Burton v. Label, LLC

• Decision Date: 30 September 2018
• Docket Number: 15-CV-5793 (VSB)
• Citation: 344 F.Supp.3d 680
• Parties: Jeanne Ann BURTON, Trustee in Bankruptcy for the Estate of Brad Schwartzman, and Trusgan, Inc., Plaintiffs, v. LABEL, LLC, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

344 F.Supp.3d 680

Jeanne Ann BURTON, Trustee in Bankruptcy for the Estate of Brad Schwartzman, and Trusgan, Inc., Plaintiffs,

v.LABEL, LLC, et al., Defendants.

15-CV-5793 (VSB)

United States District Court, S.D. New York.

Signed September 30, 2018

Appearances:

Samuel Okwudili Maduegbuna, William W. Cowles, II, Maduegbuna Cooper LLP, New York, NY, Counsel for Plaintiffs-Counter Defendants Brad Schwartzman and Trusgan, Inc. and Special Counsel for Jeanne Ann Burton, Trustee in Bankruptcy for the Estate of Brad Schwartzman, as the plaintiff/real party-in interest

John Houston Pope, Epstein, Becker & Green, P.C., New York, NY, Counsel for Defendants Automatic Data Processing, Inc. and ADP LLC

Jason Solotaroff, Aliaksandra Ramanenka, Giskan Solotaroff Anderson & Stewart LLP, New York, NY, Counsel for Defendants-Counter Claimants Label, LLC, Label, N.Y. LLC, David Miller, and Jeremy Miller

OPINION & ORDER

VERNON S. BRODERICK, United States District Judge:

On July 23, 2015, Plaintiffs Brad Schwartzman and Trusgan, Inc. (collectively, "Plaintiffs") filed this action against two groups of defendants: (1) Defendants Label LLC, Label, N.Y. LLC, David Miller, and Jeremy Miller (collectively, "Label Defendants"), and (2) Defendants Automatic Data Processing, Inc., ADP LLC, and Colin Barnett (collectively, "ADP Defendants"). On October 30, 2015, the Label Defendants filed their answer which contained defenses, affirmative defenses, and counterclaims. Before me are two motions to dismiss: (1) the ADP Defendants' motion to dismiss the Complaint in its entirety on the grounds that their contractual relationship is governed by ADP's terms of services agreement, and because it fails to state claims for defamation or negligent misrepresentation, and (2) Plaintiffs' partial motion to dismiss Label Defendants' counterclaims on the basis that the counterclaims fail to state claims under the Lanham Act and for tortious interference, and because exercising supplemental jurisdiction over the remaining state law counterclaims is inappropriate.

Because Plaintiffs have failed to state a claim against the ADP Defendants for breach of contract, breach of the implied covenant of good faith and fair dealing, and negligent misrepresentation, the ADP Defendants' motion with respect to those claims is GRANTED. With respect to Plaintiffs' defamation claim, the ADP Defendants' motion to dismiss is DENIED. Plaintiff's motion for leave to amend the Complaint to allege additional facts in support of its claim for defamation is GRANTED.

Plaintiffs' partial motion to dismiss the Label Defendants' counterclaim for violation of the Lanham Act is GRANTED, but the Label Defendants may amend the counterclaim with respect to false advertising under the Lanham Act within thirty (30) days of this Opinion & Order. Plaintiffs' motion to dismiss the Label Defendants' state law counterclaims for lack of supplemental jurisdiction and for failure to state a claim for tortious interference is DENIED.

I. Background ¹

A. Facts Alleged Against ADP in Plaintiffs' Complaint

Label sells bespoke and custom men's clothing throughout the United States.

(Compl. ¶ 19.)² David Miller and Jeremy Miler (together, the "Millers") are founding members of Label, and David Miller is a manager of the company. (Id. ¶¶ 21, 24.) In August 2013, Schwartzman started working for Label as Vice President of Sales and entered into an agreement entitled Binding Term Sheet – Cooperation Agreement ("Term Sheet"). (Id. ¶¶ 41, 43.) The Term Sheet, among other things, outlined how Schwartzman was to be compensated. (Id. ¶¶ 43–44.) In the spring of 2014, while employed at Label, he established his own bespoke tailoring and made-to-measure men's clothing company, named Trusgan. (Id. ¶ 13.) Thereafter, Schwartzman provided his services to Label as an employee of, and through, Trusgan. (Id. ¶ 53.)

In December 2013, Schwartzman and the Millers were introduced to Colin Barnett, an employee of ADP, who was interested in buying clothes from Label. (Id. ¶ 58.) Barnett did not purchase clothes, and instead offered ADP's account services to Label and Schwartzman. (Id. ¶ 61.) Label hired ADP to automate its employee payroll system, (id. ¶ 62), and began paying Trusgan for Schwartzman's services through ADP, (id. ¶ 63).

On April 22, 2014, Schwartzman also established an ADP account for Trusgan. (Id. ¶ 85.) Plaintiffs allege that they paid ADP a $1200 fee to set up an account. (Id. ¶ 176.) The ADP account was intended to transfer payments from Trusgan's bank account to Schwartzman's bank account. In connection with creating Trusgan's ADP account, Schwartzman sent Barnett a voided Trusgan check on April 25, 2014. (Id. ¶¶ 86–88.) Unbeknownst to Schwartzman, however, a voided Label check had already been sent to Barnett from Label's JP Morgan Chase account on April 24, 2014, one day earlier. (Id. ¶¶ 90–92.) ADP "ignored" the correct voided Trusgan check of April 25, 2014, (id. ¶ 95), and created a payroll that drew money from Label's Chase Bank account instead of from Trusgan's, (id. ¶ 98). As a result of this error, Schwartzman began receiving $1,500 bi-monthly payments from Label instead of Trusgan. (Id. ¶ 99.) The bank statements incorrectly indicated that payments were coming from "Trusgan, Inc." (Id. )

On September 26, 2014, Schwartzman told the Millers that he would no longer be affiliated with Label as of October 6, 2014, (id. ¶ 103), and requested that the "stipulations in the Term Sheet be honored," (id. ¶ 104). Around the same time, the Millers discovered that ADP was improperly doubling Schwartzman's salary through the two payroll accounts. (Id. ¶ 113.) Specifically, Schwartzman and Label's shared accountant, Richard Gilmartin, discovered the payroll error in September 2014, and contacted Barnett and ADP about it. (Id. ¶¶ 113–14.) Barnett refused to speak to Gilmartin, and, instead, on or about October 2014, "an ADP employee named Bob Oliverie ("Oliverie"), a Director of Accountant-Sales support, responded to Gilmartin and sent the account opening documents that Barnett had altered along with the voided Label check that Barnett had obtained from Chase." (Id. ¶ 116.) Oliverie

incorrectly but falsely told Gilmartin that Schwartzman had emailed a Label check to ADP and had also submitted documents with Label's bank account numbers to ADP that was used to set up the Trusgan payroll that resulted in the erroneous payments. As support, Oliverie and ADP provided Gilmartin the altered documents as evidence that Schwartzman was responsible for the unauthorized debits by ADP on Label's Chase Bank account.

(Id. ¶ 117.) ADP "presented the same falsehoods to Label, and told them that Schwartzman had submitted the Label check and bank account numbers to ADP," (id. ¶ 118), despite having the "correct voided Trusgan check" in its possession, (id. ¶ 120).

On October 17, 2014, the Label Defendants began their "campaign of calumny" against Plaintiffs by sending a "newsletter" by email to Label customers claiming that: (1) Schwartzman committed fraud during his employment at Label; (2) Defendants were pursuing criminal charges against Schwartzman for embezzling funds; and (3) Schwartzman's claim that he can offer Label's products at a cheaper price is false because Defendants received commitments from their suppliers that the suppliers will not do business with Schwartzman. (Id. ¶¶ 130–31.) When Schwartzman learned about the newsletter, he asked Gilmartin about it. (Id. ¶ 139.) Gilmartin, who at the time was "under the impression that Schwartzman had erroneously provided a voided Label check instead of a voided Trusgan check," told him about the ADP error, and forwarded him ADP documents that "Barnett had secretly altered." (Id. ¶¶ 140–43.) After Schwartzman received the ADP documents, he "immediately advised Gilmartin that the documents he submitted to ADP must have been altered by Barnett and ADP, and he provided the documents that he submitted to ADP and his correspondence with ADP to Gilmartin." (Id. ¶ 144.) Schwartzman learned about the payroll error for the first time from Gilmartin and, pursuant to Gilmartin's advice, returned the $19,011.95 to Label. (Id. ¶¶ 145–46.)

B. Facts Alleged in Label Defendants' Counterclaims

The Millers hired Schwartzman to serve as Vice President of Sales in August 2013. (Counterclaims ¶ 23.)³ In that capacity, Schwartzman was to be responsible for managing and training Label's clothiers and overseeing all aspects of the supply chain, from initial client fitting and sales, to interacting with wholesalers and manufacturers. (Id. ) Schwartzman was privy to all of Label's confidential business plans and client information. (Id. ¶¶ 23–24.) He was paid a substantial base salary, plus travel and entertainment expenses, and a percentage of his commissions. (Id. ¶ 25.)

Schwartzman proved to be an ineffective salesman and failed to conduct himself in a professional manner. (Id. ¶ 26.) The Millers began receiving customer complaints about Schwartzman's quality of service, (id. ¶ 28), and Schwartzman also acted in a manner inconsistent with Label's interests, (id. ¶ 27). For example, he charged personal expenses to Label credit cards, disappeared for days at a time without notice, and actively tried to steal customers for his own side business during Label work hours and using Label resources. (Id. ¶ 29.)

In January 2014, the Millers held a meeting with Schwartzman to discuss these problems, including the fact that Schwartzman's behavior was "scaring away referrals by making potential clients uncomfortable and being unfriendly and awkward, and that he was not following LABEL's pricing policies appropriately—e.g. , Schwartzman cut side deals on LABEL products with favored clients at below-market rates and used LABEL products for payment in kind to cover his personal expenses." (Id. ¶ 30.) The intervention was unsuccessful and did not affect Schwartzman's performance or stop him from engaging in this behavior. (Id. ¶¶...