MidAmerica Prods., Inc. v Derke

[*1] MidAmerica Prods., Inc. v Derke 2010 NY Slip Op 52419(U) Decided on December 27, 2010 Supreme Court, New York County Wooten, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 December 27, 2010
Supreme Court, New York County

MidAmerica Productions, Inc. and Peter Tiboris, Plaintiffs,

against

Iris Derke, Individually, Jonathan Griffith, Individually, and Distinguished Concerts International, LLC, d/b/a Distinguished Concerts International New York, Defendants.



601381/2008



ATTORNEY FOR THE PLAINTIFF :

Firm : DONALD E. CREADORE

Address : 305 BROADWAY, 7TH FLOOR

NEW YORK, NEW YORK 10007

Phone : (212) 355-7200

ATTORNEY FOR THE DEFENDANT :

Firm : CARABBA LOCKE LLP

Address : 100 WILLIAM STREET - 3RD FLR.

NEW YORK, NEW YORK 10038

Phone : (212) 430-6400

Paul Wooten, J.

This action arises out of alleged wrongful conduct by defendants Iris Derke (Derke), Jonathan Griffith (Griffith), and Distinguished Concerts International, LLC (Distinguished Concerts), whereby it is alleged that defendants, inter alia, misappropriated proprietary and [*2]confidential materials belonging to plaintiffs and used them in starting a competing business.

In motion sequence 011, the defendants move, pursuant to CPLR § 3211, to dismiss the second amended complaint in its entirety.

The following factual allegations are set forth in the complaint, and for the purpose of this motion are accepted as true.

In 1983, plaintiff Peter Tiboris (Tiboris) founded plaintiff MidAmerica Productions, Inc. (MidAmerica), an independent producer of classical music concerts, presenting soloists and choral and instrumental organizations from around the world at various New York City concert halls, as well as some international locations. Derke was employed by MidAmerica as Tiboris' assistant and as a commissioned salesperson for approximately ten years up until her resignation in December 2006. Griffith was also employed by MidAmerica as a conductor and a commissioned salesperson for several years until he resigned in February 2007. Shortly after their resignations, Derke and Griffith began operating Distinguished Concerts, which like MidAmerica, produces concerts.

Plaintiffs allege that Derke and Griffith used MidAmerica's proprietary information in their new venture. Specifically, plaintiffs allege that, throughout its 25 year existence, MidAmerica has collected information, observations, impressions, idiosyncrasies, insights, leads, facts, and notes from its clients and complied this information onto Customer Information Sheets (CIS), and that defendants used the CIS in an anti-competitive manner and were able to produce concerts using this information. It is also alleged that defendants solicited MidAmerica's clients from the information in the CIS, as well as from contact lists. It is alleged that these solicitations diverted business opportunities concerning certain MidAmerica clients.

Plaintiffs also allege that Derke and Griffith downloaded file eraser software onto their desktops at MidAmerica for the purposes of erasing communications, information, and files contained on their work computers. It is also alleged that after Derke and Griffith resigned from MidAmerica, they wrongfully accessed Tiboris' email account and intercepted and/or altered electronic communications.

In May 2008, plaintiffs commenced this lawsuit. In March 2010, plaintiff served a second amended complaint alleging several causes of action including injury to reputation and goodwill, breach of a duty of loyalty under the faithless servant doctrine, breach of restrictive covenant, claims for violation of the Electronic Communications Privacy Act, the Computer Fraud and Abuse Act, and the Storage Communications Privacy Act, claims for violating privacy laws of the State of New York, conversion, unfair competition under New York State laws and federal law, punitive damages, an accounting, permanent injunction, and statutory damages. Defendants now move to dismiss the second amended complaint.

DISCUSSION

On a motion to dismiss, pursuant to CPLR § 3211, the pleading should be liberally construed, the facts alleged by the plaintiff should be accepted as true, and all inferences should be drawn in the plaintiff's favor (Leon v Martinez, 84 NY2d 83 [1941]); however, the court must determine whether the alleged facts "fit within any cognizable legal theory." Id.at 87-88. Further, "[a]llegations consisting of bare legal conclusions . . . are not presumed to be true [or] accorded every favorable inference." Biondi v Beekman Hill House Apt. Corp., 257 AD2d 76, 81 (1st Dept 1999), affd 94 NY2d 659 (2000) (internal quotation marks and citation omitted).

Plaintiffs' first cause of action against defendant Griffith is for injury to reputation and goodwill, whereby plaintiffs allege that Griffith's disloyalty and grossly inappropriate and negligent behavior to MidAmerica caused injury to its reputation and good will. Specifically, plaintiffs assert that Griffith's reckless disregard in sending and receiving pornographic and [*3]lewd email communications via his office email address damaged MidAmerica's business reputation.

While Griffith's alleged conduct may have been a violation of a workplace policy, based on the allegations set forth, it is not an actionable tort. Plaintiffs' allegations are conclusory as they do not allege how such email communications harmed MidAmerica's reputation or good will. Although the lewd communications were sent via a work email address, these purport to be personal communications, and not, for instance, communications sent to clients or potential clients, which clearly would be damaging to MidAmerica's business reputation. Thus, this cause of action must be dismissed.

Defendants argue that plaintiffs' claims against Derke and Griffith for breach of the duty of loyalty under the faithless servant doctrine also fail as a matter of law. "It is well settled that an employee owes a duty of good faith and loyalty to an employer in the performance of the employee's duties" Wallack Freight Lines, Inc. v Next Day Express, Inc., 273 AD2d 462, 463 (2nd Dept 2000), citing Lamdin v Broadway Surface Adv. Corp., 272 NY 133 (1936); Maritime Fish Prods. v World-Wide Fish Prods., 100 AD2d 81 (1st Dept 1984). In addition, while an employee may secretly incorporate a competing business prior to departing, the employee may not use his or her employer's time, facilities or proprietary secrets to build the competing business. Id. at 463.

Here, plaintiffs have failed to allege a cause of action against Derke and Griffith for breach of the duty of loyalty under the faithless servant doctrine. Plaintiffs' allegations focus on Derke and Griffith's conduct after resigning from MidAmerica, and do not allege that they used MidAmerica's time, facilities or proprietary secrets to build the competing business while still employed at MidAmerica. Plaintiffs' conclusory allegation that, while still employed at MidAmerica, defendants misappropriated proprietary and confidential information is not enough to support this claim. Further, in their brief and supporting affidavit, plaintiffs state that Derke entered her MidAmerica's office after a holiday party and downloaded MidAmerica's files, including customer lists, after she had resigned from MidAmerica days before.

Plaintiffs also allege that Derke and Griffith erased files from MidAmerica's computer to harm MidAmerica, but do not allege or imply how this built defendants' competing business. While plaintiffs do allege that Griffith had contact with one of MidAmerica's clients before he resigned, and that client ended up doing business at a later date with Distinguished Concerts, there is no allegation that Griffith set up the deal with this client and Distinguished Concerts or persuaded this client to work with Distinguished Concerts while Griffith was employed by MidAmerica. It is not unusual for a salesperson to have contact with clients during his employment with a company. This cause of action must be dismissed.

Defendants also seek to dismiss plaintiffs' claim for breach of restrictive covenant. This cause of action fails as a matter of law. There are no allegations that Derke and Griffith entered into noncompetitive covenants with plaintiffs. Thus, there cannot be a breach without some agreement. Further, plaintiffs cannot argue that such an agreement was implied, as "anticompetitive covenants covering the postemployment period will not be implied." American Broadcasting Companies, Inc. v Wolf, 52 NY2d 394, 406 (1981).

Plaintiffs also allege claims that Derke and Griffith are liable to them for violating the Electronic Communications Privacy Act (ECPA), 18 USC §§ 2510 - 2522, and the Stored Wire and Electronic Communications Act (SECA), 18 USC §§ 2701 - 2711.[FN1]

In regard to their claims under the ECPA, plaintiffs allege that Derke and Griffith [*4]accessed Tiboris' email account, without his consent or authorization, and reviewed and copied these electronic communications contemporaneously with their transmission. Defendants argue that this cause of action fails, because there is no factual allegation that any interception was done contemporaneously with the transmission of such emails, as required under the statute. However, plaintiffs have alleged that the emails were intercepted contemporaneously with transmission. See Plaintiffs' Second Amended Complaint, ¶¶ 40-42.

In any case, the Appellate Division, First Department held that "[a]lthough the statute prohibits only intercepts that are contemporaneous with transmission, i.e., the intercepted communication must be in transit, not in storage, an allegation that there was an intercept is sufficient for pleading purposes, and the question of contemporaneousness should be addressed after joinder of issue." Hudson v Goldman Sachs & Co., Inc., 283 AD2d 246, 247-48 (1st Dept 2001) (internal citations omitted). Thus, even if plaintiffs had not alleged that the intercept was contemporaneous, their allegation of the intercept is enough to survive this motion to dismiss.

In regard to plaintiffs' claims under the SECA, plaintiffs have also stated a cause of action under this statute. The statute "creates civil liability for anyone who intentionally accesses without authorization a facility through which an electronic communication service is provided and thereby obtains, alters, or prevents authorized access to a wire or electronic communication while it is in electronic storage." Rozell v Ross-Holst, 2007 US Dist LEXIS 46450, *19 (SD NY 2007) (internal citations omitted).

Defendants argue that plaintiffs' cause of action fails because it is directed against rogue employees at best, and not high tech computer hackers as the statute was designed to combat. However, claims brought pursuant to this statute involving employers and employees are permitted. See Fraser v Nationwide Mutual Insurance Co., 352 F3d 107 (3rd Cir 2004); Rozell v Ross-Holst, 2007 US Dist LEXIS 46450, supra.

Defendants further argue that the access to these emails was not unauthorized because Derke and Griffith were previously given Tiboris' password to his email account. However, whether or not Derke and Griffith had authorization to access Tiboris' email account is a question of fact left for the fact finder to determine. Rozell v Ross-Holst, 2007 US Dist LEXIS 46450, at *19-20. Plaintiffs have sufficiently alleged that defendants Derke and Griffith, without plaintiffs' authorization or consent, accessed emails from Tiboris' email account while in electronic storage.

Defendants argue that plaintiffs' claim under the Computer Fraud and Abuse Act (CFAA), 18 USC § 1030, is fatally flawed, as plaintiffs fail to allege the necessary elements to sustain such a claim.

Plaintiffs argue that their claim under CFAA is premised on two separate allegations. First, plaintiffs allege that Derke and Griffith installed software known as Evidence Eraser and deleted files stored on MidAmerica's computer system without MidAmerica's knowledge or consent. Second, the plaintiffs allege that Derke accessed MidAmerica's computer and downloaded materials belonging to MidAmerica.

CFAA is a criminal statute which penalizes unauthorized access to computers. The CFAA also, however, contains a civil remedy. 18 USC § 1030 (g). Although a majority of cases involve "hacking activity," employers are taking advantage of the CFAA's civil remedies to sue former employees and their new companies who wrongfully used the former employer's computer system to seek a competitive edge. P.C. Yonkers, Inc. v Celebrations the Party & Seasonal Superstore, LLC, 428 F3d 504, 510 (3rd Cir 2005). The civil remedy is available to any person who suffers damage or loss by reason of a violation of 18 USC § 1030. See 18 USC § 1030 (g). Further, such damage or loss must be by reason of a violation of some [*5]provision of 18 USC § 1030 and conduct involving one of the factors set forth 1030 (c) (4) (A) (I) (I), (II), (III), (IV) or (V). Id.

Therefore, in order to state a claim under the CFAA, plaintiffs must allege (1) a loss or damage or both; (2) a violation of some provision of the CFAA, and (3) conduct involving one of the factors set forth in 18 USC § 1030 (c) (4) (A) (I) (I), (II), (III), (IV) or (V). Here, the only applicable factor is the one identified in 18 USC § (c) (4) (A) (I) (I), which provides that there must be a loss during a one-year period aggregating at least $5,000 in value.

The second amended complaint fails, at a minimum, to allege a loss during a one-year period aggregating at least $5,000 in value. Even if the court took into consideration the Affidavit of Norman Dunfee, MidAmerica's President, that plaintiffs incurred expenses exceeding $5,000 to investigate, analyze, develop, and implement procedures to rectify the issues caused by installation of the Evidence Eraser software[FN2], Mr. Dunfee does not allege that any loss occurred during a one-year period. In fact, plaintiffs' brief states that the losses exceeding $5,000 occurred in 2006 and 2007, indicating that it may have occurred in a period of more than one year. A failure to plead this necessary element is fatal. Thus, this cause of action is dismissed.

Tiboris also asserts a claim for violation of New York privacy laws against Derke and Griffith. As defendants have failed to address this cause of action in their moving papers, this claim stands.

Defendants argue that plaintiffs' cause of action for conversion also fails because plaintiffs did not bring it within the three-year statute of limitations period. Plaintiffs' conversion claims are premised on the allegations that (1) plaintiffs' contact lists, customer lists, and the CIS were stolen by defendants and (2) Derke and Griffith installed evidence eraser software on MidAmerica's computer to delete files, and perhaps, also to convert and/or manipulate those files. Plaintiffs allege that Derke stole the customer lists and the CIS sometime in December 2006, and that the eraser software was installed prior to Derke and Griffith's resignations, in December 2006 and February 2007, respectively.

"For Statute of Limitations purposes, an action for conversion as well as an action for damages for the taking of a chattel are subject to a three-year limitation period (see, CPLR § 214 [3])." Vigilant Ins. Co. of Am. v Housing Auth., 87 NY2d 36, 44 (1995). As it is well settled that accrual runs from the date the conversion takes place and not from discovery or the exercise of diligence to discover (Id. at 45), the conversion alleged here occurred, at the latest, in February 2007. Defendants assert that this conversion claim was first alleged in the second amended complaint, dated March 15, 2010, and as plaintiffs do not dispute this claim, their silence is an acknowledgment that the conversion claim was not brought until March 15, 2010, after the three-year statute of limitations expired. Thus, this claim is dismissed.

Plaintiffs also assert a claim for unfair competition predicated on the allegations that defendants misappropriated the CIS, and the CIS constitute trade secrets. Defendants argue that this claims fails because the second amended complaint does not allege that the CIS were maintained in a confidential manner, and therefore, they were not trade secrets.

A cause of action based on unfair competition may be predicated "upon the alleged bad faith misappropriation of a commercial advantage belonging to another by exploitation of proprietary information or trade secrets." Out of the Box Promotions, LLC v Koschitzki, 55 AD3d 575, 578 (2nd Dept 2008) (internal citations and quotes omitted). Here, plaintiffs have sufficiently alleged a cause of action for unfair competition. Plaintiffs have sufficiently alleged [*6]that defendants misappropriated and exploited proprietary information and trade secrets belonging to MidAmerica. Plaintiffs' allegations that the CIS were confidential and contained on a closed system database are sufficient, at this stage, to show that the CIS were maintained in a confidential manner. While defendants are correct that a trade secret must first of all be secret, whether a trade secret is secret is generally a question of fact. (Ashland Mgt. v Janien, 82 NY2d 395, 407 [1993]), and not a question for this motion.

Plaintiffs assert a claim for punitive damages. However, punitive damages for an action sounding in tort are available for "the purpose of vindicating a public right only where the actions of the alleged tortfeasor constitute gross recklessness or intentional, wanton or malicious conduct aimed at the pubic generally or are activated by evil or reprehensible motives." Aronis v TLC Vision Ctrs., Inc., 49 AD3d 576, 578 (2nd Dept 2008). Plaintiffs fail to allege a violation of a public right or that defendants acted with evil and reprehensible motives. Thus, this cause of action is dismissed.

Plaintiffs' claim for an accounting for all corporate opportunities that defendants improperly diverted from MidAmerica and for all profits and revenues derived to date is dismissed for lack of standing. To seek an accounting, there must be a fiduciary or trust relationship in respect to the subject matter of the controversy. Bouley v Bouley, 19 AD3d 1049, 1051 (4th Dept 2005). "The fiduciary relationship necessary to obtain an accounting is created by the plaintiff entrusting to the defendant some money or property with respect to which the defendant is bound to reveal his dealings." Id. Plaintiffs make no allegation that they entrusted money or property to the defendants, nor do plaintiffs allege that defendants hold money or property to which defendants would owe plaintiffs a duty of accounting. Thus, this claim is dismissed.

Plaintiffs' cause of action for an injunction also fails. A cause of action seeking a permanent injunction, is deficient on its face where the complaint does not allege irreparable harm and the lack of an adequate remedy at law. McNeary v Niagara Mohawk Power Corp., 286 AD2d 522, 525 (3rd Dept 2001). An "irreparable injury for the purposes of equity, has been held to mean any injury for which money damages are insufficient." Walsh v Design Concepts, 221 AD2d 454, 455 (2nd Dept 1995). Economic loss, compensable by money damages, does not constitute irreparable harm. Di Fabio v Omnipoint Communications, Inc., 66 AD3d 635 (2nd Dept 2009). Here, plaintiffs have failed to allege that they suffered irreparable harm for which money damages are not sufficient.

Defendants also move to dismiss plaintiffs' cause of action for statutory damages, arguing that plaintiffs have failed to sufficiently plead such. Pursuant to CPLR § 3013, the sufficiency of a pleading depends upon whether or not, considered as a whole, and construed liberally, the cause of action is sufficiently particular in that it gives notice to the court and litigants of the transactions or occurrences intended to be proved, and the material elements of each cause of action. Here, plaintiffs make the conclusory allegation that they seek damages in the amount provided by statute without indicting what statute they are entitled to damages under and what occurrences triggered these statutory damages. This is insufficient to give notice to the court and defendants as to what is being alleged here. Plaintiffs also fail to address this cause of action in their opposition to this motion. Thus, this cause of action is dismissed.

Accordingly, it is

ORDERED that the motion to dismiss is granted to the extent that the plaintiffs' first cause of action against defendant Jonathan Griffith, the plaintiffs' first, second, and fourth causes of action against defendants Jonathan Griffith and Iris Derke, and the plaintiffs' first, fourth, fifth, sixth, and seventh causes of action against all defendants in the second amended [*7]complaint are severed and dismissed; and it is further

ORDERED the defendants are directed to serve an answer to the second amended complaint within 20 days after service of a copy of this order with notice of entry.

Dated: December 27, 2010

Paul WootenJ.S.C. Footnotes

Footnote 1: 18 USC §§ 2510 - 2522 is known as Title I of the ECPA and 18 USC §§ 2701 - 2711 is known as Title II of the ECPA. See Fraser v Nationwide Mut. Ins. Co., 352 F3d 107 (3rd Cir 2004).

Footnote 2: The complaint and Mr. Dunfee fail to allege any monetary loss involved by Derke's alleged conduct in misappropriating confidential information.