Summary
dismissing claim for common-law indemnification because the underling claims were all intentional torts
Summary of this case from NXIVM Corp. v. SuttonOpinion
No. 02 Civ. 453 (RPP)
August 13, 2002
Stanley R. Goodman, Esq., Goodman Saperstein, Esqs., Garden City, NY, for Campers' World International.
Steven E. Rosenfeld, Law Offices of Steven E. Rosenfeld, P.C., New York, NY, Andrew C. Hall, Esq., Hall, David, and Joseph, P.A., Miami, FL, for Perry Ellis International.
Robert W. Forman, Matthew J. Sava, Shapiro Forman Allen Miller LLP, New York, NY, for Arnold Simon.
Barry J. Levine, Esq., Mineola, NY, for Aris Industries, Europe Craft Imports, Inc., and ECI Sportswear, Inc.
OPINION AND ORDER
Counter-defendant Arnold Simon moves to dismiss each of the claims asserted against him by Perry Ellis International, Inc. ("PEP") in Counts II-VII of PEI's Answer and Affirmative Defenses to Amended Complaint and Counter-Claim and Cross-Claim dated March 25, 2002. Specifically, Simon moves, pursuant to Fed.R.Civ.P. 9(b), to dismiss PEI's claim of fraud in the inducement on the grounds that fraud is not plead with particularity. Simon also moves, pursuant to Fed.R.Civ.P. 12(b)(6), to dismiss Counts II-VII of PEI's counter-claims for failure to state a claim upon which relief can be granted. For the following reasons, Simon's motion is granted in part and denied in part.
Background
The following facts, alleged in PEI's Counter-Claim and Cross-Claim, are assumed to be true for the purposes of this motion to dismiss. Cruz v. Beto, 405 U.S. 319, 322 (1972).
On June 30, 1998, PEI, through the Salant Corporation (a licensor of the PEI trademarks), entered into a sub-licensing agreement with Europe Craft Imports, Inc. ("Europe Craft"), a wholly owned subsidiary of Aris, for use of the PEI trademark in connection with the manufacture and sale of garments. (PEI's Counter- and Cross-Claim ("PEI's Claims") at ¶ 12, Ex. D at 1.) Pursuant to Paragraph 5(f) of the June 30, 1998 agreement, Europe Craft was precluded from selling product under the agreement to stores which are characterized by "less service and high volume turnover" such as Costco, and was required to make best efforts to prevent its jobbers, wholesalers, and distributors from reselling product under the agreement to such stores. (Id. at ¶ 13, Ex. B.)
The June 30, 1998 agreement was amended by Letter Agreement dated June 30, 1998 and by a Letter of Consent dated February 24, 1999. (PEI's Claims at ¶ 17, Exs. C, D.)
A breach of Paragraph 5(f) provided for, among other remedies, termination of the agreement without the right to sell off any inventory under Paragraphs 12 and 13 of the agreement and for payment of double the amount of royalties otherwise due under the licensing agreement. (PEI's Claims at ¶ 14.)
If the agreement was terminated for any reason other than a breach of its terms, the agreement provided the sub-licensee a right to sell-off existing merchandise pursuant to Paragraphs 13 and 14 of the agreement. (Id. at ¶ 15). The sub-licensee's right to sell off existing merchandise excluded the right to sell to certain purchasers including Costco. (Id.)
On August 26, 1999, PEI executed a separate license agreement with ECI Sportswear, Inc. ("ECI"), another wholly owned subsidiary of Aris. (Id. at ¶ 17, Ex. E.) On April 12, 2000, PEI executed a letter agreement with Aris and ECI terminating the separate agreement between PEI and ECI, permitting PEI to sell jeans under its federally registered trademarks effective July 1, 2000 for delivery not earlier than January 1, 2001, and limiting the goods manufactured by or for Aris during the year 2000 to those contemplated by the sales projection of $15,000,000 and limiting sales to off-price distribution during the six month sell off period to $3,750,000. (Id. at ¶ 18.)
In October 2000, Campers World International ("CWI") placed an order with Aris to purchase approximately 500,000 jeans bearing the PEI trademark for resale to Costco for delivery no later than February 28, 2001. (Id. at ¶¶ 25, 27.) In response to a request for documentation that Aris had the right to manufacture and sell products bearing the PEI trademark, Aris, Europe Craft, ECI, and Arnold Simon (Aris' CEO) sent the first page of the April 12, 2000 agreement (with Paragraph 2 redacted) and none of the other provisions of the agreements which governed the relationship of the parties. (Id.)
In November 2000, PEI filed suit against Aris, Europe Craft, and ECI for breach of contract, alleging that the companies had failed to pay royalties in accordance with the agreements. (Id. at ¶¶ 19, 20.)
In early 2001, PEI discovered that a number of retailers were selling mens jeans bearing the PEI trademark that were different in appearance from jeans that were authorized by PEI under the agreements previously described. (Id. at ¶ 28.) The jeans contained rivets of a quality not permitted by PEI and had paper labels on which the federally registered trademark names of PEI were placed. (Id. at ¶ 22.) On April 26, 2001, PEI sent letters to various retailers placing them on notice that there were unauthorized jeans bearing PEI trademarks for sale. (Id. at ¶ 29.)
On June 15, 2001, PEI entered into a settlement agreement with Aris, Europe Craft, and ECI on PEI's breach of contract suit. (Id. at ¶ 21.) In settlement negotiations, agents for Aris, Europe Craft, ECI, and Simon represented to PEI that all sales made by Aris were disclosed and identified to PEI; that there were no sales other than those disclosed; and that the only royalites owed were disclosed by sales identified on its books produced to PEI. (Id. at ¶ 41.) These representations were false. (Id.) Aris did not disclose its sales of unauthorized jeans to CWI or its sales of unauthorized jeans to other retailers. (Id. at ¶ 22.) The total sales of unauthorized jeans by Aris to retailers (including CWI) was in excess of 1,000,000 pairs. (Id. at ¶ 23.)
At the time it entered into the June 15, 2001 settlement agreement, PEI had not discovered that Aris was responsible for the unauthorized sale of jeans bearing PEI trademarks. (Id. at ¶¶ 28, 30). Aris' sales of the unauthorized jeans was concealed by its use of a different product identification designation for the jeans. (Id. at ¶¶ 22-24.)
In July 2001, PEI sent letters to CWI, Aris, Europe Craft, ECI, Simon, and those retailers that PEI had discovered selling unauthorized mens jeans. (Id. at ¶ 30.) As a result of these letters, PEI learned that unauthorized jeans had been sold to Costco by CWI. (Id. at ¶ 31.) CWI informed PEI that it had purchased the jeans from Aris. (Id. at ¶ 32.) CWI agreed to the return of jeans from the Costco inventory and to retain these jeans in its warehouse pending resolution of the issues of infringement. (Id. at ¶ 31.)
On January 18, 2002, CWI filed suit for declaratory judgment and for additional relief. On February 20, 2002, CWI filed an amended complaint, asserting claims against PEI for injurious falsehood, disparagement of goods, and tortious interference with contractual relations and asserting claims against Aris for breach of contract and breach of warranty. On March 27, 2002, PEI filed an answer and affirmative defenses to CWI's amended complaint and asserted claims against CWI, Aris, Europe Craft, ECI, and Simon for (1) fraud in the inducement, (2) trademark infringement in violation of 15 U.S.C. § 1114, (3) false designation of origin in violation of 15 U.S.C. § 1125(a), (4) trademark dilution in violation of 15 U.S.C. § 1125(c), (5) common law tradename infringment and unfair competition, and (6) indemnification.
PEI also asserted a breach of contract claim against Aris only. (PEI's claims at 17.)
Discussion
Arnold Simon now moves to dismiss each of the claims asserted against him in his individual capacity by PEI. Simon moves to dismiss PEI's claim of fraud in the inducement on the grounds that fraud is not plead with particularity, see Fed.R.Civ.P. 9(b), and for failure to state a claim, see Fed.R.Civ.P. 12(b)(6). Simon also moves, pursuant to Fed.R.Civ.Pro. 12(b)(6), to dismiss the remainder of PEI's claims against him for failure to state a claim upon which relief can be granted.Count II: Fraud in the Inducement
Simon alleges that PEI's claim that it was fraudulently induced into settling its breach of contract claim with Aris, Europe Craft, and ECI by misrepresentations made by Aris, Europe Craft, ECI, and Simon should be dismissed because "no particularized substantive allegations are made against Mr. Simon stating what he said or did or when he did it." (Mem. of Law in Support of Motion to Dismiss at 6.) Rule 9(b) of the Federal Rules of Civil Procedure states:
In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.
Pursuant to Rule 9(b), a complaint alleging fraud "must: (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993). "Additionally, where multiple Defendants are alleged to have committed fraud, the Complaint must `allege specifically the fraud perpetrated by each defendant.'" Simon v. Castello, 172 F.R.D. 103, 105 (S.D.N.Y. 1997) (quoting Natowitz v. Mehlman, 542 F. Supp. 674, 676 (S.D.N.Y. 1982)).
PEI's complaint alleges that:
33. In the settlement discussions between PEI and Aris, ECI, Europe Craft and Arnold Simon, the infringing mens jeans that had been manufactured and bearing the paper labels with the PEI trademarks were intentionally concealed from PEI. PEI was assured that all sales were accounted for. The sales that are described above were never disclosed. Following the June 15, 2001 settlement, there were approximately 8,800 pairs of men's jeans that Aris was permitted to sell off. None of the infringing mens jeans, as described above, were disclosed to PEI.
* * *
41. To induce PEI to settle its claims against it Cross Defendants Aris, and Additional Counter-Defendants Europe Craft, ECI and Arnold Simon, these parties made the following material misrepresentations of fact to PEI through its agents with intent to cause PEI to rely upon the same:
a. All sales made by Aris were disclosed and identified to PEI.
b. That there were no other sales other than those disclosed.
c. That the only royalties owed were disclosed by sales identified on its books produced to PEI.
42. In fact, Aris had caused over 1,000,000 pairs of jeans to be manufactured and sold that were not authorized under the agreement, that such mens jeans had been manufactured and delivered during the sell off period, that such jeans were of inferior quality but nevertheless carried the PEI trademark on them and concealed that a substantial portion of said men's jeans were for sale to Costco.
(PEI's Claims at ¶¶ 33, 41, 42.)
PEI's allegations in its complaint are insufficient under Rule 9(b). PEI generally attributes fraud to Mr. Simon, Aris, Europe Craft, and ECI based on statements made by the parties' agents. PEI does not provide the names of the agents who made the alleged misrepresentations, which of the alleged misrepresentations were made by each agent, the dates on which the alleged misrepresentations were made, or the location at which the misrepresentations were made. In addition, PEI does not state which agent represented Simon (who was not a party to the lawsuit) or whether Simon was present when these agents made the alleged misrepresentations. Accordingly, Simon's motion to dismiss PEI's claim of fraudulent inducement for failure to plead with particularity as required by Rule 9(b) is granted without prejudice.
PEI may move to file an amended complaint on or before September 13, 2002. PEI is reminded, however, that a corporate officer may only be held liable for fraud if s/he participates in it or has actual knowledge of it. See Cohen v. Koenig, 25 F.3d 1168, 1173 (2d Cir. 1994). If PEI seeks to reinstate the fraud claim, it must allege facts, with particularity, which demonstrate Simon's participation in the fraud or actual knowledge of the fraud.
Simon also contends that PEI's claim of fraud in the inducement is deficient because it (i) fails to allege causation, (ii) is an improper effort to transmute a breach of contract claim against one party into a fraud claim against another, and (iii) seeks to recover "lost profits" which are not recoverable under New York law. (Mem. of Law in Support of Motion to Dismiss at 6.)
PEI's allegation that it entered into a settlement with, and released claims against, Aris, Europe Craft, and ECI as a result of the misrepresentations made by Simon, Aris, Europe Craft, and ECI is a sufficient pleading of causation. According to the complaint, the misrepresentations were made during settlement negotiations in an effort to induce PEI to enter into a settlement agreement. PEI's subsequent release of claims and entry into the settlement agreement would be the natural and probable consequence of these misrepresentations. Accordingly, Simon's motion with regard to causation is denied.
PEI's claim of fraud is not an improper effort to convert a breach of contract claim into a tort claim. A party who is fraudulently induced to enter into a contract may join a cause of action for fraud with one for breach of the same contract where the misrepresentations are misstatements of material fact rather than a mere promissory statement as to what will be done in the future. See Shlang v. Bear's Estates Dev. of Smallwood, N.Y., 599 N.Y.S.2d 141 (N.Y.App.Div. 1993); see also Deerfield Communications Corp. v. Chesebrough-Ponds, Inc., 68 N.Y.2d 954, 502 N.E.2d 1003, 510 N.Y.S.2d 88 (N.Y. 1986). PEI alleges that Simon, Aris, Europe Craft, and ECI made misrepresentations of a material fact — that all sales made by Aris were disclosed and identified to PEI — which induced PEI to enter the settlement agreement. The alleged misrepresentations do not involve mere promissory statements as to what will be done in the future. The focus of PEI's claim is not on whether Aris, Europe Craft, and ECI have breached their obligation to pay royalties to PEI under the settlement agreement, but rather whether PEI would have entered into such an agreement absent the misrepresentations. Accordingly, Simon's motion to dismiss the fraud in the inducement claim as an improper effort to convert a breach of contract claim into a tort claim is denied.
PEI may not seek, however, to recover "lost profits on jeans" in its claim of fraud in the inducement. (PEI's Counter-Claim and Cross-Claim at ¶ 45.) PEI contends that it "seeks damages for sales it would have made but for the settlement agreement (i.e. sales it would have made if the settlement agreement had never been entered into)." The New York Court of Appeals has expressly disallowed such damages. In Lama Holding Co. v. Smith Barney, Inc., 88 N.Y.2d 413, 421 (N.Y. 1996), the Court of Appeals stated:
The true measure of damage is indemnity for the actual pecuniary loss sustained as the direct result of the wrong or what is known as the out-of-pocket rule. Under this rule, the loss is computed by ascertaining the difference between the value of the bargain which a plaintiff was induced by fraud to make and the amount or value of the consideration exacted as the price of the bargain. Damages are to be calculated to compensate plaintiffs for what they lost because of the fraud, not to compensate them for what they might have gained. Under the out-of-pocket rule, there can be no recovery of profits which would have been realized in the absence of fraud.
Accordingly, if PEI moves to file an amended complaint alleging fraud in the inducement, it may not seek to recover lost profits on jeans as damages under its fraud claim.
Counts III-VI: Trademark Infringement, False Designation of Origin, Trademark Dilution, and Common Law Trademark Infringement and Unfair Competition
Simon moves to dismiss Count III (Trademark Infringement in Violation of 15 U.S.C. § 1114), Count IV (False Designation of Origin in Violation of 15 U.S.C. § 1125(a)), Count V (Trademark Dilution in Violation of 15 U.S.C. § 1125(c)), and Count VI (Common Law Trademark Infringement and Unfair Competition) for failure to allege any factual basis for asserting these claims against Simon in his individual capacity. In considering a motion to dismiss, a Court "must read the Complaint liberally, drawing all inferences in favor of the pleader." IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1052 (2d Cir. 1993). A "district court should deny the motion [to dismiss] unless it appears to a certainty that a plaintiff can prove no set of facts entitling him to relief." Id. (quoting Ryder, 748 F.2d at 779).
A corporate officer is not personally liable for torts committed by others on behalf of the corporation solely by virtue of his or her status as a corporate officer. See, e.g., McCarthy on Trademarks and Unfair Competition § 25:24 (4th Ed.). However, a corporate officer may be held personally liable for trademark infringement or unfair competition "if the officer is a `moving, active conscious force behind [the defendant corporation's] infringement.'" Bambu Sales, Inc. v. Sultana Crackers, Inc., 683 F. Supp. 899, 913 (E.D.N.Y. 1988) (quoting Polo Fashions, Inc. v. Branded Apparel Merch., 592 F. Supp. 648 (D.Mass. 1984)); see also Carell v. The Shubert Org., Inc., 104 F. Supp.2d 236 (S.D.N.Y. 2000) ("Contributory infringement holds liable "[o]ne who, with knowledge of the infringing activity, induces, causes, or materially contributes to the infringing conduct of another . . .")
PEI's complaint alleges that Simon caused a different product identification to be attached to the jeans at issue to conceal ongoing misconduct and that, in the parties' settlement discussions, Simon intentionally concealed from PEI that the infringing jeans had been manufactured and sold. (PEI Claims at ¶¶ 24, 33.) Reading PEI's complaint liberally, the Court cannot say that "it appears to a certainty" that PEI can prove no set of facts entitling it to relief. The allegations pleaded by PEI, together with the fact that Simon was the Chief Executive Officer of Aris and therefore had the authority to act on behalf of Aris, are sufficient to withstand a motion to dismiss. Accordingly, Simon's motion to dismiss Counts III-VI of the PEI claims against him is denied.
Count VII: Indemnification
Simon moves to dismiss Count VII of PEI's claims, indemnification for any liability it may have to CWI. PEI bases its claim for indemnification on three sources: (1) the June 30, 1998 Sublicensee Agreement, (2) the August 26, 1999 Direct Agreement, and (3) the common law. Simon contends that he is not subject to indemnity based on either the 1998 Sublicensee Agreement or the 1999 Direct Agreement because he is not a party to either agreement in his individual capacity. PEI does not dispute that Simon was not a party to these agreements. Accordingly, PEI may not seek indemnity against Simon on the basis of either the 1998 or 1999 agreements. See Lerner v. Amalgamated Clothing Textile Workers Union, 938 F.2d 2, 5-6 (2d Cir. 1991).
Simon also contends that he is not subject to indemnity based on common law indemnity. "[T]he predicate of common-law indemnity is vicarious liability without actual fault on the party of the proposed indemnitee . . . [and thus,] a party who has itself actually participated to some degree in the wrongdoing cannot receive the benefit of the doctrine." Sabater v. Lead Indus. Ass'n. Inc., 2001 WL 1111505 at *6 (S.D.N.Y. Sept. 21, 2001) (quoting Trustees of Columbia Univ. v. Mitchell/Giurgola Assocs., 492 N.Y.S.2d 371, 375 (N.Y.Sup.Ct. 1985)). CWI's claims against PEI — injurious falsehood, disparagement of goods, and tortious interference with contractual relations — are all intentional tort claims which require a finding of actual fault by PEI. Accordingly, PEI may not seek indemnification from Simon for CWI's claims against PEI.
Conclusion
For the foregoing reasons, Simon's motion to dismiss Counts II-VII of PEI's claims against him is granted in part and denied in part. Simon's motion to dismiss Count II (fraud in the inducement) of PEI's claims against him is granted without prejudice; Simon's motion to dismiss Counts III-VI (trademark infringement, false designation of origin, trademark dilution, and common low trademark infringement and unfair competition) is denied; and Simon's motion to dismiss Count VII (indemnification) is granted.
IT IS SO ORDERED.