Blattman et al v. Siebel et al

Filing 64

MEMORANDUM. Signed by Judge Gregory M. Sleet on 4/12/2016. (mdb)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

ERIC BLATTMAN, individually and as an
assignee of certain former members ofE2. 0, LLC,
LAMB FAMILY LLC, and DAVID
STAUDINGER
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Plaintiffs,
v.

THOMAS M. SIEBEL, DAVID SCHMAIER,
JOHN DOE 1, andJANEDOE2,

·Defendants.

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C.A.·No. 15-530-GMS

MEMORANDUM
I.

INTRODUCTION
The plaintiffs filed a Complaint (D.I. 1) on October 28, 2014 and an Amended Complaint

on March 17, 2015 (D.I. 28) in the United States District Court for the Southern District of New
York, asserting a claim under 15 U.S.C. § 78j (b) and 17 C.F.R. § 240.lOb-5, and a common law
claim for intentional fraudulent misrepresentations and omissions, and a claim for breach of
contract. On April 24, 2015, the defendants filed a Motion to Dismiss the Amended Complaint, or
in the Alternative, to Transfer under U.S.C. § 1404(A) (D.I. 33). The defendants' Motion to
Transfer was granted on June 16, 2015 (D.I. 45), and the action was transferred to the District of
Delaware. The court stayed this action pending resolution of the defendants' Motion to Dismiss.
For the reasons that follow, the court will deny the defendants' motion to dismiss as to the fraud
claims, but grant it as to the breach of contract claim.

II.

BACKGROUND
The plaintiffs owned interests in Efficiency 2.0, LLC ("E2.0") before its merger with C3,

LLC. (D.I. 28 at ifif 1-3.) Thomas Siebel was the Chief Executive Officer and majority owner of
C3, LLC, and is now the Chairman and CEO of C3, Inc., its successor. (Id. at if 4.) David Schmaier
was the Chief Operating Officer of the C3 and was a holder of a significant minority interest in
C3, LLC. (Id. at if 5.) E2.0 was a start-up company based in New York City that provided energy
efficiency software and program services to utilities companies and its small-to-medium business
customers. (Id. at

ifif

13, 15.) C3, LLC provided energy and emissions management software

solutions for large commercial and industrial companies. (Id. at if 25.)
In early 2012, Siebel and Schmaier approached Thomas Scaramellino, the CEO and
founder of E.20 to discuss a

pot~ntial

acquisition of E2.0 by C3. (Id. at

if

29.) Numerous

negotiations between the defendants and E2.0 management resulted in a nonbinding Letter of
Intent on March 30, 2012. (Id. at if 33.) The plaintiffs allege that on four different occasions, Seibel
and Schmaier spoke directly to E2.0. employees and convinced them to continue working at E2.0
after the merger by promising incre·ased salaries and an unchanged work environment. (Id. at

if

35.)
According to the plaintiffs, Scaramellino informed Siebel and Schmaier that he would not
enter into the proposed Merger Agreement unless 1) Siebel personally committed to cause C3 to
·fund the expansion ofE2.0's business operations under a three-year budget, and 2) Siebel assured
that the post-merger E2.0 would operate as a stand-alone business based in New York with its
existing staff and management. (Id. at

if 37.)

Plaintiffs allege that Siebel "sign[ed] off on, and

approve[d]" the E2~0. three year budget. (D.1. 28 at ifi! 37-39.)

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Around May 1, 2012, C3, LLC and a wholly-owned C3 subsidiary entered into an
Agreement and Plan of Merger with E2.0 and a representative of the E2.0 Unitholders ("Merger
Agreement"). (Id. at if 41.) The Merger Agreement provided that C3 would be the sole owner of
entity created by the merger. (Id.) In exchange, the former E2.0 Unitholders would receive shares
of C3 stock and C3 would satisfy E2.0's outstanding indebtedness. (Id. at if 42.)
The plaintiffs assert that over the course of the negotiations, the defendants knowingly
made false representations and failed to disclose information to the plaintiffs that would expose
the falsity of these statements. These include: 1) assurances that C3 was a going concern and its
Units were worth $500 million (id. at ifif 45-94); 2) guarantees that E2.0 would continue as a standalone business (id. at ifif 95-115); and 3) Siebel's commitment to cause C3 to provide the capital
funding for E2.0's expansion (id. at if 116-128.). The plaintiffs claim that after the merger, they
learned that the defendants never intended to fulfil any of these promises. They claim the E2.0
Unitholders sustained substantial financial losses, including receiving C3 shares worth less than
one4hird of the value represented by the defendants. (Id. at if 133-135.) Additionally, Siebel took
control of the surviving E2.0 Business Unit post-merger, refused to fun the approved budget, fired
all of the former employees of E2.0, and shut down its New York office. (Id. at 'l! 137.)
III.

· STANDARD OF REVIEW

A. Federal Rules of Civil Procedure 8(a) & 12(b)(6)
The Federal Rules of Civil Procedure require that a plaintiff's complaint contain "a short
and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P
8(a)(2). A defendant may move to dismiss a complaint if the plaintiff fails "to state a claim upon
which relief can be granted." Fed. R. Civ. P. 12(b)(6). While the complaint need not include
"detailed factual allegations," it must at least contain "sufficient factual matter ... to 'state a claim

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for relief that is pl;msible on its face."' Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell
At!. Corp. v. Twombly, 550 U.S. 544, 555, 570 (2007)). To be facially plausible a claim must be

supported by "well-pleaded facts that permit the court to infer more than a mere possibility of
misconduct." Id. at 679.
The issue before the court when deciding a Rule 12(b)(6) motion "is not whether a plaintiff
will ultimately prevail" but, rather, whether the plaintiff's complaint is plausible enough to entitle
him to offer evidence in support ofhis claims. In re Burlington Coat Factory Sec. Litig., 114 F.3d
1410, 1420 (3d Cir. 1997). In evaluating a motion under Rule 12(b)(6), the court accepts all factual
allegations in the complaint as true, so long as they are not simply "legal conclusions[s] couched
as factual allegations[s]." Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 555). Thus, "[a]
motion to dismiss pursuant to Rule 12(b)(6) may be granted only if, accepting all well pleaded
allegations in the complaint as true, and viewing them in the light most favorable to plaintiff,
plaintiffis not entitled to relief." In re Burlington, 114 F.3d at 1420.
B. Federal Rule of Civil Procedure 9(b)
Under Federal Rule of Civil Procedure 9(b), claims that allege fraud or mistake are subject
to a heightened pleading standard; a plaintiff must "state with particularity the circumstances
constituting fraud or mistake." Fed. R. Civ. P. 9(b). "Rule 9(b) serves to give defendants 'notice
of the claims against them, provide[] an increased measure of protection for their reputations, and
reduce[] the number of frivolous suits brought solely to extract settlements."' In re Suprema
Specialties, Inc. Sec. Litig., 438 F.3d 256, 270 (3d Cir. 2006) (alterations in original) (quoting In
re Burlington, 114 F.3d at 1418). "Although [Rule 9(b)] falls short of requiring every material

detail of the fraud such as date, location, and time, plaintiffs must use alternative means ofinjecting

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precision and some measure of substantiation into their allegations of fraud." In re Rockefeller Ctr.
Props., Inc. Sec. Litig., 311F.3d198, 216 (3d Cir. 2002) (internal quotation marks omitted).

C. Private Securities Litigation Reform Act
A plaintiff must allege the following elements to state a claim for a violation of Rule 1Ob-5:
(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection
between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon
the misrepresentation or omission; (5) economic loss; and (6) loss causation. Stoneridge Inv.
Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 157 (2008). The Private Securities Litigation

Reform Act ("PSLRA") addressed the pleading standard for the first two of these elements.
Material misrepresentation/omission: "[T]he complaint shall specify each statement alleged to

have been misleading, the reason or reasons why the statement is misleading, and, if an allegation
regarding the statement or omission is made on information and belief, the complaint shall state
with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(l). Scienter:
"[T]he complaint shall, with respect to each act or omission alleged to violate this chapter, state
with particularity facts giving rise to a strong inference that the defendant acted with the required
state of mind. § 78u-4b(2)(a). The standards imposed by the PSLRA are in addition to the
traditional federal pleading requirements, set by Federal Rules of Civil Procedure 8, 9, and 12, and
federal case law. 1 See, e.g., Iqbal, 556 U.S. 662; Twombly, 550 U.S. 544.
IV.

DISCUSSION
In their complaint, the plaintiffs bring (1) a Section lO(b) fraud claim, (2) a common law

fraud claim, and (3) a breach of contract claim. (D.I. 28.) The court will address each in tum.

1
"To the extent that Rule 9(b) conflicts with the PSLRA, the statute supersedes it." Key Equity Investors v.
Sel-Leb Mktg., 246 F. App'x 780, 784 n.5 (3d Cir. 2007) (citing In re Advanta C01p. Sec. Litig., 180 F.3d 525, 531
n.5 (3d Cir. 1999)).

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A. Fraud Claims
The plaintiffs allege the defendants fraudulently conspired to cause C3 to acquire the
plaintiffs' interest in E2.0. Both the Section lO(b) and common law fraud claims require the
plaintiffs to prove they reasonably relied upon the defendants' alleged misrepresentations. The
defendants argue that the plaintiffs' fraud claims should be dismissed because the alleged
wrongdoing occurred in negotiations that preceded a contract. According to the defendants, the
Merger Agreement's integration clause precludes a finding of reasonable reliance.
· . i. Section 1O(b) Fraud Claim
To establish the reliance element of a Section 1O(b) Claim, the plaintiff must show "a causal
nexus between the misrepresentation and the plaintiff's injury" and demonstrate that "the plaintiff
exercised the diligence that a reasonable person under all of the 9ircumstances would have
exercised to protect his own interests." AES Corp v. Dow Chem. Co., 325 F.3d 174, 178 (3d Cir.
2003). Reasonable reliance is a fact-specific inquiry, including factors such as "(1) whether a
fiduciary relationship existed between the parties; (2) whether the plaintiff had the opportunity to
detect the fraud; (3) sophistication of the plaintiff; (4) the existence of a long standing business or
personal relationships; and (5) the plaintiff's access to the relevant information." Id. at 178-79. A
nonreliance clause is only one factor district courts should consider when determining whether a
plaintiff can establish the element of reasonable reliance. Id. at 183.
The Merger Agreement only includes an integration clause, not a nonreliance clause. See
In re Daimlerchrysler AG Securities Litig., 294 F. Supp. 2d 616, 623 (D. Del. 2003) ("[T]his case
involves an Integration Clause, which is not explicit with respect to the issue of reliance as the
non-reliance clause in AES."). As one of many factors for the court to consider, the integration

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clause in the Merger Agreement does not categorically b·ar the plaintiffs' claim of reasonable
reliance. The defendants' motion to dismiss the Section lO(b) claim is denied.
ii. Common Law Fraud Claim
In Kronenberg v. Katz, 872 A.2d 568 (Del. Ch. 2004), the court held that for a contract to
bar a fraud claim, "the contract must contain language that, when read together, can be said to add
up to a clear anti-reliance clause by which the plaintiff has contractually promised that it did not
rely upon statements outside the contract's four comers in deciding to sign the contract. The
presence of a standard integration clause alone, which does not contain explicit anti-reliance
representations and is not accompanied by other contractual provisions demonstrating with clarity
that the plaintiff had agreed that it was not relying on facts outside the contract, will not suffice to
bar fraud claims." Id. at 593. The integration clause here is almost identical to the one analyzed in
Kronenberg. 2 The Merger Agreement does not include other anti-reliance representations of the

kind required to bar a fraud claim. The court will not prematurely dismiss the plaintiffs common
law fraud claim.

B. Breach of Contract Claim
The plaintiffs base their breach of contract claim on Siebel' s alleged promise to cause C3
to fund the three-year budget ofE2.0. The defendants argue that the court should dismiss the claim
based on 1) the Merger Agreement's integration clause and 2) the Statute of Frauds. According to

2

The integration clause in Kronenberg states: "This Agreement, which includes the Exhibits and shall include any
Joinders upon execution thereof, constitutes the entire agreement and understanding of the parties hereto with
respect to the subject matter hereof and supersedes all prior or contemporaneous agreements, understandings,
inducements, or conditions, oral or written, express or implied." Kronenberg v. Katz, 872 A.2d 568, 587 (Del. Ch.
2004). The integration clause here states: "This Agreement and all other agreements referred to herein set forth the
entire understanding of the parties hereto relating to the subject matter hereof and thereof and supersede all prior
agreements and understandings among or between any of the parties relating to the subject matter hereof and
thereof." (D.1. 21, Ex. A at41.)

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the defendants, the plaintiffs seek to enforce a three-year oral contract covering negotiations prior
to the integrated Merger Agreement.
The Statute of Frauds requires a written contract for any agreement requiring performance
over the course of more than one year. 6 Del. C. § 2714. Multiple writings will satisfy the Statute
of Frauds if they (a) reasonably identify the subject matter of the contract, (b) indicate that the
parties have a contract, and (c) state with reasonable certainty of the unperformed promises in the
contract. Olson v. Halvorsen, 982 A.2d 286, 293 (Del. Ch. 2008).
In their amended complaint, the plaintiffs state that "Scaramellino asked that Siebel also
sign off on, and approve, the E2.0 Business Unit Budget. ... Siebel did so during the April 17
meeting." This does not support the existence of a written contract. It is ambiguous whether "sign
off on" means that Siebel physically signed the budget. But even resolving that question in favor
of the plaintiffs, they do not allege that the budget contains the subject matter of the contract-that
is, Siebel' s commitment to cause C3 to fund the budget. The Statue of Frauds requires a written
document that memorializes Siebel's promise. His approval of the budget may support the
existence of an oral contract, but it does not qualify as a written contract. There is a difference
between signing the budget and promising funding for the budget. The plaintiffs also do not point
to other documents which, combined, contain the contractual promises. Therefore, the plaintiffs'
breach of contract claim is based on an oral contract barred by the Statute of Frauds. The court will
dismiss the claim for breach of contract. 3

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The court grants plaintiffs leave to amend their complaint if the budget or other writings did, in fact, include
Siebel's promise regarding E2.0's funding. The court notes that applicability of the integration clause is a disputed
factual question, and the court would not dismiss the contract claim on that basis.

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V.

CONCLUSION
For the foregoing reasons, the court will partially grant the defendants' motion to dismiss

for failure to state a claim.

Dated: April

12:_, 2016

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