PANTHER SYS. II v. PANTHER COMPUTER SYS.

The opinion of the court was delivered by: Spatt, District Judge.

ORDER

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:

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

ORDERED, that the plaintiffs post an undertaking, pursuant to Fed.R.Civ.P. 65(c) in the amount of $25,000.00 within five (5) days of the date this order to secure the preliminary injunction.

SO ORDERED.

REPORT

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.

PROCEDURAL POSTURE

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.

BACKGROUND

Introduction

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.

In April 1990, defendant, Randy Schleger became associated with Panther Systems Ltd. Randy Schleger, through his association with the business, learned the day-to-day operations of Panther Systems Ltd. Shortly after Groveman and Randy Schleger became associated, Panther Systems Ltd. moved into the accounting offices of Stanley Schleger, Randy Schleger's father. This office provided desk space to Panther Systems Ltd. and was used as a mail drop and for a place to receive phone calls.

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.

Alleged Bad Acts

In early January, Groveman received statements from American Express indicating that Randy Schleger had charged items to Panther Systems' corporate account. Groveman contends that he never authorized Randy Schleger to have such a credit card. The charges all reflected restaurant bills. On the other hand, Randy Schleger claims that it was at Groveman's suggestion that he get an American Express card.

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

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

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.

According to Groveman, in March of 1991, PC Magazine was telephoned by someone claiming to be Lloyd Groveman and requested that a computer sent to them for evaluation by Panther Systems Ltd. be returned to the Great Neck address. Schleger contends that such act was authorized pursuant to an alleged agreement*fn4 between himself and Groveman. Federal Schleger Affidavit, at p. 16. Specifically, he contends that the proceeds of the sale of this computer were to be used to pay off Schleger's loan and to pay suppliers of Panther Systems Ltd. Federal Schleger Affidavit, at p. 16. Similarly, a Panther Systems, Ltd. computer loaned to Computer Shopper for reviewing was also diverted by Randy Schleger to Panther Computer Systems, Inc. Randy Schleger does not contest this allegation.

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. ...