Juicy facts, long opinion with comprehensive coverage of various fields of law, very sensitive to avoiding anticompetitive law even when faced with very bad behavior by defendants. Pure Power and its owner Lauren Brenner sued Warrior Fitness along with individual defendants Kenneth Fell, Ruben Belliard, Jennifer Lee, and Nancy Baynard for theft of trade secrets, trademark infringement, and related claims. Defendants counterclaimed for violations of the New York Labor Law, Stored Communications Act (SCA), and NY’s statutory right of publicity.
Facts: Brenner started a physical fitness business based on the concept of a military boot camp. Pure Power uses military camouflage colors and décor and, unlike traditional gyms, doesn’t have a membership fee. Clients sign up for “tours of duty” for a set period, and Pure Power will contact no-shows directly. Classes are limited to 16 people who go through “training” together and are called “recruits,” on the theory that people will stick to an exercise regime better if they work out in a group. Recruits wear a Pure Power T-shirt and camouflage pants. The routine uses physical objects as part of an indoor obstacle course, modeled after a Marine Corps outdoor obstacle course. Brenner used flooring made of crushed tires designed to look like outdoor dirt, and arranged the obstacles, which are surrounded by a running track separated by a border of dark sand bags.
This “unique concept” became an immediate success, garnering a fair amount of media coverage. Brenner employed former Marines as “drill instructors,” though the training techniques Pure Power uses aren’t taught in the US military, so Pure Power trains them. Hiring veterans was part of Brenner’s PR strategy.
Belliard and Fell started work at Pure Power in 2005, becoming well-liked and sought-after instructurs. Belliard eventually became Pure Power’s head drill instructor, and Brenner placed great trust in him.
Brenner intended to franchise her concept, and took significant steps in that direction, including creating a business plan, a start-up manual, and an operations manual. In preparation for the franchising roll-out, Brenner had the drill instructors sign an employment agreement as a condition of continued employment. The agreement had a number of provisions: (1) requiring employees to devote their skills and best efforts to Pure Power; (2) a nondisclosure provision; (3) a provision that precludes Pure Power employees from challenging the validity or enforceability of Pure Power's "Intellectual Property"; (4) a non-compete provision lasting 10 years worldwide precluding any employment with any business that competes directly with Pure Power using “obstacle courses,” “exercises derived from military training,” or a “military theme”; and (5) a non-solicitation provision.
Brenner applied to register Pure Power’s trade dress. The initial application was rejected, but Pure Power eventually obtained a service mark for “a drawing of an exercise facility, styled to look like a military boot camp training course comprised of camouflage wall and ceiling decor, crushed rubber flooring, a tire run, climbing walls, climbing nets, and hurdles, with the terms ‘desire,’ ‘stre,’ ‘courage,’ and ‘uty.’” (I think Strength and Duty are the chopped-up words.)
Before beginning the franchising process, Brenner opened a second Pure Power in Jericho, New York, which looks somewhat different from the Manhattan location. Brenner offered Belliard a partnership in the Jericho location, but he declined on the grounds that he didn’t have enough money to invest. After she opened the Jericho facility, Brenner spent most of her time there.
In mid-2007, Belliard and Fell began planning to open Warrior Fitness. Lee, a Pure Power client from 2006-2008 and now Fell’s wife, became an owner and silent partner in Warrior Fitness. Fell and Lee were dating in violation of an express Pure Power policy against social relationships between drill instructors and clients.
While she was still a Pure Power client, Lee emailed Pure Power clients and others to promote Warrior Fitness. The class times and promotional descriptions “closely mirrored” those of Pure Power. The defendants also organized a cocktail party, attended by a number of Pure Power clients, where Fell announced that he’d be opening Warrior Fitness. Baynard, another Pure Power client 2006-2007, was secretly dating Belliard and created a Party List that was supposed to be used to celebrate the grand opening of Warrior Fitness, but the party never took place.
Belliard stole documents from Brenner’s private office and personal computer, including the business plan, start-up manual, and operations manual. He stole a folder of employment agreements and destroyed them. He also downloaded a copy of Pure Power’s confidential customer list. He shared the stolen materials with Fell, Baynard, and Lee.
Lee also disparaged Brenner and Pure Power. Witnesses testified that Lee told them that (1) Brenner treated employees badly and didn’t pay them; (2) Brenner “hated homosexuals” and had fired a former employee because he was gay.
Fell engineered his own firing by refusing to comply with Brenner’s explicit instructions and screaming at her, daring her to fire him. Two weeks later, Belliard quit without notice, but before he did so, he told Brenner about alleged problems relating to another drill instructor and recommended that this instructor be fired. Brenner, who still trusted Belliard, did so. The loss of three full-time employees in close succession left Pure Power understaffed at a critical time in its expansion.
In April 2008, Brenner found out about the plans to open Warrior Fitness and about the thefts. Third-party defendant Elizabeth Lorenzi (a Pure Power employee) knew that Fell had used the Pure Power computer. She and third-party defendant Cheryl Dumas, a close friend of Brenner’s and a Pure Power client, were able to access and print emails from three of Fell's personal email accounts, without Brenner’s prior knowledge or approval. The emails provided a detailed picture of defendants’ scheme. Warrior Fitness opened the next month.
Pure Power sued in state court seeking a TRO. The state court found the noncompete agreement unenforceable as drafted and allowed Warrior Fitness to open, but directed defendants to return certain stolen materials and to alter the décor to further distinguish its appearance from that of Pure Power. Defendants removed and sought an order precluding the use or disclosure of specific emails obtained from Fell’s email accounts, which was granted, along with partial summary judgment finding four violations of the SCA (but not of the Electronic Communications Privacy Act). The court assessed statutory damages of $4000 but left open who was responsible and whether punitive damages, attorneys’ fees, and costs should be awarded.
With all of this background, the court turned to the plaintiffs’ claims. As to breach of contract, the noncompete agreement was unreasonable in duration and scope, as well as overbroad and vague in what it covered, since boot-camp style programs are common in fitness centers of all sorts. It was unenforceable. Likewise, there was no violation of an enforceable nonsolicitation agreement. Of the 147 clients allegedly improperly solicited, only 20 or so were actually enrolled at Pure Power at the time of the solicitation, and there was no direct evidence that they were solicited improperly by the individual defendants. And there was no evidence that defendants offered specialized or personal confidential services, which might support a stronger nonsolicitation claim; the court found that leading fitness classes doesn’t qualify as specialized or personal confidential services.
Nor did defendants breach the IP provision of the employment agreement, which was impermissibly vague (purporting to cover “obstacle-confidence courses and related environments”), indefinite, and overbroad. “Permanently barring an employee from challenging an employer's alleged intellectual property--however vaguely defined--runs contrary to the ‘important interest in permitting full and free competition in the use of ideas which are in reality a part of public domain.’” Plaintiffs didn’t have a legitimate business interest beyond that already covered by IP law, and weren’t entitled to restrict defendants’ freedom to use ideas relating to the US military.
Similarly, the “best efforts” provision of the contract was patently subjective and therefore unenforceable.
The confidentiality portion of the agreement barred disclosure of confidential or commercially sensitive information. Pure Power’s client list qualified as a protectable trade secret which plaintiffs took reasonable measures to protect, and which Belliard obtained by improper means. Belliard was liable for breach of the non-disclosure provision. However, Pure Power was unable to get lost profits; it failed to show any of the three requirements that (1) lost profits were fairly within the parties’ contemplation when the contract was formed; (2) lost profits were caused by the defendants’ breach; and (3) damages are capable of proof with reasonable certainty. As to (2), Belliard and Fell already knew how to operate a gym using Brenner’s methods, they already knew Pure Power’s pricing structure, and their partner Lee had business experience, so there was not enough proof that information in the stolen business documents or the client list was necessary to open Warrior Fitness.
The court found numerous breaches by Belliard and Fell of their duty of loyalty to Pure Power, as detailed above. Pure Power wasn’t entitled to disgorgement of Warrior Fitness’ revenues from 2008-2010, though. Disgorgement requires proof that the breach of duty was a “substantial factor” contributing to defendants’ profits, and is usually only appropriate in a straightforward case in which an employee profits from transactions on behalf of his employer. Opening a competing business was not a breach of the duty of loyalty, and they would have been able to open the business even in the absence of breach because the stolen documents etc. weren’t a substantial factor in their ability to open the business. Nor could Pure Power establish that a corporate opportunity was usurped, as it couldn’t show a tangible expectancy in many of the Pure Power clients allegedly solicited by defendants.
NY does also have a “faithless servant” doctrine, which allowed Pure Power to recover the compensation Belliard and Fell earned while working at Pure Power. This doctrine requires no showing of damage as a result of the breach of duty. Forfeiture of their compensation during the period of their disloyalty, beginning in August 2007, was appropriate given Belliard and Fell’s actions. The court awarded a bit over $55,000 from Belliard and $40,000 from Fell. The court then increased that with an award of punitive damages. Belliard’s breach of loyalty was “particularly egregious,” given its calculated nature and his concealment of the breach, including by providing a lot of misleading and false testimony to the court (this really angers judges, for some reason). Fell’s actions were also willful and wanton; among other things, he encouraged other Pure Power instructors not to sign new employment agreements after Belliard destroyed the originals. He also offered “evasive and misleading” testimony at trial. Punitives were set at twice compensatory damages from Belliard and equal to compensatory damages from Fell.
Lee also aided and abetted Belliard and Fell’s breach of their duty of loyalty by knowingly and willfully providing substantial assistance, but there wasn’t sufficient evidence that Bayard did. Lee relied on the stolen materials, knowing they were stolen, in drafting her business plan, and repeatedly encouraged then-enrolled Pure Power clients to leave for Warrior Fitness. She signed up for additional classes in October 2007 through April 2008 as part of her “network and campaign” (her words) to solicit Pure Power clients. She also repeatedly disparaged Brenner and Pure Power to Pure Power clients, as detailed above, without disclosing her financial interest in Warrior Fitness.
By contrast, the court found Baynard’s testimony credible that she didn’t know about the stolen materials, and there was no specific evidence that she maligned plaintiffs. The only evidence that she solicited Pure Power clients was that, after Belliard and Fell left Pure Power, she made statements to friends that she was working out at a new gym, that she loved working out with her friends, and that she hoped her friends would join her at her new gym. This wasn’t enough to constitute aiding and abetting; once Belliard left, Baynard was free to assist her boyfriend by promoting his new business.
Plaintiffs’ claims against Lee and Baynard for tortious interference with contract failed because there was no evidence they had actual knowledge of the nondisclosure provision, and plaintiffs failed to show that the breach wouldn’t have occurred but for their actions. Tortious interference with prospective economic advantage also failed because plaintiffs failed to establish that, even as to the 20 clients enrolled at Pure Power in 2008 who enrolled at Warrior Fitness, defendants used improper means to get them. Clients’ attachment to Belliard and Fell and the quality of their training was the primary reason for these switches.
As to unjust enrichment, it was not unjust for defendants to benefit and learn from their employment at Pure Power. “Businesses often attempt to replicate the successful ideas and concepts of their competitors, and this is proper so long as those ideas and concepts are not otherwise protectable.” The stolen documents did constitute unjust enrichment, but the harm wasn’t adequately quantified; Warrior Fitness would have opened anyway, and plaintiffs didn’t establish the value that defendants would have paid had the parties negotiated in good faith for Pure Power’s documents. The remaining unjust enrichment claim was coextensive with the trade dress claim, about to be discussed.
Plaintiffs’ conversion claim also failed because defendants only took copies, not originals.
Trade dress: After Wal-Mart, interior décor is enough like product packaging that it can be inherently distinctive, and is evaluated using the Abercrombie spectrum (comment: except not really, because that just doesn’t work well with trade dress).
The court had “some difficulty” in identifying the elements of Pure Power’s trade dress, in large part because plaintiffs kept changing the description. Some courts would find that sufficient to deny relief—it’s hard to figure out whether a trade dress that can’t be identified has been infringed—but this court went on. The federal registration made no mention of an indoor obstacle course, but plaintiffs said this was only a portion of the overall trade dress. The initial application claimed “a drawing of an exercise facility styled to look like a military boot camp training course which includes but is not limited to camouflage wall and ceiling decor, crushed rubber flooring, a tire run, climbing walls, climbing nets and hurdles.” The court pointed out that “but is not limited to” was one of the grounds on which the USPTO initially denied registration, requiring plaintiffs to replace that indefinite wording with “comprised of.”
Plaintiffs also said the trade dress was the equipment plus the design features:
[W]alls that are covered with green camouflage netting, changing rooms that are World War II tents, flooring that is bordered by military-looking sandbags, and a flooring surface of the obstacle course that is crushed-rubber, recycled surface that has the look and feel of dirt. Eleven standing pillars stenciled with principles of leadership are also part of the Design Features. Finally, individuals entering the Pure Power facility are greeted with a life-size statue of a screaming marine carrying a machine gun.At trial, they expanded the description to include the size of the fitness classes, programs, corporate team-building, and consumer markets. The court found that Pure Power was improperly seeking to include ideas, concepts, and innovations within the definition of the trade dress.
Even if Pure Power was the first indoor exercise facility that used a fixed indoor obstacle course, that’s not protectable. Only the “look and feel” of Pure Power’s facility is. The court found that look and feel to be source-indicating and distinctive. The essence was a fixed indoor obstacle/confidence course surrounding by a running track with a floor covered with simulated dirt, using specific obstacles, coupled with special USMC-inspired design features as described above. This is unlike traditional exercise facilities, with standard workout equipment arranged in linear fashion with a utilitarian appearance. Indeed, as far as the record goes, this combination of arranged obstacles and military décor was unique in the US when Pure Power opened, and Brenner was the first to recognize its significant profit potential. (Comment: but isn’t that just describing the unprotectable idea?)The court then turned to functionality and found that “what is distinctive about Pure Power's trade dress is neither essential to operating a gym, or even a gym with a fixed indoor obstacle course, or to effectively competing in the fitness industry. Indeed, it is possible to open and operate a fitness facility with a fixed indoor obstacle course, even one employing a military-themed decor, in a way that does not resemble the overall look and feel of the Pure Power facility…. Nor is there any basis to conclude that having to employ a different appearance and a different arrangement of obstacles would put competitors in this particular market at a competitive disadvantage--Warrior Fitness's financial success suggests as much.”
As this last phrase suggests, Pure Power gets protection for its trade dress, but only limited in scope. Query whether shifting the bulk of the inquiry to likely confusion is a game worth the candle here, especially given that there are lots of reasons a design might be unique, and recognized as such, without being source-identifying in the trademark sense.
Now to likely confusion. Strength: because the trade dress is inherently distinctive and unique, it’s strong, though weakened to some extent because the trade dress isn’t consistent in the two Pure Power locations. Similarity: the parties use similar exercise equipment, including a crushed rubber flooring surface, a running track, flooring surface and a running track, monkey bars, parallel or dip bars, high hurdles, rope climbs, a tunnel or low crawl apparatus, scaling walls, and tire runs. But these are derived from military obstacle courses. Similarity in use of individual functional, nonpatented equipment and obstacles is “of little consequence.” The court thought this might explain why the state court didn’t enjoin Warrior Fitness from opening, though it instructed defendants to remove the tents and camouflage netting and to paint the facility in some color other than military green.
There was also some similarity in overall layout: obstacles are clustered in the center of the space and surrounded by a running track. But arrangement of obstacles isn’t what makes the Pure Power trade dress distinctive: “the very same obstacle course in another exercise facility dressed up in a safari-themed decor, or a superhero decor geared towards young adults, for example, would give rise to an entirely different ‘look and feel’ and would not cause consumer confusion as to source.” It’s the obstacle arrangement in combination with military-inspired designs that creates inherent distinctiveness.
But comparing the parties’ military-inspired design elements showed no confusing similarity.
It is true that Warrior Fitness employs a military theme insofar as the walls at the Warrior Fitness facility are painted in the yellow and red colors of the United States Marine Corps and are sparsely decorated with military memorabilia, including posters and flags, as well as certain inspirational quotes, and that, like Pure Power, the trainers at Warrior Fitness wear camouflage fatigues, T-shirts, and combat boots. Yet, in nearly every other important design detail, Warrior Fitness's appearance differs from Pure Power's. The Warrior Fitness facility, for instance, does not employ … camouflage color walls, camouflage decor, hurdles with written words, and climbing nets. Nor does the Warrior Fitness facility [use] World War II tents that serve as changing rooms, camouflage cargo netting, flooring bordered by sandbags, standing pillars stenciled with principles of leadership, barbed wire, and a life-size statue of a screaming soldier. In addition, unlike Pure Power, Warrior Fitness does not provide its clients with fatigues, or require its clients to wear camouflage attire.The similarities only existed in the broadest sense: obstacle course and military theme. But Pure Power wasn’t entitled to exclusive use of that concept. “[T]hrough the use of camouflage colors, sand bags, tents, barbed wire, and various other props, including a life-size reproduction of a combat soldier holding a machine gun, the Pure Power facility achieves something of a ‘theme park’ look and feel, while the Warrior Fitness facility, by contrast, with its relative lack of decoration, florescent lights, plain white ceilings, and simple white walls with two bands painted yellow and red, is more clinical in its effect.”
Direct competition increased the likelihood of confusion, but there was no evidence of actual confusion, and coexistence for three years without that weighed against a finding of likely confusion. Several clients who went to both places testified that they had a different “look and feel.” There was no evidence that anyone considered signing up for Pure Power but mistakenly signed up for Warrior Fitness instead.One Pure Power client visited the Warrior Fitness website and concluded “it’s the same thing,” and four witnesses, none of whom had ever visited Warrior Fitness, testified that they saw ads for Warrior Fitness in the back of NYC taxis and believed them to be for Pure Power or were otherwise confused. But those ads didn’t show the Warrior Fitness trade dress; they just showed defendants and clients exercising. Any confusion was based on the fact that both parties operate gyms based on a Marine boot camp model. “This is not confusion as to Pure Power's trade dress, but, rather, as to more general concepts and innovations to which Brenner is not entitled trade dress protection.” And Warrior Fitness’ use of its own mark at the beginning and end of the ads, along with its website address throughout, made confusion unlikely.
Bad faith: “Although there is no doubt that Defendants copied many elements of the Pure Power concept, Brenner's ideas, concepts, and innovations are not a part of her protectable trade dress.” The look and feel of the gyms isn’t substantially similar, and there was no evidence that defendants intended to mislead consumers; the court noted that the names were not confusingly similar.
Quality was irrelevant, as usual (wouldn’t it be worthwhile for the Second Circuit to en banc this and dump this factor from the standard confusion test?).
Consumer sophistication: the parties’ training is of a different and more strenuous nature than traditional gym regimes. Because most of their customers have already patronized one or more traditional fitness centers, they tend to be more sophisticated consumers of fitness services, weighing against likely confusion.
On balance, confusion was not likely. Similar considerations also doomed the state law dilution claim.
Defamation: Plaintiffs alleged five sets of defamatory statements by Lee: (1) Brenner "hated homosexuals;" (2) Brenner treated her employees "like garbage;" (3) Brenner was a "loose cannon;" (4) Brenner fired one of her drill instructors because he was gay; and (5) Brenner was a liar. (Compare statement (1) to (4) in the list immediately following: the world has changed, and defamation doctrine should too.) A defamation plaintiff must show special harm except in cases of defamation per se: (1) a statement charging an individual with a serious crime; (2) a statement that tends to injure another in his or her trade, business, or profession; (3) a statement that claims an individual has a "loathsome disease;" or (4) a statement imputing unchastity to a woman.
The court concluded that Lee’s statements weren’t defamatory; plaintiffs failed to show special harm, and the statements weren’t defamation per se. Only (2) was at issue here. A statement that tends to injure another in her trade must be made with reference to a matter of significance for the business, rather than a more general reflection on her character; the statement must be targeted at specific standards relevant to the plaintiff’s business and must impute conduct incompatible with the proper conduct of that business. The “garbage”/firing a gay employee statements weren’t sufficiently targeted at the specific standards of performance relevant to Brenner’s duties as the owner of Pure Power. (Given the gym culture in Manhattan, I’ve got to wonder about this conclusion.) The statements don’t impute fraud or misconduct to Brenner or suggest a general unfitness to perform her duties. The same for “hates homosexuals” and “loose cannon”—that doesn’t specifically reflect on her competence as a fitness instructor but more generally on her character. And, except for the statement about firing a drill instructor, these are statements of opinion, not fact.
The court then turned to the counterclaims, first dismissing the Labor Law claim for failure to prove unpaid hours worked with any reasonable degree of certainty. Then it let Brenner off the hook for the SCA violations; Lorenzi and Dumas accessed Fell’s emails out of a sense of loyalty when they discovered that Belliard and Fell had been secretly plotting to compete with Pure Power and had stolen confidential documents. There was no evidence they were acting at Brenner’s request or direction. Though Lorenzi was an employee, she was never given access to other employees’ personal email accounts, and her actions were outside the scope of her duties at Pure Power. So Lorenzi and Dumas alone were jointly and severally liable for the $4000 in compensatory damages awarded by the court.
The court, however, refused to award punitive damages or attorneys’ fees, available if the violation is willful or intentional. There was no reason to think that the defendants were aware of the statute or knew that their conduct was unlawful. They “reflexively” accessed his accounts after learning of his plans to sabotage Pure Power, and disclosed his emails in an effort to thwart his unlawful efforts to harm Pure Power. Their reasons were not malicious and they used the emails only prophylactically, nor did they personally benefit from the access. An award of equitable remedies to defendants wouldn’t be just in view of their egregious conduct; they’d already had the use of the emails precluded at trial.
As for N.Y. Civil Rights Law s. 51, the statutory right of publicity, a claim that a person’s picture was unlawfully use requires that the person be recognizable. The ad here was a photo of Brenner flanked by four drill instructors, all of whose backs are turned to the camera and none of whom other than Brenner are recognizable. (I think this might be the picture, or a later version of it.)
Posts
No comments:
Post a Comment