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Decided on October 22, 2010
Supreme Court, New York County

603778/2005
For Plaintiff: The Paul Law Firm 2 Collyer Place White Plains, New York 10605 (Joshua Paul) For Defendants: Mound Cotton Wollan Greengrass One Battery Park Plaza New York, New York 10004 Attorneys for Abelman defendants (Daniel Markewich, Michael Koblenz, and Emilie Bakal-Caplan) Capuder Fazio Giacoia LLP 90 Broad Street New York, New York 10004 Attorney for Ross defendants (Douglas Capuder) Bernard J. Fried, J.
In this legal malpractice action, plaintiff Elizabeth Arden, Inc. (Arden) seeks damages against the defendant law firms, Abelman, Frayne & Schwab (Abelman), and The Firm of Karl F. Ross,
P.C. (Ross), as well as two individual attorneys at each firm, Joseph J. Catanzaro (Catanzaro; Abelman includes Catanzaro unless the context otherwise requires), and the estate of Herbert Dubno (Dubno), relating to patent number 5,268,166 (the patent), which lapsed on December 7, 2001.
The patent covered a cosmetic application system, and would have expired on July 9, 2012, if all three periodic maintenance fees had been timely paid to the Patent and Trademark Office (PTO).
The patent was licensed to Mystic Tan, Inc., pursuant to a license agreement dated May 6, 1999 (the license agreement), which would have continued for the expected life of the patent. Arden had a contractual duty pursuant to the license agreement to maintain the patent.
Arden, in consultation with Abelman, intentionally decided not to pay the required maintenance fee, in order to reduce costs. Arden charges Abelman with malpractice for not advising it of the existence of the third-party license agreement. Arden also charges both Abelman and Ross with negligence for failing to bring a timely petition before the PTO to revive the patent on the ground of unintentional delay in paying the maintenance fee.
The regulations of the PTO allow for two distinct grounds for reinstatement of a lapsed patent, unintentional delay in payment (37 CFR 1.137 [b]), and unavoidable delay (37 CFR 1.137 [a]). The former requires merely a statement that the delay in payment was unintentional. The latter applies a more stringent standard and requires an evidentiary showing. Both require that the entire delay from the date of lapse be either unintentional or unavoidable, respectively.
Defendants move to dismiss the second amended complaint (the complaint) in its entirety as untimely (CPLR 3211 [a] [5]), for summary judgment (CPLR 3212), and for failure to state a cause of action (CPLR 3211 [a] [7]), on the ground that, as a matter of law, defendants have established that Arden cannot prove, on this record, that it would have prevailed, but for defendants' alleged negligence, on a petition based on unintentional delay, which is the "case within the case" in this malpractice action (see Ambase Corp. v Davis Polk & Wardwell, 8 NY3d 428, 434 [2007]; Aquino v Kuczinski, Vila & Associates, P.C., 39 AD3d 216, 219 [1st Dept 2007]).
This action was commenced by filing on October 25, 2005. Abelman has presented a prima facie case that it was replaced by Ross as counsel in the summer of 2002, except for some unrelated matters that it retained. This action therefore must be dismissed as untimely on its face, as against Abelman, unless Arden can present sufficient evidence to raise a triable issue of fact as to whether the statute of limitations (CPLR 214 [6]) was tolled by Arden's continuous representation on the specific matter of the revival of the patent after October 25, 2005.
The complaint contains five causes of action, denoted as "counts." The first three causes of action are against Abelman for professional negligence. The first is in connection with the lapse of the patent, consisting of failing to inform Arden of the facts surrounding the payment of the maintenance fee for the lapsed patent and the existence of the licensing agreement. The second cause of action alleges that Abelman failed to advise Arden properly about the significance of the PTO regulations in relation to payment of the maintenance fee for the patent before it lapsed, and the procedures available to Arden before the PTO. The third cause of action alleges that Abelman failed to advise Arden properly about the requirements and [*2]procedures of the PTO after the patent had lapsed. The fourth cause of action has been withdrawn.
The fifth cause of action charges Ross, and defendant Phyllis Dubno, the administrator for her husband, a deceased Ross attorney, with numerous actions or omissions, including the failure to check the available public sources to determine the patent's status in October 2002; failure to send Arden a copy of an October 21, 2002 letter from Catanzaro, which suggested that Ross consult Arden on whether to pursue the petition on the grounds of unintentional delay, or to consult with Arden on the contents; failure to seek instructions from Arden on whether to continue with the petition; failure to notify Arden that the patent was not in full force; and failure to advise Arden of the necessity of filing a petition with the PTO expeditiously. Arden alleges that, but for Ross's negligence, the PTO would have granted a timely-filed petition based on unintentional delay.
No petition was filed on behalf of Arden by either Abelman or Ross. The applicable two-year statute of limitations for a petition on the ground of unintentional delay (35 USC 41 [c] [1]; 37 CFR 1.20) expired on December 7, 2003.
In 2005, upon learning that the patent had not been revived, Arden filed a petition to accept late payment on the ground that the maintenance fee had been unavoidably delayed (37 CFR 1.378 [a]). No petition was ever filed on the ground of unintentional delay.
The PTO denied the petition, and denied Arden's request for reconsideration. In that decision (deft.'s ex. 13), based on detailed submissions from Arden, the PTO considered the entire factual background, including how Arden outsourced the administration of its newly acquired patent portfolio to outside counsel, and held that Arden had not shown that its conduct met the applicable standard that it exercised that degree of diligence that a reasonably prudent person "generally used and observed ... in relation to their most important business" to ensure that the maintenance fee was timely paid (id.). The PTO held that Arden had not satisfied the reasonably prudent person standard because it had an independent duty to investigate the patent, in order to ensure that the maintenance fee was timely paid, and counsel's failure was not a sufficient excuse. The record does not indicate that Arden has sought judicial review of the PTO's determination.
There are two distinct spheres of representation in which malpractice is alleged: Abelman's services leading up to the ill-advised decision to allow the patent to lapse, and the failure of all defendants to file a petition to revive on the ground of unintentional delay with the PTO. In the former sphere, the issue on the timeliness motion is whether Abelman has established as a matter of law that the statute of limitations was not tolled by continuous representation with respect to its involvement in the decision to allow the patent to lapse. In the latter sphere, the issue on this motion with respect to all defendants is whether defendants have established as a matter of law that Arden could not have prevailed on a revival petition before the PTO, if it had been timely filed.
In a transaction that closed on January 23, 2001, Arden's predecessor, through its subsidiary, plaintiff FD Management, Inc., acquired from a Unilever, Inc. (Unilever) subsidiary, not only the Arden name, which it adopted upon the closing, but also the patent, along with 791 other patents and a portfolio of trademarks. Prior to this transaction, Arden had owned trademarks, but no patents. Abelman had administered Arden's trademark portfolio. Abelman represented Arden both in connection with performing due diligence for the Unilever transaction, and then, according to Oscar Marina (Marina), Arden's General Counsel, Abelman [*3]acted as Arden's outsourced patent and trademark department (pltf.'s ex. 7).
After the closing of the Unilever transaction, Arden and Abelman worked together to determine what patents had no value to Arden and could be allowed to expire by not paying the maintenance fee.
According to the declaration submitted to the PTO by James T. Perry (Perry), Associate General Counsel of Arden (deft.'s ex. 10 [A]), Abelman took possession of the patent files directly from Unilever prior to the closing, and some of the files were disorganized and incomplete. Abelman handled the actual payments of the maintenance fees to the PTO, in consultation with and subject to instructions from Arden.
According to the complaint, Abelman was charged with the responsibility of obtaining information about the patent portfolio from Unilever, communicating that information to Arden, and advising Arden as to the significance of that information. According to Marina, his expectation was that Abelman would take the information about the license agreement, "along with all the other information they were collecting with the patents, in order for them to provide us with legal advice at the right time with respect to a decision on whether to maintain or withdraw a patent" (pltf.'s ex. 7, at 44).
Abelman initially worked in consultation with Unilever's in-house patent counsel, Milton Honig (Honig), to determine which utility patents were worth keeping. In a March 9, 2001 telephone conference, Honig conveyed his opinion to Alan Gilliland (Gilliland), an attorney with Abelman, on which patents to keep, and which to drop, and explained to Gilliland that the patent should be kept because it was licensed to Mystic Tan, Inc. Gilliland prepared a memorandum of that conversation that included a list of utility patents, including the patent, listed under its Unilever internal number of J3191, with the notation, "licensed to Mystic-Tan. Keep it" (ptff.'s ex. 26).
Honig sent a copy of a March 8, 2001 letter outlining the financial terms of the Mystic Tan license agreement to both Gilliland and Marina. Both Arden and Abelman thus had institutional knowledge of the existence of the Mystic Tan license, based on the documentary evidence that each had received. Honig also prepared a master list of utility patents worldwide (pltf's. ex. 40), and provided it to Gilliland.
On June 7, 2001, one of the maintenance fees became due, and was not paid. Gilliland had been notified of the due date, but the decision was made to take advantage of the six-month grace period for payment of maintenance fees. The PTO allows such maintenance fees to be paid prior to the expiration of a six-month grace period authorized by 35 USC 41 (b), with a minor surcharge.
On June 26, 2001, Arden hired Cathy Shore-Sirotin (Shore-Sirotin) as Associate General Counsel, and directed her to work with Abelman, and to obtain information from Honig and Anthony Vargas (Vargas), an Arden vice-president for product development, to determine what patents could be allowed to expire because they were of no value to Arden. Also in June 2001, Gilliland was largely replaced by Catanzaro in handling the Arden account.
By letter dated August 7, 2001 (deft.'s ex. 14), Catanzaro sent Shore-Sirotin a schedule of patents, including the lapsed patent, that had been acquired from Unilever, and asked her to review the patents with Vargas, and then provide Abelman with instructions on how to proceed. That schedule did not have any notations written in next to the patent. Vargas advised Shore-Sirotin that Arden was not using the patent, but did not advise her of the existence of the license agreement. [*4]
By letter dated September 10, 2001, Catanzaro transmitted several schedules of patents worldwide, including patents in the United States, with maintenance fees due during the period of June through August 2001, to Shore-Sirotin, requesting that she review each patent to determine whether the maintenance fees should be paid. Shore-Sirotin returned that schedule to Catanzaro with the notations "drop" and "offer to buy" next to the lapsed patent, indicating that she was aware that there was an outstanding offer to purchase the lapsed patent. This raises an obvious question as to how Arden could indicate that a patent, for which there was an offer to buy, should be dropped.
On December 6, 2001, the last day before the end of the grace period for payment of the maintenance fee, Shore-Sirotin sent Catanzaro by fax a copy of the schedule that he had sent her with the notation "drop" next to the lapsed patent. In accordance with this apparent instruction from Shore-Sirotin, Abelman did not pay the maintenance fee on the lapsed patent prior to expiration of the grace period on December 7, 2001.
Shore-Sirotin testified at her deposition that Marina never informed her of the Mystic Tan license. The Abelman firm also did not advise Arden not to drop the patent because it was licensed to Mystic Tan.
Several months after the patent had lapsed, Shore-Sirotin learned from Honig that the patent was licensed, and immediately sent an e-mail dated March 19, 2002, referencing the patent and its United Kingdom analogue, to Pat Tormey, an Abelman legal assistant, stating, "[P]lease do NOT DROP these patents in the U.S ... We have licensed these patents in the U.S. and have a duty to maintain them [capitalization in original]" (deft.'s ex 10 [A]).
In a series of e-mail exchanges in early June 2002, Shore-Sirotin and Catanzaro discussed the cost of reviving the patent. At that time, a fee dispute had arisen between Arden and Abelman over what Arden considered excessive amounts billed for attorney services, primarily involving Catanzaro, for work that Marina believed should have been done by paralegals. According to Shore

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