New York Legal Update

Court Dismisses Trespass Class Action Against Distributor Of Advertising Fliers

You get them on your doorstep all the time - advertising fliers. I personally like them; I like to get that menu from the local Chinese restaurant. You never know when you might want to order take out. But others hate them finding them a nuisance and contributing to litter and the cutting down of trees. Can you commence a lawsuit for trespass against the distributor of such fliers? How about a class action?

Last week in Leyse v Domino's Pizza LLC, 2008 NY Slip Op 01798, the First Department dismissed such an action. The plaintiff attempted to commence a class action against Domino's Pizza seeking an injunction and a judgment declaring that Domino's trespassed on the plaintiff's property by slipping an advertising flier under the door to the plaintiff's apartment without the plaintiff's permission. The plaintiff had not given prior notice to Domino's that he objected to the delivery of the flier. In upholding the dismissal of the action, the First Department stated that such prior notice by the plaintiff to Domino's that he objected to delivery of the flier was required by Domino's constitutional right of free speech. In addition, the Court was concerned about a floodgate of litigation by apartment dwellers suing distributors of restaurant fliers. The Court, however, did not find that the action was frivolous.

So the next time you get that menu slipped under your door don't run to the court house. Instead, order in and watch a good movie or something.

The Stealing Of Business Ideas - The Question Of Novelty

You have a great idea for a new business. You tell somebody about it, and then that person goes out and creates a very similar business to the one expressed in your idea. Are you allowed to recover damages for the misappropriation of your idea? The answer to that question depends on whether your idea was sufficiently novel or original.

The First Department had to confront such a case last week in American Bus. Training Inc. v American Mgt. Assn., 2008 NY Slip Op 01416.

In that case, the defendant American Management Association (AMA) was a not-for-profit association that offered instructional seminars in areas of business and management. Judith Segal was an employee of AMA from 1976 through 1991; and her responsibilities included the development and promotion of seminars.

After she was laid off by AMA, Ms. Segal founded her own company American Business Training, Inc. (ABT) which was in the business of developing and marketing seminars for the business community. After creating her new company, she began to create what she thought was a novel and unique concept for a course for business executives. It was a seminar known variously as "The 5-Day MBA" and "Essentials of an MBA." ABT's publicity materials described the course as designed for managers, executives, and other business professionals who did not have an MBA degree but who needed to learn basic business concepts and techniques in order to acquire a broader overall understanding of the processes of operating a business. These materials stated that the course provided practical skills and knowledge in such areas as management, accounting, finance, sales, marketing, pricing, strategic planning, research and development, and human resources. ABT expended $700,000 in the development of the program.

Ms. Segal claimed that the course was well received, but that it struggled with profitability. Thus, in November 2000, Ms. Segal telephoned an AMA employee, William Fexas, to inquire if AMA would be interested in entering into a joint venture to market the program. It was alleged that Fexas told her that AMA "could be interested," and directed her to Edward Selig, an AMA employee in charge of new course offerings. After Segal called Selig and gave him an overview, he asked her to forward the course brochure, which she did "with the understanding that AMA could only make use of the materials in a joint enterprise with ABT."

Two weeks later, Selig advised Segal that AMA would not run such a course because it was competitive with other courses being offered by AMA. Yet, in June 2001, AMA began offering a course entitled "AMA's Five Day MBA . . . Essential Elements." Like the ABT course, the AMA "Five-Day MBA" course was billed as providing a grounding in the essential elements of an MBA program, covering the basic principles of business economics, accounting, finance, marketing and management, so that attendees would learn how all the components of running a business fit together. AMA's course quickly became highly successful.

Ms. Selig and her company brought an action asserting seven causes of action, claiming fraud, misappropriation of ideas, breach of a joint venture agreement, unjust enrichment, breach of an implied-in-fact contract, breach of a quasi-contract, and conversion.

In upholding summary judgment in favor of the defendant AMA, the First Department set forth the law to property rights in ideas previously expressed by the Court of Appeals in Downey v General Foods Corp. (31 NY2d 56, 61 [1972]):

An idea may be a property right. But, when one submits an idea to another, no promise to pay for its use may be implied, and no asserted agreement enforced, if the elements of novelty and originality are absent, since the property right in an idea is based upon these two elements (citation omitted).

The First Department then found that there was no contract entered into following plaintiff's submission to defendant of the claimed idea. Thus, in order for the plaintiff to recover under Downey the elements of novelty and originality had to be established. Reviewing the evidence of AMA's prior course offerings, as well as other organizations offerings of various business courses, the First Department concluded that the plaintiff's "The 5-Day MBA" was not significantly novel or original to warrant protection.

Members of a Limited Liability Company May Bring Derivative Suits

New York's Limited Liability Company Law contains no provision allowing for derivative suits by members of the LLC. Nevertheless, today the Court of Appeals in Tzolis v Wolff, 2008 NY Slip Op 01260 held that members of a LLC  may bring derivative suits on the LLC's behalf.

In that case, Pennington Property Co. LLC was the owner of a Manhattan apartment building. The plaintiffs owned 25% of the membership interests in the LLC. The plaintiffs claim that those in control of the LLC, and others acting in concert with them, arranged first to lease and then to sell the LLC's principal asset for sums below market value; that the lease was unlawfully assigned; and that company fiduciaries benefited personally from the sale. The plaintiffs thus brought an action "individually and in the right and on behalf of" the company seeking to declare the sale void, and to terminate the lease.

In upholding the right of LLC members to bring derivative suits, the Court of Appeals noted that the derivative suit was well recognized as part of the general corporate law of the state since 1832, even though it was not codified until much later in Business Corporation Law § 626 [a]. The Court thus noted that even though the Limited Liability Company Law did not expressly provide for such derivative suits, it could also find no clear mandate in the Legislative history barring derivative suits, and that to eliminate derivative suits by LLC members would be a radical step.

Davis Bacon Act Does Not Preempt Filing False Instrument Charge

The Davis-Bacon Act (40 USC § 3141 et seq.) is a Federal law which established the requirement for paying prevailing wages on public works projects. All federal government construction contracts, and most contracts for federally assisted construction must include provisions for paying workers on-site no less than the locally prevailing wages and benefits paid on similar projects.

On Tuesday, the Second Department held that the Davis-Bacon Act does not preempt a State prosecution of offering a false instrument for filing in People v Caridi, 2008 NY Slip Op 00708. The defendant was the president of a corporation involved in a construction project funded by the United States Department of Housing and Urban Development (HUD). As a condition for the receipt of funds, the defendant filed payroll certificates with HUD, in which he falsely represented that workers on the project were paid at the prevailing wage rate. He was charged with offering a false instrument for filing in the second degree (Penal Law § 175.30). The defendant pleaded guilty, but on appeal argued that his prosecution was preempted by the Davis-Bacon Act and federal regulations providing administrative remedies for noncompliance with the Davis-Bacon Act.

The Second Department disagreed stating that the State prosecution did not constitute a regulation of wages determined by the federal government, but was instead a valid exercise of the State's police power which had only a peripheral relationship to the wages required under the Davis-Bacon Act. In addition, the Court found that there was no indication that Congress intended to preempt the State's police power. Finally, the Court found there was no conflict between the State and Federal law. Thus, the Court affirmed the defendant's conviction.

Breach Of Fiduciary Duty Claim Against New York Stock Exchange And John Thain Dismissed

Yesterday the Appellate Division, First Department reversed a lower court ruling and dismissed a breach of fiduciary duty claim against the New York Stock Exchange and its Chief Executive Officer John Thain - Hyman v New York Stock Exch., Inc., 2007 NY Slip Op 09909.

The case arose when certain plaintiffs sold their Exchange memberships before an announced merger with Archipelago Holdings, Inc. - an all electronic stock exchange. After the announced merger, the value of Exchange memberships dramatically increased. The plaintiffs alleged that the Exchange and Thain breached their respective duties to disclose, prior to the sales of their Exchange memberships, the existence of merger negotiations between the Exchange and Archipelago, and that had there been full disclosure of the possibility of the merger, they would not have sold their seats prior to the announced merger.

The First Department held that the claim against the Exchange should have been dismissed because a corporation does not owe a fiduciary duty to its members or shareholders. With respect to the claim against Thain, the Court found that the plaintiffs failed to satisfy the pleading requirements of CPLR 3016(b) which requires that in cases alleging misrepresentation, fraud, and breach of trust the circumstances  constituting the wrong must be stated in detail. The Court fond that the plaintiffs should have been able to recite with more specificity Thain's actual words or actions that were alleged to have been misleading. 

Martin Act Does Not Preclude Common Law Fraud Claim

The Martin Act (General Business Law art. 23-A) grants the Attorney General the power to investigate and bring an action against entities who engage in fraud or deceptive practices in connection with the sale of securities (including the sale of condominium and cooperative interests). There has been some confusion in the case law whether the Martin Act thus precludes a private party from bringing a common-law fraud claim in connection with the sale of such securities.

On Tuesday, the First Department clarified the issue in Kramer v W10Z/515 Real Estate Ltd. Partnership, 2007 NY Slip Op 07763. The First Department held that the Martin Act does not preclude a private party from prosecuting an otherwise valid common-law fraud claim.

The confusion in the case law arose as follows. Under the Martin Act, the Attorney General does not need to allege or prove either scienter or intentional fraud. Thus, in a case Whitehall Tenants Corp. v Estate of Olnick, 213 AD2d 200 [1995], lv denied 86 NY2d 704 [1995], it was held that private parties could not use artful pleadings to press claims of the type that the Attorney General could bring and styled as one for common-law fraud, where the essential elements of common-law fraud were lacking. Unfortunately, as the First Department recognized, Whitehall was erroneously extended in a number of case which were at the pleading stage where the elements of common-law fraud were alleged.

Thus, in Kramer the First Department held that as long as a plaintiff pleads all the elements of fraud with particularity, there is nothing in the Martin Act to prevent that plaintiff from pursuing the common-law fraud cause of action.

Negligent Issuance Of Life Insurance Policy Action Dismissed

While other jurisdictions recognize such claims, New York does not recognize a theory of recovery based on the negligent issuance of a life insurance policy. Last week the Second Department rejected a wrongful death and pain and suffering action based on such a theory in Katchalova v Perchikov, 2007 NY Slip Op 06640.

The administratrix of the decedent's estate brought an action to recover damages for wrongful death and pain and suffering claiming that the defendant insurance companies and insurance agents negligently issued life insurance policies to the decedent and thereby helped to bring about her death. The complaint alleged that one Eugene Perchikov became intimate with the decedent and convinced her to apply for large amounts of life insurance naming him as the beneficiary. Perchikov then accompanied the decedent to meet with various insurance agents and served as her translator during the various application processes for life insurance policies. During the application processes, the decedent misrepresented her income, her occupation, and her relationship with Perchikov. After procuring one million dollar life insurance policies from the defendant insurance companies Perchikov allegedly murdered the decedent in order to obtain the proceeds of the life insurance policies.

The insurance companies moved to dismiss the action. The Second Department affirmed dismissal stating that the circumstances of the case did not even fall under any of the scenarios pursuant to which other jurisdictions had recognized such a theory of recovery.

What Constitutes "Maintenance" Of An Automobile?

Many insurance policies contain provisions providing coverage (or excluding coverage ) for bodily injury arising out of the "maintenance" of an automobile. What constitutes "maintenance" of an automobile in the insurance context? Today the Court of Appeals addressed that question in Guishard v General Sec. Ins. Co., 2007 NY Slip Op 0658.

The plaintiff injured his eye while riveting metal to a van for the purpose of converting it into a "Mr. Softee" ice cream truck. The plaintiffs sought a judgment declaring that the defendant insurance company was obligated under the terms of a commercial general liability policy to defend and indemnify them in a pending personal injury action. The policy at issue excluded coverage for bodily injury "arising out of the ownership, maintenance, use or entrustment to others of any . . . auto" .

The Court of Appeals found that work performed by the injured plaintiff did not constitute "maintenance" of an auto. It stated that "maintenance," as that term is used in an insurance policy, means performance of work on "an intrinsic part of the mechanism of the car and its overall function" (citations omitted). The Court then stated that riveting metal to a van in furtherance of its conversion to an ice cream truck aids in transforming the auto's function, an activity which is distinct from "maintenance." Thus, the insurance company was obligated to defend and indemnify plaintiffs.

Court of Appeals To Decide Fiduciary Duty of Buyer's Agents

The Court of Appeals accepted certification today of a question asked by the U.S. Court of Appeals for the Second Circuit regarding the fiduciary duty of buyer's agents in real estate transactions - Rivkin v Century 21 Teran Realty LLC, 2007 NY Slip Op 06531. The use of real estate agents by buyers in real estate transactions has become increasing poplar in recent years, yet New York law has not yet decided important aspects of the nature of the relationship between the buyer and the agent. In the case at issue, a buyer was using a real estate agency as a buyer's agent to look for property to purchase. One of the brokers in the agency located a property for the buyer, and the buyer made a bid. However, unbeknownst to the buyer, at the same time another broker in the same agency was representing another buyer also interested in the same property. This second buyer bid a higher price, and thus, the first buyer was unable to obtain the property. The first buyer claimed that his broker and/or the agency itself, should have disclosed the fact that another broker in the same office was representing another interested buyer for the property. The first buyer claimed that if he had known that the agency was representing another buyer, he would have changed his bidding strategy, or not relied on the advice of his broker in making his bid.

Since the issue of a buyer's agent's duty to disclose such competing buyers has not been decided by the N.Y. Courts, the Second Circuit certified the following question to the Court of Appeals:

Did [the defendants] breach a fiduciary duty to [the plaintiff] by failing to disclose, in any form, [defendants'] representation of a competing buyer for the property [plaintiff] sought to buy?

The question will be briefed and argued before the Court of Appeals presumably during this term.

Class Action Suit Against "Off-Label" Use Of Pfizer's Neurontin Dismissed

The Food and Drug Administration approved Warner-Lambert's drug Neurontin in 1993 for the treatment of epilepsy. From June 1995 to April 2000, however, Warner-Lambert also engaged in a campaign to promote Neurontin for a variety of "off-label" uses such as pain relief and the treatment of psychiatric conditions such as bipolar disorder and anxiety. Following a six-year investigation of these activities, the United States Department of Justice prosecuted Warner-Lambert for (1) introducing into interstate commerce a misbranded drug that did not have adequate directions on the label for the intended uses of the drug and (2) introducing an unapproved new drug into interstate commerce. Warner-Lambert pled guilty and consented to criminal and civil fines of some $430. Warner-Lambert was acquired by Pfizer, Inc. in 2000.

That was not the end of the "off-label" controversy surrounding Neurontin for in New York one plaintiff sought to commence a statewide class action suit  on behalf of all individuals who purchased Neurontin for "off-label" uses. Last Thursday however, the Third Department affirmed a dismissal of the class action suit finding that the plaintiff failed to state a cause of action in Baron v Pfizer, Inc., 2007 NY Slip Op 05813. 

The plaintiff's action sounded in fraud, violation of General Business Law § 349, and unjust enrichment based upon the fact that she was prescribed and used Neurontin for neck pain. The plaintiff sought a refund of the purchase price of Neurontin on the ground that she would not have purchased the drug absent defendant's deceptive practices. In finding that the complaint was insufficient, the Court found that the plaintiff failed to allege any actual harm or a pecuniary injury. For instance, the Court noted that the plaintiff failed to allege that the Neurontin was ineffective to treat her neck pain, that the product otherwise adversely affected her health, or that the price of the drug was inflated as a result of the defendant's deceptive practices. The Court also stated that the plaintiff's claim that Neurontin was potentially dangerous was only speculative, and was belied by the fact that the "off-label" use of a drug is a widespread and accepted medical practice. Furthermore, the plaintiff failed to allege that her physician's decision to prescribe the drug was influenced by defendant. The plaintiff also had abandoned her common-law fraud claim during the appeal. 

It is unclear how this decision will affect other suits in other jurisdictions.