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Atmosphere Sciences, LLC v. Schneider Advanced Technologies

September 19, 2012


The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.



Atmosphere Sciences LLC ("Atmosphere") and Zero Odor LLC ("Zero Odor") have sued Schneider Advanced Technologies ("SAT") and Rem Brands ("Rem"), alleging seven causes of action arising our of SAT and Rem's sale of odor-related technology and products. Defendants filed a motion to dismiss all counts on June 22, 2012. The motion is denied in part and granted in part. Counts three, four, five, and six are dismissed, and plaintiffs are granted leave to amend their complaint.


Atmosphere and Zero Odor brought suit on April 24, 2012. They allege that SAT and Rem engaged in duplicitous business practices that gave rise to seven causes of action: (1) breach of contract [Atmosphere v. SAT], (2) breach of fiduciary duty [Atmosphere and Zero Odor v. SAT], (3) inducing a breach of a fiduciary duty [Atmosphere and Zero Odor v. Rem], (4) tortious interference with a contract [Zero Odor v. Rem], (5) diverting corporate opportunities [Zero Odor v. SAT], (6) breach of the covenant of good faith and fair dealing [Atmosphere v. SAT], and (7) fraud [Zero Odor v. SAT].*fn1 Atmosphere owns a majority stake in Zero Odor, and both are located in New York.*fn2 SAT owns a minority stake in Zero Odor and is located in Kentucky, as is Rem.*fn3

The complaint alleges the existence of three separate contracts. The first, a September 20, 2004 Sale and Royalty Agreement ("SRA"), was between Zero Odor and SAT.*fn4 In that agreement, SAT agreed to sell certain products exclusively to Zero Odor, and Zero Odor agreed to buy these products exclusively from SAT.*fn5 The second alleged contract was a modified restatement of the first -- the January 1, 2007 Amended Sale and Royalty Agreement ("Amended SRA").*fn6

In this agreement Zero Odor agreed to pay SAT royalties of five percent of all SAT products that Zero Odor sold, award a minimum royalty payment to SAT of $600,000 per year, and grant SAT a twenty-three percent share in Zero Odor.*fn7

In return, SAT promised to sell certain products exclusively to Zero Odor.*fn8 SAT also provided assurances that its intellectual property protections ensured that no other company could produce substantially similar products.*fn9 Finally, in 2008, Atmosphere and SAT -- as the only shareholders of Zero Odor -- allegedly entered into an agreement ("Operating Agreement") providing that both parties were allowed to do business with others as long as this activity did not compete with and was not detrimental to "the interests of the Company or any Affiliate of the Company."*fn10 "[T]he Company" presumably referred to Zero Odor. SAT was also given the right to prevent Zero Odor from acquiring any loans from Atmosphere in excess of five million dollars.*fn11

According to the Complaint, SAT then took a variety of actions that violated the written agreements and breached duties owed to Zero Odor or Atmosphere. Specifically, the Complaint alleges that the owner of SAT, David Schneider, discontinued research and development work at SAT and used SAT resources and technology to continue work at a new, shell company, Rem.*fn12

Schneider and Rem then allegedly developed products that they provided to other companies even though Zero Odor was theoretically entitled exclusive access to these products.*fn13 While doing this, Schneider denigrated Zero Odor's products to its competitors and potential purchasers.*fn14 Some of these competitors had initially contacted SAT because they saw SAT's patents on Zero Odor's products.*fn15 SAT also denied Zero Odor the ability to increase the size of its loan from Atmosphere unless Zero Odor would agree to limit or remove the exclusivity agreement.*fn16 The Complaint then lists various statements SAT made to Zero Odor and facts that would indicate the known falsity of these statements.*fn17

SAT and Rem's motion to dismiss alleges that the Complaint does not state a claim upon which relief can be granted.*fn18 They also argue that the court lacks personal jurisdiction over Rem, that Atmosphere lacks standing to sue, and that the dispute is subject to an arbitration clause that is present in one of the three signed contracts.*fn19


A. Standard for Dismissal for Failure to State a Claim

In deciding a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), the court evaluates the sufficiency of the complaint under the "two-pronged approach" suggested by the Supreme Court in Ashcroft v. Iqbal.*fn20

First, a court "'can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth.'"*fn21

"Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice" to withstand a motion to dismiss.*fn22 Second, "[w]hen there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief."*fn23

To survive a Rule 12(b)(6) motion to dismiss, the allegations in the complaint must meet a standard of "plausibility."*fn24 A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."*fn25

Plausibility "is not akin to a probability requirement;" rather, plausibility requires "more than a sheer possibility that a defendant has acted unlawfully."*fn26 "In documents attached to the complaint as exhibits, and documents incorporated by reference in the complaint."*fn27


A. Personal Jurisdiction

On a motion under Rule 12(b)(2), when the issue of personal jurisdiction "is decided initially on the pleadings and without discovery, the plaintiff need show only a prima facie case."*fn28 Plaintiffs "can make this showing through [their] own affidavits and supporting materials containing an averment of facts that, if credited . . . would suffice to establish jurisdiction over the defendant."*fn29 Thus, a court may consider materials outside the pleadings,*fn30 but must credit plaintiffs' averments of jurisdictional facts as true.*fn31 "[A]ll allegations are construed in the light most favorable to the plaintiff and doubts are resolved in the plaintiff's favor, notwithstanding a controverting presentation by the moving party."*fn32 Nonetheless, where a defendant "rebuts [plaintiffs'] unsupported allegations with direct, highly specific, testimonial evidence regarding a fact essential to jurisdiction -- and plaintiffs do not counter that evidence -- the allegation may be deemed refuted."*fn33

1. New York General Jurisdiction Under Section 301

Under section 301 of the New York Civil Practice Law and Rules ("CPLR"), New York subjects a foreign corporation to general jurisdiction if it is "doing business" in the State.*fn34 Courts will find that a foreign parent corporation is doing business in New York "when the subsidiary is acting as an agent for the parent, or when the parent's control is so complete that the subsidiary is a 'mere department' of the parent."*fn35 Determining whether an entity is a "mere department" requires "a fact-specific inquiry into the realities of the actual relationship between the parent and subsidiary."*fn36

To determine whether the subsidiary is a "mere department" of the parent corporation, a court must consider the following factors set forth in Volkswagenwerk Aktiengesellschaft v. Beech Aircraft Corp.: (1) "common ownership," (2) "financial dependency of the subsidiary on the parent corporation," (3) "the degree to which the parent corporation interferes in the selection and assignment of the subsidiary's executive personnel and fails to observe corporate formalities," and (4) "the degree of control over the marketing and operational policies exercised by the parent."*fn37 While the first factor -- common ownership -- is "essential" for an assertion of jurisdiction, "[t]he other three are important, but not essential."*fn38 As such, "[t]he overall weighing of the various factors thus necessitates a balancing process, and not every factor need weigh entirely in the plaintiffs' favor."*fn39

2. New York Specific Jurisdiction Under CPLR 302(a)(3)

Section 302(a)(3) confers personal jurisdiction over a non-resident defendant who commits a tortious act outside New York that causes injury in New York. The plaintiff must prove that the defendant (i) regularly does or solicits business, or engages in any other persistent course of conduct, or derives substantial revenue from goods used or consumed or services rendered, in the state, or (ii) expects or should reasonably expect the act ...

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