Opinion
01 Civ. 4780 (HB).
January 16, 2002
OPINION ORDER
Jack Hidary ("Hidary") and Marmellata Childrenswear, Inc. ("Marmellata") (collectively, "defendants") moved for summary judgment on all claims asserted against them by Zeke N' Zoe Corp. ("ZNZ-Corp. or plaintiff') and for summary judgment on its counterclaims for malicious prosecution, abuse of process and abuse of Copyright and Trademark statutes. For the reasons discussed below, defendants' motion is granted in part and denied in part.
Background
ZNZ-Corp is (or was) a clothing company that sells childrenswear under the label "Zeke N' Zoe" and is 100% owned by Joanne Terranova ("Terranova"). In 1995, ZNZ-Corp. registered the Zeke N' Zoe trademark (the "mark" or Zeke N' Zoe mark") with the United States Patent and Trademark Office ("PTO"). In 1997 Terranova formed a new corporation with Hidary called Zeke N' Zoe LLC ("ZNZ-LLC"), of which Hidary's company Grace Apparel ("Grace," aka Esgra Holdings LLC) owned 70% and Terranova owned 30%. The idea was to grow the Zeke N' Zoe clothing line with financing provided by Grace.
It is unclear whether ZNZ-Corp. is still doing business.
Hidary is the majority shareholder of Grace, others of his relations also have ownership interests in the company.
ZNZ-LLC and Grace entered into two agreements, an operating agreement and a license agreement. According to the former, Terranova would be "President" of ZNZ-LLC and Hidary would serve as its "Manager." Under the latter agreement, entitled the "Exclusive License Agreement," ZNZ-Corp. licensed its "Zeke-n-Zoe" trademark as well as "all names, logos, pectoral art, designs, illustrations and other graphic elements relating to the Mark" to ZNZ-LLC (License Agree. ¶ ¶ 1a, 1b.). The license agreement was terminable by ZNZ-Corp. upon the occurrence of one or both of two conditions: ZNZ-LLC breached a material term of the agreement (id. ¶ 12a(i)) or terminated Terranova's employment (id. ¶ 12a(ii)).
Hidary fired Terranova in July 1999, and soon thereafter Terranova's attorneys sent ZNZ-LLC a letter terminating the license agreement. In the second half of 2000, Hidary sold ZNZ-LLC's office furniture and equipment, as well as purchase orders from Kmart and other retailers to another children's clothing company named Marmellata. Marmellata also hired five of ZNZ-LLC's employees, including graphic artists, and sub-leased ZNZ-LLC's vacated office space. ZNZ-LLC is now defunct. Marmellata used some designs from the ZNZ line, but claims not to do so any longer. ZNZ-Corp. argues, but with no evidentiary support, that Marmellata has used and continues to use numerous (unidentified) designs related to the Zeke N' Zoe mark and that Marmellata is representing itself to retailers as the new incarnation of ZNZ-LLC. With respect to the latter allegation, ZNZ-Corp.'s wholly unsubstantiated theory is that Arthur German, a former ZNZ-LLC and Marmellata salesperson, represented to Kmart and other retailers that Marmellata owns all of ZNZ-Corp.'s designs; and as proof that the foregoing misrepresentations were made the plaintiff represents that Kmart is now buying sleepwear from Marmellata, when it had not done so before ZNZ-LLC's dissolution, and that the sleepwear is designed by a former ZNZ-LLC employee. To the extent that I understand this purely hypothetical argument, it is of little help to plaintiff. What I do know is that there was ample opportunity for discovery, the time for which was extended by the Magistrate judge, and that Kmart, amongst others that might have shed some light on this at best translucent fact pattern, was never deposed.
There is a factual dispute as to whether Grace breached the license agreement when on May 21, 1997 Hidary filed an application with the Patent Trademark Office "PTO" to register the Zeke-n-mark in the name of ZNZ-LLC. The license agreement expressly provided that "Licensee shall not seek any copyright or trademark registration as owner of the Licensed Property." (license agreement, ¶ 7(a). The PTO rejected the application because of the potential confusion with the existing mark, and in 1999, after several unsuccessful communications with the PTO, Hidary abandoned his efforts to register the mark for ZNZ-LLC. The letter that Terranova's attorneys sent to ZNZ-LLC shortly after she was fired (wherein she terminated the license agreement) cited Hidary' s attempt to register the mark as the basis for the termination. Plaintiff attaches great significance to these events in opposing defendants' motions; I find their relevance to be elusive at best.
Apparently, Marmellata only chose to fill ¶ of those orders, all from Kmart. All ¶ were so-called "private label" orders, which means that Kmart ordered clothes to be sold in Kmart under a Kmart owned label, and not as Zeke N' Zoe or Marmellata fashions. In consideration of the Fall 2000 orders, the lease and the office and equipment, Marmellata paid Grace in the neighborhood of $200,000. (See Exhibit U attached to Lumer's affirmation).
The only documentary evidence of the sale to Marmellata is a May 10, 2000 letter from Hidary to Fran Arazi ("Arazi"), the owner of Marmellata, describing the deal and suggesting a price of $200,000 (Lumer Affirm., Exh. U). In her deposition, Arazi stated that the final price was "$200,000, approximately." (Arazi depo. tr., at 65).
Christopher Kenyon ("Kenyon"), a designer who worked for ZNZ-LLC prior to its demise and who now works for Marmellata, testified that Marmellata did use "artwork or designs" that he had created while employed by ZNZ-LLC although he has no notion of how many. (Kenyon depo. tr., at 69.)
Arthur German was later fired by Marmellata.
ZNZ-Corp. filed a lawsuit in this Court on June 1, 2001 alleging various contract and intellectual property claims and moved by order to show cause for a preliminary injunction, which was denied in June 2001. Defendants then moved to dismiss the amended complaint (amended on June 19, 2001 before the show cause hearing) which prompted ZNZ-Corp. to crossmove for leave to amend and add certain claims. After a hearing in August 2001, the Court dismissed all but the breach of contract and common law unfair competition claims against defendants and gave ZNZ-Corp. the right to amend its complaint to add a fraud claim, which ZNZ-Corp. inexplicably chose not to do. The case was then referred to Magistrate Dollinger to resolve discovery disputes. Defendants now move for summary judgment on the remaining two claims — breach of contract against Hidary and unfair competition against both defendants — and its counterclaims for malicious prosecution, abuse of process and abuse of Copyright and Trademark statutes.
Specifically, ZNZ Corp. requested that the Court (1) enjoin ZNZ-LLC and various other defendants from using intellectual properties belong to ZNZ-Corp., (2) compel ZNZ-LLC and Marmellata to hold in trust certain revenues relating to sales of properties, (3) compel Kmart to hold in trust monies owing to ZNZ-LLC or Marmellata, and (4) require Kmart to disclose documents regarding purchases from ZNZ-Corp. and Marmellata.
In its amended complaint (served on June 18, 2001), ZNZ-NJ filed claims for (1) trademark infringement, (2) false designation of origin, (3) dilution, (4) copyright infringement, (5) deceptive trade practices, (6) false advertising, (7) unfair competition, and (8) breach of contract.
Discussion
1. Standard of Review
In a motion for summary judgment, the burden is on the moving party to establish that there are no genuine issues of material fact in dispute and that it is entitled to judgment as a matter of law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986); Fed.R.Civ.P. 56(c). A dispute regarding a material fact is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party."Aldrich v. Randolph Cent. Sch. Dist., 963 F.2d 520, 523 (2d Cir.) (quotation omitted). The court resolves all ambiguities and draws all inferences in favor of the nonmoving party in order to determine how a reasonable jury would decide. Aldrich, 963 F.2d at 523.
Breach of Contract — Hidary
A. Temporal Scope of the License Agreement
ZNZ-Corp.'s breach of contract claim against Hidary, and indeed all of its remaining claims against defendants, are viable only upon a particular construction of the license agreement, and that construction is implausible.
Plaintiff's theory of the case boils down to the following: Under the terms of the license agreement ZNZ-Corp. "is the owner [of] all artwork and designs created by" ZNZ-LLC (Pl.'s br. at 14), and when Terranova terminated the license agreement all rights to Zeke N' Zoe clothing and to the Zeke N' Zoe name reverted exclusively to ZNZ-Corp. ZNZ-LLC's continued sales of the Zeke N' Zoe clothing, as well as the later assignment to Marmellata of Zeke N' Zoe designs and product orders, constituted breaches of license agreement for which she is entitled to compensation.
There is a factual dispute as to whether the assignment of ZNZ-LLC orders constitute a breach of the license agreement even under plaintiffs expansive reading of it. Pursuant to the terms of the license, after termination ZNZ-LLC retained its rights as licensee "for the design Season following the design season in process on the date of such termination." (license agreement, ¶ 13(b)). Plaintiff argues that there are 4 design seasons each year, and that Terranova was fired while ZNZ-LLC was preparing for the Fall 1999 season, and that therefore ZNZ-LLC retained its rights only for the Holiday 1999 season. Defendants argue that ZNZ-LLC only had 2 design seasons, Fall/Holiday and Spring/Summer, and that since ZNZ-LLC was working on Spring/Summer 2000 when Terranova was fired, it retained rights for Fall/Holiday 2000, the season for which Terranova filled Kmart's orders. I do not resolve this factual dispute as it is not necessary for me to do so.
In sum, plaintiff's theory gets out of the starting gate only if the license gave ZNZ-Corp. the rights to designs created by ZNZ-LLC. In support thereof, ZNZ-Corp. points to the definition in the license agreement of "Licensed Property" as "the Mark and all . . . designs. relating to the Mark," (license agreement, ¶ 1b), the requirement of the licensor to assist the licensee in the copyright and trademark protection of the Licensed Property (id., ¶ 6). and to nothing else. From this extremely thin reed, plaintiff claims unambiguous support for its view, and in the alternative argues that ¶ 1b is ambiguous and should be resolved by the jury at trial. I do not agree. Nowhere in the license agreement did the parties explicitly or implicitly indicate an intent that the license operate prospectively — i.e., to include not only existing designs created by ZNZ-Corp. that related to the Zeke N' Zoe mark, but to all future designs by ZNZ-LLC and its employees relating thereto as well — nor, is there any supporting deposition testimony or other evidence for ZNZ-Corp's expansive interpretation. Indeed, the natural reading of ¶ 1b is that "licensed property" refers only to those designs pre-dating the license. Further, even if the license agreement were deemed ambiguous as to the ownership of future designs, ZNZ-Corp.'s construction thereof is wholly implausible and does not create a material issue of fact so as to defeat summary judgment. For plaintiffs view to be cognizable, Grace would have to agree to finance and take a 70% interest in a business (both profits and liabilities) whose entire intellectual property and inventory belonged to the 30% owner, who had the option to shutter that business if she were ever fired leaving it a bereft shell. Every design that ZNZ-LLC' employees created and every relationship it developed with a retailer vis--vis the Zeke N' Zoe line belonged to ZNZ-Corp, and ultimately to Terranova herself. To create a material issue of fact on this issue, which it has not done, plaintiff would have had to do more than cite ¶ 1b of the license and a highly improbable interpretation in conclusory fashion.
B. Piercing the Corporate Veil
Regardless of the foregoing, ZNZ-Corp. cannot state a claim for breach of contract against Hidary unless the Court pierces the corporate veils of ZNZ-LLC and Grace. "It is well settled that New York courts are reluctant to disregard the corporate entity." William Wrigley Jr. Co. v. Waters, 890 F.2d 594, 600 (2d. Cir. 1989). "Thus, the corporate veil will be pierced only when it can be demonstrated that the "[corporate] form has been used to achieve fraud, or when the corporation has been so dominated by an individual . . . and its separate identity so disregarded, that it primarily transacted the dominator's business rather than its own and can be called the other's alter ego." Id. (quotingGartner v. Snyder, 607 F.2d 582, 586 (2d Cir. 1979)).
A close examination of the many cases reveals common characteristics broadly utilized by reviewing courts in deciding whether to disregard the corporate form. In each case, the evidence demonstrated an abuse of that form either through on-going fraudulent activities of a principal, or a pronounced and intimate commingling of identities of the corporation and its principal or principals, which prompted the reviewing courts, driven by equity, to disregard the corporate form.Id. at 601. Conclusory allegations that defendant exercises control and dominion are not a sufficient basis to pierce. Franklin Electronic Publishers, Inc. v. Unisonic Products Corp., 763 F. Supp. 1, 3 (S.D.N.Y. 1991).
ZNZ-Corp. argues that ZNZ-LLC's corporate veil should be pierced because: (1) Hidary signed the license agreement on behalf of Grace (which owned 70% of ZNZ-LLC), (2) Hidary owned 50% of Grace (the remainder distributed between his father and brother) and was its CEO; (3) Hidary was the Manager and only senior officer of ZNZ-LLC after Terranova's termination, (4) Hidary could not recall during his deposition whether his son worked for Grace or ZNZ-LLC or in what capacity (in fact he was the Treasurer of ZNZ-LLC), and (5) Hidary attempted (unsuccessfully) to register the ZNZ trademark in the name of ZNZ-LLC and engineered both Terranova's firing and the sale of her properties to Marmellata.
This is not enough. In essence, ZNZ-Corp. has only shown that Hidary controlled ZNZ-LLC and Grace through his ownership interests thereof and stood to personally profit from the actions of those corporations. Plaintiff has not demonstrated that Hidary disregarded the corporate form of either ZNZ-LLC or Grace, for example by commingling corporate and personal accounts or undercapitalizing the corporations, see William Wrigley Jr. Co., 890 F.2d at 601, nor has it shown that Hidary's eventually abandoned attempt to register the mark or his management of ZNZ-LLC after Terranova's departure constituted "an abuse of the corporate form either through on-going fraudulent activities of a principal." Id. Thus, the allegations underpinning this lawsuit do not give rise to claims against Hidary personally.
Unfair Competition — Hidary Marmellata
"New York's law of unfair competition is a broad and flexible doctrine that depends more upon the facts set forth . . . than in most causes of action. It has been broadly described as encompassing any form of commercial immorality, or simply as endeavoring to reap where one has not sown; it is taking the skill, expenditures and labors of a competitor, and misappropriate(ing) for the commercial advantage of one person . . . a benefit or property right belonging to another." Telecom Intern. America, Ltd. v. AT T Corp., 2000 WL 33650021, * 18 (2d. Cir. 2001) (quotation marks omitted). "There is no complete list of the activities which constitute unfair competition. The general principle, however, evolved from all of the cases is that commercial unfairness will be restrained when it appears that there has been a misappropriation, for the commercial advantage of one person, of a benefit or property right belonging to another." Id.
Plaintiffs argument that Hidary and Marmellata misappropriated the artwork and designs of ZNZ-Corp., like the contract claim against Hidary, fails because plaintiff has not shown that Hidary or ZNZ-NY breached the license agreement. Plaintiff has adduced no evidence that ZNZ-LLC sold ZNZ-Corp.'s designs (as opposed to designs created by and belonging to ZNZ-LLC) to Marmellata or that Marmellata ever misappropriated designs. In fact, plaintiff has not put before the Court any specific designs that she alleged Marmellata to have misappropriated.
During the show cause hearing in June 2002, ZNZ-Corp. submitted several photographs Terranova allegedly took of garments for sale in a Kmart store. Each garment bears a Kmart label. It is impossible to determine from the images themselves where the photographs were taken, whether the garments had been sold by Marmellata to Kmart, or the basis of ZNZ-Corp's claim to ownership. That is the extent of plaintiff's evidence of misappropriation.
Defendants' Counterclaims
Defendants' recently asserted counterclaims — malicious prosecution, abuse of process and abuse of Copyright and Trademark statutes — are without support in law or fact. Defendants did not cite a single case with respect to any of its three belated counterclaims, and while ZNZ-Corp.'s case was weak from the outset, the elements that make up these claims cannot withstand equitable scrutiny and the conduct ascribed to ZNZ-Corp. fails to warrant the relief requested.Conclusion
For the reasons discussed above, defendants' motion is granted as to the breach of contract claim against Hidary and the unfair competition claims against Hidary and Marmellata, and is denied as to the counterclaims. The Clerk of the Court is directed to remove this case from my docket and close any pending motions.