Automated Management Systems, Inc. v. Rappaport Hertz Cherson Rosenthal, P.C.

Background

Automated Management Systems, Inc. (AMSI) asserted claims involving copyright infringement, trade-secret misappropriation under the Defend Trade Secrets Act, unfair competition, breach of contract, and tortious interference with contract. The case concerned software including AMSI’s Landlord Tenant Legal System and software associated with defendant Branko Rakamaric.

On March 9, 2020, the court entered a protective order governing confidential and proprietary information produced, disclosed, or filed in the case. The order covered confidential information and copies, extracts, compilations, and summaries of that information, and limited who could receive it.

In connection with pretrial motions filed in October 2024, AMSI gave the court a flash drive containing videos and links to videos comparing aspects of AMSI’s software with Rakamaric’s software. At least 15 videos were made using Invideo-AI, whose terms of service stated that users granted the platform a broad license to use customer content and generated output. AMSI programmer Iuri Riemer stated that he had uploaded data from both software systems to Invideo-AI and had created some videos several years earlier and additional videos more recently.

Defendants’ motion

The defendants moved for sanctions under Rule 37(b)(2) of the Federal Rules of Civil Procedure. They sought dismissal of AMSI’s Third Amended Complaint and attorney’s fees and costs. Alternatively, they sought fees and costs connected with earlier summary-judgment motions and permission to file a new summary-judgment motion. They argued that AMSI violated the protective order by sharing confidential information with Invideo-AI and by posting or publicly filing videos containing confidential information.

Court’s analysis

The court held that the record did not clearly establish what confidential information AMSI gave to Invideo-AI or when the disclosure occurred. Because Riemer stated that he had possessed the source-code information since 2016, the court could not determine whether any disclosure to Invideo-AI occurred before or after the protective order took effect. The court therefore could not find clear evidence of a protective-order violation based on the alleged provision of information to Invideo-AI.

The court reached a different conclusion about the trial videos. It found a clear violation because AMSI prepared videos containing extracts, compilations, or summaries of confidential information from Rakamaric’s source code, submitted them to the court without requesting that they be sealed, and shared them with third parties, including Schmuel Judkovitz, YouTube, and Invideo-AI. The court found that these violations occurred after the protective order was entered and continued for several years before AMSI attempted to correct the problem by removing the YouTube videos.

The court declined to impose terminating sanctions, meaning dismissal of AMSI’s claims, because the violation did not prejudice the defendants’ ability to defend the case. It concluded that a less severe sanction was appropriate because AMSI had violated the order, concealed the conduct for several years, and caused the defendants to spend time and resources bringing the issue before the court.

Ruling

The court denied in part and granted in part the defendants’ motion. It awarded the Law Firm Defendants their attorney’s fees and expenses associated with bringing the sanctions motion. The court denied all other requested relief, including the request for dismissal and the alternative requested relief described in the motion.

The court stated that it would issue a separate order requiring AMSI to show cause—explain why—its trade-secret claims should not be dismissed in light of the evidence that AMSI disclosed information it claimed was secret. That potential dismissal was not decided in this Memorandum Order. Judge Laura Taylor Swain directed that any motion seeking determination of the amount of fees be filed within 90 days, after the required meeting and conferral with opposing counsel, and supported by appropriate time records.