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Cutco Industries Inc. v. Naughton

decided: November 26, 1986.

CUTCO INDUSTRIES, INC., PLAINTIFF-APPELLANT
v.
DENNIS E. NAUGHTON, DEFENDANT-APPELLEE



CutCo Industries, Inc. appeals from an order of the United States District Court for the Eastern District of New York (Bramwell, J.) entered January 31, 1986 that dismissed its complaint against appellee, Dennis E. Naughton, for lack of in personam jurisdiction under Fed. R. Civ. P. 12(b)(2). Reversed and remanded.

Author: Cardamone

Before: KAUFMAN, CARDAMONE AND WINTER, Circuit Judges

CARDAMONE, Circuit Judge:

This appeal requires us to decide whether New York courts would find jurisdiction over non-resident defendant, Dennis E. Naughton, under the state's long-arm statute, N.Y. CPLR 302(a)(1). The United States District Court for the Eastern District of New York (Bramwell, J.), without conducting an evidentiary hearing, held that they would not, and dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(2). Plaintiff, CutCo Industries, Inc., appeals that order entered January 31, 1986. Because the district court erroneously concluded that plaintiff had failed to establish prima facie persona jurisdiction over defendant, we reverse and remand this case to the district court for an evidentiary hearing.

I FACTS

The following facts are either uncontested or appear from the plaintiff's papers and affidavits; since the complaint was dismissed without an evidentiary hearing we accept the latter as true for purposes of this appeal. Hoffritz for Cutlery, Inc. v. Amajac, Ltd., 763 F.2d 55, 56-57 (2d Cir. 1985).

Plaintiff is a New York corporation that franchises hair salons throughout the United States under the trade name "Great Expectations Precision Haircutters." While a resident of Arizona, Naughton developed a business relationship with plaintiff in 1978 which led to his acquiring ownership interests in five of these salons between 1978 and 1981. The business relationship began when Naughton telephoned CutCo in New York to express interest in acquiring a Great Expectations franchise with two business associates, Milton Dahlene and W.J. Wade. Naughton spoke with Norman Bander, CutCo's Franchise Marketing Director, and the two agreed that (1) Bander would send Naughton the relevant materials, including a proposed licensing agreement; (2) Naughton and Wade would visit an available mall site in Lakewood, California; and (3) Dahlene would come to New York to meet with CutCo representatives to discuss the proposed venture.

Dahlene came to New York where he met with Bander and other CutCo representatives and discussed in detail the operations of a Great Expectations salon, the financial and other terms and conditions of the licensing agreement and sublease for the Lakewood salon, and the relationship that would exist between CutCo and the potential licensees. Bander gave Dahlene a copy of the standard Great Expectations sales kit and other written material, though no agreement was entered into during Dahlene's visit. After Dahlene's visit, Naughton informed Bander that he, Dahlene, and Wade would purchase the Lakewood franchise through WND, Inc., a corporation formed to effectuate the purchase that was owned equally by the three co-venturers. Naughton's counsel represented at oral argument that WND, Inc. had not been formed at the time of Dahlene's visit to New York.

Naughton visited CutCo's offices on three different occasions from December 1978 to September 1982. In December 1978, he attended a national seminar sponsored by CutCo for its franchisees in New York. The seminar consisted primarily of discussions, workshops, and meetings related to new products, training, management, advertising, and salon operations. CutCo's Vice-President in Charge of Marketing and Naughton discussed the operations of the Lakewood salon and the possibility of Naughton purchasing additional CutCo salons. Again, in 1981 Naughton and Dahlene visited CutCo's New York offices and discussed the operations of Naughton's four existing salons as well as the possibility of his opening additional ones.

In September 1982, Naughton came to New York to discuss the possibility of opening a new chain of haircutting salons under the name "Great Cuts." Naughton's plan was to own and operate these salons with his partners and pay CutCo a small royalty. In order to effectuate this plan, Naughton asked to be released from the restrictive covenants under his five existing franchise agreements. CutCo turned down this request and instead urged Naughton to open additional "Great Expectations" salons.

In August 1985, Naughton--who had by this time become a resident of California--ceased his involvement in four of the salons and notified plaintiff of his intention to terminate the existing franchise agreement for the fifth salon. Several months later he opened two new hair salons and reopened the fifth salon under the trade name "The Look Apart." As a result, CutCo brought this diversity suit alleging that Naughton's actions violated the in-term restrictive covenants in the five Great Expectations franchise licensing agreements or, in the alternative, the post-term restrictive covenants contained in Naughton's various licensing agreements with CutCo.

During its seven-year relationship with Naughton, CutCo asserts that it has been in constant communication with him by telephone and through correspondence, providing technical advice, advertising, and equipment. Naughton and his business associates telephoned CutCo's offices in New York and regularly forwarded royalties, fees, and reports to plaintiff in New York. CutCo sent personnel to visit defendant's salons. Moreover, each franchise agreement signed by Naughton and CutCo provided that any dispute arising under them would be governed by New York law and that any arbitrable dispute would be argued in New York. Naughton consented to the jurisdiction of the New York courts over the enforcement or confirmation of any award rendered by an arbitrator.

After examining plaintiff's pleadings and other documents, the district court dismissed CutCo's complaint finding that the recited facts when viewed as a whole failed to ...


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