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B.U.S.A. Corp. v. Ecogloves

September 28, 2009


The opinion of the court was delivered by: Jed S. Rakoff, U.S.D.J.


This action -- which was reassigned from the Honorable Stephen C. Robinson to the undersigned on June 5, 2009 -- centers around allegations that defendant Lynn Riley, a former employee of plaintiffs B.U.S.A. Corp. ("B.U.S.A.") and Robert Temkin Associates ("RTA") misappropriated trade secrets from B.U.S.A. and RTA and then went on to wrongfully compete with them after forming her own company, defendant Ecogloves, Inc. ("EcoGloves"). Plaintiffs are in the cosmetics supply business; among other things, they supply gloves and other accessories that are inserted into hair coloring kits sold by cosmetics companies. Riley worked as a business manager for plaintiffs, overseeing the glove supply part of RTA's business, from 1999 until June 2005, when she resigned and went into business for herself. In their complaint, filed in November 2005, plaintiffs assert five state-law and two federal-law claims arising out of these events. Specifically, plaintiffs state claims for 1) violation of the federal Computer Fraud and Abuse Act ("CFAA"); 2) misappropriation of trade secrets; 3) tortious interference with contract; 4) tortious interference with a business or economic opportunity; 5) breach of fiduciary duty; 6) deceptive business practices; and 7) civil damages under the Racketeer Influenced and Corrupt Organizations Act ("RICO").

At the same time that they filed their complaint, plaintiffs moved for a preliminary injunction prohibiting defendants from, inter alia, disclosing certain trade secret information and soliciting business from any of plaintiffs' customers. Judge Robinson granted that motion by Memorandum Decision and Order dated January 31, 2006. After discovery, the parties cross-moved for summary judgment in July 2007. Specifically, plaintiffs moved for summary judgment in their favor on their state-law claims for misappropriation of trade secrets, breach of fiduciary duty, and tortious interference with a business opportunity. Defendants, for their part, moved for summary judgment in their favor on plaintiffs' two federal-law claims and further moved for dismissal of plaintiffs' remaining state-law claims. Before these motions could be resolved, defendant Riley entered personal bankruptcy, but the automatic stay imposed under 11 U.S.C. § 362 was lifted as to this case by the bankruptcy court by order dated December 23, 2008, see Ex. A to Notice of Filing Order Granting B.U.S.A. Corp. and Robert Temkin Associates Relief from the Automatic Stay.*fn1 For the reasons stated below, the Court now grants defendants' motion to dismiss plaintiffs' federal-law claims, declines to exercise jurisdiction over plaintiffs' remaining state-law claims, and therefore dismisses the case.

Both RTA and B.U.S.A. are wholly owned and controlled by Robert Temkin. Defendants' Rule 56.1 Statement ("Def. 56.1") ¶ 1; Plaintiffs' Rule 56.1(b) Opposition to Defendants' Rule 56.1(a) Statement ("Pl. Opp. 56.1") ¶ 1.*fn2 While the specifics of their respective businesses are disputed, see, e.g., Def. 56.1 ¶1; Pl. 56.1 ¶ 1, it appears that RTA works with manufacturers -- although the issue of whether plaintiffs have an exclusive relationship with any of these manufacturers is, again, disputed, see, e.g., Def. 56.1 ¶¶ 22-23; Pl. Opp. 56.1 ¶¶ 22-23 -- to create gloves and other hair color accessories for such clients as L'Oreal and Proctor and Gamble (and its subsidiary Clairol), Def. 56.1 ¶ 6; Pl. Opp. 56.1 ¶ 6. The accessories are ultimately inserted into hair dye kits that are sold to the public. Plaintiffs' Rule 56.1 Statement of Material Facts in Support of Their Motion for Summary Judgment ("Pl. 56.1") ¶ 2; Defendants' 56.1 Response and Counterstatement to Plaintiffs' Statement of Facts ("Def. Opp. 56.1") ¶ 2A.

In 1999, defendant Riley was hired by RTA as a business manager overseeing the "glove part" of RTA's business. Def. 56.1 ¶ 3; Pl. Opp. 56.1 ¶ 3. The responsibilities of her job included submitting bids to customers such as Clairol, see Pl. 56.1 ¶ 39; Def. Opp. 56.1 ¶ 39A, and traveling overseas to visit manufacturers with which RTA had a relationship, see Pl. 56.1 ¶¶ 10, 35; Def. Opp. 56.1 ¶¶ 10A, 35A. It appears that over time, Riley and Temkin disagreed over whether she would be granted control and/or ownership of certain aspects of RTA's business. Compare Pl. 56.1 ¶ 16 ("Defendant Riley believed she was entitled, and demanded, ownership of certain aspects of Plaintiffs' companies [sic].") with Def. Opp. 56.1 ¶ 16A ("[P]laintiffs' principal Robert Temkin assured defendant Riley that she would be permitted to control and run whatever business she built while working for RTA, upon which assurance Ms. Riley relied in continuing employment with RTA. Later, Mr. Temkin reneged on his agreement. . . ."). On June 5, 2005, Riley submitted her resignation to B.U.S.A. and RTA, and her resignation became effective the following day. Def. 56.1 ¶ 31; Pl. Opp. 56.1 ¶ 31.

Plaintiffs allege that prior to, at the time of, and immediately following her resignation, Riley engaged in misappropriation of its trade secrets and other wrongful acts. Plaintiffs' allegations of specific wrongdoing date back to as early as September 2003, when a list of potential names for a new glove venture was circulated. Pl. 56.1 ¶ 17; Def. Opp. 56.1 ¶ 17A. Although the parties dispute the nature of this new venture and to what extent plaintiffs ever intended to pursue it, see Pl. 56.1 ¶ 17; Def. Opp. 56.1 ¶ 17A, it is undisputed that one of the names on the list was "EcoGlove" or "Ecogloves," Pl. 56.1 ¶ 17; Def. Opp. 56.1 ¶ 17A, and that at some point thereafter (in August 2004, according to plaintiffs) Riley registered the domain name "," Pl. 56.1 ¶ 18; Def. Opp. 56.1 ¶ 18A. Plaintiffs contend that while still employed with them, Riley initiated discussions with one of plaintiffs' manufacturers, a company called Shengda in China, about developing gloves for her own business. Pl. 56.1 ¶ 33. (Riley disputes this. See Def. Opp. 56.1 ¶¶ 33A-33B.) Plaintiffs also allege, and defendants do not directly dispute, that prior to her resignation, Riley began using the email address "" to communicate with certain suppliers. See Pl. 56.1 ¶ 19; Def. Opp. 56.1 ¶ 19A. Cf. Plaintiffs' Appendix of Exhibits in Support of Their Motion for Summary Judgment ("Pl. Appx.") at A1166-A1547.*fn3

On June 7, 2005, the day after her resignation became effective, Riley filed incorporation papers with the Secretary of State of New York to form her own company called EcoGloves, Inc., Pl. 56.1 ¶ 24; Def. Opp. 56.1 ¶ 24A, and she thereupon began to compete in the glove supply industry, see Pl. 56.1 ¶ 27; Def. Opp. 56.1 ¶ 27A. Plaintiffs contend that Riley immediately began using information she had access to only by virtue of having been employed by plaintiffs (including their customer contact lists and access to plaintiffs' manufacturers) in order to compete against them. See Pl. 56.1 ¶¶ 51-68.

Plaintiffs specifically contend that they lost at least one account -- the Clairol "Nice 'N Easy" account -- because of Riley's actions. See Pl. 56.1 ¶¶ 39-50. Although Riley disputes the term "account," see Def. Opp. 56.1 ¶ 39A, it is undisputed that during the time Riley worked for plaintiffs, plaintiffs supplied products to Clairol for its Nice 'N Easy line of products. Pl. 56.1 ¶¶ 39-40; Def. Opp. 56.1 ¶¶ 39-40. At some time in 2005 prior to Riley's resignation from B.U.S.A./RTA, Clairol sought a new bid from plaintiffs for its Nice 'N Easy business. See Pl. 56.1 ¶¶ 41-45; Def. Opp. 56.1 ¶¶ 41A-45C. Plaintiffs allege that Clairol requested that plaintiffs lower their price and reduce their lead time and that Riley never disclosed these demands to plaintiffs and refused to meet Clairo's requirements, Pl. 56.1 ¶¶ 41-44, while Riley maintains that Clairol sought a new bid and that she attempted to work with Temkin to present such a bid, Def. Opp. 56.1 ¶¶ 41A-45C, but in the event the bid was rejected and Clairol went with a different supplier, see Pl. 56.1 ¶ 45; Def. Opp. 56.1 ¶ 45A.

In addition, plaintiffs allege that, literally on the eve of her departure (on June 5, 2005), Riley committed several acts that amount to computer fraud. The Complaint alleges that Riley accessed information in plaintiffs' computer systems without authorization, obtained trade secret information, copied trade secret information, and removed certain files from plaintiffs' computer systems, Compl. ¶¶ 73-74, in addition to damaging a laptop computer that she had been using so that it became "unworkable," id. ¶ 77. The evidence of what Riley actually did in this regard is, however, sketchy. Specifically, plaintiffs allege that Riley copied "thousands" of emails into a folder on her workplace desktop entitled "PSTs to Make into CDS," and then copied the emails onto removable discs. Pl. 56.1 ¶¶ 69-70. In support of this contention, however, they point only, see id., to an image that purports to be a screen shot of Riley's desktop, Pl. Appx. at A863, the authenticity of which cannot be verified, and to portions of the Amended Expert Report of Guy Austrian, id. at A1936-37, which report was excluded from evidence in its entirety, see tr. 9/10/07 (Magistrate Judge Fox's ruling); Minute Entry 9/26/07 (Judge Robinson's affirmation of Magistrate Judge Fox's ruling). Plaintiffs further allege that Riley encrypted these files so that they were only accessible with a password, Plaintiffs' Opposition to Defendants' Motion for Partial Summary Judgment ("Pl. Opp. Mem.") at 5, but here the only evidence to which plaintiffs point is a declaration made by Robert Temkin at the time that the parties moved for summary judgment, see Declaration of Robert Temkin dated June 26, 2007 ("Temkin Decl.") ¶ 17. Temkin states that "[t]hese files were each separately password protected" without explaining the basis for his knowledge of this alleged fact. Id.

These and other evidentiary gaps will be discussed further below. In any case, on the basis of these alleged events, plaintiffs brought the various claims asserted in this action, including the two federal claims under the CFAA and RICO respectively. The Court finds, however, that neither of these federal-law claims withstands defendants' motion for summary judgment.

The Court turns first to plaintiffs' civil RICO claim. Plaintiffs, bringing suit pursuant to 18 U.S.C. § 1964(c), allege that defendants have violated 18 U.S.C. § 1962(b) and/or (c) by maintaining an interest in an enterprise, or conducting an enterprise's affairs, through a pattern of racketeering activity. In order to establish a pattern of racketeering activity, plaintiffs must, first, prove that defendants committed at least two acts of racketeering activity as defined in 18 U.S.C. § 1961(1) within a ten-year period. 18 U.S.C. § 1961(5). The Supreme Court has further held that in order to establish a pattern, "continuity" among the predicate acts over time must be shown -- in other words, as the Court explained, "it must . . . be shown that the predicates themselves amount to, or that they otherwise constitute a threat of, continuing racketeering activity." H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 240 (1989) (emphasis in original). "Predicate acts extending over a few weeks or months and threatening no future criminal conduct do not satisfy this requirement: Congress was concerned in RICO with long-term criminal conduct." Id. at 242.

Plaintiffs point to such acts as registering the domain name and the numerous emails and phone calls that Riley allegedly sent or made to competitors immediately upon resigning as instances of mail or wire fraud because Riley, by undertaking these acts, was breaching her fiduciary duty and/or trading on misappropriated trade secret information. Defendants dispute that these acts can be accurately characterized as mail or wire fraud, but even assuming, arguendo, that they can be, plaintiffs still fail to make out a civil RICO claim.

Since the Supreme Court decided H.J. Inc., the Second Circuit has elaborated on what is required to establish "continuity" and so satisfy the pattern requirement of a RICO claim. In GICC Capital Corp. v. Technology Finance Group, 67 F.3d 463 (2d Cir. 1995), the Second Circuit explained that a plaintiff in a RICO action must allege either an "open-ended" pattern of racketeering activity (i.e., past criminal conduct coupled with a threat of future criminal conduct) or a "closed-ended" pattern of racketeering activity (i.e., past criminal conduct extending over a substantial period of time).

Id. at 466 (quotation marks omitted). Neither type of pattern is plausibly established by the facts upon which plaintiffs rely. Specifically, plaintiffs point to 1) Riley's registration of the domain name in August 2004; 2) emails sent from the "" address to plaintiffs' suppliers between January and November 2005, allegedly soliciting the suppliers' involvement in Riley's competing business, see Pl. Appx. at A591-93, A1166-1547*fn4 ; 3) emails between Riley and employees of such companies as Proctor and Gamble and L'Oreal that show her, beginning on the day of her resignation and continuing through November 2005, soliciting business from them, see, e.g., id. at A1918, A1598-1801.*fn5

Even on the most generous interpretation, these acts do not amount to an "open-ended" or a "closed-ended" pattern of racketeering activity. A "closed-ended" pattern must extend over a "substantial period of time," and "[s]ince the Supreme Court decided H.J., Inc., [the Second Circuit] has never held a period of less than two years to constitute a 'substantial period of time.'" DeFalco v. Bernas, 244 F.3d 286, 321 (2d Cir. 2001). The span of time over which Riley's supposed wrongdoings took place here is, at most, less than a year and a half (from August 2004 to November 2005).

As for an "open-ended" pattern, under GICC Capital, "an inherently unlawful act performed at the behest of an enterprise whose business is racketeering activity would automatically give rise to the requisite threat of continuity" to establish an "open-ended" pattern, whereas if "the nature of conduct or the enterprise does not by itself suggest that the racketeering acts will continue," the court must look at "other external factors." 67 F.3d at 466. None of the circumstances here present suggests that defendants are or were likely to engage in future racketeering acts; Riley's alleged wrongdoings were directed at a single victim (or two closely-related victims, depending on whether B.U.S.A. and RTA are or are not both in the glove business) and had a single purpose (to start her own business and -- purportedly wrongfully -- compete with her former employers). See Medinol Ltd. v. Boston Scientific Corp., 346 F. Supp. 2d 575, 613 (S.D.N.Y. 2004) ("Courts have uniformly and consistently held that schemes involving a single, narrow purpose and one or few participants directed towards a single victim do not satisfy the ...

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