in New York. In determining whether personal jurisdiction over Spirit existed, the Court looked to whether Black Diamond properly invoked New York’s Long Arm Statute under CPLR § 302.

Justice Hudson’s decision takes its reader through a history of the salient personal jurisdiction decisions and is likely reminiscent of your 1L civil procedure outline. The highlights are as follows:

  • World-Wide Volkswagen Corp v Woodson – a court may exercise jurisdiction over a defendant only where there are “sufficient contacts with the forum state and substantial evidence that the defendant purposely availed themselves of the protections of the forum state.”
  • Daimler AG v Bauman – a corporation’s association with the forum state must be “so continuous and systematic as to render the corporation at home in the state.” A court should consider the following factors: (i) burden on the defendant; (ii) the forum state interest; (iii) the plaintiff’s interest in litigating in the forum; (iv) efficient resolution of controversies; and (v) the shared interest of the several states in furthering fundamental substantive policies.
  • Bristol-Myers Squibb Co. v Superior Court– there must be a “strong affiliation” between the specific claim at issue in the case and the forum state.
  • Licci v Lebanese Canadian Bank – Although determining what facts constitute “purposeful availment” is an objective inquiry, it always requires a court to closely examine the defendant’s contacts for their quality.
  • Pichardo v Zayas – for personal jurisdiction to exist there must be an “articulable nexus” or “substantial relationship” in light of all the relevant circumstances. There must be some “relatedness between the transaction and the legal claim at issue.”

Under the facts alleged in Black Diamond’s complaint, the Court determined no specific jurisdiction exists over Spirit because it has “no strong affiliation” with New York. The work performed by Spirit was performed solely in Columbus, Ohio; Spirit did not send any staff to work in New York; and the only connection Spirit had to New York was they agreed to release the Falcon 7X from their care to MacArthur Airport to be worked done by ASES.

The court emphasized that when a contract is negotiated via e-mail, or telephone, as it was here, and no business is performed within the forum state, the foreign defendant is not subject to personal jurisdiction (see AM Pitt Hotel LL C v 400 5th Ave LP). Here, the entirety of the May 2019 Agreement was negotiated and agreed upon between Spirit’s office space in Ohio and Black Diamond’s office in Connecticut, and the bargained for work pursuant to that agreement did not take place in New York, but rather Ohio. The court found, relying on an affidavit from the CEO of Spirit, that Spirit does not have an office in New York State and does not have any employees or property in New York State. Only upon request from Black Diamond did Spirit release the Aircraft to New York where the work was completed. Thus, the Court found Spirit did not avail itself the protections of the New York nor does it have sufficient contacts within New York and therefore personal jurisdiction could not be properly asserted over Spirit.

Upshot: Work performed in the forum state in connection with an out-of-state contract may be insufficient to establish personal jurisdiction over a foreign defendant.

The New York Commercial Division continues to be a beacon of innovation with a recent amendment to ComDiv Rule 6, now requiring bookmarking and hyperlinking within briefs and affidavits filed with the court.  The amendment is no doubt welcome news to an overburdened (and underbudgeted) court system already well-known for its efficient administration of justice.

Gone are the days when the recipient of a legal brief — whether judge, law clerk, or other court personnel — would be compelled to get up from one’s desk, walk down the hall, and check the stacks for this or that case citation.  Gone, even, are the days when a judge or her staff would be compelled to pore through banker’s boxes of documents to confirm this or that record citation.  The advent of e-filing, online-research databases, e-discovery software, and other document-management systems have long since rendered such practices obsolete.

Now, with the advent of Amended ComDiv Rule 6, judges and their staff will literally have at their fingertips the entirety of the factual and procedural record, as well as all the case law and statutes, supporting the arguments presented in the document they happen to be reading on their computer screen.  As one judge put it in the ComDiv Advisory Council’s memo proposing the amendment:  “This is going to be easy.”

My colleague and fellow blogger, Viktoriya Liberchuk, first reported on this amendment, in proposed form, back in January of this year.  At the time, we referenced the Advisory Council’s contention that hyperlinks would be particularly helpful with respect to the complex commercial cases that tend to make up the ComDiv’s docket.  To wit:

In the interest of remaining a leader in the efficient and effective administration of justice in complex commercial cases, the [Advisory Committee] recommends that the current e-filing and bookmarking requirements be extended to require or encourage hyperlinking to other sources in appropriate cases.

*     *     *     *     *

The case for making greater use of this simple yet powerful technology in judicial filings is obvious and compelling, and it presents an opportunity for the Commercial Division to continue its innovation and leadership in the smart adaptation of technology in aid of the efficient administration of justice.

ComDiv Rule 6 (Form of Papers) — which concerns font size, margins, and other formalities — formerly required “bookmarks providing a listing of the document’s contents and facilitating easy navigation by the reader within the document.”  In other words, briefs and affidavits filed in compliance with the the rule prior to amendment allowed a judge and her staff to jump instantly from specific points of fact or law outlined in a table of contents to the corresponding substantive content within the body of the document itself.

Amended ComDiv Rule 6, which went into effect a couple weeks ago on November 16, goes a step or two further by:

  • requiring that “[e]ach electronically submitted memorandum of law or other document that cites to another document previously filed with NYSCEF shall include a hyperlink to the NYSCEF docket entry for the cited document”;
  • allowing judges the discretion to require that “electronically submitted memoranda of law include hyperlinks to cited court decisions, statutes, rules, regulations, treatises, and other legal authorities in either legal research databases to which the Court has access or in state or federal government websites”; and
  • otherwise encouraging parties “to hyperlink such citations unless otherwise directed by the Court.”

Lest the luddites among us be left lumbering in the electronic ether, Amended ComDiv Rule 6 defines and distinguishes “bookmark” and “hyperlink” at the outset.

[A] hyperlink means an electronic link between one document and another, and a bookmark means an electronic link permitting navigation among different parts of a single document.

In other words, whereas the former rule allowed for instant navigation within the brief or affidavit at hand, the rule as amended allows for instant navigation to documents and resources outside the brief or affidavit as well.  As the Advisory Council puts it:

Hyperlinks … enable the reader of one document to access another document discussed or referred to in the text of the first document in seconds, with a single mouse-click.

Hence, the practice of law at your fingertips.

The statutes of limitations set forth in the CPLR are default rules, and parties generally are free to modify default rules by agreement.  But statutes of limitations also further the important public interests, such as avoiding stale claims and giving repose to our affairs.  In light of the public interests involved, there are substantial limits on how much parties can agree to lengthen, shorten, or waive the limitations periods applicable to claims arising under New York law.

For example, while parties can agree to a shorter limitations period than prescribed by the CPLR, a recent case by Albany County Commercial Division Justice Richard Platkin serves as a sharp reminder that a contractually shortened limitations period must be reasonable under the circumstances and, in many cases, the reasonableness of such an agreement depends not only on the length of the limitations period itself, but also on the accrual date.

Continue Reading Expect Careful Scrutiny of Contractually Shortened Statutes of Limitations

“Reasonably anticipated litigation” is a necessary element you need to show to benefit from the common interest privilege in your attempt to withhold certain documents already shared with a third-party during a pending suit in New York – but, when does this privilege apply and what does “reasonably anticipated litigation” actually mean?

Recently, Justice Andrew Borrok issued a decision which analyzed the applicability of the “common interest privilege” and the need to prove the element of “reasonably anticipated” litigation when relying on this privilege in New York courts as a basis for withholding certain discovery.

In Starr Russia Investments III B.V. v Deloitte Touche Tohmatsu Ltd., Plaintiff Starr Russia Investments III B.V. (“Starr”) brought a fraud action against Deloitte Touche Tohmatsu Ltd. and various related entities, including ZAO Deloitte & Touche CIS (“D-ZAO”), claiming that Starr was fraudulently induced by Defendants to invest, between 2008 and 2010, approximately $110 million in Investment Trade Bank (“ITB”), a Russian joint stock company controlled by a Russian national, and that Starr lost the full value of its investment when, in 2015, the Central Bank of Russia revealed that ITB had amassed a huge capital deficit and was deemed insolvent.

Starr claimed that it engaged Allen and Overy (“A & O”) to represent it in its investment in the ITB transaction.  Shortly after, Starr approached FPK Capital/J.C. Flowers (“JC Flowers”) about becoming a co-investor.  JC Flowers engaged Skadden, Arps, Slate, Meagher & Flom LLP (“Skadden”) to represent it in the transaction.  Skadden commissioned the Risk Advisory Group (“RAG”) to produce a report as part of its due diligence (the “RAG Report”).  Skadden, in turn, shared the RAG Report, dated June 9, 2008, with Starr based on the parties’ agreement to share due diligence materials.

D-ZAO moved to compel Starr to produce the RAG Report and its communications discussing the report’s factual findings and responsive documents it shared with third-parties, including JC Flowers from 2007 to 2015.

Starr refused to produce the RAG Report, claiming that it was protected by the attorney-client privilege and the common interest privilege.

With respect to attorney-client privilege, the Court held that because there was neither a written expression of joint representation by Skadden and A & O as to both JC Flowers and Starr nor a written agreement indicating that the documents shared during the course of due diligence were privileged and could not be shared with others, the RAG Report was not protected by the attorney-client privilege.

With respect to Starr’s claim that the Rag Report was protected by the common interest privilege, the Court analyzed whether the report was prepared in anticipation of litigation, a necessary element in New York.

Under New York law, the common interest privilege is applicable to attorney-client communications disclosed to a third-party where

(1) the third-party shares a common legal interest;

(2) the confidential communication is made in furtherance of that common legal interest; and

(3) the confidential communication relates to pending or reasonably anticipated litigation.

These elements were articulated in the seminal case of Ambac Assurance Corporation v Countrywide, in which the New York Court of Appeals recognized the applicability of the common interest privilege to both criminal and civil matters and rejected expanding the privilege to commercial transactions in the antitrust context where communications do not concern pending or reasonably anticipated litigation.

The Court in Ambac recognized that on a public policy level, the common interest privilege promotes the exchange of privileged information and candor that may otherwise be inhibited by the threat of mandatory disclosure, thereby creating an environment which encourages the coordination of legal strategy where “parties are engaged in or reasonably anticipate litigation in which they share a common legal interest.”

The law in New York State, however, differs from the applicability of the common interest privilege in several federal courts.  For example, the Second, Third, Seventh and Federal Court of Appeals Circuits have rejected the “pending or reasonably anticipated litigation” requirement and applied the common interest privilege in purely transaction contexts.

Ultimately, relying on the precedence set in Ambac, the Court found that the common interest privilege was inapplicable where the RAG Report was prepared for transaction structuring purposes.  In fact, the Court noted that Starr began to “reasonably anticipate litigation” in 2011 when they began to hire outside counsel concerning potential contract claims arising from the shareholders’ agreement.  Although Starr attempted to argue that it already anticipated litigation in 2008, around the time that the RAG Report was prepared, based on an email from JC Flowers which described litigation risks associated with the transaction, the Court held that there was no evidence of a demand, or a refusal of a demand or any other indication that Starr would sue or be sued. Simply put, “[t]he fact that one evaluates litigation risk and or uses litigation risk as a negotiating tool does not mean that litigation is reasonably anticipated.”

Takeaway: New York transaction attorneys and litigators should be mindful of New York State’s restrictive applicability of the common interest privilege where they can expect that documents and communications exchanged with third-parties during a commercial transaction are likely discoverable during litigation.

Summons and Complaint 

Service of Process

Answer

Discovery ☐

You now have to collect, review and produce documents pursuant to the preliminary conference order.  And so, in collecting documents from the various custodians, it appears some of the documents contain truly “irrelevant” material.  However, parts of the document are indeed responsive.  Can you legitimately redact that portion of the document you deem “irrelevant”?

On September 25, 2020, Justice Andrew Borrok issued a decision addressing this very topic i.e., whether a party may redact irrelevant information.

In Hansen Realty Development Corp. v Sapphire Realty Group LLC, a case involving a real estate development project,  Triple Star Realty LLC (“Triple Star”) purchased the property  for $91 million but, because it was unable to move past pre-construction activity, among other things, the parties abandoned the property and sold it in 2017.  Pursuant to Triple Star’s Operating Agreement, Hansen Realty Development Corp (“Hansen”) held a 75% interest in Triple Star and Sapphire Realty Group LLC (“Sapphire”), whose sole member and Chief Executive Officer is Yan Po Zhu (“Zhu”) (collectively with Sapphire, the “Zhu Defendants”), held the remaining 25% interest.

In November, 2017, Hansen commenced this derivate action on behalf of Triple Star alleging that the Zhu Defendants mismanaged the property’s development and misappropriated Triple Star’s account for personal use. In December, 2017, Sapphire commenced a third-party derivate action on behalf of Triple Star against Hansen, Triple Star’s Chief Operating Officer, Weiming Yin, and the sole shareholder of Hansen’s parent company, Shu Sen Jia for, inter alia, grossly mismanaging Triple Star, and causing Triple Star to pay for their personal expenses.

On September 15, 2018, Sapphire filed a motion to compel Hansen to respond to its discovery demands and to produce (i) Hansen’s financial documents, (ii) documents pertaining to Yin’s employment, (iii) documents and communication between Yin and Hansen, and (iv) email messages and WeChat messages from Hansen’s agents and representatives concerning the property. By order dated January 25, 2019, Hansen was directed to produce communications with Mr. Yin regarding the development and management of the property.  Although Hansen produced the WeChat messages, they contained significant redactions.

The Court noted that the WeChat messages were never downloaded into a database for preservation or searched pursuant to any search terms. However, Hansen’s counsel explained that its office in Shanghai used a “mobile forensic application to extract WeChat messages.”  Upon review of the messages for privilege, Hansen’s counsel in China redacted certain messages and the spreadsheet containing the WeChat messages was returned to Hansen’s counsel in the USA for production.

As with most productions, Hansen’s counsel produced a privilege log.  Unfortunately, here, the log stated that the WeChat messages were redacted on the basis that they were “either not relevant, subject to attorney-client privilege, or redacted according to the laws of the People’s Republic of China.” The deficient privilege log resulted in Sapphire’s instant motion to compel the production of the redacted WeChat messages.

In its motion to compel, the Zhu Defendants contest Hansen’s production in light of the fact that the production contains documents redacted solely for lack of relevance. Hansen, argues that the redacted WeChat messages “should be treated no differently than other documents that are not produced for lack of relevance.”  In support of its position that it can redact irrelevant information, Hansen relied on Ohnmacht v. State. However, the Ohnmacht Court conducted an in camera review of the unredacted version of the document and held that the redactions protect sensitive information that are also not relevant to the claim. Although the Court permitted the party to redact irrelevant information, the Ohnmacht Court did not conclude, as Hansen wrongly alleges, that a party can redact documents on the basis of relevance alone.  In other words, the Court did not set a blanket rule that redactions for relevance are valid.

Interestingly, the Court noted that the WeChat messages in question are not separate documents that can be withheld as “non-responsive” because they comprise of an entire conversation, some of which Hansen’s counsel seeks to redact on the basis of relevance.

Pursuant to CPLR § 3101 (a) “[t]here shall be full disclosure of all matter material and necessary in the prosecution or defense of an action.” To that end, the First Department has previously held that this provision should be interpreted liberally “to require disclosure of any facts which will assist the good faith preparation for trial,” but noting that documents that are either privileged, constitute attorney-work product, and/or contain materials in preparation of trial are not subject to disclosure ( Johnson v. Nat’l R.R. Passenger Corp., CPLR 2101[b]-[d]). Confidential personal information is also not subject to disclosure and should be redacted (22 NYCRR §202.5[e]).

The Court acknowledged that notwithstanding these rules, there ” is no guidance as to whether parties are permitted to redact materials on the basis of relevance alone.”   

The Court noted that Hansen failed to “provide a compelling reason why its unilateral relevance redactions should be accepted, given the existence of substantial authority to the contrary and given its repeated failure to set forth the basis for its blanket assertion for lack of relevance, particularly as there is a compelling reason to believe that the redactions may be relevant based on their time period.”  Justice Borrok ultimately directed the parties to agree to an ESI protocol with respect to the WeChat messages, including search terms.  In that regard, the Court required Hansen to have all the WeChat messages translated in English and uploaded to a searchable database, which shall be preserved in the event of a dispute, and to produce all responsive messages together with a detailed privilege log.  The Court held that in the event of a dispute, the parties can contact the Court, which will conduct an in camera review of the WeChat messages.

Although there is apparently a paucity of case law in state court on the issue of redactions, the question of the legitimacy of redacting on the grounds of relevancy alone is not new to the federal courts (see, e.g., New Falls Corp. v Soni; Durling v. Papa John’s Int’l, Inc.; Howell v. City of New York [“It is not the practice of this court to permit parties to selectively excise from otherwise discoverable documents those portions that they deem not to be relevant”]).  There does appear, however, to be authority both supporting and opposing the approach of redacting for relevance (compare for example, Brussels Lambert v. Chase Manhattan Bank [allowing redactions for “nonresponsive” information] with, John Wiley and Sons Inc. v. Book Dog Books LLC, [noting that redactions are generally impermissible, unless “based on a legal privilege”]).

Takeaway:

Do not be misled — relevance alone is not a basis for redacting documents. However, courts may be amenable to offer in camera review to avoid the discovery of irrelevant information. In that regard, be sure to provide the court with an explanation regarding the reason why the relevance redactions should be accepted.  Also, perhaps this is a good topic for discussion among counsel and the court in the initial or preliminary conference.

Trademark registration is essential for small business owners who are looking to build and protect the brand within their community. But when a competitor opens up down the street with the same or similar name, trademark registration may only be half the battle:  customer confusion is the other half. Justice Elizabeth Hazlitt Emerson’s ruling in the recent case out of Suffolk County, JJFM Corp v Mannino’s Bagel Bakery, emphasizes the importance of establishing consumer confusion when it comes to trademark disputes.

In JJFM Corp, the court denied plaintiff’s motion for summary judgment and granted defendants cross-motion for summary judgment, finding that two families operating food establishments in the same town under the Mannino’s name did not constitute trademark infringement, unfair competition, or a unfair business practices in violation of New York General Business Law (“GBL”) §§ 349 and 360-k.

Plaintiff operates three family-owned Italian restaurants in Suffolk County: Mannino’s Pizzeria Restaurant (Smithtown), Mannino’s Restaurant & Lounge (Oakdale), and Mannino’s Italian Kitchen & Lounge (Commack). If visiting one of the plaintiff’s restaurants, one can expect high-quality Italian food in an elegant setting. Needless to say, the plaintiff wasn’t thrilled when defendants opened Mannino’s Bagel Bakery only a few miles away from plaintiff’s Smithtown location, selling deli items like bagels and sandwiches.[1] Alleging defendants were capitalizing on the Mannino brand and good will, plaintiff brought suit for a permanent injunction and to recover damages.

While you may expect trademark infringement and unfair competition claims to be brought in Federal Court under the Lanham Act, rather than in State Court under the GBL, the elements required to prevail on trademark-infringement and unfair competition claims in New York mirror those required under the Lanham Act.  The choice to use one or the other likely comes down to strategy, rather than a substantive legal difference. Under both the Lanham Act and GBL 360-k, a plaintiff must prove the defendant’s mark is likely to cause confusion, mistake or deception. To make this determination, the court employed a two-prong test: (1) whether plaintiff’s mark is entitled to protection; and (2) whether the defendant’s use of the mark is likely to cause consumers confusion as to the origin or sponsorship of the defendant’s goods.[2]

Plaintiff easily satisfied the first prong because the logos for all three of its restaurants had been registered as service marks in New York since 2016, and two of the three were registered with the U.S. Patent and Trademark. Thus, the only issue for the court to determine was the likelihood of confusion. For this, the court employed an eight-factor test: (1) the strength of the plaintiff’s mark, (2) the similarity of the plaintiff’s and the defendant’s marks, (3) the proximity of the products, (4) the likelihood that the plaintiff will “bridge the gap,” (5) actual confusion between products, (6) the defendant’s good or bad faith in adopting the mark, (7) the quality of the defendant’s product, and (8) the sophistication of the buyers.[3]

The court instructed that just because two marks appear similar is not dispositive. Rather they need to be compared against each other as a whole to determine whether such similarity is more likely than not to cause consumer confusion. Here, the court found that beyond using the common word “Maninno’s,” the plaintiff’s mark and the defendants’ bakery sign had no similarity; plaintiff’s mark showed the Mannino’s restaurant name in stylized lettering with shaded shapes, whereas defendants’ sign did not use the stylized lettering, shaded shapes, or words like “Italian,” “Kitchen,” “Pizzeria,” “Restaurant,” or “Lounge.” While the court determined the marks were not similar, it continued its analysis because “the use of the word ‘Maninno’s’ may still have some effect.”

Although registered trademarks are typically afforded the utmost protection, the court in this case determined the strength of plaintiff’s mark to be weak. Noting that “Mannino” is a relativity common Sicilian name and the name itself did not necessarily identify the product (such as “Bacardi” for rum, “Ford” for automobiles, or “Smucker’s” for jam), the court determined that plaintiff’s existence in Suffolk County since 1996 and brand notoriety was insufficient to give the Mannino’s mark a high strength rating.

The court found that despite the fact that the parties were both in restaurant business, their businesses were vastly different; one serving high end food with the other selling deli items. There was no evidence that plaintiff had any intention of entering the bagel or the delicatessen business, and thus had no intention of “bridging the gap.” Although there had been one instance where a check meant for the defendants was mistakenly sent to the plaintiff, and defendants were occasionally asked by customers if they were affiliated with the plaintiff, these facts were insufficient to evidence actual confusion between the two. The court found no evidence of bad faith, especially because when the defendants were asked if they was affiliated with the plaintiff, they responded “no.” Plaintiff alleged the defendants were taking advantage of its reputation for high-quality Italian cuisine, however the court found that other than a few items, defendants did not even sell Italian food. Thus the relative quality of the products was not a significant factor and it was unlikely that even an unsophisticated buyer would be confused as to the source of the products.

In the end, the court held these facts factored the defendants, and thus dismissed plaintiff’s claims for trademark infringement and unfair competition. Unable to find evidence in the record suggesting risk of harm to the public, the court further dismissed plaintiff’s claim for unfair business practices.

Upshot: To be successful on trademark infringement and unfair competition claims, a plaintiff needs to show a defendant has more than a similar name and operating in the same general industry. Rather, a plaintiff needs to be ready to withstand the scrutiny of an eight-factored test to establish defendant’s use of the mark is likely to cause consumer confusion.

 

[1] Defendants are two corporations, RAGF Food Corp. (“RAGF”) who operate Mannino’s Bagel Bakery in Freeport, New York, and ARF Food Corp. (“ARF”) who operate Mannino’s Bagel Bakery in Smithtown, New York.

[2] The law of trademark infringement is part of the law of unfair competition and the same test is applied in determining each claim.

[3] These factors originate from Polaroid Corp v Polarad Elecs Corp.

Proximate cause is a necessary element in tort law, but also applies to claims of breach of commercial contract.  In a recent decision by Justice Barry R. Ostrager in MUFG Union Bank, N.A. v. Axos Bank et al., No. 652474/2019, 2020 N.Y. Slip Op. 51101(U) (Sup. Ct., New York County Sept. 25, 2020), the Commercial Division of the Supreme Court, New York County addressed, among other things, the issue of whether a defendant’s breach was a proximate cause of plaintiff’s damages in denying one defendant’s motion for summary judgment seeking to dismiss plaintiff’s breach of contract claim.

The parties to the action are MUFG Union Bank, N.A. (“Union”), Epiq Systems, Inc. (“Epiq”), and Axos Bank, Axos Fiduciary Services, Axos Nevada, LLC, and Seller Sub, LLC (collectively, “Axos”).

On or about September 27, 2012, Union and Epiq entered into a Joint Services Agreement (“JSA”), effective October 1, 2012, as amended. Pursuant to the JSA, Union and Epiq agreed, among other things, “to jointly promote their products and services to bankruptcy and insolvency professionals and also fiduciary types as may be agreed upon by the parties on a case-by-case basis,” which professional and fiduciary types were deemed “Joint Clients”. Specifically, Union provided deposit services to bankruptcy trustee customers and Epiq provided software services to bankruptcy trustee customers. The JSA expressly restricted Union and Epiq’s ability to assign the JSA or transfer Joint Client relationships or accounts without the other’s prior written consent. Notwithstanding this restriction, Epiq, without consent of Union, decided to sell its software business to Axos. In order to circumvent the anti-assignment provision in the JSA, Epiq established Seller Sub, LLC (“Seller Sub”), identified as “a special purpose entity wholly owned by Epiq and allegedly created for the sole purpose of effectuating the transfer of the JSA to Axos without Union’s consent.” Epiq formed Seller Sub one day before entering into a fifh amendment of the JSA with Union. Epiq then transferred the JSA to Seller Sub. Axos then acquired Seller Sub with the JSA. But Epiq directly transferred its software business to Axos. Thereafter, Axos terminated the JSA with Union and the action ensued. Continue Reading Proximate Cause In Breach Of Contract Actions: Is Loss A Foreseeable Consequence Of Circumstances Created By The Breaching Party?

To be sure, much has been reported on here at New York Commercial Division Practice concerning Commercial Division innovation — including in the areas of courtroom technology and, more recently, in adapting to the “new norm” of virtual practice in the wake of the COVID-19 pandemic.  As we observed a few months back, the virtual practice of law in the Commercial Division is becoming more real than virtual.  A recent amendment to the Commercial Division Rules over the summer, particularly to Commercial Division Rule 1 (“Appearance by Counsel with Knowledge and Authority”), has arguably furthered the cause by expressly allowing lawyers to request permission from the court to appear remotely by videoconference.

ComDiv Rule 1 is your basic “Be Prepared!” reminder when practicing in the Commercial Division.  It specifically requires lawyers appearing before ComDiv judges to be “fully familiar” with their cases; “fully authorized” to enter into agreements; “sufficiently versed” in e-discovery matters; and promptly “on time” for scheduled appearances.  As of July 15, 2020, Rule 1 now also provides at subsection (d) that:

Counsel may request the court’s permission to participate in court conferences and oral arguments of motions from remote locations through use of videoconferencing or other technologies. Such requests will be granted in the court’s discretion for good cause shown; however, nothing contained in this subsection (d) is intended to limit any rights which counsel may otherwise have to participate in court proceedings by appearing in person.

The language of Rule 1’s new subsection is both permissive and discretionary.  As the Commercial Division Advisory Council noted in its memorandum setting forth the reasons for the amendment, “Rule 1 enables any lawyer to decline to participate from remote locations … [and is not] intended to limit any rights which counsel may otherwise have … by appearing in court.”  As noted by the Council, “many lawyers feel that to serve their clients effectively, they must be able to make their presentations in person and see the judge in order to gauge his or her reactions to the arguments presented.”  The use of the permissive “may” in the new provision addresses that concern, among others.

The use of the phrase “in the court’s discretion” likewise addresses common concerns from the bench, including but not limited to the ability to “control overbearing or other inappropriate behavior by counsel more readily and more effectively by visual cues or otherwise.”  That said, the Advisory Council’s memo made specific reference to a videoconferencing survey circulated some years back among federal appeals judges in which the majority of the judges “indicated no difference in their understanding of the legal issues in arguments that were video-conferenced versus those that were not.”  After all, as the Council observed, “videoconferencing can replicate the experience of talking to a real person across the table, will all the nuances and body language that in-person conversations would convey.”

Notably, the amendment is limited to “court conferences and oral argument of motions and … not intended to address the more complex subject of testimony by witnesses at trials or other evidentiary hearings.”

Having been sent out for public comment over a year ago, there understandably is no mention of COVID-19 in the Advisory Council’s rationale for the amendment, which instead focused on efficiency and “obviat[ing] huge amounts of wasted time and money devoted to unnecessary travel by lawyers.”  Here’s the money quote (literally) from the Council on the topic:

A lawyer who travels from White Plains to Albany County to participate in a status conference will require a minimum of four hours of travel time and will incur out-of-pocket disbursements for travel by train or automobile. If that lawyer bills $600 per hour, the cost of the travel to the lawyer’s client would be $2,400 in attorney’s fees plus another $100 in disbursements.

In other words, a Westchester-based client may soon be pleasantly surprised to find a “.5” rather than a “5.5” next to a billing entry that says, “Travel to/from Albany County Supreme for status conference before Platkin, J.”

In short, there is much in the way of practical wisdom behind the new amendment to ComDiv Rule 1, even without consideration of the novel circumstances we’ve all been navigating over the last six months.  Add a pandemic to the mix, and the amendment couldn’t have come to us at a more perfect time.