Opinion
4015204.
Decided July 28, 2005.
Plaintiff, Repair Tech Inc. (hereinafter RPI) moves by order to show cause and pursuant to CPLR § 6301 for a preliminary injunction enjoining the defendants. Defendants move by order to show cause for an order pursuant to Business Corporations Law § 1312 either dismissing or in the alternative staying plaintiff's action and an order pursuant to CPLR § 8502 requiring the plaintiff to post security.
RPI is a corporation organized in the State of New Jersey and engaged in the business of offering extended warranties to retail purchasers of cameras and consumer electronic equipment who purchase such products from retail merchants. Defendant Shemaya Zakarin (Zakarin) was an employee of the plaintiff and was responsible for soliciting and servicing retail merchants in connection with the sale of plaintiff's extended warranties. Consumer Priority Service Corporation (CPS) is a corporation organized in the State of New York and the current employer of Zakarin.
On December 10, 2004, RPI commenced this action by filing a summons and verified complaint with the Kings County Clerk's office. The complaint contains twenty allegations of fact and pleads three causes of action, namely, breach of fiduciary duty, unfair competition, and misuse of plaintiff's confidential and proprietary information.
On December 21, 2004, RPI filed the instant order to show cause seeking a preliminary injunction preventing the defendants from soliciting plaintiff's clients and employees, and from using information taken from plaintiff's business records. On December 28, 2004, defendants also filed an order to show cause seeking dismissal, or in the alternative, a stay of the of plaintiff's complaint pursuant to BCL § 1312. Defendants also seeks an order requiring the plaintiff to post security in accordance with CPLR § 8501 and staying the proceedings pending the posting of same in accordance with CPLR § 8502.
Pursuant to CPLR § 2218, the court ordered a joint hearing on the factual disputes raised in the parties respective motions. Plaintiff presented two witnesses and documentary evidence in support of the motion. Defendants called no witnesses and advised the court that they were relying on the transcripts of prior testimony of an officer of RPI.
There is no dispute that the plaintiff commenced an action against the defendants in the United States District Court, Eastern District of New York under case number CV 04-5139. On December 1, 2004, Judge Nicholas G. Garaufis conducted a hearing to determine whether the court had diversity jurisdiction over the parties. Before the court made a determination, plaintiff voluntarily withdrew the action. Defendants have annexed as exhibit D to their motion, the transcripts of these proceedings which contain the representations made by plaintiff's counsel and the testimony of Yousef Saidea, the vice-president of RPI. Defendants did not include the pleadings which commenced the federal action. Defendants contend that the plaintiff's admissions before Judge Garaufis support their application for a dismissal or stay of plaintiff's cause of action.
BCL § 1312 pertains to actions or special proceedings by unauthorized foreign corporations and provides as follows:
(a) A foreign corporation doing business in this state without authority shall not maintain any action or special proceeding in this state unless and until such corporation has been authorized to do business in this state and it has paid to the state all fees and taxes imposed under the tax law or any related statute, as defined in section eighteen hundred of such law, as well as penalties and interest charges related thereto, accrued against the corporation. This prohibition shall apply to any successor in interest of such foreign corporation.
CPLR § 4517(a)(2) pertains to prior testimony in a civil action and provides as follows:
The prior trial testimony of a party or of any person who was a party when the testimony was given or of any person who at the time the testimony was given was an officer, director, member, employee, or managing or authorized agent of a party, may be used for any purpose by any party who is adversely interested when the prior testimony is offered in evidence.
In accordance with CPLR § 4517(a)(2), defendants may use the prior testimony of plaintiff's vice president to support its application. The BCL § 1312 precludes a foreign corporation doing business in New York from maintaining a New York action without having duly licensed itself and paid all required fees and taxes ( Airline Exchange, Inc. v. Bag 266 AD2d 414 [2nd Dept. 1999]; see also [ Siegel, New York Practice § 30, 4th Ed.]). It is a revenue measure designed to place foreign corporations on the same footing with domestic ones and is not jurisdictional ( Siegel, New York Practice § 30, 4th Ed.). Its purpose is not to enable defendants to avoid contractual obligations but to regulate such foreign corporations which are in fact conducting business within the State so that they shall not be doing business under more advantageous terms than those allowed a corporation of this State ( Von Arx A.G. v. Breitenstein, 52 AD2d 1049 [4th Dept. 1976]).
Whether a foreign corporation is doing business within the purview of this section so as to foreclose access to our courts depend on the particular facts of each case with inquiry into the type of business being conducted. In connection with such determination it is to be recognized that, while some activities might constitute "doing business" pursuant to CPLR § 301 and so subject a foreign corporation to the jurisdiction of New York courts, such a finding would not necessarily render a corporation liable to the qualification requirements of this section. ( Von Arx A.G. v. Breitenstein 52 AD2d 1049 [4th Dept 1976]).
Since the defendants are relying upon this statutory barrier, it is their burden to prove that the corporation's business activities in New York were not just casual or occasional, but so systematic and regular as to manifest continuity of activity in the jurisdiction ( S T Bank v. Spectrum Cabinet Sales, 247 AD2d 373, [2nd Dept. 1998]). Not all business activity falls within the proscribed category of business in New York State. For example, solicitation of business and facilitating the sale and delivery of merchandise incidental to a plaintiff's business in interstate and international commerce do not constitute doing business in this state within the contemplation of section 1312 ( Uribe v. Merchants Bank of NY, 266 AD2d 21 [1st Dept. 1999]).
Nor may a State unlawfully interfere with a foreign corporation's right to engage in purely interstate commerce. Where a company's activities within New York are merely incidental to its business in interstate and international commerce, section 1312 is not applicable ( Alicanto, S.A. v. Woolverton, 129 AD2d 601-602 [2nd Dept. 1987]).
Here the evidence establishes that plaintiff has salesmen working out of an office in Bayonne, New Jersey and Brooklyn, New York to solicit new business and to service consumers who have purchased their extended warranties. The transcripts of the federal court proceedings show evidence of some of plaintiff's business activities in New York State. However, they are insufficient to show that plaintiff's business activities in New York were so systematic and regular as to manifest continuity of activity in New York.
This court conducted a joint hearing to determine the factual disputes contained in the parties' respective motions. The evidence elicited in this proceeding also did not establish that plaintiff was doing business in New York within the ambit of BCL § 1312. The plaintiff's business is internationally advertised on the internet and the clients are provided service regardless of their state or country of residence. Although many clients reside in New York, many also reside in Alaska, Arizona, Georgia, Ohio, Pennsylvania, Texas and outside of the United States. Therefore, notwithstanding the presence of salesmen to solicit business and service customers in Brooklyn, the evidence of activities in New York are insufficient to rebut the presumption that plaintiff is doing business in New Jersey. A foreign corporation bringing suit in New York, is presumed to be doing business in its state of incorporation and not in New York ( Fine Arts Enterprises, N.V. v. Levy, 149 AD2d 795 [3rd Dept. 1998]). Rather, the evidence supports plaintiff's contention that it is engaged in interstate commerce. Defendants' application to dismiss or stay plaintiff's action and proceedings pursuant to BCL § 1312 is denied.
Plaintiff called two witnesses in support of the application for pendente lite injunctive relief. Guy Cohen (Cohen) testified that he and his brother are partners in a telecommunications business called 101 Phones. The business maintains a website which markets predominately cordless telephones and accessories. He testified to doing business with Repair Tech Inc. through "Shemaya" and reselling plaintiff's extended warranties to their own customers. He further testified to continuing to work with Shemaya offering the same service but using CPS or Computer Priority Services instead of the plaintiff. This court credits Cohen's testimony and finds that Shemaya is the defendant, Shemaya Zakarin (Zarkarin).
Yousef Saieda, the vice-president of Repair Tech Inc., also testified. His credible testimony revealed Zakarin's possession of plaintiff's customer list and confidential price lists of extended warranty services as adjusted for specific clients. Zakarin threatened to undercut plaintiff's price list of services and to compete directly for plaintiff's clients. Zakarin communicated these threats by telephone and electronic mail to Saieda. He also demonstrated his possession of those lists and his ability to carry out those threats.
Plaintiff seeks injunction relief, pendente lite, preventing the defendants from soliciting plaintiff's clients and employees, and from using information taking from plaintiff's business records. For a party to receive injunctive relief, the movant must establish: (1) the likelihood of ultimate success on the merits, (2) irreparable injury absent the granting of the preliminary injunction, and (3) that a balancing of equities favors the movant's position ( see, Trimboli v. Irwin, 18 AD3d 866 [2nd Dept. 2005]).
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 Freigh Lines, Inc. v. Next Day Express, Inc., 273 AD2d 462 [2nd Dept. 2000]). An employee may create a competing business prior to leaving his employer without breaching any fiduciary duty unless he makes improper use of the employer's time, facilities or proprietary secrets in doing so ( Don Buchwald Assoc., Inc. v. Marber-Rich, 11 AD3d 277-278 [1st Dept. 2004]).
The evidence does not establish Zarakin's improper use of his employer's time or facilities, therefore, the court will focus on the use of plaintiff's customer list and confidential price lists adjusted for specific clients. A trade secret or confidential information includes a compilation of information which is used in one's business and which gives the possessor of the information a competitive advantage over one's competitors who do not possess this information ( Ashland Management Inc. v. Janien, 82 NY2d 395).
In determining whether information is a trade secret, the Court should consider: (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 and 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; see also Ashland Management Inc. v. Janien, 82 NY2d 395).
A customer list will be treated as a trade secret where the names and addresses of the customer are not known in the trade or can be obtained only through extraordinary effort ( Stanley Tulchin Assoc., Inc. v. Vignola, 186 AD2d 183 [2nd Dept 1992]). This is especially true where the customers' patronage has been secured through years of effort and advertising involving a substantial expenditure of time and money.
Saeida's testimony establishes that he expended years of time, effort and funds to develop a client list. The evidence does not establish, however, what measures, if any, were taken to keep the client list or service price list secret. Trade secret protection will not attach to customer lists where such customers are readily ascertainable from sources outside the former employee's business unless the employee had stolen or memorized the customer lists ( Atmospherics Ltd. v. Hansen, 269 AD2d 343 [2nd Dept. 2000]). Furthermore, solicitation of an employer's customers by a former employee is not actionable unless the customer list could be considered a trade secret or there was wrongful conduct by the employee, such as physically taking or copying the employer's files or using confidential information ( Starlight Limousine Serv. v. Cucinella, 275 AD2d 704 [2nd Dept. 2000]).
The plaintiff came forward with strong evidence that Zarakin misappropriated and utilized plaintiff's customer list and adjusted service price list to compete against the plaintiff and to steer plaintiff's clients to himself. Indeed, the evidence establishes Zarakin's audacious admissions to Saeida of this very conduct. The evidence demonstrates plaintiff's likelihood of success on the merits on the causes of action for breach of fiduciary duty and unfair competition. It is clear that defendant's continued improper solicitation of plaintiff's clients derived from a misappropriated list would result in irreparable harm (see Stanley Tulchin Assoc., Inc. v. Vignola, 186 AD2d 183 [2nd Dept. 1992]). By exploiting a customer list which took the plaintiff years to develop and by utilizing confidential price list tailored and adjusted for these clients, the defendants may unfairly undercut plaintiff's price and exploit his access and familiarity with the client. It is also clear that if the court were not to render injunctive relief, any judgment obtained by the plaintiff after trial may prove ineffectual. Defendant is in a position to exploit his disloyal and improper conduct to divert all of plaintiff's clients to the defendants. The failure to grant preliminary injunctive relief would cause greater injury to the plaintiff than the imposition of the injunction would cause to the defendants (see generally Klein, Wagner Morris v. Lawrence A. Klein, P.C., 186 AD2d 631 [2nd Dept. 1992]). Therefore, the court will grant a preliminary injunction that is limited in scope and which prohibits the defendants from contacting or soliciting those customers of the plaintiff who previously were served by Zarakin while he was employed by the plaintiff ( Laro Maintenance Corp. v. Culkin, 255 AD2d 560 [2nd Dept. 1988]). In accordance with CPLR § 6312(b), plaintiff is directed to post an undertaking in the amount of five thousand dollars ($5,000.00) within thirty days of the entry of this order. While fixing the amount of an undertaking when granting a motion for a preliminary is a matter within the sound discretion of the trial court, the party seeking an injunction is clearly and unequivocally required to give an undertaking ( Ying Fung Moy v. Hohi Umeki, 10 AD3d 604 [2nd Dept. 2004]).
CPLR § 8501(a) pertains to the security for costs as of right and provides:
Except where the plaintiff has been granted permission to proceed as a poor person or is the petitioner in a habeas corpus proceeding, upon motion by the defendant without notice, the court or a judge thereof shall order security for costs to be given by the plaintiffs where none of them is a domestic corporation, a foreign corporation licensed to do business in the state or a resident of the state when the motion is made.
CPLR § 8503 pertains to undertaking and provides:
Security for costs shall be given by an undertaking in an amount of five hundred dollars in counties within the city of New York, and two hundred fifty dollars in all other counties, or such greater amount as shall be fixed by the court that the plaintiff shall pay all legal costs awarded to the defendant.
Defendants seek an order directing plaintiff to post security for costs in accordance with CPLR § 8501. Plaintiff is a foreign corporation not licensed to do business in the state and is therefore within the ambit of CPLR § 8501. The court, therefore orders an undertaking in the amount of five hundred dollars ($500.00) as security for cost.
The foregoing constitutes the decision and order of this court.