Meyers Assoc., L.P. v Conolog Corp.
Annotate this CaseDecided on March 5, 2008
Supreme Court, New York County
Meyers Associates, L.P., Plaintiff,
against
Conolog Corporation, Defendant.
600824/07
Attorneys for Plaintiff
Schrader & Schoenberg, LLP
711 Third Avenue, Suite 1505
New York, New York 10017
Att: Bruce A. Schoenberg, Esq.
(212) 986-4888
Attorneys for Defendants
Moses & Singer LLP
405 Lexington Avenue
New York, New York 10174
Att: Kimberly Klein, Esq.
(212) 554-7800
Helen E. Freedman, J.
In this action, plaintiff Meyers Associates, L.P. ("Meyers" or "Plaintiff"), sues defendant Conolog Corporation ("Conolog" or "Defendant"), alleging breach of contract, quantum meruit, theft of trade secrets, and unjust enrichment, in relation to the issuance and sale of certain Conolog's securities to investors. After filing an answer, Defendant now moves, pursuant to CPLR 3211, for dismissal of all claims, based upon documentary evidence, statute of frauds and failure to state a cause of action or, in the alternative, pursuant to CPLR 3212, for summary judgment. Inasmuch as issue has been joined and the parties have submitted evidence in connection with this motion, the Court will treat the motion as one for summary judgment.
For the reasons set forth below, Conolog's motion is granted as to the first, second and third
causes of action, and it is denied as to the unjust enrichment claim.
Background
The Complaint alleges that Meyers is a licensed broker-dealer in securities which also provides investment banking services to corporate issuers. On October 4, 2004, Meyers and Conolog signed a two-page document entitled "Conolog Corp. Outline for Proposed Investment," which summarizes the terms pursuant to which Conolog was to issue and sell securities to potential investors in connection with a Regulation D offering. Regulation D exempts an offering from the federal securities registration requirements and allows a company to sell its securities in a "private placement" to "accredited investors," i.e., institutional investors or sophisticated individuals meeting certain wealth and income requirements. The two-page document, which both parties refer to as the "Term Sheet," provides in part as follows:
[t]he purpose of this letter is to set forth the indicative terms pursuant to which, subject to
certain conditions set forth herein, (the "Purchaser") would purchase certain securities of
Conolog Corp., (the "Company"), and the Company would sell such securities to the purchaser
("the Transaction"). The terms and conditions set forth herein are subject to change and this letter
does not constitute an offer. The issuance and sale of such securities is subject to completion of
due diligence to the Purchaser's satisfaction, the preparation of definitive documentation to effect
the Transaction that is mutually satisfactory to each party and, in the case of the Purchaser, that
the Purchaser shall have determined that subsequent to the date hereof and prior to the closing of
the Transaction, there shall have been no material adverse developments relating to the business,
assets, operations, properties, condition (financial or [*2]otherwise) or prospects of the Company and its subsidiaries, taken
as a whole.
The Term Sheet sets the closing date for the sale of the securities as October 30,
2004.
During October 2004, Meyers retained a law firm to prepare draft offering documents, including the subscription agreements for the investors. It also arranged and participated in conference calls between members of Conolog's senior management and institutional investors to whom it had proposed the offering. In late October 2004, however, Conolog informed Meyers that it had decided to delay the Regulation D offering and that it was pursuing a new Regulation S offering through another broker dealer/ investment banking firm. Regulation S, which also exempts offerings from the federal securities registration requirements, is limited to non-U.S. based investors.
According to the Complaint, a conversation ensued between the parties whereby Meyers advised Conolog that it did not consent to the "diversion" of any of the institutional investors that it had previously introduced to Conolog to the Regulation S offering, and Conolog orally agreed. Conolog disputes that any such conversation or agreement ever took place. Subsequently, Meyers drafted a letter dated October 28, 2004, which states in pertinent part as follows:
[t]his letter is to advise you that for a period of two (2) years from the date hereof Conolog is
not to solicit any offer to buy from or offer to sell to any person listed on Schedule A in
connection with the Offering, or any other offering by Conolog, directly or indirectly, any
securities of Conolog or of any other entity, or provide the name of any such person to any other
securities underwriter, broker or dealer or selling agent.
Meyers transmitted the letter to Conolog by fax on October 29, and attached
"Schedule A," which was a list of twenty-nine institutional clients that had been solicited to
invest in the Regulation D offering.
In December 2004, Conolog informed Meyers of its final decision not to pursue the Regulation D offering. In reviewing Conolog's Regulation S documents when they became publicly available, Meyers noticed that three of the institutional investors participating in that deal were among those introduced to Conolog by Meyers. In addition, Meyers noticed that the Subscription Documents used in the Regulation S offering were virtually identical to the documents that Meyers had provided to Conolog in relation to the Regulation D offering.
The Complaint alleges that Conolog breached the Term Sheet by terminating Meyers and
electing to proceed with a Regulation S offering through a different firm. In the alternative,
Meyers asserts a quantum meruit claim seeking to recover the reasonable value of the
services rendered to Conolog in relation to the Regulation D offering. The Complaint also avers
that Conolog misappropriated Meyers' list of institutional investors which constituted a trade
secret, and improperly solicited them to participate in the Regulation S offering. Further, Meyers
claims that Conolog was unjustly enriched by retaining and using the list and the draft offering
documents provided by Meyers.
Discussion
I.Breach of Contract Claim.
As to the first cause of action, for breach of contract, this claim is dismissed because the [*3]Term Sheet at issue does not constitute an agreement between Conolog and Meyers. Conolog and "the Purchaser" are the only parties to this document. As explained in Plaintiff's affidavit, the Regulation D offering was intended to be a "best efforts" underwriting, where Meyers did not commit to take title to the offered securities but merely to act as a selling agent for the issuer. Thus, Meyers, by its own admission, never intended to be "the Purchaser." Since the Term Sheet, on its face, does not afford any rights to Meyers, but appears to refer to rights and obligations between Conolog and potential investors, its is not a contract enforceable by Meyers in this action.
Even if the Term Sheet sufficed as an agreement between Conolog and Meyers, the breach of contract claim fails because the Term Sheet, by its own terms, expired on October 30, 2004, well before Conolog allegedly terminated the offering plan in December, and, more importantly, before any of Conolog's securities were sold to investors. The Complaint vaguely alleges that the Regulation D offering was delayed; however, Meyer does not allege or maintain that the parties modified the closing date, nor that Conolog was bound to deal with Meyers on an exclusive basis. Thus, the breach of contract claim is dismissed.
II.Quantum Meruit Claim.
Since the Term Sheet does not constitute an enforceable contract with Conolog, Plaintiff's second cause of action for quantum meruit must also be dismissed as barred by the Statute of Frauds. General Obligations Law § 5-701, which codifies New York law regarding the Statute of Frauds, provides in relevant part as follows:
(a) Every agreement, promise or undertaking is void, unless it or some note or memorandum thereof be in writing, and subscribed by the party to be charged therewith, or by his lawful agent, if such agreement, promise or undertaking:
. . .
(10) Is a contract to pay compensation for services rendered in negotiating . . . the . . . sale . .
. of a business opportunity, business . . . . "Negotiating" includes procuring an introduction to a
party to the transaction or assisting in the negotiation or consummation of the transaction. This
provision shall apply to a contract implied in fact or in law to pay reasonable compensation . . . .
Gen.Oblig. Law § 5-701(a)(10) (McKinney's 2002). In the instant case,
Meyers' alleged agreement with Conolog to propose the Regulation D offering to potential
investors is one for services involving the introduction of a party to a business transaction or
assisting in negotiating or consummating a business transaction. Thus, it must be evidenced by a
writing to be enforceable. See Freedman v. Chemical Const. Corp., 43 NY2d 260, 266
(1st Dep't 1977) (the statute applies to various kinds of intermediaries, including finders and
brokers, who perform limited services in connection with certain kinds of commercial
transactions). Inasmuch as the Term Sheet does not create a contract between these parties, it
violates the Statute of Frauds. See DeRosis v. Kaufman, 219 AD2d 376, 379 (1st Dep't
1996) (to be considered sufficient under the Statute of Frauds, "a writing must designate the
parties, identify and describe the subject matter, and state all essential or material terms of the
contract"). It is well established that a plaintiff cannot use a quantum meruit theory of
recovery to circumvent the Statute of Frauds. American-European Art Assocs. v. Trend
Galleries, 227 AD2d 170, 171 (1st Dep't 1996).
III.Theft of Trade Secrets Claim. [*4]
Plaintiff's third cause of action for misappropriation of trade secrets is dismissed because Meyers' investor list was not a trade secret. New York courts generally consider the following factors when deciding whether information qualifies for protection as a trade secret:
(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 or money expended by the business in
developing the information; and (6) the ease or difficulty with which the information could be
properly acquired or duplicated by others.
Ashland Mgt., Inc. v. Janien, 82 NY2d 395, 407 (1993) (citation
omitted); see also Wiener v. Lazard Freres & Co., 241 AD2d 114 (1st Dep't 1998). A
customer list will be treated as a trade secret if a plaintiff can demonstrate that "the customers are
not known in the trade or are discoverable only by extraordinary efforts." Leo Silfen, Inc. v.
Cream, 29 NY2d 387, 392-93 (1972). However, the proponent of trade secret status for a
customer list must show that it "employed precautionary measures" to preserve the secrecy of the
list. See Precision Concepts, Inc. v. Bonsanti, 172 AD2d 737, 738 (2d Dep't 1991).
Here, it is clear that the investor list neither contained a trade secret, nor was treated by Meyers as one. Conolog submits an email it received on October 11, 2004, from the firm that handled the Regulation S offering, which lists, among the clients that that firm was planning on soliciting in connection with the offering, two of the three institutional investors that Meyers claims were its trade secret based on the list attached to its October 28 letter. It is clear that these investors were known in the trade by at least the Plaintiff and another firm, and their potential interest in investing in a company like Conolog was not trade secret information.
In any event, even if Meyers' list constituted a trade secret, its confidentiality was lost when Meyers voluntarily disclosed the list to Conolog in the October 28 letter, without the protection of an enforceable written agreement not to disclose or solicit. Meyers contends that the October 28 letter memorializes an oral promise not to disclose or solicit for two years. Conversely, Conolog contends that it never discussed or agreed to such conditions. Because the Statute of Frauds requires a writing "subscribed by the party to be charged therewith" for contracts that cannot be performed within one year, these contentions have no bearing on the instant analysis. Gen.Oblig. Law § 5-701(a)(1) (McKinney's 2002).
Here, the provisions contained in the letter fall within the Statute because, by their very terms, they could not be performed within one year: "[t]his letter is to advise you that for a period of two (2) years from the date hereof . . . ." Since Conolog did not accept the terms set forth in the letter by signing it, these unilaterally imposed non-disclosure and non-solicitation provisions are not enforceable under the Statute of Frauds. Moreover, Conolog and Meyers never otherwise entered into a confidentiality agreement, nor was there any indication that confidentiality was required in the Term Sheet.
IV.Unjust Enrichment Claim.
As to the fourth cause of action, for unjust enrichment, this claim is not dismissed. Unjust enrichment occurs when the defendant enjoys a benefit bestowed by the plaintiff without adequately compensating the plaintiff. See Wiener v. Lazard Freres & Co., 241 AD2d 114, 119 (1st Dep't 1998). Conolog contends that this claim is barred by the Statute of Frauds as pleaded [*5]in the alternative to the breach of contract claim. However, the Statute of Frauds is not an automatic bar to a cause of action for unjust enrichment. See RTC Properties, Inc. v. Bio Resources, Ltd., 295 AD2d 285 (1st Dep't 2002) (citing Farash v. Sykes Datatronics, Inc., 59 NY2d 500 (1983)). As it has been determined above that the investor list is not a trade secret, it has no intrinsic value and is not subject to a claim for unjust enrichment. However, here there is evidence that Conolog has received, retained, and may have used the draft offering documents generated by a law firm at Meyers' expense. Thus, Meyers' claim for unjust enrichment may be valid to the extent that Meyers has a right to be compensated for the cost of creating the draft documents provided to Conolog.
Based on the foregoing, it is hereby
ORDERED that Defendant Conolog Corporation's motion for summary judgment against Plaintiff Meyers Associates is granted to the extent that the first, second, and third causes of action in the complaint are severed and dismissed, and it is further
ORDERED that the action remains as to the fourth cause of action for unjust enrichment as to the cost of document preparation as stated in Plaintiff's complaint, and it is further
ORDERED that the parties are directed to appear for a status conference on April 1st, 2008,
at 9:30 a.m. in courtroom 208, 60 Centre Street, New York, New York 10007.
Dated: March 5, 2008
Enter:
_________________________
Helen E. Freedman, J.S.C.
Appearances
Attorneys for Plaintiff
Schrader & Schoenberg, LLP
711 Third Avenue, Suite 1505
New York, New York 10017
Att: Bruce A. Schoenberg, Esq.
(212) 986-4888
Attorneys for Defendants
Moses & Singer LLP
405 Lexington Avenue
New York, New York 10174
Att: Kimberly Klein, Esq.
(212) 554-7800
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