KGK Jewelry LLC v. ESDNetwork et al

Filing 34

MEMORANDUM OPINION AND ORDER re: 24 SECOND MOTION to Dismiss Plaintiff's Second Amended Complaint. filed by ESDNetwork, Steve Yeko. For the foregoing reasons, Defendants' motion to dismiss Plaintiff's SAC is granted in part a nd denied in part as follows. Plaintiff's First Cause of Action (breach of contract) is dismissed insofar as it is premised on failure to perform unspecified "obligations." Plaintiff's Second Cause of Action (injunctive relief) is dismissed insofar as it seeks relief "directing Defendants to meet their obligations under the Yeko Contracts." Plaintiff's Fourth Cause of Action (tortious interference with prospective business relationships) is dismissed. All claims against Defendant Yeko in his personal capacity are dismissed. The motion is denied in all other respects. This Memorandum Opinion and Order resolves docket entry no. 24. (Signed by Judge Laura Taylor Swain on 1/8/2013) (djc)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

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KGK JEWELRY LLC,
Plaintiff,
No. 11 Civ. 9236 (LTS)(RLE)

-v-

ESDNETWORK and STEVE YEKO,
Defendants.

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MEMORANDUM OPINION AND ORDER

PlaintiffKGK Jewelry LLC ("Plaintiff' or "KGK") brings this action against
Defendants ESDNetwork ("ESDN") and Steve Yeko ("Yeko") (collectively, "Defendants"),
asserting claims for breach of contract, tortious interference with third-party contracts, tortious
interference with prospective business relations, and unfair competition. Plaintiff also seeks to
pierce the corporate veil of ESDN and hold Yeko personally liable for all claims. Defendants
have moved pursuant to Federal Rule of Civil Procedure 12(b)(6) to dismiss Plaintiffs Second
Amended Complaint ("SAC" or the "Complaint") for failure to state a claim upon which relief
can be granted. 1 The Court has jurisdiction of this action pursuant to 28 USC. § 1332. For the
following reasons, Defendants' motion is granted in part and denied in part.
BACKGROUND

The following facts are derived from the allegations in the SAC, and are assumed
to be true for purposes of this motion practice. KGK is a New York company that manufactures
jewelry and provides customized marketing services to 70 independently-owned retail jewelry

Defendants have sought to dismiss the SAC "in its entirety," but have failed to
address Plaintiffs unfair competition claim. The motion is therefore treated as
one to dismiss all claims other than the unfair competition claim.
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stores. (SAC ~~ 1,4, 10.) Defendant ESDN is a privately-held company, organized under the
laws of Wisconsin, which provides web-based marketing tools and services to retail businesses.
(Id.

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5.) Defendant Yeko is the Chief Executive Officer ofESDN and is domiciled in

Wisconsin. (Id. ~ 6.)
As of October 20, 2011, KGK had executed contracts with 70 retail jewelers,
agreeing to provide certain services for a new Internet-based marketing program. (Id.

~~

10, 13,

18.) One feature of the marketing program was an in-store kiosk, which contained a touch
screen tablet computer that the retailers' customers could use to obtain information regarding the
retailers' inventory and register for various promotional events. (Id.

'r~

11-12.) Other services

included "television commercials, newsletters, catalogs, social media, and in-store events." (Id.

,r 12.)

A "critical component" of the marketing program was the collection of customers' email

addresses via the in-store kiosks. (Id.) The retailers used these email addresses to send their
customers information periodically about the store and sale events. (Id.)
In two letters signed by Yeko and dated October 20, 2011 (hereinafter, "Yeko

Contracts"), KGK agreed to pay ESDN for providing some of these services for a twelve-month
time period. (Id.

'l,r 16-17.)

The first letter indicated that KGK had already fully paid ESDN for

providing services to 52 of the enrolled retail stores and included a list of those stores. (Id.

~

19,

Ex. B.) The second letter included a list of the remaining 19 stores that were enrolled in the
program and indicated that KGK would pay ESDN for those services sometime in the future.
(Id.

~

19, Ex. B.) The SAC alleges that, "[a]1though Defendants did not provide all the retailers

with kiosks or performed [sic] all of their obligations under the Yeko Contracts, including
providing each retailer access to the computer system," KGK had paid over S350,000 to
Defendants by the time of the filing of the SAC. (Id. ~ 20.)
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After executing the Yeko Contracts, Defendants claimed that they were owed
nearly $1 million for additional services. (Jd.

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21.) KGK refused to pay, and Defendants

threatened to stop providing all marketing services. 2 (Id. ~~ 1-6.) Defendants knew that
withholding their services would "wreak havoc" on the retailers' business. (Id.

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24.) Moreover,

without Defendants' services, Plaintiff would be in breach of its contracts with the retailers.
(Id.)
In early February 2012, KGK learned that Defendants had retained certain email

addresses that retailers' customers had supplied through the kiosks. (Id.,r 29.) KGK demanded
that Defendants return the email addresses to either KGK or the retail jewelers; Defendants
refused. (ld. ~ 29.) KGK alleges that Defendants' refusal constitutes a breach of the Yeko
Contracts "in that Defendants' authority to retain and/or possess infonnation stored on the kiosks
was limited to the fulfillment of its marketing services detailed in the Yeko Contracts." (Id.

'130.) Plaintiff also alleges that Defendants' retention of the email addresses "has caused KGK
to be in breach of its contractual obligations to its retail stores" by "preclud[ing] KGK from
providing its retail stores with certain customer infonnation that KGK has agreed to provide and
the retail stores expect KGK to provide." (Id.,r 31.)
KGK also learned in early February 2012 that Defendants were "improperly
contacting KGK's retail stores, including but not limited to communications through the kiosks,

2

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On December 16, 2011, KGK commenced this action and expressed its intent to
seek a temporary restraining order and preliminary injunction. (SAC ~25.) On
the same date, Defendants and KGK reached an agreement whereby Defendants
would refrain from shutting offKGK's computer system and KGK would
withdraw its request for injunctive relief. (Id.' 25.) Despite this agreement,
Defendants' threats continued. (Id." 26.) In February 2012, KGK switched to a
new kiosk system and ceased working with Defendants. (Id." 27.)
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in an attempt to intentionally divert and steer KGK's business opportunities to Defendants,
including the marketing services that are the subject matter of the Yeko Contracts." (Id. ,,32.)
Specifically, Defendants "encourage[d] [the retail stores] to cease working with KGK and use
Defendants' competing services." (Id.

~

28.) Plaintiff alleges, "upon information and belief,"

that Defendants have continued to "improperly" contact its retail stores, despite its demands that
Defendants cease. (Id. "33.)
Plaintiffs Complaint also puts forth several allegations relevant to its corporate
veil piercing claim. First, Plaintiff alleges that "[t]here is such unity between Defendants ESDN
and Yeko that the separateness of ESDN has ceased," and that failing to hold Yeko liable "would
result in injustice." (ld. "36.) Plaintiff alleges, "upon information and belief," that Yeko holds
a majority financial interest in ESDN and "exercises total domination and control over ESDN."
(Id.

~

37.) Plaintiff further alleges that, "[u]pon information and belief, ESDN's sole purpose

has been to serve Yeko for his individual interest, profit, benefit and advantage," and that
"ESDN merely operates as the alter ego ofYeko." (Id.

~

38.) The Complaint also includes

allegations that the Yeko Contracts were signed by Yeko without any indication that he was
doing so in his capacity as CEO of ESDN, and that the "About Us" page ofESDN's website
refers solely to Yeko without mentioning any other officers or directors ofESDN. (rd. '1"39­
40.) Moreover, "upon infomlation and belief," ESDN's finances are "co-mingled with and
integrally tied to" those ofYeko. (Id." 41.) Finally, Plaintiff alleges "upon information and
belief' that Yeko "authorized, directed and approved of ... or should have known" ofESDN's
actions as described above.
DISCUSSION

In deciding a motion to dismiss a compliant pursuant to Rule 12(b)(6) of the
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Federal Rules of Civil Procedure, the Court accepts as true the non-conclusory factual
allegations in the complaint and draws all reasonable inferences in the plaintiffs favor. Roth v.
Jennings, 489 F.3d 499,501 (2d Cir. 2007); see also Ashcroft v. Iqbal, 556 U.S. 662, 677 (2009).
"A pleading that offers labels and conclusions or a formulaic recitation of elements of a cause of
action will not do." Iqbal, 556 U.S. at 677 (internal quotation marks and citation omitted).
Rather, to survive a motion to dismiss, a complaint must plead "enough facts to state a claim to
relief that is plausible on its face." Bell Atlantic v. Twombly, 550 U.S. 544, 570 (2007).
"Where a complaint pleads facts that are merely consistent with a defendant's liability, it stops
short of the line between possibility and plausibility of entitlement to relief." Iqbal, 556 U.S. at
677 (internal quotation marks and citations omitted). For this reason, "the tenet that a court must
accept a complaint's allegations as true is inapplicable to threadbare recitals of a cause of action's
elements, supported by mere conclusory statements." Iqbal, 556 U.S. at 663.

In deciding a motion to dismiss, the Court may consider, in addition to the factual
allegations of the complaint, "documents attached to the complaint as an exhibit or incorporated
in it by reference." Brass v. American Film Tech., Inc., 987 F.2d 142, 150 (2d Cir. 1993) (citing
Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d Cir. 1991)).
Breach of Contract Claim
To plead a breach of contract claim under New York law, a party must allege "(1)
the existence of an agreement, (2) adequate performance of the contract by the plaintiff, (3)
breach of contract by the defendant, and (4) damages." Harsco Corp. v. Segui, 91 F.3d 337,348
(2d Cir. 1996) (internal citation omitted). Defendants argue that Plaintiff's breach of contract
claim fails to plead sufficiently the third element - breach of the contract by the other party.

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Plaintiff alleges that, under the Yeko Contracts, Defendants were obligated to
provide services for a twelve-month period, and that their failure to do so constitutes a breach.

Defendants argue that the Yeko Contracts were unclear as to duration, start date, and end date,

and therefore do not state when Defendants were allegedly required to perforn1 the listed

services. Although the Yeko Contracts do not include any explicit teffi1S regarding duration, start

date, or end date, they do provide that ESDN will provide "annually [sic] ESDN support."

(SAC, Ex. C.) This teffi1 could support a reasonable inference that the Yeko Contracts

contemplated a twelve-month teffi1 of duration.

Defendants next argue that Plaintiffs claims premised on Defendants' retention of
customers' email addresses fail because there is no explicit provision in the Yeko Contracts
requiring Defendants to provide access to customer email addresses. The SAC, however, alleges
that this conduct breached Defendants' implied duty of good faith and fair dealing in the course
of perfoffi1ance. "Under New York law, a covenant of good faith and fair dealing is implied in
all contracts and [a] breach ofthe duty of good faith and fair dealing is considered a breach of
contract." Fishoffv. Coty Inc., 634 F.3d 647, 653 (2d Cir. 2011). "Encompassed within the
implied obligation of each promisor to exercise good faith are any promises which a reasonable
person in the position of the promisee would be justified in understanding were included. This
embraces a pledge that neither party shall do anything which will have the effect of destroying or
injuring the right of the other party to receive the fruits of the contract." Dalton v. Educational
Testing Service, 87 N.Y.2d 384,389 (1995) (internal quotations omitted). Moreover, "a party
may be in breach of an implied duty of good faith and fair dealing, even if it is not in breach of its
express contractual obligations, when it exercises a contractual right as part of a scheme to ...

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deprive the other party of the fruit of its bargain." Eaves v. Designs for Finance, Inc., 785 F.
Supp. 2d 229,258 n.22 (S.D.N.Y. 2011) (quoting Duration Mun. Fund, L.P. v. J.P. Morgan Sec.
Inc., 899 N.Y.S.2d 59 (Sup. Ct., N.Y. Co., Sept. 16,2009». Plaintiff alleges that obtaining
customers' email addresses was "a critical component" of the kiosk services because they
enabled the retailers to target customers with sales and store infonnation. (SAC ~ 12.) Thus, the
Complaint adequately alleges that Defendants' refusal to tum over those addresses breached the
implied covenant of good faith and fair dealing.
Defendants similarly argue that their communications with KGK's retail jewelers
do not constitute breach of contract because the Yeko Contracts do not explicitly forbid such
communications. Plaintiff admits that Defendants had limited authority to contact the retail
jewelers because Defendants were required to provide annual ESDN support under the terms of
the Contracts. However, Plaintiff argues

and the SAC makes adequately clear

that it is

challenging a much more limited course of conduct, namely, Defendants' attempts to divert
Plaintiffs customers by contacting them through the kiosks that ESDN was contracted to
provide. Like the allegations regarding withholding of customer infonnation, this allegation
states a claim for breach of the implied duty of good faith and fair dealing.
Lastly, Defendants argue that the breach of contract claim is impennissibly vague
because the SAC does not identify which services Defendants failed to perfonn. The SAC
alleges that "Defendants did not provide all the retailers with kiosks or perfonn[] all of their
obligations under the Yeko Contracts." (SAC ~r 20.) The SAC does not specify which retailers
did not receive kiosks, although it lists all of the relevant retailers, nor does it provide any details
as to which obligations Defendants failed to fulfill. The Court finds these allegations too vague

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to state a claim with respect to failure "to perform[] all of [Defendants'] obligations under the
Yeko contracts."
Accordingly, the Court grants the motion to dismiss Plaintiffs claims premised on
Defendants' breach of its duty to perform obligations that are not specified in the SAC. The
claims predicated on Defendants' withholding of customer information, improper
communication with customers, and failure to install kiosks survive.
II.

Claim for Tortious Interference with a Third-Party Contract
Under New York law, a claim of tortious interference with contractual relations

requires a four-part showing: "(i) existence of a valid contract; (ii) defendant's knowledge of that
contract; (iii) defendant's intentional procurement of the breach of that contract; and (iv)
damages caused by the breach." G.K.A. Beverage Corp. v. Honickman, 55 F.3d 762, 767 (2d
Cir. 1995).
Plaintiff claims that Defendants have tortiously interfered with its third-party
contracts by withholding the disputed customer email addresses, thereby preventing Plaintiff
from performing its contractual obligation to share that information with its retailers. Relying on
Israel v. Wood Dolson Co., 1 N.Y.2d 116, 120 (1956) and NBT Bancorp Inc. v. FleetlNorstar
Financial Group, Inc., 641 N.Y.S.2d 581 (1996), Defendants argue that a tortious interference
with contractual relations claim only lies where the defendant interfered with the third-party's
performance of the contract, not the plaintiffs performance. Defendants thus move to dismiss
this claim for failure to show a third-party breach.
This precise issue ~ whether tortious interference with contractual relations
requires a third-party breach ~ was thoroughly examined in Italverde Trading, Inc. v. Four Bills

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of Lading, 485 F. Supp. 2d 187,203 (E.D.N.Y. 2007), which concluded that a showing that a
defendant's action caused plaintiff to breach was sufficient to state a claim. The Court cannot
conceive of any principled reason why the tort should be cabined as Defendants propose; nor is it
aware of any binding authority directly holding that a breach by plaintiff will not suffice.
Accordingly, the Court adopts the reasoning ofItalverde. See also Morris v. Blume, 55 N.Y.S.2d
196, 199 (Sup. Ct. N.Y. Co. 1945) (holding that "[a]n unlawful interference with a person in the
performance of his contract with a third party is just as much a legal wrong as is an unlawful
inducement of a breach of that contract by a third party"); Stiso v. Inserra Supermarkets, Inc., 179
A.D.2d 878 (1992) (finding defendant's exclusion of plaintiff-sales representative from its stores
constituted tortious interference with plaintiffs exclusive distribution contract with distributor);
DEP Corp. v. Interstate Cigar Co., Inc., 622 F.2d 621, 624 (2d Cir. 1980) (recognizing plaintiff
might state an unlawful interference with a contract claim where defendant caused plaintiff to
breach the contract).
Defendants' motion to dismiss Plaintiffs tortious interference claim is therefore
denied.
Claim for Tortious Interference with Prospective Business Relations
To establish a claim for tortious interference with prospective business relations
under New York law, "a plaintiff must establish '(1) that [he] had a business relationship with a
third party; (2) the defendant knew of that relationship and intentionally interfered with it; (3) the
defendant acted solely out of malice, or used dishonest, unfair, or improper means; and (4) the
defendant's interference caused injury to the relationship. '" Friedman v. Coldwater Creek, Inc.,
321 F. App'x 58,60 (2d Cir. 2009) (quoting Kirch v. Liberty Media Corp., 449 F.3d 388,400 (2d

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Cir. 2006). The New York Court of Appeals has held that "[ a] s a general rule, the defendant's
conduct must amount to a crime or an independent tort" because "[ c]onduct that is not criminal
or tortious will generally be 'lawful' and thus insufficiently 'culpable' to create liability for
interference with prospective contracts or other non-binding economic relations." Carvel Corp.
v. Noonan, 818 N.E.2d 1100, 1103 (N.Y. 2004) (internal citation omitted). "A defendant who
has not committed a crime or independent tort or acted solely out of malice may nevertheless be
liable ifhe has employed 'wrongful means.'" Friedman, 321 F. App'x at 60. "'Wrongful means'
include physical violence, fraud or misrepresentation, civil suits and criminal prosecutions, and
some degrees of economic pressure; they do not, however, include persuasion alone although it is
knowingly directed at interference with the contract." Guard-Life Corp. v. S. Parker Hardware
Mfg. Corp., 50 N.Y.2d 183, 191,406 N.E.2d 445,449 (1980). For economic pressure to be
wrongful it must be "extreme and unfair." Carvel Corp., 818 N.E.2d at 1105.
Plaintiff alleges that Defendants interfered with its business relations by
contacting the retail jewelers through the kiosks and encouraging them to cease working with
Plaintiff and use Defendants' competing services. This conduct does not amount to a crime or
independent tort. Nor does this conduct constitute "extreme and unfair" economic pressure. Cf.
Masefield AG v. Colonial Oil Indus., No. 05 Civ. 2231,2006 WL 346178, *9 (S.D.N.Y. Feb. 15,
2006) (urging third party to raise prices or cancel contract not extreme or unfair economic
pressure); Lawrence v. Union of Orthodox Jewish Congregations of Am.. 32 A.D.3d 304 (lst
Dep't 2006) (sending letter to employer's customers urging boycott of employer unless employer
fired plaintiff not extreme and unfair economic pressure),3

3

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Nor does the Complaint allege facts sufficient to support the inference that
Defendants contacted the retailers with the sole purpose of inflicting harm on
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Even if Plaintiff could establish that Defendants' conduct involved wrongful
means, the SAC does not allege such conduct with enough specificity to place Defendants on
notice. For example, the SAC does not allege which retailers were contacted, what form the
communications "through the kiosks" took, nor the content of those communications. 4
Accordingly, the motion to dismiss Plaintiffs interference with prospective
business relations claim is granted.
Yeko's Personal Liability
Defendants argue that any claims brought against Yeko in his individual capacity
should be dismissed because he is not a party to the Yeko Contracts. In its opposition papers, the
only basis Plaintiff advances for holding Yeko personal1y liable is piercing the corporate veil.
With one exception, Plaintiff s allegations in support of its veil piercing claim are
entirely conclusory. The one non-conclusory allegation

that Yeko signed the Yeko Contracts

without specifying that he was acting in a corporate capacity - is, standing alone, insufficient to
raise the necessary inference of unitary and unjust conduct. Cf. Consumer's Co-op. of Walworth
County v. Olsen, 142 Wis. 2d 465,484 (1988) (plaintiff seeking to corporate veil must show

Plaintiff. The Complaint does not allege that Defendants reached out to retailers
in retaliation for Plaintiffs refusal to pay their demands. In fact, the Complaint
notes the Defendants are "in the business of providing web-based marketing tools
and services to those in the retail supply chain," which suggests that Defendants
had an independent economic incentive to divert Plaintiffs customers.
4

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In its Memorandum in Opposition to Defendants' Motion to Dismiss, Plaintiff
alleges that "Yeko has recently resorted to defaming and disparaging KGK to
KGK's customers in an attempt to sabotage and steal business opportunities with
these customers," This allegation was not included in the Second Amended
Complaint. The Court therefore declines to consider it here.
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complete control used by defendant to commit a wrong). 5 Plaintiff s claims against Yeko will
therefore be dismissed.
Injunctive Relief
Finally, Defendants argue that Plaintiffs request for injunctive relief is moot
because, according to the SAC, Plaintiffhas already taken over all of the retailer kiosks and
completely cut ESDN off from the retailers. Thus, to the extent the SAC seeks to compel
Defendants to provide the services detailed in the Yeko Contracts, that request is moot.
However, Plaintiff argues that Defendants continue to withhold certain customer information
from KGK and/or its retail stores. That claim is not moot. Therefore, the motion to dismiss that
claim is denied.
CONCLUSION

For the foregoing reasons, Defendants' motion to dismiss Plaintiffs SAC is
granted in part and denied in part as follows. Plaintiffs First Cause of Action (breach of
contract) is dismissed insofar as it is premised on failure to perform unspecified "obligations."
Plaintiffs Second Cause of Action (injunctive relief) is dismissed insofar as it seeks relief
"directing Defendants to meet their obligations under the Yeko Contracts." Plaintiffs Fourth
Cause of Action (tortious interference with prospective business relationships) is dismissed. All
claims against Defendant Yeko in his personal capacity are dismissed. The motion is denied in
all other respects.

"Under New York's choice-of-law rules, the law of the state of incorporation ...
determines when a court may pierce the corporate veil." RUS, Inc. v. Bav
Industries, Inc., No. 01 Civ. 6133,2004 WL 1240578, at *21 (S.D.N.V. May 25,
2004) (citing Fletcher v. Atex, Inc., 68 F.3d 1451, 1456 (2d CiL 1995)). Because
ESDN is incorporated under the laws of Wisconsin, Wisconsin law governs.
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This Memorandum Opinion and Order resolves docket entry no. 24.

SO ORDERED.
Dated: New York, New York
January 8, 2013

~ORSWAIN

United States District Judge

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