Antitrust Law Daily Wrap Up, RICO—S.D.N.Y.: RICO, trademark dilution, fraud claims fail against jewelry sales agents; New York consumer protection, breach of fiduciary duty, trade secret claims proceed, (Aug 2, 2013)

By Tobias J. Gillett, J.D., LL.M.

Two Italian companies failed to state RICO, trademark dilution, and common law fraud claims against sales agents that allegedly sold their jewelry without remitting the companies’ share of the proceeds, misused intellectual property related to the jewelry, and manufactured and sold unauthorized copies of the companies’ jewelry following their termination as sales agents, the federal district court in New York City has ruled (Helios International S.A.R.L. v. Cantamessa USA, Inc., July 27, 2013, Sweet, R.). However, the court found the companies did state claims for violation of the New York Consumer Protection Act (NYCPA), breach of fiduciary duty, and trade secret misappropriation.

According to the complaint, in 2007 Idea Italiana s.r.l. acquired the tangible and intangible assets of longtime jewelry producer Cantamessa s.r.l. after the company declared bankruptcy. In 2009, Helios International S.A.R.L. purchased Idea’s inventory of Cantamessa jewelry and entered into an exclusive distributorship agreement with Idea. Later that year, Helios entered into an agreement with Fabrizio Cantamessa, grandson of Cantamessa s.r.l.’s founder, under which Cantamessa would act as Helios’ global sales agent for Cantamessa jewelry. In 2010, Helios entered into a similar agreement with Robert Kheit.

In September 2010, Cantamessa and Kheit incorporated Cantamessa USA, Inc. and opened a boutique selling Cantamessa jewelry in New York City. However, they allegedly remitted to Helios only part of the money to which Holios was entitled, and kept the proceeds from many sales for themselves. Cantamessa and Kheit also requested and received jewelry for use in an exhibition, but kept and began selling the jewelry rather than returning it after the exhibition. In 2011, Cantamessa and Kheit filed a trademark application with the United States Patent and Trademark Office that claimed that Cantamessa USA owned the Cantamessa name and logo, and an application with the Trademark and Designs Office of the European Union claiming that Cantamessa himself owned the trademarks.

In October 2011, after Cantamessa failed to respond to a demand for an accounting, Helios allegedly discovered that Cantamessa and Kheit had removed the entire inventory of Cantamessa jewelry that Helios had stored in a warehouse. Helios terminated its agreement with Cantamessa, and demanded that he stop using the Cantamessa intellectual property. Cantamessa USA refused demands for return of Helios’ merchandise and for information on unpaid sales proceeds. Cantamessa USA also had a factory in Thailand begin producing copies of Cantamessa jewelry pieces and offering them for sale.

Helios and Idea filed suit against Cantamessa USA, Cantamessa, and Kheit, asserting a wide range of claims. In the present motion, the defendants sought dismissal of claims for violations of the RICO Act, trademark dilution, common law fraud, breach of fiduciary duty, trade secret misappropriation, and violation of the New York Consumer Protection Act (NYCPA).

RICO. The court found that Helios and Idea had failed to state RICO claims, concluding that the plaintiffs’ alleged predicate acts presented nothing more than “a commonplace business dispute involving what are, at essence, garden variety commercial claims.”

With respect to predicate acts based on transportation of stolen goods and sale of stolen goods, the court observed that the defendants had been “given unrestricted, unsupervised access to Plaintiffs’ multi-million dollar inventory warehouse,” that the defendants were allowed to take jewelry for sale or marketing, that they were given “general authority to execute sales,” and that they were authorized to use the Cantamessa name and logo in sales and marketing efforts. Therefore, the allegation regarding the removal of jewelry from the warehouse “merely raise[d] a contract dispute regarding the extent of the authority and autonomy granted to defendants over the warehouse merchandise,” while allegations regarding the defendants’ retention of jewelry only authorized for use in exhibitions “merely indicate[d] a contract dispute regarding the extent of the authority and autonomy granted to defendants over marketing and sales.”

Similarly, a predicate act of money laundering based on the defendants’ transfer of money to the Thailand factory, payment for the shipment of jewelry from the warehouse, and transfer of money for marketing Cantamessa jewelry also failed. The payment for shipping the jewelry from the warehouse “merely raise[d] a contractual issue regarding the parameters of the autonomy afforded to defendants as to the transportation of the jewelry, the expenditure of funds for marketing the jewelry “merely implie[d] a contractual dispute regarding the parameters of the autonomy afforded to defendants to fulfill their contractual obligations,” and the transfer of money to the Thailand factory gave “rise to either a contractual dispute or perhaps a cause of action for breach of fiduciary duty.”

The defendants’ travel to market Cantamessa jewelry, and the sending of jewelry designs and funds to the Thailand factory, also did not give rise to a predicate act of interstate and foreign travel or transportation in aid of racketeering enterprises, according to the court. Those allegations “sound[ed] in breach of contract or other common law causes of action, rather than criminal violations sufficient to form the basis for a RICO claim.”

The court also rejected a predicate act of criminal copyright infringement. The court noted that the defendants’ contract gave them authority to market Cantamessa jewelry, and therefore their “conduct [fell] more into the realm of breach of contract or breach of fiduciary duty.” Moreover, the court observed that criminal copyright infringement generally only rose to the level of a RICO predicate act in “egregious” cases, and the allegedly infringing jewelry had “an aggregate retail value of merely $270,000.” The court concluded that the small value of the infringement, “coupled with the overall run-of-the-mill commercial dispute tenor of the case,” indicated it would be inappropriate for the infringement to constitute a predicate act even if the plaintiffs did adequately allege criminal copyright infringement.

Finally, the court found the plaintiffs failed to plead predicate acts of mail fraud and deprivation of honest services by mail and wire fraud based on the defendants’ use of the internet to market Cantamessa jewelry, use of mail and wire to obtain jewelry from the warehouse, use of mail and wire to convince the plaintiffs to send jewelry for use in an exhibition, and use of mail and wire to arrange for production of copies of Cantamessa jewelry. The court determined that the plaintiffs’ claims were “contravened by the allegations in the complaint that describe Defendants’ unfettered access to the jewelry in the warehouse, and contractual authorization to market and sell Cantamessa jewelry, which indicate that the complained-of conduct supports causes of action to breach of contract and/or fiduciary duty, rather than federal criminal fraud that was committed as part of a broad-based criminal racketeering scheme.”

New York Consumer Protection Act. However, the court concluded that Helios and Idea did state a claim under the NYCPA. The court observed that claims for trademark and trade dress infringement could fall within the scope of the NYCPA if “there is a specific and substantial injury to the public interest over and above ordinary trademark infringement or dilution.” Here, the court found the plaintiffs’ claims that the defendants had “conspired to deceive American consumers with counterfeit goods” were sufficient to state a claim under the NYCPA.

Trademark dilution. The court rejected the claim for trademark dilution. The court observed that trademark dilution under the Trademark Dilution Revision Act required the mark to be “famous.” The term “famous” in the TRDA required the mark to be “widely recognized by the general consuming public of the United States as a designation indicating a single source of good or services.” Here, the plaintiffs’ allegation that the marks at issue had “an extremely high degree of recognition among consumers of luxury jewelry” was “the very definition of the type of niche fame that is insufficient to support a finding of fame to TRDA purposes,” according to the court.

Common law fraud. The plaintiffs also failed to state a claim for common law fraud, in the court’s view. The court observed that under New York law “a cause of action for fraud does not arise when the only fraud charged relates to a breach of contract.” Here, the parties were in a contractual relationship granting the defendants authority to market and sell Cantamessa jewelry at the time they requested the jewelry for the exhibition and later failed to return it. Moreover, New York law required a fraud plaintiff to “set forth specific facts indicating that the promisor never intended to honor his or her obligations at the time the promise was made,” and the plaintiffs did not allege any facts regarding the defendants’ state of mind at the time.

Breach of fiduciary duty. However, the plaintiffs did state a claim for breach of fiduciary duty, according to the court. The court rejected the defendants’ contention that the parties were in an “arms’ length” business relationship that did not give rise to fiduciary obligations, observing that the plaintiffs had “entrusted Defendants with broad authority and discretion over Plaintiffs’ business, including unfettered authority to draw inventory from Plaintiffs’ warehouse.”

Trade secret misappropriation. The plaintiffs also stated a claim for trade secret misappropriation, in the court’s view. The plaintiffs’ allegations that the defendants had misappropriated a variety of “proprietary business information,” and that the plaintiffs had taken “reasonable steps to maintain the confidentiality of their proprietary information,” were sufficient to state a claim with respect to those items. However, the court observed that the plaintiffs’ jewelry designs had “been made public through sales and display of those pieces, as well as through registration of the designs with the U.S. Copyright Office,” and therefore the plaintiffs could not state a claim for trade secret misappropriation as to the jewelry designs.

The case is No. 12 Civ. 8205.

Attorneys: Carl W. Oberdier (Oberdier Ressmeyer LLP) for Helios International S.A.R.L. J. Christopher Jensen (Cowan, Liebowitz & Latman, P.C.) for Cantamessa USA, Inc.

Companies: Helios International S.A.R.L.; Idea Italiana s.r.l.; Cantamessa USA, Inc.

Cases: RICO FranchisingDistribution StateUnfairTradePractices NewYorkNews