Case 1:16-cv-04762-LTS-KNF Document 116 Filed 01/04/19 Page 1 of 9
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`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
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`AUTOMATED MANAGEMENT
`SYSTEMS, INC.,
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`RAPPAPORT HERTZ CHERSON
`ROSENTHAL, P.C. et al.,
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`-------------------------------------------------------x
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`Plaintiff,
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`Defendants.
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`No. 16 CV 4762-LTS-KNF
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`MEMORANDUM OPINION AND ORDER
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`Plaintiff Automated Management Systems, Inc. (“AMSI”) brings this action
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`against Defendants Rappaport Hertz Cherson Rosenthal, P.C. (“RHCR”), its four named partners
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`William Rappaport, Steven M. Hertz, Eliot J. Cherson, and Michael C. Rosenthal (the
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`“Individual Defendants,” and together with RHCR, the “RHCR Defendants”), and Defendant
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`Branko Rakamaric (collectively, “Defendants”) for copyright infringement, breach of contract,
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`and unfair competition. On August 30, 2017, this Court granted Defendants’ motion to dismiss
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`Plaintiff’s Amended Complaint in its entirety. (Docket entry no. 66, the “August Opinion.”) On
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`July 12, 2018, the Court granted AMSI’s motion for leave to file a Second Amended Complaint
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`(docket entry no. 83,1 the “SAC”). (Docket entry no. 97, the “July Opinion.”) Before the Court
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`is the RHCR Defendants’ motion to dismiss the SAC (docket entry no. 100), and AMSI’s motion
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`for sanctions (docket entry no. 111). This Court has subject matter jurisdiction of Plaintiff’s
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`The SAC appears in clean and blacklined versions at docket entry nos. 83 and 82,
`respectively. Because AMSI did not re-file a copy of the SAC on the public docket after
`the Court granted AMSI leave to file an amended complaint, the Court refers to these
`proposed versions, which shall be deemed filed, in this Memorandum Opinion and Order.
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`Case 1:16-cv-04762-LTS-KNF Document 116 Filed 01/04/19 Page 2 of 9
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`federal copyright infringement claim pursuant to 28 U.S.C. §§ 1331 and 1338, and may exercise
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`supplemental jurisdiction of Plaintiff’s state law claims pursuant to 28 U.S.C. § 1367. The Court
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`has carefully considered the parties’ submissions and, for the following reasons, the RHCR
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`Defendants’ motion to dismiss the Second Amended Complaint is denied and AMSI’s motion
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`for sanctions is denied.
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`BACKGROUND
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`The Court assumes the parties’ familiarity with the background of this case,
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`which is laid out in detail in the August and July Opinions. (August Opinion at 2-3; July Opinion
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`at 2-3.) The allegations of fact underlying AMSI’s copyright infringement claim are materially
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`unchanged from the proposed SAC filed in connection with AMSI’s motion for leave to amend,
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`and the Court adopts the factual recitation from the July Opinion relating to those claims.
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`Specifically, AMSI alleges that it licensed its Landlord-Tenant Legal System (“LTLS”) software
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`to RHCR pursuant to a Software Subscription Agreement entered into on January 2, 2007. (SAC
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`¶ 9, Ex. C (the “Agreement”).) In 2007, AMSI installed new software at RHCR. (SAC ¶ 3.)
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`The SAC alleges that this new software was registered with the U.S. Copyright Office under
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`registration number TX 7-232-319, for a work titled “Landlord & Tenant Legal System” that was
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`completed in 2007 and first published on November 1, 2007. (SAC ¶ 6, Ex. A (the “Landlord &
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`Tenant Copyright”).) The software installed in 2007 replaced a prior software system, which
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`was registered with the U.S. Copyright Office under registration number TX 7-232-302. (SAC
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`¶¶ 7-8.) Registration TX 7-232-302 is for a work titled “L&T Legal System” that was completed
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`in 1998 and first published on September 1, 1998. (SAC Ex. B (the “L&T Copyright”).) AMSI
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`alleges that “[t]o the extent that copyrightable elements of the prior software were incorporated
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`into” the software installed in 2007, they continue to be protected by the L&T Copyright. (SAC
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`¶ 8.) The Landlord & Tenant Copyright and the L&T Copyright were both registered on
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`September 3, 2010. (SAC Exs. A & B.)
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`AMSI alleges that Defendants have been copying the software installed in 2007
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`onto a separate server run by RHCR since at least October 18, 2015, and that Defendant
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`Rakamaric, in his capacity as an information technology services provider, modified and
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`developed a derivative of the software. (SAC ¶¶ 34-41, 44, 46.) AMSI alleges that Individual
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`Defendants Rappaport, Hertz, Cherson, and Rosenthal were personally involved in the
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`management of RHCR’s information technology systems (SAC ¶ 52), participated in the
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`decision to hire Rakamaric to copy the software installed in 2007 (SAC ¶ 53), agreed to copy the
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`software installed in 2007 to a separate server (SAC ¶ 54), and had a direct financial interest in
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`copying the software installed in 2007 because they sought to avoid making further payments to
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`AMSI for use of the software (SAC ¶ 55).
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`Motion to Dismiss
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`DISCUSSION
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`To survive a Rule 12(b)(6) motion to dismiss, a complaint must plead “enough
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`facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S.
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`544, 570 (2007). A proper complaint cannot simply recite legal conclusions or bare elements of
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`a cause of action; there must be factual content plead that “allows the court to draw the
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`reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal,
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`556 U.S. 662, 678 (2009). Under the Rule 12(b)(6) standard, the court accepts as true the
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`nonconclusory factual allegations in the complaint and draws all reasonable inferences in the
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`plaintiff’s favor. Roth v. Jennings, 489 F.3d 499, 501 (2d Cir. 2007).
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`The RHCR Defendants raise three principal arguments in support of their motion
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`to dismiss the SAC. First, the RHCR Defendants argue that the SAC does not plausibly allege a
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`claim for copyright infringement because AMSI does not allege that it has a valid copyright
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`registration for “the software in question.” (Docket entry no. 102, Motion at 4.) The RHCR
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`Defendants contend that “the Landlord-Tenant System that was installed and is the subject of
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`[the Agreement] is not registered” because the software registered with the U.S. Copyright
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`Office under registration number TX 7-232-319 was first published on November 1, 2007, ten
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`months before the Agreement was signed on January 2, 2007. (Id. at 5-6.) As the Court
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`explained in the July Opinion, however, the RHCR Defendants’ argument misreads the SAC and
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`conflates the publication date of the new software with the date on which the Agreement was
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`signed. (See July Opinion at 4-5.) In doing so, the RHCR Defendants misidentify “the software
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`in question” and assume that the software upon which AMSI’s copyright infringement claim is
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`based is the same as the LTLS software that is the subject of the Agreement. As the Court
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`explained in the July Opinion, the SAC adequately pleads a copyright infringement claim as to
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`the software installed in 2007, even though the SAC contains no specific allegations connecting
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`the software installed in 2007 to the LTLS software that is the subject of the parties’ Agreement.
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`(July Opinion 4-5, n.2.)
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`In this context, the RHCR Defendants’ citation to SimplexGrinnell LP v.
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`Integrated Sys. & Power, Inc., 642 F. Supp. 2d 167, 188 (S.D.N.Y. 2009) is inapposite. In
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`SimplexGrinnell, the court dismissed, after a trial on the merits, plaintiff’s copyright
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`infringement claims that were based upon what the court determined were unregistered
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`derivative versions of a registered original work.2 The court’s decision in SimplexGrinnell is
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`consistent with the well-established rule in this Circuit that registration of an original work does
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`not automatically enable the copyright holder to bring a suit for infringement of an unregistered
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`work derived from the original. Unlike the plaintiff in SimplexGrinnell, however, AMSI does
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`not assert a copyright infringement claim with respect to any unregistered derivative works, but
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`rather alleges that its rights in an original work installed in 2007 and registered under registration
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`number TX 7-232-319 have been infringed. To the extent that the RHCR Defendants contend
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`that the software installed in 2007 is not in fact an original work, or that the software installed in
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`2007 is an unregistered derivative version of some other work, those defenses cannot be resolved
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`at the pleading stage without further factual inquiry. Because the SAC adequately alleges a
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`copyright infringement claim as to the software installed in 2007, the RCHR Defendants’ motion
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`to dismiss AMSI’s copyright infringement claim is denied.
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`Next, the RHCR Defendants argue that all claims against the Individual
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`Defendants must be dismissed because the SAC does not allege a plausible theory of personal
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`liability. As the RHCR Defendants acknowledge, however, corporate officers can be held
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`vicariously liable for copyright infringement if they had “(i) the right and ability to supervise the
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`infringing activity; and (ii) an obvious and direct financial interest in exploitation of copyrighted
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`materials.” Carell v. Shubert Organization, Inc., 104 F. Supp. 2d 236, 270 (S.D.N.Y. 2000). The
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`Although the court in SimplexGrinnell held that it lacked subject matter jurisdiction of
`these claims, the Supreme Court’s later decision in Reed Elsevier, Inc. v. Muchnick, 559
`U.S. 154 (2010) makes clear that registration constitutes a statutory prerequisite to suit
`rather than a jurisdictional bar. On reconsideration, the SimplexGrinnell court modified
`its ruling to the extent that it found that the unregistered versions of the software at issue
`were definitively derivative works, but this modification did not alter the court’s ultimate
`conclusion that it could not entertain infringement claims based on unregistered works.
`See SimplexGrinnell LP v. Integrated Systems & Power, Inc., 642 F. Supp. 2d 206, 212
`(S.D.N.Y. 2009).
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`SAC alleges that the Individual Defendants were personally involved in the management of
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`RHCR’s information technology systems (SAC ¶ 52), that the Individual Defendants were
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`involved and participated in the decision to hire Rakamaric to copy the software installed in 2007
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`(SAC ¶ 53), that the Individual Defendants each agreed to copy the software installed in 2007 to
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`a separate server (SAC ¶ 54), and that the Individual Defendants had a direct financial interest in
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`copying the software installed in 2007 insofar as they sought to avoid making further payments
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`to AMSI for use of the software (SAC ¶ 55). The Court finds that these allegations are sufficient
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`to allege plausibly that the Individual Defendants are vicariously liable for copyright
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`infringement. Accordingly, the RHCR Defendants’ motion to dismiss AMSI’s claims against the
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`Individual Defendants is denied.
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`Finally, the RHCR Defendants argue that AMSI’s common law unfair
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`competition claim is duplicative of, and therefore preempted by, its federal copyright
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`infringement claim. Unfair competition claims “grounded solely in the copying of a plaintiff’s
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`protected expression are preempted by section 301 [of the Copyright Act].” Computer Assoc’s
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`Intern. Inc. v. Altai, Inc., 982 F. 2d 693, 717 (2d Cir. 1992). A state law claim is not preempted,
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`however, if an “extra element” of the claim “changes the nature of the action so that it is
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`qualitatively different from a copyright infringement claim.” Id. Unfair competition claims
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`based upon breaches of confidential relationships, breaches of fiduciary duties, and trade secrets
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`satisfy the extra element test and are not preempted by the Copyright Act. Id. AMSI’s unfair
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`competition claim appears to be asserted under the misappropriation branch of New York’s
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`unfair competition law, which generally “protects against a defendant’s competing use of a
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`valuable product or idea created by the plaintiff through investment of time, effort, money and
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`expertise.” Shepard v. European Pressphoto Agency, 291 F. Supp. 2d 465, 475 (S.D.N.Y. 2017)
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`(internal quotations omitted). The SAC alleges that the RHCR Defendants engaged in unfair
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`competition by hiring and granting Rakamaric, who allegedly “has a side business as an
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`information technology services provider,” access to the software installed in 2007, in violation
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`of RHCR’s Agreement with AMSI. (SAC ¶¶ 25-26, 52-53.) Because this claim is predicated
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`upon facts that are distinct from Defendants’ alleged copying of the software installed in 2007
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`and is thus “qualitatively different” from AMSI’s copyright infringement claim, the Court finds
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`that AMSI’s unfair competition claim is not preempted by federal copyright law, and denies the
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`RCHR Defendants’ motion to dismiss that claim.
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`Motion for Sanctions
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`By separate motion, AMSI seeks, pursuant to Federal Rule of Civil Procedure 11,
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`the Court’s inherent authority, and 28 U.S.C. § 1927, the imposition of sanctions in the form of
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`an award of attorneys’ fees incurred in opposing the RHCR Defendants’ motion to dismiss.
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`AMSI argues primarily that the RHCR Defendants’ motion to dismiss advances “frivolous” legal
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`arguments and raises an untimely argument already considered by this Court in the July Opinion.
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`Rule 11 is violated when “a pleading has been interposed for any improper
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`purpose, or where, after reasonable inquiry, a competent attorney could not form a reasonable
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`belief that the pleading is well grounded in fact and is warranted by existing law or a good faith
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`argument for the extension, modification or reversal of existing law.” Greenberg v. Chrust, 297
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`F. Supp. 2d 699, 703 (S.D.N.Y. 2004) (internal quotations omitted). Rule 11 sanctions are
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`appropriate “where it is patently clear that a claim has absolutely no chance of success under the
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`existing precedents, and where no reasonable argument can be advanced to extend, modify or
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`reverse the law as it stands.” Katzman v. Victoria's Secret Catalogue, 167 F.R.D. 649, 659–61
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`(S.D.N.Y. 1996). The test is whether the attorney’s conduct was objectively reasonable at the
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`time the pleading was signed. Greenberg, 297 F. Supp. 2d at 703. Sanctions should “be imposed
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`carefully lest they chill the creativity essential to the evolution of the law.” Id. Furthermore, the
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`imposition of sanctions pursuant to 28 U.S.C. § 1927 or the Court’s inherent powers requires a
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`finding of bad faith. United States v. International Bhd. of Teamsters, 948 F.2d 1338, 1345 (2d
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`Cir. 1991) (“One component of a court’s inherent power is the power to assess costs and
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`attorneys’ fees against either the client or his attorney where a party has ‘acted in bad faith,
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`vexatiously, wantonly, or for oppressive reasons.’”); see also Oliveri v. Thompson, 803 F.2d
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`1265, 1272 (2d Cir. 1986) (“Imposition of a sanction under § 1927 requires a ‘clear showing of
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`bad faith.’”).
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`Here, it cannot be said that it was patently clear that the RHCR Defendants’
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`instant motion to dismiss had absolutely no chance of success, or that counsel’s conduct was
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`objectively unreasonable or taken in bad faith. AMSI’s disagreement with the substance of the
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`RHCR Defendants’ motion to dismiss, including the legal authorities cited therein, does not
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`establish that the RHCR Defendants’ arguments are so frivolous or lacking in merit as to warrant
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`the imposition of sanctions. Although the motion to dismiss raises an argument that the Court
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`had already considered in connection with AMSI’s prior motion for leave to amend, the Court
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`does not find the argument to be so ill-conceived or devoid of a basis in law to support an award
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`of sanctions. Nor has AMSI demonstrated any improper motive or bad faith by the RHCR
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`Defendants or their counsel in filing the instant motion to dismiss. While it would have been
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`more efficient to raise these arguments in connection with AMSI’s prior motion for leave to
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`amend, there is no evidence that the RHCR Defendants sought to delay or otherwise frustrate the
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`resolution of this action by filing their motion to dismiss. Accordingly, AMSI’s motion for
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`sanctions is denied.
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`For the foregoing reasons, the RHCR Defendants’ motion to dismiss the Second
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`CONCLUSION
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`Amended Complaint is denied and AMSI’s motion for sanctions is also denied. This
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`Memorandum Opinion and Order resolves docket entry nos. 100 and 111. This case remains
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`referred to Magistrate Judge Fox for general pre-trial management.
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`SO ORDERED.
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`/s/ Laura Taylor Swain
`LAURA TAYLOR SWAIN
`United States District Judge
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`Dated: New York, New York
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`January 4, 2019
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