NXIVM vs. Ross Transcript of Injunction proceedings

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF NEW YORK

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NXIVM CORPORATION, et al.

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Plaintiffs,

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-versus-

03-CV-976

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(DECISION)

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THE ROSS INSTITUTE, et al.

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Defendants.

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TRANSCRIPT OF PROCEEDINGS held in and for

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the United States District Court, Northern District of

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New York, at the James T. Foley United States Courthouse,

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445 Broadway, Albany, New York 12207, on MONDAY,

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SEPTEMBER 8, 2003, before the HON. THOMAS J. McAVOY,

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UNITED STATES DISTRICT COURT JUDGE.

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UNITED STATES DISTRICT COURT REPORTER - NDNY

BONNIE J. BUCKLEY, RPR

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APPEARANCES:

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FOR THE PLAINTIFF:

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TOBIN, DEMPF LAW FIRM

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BY: KEVIN A. LUTBRAND, ESQ.

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-and-

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SCHMEISER, OLSEN LAW FIRM

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BY: ARLEN L. OLSEN, ESQ.

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FOR THE DEFENDANT ROSS INSTITUTE:

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GLEASON, DUNN LAW FIRM

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BY: THOMAS F. GLEASON, ESQ.

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FOR THE DEFENDANT STEPHANIE FRANCO:

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RIKER, DANZIG LAW FIRM

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BY: ANTHONY J. SYLVESTER, ESQ.

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UNITED STATES DISTRICT COURT REPORTER - NDNY

BONNIE J. BUCKLEY, RPR

NXIVM V THE ROSS INSTITUTE

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(Court commenced at 10:30 AM.)

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THE CLERK: NXIVM Corporation, et al. versus

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the Ross Institute, 03-CV-976

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May I have the appearances for the plaintiff.

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MR. LUIBRAND: For the plaintiffs, Kevin

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Luibrand from Tobin & Dempf in Albany.

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THE COURT: All right.

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MR. OLSEN: For the plaintiffs, Arlen Olsen

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from Schmeiser & Olsen.

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THE CLERK: On behalf of the defendant.

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Mr. SYLVESTER: Yes, good morning, your Honor.

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Anthony J. Sylvester from Riker, Danzig, on both matters, for

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the defendant Stephanie Franco.

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MR. GLEASON: Thomas F. Gleason, in both

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matters, on behalf of the Ross Institute, Rick Ross and Paul

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Martin, and wellspring Retreat, Inc. and I think that's it.

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THE COURT: All right. The plaintiffs' motion

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is brought by separate order to show cause for preliminary

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injunction preventing the defendants from disseminating

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information about the plaintiffs' business. So Mr. Luibrand

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why should the Court issue injunctions in this case?

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(Oral argument heard.)

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------

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UNITED STATES DISTRICT COURT REPORTER - NDNY

BONNIE J. BUCKLEY, RPR

NXIVM V THE ROSS INSTITUTE

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(Brief recess at 11:25 AM.)

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(Court reconvened at 11:32 AM.)

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THE COURT: I am just going to begin by

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addressing something that wasn't addressed by the parties,

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something about my gratuitous comment before you began

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argument.

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As is evident, cases 03-CV-976 and 03-CV-1051

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involve common questions of fact. Separate trials would be

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wasteful of the scarce judicial resources in this district.

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See Internet Law Library Inc. versus Carr, 2002 Westlaw

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550966 *2. In the exercise of discretion, the Court

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con ates the two actions pursuant to Rule 42 (a). See

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Curtis versus CitiBank NA, 226 F. 3d 133, at 138. The first

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filed case, 03-CV-976, will be the lead case.

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The Court has already set forth the

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preliminary injunction standard in its August 21^st decision

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in the lead case. The Court adds, however, that while a

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factual hearing is generally required on an application for

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an injunction, no hearing is required where no material

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issues are in dispute. Maryland casualty Company versus

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Realty Advisor Board on Labor Relations, 107 F. 3d 979, at

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984.

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Addressing the copyright claim first,

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plaintiffs are correct that a demonstration of likelihood of

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success on the merits equates with a presumption of

UNITED STATES DISTRICT COURT REPORTER - NDNY

BONNIE J. BUCKLEY, RPR

NXIVM V THE ROSS INSTITUTE

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irreparable harm. See Random House Inc. versus Rosetta Books

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LLC, 283 F. 3d 490, at 491. However, plaintiffs have not made

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such a demonstration.

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There is no dispute that plaintiffs offer

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personal success programs, but none of the defendants offer

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anything remotely similar. Further, there's no dispute that

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the allegedly offending works of Dr. Martin criticize

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plaintiffs' courses, but do not encourage readers to take any

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other type of self-improvement course.

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Section 107 of Title 17, United States Code

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provides that the, quote, fair use of a copyrighted work,

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including such use by reproduction and copies for purposes

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such as criticism, comment, news reporting, teaching,

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scholarship or research is not an infringement of copyright,

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close quote. The statute sets forth four factors to be

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examined, quote, in determining whether the use made of a

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work in any particular case is a fair use, close quote, The

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statue further provides that, quote, the fact that a work is

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unpublished shall not itself bar a finding of fair use if

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such finding is made upon consideration of all the above

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factors, close quote.

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While the defendants have the burden of

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providing that their potentially infringing use was fair, see

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Infinity Broadcast Corporation versus Kirkwood, 150 F.3d 104,

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at 107, they need not establish that all of the factors favor

UNITED STATES DISTRICT COURT REPORTER - NDNY

BONNIE J. BUCKLEY, RPR

NXIVM V THE ROSS INSTITUTE

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them. Wright versus Warner Books Incorporated, 923 F.2d 731,

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at 740.

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Here, given the fact that Martin's works

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clearly constitute, quote, criticism, scholarship or

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research, close quote, about plaintiffs' courses are not a

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primer on executive success techniques, the first factor is

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in the defendants' favor. See New Ear Publications

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International ApS versus Carol Publishing Group, 904 F. 2d

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152. His two works are clearly transformative in nature.

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Campbell versus Acuff-Rose Music, Incorporated, 510 U.S. 569,

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at 579. The fact that some defendants might conceivably

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profit form Dr. Martin's criticism through the offering of

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the deprogramming services doesn't change the impact of this

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factor. See Castle Rock Entertainment versus Carol

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Publishing Group, 150 F. 3d 132, 141, 142.

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When analyzing the second factor, courts look

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to whether the original work previously had been published,

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whether it is fictional, and whether it is creative in

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nature. As indicated, the fact that original work was

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not published requires the Court to examine all the factors.

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Creative works are entitled to greater copyright protection

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than factual works. Video-Cinema Films Incorporated versus

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Cable News Network Inc., 2001 Westlaw 1518264 at *7. This

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factor favors the plaintiffs, but is not dispositive. On 

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Davis versus The Gap Incorporated, 246 F. 3d 152, at 175.

UNITED STATES DISTRICT COURT REPORTER - NDNY

BONNIE J. BUCKLEY, RPR

NXIVM V THE ROSS INSTITUTE

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The third factor has both a quantitative and a

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qualitative aspect to it. Wright, at 738. Thus, this Court

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must consider whether the quotes in Martin's  work formed a

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significant percentage of the copyrighted works and whether

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the quotes are essentially the heart of the copyrighted

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works. Wright, at 738. Courts have also considered, quote,

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whether the quantity of the material uses was reasonable in

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relation to the purpose of the copying, close quote.

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American Geophysical union versus Texaco Incorporation, 60

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F. 3d. 913, at 926, and citing Campbell, 510 U.S. at 586.

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While Martin's works do quote expansively form

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plaintiffs' materials, the quotes appear reasonably necessary

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to convey his point. Further, plaintiffs have asserted that

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it took 30 years to develop the rational inquiry technology

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and that the science of this technology is realized by the

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meticulous fashion that word, the order of words, questions

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and order of questions are used in the course material. The

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defendant Franco has submitted an affidavit which attaches

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over 500 pages of course materials, much of which is in

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outline form to be covered in consecutive ten-hour day

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seminars in which students interact with ESP coaches. How

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the coaches respond to student's statements and answers does

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not appear in the course materials. Because a copyright

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protects only the form of expression and not the ideas

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expressed, Attia versus Society of New York Hospital, 201

UNITED STATES DISTRICT COURT REPORTER - NDNY

BONNIE J. BUCKLEY, RPR

NXIVM V THE ROSS INSTITUTE

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F. 3d 50, at page 54, cert. Denied, 531 U.S. 843; see 17 U.S.

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Code Annotated, Section 102(b), it hardly appears that

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expression of plaintiffs' theory could be captured in the

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registered works or that Martin's two writings which, taken

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together, consists of 17 pages, could capture the heart of

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it. This factor is, at best, neutral.

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Looking at the fourth factor, the Supreme

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Court in Campbell explained that if the secondary work harms

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the market for the original through criticism or parody,

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rather than by offering a market substitute for the original,

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it does not produce a harm cognizable under the Copyright

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Act. That's in quotes, it does not produce a harm cognizable

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under the Copyright Act, close quote. Campbell, at 592.

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Quote, the role of the courts is to distinguish between

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biting criticism that merely suppresses demand and copyright

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infringement which usurps the market for the original, close

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quote Campbell, at 592.

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Martin's writings are undoubtedly

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transformative secondary uses intended as a form of

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criticism. All of the alleged harm arises from the biting

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criticism of this fair use, not from a usurpation of the

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market by any of the defendants. See On Davis, at 175.

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In On Davis, the Second Circuit wrote:

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When secondary uses harms the market for or

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value of the original, courts must examine the source of the

UNITED STATES DISTRICT COURT REPORTER - NDNY

BONNIE J. BUCKLEY, RPR

NXIVM V THE ROSS INSTITUTE

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harm. If the harm resulted form a transformative secondary

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use that lowered the public's estimation of the original,

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paren, such a devastating review of a book that quotes

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liberally from the original to show how silly and poorly

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written it is, close paren, this transformative use will be

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found to be a fair use, notwithstanding the harm.

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On Davis, at 175.

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Consequently, not only is the fourth factor in

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defendants' favor, it raises a question whether there is even

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an actionable copyright claim here.

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Plaintiffs have failed to demonstrate a

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likelihood of success on the merits of the copyright claim

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and consequently failed to demonstrate irreparable harm

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cause by the violation. They've also failed to establish

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that there are sufficiently serious questions going to the

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merits to make them a fair ground for litigation. Therefore,

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the preliminary injunction based on the alleged copyright

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violations is denied.

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Moving on, in order to establish a viable

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claim under section 43(a) of the Lanham Act, plaintiffs must

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show that the defendants (1) made false or misleading

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representations; (2) for goods; (3), in interstate commerce;

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(4) in commercial advertising or promotion; (5) about a

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material facet of plaintiffs' product, (6) that caused damage

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to plaintiffs. Coomed Corporation versus Erbe Electromedizin

UNITED STATES DISTRICT COURT REPORTER - NDNY

BONNIE J. BUCKLEY, RPR

NXIVM V THE ROSS INSTITUTE

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GmbH, 129 F.2d -129 F.Supp.2d 461, at 470. Although

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plaintiffs point to some inaccuracies in Hochman's report

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they hardly rise to the level of false or misleading

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representations about a material facet of plaintiffs'

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product.

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Further, assuming that material

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misrepresentations were made, there's no demonstration that

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they occurred in commercial advertising or production.

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Commercial advertising or promotion under the Lanham Act is

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defined as: (1) commercial speech; (2) made by a defendant

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who was in commercial competition with the plaintiff; (3) for

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the purpose of influencing consumers to buy the defendant's

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good or services; and (4) disseminated sufficiently to the

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relevant purchasing public to constitute advertising or

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promotion within that industry. Gordon & Breach Science

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Publishers SA versus American Institute of Physics, 859

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F.Supp. 1521, at 1535 and 1536.

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While the Second Circuit has not expressly

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adopted the second element, it has adopted the first, third

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and forth elements of this standard. See Fashion Boutique

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of Short Hills, Incorporated versus Fendi USA Incorporated,

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314 F.3d 48, at page 58. Other circuit courts have adopted

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all four elements, including the competition requirement.

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See Proctor & Gamble Company versus Haugen, 222 F.3d 1262,at

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1273 and 1274; that's the Tenth Circuit; Coastal Abstracts

UNITED STATES DISTRICT COURT REPORTER - NDNY

BONNIE J. BUCKLEY, RPR

NXIVM V THE ROSS INSTITUTE

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Service Incorporated versus First American Title Insurance

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Company, 173 F.3d 725, at 735; that's the Nine Circuit;

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Seven-Up Company versus Coca Cola Company, 86 F.3d 1379, at

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1384. The Supreme Court has stated that, quote, the Lanham

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Act was intended to make actionable the deceptive and

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misleading use of marks and to protect persons engaged in

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commerce against unfair completion, close quote. Two Pecos

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Incorporated versus Taco Cabana, 505 U.S. 763, at 767, 768.

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Plaintiffs were not in competition with any of

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the defendants. Further, there's no possibility of consumer

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confusion as to the origin or sponsorship of defendants'

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goods or services. Virgin Enterprises Limited versus Nawab,

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335 F.3d 141, at 146. De. Hochman's article criticized the

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plaintiffs' courses, so any consumer seeking services from

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Hochman or Ross would not be confused that ESP somehow

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sponsored them. Stephanie Franco's article mentioned nothing

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of ESP. There is no demonstration of a likelihood of success

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against the defendants on the Lanham Act claims.

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Further, the defendants have raises a First

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Amendment defense to their speech. Offending commercial

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speech which violates the Lanham Act does not enjoy First

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Amendment protection, however, if the speech does not violate

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the Lanham Act, it may be protected by the First Amendment.

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See Taubman Company versus Webfeats, 319 F.3d 770, at 774,

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775. From the allegations and arguments, it's clear that the

UNITED STATES DISTRICT COURT REPORTER - NDNY

BONNIE J. BUCKLEY, RPR

NXIVM V THE ROSS INSTITUTE

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essence of plaintiffs' complaint is that they're being harmed

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by the conclusion that they're a cult. This opinion is not a

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enjoyable absent extraordinary circumstances, which is not

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present here. See Metropolitan Opera Association versus

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Local 100, Hotel Employees and Restaurant Employees

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International Union, 239 F.3d 172, at 176. An injunction

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which may impose a prior restraint on speech is strongly

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disfavored. See metropolitan Opera Association, at 176.

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Therefore, even assuming plaintiffs could establish

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irreparable harm and sufficiently serious question going to

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the merits on this claim, the balance of hardships weigh in

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favor of the defendant. The preliminary injunction is denied

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on the Lanham Act.

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Finally, plaintiffs seek an injunction based

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upon the alleged breach of the confidentiality clause

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contained in Stephanie's Franco's course application.

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assuming without deciding that the boiler plate wording is a

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binding confidentiality agreement, the asserted First

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Amendment defense would prevent the Court from issuing an

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injunction of the scope requested by the plaintiffs. The

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plaintiffs have not demonstrated that they've suffered or

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will suffer irreparable harm caused by the asserted breach.

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Accepting plaintiffs' vague allegations of harm as true, they

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indicate that their business is suffering because they've

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been labeled as a cult, not because clients or sponsors are

UNITED STATES DISTRICT COURT REPORTER - NDNY

BONNIE J. BUCKLEY, RPR

NXIVM V THE ROSS INSTITUTE

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flocking to some other success program or because clients

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feel they no longer need the ESP program and instead can get

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the same information from Ross' website.

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While the clause in the application might

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prevent Miss Franco from giving someone else the course

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materials, it is doubtful that the clause could legally

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prevent Miss Franco from expressing an opinion. Therefore,

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even assuming that there existed some sort of conspiracy

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between Franco and the other defendants, which appears

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Doubtful on this record, there's no demonstration that the

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breach of the confidentiality clause is causing the asserted

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harm. Rather, that harm, if it is occurring, appears to be

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caused by the various defendants' expression of opinion. The

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Court will not enjoin that opinion.

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On the other hand, the clause does seemingly

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protect against course participants disclosing trade secrets

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which, once disclosed to a competitor, could constitute

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irreparable harm. See Worldwide Sport Nutritional

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Supplements, Inc. versus Five Star Brands LLC, 80 F.Supp.2d

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25, at page 33; see Softel Inc., versus Dragon Medical and

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Scientific Communications Inc., 118 F.3d 955, at 968, cert.

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denied, 523 U.S. While there's no indication that a

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disclosure to a competitor has occurred, Miss Franco did

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seemingly agree not to transmit the course materials to

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anyone. In order to maintain the status quo pending this

UNITED STATES DISTRICT COURT REPORTER - NDNY

BONNIE J. BUCKLEY, RPR

NXIVM V THE ROSS INSTITUTE

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litigation, she's enjoined from transmitting the materials

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anyone other than her attorneys and persons retained by them

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in connection with these suits. And in addition, the

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affidavit filed with the Court containing the bulk of the

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course materials is hereby ordered sealed.

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The other defendants who are not parties to

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the alleged contract are not enjoined in this manner, but

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they should be on notice that if they divulge plaintiffs'

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materials in a fashion that would constitute the elements of

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A common law misappropriation of trade secrets claim, the

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Court will entertain another application for preliminary

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injunction.

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In conclusion, the Court finds no basis to

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issue a preliminary injunction other than the limited

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injunction preventing Miss Franco from disclosing the course

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materials to anyone other than her attorneys. In all other

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Respects, plaintiffs' motions are denied.

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The Court will issue its own order.

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Thank you for interesting arguments on both

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sides.

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MR.SYLVESTER: Thank you, your Honor.

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MR. LUIBRAND: Will the sealing order be a

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Separate order of will it be part --

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THE COURT: It will be a part of the order

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that I'm going to issue.

UNITED STATES DISTRICT COURT REPORTER - NDNY

BONNIE J. BUCKLEY, RPR

NXIVM V THE ROSS INSTITUTE

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MR. LUIBRAND: All right.

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THE COURT: Does it have to be separate?

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MR. LUIBRAND: Well, I don't know. I just --

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I'm asking the question.

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THE COURT: No.

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MR. LUIBRAND: It's considered sealed

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effective immediately?

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THE COURT: Effective immediately.

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MR. OLSEN: Your Honor, with respect to the

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sealing order, just so I can clarify that, you are indicating

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that whatever is on the website is affected by that?

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THE COURT: Did you hear me say anything about

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that?

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MR. OLSEN: I did not. Just clarifying that,

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your Honor.

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THE COURT: Well, you don't have to clarify it

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because you didn't hear it.

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MR. OLSEN: All right. Thank you, your Honor.

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(Court adjourned at 11:50 AM.)

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UNITED STATES DISTRICT COURT REPORTER - NDNY

BONNIE J. BUCKLEY, RPR

NXIVM V THE ROSS INSTITUTE

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CERTIFICATION

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I, BONNIE J. BUCKLEY, RPR, Official Court

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Reporter in and for the United States District Court,

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Northern District of New York, do hereby certify that I

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Attended at the time and place set forth in the heading

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hereof; that I did make a stenographic record of the

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proceedings held in this matter and caused the same to be

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transcribed; that the forgoing is a true and correct

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transcript of the same and whole thereof.

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BONNIE J. BUCKLEY, RPR

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Official Court Reporter

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DATED: SEPTEMBER 11, 2003

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UNITED STATES DISTRICT COURT REPORTER - NDNY

BONNIE J. BUCKLEY, RPR