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Cross Media Marketing Corp. v. Marie Nixon

06 Civ. 4228 (MBM) (S.D.N.Y., August 11, 2006)

Defendant Held Guilty Of Misappropriation Of Trade Secret In Attempt To Auction Customer List Over Internet

Affirming the decision of the Bankruptcy Court below, the Southern District of New York holds that defendant Marie Nixon (“Nixon”) misappropriated plaintiff’s trade secrets, converted its property, and was unjustly enriched, by taking possession of plaintiff’s customer list, and attempting to auction it over the Internet.  As a result, the Court affirms an award to plaintiff Cross Media Marketing of $236,000 in actual damages, representing the cost of developing plaintiff’s customer list, and an additional $50,000 in punitive damages.  Notably, such an award was rendered despite the fact that defendant Nixon did not actually sell the customer list via auction.  It should be noted that defendant Nixon did not appear at the trial of this matter, and was not represented by counsel on appeal.  On appeal, her motion for a new trial was denied.

Defendant Attempts To Auction Customer List Over Internet

Plaintiff Cross Media Marketing (“Cross Media”) is in the business of selling magazine subscriptions to consumers.  To aid it in these efforts, Cross Media developed a customer list, which included, among other things, customer names, addresses, payment histories, credit or debit card information, magazines to which the customer had historically subscribed, and magazine subscriptions coming up for renewal.  This customer list was developed through a substantial effort spanning many years, and included information gathered from approximately 200 dealers.  Cross Media took a number of steps to protect the confidentiality of its customer list.  Access was limited to those who received the requisite password.  In addition, only a limited number of individuals were granted access to the entire database.

Plaintiff hired defendant’s husband, Michael Nixon, as a financial consultant.  To aid him in performing services on its behalf, Cross Media gave Michael Nixon access to its customer list.  To obtain such access, Michael Nixon was required to, and did, enter into a confidentiality agreement with Cross Media.

Sometime thereafter, Cross Media discovered that an anonymous individual was attempting to auction its customer list on the Internet.  Cross Media obtained a temporary restraining order, prohibiting the auction from going forward.  Via discovery, Cross Media traced these efforts to a ‘Marie Labesky,’ which was defendant Marie Nixon’s maiden name. 
Cross Media commenced suit, charging Nixon and her husband, inter alia, with misappropriation of trade secrets, conversion and unjust enrichment.  The action against Michael Nixon was stayed by his filing for bankruptcy.  After trial, the Bankruptcy Court found for plaintiff on all counts, and awarded Cross Media $236,000 in actual damages, and $50,000 in punitive damages.  The District Court affirmed.

Nixon Guilty Of Misappropriation Of Trade Secrets

As explained by the Court “to prevail on a claim for the misappropriation of a trade secret, Cross Media must prove ‘(1) it possessed a trade secret and (2) defendant is using that trade secret in breach of an agreement, confidence, or duty, or as a result of discovery by  improper means.’”

Customer List Protectable Trade Secret

The Court held that Cross Media’s customer list was a protectable trade secret.  Such was the case notwithstanding the fact that a portion of the information it contained, including client addresses, was available in the public domain, and further, that many dealers had contributed to its formation.  Said the Court:

A customer list that contains information such as the identities and preferences of client contacts is a protectable trade secret. … Additionally, a ‘trade secret can exist in a combination of characteristics and components, each of which, by itself is in the public domain, but the unified process, design and operation of which, in unique combination, affords a competitive advantage and is a protectable secret.’ …

Cross Media’s customer lists were developed through a substantial effort spanning many years that involved gathering information from approximately 200 dealers, it was kept in confidence, and such information was not readily ascertainable to Cross Media’s competitors. …

[P]arts of the customer lists may be known to many parties as the information was culled from a multitude of sources and some of the information gathered in the list, such as customer addresses, may be in the public domain.  That Cross Media’s network of approximately 200 dealers contributed information to the list does not mean that the customer lists were known to many people.  There is a difference between knowing a customer list exists and knowing all of the contents of such a list.  The value of the customer lists lies not in the individual pieces of information they contain but in the combination of all of the information Cross Media has culled over many years.  Thus, as the combination of the individual pieces of potentially well know information was not well known, it is a protectable trade secret.

The Court also held that Cross Media had established that Nixon had improperly used this customer list without its permission, and thus was guilty of misappropriating its trade secrets.  Cross Media made this showing by demonstrating that Nixon’s husband had obtained the list in breach of his confidentiality agreement, and had passed it on to his wife to auction over the Internet.

Actual Damages

As a result of this misappropriation, the court determined plaintiff was entitled to actual damages in the amount of $236,000.  This sum represented the cost to plaintiff of compiling the customer list, shown by Cross Media to be 25 cents per lead, multiplied by the 944,000 names contained in its customer list.  Said the Court:

Once it is determined that a trade secret was misappropriated, damages can be calculated in several ways.  First, the award of damages may be measured by the plaintiff’s losses, which may include the cost of developing the trade secret.  Second, damages may be measured by the profits unjustly received by the defendant.  Third, when plaintiff in a  misappropriation of trade secret case it not adequately compensated by the aforementioned methods, the damages award can be calculated based upon a reasonable royalty.  …  The Bankruptcy Court’s award of damages based upon Cross Media’s loss, calculated by determining the development cost of the customer lists, was adequate to compensate Cross Media and properly determined.

Notably, the Court affirmed this award despite Nixon’s contention that she did not profit from her misappropriation, because she was prevented from auctioning the customer list by the injunction issued by the Court.   Said the Court:

[C]ontrary to Nixon’s argument, ‘the lack of actual profits does not insulate the defendants from being obliged to pay for what they have wrongfully obtained.’  Thus, even though she was not successful in auctioning off Cross Media’s customer lists, Nixon is responsible to pay Cross Media the cost of developing the customer lists she wrongfully obtained.

The Court also affirmed the Bankruptcy Court’s finding that Nixon had converted plaintiff’s property by taking possession of the customer list without permission, attempting to auction it over the Internet, and refusing to return it to Cross Media.

Nixon Also Unjustly Enriched

Finally, the Court affirmed the Bankruptcy Court’s determination that Nixon, by her conduct, had been unjustly enriched.  To establish such a claim, “under New York law, Cross Media must prove (1) a benefit to Nixon (2) that was acquired at Cross Media’s expense, which (3) in equity and good conscience should be restored.”  By taking possession without authorization of the valuable customer list, which had been developed by Cross Media at its expense, the Court held Nixon was unjustly enriched.  In reaching this result, the Court rejected Nixon’s argument that she was not unjustly enriched because she was unable to complete her attempted auction of the customer list.  Said the Court:

[T]he information contained in the customer lists was not well known, and thus, by taking possession of it, Nixon conferred a benefit upon herself.  This benefit was acquired at Cross Media’s expense and Nixon should provide restitution for what she acquired, because Nixon did not have to pay the costs of developing such a valuable collection of information.  … Nixon’s argument that no unjust enrichment claim can lie against her because Cross Media provided no evidence that the customer lists were actually sold is without merit;  she can be unjustly enriched even though she was unable to complete the sale of the wrongfully obtained items.

Punitive Damages Awarded

Finally, the District Court affirmed the award of punitive damages.  Such an award, held the Court, was appropriate because Nixon had converted Cross Media’s property “with malice or reckless disregard of plaintiffs’ rights.”  Such an award was also appropriate because of the gross and wanton misconduct Nixon had engaged in in misappropriating Cross Media’s trade secrets.  Said the Court:

When Nixon converted the customer lists, she did so with both malice and disregard of Cross Media’s rights.  Because her husband signed a confidentiality agreement with Cross Media, Nixon could have gained access to the customer lists only when her husband knowingly violated his confidentiality agreement.  In taking and attempting to sell a database of her husband’s employer’s confidential information, Nixon could not have rationally believed that the customer lists were her rightful property or that such a compilation of information was publicly available.

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