Hair Say, Ltd. v Salon Opus, Inc.

[*1] Hair Say, Ltd. v Salon Opus, Inc. 2005 NY Slip Op 50382(U) Decided on March 17, 2005 Supreme Court, Nassau County Austin, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on March 17, 2005
Supreme Court, Nassau County

HAIR SAY, LTD., Plaintiff,

against

SALON OPUS, INC., WILLIAM WASSERMAN, NICHOLAS RUSSO, and DIANE RIAOLA, Defendants.



5106-01



ATTORNEY FOR PLAINTIFF

Rosen & Leff, Esqs.

105 Cathedral Avenue

Hempstead, New York 11550

ATTORNEY FOR DEFENDANTS

White, Cirrito & Nally, LLP

58 Hilton Avenue

Hempstead, New York 11550

Leonard B. Austin, J.

ORDER

The following papers were read on Defendant's motion for summary judgment:

Notice of Motion dated January 18, 2005;

Affirmation of Michael L Cirrito, Esq. dated January 18, 2005;

Affidavit of Lawrence Yuran sworn to on February 15, 2005;

Plaintiff's Memorandum of Law;

Affirmation of Michael L. Cirrito, Esq. dated March 1, 2005. [*2]

Defendants move for summary judgment dismissing the complaint and for sanctions pursuant to 22 NYCRR §130-1.1

BACKGROUND

Plaintiff, Hairsay, Ltd. ("Hairsay"), operates a beauty salon in Garden City Park. Lawrence Yuran ("Yuran") is the principal of Hairsay. Defendants, William Wasserman ("Wasserman") and Nicholas Russo ("Russo"), were employed by Hairsay as hairdressers. Defendant, Diane Raiola ("Raiola"), was employed by Hairsay as a receptionist.

Defendant, Salon Opus, Inc. ("Opus"), is a hair salon in which Wasserman and Russo are the principals.

On February 15, 2001, Yuran learned that Wasserman was planning to open his own salon Opus. On February 17, 2001, Yuran learned that Russo was also a principal in Opus.

Upon learning that Russo and Wasserman were going to open their own salon, Yuran terminated their employment with Hairsay.

Russo and Wasserman opened Opus on February 20, 2001. Opus is located approximately one mile from Hairsay. Opus' decor is alleged to be similar to that of Hairsay. Opus allegedly carries the same lines of beauty products, hair and skin care products and make-up as Hairsay. Opus' telephone number is one digit different from that of Hairsay.

On February 20, 2001, most of the staff of Hairsay voluntarily terminated their employment with Hairsay and went to work for Opus.

The complaint alleges ten causes of action. The third cause of action has been resolved by the parties. The fourth cause of action seeks damages for slander. The ninth cause of action seeks punitive damages. The tenth cause of action seeks attorney's fees, expert fees, costs and disbursements.

The first, second, fifth, sixth, seventh and eighth cause of action are all premised upon Opus having misappropriated and used Hairsay's customer list to solicit business. Hairsay asserts that the customer list contains confidential information and is a trade secret. In each of these causes of action, Hairsay seeks to recover the revenue it allegedly lost as a result of Defendants using the customer list to solicit business for Opus.

The customer list is computerized and is alleged to contain the names, addresses, home and business telephone numbers and other relevant information such as the name of the member of Hairsay's staff who provided services to the customer, the date of the customer's last appointment, the date of the customer's next appointment, the customer's birthday, the formula for a customer's hair color or permanent wave, etc. Thus, Hairsay asserts that the customer list is a trade secret.

Access to Hairsay's customer list was limited depending on the classification of its employees. Hairsay's customer list as it was maintained in its computer system had six levels of access, although only four were used.

Level Six provided the most limited level of access to the customer list. [*3]Employees in this class included hair stylists and other technicians. The only information employees in this class could get appointment information. Employees in this class also had limited ability to input data. They could enter data such as the formula for the customer's hair color or permanent wave. Employees at this level could not access customer's address or telephone number.

Levels Four and Five were not used.

Level Three was assigned to junior receptionists. Employees at this level could enter and view customer information and do "end of day" processing to balance the cash drawer, change prices of retail items and print time clock reports of the staff work hours.

Level Two was assigned to management, the shop manager and the senior receptionist. Raiola was in this class. Employees in this class could access and print customer information including the name, address and telephone number of the customers. They could also print labels for promotional mailings. Access to this level provided these employees with access to approximately 85 to 90% of the material stored in the system.

Level One could be accessed only by Yuran. This level contained financial information. In addition, Yuran could determine the entire history of computer use in the salon broken down by user code and terminal. In this way, Yuran could determine who accessed the system, on what date and for what purpose. Yuran asserts that, by checking in the history of computer use, he determined that Raiola accessed and printed the customer list on October 17, 2000; four months prior to the departure of the individual Defendants and the opening of Opus.

Opus disputes whether the customer list is a trade secret or proprietary information. Opus further claims that it did not need the information in the Hairsay customer list. Opus claims that it is the usual custom and practice in the industry for hair stylists and others in this business to maintain a customer list that would contain the names and addresses of their customers. Additionally, Opus claims that the stylists and other technicians were regularly provided with lists containing the names and addresses of their customers so that they could send out announcements indicating when the stylist or technician would be on vacation.

Opus claims that it sent out less than 2,000 announcements announcing the opening of its new salon. Opus claims that it sent announcements only to the customers of the hair stylists who left Hairsay. Opus further asserts that each individual hair stylist decided and was responsible for sending out announcements indicating Opus' opening. The announcements were sent to customers from each hairstylists personal customer list. Opus essentially asserts that even if it had the Hairsay's customer list, it did not use the list. Opus further asserts that Hairsay has failed to establish that it sustained any damages as a result of Wasserman, Russo and/or Raiola's actions; even if proven.

Hairsay alleges that Defendants' misdeeds cost it over $600,000 in business. However, financial disclosure revealed that Hairsay reported gross revenues of approximately $381,000 in 2000 and that its revenues increased to approximately $423,000 in 2001; after Defendants left and established Opus. [*4]

The fourth cause of action alleges a claim for slander. Hairsay asserts that its customers were contacted by telephone by Opus and advised that Hairsay was going out of business, that Hairsay had relocated its business to Opus' address and/or that Yuran had fired the entire Hairsay staff. Wasserman, Russo and Raiola deny making such statements and further assert that Hairsay has failed to establish the requisite publication of the allegedly slanderous statements.

DISCUSSION

A. Summary Judgment - Standard

Summary judgment is a drastic remedy which will be granted only when it is clear that there are not triable issues of fact. Alvarez v. Prospect Hosp., 68 NY2d 320 (1986); and Andre v. Pomeroy, 35 NY2d 361 (1974).

The party moving for summary judgment must make a prima facie showing of entitlement to judgment as a matter of law. Lesocovich v. 180 Madison Avenue Corp.,

81 NY2d 982 (1993); and Zuckerman v. City of New York, 49 NY2d 557 (1980). Once the party seeking summary judgment has made a prima facie showing of entitlement to judgment as a matter of law, the party opposing the motion must come forward with proof in evidentiary form establishing the existence of triable issues of fact or must demonstrate an acceptable excuse for its failure to do so. Zuckerman v. City of New York, supra ; Davenport v. County of Nassau, 279 AD2d 497 (2nd Dept. 2001); and Bras v. Atlas Construction Corp., (2nd Dept., 1991).

Summary judgment should be denied if the court has any doubt as to the existence of a triable issue of fact. Kolivas v. Kirchoff, 14 AD3d 493 (2nd Dept. 2005); and Freese v. Schwartz, 203 AD2d 513 (2nd Dept. 1994).

When deciding a motion for summary judgment, the Court must view the evidence in a light most favorable to the non-moving party and must give the non-moving party the benefit of all reasonable inferences which can be drawn from the evidence. Negri v. Stop & Shop, Inc., 65 NY2d 625 (1985); and Erikson v. J.I.B. Realty Corp., 12 AD3d 344 (2nd Dept. 2004).

B. First Cause of Action - Illegal Use of Proprietary and Confidential Information

A customer list will be treated as a trade secret where the names and addresses of the customer are not known in the trade or can be obtained only through extraordinary effort. Stanley Tulchin Assoc., Inc. v. Vignola, 186 AD2d 183 (2nd Dept. 1992); and Greenwich Mills Co. Inc. v. Barrie House Coffee Co., 91 AD2d 398 (2nd Dept. 1983). This is especially true where the customers' patronage has been secured through years of effort and advertising involving a substantial expenditure of time and money. Leo Silfen, Inc. v. Cream, 29 NY2d 387 (1972); and WMW Machinery Co. Inc. v. Koerber AG, 240 AD2d 400 (2nd Dept. 1997).

Trade secret protection will not be accorded to customer lists where the names and addresses of the customers are readily ascertainable. Leo Silfen, Inc. v. Cream, supra ; and Atmospherics Ltd. v. Hansen, 269 AD2d 343 (2nd Dept., 2000).

A trade secret or confidential information includes a compilation of information which is used in one's business and which gives the possessor of the information a competitive advantage over one's competitors who do not possess this information. [*5]Ashland Management Inc. v. Janien, 82 NY2d 395 (1993); and Eagle Comtronics, Inc. v. Pico, Inc., 89 AD2d 803 (4th Dept. 1982). In determining whether information is a trade secret, the Court should consider:

"(1) the extent to which the information is known outside of [the] business;

(2) the extent to which it is known by employees and others involved in

[the] business; (3) the extent of measures taken by [the business] to

guard the secrecy of the information; (4) the value of the information

to [the business] and [its] competitors; (5) the amount of effort and money

expended by [the business] in developing the information; (6) the ease or

difficulty with which the information could be properly acquired or

duplicated by others." Restatement of Torts, §757, comment b.

See also, Ashland Management, Inc. v. Janien, supra ; and Eagle Comtronics, Inc. v. Pico, Inc., supra .

While the names, addresses, and telephone numbers of the people on

Hairsay's customer list is not known outside the its business, other factors presented demonstrated that the customer list is not a trade secret.

Although Yuran claims that access to the customer list was restricted, several employees had access to all or part of the list. Each of the hairstylists had access to the names and addresses of their customers. Each hairstylist also compiled and kept a list of their own customers separate and apart from the list maintained by Hairsay. Additionally, the list could be accessed by junior receptionists, the shop manager and the senior receptionists.

Little was done to protect the list or restrict access to the list. Junior receptionists could access information on the list. Senior receptionists and the shop manager had access to the entire list and could print the list or address labels at any time. Each hairstylist could obtain mailing labels containing the names and addresses of their respective customers. Thus, the entire staff had access to all or part of the customer list at all times.

Additionally, it is undisputed that the hair stylists maintained their own personal customer list apart from the list maintained by Hairsay. Opus asserts that it printed 4,000 announcements and mailed out less than 2,000. Opus claims that the announcements were sent solely to those persons who were customers of the hair stylists who left Hairsay to work at Opus.

No evidence has been adduced regarding the value of the customer list to either Hairsay or Opus. Hairsay does not indicate how the list was used in connection with its business. As best as the Court can determine, the customer list is nothing more than a compilation of the names, business and/or residence addresses and business and/or home telephone number of current and former Hairsay customers. There is no evidence that this list was used by Hairsay to solicit business, advertise services or even to maintain current customers. Simply taking and compiling a list of the names, addresses and telephone numbers of customers who patronized Hairsay on one or more occasion does not make that list confidential or a trade secret. What makes a customer list a trade secret is its use in connection with the business which gives the possessor of that list a competitive advantage. See, e.g., Ashland Management Inc. v. [*6]Janien, supra . In this case there is simply no evidence that the list was used by Hairsay in connection with its business or that it provided Hairsay with a competitive advantage.

Hairsay has failed to place before the Court any evidence that it expended any time or money in developing this customer list. While Yuran asserts that he engaged in

"...expensive, painstaking and extensive measures in marketing, networking, advertising and customer care" in preparing this list, this is stated as a conclusion. There is no evidence in the record indicating what expenses Hairsay incurred in compiling, maintaining or updating the customer list or what advertising, networking or marketing was involved in compiling the list.

Hairsay has failed to establish that the customer list is a trade secret leaving Defendants, its former employees, free to compete. NCN Co., Inc. v. Cavanagh, 215 AD2d 737 (2nd Dept. 1995); and Walter Karl Inc. v. Wood, 137 AD2d 22 (2nd Dept. 1988). The first cause of action is dependent upon the Court finding that the customer list was a trade secret. There are no triable issues of fact as to this issue. Thus, the first cause of action must be dismissed.

C. Second Cause of Action - Conversion

The second cause of action seeks damages for conversion alleging that the Defendants converted Hairsay's property; its customer list.

Conversion is the exercise of control over personalty contrary to the rights of the owner or one with a superior right of possession. Fiorenti v. Central Emergency Physicians, PLLC, 305 AD2d 453 (2nd Dept., 2003); and Hart v. City of Albany, 272 AD2d 668 (3rd Dept., 2000).

Hairsay has failed to establish a prima facie case of conversion. While Opus and the individual Defendants may have a copy of Hairsay's customer list, their possession of a copy of the list did not deprive or exclude Hairsay of possession of that list.

An essential element of conversion is unauthorized possession to the exclusion of the rights of the Plaintiff. See, AMF Inc. v. Algo Distributors, Ltd., 48 AD2d 352 (2nd Dept. 1975). In this case, Hairsay retained possession of the customer list at all times. There are no triable issues of fact. Defendants' motion for summary judgment dismissing the second cause of action should be granted.

D. Fourth Cause of Action - Slander

Hairsay asserts that it was slandered by the Defendants stating that it went out of business, changed its location to that of Opus and/or had fired all of its employees.

CPLR 3016(a) requires that the defamatory statements be plead with specificity.

The allegedly slanderous statement must be published by the Defendant and heard by a third party. Rabushka v. Marks, 256 AD2d 562 (2nd Dept., 1998); and Barber v. Daly, 185 AD2d 567 (3rd Dept. 1992). Plaintiff must prove the specific time, place and manner in which the defamatory statements were made. Sirianni v. Rafaloff, 284 AD2d 447 (2nd Dept. 2001). Plaintiff must also establish to whom the statements were made. Ott v. Automatic Connector, Inc., 193 AD2d 657 (2nd Dept. 1993); and Horowitz v. Aetna Life Ins., 148 AD2d 584 (2nd Dept. 1989).

When a Defendant denies making the slanderous statement, the Plaintiff must [*7]come forward with proof in evidentiary form to establish that the slanderous statement was made and published by Defendant. Schulman v. Continental Ins., 258 AD2d 639 (2nd Dept. 1999); Snyder v. Sony Music Entertainment, Inc., 252 AD2d 294 (1st Dept. 1999); and Green v. Irwin, 29 AD2d 971 (1st Dept. 1967)

Defendants have specifically denied making the alleged slanderous statements. Hairsay has failed to place before the Court any evidence attributing the slanderous statements to any of the Defendants and their agents. Additionally, Yuran fails to indicate when these statement were made, the place that these statements were made and to whom the statements were made.

Hairsay's reliance on the deposition testimony of Robin Kutzner, Hairsay's former receptionist, and Wasserman does not overcome this deficiency in the proof.

Kutzner testified at deposition, that after Wasserman and Russo and the other staff members had left Hairsay and opened Opus, she had telephone conversations with customers, whose names she could not recall, during which the customers said they thought Hairsay had gone out of business or relocated. Neither Kutzner nor the unidentified customers attributed the allegedly defamatory statements to the Defendants herein.

Wasserman testified that his sisters, Vicky and Amy, made telephone calls to persons on his personal customer list. These calls were made at or about the time that Wasserman left Hairsay and opened Opus. He claims that the names and telephone numbers of these customers was derived from a list he kept on his Palm Pilot and backed up on his home computer. The record does not reflect what Vicky and Amy said to these customers. The only instructions Wasserman gave to his sister was to be courteous.

Hairsay has failed to establish any of the necessary elements of a cause of action for slander. It has failed to attribute the defamatory statements to the Defendants or their agents. Thus, it has failed to establish publication. Hairsay has failed to establish the time, place or manner in which the allegedly defamatory statements were made. In fact, Hairsay has failed to plead or prove any of the necessary elements of a cause of action for slander. Therefore, the cause of action for slander must be dismissed.

E. Fifth Cause of Action - Breach of Duty of Good Faith and Loyalty

An employee owes one's employer a duty of good faith and loyalty in the performance of one's duties. Wallack Freight Line, Inc. v. Next Day Express, Inc., 273 AD2d 462 (2nd Dept. 2000); and Maritime Fish Prods. v. World-Wide Fish Prods., 100 AD2d 81 (1st Dept., 1984).

In the absence of a covenant not to compete, an employee may form a business that competes with the former employer's business unless the former employee uses the former employer's trade secrets or employs fraudulent methods to compete. NCN Co., Inc. v. Cavanagh, supra ; and Walter Karl, Inc. v. Wood, supra . See also, Reed Roberts Assocs., Inc. v. Stauman, 40 NY2d 303 (1976); and Support Systems Assocs., Inc., v. Tavolacci, 135 AD2d 704 (2nd Dept. 1987).

An employee may incorporate the new competing business prior to leaving one's employer without breaching one's fiduciary duty to the employer unless the employee improperly uses the former employer's time, facilities or trade secrets. Wallack Freight [*8]Line, Inc. v. Next Day Express, Inc., supra ; and Schneider Leasing Plus, Inc. v. Stallone, 172 AD2d 739 (2nd Dept. 1991).

This cause of action is premised upon Hairsay's allegation that Opus, Wasserman, Russo and Raiola breached their fiduciary duty by misappropriating and using Hairsay's trade secret; its customer list. Since the Court has concluded that the customer list is not a trade secret, this cause of action also must fail. Therefore, the sixth cause of action is dismissed.

F. Sixth Cause of Action - Tortious Interference with Prospective Business Relations

The elements of a cause of action for intentional interference with prospective business relations are (1) that the Defendant knew of the proposed business relations between the Plaintiff and a third party; (2) that the Defendant intentionally interfered with the proposed business relations; (3) that the parties would have entered into the proposed business relations except for Defendant's interference; (4) that the Defendant's interference was done in a wrongful manner; and (5) that Plaintiff sustained damages. See, NBT Bancorp v. Fleet/Norstar Financial Group, Inc., 87 NY2d 614 (1996); and Guard-Life Corp. v. S. Parker Hardware Mfg. Corp., 50 NY2d 183 (1980). See also, 2 NY PJI 3:57, at p. 507.

Wrongful conduct for this purpose requires that the interference with the proposed business relationship be caused by physical violence, fraud, misrepresentation, civil suit or criminal prosecution. Guard-Life Corp. v. S. Parker Hardware Manufacturing Corp., supra ; and BGW Development Corp. v. Mount Kisco Lodge No. 1552 of the Benevolent and Protective Order of Elks of the United States of America, Inc., 247 AD2d 565 (2nd Dept. 1998). Alternatively, wrongful conduct involves interfering with a contractual or prospective business relationship in breach of a fiduciary duty such as that owed by an employee to an employer. Hayes v. Case-Hoyt Corp., 262 AD2d 1018 (4th Dept. 1999).

Defendants did not breach their fiduciary duty to Hairsay. Hairsay fails to present any evidence that Opus, Wasserman, Russo and/or Raiola or their agents prevented Hairsay customers from patronizing Hairsay through physical violence or fraud or misrepresentation. At most, the Court has Yuran's speculation that the Defendants told Hairsay customers that Hairsay had closed or relocated. However, Hairsay customers could have determined the truth or falsity of such representations by simply calling Hairsay or going to the shop. One cannot be defrauded if the misrepresentation could have been discovered through the exercise of due diligence. See, Danann Realty Corp. v. Harris, 5 NY2d 317 (1957).

Additionally, Defendants did not commence or threaten to commence civil litigation or institute a criminal proceeding against either Hairsay or its customers.

Since Hairsay has failed to establish the essential elements of this cause of action, it must be dismissed.

G. Seventh Cause of Action - Permanent Injunction - Trade Secrets, Obtaining a Deceiving and Confusing Telephone Number and Making Slanderous Statements [*9]

Since the Court has found that Hairsay's customer list is not a trade secret, it cannot enjoin Defendants from using it; even if they do have it.

Hairsay seeks to enjoin Opus, Wasserman, Russo and Raiola from making slanderous comments about Hairsay. However, Hairsay fails to indicate what slanderous statements were made.

Hairsay asserts that the Defendants chose a similar telephone number with one different digit to confuse patrons. Hairsay's telephone number is 516-742-HAIR (4247).

Opus' telephone number is 516-747-HAIR (4247). Hairsay asserts that Opus chose this telephone number specifically to obtain a business advantage and to confuse and deceive customers.

The primary issue the court must consider in a claim for unfair competition is whether the acts complained of are fair or unfair or are designed to create confusion. Capitaland Heating and Cooling, Inc. v. Capitol Refrigeration Co, Inc., 134 AD2d 721 (3rd Dept. 1987); and Buffalo Fire and Safety Equipment Co., Inc. v. Buffalo Viking Machine Tool Corp., 89 AD2d 798 (4th Dept. 1982). The court may enjoin unfair competition. See, Allied Maintenance Corp. v. Allies Mechanical Trades, 42 NY2d

538, ( 1977); and Town & Country House & Home Services, Inc. v. Newberry, 3 NY2d 554 (1958).

In this case, it would be improvident to grant an injunction enjoining Opus from using its telephone number. Opus has had that telephone number since it opened the business. More than four years have elapsed since Opus opened its business. At this point, any possible confusion between Opus and Hairsay resulting from the similar telephone number must be de minimis. In fact, there is nothing in the record which would reflect any confusion in fact resulted from the similar telephone numbers. In view of this, the potential harm to Opus in requiring it to change its telephone number would far outweigh any possible benefit to Hairsay.

Therefore, Defendants' motion seeking summary judgment dismissing the Seventh Cause of Action must be granted.

H. Eight Cause of Action - Conspiracy

This cause of action must be dismissed because New York does not recognize civil conspiracy as an independent cause of action. Ward v. City of New York, AD3d , 789 NYS2d 539 (2nd Dept. 2005).

I. Ninth Cause of Action - Punitive Damages

New York does not recognize a separate cause of action for punitive damages so as to sustain this cause of action. Paisley v. Coin Device Corp., 5 AD3d 748 (2nd Dept. 2004); and Schwegel v. Chiaramonte, 4 AD3d 519 (2nd Dept. 2004).

J. Tenth Cause of Action - Attorney's Fees, Expert Fees, Costs and Disbursements

Attorney's fees are an incident of litigation and are not recoverable in the absence of a contractual provision, statute or court rule. Hooper Assocs., Ltd. v. AGS

Computers, Inc., 74 NY2d 487 (1989); and Levine v. Infidelity, Inc., 2 AD3d 691 (2nd Dept., 2003). This claim is not based upon a contract. Hairsay fails to cite and the [*10]Court cannot find any statute or court rule that would provide for the payment of counsel fees in this situation.

Similarly, in the absence of a contractual provision, statute or court rule, a party to litigation must pay and cannot recover from the other party fees paid to experts. See gen'lly, Frankel v. Frankel, 2 NY3d 601 (2004). Hairsay fails to cite and the Court cannot locate any statute or court rule that would provide for the Defendants to pay the expenses incurred for Plaintiff's experts.

Costs and disbursements are statutorily taxed by the County Clerk in favor the party prevailing in the litigation upon the entry of a judgment. See, CPLR Articles 81, 82, 83 and 84.

Since summary judgment is being granted to the Defendants, Plaintiff would not be entitled to statutory costs and disbursements.

K. Damages

In an action to recover damages for breach of fiduciary duty, unfair competition and misappropriation of trade secrets, a Plaintiff's damages are limited to profits lost from the actual diversion of customers. Suburban Graphics Supply Corp. v. Nagle, 5

AD3d 663 (2nd Dept. 2004); and Allan Dampf P.C. v. Bloom, 127 AD2d 719 (2nd Dept., 1987).

In this case, Hairsay will be unable to establish lost profits. For the year 2000, Hairsay reported gross sales of $381,892.00 and gross profits of $159,311. For the year 2001, Hairsay reported gross sales of $423,539.00 and gross profits of $209,111.00. Thus Hairsay's sales and profitability improved when Wasserman and Russo were fired and the other staff members defected. See, Weiss v. Miller, 166 AD2d 283 (1st Dept. 1990). Thus, even were the Court to sustain any of the dismissed causes of action finding triable issues of fact, summary judgment would nevertheless be appropriate inasmuch as actual damages are a necessary element of each cause of action at law. See, Fellion v. Darling, AD3d , 789 NYS2d 541 (3rd Dept. 2005).

L. Sanctions

Defendants seek sanctions for the commencement and maintenance of this action on the ground that it is frivolous. Defendants assert that the action was frivolous since Hairsay's claim for damages is premised on an allegation that Hairsay had gross receipts of $1,000,000 and lost business in excess of $630,000.00 as a result of the actions of Opus and its incorporators. Defendants claim that Plaintiff and its counsel knew or should have known that Hairsay reported gross sales of only $381,892.00 to the Internal Revenue Service for the year 2000.

While their damage claim may be overstated, Plaintiff's claim clearly had merit when it was commenced. There was, at the commencement of this action, a meritorious argument that the customer list was a trade secret.

This action was commenced at or about the time that Opus opened. At that time, Hairsay did not and could not know what impact Opus' opening and the defection of almost its entire staff would have on its business.

Sanctions may be awarded pursuant to 22 NYCRR 130-1.1 for frivolous conduct.

Conduct is frivolous if: [*11]

(1) it is completely without merit in law and cannot be supported by a reasonable

argument for an extension, modification or reversal of existing law:

(2) it is undertaken primarily to delay or prolong other resolution of the litigation, or to harass or maliciously injure another; or

(3) it asserts material factual statements that are false. 22 NYCRR 130-1.1(c).

Defendants' counsel makes clear that the basis for seeking sanctions is the statement contained in the pleadings that Hairsay had gross sales of $1,000,000.00 and lost business as a result of Defendants' actions of $632,000. Defendant's counsel asserts that this was a material statement of fact that was false and that Plaintiff and its attorney knew it was false when it was made.

The determination as to whether to impose sanctions is one addressed to the discretion of the Court. Wagner v. Goldberg, 293 AD2d 527 (2nd Dept. 2002). In this case, sanctions are simply not appropriate. At the commencement of this action, Hairsay arguably had a valid claim that its customer list was a trade secret or proprietary information. There was arguable merit to its claim for breach of fiduciary duty. Discovery proved to the contrary. It would be an abuse of discretion to grant sanctions against Plaintiff or its attorney for commencing an arguably meritorious action.

Not every unsuccessful claim is frivolous. The absence of success without more is insufficient to justify sanctions. To hold otherwise would chill earnest and colorable claims from being prosecuted. That is not the purpose of the sanctions rule. This Court declines to so extend that rule as Defendants suggest.

Accordingly, it is,

ORDERED, that Defendants' motion for summary judgment dismissing this action is granted. The complaint is hereby dismissed; and it is further,

ORDERED, that Defendants' motion for sanctions is denied.

This constitutes the decision and order of this Court.

Dated: Mineola, NY ____________________________

March 17, 2005 Hon. LEONARD B. AUSTIN, J.S.C.

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