July 19, 2010

Nutritional Supplements Company Loses Suit Against Competitor For Misappropriation Of Trade Secrets And Must Pay $1 Million In Attorneyss Fees; Court Voids Confidentiality Agreement.

The New Jersey Superior Court Finds That Plaintiff Failed To Prove Its Misappropriation Of Trade Secrets Case Citing Lack of Credibility and Lack of Documentary Evidence Due To Systematic Destruction Of Documents. The Court Holds That The Confidentiality Agreement With Former Employee Unenforceable As Impermissibly Broad And Anticompetitive. Attorneys’ Fees Awarded To Defendants For Plaintiff’s Breach Of Covenant Not To Sue.

The Chancery Division entered Final Judgment on July 19, 2010 (http://www.ravin.com/articles/Judgment.pdf), pursuant to its opinion dated March 19, 2010  (http://www.ravin.com/articles/GrowTrOp.pdf) in Grow Company, Inc. v. Dilip Chokshi and Pharmachem Laboratories, Inc., et al., Docket No. BER-C-280-05, tried before the Honorable Ellen L. Koblitz, P.J. Ch.  Following a 15-day bench trial spanning six weeks, Judge Koblitz ruled that the plaintiff failed to prove its misappropriation of trade secrets case against its former employee which was commenced in August 2005, 14 years after the employee left plaintiff in 1991.  Significantly, the court declared that a confidentiality agreement entered into between Plaintiff Grow Company, Inc. (“Grow”) and its former employee, Defendant Dilip Chokshi, was unenforceable because it was overly broad and anticompetitive.  The court also has awarded $999,186 in attorneys’ fees and expenses on defendants’ counterclaim for breach of a Release, Covenant Not To Sue and Settlement Agreement, arising out of a prior litigation.

Both Grow and Mr. Chokshi’s current consulting client, co-defendant Pharmachem Laboratories, Inc. (“Pharmachem”), are manufactures of vitamin and mineral supplements.  In addition, Pharmachem is a developer, manufacturer and supplier of products in the food, beverage, flavors and fragrances industries, with annual sales of more than $100 Million dollars.  Mr. Chokshi is a scientist, specializing in fermentation technology for the nutritional supplements industry.  He had worked at Grow from 1979 to 1991.  Mr. Chokshi began working for Pharmachem as a consultant in 2000 and continues to work for Pharmachem.

The trial court found that Grow had failed to establish or identify its alleged trade secrets, failed to prove any disclosure of its alleged trade secrets by Mr. Chokshi to Pharmachem, and failed to show sufficient similarity between the products of Grow and Pharmachem.  Grow did not introduce into evidence at trial any manufacturing or product formulation documents used by Grow in the production of it products dating back to the time when Dilip Chokshi worked at Grow (1979-1991.)  The court found that Grow was unable “to produce virtually any documentary evidence dating back to the period of Chokshi’s employment from 1979 to 1991 since Grow systematically destroyed records to maintain their trade secrets.”  Opinion, at 9.

In 1982, during his employment with Grow, Mr. Chokshi signed a confidentiality agreement.  By way of counterclaim, Mr. Chokshi had sought a declaratory judgment that the confidentiality agreement was void as against public policy for being an unreasonable restraint of trade.  The court agreed, holding that “[t]he shear breadth of these provisions is indicative of Grow’s intent to prevent any and all competition from Chokshi and other Grow employees who signed this type of agreement, upon termination of their employment with Grow. The agreement impermissibly prohibits Chokshi from using or divulging ‘any information of any kind, nature or description concerning any matters affecting or relating to the business of [Grow]’… even though such information may not be a trade secret, as it would include information that may be widely known in the industry.” Opinion at 23; (citations omitted) (emphasis in original).  The court ruled that “[a]s a matter of law, Grow may not restrict Chokshi’s ability to compete and use such knowledge, skill and experience, upon his termination of employment with Grow, under the guise of a confidentiality agreement.”  (Id. at 24.)  The trial court further held that the confidentiality agreement is invalid, stating: “[t]he 1982 Agreement includes all information ‘without regard to whether any or all of the foregoing matters would be deemed confidential, material, or important.’…. Such a broad prohibition against the disclosure of Grow’s business information, whether or not such information is public, is unenforceable as written as a matter of law. See Whitmyer Bros., Inc., 58 N.J. 25, 33-34, 37 (1971; Taylor Iron & Steel Co. v. Nichols, 73 N.J. Eq. 684, 687 (E.& A. 1908).”  (Opinion at 23; citation omitted.)

As to its misappropriation of trade secrets claim, Grow alleged that six patents belonging to Pharmachem, naming Mr. Chokshi as inventor, disclosed Grow’s trade secrets for its alleged yeast fermented, vitamins, minerals, Co-Q10 and Phaseolamin.  The Pharmachem patents disclosed a process for dual fermentation – utilizing both active yeast (Saccharomyces cerevisiae) and  yogurt culture (lactobacillus) to ferment vitamins, minerals, Co-Q10 and Phaseolamin.  The court found that Grow engaged in false advertizing relating to the use of the 1982 patent, belonging to Grow’s founder, Andrew Szalay, for the manufacture of its products.  The court also found that Mr. Szalay had surreptitiously used animal products in its finished products.  Grow’s former sales representative, Robert Koetzner, had testified that this revelation led him to leave the company in 1991 because he and Grow had been marketing the products for 15 years as being vegetarian.  The court found there was much evidence at trial that while Mr. Chokshi was at Grow, the company did not even use the fermentation technology it had claimed was at the core of its trade secrets, and which was allegedly disclosed in Pharmachem’s patents and used by Pharmachem.  Massoud Arvanaghi, who was hired by Grow to replace Mr. Chokshi, did not join Grow until after Chokshi had left in 1991 and was not able to testify from personal knowledge as to Grow’s alleged trade secrets at the time Chokshi was there. 

Grow had sought in excess of $25 Million in compensatory damages prior to trial, but abandoned that claim for relief shortly before trial in response to defendants’ motion in limine as Grow failed to produce any evidence of compensatory damages.  Grow also sought various forms of injunctive relief against Mr. Chokshi and Pharmachem, including banning Mr. Chokshi from working for Pharmachem for a period of two years, and banning Pharmachem from doing business with former customers of Grow, irrespective of whether Pharmachem was selling the accused products to its customer, which had not done any business with Grow for 14 years prior to Grow’s commencement of the lawsuit. Grow also sought disgorgement of profits of Mr. Chokshi and Pharmachem in the millions of dollars.

Prior to the case going to trial, the trial court had granted summary judgment to defendants based on a Release, Covenant Not To Sue and Settlement Agreement dated December 21, 2001 (“Release”) resulting from the settlement of prior litigation.  Grow had sued Mr. Chokshi in 1999, along with Bio-Foods, Ltd., and its other shareholders, Robert Koetzner and Bharat Patel, alleging trade libel. Grow appealed, and defendants cross-appealed. The Appellate Division reversed and remanded the matter for trial, holding that the matter should not have been decided by summary judgment. 

However, one of the issues decided by the Appellate Division was whether Mr. Chokshi could recover attorneys’ fees, expenses and costs under the Covenant Not To Sue, even though Pharmachem had paid all of Mr. Chokshi’s legal bills related to the litigation.  The appellate court held that Grow could not escape its promise to pay for attorneys’ fees merely because Chokshi did not actually pay the attorneys’ fees.  The appellate court stated: “it would be inequitable for a person in  Grow’s position to be able to avoid its contractual obligation to pay fees simply because another has provided financing to wronged party.” (Grow v. Chokshi, 403 N.J. Super. 443, 472 (App. Div. 2008.)  Although Pharmachem was not included in the Release by name, it was, according to the trial court, a “Releasee” as defined by the Release, and therefore, entitled to the benefits of the Release. The trial court awarded Defendants $1 Million in attorneys’ fees and expenses against Grow.

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March 8, 2010

New Jersey Appellate Court Rules That E-Mailer Can Retain Anonymity

Plaintiff in Defamation Suit Cannot Discover Identity of Author of E-Mail Sent To High School Faculty Member Stating That Heroes And Cool Kids Club Members Were Engaged In Underage Drinking of Alcohol.   Photos Downloaded From www.facebook.com Were Attached As Evidence.

The New Jersey Appellate Division affirmed the trial court’s order quashing plaintiff’s subpoena in an online defamation case (A.Z. et al. v. Doe et al., A-5060-08T3 http://www.ravin.com/articles/a5060-08.pdf) aimed at discovering the identity of Defendant Doe, an anonymous author, represented by Richard L. Ravin, Esq., of Hartman & Winnicki, P.C. (www.Ravin.com).  The appellate court held that Mr. Ravin’s client has the right to remain anonymous in an Internet libel and slander case.

Plaintiff alleged that Defendant Doe had defamed plaintiff by sending an e-mail to a high school faculty adviser critical of the Heroes and Cool Kids club. The e-mail stated that some of the club’s members were breaking their contracts with the club and breaking the law. The anonymous author attached photos to the e-mail which were downloaded from www.facebook.com showing some members of the club engaging in underage drinking and partying.  A list of the names of the individuals pictured in the photographs (including plaintiff) appeared at the end of the e-mail.

In an effort to learn the identity of the author, plaintiff served a subpoena on Cablevision which was the ISP linked with the transmission of the e-mail. Mr. Ravin filed an emergency motion to quash the subpoena on behalf of Defendant Doe. In affirming the result of the lower court, the Appellate Division ruled that pursuant to the Dendrite v. Doe case, the online author had a First Amendment right to remain anonymous because plaintiff failed to establish the third Dendrite factor – presenting prima facie evidence of its defamation claim.  The appellate court found that the plaintiff had failed to prove falsity -- that is, that plaintiff did not engage in underage drinking.

A unique aspect of this case is that the court relied on a certification filed by Defendant Doe, to which were attached additional photos showing plaintiff consuming alcoholic beverages.  The Doe certification authenticated these photos as being uploaded to www.facebook.com by plaintiff or her sister.  The court found the certification to be compelling evidence of the truth of the statements by Doe, especially given plaintiff’s failure to file any sworn statement refuting the photographs, or otherwise attesting to the falsity of the alleged defamatory statement.  Because truth is an absolute defense in defamation cases, the court ruled that plaintiff had failed to meet its burden of proof to present a prima facie case under Dendrite, and therefore, affirmed the lower court’s order barring plaintiff from using the court’s subpoena power to discover the identity of Doe from Cablevision.

About Richard L. Ravin, Esq.

Mr. Ravin has successfully represented other online anonymous authors in motions to quash subpoenas, including in the Eye-on-Emerson case (see article: www.ravin.com/anonymous.html) in New Jersey Superior Court, and in case in U.S. District Court for the Southern District of New York.  Mr. Ravin has also represented corporations, including a publicly traded company and its chief executive officer, seeking the identity of anonymous authors who have posted defamatory statements to financial message boards. 

Mr. Ravin is a member of Hartman & Winnicki, P.C., and heads the firm's Internet, Technology, Intellectual Property Law practice areas.  He also practices Commercial Litigation, and Bankruptcy law, with offices in Paramus and New York.  He is current (and founding) Co-chair of the Internet and Technology Law Committee of the New York State Bar Association's Intellectual Property Law Section and Past Chair of the New York State Bar Association’s Intellectual Property Law Section. Mr. Ravin was selected for inclusion in 2010 edition of The Best Lawyers in America® in the practice area of Intellectual Property Law (no aspect of that advertisement has been approved by the Supreme Court of New Jersey.  See www.bestlawyers.com for details on selection methodology).

Mr. Ravin is an experienced trial and transactional attorney, with experience handling cases involving trade secrets, trademarks, copyrights, patents, licensing and technology transfers, as well as wide variety of Internet cases, including anonymous online speech, defamation, and domain name disputes.  He is admitted to practice law in New Jersey, New York, Florida and the District of Columbia, as well as U.S. District Courts for the District of New Jersey, and Southern and Eastern Districts of New York.

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March 19, 2010

New Jersey Court Vacates Discovery Order Seeking Identity Of Anonymous Authors, Preserving Online Speakers’ First Amendment Rights To Anonymity

Court Requires Petitioner To File John Doe Complaint
And Make Dendrite Application

The NJ Superior Court, Hudson County, Law Division, issued a decision on March 19, 2010, that is important to all New Jersey online anonymous speech cases.  In the case of In the Matter of Slava Lerner To Perpetuate The Testimony of Michael R. DeLuca (the order and opinion are at: http://www.ravin.com/articles/L-672-10.pdf) the court held that would-be plaintiffs in online defamation cases seeking to identity the authors of statements must adhere to the strictures of Dendrite v. Doe.  A Rule 4:11-1 petition for pre-action discovery cannot be used to skirt a defendant’s First Amendment Right to anonymity.

In the Lerner case, the court held that because petitioner could file a John Doe lawsuit against individuals which have not yet been identified, the Rule 4:11-1 procedure was not available, and vacated the court’s previous order allowing discovery.  Rule 4:11-1 requires that the petitioner establish by verification that petitioner is unable to bring an action.  However, as the Lerner court found “Lerner proffers no reason beyond his control why he cannot plead a cause of action before conducting discovery.”  As respondent argued to the court Rule 4:26-4 permits the filing of actions using fictitious names of defendants.

The pre-action discovery procedure cannot be used merely to help the petitioner frame his complaint by discovering the true identities of the defendants.  The court held that: “the anonymity of the pretrial defendants does not justify the granting of the petition for pre-trial discovery pursuant to Rule 4:11-1, where the petitioner can sue the message board posters as John Does and thereafter file a request for pre-service discovery subject to the Dendrite principles.” 

Richard L. Ravin, of Hartman & Winnicki, P.C., of Paramus, New Jersey along with Paul Alan Levy, of the Public Citizen Litigation Group in Washington D.C., represented the respondent, Michael DeLuca.  Mr. Ravin stated that the Lerner case is significant to New Jersey civil practice because "prior to the Lerner ruling there was no case that specifically addressed the proper procedure to follow when seeking the identities of online defamation defendants."  Mr. Ravin continued that "the Lerner case establishes that the proper procedure for a plaintiff to seek discovery in anonymous online speech cases is for plaintiff to file a John Doe lawsuit and then make a motion to the trial court under Dendrite for pre-service discovery."   

Earlier this month, the Appellate Division, in the case of A.Z. v. Doe, affirmed the trial court’s quashing of a subpoena under the Dendrite standard in protecting the First Amendment anonymity rights of an e-mailer.  Mr. Ravin represented the anonymous Doe defendant in that case.

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Past Chair of New York State Bar Association’s
Intellectual Property Law Section

July 2006. Richard L. Ravin, head of the Internet and Intellectual Property Law Practice Area of Hartman & Winnicki, P.C., completed a two-year term as Chair of the New York State Bar Association's 2,000-member Intellectual Property Law Section. Ravin is also the Section's past (founding) Co-Chair of the Internet Law Committee. His firm has offices in Paramus NJ and New York City, where Ravin also practices commercial litigation and bankruptcy law.

Ravin is a frequent speaker for the NJ and NY State Bar Associations on legal issues pertaining to the Internet, Technology, and Intellectual Property (e.g. trademarks, copyrights, trade secrets, patents). In May, he was Panel Chair for a Continuing Legal Education presentation to NJ and NY lawyers about Internet privacy issues, the new Federal CAN-SPAM Act, liability for music file-sharing, online defamation suits against anonymous authors, and use of false and misleading domain names and trademarks. Recently, Ravin was Program Co-Chair of the “U.S. Copyright Office Comes To New York” conference at the Cardozo School of Law, as well as a panelist, discussing liability for music file-sharing under the Digital Millennium Copyright Act. Ravin’s articles on technology law are frequently published, and recently include: “Lanham Act For Lenders”, in New Jersey Lawyer Magazine (February 2004), and "Contributory Copyright Infringement For Music File Sharing: Grokster v. Aimster", State Bar News, (November 2003). Ravin’s articles are available on his Web site: www.ravin.com, including an article about anonymous online speech and the Eye on Emerson case.

In recent years, Ravin successfully defended “John Doe” defendants in the Eye on Emerson case, in which former members of the Emerson Borough Town Council and other public figures sued the anonymous online posters to a community Web site for alleged defamation. The court granted Ravin’s motion to quash the subpoenas issued to the Internet Service Provider of the electronic chat room on First Amendment grounds, thereby denying the politicians the ability to learn the identities of their critics. Ravin convinced the court that the First Amendment protects not only the right to speak freely, but anonymously as well, and that before Plaintiffs have the right to seek the identities of their critics, they must prove that the statements made online were defamatory.

Ravin is admitted to practice law in New Jersey, New York, Florida and the District of Columbia, as well as several U.S. District Courts. He is a graduate of Syracuse University’s Newhouse School of Public Communications (1978) and earned his Juris Doctor degree from Shepard Broad Law Center, Nova Southeastern University (1986), and thereafter, clerked for the Presiding Judge for Administration of the Appellate Division, New Jersey Superior Court.

Ravin is a member of the New Jersey State Bar Association’s Internet and Computer Law Committee and the American Bar Association, and is a Master of the John J. Gibbons Intellectual Property Law Inn of Court. He is also an arbitrator with the National Arbitration Forum.