NXIVM Corp. v. Ross [1]

NXIVM provides a course manual for the paid subscribers of its exclusive and expensive seminar training program, "Executive Success." The course manual contains a copyright notice on almost every page and all seminar participants sign non-disclosure agreements, purporting to bar them from releasing the manual or the proprietary techniques learned in the seminars to others.

Rick Ross runs nonprofit websites, www.rickross.com and www.cultnews.com, in connection with his work as a for-profit "cult de-programmer." The websites provide information to the public about cults and other controversial groups. Ross obtained a copy of NXIVM's course manual from fellow defendant, Stephanie Franco, a one-time NXIVM participant. Ross commissioned two self-styled experts, Paul Martin and John Hochman, to write reports analyzing and critiquing the course manual. The reports quoted sections of the manual in support of their analyses and criticisms and were published on Ross's websites. The reports also made statements that, according to NXIVM, misled readers into believing that the Executive Success program is a "cult." The websites also included Executive Success on a list of organizations designated as "cults."

NXIVM sued Ross and various co-defendants for copyright infringement, trademark disparagement under federal law, interference with contractual relations, and product disparagement. On the basis of the copyright claim, NXIVM moved for a preliminary injunction to require that Ross remove the copyrighted information from his websites. The United States District Court for the Northern District of New York denied the preliminary injunction, finding that NXIVM had no likelihood of success on the merits of its claim because the defendants' use of quotations from the course manual constituted fair use. On appeal, the Second Circuit Court of Appeals affirmed [2], finding that the websites' use of quotations from the manual to support their critical analyses of the seminars was transformative, and that this outweighed the concurrent commercial purpose of Ross's use (in connection with his for-profit business as a de-programmer of cult victims) and his (assumed) bad faith in obtaining the manuscript in violation of NXIVM's non-disclosure agreement. The court also held that the defendants' use of portions of 17 pages out of a 500-page manual was not unreasonable in light of their purpose, and that any damage to the market for NXIVM's work was a result of criticism (which weighs in favor or fair use), not substitution (which weighs against fair use). NXIVM Corp. v. Ross Institute [2], 364 F.3d 471 (2nd Cir. 2004) (Second Circuit website version attached). The Supreme Court denied certiorari. NXIVM Corp. v. Ross Institute, 543 U.S. 1000 (2004).

The case was then transferred to New Jersey on 03/07/2006 (Case No. 06-CV-01051). NXIVM amended its complaint, apparently dropping its trademark claim and adding a trade secrets claim. Morris and Rochelle Sutton moved to dismiss the product disparagement, interference with contractual relations, tortious interference with contractual relations, and copyright infringement counts of the amended complaint. The court dismissed the product disparagement claim, holding that the challenged statements were statements of opinion protected by the First Amendment. It dismissed the tortious interference claims on the same grounds, holding that, where a claim for tortious interference with contractual relations or prospective economic advantage implicates constitutionally protected speech, the constitutional privilege for statements of opinions applies. The court also dismissed the vicarious copyright infringement claims against the Suttons, finding that they had no right or ability to control the statements published on the websites. See NXIVM Corp. v. Sutton [3], No. 06-CV-1051 (D.N.J. June 27, 2007).

Update:

2/13/2008 - A number of defendants moved to strike NXIVM's pleadings and for sanctions as a result of discovery disputes.

2/23/2008 - NXIVM filed a memorandum [4] in opposition to the motions to strike.

5/9/2008 - Court denied [5] the motions to strike, but awarded attorneys' fees to defendants for discovery costs.

4/09/2009 - NXIVM  filed suit with similar claims against the defendants in the Western District Court of New York (2009 WL 1524800). NXIVM also added Lollytogs, a children's clothing supplier, as a defendant. All defendants have moved to dismiss. The Suttons in their motion to dismiss point out that by refiling this complaint in New York, NXIVM is forum-shopping. The court has not yet ruled on these motions.