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Tesla Wall Systems, LLC v. Related Companies, L.P.

United States District Court, S.D. New York

December 18, 2017

TESLA WALL SYSTEMS, LLC, Plaintiff,
v.
RELATED COMPANIES, L.P. and NEW HUDSON FACADES LLC, Defendants.

          OPINION AND ORDER

          JED S. RAKOFF, U.S.D.J.

         On August 7, 2017, Tesla Wall Systems, LLC ("Tesla") filed the instant action against Related Companies, L.P. ("Related") and New Hudson Facades LLC ("NHF") seeking relief for defendants' misappropriation of trade secrets in violation of the Defend Trade Secrets Act ("DTSA") (18 U.S.C. § 1836) and Related's false and misleading statements in interstate commerce in violation of the Lanham Act (15 U.S.C. § 1125). See Am. Compl. ¶¶ 141-154, 160-165, Dkt. 14. Tesla also brought seven state law claims for unfair competition, tortious interference with contract, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, breach of the covenant of good faith and fair dealing, common law fraud, and unjust enrichment. See id. ¶¶ 155-159, 166-211.

         This is the fourth suit arising out Tesla's "demise" in 2014, see id. ¶ 7, and the second pending before this Court, see Related Companies, L.P. v. Ruthling, No. 17 Civ. 4175 (JSR) (S.D.N.Y. 2017). Defendants now move to dismiss Tesla's claims on various grounds including improper claim splitting, res judicata, laches, and failure to state a claim upon which relief can be granted. See Memorandum of Law in Support of Defendants' Motion to Dismiss Plaintiff's Complaint ("Def. Mem."), Dkt. 22.

         For the reasons set forth below, the Court dismisses counts III, VIII, and IX of plaintiff's complaint for failure to state a claim and count IV as time barred, but denies defendants' motion to dismiss counts I, II, V, and VI.[1]

         The pertinent allegations, as set forth in plaintiffs' amended complaint, are as follows:

         Related is a New York-based, multi-billion dollar real estate developer. Am. Compl. ¶¶ 1, 9. Tesla is a Nevada-based, vertically-integrated "curtain wall" supplier that, for a period of several years, supplied high-end glass facades to three of Related's building projects. Id. ¶¶ 8, 25-29. NHF is a New York-based affiliate of Related that manufactures and installs curtain wall for Related's building development projects. Id. ¶ 10.

         Tesla is majority-owned by its founder Carleton Ruthling. Related owns a non-controlling interest in Tesla, holds one of the three seats on its Board of Directors, and has the right to approve certain corporate actions.

         Pursuant to a "Term Sheet" executed in 2013, Tesla is contractually obligated to distribute its cash in a "waterfall" as follows: (1) in payment of taxes; (2) in repayment of cash advances from Related, with accrued interest at 9%; (3) 60% to Related and 40% to Skye Holdings [controlled by Ruthling] until existing loans from Related are paid off [approximately $6 million]/ and (4) 25% to Related and 75% to Skye Holdings. See Related v. Ruthling, Declaration of Nicholas A. Gravante, Jr. in Support of Plaintiffs' Opposition to Defendant Christopher Du's Motion to Dismiss, Ex. 6, Affidavit of Dr. Carleton Ruthling ¶ 13, Dkt. 69.

         Because of a dispute between Ruthling and Related over these terms, Related ended its partnership with Tesla in 2014. Prior to this dissolution and, in or around July 2013, Related, in an effort to acquire Tesla's trade secrets allegedly "began a concerted campaign to induce Budd to leave his position as Tesla's President" and to work for Related to form a competing curtain wall company that would design, manufacture, and install curtain wall at reduced costs. See Am. Compl. ¶ 73. Although Related knew that Budd's employment agreement with Tesla included confidentiality, noninterference, non-competition, and non-solicitation clauses, see id. ¶¶ 65-72, Related nonetheless held numerous secret meetings with him, see id. ¶ 75.

         On or about December 13, 2013, while Tesla was supplying curtain wall to Related, and several months before Related indicated it wanted to cease doing business with Tesla, Budd distributed Tesla's business plan and financials to Related executives without Tesla's knowledge or permission. Id. ¶ 84. In January and February, Budd travelled to New York to discuss potential projects for a new, competing company, eventually incorporated as NHF, see id. ¶ 85, and on March 7 Related extended Budd a written offer of employment, see id. ¶ 86.

         The next day, Budd tendered his resignation with an effective date of May 8, remaining President of Tesla for a further two months. Id. ¶ 87. During this time, and throughout his six-month non-interference period, Budd and Related worked secretly to develop NHF and, at Related's request, Budd solicited Tesla's U.S. employees in violation of a non-solicitation agreement. Id. ¶ 94. Subsequently, Related induced Budd to breach his obligations to Tesla by requesting and receiving Tesla's confidential information and trade secrets.[2] Id. ¶ 96.

         In 2015, following Tesla's "demise, " Related sought to recover $3.3 million that a contractor on a Related building project still owed Tesla in conjunction with Tesla's work on that project. See id. ¶¶ 123-24. In response to Related's request, the contractor sought an executed power of attorney showing that Related had the authority to bill on Tesla's behalf. Id. ¶ 129. As Related could not produce this, Related directed a former Tesla employee working for Related to create a false payment application to submit it to the contractor. Id. ¶ 132. On January 16, 2015, a Related employee accessed Tesla's billing portal without authorization and fraudulently notarized a payment application. See id. ¶¶ 133, 135. Subsequently, Related received the $3.3 million. Id. ¶ 137.

         DISCUSSION

         In connection with these allegations, Tesla brings the aforementioned nine claims for relief against Related and NHF. Defendants move to dismiss these claims on various grounds. They argue that plaintiff's Lanham Act, fraud, and unjust enrichment claims (the "fraud claims"), which are related to the $3.3 million defendants allegedly stole, are barred by res judicata, as they should have been raised as counterclaims in a New York State Court action, The Related Companies, L.P. v. Tesla Wall Systems, LLC, brought by defendants, which resulted in a $15.6 million judgment against Tesla. No. 650778/2015 (N.Y. Sup. Ct. 2015). Plaintiff's remaining claims (its "trade secrets claims"), defendants argue, should have been raised in Tesla Wall Systems v. Budd, which resulted in a final judgment against Related and is pending a retrial on damages. No. 14 Civ. 8564 (LLS) (S.D.N.Y. 2014). Defendants also contend that counts I, III, and VII fail to state a claim and that counts II, IV, V, and VI are time barred.

         The Court considers each argument in turn:

         I. The Fraud Claims Counts III, VIII, and IX of plaintiffs' complaint involve payment to Related - by a third-party contractor - of $3.3 million owed to Tesla.

         A. Count III: Lanham Act Violation

         Defendants argue that plaintiff's complaint fails to state a claim under the Lanham Act arising out of this incident.

         The Lanham Act provides that "any person who, on or in connection with any goods or services . . . uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact or false or misleading representation of fact, which . . is likely to cause confusion . . . or to deceive as to the affiliation, connection, or association of such person with another person . . . shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act." 15 U.S.C. § 1125(a)(1)(A).

         In order to state a Lanham Act claim, Tesla must "show that defendant's use of its mark is likely to cause 'an appreciable number of ordinarily prudent purchaser's 'confusion as to the origin, sponsorship, or approval' of the defendant's product." Louis Vuitton Malletier S.A. v. Warner Bros. Entm't Inc., 868 F.Supp.2d 172, 177 (S.D.N.Y. 2012) (quoting Savin Corp. v. Savin Group, 391 F.3d 439, 456 (2d Cir. 2004)).

         But Tesla makes no allegations that Related used plaintiff's mark "in commerce" either "on goods" - meaning "on the goods or their containers or the displays associated therewith or on the tags or labels affixed thereto, or if the nature of the goods makes such placement impracticable, then on documents associated with the goods or their sale, and the goods are sold or transported in commerce" - or "on services" (meaning "used or displayed in the sale or advertising of services"). 15 U.S.C. § 1127.

         The Lanham Act is designed to protect "trademark owners against confusion as to 'affiliation, connection, or association' in the marketplace." V&S Vin & Spirit Aktiebolag (Publ) v. Absolute Pub. USA Inc., No. 05 Civ. 4429 (RMB) (RLE), 2005 WL 3272828, at *2 (S.D.N.Y. Nov. 28, 2005), report and recommendation adopted sub nom. V&S Vin & Sprit Aktiebolag (publ) v. Absolute Publ'g USA Inc., 2006 WL 197001 (S.D.N.Y. Jan. 25, 2006) (quoting 15 U.S.C. § 1125(a) (1) (A) (emphasis added)). Tesla's claim here has nothing to do with Related's use of Tesla's trademark on its goods or services in the marketplace. It is more akin to a conversion claim against Related for misrepresenting to a third-party a right to receive monies allegedly owed to Tesla. Thus, defendants' motion to dismiss count III is granted.

         B. Counts VIII and IX: Fraud and Unjust Enrichment

         Turning to plaintiff's unjust enrichment and common law fraud claims, defendants argue that these claims are barred by res judicata.

         Under New York law, "once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon difference theories or if seeking a different remedy." O'Brien v. City of Syracuse, 54 N.Y.2d 353, 357 (1981). "While New York does not have a compulsory counterclaim rule (see, C.P.L.R. § 3011), a party is not free to remain silent in an action in which he is the defendant and then bring a second action seeking relief inconsistent with the judgment in the first action by asserting what is simply a new legal theory." Henry Modell & Co. v. Minister, Elders & Deacons of Reformed Protestant Dutch Church of City of N.Y., 68 N.Y.2d 456, 461 (1986) (collecting cases)).

         Related contends that Tesla remained silent in a state court case brought by Related, which awarded Tesla the same $3.3 million they now bring suit to recover. (In that case, The Related Companies, L.P. v. Tesla Wall Systems, LLC, Related won a $15 million judgment against Tesla, which was $3.3 million lower, before interest, than it otherwise would have been due to the contractor's 2015 payment to Related. ...


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