Midsummer Fin. Prods., Inc. v Rapid Filing Servs. LLC
Annotate this CaseDecided on July 12, 2006
Supreme Court, New York County
Midsummer Financial Products, Inc., Plaintiff,
against
Rapid Filing Services LLC, and Rapid Tax & Financial Services, Inc., and Willem Veldhuyzen, and Albert R. Veldhuyzen, and Ada Veldhuyzen, Defendants.
600425/06
Helen E. Freedman, J.
Motions with sequence numbers 002 and 003 are consolidated for joint disposition.
In this action, Midsummer Financial Products, Inc. ("Midsummer") sues Rapid Filing Services LLC, Rapid Tax & Financial Services ("RTFS"), Midsummer's former employee Willem Veldhuyzen ("Veldhuyzen"), and Albert Veldhuyzen (collectively, the "Defendants") for misappropriation of trade secrets and breach of an employment agreement. The corporate parties provide online tax preparation services that promise prompt tax refunds by collecting clients' data through the companies' websites, processing the data using third party software, and electronically submitting the tax returns to the Internal Revenue Service. Veldhuyzen supervised Midsummer's online tax program for seven months before leaving the company on August 25, 2005. On August 30, 2005, he purchased the domain name "RapidTaxRefund.com" and incorporated RTFS. RTFS began its online operations on January 27, 2006.
Defendants move to dismiss the Verified Complaint pursuant to CPLR 3211 (1) and (7), contending that there are no trade secrets at issue and thus no misappropriation of trade secrets, and that Veldhuyzen never signed an employment agreement. Defendants argue that even if Veldhuyzen had signed the employment agreement, the restrictive covenant provision that appears in the unsigned agreement plaintiff submits is overbroad and unenforceable, and it contains a mandatory arbitration clause.
On February 9, 2006, this court granted plaintiff a limited temporary restraining order ("TRO"), and on February 16, this court vacated the TRO, denied plaintiff a preliminary injunction, and dismissed the complaint against Ada Veldhuyzen. Defendants move for sanctions pursuant to 22 N.Y.C.R.R. § 130-1.1, claiming that Midsummer and its counsel obtained the TRO against Defendants without providing sufficient notice, restrained Dr. Veldhuyzen's personal bank account without authority, and misrepresented the scope of the TRO to Defendants' internet service provider to prevent it from processing RTFS's business transactions.
For the reasons stated below, Defendants' motion to dismiss is granted. The motion for sanctions is denied, but Defendants are entitled to actual expenses incurred as a result of freezing [*2]RTFS's website, equal to twenty-nine dollars ($29.00), and restraining Veldhuyzen's personal bank account, equal to one hundred three dollars ($103.00). Any additional damages to Defendants' business were caused by third parties' interpretations of the TRO, which were not unreasonable. There is no basis for sanctions concerning the obtaining of the TRO inasmuch as the Court made that decision.
Midsummer's complaint alleges that Defendants misappropriated the following "trade secrets": 1) its specific style of asking questions to complete tax forms, 2) third party software used to transfer data from the client's online tax questionnaire to tax forms, 3) its advertising slogans , 4) the look and functionality of its website, and 5) its domain name, "24hourtaxrefund.com," which Midsummer contends is "virtually identical" to RTFS's domain name, "rapidtaxrefund.com." Plaintiff also alleges that Veldhuyzen stole his signed employment agreement from his employee file at Midsummer.
Midsummer has not responded to Defendants' arguments related to the employment contract, and concedes that it has neither a signed copy of the employment agreement nor any evidence that Veldhuyzen agreed to its terms. Even accepting as true plaintiff's assertion that Veldhuyzen stole his signed employment agreement, that agreement contains a mandatory arbitration clause. Thus, the claim for breach of the employment agreement is dismissed.
Although misappropriation of trade secrets may be actionable absent an employment agreement, Midsummer fails to allege that Defendants engaged in wrongful conduct or that the assets allegedly misappropriated constitute "trade secrets." Midsummer merely alleges that Veldhuyzen had access to its processes and software when he worked at Midsummer, and that RTFS began competing with Midsummer five months after Veldhuyzen left. Absent a restrictive covenant, "an employee may freely compete with a former employer unless trade secrets are involved or fraudulent means are employed." Pearlgreen Corp. v. Yau Chi Chu, 8 AD3d 460 at 461 (2nd Dept. 2004).
A trade secret is a "formula, pattern, device or compilation of information which is used in one's business, and which gives [one] an opportunity to obtain an advantage over competitors who do not know or use it." Ashland Mgmt. Inc. v. Janien, 82 NY2d 395 (1993) citing Restatement of Torts, § 757. In order to receive trade secret protection, plaintiff must allege that it employed precautionary measures to protect the allegedly exclusive knowledge of the process at issue. Precision Concepts, Inc. v. Bonsanti, 172 AD2d 737 (2nd Dept. 1991).
Midsummer's online content including the questions it asks customers, advertising slogans, and the website's "general look and functionality" are not trade secrets because they are publicly exhibited on the website and not secret. See Wiener v. Lazard Freres & Co., 241 AD2d 114 (1st Dept. 1998). The parties' domain names contain different terms, "24 hour" and "rapid," and they are purely descriptive and thus not proprietary. Midsummer's method for processing client data and converting it to tax forms is also not a trade secret. Plaintiff refers to this information processing method as the "XML importer" in the complaint and renames it the "trade secret processing function" in its opposition papers. Regardless of what plaintiff chooses to name its method for converting client data to tax forms, it is not a trade secret because Midsummer uses publicly available third party software for which it pays a license. Defendants note that Midsummer uses XML based software known as "Rangefinder," developed by ATX, Inc. Not only can Midsummer not receive trade secret protection for software that it did not develop, but Defendants use different software that is"J-File based," rather than "XML based," and thus incompatible with "Rangefinder." [*3]
Accordingly, it is
ORDERED that Defendants' motion to dismiss the Verified Complaint is granted and the Verified Complaint is dismissed, and it is further
ORDERED that Defendants' motion for sanctions is denied, and it is further
ORDERED that Defendants are awarded actual expenses incurred as a result of the freezing of its website and restraint of Veldhuyzen's personal bank account in the amount of one hundred thirty-two dollars ($132.00), and it is further
ORDERED that the Clerk is directed to enter judgment accordingly.
DATED: July 12, 2006ENTER:
_________________________
Helen E. Freedman, J.S.C.
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
