Opinion
20273 2010.
Decided February 14, 2011.
Plaintiff SRM Beauty Corporation commenced the within action against Sook Yin Loh and Trendy Beauty Spa, Inc. on August 8, 2010. The complaint alleges that plaintiff SRM Beauty Corporation was incorporated in New York on May 7, 2008 and that defendant Trendy Beauty Spa, Inc. was incorporated on January 26, 2010. Plaintiff alleges that it sells high-end beauty products at retail stores located at 135-12 Roosevelt Avenue and 37-11 Main Street, Flushing, New York; that it entered into confidential retail sales agreements with "Shiseido, Cle de Beauties, Demagogical" [sic], and other brand names to sell their line of products in its retail stores; that plaintiff invested tens of thousands of dollars to develop a proprietary client list by means which is not generally available to the public; that said confidential retail agreements and client list are the corporation's core asset; that defendant Loh is a shareholder of the plaintiff corporation; that during the time Loh worked at the 135-12 Roosevelt Avenue store, "from the beginning until February 2010," she had complete unfettered access to the plaintiff's trade secrets; that the plaintiff's Board of Directors passed a resolution restricting the corporation's officers and shareholders from competing with said corporation; that Loh organized and incorporated Trendy Beauty while she was an employee, officer and shareholder of the plaintiff; that Loh is a "direct/indirect" owner of Trendy Beauty; that Loh, without the prior knowledge, consent or approval of the plaintiff, its Board of Directors or shareholders, and while an employee, officer and shareholder of the plaintiff, opened Trendy Beauty at 270 North Broadway, Hicksville, New York, entered into retail agreements with the plaintiff's confidential retail suppliers and misappropriated plaintiff's proprietary client's list.
The first cause of action alleges that Loh, as an officer of the plaintiff corporation, owed a fiduciary duty to the corporation and its shareholders, which she breached by opening Trendy Beauty, and selling high-end beauty products. The second cause of action alleges that Loh, without the consent, knowledge or approval of the plaintiff corporation, its Board of Directors and shareholders, misappropriated the plaintiff's trade secrets for her own use and that of Trendy Beauty. The third cause of action alleges that Loh misappropriated the plaintiff's confidential supplier agreements and proprietary client list for her own personal benefit and that she will unjustly enrich herself at the expense of the plaintiff. The fourth cause of action alleges that plaintiff's Board of Directors passed a resolution adopted by the shareholders restricting all officers and shareholders from competing with the corporation and from using its trade secrets for their personal benefit, and that Loh breached said restrictive covenant not to compete by organizing Trendy Beauty in January 2010 and misappropriating the plaintiff's trade secrets to herself and to Trendy Beauty.
Plaintiff seeks to recover damages, including treble damages on the first and third causes of action, and seeks a permanent injunction on the second and fourth causes of action.
Defendants now move for an order dismissing the complaint pursuant to CPLR 3211 and 3212. In view of the fact that there is no evidence that defendants have served an answer, the request for summary judgment pursuant to CPLR 3212 is denied as premature, as issue has not been joined.
With respect to the motion to dismiss the complaint pursuant to CPLR 3211, defendants assert that the complaint fails to state a cause of action for breach of fiduciary duty, misappropriation of trade secrets, unjust enrichment, and breach of a restrictive covenant. Defendants further assert that the claim for breach of restrictive covenant is barred by the statute of frauds, and that they did not steal, copy or memorize any confidential information.
Defendant Loh states in her affidavit that she never signed any agreement with the plaintiff and did not consent to, or ratify, any Board resolution with regard to a covenant not to compete. She further states that any such Board resolution was never put to a shareholder vote during the time she was a shareholder of SRM Beauty Corporation. She further states that she never copied or memorized any customer information of SRM Beauty Corporation, or solicited any of its customers.
Plaintiff, in opposition, submits an affidavit from Peck K Ng, who states that she and her husband Tek H Ng "founded" the plaintiff corporation, and that they offered her cousins the opportunity to become owners and manage a retail store. She states that Peck Loow Cheng, Cheng Y The and Sook Y Loh and herself are the only shareholders, officers, and directors of the corporation. She stated that unbeknownst to herself and the other shareholders, Trendy Beauty had a grand opening on August 8, 2010, as depicted in an advertisement in a Chinese language newspaper and that of the five women appearing in a photograph accompanying said advertisement, three previously worked for or had a position of trust in the plaintiff corporation. Ms. Ng identifies three clients, who she refers to by number, as having contacted her and informed her that the defendant Loh and another woman solicited them to purchase specific beauty products that they were scheduled to purchase from the plaintiff. She further asserts that other clients contacted her about Loh's "poaching." Ms. Ng asserts that she owns more than 50% of the business, and that together with her cousins, they own more than 80% of the business. She states that when defendant joined the company, she became subject to its bylaws. She claims that Loh's guarantee of SRM's lease belies her minority interest and her position in the corporation.
Plaintiff submits a copy of a shareholder agreement dated May 15, 2008 between Tek H Ng, Peck K Ng and SRM Beauty Corporation, which states that said corporation was organized on May 7, 2008, and authorized the issuance of 200 shares of common stock; that the sole shareholders are Tek H Ng with 100 shares of the initial shares of stock and Peck K Ng with 100 shares of the initial shares of stock; that these shareholders will vote their shares of stock so as to secure their own election as the Directors of the corporation and that the Directors will elect Peck K Ng as president, Sook Y Loh as vice-president, Peck Y Loow Cheng as treasurer and Cheng Y The, as secretary. Plaintiff submits a copy of a shareholder certificate dated May 23, 2008, which states that there are 200 authorized shares of stock without par value, and that Sook Yin Loh is the registered holder of 18 shares of SRM Beauty Corporation, subject to the shareholders' agreement. Plaintiff asserts that this certificate is binding on Ms. Loh with respect to the terms of the shareholder agreement.
It is noted that the documents submitted by plaintiff with respect to Supreme Beauty Corporation, a separate corporate entity, are not relevant to this action.
It is well settled that "[i]n considering a motion to dismiss for failure to state a cause of action ( see CPLR 3211[a][7]), the pleadings must be liberally construed ( see CPLR 3026). The sole criterion is whether [from the complaint's] four corners factual allegations are discerned which taken together manifest any cause of action cognizable at law ( Leon v Martinez, 84 NY2d 83, 87-88; Guggenheimer v Ginzburg, 43 NY2d 268, 275; Rochdale Vil. v Zimmerman , 2 AD3d 827 ; see also Bovino v Village of Wappingers Falls, 215 AD2d 619). The facts pleaded are to be presumed to be true and are to be accorded every favorable inference, although bare legal conclusions as well as factual claims flatly contradicted by the record are not entitled to any such consideration ( see Morone v Morone, 50 NY2d 481; Gertler v Goodgold, 107 AD2d 481, affirmed 66 NY2d 946). When evidentiary material is considered, the criterion is whether the proponent of the pleading has a cause of action, not whether he has stated one' ( Guggenheimer v Ginzburg, supra at 275). This entails an inquiry into whether or not a material fact claimed by the pleader is a fact at all and whether a significant dispute exists regarding it ( see Guggenheimer v Ginzburg, supra at 275; Siegel, Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, CPLR C3211:25, at 39)" ( Gershon v Goldberg , 30 AD3d 372 ; Hispanic Aids Forum v Estate of Bruno , 16 AD3d 294 , 295; Sesti v N. Bellmore Union Free Sch. Dist., 304 AD2d 551, 551-552; Mohan v Hollander, 303 AD2d 473, 474; Doria v Masucci, 230 AD2d 764, 765; Rattenni v Cerreta, 285 AD2d 636, 637; Kantrowitz Goldhamer v Geller, 265 AD2d 529; Mayer v Sanders, 264 AD2d 827, 828; Sotomayor v Kaufman, Malchman, Kirby Squire, 252 AD2d 554).
In order for plaintiff to establish a claim for breach of fiduciary duty, it must prove the existence of a fiduciary relationship, misconduct by the defendant, and damages that were directly caused by the defendant's misconduct ( Fitzpatrick House III, LLC v Neighborhood Youth Family Servs. , 55 AD3d 664 ; Kurtzman v Bergstol , 40 AD3d 588 , 590).
It well settled that the directors and officers of a corporation occupy a fiduciary relationship both to the shareholders and to the corporation that they serve ( Schwartz v Marien, 37 NY2d 487). Directors and officers have this relationship by virtue of their responsibility to act as guardians of the corporate interests ( see Alpert v 28 Williams Street Corp., 63 NY2d 557). Corporate officers owe a duty of good faith and fair dealing to the corporation that they serve. When a director or officer benefits himself or herself at the expense of the corporation, the duty to the shareholders is breached because the shareholders are prevented from realizing their expectation to share fairly in the corporate profits.
A majority shareholder in a close corporation owes a minority shareholder a fiduciary duty ( O'Neill v Warburg, Pincus Co. , 39 AD3d 281, 282). While shareholders of a close corporation owe each other a duty to act in good faith ( Matter of Cassata v Brewster-Allen-Wichert Inc., 248 AD2d 710, 711; see also Brunetti v Musallam , 11 AD3d 280 , 281), this is not the equivalent of a fiduciary duty, as a fiduciary obligation is not imposed on every shareholder of every small or close corporation.
Here, as plaintiff concedes that Ms. Loh is a minority shareholder, she does not owe a fiduciary duty to the other shareholders for her actions. However, Ms. Loh, in her affidavit in support of the motion to dismiss the complaint, does not state whether or not she was a corporate officer. Unsworn statements made by defendants' counsel in his memoranda of law regarding Ms. Loh's status as a corporate officer lack probative value, and cannot be considered by the court. Since the allegations set forth in the complaint are sufficient to state a cause of action for breach of fiduciary duty based upon Ms. Loh's alleged status as a corporate officer, that branch of defendants' motion which seeks to dismiss the first cause of action for breach of fiduciary duty is denied.
The second cause of action for misappropriation of trade secrets alleges that plaintiff's retail sales agreements with certain cosmetic and beauty product suppliers, and its client list constitute a trade secret. A trade secret is "any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it." Restatement (Third) of Unfair Competition § 39 defines a trade secret as "any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others." The following factors may be considered in determining whether information qualifies 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 to [its] competitors; (5) the amount of effort or 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).
The information must, in the first instance, be secret ( Ashland Mgt. v Janien, 82 NY2d 395, 407). Here, plaintiff's retail sales agreements with "Shiseido, Cle de Beauties, Demagogical [sic]" and other cosmetic or beauty product manufacturers or suppliers, cannot be considered to be of a genuinely "secret" nature. Plaintiff does not allege that it is the exclusive seller of these cosmetic and beauty products, or that these manufacturers and suppliers do not enter into retail sales agreements with other competing businesses. Therefore, that branch of defendants' motion which seeks to dismiss the second cause of action is granted to the extent that it alleges the retail sales agreements are trade secrets.
With respect to the client list, the complaint alleges that plaintiff invested tens of thousands of dollars to develop a proprietary client list by means not generally available to the public. Ms. Loh, in her affidavit, denies copying or memorizing any customer information, and states that she never solicited any of the plaintiff's clients for any business other than that of the plaintiff.
Ms. Ng asserts in her affidavit that three long-time customers contacted her and informed her that Loh and Wong solicited them to purchase specific beauty products that these clients were scheduled to purchase from the plaintiff. She also has submitted forms printed by Shiseido which contain the client's name, month and day of their birthday, address, occupation, business or home telephone numbers, skin types, and list of services provided and products sold to these clients on particular dates. Plaintiff asserts that the compilation of such information regarding its clients constitutes a trade secret.
Whether a customer list is a trade secret or readily ascertainable from public sources is an issue of fact ( Suburban Graphics Supply Corp. v Nagle , 5 AD3d 663). The complaint, therefore, sufficiently states a cause of action for misappropriation of trade secrets as regards the client list. Therefore, that branch of defendants' motion which seeks to dismiss the second cause of action for misappropriation of company trade secrets, is denied.
The third cause of action for unjust enrichment is based upon the alleged "misappropriation of the Company's confidential supplier agreements and proprietary client list for her own personal benefit." Although the supplier agreements do not constitute a trade secret, plaintiff may maintain the claim for unjust enrichment based upon the misappropriation of the client list. Defendants' request to dismiss the third cause of action, therefore, is denied.
The fourth cause of action alleges that the Board of Directors passed a resolution adopted by the shareholders restricting all officers and shareholders from competing with the plaintiff and from using the company's trade secrets for their own personal benefit, and that Loh breached this restrictive covenant by organizing Trendy Beauty in January 2010, and by misappropriating the plaintiff's trade secrets.
Ms. Loh, in her affidavit, asserts that she did not sign any agreement with the plaintiff, nor consent to or ratify any Board resolution with respect to an agreement not to compete, and asserts that no such resolution was ever voted on while she was a shareholder.
Ms. Ng, in her opposing affidavit, fails to state that any such resolution was, in fact, passed by the Board of Directors and ratified by the shareholders. Rather, it appears that plaintiff is relying upon the restrictive covenant set forth in the shareholders' agreement and the certificate of shares issued to Ms. Loh provides that "the shares represented in this certificate are subject to the terms of an Agreement dated: 5/5/08 between Tek H Ng and Peck K Ng, a copy of which is on file in the Office of the Corporation, and any subsequent shareholder(s) is/are bound by the same Agreement, and the transferee of share(s) is/are restricted by the same Agreement."
The shareholders' agreement provides, in pertinent part, as follows:
"X. RESTRICTIVE COVENANT
The Shareholders hereby covenant and agree that no Shareholder while he/she is a shareholder shall directly or indirectly own, manage, operate, control, be employed by, own stock, be an officer, director, associate or participate in or be connected in any manner with the ownership, management, operation or control of any business considered reasonably similar to the Corporation in its design, name and operation unless otherwise approved by a majority of the Board of Directors for Two (2) years after the shareholder sells his/her shares and/or is no longer employed, either by voluntary leave or termination."
"The Shareholders(s) further covenant and agree that he/she will not use, copy, distribute the Corporation's client list/profile for his/her own or another's benefit unless otherwise approved by a majority of the Board of Directors."
This restrictive covenant is not enforceable as a matter of law. To be enforceable, such an agreement must be in writing signed by the party to be charged ( see Dunbar Camps. Inc. v Amster, 106 NYS2d 508 [1951], mod other grds, 279 App Div 605, affirmed 303 NY 958; General Obligations Law § 5-701). Here, it is undisputed that defendant Loh did not execute either the shareholders' agreement or the certificate of shares, and did not sign the acknowledgment set forth on the reverse side of said certificate.
Furthermore, even if Ms. Loh had agreed in writing to be bound by the restrictive covenant, it is unenforceable as a matter of law. In order to be enforceable, a restrictive covenant pertaining to employment must be reasonably limited temporally and geographically and to the extent necessary to protect the employer's trade secrets and confidential information ( see BDO Seidman v Hirshberg, 93 NY2d 382; Columbia Ribbon Carbon Mfg. Co. v A-1-A Corp., 42 NY2d 496; Reed Roberts Assoc. v Strauman, 40 NY2d 303; Stiepleman Coverage Corp. v Raifman, 258 AD2d 515; Chernoff Diamond Co. v Fitzmaurice, Inc., 234 AD2d 200; HDB Inc. v Ryan, 227 AD2d 448).
Here, the restrictive covenant prohibiting the shareholders, upon the sale of their shares or termination of employment, from owning, managing operating or controlling a retail cosmetic and beauty supply business anywhere in the world is unreasonable geographically and, thus, is plainly unenforceable ( see Garfinkle v Pfizer, Inc., 162 AD2d 197; BDO Seidman v Hirshberg, supra at 389). Therefore, that branch of the defendants' motion which seeks to dismiss the fourth cause of action is granted.
Accordingly, defendants' motion to dismiss the complaint is granted as to the fourth cause of action, and is denied as to the first, second and third causes of action.