United States District Court, S.D. New York
August 2, 2005.
THE TOPPS COMPANY, INC., Plaintiff,
CADBURY STANI S.A.I.C. f/k/a PRODUCTOS STANI SOCIEDAD ANONIMA INDUSTRIAL Y COMMERCIAL, Defendant.
The opinion of the court was delivered by: CHARLES HAIGHT, District Judge
[EDITOR'S NOTE: This case is unpublished as indicated by the issuing court.] MEMORANDUM, OPINION AND ORDER
This diversity case is before the Court on the motion of
defendant Cadbury Stani S.A.I.C.*fn1 ("Stani") for partial
summary judgment on the claims and prayed-for damages of
plaintiff The Topps Company, Inc.*fn2 ("Topps").*fn3
The rights and obligations of the parties are governed by New
York substantive law pursuant to a forum selection clause in the
1980 contract between them. Ebert Aff., Exhibit A, ¶ 31.
In October 1957, Stani and Topps at that time, two family
owned enterprises entered into a licensing contract whereby
Topps granted Stani the exclusive right to "manufacture, sell,
and distribute chewing gum under the Topps brands" in Argentina,
Bolivia, Chile, Paraguay and Uruguay (collectively "the Territory"). 1957 License Agreement,
in Orr Aff., Ex. A, ¶¶ 1, 7 (hereinafter the "Original License
Agreement"). Topps agreed to share with Stani "the know-how,
formulae, processes and techniques (hereinafter collectively
called Topps processes) used by Topps." Id. In return, Stani
agreed to pay Topps royalties based on the sales of the licensed
products. Id. at ¶¶ 8-10. The Original License Agreement, which
provided for an expiration date in October 1977, was signed by
Joseph Shorin, at that time the President of Topps, and by
Arnoldo Stanislavsky, president of Stani (and notarized by Edward
Shorin, Joseph's brother, and future contract signatory and vice
president of Topps). Id. at ¶ 13.
In 1976, the parties signed a second Licensing Agreement (the
"1976 Agreement") in which they expressed a mutual desire to
continue their licensing relationship. See 1976 Agreement, in
Orr Aff., Ex. B. The 1976 Agreement was expressly replaced and
superceded in 1980 by the Amended and Restated License Agreement
(the "1980 Agreement"). See 1980 Agreement, in Orr Aff., Ex.
The 1980 Agreement reiterated the basic arrangement: Topps
agreed to provide Stani with an exclusive license to manufacture
and sell a group of Topps licensed products in the Territory in
return for royalty payments. Furthermore, Topps agreed to provide
Stani with the "Topps Technology" necessary to that end. Because
what constitutes Topps Technology is central to this dispute, I
recite the capacious contractual definition in full:
(1) . . . (a) "Topps Technology" means the
specialized knowledge and experience of Topps
applicable to the manufacture and/or sale of Licensed
Products, such as (but not limited to):
(i) manufacturing technology consisting of
formulae, recipes, processes, equipment utilization,
labour and equipment standards, ingredient
specifications, factory management and production
planning techniques, factory facility design and
layout and quality control procedures, including gum
base technology, and
(ii) marketing technology consisting of finished
product design, packaging material design and
specifications, promotional and advertising
techniques, marketing techniques and sales force
management techniques, (iii) all other elements of Topps' knowledge and
experience in the confectionary industry applicable
to Licensed Products currently being produced by
Topps or future products produced by Topps.
1980 Agreement, ¶ 1(a) in Orr Aff., Ex. D.
The 1980 Agreement signed by Stanislavsky, Stani's president,
and Edward Shorin, Topps' vice president further provided that
Topps Trademarks and Technology remained the exclusive property
of Topps and obligated Stani "not to disclose to third parties
any information relating directly or indirectly to the Topps
Technology." Id. at ¶¶ 3, 12, 27. In consideration of the
license and rights granted to Stani, it agreed to pay Topps a
license fee, or royalty payment, of 3% of the annual net sales of
the licensed products. Id. at ¶ 20. The 1980 Agreement also
gave Topps the right to inspect the manufacturing process of
licensed products and required Stani to provide Topps with
regular license fee statements to enable Topps to "confirm? the
accuracy of license fee calculation[s]." Id. at ¶ 21. Topps
also maintained the right to inspect Stani's "books of account"
relating to Stani's sales of the licensed products. Id. at ¶
23. Upon expiration of the 1980 Agreement in April 1996, Stani's
right to employ Topps Trademarks and Technology would cease.
Id. at ¶¶ 6, 25(b)(ii).
In January 1985, Stanislavsky wrote a letter to Arthur Shorin,
Topps' president, in which he suggested that the parties
"reconsider? some aspects of our business relationship." Orr
Aff., Ex. D, at 1. Stanislavsky observed that while the original
arrangement provided for royalties to be paid on all products
Topps licensed to Stani, due to changes in the consumer market,
the state of technology, and Stani's sales "the sole
consideration has become the use of the trademark Bazooka
[chewing gum]," which accounted for 75% of Stani's "turnover in
gum." Id. In other words, Stani contended that because it was
no longer relying on Topps Technology, Stani's payment of
royalties to Topps for the sales of its non-Bazooka licensed
products was putting those non-Bazooka products at a competitive disadvantage. Id.
The primary non-Bazooka licensed product was a chewing gum called
As a result of Stanislavsky's January 1985 letter, in May 1985
the parties entered into an Amendment to Amended and Restated
License Agreement (the "1985 Amendment"). 1985 Amendment, in
Orr Aff., Ex. E. The 1985 Amendment was signed by Arthur Shorin
and Stanislavsky. Id. at 4. Noting that "Topps and Stani
attribute the durable quality of the[ir] association to the
willingness of the parties to alter contract terms and conditions
in order to reflect changed circumstances," the parties amended
the 1980 Agreement to address Stanislavsky's concerns, as
expressed in his January letter, that Beldent and other
non-bazooka products were at a competitive disadvantage because
of the royalty payments. Id. at 1. First, the 1985 Amendment
excluded all non-Bazooka products from license fee calculations
once the total license fees on those products reached $350,000.
Id. at ¶ 4. The 1985 Amendment also provided that "[a]ll other
terms and conditions of the  Agreement not specifically
altered by this Amending Agreement are to remain unchanged."
Id. at ¶ 8.
Precisely what event or events precipitated the deterioration
of the parties' relationship is not clear, though it appears to
be related to the 1993 acquisition of Stani by Cadbury Schweppes,
PLC. On or about November 18, 1993, Cadbury Schweppes purchased a
majority interest in Stani. Fourth Amd. Compl., ¶ 4. According to
Topps, both during the course of and after this transaction,
Stani illicitly shared Topps Technology with Cadbury Schweppes,
and then endeavored to conceal its misdeeds from Topps. Id. at
Topps' Fourth Amended Complaint alleges five Claims.*fn4 Topps' First Claim, for breach of contract, asserts that Stani
breached the 1980 Agreement with Topps by (i) disclosing Topps
Technology to Cadbury Schweppes during the due diligence phase of
the Cadbury/Stani transaction, in contravention of ¶ 12; (ii)
continuing to use Topps Technology after the expiration of the
agreement, in contravention of ¶ 25(b)(i); and (iii) disclosing
Topps Technology to Cadbury after the expiration of the
agreement, in contravention of ¶¶ 3, 12, and 25(b)(i). Topps
demands damages exceeding $250 million and disgorgement of
Topps' Second Claim, for misappropriation of trade secrets, is
based upon Topps' assertions that through, inter alia, "reverse
engineering," Stani misappropriated Topps Technology in violation
of both the agreement and the parties' confidential relationship.
Stani is also alleged to have used and disclosed the technology
to Cadbury both before and after the expiration of the agreement,
and then deliberately concealed the use and disclosure from
Topps. Topps demands damages exceeding $250 million and
disgorgement of Stani's profits.
Topps Third Claim is a prayer for injunctive relief in the form
of a permanent injunction against the future use and
dissemination of Topps Technology by Stani.
Topps' Fourth Claim, for fraudulent inducement, is grounded in
the representations made in Stanislavsky's January 1985 letter
now alleged by Topps to be false regarding the sources of
Stani's gum manufacturing technology and the percentage of its
net sales attributed to Bazooka. Specifically, Stani's letter
stated that they were no longer using Topps Technology in the
production of Beldent and all other non-Bazooka gum products, and
that those non-Bazooka products accounted for less than 25% of
Stani's net sales. Topps claims that these fraudulent
representations induced Topps to agree to the 1985 Amendment.
Topps requests judgment (i) declaring the Amendment a nullity,
and (ii) estopping Stani from claiming that the 1985 Amendment altered the Agreement allowing Stani to use Topps
Technology after the 1996 expiration of the Agreement. Topps also
includes an estoppel demand in its Fourth Claim, endeavoring to
preclude Stani from arguing that the 1985 Amendment altered the
Because the 1985 Amendment terminated royalties on non-Bazooka
products (primarily Beldent) after such royalty payments reached
$350,000, Topps' Fifth Claim prays for lost royalties for the
period between 1987, when the aggregate royalty payments reached
the $350,000 threshold, and 1996, when the Agreement expired.
Topps also requests punitive damages, interest, and costs.
Following extensive discovery, Stani now moves for partial
summary judgment on Topps' Fourth and Fifth Claims and seeks to
First, Stani claims that Topps' Fourth and Fifth Claims are
time barred because they were not filed within the applicable
statute of limitations period, which in New York is within six
years from the accrual of the cause of action or two years from
the time the plaintiff discovered the fraud or should have
discovered it. Stani claims, first, that Topps had actual
knowledge of the alleged fraud fraud which Stani denies
occurred more than two years prior to the date on which Topps
filed its fraudulent inducement claim. Alternatively, Stani
contends that even if Topps did not have actual knowledge of the
fraud, Topps by the exercise of reasonable diligence could have
discovered the fraud more than two years prior to its filing of
this suit. In other words, Stani contends that Topps had either
actual or constructive knowledge of Stani's allegedly-fraudulent
representations more than two years before Topps' inclusion of
its fraudulent inducement claim in this action. Second, Stani claims that punitive damages are not available to
Topps on any claim. Under New York law, according to Stani, a
prerequisite for the award of punitive damages arising out of a
contractual relationship is that defendant engage in a pattern of
activity directed against the general public ("public harm").
Because Topps fails to allege that Stani committed a public harm,
punitive damages are not available. Moreover, Stani claims that
Topps cannot demonstrate that Stani's management possessed the
requisite level of egregiousness that would warrant punitive
Finally, Stani asserts that disgorgement is not an available
remedy for Topps' First and Second claims (breach of contract and
misappropriation). Emphasizing the overlapping nature of the two
claims, Stani argues that disgorgement is not recoverable on
Topps' breach of contract claim, and that disgorgement on the
misappropriation claim would be unjust because Stani's own
endeavors added value to the allegedly misappropriated trade
secrets. Rather, Stani contends, the Court should apply the
"reasonable royalty" damage measure, which Stani contends is the
3% of net profits agreed upon in the 1980 Agreement.
Topps resists all aspects of Stani's motion. After the parties
submitted extensive briefs and voluminous evidentiary material,
the Court heard oral argument from counsel.
For the reasons that follow, I deny defendant's Motion for
Partial Summary Judgment in part and grant it in part.
Specifically, (i) I deny summary judgment on Topps' Fourth and
Fifth Claims insofar as Topps' claim is not obviously
time-barred; (ii) I grant summary judgment on Topps' Fourth Claim
insofar as it seeks that Stani be estopped from claiming that the
1985 Amendment altered the 1980 Agreement; (iii) I deny summary
judgment on the issue of punitive damages relating to Topps' misappropriation claim; (iv) I grant summary judgment on
the issue of punitive damages relating to Topps' breach of
contract and fraudulent inducement claims; (v) I deny summary
judgment on the issue of disgorgement of Stani's profits for
misappropriation of trade secrets; and (vi) I grant summary
judgment on the issue of disgorgement of Stani's profits on
Topps' breach of contract claim.
A. Standard of Review on Motion for Summary Judgment Pursuant
to Rule 56
Rule 56 of the Federal Rules of Civil Procedure provides that a
court shall grant a motion for summary judgment "if the
pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show
that there is no genuine issue of material fact and that the
moving party is entitled to a judgment as a matter of law."
Fed.R.Civ.P. 56(c); see also Celotex Corp. v. Catrett,
477 U.S. 317 (1986). "The party seeking summary judgment bears the burden
of establishing that no genuine issue of material fact exists and
that the undisputed facts establish her right to judgment as a
matter of law." Rodriguez v. City of New York, 72 F.3d 1051,
1060-61 (2d Cir. 1995). The substantive law governing the case
will identify those facts which are material and "only disputes
over facts that might affect the outcome of the suit under
governing law will properly preclude the entry of summary
judgment." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986). In the case at bar, the parties selected New York law to
govern the case pursuant to a forum selection clause in the 1980
contract between the parties. Ebert Aff., Exhibit A, ¶ 31, p. 27.
In determining whether a genuine issue of material fact exists,
a court must resolve all ambiguities and draw all reasonable
inferences against the moving party. Matsushita Elec. Indus. Co.
v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). If there is
"any evidence in the record from any source from which a
reasonable inference could be drawn in favor of the non-moving party," then summary judgment should be denied. Chambers v. TRM
Copy Centers Corp., 43 F.3d 29, 37 (2d. Cir. 1994).
B. Statute of Limitations
Under New York law, actions based on fraud must be commenced
within "six years from the date the cause of action accrued or
two years from the time the plaintiff . . . discovered the fraud,
or could with reasonable diligence have discovered it."
N.Y.C.P.L.R. 213(8) (Consol. 2004) (effective Aug. 17,
2004).*fn5 In the case at bar, Topps alleges that Stani
fraudulently induced Topps to enter into the Amendment through
representations made in a letter dated January 17, 1985. The
Amendment was actually consummated on May 1, 1985, and
consideration paid immediately when Topps allowed Stani to
continue to use "Topps Technology." Orr Aff., Ex. E; Fourth
Amended Compl. ¶ 42. Topps filed its initial complaint in this
action on September 24, 1999 and filed its Third Amended
Complaint, the first complaint containing its fraudulent
inducement claims, on February 4, 2002.*fn6 Hence, there is
no dispute that plaintiff's action was not filed within six years
of the accrual of the action. The crux of the dispute, then, is
whether Topps had actual or constructive notice of the alleged
fraud more than two years prior to stating its fraudulent
inducement claim. While there is significant evidence to indicate that Topps knew
of the alleged falsity of the facts proffered by Stani, or at
least should reasonably have known of their falsity, on this
motion for partial summary judgment I am required to resolve all
ambiguities and draw all inferences against Stani as the moving
party. Having done so, I conclude that the evidence is
insufficient to entitle Stani to a summary disposition of these
1. Actual Knowledge
The parties dispute whether Topps had actual knowledge of
Stani's alleged fraud more than two years prior to the filing of
this claim. Both parties selectively excerpt the deposition of
Arthur Shorin Topps CEO and Chairman to substantiate their
positions. According to Topps, Shorin believed the
representations made by Stani in the 1985 letter, specifically
that Stani was no longer using Topps Technology in the production
of Beldent, and that Beldent sales comprised less than 25% of
Stani's net gum sales. See, e.g., Ebert Aff. ¶ 22. In contrast,
Stani points to Shorin's statements in which he suggests that
Stani could not manufacture chewing gum without employing Topps
Technology. See, e.g., Defendant's Memorandum of Law, p. 8.
There is a significant dispute between the parties as to what
constitutes "Topps Technology," whose contractual definition,
quoted in Part I, encompasses an extremely broad range of
activities and products. Stani asserts that if one accepts Topps'
own conception of what constitutes Topps Technology a
definition which Stani calls "wholly unrealistic and unreasonably
broad" and "overblown," Defendant's Supplemental Submission, p.
5, it necessarily follows that Topps knew Stani was employing
Topps Technology. In that regard Stani points to the deposition
testimony of Topps' Chairman and CEO that "any manufacturer of
any chewing gum product was, you know, employing our technology."
A. Shorin Dep. Tr. at 313 in Defendant's Supplemental
Memorandum at 7. Stani also points to evidence that Topps executives knew about Stani's continued use of dusting sugar and
mechanisms for reclaiming gum "scrap,"*fn7 both alleged to
be Topps Technologies. Id. at 10-11.
No doubt, by 1985 the fruits of twenty-eight years of Topps'
technical assistance to Stani were integrated throughout Stani's
gum manufacturing operations. This was known to Topps. It had to
be. However, the extent to which Topps Technology was still being
surreptitiously employed by Stani in its production of Beldent,
and the extent to which Topps had actual knowledge of such use,
are disputed issues of material fact. There can be no doubt that
Topps knew that Stani continued to use certain areas of Topps'
"specialized knowledge and experience" such as "factory facility
design and layout" and "equipment utilization," as well as some
"other elements of Topps' knowledge and experience in the
confectionary industry" after the expiration of the agreement.
See 1980 Agreement, ¶ 1(a) in Orr Aff., Ex. D. However, the
fact that Topps knew that some of its then-twenty-eight years of
technical assistance was still being employed by Stani does not
prevent Topps from claiming, as it does, that Topps was
fraudulently induced into the 1985 Amendment through intentional
misrepresentations about Stani's use of other aspects of Topps
Technology, including the gum base and softener formulas used in
Beldent, and through misrepresentations contained in Stan's
inaccurate financial reports.
In sum, determining what constitutes Topps Technology is a
fact-intensive inquiry, best left to the fact finder after both
parties have been afforded the opportunity to present their
evidence. After the fact finder agrees what proprietary
information constitutes Topps Technology, it can proceed to
determine whether Topps had actual knowledge of its
allegedly-improper use by Stani, such that Topps' Fourth and
Fifth Claims are barred by the statute of limitations. 2. Constructive Knowledge
The conclusion just reached in Part I.B.1. concerning Topps'
actual knowledge does not resolve the time bar issue. For the
purpose of determining when the statute of limitations begins to
run, the absence of conclusive evidence of actual knowledge is
only the beginning of the inquiry, since the statutory period
does not await "the leisurely discovery of the full details of
the alleged scheme." Klein v. Bower, 421 F.2d 338, 343 (2d Cir.
1970). Knowledge will be imputed to a plaintiff claiming fraud
if, with reasonable diligence, plaintiff could have discovered
the fraud prior to its actual discovery. N.Y.C.P.L.R. 213(g). The
test employed by the courts to determine whether the fraud should
have been discovered is an objective one. Armstrong v. McAlpin,
699 F.2d 79, 88 (2d Cir. 1983); Lenz v. Associated Inns and
Restaurants Company of America, 833 F. Supp. 362, 370 (S.D.N.Y.
1993); Sielcken-Schwarz v. American Factors, 265 N.Y. 239,
(1934) ("Where there is knowledge of facts sufficient `to suggest
to a person of ordinary intelligence the probability that he has
been defrauded, a duty of inquiry arises,' and may thus start the
running of the statute.") (quoting Higgins v. Crouse,
147 N.Y. 411, 416 (1895)).
There is no general rule as to the number or nature of facts
which should trigger such an investigation. Rather, each case
presents a universe of unique facts which must be evaluated in
order to determine whether the alleged fraud should have been
discovered. Lenz, 833 F. Supp. at 370. "Issues of due diligence
and constructive knowledge depend on inferences drawn from the
facts of each particular case. . . ." Robertson v. Seidman &
Seidman, 609 F.2d 583, 591 (2d Cir. 1979). Consequently, a
defendant seeking summary judgment based on plaintiff's failure
to timely discover fraud faces considerable hurdles,*fn8
since the moving party bears the burden of demonstrating the absence of a genuine issue of material fact.
Adickes v. S.H. Kress & Co., 398 U.S. 144 (1970).
Because the objective test for constructive knowledge of fraud
requires an intensive and fact-specific factual inquiry, the
Second Circuit has held that it "ordinarily should not be
disposed of by summary disposition." Schmidt v. McKay,
555 F.2d 30, 37 (2d Cir. 1977), and went on to say:
This inquiry has been described as a mixed question
of law and fact. . . . Since such an inquiry
necessarily involves a dispute concerning state of
mind and conflicting interpretations of perceived
events, summary judgment is ordinarily not a proper
vehicle for the resolution of such a dispute.
Id. (citations and quotations omitted). "[T]he better practice
is to allow the defense to stand until trial." Mahfouz v.
Mahfouz, 24 A.D.2d 988
(2d Dep't 1965); see also Menke v.
Glass, 898 F. Supp. 227, 233 (S.D.N.Y. 1995) (holding that "the
determination of whether a plaintiff has exercised sufficient
diligence is normally a question of fact for the jury to
decide"); In re Integrated Resources Real Estate Ltd.
Partnerships Securities Litigation, 815 F.Supp. 620, 638
(S.D.N.Y. 1993) (same).
However, I do not mean to suggest that summary judgment would
never be appropriate on the issue of constructive knowledge.
"[I]n particularly clear cases summary judgment may be granted."
Rickel v. Levy, 370 F. Supp. 751, 756 (E.D.N.Y. 1974). See,
e.g., Ferber v. Ehrlich, 1994 WL 132168, at *7 (S.D.N.Y. Apr.
14, 1994) (granting motion to dismiss where plaintiff failed to
receive promised distributions from investments, did receive
contrary I.R.S. Information about the status of his investments,
and his requests for an explanation were repeatedly rebuffed by
defendant); Lenz, 833 F. Supp. at 374 (granting summary
judgment where "undisputed facts" showed that plaintiff was aware
of continuing material inconsistencies between defendant's oral
representations and written statements and agreements, the
plummeting value of the investment, and defendant's prior fraud conviction); Buckler v. Marvel
Entertainment Group, Inc., 1992 WL 210101, at *3 (S.D.N.Y. Apr.
17, 1992) (granting summary judgment where plaintiff acknowledged
failing to read the terms of his contract); Nusca v. Fodera,
514 N.Y.S.2d 65 (2d Dep't 1987) (granting summary judgment where
plaintiff did not receive 25% of corporation's stock promised him
in exchange for real property, yet waited twelve years after the
promised stock was due to file suit). But the case at bar is of a
quite different nature.
Both parties nimbly shear snippets from various depositions to
support their claims that Topps had reason, or did not have
reason, to know of Stani's alleged fraud. Such excerpts, however,
are insufficient to demonstrate that there is no genuine issue of
material fact concerning whether constructive knowledge should be
imputed to Topps. At the time of the 1985 Amendment, Topps and
Stani were in the midst of a twenty-eight year business
relationship. Defendant's Rule 56.1 Statement ¶¶ 3, 4. There is
nothing in the record which indicates that between 1957 and 1985
the long-standing relationship between these formerly
family-owned corporations was anything but amicable, or, to state
the proposition more precisely, that Topps had reason to suspect
that Stani was acting fraudulently.
Defendant contends that because Topps' executives had access to
Stani plants and financial paperwork in 1985, Topps should have
discovered the alleged fraud earlier.*fn9 Topps responds
that Topps' executives believed Stani's representations, and only
discovered the alleged fraud during discovery in 2001.
Specifically, during the hearing, counsel for Topps was asked by
the Court, "[w]hat was it, Mr. Ebert, that first carried to your
client's nostrils the faint whiff of fraud?" Tr. 66. Ebert,
Topps' attorney, responded that the whiff was carried by a document, produced during discovery in 2001, which showed that
Stani had done nothing to alter the gum base and softener
formulas used in Beldent. Tr. 67. According to Topps, it was only
when the present Beldent formulae were compared with the formulae
used in Beldent in 1985, that Topps became aware that Stani
allegedly used fraudulent misrepresentations to induce Topps into
the 1985 Amendment. According to Topps, until this discovery, it
had no reason to suspect fraud.
Through development of the facts at trial, the fact finder will
be better able to determine whether the totality of the
circumstances were sufficient to trigger an investigation, and if
so, whether the investigation Topps actually embarked upon was
adequate. Because this inquiry involves disputes over state of
mind and conflicting interpretations of perceived events, summary
judgment is not a proper vehicle for its resolution, and
therefore I deny defendant's motion for summary judgment as to
Topps' Fourth and Fifth Claims.
Within its Fourth Claim for relief, Topps includes a section
entitled "Stani's Erroneous Post-Litigation Construction of the
 Amendment." Fourth Amended Compl., at p. 9. Therein, Topps
contends that Stani's interpretation of the 1985 Amendment to the
1980 Agreement is flawed and, as a result, Topps demands that
Stani be "estopped and precluded from contending that it was
relieved of liability for using Topps Technology in its Beldent
gum product after the expiration of the Agreement." Id. at ¶
51. Stani moves for summary judgment on Topps' estoppel demand,
contending that there is no colorable justification for estopping
Stani from asserting this argument. I agree.
Whether, and to what extent, the 1985 Amendment altered the
1980 Agreement are issues of fact for the jury. I am unable to
discern, and Topps has not offered, any reason why this issue should be adjudicated in any other manner. The
doctrine of judicial estoppel "applies only in situations where a
party both takes a position that is inconsistent with one taken
in a prior proceeding, and has had that earlier position adopted
by the tribunal to which it was advanced." Stichting Ter
Behartiging Van de Belangen Van Oudaandeelhouders In Het Kapitaal
Van Saybolt International B.V. v. Schreiber, 407 F.3d 34, 45 (2d
Cir. 2005) (citing Rodal v. Anesthesia Group of Onondaga, P.C.,
369 F.3d 113, 118 (2d Cir. 2004)). Because neither of those
factors are present here, I grant Stani's motion for summary
judgment on Topps' demand that Stani be estopped from claiming
that the 1985 Amendment otherwise altered the 1980 Agreement.
C. Punitive Damages
Topps' lawsuit rests on three causes of action: (i) breach of
contract (First Claim); (ii) fraudulent inducement (Fourth
Claim); and (iii) trade secret misappropriation (Second
Claim).*fn10 For the reasons that follow, I hold that
punitive damages are not available to Topps, as a matter of law,
on its breach of contract and fraudulent inducement claims,
though such damages may be available on its misappropriation of
trade secrets claim.
1. Breach of Contract (First Claim)
Damages for a breach of contract are normally limited to the
amount necessary to put the plaintiff in the same economic
position plaintiff would have occupied had the breaching party
performed the contract.*fn11 See Wallace Steel, Inc. v.
Ingersoll-Rand Co., 739 F.2d 112, 115 (2d Cir. 1984). In contrast, the purpose of awarding punitive damages
is not to make the plaintiff whole, but rather to punish the
defendant and to deter future egregious conduct. United States
for Use and Benefit of Evergreen Pipeline Const. Co., Inc. v.
Merritt Meridian Const. Corp., 95 F.3d 153, 160 (2d Cir. 1996).
As a result, "[p]unitive damages are not recoverable for an
ordinary breach of contract," Rocanova v. Equitable Life
Assurance Society of the U.S., 83 N.Y.2d 603, 613 (1994),
because they would put the non-breaching party in a better
financial position than they would have occupied but for the
breach.*fn12 See Aniero Concrete Co., Inc. v. New York City
Const. Authority, 2000 WL 863208, at *28 (S.D.N.Y. June 27,
2000) (Haight, J.); Restatement (Second) of Contracts § 356 cmt.
a (1981) ("The central objective behind the system of contract
remedies is compensatory, not punitive.").
Because they do not advance the objectives of the compensatory
damages regime, punitive damages are rarely available for a
breach of contract claim. They become available only when a
defendant engages in conduct "aimed at the public generally" so
that punitive damages become "necessary to vindicate public
rights." Rocanova, 83 N.Y.2d at 613. Moreover, the misconduct
must evince a "high degree of moral turpitude [demonstrating]
such wanton dishonesty as to imply a criminal indifference to
civil obligations." Walker v. Sheldon, 10 N.Y.2d 401, 405
(1961); Rocanova, 83 N.Y.2d at 613; see also New York Univ.
v. Continental Ins. Co., 87 N.Y.2d 308, 316 (1995). These are
known, respectively, as the "public wrong" and "extraordinary
A very recent Second Circuit decision, TVT Records v. Def Jam
Music Group, 412 F.3d 82, (2d Cir. 2005), adheres to the New York
Court of Appeals' decisions in Rocanova and New York
University which required proof of a public wrong and
extraordinary egregiousness to enable a punitive damages award
for a simple breach of contract. In TVT Records the district
court let stand a jury award of punitive damages in a breach of
contract case because the court discerned in two earlier New York
Appellate Division cases the theory that "punitive damages might
be available on a contract claim, absent conduct directed at the
public, where the plaintiff establishes a sufficiently high
degree of bad faith by the defendant . . ." 412 F.3d at 94. That
theory, the Second Circuit concluded in TVT Records, could not
survive the New York Court of Appeals' subsequent decisions in
Rocanova and New York University, which led the Second
Circuit to observe that under New York law "punitive damages are
recoverable in a contract action only if necessary to vindicate a
public right. This rule has not been changed by the Court of
Appeals, and we have no reason to question its continued
vitality." Id. (ciations and internal quotation marks omitted).
Hence, the Second Circuit set aside the award of punitive damages
because "[w]e do not believe that [defendant's] conduct in
breaching the [contract] was aimed at the public generally."
Id. at 94-95.
Accordingly, in order to collect punitive damages for its
breach of contract claim Topps must first adduce evidence that
Stani's conduct was part of a pattern directed at the public
generally, i.e. a public wrong. For the purposes of identifying
a public wrong, New York law distinguishes between "a gross and
wanton fraud upon the public" and "an isolated transaction
incident to an otherwise legitimate business." Walker,
10 N.Y.2d at 406; see also TVT Records, 2005 WL 1394140, at *10. The latter does not constitute conduct
aimed at the public generally. Id. Even viewing the evidence in
the light most favorable to Topps, no interpretation of the facts
underlying the claim could support labeling Stani's conduct a
gross and wanton fraud upon the public.*fn13 Topps alleges
the quintessential private wrong and, as a matter of law, its
breach of contract claim does not warrant punitive
2. Fraudulent Inducement (Fourth Claim)
In addition to eliminating punitive damages from simple breach
of contract claims, New York law limits the availability of
punitive damages for a tort claim which "arises from,"
Rocanova, 83 N.Y.2d at 613,*fn15 or "has its genesis in,"
New York Univ. v. Continental Ins. Co., 87 N.Y.2d 308, 316
(1995), a contractual relationship.*fn16 See also Schonfeld
v. Hilliard, 218 F.3d 164, 183-84 (2d Cir. 2000) (same). In
Rocanova, the Court summarized the four pleading elements
required to state a claim for punitive damages when the claim
arises from a contractual relationship between the parties: (1)
defendant's conduct must be actionable as an independent tort;*fn17 (2) the tortious conduct must be of the egregious
nature set forth in Walker v. Sheldon, supra; (3) the egregious
conduct must be directed at plaintiff; and (4) it must be part of
a pattern directed at the public generally. 83 N.Y.2d at 613;
see also Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc.,
2003 WL 22795650, at *9 (S.D.N.Y. Nov. 5, 2003); New York
Univ., 87 N.Y.2d at 316.
In contrast, under New York law a court may award punitive
damages on a tort claim unrelated to a contractual relationship
if plaintiff can simply demonstrate that the defendant committed
"gross, wanton or willful fraud or other morally culpable
conduct." Borkowski v. Borkowski, 39 N.Y.2d 982, 982 (1976). No
showing of a public wrong is required. Neither need plaintiff
demonstrate the degree of egregiousness (namely, wanton
dishonesty implying a criminal indifference to civil obligations)
necessary to recover punitive damages on a claim arising from a
contractual relationship. Thus, punitive damages are more likely
to be available on a tort claim that does not arise from a
contractual relationship. Though dicta abound, neither the Second Circuit*fn18 nor
the Court of Appeals of New York*fn19 has ruled on whether a
claim of fraudulent inducement arises from the subsequent
contract. Lower court opinions, including those of this
one,*fn20 are somewhat inconsistent.*fn21 Perhaps that
inconsistency is not surprising; fraudulent inducement as a
particular species of fraud "combines both contract and tort
law concepts [and is] at the juncture point of contract and tort
law."*fn22 48 AM. JUR. 3D Proof of Facts 329, § 1 (2004);
cf. Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc., 02 Civ. 7689, 2003 WL 22795650, at *9
(S.D.N.Y. Nov. 25, 2003) ("[T]here is some uncertainty about when
punitive damages are available if a claim for fraud[ulent
inducement] is related to a claim for breach of contract.").
Under New York law, a claim of fraudulent inducement requires
proof (1) that the defendant made a representation, (2) as to a
material existing fact, (3) which was false, (4) and known to be
false by the defendant, (5) that the representation was made for
the purpose of inducing plaintiff to rely upon it, (6) that
plaintiff reasonably did so rely, (7) in ignorance of its
falsity, (8) to her injury. Computerized Radiological Servs. v.
Syntex Corp., 786 F.2d 72, 76 (2d Cir. 1986); see also Channel
Master Corp., 4 N.Y.2d at 407 (summarizing elements of
fraudulent inducement as "representation of a material existing
fact, falsity, scienter, deception and injury."). Furthermore,
New York courts clearly distinguish between a "promissory
statement as to what will be done in the future," which gives
rise only to a breach of contract claim, and a false
"representation of present fact," which gives rise to a separable
claim of fraudulent inducement. Stewart v. Jackson & Nash,
976 F.2d 86, 89 (2d Cir. 1992) see also Restatement (Second) of
Contracts § 159, cmt. c. (1981) (same). "To say that a
contracting party intends when he enters an agreement not to be
bound by it is not to state `fraud' in an actionable area, but to
state a willingness to risk paying damages for breach of
contract. . . ." Briefstein v. P.J. Rotondo Constr. Co.,
8 A.D.2d 349 (1st Dep't 1959).
In the case at bar, Stani first asserts that fraudulent
inducement claims intrinsically arise from the subsequent
contractual relationship, and hence punitive damages require
proof of a public wrong and extraordinary egregiousness. I do not
accept that argument.
Topps alleges that Stani fraudulently induced Topps to enter
into the 1985 Amendment through misrepresentations made in
Stani's letter dated January 17, 1985 as well as other "communications with Plaintiff in or about January 1985." Fourth
Amended Compl. ¶¶ 42-43. The 1985 Amendment was actually
consummated on May 1, 1985. Orr Aff., Ex. E. The finder of fact
would have to examine the evidence concerning these
communications to determine whether Topps adequately demonstrated
that it was improperly induced into the contract by Stani's
representations. Did Stani make representation made about a
then-present material fact? Was that representation false? When
the representation was made was it known to be false? Did Stani
intend the representation to induce reliance? Did Topps actually
rely on the misrepresentation? Was Topps' reliance reasonable?
The finder of fact need not inquire into anything of substance
contained in the contract. There need be no evidence of the
terms, the meaning of the terms, or whether parties have
performed or breached. The actual contract is relevant only
insofar as its existence is evidence of Topps' detrimental
reliance on the misrepresentations. When all of the essential
contours of a claim precede the subsequent contractual
relationship, such a claim cannot reasonably be said to arise
from that relationship. Rather, the contract simply constitutes
the culmination of the allegedly-tortious conduct.*fn23
However, Stani's second argument is persuasive. Whether or not
fraudulent inducement claims intrinsically arise from the
subsequent contractual relationship, Topps' claim that it was
fraudulently induced to amend the 1980 Agreement by Stani's 1985
letter arises directly from a twenty-eight year contractual
relationship. In other words, the agreement which Topps asserts
it was fraudulently induced into entering (the 1985 Amendment),
was the fourth contract between Stani and Topps, and its purpose
was to amend the third contract (the 1980 Agreement). In these circumstances, Topps' fraudulent inducement claim arises from its
long-standing contractual relationship with Stani, and hence
Topps must satisfy the four Rocanova elements in order to
receive punitive damages. There is no issue of material fact
here: Stani's conduct does not, as a matter of law, constitute "a
gross and wanton fraud upon the public," Walker,
10 N.Y.2d at 406, and hence, as a matter of law, punitive damages are
unavailable to Topps on this claim.
3. Trade Secret Misappropriation*fn24 (Second Claim)
"New York law apparently allows the recovery of punitive
damages in a trade secrets case if the defendant's conduct has
been sufficiently `gross and wanton.'" A.F.A. Tours, Inc. v.
Whitchurch, 937 F.2d 82, 87 (2d Cir. 1991) (quoting Huschle v.
Battelle, 308 N.Y.S.2d 235 (1st Dep't 1970), aff'd,
31 N.Y.2d 767, 338 (1972)). Stani argues, however, that New York law
specifically the Appellate Division's decision in Huschle
also imposes a public harm requirement on misappropriation
claims. Defendant's Memorandum of Law, p. 13. While there is
dicta in Huschle concerning "public right[s]," it does not
apparently bear on the Appellate Division's decision in that
case. Huschle, 33 A.D.2d at 235. Moreover, the Court of
Appeals' affirmance summarized the Appellate Division's holding
as follows: "The Appellate Division . . . held that any wrongful
appropriation of the trade secret was not so gross and wanton as
to justify punitive damages." Huschle, 31 N.Y.2d at 768;
Plaintiff's Memorandum in Opposition, p. 16. The Court of Appeals
does not make any mention of a public harm requirement. See
also, General Aniline & Film Corp. v. Frantz, 272 N.Y.S.2d 600,
610 (N.Y.Sup. 1966) (awarding $50,000 in a trade secret misappropriation case due to
defendant's "wilful [sic] and intentional breach of confidence
and wanton disregard of the property rights of others").
Furthermore, neither the Second Circuit nor this Court has
required proof of a public harm for claims seeking punitive
damages for trade secret misappropriation. A.F.A. Tours, Inc.,
937 F.2d at 87; Softel, Inc. v. Dragon Medical and Scientific
Communications Ltd., 891 F.Supp. 935 (S.D.N.Y., 1995) (awarding
$250,000 in punitive damages for "willful" trade secret
misappropriation where there is no evidence of a public harm nor
any mention of a similar requirement).
As a matter of sound jurisprudence, the fact that punitive
damages may be available for egregious instances of
misappropriation is not surprising. The Rule delineated in the
Restatement of Torts which New York Courts regularly cite as
the basis for the tort of misappropriation "rests not upon a
view of trade secrets as physical objects of property but rather
upon abuse of confidence or impropriety in learning the secret."
Restatement of Torts § 757 cmt. b (1939). Therefore, damages are
not necessarily awarded simply to compensate the aggrieved party,
but also to punish the egregious offender and deter future
offenders. Hence, under New York law punitive damages are
available for a misappropriation of trade secrets claim, but only
if defendant's conduct is sufficiently gross and wanton.
Because punitive damages are intended to punish the wrongdoer
and deter others so inclined, their availability is measured by
the severity of defendant's conduct, which is a determination
that can best be made after each party has a full opportunity to
present their evidence. Chase Manhattan Bank, N.A. v. Perla,
411 N.Y.S.2d 66, 69 (4th Dep't 1978). Hence, whether Stani's
conduct was sufficiently egregious to satisfy Huschle's "gross
and wanton" test is a question best answered by the finder of
fact. Loughry v. Lincoln First Bank, 67 N.Y.2d 369, 378 (1986) ("the decision to award punitive damages in any
particular case, as well as the amount, are generally matters
within the sound discretion of the trier of fact"); AT&T
Information Systems, Inc. v. McLean Business Services, Inc.,
572 N.Y.S.2d 582, 583 (4th Dep't 1991). As such, I deny Stani's
motion for summary judgment on the question of punitive damages
for the alleged misappropriation of trade secrets.
D. Disgorgement of Stani's Profits
Topps' First Claim for breach of contract, and its Second Claim
for misappropriation of trade secrets, assert that Topps is
entitled to recover Stani's profits due to Stani's continued use
and dissemination of so-called Topps Technology. Fourth Amended
Compl. ¶¶ 21, 33. Stani responds that if Topps were to prevail at
trial, as a matter of law the most it would be entitled to is the
3% royalty rate established in the contract. Defendant's
Memorandum, p. 16. First, Stani argues that Topps' claims for
misappropriation and breach of contract are "essentially
identical," so Topps should not be able to recover profits for
the former, since they are generally not available for the
latter. Id. at 16-18. Second, Stani argues that because it has
added value to Topps Technology, it would be unjust to award
Topps Stani's "entire profit." Id. at 19-22. Neither of Stani's
arguments is particularly compelling.
New York law provides three methods of awarding damages for
misappropriation of trade secrets compensation for plaintiff's
losses, an accounting of defendant's profits, or a reasonable
royalty and the appropriate measure of Topps' damages should be
determined after full presentation of the facts in the event that
Topps prevails at trial. However, insofar as Topps requests
disgorgement for breach of contract, as an independent claim
sounding in contract law, disgorgement is not an appropriate
remedy and Stani's motion for summary judgment in that regard is
granted. 1. Misappropriation of Trade Secrets (Second Claim)
As a preliminary matter, Stani's contention that the
misappropriation claim is merely an attempt to bootstrap
otherwise-unavailable damages can be quickly disposed of. In
fact, Stani largely abandons that position in its Reply
Memorandum, relegating it to two desultory sentences in a
footnote. Defendant's Reply Memorandum, n. 7. As described in
some detail above, the duty to refrain from misappropriating
another's trade secrets exists separate and apart from a
contractual obligation to refrain from the same. See, e.g.,
Channel Master Corp. 4 N.Y.2d at 408. While Topps may not be
awarded dual compensatory damages which could provide a
windfall recovery, they may recover damages in tort which are
unrecoverable as contract damages.
Nor can Stani seriously contest that an accounting of
defendant's profits is a proper remedy in a case concerning
misappropriation of trade secrets; a remedy which the Second
Circuit has called "an appropriate measure of damages under New
York law." Softel, Inc. v. Dragon Medical and Scientific
Communications, Inc., 118 F.3d 955, 969 (2d Cir. 1997) (citing
David Fox & Sons, Inc. v. King Poultry Co., 23 N.Y.2d 914
(1969); see also A.F.A. Tours, Inc., 937 F.2d at 87; LinkCo,
Inc. v. Fujitsu Ltd., 232 F.Supp.2d 182, 185-86 (S.D.N.Y. 2002);
Town & Country House & Home Service, Inc. v. Newbery,
3 N.Y.2d 554, (1958); Michel Cosmetics, Inc. v. Tsirkas, 282 NY 195,
(1940); Hecht Foods, Inc. v. Sherman, 351 N.Y.S.2d 711 (2nd
Dep't 1974); American Electronics, Inc. v. Neptune Meter Co.,
290 N.Y.S.2d 333 (1st Dep't 1968); Harry R. Defler Corp. v.
Kleeman, 243 N.Y.S.2d 930 (4th Dep't 1963); Michael A.
Rosenhouse, Proper Measure and Elements of Damage for
Misappropriation of Trade Secret, 11 A.L.R.4th 12 § 2(a) (2004)
("The most commonly accepted measure of damages for trade secret
misappropriation is the defendant's profits. . . ."). Accordingly Stani is reduced to arguing that simply because its
efforts added value to Topps Technology, it would be unjust to
require Stani to disgorge the entirety of its profits. Rather,
the argument continues, because the parties agreed upon a royalty
rate of 3%, and because New York law recognizes royalties as an
appropriate measure of damages, Topps should be unconditionally
limited to the royalty rate.*fn25 However, the briefs are
replete with disputed factual issues, such as the extent to which
Stani's profits reflect value beyond that attributable to the
alleged-misappropriation; what actually constitutes Topps
Technology; and whether reverse engineering was employed by
Stani, and if so, whether it was properly employed within the
Topps/Stani relationship. The resolution of what, if any, damage
measures would be appropriate in this case necessitates a full
factual inquiry and hence is ill-suited for a motion on summary
judgment. For these reasons, I deny Stani's motion for summary
judgment on the issue of disgorgement of Stani's profits for
misappropriation of trade secrets. 2. Breach of Contract (First Claim)
Elementary principles of contract law dictate that damages for
a breach of contract should put the non-breaching party in the
position it would have occupied but for the breach; the injured
party should not recover more from the breach than the party
would have gained had the contract been fully performed. See
supra Part C.1; Kenford Co., Inc. v. County of Erie,
73 N.Y.2d 312, 319 (1989) ("Kenford II"); Freund v. Washington Square
Press, Inc., 34 N.Y.2d 379, 382 (1974); see also Kenford Co. v.
County of Erie, 67 N.Y.2d 257 (1986) ("Kenford I"); Goodstein
Const. Corp. v. City of New York, 80 N.Y.2d 366 (1992).
Disgorgement of profits is not an appropriate remedy for a breach
of contract. See, e.g., Burger King Corp. v. Mason,
710 F.2d 1480, 1494 (11th Cir. 1983). Disgorgement looks to the
defendant's ill-gotten gains, rather than to the plaintiff's
losses, and hence is not a suitable remedy for a breach of
As a consequence, although disgorgement may be available to
Topps to remedy the independent tort of misappropriation of trade
secrets, it is not available on the breach of contract claim, and
Stani's motion for summary judgment on that issue is granted.
In these circumstances, and based upon the foregoing:
1. Stani's motion for summary judgment on Topps'
Fourth and Fifth Claims is denied.
2. Stani's motion for summary judgment on Topps'
demand that Stani be estopped from claiming that the
1985 Amendment altered the 1980 Agreement is granted.
3. Stani's motion for summary judgment on the issue
of punitive damages relating to Topps' breach of
contract and fraudulent inducement claims is granted.
4. Stani's motion for summary judgment on the issue
of punitive damages relating to Topps'
misappropriation claim is denied 5. Stani's motion for summary judgment on the issue
of disgorgement of Stani's profits for
misappropriation of trade secrets is denied.
6. Stani's motion for summary judgment on the issue
of disgorgement of Stani's profits on Topps' breach
of contract claim is granted.
In the light of these rulings, counsel for the parties are
directed to send letters to the Court, with copies to each other,
not later than August 31, 2005, advising (1) whether any further
pretrial discovery is required; (2) if so, the nature and extent
of that discovery; and (3) if the case is now trial ready, the
estimated time each party will require for the presentation of
its case in chief. The Court will then enter its final pretrial
order and schedule the case for trial.
It is SO ORDERED.