Kraus USA, Inc. v. Magarik et al
Filing
166
OPINION AND ORDER re: 160 AMENDED MOTION to Dismiss (correcting deficient docket entry 139) filed by Nigel Challenger, Leonid Valdberg, Vonn, LLC, Sergio Magarik, Vigo Industries, LLC. In sum, Defendants' motion for ju dgment on the pleadings is GRANTED with respect to Counts II, XII, XIII, XIV, and XVIII as to all Defendants, GRANTED with respect to Count X as to Defendants Vigo and Valdberg, and DENIED with respect to all remaining counts and as to all remain ing Defendants. Plaintiff's motion to amend is GRANTED with respect to Counts II, X, XII, XIII, and XIV and DENIED with respect to Count XVIII. The parties are directed to appear for a status conference on May 22, 2020 at 10:15 AM. The Court respectfully directs the Clerk to terminate this motion, Doc. 160. (Signed by Judge Edgardo Ramos on 5/12/2020) (mro)
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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
KRAUS USA, INC,
Plaintiff,
v.
SERGIO MAGARIK, a/k/a SERGEI MAGARIK,
VONN, LLC, a/k/a VONN LIGHTING, LLC, d/b/a
VONN LIGHTING, LEONID VALDBERG, VIGO
INDUSTRIES, LLC and NIGEL CHALLENGER,
OPINION AND ORDER
17-CV-6541 (ER)
Defendants.
Ramos, D.J.:
Kraus USA, Inc. (“Kraus”) brings this action against former minority shareholder
Sergio Magarik (“Magarik”), Magarik’s company Vonn, LLC (“Vonn”), competitor
Leonid Valdberg (“Valdberg”) and his company Vigo Industries, LLC (“Vigo”), and
former employee Nigel Challenger (“Challenger”), collectively (“Defendants”), alleging,
inter alia, corporate espionage in usurping Kraus’ opportunity to enter the lighting
business. Before this Court is Defendants’ motion for judgment on the pleadings
pursuant to Federal Rule of Civil Procedure 12(c), and Kraus’ motion for leave to amend.
For the reasons set forth below, Defendants’ motion is GRANTED in part and DENIED
in part, and Kraus’ motion is GRANTED in part and DENIED in part.
I.
Factual and Procedural Background
A.
Facts Alleged in the Instant Complaint
Kraus is a nationally known designer, manufacturer, and seller of kitchen and
bathroom plumbing fixtures. Doc. 1, ¶ 1. Magarik was an employee, officer, director,
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and represented himself as a founding partner of Kraus until his termination on
September 10, 2015. Id., ¶¶ 21-22, 83.
From as early as February 2013, Kraus considered expanding its product offerings
to enter the lighting market and explored several routes to gain presence in the lighting
business. Docs. 1, ¶ 23; 1-1, 2. For example, Build.com, an online home improvement
company, told Kraus that it could become one of its most prominent lighting suppliers
(the “Lighting Opportunity”). Doc. 1, ¶¶ 25-27. To encourage Kraus to expand its
business to lighting, Build.com employee Zak Kearns (“Kearns”) wrote to Magarik in
October 2013 that lighting was a “100M business” for Build.com, Kraus has “more brand
recognition than 90% of lighting manufacturers[,]” lighting is an “easier product to get to
customers[,]” “has nearly unlimited growth potential[,]” and would be “[e]asily crosssold” with Kraus bath products. Docs. 1, ¶¶ 28-30; 1-1, 4. Kraus was also offered a joint
venture with the New York Lighting Company (“NLCO”), whose focus was on
commercial lighting (the “NLCO Opportunity”). Doc. 1, ¶ 33.
Magarik, who handled Kraus’ relationship with Build.com, advised Kraus against
both lighting opportunities, minimizing the upside and emphasizing the downside,
specifically that exploiting the lighting opportunities would require a significant capital
expenditure and jeopardize Kraus’ growth. Id., ¶¶ 34-37, 45.
Meanwhile, and without telling Kraus, Magarik bought the domain name
www.vonnlighting.com on September 1, 2014, and established Vonn Lighting on
February 5, 2015 to pursue the Lighting Opportunity. Id., ¶¶ 48-49, 51-53. He also hired
Kearns as a consultant sometime after late 2014 or early 2015, without telling Kraus that
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Kearns was available for hire. Id., ¶¶ 40-45. Kraus continued to consider the Lighting
Opportunity throughout this period. Id., ¶ 52.
According to Kraus, Magarik sought investment in Vonn from Valdberg, owner
of Vigo, a longtime competitor of Kraus in the sink and faucet market. Id., ¶¶ 58-61.
Vigo made products that Kraus believed infringed its designs. Docs. 1, ¶¶ 62-64; 1-1, 1116.1 In exchange for Valdberg’s investment in Vonn, Magarik provided Valdberg with
Kraus trade secrets, including technical product specifications, information on upcoming
designs, sales data, e-commerce data, and other commercially sensitive information
including customer lists, vendor relationships, the identity of contractual counterparties,
internal cost structure and operating expenses, and e-commerce knowledge. Doc. 1, ¶¶
67-68, 76. Kraus further alleges that Vigo and Valdberg knew that Magarik was usurping
its Lighting Opportunity, intended to aid and abet his misappropriation, and profit from
the Kraus trade secrets Magarik shared with them. Id., ¶¶ 69-70. In addition, Kraus
alleges that Magarik leveraged his affiliation with Kraus to promote his new company by
contacting Kraus’ account representatives at major retail outlets, noting that it “takes
significant effort” for new suppliers to gain access to those companies. Id., ¶¶ 73-75.
Despite still drawing compensation from Kraus, Magarik devoted most of his
remaining eight months at Kraus to establishing Vonn to the detriment of his Krausrelated work. Id., ¶ 71. He was frequently absent from work at Kraus and his
contributions to its work were increasingly limited. Id., ¶ 78. Magarik focused on
negotiating and securing a commercial lease, hiring and onboarding Vonn employees,
and traveling to visit suppliers. Id., ¶ 79. Valdberg and Magarik even went to China to
1
At Kraus, Magarik had been tasked with protecting the company from infringement and had noted in a
June 1, 2010 email that Vigo copied Kraus’ products. Docs. 1, ¶¶ 65-66; 1-1, 18.
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attend a light show during this time period, but represented that their trip was a preplanned vacation. Id., ¶ 80.
When he was at work, Magarik created conflicts within Kraus to distract Kraus
from his development of the Lighting Opportunity for himself. Id., ¶ 77. When Kraus
eventually confronted Magarik, he admitted that he launched Vonn. Id., ¶ 82. He also
acknowledged that Vigo and Valdberg infringed on Kraus’ intellectual property, but
asserted that they had a mutual agreement to not discuss Kraus’ business. Id.
Following Magarik’s September 2015 termination from Kraus, several Kraus
employees were recruited by Defendants. Id., ¶¶ 83, 85. Vigo hired Daniel Racinos
(“Racinos”), a longtime Kraus employee who was familiar with Kraus’ product line and
content strategy, and tried to recruit two other Kraus employees via LinkedIn in March
2016 and May 2017. Docs. 1, ¶¶ 86-87; 1-1, 19-22. Magarik also solicited and hired
Challenger to work at Vonn on or about May 1, 2017. Doc. 1, ¶ 89.
At Kraus, Challenger was subject to a confidentiality agreement that prohibited
him from disclosing Kraus’ confidential proprietary information. Docs. 1, ¶¶ 91-95; 1.1
at 24-32. On April 27, 2017, a few days prior to his resignation from Kraus, Challenger
remotely logged in to Kraus’ computer system and downloaded propriety information
about customers, vendors, product pricing, and sales data, and then tried to delete
evidence of his access history. Docs. 1, ¶¶ 96-97; 1-1, 34. He resigned four days later on
May 1, 2017. Doc. 1, ¶ 98. That July, Challenger asked a current employee to send him
a warranty he worked on while at Kraus over text message, and contacted another
employee asking for further information about Kraus. Docs. 1, ¶¶ 99-100; 1-1, 36.
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Kraus alleges that it has suffered harm in the amount of several million dollars as
a result of Defendants’ actions. Doc. 1, ¶¶ 101-02.
B.
Magarik’s Parallel State Court Case against Kraus and Co-Founders2
Nine days after his termination from Kraus, on September 19, 2015, Magarik filed
suit in Nassau County against Kraus and fellow founders Michael Rukhlin (“Rukhlin”)
and Russell Levi (“Levi”). Docs. 1, ¶¶ 56-57; 112, 5; Magarik v. Kraus USA Inc. et al.,
Index No. 606128/2015 (N.Y. Sup. Ct. Nassau Cty.) (the “Nassau County Action”).
Magarik alleged that he founded Kraus in 2007 with Rukhlin and Levi, who each owned
24%, 25% and 51% of Kraus, respectively. Petition (“Pet.”), ¶¶ 9-13. Magarik pleaded
that he entered into “an oral shareholders agreement” with Rukhlin and Levi, pursuant to
which he provided $100,000 cash investment and a $100,000 loan in exchange for a seat
on Kraus’ Board of Directors, being an employee, and having control of sales and
marketing. Id., ¶¶ 14-16.
Magarik further alleged that he handled “virtually all aspects” of Kraus’ business
from 2007 until 2011. Id., ¶ 18. But, in 2011, Levi relegated Magarik to sales and
marketing and began dominating the business. Id., ¶¶ 20-21. According to Magarik,
Levi hired unqualified employees, diverted company resources to other ventures,
manipulated the books, and took on debt. Id., ¶¶ 23, 32, 37, 58. After Magarik refused to
invest in one of the ventures, Kraus China, he was fired. Id., ¶¶ 72-76. Magarik brought
suit for, inter alia, dissolution of the company under N.Y. Bus. Corp. Law § 1104-a, and
breach of his contract. Id., ¶¶ 80-122. Following several years of litigation, Levi and
2
“A court may take judicial notice of a document filed in another court ‘not for the truth of the matters
asserted in the other litigation, but rather to establish the fact of such litigation and related filings.’” Liberty
Mutual Ins. Co. v. Rotches Pork Packers, Inc., 969 F.2d 1384, 1388 (2d Cir. 1992) (citation omitted). See
also Flatiron Acquisition Vehicle, LLC v. CSE Mortg. LLC, No. 17-CV-8987, 2020 WL 832340, at *2 n.3
(S.D.N.Y. Feb. 20, 2020) (applying Liberty to public records generally).
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Rukhlin opted to purchase Magarik’s shares under N.Y. Bus. Corp. Law § 1118(b).
Decision and Order After Trial: Findings and Conclusions (“Dec.”), 2. Magarik was
awarded $1,379,400 for his 24% share of Kraus on April 28, 2020. Id., 6.
C.
Procedural History
Kraus filed the instant action on August 28, 2017, asserting eighteen causes of
action. Doc. 1, ¶¶ 103-201. Defendants filed an answer on September 19, 2017. Doc.
21. Magarik filed a counterclaim against Kraus and a third-party complaint against
Kraus’ co-founders, among others (“Third-Party Defendants”), asserting, inter alia,
breach of fiduciary duty and fraud. Doc. 29. On January 5, 2018, Defendants moved, for
the first time, to dismiss the complaint and for judgment on the pleadings. Doc. 54-1.
On February 9, 2018, Kraus and the Third-Party Defendants cross-moved to dismiss
Magarik’s counterclaim, and the Third-Party Defendants moved to strike the third party
complaint. Doc. 65.
On September 28, 2018, since Defendants had answered, the Court construed
Defendants’ motion to dismiss as a motion for judgment on the pleadings, and denied it
as untimely, with leave to renew at the close of pleadings. Doc. 112, 22-25. The Court
also denied Kraus and Third-Party Defendants’ cross-motion to dismiss Magarik’s
counterclaim, and granted Third-Party Defendants’ motion to strike Magarik’s third-party
complaint. Id. at 25. On December 28, 2018, Kraus moved for judgment on the
pleadings with respect to Magarik’s counterclaims and, on September 30, 2019, the Court
granted that motion. Docs. 140, 155.
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Defendants then filed a motion to dismiss the complaint pursuant to Rule 12(c) on
December 27, 2018.3 Doc. 139. Kraus opposed, and requested leave to amend, on
February 1, 2019. Doc. 146. Defendants replied on February 22, 2009 and requested that
the Court take judicial notice of (1) an excerpt of Levi’s deposition from the Nassau
County action, (2) Kraus’ 2014 and 2015 operating plans, (3) Kraus’ 2014 financial
statement, (4) Kraus’ Build.com 2015 growth and transparency plan, and (5) a discovery
dispute between the parties memorialized in Defendants’ October 15, 2018 letter to the
Court. Docs. 151, 152, 152-1.4
II.
Legal Standards
A.
Motion for Judgment on the Pleadings under Rule 12(c)
In evaluating a motion for judgment on the pleadings pursuant to Rule 12(c) of
the Federal Rules of Civil Procedure, courts apply the same standard as applied on a
motion to dismiss for failure to state a claim under Rule 12(b)(6). Patel v. Contemporary
Classics of Beverly Hills, 259 F.3d 123, 126 (2d Cir. 2001) (describing the standards as
“identical”). The facts are assumed true for purposes of deciding the pending motions
and all reasonable inferences are drawn in favor of the plaintiff. See Koch v. Christie’s
Int’l PLC, 699 F.3d 141, 145 (2d Cir. 2012). When deciding a motion for judgment on
the pleadings, a court may consider the pleadings and attached exhibits, statements or
documents incorporated by reference, matters subject to judicial notice, and documents
3
Defendants re-filed the same motion on October 14, 2019 due to an ECF filing error. Doc. 160.
4
Though the Court may take judicial notice of the existence of the October 15, 2018 letter, which was
publicly filed, the Court declines to take judicial notice of any of the other documents cited by Defendants.
See supra 5 n.2; Doc. 151, 1-11; Goel v. Bunge, Ltd., 820 F.3d 554, 559-60 (2d Cir. 2016) (reversing lower
court decision to consider plaintiff’s deposition testimony in state court action when deciding motion to
dismiss because not “integral” to the complaint); U.S. v. $22,173.00 in U.S. Currency, 716 F. Supp. 2d 245,
252 n.45 (2010) (declining to address the “evidentiary items” claimants wanted judicially noticed because
they raised questions of fact not resolvable on summary judgment or motion to dismiss).
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submitted by the moving party that the non-moving party either has in its possession or
relied on in the pleadings. Prentice v. Apfel, 11 F. Supp. 2d 420, 424 (S.D.N.Y. 1998)
(citing Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir. 1993)).
B.
Motion to Amend under Rule 15(a)
Rule 15 of the Federal Rules of Civil Procedure allows a party to amend its
complaint pursuant to the other party’s written consent or the court’s leave. Fed. R. Civ.
P. 15. Under Section 15(a)(2), a “court should freely give leave [to amend] when justice
so requires.” Fed. R. Civ. P. 15(a)(2). Motions to amend are ultimately within the
discretion of the district court judge, Foman v. Davis, 371 U.S. 178, 182 (1962),
who may deny leave to amend for “‘good reason, including futility, bad faith, undue
delay, or undue prejudice to the opposing party.’” Holmes v. Grubman, 568 F.3d 329,
334 (2d Cir. 2009) (quoting McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 200 (2d
Cir. 2007)).
An amendment to a pleading is futile if the proposed claim would not withstand a
motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6). Dougherty v. North Hempstead
Bd. of Zoning Appeals, 282 F.3d 83, 88 (2d Cir. 2002) (citing Ricciuti v. N.Y.C. Transit
Auth., 941 F.2d 119, 123 (2d Cir. 1991)). The Second Circuit has held that leave to
amend may be denied on the basis of futility when it is “beyond doubt that the plaintiff
can prove no set of facts in support of his amended claims.” Pangburn v. Culbertson,
200 F.3d 65, 70-71 (2d Cir. 1999) (citation omitted). In determining whether an
amendment is futile, the court evaluates the amended complaint “through the prism of a
Rule 12(b)(6) analysis.” Henneberry v. Sumitomo Corp. of Am., 415 F. Supp. 2d 423,
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433 (S.D.N.Y. 2006). Following this standard, the court accepts the Plaintiff’s factual
allegations as true and draws reasonable inferences in favor of the Plaintiff. Id.
III.
Discussion
A.
Alleged Violation of the Defend Trade Secrets Act and
Misappropriation of Trade Secrets against All Defendants (Counts I
and IX)
Effective on May 11, 2016, the Defend Trade Secrets Act, or DTSA, created a
private right of action for the misappropriation of trade secrets in federal court. 18
U.S.C. § 1836(b); Kairam v. West Side GI, LLC, 793 F. App’x 23, 27 (2d Cir. 2019)
(summary order); Zirvi v. Flatley, No. 18-CV-7003, 2020 WL 208820, at *9 (S.D.N.Y.
Jan. 14, 2020). Under the DTSA, “a party must show an unconsented disclosure or use of
a trade secret by one who (i) used improper means to acquire the secret, or, (ii) at the time
of disclosure, knew or had reason to know that the trade secret was acquired through
improper means, under circumstances giving rise to a duty to maintain the secrecy of the
trade secret, or derived from or through a person who owed such a duty.” Medidata
Solutions, Inc. v. Veeva Sys. Inc., No. 17-CV-589, 2018 WL 6173349, at *4 (S.D.N.Y.
Nov. 26, 2018) (citations omitted). Improper means includes “inducement of a breach of
duty to maintain secrecy[,]” like a contractual agreement not to disclose information. Id.
(citations omitted).
The DTSA defines trade secrets as “all forms and types of financial, business,
scientific, technical, economic, or engineering information, including patterns, plans,
compilations, program devices, formulas, designs, prototypes, methods, techniques,
processes, procedures, programs, or codes[.]” 18 U.S.C. § 1839(3). However, to qualify
as a trade secret, the owner of the trade secret must have taken “reasonable measures” to
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keep it a secret and the trade secret itself must acquire economic value from not being
generally known or easily obtained by others who would gain economic value from the
use or disclosure of it. Id. Though the Second Circuit has not articulated a specificity
requirement for pleading a trade secret, and it is “not necessary to disclose every detail of
an alleged trade secret in a complaint[,]” the district courts routinely require that the
allegations must “specify the general contours of a trade secret” without merely restating
the elements of one. Democratic Nat’l Comm. v. Russian Fed’n, 392 F. Supp. 3d 410,
448 (S.D.N.Y. 2019) (citations omitted); Lawrence v. NYC Med. Practice, P.C., No. 18CV-8649, 2019 WL 4194576, at *4 (S.D.N.Y. Sept. 3, 2019) (citation omitted);
Medidata Solutions, Inc., 2018 WL 6173349, at *3.
Though the question of whether proprietary information qualifies as a trade secret
is ordinarily a question of fact not resolvable on a motion to dismiss, courts dismiss
claims involving trade secrets where they are not actually secret or there is no discernible
economic value from them not being generally known. Zirvi, 2020 WL 208820, at *11;
ExpertConnect, L.L.C. v. Fowler, No.18-CV-4828, 2019 WL 3004161, at *5 (S.D.N.Y.
July 10, 2019). Courts consider several factors as “guideposts[,]” which need not all be
alleged, in discerning whether information qualifies as a trade secret, including
(1) the extent to which the information is known outside of the business;
(2) the extent to which it is known by employees and others involved in
the business; (3) the extent of measures taken by the business to guard the
secrecy of the information; (4) the value of the information to the business
and to its competitors; (5) the amount of effort or money expended by the
business in developing the information; (6) the ease or difficulty with
which the information could be properly acquired or duplicated by others.
Iacovacci v. Brevet Holdings, LLC, No. 18-CV-8048, 2020 WL 528059, at *8 (S.D.N.Y.
Feb. 3, 2020) (citation omitted).
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The elements for stating a claim of misappropriation of trade secrets under New
York law “are fundamentally the same” as those sustaining a claim under the DTSA. Id.
at *7 (citing N. Atlantic Instruments, Inc. v. Haber, 188 F.3d 38, 43-44 (2d Cir. 1999)). If
a complaint sufficiently alleges a claim under the DTSA, it also sufficiently pleads
misappropriation of trade secrets under New York law. Id. (citation omitted).
Defendants argue preliminarily that Kraus’s claim under the DTSA fails because
Kraus has not sufficiently pleaded a protectable trade secret. Doc. 161, 5-9. Defendants
also describe Kraus’ description of the trade secrets at issue as conclusory and contend
that such claims render making a defense difficult. Doc. 161, 6-8. But, Kraus alleges
several specific categories of information that were misappropriated, including technical
product specifications, information on upcoming designs, sales data, e-commerce data,
and other commercially sensitive information including customer lists, vendor
relationships, the identity of contractual counterparties, internal cost structure and
operating expenses, and e-commerce knowledge. Doc. 1, ¶¶ 67-68, 76. At the pleading
stage, alleging categories of trade secrets are sufficiently specific to support a claim under
DTSA and provide sufficient notice to the defendant. Medidata Solutions, 2018 WL
6173349, at *3 (finding pleading “numerous specific categories of information relating to
its software, marketing and business plans” sufficiently specific to survive a motion to
dismiss and to provide defendant with notice of the claims against them); iSentium, LLC
v. Bloomberg Fin. L.P., No. 17-CV-7601, 2018 WL 6025864, at *3 (S.D.N.Y. Nov. 16,
2018).5
5
Defendants further argue that Kraus fails to identify any specific intellectual property that Defendants
misappropriated, but Kraus need only identify “the general contours” of the trade secrets to plead a viable
claim of misappropriation. Democratic Nat’l Comm., 392 F. Supp. 3d at 447-48. Doc. 161, 8.
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Turning to the specific categories of trade secrets alleged to have been
misappropriated, Defendants contend that Kraus’ customer lists cannot be trade secrets
because its customers are well-known retailers like Home Depot and Lowe’s, which is
discoverable with minimal effort and provides no competitive advantage to Kraus. Doc.
161, 5. Defendants further argue that price lists are not trade secrets for the same
reasons, and because Kraus does not claim a propriety formula underlying its prices. Id.,
6-7. Defendants are wrong. Kraus pleaded that its vendor relationships required
“significant effort” to develop. Docs. 1, ¶¶ 68, 73-74; 146, 4-5. Kraus also contends that
Magarik used the customer list to further his lighting business by building on Kraus’
longstanding relationships with these retailers. Docs. 1, ¶¶ 68, 72-75; 146, 5-6.6
Moreover, Kraus alleges that with its pricing information and customer lists, competitors
Vigo and Valdberg could undermine its market share, offering similar products for lower
prices to the same account representatives. Docs. 1, ¶¶ 67-70; 146, 6. In ExpertConnect,
L.L.C. v. Fowler, the Southern District of New York upheld similar claims that customer
lists and pricing information were trade secrets because they allowed defendant to
underprice plaintiff’s product and divert customers. 2019 WL 3004161, at *3-5. See
also Telerete Sys., Inc. v. Caro, 689 F. Supp. 221, 232 (S.D.N.Y. 1988) (granting
preliminary injunction for misappropriation of a trade secret under state law pre-DTSA
because, “[e]ven a slight competitive edge will satisfy this requirement of trade secret
protection.”).
Indeed, many of the cases cited by Defendants support the proposition that
customer lists and pricing information have traditionally been considered trade secrets.
6
Defendants’ contention that Kraus does not allege how Magarik could have used this information to
further Vonn’s success in the lighting business given that Kraus does not sell lighting is thus unavailing.
Doc. 161, 8.
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See, e.g., In re Dana Corp., 574 F.3d 129, 152 (2d Cir. 2009) (“Confidential proprietary
data relating to pricing, costs, systems, and methods are protected by trade secret law.”);
LinkCo, Inc. v. Fujitsu Ltd., 230 F. Supp. 2d 492, 498 (S.D.N.Y. 2002) (identifying
customer lists as trade secrets); Hudson Hotels v. Choice Hotels Int’l, 995 F.2d 1173,
1176-77 (2d Cir. 1993), abrogated on other grounds, Nadel v. Play-by-Play Toys &
Novelties, Inc., 208 F.3d 368, 379 n.9 (2d Cir. 2000) (“Compilations of information,
traditionally viewed and protected under trade secret law, are items like customer and
supplier lists and pricing and cost information.”).7 This is especially true where, as here,
the compilation of the customer lists is alleged to have taken considerable experience and
effort. N. Atlantic Instruments, 188 F.3d at 44-46; Leo Silfen, Inc. v. Cream, 29 N.Y.2d
387, 395 (1972).
Defendants further argue that Kraus did not allege how it sought to protect its
trade secrets and that the customer lists and pricing information were not actually secrets
because they are readily available to the public. Doc. 161, 6-7, 10. Yet, Kraus alleged
that Challenger signed a confidentiality agreement prohibiting him from sharing trade
secrets such as customer information and pricing policies. Docs. 1, ¶¶ 6-7, 90-95, 105; 11, 24; 146, 7-8. In addition, as Defendants admit, this information was maintained in
Kraus’ computer system and was protected, as it was only available to Challenger with a
username and password. Doc. 161, 9. This is sufficient to establish Kraus’ efforts to
maintain secrecy. See TransPerfect Global, Inc. v. Lionbridge Tech., Inc., No. 19-CV7
The cases Defendants cite to the contrary were not in the motion to dismiss context, and were often for
injunctive relief, requiring a showing of the likelihood of success on the merits, a more rigorous standard
than plausibility. See, e.g., Prod. Res. Group, LLC v. Oberman, No. 03-CV-5366, 2003 WL 22350939, at
*14 (S.D.N.Y. Aug. 27, 2003) (denying TRO because “The testimony makes clear that customer contacts
are not protectable trade secrets in this case.”); Free Country Ltd. v. Drennen, 235 F. Supp. 3d 559, 566-67
(S.D.N.Y. 2016) (finding, in a pre-DTSA case where plaintiff sought a TRO, customer lists and pricing
information were not trade secrets because they were readily ascertainable customers, and there was no
pricing algorithm).
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3283, 2020 WL 1322872, at *4-5 (S.D.N.Y. Mar. 20, 2020) (noting that a plaintiff has
made reasonable efforts to secure trade secrets where there is a confidentiality agreement
limiting their disclosure and they can only be accessed via proprietary login); Medidata
Solutions, 2018 WL 6173349, at *3. In addition, Kraus alleged it derived value from
keeping this information a secret, lending further plausibility to its misappropriation
claims. Docs. 1, ¶¶ 68, 74; 146, 6; TransPerfect Global, 2020 WL 1322872, at *4
(alleging value of information in prevention of underbidding by competitors).
Nor is it a defense to say that a trade secret is readily available if the information
was actually obtained via a confidential relationship. Docs. 161, 8; 146, 5. This Court
has long held that, “[e]ven assuming that the information could be obtainable through
reverse engineering without a base of prior knowledge gleaned from the proprietary
materials, . . . the possibility of discovery by fair and honest methods does not preclude
the finding of a trade secret.” Anacomp, Inc. v. Shell Knob Servs., Inc., No. 93-4003,
1994 WL 9681, at *12 (S.D.N.Y. Jan. 10, 1994), aff’d, 29 F.3d 621 (2d Cir. 1994)
(affirming grant of preliminary injunction) (citation omitted and emphasis in original).8
While Defendants argue that Kraus does not allege the improper means by which
Challenger obtained trade secrets given that he had login credentials, Challenger is
alleged to have downloaded sensitive information that he was prohibited from sharing
mere days before his resignation, tried to delete evidence that he had logged into the
system, and shared that information with the other Defendants to their benefit and to
Kraus’ detriment. Docs. 1, ¶¶ 6-9, 67-70, 89-100; 1-1, 24-32; 161, 9. Allegations that an
employee personally downloaded information from a proprietary system covered by a
8
That the warranty Challenger sought from his former Kraus colleague was available online is of no
moment, as Kraus does not allege that the terms of the warranty were a trade secret. Doc. 161, 8.
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confidentiality agreement are sufficient to sustain a claim under the DTSA. AUA Private
Equity Partners, LLC v. Soto, No. 17-CV-8035, 2018 WL 1684339, at *4-5 (S.D.N.Y.
Apr. 5, 2018); Medidata Solutions, 2018 WL 6173349, at *4.
Defendants also argue that Kraus has failed to allege that the DTSA violation
relates to interstate commerce. Doc. 161, 9. However, Kraus alleges that it is a
“nationally renowned” company and its trade secrets are used in interstate commerce,
which are sufficient to state a claim under the DTSA. Docs. 1, ¶¶ 1, 104; 146, 7. In
Yager v. Vignieri, this Court concluded that allegations that a doctor’s patients came from
across state lines was a sufficient nexus for interstate commerce. No. 16-CV-9367, 2017
WL 4574487, at *2 (S.D.N.Y. Oct. 12, 2017) (acknowledging that the DTSA was meant
to “‘reach broadly in protecting against the theft of trade secrets.’”) (citation omitted).
Accordingly, Defendants’ motion for judgment on the pleadings is denied as to
Counts I and IX.9
B.
Alleged Violation of the Computer Fraud and Abuse Act against All
Defendants (Count II)
The Computer Fraud and Abuse Act (“CFAA”) created a civil right of action for
any person who suffered “damages or loss” as a result of individuals who intentionally
accessed a protected computer without authorization or in a way that exceeded their
authorized access. 18 U.S.C. §§ 1030(a)(2)(C), 1030(g). Under the CFAA, damage
refers to “any impairment to the integrity or availability of data, a program, a system, or
information.” 18 U.S.C. §§ 1030(e)(8). Loss is defined as “any reasonable cost to any
victim, including the cost of responding to an offense, conducting a damage assessment,
9
Because Kraus’ federal claim under the DTSA survives Defendants’ motion for judgment on the
pleadings, the Court need not decide whether Kraus’ remaining claims afford the Court subject matter
jurisdiction in this case. Doc. 161, 44.
15
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and restoring the data, program, system, or information to its condition prior to the
offense, and any revenue lost, cost incurred, or other consequential damages incurred
because of interruption of service.” 18 U.S.C. §§ 1030(e)(11). Any alleged loss is
limited to “economic damages” of at least $5,000. 18 U.S.C. §§ 1030(c)(4)(A)(i)(I),
1030(g). This Court has long held that “costs not related to computer impairment or
computer damages are not compensable under the CFAA.” Civic Center Motors, Ltd. v.
Mason Street Import Cars, Ltd., 387 F. Supp. 2d 378, 382 (S.D.N.Y. 2005); see also
Deutsch v. Human Res. Mgmt., Inc., No. 19-CV-5305, 2020 WL 1877671, at *5
(S.D.N.Y. Apr. 15, 2020).
Defendants are correct that Kraus failed to adequately plead damages or loss.
Doc. 161, 11-13. Unlike cases Kraus cites to the contrary, Kraus did not allege that it
conducted any investigation related to Challenger’s accessing of their computer system or
suffered any damage to its computer system from his access. See, e.g., Obeid on behalf
of Gemini Real Estate Advisors LLC v. La Mack, No. 14-6498, 2017 WL 1215753, at *8
(S.D.N.Y. Mar. 31, 2017) (denying motion to dismiss CFAA counterclaim because
defendant alleged plaintiff’s damage to servers and costs to repair in excess of the $5,000
threshold); Lapp Insulators LLC v. Gemignani, No. 09-0694, 2011 WL 1198648, at *7
(W.D.N.Y. Mar. 9, 2011) (denying dismissal motion because plaintiff alleged an
investigation following unauthorized access of computer system). Kraus alleges only that
“[a]s a result [of Challenger’s access] Defendants have obtained items of value and have
caused harm in excess of $5,000.” Doc. 1, ¶ 113. This allegation implies that Kraus
seeks damages that are not countenanced by the CFAA. Civic Center Motors, 387 F.
Supp. 2d at 382. Even if the “harm” referenced were interpreted as harm to Kraus’
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computer system, which is nowhere else alleged, the allegation would still fail as
conclusory. Deutsch, 2020 WL 1877671, at *5 (“Because Plaintiff alleges only that she
incurred more than $5,000 in damages, she has not adequately alleged that she satisfied
the CFAA threshold”).
Because Kraus’ CFAA claim fails on these grounds, it is unnecessary to address
Defendants’ other arguments for dismissal.10 Doc. 161, 13-16. Accordingly,
Defendants’ motion for judgment on the pleadings is granted as to Count II and Kraus’
claim under the CFAA is dismissed.11
C.
Breach of Fiduciary Duty (Counts III and XVII) and Request for
Declaratory Judgment (Count VII)
In New York, “an employee owes a duty of good faith and loyalty to his
employer.” Design Strategies, Inc. v. Davis, 384 F. Supp. 2d 649, 659 (S.D.N.Y. 2005)
(citing Western Elec. Co. v. Brenner, 41 N.Y.2d 291, 295 (1977) and Mar. Fish Prods. v.
World-Wide Fish Prods., 100 A.D.2d 81, 87 (1st Dep’t 1984)); Laro Maint. Corp. v.
10
It bears noting, however, that Kraus also failed to state a claim under the CFAA because Challenger was
admittedly an employee with access to the materials he is alleged to have circulated. Docs. 1, ¶¶ 7, 96-98;
148, 9-10; 161, 13-15. In U.S. v. Valle, the Second Circuit held that defendant, who had access to a law
enforcement database for his work as a police officer, but who had accessed information from that database
for a purpose unrelated to law enforcement, had not exceeded his authorized access under the CFAA. 807
F.3d 508, 523-24, 527-28 (2d Cir. 2015). In an even more similar case, Amphenol Corp. v. Paul, the
Second Circuit found that a former employee who had downloaded proprietary information before his
termination had not exceeded his authorized access because his former employer failed to allege that the
material he accessed was outside of the scope of his authorization. 591 F. App’x 34, 36 (2d Cir. 2015)
(summary order). See also Deutsch, 2020 WL 1877671, at *3 (dismissing a CFAA claim because “[t]he
law is clear in the Second Circuit that the CFAA imposes liability only on persons who gain access to a
protected system when that access was not authorized.”); Poller v. BioScrip, Inc., 974 F. Supp. 2d 204, 232
(S.D.N.Y. 2013) (“exploitative or disloyal access to an employer's computer will not render otherwise
permissible access unauthorized within the CFAA's meaning.”). The Court notes, however, that the
Supreme Court granted certiorari on the question of whether a person who is authorized to access
information on a computer for certain purposes violates § 1030(a)(2) of the CFAA by accessing the same
information for an improper purpose. Van Buren v. U.S., 940 F.3d 1192, 1207-08 (11th Cir. 2019)
(affirming conviction under CFAA for misusing computer access), cert. granted, --- S. Ct. ---, 2020 WL
1906566 (U.S. Apr. 20, 2020) (No. 19-783).
11
Because Kraus’ CFAA claim fails, the Court need not address whether there would be personal liability
for Magarik and Valdberg under the statute. Doc. 161, 15-16.
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Culkin, 267 A.D.2d 431, 433 (2d Dep’t 1999) (applying the same rule to officers as well
as employees). An employee also has “‘an affirmative duty at all times to act in his
employer’s best interests.’” Design Strategies, Inc., 384 F. Supp. 2d at 659 (quoting
Mar. Fish Prods., Inc., 100 A.D.2d at 89). “Disloyal employees may be held liable for
their compensation even if ‘the principal suffered no provable damage as a result of the
breach of fidelity.’” Design Strategies, Inc., 384 F. Supp. 2d at 660 (citation omitted).
i.
Magarik
Under New York Law, officers and directors of a corporation must perform their
duties “in good faith and with that degree of care which an ordinarily prudent person in a
like position would use under similar circumstances.” N.Y. Bus. Corp. Law §§ 715(h),
717(a). Pursuant to these provisions, officers and directors owe a fiduciary duty to the
corporation and its shareholders. In re Global Serv. Group, LLC, 316 B.R. 451, 459
(S.D.N.Y. 2004). Though a fiduciary is allowed to pursue other business ventures
without the consent of his colleagues, “[i]t is axiomatic that a corporate fiduciary may not
divert and exploit any opportunity that belongs to the corporation.” Memory Film Prods.
v. Makara, No. 05-CV-3735, 2008 WL 11434484, at *5 (E.D.N.Y. Sept. 5, 2008) (citing
Am. Fed. Group, Ltd. v. Rothenberg, 136 F.3d 897, 905-06 (2d Cir. 1998)). This concept,
known as the corporate opportunity doctrine, prohibits fiduciaries from usurping, without
consent, any opportunity that should be deemed an asset of the corporation. Alexander &
Alexander of New York v. Fritzen, 147 A.D.2d 241, 246 (1st Dep’t 1989). The doctrine is
limited, however, to circumstances where the corporation has a “tangible expectancy” in
the opportunity. Am. Fed. Group, Ltd., 136 F.3d at 906; Design Strategies, Inc., 384 F.
Supp. 2d at 672. A tangible expectancy in the opportunity is “something much less
18
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tenable than ownership, but, on the other hand, more certain than a desire or a hope.”
Am. Fed. Group, Ltd., 136 F.3d at 906 (citing Alexander & Alexander of New York, Inc.,
147 A.D.2d at 247-48). Where the plaintiff seeks damages for a breach of fiduciary duty,
they must allege that defendant’s breach proximately caused their injury. In re Refco Sec.
Litig., 826 F. Supp. 2d 478, 514 (S.D.N.Y. 2011). Pleading proximate cause means
alleging plaintiff’s injury was the “direct or reasonably foreseeable result” of defendant’s
actions. Id. (citation omitted).
Defendants argue that the complaint fails to state a claim that Magarik breached
his fiduciary duty to Kraus because the complaint contains no factual detail as to how he
proximately caused its damages. Doc. 161, 16. Defendants further contend that Magarik
starting Vonn while he was still employed by and a minority shareholder of Kraus is not a
breach of his fiduciary duty because even a fiduciary can engage in other opportunities
outside of the corporation. Id., 16-17. However, Kraus’ description of Magarik’s actions
clearly state a claim that he diverted an opportunity Kraus was considering and had at
least a tangible expectancy of obtaining, without its consent. Am. Fed. Group, Ltd., 136
F.3d at 906. Kraus pleads with sufficient detail that, while Magarik was an officer and
director of Kraus, he handled Kraus’ relationship with Build.com and he advised Kraus
against exploiting the Lighting Opportunity and the NLCO Opportunity because of their
cost and diversion of resources from Kraus’ main product line. Doc. 1, ¶¶ 29, 34-38.
Kraus also alleges that Magarik started Vonn and used its contacts with retailers to take
advantage of the Lighting Opportunity. Doc. 1, ¶¶ 49, 51, 71-75. Kraus additionally
alleges that it was still considering the Lighting Opportunity and the NLCO Opportunity
when Magarik formed Vonn, and that Magarik never asked for its consent to pursue the
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Lighting Opportunity for his own benefit.12 Doc. 1, ¶¶ 52-55. Moreover, these
allegations support the inference that Magarik’s breach was the proximate cause of
Kraus’ injuries. Doc. 1, ¶¶ 101-02; In re Refco Sec. Litig., 826 F. Supp. 2d at 515
(“Questions of proximate cause are generally left to the jury.”).
Defendants’ reliance on Licensing Dev. Group, Inc. v. Freedman, 184 A.D.2d 682
(2d Dep’t 1992) and Alexander & Alexander of New York, Inc. v. Fritzen, 147 A.D.2d
241 (1st Dep’t 1989) is misplaced. Docs. 151, 13-14; 161, 17-20. In Licensing Dev.
Group, Freedman started his own licensing company, which had a lucrative deal with the
brand Teenage Mutant Ninja Turtles, before entering into a separate licensing venture
with other partners. 184 A.D.2d at 682. His partners in the second licensing company
then brought suit for his failure to disclose the Ninja Turtles relationship. Id. at 683.
While affirming dismissal of plaintiffs’ breach of fiduciary duty claim, the Second
Department reasoned that Freedman could not have usurped the second company’s
corporate opportunity because he had secured the Ninja Turtles deal long before the
second company existed. Id. Not so here: Magarik started Vonn only after the two
lighting opportunities were presented to Kraus and while Kraus was still considering
them. Docs. 1, ¶¶ 29-33, 49-55; 146, 14. In Alexander & Alexander, the First
Department affirmed summary judgment that defendants had not diverted a corporate
12
Defendants additionally contend that Magarik did not usurp the Lighting Opportunity from Kraus
because (1) Kraus is not in the lighting business today; (2) there is nothing proprietary from Kraus’
business that would have been useful to Vonn; (3) the entire lighting market does not count as an
opportunity; and (4) Vonn did not exist at the time of the presentation of the Lighting Opportunity. Doc.
151, 11-13. None of these arguments have merit. Kraus alleges precisely that its relationships, which took
resources to develop, were leveraged by Magarik to establish Vonn in the lighting business, and that Kraus
had opportunities to enter that business but did not do so because of Magarik’s self-serving advice. Doc. 1,
¶¶ 32-38, 73-75. Contrary to Defendants assertions, entry into the lighting business was not just a
“natural[] or easy[]” expansion for Kraus; it had two tangible opportunities to do so that it did not take
based on Magarik’s representations. Alexander & Alexander, 147 A.D.2d at 249; Docs. 151, 13-14; 161,
18.
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opportunity to sell insurance in part because plaintiff could not sell insurance in New
York and did not know of plaintiff’s desire to sell insurance there. 147 A.D.2d at 248-49.
Here, Kraus could have sold lighting and was presented with at least two opportunities to
do so, which Magarik knew. Docs. 1, ¶¶ 31-39; 146, 13-14.
Thus, Defendants’ motion for judgment on the pleadings as to Counts III and
VII13 is denied.
ii.
Challenger
Defendants argue that Challenger did not breach his fiduciary duty because he
accessed Kraus’ computer system using his active username and password while still an
employee. Doc. 161, 43. However, Kraus’ claim is not entirely predicated on its CFAA
claim. Docs. 1, ¶ 192; 146, 36-37; see supra Part III.B. Kraus’ claim is based on
allegations that Challenger downloaded proprietary information to share with Magarik
and Vonn, who usurped Kraus’ Lighting Opportunity, and Valdberg and Vigo, who
compete with and copy Kraus products, to aid all of them in profiting at the expense of
Kraus’ business. Docs. 1, ¶¶ 7-8, 89-100; 146, 36-37. Kraus has thus sufficiently alleged
that Challenger, who was a Kraus employee at the time of these actions, violated his duty
to be loyal to Kraus and to act in Kraus’ best interests.
Defendants further argue that because Kraus failed to show sufficient damages to
its computer system under the CFAA, Kraus cannot show any damage resulting from any
breach of Challenger’s fiduciary duty. Doc. 161, 43. While the Court agrees that Kraus
13
Defendants contend that Kraus is not entitled to declaratory judgment that Magarik, Vonn, and Valdberg
usurped Kraus’ corporate opportunity and in support of a corporate trust if the fiduciary duty claim fails.
Doc. 161, 20-21. Because this claim survives Defendants’ motion, and because the remedy for a diversion
of corporate opportunity is a constructive trust, Defendants’ motion for judgment on the pleadings as to
Kraus’ request for a declaratory judgment, Count VII, is also denied. Docs. 1, ¶¶ 128-30, 136-39; 146, 12;
161, 17, 20-21. Cont’l Indus. Grp., Inc. v. Altunkilic, 788 F. App’x 37, 43 (2d Cir. 2019) (summary order).
21
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has not alleged sufficient damages under the CFAA, see supra Part III.B, Kraus need not
show damages to sustain a claim of breach of fiduciary duty. Design Strategies, Inc., 384
F. Supp. 2d at 660 (citation omitted).
Thus, Defendants’ motion for judgment on the pleadings as to Count XVII is
denied.
D.
Magarik’s Alleged Conversion and Theft (Count IV)
Conversion occurs when “someone, intentionally and without authority, assumes
or exercises control over personal property belonging to someone else, interfering with
that person's right of possession.” Colavito v. New York Organ Donor Network, Inc., 8
N.Y.3d 43, 49-50 (2006) (citation omitted). To allege a claim of conversion, a plaintiff
must plead that defendant’s dominion over, or interference with, its possessory right over
property derogated those rights. Petrone v. Davidoff Hutcher & Citron, LLP, 150 A.D.3d
776, 777 (2d Dep’t 2017) (citing Colavito, 8 N.Y.3d at 50).
Defendants argue that because trade secrets are intangible, Kraus’ conversion
claim must fail. Doc. 161, 28-29. In making this argument, Defendants rely on too
narrow an interpretation of Thyroff v. Nationwide Mutual Ins. Co., 8 N.Y.3d 283 (N.Y.
2007). In Thyroff, the New York Court of Appeals addressed a certified question from
the Second Circuit on whether electronic records stored on a computer constituted
tangible property. 8 N.Y.3d 283, 284 (2007). The Court of Appeals explained that,
though conversion historically only applied to physical property, “electronic records that
were stored on a computer and were indistinguishable from printed documents” are also
subject to conversion claims. Id. at 288-93. Although the Court of Appeals declined to
decide “whether any of the myriad other forms of virtual information should be protected
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by the tort[,]” the electronic records it determined were subject to conversion—customer
contacts and related data—are remarkably similar to those at issue here. Id. at 292-93.
More than a decade later, in People v. Aleynikov, the Court of Appeals rejected
the argument that even a copy of computer source code was intangible. 31 N.Y.3d 383,
401-02 (N.Y. 2018). Aleynikov had downloaded high frequency trading source code
from Goldman Sachs before resigning to work for a start-up that aimed to create similar
source code. Id. at 386-88. As a defense to N.Y. Penal Law § 165.07, which prohibits
making tangible reproductions of scientific material, he argued that Thyroff implied that
electronic records are intangible. Id. at 401. The Court of Appeals rejected this
argument, reasoning that Thyroff “is best read . . . as treating the allegedly
converted information as intangible property, rather than as holding or implying that any
electronic reproduction of the information stored on a computer was intangible.” Id. at
402 (emphasis in original). Because the trade secrets Kraus alleges Magarik converted—
technical product specifications, information on upcoming designs, sales data, ecommerce know-how and data, customer lists, vendor relationships, the identity of
contractual counterparties, and internal cost structure and operating expenses—were
stored on the computer but likely shared in some tangible, documentary form, a
conversion claim is sufficiently alleged. Docs. 1, ¶¶ 67-68, 96; 146, 22; Thyroff, 8
N.Y.3d at 292-93; see also Salonclick LLC v. SuperEgo Mgmt. LLC, No. 16-CV-2555,
2017 WL 239379, at *4-5 (S.D.N.Y. Jan. 18, 2017) (denying dismissal of conversion
claim based on intangible domain and social media account names).14
14
To the extent Defendants are also arguing that the appropriation of the Lighting Opportunity is not
properly the subject of a conversion claim based on Barrett v. Toroyan, 28 A.D.3d 331 (1st Dep’t 2006),
Kraus’ still plausibly pleads conversion. Doc. 161, 28-29. The Barrett Court dismissed a conversion cause
of action with respect to a partnership opportunity, but sustained as to asset management fees. Id. at 333.
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Defendants also argue that this Court should dismiss Kraus’ conversion claim
because it is duplicative of Kraus’ misappropriation of trade secrets claim. Doc. 161, 29.
However, alternative pleading is expressly authorized by Rule 8(d)(2) of the Federal
Rules of Civil Procedure. Paysys Int’l v. Atos SE, No. 14-CV-10105, 2015 WL 4533141,
at *4 (S.D.N.Y. July 24, 2015) (declining to dismiss conversion claim as duplicative of
tort and contract claims based on Rule 8(d)(2)).
Accordingly, Defendants’ motion for judgment on the pleadings as to Count IV is
denied.
E.
Alleged Unjust Enrichment Against All Defendants (Count XV)
Adequately pleading unjust enrichment requires alleging that the defendant was
enriched at the plaintiff’s expense, and that allowing the defendant to retain what plaintiff
seeks to recover runs contrary to “equity and good conscience.” Georgia Malone & Co.
v. Rieder, 19 N.Y.3d 511, 516 (N.Y. 2012) (citation omitted). Because unjust enrichment
is a “quasi-contract” claim, it also requires that there be a relationship between the parties
that is not “too attenuated.” Id. (citing Sperry v. Crompton Corp., 8 N.Y.3d 204, 215-16
(N.Y. 2007)).
Defendants argue that there are “[z]ero allegations” to support an unjust
enrichment claim against Vigo and Valdberg and that, as competitors and not fiduciaries,
their relationship with Kraus is too attenuated for relief. Docs. 151, 15-16; 161, 25.
Defendants are wrong. In the case Defendants’ primarily rely on, Georgia Malone & Co.
v. Rieder, Georgia Malone did due diligence on properties for a developer, CenterRock,
but CenterRock shared the due diligence with a rival company, Rosewood, who advised a
Similarly, Kraus’ conversion allegations, read broadly, encompass Magarik’s profits from usurping the
Lighting Opportunity. Doc. 1, ¶¶ 101-02, 124-27.
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new buyer to purchase the properties, cutting Georgia Malone out of its promised
commission. 19 N.Y.3d at 513-14. The New York Court of Appeals affirmed dismissal
of Georgia Malone’s unjust enrichment claim against Rosewood, concluding that their
relationship was too attenuated, as they had no interactions and there were no allegations
that Rosewood was even aware of the “wrongfulness” of the other parties’ actions. Id. at
517-19. Unlike in Georgia Malone, Kraus alleged that Vigo and Valdberg were aware of
Magarik’s deceits. Docs. 1, ¶¶ 58-70; 146, 19.
As a result, this case is more like Philips Int’l Inv., LLC v. Pektor, 117 A.D.3d 1
(1st Dep’t 2014). In Philips, plaintiff entered a venture to buy properties with the
Pektors, which they ultimately did not buy, but which the Pektors bought through
numerous entities they created to shut plaintiff out of the transaction. Id. at 3-4. The
First Department affirmed plaintiff’s pleading of unjust enrichment against all of the
entities because those entities were working with the Pektors and thus not too attenuated
from plaintiff. Id. at 7-8. Like the Pektors in Philips, Magarik is the common
denominator sufficiently connecting Kraus to Vigo and Valdberg. Here, Kraus alleged
that Vigo and Valdberg were aware of Kraus as a major competitor, and invested in
Vonn, Magarik’s company, in exchange for confidential information about Kraus’
business.15 Docs. 1, ¶¶ 3, 58-70, 101; 146, 19.
Defendants also argue that the claim must fail because Magarik owed no fiduciary
duty to Kraus, and Valdberg and Vigo therefore did not aid and abet his breach of that
duty. Doc. 161, 25. As noted, the Court disagrees. See supra Part III.C.i; infra Part
III.H. But, more fundamentally, Magarik was an officer and director of Kraus during the
15
For the same reasons, Defendants’ argument that Kraus, Vigo and Valdberg do not have a sufficiently
close relationship for an unjust enrichment claim because they are competitors fails. Doc. 151, 15-16.
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relevant time period, hardly an attenuated relationship. Docs. 1, ¶ 21; 146, 18-19.
Because Challenger was also an employee of Kraus during the relevant time period,
Defendants’ argument to exclude him from the unjust enrichment claim likewise fails.
Docs. 1, ¶¶ 89-98; 146, 19; 161, 27.
Thus, Defendants’ motion for judgment on the pleadings as to Count XV is
denied.
F.
Request for a Constructive Trust against Vonn (Count V)
Courts in this jurisdiction have long held that “‘a constructive trust is the formula
through which the conscience of equity finds expression.’” Counihan v. Allstate Ins. Co.,
194 F.3d 357, 360 (2d Cir. 1999) (quoting Simonds v, Simonds, 45 N.Y.2d 233, 241
(1978)). Pleading the necessity of a constructive trust is flexible and relies on several
factors: (1) a confidential or fiduciary relationship; (2) a promise; (3) a transfer in
reliance on that promise; and (4) unjust enrichment. Counihan, 194 F.3d at 361-62
(citations omitted).
Defendants argue that Kraus’ request for a constructive trust must fail because
Kraus has not successfully pleaded unjust enrichment. Doc. 161, 28. However, as stated
supra Part III.E, Kraus has plausibly pleaded unjust enrichment. Defendants further
argue that Kraus has failed to allege a promise or a transfer of tangible property. Doc.
161, 28. But, as explained supra Parts III.D and III.C.i., the trade secrets were tangible,
and Kraus has sufficiently pleaded that Magarik had a fiduciary duty to Kraus to act in
good faith, which he breached by transferring those trade secrets to Kraus’ rival and
starting Vonn to pursue the Lighting Opportunity, all while still working for Kraus. See
26
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also Doc. 146, 20-21. As a result, Defendants’ motion for judgment on the pleadings as
to Count V is denied.
G.
Demand for Accounting from Magarik and Vonn (Count VI)
The right of a plaintiff to an accounting “is premised upon the existence of a
confidential or fiduciary relationship and a breach of the duty imposed by that
relationship respecting property in which the party seeking the accounting has an
interest.” Araujo v. Macaire, No. 16-CV-9934, 2018 WL 894390, at *6 (S.D.N.Y. Jan. 8,
2018) (citing Palazzo v. Palazzo, 121 A.D.2d 261, 264 (1st Dep’t 1986)). An accounting
may also be based on “the existence of a joint venture or other special circumstances
warranting equitable relief” between plaintiff and defendant. Gary Friedrich Enters.,
LLC v. Marvel Enters., Inc., 713 F. Supp. 2d 215, 233 (S.D.N.Y. 2010) (citation omitted);
Adam v. Cutner & Rathkopf, 238 A.D.2d 234, 242 (1st Dep’t 1997)
Because Kraus has plausibly asserted a claim of breach of fiduciary duty against
Magarik, Kraus’ accounting claim against Magarik also survives Defendants’ motion.
Araujo, 2018 WL 894390, at *6; supra Part III.C.i.
In addition, the Lighting Opportunity, which Magarik usurped, constitutes
property in which Kraus has an interest. Doc. 1, ¶ 51. Defendants counter that there is
no fiduciary relationship between Kraus and Vonn. Doc. 161, 24. But, Kraus had a
special relationship with Vonn because Magarik, an officer of Kraus, diverted Kraus’
business opportunity and potential profit to Vonn. Sheehan v. Moore & McCormack Co.,
219 A.D. 317, 320 (1st Dep’t 1927) (ordering an accounting in part because companies
had officers in common).
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Moreover, because Kraus alleges Vonn was successful as a result of its industry
know-how and vendor relationships, which took time and money to develop, Kraus was
akin to an investor in Vonn who was cheated out of its profits. Doc. 1, ¶¶ 72-75. See
also Haddock v. Countrywide Bank, N.A., No. 14-CV-6452, 2014 WL 12597043, at *4
(C.D. Cal. Dec. 22, 2014) (evaluating a claim for accounting under a similar standard and
stating, “The right to an accounting can arise from the possession by the defendant of
money or property which, because of the defendant's relationship with the plaintiff, the
defendant is obliged to surrender.”) (citation omitted); Kaminsky v. Kahn, 23 A.D.2d 231,
238-39 (1st Dep’t 1965) (upholding accounting claim “under the special circumstances
here, where the defendant has wrongfully pocketed . . . the profits” of sale of plaintiff’s
stock); cf. Intellectual Capital Partner v. Inst. Credit Partners LLC, No. 08-CV-10580,
2009 WL 1974392, at *7 (S.D.N.Y. July 8, 2009) (citing plaintiff’s exclusion of
defendant from client contact list advocated against accounting claim).16
Thus, Defendants’ judgment on the pleadings motion is denied as to Count VI.
H.
Alleged Aiding and Abetting Magarik’s Breach of Fiduciary Duty
against Valdberg and Vigo (Count VIII)
Aiding and abetting a breach of fiduciary duty requires that there was a breach of
fiduciary duty by another, the defendant had actual knowledge of the breach, the
defendant knowingly induced or participated in the breach, and that the plaintiff suffered
damages as a result of the breach. In re Sharp Int’l Corp., 403 F.3d 43, 49-50 (2d Cir.
2005) (citations omitted). A defendant participates in a breach by providing “substantial
assistance” to the primary violator, which means “affirmatively assist[ing], help[ing]
16
Defendants also argue that no authority allows for a nonmember of a limited liability company to have an
accounting, but cite not a single case even addressing that argument. Doc. 151, 16; 161, 24.
28
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conceal or fail[ing] to act when required to do so, thereby enabling the breach to occur.”
Id. at 50 (citation omitted).
Defendants argue that Kraus’ claim against Valdberg and Vigo for aiding and
abetting Magarik’s breach of fiduciary duty must fail because the allegations are
conclusory and were insufficiently detailed with respect to the actual knowledge and
substantial assistance prongs. Doc. 161, 21-23. Neither argument is persuasive.
Defendants’ reliance on Kaufman v. Cohen, 307 A.D.2d 113 (1st Dep’t 2003), as
support that Kraus did not plead actual knowledge is unavailing. In Kaufman, Kaufman,
Cohen, and Seigel formed a partnership, SIG, to buy real estate and, together with
another company, bought the Falchi building. Id. at 115. At some point, Cohen advised
against maintaining SIG’s share of the Falchi building, but was in secret negotiations to
reacquire the building after foreclosure with new partners. Id. at 115-16. The First
Department revived Kaufman’s breach of fiduciary duty claim against Cohen on appeal,
but affirmed dismissal of the aiding and abetting breach of fiduciary duty claim against
the Falchi defendants because Kaufman failed to sufficiently allege their actual
knowledge of Cohen’s breach, stating only that the Falchi defendants were “aware of”
Cohen’s partnership with SIG and their interest in the Falchi building. Id. at 125; Doc.
161, 22. Here, by contrast, Kraus pleads in detail that Magarik had sought out Valdberg
as an investor with full knowledge that Valdberg’s company was a longtime competitor
of Kraus. Docs. 1, ¶¶ 3-4, 58-66; 1-1, 11-16, 18. Kraus further pleads that Magarik gave
Valdberg access to Kraus trade secrets in exchange for Valdberg’s “substantial equity”
investment in Vonn, and that Valdberg and Vigo knew Magarik was unsatisfied with
Kraus and was pursuing the Lighting Opportunity without Kraus’ knowledge. Doc. 1, ¶¶
29
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58, 67-70, 76. That Vigo was a “nemesis” of Kraus lends further credence to the
inference that Valdberg and Vigo knew Magarik was vindictively sharing Kraus’ trade
secrets with them. Docs.1, ¶¶ 58, 69; 161, 21. Indeed, actual knowledge may be
“implied from a strong inference of fraudulent intent” and “motive is probative of that
inference.” In re Refco Inc. Sec. Litig., 826 F. Supp. 2d at 517 (citation omitted); Doc.
146, 16.
Kraus’ allegations of substantial assistance are also adequate. In Am. Baptist
Churches of Metropolitan New York v. Galloway, plaintiff’s aiding and abetting claim,
which had been dismissed by the trial court for insufficient allegations of knowledge and
substantial assistance, were reinstated on appeal. 271 A.D.2d 92, 101 (1st Dep’t 2000).
The First Department found the allegations were sufficient on both scores because the
plaintiff had described how the primary violator and accused assisters acted in concert to
divert the opportunity. Id. The First Department further reasoned that the allegations
were supported by the fact that the primary violator had formed the usurping company
months prior to when the deal at the center of the opportunity was meant to close. Id.
Like in Am. Baptist, the allegations here support a theory that Valdberg, Vigo, and
Magarik, who created Vonn eight months prior to his departure from Kraus, acted in
concert to divert Kraus’ Lighting Opportunity to Vonn. Doc. 1, ¶¶ 49, 51, 58-71, 83.
Of course, Defendants are right that Valdberg becoming Magarik’s partner in
Vonn does not mean that he aided and abetted Magarik’s breach. Doc. 161, 21. But, that
oversimplifies Kraus’ claim, which is actually that Magarik and Valdberg had a quid pro
30
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quo arrangement in which Valdberg provided capital for Vonn and Magarik provided
Valdberg with Kraus’ trade secrets.17 Docs. 1, ¶¶ 3-5, 58-70; 146, 16.
Accordingly, Defendants’ motion for judgment on the pleadings as to Count VIII
is denied.
I.
Defendants’ Alleged Tortious Interference (Count X)
To raise a claim of tortious interference, a plaintiff must show the existence of a
valid contract between the plaintiff and a third party, defendant’s knowledge of the
contract, defendant’s “intentional procurement” of the third party’s breach of the
contract, actual breach of the contract, and damages as a result of the breach. Kirch v.
Liberty Media Corp., 449 F.3d 388, 401 (2d Cir. 2006) (citation omitted).
Kraus pleads three instances of tortious interference. First, Kraus pleads that
Valdberg and Vigo tortiously interfered with Kraus’ contractual relationship with
Magarik. Doc. 1, ¶ 156(a). Second, Kraus pleads that Valdberg and Vigo tortiously
interfered with Kraus’ contractual relationship with Racinos. Id., ¶ 156(b). Lastly, Kraus
pleads that Magarik and Vonn tortiously interfered with Kraus’ contractual relationship
with Challenger. Id., ¶ 156(c).
Defendants argue that Kraus failed to state a claim that Valdberg and Vigo
tortiously interfered with Kraus’ contractual relationships with Magarik or Racinos
because Kraus does not sufficiently allege a contractual relationship with either. Doc.
161, 36-37, 42.18
17
Defendants’ related argument, that Valdberg and Vigo are not fiduciaries of Kraus, is equally unavailing
because “a party need not have a fiduciary duty in order to be liable for aiding and abetting the breach of
fiduciary duty of another.” In re Refco Inc. Sec. Litig., 826 F. Supp. 2d at 519; Docs. 146, 17 n.6; 151, 15;
161, 21.
18
Defendants however, do not challenge the existence of a contract between Challenger and Kraus, or that
Magarik and Vonn tortiously interfered with it. Doc. 146, 31 n.12.
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With respect to Magarik, though Kraus alleges having a “contractual
relationship[,]” and Magarik pleaded the existence of his contract with Kraus in the
Nassau County Action, Kraus’ complaint is devoid of any details of the formation or
terms of the alleged contract, which is fatal. Docs. 1, ¶ 156(a); 146, 29-30, 35; Pet., ¶¶
14-17, 90-95. In Berman v. Sugo LLC, 580 F. Supp. 2d 191 (S.D.N.Y. 2008), the Court
dismissed claims for breach of contract and tortious interference because the complaint
alleged the existence of an agreement but did not “set forth a single fact relating to the
formation of the contract, the date it took place, the contract’s major terms, the parties to
the contract, or [defendant’s] assent to its terms.” Id. at 202-03.
As to Racinos, the complaint is similarly deficient. Docs. 1, ¶ 156(b); 146, 29-30.
Because there are no details regarding the existence of or terms of his contract with
Kraus, this claim similarly must fail. Berman, 580 F. Supp. 2d at 202-03.19
Accordingly, Defendants’ motion for judgment on the pleadings on Count X is
granted with respect to Defendants Vigo and Valdberg.20
J.
Vigo’s Alleged Unfair Competition (Count XI)
Courts have described unfair competition is a “‘broad and flexible doctrine’ . . .
encompassing any form of commercial immorality, or simply as endeavoring to reap
where one has not sown; it is taking the skill, expenditures and labors of a competitor,
and misappropriating for the commercial advantage of one person a benefit or property
19
Defendants’ other argument for dismissal, that Vigo and Valdberg cannot be liable for tortious
interference because they have not acted unlawfully, is less convincing. Doc. 161, 37. Under New York
law, “where there is an existing, enforceable contract and a defendant's deliberate interference results in a
breach of that contract, a plaintiff may recover damages for tortious interference with contractual relations
even if the defendant was engaged in lawful behavior.” Carvel Corp. v. Noonan, 3 N.Y.3d 182, 189-90
(N.Y. 2004) (quoting NBT Bancorp Inc. v. Fleet/Norstar Fin. Grp., 87 N.Y.2d 614, 621 (N.Y. 1996)); Doc.
146, 30.
20
Kraus’ claim that that Magarik and Vonn tortiously interfered with Challenger’s contract remains, as it
went unchallenged.
32
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right belonging to another.’” Big Vision Private Ltd. v. E.I. du Pont de Nemours and Co.,
610 F. App’x 69, 70 (2d Cir. 2015) (citing Roy Exp. Co. Establishment of Vaduz,
Liechtenstein v. Columbia Broad. Sys., Inc., 672 F.2d 1095, 1105 (2d Cir. 1982)). Unfair
competition is often pleaded alongside misappropriation of trade secrets, but the
information misappropriated need not rise to the level of trade secrets. Berman, 580 F.
Supp. 2d at 209. However, the defendant’s actions must involve “‘some element of bad
faith.’” Id. (citing Saratoga Vichy Spring Co., Inc. v. Lehman, 625 F2d. 1037, 1044 (2d
Cir. 1980)). The defendant’s behavior must also be “‘likely to cause confusion or to
deceive purchasers as to the origin of the goods.’” Arcadia Biosciences, Inc. v. Vilmorin
& Cie, 356 F. Supp. 3d 379, 402-03 (S.D.N.Y. 2019) (quoting Jeffrey Milstein, Inc. v.
Greger, Lawlor, Roth, Inc., 58 F.3d 27, 34 (2nd Cir. 1995)); see also Allied Maint. Corp.
v. Allied Mech. Trades, Inc., 42 N.Y.2d 538, 543 (1977) (“a showing of a likelihood of
confusion, rather than actual confusion, is all that is required to state a cause of action” of
unfair competition) (citation omitted).
Defendants contend both that Kraus has not sufficiently alleged any
misappropriation by Vigo, and that this claim is duplicative of Kraus’ misappropriation
of trade secrets claims. Doc. 161, 41. However, Kraus alleges in detail that Vigo was a
rival company that often copied its plumbing designs and that then partnered with
Magarik to form Vonn in exchange for Kraus’ confidential proprietary information.
Docs. 1, ¶¶ 3-9, 58-70, 76; 146, 33-34. Kraus even attaches pictures of Vigo’s allegedly
infringing designs and an email where Magarik acknowledges Vigo copied Kraus
products. Doc. 1-1, 11-18. Kraus also alleges that it had invested significant resources of
both time and capital in designing innovative plumbing fixtures. Docs. 1, ¶ 64; 146, 33.
33
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A fair inference from these allegations is that Vigo acted in bad faith. Bytemark, Inc. v.
Xerox, 342 F. Supp. 3d 496, 507-08 (S.D.N.Y. 2018) (finding allegations that defendant
obtained plaintiff’s trade secrets “under the guise” of partnering with them when
defendant had no intention of following through on the partnership, then cut plaintiff out
of a subsequent deal using those trade secrets, sufficiently alleged unfair competition to
survive dismissal). And though Kraus has sufficiently pleaded misappropriation of trade
secrets, see supra Part III.A, the information Vigo is alleged to have misappropriated
does not have to constitute trade secrets to state a cause of action for unfair competition.
Berman, 580 F. Supp. 2d at 209.21 As a result, this claim is broader than and not
duplicative of Kraus’ misappropriation claims. Bytemark, Inc., 342 F. Supp. 3d at 509.
Therefore, Defendants’ motion for judgment on the pleadings on Count XI is
denied.
K.
Magarik’s Alleged Common Law Fraud (Count XIII)
Common law fraud requires “a misrepresentation or a material omission of fact
which was false and known to be false by the defendant, made for the purpose of
inducing the other party to rely upon it, justifiable reliance of the other party on the
misrepresentation or material omission, and injury.” Ambac Assurance Corp. v.
Countrywide Home Loans, Inc., 31 N.Y.3d 569, 578-79 (N.Y. 2018) (citation omitted).
A misrepresentation or omission is material if there is a substantial likelihood that a
reasonable actor would have considered the information in making an investment
21
Defendants also argue that the only plausible claim of unfair competition Kraus made out is that Vigo
hired Racinos, but that is not the basis of Kraus’ pleading of this claim or its argument in opposition. Docs.
1, ¶¶ 164-69; 146, 32-35; 161, 41. Vigo’s hiring of Racinos is alleged, instead, as tortious interference.
Doc. 1, ¶ 156(b); see supra Part III.I.
34
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decision. Abbey v. 3F Therapeutics, Inc., No. 06-409, 2009 WL 4333819, at *8, 13
(S.D.N.Y. Dec. 2, 2009).
Additionally, under Rule 9(b) of the Federal Rules of Civil Procedure, there is a
“higher pleading standard” for pleading fraud with particularity which mandates that the
“‘complaint must adequately specify the statements it claims were false or misleading,
give particulars as to the respect in which plaintiffs contend the statements were
fraudulent, state when and where the statements were made, and identify those
responsible for the statements.’” McLaughlin v. Anderson, 962 F.2d 187, 191 (2d Cir.
1992) (citing Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989)). Rule 9(b) allows,
however, that “[m]alice, intent, knowledge, and other conditions of a person's mind may
be alleged generally.” Fed. R. Civ. P. 9(b). Knowledge can be strongly inferred from
allegations “(1) that the defendant had the motive and opportunity to commit fraud, or (2)
strong circumstantial evidence of conscious misbehavior or recklessness.” Abbey, 2009
WL 4333819, at *10 (citation omitted).
Defendants are correct that Kraus has not alleged its fraud claim against Magarik
with sufficient particularity under Rule 9(b). Doc. 161, 30-31. Though Kraus
specifically alleged that Magarik misrepresented the Lighting Opportunity by
“downplay[ing] the upside” and withheld the fact that Build.com representative Kearns
was available for hire, Kraus does not specify when these events occurred. Doc. 1, ¶¶ 3438, 40-44. Instead, Kraus alleges, in substance, that the misrepresentation occurred
between October 2013 and September 2015, and that the omission occurred sometime
between “late 2014 or early 2015” and September 2015. Docs. 1, ¶¶ 29-38, 40-44, 83;
146, 24.
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Specifically, according to Kraus, the Lighting Opportunity was presented in an
email dated October 14, 2013. Docs. 1, ¶ 29; 1-1, 4. Kraus pleads that it continued to
consider the Lighting Opportunity “[a]s of March 2014,” and implies that it was also
considering the NLCO Opportunity at that time, but fails to provide any timeframe during
which Magarik advised against either venture—facts surely within Kraus’ knowledge.
Doc. 1, ¶¶ 31-37. Given Magarik was an employee until September 2015, his alleged
misrepresentations may have occurred at any time from October 14, 2013 until
September 2015, a period of almost two years. Doc. 1, ¶¶ 29, 83. Even if one can infer
Magarik advised Kraus after March 2014, that only narrows the time frame during which
he could have made his misrepresentation to well over a year. Doc. 1, ¶ 31.
With respect to the omission regarding Kearns’ availability, Kraus alleges only
that Magarik contacted Kearns “around late 2014 or early 2015” about his personal
interest in pursuing the Lighting Opportunity. Doc. 1, ¶ 40. Kraus makes no
representations about when Magarik hired Kearns. Doc. 1, ¶¶ 43-44. Because Magarik
was fired in September 2015, he could have failed to disclose Kearns’ consulting
availability at any point between late 2014 and early 2015, itself a vague estimate, and
September 2015, a period of approximately a year. Doc. 1, ¶¶ 40, 83. Overall, the
allegations never narrow the time period during which Magarik’s alleged omission or
misrepresentation occurred to less than a year. Similar, and even shorter, lengths of time
have been held insufficiently specific under Rule 9(b). See, e.g., Eaves v. Designs for
Fin., Inc., 785 F. Supp. 2d 229, 248-50 (S.D.N.Y. 2011) (finding fraud claim
inadequately plead where misrepresentations occurred “during 2001”); Doehla v. Wathne
36
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Ltd., Inc., No. 98-CV-6087, 1999 WL 566311, at *17 (S.D.N.Y. 1999) (dismissing fraud
claim where misrepresentations allegedly took place over a four-month period).22
Accordingly, Defendants’ motion for judgment on the pleadings as to Count XIII
is granted.
L.
Alleged Aiding and Abetting Conspiracy to Commit Common Law
Fraud and Other Torts against Vonn, Vigo, and Valdberg (Count
XIV)
Because both the aiding and abetting of a fraud, and conspiring to commit a fraud,
are predicated upon the existence of the underlying fraud, and Kraus’ fraud claim has
been dismissed, Defendants’ motion on Count XIV is similarly granted. Filler v. Hanvit
Bank, No. 01-CV-9510, 2003 WL 22110773, at *3 (S.D.N.Y. Sept. 12, 2003); Diamond
State Inc. v. Worldwide Weather Trading, LLC, No. 02-CV-2900, 2002 WL 31819217, at
*4 (S.D.N.Y. 2002); see supra Part III.K.23
22
Defendants’ other arguments in support of dismissal, that Magarik’s advice to forgo the Lighting
Opportunity was not a misrepresentation but mere opinion, that his opinion was protected by the business
judgment rule, and that Kraus was not justified in relying on his opinion, are less availing. Docs. 151, 1415; 161, 31-32. The complaint provides strong indication that Magarik’s advice was not his opinion on the
value of the lighting deals at all. Docs. 1, ¶¶ 29-55; 1-1, 4; 146, 25-26. Abbey, 2009 WL 4333819, at *9
(noting opinion statements may be actionable if the speaker does not reasonably believe them). Moreover,
“[i]t is black-letter, settled law that when a corporate director or officer has an interest in a decision, the
business judgment rule does not apply.’” In re Croton River Club, Inc., 52 F.3d 41, 44 (2d Cir. 1995).
Here, Kraus clearly pleads that Magarik had an interest in Kraus not pursuing the Lighting Opportunity: to
take advantage of it himself using Vonn. Doc. 1, ¶ 51. In addition, Magarik’s misrepresentation was
material, as evidenced by the fact that Kraus put off entry into the lighting space following Magarik’s
advice. Docs. 1, ¶ 34; 146, 25; 161, 32. Kraus also plausibly alleges its reliance on Magarik’s advice given
his longstanding relationship with Kraus as a founding member. Docs. 1, ¶ 22; 146, 26. And, in any event,
the reasonableness of reliance on a misrepresentation is “intensely fact specific” and “generally considered
inappropriate for determination on a motion to dismiss.” Abbey, 2009 WL 4333819, at *12 (citation
omitted).
23
Dismissal would not be warranted, however, based on Defendants’ argument that Kraus failed to allege
what each of Vigo, Valdberg, and Vonn, did to aid and abet and conspire to commit the fraud. Doc. 161,
33-35. Kraus specifically alleges that Vigo and Valdberg invested in Vonn, knowing that Magarik was
using Vonn to divert the Lighting Opportunity, that Vonn hired Challenger after he collected documents for
Vigo and Valdberg about Kraus’ business, and that Vigo hired Racinos and tried to entice other Kraus
employees to join Vigo. Docs. 1, ¶¶ 3-9, 58-62, 67-70, 80, 85-89, 96-100; 1-1, 20-22, 34-36; 146, 27-28.
37
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M.
Breach of Contract (Counts XII and XVI)
Under New York law, pleading a breach of contract claim requires alleging “‘the
existence of a contract, the plaintiff’s performance pursuant to the contract, the
defendant’s breach of his or her contract obligations, and damages resulting from the
breach.’” Innovative Biodefense, Inc. v. VSP Techs., Inc., 176 F. Supp. 3d 305, 317
(S.D.N.Y. 2016) (citing LaRoss Partners, LLC v. Contact 911 Inc., No. 11-CV-1980,
2015 WL 2452616, at *6 (E.D.N.Y. May 21, 2015)).
i.
Magarik
Defendants’ sole argument for dismissal with respect to the breach of contract
claim against Magarik is that there is no allegation of a valid contract between Magarik
and Kraus. Doc. 161, 42. Because the Court has determined that a contract is not
sufficiently alleged, see supra Part III.I, Defendants’ motion for judgment on the
pleadings as to Count XII is granted.
ii.
Challenger
Defendants contend that there are no factual details alleged sufficient to show that
Challenger breached his confidentiality agreement with Kraus. Doc. 161, 42. To the
contrary, Kraus alleges that, mere days before resigning to work at Vonn, Challenger
downloaded proprietary information to share with Vigo, Valdberg, and Vonn, and that he
continued to solicit Kraus employees for further proprietary information after his
departure. Docs. 1, ¶¶ 7-8, 89-100; 146, 35-36. Kraus specifically pleads that this
behavior violated the confidentiality agreement provisions against (1) disclosing
proprietary information and (2) soliciting Kraus employees upon termination, attaches
38
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those provisions, and appends the messages Challenger sent to a Kraus employee to
obtain information generated while at Kraus. Docs. 1, ¶¶ 91-94; 1-1, 24-36.
As a result, Defendants’ motion for judgment on the pleadings is denied with
respect to Count XVI.24
N.
Alleged Unfair and Deceptive Trade Practices Against All Defendants
Except Vonn (Count XVIII)
A claim under § 349 of New York’s General Business Law requires allegations
that “a defendant has engaged in (1) consumer-oriented conduct, that is (2) materially
misleading, and that (3) the plaintiff suffered injury as a result of the allegedly deceptive
act or practice.” Plavin v. Group Health Inc., --- N.E.3d ---, 2020 WL 1355864, at *4
(N.Y. Mar. 24, 2020). Although claims under § 349 are generally raised by consumers, a
corporate competitor may sue under the statute so long as there is “‘some harm to the
public at large.’” Boule v. Hutton, 328 F.3d 84, 94 (2d Cir. 2003) (citing Securitron
Magnalock Corp. v. Schnabolk, 65 F.3d 256, 264 (2d Cir. 1995)). To that end, a
corporate plaintiff must allege the defendant “harmed the consumer or the public interest
in a material respect.” BBK Tobacco & Foods, LLP v. Galaxy VI Corp., 408 F. Supp. 3d
508, 523 (S.D.N.Y. Sept. 30, 2019) (citations omitted). In particular, trademark
violations are not generally cognizable under § 349 unless “there is a specific and
substantial injury to the public interest over and above ordinary trademark infringement
or dilution.” Coach, Inc. v. Horizon Trading USA Inc., 908 F. Supp. 2d 426, 435
24
Defendants’ secondary argument for dismissal, made several times throughout their papers, that Vonn
does not compete with Kraus, is similarly unpersuasive. Docs. 151, 11, 13; 161, 15, 18, 20, 24, 27-28, 32,
40, 42. Though Vonn is a lighting company and Kraus is not, the crux of Kraus’ complaint is that Magarik
created Vonn to pursue a Lighting Opportunity meant for Kraus, and that the pursuit was made easier by
the information Magarik was able to use at Vonn and provide his investors, who happened to be Kraus
competitors. Doc. 1, ¶¶ 51, 58, 67-68, 73-76. That Kraus and Vonn do not compete in the lighting
business today is thus inconsequential, except to the extent that it supports Kraus’ claim that Magarik
misled Kraus to forgo the Lighting Opportunity for his own benefit. Doc. 1, ¶¶ 34-38.
39
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(S.D.N.Y. 2012). Thus, to properly state a claim under § 349, Kraus “must allege
conduct that has ‘significant ramifications for the public at large.’” RCA Trademark
Mgmt S.A.S. v. VOXX Int’l Corp., No. 16-CV-6294, 2015 WL 5008762, at *4 (S.D.N.Y.
Aug. 24, 2015) (citing Gucci Am., Inc. v. Duty Free Apparel, Ltd., 277 F. Supp. 2d 269,
273 (S.D.N.Y. 2003)). Significant ramifications are “potential danger to the public health
or safety.” RCA Trademark Mgmt S.A.S., 2015 WL 5008762, at *4 & n.5 (citing, inter
alia, DePinto v. Ashley Scott, Inc., 222 A.D.2d 288, 289 (1st Dep’t 1995)).
Defendants argue that Kraus has failed to sufficiently allege that Vigo, Valdberg,
Magarik and Challenger engaged in deceptive, consumer-oriented behavior that affected
the consumer-at-large. Doc. 161, 39-40. Though Kraus sufficiently alleged deception in
that Vigo and Valdberg copied its products, Magarik and Challenger provided them with
the means to do so, and they sold products substantially similar to Kraus’, Kraus
admittedly has not alleged any harm to consumers beyond confusion. Docs. 1, ¶¶ 3, 6-7,
58-70, 96-100, 196-201; 1-1, 11-18; 146, 32. Because consumer confusion is a harm that
may be addressed by trademark laws, and because Kraus has not raised any allegation
implicating the health or safety of the consumer, Kraus’ claim under § 349 must fail.
BBK Tobacco & Foods, LLP, 408 F. Supp. 3d at 529-30 (citing Coach, 908 F. Supp. 2d
at 435-36); see also Rosenshine v. A. Meshi Cosmetics Indus. Ltd., No. 18-CV-3572,
2020 WL 1914648, at * 10-11 (E.D.N.Y. Mar. 30, 2020).25
25
The authority Kraus relied on to the contrary, Mayes v. Summit Entm't Corp., No. 16-CV-6533, 2018 WL
566314, at *7 (E.D.N.Y. Jan. 18, 2018), was a report and recommendation that was subsequently rejected
on this very issue. Mayes v. Summit Entm’t Corp., 287 F. Supp. 3d 200, 211 (E.D.N.Y. 2018) (“In sum,
Plaintiffs have failed to allege a consumer-oriented harm greater than consumer confusion, a harm which is
insufficient to support a claim under Section 349.”); Doc. 146, 32.
40
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Accordingly, Defendants’ motion for judgment on the pleadings as to Count
XVIII is granted.26
O.
Valdberg
Defendants argue that, because Valdberg is not subject to any cause of action as
an individual independent of his company Vigo, that the complaint against Valdberg
should be dismissed. Doc. 161, 43. Defendants, however, make this claim without citing
any authority, and by discounting the several instances where Kraus made specific
allegations as to Valdberg. Doc. 146, 37-38. Those instances include that Valdberg
invested in Vonn in exchange for information about Kraus’ business, and that Valdberg
knew that Magarik was using Vonn to take advantage of the Lighting Opportunity. Doc.
1, ¶¶ 58-70. Accordingly, judgment on the pleadings will not be rendered as to Valdberg.
P.
Leave to Amend
Kraus is granted leave to amend the claims dismissed on Rule 9(b) grounds,
common law fraud and aiding and abetting conspiracy to commit fraud, Counts XIII and
XIV, respectively. Anhui Konka Green Lighting Co., Ltd. v. Green Logic LED Elec.
Supply, Inc., No. 18-CV-12255, 2019 WL 6498094, at *12 (S.D.N.Y. Dec. 3, 2019)
(“Leave to amend should be freely granted, especially where dismissal of the complaint
was based on Rule 9(b).”) (collecting cases). Kraus is also granted leave to amend its
CFAA claim, Count II, its tortious interference claims against Vigo and Valdberg, Count
X, and its breach of contract claim against Magarik, Count XII.
26
Defendants’ other arguments to dismiss this claim are less persuasive. Doc. 161, 39-40. Construed with
every inference in Kraus’ favor, Kraus plausibly pleaded that the alleged deceptions occurred in New York.
Docs. 1, ¶¶ 18-19; 146, 32 n.13; N.Y. Gen. Bus. Law § 349(a). Defendants also cite no authority that the
Court must dismiss where Kraus has failed to identify any registered intellectual property that Vigo copied,
or supporting the proposition that Magarik and Challenger never having worked for Vigo precludes Kraus’
claim, especially where they are alleged to have shared Kraus’ proprietary information with Vigo. Docs. 1,
¶¶ 2-9, 58-70, 76, 89-100; 161, 39-40.
41
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However, Kraus’ claim for unfair and deceptive trade practices, Count XVIII,
would not succeed even if replead because Kraus cannot claim any risk to the public from
Vigo’s actions, even if its allegations are taken as true. See supra Part III.N. Thus, leave
to amend would be futile and is denied with respect to Count XVIII. Henneberry, 415 F.
Supp. 2d at 433.
IV.
Conclusion
In sum, Defendants’ motion for judgment on the pleadings is GRANTED with
respect to Counts II, XII, XIII, XIV, and XVIII as to all Defendants, GRANTED with
respect to Count X as to Defendants Vigo and Valdberg, and DENIED with respect to all
remaining counts and as to all remaining Defendants.
Plaintiff’s motion to amend is GRANTED with respect to Counts II, X, XII, XIII,
and XIV and DENIED with respect to Count XVIII. The parties are directed to appear
for a status conference on May 22, 2020 at 10:15 AM.
The Court respectfully directs the Clerk to terminate this motion, Doc. 160.
SO ORDERED.
Dated:
May 12, 2020
New York, New York
_______________________
Edgardo Ramos, U.S.D.J.
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