United States District Court, E.D. New York
GLUCO PERFECT, LLC, U.S. HEALTH & HOME CARE, INC., JOY MERNONE, individually and in her capacity as Executor of the Estate of Kevin R. Mernone and derivatively on behalf of Perfect Care, Inc., and PERFECT CARE, INC., Plaintiffs,
PERFECT GLUCO PRODUCTS, INC., USHH PRODUCTS, INC., FRANCINE FREIMAN, WILLIAM J. GILLEN, GLENN MERNONE, and PERFECT CARE SOLUTIONS, INC., Defendants.
MEMORANDUM & ORDER
KIYO A. MATSUMOTO, District Judge.
Based on the submissions of the parties and the affidavits, evidence and testimony presented during a hearing held on July 24 and 25, 2014, and pursuant to Federal Rule of Civil Procedure 65, the court sets forth herein its Findings of Fact and Conclusions of Law as follows and enters a preliminary injunction against defendants PERFECT GLUCO PRODUCTS, INC., USHH PRODUCTS, INC., FRANCINE FREIMAN, WILLIAM J. GILLEN, and PERFECT CARE SOLUTIONS, INC.
On March 13, 2013, plaintiffs Gluco Perfect, LLC ("Gluco"), U.S. Health & Home Care, Inc. ("U.S. Health"), Joy Mernone, individually and in her capacity as Executor of the Estate of Kevin R. Mernone and derivatively on behalf of Perfect Care, Inc., and Perfect Care, Inc. filed this suit and moved ex parte for entry of a temporary restraining order ("TRO") against defendants Perfect Gluco Products, Inc. ("Perfect Gluco"), USHH Products, Inc. ("USHH"), Francine Freiman, William Gillen (collectively, the "Freiman defendants"), and Andre Ramnauth. (ECF No. 1.) The plaintiffs established good cause as to why notice should not be required. On the same day, the court entered a TRO and an order to show cause ("OTSC") as to why a preliminary injunction should not be granted, and set an order to show cause hearing for March 18, 2014. (ECF No. 4.) The court held telephonic conferences with the parties on March 14 and March 17 regarding the details of and defendants' compliance with the TRO and OTSC. The parties and Glenn Mernone appeared for the hearing on March 18. Following the hearing, at approximately 6:05 p.m. on March 18, the court extended the TRO. (ECF No. 25.) On March 21, 2014, plaintiff Gluco posted a $50, 000 bond in compliance with Federal Rule of Civil Procedure 65(c). Glenn Mernone, who was then a self-described "interested party, " appeared through counsel for all of the above conferences and was served with a copy of the OTSC and TRO. ( See G. Mernone Ltr. dated Mar. 14, 2014, at 2 n.1 (indicating that Mr. Mernone was served with the OTSC on March 14, 2014).)
At the request of the parties, the TRO was continued and a preliminary injunction hearing was initially scheduled for April 10, 2014, but, due to a change in the Freiman defendants' counsel and certain discovery disputes, the parties requested that the hearing date be adjourned to June 20, 2014. ( See Minute Entry dated March 25, 2014; Order dated Apr. 15, 2014.) The parties consented to the continuation of the TRO until after the rescheduled hearing date. ( Id. )
The parties jointly requested a further adjournment of the preliminary injunction hearing date on June 17, 2014 and again consented to the continuation of the TRO until the hearing date. ( See Joint Ltr. dated June 17, 2014, ECF No. 58; Gluco Perfect Ltr. dated June 19, 2014.) The court scheduled the hearing for July 24, 2014. (Order dated June 19, 2014.) The parties subsequently consented to the TRO's extension until the court reached a decision on the merits of plaintiffs' motion for a preliminary injunction. ( See Tr. 4.)
On June 6, 2014, prior to the preliminary injunction hearing but after the entry of the TRO, plaintiffs filed an Amended Complaint, adding Glenn Mernone and Perfect Care Solutions, Inc. ("Perfect Care Solutions") as defendants. (Am. Compl., ECF No. 53.) The extended TRO issue on March 18, 2014 included restraints against the Freiman defendants using or infringing plaintiffs' trademarks or trade names or any other similar names or marks and was thus applicable to Perfect Care Solutions. (TRO ¶ 7.)
A preliminary injunction hearing was held on July 24 and July 25, 2014. The parties presented direct testimony by affidavit and engaged in cross-examination in the courtroom. Plaintiffs presented the following witnesses: Joy Mernone, John Schmidberger, Bibi Samad, Cliff Bravo, Alex Rodriguez, and Jose Torres. The Freiman defendants presented the testimony of Ms. Freiman. Then-defendant Ramnauth also offered his own testimony. Glenn Mernone also appeared and testified pursuant to a subpoena issued by plaintiffs, although he did not submit an affidavit.
Following the hearing, plaintiffs dismissed Ramnauth as a defendant. (Stipulation of Dismissal, ECF No. 73.) The parties also submitted post-hearing briefing. ( See Freiman Defs. Proposed Findings of Fact, ECF No. 76; Pls. Proposed Findings of Fact, ECF No. 77; G. Mernone Proposed Findings of Fact, ECF No. 78; Freiman Defs. Opp. to Pls. Submission, ECF No. 79; Pls. Opp. to G. Mernone Submission, ECF No. 80; Pls. Opp. to Freiman Defs. Submission, ECF No. 81; G. Mernone Reply, ECF No. 82; Pls. Reply, ECF No. 84; G. Mernone Sur-Reply, ECF No. 85.)
FINDINGS OF FACT
The court makes the following findings of fact based on the parties' submissions and testimony and evidence presented at the preliminary injunction hearing. In hearing evidence on a motion for preliminary injunction, the "ordinary rules of evidence do not apply." Sunham Home Fashions, LLC v. Pem-Am., Inc., No. 02-CV-6284, 2002 WL 31834477, at *9 (S.D.N.Y. Dec. 17, 2002); see also Zeneca Inc. v. Eli Lilly & Co., No. 99-CV-1452, 1999 WL 509471, at *4 (S.D.N.Y. 19, 2009) (same). Specifically, hearsay evidence may be considered on a motion for a preliminary injunction. Mullings v. City of New York, 626 F.3d 47, 52 (2d Cir. 2010) (holding, as a matter of first impression, that trial courts may consider hearsay in evaluating a motion for a preliminary injunction). Nonetheless, during a preliminary injunction hearing, the court may consider whether evidence is hearsay in order to determine the weight it should be given. See id. ("The admissibility of hearsay under the Federal Rule of Evidence goes to weight, not preclusion, at the preliminary injunction stage."); Zeneca, 1999 WL 509471, at *2 ("The Court has... applied the Federal Rules of Evidence in determining the weight to be accorded the evidence that was introduced [at the preliminary injunction hearing].") Moreover, this court has considered whether the exclusion at trial of inadmissible hearsay evidence will affect plaintiffs' likelihood of success on the merits.
The court will first discuss its findings of fact regarding the individuals and corporate entities relevant to this action, as well as the structure and operation of those entities' operations prior to Kevin Mernone's death. Then, the court will set forth chronologically its findings regarding the actions of the defendants, prior to, at the time of, and subsequent to Kevin Mernone's death, including after the entry of the TRO in this case.
I. The Corporate Entities
a. Gluco Perfect LLC and U.S. Health & Home Care, Inc. ("the plaintiff companies" or "plaintiff entities")
1. On March 17 2005, Kevin Mernone, now deceased, formed New York limited liability company U.S. Health & Home Care, Inc. ("U.S. Health"). (Mar. 12, 2014 Affidavit of Joy Mernone ("J. Mernone Aff.") ¶ 2; Pls. Ex. 3.) Kevin Mernone was U.S. Health's sole shareholder and its president and director. ( Id. ) Since Kevin Mernone died on October 16, 2013 of conditions related to chronic alcohol abuse, Joy Mernone became the 100% owner of U.S. Health, and Gluco Perfect. (Pls. Ex. 31; J. Mernone Tr. 427-28; J. Mernone Aff. ¶¶ 21-24.) U.S. Health is headquartered and operates at 89-27 126th Street, Richmond Hill, New York ("the Richmond Hill facility" or "Richmond Hill"). (J. Mernone Aff. ¶ 17.) U.S. Health sells incontinence products within the United States and internationally, to various customers, including nursing homes. ( Id. ¶¶ 13, 16.)
2. U.S. Health has used the trade name "U.S. Health & Home Care" since its formation, and has spent time and money marketing and protecting its trade name. ( Id. ¶ 14.)
3. Defendant Francine Freiman ("Ms. Freiman") was a salaried employee of U.S. Health and managed the day-to-day operations of the company, prior to Kevin Mernone's death. (July 17, 2014 Affidavit of Francine Freiman ("Freiman Aff.") ¶ 22; Glenn Mernone ("G. Mernone") Tr. 132.) Ms. Freiman receive a salary, as well as commissions, from U.S. Health, but did not have an employment contract with U.S. Health. (Freiman Tr. 518.)
4. On January 2, 2006, Kevin Mernone formed a second New York limited liability company, Gluco Perfect LLC ("Gluco") and was its sole owner. (J. Mernone Aff. ¶ 1; Pls. Ex. 1.) Like U.S. Health, Gluco is headquartered and operates at the Richmond Hill facility. (J. Mernone Aff. ¶ 17.) Gluco sells diabetic products and blood glucose monitoring products. (Pls. Ex. 105 ¶ 6.)
5. Gluco Perfect has three trademarks for "medical diagnostic test strips for the use in the field of glucose level monitoring" and other products that are registered with the United States Patent and Trademark Office, all of which remain valid: on January 17, 2006, it registered "Gluco Perfect;" on August 20, 2013, it registered "Perfect;" and on January 24, 2007, it registered "Perfect 2." (J. Mernone Aff. ¶¶ 7-9; Pl. Exs. 5-7.) Gluco orders its products from suppliers and sells its products bearing its trademarks and trade name on the products and packaging. (J. Mernone Aff. ¶ 10.) Gluco also registered and maintains an internet domain name, www.glucoperfect.com. (J. Mernone Aff. ¶ 11; Pls. Ex. 8.) Gluco has been using its trade name since its formation and has spent time and money protecting and maintaining its trade name. (J. Mernone Aff. ¶¶ 6, 14.) Its products are also sold nationally and internationally and are available through online retailers, such as Amazon and Walmart, and the company is identifiable to suppliers, customers and the public by its trademarked products. ( Id. ¶¶ 11, 12, 15.) Since Kevin Mernone's death, Joy Mernone became the sole owner of Gluco. ( Id. ¶ 1; Pls. Exs. 2, 4.)
6. Defendant Freiman was an independent salesperson for Gluco, receiving a commission on sales from the company, and ran the company's day-to-day operations prior to Kevin Mernone's death. (Freiman Aff. ¶ 22; Freiman Tr. 324; G. Mernone Tr. 132.) Ms. Freiman also became Vice-President of Gluco Perfect at some point during her tenure at the company. (Freiman Aff. ¶ 24; J. Mernone Aff. ¶ 20.) She did not have an employment contract with Gluco or U.S. Health.
b. Perfect Care, Inc.
7. Perfect Care, Inc. ("Perfect Care") is a corporation inherited and purchased by Kevin and defendant Glenn Mernone, Kevin's brother, from their father. Prior to his death, Kevin Mernone owned 50% of the company, and Glenn Mernone owned 50%. (Freiman Aff. ¶ 6; G. Mernone Tr. 100; Deposition of Kevin Mernone ("Kevin Mernone Dep.") at 20, annexed as Ex. 2 to Freiman Aff. in Opp'n to OTSC (ECF No. 17).) Joy Mernone is now 50% owner of Perfect Care with Glenn Mernone. (J. Mernone Aff. ¶ 4; see also Pls. Ex. 4.)
8. Like Gluco and U.S. Health, Perfect Care is located at the Richmond Hill facility, and it is in the business of selling incontinence and personal care products. (J. Mernone Aff. ¶ 17; Pls. Ex. 105 ¶ 5.)
9. Defendant Freiman joined Perfect Care in 1997 and managed the day-to-day operations of the company but was not subject to an employment contract. ( See J. Mernone Aff. ¶ 20.)
10. Since 2007, Glenn Mernone's primary role at the company has been to manage its information technology operations, although he also signs Perfect Care checks for both payroll and accounts receivable. (G. Mernone Tr. 117, 202.)
a. Perfect Gluco and USHH ("the Freiman companies")
11. In October of 2012, Ms. Freiman formed two companies with virtually identical and business operations names as the plaintiff companies. On October 10, 2012, Perfect Gluco Products, LLC ("Perfect Gluco") was formed, and, on October 17, 2012, USHH Products, Inc. ("USHH") was formed (hereinafter, Perfect Gluco and USHH will be referred to, collectively, as the "the Freiman companies"). (Pl. Exs. 10-11.)
12. Ms. Freiman is the 100% owner of both companies and operated the companies out of the same Richmond Hill facility as the plaintiff companies, until the TRO was issued. (Freiman Aff. ¶¶ 5, 17; J. Mernone Aff. ¶¶ 30-33; see also June 17, 2014 Affidavit of Bibi Samad ("Samad Aff.") ¶¶ 4-5; Pls. Exs. 13-14; July 16, 2014 Supplemental Affidavit of John Schmidberger ("Schmidberger Supp. Aff.") ¶ 2; Andre Ramnauth ("Ramnauth") Tr. 275.)
13. Ms. Freiman's husband, William Gillen, a defendant in this case, is a registered agent for Perfect Gluco. (Pls. Ex. 10.)
a. Perfect Care Solutions, Inc.
14. In November of 2013, Ms. Freiman formed a third company, again with a virtually identical name as a plaintiff company, Perfect Care Solutions, Inc. ("Perfect Care Solutions"), a New York corporation. (G. Mernone Tr. 169, 190.) Perfect Care Solutions is owned 50% by Glenn Mernone and 50% by Freiman. (Freiman Aff. ¶ 84; G. Mernone Tr. 169.) Although Freiman and Glenn Mernone discussed forming a company together and possible names for it, Mr. Mernone was not aware that the company had been formed or what his interest was until after the fact. (G. Mernone Tr. 169-70, 242-43.) Glenn Mernone never saw the corporate documents of Perfect Care Solutions, or any of its books or records. ( Id. at 169-70, 242, 262.) Perfect Care Solutions also operated out of the Richmond Hill facility and engaged in home deliveries of and sold the same products as Perfect Care. ( Id. at 262, 264-66; see also Freiman Aff. ¶ 84.)
15. There is no credible admissible evidence in the record that the plaintiff entities authorized Ms. Freiman to form and use names similar to the plaintiff entities, to use their trademarks or trade names, or to use the Richmond Hill facilities to operate competing businesses.
a. General Operations at the Richmond Hill Facility
Based on evidence presented at the hearing about the general business practices of all of the companies at issue in this case at the Richmond Hill facility and elsewhere, the court finds the following.
i. Computer and I.T. Practices
16. The plaintiff companies at Richmond Hill did not use a company email. Instead employees used their personal emails to conduct business of the companies. (G. Mernone Tr. 184-85.)
17. The computer accounting system used at Richmond Hill is called "Macola." (Schmidberger Tr. 44; G. Mernone Tr. 187.) Each company at the Richmond Hill facility had a separate directory in Macola. (G. Mernone Tr. 192.)
18. When Glenn Mernone created directories for the Freiman companies in October or November of 2012, Glenn Mernone initially copied the directories for Gluco and U.S. Health without deleting or purging data, and the copied directories were later renamed Perfect Gluco and USHH, respectively. ( Id. at 188; Pls. Ex. 112; see also Samad Aff. ¶¶ 4-6.)
19. Glenn Mernone testified that, in light of the Macola system's age, it was not very secure. (G. Mernone Tr. 193.) Multiple employees shared Ms. Freiman's Macola password. ( Id. at 201.) Specifically, it would be possible for anyone with access to Macola (whether in the facility or remotely) to delete information from it. ( Id. at 193-95.) Mr. Mernone acknowledged, however, that remote deletion of data would be "very complicated." ( Id. at 252-53.)
20. In addition, the Macola system allowed the backdating of checks without a record. (Ramnauth Tr. 277; Schmidberger Supp. Aff. ¶ 12; G. Mernone Tr. 128-131, 155; Pls. Exs. 52, 58, at 225.) Once a check is printed, Macola reflects a payment even if the check is not sent out and cashed. (Ramnauth Tr. 281, 320-21; Schmidberger Aff. ¶ 19.)
21. Although Macola could be used to track inventory, the inventory record on the computer system is inaccurate. (Schmidberger Tr. 44.) Prior to Joy Mernone's inspection of the Richmond Hill warehouse in the spring of 2014, a physical check of the inventory at that warehouse had not been performed since approximately 2000. (Ramnauth Tr. 284-85; see also Torres Aff. ¶ 6.) The 2014 inspection of the Richmond Hill warehouse, after Ms. Mernone gained court-ordered access, revealed that the Macola records and physical inventory did not match. (Ramnauth Tr. 285-86.)
22. The evidence demonstrated that the companies' general ledger was subject to manipulation. The ledger was not closed on a monthly basis. (Ramnauth Tr. 277-78; see also Schmidberger Supp. Aff. ¶ 16.) As a result, Mr. Ramnauth, at Ms. Freiman's direction, was able to change the classification of what had been loans to Perfect Care from U.S. Health and Perfect Gluco to accounts receivable. (Ramnauth Tr. 306-07.)
23. The extent of electronic evidence that could have been evaluated in this case has been limited because no controls were put in place in order to preserve electronic information. (G. Mernone Tr. 173-74.)
i. Check-Writing Practices
24. It is difficult to track the checks issued by the plaintiff entities for several reasons. First, the Macola accounting system at Richmond Hill permits checks to be backdated, and it is impossible to determine whether or not backdating has in fact occurred. (Ramnauth Tr. 277; Schmidberger Supp. Aff. ¶ 12.) Second, while the Macola system registered that payments had been made as soon as a check was printed, checks were often printed and signed but not sent out at Ms. Freiman's direction. (Ramnauth Tr. 279-80; Schmidberger Supp. Aff. ¶ 19.) For example, seven checks totaling $264, 653.50 from U.S. Health, payable to a supplier called Presto Absorbent Products, were signed but not sent to Presto. Presto sued U.S. Health for payment and obtained a default judgment against the company. (Pls. Ex. 21; see also Ramnauth Tr. 279; Schmidberger Supp. Aff. ¶ 19; Pls. Ex. 60.)
25. Kevin Mernone was the sole signatory on Gluco Perfect's account. (J. Mernone Aff. ¶ 36.)
26. Beginning in October of 2012, shortly after she formed Perfect Gluco and USHH, Ms. Freiman began signing Kevin Mernone's name to Gluco checks, including a total of 72 Gluco checks totaling $2, 560, 180.79, between October 2012 and October 2013, made payable to, and deposited into an account held by Perfect Gluco. ( Id. ¶¶ 36-38; Pls. Ex. 35; Freiman Tr. 462.) Although Ms. Freiman avers that Mr. Mernone authorized her to sign these checks (Freiman Aff. ¶¶ 41, 43.), she has presented no evidence to indicate that this was the case, and, therefore, the court does not credit her assertion.
i. Wiring of Funds Through the Freiman Companies
27. Beginning in the last quarter of 2012, Ms. Freiman began wiring money from the Perfect Gluco bank account to Gluco suppliers located abroad. (Freiman Tr. 458; Ramnauth Tr. 297; see also Freiman Defs. Ex. F.) Ms. Freiman wired money from Perfect Gluco to the suppliers, and arranged for checks from Gluco to reimburse Perfect Gluco. (Freiman Aff. ¶¶ 48-50.) Ms. Freiman told Mr. Ramnauth that she was sending the wire on Kevin Mernone's behalf because Mr. Mernone was "too busy." (Ramnauth Tr. 297.)
28. Mr. Schmidberger was unable to verify the validity of the wire transfers because few supplier invoices corresponding to Gluco's purchase orders were kept at the Richmond Hill facility. (Schmidberger Aff. ¶ 13.)
29. The Freiman companies received at least two checks from the plaintiff entities, purportedly in order to pay suppliers, but did not forward those checks to suppliers. First, Gluco wrote Perfect Gluco a $37, 500 check to pay a Gluco supplier, Apex, but there is no evidence that the amount was paid to Apex. ( See Freiman Tr. 462-66, 468; Schmidberger Aff. ¶ 16; see also Pls. Ex. 35, at 6; Freiman Defs. Ex. F.) Second, Gluco wrote Perfect Gluco a $59, 100 check to pay another supplier, Biotest, but there is also no record of these funds being paid to Biotest. ( Compare Pls. Ex. 35, at 4 with Freiman Defs. Ex. I.)
i. Loans Between the Companies
30. Ms. Freiman testified that, after Perfect Gluco was formed by Ms. Freiman in October 2012, Perfect Gluco began loaning Perfect Care funds. (Ramnauth Tr. 305-07.)
31. No written loan agreements, corporate authorizations, or other documentation underlying the loans were presented at the hearing. (Schmidberger Tr. 37-38). Instead, Ms. Freiman made these loans to Perfect Care on her own initiative. (G. Mernone Tr. 232; Ramnauth Tr. 335.) The court places negligible weight on Ms. Freiman's testimony that her newly created Perfect Gluco company loaned funds to the plaintiff entities which had long been in operation.
32. Glenn Mernone investigated the loans made by Perfect Gluco to Perfect Care in 2013 and found that they had all been paid back; however, the status of loans from other ...