Securitron Magnalock Corp. v. Schnabolk

• Decision Date: 07 September 1995
• Docket Number: No. 1531,D,1531
• Parties: RICO Bus.Disp.Guide 8884, 42 Fed. R. Evid. Serv. 1388 SECURITRON MAGNALOCK CORP., Plaintiff-Appellee, v. Charles SCHNABOLK, Kalon Systems, Inc. and Andra Systems, Inc., Defendants-Appellants. Charles SCHNABOLK, Kalon Systems, Inc. and Andra Systems, Inc., Counter-Claimants, v. SECURITRON MAGNALOCK CORP., Counter-Defendant. ocket 94-9194.
• Court: U.S. Court of Appeals — Second Circuit

Page 256

65 F.3d 256

RICO Bus.Disp.Guide 8884, 42 Fed. R. Evid. Serv. 1388

SECURITRON MAGNALOCK CORP., Plaintiff-Appellee, v. Charles SCHNABOLK, Kalon Systems, Inc. and Andra Systems, Inc., Defendants-Appellants.

Charles SCHNABOLK, Kalon Systems, Inc. and Andra Systems, Inc., Counter-Claimants, v. SECURITRON MAGNALOCK CORP., Counter-Defendant.

No. 1531, Docket 94-9194.

United States Court of Appeals, Second Circuit.

Argued May 4, 1995.

Decided Sept. 7, 1995.

David Jaroslawicz, New York City (Robert J. Tolchin, Jaroslawicz & Jaros, of counsel), for defendants-appellants-counter-claimants.

Nathaniel H. Akerman, New York City (Bernard A. Solnik, Seyfarth, Shaw, Fairweather & Geraldson, of counsel), for plaintiff-appellee-counter-defendant.

Before: MINER, JACOBS and CABRANES, Circuit Judges.

MINER, Circuit Judge:

Defendants-appellants Charles Schnabolk, Kalon Systems, Inc. ("Kalon") and Andra Systems, Inc. ("Andra") appeal from a judgment entered in the United States District Court for the Southern District of New York (Buchwald, M.J.) awarding damages in the total amount of $1,050,000, attorney's fees in the sum of $284,134 and costs of $58,847 and enjoining them from engaging in deceptive acts and practices. The judgment followed a jury verdict favorable to plaintiff-appellant Securitron Magnalock Corp. ("Securitron") under the Racketeer Influenced and Corrupt Organization Act ("RICO"), the New York General Business Law and the New York law of defamation. We affirm in all respects.

BACKGROUND

Based on the evidence, the jury could have found the following.

I. The Parties.

Securitron is a manufacturer of electromagnetic locks and relating locking system equipment. Electromagnetic locks are devices that lock doors by using electricity to generate a magnetic field. The lock manufactured by Securitron is known as the Magnalock, and it is sold in most part to security equipment wholesalers who in turn sell to installing companies. Securitron also sells accessory products for the Magnalock such as power supplies, entrance controls and releasing devices.

Kalon is in the business of installing security equipment, and Schnabolk was its owner and President at all times relevant to this litigation. In 1988, Osborne Frazier, a former Security Director for the Newark, New Jersey School System, was the Vice President in charge of marketing. Kalon never had more than six permanent employees during the period in question.

Andra is in the business of manufacturing alarm systems, electromagnetic locks and related items. Its electronic lock is known as the Andralock, and Schnabolk was its principal owner until May 1, 1989, when he sold his controlling interest to undisclosed individuals. Schnabolk was Vice President of this corporation and, at least at some point, one Louie Delisio was President. Frazier also was a Vice President of Andra, which apparently had no other employees. Kalon and Andra shared office space at 74 Warren Street in New York City.

II. Communications to the Bureau of Standards and Appeals.

At all relevant times, the New York City Bureau of Standards and Appeals ("BSA") was the only city agency having jurisdiction to approve materials, including electromagnetic locks, for use in city construction projects. The Magnalock has been approved by the BSA since September, 1980. On August 2, 1988, Schnabolk wrote on Kalon stationery to BSA Commissioner Raymond Lawrie, stating that the Magnalock had " 'shorted' into a locked position on numerous occasions," that the Magnalock "failed our laboratory test when we applied the 1000 volt test" and that Kalon "currently [has] a contract to remove these locks from a Newark school because of the shorting/failure problem." In fact, there was no evidence that the Magnalock ever shorted into a locked position, and a short in the system would result in the lock remaining open instead of closed in any event. Also, there was no evidence of the failure of a "1000 volt test" or of the existence of a contract with the Newark schools to remove any locks. After making the foregoing misrepresentations, Schnabolk concluded his letter to Commissioner Lawrie by asking him to "review th[e] Securitron application and let me know if they are to retain their [BSA] listing."

On June 16, 1989, Schnabolk wrote to Kathleen A. Carney, Executive Director of the BSA, on stationery bearing the heading "Institute for Security Design." In that letter, Schnabolk reiterated his allegation regarding "the potential danger that [the Securitron Magnalock] creates when used in fire safety situations." He also stated that he had been informed by Underwriters Laboratories ("UL") that the Securitron locking system had failed certain tests and that the Securitron lock was not on the UL approved list. Both statements were false. Schnabolk concluded his letter to Ms. Carney by suggesting that it would be "in the best interests of all concerned" if Securitron were removed from the BSA approved list.

III. Communications With and Concerning UL.

Since 1984, the Securitron Magnalock has been included on the UL approved list. Certain end users of electromagnetic locks apparently required UL listing for the locks they employ. On October 13, 1988, Schnabolk wrote a letter to UL on Andra stationery, falsely representing that the Securitron lock had "shorting problems." UL promised to investigate but, because no action was taken, Schnabolk wrote again on June 20, 1989 in his capacity as Executive Director of the Institute for Security Design and as Andra President. In this letter he noted that the Securitron Magnalock "poses a potentially life-threatening situation" because of its "tendency to 'ground' into a locked position when it should be 'opened.' " Schnabolk UL continued to approve the Magnalock, and Schnabolk made good on his threats. In September 1989 he spoke before the American Society of Industrial Security at Nashville, Tennessee. In his speech he said that UL is "the greatest fraud in America," that it "has done nothing for the security industry," that its "tests are irrelevant," and that UL "stands for useless and lacks credibility."

threatened UL that he would expose its inaction in lectures and publications and would attempt to have UL removed from the BSA approved list of testing laboratories.

IV. Installations at Four Newark High Schools.

A Securitron dealer, Absolute Protective Systems, submitted a bid on September 3, 1987 to install electromagnetic locks at four high schools operated by the Newark Board of Education. Absolute's bid was $190,800, but it lost out to Kalon, which bid $153,300 to install Andralocks. It appears that Kalon's bid was less than cost and that only sixty percent of the work was completed when Kalon abandoned the job sites. Many of the Andra locks that were installed did not operate properly, fire department and UL approvals were lacking for them, and city and state permits had not been obtained. When Robert Salvatore, the Principal Engineer for the Newark Board of Education, withheld final payment to Kalon as the result of these deficiencies, Schnabolk threatened to have him removed from his position. Later, Schnabolk asked the Board of Education "to fire Salvatore outright." Kalon eventually received full payment.

After Kalon was awarded the contract for the four high schools, Schnabolk took steps to prevent future bids by Absolute in Newark. On September 10, 1987, he wrote a letter on Kalon stationery to the New Jersey Department of the Treasury. In the letter he referred to "the submission of a forged Pre-Qualification Statement by Absolute Protection Systems" and requested that "some penalty" be imposed upon that firm. Schnabolk later admitted that his purpose in making this false accusation "was to disqualify Absolute ... from ever bidding again in Newark."

V. Bidding on Nine Additional Newark High Schools.

After the installation of Andralocks by Kalon in the four high schools in 1988, the Newark Board of Education began to plan for the installation of electromagnetic locks at nine additional high schools. Anticipating the upcoming bids for this work, Osborne Frazier, Kalon's Vice President for Marketing, sent a letter on October 18, 1988 to Joseph Imperiale, Senior School Construction Inspector for the Newark Board of Education. Frazier wrote: "New York City has banned several other lock/magnets, and categorized them as illegal for installation on fire exits as they are prone to shorting-out, and are potentially hazardous. Securitrons [sic] lock/magnet happens to be one of that number."

Following this false statement regarding the Securitron lock, Schnabolk on November 3, 1988 wrote on Kalon stationery to James Kokkalis, Director of the Division of Design and Construction for the Newark Board of Education. In his letter, Schnabolk advanced similar false information: "The manufacturer that had his lock mounted on the doors of a Newark HS refuses all requests for replacement of defective units ... even though they sold the locks with a 5 year guarantee. This firm is Securitron and they have been rejected by the NYC Bureau of Standards and Appeals because of a basic design deficiency and they are prone to false alarms."

The Newark Board of Education issued the specifications for installation of electromagnetic locks at the nine additional high schools in or about March of 1989. The specifications were written and provided by another Schnabolk entity, the Institute for School Security, apparently in violation of a New Jersey rule prohibiting those who would bid from writing the specifications. Originally, the Securitron Magnalock was prohibited, but that prohibition was removed from the specifications before the bidding at the instance of Ahmed Khalifa, the Principal Engineer for the Board of Education. On March 7, 1989, four contractors submitted bids, with Kalon offering the Andralock and the three Less than one week after the bids were opened, Frazier...