Opinion
Index No. 653758/2023
07-02-2024
Springtex USA, LLC, Plaintiff, v. SPSC Design, LLC d/b/a LEOTA NEW YORK, and SARAH CARSON, Defendants.
Reid & Wise LLC, New York, NY (Matthew Sava, Shiyong Ye, and Siyao Lin of counsel), for plaintiff. J. Mark Lane, P.C., Larchmont, NY (Mark Lane, of counsel), for defendants.
Unpublished Opinion
Reid & Wise LLC, New York, NY (Matthew Sava, Shiyong Ye, and Siyao Lin of counsel), for plaintiff.
J. Mark Lane, P.C., Larchmont, NY (Mark Lane, of counsel), for defendants.
Gerald Lebovits, J.
This dispute arises out of an alleged breach of a contract referred to as an exclusivity agreement. (NYSCEF No. 2 at 1, NYSCEF No. 3 at 1-2.) This agreement was formed on December 12, 2018, between the owner of Springtex USA, LLC, Dawei Lu, and SPSC Design LLC's founder and CEO, Sarah Carson. (NYSCEF No. 3 at 1, 7.) The agreement provides that defendant SPSC Design would use plaintiff Springtex USA as the exclusive manufacturer for its clothing lines. (NYSCEF No. 3 at 1-2.) The agreement further states that SPSC Design would not use and sell more than 10 percent of goods coming from other manufacturers. (NYSCEF No. 3 at 1.)
Additionally, the exclusivity agreement provides that SPSC Design would pay Springtex damages at a rate of $6 per item for any item bought or sold beyond this 10 percent threshold. (NYSCEF No. 2 at 3-4.) Springtex alleges that SPSC Design failed to pay 10 invoices that have been overdue for over three years, resulting in an outstanding balance of $476,743.02. (Id. at 2.)
Acting on SPSC Design's behalf, and on the same day the exclusivity agreement was formed, Carson personally guaranteed that the clothing orders would be completed. (NYSCEF No. 2 at 4.) Carson claims that she signed the personal guaranty only under "duress" and out of "necessity" after Springtex "harassed her and her employees." (NYSCEF No. 22 at 2, 3, 6.) She alleges that she signed both the exclusivity agreement and personal guaranty documents because she would have otherwise "los[t] the business [and her] livelihood." (Id. at 3.)
In motion sequence 001, Springtex moves under CPLR 3211 (a) (1) to dismiss SPSC Design's two counterclaims from its answer on the basis of documentary evidence under and under CPLR (a) (7) for failure to state a cause of action. The motion is granted.
In motion sequence 002, defendants move under CPLR 3025 (b) for leave to amend its answer with counterclaims to set forth more facts and additional causes of action. The motion is granted in part and denied in part.
Discussion
This decision addresses both motion sequences 001 and 002. With respect to the first two counterclaims, the court considers the two motions together. Because these two counterclaims were asserted in defendants' initial answer, the questions whether the counterclaims should survive dismissal and whether amendment should be permitted overlap substantially. The remaining 10 counterclaims are analyzed only in relation to motion sequence 002. These counterclaims were not asserted in the original answer, and they are outside the scope of those addressed in motion sequence 001.
To survive a motion to dismiss, counterclaims are judged by a standard that requires "accept[ance of] the facts alleged in the complaint as true, accord[ing] plaintiff the benefit of every possible favorable inference, and determin[ing] only whether the facts as alleged fit within any cognizable legal theory." (Leon v Martinez, 84 N.Y.2d 83, 87 [1994].)
Absent prejudice to the opposing party, a motion to amend a pleading should be "freely given." (CPLR 3025 [b].) To prevail, a moving party must show only that the proffered amendment is not palpably insufficient or clearly devoid of merit. (See Krakovski v Stavros Assoc., LLC, 173 A.D.3d 1146, 1147-48 [2d Dept 2019].) In consideration of a party's motion to amend, the court need not decide the merits of plaintiff's proposed amendment unless the amendment is "patently insufficient on its face.'" (Pier 59 Studios, L.P. v Chelsea Piers, L.P., 40 A.D.3d 363, 366 [1st Dept 2007] [internal quotation marks omitted].) The court's inquiry ends once the prima facie basis for the amendment has been established. (Id. at 366.)
A moving party may choose to apply its motion to dismiss to the nonmoving party's proposed amended claims. (See Sage Realty Corp. v Proskauer Rose LLP, 251 A.D.2d 35, 38 [1st Dept 1998].) Springtex has chosen to apply its motion to dismiss to SPSC Design's first and second proposed amended counterclaims. (NYSCEF No. 33 at 12.) Plaintiff does not move to dismiss defendants' remaining proposed counterclaims.
I. Counterclaim One: Conversion
The conversion counterclaim, as it appears in the proposed amended answer, is mostly unchanged from defendants' initial answer, but it adds a few factual allegations. (NYSCEF No. 31 at 21.) This counterclaim is dismissed.
Plaintiff moves under CPLR 3211 (a) (1) and (a) (7) to dismiss the counterclaim on the basis that the intangible property that the dispute centers on is not capable of being converted. This argument is foreclosed by the Court of Appeals' decision in Thyroff v Nationwide Mutual Insurance Co. (8 N.Y.3d 283 [2007]). Before Thyroff, a claim of conversion was covered only by tort law and was established when a plaintiff showed "(1) legal ownership or an immediate right to possession to a specific identifiable thing and (2) that the defendant exercised an unauthorized dominion over the thing in question to the exclusion of the plaintiff's right." (Giardini v Settanni, 159 A.D.3d 874, 875 [2d Dept 2018].) This older theory of conversion required that the "specific identifiable thing" at issue in this tort be tangible property. (Id.)
But as of 2007, intangible property can be the subject of a conversion claim. (See Thyroff, 8 N.Y.3d at 292.) The Thyroff Court updated the older tort-law theory of conversion, finding that society's increasing use of computers and electronic records demand a new approach to theories of conversion. (See 8 N.Y.3d at 292.) The new approach allows a plaintiff to bring a conversion claim based on an intangible property right-refuting plaintiff's view that one cannot recover on a conversion claim when the property interest is intangible. (See id.)
In this case, the exclusivity agreement provides that SPSC Design must license its designs to Springtex and that Springtex will manufacture the goods according to SPSC Design's specifications and return the improved goods to SPSC Design. (NYSCEF No. 3 at 1.) Each stage was subject to several of Springtex's conditions. When Carson signed the agreement on SPSC Design's behalf, she agreed to the provision that Springtex may stop providing goods to SPSC Design if payment for the goods Springtex manufactured were not received. (Id. at 3.) Specifically, the contract terms provide that "[i]f Leota [SPSC Design] fails to pay the balance by the due date, Springtex will impose an interest on the late payment... and [Springtex] ha[s] the right to stop providing Goods to Leota until the requested payment is received." (Id.)
Springtex has provided invoices as well as demand letters to support its allegation that SPSC Design did not pay for 10 orders and, therefore, that the shipments were properly withheld. (See NYSCEF Nos. 5, 6, 7.) SPSC Design, on the other hand, alleges that Springtex sought to engage in insurance fraud and that the invoice numbers SPSC Design provides might be falsified to fit the purported scheme SPSC Design claims Springtex revealed to them. (NYSCEF No. 21 at 6.) But SPSC Design's motion papers also appear to suggest that it did not pay in full for all the orders. SPSC Design explains that Springtex's increased prices "created significant [financial] problems for SPSC... [and that] a balance started to accumulate." (NYSCEF No. 22 at 2.) According to the parties' agreement, if SPSC Design did not pay for the disputed orders, it did not own the goods. Consequently, SPSC Design would have no "legal ownership," making its conversion claim impossible. (See Giardini, 159 A.D.3d at 875 [finding that a superior right to ownership is an essential element of a plaintiff's prima facie case for a conversion claim].)
As for the exclusionary element of the claim, Springtex argues that because of the method SPSC Design used in creating its designs, SPSC Design was not truly deprived of its access to the patterns and designs. (NYSCEF No. 24 at 12.) Defendants created the patterns on paper and then uploaded them into an electronic form; these electronic forms of the patterns are called "tech packs." (NYSCEF No. 31 at 19). When the manufacturer (here, Springtex) is ready to make the clothing item, the pattern is taken from the digital record and printed on roll paper. It is then placed on top of the new clothing's fabric, and the process is complete. (Id.)
SPSC Design provides the list of some 3,000 designs it believes are copies of its patterns that plaintiff has made and sold to another company without permission. (NYSCEF No. 22 at 8.) SPSC Design claims the designs are its property but does not mention what occurs with the paper form after the tech packs are created. (NYSCEF No. 11 at 19.) Carson notes that a created pattern is comparable to "a document that is used in physical and digital form." (NYSCEF No. 22 at 8.) Carson further explains that "the physical form [of the design] is required, and the digital form is essentially an efficiency." (Id.) In SPSC Design's proposed amended answer, it attempts to add that "Springtex has always insisted on taking sole and exclusive possession of the digital information, to the exclusion of SPSC." (NYSCEF No. 31 at 19.) But neither Carson nor SPSC Design clarifies what occurs with the paper versions of the designs or whether these paper patterns are still in SPSC Design's possession. For conversion purposes, defendants have insufficiently alleged or represented that plaintiff denied them access to their assertedly proprietary designs.
Applying Springtex's arguments for dismissing the first counterclaim to the proposed amended answer/counterclaims, this court dismisses this counterclaim.
II. Counterclaim Two: Conversion: Theft of Goods
As both parties agree, SPSC Design does not alter the substance of its second counterclaim but adds only the term "conversion" in the title. (NYSCEF No. 31 at 21.) SPSC Design argues that this new title is only for clarity, not recharacterization. Springtex suggests that the title change is SPSC Design's attempt to recharacterize this counterclaim as another conversion counterclaim. (NYSCEF No. 33 at 5-6.) Regardless, the substance of this counterclaim, as it appears in the proposed amended answer, is unchanged from SPSC Design's original answer. (See NYSCEF No. 31 at 21-22; NYSCEF No. 9 at 12-13.)
Springtex is correct that New York law does not recognize a "theft of goods" cause of action. (See Arts4All, Ltd. v Hancock, 5 A.D.3d 106, 111 [1st Dept 2004] [causes of action alleging theft were properly dismissed on the ground that no claim for theft will lie].) SPSC Design admits in its memorandum that this second counterclaim is basically another name for a conversion counterclaim. (NYSCEF No. 21 at 16-17.) SPSC Design explains that "the Second Counterclaim is in effect a second conversion claim." (Id.) Defendants may not raise the same counterclaim twice.
The motion to dismiss the second counterclaim is granted.
III. Counterclaim Three: Fraud
In their third counterclaim, defendants allege that plaintiff agreed to enter into a manufacturing relationship with SPSC Design based on representations of lower pricing that plaintiff had no intention of honoring. (NYSCEF No. 28 at 9.)
For a fraud claim to succeed, a plaintiff must allege "a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance... and damages." (Eurycleia Partners, LP v Seward & Kissel, LLP, 12 N.Y.3d 553, 559 [2009].) CPLR 3016 (b) requires that for claims or defenses based on fraud, "the circumstances constituting the wrong shall be stated in detail." (Solomon Capital, LLC. v Lion Biotechnologies, Inc., 171 A.D.3d 467, 469 [1st Dept 2019].) Further, "intent to commit fraud is to be divined from surrounding circumstances." (Oster v Kirschner, 77 A.D.3d 51, 55-56 [1st Dept 2010].) SPSC Design's allegations about plaintiff's immediate refusal to honor the price and the motivation for that refusal suffice to raise an inference of fraudulent intent. (NYSCEF No. 37 at 3.)
Springtex argues that SPSC Design's allegations under this counterclaim duplicate its breach-of-contract counterclaims and are therefore barred. (NYSCEF No. 33 at 5-6). Fraud claims that duplicate a breach-of-contract claim generally must be dismissed. (See Mañas v VMS Assoc., LLC, 53 A.D.3d 451, 454 [1st Dept 2008].) But SPSC Design is seeking compensatory damages for harm to its business, reputation, and good will, and also punitive damages, none of which may be recovered on a breach-of-contract claim. (See 2470 Cadillac Resources, Inc. v DHL Exp. (USA), Inc., 84 A.D.3d 697, 699 [1st Dept 2011].) Because the damages sought by SPSC Design on its fraud claim are unavailable in contract, the fraud claim is not subject to dismissal as duplicative. (See Mañas, 53 A.D.3d at 454.)
The motion to add the third counterclaim is granted.
IV. Counterclaims four and five
A. Four: Unfair Competition
In the fourth counterclaim, defendants argue that plaintiff took, and then used, defendants' patterns and designs so that plaintiff could "produce and sell products in direct competition" with defendants. (NYSCEF No. 30 at 23.)
There is no complete list of activities that constitute unfair competition. (See Metropolitan Opera Ass'n v Wagner-Nichols Recorder Corp., 199 Misc. 786, 792 [Sup Ct, NY County 1950], affd, 279 AD 632 [1st Dept 1951].) Allegations that a defendant has misappropriated plaintiff's property may serve as a basis for an unfair-competition claim. (See ITC Ltd. v Punchgini, Inc., 9 N.Y.3d 467, 475 [2007] [describing the common acceptance of the misappropriation theory for unfair-competition claims in New York courts].) In addition, an unfair-competition action can be based on "the alleged bad faith misappropriation of a commercial advantage belonging to another by exploitation of proprietary information or trade secrets." (Out of Box Promotions, LLC v Koschitzki, 55 A.D.3d 575, 578 [2d Dept 2008].)
Defendants seem to adopt the misappropriation theory of unfair competition, in which "a party is liable if they unfairly exploit 'the skill, expenditures and labors' of a competitor... in an unethical way and thereby unfairly neutralized a commercial advantage that the plaintiff achieved through 'honest labor.'" (E.J. Brooks Co. v Cambridge Security Seals, 31 N.Y.3d 441, 444 [2018] [internal citations omitted].) SPSC Design creates the designs; Springtex does not. Springtex manufactured the products based on SPSC Design's patterns. It can be inferred from the parties' roles in the exclusivity agreement that defendant specialized in creating patterns, where plaintiff focused on manufacturing clothing. Defendants have made these designs and patterns, its "skill," through "honest labor," which gave them a commercial advantage. (See E.J. Brooks Co., 31 N.Y.3d at 444.)
Furthermore, to support its argument that plaintiff unfairly exploited its designs, defendant has provided, from Springtex's website, a list of the specific patterns that it understands to be its original designs. (NYSCEF No. 22 at 8.) Defendants have thus properly pleaded the unfair competition counterclaim.
SPSC Design's motion to add counterclaim four is granted.
B. Fifth: Misappropriation of Trade Secrets
In its fifth counterclaim, SPSC Design argues that plaintiff misappropriated its trade secrets, defendants' patterns and designs, to sell products in competition with defendants. (NYSCEF No. 28 at 10.)
To state a tort claim for misappropriation of trade secrets, a plaintiff must allege that (1) it possesses a trade secret; and (2) defendant is using that trade secret in breach of an agreement, confidence, or duty, or resulting from discovery by improper means. (See Schroeder v Pinterest Inc., 133 A.D.3d 12, 27 [1st Dept 2015].) A trade secret is "any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it." (Ashland Mgt. v Janien, 82 N.Y.2d 395, 407 [1993].)
Springtex argues that SPSC Design did not treat the information in dispute (its patterns and designs) as "secret" because SPSC Design placed its designs on a website where "other brands could allegedly place orders for its designs." This argument is directly disproved by the exclusivity agreement's confidentiality clause. (NYSCEF No. 3 at 5.) The confidentiality clause provides that both parties agreed to keep business information confidential as it arose. (Id.) The information was treated as secret because the designs ultimately gave SPSC Design an advantage over competitors. (Cf Ashland Mgt., 82 N.Y.2d at 407 [finding that a computerized mathematical stock selection model that can easily be reproduced without access to the company's internal computers is not a trade secret].) Springtex's signature on the exclusivity agreement suggests knowledge of the information's confidentiality that was disclosed between it and defendants.
Springtex's other argument is that SPSC Design did not inform Springtex of the status as the designs as secret. (NYSCEF No. 33 at 17-18.) However, it would be implausible to require that those who have trade secrets disclose their status as such to meet the requirements of a claim that they have been misappropriated. In short, SPSC Design has sufficiently alleged that its patterns and designs are trade secrets. Again, defendant's list of some 3,000 designs it believes Springtex has sold to another company supports the standard of using the trade secrets in breach of an agreement or confidence. (NYSCEF No. 22 at 8; Schroeder, 133 A.D.3d 12 at 27.)
The motion to add the fifth counterclaim is granted.
V. Counterclaim Six: "Tortious interference with business relations"
Defendants' sixth counterclaim is for tortious interference with business relations. To prevail on that claim, a party must prove that (1) plaintiff had business relations with a third party; (2) defendant interfered with those business relations; (3) defendant acted with the sole purpose of harming the plaintiff or by using unlawful means; and (4) there was resulting injury to the business relationship. (See Zetes v Stephens, 108 A.D.3d 1014, 1020 [4th Dept 2013].)
For tortious interference with prospective business relations claims, a plaintiff must identify any specific customer it would have obtained but for defendant's actions. (See Learning Annex Holdings, LLC v Gittelman, 48 A.D.3d 211, 211 [1st Dept 2008].) For tortious interference with present contractual relations, a plaintiff must prove "(1) the existence of a contract between the plaintiff and a third party, (2) the defendant's knowledge of the contract, (3) the defendant's intentional inducement of the third party to breach or otherwise render performance impossible, and (4) damages to plaintiff." (See Anesthesia Assoc. of Mount Kisco, LLP v Northern Westchester Hosp. Ctr., 55 A.D.3d 473, 476 [2d Dept 2009].)
Under either theory, a party bringing a tortious interference claim must identify an affected third party. But as Springtex points out, SPSC Design's proposed counterclaim fails to identify the specific relationships harmed as a result of Springtex's alleged misconduct. (NYSCEF No. 33 at 20-21.) Instead, defendants simply refer to its "business relations with various third parties, including retailers and other customers." (NYSCEF No. 30 at 24.)
Here, SPSC Design argues that Springtex "took and utilized SPSC Design's patterns and designs, and marketed products based on those designs." (NYSCEF No. 30 at 24-25.) Further, SPSC Design alleges that Springtex "improperly consigned shipments to itself, improperly withheld products, shipped late and shipped defective products." (Id.) From defendants' allegations, it can be inferred that plaintiff's sole interest was to refuse to deliver the contractual obligation under its agreement with defendants. Adopting this inference, plaintiff's behavior was not targeted at harming defendants' relationship with a third party. (See G.K.A. Beverage Corp. v Honickman, 55 F.3d 762, 768 [2d Cir 1995].) That defendants' customers may have been incidentally harmed does not affect the conclusion that Springtex's alleged goal was to avoid performing under the contract-not to harm defendants' relationships with third parties. (See id.) If defendants had alleged that plaintiff directly interacted with SPSC Design's customers, for instance by attempting to convince the customers to do business with plaintiff instead of defendants, then this claim might have been meritorious. (Id.) But as it stands, defendants' sixth counterclaim is without merit under any theory of tortious interference with business relations.
The motion to add the sixth counterclaim is denied.
VI. Counterclaim seven: breach of fiduciary duty
Defendants' seventh counterclaim is for breach of (implied) fiduciary duty. (NYSCEF No. 37 at 9-10.)
The elements for a cause of action for breach of fiduciary duty are (1) a fiduciary relationship; (2) misconduct by the defendant; and (3) damages caused by the misconduct. (New York Mar. & Gen. Ins. Co. v Wesco Ins. Co., 213 A.D.3d 461, 462 [1st Dept 2023].) A fiduciary relationship "exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matter within the scope of the relation." (EBCI, Inc. v Goldman Sachs & Co., 5 N.Y.3d 11, 19 [2005].) This type of relationship, necessarily fact-specific, is grounded in a higher level of trust than normally present in the marketplace between those involved in arm's-length business transactions. (Northeast Gen. Corp. v Wellington Adv., 82 N.Y.2d 158, 162 [1993].)
Defendants appear to concede that there is no express agreement providing that Springtex owes them a fiduciary duty. (NYSCEF No. 37 at 11.) Instead, SPSC Design attempts to rely upon the "relation" between the two parties after its conveyance of its "confidential information," its patterns and designs, to Springtex. (Id.) SPSC Design implies from this conveyance of information that "Springtex owed a fiduciary duty to SPSC to properly... safeguard that [confidential] information, and not to appropriate it for itself." (NYSCEF No. 30 at 25.) But the mere communication of confidential information is insufficient to create a fiduciary relationship. (Wiener v Lazar Freres & Co., 241 A.D.2d 114, 122 [1st Dept 1998] [explaining that, taken alone, the exchange of confidential communication between a bank and its customer does not create a fiduciary duty].)
In addition, a fiduciary relationship exists when one is under a duty to act for, or to give advice for the benefit of, another. (EBC I, Inc. v Godman, Sachs & Co., 5 N.Y.3d 11, 19 [2005].) Here, Springtex contracted with SPSC Design only to manufacture apparel products for SPSC Design. Springtex had no duty to act for or to give advice to defendants. (See NYSCEF No. 3.) Moreover, defendants do not argue that they detrimentally relied on Springtex's superior expertise or knowledge by commissioning Springtex to manufacture the apparel. (Cf. Barrett v Freifeld, 64 A.D.3d 736, 737 [2d Dept 2009] [finding that reasonable detrimental reliance in a non-arms-length business relationship can create a fiduciary duty].)
Thus, on the record before the court, plaintiff and defendants instead have an ordinary, arms-length business relationship as a buyer and seller-not a relationship in which one party owes fiduciary obligations to the other. (Cf. Tiny 1, Ltd. v Samfet Marble Inc., 201 A.D.3d 423, 424 [1st Dept 2022] [repeating that a fiduciary relationship does not exist in an arms-length business transaction].)
The motion to add the seventh counterclaim is denied.
VII. Counterclaims eight through ten: breach of Contract
A. Eight: Breach of a "Manufacturing Agreement "
SPSC Design argues that Springtex breached a "manufacturing agreement" between them. (NYSCEF No. 31 at 12). To state a claim for breach of contract, a party must allege that "(1) a contract exists; (2) plaintiff performed in accordance with the contract; (3) defendant breached its contractual obligations... [and] (4) defendant's breach resulted in damages." (34-06 73, LLC v Seneca Ins. Co., 39 N.Y.3d 44, 52 [2022].)
Springtex incorrectly argues that SPSC Design's allegations are vague and conclusory and thus insufficient. (Cf. Gordon v Dino De Laurentiis Corp., 141 A.D.2d 435, 436 [1st Dept 1988] [holding that vague and conclusory allegations about a breach-of-contract action were insufficient to state a cause of action].) Springtex statute-of-frauds argument does not change this conclusion, because defendants do not allege that there was a verbal contract between the parties. (NYSCEF No. 33 at 25.) The exclusivity agreement, the focus of defendants' allegations, is a written contract.
According to defendants, the allegedly breached agreement was based on a product price list that Springtex's owner signed and on which defendants then relied. (NYSCEF No. 31 at 27.) Defendants argue that Springtex did not "honor the prices they had promised," according to this product price list. (NYSCEF 31 at 12-13.) Defendants have sufficiently alleged that (1) a contract existed; that is, the product price list signed by each party; (2) there was performance in accordance with the contract, as SPSC Design sent its designs to be manufactured by Springtex; (3) Springtex breached its contractual obligation to follow the pricing terms of the contract; and (4) SPSC was harmed through the loss of customers and inability to pay the higher prices.
The motion to add the eighth counterclaim is granted.
B. Nine: Breach of the Exclusivity Agreement's Confidentiality Provision
The ninth counterclaim is another breach-of-contract claim, based on the exclusivity agreement's confidentiality provision. (NYSCEF No. 37 at 11.) Springtex argues that the information SPSC Design gave it was not treated as confidential by SPSC Design during the parties' business relationship. However, the exclusivity agreement provides that "[b]oth parties agree to treat all such information and the terms of this Agreement as confidential." (NYSCEF No. 3 at 5.)
The confidentiality clause here assumes that both parties understand the confidentiality of the information disclosed to one another. (NYSCEF No. 3 at 5.) Thus, on this record, Springtex's argument that defendants did not treat the information as secret is invalid.
Nor is there merit to Springtex's argument that defendants fail to allege that they disclosed confidential information to it. As alleged in counterclaims four and five, defendants gave Springtex access to trade secrets in the form of clothing designs. Because confidentiality is a necessary element for considering information a trade secret, it follows that the patterns and designs are confidential for purposes of the breach-of-confidentiality counterclaim.
The motion to add the ninth counterclaim is granted.
C. Ten: Breach of Contract Terms
The tenth counterclaim is another breach-of-contract claim based on the alleged breach of multiple "agreements" between the two parties. (NYSCEF No. 30 at 28). Specifically, SPSC Design alleges that "Springtex repeatedly failed and refused to honor its agreements [by] refusing to ship products on a timely basis, withholding products against improper and extortionate demands, improperly consigning shipments of SPSC goods to itself [and more allegations]." (NYSCEF No. 30 at 28.)
Provisions within the exclusivity agreement regulate both the delivery place and the delivery date for the completed goods. (NYSCEF No. 3 at 3.) In this counterclaim, SPSC Design successfully alleges a breach of "[a] specific provision upon which liability is predicated." (Matter of Sud v Sud, 211 A.D.2d 423, 424 [1st Dept 1995].)
Springtex argues that SPSC Design was required to raise issues of product defect during inspection of the goods and that because SPSC Design did not, its claim is precluded. (NYSCEF No. 33 at 28.) But UCC 2-314 implies a warranty of merchantability when-as here-the seller is a merchant. Springtex does not argue that this implied warranty of merchantability was waived or modified; nor does any language appear in the exclusivity agreement that might have that effect. (Cf. UCC 2-316 [listing the words that must be present in a contract in order for the implied warranty of merchantability to be excluded or modified].) Thus, the implied warranty of merchantability applied to the goods Springtex delivered.
However, Springtex's argument that it had a right to withhold the shipments in the event of SPSC's default, pursuant to the express terms of the exclusivity agreement, is successful. (NYSCEF No. 3 at 3.) Neither party disputes SPSC Design's failure to pay for the 2020 Summer clothing order. (NSCEF No. 28 at 12.) As a result, SPSC may not make a breach-of-contract allegation about the withholding of the SPSC Design Summer 2020 clothing line, as Springtex acted according to the terms of the exclusivity agreement.
The motion to add the tenth counterclaim is granted, except for the allegation about Springtex's refused shipment to defendants for the SPSC Design Summer 2020 product line.
VIII. Counterclaim eleven: Breach of duty of good faith and fair dealing
The eleventh counterclaim is for breach of the implied covenant of good faith and fair dealing. (NYSCEF No. 28 at 13.) A claim for breach of this implied covenant must be dismissed if it merely duplicates a breach-of-contract claim. (E.g. MBIA Ins. Co. v GMAC Mtge. LLC, 30 Misc.3d 856, 856-857 [Sup Ct, NY County 2010] [dismissing good faith and fair dealing claims for being duplicative when plaintiff merely reiterated its breach-of-contract claims and added bad faith to its allegations].) Claims for a breach of the duty of good faith and fair dealing are not duplicative when they are not directed at all the defendants or when not predicated on contractual terms that form the basis of the breach-of-contract claim. (Id. at 865.)
Plaintiff argues that the facts that defendants provide to support this counterclaim are identical to the facts defendants give in the seventh, eighth, and ninth for the breach-of-contract counterclaims. (NYSCEF No. 33 at 30.) For instance, SPSC Design's allegation of Springtex's misuse of the confidential information for its own benefit resembles the alleged breach of the confidentiality clause in the ninth counterclaim. (NYSCEF No. 30 at 29; NYSCEF No. 31 at 27-28.) Springtex is thus correct that this counterclaim is duplicative. It repeats facts from the earlier breach-of-contract counterclaims and is predicated only on contractual terms.
The motion to add the eleventh counterclaim is denied.
IX. Counterclaim Twelve: Deceptive practices
Defendants' twelfth counterclaim is for deceptive practices. One of defendants' main arguments is that plaintiff placed items of clothing that defendants designed on plaintiff's website, with inaccurate clothing-brand labels. (NYSCEF No. 30 at 30.)
To state a claim under GBL § 349 (a), a plaintiff must allege that (1) defendant's conduct was consumer-oriented; (2) defendant's act or practice was deceptive or misleading in a material way; and (3) plaintiff suffered an injury as a result of the deception. (See Himmelstein, McConnell, Gribben, Donoghue & Joseph, LLP v Matthew Bender & Co., Inc., 37 N.Y.3d 169, 176 [2021] [ Himmelstein ].) For the first element, "the consumer-oriented element precludes a GBL § 349 claim based on 'private contract disputes, unique to the parties.'" (Id. at 177 [internal citations omitted].) Although no bright-line rule to determines whether conduct is consumer-oriented, several considerations in combination are dispositive.
The consumer-oriented element can be satisfied when the product in dispute is marketed to consumers "'who purchase goods and services for personal, family, or household use.'" (Id. at 173, 176, quoting Med. Socy. v Oxford Health Plans, Inc., 15 A.D.3d 206, 207 [1st Dept 2005].) The "consumer-oriented element [does not] depend on the use to be made of the product... [but] whether the defendant's allegedly deceptive act or practice is directed to the consuming public and the marketplace." (Himmelstein, 37 N.Y.3d at 177.) Furthermore, an act or practice is consumer oriented when it has "'a broader impact on consumers at large.'" (Id., quoting Oswego Laborers' Local 214 Pension Fund v Marine Midland Bank, 85 N.Y.2d 20, 25 [1995].)
Springtex argues that this counterclaim fails because it "is based on a purely private contract dispute." (NYSCEF No. 33 at 24.) That alone, though, does not defeat a claim under GBL § 349 (a). Defendants argue that items of its clothing, as they appeared on Springtex's website, "were mislabeled with other brands." (NYSCEF No. 30 at 30.) This is the only possibly consumer-oriented allegation that SPSC Design makes: The rest, such as "inflating prices... routinely shipping defective goods... refusing to allow charge-backs... [etc.]" are otherwise duplicative of defendants' earlier breach-of-contract counterclaims. (NYSCEF No. 30 at 30.)
Several of the allegations SPSC Design makes in this counterclaim center on the exclusivity agreement. However, the exclusivity agreement is not consumer-oriented, since the terms of the agreement do not concern or affect the public. (See Himmelstein, McConnell, Gribben, Donoghue & Joseph, LLP, 37 N.Y.3d at 176.) Therefore, the allegations about the exclusivity agreement may not suffice under defendants' GBL § 349 (a) counterclaim. But Springtex allegedly mislabeling products on its website might mislead a reasonable customer in a material way, by tricking them into thinking they are buying something that they are not. (Cf Stutman v Chemical Bank, 95 N.Y.2d 24, 29 [2000].) Given the undemanding standard governing motions for leave to amend, that possibility is enough.
The motion to add the twelfth counterclaim is granted.
Accordingly, it is
ORDERED that Springtex's motion to dismiss defendants' first and second counterclaims (mot seq 001) is granted, and those counterclaims are dismissed; and it is further
ORDERED that the balance of the claims and counterclaims in this action are severed and shall continue;
ORDERED that defendants' motion for leave to amend (mot seq 002) is granted with respect to proposed counterclaims three, four, five, eight, nine, and twelve; granted with respect to proposed counterclaim ten except to the extent that the tenth counterclaim is based on Springtex's refused shipment to defendants for the SPSC Design Summer 2020 product line; and is denied with respect to proposed counterclaims one, two, six, seven, and eleven; and it is further
ORDERED that within 14 days of service of a copy of this order with notice of its entry, defendants file an updated amended answer-with-counterclaims that conforms to the rulings set out above, which upon filing shall become defendants' operative pleading in this matter; and it is further
ORDERED that Springtex shall respond to the amended answer-with-counterclaims within 20 days of its filing; and it is further
ORDERED that Springtex serve notice of entry on all parties.