Uni-World Capital L.P. v. Preferred Fragrance, Inc.

Citations: 43 F. Supp. 3d 236; 2014 WL 3610906; 2014 U.S. Dist. LEXIS 99831Docket: No. 13 Civ. 7204(PAE)

Court: District Court, S.D. New York; July 21, 2014; Federal District Court

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Plaintiffs' motion to amend their Amended Complaint is granted in part, allowing the addition of Count 10 for breach of contract against Ezriel Polatsek, Count 13 for unjust enrichment against Abraham Polatsek, Ouleaf, Qian Liu, and Onlyou, and amendments to factual allegations. The motion is denied in all other respects. 

The case background involves Ezriel Polatsek, founder and CEO of Preferred Fragrance, Inc., sold to plaintiffs in October 2011. After his termination in October 2013, plaintiffs alleged fraud connected to the sale and claimed Ezriel violated non-compete agreements by engaging with competing entities, Exceed LLC and Ouleaf Inc. 

Defendants sought to dismiss or stay the case, citing the Colorado River abstention doctrine and asserting deficiencies in the plaintiffs' federal claim under Rule 10b-5. Plaintiffs filed an Amended Complaint to address these issues, but the court ultimately denied the defendants' motions to dismiss. 

Subsequently, both parties engaged in a series of pleadings, including counterclaims from the Polatseks and Preferred Fragrance. Plaintiffs initially sought a temporary restraining order to prevent Ezriel from breaching the non-compete agreements, which the court denied but allowed for expedited discovery. A preliminary injunction was later granted on July 10, 2014, to enjoin Ezriel from violating these agreements.

On May 30, 2014, plaintiffs filed a motion to amend their Amended Complaint, seeking to include new allegations against Ezriel Polatsek and additional defendants, based on facts uncovered during expedited discovery. They claim that Ezriel and the new defendants engaged in a scheme to replicate Preferred Fragrance's business model by selling imitation fragrance products, proposing 11 new causes of action including fraud, copyright infringement, trade dress infringement, and unfair competition, while adding five new defendants: Abraham, Ouleaf, Qian Liu, Onlyou, and Exceed. The existing defendants, Preferred Fragrance and members of the Polatsek family, opposed the motion on grounds of futility and potential undue prejudice, arguing that the proposed claims are duplicative, insufficiently pled, preempted by federal law, and would complicate and delay proceedings. The court's discretion to grant leave to amend is guided by Federal Rule of Civil Procedure 15, which favors amendment unless there is undue delay, bad faith, or futility. In particular, the defendants assert that the fraud claim is duplicative of the breach of contract claim, undermining its viability.

Defendants are found to be correct regarding the insufficiency of allegations for a fraud claim under New York law, as established by the Second Circuit. Specifically, claims asserting that a party intended to breach a contract do not constitute fraud. Relevant cases, such as Marriott Int’l, Inc. v. Downtown Athletic Club of N.Y. City, emphasize that mere statements of intent to perform do not equate to fraud. The proposed Second Amended Complaint (SAC) alleges that Ezriel stated he would abide by the terms of the Restrictive Covenants but did not intend to do so. However, the plaintiffs failed to meet exceptions to the rule against fraud claims based on contractual obligations, lacking allegations of a separate legal duty, fraudulent misrepresentation, or special damages. Consequently, Count 3 of the proposed SAC is rejected.

In Counts 11 and 12, plaintiffs allege Ezriel breached his fiduciary duties by engaging in competing ventures and misappropriating confidential information. Count 12 also asserts that other defendants assisted Ezriel in these breaches. The defendants argue that the fiduciary duty claims are duplicative of the breach of contract claim, which they do not contest. Under New York law, a breach of fiduciary duty claim that overlaps with a breach of contract claim is not viable. The plaintiffs assert that Ezriel’s fiduciary duties exist independently of any agreement due to his roles within the company. However, the court finds that the breach of fiduciary duty claim is substantively identical to the breach of contract claim, as both arise from the same facts and seek the same damages related to Ezriel's alleged misconduct.

Plaintiffs allege that Ezriel assisted Ouleaf by introducing it to the Company’s customers, participating in the Wilhelmina Venture, and misappropriating the Company’s confidential information, enabling Ouleaf to compete with the Company. They claim Ezriel diverted opportunities from the Company to favor his interest in Exceed. The allegations regarding the disclosure of confidential information, misappropriation of corporate opportunities, and involvement with Ouleaf and Wilhelmina are essentially the same as those in the breach of contract claim. As there is no distinct factual basis for the breach of fiduciary duty claim beyond the breach of contract, Count 11 is dismissed. Consequently, Count 12, which alleges aiding and abetting breach of fiduciary duty, is also dismissed because it lacks an independent fiduciary breach, and since this is the only claim against Exceed, the request to add Exceed as a defendant is denied.

In Count 5, plaintiffs assert that Ezriel and others had access to and copied the Preferred Design Elements from their fragrance product packaging and that Ouleaf created infringing products with similar elements. They claim that Ezriel, Abraham, Liu, and Onlyou are contributorily liable for Ouleaf's infringement. To prove copyright infringement, plaintiffs must show the defendant copied the work and that the copying was illegal due to substantial similarity. The Court finds that plaintiffs have sufficiently alleged the first element of copying circumstantially. However, the determination of substantial similarity does not exclusively belong to a jury and can be resolved by the court in certain circumstances, particularly if the similarities are limited to noncopyrightable elements or if no reasonable jury could find substantial similarity.

In copyright infringement cases, the actual works in question govern over any conflicting descriptions or allegations in legal pleadings. When the works are attached to a plaintiff's complaint, the district court can appropriately assess their similarity during a motion to dismiss. If the court finds that the works are not substantially similar as a matter of law, it can determine that the complaint does not plausibly establish a right to relief. The evaluation must be discerning when works contain both protectable and unprotectable elements, focusing on whether the protectable elements are substantially similar when unprotectable ones are removed from consideration.

In this case, the plaintiffs claim valid copyrights for the artwork and graphic designs of three fragrance product packages. However, a direct comparison reveals that the similarities largely involve non-copyrightable elements, such as a color scheme designed to evoke heat and a ribbon on a gift box, rather than the actual artwork or designs. For the first product, an imitation of a 'Beyonce Heat' fragrance, the plaintiffs’ design features a solid pink lid with floral designs and a flame image, while Ouleaf’s version presents a lid with orange and yellow clouds and lacks any flame or floral elements. Both designs use a red and orange color scheme to suggest 'heat,' but this concept is not protectible, and Ouleaf’s packaging does not incorporate any of the plaintiffs’ distinctive designs.

Similarly, the second product, an imitation of 'Viva La Juicy,' shows that while both parties use comparable pink and gold color schemes to convey femininity and luxury, Ouleaf’s design differs significantly in details and does not replicate the plaintiffs’ floral or star motifs. Thus, these ideas of color schemes and themes are not original or protectible, reinforcing that Ouleaf’s packaging does not infringe on the plaintiffs’ copyrights.

Plaintiffs allege that Ouleaf's imitation of their 'Snooki by Nicole Polizzi' fragrance box set infringes on their trade dress. The plaintiffs' version features a distinct pink and black zebra-print lid with specific imagery and color patterns, while Ouleaf's version uses a pink and black leopard-print lid with a different design and additional imagery. Both versions aim to evoke 'sexiness' through the use of color and animal prints, a concept not original to either party. Plaintiffs claim that Ouleaf has copied their approach to creating an 'impression of fragrance products,' yet this practice of imitating successful designs is not protectable. Plaintiffs lack proprietary rights to the packaging designs of other fragrance products and cannot exclude others from similar practices. Moreover, the plaintiffs do not assert that their specific copyrighted designs were copied, but rather that the defendants created similar products using common ideas, which do not qualify for copyright protection. 

Regarding trade dress claims under Counts 6 and 7, plaintiffs allege that Ouleaf's products are confusingly similar to their trade dress, violating the Lanham Act and common law. Plaintiffs, proceeding under 43(a) of the Lanham Act, must demonstrate that their mark is distinctive and that there is a likelihood of confusion between the two products. Distinctiveness can be established through inherent distinctiveness or acquired distinctiveness. The purpose of trade dress law is to protect the identification of product sources while allowing competition among functionally similar products. Without a registered trademark, plaintiffs face challenges in proving their claims.

Plaintiffs fail to allege that their perfume products possess a distinctive mark indicating their source. They admit to creating 'impressions of' existing perfumes, indicating a lack of originality in their products. The company clearly labels its products as 'impression of another brand' to prevent consumer confusion regarding the original source. Plaintiffs have not demonstrated any unique or common method in their imitation process, nor have they specified how their products significantly alter the originals.

Regarding the claims of unfair competition, tortious interference, and civil conspiracy, the court finds these allegations are insufficient. The unfair competition claim lacks evidence that consumers would confuse the plaintiffs’ products with those of other brands. While the proposed Second Amended Complaint (SAC) satisfies some elements of tortious interference, it fails to show improper means as it does not adequately allege copyright or trade dress infringement. Additionally, civil conspiracy claims require a link to a primary tort, which the proposed SAC does not sufficiently establish, rendering the conspiracy claim also deficient.

Count 13 alleges that new defendants Abraham, Liu, Ouleaf, and Onlyou were unjustly enriched by profiting from unfair competition and selling products that infringed upon the Plaintiffs' Preferred Trade Dress and Design Elements. The existing defendants do not contest this claim's addition, as it pertains solely to the proposed new defendants, who will have the opportunity to respond once included in the case.

Count 10 involves a breach of contract claim against Ezriel, a stockholder of Preferred Fragrance, for allegedly breaching representations and warranties in the Asset Purchase Agreement (APA). This claim asserts that Ezriel violated his non-compete agreements and contractual obligations by collaborating with Ouleaf, Exceed, and Wilhelmina Modeling Company, thus failing to devote his time to Fragrance Acquisitions and disparaging the company. The court has determined that amending the complaint to include this count is not futile, allowing its addition.

The court concludes that allowing the addition of the new claims, specifically Count 10 and Count 13, does not impose significant prejudice on the defendants. The opposition's arguments regarding added complexity and increased discovery costs are acknowledged but deemed insufficient to prevent the amendment, as the new claims primarily involve new defendants and will not significantly burden the existing parties.

Count 13, concerning unjust enrichment, is asserted against four new defendants: Ouleaf, Onlyou, Abraham, and Liu. The addition of this claim is not expected to impose a significant burden on the current defendants, who have already managed related claims by abstaining from depositions or hearings. The proposed new breach of contract claim, Count 10, against Ezriel is also unlikely to prejudice him, as it relates to conduct within the same timeframe as the original claims and is connected to ongoing discovery regarding Ezriel's alleged breaches of Restrictive Covenants. Discovery is still ongoing, with a completion date set for September 10, 2014, and Ezriel has not claimed any missed opportunities for deposition. The new claim is closely linked to an existing claim for injunctive relief concerning Ezriel's non-compete agreements, for which some discovery has already occurred. Ezriel has not articulated any significant inconvenience from the addition of this claim, aside from potential minor additional discovery. While plaintiffs' amendment may cause a slight delay, it does not unduly prejudice the current defendants, as no trial date is set, no motions for summary judgment have been filed, and discovery is still ongoing. Consequently, the Court permits the addition of Counts 10 and 13 while denying the addition of other claims and defendants. Plaintiffs are instructed to file a Second Amended Complaint by July 23, 2014, and serve it along with relevant court orders to all defendants. Ezriel has also filed a motion to be relieved from the preliminary injunction against him.

Ezriel, while having previously accepted the facial adequacy of the Amended Complaint, now contends that the Court lacks jurisdiction due to the failure of the sole federal claim under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 to state a claim. Ezriel indicates that defendants plan to move for dismissal of the Amended Complaint on these jurisdictional grounds shortly. The Court has ordered expedited briefing on Ezriel’s Rule 60(b) motion and the upcoming motion to dismiss, both asserting that the federal claim is facially deficient. Deadlines have been set for the defendants to file their motion to dismiss by July 24, 2014, with plaintiffs' opposition due by July 30, 2014, and defendants' reply by August 4, 2014. The Court aims to resolve these motions quickly. Should the motions be granted, the Court will request additional briefing on whether to exercise supplemental jurisdiction over remaining claims. Conversely, if jurisdiction is confirmed, the parties will be instructed to meet and propose a schedule for discovery and motions from the new defendants, along with a revised case management plan. The obligation for new defendants to respond to the Second Amended Complaint is indefinitely extended until the Court resolves the existing defendants' challenge. Following this resolution, a deadline for responsive pleadings will be established, anticipated to be 14 days post-resolution. The Court also clarifies that multiple parties named Polatsek will be referred to by their first names for clarity. Additionally, the Court notes a prior dismissal of the Brooklyn Action without prejudice by Judge Carolyn E. Demarest, allowing for potential restoration if the federal action does not address all issues. The Court references Rule 21 regarding the addition or dropping of parties, stating that the same liberality applied under Rule 15 for amending pleadings should guide decisions on just terms for amendments.

The court allows the plaintiffs in Bridgeport Music, Inc. v. Universal Music Group Inc. to add new defendants (Abraham, Liu, Ouleaf, and Only You) but denies the addition of Exceed, as the claims against the new parties are not futile. The court references a conflict in New York case law regarding fraud related to undisclosed intentions in contractual promises, noting that while the Court of Appeals has held such intentions can constitute fraud, Appellate Division cases suggest otherwise. The Second Circuit has reconciled these views by applying the Appellate Division's rule with specific exceptions.

The court finds that the plaintiffs' unfair competition claim is not preempted by the Copyright Act, as it involves the "extra element" of intentional deception, distinguishing it from mere copyright infringement. The claim alleges that the new defendants misappropriated the plaintiffs' work and created confusion regarding the source of the goods, which are significant factors for an unfair competition claim under state law.

The defendants' assertion that the timing of the plaintiffs' amendment request indicates bad faith is dismissed. The court notes that the request was prompted by evidence obtained during expedited discovery and was made within the timeline established by the court’s scheduling order. No evidence of bad faith or dilatory motives on the part of the plaintiffs is found.