Sunday, August 17, 2014

Meet the Incredibles: New Twists in the Preferred Fragrance Legal Saga

Back in October of 2011, a group of investors bought Preferred Fragrance, Inc., a manufacturer of knock-off perfumes. The investors soon came down with a severe case of buyer’s remorse. They believe they paid too much for the company because the sellers misrepresented its value. [Wait—professional knock-off artists misrepresented value? I’m shocked, shocked!—Ed.] The investors also believe that the CEO of the acquired company violated not one but two non-compete agreements.

The investors (Uni-World Capital, L.P. et al.) eventually put their allegations into an October, 2013 lawsuit against Preferred Fragrance CEO Ezriel Polatsek and others, including Ezriel’s wife, brother, and father who were employed by PF. In the course of the lawsuit, the investors asked Federal judge Paul Engelmayer for a temporary restraining order and preliminary injunction to stop Ezriel Polatsek from violating his non-compete agreements. The judge denied the request but after further discovery the plaintiffs returned with substantially stronger evidence to support the injunction.

At this point the judge decided he needed to hear live testimony from Ezriel Polatsek and his younger brother Abraham in order to sort things out. The hearings took place over several days this past June. From the snippets of transcript included in the opinion, the hearings sound at times like dialogue from a Marx brothers movie. (English is a second language for the Polatsek brothers, who grew up speaking Yiddish at home. The judge was mindful of this fact and gave it due consideration.)
THE COURT: Sorry. Wait a minute. Let me understand this. At your deposition, when you were asked, did anyone go with you on that trip, the truthful answer was your brother, correct?
THE WITNESS [Ezriel Polatsek]: Right, but –
THE COURT: Whoa. And you did not mention your brother, correct?
THE COURT: At the time of your deposition, did you remember that your brother had gone with you on that trip?
THE COURT: Why did you not mention your brother when you were asked the question whether anyone went with you on the trip?
THE WITNESS: Because it was a lot of Abes, and my answer to Abe Polatsek, and I just make a mistake to this answer, Abe Katz.
THE COURT: Thank you.
The Court finds Ezriel’s explanation for his false statement at his deposition—that he had accidentally confused his own brother with a business associate—wholly incredible.
That’s strong language. In addition to “wholly incredible,” the judge uses the phrase “not credible” seven times in connection with the testimony of the Polatsek brothers. (That doesn’t count “incredible,” “lacks credibility,” and “pattern of credibility-defying denials.”)

Judge Engelmayer doesn’t mince words:
The Polatseks’ original, flagrantly false testimony, is vital context. There is no benign explanation for this false testimony. The Court must conclude that the Polatseks had something to hide

The Court does not credit Ezriel’s explanations, which are repudiated by the assembled documentary evidence. They reflect a facile and unconvincing attempt to explain away emails that show active involvement by him on behalf of Exceed.
On July 10, Judge Engelmayer granted a preliminary injunction against Ezriel Polatsek enforcing the non-compete agreements. It appears to have not been a difficult call.

The judge found compelling evidence that Ezriel Polatsek “has violated his non-compete agreements, on a number of occasions and in connection with multiple competing or potentially competing entities.”
the brothers’ testimony was so substantially impeached—including by documentary proof or other testimony, and at points by its inherent illogic—that the Court is constrained to conclude that Ezriel and Abraham at points gave knowingly untruthful testimony to the Court. These adverse credibility findings contributed to the Court’s determination that Ezriel has violated the non-compete agreement and that there is a substantial likelihood that he will continue to do so absent a preliminary injunction.
The fifty-one page opinion makes for highly entertaining reading. It describes how, in 2013, two fragrance-related companies—Ouleaf and Exceed—were started by Ezriel’s brother and a former employee’s son, respectively. Abraham formed Ouleaf after a few conversations with a woman who owns a Chinese company that is PF’s main supplier. Ouleaf sells perfumes to 10 retail chains, each of which is or previously was a customer of PF. Exceed LLC was the brainchild of 22-year-old Abe Katz, son of Ezriel’s former right-hand saleswoman at PF, and its big project was a product line for the Wilhelmina modeling agency. Ezriel’s involvement with both companies was in violation of his non-compete agreement.

With the non-compete injunction out of the way (assuming that Ezriel abides by its terms), the case will now focus on the fraud charges against the Polatseks and their associates. Expect more stories from the colorful world of knock-off perfume.

The case discussed here is Uni-World Capital, L.P. et al v. Preferred Fragrance, Inc. et al., U.S. District Court, Southern District of New York, Filing 156: Opinion and order, dated July 10, 2014. It is available here.

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