NXIVM CORPORATION et al v. ROSS INSTITUTE et al

Filing 518

OPINION fld. Signed by Judge Dennis M. Cavanaugh on 12/18/13. (sr, )

NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY

\X[V\l CORPORATION. formerl\
kno’n as EXECUTIVE SUCCESS
PROGRAMS. INC,, and FIRST
PRINCIPLES. INC..
Plaintiffs.

:

Hon. Dennis M. Cavanaugh
OPINION

:

Civil Action No. 06-cv-1051 (DMC)(MF)

V.

ESTATE OF MORRIS SUTTON,
ROCHELLE SUTTON, THE ROSS
INSTITUTE. RICK ROSS a/k/a “RICKY
ROSS”, STEPHANIE FRANCO, PAUL
MARTIN, PH.D.. and WELLSPRING
FlTRlVf, INC..
Defendants.

DENNIS M. CAVANAUGH, U.S.DJ.:
Plus matter comes beftre the Court upon the Motion of the Estate ot Morris Sutton and
Rochelle Sutton (collectively the “Sutton Defendants”) for Summary Judgment and the

lotion

of Stephanie Franco (‘Franco”) for Summary Judgment. Pursuant to FED. R. C’v, P 78. no oral
argument was heard. Based on the following and for the reasons expressed herein, Franco’s
Motion br Summary Judgment is (jellied and the Sutton Defendants’ Motion for Summar
Judgment is granted in part and denied in part.

I

BACKGROUND’
A. Factual Back2round
1) The Parties
Plaintiff NXIVM Corporation (NXIVM”) was formerly known as Executive Success

Programs, Inc. NXIVM’s primary business involves conducting Executive Success training
programs designed primarily for managers. chief executives. and other business protessionLlls.
Plaintiff First Principles. Inc. (“First Principles”) has developed many ol’ the proprietary
materials that are used by NX1VM in its business. NXIVM has a license agreement with First
Principles for the trade secret and patent pending technology underlying the work. Both NXIVM
and First Principles are corporations formed and existing under the laws of the State of Delaware
and are authorized to do business in the State of New York, with their principal places of
business located at the same address in Albany. New York. Plaintiffs’ programs proxide

training

in areas such as logical analysis and problemsolving skills, and are based primarily on the
Rational Inquiry system developed by Keith Raniere. The Rational lnquiry theory and
TM
’
T
practice allegedly involves analyzing and optimizing how the mind handles data.
The Sutton Defendants are individuals residing in the state of New Jersey. Franco,
daughter of Morris Sutton. is also an individual residing in the state of New Jerse.
2) Michael Sutton and NXIVM
Michael Sutton is the son of the Sutton Defendants and the half-brother of Franco.
Michael Sutton enrolled in one of Plaintiffs’ courses in the fall of 2000 and eventually became
one

of

Plaintiffs’ coaches. Plaintiffs allege that Michael Sutton turned to NX1VM in order to help

him deal with the

stress of

living a “double life,”

as

he was concealing that fact that he had a

The ftcts from this section are taken from the parties’ pleadings.

2

non-Sephardic girlfriend and had fathered a child with her.
3) Franco and NXIVM
Franco is a former participant of Plaintiffs’ training programs. Like Michael Sutton,
Franco was accepted into several increasing levels of Plaintiffs’ coaching program to learn the
Rational Inquiry method. From this additional training, Franco acquired portions of Plaintiffs’
’
tm
protected materials that are available only through the coaching program to clients who represent
their intent to become trainers exclusively for Plaintiffs. Before attending the classes. Franco
signed a short document that stated that she would return all course materials and would not
copy. duplicate, transmit, teach, or otherwise use the methods learned in NXIVM’s classes (the
“Short-Form Agreement”). Plaintiffs also require students to sign a seven-page confidentiality
agreement before taking classes (the “Long-Form Agreement”). Franco claims that she never
signed the Long-Form Agreement.
4) The Sutton Defendants’ Intervention with Michael Sutton
Rick Ross is the founder and Executive Director of The Ross Institute. Ross holds
himself out as “an internationally known expert on cults and other radical, extreme and often
unsafe groups.” Ross earns revenue primarily from conducting cult deprogrammings” of
individuals and through the sales of related products such as audio and video tapes. Ross was
hired by the Sutton Defendants to conduct an intervention with Michael Sutton concerning his
association with NXIVM.
Beginning in November 2002, Ross conducted several interventions with Michael Sutton.
The first intervention took place over the course of five days, during a family vacation in Florida.
The second intervention took place at the Sutton Defendants’ home in New Jersey. Franco was
present during the New Jersey intervention. During the interventions, Ross allegedly asked

3

Michael Sutton to provide him with Plaintiffs’ protected materials. Michael Sutton refused,
informing Ross that the materials were confidential. At
COl)V

some point. I)SS

obtained 1’roii Iranco a

01 all of Plaintiffs protected iateria1s in her possession. allegedly in violation ol Iranco s

confidentiality agreement with Plaintiffs. However, it is disputed whether Franco directly gave
the materials to Ross, or instead gave them to Jeffrey Sutton, her half-brother, who later provided
Ross with the materials without her knowledge.
5) Ross’s Website and the MartinlHochman Articles
Michael Sutton eventually told his father that he would not disassociate from Plaintiffs.
Morris Sutton allegedly responded angrily and indicated to Michael that he would do whateer
was necessary to destroy Plaintiffs’ business. Plaintiffs allege that the Sutton Defendants directed
Ross “to engage in a series of activities

.

.

.

to disparage and damage Plaintiffs’ business.” Such

acts purportedly included obtaining and distributing Plaintiffs’ protected materials to others and
hiring individuals to write articles disparaging Plaintiffs’ and their programs.
The Sutton Defendants allegedly hired Paul Martin, P.h.D. and John Hochman, M.D. to
provide negative and damaging written analyses of Plaintiffs and Plaintiffs’ training courses that
conclude that Plaintiffs are a “cult” or are “cult—like.” Ross, at the direction of the Sutton
Defendants, allegedly provided all or some of Plaintiffs protected materials to Martin and
Hochman. Specitically. Defendant Martin authored two

pieces:

Exec zilo e Succ esv Pt ogi ams Inc and Robei t Jay li/ton

1 Critical Jnalvsis oft/ic

Lilzt Cik 1 za of J/ioucht Ri lot in as

Applied to the Executive Success Programs (“the Martin articles”). 1iochman authorized a piece
entitled. A Forensic Psychiatrist Evaluates ESP (“the Hochman article”). Plaintiffs allege that
both pieces mischaracterize Plaintiffs’ materials and training programs and mislead readers
regarding the nature of Plaintiffs and their programs. l3oth the Martin articles and the I lochman

4

article were published on Ross’s websites.
13. Procedural Background
This case xvas originally commenced as two separate actions in the Northern Distriu of
New York in August 2003. and alleged that Franco. among others. violated the Lanham Act and
is liable for copyright infringement. Both actions sought cx pane temporary restraining orders to
remove the Hochman and Martin articles from the Ross Institute’s websites, The District Court
denied both cx panic applications. Additionally, the District Court denied Plaintiffs’ applications
for preliminary injunctions. The Second Circuit Court of Appeals affirmed the District Court’s
denial of the preliminary injunction applications, finding that Plaintiffs could not demonstrate a
likelihood of success on the merits. See NXIVM v, Ross Inst., 364 F,3d 471 (3d Cir, 2004). The
United States Supreme Court denied Plaintiffs’ petition br a writ of certiorari.
Thcrcallcr. the District Court granted Defendant Franco’s motion to dismiss Plainti fi
Lanharn Act, Copvri ght Act. tortious interference and common—law fraud claims, Additionall.
the District Court granted in part and denied in part Plaintiffs’ motion to amend their pleadings
and to add the Suttons as defendants. Specifically, the I)istrict Court denied Plaintiffs leave to
plead fraud, conversion and prima facie tort claims and granted Plaintiffs leave to assert breach
of contract and misappropriation of trade secrets claims. The District Court denied Plaintiffs
leave to file claims against the Sutton Defendants for conversion, Lanham Act violations, unfiuir
competition and prima facic tort. Plaintiffs were granted leave to assert claims against the Sutton
i)cfendants for product disparagement. tortious interference with contract, interference with
prospective contractual relations and copyright infringement.
On April 19, 2005, Plaintiffs filed their Amended and Consolidated Complaint.
Thereafter, the I)istrict Court granted the Sutton Defendants’ motion to transfer this action

pursuant to 28 U.S.C.

§

1404(a) and 28 U.S.C.

§

1406. On •June 27. 2007. this Court dismissed

I1ainti ifs’ product disparagement claim, one of Plaintiffs’ tortious interièrence with contractual
relations claims, and Plaintiffs’

tortious intertèrence

with prospective economic advantage claim

against all Defendants, and dismissed Plaintiffs’ copyright infringement claim against the Sutton
Defendants. This Court denied Plaintiffs Motion to revise that ruling.
The Sutton Defendants and Franco filed the instant Motions for Summary Judgment on
May 10, 2013 (ECIF Nos. 485—86). Plaintiffs tiled Oppositions on July 31, 2010. Defendants tiled
Replies on October 14. 2() 13. Plaintiffs tiled a Sur—Replv to both Oppositions on December 2.
2013.
IL

STANDARD OF REVIEW
Pursuant to Fed. R. Civ. P. 56(c), summary judgment must be granted “if the pleadings.

depositions, answers to interrogatories, and admissions on tile, together with the aflidavits. if any.
show that is no genuine issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law,” The moving party “bears the initial responsibility of inlhrming the
district court of the basis thr its motion, and identifying those portions of the the record which it
I
believes demonstrate the absence of a genuine issue of material li.ct.” Celotex Corpvatrett. 477
U.S. 317, 323 (1986). A genuine issue of material fact exists only if sufficient evidence is presented
favoring the nonmoving party for a jury to return a verdict for that party. Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 248 (1986). ‘Thus,

to

withstand a properly supported motion for

summary judgment. the nonmoving party must identify specilIc facts and aftirmative evidence that
contradict those offered by the moving

party.”

Red Roof Franchising. LLCv, AA Hopjtilitv

Noithshoic 11 C 877 F Supp 2d 140, 147 (D NJ 2012) (citmg Andtison 477 U S at 2’6 7)
U) do so, j aj party opposing summary judgment must do more than lust rest upon mere

6

allegations, general denials, or vague statements.” Id. (citing Saldana v. Kmart Corp., 260 F.3d
228. 232 (3d Cir. 2001)). Accordingly. “[wjhere the record taken as a whole could not lead
a
rational trier of fact to find for the non-moving party, there is no ‘genuine issue for triaL”
jsushita Flee. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
ill.

l)ISCUSSION
A. Misappropriation of Trade Secrets Claim against Franco and the Sutton
Defendants
1) Choice of Law

Choice oliaw in a diversity case is governed by the rules of the forum state. rriner

\

Stanton, 475 F.3d 497. 499—500 (3d Cir. 2007). New Jersey employs the ‘most significant
relationship” test to choice—of—law quest ions, which requires. in the first instance, a determination
of whether an actual conflict exists. Nafarv.Hollvwood_npigvInc., 339 F. Appx 2 1 6,
220 (3d Cir, 2009). Factors for this Court to examine are i) where the injury occurred; 2) where
the conduct causing the injury occurred: 3) the ‘domicile, residence, nationality, Place of
incorporation and place of business of the parties:” and 4) the place where the relationship

heteen the parties is centered. P.V. cx rd. T.V. v. Camp Ja ccc. 962 A.2d 453. 461-62 (2008).
The parties concede that an actual conflict exists between New Jersey and New York la\\ as to
Plaintiffs’ misappropriation of trade secrets claim because New Jersey law requires that the trade
secret as disclosed to a competitor and that the competitor used the trade secret,i
analyzing the factors set forth in Camp Jaycee, this Court finds that Nex York law should apph
to Plaintiffs’ misappropriation of trade secrets claim against Franco because her alleged signing
of the contract with NXIVM took place in New York. she received the course materials that she
allegedly misappropriated in New York, her relationship with NX1VM is centered on the classes
2

There is no choice of law issue with the other claims addressed in this Opinion.

7

she took in \e ‘york, and she allegedly injured a company that has its principal place of’
business in New York. However, this Court finds that New Jersey law should apply to Plaintiffs’
misappropriation of trade secrets claim against the Sutton Defendants, as they have no real
connection with New York and their alleged wrongful actions all occurred in New Jersey.
2) Franco

lo establish a claim of misappropriation of trade secrets in New York. a plainti 11 must
sho\\ :

‘(

1) that ii possessed a trade secret, and (2) that the defendants used that trade secret in

breach of an agreement, confidential relationship or duty, or as a result of discovery by improper
means,” Medtech Products Inc. v. Ranir. LLC, 596 F. Supp. 2d 778. 787 (SDNY. 2008)
(citation omitted). A trade secret is any formula, pattern, device or compilation of miormation
which is used in ones business, and which gives him an opportunity to obtain an advantage over
competitors who do not know or use it.” Ashland Mgmt. Inc. v. Janien. 82 \.Y.2d 395 ( 1 093
(citation omitted). While New York courts consider a number of factors in determining

hether

information qualifies as a trade secret, “the most important consideration is whether the
information was kept secret.” Sasgua Grp., Inc. v. Courtney, No, 10-528, 2010 WL 3613855, at
*16 (LD.N.Y. Aug. 2.2010) report and recommendation adopted, No, lQ-CV-528.
2010 WL
3702468 (E.D.N.Y. Sept. 7. 2010).
First. Franco asserts that Plaintiffs’ course materials are not trade secrets. arguing that the
materials are publicly available because they have been registered v ith the Jnited States
Copyright Office (‘USCO”), have been made public in patent applications, or were made part of’
a public record in a court proceeding. in response, Plaintiffs submitted a declaration of’ expert
Nancy Salzman. who set fbrth charts showing that certain inlormation published in the Martin
articles and the Hochman article were never made public. Defendants ask this court to reject

8

Salzman’s deposition under the sharn allidavit doctrine” This doctrine allows a trial court to
3
disicg ic1 in 11ida it that contiadicts a piioi dLposition hminz

\1I \m P. IthskLlL.i Irìc

503 F.3d 247. 253 (3d Cir. 2007). However. the Third Circuit rakes a ‘tlexihle approach’ to this
doctrine and has stated that ‘not all contradictory affidavits are necessarily shams,” [ç[ at 254.
This Court declines to disregard Salzman’s, as she has explained that her previous

inCOnSiStent

statements were accidental. For example. when she offered her opinion that certain materials
were filed with the USCO, she did this upon the mistaken belief that a copyright stamp appearing
on a document implies registration.
Further. this Court finds that a number of issues of fact exist as to whether Plainti ITs
otherwise took precautions to maintain the secrecy of their alleged trade secrets, For example,
Plainti ITs dispute I ranco s allegation that NXIVM virtually never asks students to return their
course materials. Further, while Franco claims that NXIVM distributes its coaching materials
without taking any measures to ensure that these materials will be returned, Plaintiffs claim that
they vigorously pursue former coaches who do not return their materials, Finally, while 1’ranco
claims that NXIVM distributed course materials to her even though she never signed a Long—
Form Agreement, Plaintiffs’ witnesses claim that Franco did in fact sign this agreement.
This court also finds that issues of material fact exist with respect to the second element
of’ misappropriation of trade secrets. particularly whether a contract existed between Franco and
Plaintiffs, This issue is addressed in more detail below, Accordingly, Franco’s Motion lbr
Summary Judgment for Plaintiffs’ misappropriation of trade secrets claim is denied,

This argument is actually raised in the Sutton Defendants’ Reply. However, as the moving papers of Franco and
the Sutton I)efendants consistently relerence to one another, this Court will consider this argument in decidin
Franco’ s Motion.

9

3) The Sutton Defendants
In New

Jersey. to state a claim for misappropriation of’ trade secrets.
a plaintilY must

establish the 1()1lO\Viflg e1eients:
( R A trade secret exists; (2) the information comprising the trade secret was
communicated in confidence by plaintiff to the Ldefendant1; (3) tile secret
information was disclosed by that [defendant] and in breach ofthat contHence: ($
the secret inlormation was acquired by a competitor with knowledge of the
[defendant’sl breach of confidence (5) the secret information was used by the
competitor to the detriment of plaintiffi and (6) the plaintiff took precautions to
maintain the secrecy of the trade secret.
Jurista v, Arnerinox Processing, Inc., 492 B.R. 707, 771 (D.N.J. 2013).
The Sutton Defendants correctly argue that it is undisputed that Plaintiffs cannot prove
elements 1ve and six, as they have not shown that a competitor acquired and used Plaintiffs’
trade secrets. lranco and the Sutton Defendants clearly are not competitors of NXIVM. As ftr
Ross. Plaintiffs have not set forth sufficient evidence that Ross is a competitor and the Second
Circuit has already stated that Ross is “not trying to get into the relevant market that is NXlVis
central business concern.” NTXTVM. 364 F.3d at 482. Accordingly, the Sutton Defendants’
Motion for Summar Judgment for Plaintiff’s misappropriation of trade secrets claim is granted.
B. Breach of Contract Claim against Franco
Plaintiffs claim that Franco is liable for breach of contract because she violated the
conditions of the Short-Form and Long-Form Agreements. Franco first argues that she never
signed the Long—Form Agreement. This is clearly a disputed fact, as several of Plaintiffs’
witnesses claim otherwise. Second, Franco argues that the agreements are unenforceable as
against public policy because they attempt to protect pieces of information that are not trade
secrets. I Tovever, there are several issues of fact surrounding whether the course materials are
trade secrets. such as whether NXTVM allowed its students to keep the course materials after
they left. Finally, there are numerous issues of fact as to whether NXIVM was damaged by
10

Franco’s actions. Accordingly. Franco’s Motion for Summary Judgment for Plaintiffs’ breach of
contract claim is denied,
C.

lortious

Interference with Contract Claini against the Sutton 1)efendants

Pu state a claim for tortious interference with contract, a plaintiff must

show

( 1) an

existing contractual relationship (2) intentional inter1rence with that relationship: (3) the
malicious nature of the interference; and (4) damages resulting from the interference,’ Matrix
Essentials, Inc. v. Cosmetic Gallery. Inc.. 870 F. Supp. 1237. 1247 (D.N.J. 1994) aff’d. 85 F.3d
612 (3d Cir. 1996). 1 lere. all four elements involve disputed facts. First. as discussed above, the
parties dispute whether Franco signed the Long-Form Agreement and whether the Long-Form
and Short-Form contracts are enforceable. Second, the iarties dispute whether the Sutton
Defendants had knowledge of Franco’ s purported agreement with iXlVN 1. Third. the Sutton
Defendants argue that any actions taken by them were done with the intention of helping
Michael Sutton, whereas Plaintiffs argue that the Sutton Defendants were motivated by a desire
to destrov NXIVM. Finally, the parties dispute whether Plaintiffs have the ability to show that
they suffered any damages as a proximate result of the Sutton T)efendants’ conduct. Accordingly.
the Sutton Defendants’ Motion for Summary Judgment is denied for Plaintiffs’ tortious
interhrence with contract claim.
IV.

CONCLUSION
For the foregoing reasons Franco’s Motion for Summary Judgment is denied and the

Sutton Defendants’ Motion br Summary Judgment is granted in part and denied in part.

Date:
Original:
cc:

December
2013
Clerks Of ice
Hon. James B. Clark U.S.M.J.
All Counsel of Record
File
,

1 1.