Summary
In Tommy Hilfiger Licensing, Inc. v. Bradlees, Inc. (S.D.N.Y. Jan. 11, 2002) 2001 WL 1702151, we set out the factual background and procedural history underlying this litigation in extensive detail.
Summary of this case from Tommy Hilfiger Licensing, Inc. v. Bradlees, Inc.Opinion
99 Civ. 4677 (WK)
January 11, 2002
For Plaintiffs: Louis S. Ederer, Michael D. Pantalony, Gursky Ederer, P.C., New York, NY.
For Defendants MD Sportswear Corp. and Dalia Wallach: Leonard S. Baum, Dean T. Cho Solomon, Zauderer, Ellenhorn, Frischer Sharp, New York, NY.
For Defendant Bradlees, Inc.: Lawrence M. Sands, New York, NY. Jay T. Hahn Goodwin, Proctor Hoar LLP, New York, NY.
For Defendants BL Enterprises of NY, Inc. and Jack Schwartz: Lawrence M. Sands, New York, NY.
For Defendant Marty Mirkin: William A. Rome, Hoffman Pollok Pickholz LLP, New York, NY.
MEMORANDUM ORDER
Plaintiffs Tommy Hilfiger Licensing, Inc. ("Tommy Hilfiger"), PRL USA Holdings, Inc. ("Polo"), Nike, Inc. ("Nike"), Adidas-Salomon AG, Adidas International BV, and Adidas America (the last three manufacturers hereinafter referred to as "Adidas") brought this action against, among others, Defendants MD Sportswear Corp. ("MD") and Dalia Wallach ("Wallach") for trademark counterfeiting, trademark infringement (in violation of both the Lanham Act and the common law), trademark dilution in violation of the Lanham Act, common law unfair competition, and violations of New York General Business Law §§ 349 and 360-1. Defendants MD and Wallach filed an Answer with counterclaims for malicious prosecution against Plaintiffs Nike, Polo, and Adidas, and Plaintiffs moved to dismiss these counterclaims. Although our decision with respect to Plaintiffs' motion to dismiss is still pending, MD and Wallach have since moved for leave to file an Amended Answer which would add new counterclaims against Plaintiffs Nike, Polo, and Adidas and also add these new counterclaims against additional individuals and agencies who are not presently parties to this litigation.
For the reasons that follow, we hereby deny MD and Wallach leave to add these new counterclaims against either Plaintiffs Nike, Polo, and Adidas or against the new parties. However, we otherwise accept the Amended Answer to the extent that it modifies the allegations underlying MD and Wallach's original malicious prosecution counterclaims.
BACKGROUND
On June 28, 1999, Plaintiffs Tommy Hilfiger and Polo initiated this action against Defendants Bradlees, Inc., BL Enterprises of NY, Inc., Summit Merchandising, Ltd., Jack Schwartz, and Mayer Parets. These defendants are a series of manufacturers, distributors, wholesalers, and retailers of allegedly counterfeit apparel. On July 8, 2000, this Complaint was amended to include additional Plaintiffs (i.e. Nike and Adidas), additional causes of action, and additional exhibits. On July 24, 2000, Plaintiffs further amended their Complaint to include actions against additional parties, namely Defendants Marty Mirkin, Andrez Shops, Inc., Shahin Ghaderi, and Consolidated Stores Corp., as well as Defendants MD Sportswear Corp. ("MD") and Dalia Wallach ("Wallach").
MD is a wholesale apparel distributor which was formed in 1998 to replace its predecessor corporation, ST Sportswear. Wallach was MD's sole principal and stockholder. In late 1998, MD became involved in the "cut-label" business, buying and reselling "irregulars" or "seconds" of name brand merchandise. According to MD and Wallach, such merchandise is commonly called "closeouts" or "cut-label" because the garments are typically sold with the manufacturers' label cut in half or cut off altogether to ensure that they are not confused with first quality goods.
MD was engaged in this "cut-label" business from late 1998 through mid-2000. The business apparently proved unprofitable and MD ceased buying apparel in March 2000. In June 2000, the company was allegedly in the process of its liquidating its inventory.
MD and Wallach assert that in 1999, Plaintiffs approached state law enforcement authorities and allegedly "instigated" a criminal investigation of counterfeit clothing. In their Amended Answer, MD and Wallach extensively cite a joint press release allegedly issued by Bronx District Attorney Robert T. Johnson and (now former) New York City Police Commissioner Howard Safir, to describe the investigation. According to the release, this investigation was "the first in which private industry provided financial support for a sting operation designed to disrupt trafficking in counterfeit designer label clothing." See Amended Answer, Exhibit B at 1. The press release explains that:
Attached as Exhibit B to the Amended Answer.
Using approximately $70,000 supplied by the industry, Bronx DA and NYPD investigators set up a warehouse, TIU Traders, at 1465 Bassett Avenue in the Eastchester section of the Bronx. (TIU is the NYPD's Trademark Infringement Unit). During the course of the investigation, undercover detectives made more than 30 purchases of counterfeit trademark clothing from vendors in Manhattan's garment district. The apparel was shipped to the Bronx warehouse where it was later examined by representatives of various designer labels who determined that the apparel was, in fact, counterfeit.
Id.
As part of this investigation, which MD and Wallach assert was instigated, financed, and influenced by Nike, Polo, and Adidas, an undercover agent allegedly made four purchases from MD between January and April 2000 in the aggregate amount of $4,440.44. Purportedly, these purchases consisted of 817 t-shirts (mostly from Nike) and 1 package of socks from Nike as well as 1 package of socks from Polo. These items were thereafter allegedly delivered to a private investigation company and were in turn allegedly forwarded to the employees of Polo, Nike, and Adidas. MD and Wallach assert that the representatives of these manufacturers determined that the items were counterfeit.
Subsequently, on June 21, 2000, a large number of police, allegedly still acting at the instigation (and through the influence) of Polo, Nike, and Adidas, raided MD's premises. Wallach and her father were questioned, following which Wallach was arrested and charged with trademark counterfeiting. During the raid, Plaintiffs' representatives purportedly inspected MD's inventory and designated over $417,000 worth of apparel for seizure based on the conclusion that such apparel was counterfeit. The New York Police Department ("NYPD") then seized the designated apparel, as well as MD's computers, books, cash, and records.
Just after the raid on MD's premises, the Bronx District Attorney ("Bronx D.A.") commenced a criminal action against Wallach for trademark counterfeiting. The Bronx D.A. also commenced a civil forfeiture action against Wallach and MD, as well as various other defendants, in which the Bronx D.A. sought the forfeiture of approximately $2,555,089 (which represented an estimate of the seized apparel's wholesale value). According to Wallach and MD, the criminal action against Wallach was principally handled by Assistant District Attorney David Hoovler ("A.D.A. Hoovler"). MD and Wallach assert that the criminal action and civil forfeiture action were instigated through the conduct of Nike, Polo, and Adidas.
It was shortly after the commencement of the criminal action against Wallach and the civil forfeiture action against MD and Wallach that, as discussed above, Plaintiffs amended their Amended Complaint to include claims against MD and Wallach. In their Second Amended Complaint, Plaintiffs Polo and Nike now asserted actions against, among others, MD and Wallach for trademark counterfeiting, trademark infringement (under both the Lanham Act and the common law), false designation of goods, trademark dilution in violation of the Lanham Act, common law unfair competition, and violations of New York General Business Law sections 349 and 360-1. Plaintiffs' actions were premised on their allegations that MD and Wallach had, at an earlier point in time, sold particular counterfeit Polo socks and Nike t-shirts and socks to three retailers, DSW Shoe Warehouse Stores, Ammar's, Inc., and Bradlees, Inc. On August 28, 2000, MD and Wallach filed their Answer to Plaintiff's Second Amended Complaint. In that Answer, they asserted counterclaims against Plaintiffs Polo, Nike, and Adidas (but not against Plaintiff Tommy Hilfiger) for malicious prosecution.
Even as Plaintiffs' lawsuit was proceeding against them, MD and Wallach's counsel claims to have met with officials from the Bronx D.A.'s office in August 2000 and presented them with information in an attempt to demonstrate that MD's samples were effectively indistinguishable from the various manufacturers' goods and therefore not counterfeit. In addition, on November 3, 2000, MD and Wallach presented the Bronx D.A. and A.D.A. Hoovler with an extensive written submission in an attempt to demonstrate that MD and Wallach did not engage in trademark counterfeiting activity. For unspecified reasons, the Bronx D.A. chose not to pursue the criminal action against Wallach and on or about November 15, 2000 that criminal action was dismissed without prejudice. In addition, on November 16, 2000, the D.A. agreed to stipulate to a voluntary discontinuance of the civil forfeiture action against MD and Wallach with prejudice, and that action was dismissed around November 18, 2000.
Although the Bronx D.A. had agreed to the dismissal of the civil forfeiture action and had chosen not to pursue the criminal action, Plaintiffs continued to seek monetary damages in this civil action against MD and Wallach. Plaintiffs assert that their civil action against MD and Wallach involves the sale of counterfeit apparel entirely separate from the allegedly counterfeit apparel which was seized by the police in June 2000.
Throughout the course of the criminal action and the civil forfeiture action, MD and Wallach had repeatedly requested that the apparel seized on June 21, 2000 be preserved. On August 4, 2000, MD and Wallach inquired as to the proposed disposition of the seized property, and, upon being informed that the seized apparel would be catalogued, photographed, and destroyed, MD and Wallach demanded that the apparel not be destroyed. At the very least, according to MD and Wallach, they thereafter repeated that demand with respect to the destruction of the apparel to either the Bronx D.A. or A.D.A. Hoovler on August 9, August 11, November 8, November 16, November 21, and November 22, 2000, and defendants claim that they were advised by A.D.A. Hoovler in December 2000 that the police had been instructed not to destroy the apparel. However, MD and Wallach also assert that A.D.A. Hoovler advised them that he could not assure them that the police would not eventually destroy the apparel. MD and Wallach also contacted Plaintiffs' counsel on November 20, 2000, in an effort to secure assistance in ensuring the preservation of the apparel; Plaintiffs' counsel allegedly stated that he would contact the Bronx D.A.'s office to request that the seized apparel be preserved. MD and Wallach thereafter advised Plaintiffs' counsel of their demand with respect to the preservation of the apparel on January 3 and January 10, 2001, although Plaintiffs' counsel now allegedly refused to cooperate in the apparel's preservation. In addition, on February 13, 2001, MD and Wallach's counsel wrote to the NYPD's counsel insisting on the preservation of the seized property.
Despite MD and Wallach's repeated requests, the apparel seized on June 21, 2000 was destroyed in December 2000. MD and Wallach apparently learned of the destruction of the apparel for the first time at the February 15, 2001 preliminary injunction hearing before this Court in which they sought an order to preserve the items seized by the police in June 2000. On March 5, 2001, MD served a Notice of Claim with respect to the destroyed apparel.
In October 2001, Defendants moved for leave to file an Amended Answer. In that Amended Answer, MD and Wallach sought to assert, among other things, three additional counterclaims against Polo, Nike, and Adidas. In essence, MD and Wallach seek to add a counterclaim against them under 42 U.S.C. § 1983 for deprivation of due process, as well as to add counterclaims against them for conversion and replevin. They also seek to join the City of New York, the NYPD, the Property Clerk Division of the NYPD, Robert Johnson (in his capacity as the District Attorney of Bronx County), and A.D.A. Hoovler (collectively hereinafter referred to as the "NYC Parties") as defendants to these new counterclaims pursuant to Federal Rule of Civil Procedure 13(h).
MD and Wallach's Amended Answer would also add other various allegations and exhibits. These allegations and exhibits, which were not previously included in or attached to the original Answer, are relevant to their original counterclaims for malicious prosecution, and would thereby amend and supplement the original counterclaims in part.
They also seek to add "John Doe" as a party to these new counterclaims. "John Doe" is allegedly an individual employed by the Property Clerk and whose identity is unknown to MD and Wallach at this time. See Amended Answer ¶ 29. This "John Doe" was purportedly the individual who made the determination to destroy MD's seized apparel. Id.
DISCUSSION
Generally, Federal Rule of Civil Procedure 15 governs amendments to pleadings. However, in this instance, MD and Wallach seek to amend their original Answer by adding additional counterclaims against Plaintiffs Polo, Nike, and Adidas pursuant to Federal Rule of Civil Procedure 13(e) and joining various agencies and individuals as new parties to those additional counterclaims pursuant to Federal Rule of Civil Procedure 13(h). While Rule 13(f) generally applies to counterclaims which were omitted from the original pleading, see FED.R.CIV.P. 13(f), Rule 13(e) allows a party to supplement its answer, with the Court's permission, to add counterclaims which had either not yet been acquired or had not yet matured at the time of the original pleading, see FED.R.CIV.P. 13(e). MD and Wallach contend that Rule 13(e) is applicable because their new counterclaims had not matured or had not yet been acquired until after they had served their original Answer in August 2000. Since Plaintiffs do not dispute that Rule 13(e) is applicable here, we analyze the new counterclaims under that provision.Rule 13(e) provides that "[a] claim which either matured or was acquired by the pleader after serving a pleading, may, with the permission of the court, be presented as a counterclaim by supplemental pleading." FED.R.CIV.P. 13(e). "Rule 13 must be read in conjunction with Rule 15 of the Federal Rules of Civil Procedure." Gasser Chair Co., Inc. v. Infanti Chair Mfg. Corp. (E.D.N.Y. Jan. 24, 1991) 1991 WL 10931, *1. Although the grant or denial of an opportunity to amend is within our discretion, "[i]t is well-settled that pursuant to Rule 15 leave to amend should be granted liberally." Id. This liberal amendment policy of Rule 15 applies to requests to add counterclaims pursuant to Rule 13(e). See id.; Four Seasons Solar Products Corp. v. Sun System Prefabricated Solar Greenhouses, Inc. (E.D.N.Y. 1983) 101 F.R.D. 292, 293-294. With these considerations in mind, we turn to the issues raised by the Amended Answer.
A. Whether The New Counterclaims Are Compulsory
At the outset, MD and Wallach assert that the new counterclaims included in the Amended Answer are compulsory in nature. They argue that "[i]f the facts suggest that the counterclaim is compulsory in nature, the Court must permit the counterclaim to proceed." Defs.' Reply Brief at 3. However, they do not cite to a single case in support of the proposition that we would be required to permit the addition of the new counterclaims if they were compulsory. Indeed, given the treatment of the various types of counterclaims under the Federal Rules of Civil Procedure, a party does not have an absolute right to assert new counterclaims at this time in the same way that it had a right to assert counterclaims in its original answer. Chrysler Corp. v. Fedders Corp. (S.D.N.Y. 1982) 540 F. Supp. 706, 713.
Even assuming that we would be required to permit the addition of new compulsory counterclaims when they are asserted by way of Rule 13(e), MD and Wallach cannot demonstrate that their counterclaims are compulsory in nature. "[A] counterclaim is compulsory if, among other things, it is a claim the pleader had at the time of serving the original pleading." Nordco, A.S. v. Ledes (S.D.N.Y. Dec. 21, 1999) 1999 WL 1243883, *10. "Since a counterclaim under Rule 13(e) by definition does not mature until after a party has served his pleading, it falls under one of the exceptions to Rule 13(a) and is technically not a compulsory counterclaim. . . ." Skaro v. Eastern Savings Bank (W.D.Pa. 1994) 866 F. Supp. 229, 233 (emphasis added). See also Young v. City of New Orleans (5th Cir. 1985) 751 F.2d 794, 801 ("A counterclaim acquired by the defendant after he has answered will not be considered compulsory even if it arises out of the same transaction as does the plaintiff's claim"); Union Corp. v. Brown (E.D.Pa. Mar. 29, 1988) 1988 WL 31080 ("[a] counterclaim acquired after he has answered will not be considered compulsory even if it arises out of the same transaction as does plaintiff's claims"); Steinberg v. St. Paul Mercury Ins. Co. (S.D.Ga. 1985) 108 F.R.D. 355, 358 (same); 3 J. WM. MOORE ET AL., MOORE'S FEDERAL PRACTICE ¶ 13.14[1] (3d ed. 1999) ("A counterclaim that arose from the same transaction or occurrence as the primary claim, but did not accrue or mature until after service of the responsive pleading (i.e. the answer), is not compulsory in the action . . . Once the claim matures, however, the pleader may have the option — with leave of court — to bring the claim as a permissive counterclaim.")
Since MD and Wallach's counterclaims matured or were acquired after they served their original Answer, thereby justifying their motion for leave to add the new counterclaims under Rule 13(e) rather than as omitted counterclaims under Rule 13(f), the new counterclaims are permissive in nature and not compulsory. We therefore give no credence to MD and Wallach's assertion that we are required to permit the addition of these counterclaims on the basis that they are compulsory.
B. Whether The New Counterclaims Are Logically Related To Plaintiffs'
Claims
Even though we have rejected MD and Wallach's contention that they must be permitted to add their counterclaims on the mere basis that they are compulsory, the question of whether or not the new counterclaims are related to Plaintiffs' claims is still relevant to whether we should grant leave to add these new counterclaims. Generally, counterclaims are compulsory where they are logically related to the opposing party's claims. See Critical-Vac Filtration Corp. v. Minuteman Int'l, Inc. (2d Cir. 2000) 233 F.3d 697, 699, cert. denied (2001) 121 S.Ct. 1958, 149 L.Ed.2d 754. In this instance, as discussed above, the new counterclaims are not compulsory even if they arose from such a logical relationship because they matured or were acquired after the original Answer had been filed. However, even though the new counterclaims may technically be permissive in nature, Plaintiffs' opposition to the addition of the new counterclaims still puts at issue the relationship between Plaintiffs' claims and the new counterclaims.
Plaintiffs argue that leave to add the new counterclaims should be denied because the new counterclaims are unrelated to Plaintiffs' actions under the "logical relationship" test set out by the Second Circuit and that the introduction of these new unrelated counterclaims and new parties will unnecessarily complicate and disrupt the current litigation. Before allowing the addition of new counterclaims under Rule 13(e), "the court must consider whether the counterclaim will cause confusion or inconvenience." Gasser Chair Co., Inc., 1991 WL 10931 at *1, citing 6 CHARLES A. WRIGHT AND ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE § 1428 (2d. ed. 1990). Indeed, the very reason that a court's permission is required under Rule 13(e) to add new counterclaims "is that the course of the litigation may be unduly disrupted if new claims are belatedly injected; in that case permission will be denied and the defendant can bring his claim as an independent lawsuit." Harbor Ins. Co. v. Continental Bank Corp. (7th Cir. 1990) 922 F.2d 357, 360-361.
In accordance with these principles, where a counterclaim does not arise from the same transaction or occurrence as the plaintiffs' claims and is therefore not particularly relevant, a court may properly conclude that such a claim should be asserted in an independent proceeding, especially if it is advanced at a late date in the proceeding. All West Pet Supply Co. v. Hill's Pet Products Division (D.Kan. 1993) 152 F.R.D. 202, 204. See also Hewlett-Packard Co. v. Repeat-O-Type Stencil Mfg. (N.D.Cal. Aug. 30, 1995) 1995 WL 552168, *5 ("It is well within the court's discretion to deny leave to amend where the proposed counterclaim presents a cause of action unrelated to the pending action"); Galan v. Gegenheimer (E.D.La. Oct. 14, 1992) 1992 WL 301383, *2 ("Where the proposed counterclaim . . . presents a cause of action unrelated to the pending action, it is not an abuse of discretion to deny leave to amend"). However, "[c]losely related claims should if possible be tried together to spare the parties and the American judicial system the diseconomies of multiple proceedings." Harbor Ins. Co., 922 F.2d at 361.
The test for determining whether a counterclaim arises out of the same transaction or occurrence as the opposing party's claim is "whether a logical relationship exists between the claim and the counterclaim and whether the essential facts of the claims are `so logically connected that the considerations of judicial economy and fairness dictate that all the issues be resolved in one lawsuit.'" Adam v. Jacobs (2d Cir. 1991) 950 F.2d 89, 92. In this instance, we agree with Plaintiffs that the new counterclaims are unrelated to Plaintiffs' claims. Plaintiffs' causes of action primarily focus on issues and facts stemming from Plaintiffs' trademarks and MD and Wallach's actions in the course of their sales of particular apparel to three retailers. In sharp contrast, MD and Wallach's counterclaims stem from the subsequent seizure of different apparel, and most importantly, the conduct of the NYC Parties and Plaintiffs in later allegedly wrongfully retaining and destroying that different set of apparel. In large measure, the new counterclaims simply involve different facts and issues than do Plaintiffs' claims.
Here, the addition of such new counterclaims would therefore result in the interjection of a host of new issues and new parties unrelated to Plaintiffs' claims and would unnecessarily require significant additional discovery and litigation, complicate the adjudication of Plaintiffs' claims, significantly delay the final disposition of this action, and quite likely result in jury confusion. Under these circumstances, where the new counterclaims are unrelated to Plaintiffs claims and can be raised without prejudice in a separate action, we deny MD and Wallach leave to add the new counter-claims. See Gucci America, Inc. v. Exclusive Imports International (S.D.N.Y. Jan. 9, 2001) 2001 WL 21253, *6 (denying leave to add new counterclaims where the counterclaims were factually remote from the plaintiff's claim and would result in additional discovery and the prolongation of the litigation); BPW Rhythmic Records, L.L.C. v. CDNow, Inc. (S.D.N.Y. Oct. 12, 2000) 2000 WL 1512620, *1 (striking new claims impermissibly added without the court's permission where the new claims sought to inject entirely new issues which would require additional discovery and delay the resolution of the action); A.H. Guretzmacher Co. v. Massey-Ferguson, Inc. (N.D.Ill. 1981) 512 F. Supp. 194, 201 (denying leave to file additional unrelated counterclaims where they involved new parties and new issues and could be brought as an independent action).
C. The New Allegations And Exhibits Related To The Original Counterclaims
As we indicated earlier, the Amended Answer would not only add new counterclaims but also modify the allegations underlying MD and Wallach's proposed counterclaims. Although MD and Wallach have sought to file the Amended Answer without formally requesting leave to amend and supplement their original counterclaims in this manner, we treat their motion for leave to file the Amended Answer as not only a request to add new counterclaims and parties under Rule 13(e) and Rule 13(h) but also as a request to amend and supplement the pleadings under Rule 15(a) and 15(d). Since Plaintiffs oppose the motion for leave to file the Amended Answer solely with respect to the addition of new counterclaims and parties and not as to the modification of the original counterclaims, we hereby grant MD and Wallach leave to amend and supplement their original malicious prosecution claims by way of this Amended Answer.
D. The November 28, 2001 Stay On Depositions
On November 28, 2001, we issued an order staying "all depositions in this case pending this Court's resolution of MD Sportswear Corp. and Wallach's . . . motion for leave to file an amended answer. . . .' See Tommy Hilfiger Licensing, Inc. v. Bradlees, Inc. (S.D.N.Y. Nov. 28, 2001) 2001 U.S. Dist. LEXIS 19324, *1. Since we now issue our determination with respect to that motion, we lift the stay on any depositions relating to Plaintiffs' claims and MD and Wallach's counterclaims for malicious prosecution.
CONCLUSION
For the foregoing reasons, Defendants' motion for leave to file an Amended Answer which asserts new counterclaims and adds new parties is denied, but their request to amend and supplement their original malicious prosecution claim by way of the Amended Answer is granted.
SO ORDERED.