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PrecisionFlow Technologies, Inc. v. CVD Equipment Corp.

March 19, 2007

PRECISIONFLOW TECHNOLOGIES, INC., PLAINTIFF-COUNTER-DEFENDANT
v.
CVD EQUIPMENT CORPORATION, DEFENDANT- COUNTER-CLAIMANT; AND STAINLESS DESIGN CONCEPTS, LTD., DEFENDANT.
CVD EQUIPMENT CORPORATION, PLAINTIFF,
v.
KEVIN BRADY AND JOHN DOES I-XV, DEFENDANTS.



The opinion of the court was delivered by: Hon. Norman A. Mordue, Chief U.S. District Judge

MEMORANDUM-DECISION AND ORDER

INTRODUCTION

In Action No. 99-CV-1536, PrecisionFlow Technologies, Inc. ("PFT") asserts against a competitor, CVD Equipment Corporation ("CVD"),*fn1 claims sounding in false advertising and commercial disparagement under section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), and related state law claims. Essentially, PFT, a provider of custom gas and chemical delivery systems and services for computer chip fabrication, claims that CVD falsely represented to others in the industry that goods and services provided by PFT infringed CVD's intellectual property, causing PFT to lose business and suffer damage to its reputation.

In Action No. 99-CV-2030, CVD sues Kevin Brady, President and major shareholder of PFT. CVD alleges that in 1998 it purchased all assets, including the intellectual property and intangible assets, of Stainless Design Corporation ("SD Corp.") at a secured party public auction. It further alleges that, through Kevin Brady, who had previously been employed by SD Corp., PFT has come into possession of and has been using the SD Corp. intellectual property purchased by CVD at the auction, thus damaging CVD's business. CVD asserts claims against Kevin Brady for copyright infringement under 17 U.S.C. § 501, and state law claims. CVD asserts these same claims against PFT in counterclaims in its answer to PFT's complaint in Action No. 99-CV-1536.

The two actions have been consolidated (Action No. 99-CV-1536, Dkt. No. 7). Action No. 99-CV-1536 is the lead case; Action No. 99-CV-2030 is the member case. Unless otherwise indicated, all docket numbers used herein refer to the lead case, Action No. 99-CV-1536.

PFT and Kevin Brady move (Dkt. No. 81) for summary judgment dismissing all claims by CVD and for partial summary judgment holding that CVD is liable to PFT on certain claims. For the reasons set forth below, the Court denies the motion. CVD cross-moves (Dkt. No. 105) for summary judgment dismissing all claims by PFT. As set forth below, the Court grants the cross motion in part and denies it in part.

PFT'S COMPLAINT

In its complaint (Action No. 99-CV-1536, Dkt. No. 1), PFT states that it is in the business of providing custom gas and chemical delivery systems and services for computer chip fabrication; that CVD is a competitor in the business; and that CVD engaged in a "promotional campaign ... which falsely represents the goods, services, commercial activities and/or business reputation of PFT to existing and prospective purchasers, including ... Lucent Technologies/Icon Dynamics, and other prospective purchasers or existing and/or prospective vendors[.]"

PFT alleges that on July 2, 1999, Lucent Technologies, Inc. ("Lucent"), with which PFT had an ongoing business relationship, requested that PFT quote its price for certain goods and services, specifically the sale and installation of gas cabinets and accessories for computer chip fabrication equipment; that on July 8, 1999, PFT responded with a detailed quotation; that CVD became aware of these facts; and that on July 9, 1999, a representative of CVD stated to a representative of Lucent that PFT could not provide such goods and services because to do so would "infringe the intellectual property of CVD." PFT avers that CVD had no such intellectual property; that CVD made the statement with knowledge of its falsity or in reckless disregard of its truth or falsity; that CVD made the statement with the intent to disparage PFT's goods and services and to harm PFT's business and reputation; that "but for" the statement, the contract for the goods and services would have been awarded to PFT; and that as a result of the statement, the contract was awarded to CVD. PFT's complaint also names International Business Machines Corporation ("IBM"), as an existing and/or prospective purchaser to which CVD made false representations; however, PFT has withdrawn its claims concerning IBM. PFT further claims that a vendor, Methods Tooling, Inc., refused to provide goods and services to PFT as a result of statements by CVD that legal proceedings against PFT would render PFT unable to pay its vendors.

PFT's first two causes of action are based on section 43(a)(1)(B) of the Lanham Act, 15 U.S.C. § 1125(a)(1)(B), which provides a civil cause of action to anyone injured or likely to be injured by another's conduct in making a false or misleading representation of fact in commercial advertising or promotion which "misrepresents the nature, characteristics, [or] qualities ... [of its] or another person's goods, services, or commercial activities[.]" The first cause of action is for false advertising; the second cause of action is for commercial disparagement.

PFT's remaining causes of action are based on New York statutory and common law. The third cause of action is for false advertising under section 350 of New York General Business Law; the fourth is for commercial disparagement under common law; the fifth is for deceptive acts and practices under section 349 of New York General Business Law; the sixth is for injury to business reputation under section 360-l of New York General Business Law; the seventh is for defamation under common law; the eighth is for tortious interference with prospective business relations under common law; the ninth is for tortious interference with contractual relations under common law; and the tenth is for unfair competition under common law. PFT seeks injunctive relief, an order directing the recall and destruction of all falsely designated materials within the control of CVD, an accounting of CVD's profits, an award of money damages, corrective advertising, costs, and attorney's fees.

CVD'S COMPLAINT

In its complaint (Action No. 99-CV-2030, Dkt. No. 1) against Kevin Brady in the member case, CVD alleges that since 1983 it has been in the business of, inter alia, providing custom gas and chemical delivery systems and services for computer chip fabrication. In December 1998, at a secured party public auction, CVD purchased from Fleet National Bank all assets of SD Corp. Before it went out of business, SD Corp. had designed, manufactured, and sold custom gas and chemical delivery systems and, according to CVD, had developed valuable intellectual property in connection therewith. CVD claims that in purchasing SD Corp.'s assets, CVD acquired all such intellectual property including copyrighted and proprietary technical drawings, software, and operations manuals. CVD has filed copyright applications and/or obtained copyright registrations in accordance with the Copyright Act, 17 U.S.C. §§ 101 et seq., covering some of the SD Corp. intellectual property it purchased, including technical drawings authored by SD Corp. for a work entitled Silane Delivery System.

CVD further alleges that PFT is a competitor in the business of providing custom gas and chemical delivery systems and services; that the majority of PFT's founding shareholders and a number of PFT's officers and/or employees, including Kevin Brady, were formerly officers and/or employees of SD Corp.; and that while at SD Corp. they had access to the intellectual property subsequently purchased by CVD at the auction of SD Corp.'s assets. CVD claims that Kevin Brady and others from PFT have copied substantial portions of the Silane Delivery System and other works and have knowingly caused and/or contributed to the infringement of CVD's copyrights therein. CVD further claims that, through fraud, deception and/or an abuse of their fiduciary relationship with SD Corp., Kevin Brady and others have misappropriated CVD's confidential proprietary information; have wrongfully disclosed CVD's intellectual property to PFT, PFT's customers, and/or PFT's prospective customers; and have interfered with CVD's business relations with Lucent by improper means, including providing goods to Lucent embodying CVD's intellectual property, and falsely informing Lucent that PFT was entitled to sell such goods, thereby causing CVD to lose at least one sale.

CVD's first cause of action is for copyright infringement in violation of 17 U.S.C. § 501. CVD has withdrawn the second cause of action, asserting false advertising under section 43(a)(1)(B) of the Lanham Act, 15 U.S.C. § 1125(a)(1)(B).

CVDs's third, fourth and fifth causes of action, under New York common law, are based on the averment that Kevin Brady and others have caused PFT to market and/or sell products embodying CVD's proprietary and confidential information. The third cause of action sounds in unfair competition; the fourth sounds in unjust enrichment; and the fifth alleges tortious interference with CVD's prospective business relations.

CVD seeks declaratory relief, injunctive relief, an order requiring the impounding and forfeiture of the infringing products and related materials, an accounting, money damages, corrective advertising, punitive damages, costs, and attorney's fees.

CVD'S COUNTERCLAIMS

In its answer (Dkt. No. 3) to PFT's complaint in the lead case, CVD asserts the following counterclaims against PFT: first, copyright infringement in violation of 17 U.S.C. § 501; second, false advertising under the Lanham Act § 43(a) (withdrawn); third, common-law unfair competition; fourth, common-law unjust enrichment; and fifth, common-law tortious interference with prospective business relations. Thus, CVD's counterclaims in the lead case assert against PFT the same claims that CVD's complaint asserts against Kevin Brady in the member action. To simplify the discussion, the Court generally treats CVD's claims against PFT and Kevin Brady as if they were set forth in a single pleading.

MOTIONS -- GENERALLY

PFT and Kevin Brady*fn2 move (Dkt. No. 81) for summary judgment dismissing all claims by CVD, and imposing liability on CVD on five of PFT's causes of action. Briefly, in arguing for dismissal of CVD's claims, PFT contends that SD Corp. did not possess any protectable rights in the works*fn3 in issue and that therefore CVD did not obtain any protectable rights when it purchased SD Corp.'s assets. PFT bases this contention on assertions that the information was not created by SD Corp. and that whatever protectable rights SD Corp. may have had were abandoned, transferred or licensed to third parties. Therefore, PFT argues, any use of the information by PFT was proper. PFT further contends that it is entitled to partial summary judgment imposing liability on CVD for false advertising under state and federal law, tortious interference with contract, and/or tortious interference with prospective business relations (causes of action one, three, five, eight, and nine).

CVD cross-moves (Dkt. No. 105) for summary judgment dismissing all of PFT's claims for lack of supporting evidence. Essentially, CVD argues that PFT has no competent evidence that a representative of CVD made false statements to PFT's customers and/or vendors, nor can PFT prove that any such statements caused PFT to lose business. CVD also urges that PFT's claims under sections 349, 350 and 360-l of New York General Business Law (causes of action three, five, and six) must be dismissed as a matter of law.

A party moving for summary judgment bears the initial burden of demonstrating that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. Fed. R. Civ. P. 56 (c); see Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the Court, viewing the evidence in the light most favorable to the non-movant and drawing all reasonable inferences in the non-movant's favor, determines that the movant has satisfied this burden, the burden then shifts to the non-movant to adduce evidence establishing the existence of a disputed issue of material fact requiring a trial. See Ramseur v. Chase Manhattan Bank, 865 F.2d 460, 465 (2d Cir. 1989). If the non-movant fails to carry this burden, summary judgment is appropriate. See Celotex, 477 U.S. at 323.

DISCUSSION

Generally

The Court first addresses so much of the motion by PFT and Kevin Brady (Dkt. No. 81) as seeks summary judgment dismissing all claims by CVD. The issues are discussed in the following order: CVD's cause of action for unfair competition; CVD's cause of action for copyright infringement; CVD's cause of action for tortious interference with prospective business relations; preemption of CVD's claims for unfair competition and unjust enrichment; CVD's false advertising claim under section 43(a) of the Lanham Act; and CVD's claims against Kevin Brady.

The Court then considers so much of PFT's motion as seeks partial summary judgment holding that CVD is liable on PFT's claims of false advertising under state and federal law, and tortious interference with contract and/or with prospective business relations. Concurrently, the Court considers CVD's cross motion (Dkt. No. 105) to dismiss these claims.

Finally, the Court addresses the other relief requested in CVD's cross motion, i.e., summary judgment dismissing PFT's claim for injury to reputation and summary judgment dismissing all of PFT's claims for lack of competent supporting evidence.

I. MOTION BY PFT FOR SUMMARY JUDGMENT CVD's

Cause of Action for Unfair Competition -- PFT's Motion to Dismiss

Unfair Competition -- Generally

The Court first considers PFT's motion insofar as it seeks dismissal of CVD's third cause of action against Kevin Brady and third counterclaim against PFT for unfair competition. PFT argues that CVD has no trade secret or other interest that would support a claim for unfair competition.*fn4 CVD responds that it possesses valid trade secrets and further that, even if the works do not rise to the level of trade secrets, CVD nonetheless has a valid claim for unfair competition based on the improper conduct of PFT in misappropriating CVD's confidential and proprietary works.

Under New York common law, "the essence of unfair competition is the bad faith misappropriation of the labors and expenditures of another, likely to cause confusion or to deceive purchasers as to the origin of the goods." Forschner Group, Inc. v. Arrow Trading Co., Inc., 124 F.3d 402, 408 (2d Cir. 1997) (citation and internal quote omitted). An unfair competition claim involving misappropriation "usually concerns the taking and use of the plaintiff's property to compete against the plaintiff's own use of the same property[.]" Roy Export Co. v. Columbia Broadcasting Sys., Inc., 672 F.2d 1095, 1105 (2d Cir. 1982). CVD points out that New York courts recognize unfair competition claims based on a former employee's abuse of his relationship of trust with his employer by misappropriating the employer's confidential information and using it to solicit the employer's customers. See, e.g., Leo Silfen, Inc. v. Cream, 29 N.Y.2d 387, 391-92 (1972); Allan Dampf, P.C. v. Bloom, 512 N.Y.S.2d 116, 117 (2d Dep't 1987).

To make out a claim for unfair competition based on misappropriation of trade secrets under New York common law, CVD must establish that it possessed a trade secret, and that PFT used that secret in breach of an agreement, confidential relationship or duty, or as a result of discovery by improper means. See LinkCo, Inc. v. Fujitsu Ltd., 230 F.Supp.2d 492, 497-98 (S.D.N.Y. 2002) (citing North Atlantic Instruments, Inc. v. Haber, 188 F.3d 38, 43-44 (2d Cir. 1999) (internal quotation marks omitted)). Under New York law, a trade secret "may consist of any formula, pattern, device or compilation of work which is used in one's business, and which gives [the owner] an opportunity to obtain an advantage over competitors who do not know or use it." Softel, Inc. v. Dragon Med. & Scientific Communications, Inc., 118 F.3d 955, 968 (2d Cir. 1997) (quoting Restatement of Torts § 757 cmt. b (1939)); accord Integrated Cash Mgmt. Servs., Inc. v. Digital Transactions, Inc., 920 F.2d 171, 173 (2d Cir. 1990). In determining whether a party possesses a trade secret, New York courts consider various factors including: the extent to which the information is known outside of the business; the extent to which it is known by employees and others involved in the business; the measures taken by the business to guard the secrecy of the information; the value of the information to the business and its competitors; and the amount of effort or money expended by the business in developing the information. See North Atlantic, 188 F.3d at 44.

In addressing PFT's unfair competition claim, the Court first considers the evidence bearing on whether CVD has a protectable interest in the works, based on trade secret or some other confidential property right. The Court then addresses the related question of whether PFT's use of any protected works was improper.

Protectable Interest in the Works -- Discussion

In PFT's Statement of Material Facts and CVD's response thereto, the parties specify the following works as the property on which CVD bases its claims: Lucent Silane Delivery System Drawings; four Emcore standard gas panel drawings; Lucent and IBM wiring diagrams and drawings; Silane Delivery System Software; IBM Silane Systems Software; Lucent Gas Cabinet Software; IBM Gas Cabinet Software; and IBM Touch Screen Software.*fn5 CVD claims that SD Corp. held protectable property rights in these works and that CVD obtained these rights when it purchased SD Corp.'s assets.

Generally, the evidence bearing on whether SD Corp. held protectable property rights in these works falls into the following categories: (1) whether many of the works in issue were created by third parties; (2) whether the works were known outside SD Corp.'s business and whether SD Corp. took measures to guard the secrecy of the works; (3) whether the works were commonly available to SD Corp.'s employees and whether they were treated as confidential; and (4) whether value was placed upon the works by CVD, SD Corp., or others in the industry. The Court briefly summarizes below some of the relevant evidence on each of these points.

1. Whether Many of the Works were Created by Third Parties

In support of its assertion that many of the works in issue were created by third parties and were not proprietary to SD Corp., PFT points to the declaration of Kevin Brady, PFT's President and formerly Vice President of Engineering at SD Corp. According to Kevin Brady, many of the drawings in issue were not created by SD Corp. but rather were provided to SD Corp. by its customers free of charge. He explains that SD Corp.'s customers typically provided detailed specifications for the equipment they wanted SD Corp. to build. Such specifications often included schematic and/or conceptual drawings and identified the exact type and quantity of components desired, sometimes even specifying the ...


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