The Gerffert Company, Inc. et al v. Dean et al

Filing 350

MEMORANDUM & ORDER: For the reasons set forth in the attached Memorandum & Order, the Court dismisses, without prejudice to be re-filed in state court, Plaintiffs' "Diversity of Citizenship Claims" (Counts 1-9) for lack of subject matter jurisdiction. Ordered by Judge Pamela K. Chen on 6/12/2014. (Lo, Justin)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
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THE GERFFERT COMPANY, INC. &
STEPHEN PANIGEL,
Plaintiffs,

-against-

09-CV-266 (PKC)

JAMES DEAN, et al.,
Defendants.
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MEMORANDUM & ORDER ON
MARCH 14, 2014 ORDER TO SHOW CAUSE
REGARDING SUBJECT MATTER JURISDICTION
On March 14, 2014, Plaintiffs were directed to show why the Court has subject matter
jurisdiction over their “Diversity of Citizenship Claims” (Counts 1-9). (See Order to Show
Cause (“Order”), dated Mar. 14, 2014; Dkt. No. 346 (“Pls.’ Br.”).) Based on the absence of
complete diversity between the parties and the unrelated nature of Plaintiffs’ “Diversity of
Citizenship Claims” to their federal Lanham Act claim, the Court finds that it lacks subject
matter jurisdiction over the diversity claims, and dismisses them without prejudice to be re-filed
in state court.

I. Background
For many years, Plaintiffs 1 and Defendants 2 have allegedly been engaged in a war over
the market for religious merchandise. (See Pls.’ Br., at 2-3 (referring to the Complaint as “the
story of how the defendants stole all that the Gerffert company had built over the course of more
than 50 years”).) 3 Plaintiffs’ Complaint separately sets forth two sets of factual allegations to
support two sets of claims, denoted as (i) “Diversity of Citizenship Claims” (Counts 1-9) and (ii)
“Claims Arising Under 15 U.S.C. § 1121, et seq [i.e., the federal Lanham Act] and Pendent State
Claims” (Counts 10-16). (Compl., at 5, 26.)
Under the heading, “Factual Allegations Regarding Diversity of Citizenship Claims,”
Plaintiffs allege that:

1

Plaintiffs are The Gerffert Company, Inc. (“Gerffert”), a New York distributor of
religious merchandise (e.g., holy cards and religious artwork and certificates) and other items,
and its owner, Stephen Panigel (“Panigel”). (Dkt. No. 1 (“Compl.”) ¶¶ 2-3, 32.)
2

Defendant Fratelli Bonella, s.r.l. (formerly, Fratelli Bonella) (“Bonella”), an Italian
manufacturer of religious artwork, is owned and operated by members of the eponymous family,
including Defendants Andrea Bonella (“Andrea”), Mario Bonella, and Gianfranco Bonella.
(Compl. ¶¶ 5, 8-9, 10-12, 17.) Defendant HMH Religious Manufacturing Co., Inc. (“HMH”), a
Rhode Island manufacturer of religious-themed jewelry, is owned and operated by Defendant
James Dean (“Dean”), who also worked as a “commissioned salesman” for Gerffert. (Id. ¶¶ 13,
29.) Non-party William J. Hirten Company, Inc. (“Old Hirten”), a New York distributor of
religious merchandise (e.g., crucifixes, rosaries, statuaries, communion items, and prayer books),
is owned and operated by Defendant Dolores King (“King”), a citizen of New York. (Id. ¶¶ 6,
31-32; see also Dkt. No. 31 ¶ 6 (“King admits that she is a citizen of the State of New York[.]”).)
Defendant William J. Hirten Co., LLC (“New Hirten”), a Delaware distributor of religious
merchandise, is owned and operated by Bonella, Dean, and King as a limited liability company.
(Compl. ¶ 50; see also Dkt. Nos. 332-7 ¶ 1 (“[King is] the Vice President and one-third owner of
[New Hirten][.]”); 295 ¶ 7 (“[New Hirten] admits that [it] is a Delaware limited liability
company[.]”).)
3

Plaintiffs also reference “the Lord of the Rings trilogy,” a fictional account of the battle
for Middle Earth with religious themes, to describe their longstanding conflict with Defendants.
(Pls.’ Br., at 2.)

2

•

For the past 50 years, until around 2007, Gerffert was the “exclusive U.S.
distributor” of Bonella’s artwork, pursuant to distributorship agreements with
Bonella (id. ¶¶ 18-19);

•

In 2004, Panigel devised a “plan to increase U.S. sales of Bonella artwork by
expanding the types and categories of religious merchandise Gerffert would sell.”
Panigel thus began discussions with King and Dean regarding Gerffert’s potential
acquisition of Old Hirten and HMH, which would enable Gerffert to establish a
new “‘one stop shop’ for the purchase of religious articles” called “GerffertHirten, LLC” by combining the three companies (id. ¶¶ 28, 32-33);

•

Thereafter, in anticipation of the potential acquisition, Panigel allegedly:


Invested time and money into redeveloping Old Hirten’s line of merchandise
and renovating the second floor of the Gerffert factory to accommodate Old
Hirten (id. ¶¶ 38-39);



Reached an agreement with Dean for his transfer of HMH to “Gerffert-Hirten,
LLC,” in exchange for Dean getting a 10% ownership interest and Gerffert a
90% ownership interest in the new company (id. ¶ 34);



Arranged for Gerffert’s acquisition of non-party Regina Manufacturing
Company, Inc. (“Regina”), another Rhode Island manufacturer of religiousthemed jewelry, “with the intention of combining Regina’s jewelry line with
HMH’s” (id. ¶ 33); and



Invested in “redeveloping and recapitalizing” HMH and Regina and the
combination thereof (id. ¶ 39);

•

Bonella “solicited, requested, approved and endorsed” Panigel taking the above
steps to increase its U.S. sales (id. ¶ 36);

•

Once Panigel had begun taking these steps, however, King, at the behest of Dean
and Andrea, became more difficult to negotiate with, and, in March 2007, King
terminated negotiations with Panigel for Gerffert’s acquisition of Old Hirten (id.
¶¶ 40-43);

•

In April 2007, Andrea made an alternative proposal to Panigel: forming a new
company that would acquire Old Hirten and distribute a broader line of
merchandise, using Bonella artwork, with Bonella, Dean, and Panigel as one-third
(33-⅓%) owners (id. ¶ 46); and

•

Finally, in September 2007, after Panigel rejected Andrea’s proposal, Bonella,
Dean, and King formed New Hirten, which acquired Old Hirten and began
distributing the “Hirten merchandise line,” including its newly-developed
Bonella-related merchandise (id. ¶ 50).

3

Based on these (pre-New Hirten) factual allegations, Plaintiffs claim that Defendants breached
and/or tortiously interfered with Gerffert’s distributorship agreements with Bonella and with
Gerffert’s agreement with Dean for the transfer of HMH; unjustly enriched themselves with the
benefits of the investments by Gerffert in Old Hirten, HMH, and Regina; and otherwise acted
improperly in the negotiations over Gerffert’s potential acquisition of Old Hirten and HMH.
(See id. ¶¶ 17-108.)
By contrast, under the heading, “Factual Allegations Regarding Claims Arising Under 15
U.S.C. § 1121, et seq [i.e., the federal Lanham Act] and Pendent State Claims,” Plaintiffs make
(post-New Hirten) factual allegations, including, for instance, that New Hirten:
•

“[O]ffers the same or similar products and services as provided by Gerffert and
caters to potential customers in the same or similar geographical area, within the
same or similar price range” (id. ¶ 119);

•

Has diverted Gerffert’s customers using its “name, reputation and proprietary
work product” and, indeed, in the Summer of 2008, these customers reportedly
received catalogs from New Hirten which contained the “proprietary stock
numbers, item numbers, photography, header language or page layouts” that
Gerffert had developed for the “same merchandise” in its prior catalogs (id.
¶¶ 121-24);

•

Has made other misstatements about Gerffert and New Hirten to Gerffert’s
customers (id. ¶¶ 162-63); and

•

Uses “Gerffert’s confidential customer list, sources of supply and proprietary
stock numbering system,” stolen by Dean (id. ¶ 172).

These factual allegations support Plaintiffs’ claims that, after forming New Hirten, Defendants
infringed upon Gerffert’s rights under Section 43(a) of the federal Lanham Act, 15 U.S.C.
§ 1125(a), by using Gerffert’s “trade dress” in New Hirten’s catalogs, and that Defendants’
conduct also violated other state-law causes of action, including “Injurious Falsehood” and
“Misappropriation of Trade Secrets.”

(See id. ¶¶ 109-84; see also Dkt. No. 336, at 8-11

4

(characterizing the federal Lanham Act claim as a “trade dress infringement claim” relating to
New Hirten’s catalogs).)
On January 22, 2009, Plaintiffs filed the Complaint. Discovery was conducted over the
course of several years. Four years later, on March 8, 2013, Judge Margo K. Brodie, who was
previously assigned to this case, 4 set a briefing schedule for Defendants’ summary judgment
motion. (Minute Entry, dated Mar. 8, 2013.) On October 29, 2013, the parties fully briefed that
motion, currently pending before the Court. (Dkt. No. 331.)
On March 14, 2014, the Court issued the Order to Show Cause regarding its subject
matter jurisdiction over Plaintiffs’ “Diversity of Citizenship Claims,” citing the fact that King
and New Hirten, by virtue of King’s one-third ownership, are citizens of New York just like
Plaintiffs. See Handelsman v. Bedford Vill. Assocs. Ltd. P’ship, 213 F.3d 48, 51-52 (2d Cir.
2000) (Sotomayor, J.) (collecting cases for the proposition that “a limited liability company has
the citizenship of its membership”). Because these claims are brought, in part, against King and
New Hirten as non-diverse Defendants, their presence destroys the Court’s original jurisdiction
over all the pre-New Hirten claims, which are based on diversity of citizenship (28 U.S.C.
§ 1332). See Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 554 (2005) (Kennedy,
J.) (“Incomplete diversity destroys original jurisdiction with respect to all claims[.]”). 5
In response, Plaintiffs argue, for the first time, that—despite the fact that Counts 1-9 are
denoted as “Diversity of Citizenship Claims” in the Complaint—the Court “should exercise its
4

Prior to Judge Brodie, this case was assigned to Judge Kiyo A. Matsumoto.

5

See also K.M.B. Warehouse Distribs., Inc. v. Walker Mfg. Co., 61 F.3d 123, 130 (2d Cir.
1995) (stating that, even though “the second and third claims involved only [the plaintiff], a
citizen of New York and Connecticut, and [one defendant], a citizen of Delaware and
Wisconsin,” “complete diversity between all plaintiffs and all defendants was absent since
[other] defendants . . . and [the] plaintiff . . . are all citizens of New York” with respect to the
remaining state-law claims).

5

supplemental jurisdiction over” these claims, because they involve the “same case or
controversy” as the federal Lanham Act claim (Count 10) over which the Court has original
jurisdiction (15 U.S.C. § 1121; 28 U.S.C. § 1331). (Pls.’ Br., at 1.) Plaintiffs, in other words,
ask that the Court assert the same supplemental jurisdiction over the previously-denominated
diversity claims that it asserts over the state-law claims brought in conjunction with Plaintiffs’
federal Lanham Act claim.
II. Discussion
A. Legal Standard
“[I]n any civil action of which the district courts have original jurisdiction, the district
courts shall have supplemental jurisdiction over all other claims that are so related to claims in
the action within such original jurisdiction that they form part of the same case or controversy
under Article III of the United States Constitution.” 28 U.S.C. § 1367(a) (emphasis added). To
satisfy the “same case or controversy” requirement, the state-law claims must share a “‘common
nucleus of operative fact’” with the federal claim, which means that “the facts underlying the
federal and state claims substantially overlap[]” or “presentation of the federal claim necessarily
br[ings] the facts underlying the state claim before the court.” Lyndonville Sav. Bank & Trust
Co. v. Lussier, 211 F.3d 697, 704 (2d Cir. 2000) (emphasis added) (quoting United Mine
Workers v. Gibbs (“Gibbs”), 383 U.S. 715 (1966) (Brennan, J.)). 6
Even if the state-law claims satisfy the “same case or controversy” requirement, and are
thus properly subject to the district court’s supplemental jurisdiction, the district court still “may
decline to exercise supplemental jurisdiction,” under “enumerated circumstances” and upon

6

See also Achtman v. Kirby, McInerney & Squire, LLP, 464 F.3d 328, 335 (2d Cir. 2006)

(same).

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further consideration of “judicial economy, convenience, and fairness,” i.e., the “Gibbs factors.”
28 U.S.C. § 1367(c) (emphasis added); Itar-Tass Russian News Agency v. Russian Kurier, Inc.,
140 F.3d 442, 446-47 (2d Cir. 1998).
The distinction between subsection 1367(a) and subsection 1367(c) is significant: the
former establishes the district court’s authority to consider the state-law claims based on its
supplemental jurisdiction, whereas the latter establishes its discretion not to consider them, when
such authority would otherwise exist.

See Itar-Tass, 140 F.3d at 445 (“28 U.S.C.

§ 1367 . . . provides federal judges with both the power to exercise supplemental jurisdiction and
the discretion, in specified circumstances, to decline to entertain such claims.”). 7 Only the latter
incorporates the Gibbs factors. See id. at 446-47.
B. Analysis
While it is regrettable that the parties have litigated this case for so long before the
jurisdictional issue was identified, “federal courts have an independent obligation to ensure that
they do not exceed the scope of their jurisdiction,” and “[o]bjections to subject-matter
jurisdiction . . . may be raised at any time.” Henderson v. Shinseki, __ U.S. __, 131 S. Ct. 1197,
1202 (2011) (Alito, J.) (emphasis added). 8
There is no dispute that, as raised by the Order to Show Cause, the Court lacks original
jurisdiction over Counts 1-9, due to the absence of complete diversity (28 U.S.C. § 1332). (See

7

See also Briarpatch Ltd., L.P. v. Phoenix Pictures, Inc., 373 F.3d 296, 308 (2d Cir. 2004)
(“The fact that the district court has the power to hear these supplemental claims [under 28
U.S.C. § 1367(a)] does not mean, of course, that it must do so. Instead, it may decline to
exercise its power based on the factors laid out in 28 U.S.C. § 1367(c). This decision is left to
the exercise of the district court’s discretion.”).
8

See also ACCD Global Agric. Inc. v. Perry, No. 12-CV-6286, 2013 WL 840706, at *1
(S.D.N.Y. Mar. 1, 2013) (“[F]ederal courts are mandated to sua sponte examine their own
jurisdiction at every stage in the litigation[.]”) (emphasis in original).

7

Pls.’ Br., at 1 (conceding that Counts 1-9 are “denominated the ‘diversity of citizenship claims,”
and that there is an “absence of complete diversity between the parties”).) The sole issue is
whether the Court has the power to assert its supplemental jurisdiction over Counts 1-9, pursuant
to 28 U.S.C. § 1367(a). The Court finds that it does not.
Contrary to Plaintiffs’ arguments (see Pls.’ Br., at 2-5), Counts 1-9 do not emanate from
the same “nucleus of operative fact” as the federal Lanham Act claim (Count 10), and thus fail to
encompass the “same case or controversy” needed to establish the Court’s supplemental
jurisdiction. Lyndonville, 211 F.3d at 704 (quotations omitted). The fact that Plaintiffs, by way
of separate headings in the Complaint, distinguished the factual allegations relating to Counts 19, i.e., their diversity claims, from the factual allegations relating to Counts 10-16, i.e., their
federal Lanham Act and related state-law claims, is difficult to ignore. See supra Section I.
Indeed, the federal Lanham Act claim neither “substantially overlap[s]” with, nor
“necessarily” elicits, the factual allegations supporting Counts 1-9. Lyndonville, 211 F.3d at 704.
For the federal Lanham Act claim, Plaintiffs assert—based on their post-New Hirten factual
allegations—that the New Hirten catalogs appropriated “distinctive” and “nonfunctional” aspects
of Gerffert’s “trade dress,” i.e., its prior catalogs, that are likely to cause “confusion” over the
source of Bonella-related merchandise. E.g., Fun-Damental Too, Ltd. v. Gemmy Indus. Corp.,
111 F.3d 993, 999 (2d Cir. 1997) (citing the elements of trade dress infringement claims). The
federal Lanham Act claim does not depend on any pre-New Hirten factual allegations that
involve the 2004 agreement between Gerffert and Dean regarding the transfer of HMH;
Gerffert’s investments in Old Hirten, HMH, and Regina between 2004 and 2007; or the

8

negotiations about the potential acquisition by Gerffert of Old Hirten and HMH, which ended in
late 2007. See supra Section I. 9
While the factual allegation of distributorship agreements between Gerffert and Bonella,
dating as far back as 1957, might provide context for the federal Lanham Act claim, it is not
necessary for establishing any element of that claim, such as whether certain aspects of
Gerffert’s prior catalogs were “distinctive,” with respect to identifying Gerffert as the source of
Bonella-related merchandise. Fun-Damental Too, 111 F.3d at 999. To wit, “while facts relevant
to [Counts 1-9] might provide background with respect to the [federal Lanham Act claim], more
is required.” Burgess v. Omar, 345 F. Supp. 2d 369, 372 (S.D.N.Y. 2004) (finding a lack of
supplemental jurisdiction over counterclaims which “focus on what amounts to alleged looting of
the [business] by the plaintiff over a five to six year period,” whereas the federal Exchange Act
claims only “focus[] on what transpired during a relatively short period . . . in relation to [the
plaintiff’s] sale of the business”).

9

Notably, there is no intent requirement for federal Lanham Act claims. See CGS Indus.,
Inc. v. Charter Oak Fire Ins. Co., 720 F.3d 71, 83 (2d Cir. 2013) (“[The plaintiff’s] Lanham Act
section 43(a) claim did not require it to prove that [the defendant] intended to infringe on its
trademark, as such a claim does not require proof of intent to deceive.”) (quotations omitted). At
the same time, “evidence that the imitative mark was adopted in bad faith” is one of eight, nondispositive factors that the district court may consider in determining the “likelihood of
confusion” element. Starbucks Corp. v. Wolfe’s Borough Coffee, Inc., 588 F.3d 97, 115 (2d Cir.
2009). The “bad faith” factor refers to copying with an “intent to confuse,” and not an “intent to
copy.” Id. at 117 (quotations omitted). In this case, the factual allegations about the prior
negotiations, which purportedly led to Defendants creating New Hirten and taking over the
distribution of Bonella-related merchandise, might show that Defendants intended to copy
Gerffert’s catalogs, but not that they intended to confuse customers into thinking that New Hirten
and Gerffert were the same company. If anything, the factual allegations about the statements
that Defendants made after New Hirten’s formation are more relevant in showing their intent to
confuse and, for that reason, these post-New Hirten factual allegations are properly the basis for
state-law claims over which the Court does have supplemental jurisdiction.

9

Plaintiffs’ secondary argument—essentially, that the Court’s interests in judicial
economy, convenience, and fairness favor its exercise of supplemental jurisdiction over Counts
1-9 (see Pls.’ Br., at 5-7)—is inapposite. As discussed above, the Gibbs factors only apply, when
the district court is deciding to decline the exercise of supplemental jurisdiction over state-law
claims which it is already entitled to consider. See Itar-Tass, 140 F.3d at 446-47. Here, the
Court has no such jurisdiction to decline to exercise, despite considerations of judicial economy,
convenience, or fairness.
III. Conclusion
The Court DISMISSES, without prejudice to be re-filed in state court, Counts 1-9 for lack
of subject matter jurisdiction.
SO ORDERED:

/s/ Pamela K. Chen
PAMELA K. CHEN
United States District Judge
Dated: June 12, 2014
Brooklyn, New York

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