Point 4 Data Corporation et al v. Tri-State Surgical Supply And Equipment, LTD. et al
Filing
201
MEMORANDUM & ORDER denying 159 Motion to Amend/Correct/Supplement. For the reasons stated in the attached Memorandum & Order, the Court denies plaintiffs' belated motion to amend their complaint and add new parties. Ordered by Magistrate Judge Roanne L. Mann on 6/27/2012. (Williams, Jennifer)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
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POINT 4 DATA CORP., et al.,
Plaintiffs,
-against-
MEMORANDUM
AND ORDER
11-CV-726 (CBA)
TRI-STATE SURGICAL SUPPLY &
EQUIPMENT, LTD., et al.,
Defendants.
------------------------------------------------------------x
ROANNE L. MANN, UNITED STATES MAGISTRATE JUDGE:
In February 2011, plaintiffs Point 4 Data Corporation and Dynamic Concepts, Inc.
(collectively, “plaintiffs”) commenced this action against defendants Tri-State Surgical Supply
& Equipment, Ltd. (“Tri-State”), SJ Computers, and Shmuel Judkovitz (collectively,
“defendants”). See Complaint (Feb. 14, 2011) (“Compl.”), Electronic Case Filing Document
Entry (“DE”) #1. More than a year later, and only two-and-a-half months prior to the end of
fact discovery, plaintiffs, over Tri-State’s objection, moved to amend the complaint, seeking to
add five new defendants — two corporate officers of defendant Tri-State and three corporate
entities related to Tri-State. See Memorandum in Support of Plaintiffs’ Motion to Amend (“Pl.
Mot.”), DE #160-2; Tri-State Memorandum in Opposition to Plaintiffs’ Motion to Amend
(“Def. Opp.”), DE #168.
On May 31, 2012, the Honorable Carol B. Amon referred plaintiffs’ motion to the
undersigned magistrate judge. See Order (May 31, 2012). For the reasons set forth below,
this Court denies plaintiffs’ motion to amend.1
BACKGROUND2
I.
The Original Complaint and Early Discovery
For a number of years, plaintiffs licensed and distributed software to defendant Tri-
State. See Compl. ¶ 2. On February 14, 2011, plaintiffs filed the instant action, claiming that
the three defendants -- Tri-State and its outside computer consultants -- unlawfully hacked into
and modified plaintiffs’ software to enable Tri-State to circumvent the software’s security
protections (hereinafter, the “Crack”). See generally id. Plaintiffs alleged that the Crack
violated Tri-State’s licensing agreement; the Digital Millennium Copyright Act, 17 U.S.C. §
1201 et seq.; and other federal and state laws. See Compl. ¶¶ 34-71. Plaintiffs also sought a
temporary restraining order and preliminary injunction prohibiting Tri-State from using
plaintiffs’ software. See id. at pp. 22-23. On the same date that the complaint was filed, the
Honorable Raymond J. Dearie, the district judge originally assigned to this case, signed a
seizure order and TRO. See Order to Show Cause for Preliminary Injunction (Feb. 14, 2011),
DE #3.
A few weeks later, Judge Dearie held a preliminary injunction hearing. See Minute
Entry (Mar. 7, 2011), DE #35. At this hearing, defendants “agreed to provide full disclosure
1
In opposing the motion, Tri-State also cross-moved for judgment on the pleadings. See Def.
Opp. at 37-38. In an order dated May 14, 2012, this Court struck Tri-State’s cross-motion for
failing to comply with Judge Amon’s Individual Rules. See Order (May 14, 2012), DE #177.
2
A detailed history of this case is contained in this Court’s recent report and recommendation
on Tri-State’s motion for partial summary judgment. See generally Report and
Recommendation (June 13, 2012), DE # 196. Only those facts relevant to the instant motion
to amend are recounted herein.
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regarding the [Crack], including identifying the individuals and any financial transactions
involved.” See Memorandum and Order (docketed Mar. 23, 2011) (“3/23/11 M&O”) at 2,
DE #32. After some initial resistance by defendants, see generally id., Tri-State produced, on
March 31, 2011, a series of emails from 2010 concerning the Crack (the “2010 Emails”). See
Affirmation of Tibor L. Nagy, Jr., in Opposition to Plaintiffs’ Motion to Amend Complaint
(“Nagy Aff.”) ¶ 2, DE #170; see also Exhibits E through M to the Affirmation of Jason M.
Koral in Support of Plaintiffs’ Motion to Amend Complaint, DE #160-8 to #160-16.
The 2010 Emails included communications between defendants and DongleLabs, the
third party hired by defendants to circumvent the security protections of plaintiffs’ software.
See, e.g., 2010 Email (June 10, 2010), DE #160-8. The correspondence revealed not only the
method by which DongleLabs accessed plaintiffs’ software, but also the amount and method of
payment defendants made to DongleLabs for completing the Crack. See, e.g., id.; 2010 Email
(June 22, 2010), DE #160-9. Shimon Hoffman, the head of information technology for TriState and the son of Tri-State CEO George Hoffman, was copied on nearly all communications
with DongleLabs. In addition, the emails strongly suggested that Shimon Hoffman was
responsible for ultimately authorizing and paying for the Crack. See, e.g., 2010 Email (July
11, 2010), DE #160-11. The 2010 Emails also revealed that George Hoffman was, at the
very least, informed of the Crack and its consequences -- i.e., that it would circumvent the
security protection and allow Tri-State to exceed the number of users authorized by its license
with plaintiffs. See id.; 2010 Email (July 18, 2010), DE #160-14 at 5. George Hoffman was
also copied on emails wherein defendant Shmuel Judkovitz (“Judkovitz”) – Tri-State’s paid IT
consultant and the principal of defendant SJ Computers, Inc. – sought authorization from
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Shimon Hoffman to install and upload the Crack and to pay DongleLabs for its work. See id.;
2010 Email (July 11, 2010), DE #160-11.
In May 2011, two months after receiving the 2010 Emails, plaintiffs Point 4 Data
Corporation (“Point 4”) and Dynamic Concepts, Inc. (“DCI”) served responses to
interrogatories propounded by Tri-State. See DCI Responses to First and Second Set of
Interrogatories (“Pl. Responses”), DE #170-4.3 Notably, in explaining the amount of damages
sought against defendants, plaintiffs stated that “[d]efendants, including George Hoffman,
Shimon Hoffman and Mr. Judkovitz actively participated in the creation of the hacked
software, willfully disassembled and reverse-engineered UniBasic [the computer development
platform on which the software operated], and created or manufactured a counterfeit or hacked
Unibasic that can run on any server with unlimited users.” Id. at 8 (emphasis added). Indeed,
according to plaintiffs’ May 2011 interrogatory responses: “The email correspondence that
[d]efendants have produced clearly confirms their intention to hack, or as Shimon Hoffman
stated, to ‘crack’ the software.” Id. at 8 (emphasis added).
In addition to the 2010 Emails, Tri-State (at Judge Dearie’s direction) also provided
plaintiffs with a forensic image of Tri-State’s server. See 3/23/11 M&O at 3. In April 2011,
using the imaged copy of the server, Don Burden, CEO of plaintiff Point 4, collected the sales
figures from each of the Tri-State-affiliated entities that had used the Crack, in order to
calculate the disgorgement damages that plaintiffs claimed they were owed. See Nagy Aff.,
Exs. 6 and 7, DE #170-6 and #170-7, respectively. These entities included Tri-State Surgical
3
It is undisputed that Point 4’s interrogatory responses were essentially identical to the DCI
responses cited herein. See Def. Opp. at 11 n.32.
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West Corporation (“Tri-State West”), MBS, Ltd. (“MBS”), and H & H Laboratories, Inc. (“H
& H Labs”) (collectively, the “Related Entities”). See Nagy Aff., Ex. 6, DE #170-6 at 2-3.
II.
The Rule 16 Scheduling Conference
Shortly before defendants produced the 2010 Emails, this Court scheduled an initial
conference to address the scope and timing of discovery. See Order (Mar. 23, 2012) at 1, DE
#31. In its order scheduling the conference, the Court directed the parties “to discuss the
matters specified in Fed. R. Civ. P. 26(f) and 16(b).” See id. To this end, the Court attached
an “Initial Conference Questionnaire” (hereinafter the “Questionnaire”), which the parties
were to jointly answer and bring with them to the initial conference. See id. at 4. Among
other things, the Questionnaire required the parties to confer on a date for amending the
pleadings and a date by which additional parties should be joined. See id. (Items #11 and
#12).
Thereafter, the parties met and conferred regarding the Court’s Questionnaire. On May
20, 2011, plaintiffs forwarded to defendants a copy of plaintiffs’ proposed Questionnaire
responses. See Email (May 20, 2012), DE #170-1. In their proposed responses, plaintiffs
indicated that the time needed for amending the pleadings was “n/a” – that is, not applicable.
See id. at 2. In addition, plaintiffs noted that they had zero additional parties to be joined, and
therefore, the proposed deadline for completion of joinder was denoted as “n/a” – or, not
applicable. See id. at 3.
On June 14, 2011, the Court conducted the initial conference. See Minute Entry (June
14, 2011) (“6/14/11 Minute Entry”), DE #46. At the conference, the parties submitted their
finalized Questionnaire, which, like plaintiffs’ proposed responses, indicated that the time
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needed for amending the pleading was “n/a” and the time for joining additional parties was
likewise “n/a” – in other words, not applicable. In reviewing the Questionnaire with the
parties, the Court noted on the record that “there aren’t going to be any amendments to the
pleadings or any additional parties.” Transcript (June 14, 2011) at 20, DE #49. Neither party
objected to the Court’s statement. See generally id. In reliance on both the Questionnaire and
the parties’ conduct at the conference, the Court, in issuing its Scheduling Order, did not
include a deadline for amending the pleadings or bringing in additional parties, as the Court
and the parties understood that the pleadings had been finalized and there would be no
amendments or new parties. See Minute Entry (June 14, 2011), DE #46.
III.
Subsequent Discovery and Plaintiffs’ Proposed Amended Complaint
In the months following the initial conference, and after an unsuccessful mediation
session in early August 2011, the parties proceeded with discovery. In December 2011,
plaintiffs took the depositions of Shimon Hoffman and George Hoffman. At Shimon
Hoffman’s deposition examination, plaintiffs elicited testimony that – as first established by the
2010 Emails – he had, in fact, authorized Judkovitz to engage DongleLabs for the purpose of
circumventing plaintiffs’ software security protection. See Excerpts of Shimon Hoffman
Deposition, DE #160-6 at 4. George Hoffman testified at his deposition that, inter alia, (1) he
gave Shimon authority to resolve Tri-State’s issues with plaintiffs’ software; (2) he knew that
this meant “resolv[ing] the problem of having access to our computer”; and (3) was generally
aware that Tri-State had hired DongleLabs to “assist[] in allowing us to access” plaintiffs’
software. See Excerpts of George Hoffman Deposition (“G. Hoffman Dep.”), DE #160-5 at
8, 21-22, 25. In addition, he confirmed what plaintiffs had uncovered from the image drive in
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April 2011 — namely, that the Related Entities had made use of the Crack. See id. at 5, 1213.4 Finally, in response to an inquiry from plaintiffs’ counsel, George Hoffman
acknowledged that he had, within the month preceding his deposition, consulted with
bankruptcy counsel on behalf of Tri-State. See G. Hoffman Dep. at 6.
Following the Shimon and George Hoffman depositions, the parties submitted a joint
letter-motion to extend fact and expert discovery, which motion the Court granted. See Letter
(Dec. 28, 2011) (“12/28/11 Def. Let.”), DE #115; Endorsed Order (Dec. 29, 2011), DE
#116. In the parties’ letter to the Court, plaintiffs never indicated that they planned to amend
their complaint and add new parties. See 12/28/11 Def. Let. Two months later, the parties
again successfully sought to extend fact and expert discovery. See Letter (Feb. 23, 2012), DE
#145; Endorsed Order (Feb. 24, 2012), DE #146. As before, plaintiffs did not disclose any
desire to amend their complaint or bring in additional defendants. See generally id.
On March 8, 2012, more than one year after they filed their original complaint and
almost one year after receiving the 2010 Emails, plaintiffs requested leave to amend their
pleading. See Letter (Mar. 8, 2012), DE #149. In essence, plaintiffs seek to assert four of the
five pending claims against five new defendants – Shimon Hoffman, George Hoffman, TriState West, MBS, and H & H Labs. See Proposed Amended Complaint, DE #160-4; Redline
Comparison of Complaints, DE #170-12.
4
Although George Hoffman implied in his deposition that MBS did not use plaintiffs’
software, see G. Hoffman Dep. at 16-17, Chaim Roth, who apparently works for Tri-State and
MBS, testified that MBS did use plaintiffs’ software. See Deposition Testimony of Chaim
Roth (Dec. 13, 2011), DE #160-17 at 2-3. Tri-State does not appear to dispute that MBS made
use of the Crack. See generally Def. Opp.
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DISCUSSION5
In seeking to explain away their delay in making their motion, plaintiffs argue that,
prior to the December 2011 depositions of Shimon and George Hoffman, plaintiffs “lacked key
facts necessary to amend its [sic] complaint to add the new defendants,” and that, once
apprised of these “additional facts,” they diligently sought to amend their complaint. Pl. Mot.
at 7. Plaintiffs further contend that the amended complaint “will not affect the discovery
schedule, trial schedule, nor impose any additional burden on either the existing or the newly
added parties.” Id. at 1.
In opposition, Tri-State asserts that the information elicited at the December 2011
depositions had been revealed in the 2010 Emails, and, thus, plaintiffs were not diligent in
seeking to amend. See Def. Opp. at 1. In addition, Tri-State argues that plaintiffs’ motion is a
“tactical” move, made in bad faith only after plaintiffs learned that George Hoffman had been
5
As a preliminary matter, and based on its review of applicable caselaw, this Court concludes
that it is appropriate to issue its opinion as a Memorandum and Order, rather than a Report and
Recommendation. Although the Second Circuit has not yet definitively ruled on the issue, but
cf. Fielding v. Tollaksen, 510 F.3d 175, 178 (2d Cir. 2007) (indicating in dictum that a motion
to amend a complaint is “nondispositive” and governed by Fed. R. Civ. P. 72(a)); Kilcullen v.
N.Y. State Dep’t of Transp., 55 F.App’x 583, 584 (2d Cir. 2003) (applying Rule 72(a)
standard to challenge to magistrate judge’s denial of motion to amend), the “weight of
authority” in this Circuit treats motions to amend pleadings as nondispositive, and subject to
review under Rule 72(a) of the Federal Rules of Civil Procedure -- at least where the ruling
does not involve a denial of leave to amend that foreclose a party from asserting potential
claims. See Wilson v. City of New York, No. 06-CV-229(ARR)(VVP), 2008 WL 1909212, at
*3-4 (E.D.N.Y. Apr. 30, 2008) (collecting cases). In particular, courts have routinely applied
the “clearly erroneous” standard of review where, as here, “the ruling is based on procedural
grounds,” such as the movant’s failure to satisfy the “good cause” requirement of Rule 16 of
the Federal Rules of Civil Procedure. See, e.g., Oppenheimer & Co. Inc. v. Metal Mgmt.,
Inc., No. 08 Civ. 3697(LTS)(FM), 2010 WL 743793, at *1 (S.D.N.Y. Mar. 2, 2010) (citing
Sokol Holdings, Inc. v. BMB Munai, Inc., No. 05 Civ. 3749(KMW)(DCF), 2009 WL
3467756, at *3-4 (S.D.N.Y. Oct. 28, 2009)).
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consulting with a bankruptcy attorney. See id. at 2. In their reply, plaintiffs concede that the
2010 Emails “provide[d] significant evidence” that the Hoffmans were aware of the Crack, but
they argue that those emails “left some ambiguity concerning the Hoffmans’ role[s] in directing
and approving [the Crack].” Memorandum of Law in Reply to Tri-State’s Opposition (“Pl.
Reply”) 7-8, DE #180. Plaintiffs further contend that George Hoffman’s deposition
established, inter alia, that he “owns, controls and directs the affairs” of the Related Entities.
See id. at 12.
I.
Applicable Legal Standard
Before reaching the merits of plaintiffs’ motion to amend, this Court must, as a
threshold matter, identify the applicable legal standard. Plaintiffs contend that the dispute is
governed by Rule 15 of the Federal Rules of Civil Procedure, see Pl. Mot. at 5, whereas
defendants posit that Rule 16 applies. See Def. Opp. at 6-7. Neither side cites any case law to
support its argument regarding the appropriate legal standard.
Typically, once an answer is served, Rule 15 allows a plaintiff to amend its complaint
“only with the opposing party’s written consent or the court’s leave.”6 Fed. R. Civ. P.
15(a)(2). A court should “freely give” leave to amend “when justice so requires.” Id.;
Anderson News, LLC v. Am. Media, Inc., 680 F.3d 162, 185 (2d Cir. 2012) (citing Foman v.
Davis, 371 U.S. 178, 182 (1962)).
6
Although plaintiffs have framed their motion as one to amend under Rule 15, plaintiffs also
seek to add new parties, which implicates Rule 20 of the Federal Rules of Civil Procedure.
See Fed. R. Civ. P. 20. Regardless, the analysis for Rule 15 is substantially the same as that
for Rule 20. See Oneida Indian Nation of N.Y. State v. Cnty. of Oneida, 199 F.R.D. 61, 72
(N.D.N.Y. 2000) (collecting cases).
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Nevertheless, where a court has set a scheduling order pursuant to Rule 16, a court
must first address whether the party seeking to amend has shown “good cause” for modifying
the scheduling order. See Fed. R. Civ. P. 16(b)(4); Kassner v. 2nd Ave. Delicatessen, Inc.,
496 F.3d 229, 243-44 (2d Cir. 2007). One purpose of Rule 16 is to “offer a measure of
certainty in pretrial proceedings, ensuring that ‘at some point both the parties and the pleadings
will be fixed.’” Parker v. Columbia Pictures Indus., 204 F.3d 326, 340 (2d Cir. 2000)
(quoting Fed. R. Civ. P. 16 advisory committee’s note (1983)). If the party seeking the
amendment satisfies the “good cause” standard of Rule 16, the court then determines whether
the movant also meets the liberal standards of Rule 15. See Kassner, 496 F.3d at 244.
Here, the Court conducted a scheduling conference, established all applicable
deadlines, and issued a Rule 16 scheduling order (“Rule 16 Order”) summarizing the
unexpired deadlines. See 6/14/11 Minute Entry. While the Rule 16 Order itself does not
expressly set a deadline for amending the pleadings or bringing in additional parties, see id.,
that omission was predicated on the parties’ submitted Rule 26(f) discovery plan, which stated
that a deadline for joinder and amendment was “not applicable.” See supra p. 5. At the
conference, the Court reviewed the parties’ position with them and neither side objected or
attempted to qualify in any way their representations to the Court. Thus, the issue is whether
Rule 16’s “good cause” standard for modifying a scheduling order applies to proposed
amendments to the pleadings, where, because of the parties’ representations to the Court that
there would be no amendments or additional parties, the scheduling order itself does not
include such a deadline.
As revealed by the Court’s independent research, unaided by the parties on this issue,
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the answer to that question is yes. In analogous contexts, courts within the Second Circuit
have applied Rule 16 to motions to amend, even though the scheduling orders were otherwise
silent as to amendments. See Grant v. Citibank (S.D.), N.A., No. 10 Civ. 2955 (KNF), 2010
WL 5187754, at *6 (S.D.N.Y. Dec. 6, 2010); Nairobi Holdings Ltd. v. Brown, No. 02 Civ.
1230 (LMM), 2006 WL 2242596, at *2 (S.D.N.Y. Aug. 3, 2006); In re Wireless Tel. Servs.
Antitrust Litig., No. 02 Civ. 2637 DLC, 2004 WL 2244502, at *5 n.6 (S.D.N.Y. Oct. 6,
2004); see also 380544 Canada, Inc. v. Aspen Tech., Inc., No. 07 Civ. 1204 (JFK), 2011 WL
4089876, at *3 (S.D.N.Y. Sept. 14, 2011) (applying Rule 16 in absence of formal Rule 16
order). As those courts concluded, Rule 16 will apply, even absent a specific deadline in a
scheduling order, where the record contains some indication that the court and the parties
understood that the pleadings would not be further amended. See In re Wireless Tel. Servs.,
2004 WL 2244502, at *5 n.6 (although “[p]laintiffs deny that the prior scheduling order set a
deadline for amendments to the pleadings[,]” the court held that its various orders, “and the
conferences which proceeded them, left no doubt” that there would be no further
amendments); see also 380544 Canada, 2011 WL 4089876, at *3 (although parties’ stipulation
did not include explicit “final” deadline to amend, Rule 16 applied because prior court opinion
limited the opportunity to replead); Nairobi Holdings, 2006 WL 2242596, at *2 (Rule 16
applicable where prior court opinion limited the opportunity to replead); cf. Volunteer Fire
Ass’n of Tappan, Inc. v. Cnty. of Rockland, No. 09-CV-4622 (CS), 2010 WL 4968247, at *3
(S.D.N.Y. Nov. 24, 2010) (although deadline for amendments “was not part of a formal Rule
16 scheduling order,” Rule 16 was applicable, where the court “by verbal order and then by
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endorsement” set such a deadline).
Various courts outside this Circuit have likewise concluded that where, as here, the
parties convey to the court that there will be no further amendments after the court’s casemanagement conference, Rule 16’s “good cause” standard applies even though the resulting
scheduling order does not specifically contain a deadline for amending the pleadings. See,
e.g., Graham v. Progressive Direct Ins. Co., 271 F.R.D. 112, 119 (W.D. Pa. 2010) (where
parties represented to the court that they did not intend to amend and the scheduling order
simply stated “n/a” for deadline to amend, Rule 16 governed motion to amend); cf. Phillips v.
Greben, Civil No. 04-5590 (GEB), 2006 WL 3069475, at *6 (D.N.J. Oct. 27, 2006)
(magistrate judge did not error in denying motion to amend under Rule 16 where scheduling
order did not include deadline for amendment because “it was certainly clear” that the time to
amend would expire at least by the close of discovery).7
Plaintiffs cannot and do not dispute that “the Rule 16 order’s lack of inclusion of a
deadline to amend was based on the Court’s understanding that [p]laintiffs did not have any
intent to amend.” Pl. Reply at 6. While assuring the Court that at the initial conference they
“truly did not have th[e] intent” to amend, see id., they nevertheless argue that, “from the
7
The Court’s research has uncovered other out-of-circuit cases that declined to apply Rule 16
where the scheduling order did not include a deadline for amending the pleadings. See, e.g.,
Kingsburg Apple Packers, Inc. v. Ballantine Produce Co., No. 1:09-CV-901 AWI JLT, 2012
WL 718638, at *2 (E.D. Cal. Mar. 5, 2012); Kunin v. Costco Wholesale Corp., No. 1011456, 2011 WL 6090132, at *2 (E.D. Mich. Dec. 7, 2011); S. Shrimp Alliance v. La.
Shrimp Ass’n, Civil Action No. 07-3268, 2009 WL 3447259 at *3 n.2 (E.D. La. Oct. 20,
2009). However, in contrast to this case, none of those decisions cited any facts to suggest
that it was nevertheless understood that there would be no further amendments.
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[p]laintiffs[’] point of view, not having a firm deadline for amendments preserved some
flexibility . . . .” Pl. Mot. at 6. However, contrary to the premise of plaintiffs’ disingenuous
argument, the parties’ failure to request a deadline for amending the pleadings “does not leave
the date open-ended, but rather means that this motion is brought out of time.” EEOC v.
Joslin Dry Goods Co., Civ. Action No. 05-CV-00177-WDM-MEH, 2007 WL 2045510, at *1
(D. Colo. July 10, 2007). The whole point of requiring parties to meet and confer on a
proposed deadline to amend for Rule 16 purposes is to provide the parties and the Court with a
certain “measure of certainty,” see Parker, 204 F.3d at 340 (citing Fed. R. Civ. P. 16
advisory committee’s note (1983)) -- not to inject additional uncertainty into the scheduling
process.
In any event, plaintiffs never indicated to the Court, either in their written report or at
the scheduling conference, that their notation “not applicable” simply meant “maybe later.”
To be sure, in hindsight, the Court regrets that it did not make explicit in the Rule 16 Order
what was obvious from the parties’ Rule 26(f) discovery plan and the discussion at the initial
scheduling conference: that the time for amending the pleading and joining new parties had
come and gone. Given the parties’ failure to object to the Court’s statement on the record that
there would not be any amendments or additional parties, it is appropriate, on these facts, to
analyze plaintiffs’ motion to amend under Rule 16 standards.
II.
Whether Plaintiffs Have Established “Good Cause” to Add Defendants
Rule 16 allows a party to obtain a modification of a scheduling order “only for good
cause and with the judge’s consent.” Fed. R. Civ. P. 16(b)(4). As plaintiffs’ concede, it is the
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movant’s burden to show good cause. See Pl. Reply at 6; see also Parker, 204 F.3d at 340;
Nairobi Holdings, 2006 WL 2242596, at *3. “Whether good cause exists turns on the
diligence of the moving party.” Holmes v. Grubman, 568 F.3d 329, 335 (2d Cir. 2009)
(internal quotations and citations omitted). A party is not diligent if a proposed amendment to
the pleading is based on information “that the party knew, or should have known,” in advance
of the deadline sought to be extended. See Sokol Holdings, Inc. v. BMB Munai, Inc., No. 05
Civ. 3749 (KMW) (DF), 2009 WL 2524611, at *8 (S.D.N.Y. Aug. 14, 2009) (collecting
cases), aff’d, 2009 WL 3467756 (S.D.N.Y. Oct. 28, 2009). Although diligence is the primary
focus of a “good cause” analysis, a court may, in its discretion, also consider other factors,
such as whether “allowing the amendment of the pleading at this stage of the litigation will
prejudice defendants.” Kassner, 496 F.3d at 244.
Here, plaintiffs have not established that they were diligent in bringing the instant
motion. First, with respect to Shimon and George Hoffman, the 2010 Emails provided
plaintiffs, at the very outset of the case, with strong documentary evidence that the Hoffmans
were aware of and participated in the Crack. Indeed, in interrogatory responses served by
plaintiffs on May 31, 2011, plaintiffs cited to the 2010 Emails in asserting that “defendants”
Shimon and George Hoffman (along with defendant Judkovitz) had “actively participated” in
the Crack, with the “intention to hack” plaintiffs’ software. See Pl. Responses at 8; supra pp.
3-4. Despite this evidence and plaintiffs’ awareness of it, nearly two weeks later, at the June
14, 2011 initial conference, plaintiffs disclaimed any intention of amending the complaint or
adding new parties.
Ignoring the aforesaid interrogatory responses, plaintiffs now claim that the 2010
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Emails were ambiguous as to whether the Hoffmans approved the Crack and that therefore
plaintiffs did not feel comfortable bringing claims against them until their suspicions could be
verified at their depositions.8 See Pl. Reply at 7-8; Transcript of Pre-Motion Conference
(Mar. 27, 2012) at 20, DE #162 (plaintiffs’ counsel concedes that under a “fair view” of the
2010 Emails, they provided sufficient grounds for amending the complaint, but that plaintiffs’
counsel, who typically represents defendants, was reluctant to bring claims without “solid
basis”). Plaintiffs’ explanation is unavailing, and their reliance on Enzymotec Ltd. v. NBTY,
Inc., 754 F.Supp.2d 527 (E.D.N.Y. 2010), is misplaced. See Pl. Mot. at 16. Obviously, a
party may not seek to amend based on “factual speculation.” See Enzymotec, 754 F.Supp.2d
at 537. Here, however, the 2010 Emails admittedly provided plaintiffs with a good faith basis
for adding the Hoffmans as defendants. Plaintiffs’ desire for a more “solid basis” did not give
them the right to tell the Court they would not be amending; to thereafter obtain extensions of
the discovery deadlines without disclosing their intent to build a case against the Hoffmans;
and then to evade the requirements of Rule 16 by recasting the Court’s oral ruling so as to
grant the parties carte blanche to amend the pleadings whenever they liked. See generally
380544 Canada, 2011 WL 4089876, at *4 (finding no good cause to amend under Rule 16,
where newly discovered documents “may have buttressed [p]laintiffs’ allegations of scienter,
but they [] had enough information to plead” their new claim much earlier).
Perhaps sensing the weakness in their initial motion papers, plaintiffs’ reply highlights a
8
Although the depositions were not held until December 2011, plaintiffs do not dispute TriState’s claim that the Hoffmans were offered for deposition as early as August 2011. See Def.
Opp. at 8 n.24 (citing Nagy Aff., Ex. 2).
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different rationale for their delay in seeking to amend. Whereas the initial motion papers
emphasized that plaintiffs needed deposition testimony to “properly establish[]” the 2010
Emails’ “suggestion” of the Hoffmans’ involvement, see Pl. Mot. at 4, the reply papers claim
that “the motion to amend is motivated in significant part by its concern that Tri-State’s
principals . . . may seek to frustrate any ultimate judgment against Tri-State by diverting
funds,” Pl. Reply at 30, and/or by filing for bankruptcy. See Pl. Reply at 2-3; see also id. at
1. Even assuming arguendo that these concerns did not arise until December 2011, the
diligence inquiry focuses not on when plaintiffs learned of facts relevant to their motivation to
amend, but rather when they learned of the facts underlying their potential claims against the
proposed defendants. In other words, “where the substance of the proposed amendment was
known to the movant prior to the deadline for amending pleadings, but the movant nevertheless
failed to act, courts have denied leave to amend under Rule 16.” 380544 Canada, 2011 WL
4089876, at *3 (emphasis added) (citing Volunteer Fire Ass’n of Tappan, 2010 WL 4968247,
at *4); Oppenheimer & Co. Inc. v. Metal Mgmt., Inc., No. 08 Civ. 3697 (LTS) (FM), 2009
WL 2432729, at *3 (S.D.N.Y. July 31, 2009) (while recently produced documents “may
further have underscored the potential viability of [plaintiff’s proposed amendment], the issue
was not new”), aff’d, 2010 WL 743793 (S.D.N.Y. Mar. 2, 2010); Rent-A-Center, Inc. v. 47
Mamaroneck Ave. Corp., 215 F.R.D. 100, 104 (S.D.N.Y. 2003)); see Sokol Holdings, Inc.,
2009 WL 2524611, at *8; see also Anwar v. Fairfield Greenwich Ltd., No. 09 Civ.
0118(VM)(THK), 2012 WL 1415621, at *2-3 (S.D.N.Y. Apr. 13, 2012). Because the
significant role played by the two Hoffmans in procuring the Crack was disclosed to plaintiffs
as early as March 2011 -- two and a half months prior to the Court’s initial conference with the
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parties -- their attempts in March 2012 to bring claims against the Hoffmans cannot in good
conscience be considered diligent.
As for the Related Entities, plaintiffs concede that even prior to filing the lawsuit in
February 2011, they knew that these entities -- which “shared a single license for the
[s]oftware with Tri-State” -- were using plaintiffs’ software. See Pl. Mot. at 10. Indeed, in
June 2011, plaintiffs produced a document created in April 2011 by Point 4’s CEO, using data
from the forensic image of Tri-State’s server, and calculating plaintiffs’ disgorgement damages
based on the use of plaintiffs’ software by the Related Entities. See supra p. 4. Tri-State
correctly cites these facts as demonstrating plaintiffs’ lack of diligence in bringing in these
corporate entities. See Def. Opp. at 15.
In reply, plaintiffs counter that Tri-State’s argument “overlooks the critical additional
information provided by the depositions, including that: (1) George Hoffman owns, controls
and directs the affairs of the Related [Entities]; (2) the Related [Entities] utilized [the Crack] to
circumvent its security protections; and (3) the financial results of the Related [Entities] are
consolidated into Tri-State’s own financial statements.” Pl. Reply at 12. As for the first and
third “critical” facts, plaintiffs do not adequately explain why they are “critical,” or why
plaintiffs could not have ascertained these facts much earlier in the proceeding. As for the
second “critical” fact -- that the Related Entities used the Crack version of the software -- the
record reflects that as early as April 2011, plaintiffs, who had access to the image drive, were
calculating disgorgement damages premised on the assumption that the Related Entities made
use of the Crack. Contrary to plaintiffs’ argument, the question presented under Rule 16 is not
whether the image server screen shot, standing alone, could “prove” that the Related Entities
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used the software, see Pl. Reply at 13; after all, naming a defendant in a complaint is the
beginning, not the end, of the litigation process. Plaintiffs had a good faith basis for charging
the Related Entities early on and, in waiting until 2012 to seek to assert claims against TriState West, MBS and H & H Labs, plaintiffs failed to act with diligence.
Moreover, in assessing “good cause” under Rule 16, the Court may consider other
factors such as prejudice. Defendants as well as the Court would be prejudiced by plaintiffs’
belated amendments, as the period for fact and expert discovery has ended, and requests for
pre-motion conferences on dispositive motions are due this week. See Rodriguez v. Athenium
House Corp., No. 11 Civ. 5534 (LTS) (KNF), 2012 WL 2161284, at *3 (S.D.N.Y. June 14,
2012) (no good shown cause where, inter alia, modifying expert discovery deadline at the
parties’ joint request would, “at a minimum,” result in delaying dispositive motion deadline
and final pre-trial conference). Moreover, although plaintiffs disclaim any intention to seek to
reopen discovery, this ignores the fact that the Related Entities and the Hoffmans would be
entitled to conduct their own discovery. Whether or not the prejudice would be sufficient
under Rule 15 is beside the point: defendants (and the Court) would certainly suffer some
prejudice by the filing of an amended complaint this late in the proceeding, as that would
necessarily prolong the resolution of the case. In any event, the absence or minimal nature of
prejudice to the non-moving party does not trump the movant’s lack of good cause under Rule
16. See, e.g., Oppenheimer, 2009 WL 2432729, at *3-4. Having found that plaintiffs did not
act diligently, the Court denies their motion to amend.9
9
Tri-State does not oppose plaintiffs’ addition to their complaint of a new paragraph 44,
(continued...)
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CONCLUSION
For the reasons stated above, this Court denies plaintiffs’ belated motion to amend their
complaint and add new parties.
Any objections to the rulings contained in this Memorandum and Order must be filed
with the Honorable Carol B. Amon on or before July 13, 2012. Failure to file objections in a
timely manner may waive a right to appeal the District Court order.
SO ORDERED.
Dated:
Brooklyn, New York
June 27, 2012
Roanne L. Mann
/s/
ROANNE L. MANN
UNITED STATES MAGISTRATE JUDGE
9
(...continued)
which particularizes the technological measure that defendants are alleged to have
circumvented. See Def. Opp. at 4 n.14. Under these circumstances, the Court will permit
plaintiffs to make that one minor modification to their pleading, preferably by stipulation of the
parties.
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