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Secured Worldwide, LLC v. Kinney

United States District Court, S.D. New York

August 14, 2017

SECURED WORLDWIDE, LLC, Plaintiff/Counterclaim-Defendant,
v.
CORMAC L. KINNEY, Defendant/Counterclaim-Plaintiff. CORMAC L. KINNEY, Third-Party Plaintiff,
v.
ARTHUR JOSEPH LIPTON, Third-Party Defendant.

          HONORABLE COLLEEN MCMAHON, CHIEF U.S.D.J.;

          REPORT AND RECOMMENDATION

          Honorable Ronald L. Ellis United States Magistrate Judge.

         I. INTRODUCTION

         Plaintiff/Counterclaim-Defendant Secured Worldwide LLC ("SWW") commenced this trademark and copyright infringement action against pro se Defendant/Counterclaim-Plaintiff Cormac L. Kinney ("Kinney") on March 10, 2015, (Doc, No. 1.) A trial was held, and on December 15, 2016, Judge McMahon entered a verdict in favor of Kinney. (Doc. No, 119.) On February 2, 2017, Kinney filed a motion for post-judgment Rule 37 sanctions against SWW, its counsel, and third-party Defendant Arthur Joseph Upton ("Lipton"), for allegedly failing to identify a material witness and produce documentary evidence. (Doc. No, 149.) On February 6, 2017, Kinney filed another motion for Rule 37 sanctions against SWW for its alleged failure to comply with a full premises inspection. (Doc. No, 152.) On February 10, 2017, SWW filed its opposition to Kinney's motions. (Doc. Nos. 154-60.) Kinney filed his reply on February 14, 2017. (Doc. No. 161.) This case was referred to the undersigned on February 3, 2017, for a Report and Recommendation. (Doc. No. 150.) For the reasons that follow, I recommend that Kinney's motions for sanctions be DENIED.

         II. BACKGROUND

         On March 10, 2015, SWW filed the Complaint against Kinney, alleging breach of contract, breach of fiduciary duty, unfair competition, and copyright, trademark, and patent infringement. (Doc No. 1.) Kinney filed an Answer and Counterclaim on March 23, 2015, alleging "he had been fraudulently induced [by Lipton] to enter into [the LLC Agreement and Amended and Restated LLC Agreement (collectively, "LLC Agreements"), and the patent assignment]" with SWW. (Doc. No. 119 at 13.) On April 1, 2015, SWW received a preliminary injunction against Kinney for "(1) his competition with the company; (2) his use of the company's trademarks, copyrighted software, and trade secrets; and (3) his interference with the company's website, " (Doc. No, 119 at 13, )

         The case was tried before a jury from November 28 to December 8, 2016. At that point, the Parties stipulated to all claims being decided by Judge McMahon. (Doc. No. 120.) Judge McMahon entered her findings of fact, conclusions of law, and verdict on December 15, 2016. (Doc. No. 119.) She found that Kinney worked for SWW as the Chief Technology Officer and as a partner from 2013 to March 5, 2015, (Doc, No. 119 at 4, 12.) Judge McMahon concluded that Kinney had been fraudulently induced into the contract with SWW because "Lipton caused Kinney to believe that [SWW] had a license from GemShares to manufacture and market the commercial product eventually known as "'Vult, '" and because they were entering into a partnership, "Lipton had a duty to disclose the lack of license to Kinney before [he] signed the LLC Agreements] and the patent assignment." (Doc, No. 119 at 14-15.) Judge McMahon further concluded that Kinney's rescission from the contract was warranted after he discovered that no such patent agreement existed between SWW and GemShares. Id.

         As to damages, Judge McMahon concluded that Kinney was not entitled to "his estimate of what the value of his interest in [SWW] would be today" because Kinney "elected rescission [of the LLC Agreements] and patent assignment] as his remedy of choice" and was not entitled to the "benefit of [that] bargain." (Id. at 15.) Instead, Kinney would be entitled to the value of his work "at the time the [LLC Agreements] were signed, " or the $61, 250 capital contribution Kinney never paid to SWW. (Id. at 2, 17.) Kinney's unjust enrichment award would be calculated as the amount of use SWW "may have made or be making of the intellectual property that [Kinney] brought to the company, " in lieu of Kinney's capital contribution. Id. Judge McMahon concluded that because Kinney's "intellectual property had to be reworked by others in order to make it functional, [$61, 250] seems [] to be an equitable estimate of the amount by which [SWW] was enriched by virtue of the contribution of Kinney's intellectual property." Id. Judge McMahon further explained that even if Kinney could recover "the value of his interest in the company, " calculations to this effect were purely speculative without an expert to testify to "the current valuation of [SWW]." (Id. at 16.) She also concluded that because "Kinney agreed to accept $75, 000 in back pay for the work he performed during the first 11-12 months at [SWW], " no additional award would be allocated to compensate for that work. (Id. at 17.)

         On January 19, 2017, Kinney's motion for an extension of time to file notice of appeal was denied. (Doc. No. 140.) On January 24, 2017, Kinney filed a motion for discovery in aid of execution of judgment, (Doc. No. 144.) Judge McMahon granted Kinney's motion on January 25, 2017. (Doc. No. 147.) That same day, the Clerk of the Court issued a subpoena instructing SWW to allow an inspection of its premises for the purpose of satisfying the judgment rendered at trial. (Doc, No. 155-3.)

         On February 3, 2017, Kinney inspected SWW's premises, (Doc. No. 152.), and filed a motion for Rule 37 sanctions on February 6, 2017, alleging that SWW refused to fully comply with the subpoena. (Doc. No. 152 at 1.) Kinney stated that SWW refused access to a "glass walled office, comprising 25% of the office space" that "was blocked by tall cardboard signage." (Doc. No. 152 at 2.) On February 10, 2017, SWW filed its opposition, arguing that it did not interpret the subpoena's language to include that area of its premise ("the laboratory"). (Doc. Nos. 154, 155 at 7-8.) On February 14, 2017, Kinney replied that "Liptoh is now attempting to either conceal diamonds, or more likely the fact that [SWW] continues to employ the same manufacturing process, equipment[, ] and techniques that I developed, again contrary to his testimony." (Doc. No. 161 at 3.) On March 21, 2017, the judgment, including post-judgment interest, was satisfied. (Doc. No, 165.)

         Prior to the premises motion, Kinney filed a motion seeking post-judgment Rule 37 sanctions against SWW, its counsel, and Upton, alleging they did not produce a material witness and concealed documentary evidence during discovery and trial that would have shown that Kinney's intellectual property is still in use for SWW processes. (Doc. No. 149 at 1-2, 6.) Kinney suggests that this information would have altered the findings of fact, which "informed the conclusions of law and verdict" at trial. (Id. at 7.) Kinney asks the Court to "disregard the corporate form" and "pierce the corporate veil, " in order to hold Lipton personally liable, and award punitive damages against LipLon for his conduct. (Id. at 8-13.) Kinney seeks to recover attorneys' fees and costs, revised findings of fact, and an adjustment to his unjust enrichment award, (Doc. No. 149 at 13.) Additionally, Kinney mentions serving SWW with a Rule 11 sanctions motion, but has not filed such a motion with the Court.[1]

         On February 10, 2017, SWW filed its opposition to Kinney's motion for post-judgment sanctions, arguing that (1) the witness is not someone SWW would have used in support of its claims or defenses and is someone who was easily discoverable, (Doc. Nos, 154 at 3-4, 155 at 3.), and (2) the documents were "merely cumulative" of what Kinney already received in discovery and "would not have changed the outcome of trial." (Doc. No. 154 at 7.) SWW also argues that Rule 60 is the only rule that could apply here, and even so, Kinney does not show a "valid basis for relief." (Id. at 1.) On February 14, 2017, Kinney filed his reply arguing that because Upton received these newly discovered documents via email from Thaumaturgix, Inc, ("TGIX") "after the discovery demand, and well before any documents were delivered" to Kinney, the documents must have been "omitted intentionally." (Doc. No. 161 at 1.) Kinney also argues that prior to trial, his "only knowledge of TGIX was that they managed the website for [SWW], " (Id. at 2.)

         II. DISCUSSION

         A. Kinney's Motion for Rule 37 Sanctions Against SWW for its Refusal to Permit a Full Premises Inspection

         1. Applicable Law

         "In aid of the judgment or execution, the judgment creditor or a successor in interest whose interest appears of record may obtain discovery from any person-including the judgment debtor-as provided in these rules or by the procedure of the state where the court is located." Fed.R.Civ.P. 69(a)(2). "[B]road post-judgment discovery in aid of execution is the norm in federal and New York state courts[, ]" and "[t]he scope of discovery under Rule 69(a)(2) is constrained principally in that it must be calculated to assist in collecting on a judgment." EM Ltd. v. Republic of Argentina, 695 F.3d 201, 207 (2d Cir. 2012); see also AmTrust N. Am., Inc. v, Preferred Contractors Ins. Co., No. 16-mc-0340 (CM), 2016 WL 6208288, slip op. at *2 (S.D.N.Y. Oct. 18, 2016), Further, "[i]t is not uncommon to seek asset discovery from third parties, including banks, that possess information pertaining to the judgment debtor's assets .. . Nor is it unusual for the judgment creditor to seek disclosure related to assets held outside the jurisdiction of the court where the discovery request is made." EM Ltd., 695 F.3d at 207-08.

         "A party seeking discovery may move for an order compelling an answer, designation, production, or inspection. This motion may be made if [] a party fails to ... permit inspection." Fed.R.Civ.P. 37(a)(3)(B)(iv). If a court's order is not obeyed, a court "may issue further just orders" to remedy non-compliance, Fed.R.Civ.P. 37(b)(2)(A). "Strong sanctions [under Rule 37] should be imposed only for serious violations of discovery orders . . . when failure to comply with a court order is due to willfulness ...


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