Opinion
600269-2009.
Decided April 15, 2009.
Bruce Levinson, Esq., New York, New York, for Plaintiffs.
Harris Beach, PLLC, Pittsford, New York, By: Dale Worrall, Esq., David M. Clar, Esq., for Defendants.
Motion Sequence Nos. 001 and 002 are consolidated for disposition.
Plaintiffs brought the first motion by Order to Show Cause to restrain defendants Eric and Neil Bauman from taking actions that harm plaintiffs and their business or are contrary to the Baumans' fiduciary obligations as employees of plaintiff ZVUE Corporation. The parties' relationship is governed by several agreements into which they entered, in connection with plaintiffs' purchase in 2007 of an Internet business owned by defendant Eric Bauman ("Eric") and plaintiffs' employment of Eric and his father, Neil Bauman ("Neil"), as President and Vice-President, respectively, of that business.
In this motion, plaintiffs sought a temporary restraining order ("TRO") and preliminary injunction: (1) restraining defendants from modifying certain websites owned by plaintiffs and administered by the Baumans, the related domain name service records and servers, and any software and data on these websites, and from taking any action that would result in these websites not being accessible online or failing to respond to user requests; (2) directing defendants "not to directly or indirectly contact any persons or entities with whom one or both plaintiffs conduct business, including but not limited to service providers, advertisers, and server hosts, without the express written consent of plaintiffs' chief executive officer"; (3) directing Eric to transfer the domain name "eBaumsworld.com" to plaintiffs; and (4) enjoining defendants from "taking any action in the case captioned Bauman vs. Ebaum's World, Inc. allegedly pending in this Court under index number 09101021."
On January 29, 2009, I issued a TRO, restraining defendants from: (a) modifying certain websites owned by plaintiffs and administered by the Baumans, the related domain name service records and servers, and any software and data on these websites; and (b) taking any action that would result in these websites not being accessible online or failing to respond to user requests. I directed that a $50,000 undertaking be filed, directed expedited discovery, and scheduled a hearing on the full preliminary injunction application.
On February 17, 2009, plaintiffs brought a second motion by Order to Show Cause seeking an Order (1) holding defendants in contempt for violating the TRO; (2) enjoining defendants from (a) operating a website called "Ebaum.tv" or any other internet entertainment website; (b) using the names "Ebaum," "Ebaumsworld," or anything substantially similar thereto or to any of plaintiffs' website domain names; (c) disparaging plaintiffs; (d) employing plaintiffs' former employees; or (e) soliciting plaintiffs' clients; and (3) seeking legal fees and costs.
Both motions were folded into one evidentiary hearing, which took place over three days, on March 6, 9, and 10, 2009. The parties agreed that I could consider the deposition transcripts and affidavits as direct witness testimony. I have heard the testimony offered at the hearing and reviewed the parties' submissions.
For the reasons that follow, the requests for a preliminary injunction are denied in part and granted in part, and the request for a finding of contempt is denied.
The background of the dispute is as follows.
Plaintiff Ebaum's World, Inc., f/k/a EBW Acquisition, Inc. ("EBW"), a wholly-owned subsidiary of plaintiff ZVUE Corporation, bought the assets of defendant Eric's Universe, Inc., then known as Ebaum's World, Inc., thus acquiring ownership of the website "eBaumsworld.com," which was then owned by defendant Eric Bauman and his father, defendant Neil Bauman, pursuant to an Asset Purchase Agreement ("APA") executed by EBW and Eric's Universe, Inc., for a total purchase price of $52.5 million, of which $15 million was paid in cash at closing. The Baumans each simultaneously entered into employment agreements with EBW, dated October 31, 2007, and amended July 20, 2008, pursuant to which Eric and Neil agreed to work for ZVUE as President and Vice-President, respectively. In the amended agreements, the Baumans assumed responsibility for the web operations for other ZVUE-owned websites as well: dorks.com, yourdailymedia, funmansion, putfile, and holylemon. Eric also entered into a Non-Disclosure, Non-Compete, and Assignment Agreement with EBW on October 31, 2007. The Baumans worked out of offices in Rochester, New York, rented by ZVUE, whose management was otherwise based on the west coast.
Since the parties agree that the two employment agreements of Eric and Neil are substantively identical as relevant here, I will refer and cite to them interchangeably.
Plaintiffs filed this action and the TRO was entered on January 29, 2009.
On January 30, Ulysses S. Curry, Jr., ZVUE's interim C.E.O., appeared at EBW's offices in Rochester. Curry removed all computers and other property from the office and fired all the employees. The Baumans tendered notices of resignation to Curry on the same day. Later that same day, plaintiffs tendered notices of "for cause" termination to the Baumans.
In order to be entitled to a preliminary injunction, plaintiffs must show "a probability of success, danger of irreparable injury in the absence of an injunction, and a balance of the equities in their favor." Aetna Ins. Co. v. Capasso, 75 NY2d 860, 862 (1990).
I will first address the preliminary injunctive relief sought by plaintiffs in these motions. I will then address plaintiffs' application for an Order holding defendants in contempt of my TRO.
The portions of the first motion seeking to enjoin defendants from making ZVUE's websites inaccessible online, from modifying the websites, the related domain name service records and servers, and any software and data on these websites, and to compel them to respond to user requests are now moot, as the Baumans' employment has now terminated, and plaintiffs have seized all servers and other equipment from ZVUE's Rochester office. The portion of the motion seeking to compel defendants to transfer the eBaumsworld.com domain name is also moot, as Curry testified that the eBaumsworld.com domain name was transferred to plaintiffs at the beginning of March 2009. (Trans. at 177-78.)
The request to preliminarily enjoin defendants "from taking any action in the case captioned Bauman vs. Ebaum's World, Inc. allegedly pending in this Court under index number 09101021," is granted, as there has been no opposition.
The outstanding items of injunctive relief sought in these motions concern defendants' right to use the service mark "ebaum," the enforceability of the restrictive covenants in the agreements at issue, defendants' right to use the domain name eBaum.tv, and the disparagement allegation.
Whether defendants have a right to use the service mark "ebaum"
Plaintiffs ask me to find that they are likely to succeed on their claim that they purchased, in the APA, the right to exclusive use of the service mark "ebaum," and that defendants gave up any right to use that mark. Defendants insist that the APA gave ZVUE a license to use the name "eBaum" only in the operation of eBaumsworld.com.
The Asset Purchase Agreement ("APA") provides that Eric's Universe, Inc. sold, inter alia:
Seller's right to use the names "eBaum's World," and "eBaumsworld," and all other names used in conducting the Business, and all derivations thereof; provided, however, that ownership of the service mark "eBaum" shall remain with Eric Bauman, but Purchaser shall have the unrestricted right to use the name in the Business.
(APA § 1.01(i).) Here, "Purchaser" means EBW, and "Seller" means Eric's Universe, Inc. The "Business" is defined as "operating an internet entertainment website, which Seller operates under the name eBaumsworld.com." (APA at 1.)
Plaintiffs assert that the service mark "ebaum" is a "derivation" of "eBaum's World" and "eBaumsworld," such that the right to use "ebaum" was sold to plaintiffs, and Eric no longer retains any right to use "eBaum."
I disagree with plaintiffs' reading of section 1.01(i), for the following reasons.
The first clause reads: "Seller's right to use the names "eBaum's World," and "eBaumsworld," and all other names used in conducting the Business, and all derivations thereof." (APA § 1.01(i) (emphasis added).) The word "derivation," as relevant here, means: "the formation of a word from another word or base (as by the addition of a usually noninflectional affix)." Merriam-Webster Online Dictionary, available at http://www.merriam-webster.com/dictionary/derivation (Mar. 4, 2009). A "derivation" is the inverse of a "root word." Accordingly, "eBaumsworld" is a derivation of its root word, "eBaum," and "ebaum" is the root word of "eBaumsworld." Thus, "eBaum" is not a derivation of "eBaumsworld," but the root word from which derivations such as "eBaumsworld" and "eBaum.tv" spring. Consequently, I do not interpret the first clause of § 1.01(i) to mean that Seller sold to Purchaser the right to use "eBaum"; rather, I interpret it to mean that Seller sold to Purchaser the right to use "eBaum's World" and any derivations of that term, such as "eBaumsworld." One can imagine other such derivations based on the term, "eBaum's World."
Contrary to Curry's averment in his February 12 Affidavit, (Feb. 12 Curry Aff. ¶ 37), section 4.06 of the APA does not require defendants to change the names of companies owned by them containing the term "ebaum" or any of its variations. This is a misquotation of the APA. On the contrary, that section refers to "eBaum's World" and its variations. (APA § 4.06.)
Next, I address the second and third clauses, which read: "provided, however, that ownership of the service mark "eBaum" shall remain with Eric Bauman, but Purchaser shall have the unrestricted right to use the name in the Business." This language appears to mean that Eric sold to Purchaser the unrestricted right to use the service mark "eBaum," but that he retains ownership of "eBaum."
Plaintiffs have not provided any caselaw support for their assertion that Eric's ownership of the service mark does not imply the right to use it. The main case cited by plaintiffs in purported support of this proposition is factually distinguishable. Cf. Burnett v. Warner Bros. Pictures, Inc., 113 AD2d 710 (1st Dept. 1985) (dismissing complaint by plaintiff playwrights against producer, where plaintiffs did not expressly retain ownership of any rights in their work and did not limit defendant's rights to use that work). Likewise, the cases cited by plaintiffs based on Gen. Bus. Law § 360-l , concerning dilution of a trademark, are inapposite, since these cases involved actions against a new competitor challenging the use of a trade name of which plaintiff had enjoyed the exclusive use for many years. See Allied Maint. Corp. v. Allied Mech. Trades, Inc., 42 NY2d 538 (1977); Wyndham Co. v. Wyndham Hotel Corp., 261 AD2d 242 (1st Dept. 1999).
Section 360-l provides:
Likelihood of injury to business reputation or of dilution of the distinctive quality of a mark or trade name shall be a ground for injunctive relief in cases of infringement of a mark registered or not registered or in cases of unfair competition, notwithstanding the absence of competition between the parties or the absence of confusion as to the source of goods or services.
I conclude that plaintiffs are not likely to succeed in their contention that defendants violate the APA by using the service mark, "eBaum"; rather, it appears to me that the APA specifically carves out for defendants the right to continue to use that mark, as an incident of ownership. Consequently, plaintiffs are not entitled to injunctive relief enjoining defendants from using the service mark "eBaum."
Whether plaintiffs are entitled to an injunction enforcing the restrictive covenants
Plaintiffs also contend that they are entitled to a preliminary injunction enforcing the restrictive covenants in the agreements between the parties, which would entail an Order enjoining defendants from communicating with plaintiffs' business associates, from employing plaintiffs' former employees, and from soliciting plaintiffs' customers.
The agreements between the parties contain two potential restrictions on competition: a non-solicitation provision in section 11 of the employment agreements; and section 3 of Eric's Non-Disclosure, Non-Compete, and Assignment Agreement.
It appears that section 4.05 of the APA may contain a non-compete provision as to Eric's Universe, Inc. Other than a passing reference to section 4.05 in Curry's February 12 Affidavit, (Feb. 12 Curry Aff. ¶ 27), however, section 4.05 was not discussed or briefed by either side. As it appears to be an afterthought, I decline to issue a preliminary injunction on this ground.
The question before me is whether any of these two restrictive covenants are enforceable.
Non-solicitation provision in section 11 of Eric and Neil's employment agreements
The non-solicitation provision states in part:
Employee agrees that he shall not, during the one (1) year period after the termination of this Agreement, directly or indirectly, (a) hire any individual who was an employee of the Company or Parent on the date of such termination or at any time within six months prior thereto. . ., or (b) solicit any customer or client, or any person or entity known to Employee to be a prospective customer or client of the Company or Parent, as of the date of such termination, to purchase any goods or services of the type sold by the Company or Parent from anyone other than the Company or Parent.
(Employment Agt. § 11.) The non-solicitation covenant further provides that, "in the event the Employee's employment is terminated by the Company without Cause," the non-solicitation covenant "shall not apply." (Employment Agt. § 11.)
The defendants maintain that the non-solicitation clause in section 11 is unenforceable, because the Baumans' employment was terminated "without Cause" when they quit on January 30, 2009. The phrase "without Cause" is defined in the APA to include termination by plaintiffs or by the Baumans:
as a result of. . . the Company or Parent commits [sic] a material breach of the Asset Purchase Agreement or any "Related Document,". . . provided, however, that Employee agrees not to terminate his employment. . . without providing the Company with written notice of his intent to terminate his employment for such reason and ten (10) business days in which the Company may effect a remedy or resolution satisfactory to Employee.
(APA § 4(a)(2).)
Defendants concede they did not provide written notice before they quit. Therefore, plaintiffs are likely to succeed on their contention that defendants' resignations were not a termination "without Cause" under section 11.
Plaintiffs maintain that they terminated the Baumans "for Cause" for reasons of "persistent willful breaches of the material terms of the Agreement." (Employment Agt. ¶ 2(b)(iii).) Plaintiffs introduce a host of contentions in support of their allegation that the Baumans committed persistent, willful breaches of their employment agreements. Principally, plaintiffs maintain that the Baumans (a) failed to spend substantially all of their business efforts on ZVUE work; (b) tried to drive down the value of plaintiffs' websites; (c) permitted copyrighted and inappropriate material to appear on the site; (d) failed to timely transfer the eBaumsworld.com domain name; and (e) ignored orders of ZVUE management. I will address these items in order.
The employment agreements provide:
Employee shall devote substantially all of his business time and efforts to the business of the Company, which shall in any case be sufficient to allow Employee to carry out his duties and responsibilities hereunder, and shall not during the Term be actively engaged in any other business or professional activity that would reasonably be deemed to interfere with his ability to carry out such duties and responsibilities; provided, however, that it shall not be a violation of this Agreement for Employee to. . . manage personal investments or carry on other activities which do not significantly interfere with the performance of Employee's duties in accordance with this Agreement.
(Employment Agt. § 5.)
Plaintiffs' burden is to show a likelihood of success in proving that the Baumans persistently and willfully breached their obligation to "devote substantially all" of their business time and efforts to the business of ZVUE. Plaintiffs have produced various evidence in support of this contention.
Plaintiffs' allegation that Neil did not devote substantially all of his business time and efforts to ZVUE's business is based on at least three things. First, Curry testified that Neil was not in the office when Curry called on the telephone during business hours and did not seem to be doing much work for ZVUE. (Curry Dep'n at 208-10, 216-18.) Second, Betsey Ruster, a ZVUE employee at the Rochester office, testified that Neil typically would spend 3-4 hours a day in the office: between 11:00-11:30 a.m. and 2:30-3:00 p.m. (Trans. at 24.)
Third, it is undisputed that Neil was heavily involved in other businesses on the side. Curry testified that the data on Neil's computer in the Rochester office, which Curry seized on January 30, 2009, related only to his real estate development business, not to the business of ZVUE. (Trans. at 200-03; Jan. 27 Curry Aff. ¶ 24.) Eric testified that Ebaum's Real Estate, LLC is run almost entirely by his father, and that Neil also runs other real estate businesses on the side. (Trans. at 225-32, 323-27.) Neil testified at his deposition at some length about the real estate development projects in which he is involved. (Neil Dep'n at 22-26.) Neil acknowledged that he sent emails relating to his real estate businesses from ZVUE's computers. (Neil Dep'n at 28.)
Neil also testified, however, that he ran his real estate businesses "predominantly" from his home office. (Neil Dep'n at 19.) Eric testified that he and Neil started "Ebaum's Real Estate" at least six months before he sold eBaumsworld.com to plaintiffs, and ZVUE was aware of it from the beginning. In fact, ZVUE paid rent for the use of its Rochester office to Ebaum's Real Estate, LLC, which owns the building and has its offices upstairs from ZVUE. (Trans. at 225-32, 323-27; Eric Dep'n at 49.).)
Neil also testified at his deposition that he operates two non-real estate businesses upstairs from ZVUE's offices. One is a branch office of Lifemark Securities, a brokerage firm with which he has been affiliated for 3-4 years, and on which he spends "virtually no[]" time. (Neil Dep'n at 12-14.) The other is Agency One Life Pay, an insurance business with which he has been affiliated for one year, and on which he works 3-4 hours weekly. (Neil Dep'n at 15.) Curry testified that Neil's other businesses use the same mailing address as ZVUE's Rochester office; Neil explained in his deposition that the other businesses have offices upstairs in the same building. (Neil Dep'n at 12-13.) Plaintiffs introduced no evidence contradicting Neil's testimony about how much time he spends weekly on his brokerage and insurance businesses.
Ruster testified that, beginning around February 2008 through the summer of 2008, she overheard the Baumans in the office during business hours discussing their efforts to start a restaurant business. (Trans. at 34, 37-40.) Robert Stice, a consultant for ZVUE, testified that he heard Neil talking to his secretary about his plans for a restaurant and his real estate business. (Trans. at 75-76.) Although Neil denied being involved in Eric's restaurant project, (Neil Dep'n at 20), Eric testified that Neil handled the legal aspects of the business. (Eric Dep'n at 66-67.) Ruster acknowledged that she did not know how much time the Baumans actually spent on their restaurant venture at the office. (Trans. at 48-50.)
Neil testified that he works 16 hours a day, and spends half of that time on ZVUE matters. (Neil Dep'n at 48-49.) Neil has insisted that he worked full-time for ZVUE, mostly during normal business hours, and that he worked remotely for ZVUE at times. (Neil Bauman Aff. ¶ 16.) Eric has supported that averment. (Eric Supp'l Aff. ¶ 8.)
Plaintiffs have introduced no evidence that Neil has failed to carry out his duties and responsibilities as Vice-President, or indicated how Neil's other activities have interfered with those duties responsibilities.
With regard to Eric: Ruster testified that he did not work a 40-hour-a-week schedule in the office. While Eric agreed that he did not work the traditional 40-hour-a-week schedule in the office, he testified credibly that he devoted at least 50 hours a week for ZVUE, including work done at home before and after the rest of the staff went home. (Trans. at 216-21; Eric Bauman Aff. ¶ 34; Eric Supp'l Aff. ¶¶ 9-11.) In support of Eric's assertion, defendants submitted into evidence a large stack of emails reflecting that Eric sent work emails on ZVUE business before and after traditional working hours. (Hear'g Ex. L.) Ruster admitted that she sometimes received emails from the Baumans outside of normal business hours. (Trans. at 61-62.) Ruster also admitted that she did not know whether Eric worked at home when Eric was not in the office, or how late Eric stayed in the office after she left soon after 5:00 p.m. (Trans. at 51-52.)
Eric testified that, between August 2007 and January 30, 2009, he spent only five hours on his restaurant plans, which consisted of going to several meetings. (Trans. at 227-28, 316-22.)
Eric testified that he also owns a T-shirt company, but it is undisputed that ZVUE was aware of it since the beginning of their relationship; in fact, ZVUE sold advertising space to Eric's T-shirt company. (Trans. at 230-31.) Eric testified that he spent about an hour a week working on his T-shirt business, out of ZVUE's Rochester office. (Trans. at 314.)
Plaintiffs have not produced evidence that Eric has spent more than a nominal amount of time on his real estate, restaurant, or T-shirt businesses. It is undisputed that ZVUE was aware of Eric's T-shirt business and at least one of the Baumans' real estate businesses at the time of the acquisition, and that ZVUE, in fact, continued to do business with both of those businesses run by defendants after the acquisition. Furthermore, it is undisputed that when plaintiffs renegotiated the APA in July 2008, they agreed to expand Eric's authority to administer all of ZVUE's websites rather than just eBaumsworld.com. (Curry Dep'n at 189.)
Ruster also testified that the Baumans took 12-13 weeks of vacations in 2008. (Trans. at 21-23.) Plaintiffs have introduced no documentary evidence supporting her testimony. Both Baumans testified that they took no more than 2-3 weeks of vacation and no sick days in 2008. (Trans. at 330; Neil Dep'n at 48.) While it is hard to understand how Eric could not remember whether he took vacation trips in 2008 to Florida, Arizona, New York City, or California, (Trans. at 330-341), plaintiffs have not introduced any evidence, other than Ruster's testimony, that the Baumans' testimony about their vacation record is incorrect. On this record, plaintiffs have not shown a likelihood of success in proving that the Baumans took exorbitant amounts of vacations and sick days in 2008.
Curry became interim C.E.O. of ZVUE on September 19, 2008, first met the Baumans in October 2008, and was not involved in the negotiation of the APA, the employment agreements, or their amendments. Curry admitted he could not testify from his personal knowledge as to the Bauman's work performance prior to October 2008. (Trans. at 123-24.) Curry admitted he was unavailable to the Baumans for two of the three-and-a-half months between their first meeting and January 30, when their employment ended. (Trans. at 122-23.) Defendants produced evidence that, even during his tenure as interim C.E.O., Curry did not respond often to their calls and emails and often failed to participate in scheduled telephone conferences without notice or explanation. (Trans. at 297-98, 353-54; Eric Supp'l Aff. ¶ 13, 15; Eric 2d Supp'l Aff. ¶ 85, Ex. U; Curry Dep'n at 147-52.) Curry admitted that he was extremely difficult for defendants to get a hold of. (Trans. at 188-89; Curry Dep'n at 151-52.) Curry also admitted on cross-examination that he had no personal knowledge supporting his assertions that the Baumans rarely showed up at the office and spent work hours on real estate or restaurant businesses. (Trans. at 144-48.)
Plaintiffs have produced only one other witness who could testify from personal knowledge about the Baumans' work ethic, Ruster, and I do not find her testimony persuasive. Curry averred that on "numerous occasions," he found that the Baumans were not in the office when he called them, and that he considered it to be part of their job to be on the premises during daylight hours. (Feb. 12 Curry Aff. ¶ 48.) He admitted, however, that he never criticized the Baumans for not spending enough hours in the office. (Eric Aff. ¶ 35.) This admission detracts considerably from his contention that the Baumans committed persistent, willful breaches of their employment agreements by pursuing side businesses or working from home.
I also do not find persuasive plaintiffs' allegation that Eric must have used work hours at ZVUE to develop eBaum.tv, based on the facts that the eBaum.tv webpage was launched within 24 hours of the termination of his employment and that Eric ordered the servers that he used to launch it before his termination. Eric credibly testified that he set up a webpage for eBaum.tv on January 30, 2009, in the evening after his termination, and that he continued to add content to the site on the following days. (Trans. at 272-75; Eric 2d Supp'l Aff. ¶¶ 59-60.) Eric testified that the website became fully operational two or three weeks later. (Trans. at 280.) Stice admitted that he did not know how long it would take to put up a webpage, (Trans. at 81-82), and Curry admitted that it is possible to put up a webpage in 24 hours, (Trans. at 143-44). I find credible Eric's testimony that the webpage's promise to viewers that he had "big things planned" was just hype, not necessarily an indication that he had been planning the website's content for weeks. (Trans. at 275-77.) The fact that Eric ordered servers before the termination in order to launch a future internet business is not fatally defective to defendants' position, since they had reason to expect that their employment might end; Curry had told defendants that ZVUE was close to bankruptcy. (Curry Dep'n at 204-05.)
Based on this evidence, I conclude that plaintiffs are not likely to succeed in showing that the Baumans persistently and willfully breached their obligation to devote substantially all of their business effort and time on ZVUE's business.
I will briefly address plaintiffs' other allegations of persistent, willful breaches of the employment agreements.
Plaintiffs' allegations that the Baumans took measures to drive down the value of plaintiffs' websites in an effort to buy back eBaumsworld.com are not convincing. Defendants have produced uncontradicted evidence that many other factors at ZVUE, with which they had nothing to do, contributed to ZVUE's business troubles during the relevant times. ( E.g., Eric Bauman Aff. ¶¶ 6-8, 36-37; Eric Supp'l Aff. ¶¶ 26-27.) Curry admitted that ZVUE's business dropped dramatically between October 31, 2007 and January 30, 2009, that it was already losing money in 2006 and 2007, and that Eric had only begun administering all of ZVUE's websites in July 2008. (Trans. at 178-79, 195-97.) Curry also admitted that eBaumsworld.com alone among ZVUE's websites was profitable, by some analyses, in 2008. (Trans. at 199-200; see also Eric Aff. ¶ 36.) I credit Eric's testimony that he worked full-time to maintain the site and had a substantial personal investment in its success. ( E.g., Eric Supp'l Aff. ¶¶ 2-5.) Stephen Rush, Esq., and Mark Heyert, who each submitted affidavits averring that Neil hoped to buy back eBaumsworld.com for $2 million, did not testify in court, so they were never subject to cross-examination and I had no opportunity to make credibility determinations. The only witness offered by plaintiffs who did testify in court on this issue, Curry, conceded on cross-examination that he viewed Neil's offer to buy back eBaumsworld.com for $2 million as a reasonable offer at the time, and that he facilitated Neil's discussion of this offer with a senior lender. (Trans. at 158-59.) Consequently, plaintiffs have not shown a likelihood of success on this allegation.
Most of ZVUE's income comes from eBaumsworld.com. (Trans. at 360.)
Similarly, plaintiffs have not shown a likelihood of success in proving that defendants regularly permitted copyrighted material to appear on eBaumsworld.com and only removed it when threatened with litigation. In an affidavit, Rush who, as noted, was not called as a witness averred that Neil told him that defendants ignored take-down notices based on copyright-infringing materials as a matter of policy. ( See Rush Aff. ¶ 5.) Curry testified at his deposition, however, that he was aware of only two take-down notices that defendants did not comply with, and both of them were sent after the Baumans' employment had already terminated. (Curry Dep'n at 229-31; see also Trans. at 139-42; Feb. 17 O.S.C. Ex. K.) Plaintiffs have not submitted any evidence of any other take-down notices that defendants failed to comply with. And on the contrary, Eric testified credibly that, whenever defendants received an email reporting a trademark infringement, he immediately took action to remove the infringing content. (Trans. at 210-12; Eric 2d Supp'l Aff. ¶¶ 50-52.) As Eric's testimony on this subject was subject to cross-examination and was credible, I give it more weight than the contrary affidavit statement of Rush.
Curry also testified that eBaumsworld.com linked to websites with inappropriate content, including pornography and a site featuring swastikas. (Trans. at 181; Jan. 27 Curry Aff. ¶ 14.) Eric testified credibly that he spent many hours a week surfing the site for viruses or adult content. (Trans. at 217.) Plaintiffs have not produced any evidence contradicting Eric's testimony that the voluminous and user-generated nature of the content on ZVUE's websites would make it difficult or impossible for him to remove all inappropriate content immediately. (Eric Aff. ¶ 10; Trans. at 246-47.) I disregard the factual allegations in the February 12, 2009 affidavit of Bruce Levinson, Esq., lead counsel for plaintiffs, concerning his Internet-surfing discovery of the website with swastikas, since Levinson never testified or submitted himself to cross-examination. The credibility of plaintiffs' allegation also suffers from the uncontested averment by Eric that plaintiffs never brought this concern to his attention prior to this lawsuit. (Eric 2d Supp'l Aff. ¶ 53.) Thus, plaintiffs are unlikely to succeed in showing that defendants routinely ignored take-down notices in breach of their employment agreements.
Plaintiffs have also alleged that defendants dragged their feet in transferring the eBaumsworld.com domain name to plaintiffs, although it was supposed to happen pursuant to the APA. The record is undisputed, however, that ZVUE did not specifically request the transfer until December 2008, (Trans. at 252-54), and that my TRO prevented Eric from completing the transfer when he attempted to effect it in early February 2009. (Trans. at 255-57, Eric 2d Supp'l Aff. ¶¶ 41-42.) In these circumstances, I do not find that plaintiffs are likely to succeed in proving a breach of the APA.
Plaintiffs' allegation that defendants diverted plaintiffs' telephone calls to themselves after the termination of their employment cannot possibly bear on the "for Cause" issue, as the alleged actions took place after their employment was terminated.
Furthermore, plaintiffs' allegations that defendants failed to follow orders of ZVUE management were largely discredited by their own sworn statements. For instance, in an affidavit, one of ZVUE's technical consultants averred that ZVUE requested access to the eBaumsworld.com domain hosting and domain name service records and access to the production eBaumsworld.com servers on December 17, 2008. (Maciejewski Aff. ¶ 2; see also Curry Reply Aff. ¶ 37.) Maciejewski acknowledged, however, that plaintiffs were granted access two days later. ( Id. ¶ 6.)
Plaintiffs allege that defendants failed to provide a marketing plan, as directed. But Eric testified that he sent Curry a draft marketing plan in December 2008 and asked for feedback. (Trans. at 241-42, 248-51.) Curry admitted that he received the draft and did not provide feedback to Eric. (Trans. at 190-93, Curry Dep'n at 140-42.)
Christopher Koch, ZVUE's information technology operations manager, testified that he requested from defendants an operating manual for eBaumsworld.com and never received one. (Koch Reply Aff. ¶ 8.) Eric's testimony that no such manual ever existed, however, is undisputed. (Eric 2d Supp'l Aff. ¶¶ 35-36.) Koch admitted that plaintiffs never requested to see an operating manual during the due diligence prior to the execution of the APA, and that the person hired to create such a manual began work only in January 2009 just weeks before the entire Rochester staff was fired. (Trans. at 89-96.)
Plaintiffs also alleged that Eric was terminated for failing to "execute the Funny or Die purchase." (Curry Dep'n at 174.) But Curry admitted that Eric had a right to expect to be consulted on such a deal, and that, after consulting him and Mark Heyert, Curry decided not to go through with the deal anyway. (Curry Dep'n at 174-189.)
Plaintiffs also allege that the Baumans breached their employment obligations by locking plaintiffs out of ZVUE's websites. Koch testified that he was locked out of eBaumsworld.com for a week around January 6, 2009, and for a couple of days around January 26, 2009. ( See Maciejewski Aff. ¶ 6.)But Koch admitted that he was locked out for legitimate security reasons on both occasions. On January 6, the Rochester staff was changing the pass codes to increase security. (Trans. at 112, 115.) Eric testified that Koch was locked out of the site on January 26, after eBaumsworld.com had crashed, and evidence linked the problem to a third party using Koch's access codes, and that Koch's access to the site was restored the next day. (Trans. at 212-16; Eric 2d Supp'l Aff. ¶¶ 26-34.) Koch acknowledged that the reason he was locked out on January 26 was that the Rochester staff was investigating a security problem, and that he was let back in as soon as the problem was resolved. (Trans. at 97-101.)
Plaintiffs also allege that defendants disabled three ZVUE-owned websites immediately after the TRO issued. (Feb. 12 Curry Aff. ¶ 13; Trans. at 179.) In an affidavit, however, Victor Fryzel, a former ZVUE employee in the Rochester office, averred that he may have been inadvertently caused the temporary loss of access on that date, (Fryzel Aff. ¶¶ 7-11), and plaintiffs have produced no contradictory evidence. While plaintiffs assert that Fryzel was unauthorized to log on to any ZVUE network, (Koch Reply Aff. ¶ 3), Fryzel is not a defendant in this action. Based on this record, plaintiffs have not shown a likelihood of success in proving that these access problems were caused by malicious conduct by defendants.
Plaintiffs have also alleged that the Baumans instructed the Rochester staff not to appear for work on January 30. Curry testified that he cut off access to the eBaumsworld.com website for all the Rochester staff on January 29, 2009, (Trans. at 150-53), and that he did not respond to defendants' multiple telephone calls and emails on July 29, attempting to find out why the access codes had changed. (Eric 2d Supp'l Aff. ¶¶ 87-89; Fryzel Aff. ¶ 3; Trans. at 153-54.). On the morning of January 30, Curry appeared in the Rochester offices, seized ZVUE's property, and fired all the employees. (Trans. at 150-53.) In light of the access restriction imposed by plaintiffs, their failure to explain what was happening, and what followed it, I do not find that the equities favor plaintiffs on this issue.
Plaintiffs also allege that the Baumans refused to attend a meeting ordered by Curry in Columbus, Ohio at the end of October 2008, and instructed certain Rochester employees not to go as well. Neil admitted that he and Eric did that. (Trans. at 378-81, 395-96.) Neil testified credibly that this was management's second request for a trip to Ohio in one month, that this was the Rochester office's busiest season, that Curry was non-responsive to his concerns about the timing of the trip, and that the purpose of the meeting was never explained to him. (Trans. at 374-77, 394-95.) The reasonableness of the Baumans' refusal is mitigated somewhat by Neil's admission that the Baumans took a two-week cruise in early November. (Trans. at 392-94.) Nevertheless, this was a single incident, and cannot be described as "persistent willful breaches" of the employment agreements. There is no evidence that the Baumans were sanctioned or reprimanded then, and they were not terminated until 2-3 months later. The timing strongly suggests that the Baumans' conduct on this occasion was not the reason for their termination.
The credibility of Curry's testimony is mitigated by the fact that Curry made a number of sworn statements in his January and February affidavits that he was later forced to withdraw, after defendants had discredited them. For instance, Curry was forced to withdraw his sworn statement that defendants shut down the Rochester operations on December 19, 2008 without authorization; in fact, the Baumans had emailed him to let him know that there was a severe snowstorm in Rochester and had obtained his approval to close the office. (Trans. at 126-28; Curry Dep'n at 73.) Curry had to withdraw his sworn allegation that the Baumans had launched eBaum.tv using one of ZVUE's servers; in fact, the servers did not belong to ZVUE. (Trans. at 128; see also Curry Reply Aff.) During cross-examination, Curry admitted that his sworn allegation that the Baumans drew "large salaries," with Neil earning an annual salary of $120,000, (Feb. 12 Curry Aff. ¶ 41), was misleading, since Neil was paid only $20,000 between August 2007 and July 2008 the majority of his time working for ZVUE. (Trans. at 144-45; Curry Dep'n at 208-10.)
Based on this record, I conclude that plaintiffs are unlikely to succeed on their claim that the Baumans committed "persistent willful breaches of the material terms of the Agreement." Consequently, plaintiffs are not likely to succeed in showing that the non-solicitation provision in section 11 of the employment agreements is enforceable.
Eric's Non-Disclosure, Non-Compete, and Assignment Agreement
Plaintiffs have not contested defendants' position that "[T]he only possible restriction on [Eric's] ability to engage in Web based business ventures is contained in the Employment Agreement and the Non-Disclosure, Non-Compete, and Assignment Agreement" (the "non-compete agreement"), which was executed between plaintiff EBW and Eric on October 31, 2007. (Eric Bauman Aff. ¶ 30.) Plaintiffs have not alleged that the other two defendants were subject to a similar non-compete agreement. Therefore, this discussion concerns obligations owed only by Eric.
In the non-compete agreement, Eric agreed not to use any proprietary information of plaintiffs to compete with plaintiffs or to solicit current or former customers, clients, employees, or business contacts of plaintiffs for business or employment. (Non-Compete Agt. § 3.3.) Eric also agreed that, for six months following his termination, he would not engage in a "Prohibited Business." (Non-Compete Agt. § 3.2(a).) The term "Prohibited Business" means "any business substantially similar to or competitive with the business conducted by [plaintiffs], including, but not limited to the operation of the internet entertainment website known as eBaumsworld.'"
Notwithstanding these provisions, these restrictions "shall not be deemed to be applicable or enforceable" under two conditions: (1) if Eric was "terminated without "Cause,. . . as expressly acknowledged or agreed in writing by the Company or pursuant to a final-non-appealable judgment by a court of competent jurisdiction," (Non-Compete Agt. § 3.4(a)(i)); or (2) if plaintiffs were:
in default pursuant to any obligations to make any payment. . . when due under the Asset Purchase Agreement or any Related Document,' as that term is defined in the Asset Purchase Agreement, following ten (10) days written notice and the failure to cure during such period, (provided, however, that if the Company or the Parent disputes any such alleged default, then this clause (ii) shall be effective only upon issuance of a final-non-appealable judgment by a court of competent jurisdiction affirming the existence of such an uncured default).
(Non-Compete Agt. § 3.4(a)(ii) (emphasis in original).)
The first condition under section 3.4(a)(i) has not been met; there has been no express acknowledgment or agreement by plaintiffs or a final judgment of a court determining that Eric was terminated without cause.
With regard to the second condition under section 3.4(a)(ii): plaintiffs have not disputed that they have not made certain payments. Eric's employment agreement provides that Eric is entitled to be paid $26,666.66 on January 1, 2009, representing delayed salary for August and September 2008. (Eric Bauman Aff. § 22; Employment Agt. Amd't No. 1 ¶ 2.) Defendants sent ZVUE a default notice dated January 13, 2009 regarding this payment obligation. (Eric Bauman Aff. ¶ 24, Ex. C.)
The Baumans sued EBW in a separate action, Index No. 101021-2009, which is not assigned to me, seeking damages for ZVUE's breach of these payment obligations. (Eric Bauman Aff. ¶ 27, Ex. D.)
It is undisputed that article 3 of amendment 1 to the APA required plaintiffs to pay the Baumans $30,000 on December 20, 2008. The Baumans sent ZVUE a default notice in a December 24, 2008 letter regarding this payment obligation. (Eric Bauman Aff. ¶ 23, 26, Ex. B.)
Plaintiffs sent Eric a letter dated January 28, 2009, stating that they "dispute[d]" the two alleged defaults and asserting that Eric remained subject to the non-compete agreement. It is undisputed that the these payments are required under the terms of the agreements. Curry admitted that ZVUE did not make either of these payments. (Trans. at 162-63.) Curry testified that the basis for this "dispute" was that the Baumans were shortly going to be terminated for breach of section 3.4 of the non-compete agreement. (Curry Dep'n at 243-49.)
Section 3.4 does not permit me to assess the quality of plaintiffs' basis for disputing the default. In fact, it contemplates the possibility that a court will eventually determine that plaintiffs are not actually in default. At the preliminary injunction stage, however, plaintiffs have met their burden of showing that they have disputed the alleged defaults within the meaning of section 3.4 (a)(ii); therefore, they have shown a likelihood of success in enforcing the non-compete against Eric; he is the only defendant who signed the non-compete agreement.
I further find that plaintiffs have show that they face irreparable harm and that the balance of the equities are in their favor, with regard to this aspect of their injunctive relief application.
Consequently, plaintiffs are entitled to a preliminary injunction, under the noncompete agreement, barring Eric, for six months following his termination, from (a) using any proprietary information of plaintiffs to compete with plaintiffs or to solicit current or former customers, clients, employees, or business contacts of plaintiffs for business or employment; or (b) engaging in any business substantially similar to or competitive with the business conducted by plaintiffs.
Defendants' operation of "eBaum.tv"
I now address whether plaintiffs' are entitled to an injunction against defendants' operation of a website called "eBaum.tv."
Plaintiffs allege that Eric developed the idea of starting a website called "eBaum.tv" while working at ZVUE.
The non-compete agreement provides: "At no time during or after the term of my employment will I use any Proprietary Information to compete with the Company or to solicit the current or former customers, clients, employees or business contacts of the Company for business or employment." (Non-Compete Agt. § 3.3.) "Proprietary Information" is defined broadly to include:
the results and products of my work, creative effort and employment activity during the term of my employment with the Company, and any and all patent rights, copyrights, trade secret rights, know-how, technology, inventions (whether patentable or not), discoveries, improvements, information, ideas, designs, writings, formulas, processes, drawings, software, data, as well as any other subject matter susceptible of protection as intellectual property, together with all documentation, records, and tangible embodiments thereof in whatever media, format or wherever located.
(Non-Compete Agt. § 2.1.)
Plaintiffs are likely to succeed in proving that the "eBaum.tv" domain name, at least, is proprietary information developed while Eric worked for plaintiffs. Stice testified that he and Eric discussed creating a website using this domain name during Eric's employment at ZVUE. (Trans. at 70-74.) The record shows that the "eBaum.tv" domain name was registered by Eric in July 2008 in the name of eBaums World, Inc. at its Rochester address. (Feb. 12 Curry Aff. Ex. G.) Eric did not deny that he bought the domain name itself in 2008, while he was employed at ZVUE, and that he discussed a potential website with a very similar-sounding name with Stice. (Trans. at 305-08.)
However, the record is undisputed that ZVUE then envisioned the eBaum.tv site as being "heavy on professional content," rather than user-generated content the content that would eventually find its way onto the eBaum.tv website, after Eric's termination. (Trans. at 78-80; see also Rush Aff. ¶ 2.)
Shortly after the hearing, in a letter dated March 18, 2009, defendants announced that they have discontinued operation of eBaum.tv. Defendants have not contested the assertion by plaintiffs' counsel in his March 17, 2009 letter, however, that a user who types "eBaum.tv" into her browser is redirected to Eric's new website, "ebaumnation.com." According to plaintiffs, defendants are, in fact, still making use of the domain name, eBaum.tv.
I conclude that plaintiffs are entitled to a preliminary injunction enforcing their proprietary rights with regard to the domain name eBaum.tv. Using that domain name to redirect users to a different website would violate this injunction.
Disparagement
Finally, plaintiffs allege that the Baumans disparaged them by (a) contacting plaintiffs' vendors to denigrate them and to encourage the vendors to do business with defendants rather than plaintiffs; (b) slandering plaintiffs in the press; and (c) posting a photograph of Curry driving a vehicle with an offensive tagline on eBaumsworld.com.
Section 13 of the employment agreements provides that the Baumans "shall not. . . publicly criticize, denigrate or disparage the Company, Parent [or their agents]. . . or otherwise publish. . . statements that tend to portray any of the Company or Parent [sic] in an unfavorable light." (Employment Agt. § 13(a).)
Nothing in this provision appears to apply after the Baumans' employment has terminated. Most of the alleged disparagement including the statements to the press and the posting of an offensive tagline under a photograph of Curry driving a vehicle took place after January 30, 2009. Therefore, there is no basis on which for me to issue a preliminary injunction.
In any case, with regard to statements to vendors: Curry admitted that he had no personal knowledge of what was said by Neil to Richard Martin in telephone conversations with a vendor on January 22 and February 4, 2009. (Trans. at 154-55.) Therefore, plaintiffs are not likely to succeed in proving disparagement based on these hearsay statements.
Whether defendants are in contempt of the TRO
Plaintiffs maintain that defendants have acted in contempt of my TRO, among other things, by: (a) diverting plaintiffs' telephone calls; (b) disparaging plaintiffs to their vendors; (c) using one of plaintiffs' servers to launch a new website, eBaum.tv; (d) disabling several of their websites; (e) posting material on plaintiffs' websites asking users to use defendants' competing websites; (f) hiring five of plaintiffs' former employees; and (g) disregarding their non-compete and employment agreements. (Feb. 12 Curry Aff. ¶ 7.)
As noted above, my TRO restrained defendants only from: (a) modifying certain websites owned by plaintiffs and administered by the Baumans, the related domain name service records and servers, and any software and data on these websites; and (b) taking any action that would result in these websites not being accessible online or failing to respond to user requests. Therefore, items (a), (b), (c), (f), and (g), even if proven, do not violate my TRO. In any case, plaintiffs have now withdrawn the allegation that defendants used their servers to launch eBaum.tv. Thus, only items (d) and (e) relate to the matter subject to the TRO.
I have authority to punish a party for contempt of an order under section 753 of the Judiciary Law, if it appears with "reasonable certainty" that the condemnor knowingly disobeyed an order clearly expressing an unequivocal mandate, causing prejudice to the rights of the movant. Dep't of Envtl. Prot. v. Dep't of Envtl. Conservation, 70 NY2d 233, 239-40 (1987).
As discussed above, I am unconvinced by plaintiffs' evidence that defendants disabled several of their websites. As to eBaumsworld.com, Fryzel averred in his Affidavit that he may have caused ZVUE's websites to be inaccessible on January 31. Plaintiffs have produced no evidence that Fryzel's statements are incorrect or that the Baumans were responsible for his conduct. Plaintiffs' allegation that Fryzel attempted to hide his involvement by "wiping his prints" by clearing the log before he logged out, (Trans. at 414-16), is unconvincing. Fryzel has filed an affidavit admitting that he might have been involved. In any case, there is no evidence that Fryzel's actions could be attributed to the Baumans.
Regarding the allegation that Eric changed the passwords of three other websites owned by ZVUE dorks.com, funmansion.com, and holylemon.com I am not convinced that I can infer that this action was done by Eric, when the only evidence offered by plaintiffs that it was done by him is that the command was traced to Rochester. I do not find that plaintiffs are likely to succeed in showing that it was done by Eric, rather than by any of the other five ZVUE employees fired on January 30, 2009, who are not defendants in this action.
I am also unconvinced by plaintiffs' evidence that defendants posted material on plaintiffs' websites in an attempt to redirect viewers to eBaum.tv, after the TRO was entered. Curry conceded that there was little or no evidence that the postings submitted into evidence were, in fact, posted by or directed to be posted by Eric. (Curry Dep'n at 96-99; Trans. at 128-38.) Plaintiffs do not contest defendants' assertions that the majority of the content on eBaumsworld.com is placed there by viewers. In the lack of any real evidence to the contrary, I credit Eric's testimony that he did not post this material or direct someone else to post it. (Eric 2d Supp'l Aff. ¶¶ 56-57.)
Based on the record before me, it does not appear reasonably certain that defendants have disobeyed my TRO.
Undertaking
Defendants urge that any preliminary injunction be conditioned on posting a $6 million undertaking, because a non-competition restriction would cost defendants that much income, and based on the premise that eBaumsworld.com was worth $52.5 million at the time of sale. (Worrall Affirm. ¶ 6.) Plaintiffs insist that section 6.3 of the non-compete agreement entitle plaintiffs to injunctive relief without a bond. Section 6.3 provides: "[T]he Company shall have the right to enforce this Agreement and any of its provisions by injunction, specific performance or other equitable relief, without bond and without prejudice to any other rights and remedies that the Company may have for a breach of this Agreement."
Based on Eric's agreement in the non-compete agreement to waive any right to a bond, I will not impose an undertaking. Furthermore, the undertaking imposed as a condition of the TRO should now be vacated.
Furthermore, I reject both parties' applications for attorneys' fees and costs.
Finally, throughout the briefing of these motions, the parties have interposed legal arguments in affirmations and affidavits, signed by attorneys and non-attorneys alike. Affirmations, like affidavits, are reserved for statements of the relevant facts; arguments, contract interpretation, and statements of the relevant law belong only in a brief ( i.e., a memorandum of law). NYCRR § 202.8(c). An affidavit signed by a fact witness should not contain legal arguments, but statements of fact. An affirmation may properly be filed, under penalties of perjury, not in place of a brief but in place of an fact affidavit, by an attorney admitted to practice in New York. CPLR § 2106. I disregard all statements of fact in these affirmations and affidavits insofar as they do not appear to be within the affirmant's or affiant's personal knowledge. I disregard the two affidavits of Oscar Escobar, Esq., submitted by plaintiffs, in their entirety, as they consist entirely of legal arguments, legal opinions, and contract interpretation; Escobar does not appear to be admitted to practice law in New York and has not been admitted pro hac vice in this action. While I will not strike the other improperly-filed legal arguments in affidavits and affirmations on this occasion, counsel are admonished not to repeat this error.
Accordingly, it is
ORDERED that the parties are to settle an Order in accordance with this decision.