Graffiti Entertainment, Inc. v. Navarre Corporation et al
Filing
31
MEMORANDUM OPINION AND ORDER granting in part and denying in part 16 Defendants' Motion to Dismiss; Counts I, III and V of the Amended Complaint are DISMISSED; Graffiti Entertainment, Inc. must file a More Definite Statement for Count II by November 19, 2014 or Count II will be dismissed at that time (Written Opinion). Signed by Judge Ann D. Montgomery on 11/06/2014. (TLU)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Graffiti Entertainment, Inc.,
Plaintiff,
MEMORANDUM OPINION
AND ORDER
Civil No. 14-752 ADM/FLN
v.
Speed Commerce Inc., Navarre
Distribution Services, Inc., and Does 1-10,
Defendants.
______________________________________________________________________________
Andrew D. Winghart, Esq., Winghart Law Group, Redwood City, CA and Larry A Frost, Esq.,
Paladin Law, PLLC, Bloomington, MN, on behalf of Plaintiff.
Jeffrey R. Ansel, Esq., Winthrop & Weinstine, P.A., Minneapolis, MN, on behalf of Defendants.
_____________________________________________________________________________
I. INTRODUCTION
On September 16, 2014, the undersigned United States District Judge heard oral
argument on Defendants Speed Commerce Inc., Navarre Distribution Services, Inc., and Does 110's (collectively, “Defendants”) Motion to Dismiss [Docket No. 16]. Plaintiff Graffiti
Entertainment, Inc. (“Graffiti”) opposes the motion. For the reasons set forth below, the motion
is granted in part and denied in part.
II. BACKGROUND
A.
The Named Parties
Graffiti is a Wyoming corporation which acquired the assets, rights, and interests of
Graffiti Entertainment, LLC. Am. Compl. [Docket No. 7] ¶ 4. Speed Commerce Inc. (“Speed”)
is a Minnesota corporation with its principal executive office in Richardson, Texas. Id. ¶ 6.
Navarre Distribution Services, Inc. (“Navarre”) was a wholly owned subsidiary of Speed until
April 2014, when it was administratively dissolved. Id. ¶ 5. Graffiti alleges that a series of
corporate name changes, mergers, and acquisitions demonstrate Navarre was an alter ego of
Speed and any liability attributable to Navarre should be legally and equitably assigned to Speed.
B.
The Factual History
Graffiti is a software developer founded in 2006. Id. ¶ 11. Graffiti developed and
published, among other things, video games for gaming consoles created by Nintendo, Sony, and
Microsoft. Id. Graffiti’s products were published and manufactured for some of the world’s
leading video game publishers, including Electronic Arts and Activision. Id. Like many smaller
software developers, Graffiti did not directly distribute the products it developed. Id. ¶¶ 12, 17.
On December 6, 2007, Graffiti executed a Distribution Agreement with Navarre. Id. ¶
32, Ex. A. The Distribution Agreement made Navarre an authorized distributor of Graffiti’s
products and obligated Navarre to market and sell Graffiti’s entire line of interactive video game
software. Id. ¶ 16. In effect, Graffiti would sell video games to Navarre which in turn sold the
video games to retail outlets including Wal-Mart and GameStop.
In addition to the Distribution Agreement, Graffiti contracted with Universal Funding
(“Universal”) on or about April 9, 2010 for accounts receivable factoring (the “Factoring
Agreement”).1 Id. ¶ 89. The Factoring Agreement supplied Graffiti with essential financing for
its daily operations. Id. ¶ 91. Navarre allegedly possessed knowledge of the Factoring
Agreement through communications with Graffiti and from tendering payment of Graffiti
invoices to Universal. Id. ¶ 85.
The Distribution Agreement required Navarre to remit payment for video games within
1
Factoring is a financial transaction in which a business (like Graffiti) sells its accounts
receivable to a third party (like Universal) at a discount. These agreements are sometimes made
to help businesses meet present cash needs and finance day-to-day operations.
2
60 days from receipt of the games. Id. ¶ 38. On July 11, 2011, Graffiti issued invoice number
32373 to Navarre for $584,755.20. Id. ¶ 48. On July 25, 2011, Graffiti issued invoice number
32374 to Navarre for $146,549.76 (collectively, the “Invoices”). Id. ¶ 49. Graffiti alleges
Navarre failed to tender payment for either invoice. Without these funds, Graffiti’s ability to pay
its own creditors suffered. Id. ¶¶ 48-49, 51. Moreover, Graffiti alleges the timing of Navarre’s
failure to pay caused significant financial damage because Graffiti was in the process of a public
stock offering. Id. ¶¶ 78-82.
Graffiti also alleges that beginning on or about October 2011, Navarre employees began
misrepresenting the state of Graffiti’s inventory to retail vendors. Id. ¶ 19. Specifically, Graffiti
claims Navarre employees told retail vendors that Graffiti was only providing updates to Reader
Rabbit, an existing educational title. Id. The vendors were not informed that other Graffiti titles
in other game categories were available. Graffiti asserts these misrepresentations were intended
to prevent the sale of Graffiti’s products, which would have obligated Navarre to settle
outstanding debts owed to Graffiti. Id. ¶ 21. These misrepresentations were allegedly motivated
by Defendants’ assessment that Navarre’s agreement with GameStop was unfavorable. Id. ¶ 23.
In addition to the alleged statements to retail vendors, Graffiti claims Navarre made false
and defamatory statements to Universal, Graffiti’s factoring provider. Id. ¶¶ 86-88. These
statements caused a rift in Graffiti’s relationship with Universal and prompted Universal to sue
Graffiti. Id. ¶¶ 88-90. Graffiti claims millions of dollars in damages as a result of losing the
day-to-day funding Universal had previously provided. Id. at ¶¶ 91-92.
Graffiti asserts two claims for breach of contract, alleging Defendants’ breached the
contract by failing to pay Graffiti for the Invoices (Count I) and violating the confidentiality
3
clause by disclosing terms of the Distribution Agreement to third parties (Count II). Id. ¶¶ 5568. Graffiti also asserts a claim for breach of the covenant of good faith, alleging Defendants
breached the covenant by intentionally rendering impossible Graffiti’s further performance of
the Distribution Agreement (Count III). Id. ¶¶ 69-82. Further, Graffiti asserts a claim for
tortious interference with contract, alleging Defendants’ false and defamatory statements to
Universal caused a breach of the Factoring Agreement (Count IV). Id. ¶¶ 83-92. Finally,
Graffiti asserts a trade libel claim, alleging Defendants’ statements to third parties were false and
unprivileged (Count V). Id. ¶¶ 93-99. In addition, Graffiti alleges Navarre was an alter ego of
the company presently known as Speed and that equity demands any liability of Navarre be
legally assigned to Speed. Id. ¶ 9.
Defendants move to dismiss under Rule 12(b)(1) and 12(b)(6). Defendants claim Graffiti
lacks standing to sue Navarre for its failure to pay the Invoices because Graffiti sold, assigned,
and transferred the Invoices to Universal. Defendants also argue Graffiti’s remaining claims
must be dismissed because these claims have not been sufficiently pled, and because any
damages resulting from the alleged injuries are prohibited by the Limitation of Liability clause in
the Distribution Agreement. See id. Ex. A ¶ 9.4.
III. DISCUSSION
A.
Dismissal under Rule 12(b)(1) for Lack of Standing
Defendants’ argue Graffiti lacks standing to assert Claims I and III and that those claims
must be dismissed under Rule 12(b)(1). Standing is “an essential and unchanging part of the
case-or-controversy requirement of Article III” of the U.S. Constitution. Lujan v. Defenders of
Wildlife, 504 U.S. 555, 560 (1992) (citation omitted). “The party invoking federal jurisdiction
4
bears the burden of establishing [standing].” Id. at 561 (citations omitted). “A court may
exercise jurisdiction only if a plaintiff has standing to sue on the date it files suit.” Abraxis
Bioscience, Inc. v. Navinta LLC, 625 F.3d 1359, 1364 (Fed. Cir. 2010).
Because standing is a jurisdictional requirement, Defendants request dismissal of Count I
and III under Rule 12(b)(1) of the Federal Rules of Civil Procedure. A motion under Rule
12(b)(1) to dismiss for lack of subject matter jurisdiction may challenge the complaint either on
its face or on the factual truthfulness of its averments. See Titus v. Sullivan, 4 F.3d 590, 593
(8th Cir. 1993); Osborn v. United States, 918 F.2d 724, 729 n.6 (8th Cir. 1990). Defendants
attack the factual truthfulness of Graffiti’s allegation that it owns the Invoices and has standing
to assert claims based on their non-payment. Therefore, Graffiti does not receive the benefits of
Rule 12(b)(6)—namely to have only the pleadings considered and to have them construed in
their favor. See Osborn, 918 F.3d at 729 n.6. Rather, the Court may consider matters outside the
pleadings. Id. (citing Menchaca v. Chrysler Credit Corp., 613 F.3d 507, 511 (5th Cir. 1980)).
In a factual challenge to standing, when a defendant produces facts that call the plaintiff’s
standing into question, the plaintiff bears the burden of affirmatively demonstrating competent
proof that standing exists. Apex Digital, Inc. v. Sears, Roebuck & Co., 572 F.3d 440, 444 (7th
Cir. 2009) (citing Lee v. City of Chi., 330 F.3d 456, 468 (7th Cir. 2003); Retired Chi. Police
Ass’n v. City of Chi., 76 F.3d 856, 862 (7th Cir. 1996), cert. denied, 117 S.Ct. 305 (1996)).
1.
Count I - Breach of Contract for Failure to Pay Invoices
Defendants argue Graffiti lacks standing to bring the breach of contract claim in Count I
because Graffiti sold, assigned, and transferred the Invoices to Universal. In support of its
position, Defendants produced: (1) the Factoring Agreement between Universal and Graffiti; (2)
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images of the Invoices showing payment is due to Universal; (3) a Notification Agreement from
Universal to Navarre stating payments originally due to Graffiti had been sold and assigned to
Universal; and (4) a Settlement Agreement and Release (the “Settlement”) executed by
Universal and Navarre that discharges nine Graffiti invoices, including the Invoices at issue.2
Allen Decl. [Docket No. 19] Ex. A; Urness Decl. [Docket No. 20] Ex. A-D.
The evidence presented by Defendants supports the conclusion that Universal, not
Graffiti, possesses legal claim over the Invoices. First, the Factoring Agreement grants
Universal discretion to purchase the accounts receivable owned by Graffiti. Section 1 of the
Factoring Agreement states, in relevant part:
SECTION 1. Sale and Assignment of Accounts
1.1 Purchase of Accounts. [Graffiti] hereby agrees to sell, assign and transfer to
Universal, and Universal hereby agrees to purchase, all [Graffiti]’s Accounts
which are deemed acceptable by Universal in its sole and absolute discretion;
with full power to Universal to collect and otherwise deal with such Accounts as
the sole and exclusive owner thereof.
Allen Decl., Ex. A. ¶ 1.1.
Additionally, the Notification Agreement from Universal to Navarre notifies Navarre that
payments on any invoices that have not been paid are now to be made payable to Universal.
Correspondence attached to the Notification Agreement states, “all payments for [Graffiti] on the
statement have been sold and assigned to Universal Funding Corporation.” Urness Decl., Ex. C.
The Notification Agreement is signed by a representative of Navarre and the President of
2
One imaged invoice produced by Defendants is labeled as Invoice number 32360. This
invoice matches the date and total amount due of invoice number 32373, one of the invoices
Graffiti references in its Amended Complaint. Because the substance of these differently
numbered invoices is identical, they will be treated interchangeably.
6
Graffiti, Kenneth Hurley.3
The Invoices themselves provide further evidence that Graffiti assigned the Invoices to
Universal. The Invoices are addressed from, “Graffiti Entertainment, Inc., C/O Universal
Funding Corporation,” and the name “Universal Funding Corporation” and its associated bank
account and routing numbers appear on the bottom of the Invoices. Id. Ex. A, B.
Finally, the Settlement between Universal and Navarre discharges nine outstanding debts
owed by Navarre to Universal, including the Invoices. Id. Ex. D.
Defendants rely on the decision in a case with a similar factual context, Apex Digital.
Apex Digital, Inc. v. Sears, Roebuck & Co., 572 F.3d 440 (7th Cir. 2009). In Apex, the Plaintiff
sued a distributer for failing to pay for products delivered under the terms of a contract. Apex
Digital, 572 F.3d at 442. The defendant responded by producing evidence showing the plaintiff
assigned all rights in its accounts receivable to a third party. Id. The Seventh Circuit held that
the Plaintiff lacked standing because it “failed to provide any evidence to rebut” the claims that
the assignment eliminated its right to sue. Id. at 445 (emphasis in original). Apex, therefore,
supports shifting the burden to Graffiti to provide evidence to rebut Defendants’ strong
evidentiary showing that Graffiti lacks standing.
Graffiti presents little evidence to rebut Defendants’ evidence showing Graffiti assigned
all rights in the invoices to Universal. Graffiti attempts to demonstrate standing by asserting two
3
The Notification Agreement signed by Navarre is faded to the point of near illegibility;
the Navarre signature is the only text that is readable. A clear, unsigned version of the
Notification Agreement has been produced by Navarre as evidence of the content of the
Notification Agreement. Graffiti has not contested the legitimacy or purported content of the
signed Notification Agreement.
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instances of injury that resulted from Defendants’ breach of the Distribution Agreement.4 First,
Graffiti avers when Defendants failed to pay the Invoices, Graffiti suffered direct financial harm
in the amount of money claimed by the Invoices. Second, Graffiti claims when Navarre breached
the confidentiality provision of the Distribution Agreement, Graffiti was sued by Universal,
which obtained a substantial judgment against Graffiti in Washington State Court.
It is well settled that a breach of contract claim cannot rest exclusively on a showing of
injury. See Parkhill v. Minnesota Mut. Life Ins. Co., 174 F. Supp. 2d 952, 961 (D. Minn. 2000),
aff’d, 286 F.2d 1051 (8th Cir. 2000) (noting that damages is only one of the four required
ingredients in a breach of contract claim). Graffiti’s demonstrations of damages, while essential,
are alone insufficient to create standing.
Graffiti’s first assertion of standing fails because Graffiti’s assignment of the Invoices to
Universal extinguished any and all rights Graffiti had to collect payment from Navarre on the
Invoices. Again, in Apex, the Court concluded the Plaintiff lacked standing because it was unable
to provide “evidence that the assignment had ended, []or that it was merely an assignment for
purposes of collection.” Id. at 445. The same is true here. Graffiti has not put forward evidence
demonstrating it re-acquired the Invoices from Universal or that the initial sale, assignment, and
4
Graffiti also argues two sources of damage above and beyond the amount of the
Invoices grant it standing. First, Graffiti asserts the 20% of the total invoice amount held and
never released by Universal as a “reserve” give it standing. Twenty percent of the Invoices is
$146.260.99, which is the amount Universal withheld pursuant to Section 7.8 of the Factoring
Agreement. Allen Decl., Ex. A. ¶ 7.8. Second, Graffiti argues the monthly factoring interest and
attorneys’ fees Universal sought in the Washington litigation is further damage sustained that
also provides Graffiti standing. These alleged examples of damage, however, do not address,
and much less challenge, Defendants’ claim that Graffiti lacks standing. To demonstrate it has
standing to pursue Count I, Graffiti must present evidence that it owns the Invoices in question.
Without more, asserting claims of damage suffered does not create standing for Graffiti.
8
transfer to Universal was not a complete sale, assignment, and transfer. Absent a showing that
Graffiti has ownership of the Invoices, Defendants’ failure to pay the Invoices to Universal does
not grant Graffiti standing to pursue Defendants for payment on the same invoices.
The Washington litigation and subsequent bankruptcy in California also does not provide
standing for Graffiti to bring suit for non-payment of the Invoices against Defendants. Graffiti
argues Universal successfully obtained a judgment against Graffiti because Defendants failed to
pay the Invoices to Universal. Therefore, Graffiti argues it was damaged by the judgment and
now can pursue recovery from Defendants. Graffiti does not argue, however, that the judgment
somehow vested a legal interest in the Invoices to Graffiti. Rather, the Washington and
California litigation further undermine Graffiti’s standing because it reinforces the conclusion that
Universal, not Graffiti, possessed the legal interest in the Invoices required for commencing
litigation.
The judgment Universal obtained in the Washington litigation was the result of legal
action Universal commenced against Graffiti and Navarre. Universal’s First Amended Complaint
repeatedly references Navarre’s liability to Universal premised wholly on Universal’s purchasing
of Navarre’s debt owed to Graffiti. See Winghart Decl. [Docket No. 26] Ex. 5 ¶¶ 3.4, 3.5, 3.7,
3.10, 4.2. Moreover, Universal’s action in United Sates Bankruptcy Court in California claims
Graffiti’s former CEO, Kenneth Hurley, falsely represented the Navarre account receivables to
Universal by stating, among other things, that the Navarre accounts were not subject to set-offs.
Id. Ex. 2 ¶¶ 3.3, 3.6, 4.2, 5.2. Universal relied on invoice number 32360, one of the Invoices, and
Mr. Hurley’s representations when it advanced Graffiti over $400,000. Id. ¶ 3.4. Universal
claimed Navarre failed to timely pay because the inventory that was subject to the invoice number
9
32360 was not selling, and further that returns, markdowns, and chargebacks were expected and
authorized under the terms of the Graffiti and Navarre Distribution Agreement. Id. ¶ 3.5.
The Washington and California complaints do not allege Universal sold, assigned, or
transferred interest in the Invoices back to Graffiti. The judgment and litigation expenses
resulting from these lawsuits do not give Graffiti standing to pursue a claim against Defendants
for failing to pay the Invoices. Graffiti’s failure to present any rebuttal evidence showing it
owned the Invoices leads to the unavoidable conclusion that it lacks standing to pursue its claim
in Count I for breach of contract.
2.
Count III - Breach of the Covenant of Good Faith
Defendants also argue Graffiti lacks standing to pursue Count III because Count III is also
premised entirely on the Invoices that were transferred to Universal. However, Graffiti’s
averments do not tie Count III to Count I. Graffiti has alleged a second breach of contract claim,
Count II, asserting Defendants violated the confidentiality clause of the Distribution Agreement.
Because Graffiti’s first breach of contract claim lacks standing, that claim cannot be the
underlying breach of contract claim to support Count III. Therefore, the alleged violation of the
covenant of good faith rests on whether Graffiti’s other breach of contract claim, Count II,
survives this motion. Thus, addressing Count III under the presumptions established in Rule
12(b)(6)—not Rule 12(b)(1)—is proper.
B.
Dismissal under 12(b)(6) for Failure to State a Claim
Defendants argue dismissal of claims under Rule 12(b)(6) is warranted because
Graffiti has failed to plausibly plead its claims for breach of contract based on the
confidentiality clause (Count II), tortious interference with contract (Count IV), and trade
10
libel (Count V). In the alternative, Defendants argue Graffiti should be required to
provide a more definite statement under Rule 12(e) in support of Count IV. As mentioned
above, discussion of Count III under Rule 12(b)(6) is germane.
1.
Standard of Review
Rule 12 of the Federal Rules of Civil Procedure provides that a party may move to dismiss
a complaint for failure to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6).
In considering a motion to dismiss under Rule 12(b)(6), the pleadings are construed in the light
most favorable to the nonmoving party, and the facts alleged in the complaint must be taken as
true. Hamm v. Groose, 15 F.3d 110, 112 (8th Cir. 1994); Ossman v. Diana Corp., 825 F. Supp.
870, 879-80 (D. Minn. 1993). Any ambiguities concerning the sufficiency of the claims must be
resolved in favor of the nonmoving party. Ossman, 825 F. Supp. at 880.
A pleading must contain “enough facts to state a claim to relief that is plausible on its
face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility
when the plaintiff pleads factual content that allows the court to draw a reasonable inference that
the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949
(2009). Determining whether a complaint states a plausible claim for relief is “a context-specific
task that requires the reviewing court to draw on its judicial experience and common sense.” Id.
“But where the well-pleaded facts do not permit the court to infer more than the mere possibility
of misconduct, the complaint has alleged—but not ‘shown’—‘that the pleader is entitled to
relief.’” Id. (quoting Fed. R. Civ. P. 8(a)(2)).
2.
Count II - Breach of Contract Based on Breach of Confidentiality
Clause
Graffiti alleges the confidentiality clause in Paragraph 11 of the Distribution Agreement
11
was breached when Navarre made public and unprivileged statements that resulted in litigation
and substantial costs Graffiti was forced to incur.
Paragraph 11 of the Distribution Agreement states:
CONFIDENTIALITY. [Graffiti] and Navarre recognize that the terms of
this Agreement and the information provided to the other party pursuant to
this Agreement is confidential and each party will take reasonable steps to
protect such confidential information.
Am. Compl. Ex. A. ¶ 11. Graffiti avers that Defendants made public and unprivileged statements
regarding the Distribution Agreement to third parties. See, e.g., id. at ¶¶ 27-31; 65-86.
Defendants argue that even if these averments are true, as Rule 12(b)(6) presumes,
dismissal of Count II is still appropriate because the damages asserted are not direct damages and
thus are barred by the Distribution Agreement’s Limitation of Liability clause. The Limitation of
Liability clause in Section 9.4 of the Distribution Agreement states:
Limitation of Liability, Neither party, nor any of its directors, officers, or
employees, shall be liable to the other for any special, indirect, consequential or
incidental damages, including, but not limited to, lost profits, however caused.
This limitation shall apply even if such party has been advised of the possibility of
such damages or the damages were otherwise foreseeable. This limitation shall
not apply to third party claims for which there is an indemnification obligation.5
Id. at Ex. A. ¶ 9.4. The effect of this provision, Defendants argue, is that only direct damages are
recoverable for any alleged breach of the Distribution Agreement between Graffiti and
Defendants. Since the damages asserted by Graffiti are consequential, Defendants continue,
Graffiti has failed to state a claim under Rule 12(b)(6). Graffiti argues the Limitation of Liability
5
Graffiti argues the final sentence of the Limitation of Liability clause renders it
inapplicable to bar Graffiti’s claims. Graffiti’s position is misplaced because Graffiti, one party
to the Distribution Agreement, is asserting claims against Defendants, the other party to the
contract. Because a third party is not pursing claims, the terminal sentence of the Limitation of
Liability clause is of no consequence to the claims Graffiti is pursuing in this action.
12
clause does not preclude advancement of Count II because the Limitation of Liability clause is
unconscionable and thus unenforceable.6
Direct damages are damages that “arise out of the breach itself.” Kleven v. Geigy Agric.
Chem., 227 N.W.2d 566, 569 (Minn. 1975). Direct damages can be contrasted with consequential
damages, which “do not arise directly according to the usual course of things from the breach of
the contract itself, but are rather those which are the consequence of special circumstances known
to or reasonably supposed to have been contemplated by the parties when the contract was made.”
Id. (quoting Despatch Oven Co. v. Rauenhorst, 40 N.W.2d 73, 79 (Minn. 1949). Consequential
damages are “not based on the capital or present value of the promised performance but upon
benefits it can produce or losses that may be caused by its absence.” Porous Media Corp. v.
Midland Brake, Inc., 220 F.3d 954, 961 (8th Cir. 2000) (quoting Dan B. Dobbs, LAW OF
REMEDIES, 41 (2nd ed. 1993)).
Graffiti avers Defendants breached the confidentiality clause of the Distribution
6
Graffiti’s arguments for rendering the Limitation of Liability clause unenforceable due
to it being unconscionable are unconvincing for several reasons. Graffiti and Defendants are both
experienced in business. See Am. Compl. ¶. Graffiti put forward no evidence that the
Distribution Agreement was presented as a non-negotiable, take-it-or-leave-it, contract. Graffiti
also failed to provide evidence showing that Defendants were the only distribution source
available to deliver Graffiti products to retail outlets. Graffiti was fully able to seek an
alternative distribution company to deliver its products if it found the terms of the Distribution
Agreement unacceptable. Additionally, both Graffiti and Universal share the benefit of the
Limitation of Liability clause. These facts justify concluding the Limitation of Liability
provision is enforceable as a matter of law. See, e.g., Int’l Fin. Servs., Inc. v. Franz, 534 N.W.2d
261 (Minn. 1995) (holding that a consequential damage exclusion was enforceable because both
parties were merchants and there was no great disparity in bargaining power); Transp. Corp. of
Am., Inc. v. Int’l. Bus. Machs. Corp., Inc., 30 F. 3d 953 (8th Cir. 1994) (applying Minnesota law
and stating “[a]n exclusion of consequential damages set forth in advance in a commercial
agreement between experienced business parties represents a bargained-for allocation of risk that
is conscionable as a matter of law”).
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Agreement by disclosing confidential information to non-parties to the Distribution Agreement.
Am. Compl. ¶¶ 67-68. Graffiti alleges Universal commenced litigation as a result of the
disclosures. Id. Graffiti stylizes the disclosures as having a “direct and immediate adverse effect
on Graffiti, including the determination by [Universal] to commence litigation regarding the
unpaid invoices.” Id. at ¶ 28. Defendants argue the litigation expenses Graffiti claims in Count II
are special or consequential damages. At this early stage in the litigation, it is premature to
determine whether Graffiti’s alleged damages here are direct or consequential. Without drawing
any conclusions on the merits, Graffiti has plausibly alleged that the litigation costs it incurred
due to Defendants’ disclosures “arise out of the breach itself.” Accordingly, Count II of the
Amended Complaint plausibly pleads a cause of action and dismissal is therefore denied.
3.
Count III - Breach of the Covenant of Good Faith
A claim alleging the breach of the covenant of good faith requires pleading a breach of
contract claim. TCF Nat. Bank v. Market Intelligence, Inc., No. 11-2717, 2012 WL 3031220, at
*9, (D. Minn. July 25, 2012). Having concluded that Graffiti has plausibly pled a breach of
contract claim premised on violations of the confidentiality clause, the next issue is the viability
of Count III.
Minnesota implies a covenant of good faith in every contract. See Minn. Stat. § 336.1304 (2014). This covenant requires that one party may not unjustifiably hinder the other party’s
performance of the contract. Teng Moua v. Jani-King of Minnesota, Inc., 810 F. Supp. 2d 882,
893 (D. Minn. 2011) (quoting In re Hennepin Cnty. 1986 Recycling Bond Litig., 540 N.W.2d
494, 502 (Minn. 1955)). Prevailing on this claim requires a party to establish bad faith by
showing the adverse party has an ulterior motive for refusing to perform a contractual duty.
14
Minnwest Bank Central v. Flagship Properties LLC, 689 N.W.2d 295, 303 (Minn. Ct. App. 2004)
(citations omitted).
In Semler Const., Inc. v. City of Hanover, a development company obtained contractual
approval from the city to subdivide and develop an area of land. 667 N.W.2d 457, 459 (Minn. Ct.
App. 2003). Later, after elections changed the members of the city council, the city ordered the
development company to cease performing work it was undertaking in connection with the
previously approved development. Id. at 460, 467. In determining the development company’s
good faith claim remained viable after the city’s summary judgment motion, the Court stated
good faith requires parties to “not unjustifiably impede[] the other party from performing its
obligations under the contract.” Id. at 467 (citing In re Hennepin Cnty., 540 N.W.2d at 502).
Ordering the development company to halt construction clearly impeded the development
company’s ability to perform its obligation of the construction contract.
Graffiti does not plausibly plead a violation of the covenant of good faith. Graffiti argues
that Defendants’ failure to pay the Invoices and disclosing terms of the Distribution Agreement to
third parties rendered Graffiti’s performance of the Distribution Agreement impossible. Graffiti’s
obligation to the Distribution Agreement, however, is to provide marketable software for
Defendants. Graffiti does not demonstrate such a connection between the Defendants’ conduct
and Graffiti’s performance of the Distribution Agreement. Graffiti does not allege Defendants’
actions impeded their ability to make marketable software available. Rather, Graffiti’s sweeping
allegations only state that Defendants caused them “financial ruin” from claims asserted against
Graffiti by their vendors and suppliers. Am. Compl. ¶¶ 73-75. These claims, however, do not
plausibly satisfy the pleading requirements for alleging a breach of the covenant of good faith.
15
Count III is therefore dismissed.
4.
Count IV - Tortious Interference with Contract
Graffiti argues Defendants’ disclosures of knowingly false information to third parties
tortiously interfered with its contract with Universal, resulting in financial harm to Graffiti.
Defendants argue dismissal of this claim is warranted because Graffiti failed to plausibly state its
claim.7 In the alternative, Defendants argue Graffiti should be ordered to provide a more definite
statement under Rule 12(e).
Under Minnesota law, succeeding on a claim of tortious interference with contract
requires proving: “(1) the existence of a contract; (2) the alleged wrongdoer’s knowledge of the
contract; (3) intentional procurement of its breach; (4) without justification; and (5) damages.” EShops Corp. v. U.S. Bank Nat. Ass’n, 678 F.3d 659 (8th Cir. 2012) (citing Furlev Sales &
Assocs., Inc. v. N. Am. Auto. Warehouse, Inc., 325 N.W.2d 20, 25 (Minn. 1982)).
Graffiti fails to adequately allege at least one of the required elements: intentional
procurement of a contract’s breach. The alleged statements and actions as to this element lack
requisite particularity. Without the required particularity, Defendants are unable to reasonably
prepare a response. See Tinder v. Lewis County Nursing Home Dist., 207 F. Supp. 2d 951, 959
(E.D. Mo. 2001) (“When examining whether a more definite statement is required under Rule
12(e), the only question is whether it is possible to frame a response to the pleading.”) If Graffiti
7
Defendants’ also argue that Count IV should be dismissed because any remedy
available would be barred by the Limitation of Liability clause. This argument is unavailing
because any liability of Defendants from this claim would not flow from the Distribution
Agreement and would thus not be limited by any provision. See Superior Edge, Inc. v.
Monsanto Co. 964 F. Supp. 2d 1017, 1043 (D. Minn 2013) (noting that Minnesota law
recognizes the tort for interference with an existing contract).
16
possesses facts sufficient to plead its tortious interference claim, it should be afforded an
opportunity to do so. Extending an opportunity to plausibly establish Defendants’ intentionally
procured the breach of Graffiti Entertainment’s contract with Universal under Rule 12(e) is
appropriate.
5.
Alter Ego
Graffiti argues it should be allowed to pursue its claims not only against Navarre but also
against Speed under an alter ego theory. Defendants claim Graffiti has failed to plausibly present
its alter ego theory and Speed, an entity Graffiti has no relations with, should be dismissed from
this lawsuit.
State law governs Graffiti’s alter ego claim. Hopkins v. Trans Union, L.L.C., No. 035433, 2004 WL 1854191, at *4 (D. Minn. Aug. 19, 2004). In Minnesota, there is a “presumption
of separateness” between a parent and subsidiary corporation. Ass'n of Mill & Elevator Mut. Ins.
Co. v. Barzen Int'l, Inc., 553 N.W.2d 446, 449 (Minn. Ct. App. 1996) (citation omitted).
However, “[p]iercing the corporate veil is an equitable remedy that may be applied in order to
avoid an injustice.” Equity Trust Co. Custodian ex rel. Eisenmenger IRA v. Cole, 766 N.W.2d
334, 339 (Minn. Ct. App. 2009) (citation omitted). “A court may pierce the corporate veil . . . [if]
the party is the alter ego of the entity. When using the alter ego theory to pierce the corporate
veil, courts look to the reality and not form, with how the corporation operated.” Id. (citations
omitted).
Minnesota employs a two-prong test to decide whether a shareholder—or subsidiary—can
be liable for corporate obligations:
The first prong focuses on the shareholder's relationship to the corporation. Factors
that are significant to the assessment of this relationship include whether there is
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insufficient capitalization for purposes of corporate undertaking, a failure to
observe corporate formalities, nonpayment of dividends, insolvency of debtor
corporation at time of transaction in question, siphoning of funds by dominant
shareholder, nonfunctioning of other officers and directors, absence of corporate
records, and existence of the corporation as merely a facade for individual
dealings. The second prong requires showing that piercing the corporate veil is
necessary to avoid injustice or fundamental unfairness.
Barton v. Moore, 558 N.W.2d 746, 749 (Minn. 1997) (citing Victoria Elevator Co. v. Meriden
Grain Co., 283 N.W.2d 509, 512 (Minn. 1979)); see also Assoc. of Mill & Elevator Mutual Ins.
Co., 553 N.W.2d at 449–50 (applying same factors to parent-subsidiary analysis).
At the pleading stage, claims against corporate defendants have been permitted to proceed
when basic allegations as to one or more of these factors have been raised. C.H. Robinson
Worldwide, Inc. v. U.S. Sand, LLC, No. 13-1274, 2014 WL 67957, at *8 (D. Minn. Jan. 8, 2014).
In Bank of Montreal v. Avalon Capital Grp., Inc., an alter ego theory survived a motion to dismiss
predicated on allegations of insolvency, corporate form abuse, fraud, and more. 743 F. Supp. 2d
1021, 1031 (D. Minn. 2010). Graffiti supplies similar contentions.
Here, Graffiti alleges that prior to September 3, 2013, Speed was known as Navarre
Corporation, a Minnesota corporation with its principal executive office in New Hope,
Minnesota. Am. Compl. ¶ 6. On September 25, 2012, Navarre Corporation formed SFC
Acquisition Co., Inc. (“SFC”), a Minnesota corporation. Id. at 7. On November 20, 2012, SFC
merged with the Delaware corporation Speed FC, Inc. to form SpeedFC, Inc. (“SpeedFC”), a
Minnesota Corporation. Id. On September 13, 2013, SpeedFC filed a name change with the
Minnesota Secretary of State to be known as Speed Commerce Corporation. Id. A merger
between Speed Commerce Inc. and Speed Commerce Corporation has not been identified.
Graffiti’s allegations are deemed sufficient to present a viable alter ego claim at this stage
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of the lawsuit. Graffiti details the corporate status of the Defendants—including name changes,
corporate mergers and dissolutions and subsidiary information—and alleges instances of
corporate form disregard, insufficient funding, and corporate representations of employees. Id. ¶¶
5-10. These averments, if true, establish the existence of more than one factor under the first
prong of the Victoria Elevator test. Graffiti’s allegations are more robust than Tiger Team Techs.,
Inc. v. Synesi Grp., Inc., where dismissal of an alter ego claim was granted where no evidence
showed the alleged instrumentality “failed to observe corporate formalities, failed to pay
dividends, failed to keep corporate records, or siphon[ed] [] funds. . . .” No. 06-1273, 2009 WL
749814, at *4 (D. Minn. Mar. 18, 2009), aff’d, 371 Fed.Appx. 90 (Fed Cir. 2010). Moreover, the
second element of the analysis, “necessary to avoid injustice or fundamental unfairness,” is
alleged by the averment that Navarre Distribution, the signatory to the Distribution Agreement,
was “underfunded” and “lacked sufficient funds” to comply with the Distribution Agreement.
Am. Compl. ¶ 10. Buttressed by the complexity these claims present, it is too early to dismiss
Graffiti’s alter ego claim. See Ahim v. Rooney, 274 Minn. 259, 143 N.W.2d 65, 69 n.1 (1966)
(noting that, even at summary judgment stage, alter ego claims usually should not be disposed of
due to the complex issues involved).
6.
Count V - Trade Libel
At oral argument, counsel for Graffiti conceded dismissal of Count V is proper because
Graffiti has been unable to conclusively identify any libelous conduct that occurred within the
statute of limitations. Therefore, dismissal of Count V is warranted.
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IV. CONCLUSION
Based upon all the files, records, and proceedings herein, IT IS HEREBY ORDERED
that Defendants Speed Commerce Inc., Navarre Distribution Services, Inc., and Does 1-10's
Motion to Dismiss [Docket No. 16] is GRANTED IN PART and DENIED IN PART, as
follows:
1.
Counts I, III and V of the Amended Complaint [Docket No. 7] are DISMISSED.
2.
Dismissal as to Counts II and IV of the Amended Complaint is DENIED.
3.
Dismissal of Alter Ego Liability as to Navarre Distribution Services, Inc. and
Speed Commerce, Inc. is DENIED.
4.
Graffiti Entertainment, Inc. must file a More Definite Statement for Count II by
November 19, 2014 or Count II will be dismissed at that time.
BY THE COURT:
s/Ann D. Montgomery
ANN D. MONTGOMERY
U.S. DISTRICT JUDGE
Dated: November 6, 2014.
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