The opinion of the court was delivered by: Spatt, District Judge.
This matter was referred to United States Magistrate Judge
Michael L. Orenstein pursuant to 28 U.S.C. § 636, Fed.R.Civ.P.
72(a) and Rule 1 of the Magistrate's Rules for the Eastern
District of New York, to hear and prepare a Report and
Recommendation with regard to the plaintiffs' motion for a
preliminary injunction pursuant to Fed.R.Civ.P. 65(a). On
November 6, 1991, Magistrate Judge Orenstein rendered his
Report, recommending the following:
1. that the New York Telephone Company place a
recorded message on telephone number (516)
466-6108 which will indicate to callers where they
can contact plaintiffs and defendants and that in
all other respects the telephone number should be
discontinued;
3. that the defendants and their employees, agents
or representatives be enjoined from (a) using or
passing off as their own any office sign, labels,
business card, stationery, promotional literature,
business form, containers, name or other indicia
or insignia similar or deceptively similar to any
used or formerly used by plaintiffs; (b) stating
or imitating that Defendants' computer hardware
and software or any other goods are manufactured,
sold or warranted by plaintiffs; and (c) using
published reviews of plaintiffs' products;
4. that the defendants be directed to return to
the plaintiffs any mail addressed to plaintiffs,
computer hardware or software, business and
financial records, customer lists or any other
internal record used by Panther Systems Ltd.; 5.
that the defendants be enjoined from dissipating,
concealing, altering, diverting, destroying,
mutilating, taking into custody, or disposing of,
in any manner or using or copying all or any
portion of such documents;
6. that the defendants be enjoined from doing
business, on behalf of any entity involved in the
computer business, with Eaton Corporation or
Telephonics Corporation, plaintiff Groveman's
prior employer, or any other private customer of
plaintiffs as of January 19, 1991, or private
entity whose identity was learned by defendants or
agents or employees of defendants during the
course of association with plaintiffs or from
customer lists of plaintiffs or from inquiries
directed to plaintiffs;
7. that the defendants, their officers, agents and
employees and all persons in active concertor
participating with them be enjoined from (a)
soliciting and collecting from customers of
plaintiffs any payment of monies due plaintiffs;
(b) soliciting, collecting and taking custody over
material assets belonging to plaintiffs being held
by third parties; and (c) return and turn over to
plaintiffs all records of bank accounts, deposits,
withdrawal slips and the monies held in the name
of Panther Systems Ltd., Panther Systems II, Ltd.
or Computers Anonymous;
8. that the defendants not be enjoined from doing
business with any public or quasi-public customer
of Panther System's Ltd. which they obtained
through a public bid;
9. that the defendants' knowledge of plaintiffs'
suppliers, in addition to their possession of a
supplier list, if any, is not protectable as a
trade secret. Accordingly, defendants may solicit
orders from plaintiffs' suppliers as Light-Speed
Systems Ltd. provided that they do not use the
Panther tradename, trademark, logo, any Panther
promotional material or indicate their prior
connection to any Panther entity.
On November 20, 1991, the defendants Panther Computer
Systems, Inc., Randy Schleger, Jay Schleger, Stanley Schleger,
Stanley Schleger, C.P.A., timely filed objections to the Report
and Recommendation. On November 22, 1991, the plaintiffs
Panther Systems II, Ltd., Panther Systems, Ltd., Computers
Anonymous, and Lloyd A. Groveman timely filed objections to the
Report and Recommendation.
The Court having fully considered the Report and
Recommendation as well as the objections to the Report and
Recommendation, and having undertaken a de novo review of the
matter (see 28 U.S.C. § 636[b][1]; Grassia v. Scully,
892 F.2d 16, 19 [2d Cir. 1989]), it is hereby
ORDERED, that the Report and Recommendation of United States
Magistrate Judge Michael L. Orenstein, dated November 6, 1991,
is confirmed and adopted by this Court in all respects; and it
is further
ORDERED, that the plaintiffs' motion for a preliminary
injunction pursuant to Fed.R.Civ.P. 65(a) is granted to the
extent set forth above; and it is further
Plaintiffs seeks to enjoin defendants from further infringing
plaintiffs trademarks, tradename and copyrights. In addition,
plaintiffs seek to enjoin defendants from misappropriating
certain proprietary information belonging to plaintiffs',
including lists of current and potential customers, information
regarding those customer's past, present and future computer
needs, pricing strategies and names of contacts at these
companies and names of plaintiffs' suppliers.
On March 19, 1991, Panther Systems Ltd. and Randy Schleger,
as plaintiffs obtained at Nassau County Supreme Court an ex
parte temporary restraining order enjoining, Lloyd Groveman,
from wasting or converting the assets or diverting the
corporate opportunities of Panther Systems Ltd. Thereafter, a
preliminary injunction was denied and the state action was
dismissed with prejudice without opposition. Lloyd Groveman
then moved for a determination that the state action was
frivolous and without merit and for an award of attorney's fees
and costs. In granting the motion, the state court found that
"[t]here has never been one scintilla of evidence presented to
show [Randy Schleger] was ever a shareholder in Panther
Systems, Inc.*fn1 [sic]" Panther Systems Ltd. v. Groveman,
Index No. 5770/91 (Nassau Sup.Ct. June 4, 1991). The state
court awarded $10,000 for costs and attorney's fees.
Thereafter, Panther Systems II, Ltd., Panther Systems Ltd.,
Computer Anonymous and Lloyd Groveman, the plaintiffs herein,
filed suit in federal court for trademark infringement
(15 U.S.C. § 1051 et seq.) and copyright infringement (17 U.S.C. § 101
et seq.), and dilution of the trademark (N.Y.Gen. Bus. §
368-d [McKinney 1991]), deception (N.Y.Gen. Bus. § 133
[McKinney 1991]) and common law unfair competition under New
York State law. On August 27, 1991, plaintiffs moved for a
preliminary injunction enjoining defendants from further
infringement of plaintiff's trademark and logo, tradename and
copyrights. The case was referred to the undersigned for a
report and recommendation on the motion for a preliminary
injunction. Based upon the discussion below, the court
recommends that plaintiffs' application for a preliminary
injunction be granted to a limited extent.
Plaintiff, Panther Systems Ltd., incorporated in October
1989, was located at 74 Hickory Lane in Roslyn Heights, New
York.*fn2 Panther Systems Ltd. sold computer hardware and
software. The sole incorporator of Panther Systems Ltd. was
plaintiff Lloyd Groveman.*fn3 Prior to incorporating Panther
Systems Ltd., Groveman from July 1986 through May 1989 worked
at Eaton Corp. (now Telephonics Corp.), as a software engineer.
Thereafter, he founded Panther Systems Ltd.
Lloyd Groveman contends that his relationship with Randy
Schleger was based on Stanley Schleger's intention to invest
three hundred thousand dollars in Panther Systems Ltd. Groveman
states that upon tender of such monies he would convey fifty
percent of his shares of Panther Systems Ltd. to Randy
Schleger. On this basis, plaintiffs allege that confidential
information was made available to Randy Schleger in
anticipation of the three hundred thousand dollar investment by
Stanley Schleger. However, the alleged three hundred thousand
dollar investment never materialized.
The defendant, Randy Schleger states that he joined forces
with Lloyd Groveman "to build a computer business."
Schleger's Federal Affidavit, at p. 4. He states that neither
he nor his father ever discussed investing three hundred
thousand dollars in Panther. Schleger's Federal Affidavit, at
p. 5. In fact, Schleger claims that he and Groveman agreed to
be equal partners in Panther Systems, Ltd. and that the name of
Panther was to be built up through "sweat equity." Schleger's
Federal Affidavit, at p. 4. According to Randy Schleger, he
never "received a dime" as either commission or salary.
Schleger's Federal Affidavit, at p. 9. Randy Schleger states
that his function in Panther Systems Ltd. was that of a
"salesman." Schleger's Federal Affidavit, at p. 2. Prior to his
association with Lloyd Groveman, Randy Schleger had never been
affiliated with a computer company.
Groveman and Randy Schleger solicited the help of Stanley
Schleger, a certified public accountant, in running part of the
business. While both sides disagree as to how and why Stanley
Schleger became involved in the business, it is uncontested
that between April and December 1990, Stanley Schleger
performed many functions for Panther Systems Ltd. According to
Groveman, in September 1990, Stanley Schleger asked to hold all
of Panther Systems Ltd.'s bank and financial records. Groveman
admits to obliging this request. Stanley Schleger, at that
point, was also given responsibility for filing Panther
Systems' tax returns. Groveman claims that he requested return
of these documents numerous times after the "falling out"
between himself and Randy Schleger, but they were not returned
to him until July 1991, approximately six months after the
"falling out" and three months after the filing of the federal
complaint. Further, Groveman contends that the Schlegers still
have not yet returned Panther Systems Ltd.'s business records.
Both sides agree that Stanley Schleger represented that he
was President of Panther Systems Ltd. to the Nassau Regional
Off-Track Betting Corporation ("OTB") and both sides confirm
that he held no such position. While Groveman maintains this
representation was done without his authorization, Randy
Schleger contends that it was done at the express direction of
Lloyd Groveman to give the appearance of experience to a
business run by two "kids."
According to Randy Schleger, his father urged him to enter
into a written agreement with Lloyd Groveman and to get
possession of stock certificates of the company. Groveman
confirms this and contends that he was even asked to sign a
partnership agreement handwritten by Stanley Groveman. The
partnership agreement allegedly stated that "Lloyd Groveman and
Randy Schleger will be equal partners in Panther Systems, Ltd."
Groveman Affidavit, at p. 15. However, this partnership
agreement was never executed by Lloyd Groveman. In early
December, Groveman contends he informed Randy Schleger that he
was withdrawing his offer to sell him stock and that he could
"no longer be associated with Panther Systems, Ltd." Groveman
Affidavit, at p. 16.
According to Groveman, on January 19, 1991, Jay Schleger,
Randy's brother, telephoned him and demanded possession of all
the business records concerning Panther Systems Ltd, all the
accounts receivable and that if he didn't comply he "will be
beaten and killed." Groveman Affidavit, at p. 18. Jay Schleger
stated that "he would come to my apartment, or would find me
wherever I am." Groveman Affidavit, at p. 18. On the basis of
these threats, a criminal proceeding was initiated in Nassau
County. Groveman during this telephone call allegedly told Jay
Schleger that Randy was "to have nothing to do with Panther
Systems." Groveman Affidavit, at p. 18. Randy Schleger denies
any awareness of this telephone call. Interestingly, the court
has not been provided with any affidavits of Messrs. Jay and
Stanley Schleger indicating the same.
After this telephone call, Groveman contends that
[o]ver the course of the next few days, I was,
nevertheless, informed by clients of Panther
Systems that Mr. Randy Schleger: had driven to see
those clients; had represented to them that he was
still affiliated with Panther Systems; and had
taken into his personal custody PANTHER computers
which belonged to Panther Systems, Ltd. (These
computers were demonstration units which were lent
to those companies by Panther Systems.) In
addition, I was told by Panther Systems' clients
that Mr. Schleger had also taken into his
possession, from those clients, accounts
receivable due Panther Systems. . . . Mr.
Schleger's actions, and representations to
customers of Panther Systems, were entirely
unauthorized, and his collection of computer
equipment and accounts receivable were thefts from
Panther Systems.
Groveman Affidavit, at p. 19 [capitalization in the original].
Thereafter, on January 23, 1991, Groveman dissolved Panther
Systems Ltd. and reincorporated it on January 24, 1991, as
Panther Systems II, Ltd. ("Panther II"). Randy Schleger was not
a party to this reorganization.
On January 16, 1991, defendants incorporated Panther Computer
Systems Inc. to allegedly compete with plaintiff's Panther
entities. This was three days before the threatening phone call
to Groveman and five days before Panther Systems Ltd. wrote to
vendors and customers stating that Randy Schleger had been
dismissed.
In late January, according to Groveman, he was informed by
one of Panther Computer Systems Ltd.'s suppliers that Randy
Schleger had represented to it that he was an "agent of Panther
Systems; and had taken into his personal custody 12 computers,
which he had charged to Panther Systems' account." Groveman
Affidavit, at p. 21. However, Schleger claims that it was
Panther Computer Systems, Inc., the entity incorporated by his
brother, which paid for the computers. Schleger's Federal
Affidavit, at p. 14.
Another example of Schleger's bad faith, according to
Groveman, is evidenced by PC Magazine informing him that Randy
Schleger had told "its personnel that he, Randy Schleger, was
the owner and incorporator of Panther Systems, Ltd." Groveman
Affidavit, at p. 21. Thus, on this basis, on January 21, 1991,
Groveman contacted Panther Systems Ltd.'s vendors and clients
and informed them that "Randy Schleger had been dismissed from
Panther Systems, Ltd. and was no longer affiliated with Panther
Systems . . . and that all correspondence should be sent
directly to the Panther Systems' headquarters in Roslyn
Heights." Groveman Affidavit, at p. 19.
Thereafter, Groveman attempted to disconnect the local
telephone number of Panther Systems Ltd. He was unsuccessful,
however, since the telephone number was subscribed to Stanley
Schleger's name. While the facts establish that Panther Systems
Ltd. had a telephone line at Stanley Schleger's office, Randy
Schleger's inconsistent sworn statements regarding installation
of the phone line are indicative of his bad faith. In the state
proceeding, Schleger stated in his affidavit that "[w]e
arranged
with the phone company for a local phone service for the
business as well as a special `800' toll free line which was
installed at our offices at 111 Great Neck Road, Great Neck,
New York." Schleger's State Affidavit, at p. 3. However, in the
federal proceedings, Schleger states that "it was at our
request that . . . the telephone number (which is one of my
father's accounting firm's telephone lines) [be installed], so
that we would be able to save money." Schleger's Federal
Affidavit, at p. 5. Defendant's sworn statement in state court
while not completely inconsistent with his position in the
instant proceedings, does not reflect the reality of how the
phone line was actually installed. In reality, the line was
installed under Stanley Schleger's name.
Thereafter, Groveman filed a change of address notice with
the Great Neck Post Office. However, on February 14, 1991,
Stanley Schleger, as the accountant for Panther Systems Ltd.,
wrote to the postmaster and stated that
the offices of the Corporation have always been
located at 111 Great Neck Road . . . I insist that
the mail be forwarded to us immediately. . . . I
realize that a disgruntled employee has cost us
numerous problems to date.
Exhibit O to Groveman Affidavit. This letter was placed on the
letterhead of Stanley Schleger & Company. This letterhead
indicates that Stanley Schleger & Company is located at the
same address as Panther Systems Ltd. The fact that Stanley
Schleger characterized Lloyd Groveman as a mere "employee" is
extraordinary. Moreover, this letter having been written by the
alleged "accountant" of the corporation, almost three weeks
after Panther Systems Ltd. was dissolved, is incredible in
light of the statement that the "[c]orporation has always been
located at 111 Great Neck Road" and the fact that Stanley
Schleger and Panther Systems Ltd. shared the same offices. In
addition, the enclosure of the filing receipt for the
incorporation of Panther Computer Systems Inc., Jay Schleger's
entity, in support of his request to the postmaster, is a
flagrant misrepresentation. Groveman Affidavit, at p. 25. As a
result of this letter, Groveman contends that Stanley Schleger
successfully convinced the postmaster to forward the Panther
Systems Ltd.'s mail to the Great Neck address and thus he lost
receipts of over twelve thousand dollars which he allegedly has
yet to recover. Groveman Affidavit, at p. 25.
Moreover, in February 1991, according to Groveman, OTB
purchased from Panther II over seven thousand dollars of
computers and peripherals. The check, however, was erroneously
made out to Panther Systems Ltd. and mailed to the Great Neck
address. Thereafter, Groveman learned that the check had been
cashed by Randy Schleger against Panther Systems Ltd.'s account
and applied toward a personal loan of Mr. Schleger's.
Groveman Affidavit, at p. 23. Schleger contends this was proper
in that the loan was taken out on behalf of Panther Systems.
Federal Schleger Affidavit, at p. 15.
As evidence of defendants' further misrepresentation of
plaintiffs' name, Groveman contends that they used the Panther
Systems Ltd. name to secure an bid award from the Smithtown
Central School District. While defendants supposedly bid on the
public contract as Panther Computer Systems, Inc., the award of
the bid was received by Groveman. In addition, while defendants
used the name of their new entity, "Panther Computer Systems
Inc." in the listing on the bid proposal, the court notes that
according to the papers submitted by plaintiffs the sales
material accompanying the bid named the Groveman entity,
"Panther Systems Ltd.," as the vendor. Exhibits V and W to
Groveman's Affidavit. ...