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Millenium Expressions, Inc. v. Chauss Marketing

March 30, 2007

MILLENIUM EXPRESSIONS, INC., PLAINTIFF,
v.
CHAUSS MARKETING, LTD., PRIME SOURCE ACCESSORIES, LTD., JAMIE CHAUSS AND NATHAN ROSENBAUM, DEFENDANTS.



The opinion of the court was delivered by: James C. Francis IV United States Magistrate Judge

OPINION: AND ORDER

This case illustrates the perils of acting rashly. Jamie Chauss, as principal of Chauss Marketing, Ltd. ("Chauss Marketing"), entered into a contract to act as sales representative for Millenium Expressions, Inc. ("Millenium"), an importer of gifts and accessories. When Millenium did not take Mr. Chauss' advice to lower its prices on certain items, Mr. Chauss reacted precipitously by offering customers competing products, in violation of the contract with Millenium. When Peter Lin, the principal of Millenium, learned of this, he withheld commissions that Mr. Chauss had earned, thus violating Mr. Chauss' statutory right to prompt payment. Then, when Millenium sued for breach of contract, Mr. Chauss reacted by submitting an affidavit in which he falsely attested that the contract at issue had been superseded by a new agreement between the parties, a response that results in his forfeiting statutory relief to which he might otherwise be entitled.

The parties consented to try this case before me pursuant to 28 U.S.C. § 636(c). They waived a jury, and a bench trial was conducted on September 11 and 12, 2006. This opinion constitutes my findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure.

Background

In October 1991, Jamie Chauss formed Chauss Marketing, a Minnesota Corporation that acted as an independent sales representative organization and maintained a principal place of business in Minnesota and a showroom in New York City. (Tr. at 299, 301, 345-46).*fn1 The company operated as "Prime Source Accessories, a division of Chauss Marketing" ("Prime Source").*fn2 (Pl. Exhs. 7, 9).*fn3 In the fall of 1996, one of Prime Source's employees, Michael Miller, was approached at the showroom by Fang Chi Lin, who is known as Peter Lin. (Tr. at 6-7). Mr. Lin was president and owner of Millenium, a New York Corporation he had formed earlier that year to import and distribute accessories.

(Tr. at 3-5). Mr. Lin expressed interest in retaining Prime Source to act as its sales representative to accounts in the United States. (Tr. at 6-8).

Thereafter, Mr. Lin had a series of telephone conversations directly with Mr. Chauss. (Tr. at 8). Mr. Chauss then sent Mr. Lin a proposed sales representative agreement. (Tr. at 8-9). That agreement, between Millenium and "Chauss Marketing, Ltd. a/k/a Prime Source Accessories," provided that Prime Source, identified as the "Representative," would be the exclusive representative of Millenium, the "Manufacturer," throughout the United States. (Pl. Exh. 1, ¶ 1). It further provided that "[t]his Agreement can be canceled on 90-days written notice by either party. Representative can only be terminated for good cause." (Pl. Exh. 1, ¶ 6). After Mr. Lin reviewed the contract, he contacted Mr. Chauss and indicated that he wanted a clause that would restrict Prime Source from selling products that competed with Millenium's. (Tr. at 9-10). Mr. Chauss agreed, and Mr. Lin forwarded a new draft that was identical to the original except that it included a new paragraph stating, "It is agreed and understood that Representative will not carry another line of picture frames or accessories that will be conflicting to the Manufacturer's product line." (Tr. at 10-11; Pl. Exh. 2, ¶ 6). On October 10, 1996, the parties signed this agreement (the "Letter Agreement").

At the time the Letter Agreement was executed, Millenium's product line consisted primarily of picture frames, together with some accessories such as hair brushes, while Prime Source was acting as a representative for companies selling costume jewelry. (Tr. at 8, 302-03). Millenium's business quickly expanded, both in volume and in the types of merchandise it offered. (Tr. at 182-84). While it continued to sell picture frames, Millenium began offering a wide range of merchandise including room decorations, stationery, combs, brushes, cosmetic cases, and manicure kits. (Pl. Exh. 11).

In January 1997, Mr. Chauss combined his sales representative business with that of Nathan Rosenbaum and formed a company called Prime Source Accessories, Ltd. (Tr. at 310-11). On March 30, 1997, Mr. Chauss sent a memorandum by facsimile to each vendor he represented advising them to make commission checks payable to Prime Source Accessories, Ltd. while continuing to pay showroom fees to Chauss Marketing. (Pl. Exh. 8). In fact, although Millenium paid its first showroom fee to Chauss Marketing in response to this request, its subsequent checks were made payable to "Prime Source" or "Prime Source Accessories, Ltd." (Tr. at 38; Pl. Exh. 14).

In November 2001, Prime Source "began independently importing selected girls' accessories, some of which overlap with products offered by Millenium." (Chauss Marketing, Ltd.'s and Prime Source Accessories, Ltd.'s Post-Trial Submission ("Def. Memo.") at 7).

According to Mr. Chauss, he embarked on this program because Mr. Lin refused to lower his prices on some items to competitive levels, making it necessary for Mr. Chauss to provide alternatives in order to offer a full line of products to customers. (Tr. at 325-29).

Sometime in July 2002, Mr. Lin learned that Prime Source was selling competing products. (Tr. at 64-65). While visiting one of his customers, a Limited Too store, he discovered hairbrushes on display that were not Millenium products. (Tr. at 65-69). By matching the vendor number to records maintained by Limited Too, Mr. Lin determined that the items had originated with Prime Source. (Tr. at 65-77). Further investigation revealed that Prime Source had sold a wide range of products to Limited Too that were equivalent to items in Millenium's product line. (Pl. Exh. 25).

Mr. Lin felt "betrayed" and "violated." (Tr. at 191). On August 9, 2002, by means of a letter from its attorney, Millenium terminated the Letter Agreement. (Def. Exh. 9). It declined to pay commissions on sales that Prime Source had already made and demanded the return of Millenium product samples that Prime Source had acquired for display in its showroom. (Tr. at 239-41; Pl. Exhs. 29, 32, 34).

Millenium filed the instant action in this Court on October 19, 2002. It asserted claims against Chauss Marketing and Prime Source Accessories, Ltd. for (1) misappropriation of trade secrets, (2) unfair competition, (3) misappropriation of proprietary information, (4) tortious interference with a business relationship, (5) breach of contract, (6) unjust enrichment, (7) an accounting of profits, (8) fraud in the inducement, and (9) conversion. The defendants sued Millenium in the United States District Court for the District of Minnesota but then discontinued that action and filed an answer in this case. In that answer they asserted counterclaims for (1) violation of the Minnesota statute governing termination of sales representatives, Minn. Stat. § 325E.37, (2) breach of contract, (3) quantum meruit, (4) violation of the Minnesota law requiring prompt payment of commissions to commission salespeople, Minn. Stat. § 181.145, and (5) an accounting.*fn4

At the close of discovery, the defendants moved for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. The Honorable Richard M. Berman, U.S.D.J., to whom the case was then assigned, granted the motion in part and denied it in part. He dismissed altogether Millenium's claims for tortious interference with a business relationship and fraud in the inducement. He denied summary judgment on the claims for unfair competition, breach of contract, unjust enrichment, and an accounting of profits. With respect to the claims for misappropriation of trade secrets and proprietary information, Judge Berman granted summary judgment insofar as the plaintiff's allegations were based on its product designs but denied it to the extent that Millenium asserted that Prime Source had misappropriated marketing information. Finally, Judge Berman dismissed so much of the conversion claim as related to the alleged copying of Millenium's samples, but allowed the claim for conversion of the physical samples to proceed. (Order dated Aug. 11, 2004, at 21).

The case then proceeded to trial where evidence was introduced establishing the facts recited above. Additional facts will be discussed in connection with the analysis of each claim. Discussion

A. Millenium's Claims

1. Breach of Contract

a. Liability

Millenium contends that the defendants breached the Letter Agreement by promoting competing products. On summary judgment, the defendants took the position that the Letter Agreement had been superseded by an oral agreement between Millenium and Prime Source Accessories, Ltd. Mr. Chauss submitted an affidavit in which he stated:

In January 1997, Chauss Marketing ceased activities as an independent sales representative organization, including its work on behalf of Millenium under the Chauss Marketing Letter Agreement. At this same time, Millenium entered into a new, verbal agreement with Prime Source, whereby it retained Prime Source as its independent sales representative to sell its products to the same customers and class of trade previously serviced by Chauss Marketing. At all times the independent sales representative agreement between Millenium and Prime Source has been oral and for an indefinite duration. In no way did the oral agreement between Prime Source and Millenium limit, in any fashion, Prime Source's ability or right to sell, import, manufacture or market any type of product to, or on behalf of, any customer --regardless of whether such products were competitive with those imported by Millenium. (Pl. Exh. 6 (Affidavit of Jamie Chauss dated Oct. 10, 2003), ¶ 5). As became apparent at trial, these representations were false and misleading. The only "agreement" that Mr. Chauss could identify was the March 1997 notice to all of his vendors directing them henceforth to make commission checks payable to Prime Source Associates, Ltd. When asked what the terms of the "new agreement" with Millenium were, Mr. Chauss answered, You know, I don't know, but if there were specific terms that Peter Lin would have wanted in the agreement at that time, if it was important to him, I think that when I notified him in the March letter he would have called me up and offered me a new agreement or told me at some point in time throughout our four or five years after I notified him that he wanted me bound by that original agreement. (Tr. at 356). Finally, Mr. Chauss was asked, "So there was no agreement. It was on a sale-by-sale basis as far as you're concerned?" He answered, "As far as I'm concerned, yes." (Tr. at 357).

Not surprisingly, the defendants no longer contend that the parties entered into a new contract. Rather, they argue only that Prime Source Accessories, Ltd. cannot be held liable for violation of the Letter Agreement because it was never a party to it. (Def. Memo. at 16-18). In fact, Prime Source Accessories, Ltd. is liable under two alternative theories.

First, it is equitably estopped from denying that it assumed the obligations of Chauss Marketing under the Letter Agreement.

The elements of estoppel are with respect to the party estopped: (1) conduct which amounts to a false representation or concealment of material facts; (2) intention that such conduct will be acted upon by the other party; and (3) knowledge of the real facts. The party asserting estoppel must show with respect to himself: (1) lack of knowledge of the true facts; (2) reliance upon the conduct of the party estopped; and (3) a prejudicial change in his position.

Airco Alloys Division, Airco, Inc. v. Niagara Mohawk Power Corp., 76 A.D.2d 68, 81-82, 430 N.Y.S.2d 179, 187 (4th Dep't 1980); see also 57 N.Y. Jur. 2d Estoppel, Ratification and Waiver § 34 (2007). To be sure, "'[t]he doctrine of equitable estoppel is to be invoked sparingly and only under exceptional circumstances.'" Townley v. Emerson Electric Co., 269 A.D.2d 753, 753-54, 702 N.Y.S.2d 728, 729 (4th Dep't 2000) (quoting Gross v. New York City Health & Hospitals Corp., 122 A.D.2d 793, 794, 505 N.Y.S.2d 678, 679 (2d Dep't 1986)).*fn5 This is such a case. The "announcement" of the defendants' change in corporate structure gave no hint that it was anything more than an accounting convenience or that it was intended to abrogate pre-existing contracts. At no time did Chauss Marketing give Millenium ninety days notice that it was terminating the Letter Agreement, as it was required to do by the terms of that contract. Furthermore, the defendants plainly expected Millenium (and presumably other vendors) to rely on this obfuscation: the defendants continued to use letterhead and business cards identifying Prime Source as a "division" of Chauss Marketing through 2002, and they sought to continue their commercial relationships, at least insofar as those relationships were beneficial to the defendants. And, of course, the defendants were aware of the true nature and potential legal consequences of their corporate restructuring. For Millenium's part, it was unaware of the scope of the defendants' reorganization, it relied on the defendants' omissions in continuing to deal with Prime Source, and it was prejudiced because it would otherwise have demanded a non-compete provision as part of any new contract.

Second, even if Prime Source Accessories, Ltd. were not estopped from denying its obligations under the Letter Agreement, it would be liable on the basis of an implied contract.*fn6 "A contract implied in fact 'rests upon the conduct of the parties and not their verbal or written words.'" American Federal Group, Ltd. v. Rothenberg, No. 91 Civ. 7860, 1996 WL 282059, at *13 (S.D.N.Y. May 28, 1996) (quoting Parsa v. State of ...


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