1 UNITED STATES DISTRICT COURT
2 NORTHERN DISTRICT OF NEW YORK
3 ---------------------------------------------
4 NXIVM CORPORATION, et al.
5
6
7
8 Plaintiffs,
9 -versus- 03-CV-976
10 (ORAL ARGUMENT)
11
12 THE ROSS INSTITUTE, et al.
13
14
15 Defendants.
16 ---------------------------------------------
17
18 TRANSCRIPT OF PROCEEDINGS held in and for
19 the United States District Court, Northern District of
20 New York, at the James T. Foley United States Courthouse,
21 445 Broadway, Albany, New York 12207, on MONDAY,
22 SEPTEMBER 8, 2003, before the HON. THOMAS J. McAVOY,
23 United States District Court Judge.
24
25
UNITED STATES DISTRICT COURT REPORTER - NDNY
BONNIE J. BUCKLEY, RPR
2
1 APPEARANCES:
2
3 FOR THE PLAINTIFF:
4
5 TOBIN, DEMPF LAW FIRM
6 BY: KEVIN A. LUIBRAND, ESQ.
7 - and -
8 SCHMEISER, OLSEN LAW FIRM
9 BY: ARLEN L. OLSEN, ESQ.
10
11
12
13 FOR THE DEFENDANT ROSS INSTITUTE:
14
15 GLEASON, DUNN LAW FIRM
16 BY: THOMAS F. GLEASON, ESQ.
17
18
19
20 FOR THE DEFENDANT STEPHANIE FRANCO:
21 RIKER, DANZIG LAW FIRM
22 BY: ANTHONY J. SYLVESTER, ESQ.
23
24
25
UNITED STATES DISTRICT COURT REPORTER - NDNY
BONNIE J. BUCKLEY, RPR
NXIVM v THE ROSS INSTITUTE 3
1 (Court commenced at 10:30 AM.)
2 THE CLERK: NXIVM Corporation, et al. versus
3 the Ross Institute, et al., 03-CV-976.
4 May I have the appearances for the plaintiff.
5 MR. LUIBRAND: For the plaintiffs, Kevin
6 Luibrand from Tobin & Dempf in Albany.
7 THE COURT: All right.
8 MR. OLSEN: For the plaintiffs, Arlen Olsen
9 from Schmeiser & Olsen.
10 THE CLERK: On behalf of the defendant.
11 MR. SYLVESTER: Yes, good morning, your Honor.
12 Anthony J. Sylvester from Riker, Danzig, on both matters, for
13 the defendant Stephanie Franco.
14 MR. GLEASON: Thomas F. Gleason, in both
15 matters, on behalf of the Ross Institute, Rick Ross and Paul
16 Martin, and Wellspring Retreat, Inc. and I think that's it.
17 THE COURT: All right. The plaintiffs' motion
18 is brought by separate order to show cause for preliminary
19 injunction preventing the defendants from disseminating
20 information about the plaintiffs' business. So Mr. Luibrand
21 why should the Court issue injunctions in this case?
22 MR. LUIBRAND: Your Honor, throughout
23 commerce, businesses have forever tried to protect certain
24 materials and ideas that they don't -- and they have the
25 right to protect those under certain circumstances. And I'm
UNITED STATES DISTRICT COURT REPORTER - NDNY
BONNIE J. BUCKLEY, RPR
NXIVM v THE ROSS INSTITUTE 4
1 going to address one portion of the issues, pertaining to
2 Miss Franco, and Mr. Olsen is going to address the
3 intellectual property issues.
4 THE COURT: Okay.
5 MR. LUIBRAND: There are numerous ways you can
6 protect your materials and your ideas and your documentation.
7 Prominent, of course, is copyrights and patents and
8 trademarks, and if you are dealing person to person, you can
9 be protected by confidentiality agreements. This company,
10 this business has all those. It has utilized every available
11 vehicle to protect the privacy and confidentiality of its
12 documents.
13 With respect to Miss Franco, she attended a
14 training program of the plaintiffs' business. At the time
15 she attended it, she wasn't forced to go. She came a long
16 distance to want to go. And when she arrived, she was told
17 if you want to participate in the program, you are going to
18 be given access to information and you are going to be given
19 written materials, and you are to keep those confidential.
20 She was interviewed beforehand. And the business goes at
21 great length to protect the confidentiality of its materials
22 and methodologies. They interviewed her beforehand. She
23 agreed to and did sign a written agreement.
24 THE COURT: The Court has reviewed it.
25 MR. LUIBRAND: Yes. And it's broad and it
UNITED STATES DISTRICT COURT REPORTER - NDNY
BONNIE J. BUCKLEY, RPR
NXIVM v THE ROSS INSTITUTE 5
1 captures anything that she derives from the program. She
2 leaves the program and then, after having signed the
3 agreement and paid her fee, she's given the materials. And
4 she leaves having signed a confidentiality agreement, she
5 leaves and breaches the confidentiality agreement. She
6 admits now that she breached it. She tries to limit, I
7 suppose, the breadth of the breach because she says she gave
8 it to just her brother. But Mr. -- her other brother has
9 submitted an affidavit saying no, she gave it to Mr. Ross.
10 And Mr. Ross' affidavit says he received it from her. So
11 either she gave it to Mr. Ross or she gave it to Mr. Ross
12 through her brother. But, in any event, it reaches the hands
13 of Mr. Ross. She breached her confidentiality agreement by
14 that act and that constitutes a breach of contract. And two
15 things occur with respect to that.
16 One is, she agreed in the original agreement
17 that an injunction would issue or she would agree to
18 injunctive relief in the event she did breach the agreement.
19 That's a clause which she signed as part of her contract.
20 Secondly, those materials are protected. And
21 the plaintiffs do not have to tell anyone why they want the
22 materials protected, but they do want them protected. And I
23 will give you some of the reasons they want them protected.
24 First off, if you read the affidavit -- I know your Honor
25 reads everything thoroughly, but the affidavit of Mr. Raniere
UNITED STATES DISTRICT COURT REPORTER - NDNY
BONNIE J. BUCKLEY, RPR
NXIVM v THE ROSS INSTITUTE 6
1 shows the effort he undertook to review those materials and
2 the kind of skill and aptitude he has in developing those
3 materials. He spends a lot of time and money and effort to
4 develop and protect these materials. They're now out there
5 and they're out there as easy as some guy sitting in Jersey
6 City in an apartment at a computer has put their materials
7 out for everybody to see. And Mr. Olsen will address the
8 scope of that, but their materials are now available to
9 anybody who wants them, descriptions of them, substantial
10 wholesale quotes from the materials are out there.
11 Secondly, and, again, this refers to Miss
12 Franco, because we don't have to -- the plaintiff doesn't
13 have to show the reason they want it confidential, somebody
14 can take snippets of that and mock it and ridicule it and
15 make fun of it, and they have -- part of the process is they
16 have a bowing, that's an exact adaptation of what you do in
17 Martial Arts, and that's where that comes from. And you hold
18 that out there separately, and, again, that's protected
19 copyrighted confidential material, you get that out on a
20 website or get that out in a complete international domain,
21 that causes harm because somebody could take that information
22 like Mr. Ross did and try to draw all kinds of inferences
23 from it and can add a few other facts, which he does, and,
24 again, which Mr. Olsen will address.
25 There is a substantial likelihood of success
UNITED STATES DISTRICT COURT REPORTER - NDNY
BONNIE J. BUCKLEY, RPR
NXIVM v THE ROSS INSTITUTE 7
1 on the case against Miss Franco. The equities balance
2 completely against her. She indicated at paragraph 10 of her
3 affidavit she doesn't want to have to be constrained from
4 talking about what she's learned in the program. She has not
5 returned the materials to us or the Court. The record shows
6 she sent a copy that she redacted; she still has an original
7 set of materials. She's shown no reluctance, despite a
8 confidentiality agreement, to release it to whoever she
9 chooses she wants to. That's why the injunction should
10 issue.
11 The damages that flow, and I have a -- one
12 very specific example, and I will -- I've been trying to come
13 up with some analogies, and I have a perfect analogy. And
14 that is, if I were -- as a lawyer, if I had a substantial
15 competitor locally, Mr. Smith, and I put out -- if I had a
16 website called pornographers.com and I put on that website
17 Mr. Smith's name and under that I put a description of what
18 he does, if I run Mr. Smith's name, someone else, looking for
19 a lawyer, they find Mr. Smith on pornographers.com, they're
20 not going to go to Mr. Smith, and I'll never know and
21 Mr. Smith will never know how many people did that.
22 THE COURT: But the defendants weren't
23 competitors, so that analogy doesn't hold water.
24 MR. LUIBRAND: Oh, the defendants --
25 THE COURT: Right.
UNITED STATES DISTRICT COURT REPORTER - NDNY
BONNIE J. BUCKLEY, RPR
NXIVM v THE ROSS INSTITUTE 8
1 MR. LUIBRAND: I think that does hold water.
2 THE COURT: They're not in competition with
3 NXIVM.
4 MR. LUIBRAND: Your Honor, they're in
5 different competition.
6 THE COURT: Do they offer the same kind of
7 program that develops the skills that NXIVM says they
8 develop?
9 MR. LUIBRAND: They're trying to take the
10 people that participate in the program.
11 THE COURT: The program, right.
12 MR. LUIBRAND: And supposedly this is their
13 schtick, to deprogram them.
14 THE COURT: That's not competition.
15 MR. LUIBRAND: It's taking them away from the
16 business. They're not doing the same thing, but they've also
17 put the entire concept and ideas and information out on the
18 web so anyone can get the information.
19 THE COURT: I understand that.
20 MR. LUIBRAND: So -- and I talked about the
21 pornographers.com in the sense of the disparagement; that
22 just putting them on that website is disparaging because,
23 going back to Attorney Smith, no one will go to Smith if he's
24 on pornographers.com.
25 THE COURT: I understand the certain
UNITED STATES DISTRICT COURT REPORTER - NDNY
BONNIE J. BUCKLEY, RPR
NXIVM v THE ROSS INSTITUTE 9
1 similarity of concept there because the defendant is saying
2 that your business is a cult, and that's similar in some
3 people's mind to being associated with pornography; they're
4 both bad things. And the Court understands how that can be
5 hurtful. But you've got to remember, it's got to be hurtful
6 in such a way that's covered by the various statutes and
7 provisions and case law that will protect you from that
8 stuff. I understand your argument.
9 MR. LUIBRAND: And I agree, your Honor. And
10 there's a number of other factual assertions on the website.
11 He characterizes -- he says -- I mean being called a cult is
12 a statement of fact, that's not an opinion. Being called a
13 pornographer is a statement of fact. You are a pornographer.
14 That's a statement of fact. It's ruinous. Because this has
15 such a wide reach, and it's an international website. Anyone
16 can get on a website.
17 THE COURT: Oh, yeah.
18 MR. LUIBRAND: And anybody out there could say
19 I'm interested -- if I'm a company and say you five people
20 are going up to Albany because you are going to do this
21 executive success program, it's a great program, you'll do
22 wonderful, and they go home that night and they say that's a
23 cult, that's mind control, I'm not going to do that; and we
24 would never know that happened; we have no ability to
25 calculate damages or the extent of loss; we have no way to
UNITED STATES DISTRICT COURT REPORTER - NDNY
BONNIE J. BUCKLEY, RPR
NXIVM v THE ROSS INSTITUTE 10
1 even, to even be able to trace who those people were.
2 THE COURT: What would the damages be, loss of
3 profits?
4 MR. LUIBRAND: Loss of income. We wouldn't be
5 able to find all the people whose income we lost, because
6 anybody could find that information, because the
7 persuasiveness of the Internet and being unable to trace it
8 back to the damages. That's what's happened. By putting it
9 out on the Internet; she's changed the damages component all
10 together.
11 THE COURT: Supposing we didn't have the
12 Internet and supposing we were back to when the world was
13 comparatively sane and they drew pictures and posted them in
14 an auditorium and, same kind of thing as a website, same
15 thing as materials on a website, but they put them in an
16 auditorium in, say, Albany, New York, and the public was
17 allowed to come there and see them; does the fact that now
18 it's on the Internet, does that somehow change the law
19 involved?
20 MR. LUIBRAND: It changes the ability to be
21 able to calculate damages substantially.
22 THE COURT: So it changes the quantum of
23 damages, doesn't it?
24 MR. LUIBRAND: That's right. Not just the
25 quantum, but the ability to calculate.
UNITED STATES DISTRICT COURT REPORTER - NDNY
BONNIE J. BUCKLEY, RPR
NXIVM v THE ROSS INSTITUTE 11
1 THE COURT: You can't add them up, so you
2 don't know how much there are? You don't know who else --
3 MR. LUIBRAND: That's right.
4 THE COURT: You can't add the amount you lost
5 because you'll never know about it, except the people in your
6 program are decreasing, perhaps.
7 MR. LUIBRAND: That's right. And we face a
8 double-edge because the business has been going straight up
9 and now, well, if it doesn't grow as quickly or if it levels
10 off, you know, we're then into mathematical computations and
11 a statistical analysis as opposed to where are the people
12 that have now rejected it.
13 And in connection with that, I also want to
14 point out, your Honor, that Mr. Ross says that this is, this
15 is a very small portion of his website, this is very minor to
16 him. He just takes the information that he develops and then
17 changes it -- and Mr. Olsen will address that -- and then
18 puts it on his site. But he's got lots of other companies
19 and things that he does. He says this is very minor to him,
20 very insignificant. And in the balance, besides irreparable
21 harm, the alternative is that -- is the -- it's not
22 significant in terms of balancing. Let me get the exact
23 language, your Honor.
24 (Pause.)
25 MR. LUIBRAND: It's the second alternative to
UNITED STATES DISTRICT COURT REPORTER - NDNY
BONNIE J. BUCKLEY, RPR
NXIVM v THE ROSS INSTITUTE 12
1 the need to establish irreparable harm. There is a second
2 way to do it or second way to prove the entitlement to the
3 injunction. I have it in my brief, your Honor, I'll find it
4 before we're done. But in any event --
5 THE COURT: You're talking about the balancing
6 of the hardships?
7 MR. LUIBRAND: The balancing of the hardships,
8 your Honor. I want to get the exact language.
9 THE COURT: Okay.
10 (Pause.)
11 MR. LUIBRAND: Well, there's no hardship to
12 him, no hardship whatsoever.
13 THE COURT: So it can't tip in his favor?
14 MR. LUIBRAND: It can't tip in his favor under
15 those circumstances. And they can't stand up with the First
16 Amendment because it happens to be in commerce, Mr. Ross is
17 in possession of our materials because Ms. Franco stole them.
18 So he can't say well, I have a First Amendment right or he
19 can't adequately advance that using essentially stolen
20 materials or contractually stolen, not illegally stolen, but
21 contractually stolen materials falsely revealed to him.
22 THE COURT: Do you got case law that refers to
23 that?
24 MR. LUIBRAND: When I sit down, I'll remind
25 myself of it and let the Court know.
UNITED STATES DISTRICT COURT REPORTER - NDNY
BONNIE J. BUCKLEY, RPR
NXIVM v THE ROSS INSTITUTE 13
1 THE COURT: All right.
2 Okay. Mr. Olsen.
3 MR. OLSEN: Olsen, yes. I would like to
4 answer a question that you just had about whether there's
5 case law on that.
6 THE COURT: If A breaches a contract with B
7 and B goes out and disseminates material that he got as a
8 result of the breach, the person that now publishes that is
9 precluded from asserting a First Amendment right if he knew
10 the materials were taken, or if he didn't know they were
11 taken, but they were, then how does that work?
12 MR. OLSEN: That would fall under the trade
13 secret law. So if somebody were to take a trade secret, say
14 the Coca Cola trade secret, they shouldn't be able to go out
15 and disseminate it and use it after they've disseminated it.
16 THE COURT: But the third person is precluded
17 from raising the argument because somebody unlawfully took
18 it? There's case law that says that?
19 MR. OLSEN: I'm sorry, your Honor?
20 THE COURT: If somebody wrongfully -- if an
21 employee of Coca Cola who wrongfully purloins the secret goes
22 out and gives it to a third person, the third person who's
23 not a party to the arrangement between the Coca Cola employee
24 and Coca Cola itself, but he comes into possession of these
25 materials and puts it out there, and he says wait a minute, I
UNITED STATES DISTRICT COURT REPORTER - NDNY
BONNIE J. BUCKLEY, RPR
NXIVM v THE ROSS INSTITUTE 14
1 got a First Amendment right to criticize this Coke formula
2 because it's lousy, it ruins my teeth, which is essentially
3 what we're dealing with here, you are saying that they can't
4 raise the First Amendment because the materials were
5 wrongfully taken?
6 MR. OLSEN: Well, in this case, the facts in
7 this case are that Mr. Ross is what we consider an agent of
8 Miss Franco.
9 THE COURT: Okay.
10 MR. OLSEN: And Mr. Ross is acting on her
11 behalf. It's clear that from the facts -- well, going back
12 on the facts, Mr. Sutton and Miss Franco come from a very
13 wealthy family and they have a very successful business and
14 basically they want Mr. Sutton to spend more time in their
15 business instead of with our client's program, and so they
16 would have to find a way to discredit it, so the family goes
17 out and hires the Ross Institute, he's a hired gun
18 essentially, and they hire Paul Martin and John Hochman to
19 write these disparaging articles. They're actually being
20 paid to do all these activities.
21 THE COURT: What evidence do you have of that?
22 MR. OLSEN: What's that?
23 THE COURT: What's the evidentiary basis for
24 that?
25 MR. OLSEN: The evidentiary basis for?
UNITED STATES DISTRICT COURT REPORTER - NDNY
BONNIE J. BUCKLEY, RPR
NXIVM v THE ROSS INSTITUTE 15
1 THE COURT: The contract between the Suttons
2 and Ross or Miss Franco and Ross?
3 MR. OLSEN: In the Ross affidavit --
4 THE COURT: Mm-hmm.
5 MR. OLSEN: -- Mr. Ross says that we -- that
6 Mr. Martin was retained by the Suttons. That is in the
7 defendants' affidavit itself.
8 THE COURT: Okay.
9 MR. OLSEN: It says that they were retained.
10 That's the evidentiary basis for that, your Honor.
11 THE COURT: Okay.
12 MR. OLSEN: With respect to the -- with the
13 copyright issue, we have shown that there's a prima facie
14 case of copyright infringement. That's not in dispute.
15 There's access to the work. In fact, they provided the work
16 to you in Stephanie Franco's affidavit. And in addition,
17 there was substantial similarity. They've not rebutted that
18 there was substantial similarity and, in fact, in the
19 defendants' brief they said they took the very heart of our
20 work, they went right to the guts of what we had, and they
21 have it posted out there on the Internet. All we're left
22 with is an affirmative defense on the defendants' part as far
23 as the copyright goes.
24 And as far as irreparable harm goes, the
25 fourth factor the Supreme Court said is the most critical
UNITED STATES DISTRICT COURT REPORTER - NDNY
BONNIE J. BUCKLEY, RPR
NXIVM v THE ROSS INSTITUTE 16
1 factor in the weighing of the four facts together. And
2 that's the effect upon the market by their copyright
3 infringement. So they take the guts of our work, they post
4 it out there on the Internet, and it's out there for all of
5 our competitors and all of our potential students to see so
6 they can go out and take it. It's a very unique method. And
7 they have copyrighted it, patents pending, they have trade
8 secrets. It's a very unique technology. In it they use
9 things like rituals, bowing to their instructor or to the
10 president of the company. They don't say in the press he
11 bows back at them, just like in a Martial Arts school.
12 They're taking it and twisting it. They wear sashes, as they
13 do in Martial Arts school, they wear belts. They're a
14 multi-million dollar a year business. They have
15 20 billionaires, stated in a recent Times Union article, that
16 have signed up for the course and taken it. They have a
17 market to a very sophisticated clientele. They teach
18 principles such that, in order to succeed, you have to have
19 honesty and integrity; that people are accountable for their
20 own choices. In fact, one of the mission statements of the
21 course is that it teaches people not to steal, not to copy; I
22 put that in my initial brief; that you should not copy and
23 that copying is theft. And now we're here in Court going
24 exactly against what they're trying to teach their students.
25 They teach -- in teaching people that they're accountable for
UNITED STATES DISTRICT COURT REPORTER - NDNY
BONNIE J. BUCKLEY, RPR
NXIVM v THE ROSS INSTITUTE 17
1 their choices, I'm sure your Honor would appreciate if many
2 of the people coming through here realized that they were
3 accountable for their choices. Prisons are full of people
4 who think they're victims of society. I mean we're teaching
5 people good things. We don't want people coming in here and
6 going into prison; we want people to be successful in
7 business. We teach people that they shouldn't control --
8 THE COURT: So it's kind of a mixed motive
9 case, right?
10 MR. OLSEN: Well, it's essentially --
11 THE COURT: Your company wants to make people
12 better, but they want to make money doing it; right? That's
13 a mixed motive. I think it is.
14 MR. OLSEN: Sure. And they want the people to
15 make money that are making money. Exactly right.
16 THE COURT: More mixed motive.
17 MR. OLSEN: A lot of the cases cited go to the