In a recent Commercial Division decision, Pozner v Fox Broadcasting Company, (2018 NY Slip Op 28102 [Sup Ct, NY County Apr. 2, 2018]), Justice Saliann Scarpulla declined to extend the application of the faithless servant doctrine to a circumstance where no New York court has applied it before.

Cliff Pozner (“Pozner”), a former Executive Vice President at Fox Broadcasting Company (“Fox”), was terminated from his employment based on sexual harassment complaints from several current and former Fox employees.  He then commenced an action against Fox for allegedly breaching his employment agreement and discriminating against him on the basis of his religion.  In response, Fox asserted two counterclaims against Pozner: breach of contract based on Pozner’s alleged failure to abide by the company’s policies regarding sexual harassment, and breach of fiduciary duty, which, according to Fox, included the duty to refrain from conduct inconsistent with Fox’s policies regarding a harassment-free workplace.

Pozner moved to dismiss the counterclaims.  With respect to Fox’s breach of fiduciary duty claim, Pozner argued that he did not violate any duty owed to Fox under the faithless servant doctrine or as a breach of fiduciary duty, since he did not unfairly compete, divert business opportunities, or accept improper kickbacks.

Justice Scarpulla sustained Fox’s first counterclaim for breach of contract, but held that Fox’s breach of fiduciary duty counterclaim was “not tenable.”  As the Court explained, although Pozner, as a Fox executive and employee, owed a duty of loyalty to Fox, that duty “has only been extended to cases where the employee ‘act[s] directly against the employer’s interests – as in embezzlement, improperly competing with the current employer, or usurping business opportunities.’”  Accordingly, the Court held that sexual harassment by an executive, without more, cannot form the basis of a breach of fiduciary duty claim resulting in the employer’s recovery of the employee’s salary under the faithless servant doctrine.

In reaching its conclusion, the Court noted the lack of New York case law on point and easily distinguished the cases relied upon by Fox.  For example, in Astra USA, Inc. v Bildman, (455 Mass 116 [2009]), which the Court acknowledged was not controlling, the Massachusetts court found that the CEO and President of plaintiff’s company had, in addition to engaging in sexual harassment, committed acts directly against the company’s interest, including stealing company funds, financial records and other documents, destroying company property, and erasing data from computers (id. at 123-124, & n 13).

Similarly, in Colliton v Cravath, Swaine & Moore, LLP (2008 WL 4386764, 2008 US Dist LEXIS 74388 [SD NY Sept. 24, 2008]), the Court found the plaintiff’s admitted criminal activity (which resulted in a plea allocution) constituted a violation of his ethical duties under the New York Rules of Professional Responsibility.  Given these ethical violations, the plaintiff in Colliton was not ethically permitted to work as an attorney and thus, “his employment was the product of fraudulent concealment” (id. at *15).

Recognizing Fox’s failure to plead allegations of fraud, financial waste, or embezzlement, Justice Scarpulla declined to extend the faithless servant doctrine to cover instances where the only wrongdoing alleged is sexual harassment.  While it is possible that Fox’s counsel was looking to extend the law in light of recent news events, Justice Scarpulla was not so inclined.

Generally speaking, a fraud claim that is “duplicative” of a breach of contract claim will be dismissed. But when is a fraud claim sufficiently duplicative of a breach of contract claim so as to warrant its dismissal? The New York County Commercial Division (Sherwood, J.) recently answered this question in xLon Beauty, LLC v Day, 2018 NY Slip Op 30142(U) (Sup Ct, NY County Jan. 24, 2018).

In that case, the plaintiff, xLon Beauty, LLC (“Plaintiff”), a manufacturer of an “anti-aging” product (the “Product”), entered into a series of agreements (collectively, the “Contracts”) with the defendant, Doris Day, M.D. (“Defendant”), a publicly-known dermatologist regularly featured on radio and television shows. Pursuant to the Contracts, Defendant granted Plaintiff the right to license and utilize Defendant’s name and likeness to promote the Product in exchange for a 7% royalty fee.

Defendant ultimately sought to terminate the Contracts on the grounds that she (i) was not being adequately compensated, despite her efforts to promote and market the Product; and (ii) was receiving multiple complaints from customers concerning the quality and efficacy of the Product. Thereafter, Plaintiff commenced an action against Defendant alleging, among other things, breach of contract and fraudulent inducement.

Plaintiff’s breach of contract claim alleged that Defendant failed to “make herself available . . . for photographs, speaking engagements and/or commercials in video format” in accordance with the terms of the Contracts. The fraudulent inducement claim centered on Defendant’s purported representations prior to entering into the first agreement that she would use her business connections and acumen to help promote the Product.

Specifically, Plaintiff alleged that prior to entering into the Contracts, Defendant made certain oral promises to Plaintiff that she would “use her media connections to promote the Product if Plaintiff entered into the [Contracts],” but that Defendant was “insincere” because “she did not intend to fulfill her promises to promote the Product when she made them.” However, in a sworn affidavit, Defendant admitted that during that meeting, Defendant “never made any promises or representations to [Plaintiff] – beyond that which [she] agreed to in the written contracts [the parties] entered – concerning [her] endorsement or promotion of [the Product].”

In dismissing Plaintiff’s fraudulent inducement cause of action as duplicative of the breach of contract claim, the Court explained that a fraud claim may only be asserted in conjunction with a breach of contract claim when the alleged misrepresentation is “extraneous to the contract and involve[s] a duty separate and apart from or in addition to that imposed by the contract.” When the only fraud alleged is that the defendant was not sincere when it promised to perform under the contract, the fraud-based cause of action is duplicative of a breach of contract claim, and will be dismissed. Applying these principles, the Court dismissed Plaintiff’s claims, finding that the “alleged deceit here was integral to the contract, not extraneous or collateral to it as is required in order to make out a claim for fraudulent inducement.”

In sum, a cause of action for fraudulent inducement may be sustained on the basis of an allegation that the defendant made a promise to undertake some action separate and apart from his or her obligations under the contract. However, where a fraud claim arises out of the same facts as the breach of contract claim, and the only fraud alleged is that the defendant was not sincere when it promised to perform under the contract, the fraud claim is duplicative and will be dismissed.

Have you ever had a brilliant business idea, only to discover years later that someone else has beaten you to market? If you are a professional athlete, you might break your hand punching a fire extinguisher or picture frame in frustration. If you are a web developer, you might indignantly exclaim, “They literally stole my idea!” And if you are a New York County Commercial Division Justice (or a semantic pedant), you would reply that the idea has not actually been stolen unless the alleged thief erased it from the plaintiff’s brain.

Such is the state of conversion of intangible property in New York County, as recently expressed by Justice Kornreich in MLB Advanced Media, L.P., et al. v. Big League Analysis, LLC.  Big League Analysis, LLC (“BLA”) alleged that it contracted with MLB Advanced Media, L.P. (“MLB”) to develop youth-oriented baseball content and services that would be used on Major League Baseball’s websites. BLA further alleged that at a meeting, it turned over to MLB a binder containing confidential business information related to this content, which MLB and its related entities subsequently used to develop a competing product. The binder was returned to BLA and the relationship between BLA and MLB ceased shortly thereafter, resulting in MLB suing BLA.

In its amended answer, BLA asserted counterclaims for misappropriation of trade secrets and wrongful competition. BLA also asserted a counterclaim for conversion based on MLB’s allegedly unlawful retention and use of the information contained in the binder. MLB moved to dismiss only the counterclaim for conversion.  The Court framed the issue in the following terms:  “[W]hether intangible property (here, confidential business information) allegedly improperly used by defendant may give rise to a cause of action for conversion if, at the same time, plaintiff had complete and unfettered use of its property.”

The Court’s answer was a resounding “No”, based largely on the Court’s reading of Thyroff v. Nationwide Mut. Ins. Co., an earlier Court of Appeals’ decision recognizing a cause of action for conversion of electronic records stored on a computer held by Nationwide. Crucial to the Court’s analysis were subsequent New York County decisions dismissing conversion claims under Thyroff, where the plaintiff was not deprived of its ownership rights in the converted property. The Court also relied on State v. Seventh Regiment Fund, Inc., a 2002 decision in which the Court of Appeals reaffirmed that “denial of access to the rightful owner” has always been a necessary element of conversion. In contrast to these cases, MLB returned the binder to BLA, and BLA was free to do as it wished with its information. BLA’s counterclaim for conversion was therefore dismissed.

Not all New York courts read Thyroff so narrowly. In New York Racing Assn. v. Nassau Regional Off-Track Betting Corp., for example, another Commercial Division allowed an action for conversion of a live audio-visual simulcast, even though the plaintiff was not “excluded” from access to the electronic data transmission. In so holding, Justice Bucaria noted that, “[i]n Thyroff, the Court of Appeals suggests that plaintiff may maintain an action for conversion where its electronically stored data is misappropriated, regardless of whether plaintiff has been excluded from access to its intangible property.” (Emphasis added.)

In sum, when asserting conversion of intangible property rights, New York County practitioners should carefully consider whether the claimant was ever deprived of its property. If not, resort to “trade secret” protections may be required. However, as the Court noted, just as “trade secret” misappropriation does not always qualify as conversion, not all intangible property qualifies as a “trade secret.”

Statutorily imposed deadlines are not optional for commercial litigants; this much should be obvious. Notwithstanding, and despite numerous technological calendaring options available to commercial litigators, deadlines are blown in the Commercial Division, including the mother of all deadlines: the defendant’s time to answer or otherwise move against a complaint (see CPLR 3012). As should also be obvious, the defaulting defendant’s request for a “Get out of Jail Free Card” – a motion to extend the time to appear or plead (see CPLR § 3012 [d]) – will not be taken lightly.

A recent ruling provides such a reminder.  In State Farm Mut. Auto Ins. Co. v. Austin Diagnostic Med., P.C., the Appellate Division, Second Department recently considered the Queen’s County Commercial Division’s (Dufficy, J.) denial of such a motion. State Farm commenced the action seeking a declaratory judgment that it was not obligated to pay certain no-fault insurance benefits to the defendant. The defendant blew its deadline and, three and a half months late, filed its answer. State Farm rejected the answer and the defendant moved to extend its time to answer, “or in the alternative, to compel the plaintiff to accept” it.

In affirming the Commercial Division’s denial of the motion, the Appellate Division offered a clear reminder of the defaulting defendant’s bright-line burden: in addition to providing a reasonable excuse for its delay, it must demonstrate that it has a potentially meritorious defense. The Appellate Division held that the documents offered in support of a potentially meritorious defense – the untimely answer, which was verified by the defendant’s attorney, and an affirmation of the defendant’s attorney – were insufficient because the attorney lacked personal knowledge of the facts.

The take-away here is fundamental, but critical: do what you must to avoid a default and, if you do miss your deadline, be sure your motion for an extension establishes a reasonable excuse for the delay and a potentially meritorious defense, both of which are attested to by someone having personal knowledge of those facts.

The Second Department recently handed down a harsh reminder of the importance of obtaining an executed broker’s agreement.  Oral agreements for broker fees are apt to run afoul of the statute of frauds, and personal jurisdiction cannot be conferred by the mere insertion of a forum selection clause in the brokered sale agreement.

In Ausch v Sutton, the plaintiff alleged he was owed a broker’s fee pursuant to an oral agreement with the defendants for arranging the sale of the first defendant’s (Defendant 1) interest in a company to Defendant 2. Defendant 3 co-owned the company with Defendant 1 and resided outside New York. Aside from the purchase agreement, which contained a forum selection clause designating New York for the resolution of any disputes arising from the purchase agreement, Defendant 3 had no contacts with New York.

Defendant 3’s motion to dismiss pursuant to CPLR 3211(a)(8) was denied by the Kings County Supreme Court (Knipel, J.) on the ground that the forum selection clause in the purchase agreement conferred jurisdiction over all disputes arising from the purchase agreement, which included alleged oral agreements for related broker fees. But the Appellate Division reversed, citing Magdalena v Lins,  which held that a forum selection clause among defendants was insufficient to confer personal jurisdiction in a suit brought by the plaintiff, where the plaintiff was neither a party to the agreement containing the forum selection clause nor a third party beneficiary. In essence, the Appellate Division distinguished between the purchase agreement and the alleged oral agreement for a broker’s commission–the forum selection clause in the former was insufficient to confer personal jurisdiction with respect to the latter.

If the lack of personal jurisdiction over Defendant 3 were not enough, then the statute of frauds ultimately would have proved fatal to the plaintiff’s causes of action against all three defendants. General Obligations Law § 5-701[a][10] states that an agreement to pay a commission for arranging a sale transaction is void unless in writing. As held by the Court of Appeals, a claim for unjust enrichment or quasi-contract in connection with a brokered transaction cannot be used to get around the statute of frauds (see Snyder v Bronfman).

The bottom line for brokers of sale transactions is that they cannot rely on protections contained within the sale documents unless they are parties to those documents. To ensure that the dispute will be heard in New York and not dismissed out of hand under the statute of frauds, a broker would be well advised to obtain a signed agreement declaring the terms of her commission before engaging in any work to consummate a potential business opportunity.

If you commence an action by way of summons with notice, you must bear in mind the strict time limitations imposed by CPLR 3012(b). When the other party timely serves a written demand for a complaint, you have exactly twenty (20) days from service of the demand to serve the complaint. This is a strict, statutory deadline that should be calendared immediately upon receipt of the demand. If a litigant fails to serve a complaint within the twenty-day period, the action could be dismissed. Statutory Deadlines

This is precisely what occurred in Javoroski v. SelectQuote Ins. Service, Inc., et al., 2017 N.Y. Slip Op 50465(U)(Sup Ct, Albany County Feb. 21, 2017). Ms. Javoroski commenced an action against SelectQuote and other defendants by serving a summons with notice. The summons with notice indicated that Ms. Javoroski would be alleging, among other things, breach of contract as a result of defendants’ alleged failure to pay life insurance proceeds following the death of plaintiff’s husband. Shortly after plaintiff served the summons with notice, defendants SelectQuote and Charan Singh (“Singh”) filed a notice of appearance and demanded service of the complaint. When plaintiff did not serve the complaint within the twenty-day deadline imposed by CPLR 3012(b), Defendants moved to dismiss the action. Ms. Javoroski cross-moved for an extension of time to complete service, claiming that she had both a reasonable excuse for the delay and a meritorious claim.

First, Plaintiff’s counsel argued that his delay in serving the complaint was due to his need to “conduct further research to ascertain the identity of the correct defendant or defendants.” According to Plaintiff, there were multiple entities that included “SelectQuote” in their names and Singh was affiliated with all of them.

Next, Plaintiff’s counsel explained that, upon receiving Defendants’ notice of appearance in the mail, he undertook additional research in order to ascertain whether the appearing SelectQuote was in fact the entity that sold the life insurance policy to Plaintiff’s late husband. Notably, Plaintiff’s attorney admitted that the 20-day notice deadline was never calendared as a result of a “law office failure.”

Defendants pointed out that Plaintiff’s delay in serving the complaint was anything but short. In fact, Plaintiff served her complaint 79 days after Defendants’ demand, 118 days after service of the summons with notice, and two full weeks after Defendants served their motion to dismiss.

Defendants further argued that the excuse for the delay proffered by Plaintiff’s attorney was unreasonable because the notice of appearance identified the correct defendant and hence, there was no need for additional research.

Defendants also pointed out that the complaint pled identical, repetitive allegations against all five SelectQuote entities and hence, it was not necessary for Plaintiff to identify the correct corporate name in order to prepare the complaint.

The Court agreed with Defendants, finding that Plaintiff’s purported excuses were unreasonable under the circumstances. Importantly, the Court noted that “[e]ven if plaintiff’s attorney had a legitimate need to research the name of the correct corporate entity, it did not absolve plaintiff of the obligation to serve a duly demanded complaint within the time allowed by statute.”

Additionally, the Court noted that the complaint Plaintiff finally served “was not limited to allegations against the ‘correct’ SelectQuote defendant” and hence, Plaintiff had all of the necessary information at the time the summons was served to assert the general allegations that were ultimately put into her complaint.

Finally, the Court found that Plaintiff’s affidavit of merit fell “well short” of establishing her prima facie case, and dismissed the action.

Moral of the story? Calendar your deadlines – especially the statutory ones.

In an action for breach of contract, Pulp Fiction and Reservoir Dogs star Harvey Keitel sued E*Trade based upon a Term Sheet entered into between Keitel and advertising agency Ogilvey & Mather NY (“Ogilvey”) for the actor to do three commercials.   The case, Keitel v E*Trade Fin. Corp. (Sup Ct, NY County, Apr. 17, 2017) (Ramos, J.),  was filed in 2015 after E*Trade decided not to move forward with Keitel in its advertising campaign.

After the initial motion to dismiss was granted by the Court in March 2016, Keitel was granted leave to amend based upon additional facts learned through discovery. In his amended complaint, Keitel alleged that the totality of circumstances – including exchanges of emails and internal communications between E*Trade and Ogilvey — demonstrated an intent to be bound.

In ruling on E*Trade’s motion to dismiss the amended complaint, Justice Ramos disagreed with Keitel. In granting the motion, the Court noted that the Term Sheet states clearly that, “neither party shall be bound until the parties execute a more formal written agreement”, which was never done.  Since the Court found the Term Sheet unambiguous, resort to extrinsic evidence was unnecessary.  Even looking at the proffered extrinsic evidence, however, the Court observed that there was simply no “meeting of the minds”.  Justice Ramos also noted that this was not like PMJ Capital Corp. v PAF Capital, LLC, where there were negotiations and a finalized term sheet “ready for execution.” Finally, E*Trade’s “kill fees” of $150,000 was considered inadmissible evidence of liability under CPLR 4547.

Query whether, as pleaded in the amended complaint, were the subsequent communications between the parties enough to effectuate a waiver of the “neither party shall be bound” clause?   For a good discussion on when these “neither party shall be bound” clauses should be ignored, see Justice McGuire’s dissenting 0pinion in Jordan Panel Sys. Corp. Turner Constr. Co.

Following the decision, Keitel filed a Notice of Appeal on May 2, so stay tuned for the Appellate ruling.