Regalos De Colleccion ("Regalos"). The complaint alleges
federal racketeering and state law tort and breach of contract
claims in connection with Schmid's agreement with W. Goebel
Porzellanfabrik ("Goebel") to be the exclusive United States
distributor of certain porcelain figurines, known as Hummels.
Specifically, Schmid alleges 1) tortious interference by
defendants with Schmid's contract with Goebel; 2) tortious
interference with Schmid's prospective business relations; 3)
fraud and misrepresentation; 4) unfair competition; 5) unjust
enrichment and 6) various violations of the
Racketeer-Influenced and Corrupt Organizations ("RICO") Act.
The case is presently before the Court on three motions.
First, defendant ZGI moves to dismiss the complaint in part
pursuant to Fed.R.Civ.P. 12(b)(6). ZGI seeks to dismiss all
counts except Schmid's unfair competition claim. Second, ZGI
moves to set aside this Court's January 3, 1991 grant of
Schmid's motion for a default judgment against the defendants
Regalos and Zucker. ZGI urges this Court not to enter a final
judgment against these two defendants. Finally, Schmid moves
for the entry of a protective order pursuant to Fed.R.Civ.P.
26(c), pertaining to certain information to be produced by the
parties which is allegedly confidential. For the reasons
discussed below, ZGI's motions to dismiss and to set aside the
default judgment are denied. Schmid's motion for a protective
order is referred to a Magistrate Judge.
Since 1985, Schmid has been a distributor in the United
States of figurines and other porcelain products manufactured
by Goebel of Roedental, Germany. These porcelain products,
known as "Hummels," are derived from and inspired by the art of
Berta Hummel. On November 8, 1988, Schmid and Goebel signed a
contract which gave Schmid "the permanent, exclusive right to
distribute Goebel Hummel products in the United States and
Puerto Rico." The contract obligates Goebel to "use its best
efforts, consistent with applicable laws to prevent
unauthorized importation of Hummels into the United States and
Puerto Rico." Complaint ¶ 8.
Schmid alleges that there are United States retail dealers
selling Hummels in the United States which were not obtained
from Schmid. According to Schmid, ZGI, a company established in
1985 to sell gifts and camera equipment in the United States to
the general public and retailers, is "one of the principal gray
marketers of Hummels in this country." Plaintiff's Memorandum
of Law in Opposition to Defendant's Motion to Dismiss the
Complaint, p. 2. Plaintiff alleges that ZGI is importing into
the United States Hummels which it illegally obtained through
a shell corporation located in Panama. The alleged shell
corporation, Regalos, is owned and operated by Edward Zucker,
the president of ZGI. Regalos is registered as a Panamanian
corporation, but has no retail or wholesale store in Central or
South America and is not engaged in any business activities.
The company's resident agent in Panama is a law firm.
Schmid alleges that Zucker and ZGI, through Regalos, have
devised a scheme to deprive Schmid of the fruits of its
exclusive distribution contract with Goebel through mail,
telephone and other means, from ZGI's New York office.
Allegedly, it is through Regalos that ZGI fraudulently
purchases Hummels from Goebel and has them diverted to New
York, where ZGI re-sells them. According to Schmid, "this is
done by creating false commercial documents which purport to
show orders and payments from shipments to Regalos even though
the shipments are made directly to and paid for by ZGI in New
York." Complaint ¶ 26. Schmid alleges that as a result of ZGI's
illegal actions it has suffered "millions of dollars in damages
from lost sales, injury to its goodwill, and other injuries."
Plaintiff's Memorandum of law, p. 3.
I. Motion to Dismiss
ZGI argues that while Schmid may have been injured by
increased competition from the importation of Hummels into the
United States by Regalos there was no
illegal action by ZGI and therefore Schmid has failed to state
a claim upon which relief may be granted. Consequently, ZGI
urges this Court to dismiss all but one count of the complaint.
In a motion to dismiss, this Court looks to the four corners of
the complaint and is required to accept plaintiff's allegations
as true and construe those allegations in the light most
favorable to plaintiff. See Scheuer v. Rhodes, 416 U.S. 232,
236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974); Dacey v. New
York County Lawyers' Ass'n, 423 F.2d 188, 191 (2d Cir. 1969),
cert. denied, 398 U.S. 929, 90 S.Ct. 1819, 26 L.Ed.2d 92
(1970). The complaint will be dismissed only if plaintiff can
prove no set of facts that would entitle him to relief.
A. Tortious Interference with Contract
To state a cause of action for tortious interference with
existing contractual relations, a plaintiff must allege 1) the
existence of a valid contract between plaintiff and another
contracting party; 2) defendant's knowledge of that contract;
3) defendant's intentional procurement of a breach of that
contract by the other party; and 4) damages. See Nifty Foods
Corp. v. Great Atlantic & Pac. Tea Co., 614 F.2d 832, 839 (2d
Cir. 1980); Walters v. Fullwood, 675 F. Supp. 155, 159 (S.D.N Y
1987); Guard-life Corp. v. S. Parker Hardware Mfg. Corp., 50
N Y2d 183, 406 N.E.2d 445, 428 N.Y.S.2d 628 (1980).
Defendant ZGI's knowledge of the contract between Schmid and
Goebel and its intent to effectuate a breach of that contract
by Goebel are in essence the claims at issue.*fn1 In its
complaint, Schmid claims that the defendants knew that Schmid
and Goebel were parties to an exclusive distributorship
contract. ¶ 15. It was because of this knowledge, according to
Schmid, that defendants fraudulently schemed and conspired
through Regalos, an allegedly shell corporation controlled by
Zucker, to import Hummels into the United States through a
third country in circumvention of that agreement. ¶ 13. Schmid
urges that by utilizing the Regalos "fiction and subterfuge"
that Zucker and ZGI have and continue to transact business with
Goebel in furtherance of a conspiracy to deprive Schmid of the
fruits of its contract with Goebel. ¶ 14.
In support of its claim that the defendants intentionally
caused Goebel to breach its contract, Schmid alleges that
through Regalos, Zucker and ZGI send false documentation in the
form of orders, invoices and bills of lading for purchases and
shipments of Hummels. The purpose of this ploy allegedly is to
avoid having to reveal to Goebel or overseas Goebel
distributors that Zucker and ZGI were the true parties in
interest. Schmid urges that by these misrepresentations and
false statements, the defendants conspired to induce Goebel to
sell Hummels in violation of its contract with Schmid.
Complaint ¶ 13. According to Schmid these breaches have
occurred on a regular basis since January 1, 1989 and continue
today. Complaint ¶ 16.
Examining the four corners of the complaint, this Court
cannot conclude that plaintiff has failed to state a claim. ZGI
argues that Schmid, in its amended complaint, has failed to
allege with enough specificity that the defendants knew of the
contract between Schmid and Goebel which prohibited Goebel from
selling Hummels that were destined for shipment into the United
States to persons other than Schmid. Yet, the amended complaint
offers a number of examples of actions, as outlined above,
taken by the defendants to circumvent direct importation of
Goebel Hummels into the United States. These allegations
support the inference that defendants knew of the exclusive
contract between Schmid and Goebel.
B. Tortious Interference with Prospective Business Relations
In order to prevail on the common law claim of tortious
interference with prospective
economic advantage, the plaintiff must establish a number of
elements. See PPX Enterprises v. Audio Fidelity Enterprises,
818 F.2d 266, 269 (2d Cir. 1987); Martin Ice Cream Co. v.
Chipwich, Inc., 554 F. Supp. 933, 945 (S.D.N.Y. 1983). A
plaintiff must show that the defendant interfered with
"business relations existing between the plaintiff and a third
party, either with the sole purpose of harming the plaintiff or
by means that are dishonest, unfair or in any other way
improper." Id. In other words, if the defendant's interference
is intended, "at least in part, to advance its own competing
interests, the claim will fail unless the means employed
include criminal or fraudulent conduct." PPX, 818 F.2d at 269;
see also Nifty Foods Corp. v. Great Atlantic & Pacific Tea
Co., 614 F.2d 832, 838 (2d Cir. 1980).
For many of the same reasons discussed above, plaintiff's
pleadings on this count survive a motion to dismiss. The Court
does not question that defendants' motivation for participating
in the United States Hummel market was "to advance its own
competing interests." This is the primary motivation for all
businesses participating in a grey market. Increased
competition creates no cause of action in and of itself. What
the law seeks to redress, when found, is fraud and deceit. If
the various frauds that are alleged in the complaint are proven
and if it is correct that defendants knew about the exclusive
distribution contract between Schmid and Goebel, the
defendants' conduct may be characterized as "criminalized or
fraudulent." Accordingly, the tortious interference count
cannot be dismissed.
C. Unjust Enrichment
Schmid relies upon equitable principles of unjust enrichment
and constructive trust, which under New York law permit a
plaintiff to recover money when it has come into the
defendant's hands wrongfully and it is, under the circumstances
against good conscience for the defendant to keep the money.
Specifically, Schmid claims that as a result of defendants'
individual and concerted tortious actions, they hold funds
derived from their Hummel sales in constructive trust for
Schmid. Traditionally, four elements are needed for the
imposition of a constructive trust: 1) a promise; 2) a transfer
in reliance on the promise; 3) a confidential or fiduciary
relationship; and 4) unjust enrichment. Lines v. Bank of
America Nat'l Trust & Savings Ass'n, 743 F. Supp. 176, 180
(S.D.N.Y. 1990). "However, these elements are not talismanic,
and courts have held that a constructive trust can be imposed
in the absence of some of these factors." Id. at 180. As one
New York court has written, "the applicability of the
constructive trust doctrine is limited only by the
inventiveness of [people] who find new ways to enrich
themselves unjustly by grasping what should not belong to
them." Reiner v. Reiner, 100 A.D.2d 872, 474 N.Y.S.2d 538, 541
(App. Div. 1984).
Schmid alleges that it has entered into a confidential
relationship with Goebel and that the defendants, acting in
concert, have "intentionally participated in the furtherance of
a preconceived common plan or purpose to unjustly enrich
themselves to Schmid's detriment." Complaint ¶ 50. Schmid
further alleges that defendants have in fact been unjustly
enriched by their conspiracy since they hold funds derived from
their Hummel sales in the United States. Based on this
allegation, Schmid suggests that the defendants hold millions
of dollars in constructive trust for Schmid. These allegations
state a claim under the liberal interpretation of the elements
for a cause of action for unjust enrichment followed by the New
York courts. Since this claim is adequately alleged in the
complaint, ZGI's motion to dismiss this claim is denied.
D. Fraud, Misrepresentation and RICO
The basis of Schmid's remaining claims is the civil
provisions of RICO. The Second Circuit has not explicitly held
that Rule 9(b) of the Fed.R.Civ.P. is applicable to pleading
RICO claims. Most other circuits, however, have concluded that
Rule 9(b) is applicable to RICO predicate acts which are based
on a theory of fraud. See Cayman Exploration Corp. v. United
Line Co., 873 F.2d 1357, 1362 (10th Cir. 1989); Alan Neuman
Productions Inc. v. Albright, 862 F.2d 1388, 1392 (9th Cir.
1988); Saporito v. Combustion Eng. Inc., 843 F.2d 666, 675 (3d
Cir. 1988); New England Data Services Inc. v. Becher,
829 F.2d 286, 289-90 (1st Cir. 1987). This also appears to be the rule
that courts in this district have followed. See Newman v.
Rothschild, 651 F. Supp. 160, 162 (S.D.N.Y. 1986) (important to
require 9(b) specificity when the fraud allegations also
constitute predicate acts underlying RICO claims and implicate
the reputation interests of defendants).
To state a cause of action under RICO, a plaintiff must
allege, in a manner that passes muster under Rule 9(b), "(1)
conduct (2) of an enterprise (3) through a pattern (4) of
racketeering activity." Sedima, S.P.R.L. v. Imrex Co.,
473 U.S. 479, 496, 105 S.Ct. 3275, 3285, 87 L.Ed.2d 346 (1985).
Plaintiff, in its fraud, misrepresentation and RICO counts
alleges that Zucker and ZGI engaged in a conspiracy, through
Regalos, to deprive Schmid of the benefits of its contract with
Goebel. Complaint ¶ 55. Specifically Schmid's pleadings suggest
that the defendants have engaged in a pattern of illegal
conduct and committed the required predicate acts by sending
wire and postal communications on a regular and continuing
basis since January 1, 1989, including purchase orders and
other commercial documents, which misrepresent the true
purchaser and ultimate destination of the Hummels. Complaint ¶
56. Schmid alleges that the pattern of these racketeering
activities has deprived Schmid of "millions of dollars in
damages in its business and property from lost sales."
Complaint ¶ 57. For purposes of Rule 9(b) and a motion to
dismiss, Schmid in its complaint has identified the requisite
elements of a RICO claim and with adequate specificity. For
these same reasons, plaintiff's fraud and misrepresentation
counts also survive a motion to dismiss.
II. Motion to Set Aside Default Judgment Against Zucker and
Next, this Court must consider ZGI's motion to set aside the
default judgment against Regalos and Zucker. On January 3,
1991, the Court granted Schmid's motions to enter a default
judgment against defendants Regalos and Zucker for failing to
answer or otherwise respond to the complaint within the time
prescribed by the Federal Rules of Civil Procedure. The Court's
endorsement of the motion was filed on January 9, 1991.
Subsequently, Schmid submitted forms of judgment which have not
been endorsed. In a letter dated February 25, 1991, ZGI opposed
the entry of final judgments against those defendants.