New York Business Litigation Lawyer Blog

In another example of sophisticated parties ignoring the obvious, the parties to an option contract fought over the implication of standard contract language which provided that the option contract was supported "by good and valid consideration" and thus enforceable.

In a somewhat complex case, the parties entered into an agreement whereby CamEquity would lend money to SVCare so that SVCare could purchase a business. In connection with that, a CamEquity related entity was granted an option to purchase 99.999% of SVCare for $100 million. That option agreement stated that the parties had exchanged "good and valuable consideration" to create a binding and enforceable contract. The loan agreement and option contract were executed the same day.

The day came when CamEquity sought to exercise its option. SVCare argued that CamEquity provided no consideration in exchange for the option right and the right was therefore void. Aside from arguing that the loan was itself consideration, CamEquity pointed to the contract language stating that it provided valid consideration for the option right. SVCare claimed the loan was never made and that the boilerplate recitation of consideration was not true.

The Court of Appeal found for CamEquity. In doing so, the court decided that the SVCare's attempt to introduce evidence to contradict the boilerplate consideration language--whether or not the $100 million loan was actually made--could not be considered by the court. Allowing that practice, in the face of a clear agreement negotiated and drafted by sophisticated parties, would undermine the stability and predictability of written agreements and create a setting where a party to a contract would question the ability to rely on the plain language of that contract. Because the option agreement "unambiguously provided that the mutually beneficial covenants constituted the consideration[, ] the importation of another obligation, such as a separate loan agreement," could not be allowed. The court addressed the highly sophisticated parties to the transactions noting that "had these sophisticated business entities, represented by counsel, intended to make the $100 million loan payment a condition of the enforceability of the option, they easily could have included a provision to that effect." Because the loan agreement was not even mentioned in the option agreement, the court refused to allow that issue to play any role in the option agreement's terms and enforceability.

Remarkably, the Court of Appeals considered a second case among these parties, also involving an option contract, and again enforced the boilerplate consideration language. And again the court stated that if the parties intended for a provision to apply, the documents would have clearly expressed that intention--"this is not the sort of term these sophisticated, counseled parties would have reasonably left out of the option agreement."

I realize that we do not know what took place when these agreements were signed. I also understand that hindsight is always 20-20. But understanding the implication of every contract provision--even among friendly parties--cannot be overstated. Failing to follow this rule can lead to a very expensive lesson.

Defendant failed to complete eight bridesmaids dresses until two hours after the ceremony was scheduled to begin, when they were delivered by the groom. As a result of this delay, plaintiff incurred a host of delays for which she incurred expenses, including a delay in the bride's appearance from the rented limousine, so as not to break the tradition of not being seen by the groom or guests before the ceremony. For these expenses, the court awarded plaintiff damages. However, for the wedding parties' inability to have pictures taken in the scenes scheduled and for the bridesmaids wearing different clothing in different pictures, no award would be made as no amount could be reasonably fixed as damages for these items. The court also rejected damages for emotional distress, finding that plaintiff "failed to meet the high threshold required in proving" this claim because defendant's failure to deliver the dresses was "not so outrageous in character and extreme in degree that it exceeds all bounds tolerated by a decent society which is of a nature calculated to cause, and does cause, serious mental distress."

After writing about the "haunted house" case recently, I came across another case that addressed the same concepts, and also in an unusual setting. The haunted house court had decided that because the buyer could not have anticipated that the house under contract was haunted, and was therefore not expected to inspect the property for ghosts, and because the sellers had knowledge of the haunting, the buyer could cancel the purchase contract.

This case, Jablonski v Rapalje, involves sellers that may have hid from a buyer the fact that the house in question was bat infested. While some of the facts should have lead the buyer to pay more attention and realize that something was amiss (discussed below), the particulars of what the buyer should have questioned and investigated divided the court. The majority decided that the sellers may have concealed the bats from the buyer, so that the buyer was allowed to cancel the sales contract.

A fair reading of these cases highlight courts trying to find a way to grant recision. To do so, the courts had to first find the sellers' concealment. This case focused on whether the sellers actively concealed the bat infestation, while the haunted house court focused on whether the buyer had an obligation to search for ghosts once the seller publicized the haunting but did not inform the buyer. Each court then turned to a detailed explanation of why the buyers were not obligated to inspect for that concealed issue, so that the contracts could be rescinded.

The outcome in this case triggered a strong dissent, addressing the alleged concealment by the seller, and whether or not the buyer should have, with reasonable effort and investigation, discovered the bat problem that the majority found to have been concealed by the seller.

Although in the minority, the dissent's objections seem to make sense. The dissent argued that the buyer knew or should have known that something was amiss yet failed to investigate. The buyer had ample opportunity to inspect, was aware that the exterior of the property was stained, that the attic smelled strongly of urine and moth balls, and saw electric extension cords (presumably for lighting) running to the attic (which may have been used to force the bats to leave temporarily). The buyer even knew of the removal of "bird feces" (later determined to have been bat guano), all of which should have been sufficient to raise suspicions and cause the buyer to investigate further. Instead, the buyer took the word of the seller that nothing was amiss and left it at that. Given these facts, held the dissent, the buyer had no claim against the seller.

Ghosts and bats aside, don't be fooled. Claims that a seller hid some defect from a prospective buyer are often rejected by the courts. The concept of "buyer beware" is alive and well in New York State. Before one buys a property of any kind, a careful physical inspection and review of title cannot be ignored. Any defect or objection will not be sustained if that defect or objection was in any way known to the public or with reasonable diligence able to have been discovered by a prospective buyer.

Because the facts often dictate the outcome, investigating who knew what and when is critical. The Firm has been involved in concealment cases in New York City and can discuss any issues relevant to your situation.

A musician's laptop, loaded with valuable proprietary information, was stolen while he was on tour in Germany. A reward was offered, initially set at $20,000, but later raised to $1 million. The plaintiff found the laptop and returned it, but the reward was not paid because the hard drive had allegedly been returned with corrupted information. The musician had the hard drive examined and wiped when the data could not be recovered.

The musician argued that he intended the reward to be for the return of his data and information, not just the physical laptop. He also argued that the reward was akin to an advertisement, but not a firm offer to pay anything.

The court in Augstein v. Leslie addressed the second argument first, and rejected it. A reward, wrote the court, was intended to "induce performance" by the "'offeree [for] a specific action.'" The news reports of the theft and subsequent reward "would lead a reasonable person to believe that [the musician] was making an offer." Notwithstanding the size and significance of the amount, the reward was a promise to pay if a service was provided. Because that was the case here, the plaintiff could collect the reward.

The court then determined that the data had been on the hard drive when it was returned, and no matter its value or condition at that time, especially because it was the musician that had the hard drive wiped, the plaintiff had complied with his obligations to reap the reward.

The last time we wrote on this topic, a group of plaintiffs' had their $900 million claim thrown out by a judge, essentially because the plaintiffs had stuck their head in the sand and did not investigate red flags evident in a transaction. In Pappas v. Tzolis, it was a paltry claim of just a few million that was tossed, but the underlying facts and legal principals were the same. Interestingly, it was again the selling party, the one which many believe to have less risk than the buyer, that came up holding the very short end of the stick.

The facts here are as follows: Pappas and Tzolis (and one other) formed a LLC to lease property. Tzolis personally provided the lease deposit of almost $1.2 million and was permitted to sublet the property. The parties also agreed that they had other business and could compete with the LLC or other members without notice. Trouble surfaced when Tzolis subleased the property to a company he controlled for $20,000 above the LLC's monthly payment. Unhappy with that, Pappas claimed that Tzolis prevented the LLC from leasing it directly for a higher rent, and that Tzolis was generally frustrating the lease interest of the LLC. Shortly thereafter, Tzolis bought out the other members, including Pappas. At the closing, Pappas signed a document attesting to the facts that prior to his sale of his membership interest, he had done his own due diligence using his own lawyers, and was not relying on any representation made by Tzolis or upon their relationship as co-members of the LLC. After the transaction closed, Tzolis assigned the lease interest from his entity to a third-party for $17.5 million.

Pappas sued Tzolis claiming that Tzolis had lined up this sublease before the membership interest were transferred, in violation of his fiduciary obligations to him as a member of the LLC. Had he known, argued Pappas, he would not have agreed to sell for the price that he did. The lower court threw out the case, but parts of it, including the fiduciary claim, were reinstated by the Appellate Division. The Court of Appeals, reversed the Appellate Division and threw out the case.

The court, citing to the Centro Empresarial case discussed here earlier, reiterated the rule for raising a claim of fiduciary violations in this setting. Where sophisticated parties enter into negotiations already not trusting each other or embroiled in a dispute, so that each has good reason to know that they are each acting in their own best interest, and even signing a release or waiver, they cannot come back to complain about those transactions based on the purported trust the aggrieved party had in the other.

Here, the court held that Pappas's reliance on Tzolis was unreasonable and the documents he signed controlled. His claim of fraud, that Tzolis told them he had no lessee lined up, was not only waived when Pappas signed the release and waiver, but incredible given their relationship. Pappas's remaining claims were undermined, wrote the court, because Tzolis had a right to control the leasehold and should not have been trusted by Pappas given the history and relationship among the parties.

The Silber Law Firm, LLC has successfully litigated these types of cases, and the focus on the language of the documents, in the specific context and setting in which they are executed, cannot be overstated. There are ways to minimize the risk to the parties engaged in this kind of transaction, but a hefty dose of skepticism combined with realistic due diligence is required. Sometimes the services of a forensic accountant is also something to consider, as the entity's books often tell a story that is inconsistent with what one party is being told. If you are facing a situation described in these cases, feel free to give us a call.

I found this case while researching a potential litigation. While it is not a new decision, it presents a rather unusual set of facts.

A property buyer is charged with acting diligently in inspecting a property that is being considered for purchase. Because a property is purchased "as is," a seller has no obligation to disclose anything, meaninig, that a buyer cannot seek redress for any defects to the property or its chain of title discovered after the closing has taken place. As a result, prior to buying a house--or any property--it is physically inspected and the chain of title carefully examined. There are two exceptions to this rule: (i) Where a seller creates a defect that cannot be found by a buyer in an ordinary inspection, referred to sometimes as a seller's "active concealment" and (ii) where the parties are in some confidential relationship that requires a seller to disclose any information that could affect the property (these are infrequently found).

The buyer in this case sought to rescind the contract because the house he had agreed to buy was reportedly haunted. This fact was reported by some news outlets after the seller announced that it was haunted and allowed for it to be a tourist spot. The buyer, however, was not from the area and had no knowledge of the property's reputation. When the seller refused to cancel the deal, the buyer sued to rescind the sales contract. The trial court denied the buyer any relief, but the Appellate Division, First Department, reversed. The Appellate Division's description of the facts and principles are colorful and I quote some of it here.

After stating that the broker had no obligation to disclose the "phantasmal reputation" of the property, and that the buyer did not have "a ghost of a chance" to assert fraud by the seller (as opposed to rescinding the contract), the court decided, from an equitable perspective, that investigating ghost sightings was practically impossible. "Applying the strict rule of caveat emptor [buyer beware] to a contract involving a house possessed by poltergeists conjures up visions of a psychic or medium routinely accompanying the structural engineer and Terminix man on an inspection of every home subject to a contract of sale. It portends that the prudent attorney will establish an escrow account lest the subject of the transaction come back to haunt him and his client--or pray that his malpractice insurance coverage extends to supernatural disasters. In the interest of avoiding such untenable consequences, the notion that a haunting is a condition which can and should be ascertained upon reasonable inspection of the premises is a hobgoblin which should be exorcised from the body of legal precedent and laid quietly to rest."

The court differentiated between recovering damages and rescinding the contract. While there was no strong legal basis to recover damages, presumably because the court would not find true fault with the seller's actions, fairness would not compel the buyer to close on this contract, where the buyer did not, and could not, have discovered this issue. Recognizing that it was pushing the boundaries of settled law, the court stated that where "fairness and common sense dictate that an exception should be created, the evolution of law should not be stifled by the rigid application of a legal maxim." Finding that the buyer undertook all the normal and reasonable inspections of the property, and because no amount of research would have revealed to the buyer "the presence of poltergeists at the premises or unearth the property's ghoulish reputation," the contract would be rescinded.

The court dismissed the seller's claim that the contract provided that the property was being sold "as is" because this information was unique to this seller and had not been disclosed to the buyer. With its tongue in cheek, the court pointed out that if the terms of the contract were scrutinized, it was the seller that was in breach, as she could not deliver the house "vacant," as called for under the contract.

It is important to note that the court held this way in large part because it was the seller that revealed the condition of the house to the press, but not to the buyer. By doing this, the seller was engaged, to some degree, in the "active concealment" of a defect.

This conduct was not enough for the dissent. The dissenting opinion would have enforced the contract because the seller took no active steps to hide a defect or deceive the buyer. As far as the haunted nature of this house, the dissent argued that the "existence of a poltergeist is no more binding upon the defendants than it is upon the court."

As a practical matter, issues of disclosures have been altered in many respects by New York State's mandatory disclosure laws which compel disclosure and some waiver of defects. That said, there is plenty of active litigation over disclosure and the lack thereof when properties are bought and sold.

Plaintiff sought to recover from a corporation and its shareholders a total of $106,000 based on a $15,000 loan. Defendants denied liability and raised usury as an additional defense. Both sides moved for summary judgment, the plaintiff on the note and the defendants on their defense of usury. In opposition to the usury defense, the plaintiff claimed that the amount in excess of $15,000 was not interest but a combination of smaller loans that were consolidated and included in the repayment for ease of reference and to be repaid all at one time.

In addressing the usury defense, Kings County Commercial Division Judge Carolyn E. Demarest, agreed that if the interest charged was usurious, the lender could not collect. However, in this case, it was the borrower-defendant that drafted the loan documents, proposed the interest rate and payment options, and assured the lender-plaintiff that it was all legal and enforceable. Additionally, the defendants were plaintiff's investment brokers and were hired to research and make investments for him. In that setting found the court, to avoid a situation where "'a borrower could void the transaction, keep the principal, and achieve a total windfall, at the expense of an innocent person, through his [or her] subterfuge and inequitable deception'" a usury defense could not stand.

The court found a related basis not to allow the defendant to hide behind the usury defense. Where the parties entered into the loan based on the relationship of trust between them, and the plaintiff's relied on that relationship, the borrower will not be rewarded for his scheming and misleading conduct. Thus, where a relationship "results in a borrower inducing the lender to make a loan at a usurious rate" the court may not void the loan because it is usurious. Instead, the court will enforce the loan at a legal rate of interest.

Towbin v. Towbin reminds us that one cannot be compelled to give someone a gift. The facts here involve a son's attempt to compel his parents to complete the transaction of giving a trust he controlled a valuable apartment which his parents owned and in which they lived. The lawsuit sought to force his parents to complete the transaction they had started and thought had completed, evict them, and award him $12 million in damages.

The court dismissed the case, refusing to compel the completion of the gift, stating that because the transaction had not been properly completed, notwithstanding the intention of plaintiff's parents, the gift was never finalized and the son had no basis for his claims.

Even without a written contract, equity and fairness can sometimes provide for an enforceable oral agreement between two parties. One such basis is called "unjust enrichment." This approach allows for a party's recovery based on fairness, where one party confers a benefit on another without a written agreement, compensation may be permitted to avoid the recipient from being unjustly enriched.. One of the requirements for this to work is that the parties must have some relationship between them. The extent of that relationship is the subject of a case before New York State's highest court, the Court of Appeals, which recently decided that even where one party clearly benefits from another, and is aware that it received those benefits from the other, the lack of a direct relationship between the two defeats the provider's recovery from the recipient.

In Georgia Malone & Co., Inc. v. Rieder, Malone & Co. provided brokerage and property information to parties considering the purchase of real estate in exchange for a set fee plus a percentage of the sales proceeds. In this case, CenterRock Realty hired Malone to investigate a particular property. CenterRock agreed to keep the information provided by Malone confidential. CenterRock opted not to buy the property, but sold Malone's property and research information to Rosewood Realty Group without informing Malone. Rosewood eventually found a buyer for the property, using and benefitting from Malone's work, and earned a fee. Malone did not receive its percentage fee from the sale.

Malone sued Rosewood and CenterRock, alleging that they were both unjustly enriched by Malone. The trial court dismissed the unjust enrichment claim, but on appeal to the Appellate Division, the State's intermediary appellate court, it was reinstated against CenterRock. The Appellate Division, in a split decision, found that the relationship between Malone and Rosewood was "too attenuated" to provide the necessary connection between the two even though Rosewood benefitted from Malone's information.

Malone appealed higher, to the Court of Appeals, arguing that because Rosewood knew it was using Malone's work-product, and because "Rosewood unfairly profited at Malone's expense by collecting a commission on the sale of the properties," Rosewood was liable to Malone. The Court of Appeals disagreed and affirmed the Appellate Court's decision, finding that although an unjust enrichment claim was grounded in "'an obligation imposed by equity to prevent injustice[] in the absence of an actual agreement between the parties'" the relationship between the parties must support "a relationship or connection between [them] that is not 'too attenuated.'" Rosewood's relationship with Malone here was "too attenuated" to allow recovery "because they simply had no dealings with each other." That Rosewood knew the materials it had purchased from CenterRock were prepared by Malone did not, standing alone, create a relationship between them. Finding differently, held the court, would add an unreasonable level of complexity to any commercial transaction, requiring each party to research what parties had earlier agreed to with others, which could create liability for parties that are only tangentially involved in the transaction.

Because this decision seemed at odds with prior decisions of the Court of Appeals involving similar facts, the court felt it necessary to discuss those prior cases which found a sufficient relationship based only on the parties knowledge of each other. Ultimately, the court differentiated this case from the earlier cases because (i) Malone did not claim that it had a relationship with Rosewood, and it did not, and (ii) because Rosewood paid CenterRock for Malone's materials so that Rosewood paid something for what it received so that it was not truly unjustly enriched.

In a strongly worded dissent, two justices argued that Rosewood's knowledge of Malone's work was sufficient to establish the requisite relationship to support liability, especially under a theory grounded on fairness. Adopting the majority's approach would force parties pursuing an unjust enrichment claim to show a much closer relationship, which should not be necessary under this theory of recovery. The dissent felt that "[t]he majority ruling would appear to simply condone willful ignorance."

While Malone's arguments in this case did not persuade the majority of the Court of Appeals, unjust enrichment and similar claims are often asserted where there is no written agreement between the parties. Often, a party is unaware that recovery can be pursued without a written agreement in place, based on an oral representation or unjust enrichment-type claims. In light of this decision, and especially in today's virtual marketplace, a thorough examination of the facts and innovative application of the law, can be necessary to achieve success.

Plaintiff sells software to the financial industry. It sued a former employee and his new employer for stealing plaintiff's secret computer source code. The issue before the court centered on whether or not plaintiff had to specifically identify the secret information that it claimed its former employee had stolen. Defendants maintained that identification was necessary so that the exact information allegedly stolen could be examined to determine whether or not it was a true secret or just general knowledge that the employee had learned. Plaintiff argued that the information was secret and defendant's employment allowed him to learn those secrets while at plainitff and use that information at his new employer.

The court held that defendants did not need to guess the secrets plaintiff claimed were stolen, so that plaintiff had to identify them. This allowed defendants to examine the information and argue that some or all were not true secrets. Additionally, without this disclosure, it would be impossible to discern which of plaintiff's secrets the new employer was using and concerning which plaintiff could legitimately object.

Despite the uniform reaction of courts, trademark holders insist on filing lawsuits over gripe-sites. As discussed here in the past, websites that are created for the sole reason of complaining about a service or product, and which incorporate a trademark in doing so, are not guilty of trademark infringement. In Devere Group GMBH v. Opinion Corp. d/b/a Pissedconsumer.com, pissedconsumer.com was sued by a Swiss consulting company because the site hosted a number of sub-domains that hosted public complaints about the company. The company sought damages for trademark infringement, among other claims.

Although the court determined that the consulting company had established its trademark, it had failed to establish any infringement by the gripe-site. The court agreed with the gripe-site that no reasonable consumer, "'even the dimmest Internet user'" would believe that the comments posted to the gripe-site were sponsored by the consulting company. This was especially true here, where the complaints could never be seen as an endorsement of the services protected by the trademark or endorsed by the company, and the gripe-site did not compete with the company's website for viewers.

For the most part, the court's outcome should be the same for a complaint website that was less obvious in identifying its purpose. The line is crossed, however, where the complaint website has a commercial purpose or seeks to benefit from the protected trademark. In that case, judges look at the relationship with a more critical eye, to understand the purpose of the complaint website, and are more reluctant to dismiss an infringement complaint.

A few months ago, the Court of Appeals highlighted the pitfall of a not uncommon scenario, that of experienced and sophisticated business people relying on the representations of others but which are later found to be less than truthful. In Centro Empresarial Cempresa S.A. v. America Movil, S.A.B. de C.V., the court dismissed the fraud claims of former shareholders of a Latin American mobile telephone company because those shareholders ignored obvious concerns that arose in the course of the sale of their shares that should have put them on notice of potential problems. Not only were those issues not addressed, but those shareholders released the company and remaining shareholders from liability in connection with the sale. The outcome of this case underlines the fact that experienced and sophisticated parties must do their own due diligence no matter what they are told.

The facts are somewhat complicated but can be summarized as follows: Plaintiffs held a majority interest in an Ecuadorian company which sought funding from a Mexican company, Telemex Mexico, controlled by billionaire Carlos Slim. The funding was provided and a new entity was formed which was owned by the plaintiffs and Telemex. The parties agreed that in the event that there were additional transfers to different entities, plaintiffs could swap their interest from the old entity to the new entity on terms to be agreed. Following a subsequent transfer, plaintiffs tried to negotiate the terms for the transfer of their ownership interest into the new entity. Encountering resistance from Telemex, plaintiffs opted to just sell their interest outright and did not receive any interest in the new entity.

Eight years later, plaintiffs sued claiming to have been defrauded. Plaintiffs claimed that they were given incomplete and bogus information of the new entity's value. Had they known the true state of affairs, they alleged, they would have forced a transfer or sold their interests at a far higher price. Under the agreement by which plaintiffs sold their interests, they agreed to release the other shareholders and the new entity from any claims in connection with the agreement. The remaining shareholders and their entities also provided plaintiff with no warranties related to the business' state of affairs.

In dismissing plaintiffs' claims, the Court of Appeals faulted the plaintiffs for agreeing to broad release language while not pursuing the information they acknowledged not receiving. The court refused to give any credence to the plaintiff' arguments that they were mislead and could not have known the true value of what they gave up. The court determined that plaintiffs were sophisticated entities engaged in complex businesses and transactions who made conscious decisions not to investigate the information they were provided. That plaintiffs were aware that they were given incomplete information from a partner they no longer trusted further highlighted the need for plaintiffs to undertake their own due diligence, which they did not do. Only if the release was itself procured by some fraud would plaintiffs be able to proceed, and that was something that the plaintiffs could not establish.

Not long ago, we successfully represented a company in defending against the claims of a shareholder who alleged similar claims. The issues are always complex and a thorough investigation of the underlying facts and arguments must be examined prior to deciding on a litigation process.

A recent decision by Suffolk County Commercial Division Judge Emily Pines highlights how critical it is for a party in a dispute to keep his hands clean, even in the face of the other side's wrongful conduct.

The extensive factual and legal discussions raised over the 11 day trial are nicely explained by Peter A. Mahler, Esq. I reference this case for the limited purpose of highlighting the fact that while nasty conduct and table-banging litigation make for a good movie script, playing by the rules usually carries the day.

This case involved a dispute within a 12 member medical practice. One doctor alleged that the other doctors were not conducting themselves properly while running the practice, engaging in conduct that did not benefit the entire practice. He also complained that they caused the practice to borrow money without proper consent. And finally, that his partners expelled him from the practice without cause. The other doctors claimed that the complaining doctor went behind the others' collective back and told the prospective lender that the practice did not have proper authorization to borrow the funds. It turned out that the practice did have the authority to borrow money, as the other doctors had properly voted to obtain the loan, but the complaining doctor's notice to the bank caused it to cancel the practice's loan, to the detriment of the other doctors.

Judge Pines found that while the other doctors did not completely operate the practice properly, and withheld certain compensation from the complaining doctor, the fact that this doctor wrongfully contacted the bank, causing it to pull the loan application, precluded him from recovering a substantial portion of the amount he was demanding from the practice.

The lesson here is clear: In real life, the claim that your adversary may be robbing you blind does not necessarily give you the right to destroy the business or take unfettered, unilateral steps to defeat what your adversary is trying to accomplish. Not surprisingly, in this setting, an intensive review of the facts is necessary before any action is taken. Don't undertake that process alone. Team up with experienced counsel before you take action that you might later regret.

As readers here know, we have discussed, as far back as 2007, the importance of properly drafted documents. In December 2007 we wrote about an Inc. Magazine feature article which described the fallout between friends caused by incomplete or nonexistent incorporating documents. A recent Suffolk County Supreme Court decision highlights that again--to the tune of hundreds of thousands of dollars.

In 2006, Gary Duff and Peter Curto, Jr., formed a LLC to buy property. After Duff spent some $500,000 on the project, it collapsed. Duff sued Curto claiming that Curto was obligated to reimburse Duff half of his costs because the parties had agreed to contribute to the LLC evenly. That may have been true, except that the LLC operating agreement did not exactly say that. The operating agreement provided that each would provide 50% of the capital, but did not detail how much that was. While that alone may have not carried the day, even though Curto denied any agreement to provide anything, that Duff carried his "contributions" to the LLC as loans on his tax returns provided Judge Pines the basis she needed to find that Duff could not maintain a claim against Curto, dismissing them, even though the operating agreement was vague as written.

Would the outcome have been the same had the operating agreement been properly completed?

In an ongoing litigation between Starbucks and an outfit called Black Bear Micro Brewery, the brewer of Mr. Charbucks and Charbucks Blend coffees, a New York Southern District judge found that notwithstanding the similarity in names and the fact that Charbucks was trying to capitalize on the Starbucks name, Charbucks did not violate trademark law.

One of the privileges provided by trademark law is a trademark holder's right to prevent another's use of a mark that, while not confusingly similar in a direct way, nevertheless "dilutes" the trademark holder's registered trademark. One way to dilute a mark is to "blur" it. Blurring is pretty much as it sounds: A competitor's use of mark that, in the court's words, "impairs the distinctiveness of the famous mark." When a mark is blurred, its "distinctiveness," that element of the mark by which it is known to the public, is weakened.

In this case, the Southern District court was faced with deciding whether the marks "Mr. Charbucks" and "Charbucks Blend" diluted the Starbucks trademark. To reach a conclusion, the court had to review six factors that, while not exclusive, provided guidance in determining dilution: "(i) [t]he degree of similarity between the mark or trade name and the famous mark; (ii) [t]he degree of inherent or acquired distinctiveness of the famous mark; (iii) [t]he extent to which the owner of the famous mark is engaging in substantially exclusive use of the mark; (iv) [t]he degree of recognition of the famous mark; (v) [w]hether the user of the mark or trade name intended to create an association with the famous mark; [and] (vi) [a]ny actual association between the mark or trade name and the famous mark." Because these elements are suggested but not exclusive, the overarching consideration is whether the blurring makes the distinctive registered mark less distinctive.

Despite conceding that Starbucks' claims satisfied the distinctiveness, exclusivity and recognition elements, and also agreed that Black Bear attempted to create an association between its product and Starbucks', the court refused to find dilution because the way that the respective marks were used were not similar and easily distinguished by the consumer. For example, the court noted that Charbucks was always preceded by "Mr."or "Mister," or in conjunction with "Blend" and its logo was very different that what Starbucks used. Presumably, though, had the mark "Charbucks" been used alone, Starbucks would have made out its dilution claim.

The court expressed its concern that preventing the use of the Charbucks mark would give Starbucks too broad a right to exclude any mark that troubled Starbucks, something not provided for under law, even where defendant intended to associate its coffee with Starbucks'.

This case highlights that while some surface confusion between marks may appear, a deeper examination is required before confusion becomes a concern. Succeeding on a dilution claim against a small competitor without a meaningful market presence is made more difficult with this decision, notwithstanding the change in law designed to avoid this type of outcome, which was enacted subsequent to the United States Supreme Court's decision in the seminal Victoria's Secret case. Seemingly, where a small competitor tries to piggy-back off the recognition of a large and well know company's trademark, a dilution claim seems to not always be enough to obtain an injunction.

For some tongue-in-cheek thoughts on this issue, take a look at a post by Ron Coleman, Esq.