Ascente Business Consulting, LLC v. DR myCommerce et al
Filing
69
ORDER granting in part and denying in part 54 Motion to Alter/Amend/Supplement Pleadings(Written Opinion) Signed by Magistrate Judge Katherine M. Menendez on 4/8/2019. (BJP)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
ASCENTE BUSINESS CONSULTING, LLC
d/b/a LIBERTYID,
Case No. 0:18-cv-00138-JNE-KMM
Plaintiff,
v.
ORDER
DR MYCOMMERCE d/b/a ESELLERATE;
and DIGITAL RIVER, INC.;
Defendants.
This matter is before the Court on Ascente Business Consulting LLC’s
(“Ascente”) motion for leave to amend the complaint. (ECF No. 54.) Ascente seeks
permission to add claims for fraud, fraudulent inducement, and reckless
misrepresentation against the defendants, DR MyCommerce (“DRM”) and Digital River,
Inc. (“Digital River”), which is DRM’s parent company. In an Order dated July 26, 2018,
the District Court granted the defendants’ motion to dismiss a fraud claim that Ascente
included in its original Complaint. (7/26/2018 Order, ECF No. 36.) Now that the parties
have engaged in discovery, Ascente argues that it can adequately plead fraud and
fraudulent-inducement claims as well as a reckless-misrepresentation claim. DRM and
Digital River argue that Ascente’s motion to amend should be denied because the
proposed claims are futile—i.e., they would not survive a motion to dismiss for failure to
state a claim. For the reasons that follow, the motion to amend is granted in part and
denied in part.
I.
Background1
Ascente provides identity-theft protection products to consumers. DRM is a
software development company and a wholly owned subsidiary of Digital River. Ascente
approached DRM in January 2014 to develop a web portal so that individual consumers
1
This recitation of the facts is drawn from Ascente’s Proposed Amended
Complaint. (See ECF No. 57-2; see also ECF No. 60-2 (Defs.’ Redline).)
1
could go online and purchase an identity-monitoring subscription service from Ascente.
The parties negotiated and, in May 2014, agreed to a “Statement of Work,” by which
Ascente would pay DRM $44,822 to develop the web portal. The parties also entered a
“Publisher Agreement,” which provided that DRM would receive 10 percent of the
revenue that was generated by the web portal. The development of the web portal was
to be completed in approximately five months, by October 2014.
In October, DRM told Ascente that it exceeded projected costs in developing and
building the portal. On October 28, 2014, Jennifer Manwarren and Thomas Peterson,
both of DRM, exchanged an email indicating that the web portal was “on schedule” to be
launched before the end of the month. (Proposed Am. Compl. ¶ 27.) On October 28th
and 29th, Chad Johnson and Cory Husfeldt of DRM told Ascente employee Bret Busse
that the portal was ready for launch and “ready for commerce” as required by the
parties’ agreement. (Id. ¶ 28.)
Around the same time, DRM delivered the web portal to Ascente. Unfortunately,
when it went live on October 29, 2014, the web portal did not function as intended.
(Proposed Am. Compl. ¶ 34.) Several months later, on January 20, 2015, DRM employee
Christine Roe emailed her coworker, Jim Swenson, and stated that certain work on the
portal had not been completed. (Id. ¶¶ 29–31.) Ms. Roe also stated that the software
that was delivered was not the end product, and she believed that Ascente was “getting
a little screwed.” (Id.)
Ascente informed DRM of the problems it was having with the web portal and
representatives of both sides met in Denver on January 28, 2015 to negotiate a new
agreement. (Proposed Am. Compl. ¶¶ 35, 38.) According to Ascente, prior to the
meeting in Denver, DRM employees Matthew Kleinsasser and Stefan Weber exchanged
internal messages regarding the need to bring the web portal software up to compliance
with security standards to protect credit card information. Recognizing that this would
take a considerable amount of work, Mr. Weber stated: “I wish we could get rid of
Ascente[.]” (Id. ¶ 65.) Ascente claims that the Defendants then “hatched a plan to dump
the web portal,” claiming that they would complete the web portal if they received
additional money from Ascente, but really “had no intention to do so.” (Id. ¶ 66.) On
January 28, 2015, Mr. Weber emailed Swenson, Kleinsasser, and other DRM personnel
2
indicating that DRM employee Rodney Salazar would “try to get out of the contract with
Ascente today.” (Id. ¶ 67.)
However, at the January 28, 2015 Denver meeting, Ascente and DRM did not
break off their business relationship. Chad Johnson (DRM) told Ascente representatives
that DRM had outstanding development costs of $187,336.25, which they had incurred
in working on the project. (Proposed Am. Compl. ¶¶ 39–40.) Mr. Johnson offered that
the defendants would complete the work necessary to get the web portal up and running
in exchange for Ascente’s agreement to pay the outstanding development costs. (Id.
¶ 40.) Based on the internal DRM communications before the Denver meeting and
several others that occurred afterward, Ascente asserts that DRM never intended to do
any additional work on the portal. (Id. ¶¶ 68–71, 74–85.) For example, in early February
2015, several DRM employees internally discussed getting rid of or “divesting” from
Ascente as well as placing a hold on development work. (Id. ¶¶ 68–71.)
Moreover, Ascente alleges that the $187,3362 the Defendants said they incurred
as DRM’s outstanding development costs was not the actual amount. Ascente alleges:
On February 17, 2015, [Chad] Johnson [of DRM] reviewed a draft [bill]
and pointed out that Ascente’s “most recent contract/SOW call[s] for $73
hour versus the $75 that’s called out in the invoice.” [Jennifer]
Manwarren [of DRM] responded, “Are you serious?” Johnson wrote “Yep.
We can try to submit to them as is but they will likely question it.”
Manwarren: “No. They agreed to a dollar amount-, so you saw the wild
math I had to do to get there.” ... Instead, Johnson suggested, “What if I
deleted the rate and just left the total?”
(Proposed Am. Compl. ¶ 72.) The defendants did not tell Ascente that the $187,336
“was not an accurate figure, nor did they ever tell Ascente the true amount of their
alleged cost overruns.” (Id. ¶ 73.) Ascente eventually paid $187,336 to DRM, with the
last installment payment occurring on May 4, 2016. (Id. ¶¶ 41, 44.)
Out of the agreement reached at the Denver meeting, the parties reached a new
contractual arrangement. In July 2015, the parties executed a Software Development
2
At times in the record, the alleged cost overruns are identified as $187,336 or
$187,335. This $1 difference appears to be immaterial. The court will use the $187,336
figure in this Order.
3
Agreement (“SDA”), which formalized Ascente’s agreement to pay an additional
$187,336 in exchange for the defendants delivering a web portal that met certain
specifications laid out in an Appendix A that was attached to the agreement. (Proposed
Am. Compl. ¶ 52.) According to Ascente, it never received a web portal that worked as
intended, and the defendants’ communications that followed the SDA’s execution
allegedly show that the defendants did not intend to provide a functioning portal after
DRM was paid the $187,336. (Id. ¶¶ 80–87.) For example, in an August 27, 2015 email,
Christine Roe suggested to a colleague that “Ascente access can probably be
dropped.... We’re not planning any additional coding changes....” (Id. ¶ 80.) Other
internal messages among the defendants’ personnel from April, June, and October of
2016 allegedly confirm that DRM never intended to do additional work on the project,
but instead falsely claimed to have delivered a working portal. (Id. ¶¶ 81–82, 84–85.)
Ascente claims it has not been able to launch its business-to-consumer marketing
campaign as a result of the defendants’ failure to provide a functioning web portal,
costing it millions of dollars in revenue. (Id. ¶ 88.)
II.
Futility Standard
Federal courts should freely give leave to a party moving to amend its pleadings
“when justice so requires.” Fed. R. Civ. P. 15(a)(2). However, there are several reasons
a court may deny leave to amend. See, e.g., Roberson v. Hayti Police Dep’t, 241 F.3d
992, 995 (8th Cir. 2001) (“[D]denial of leave to amend pleadings is appropriate only in
those limited circumstances in which undue delay, bad faith on the part of the moving
party, futility of the amendment, or unfair prejudice to the non-moving party can be
demonstrated.”). Here, the defendants rely solely on their argument that the proposed
amendment would be futile to support their opposition to amendment. A futility
challenge will defeat a motion to amend when “the proposed amended complaint cannot
survive a motion to dismiss for failure to state a claim.” Lunsford v. RBC Dain Rauscher,
Inc., 590 F. Supp. 2d 1153, 1158 (D. Minn. 2008).
A complaint survives a motion to dismiss for failure to state a claim under Fed. R.
Civ. P. 12(b)(6) when, accepting the factual allegations as true, it states a facially
plausible claim for relief. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A court
determining whether the claim has facial plausibility draws reasonable inferences in the
plaintiff’s favor. Blankenship v. USA Truck, Inc., 601 F.3d 852, 853 (8th Cir. 2010).
4
However, a court may disregard legal conclusions in a complaint that are couched as
factual allegations. See Iqbal, 556 U.S. at 678–79.
Generally, courts ignore matters outside the pleadings when considering the
sufficiency of a complaint under Fed. R. Civ. P. 12(b)(6). Porous Media Corp. v. Pall
Corp., 186 F.3d 1077, 1079 (8th Cir. 1999). However, courts may “consider some
material that are part of the public record or do not contradict the complaint as well as
materials that are necessarily embraced by the pleadings.” Id. (quotations and citation
omitted); see also Enervations, Inc. v. Minn. Mining & Mfg. Co., 380 F.3d 1066, 1069
(8th Cir. 2004) (“[D]ocuments ‘necessarily embraced by the complaint’ are not matters
outside the pleading.”). Consideration of such materials is discretionary. Stahl v. United
States Dep’t of Agric., 327 F.3d 697, 701 (8th Cir. 2003).
III.
Analysis
Ascente seeks leave to amend its complaint to add claims for fraud, fraudulent
inducement, and reckless misrepresentation. The defendants argue that Ascente’s
proposed amendments should not be permitted because they cannot survive a motion to
dismiss for failure to state a claim. As discussed below, with one narrow exception, the
Court concludes that Ascente’s proposed amended complaint fails to state a claim for
fraud, fraudulent inducement, or reckless misrepresentation.
A. Applicable Law
The defendants’ futility challenge requires the Court to consider Minnesota’s
substantive law regarding fraud, fraudulent inducement, and reckless misrepresentation.
All of these claims must be pled with the particularity required by Rule 9(b). Fed. R. Civ.
P. 9(b); Lyon Fin. Servs., Inc. v. MBS Mgmt. Servs., Inc., No. 06-cv-4562 (PJS/JJG),
2007 WL 2893612, at *3, *8 (D. Minn. Sept. 27, 2007) (providing that not only fraud
claims, but also claims for reckless misrepresentation must comply with the
particularized pleading requirements of Rule 9(b)). With respect to Ascente’s fraud
claim, the allegations in the complaint must show:
(1) a false representation of a past or existing material fact susceptible of
knowledge; (2) made with knowledge of the falsity of the representation
or made without knowing whether it was true or false; (3) with the
intention to induce action in reliance thereon; (4) that the representation
5
caused action in reliance thereon; and (5) pecuniary damages as a result
of the reliance.
U.S. Bank N.A. v. Cold Spring Granite Co., 802 N.W.2d 363, 373 (Minn. 2011)) (internal
quotation marks omitted).
Similar to the fraud claim, Ascente’s claim for fraudulent inducement under
Minnesota law requires it to plead with specificity that (1) defendants made a
misrepresentation of material fact; (2) defendants knew their representations were false
at the time or made the representations without regard to their truth or falsity;
(3) defendants intended to induce Ascente to enter into the agreement; (4) Ascente
entered the agreement in reasonable reliance on the statements; (5) Ascente suffered
damages; and (6) the misrepresentations proximately caused the damages. See Martens
v. Minn. Mining & Mfg. Co., 616 N.W.2d 732, 747 (Minn. 2000); see also Triple Five of
Minn., Inc. v. Simon, 213 F.R.D. 324, 328 (D. Minn. 2002) (listing elements of fraudulent
inducement and citing Cohen v. Appert, 463 N.W.2d 787, 789 (Minn. Ct. App. 1990)).
“Reckless misrepresentation occurs when a misrepresenter speaks positively and
without qualification, but either is conscious of ignorance of the truth, or realizes that
the information on which he or she relies is not adequate or dependable enough to
support such a positive, unqualified assertion.” Christensen v. Metropolitan Life Ins.
Co., 542 F. Supp. 2d 935, 944 (D. Minn. 2008) (quoting Florenzano v. Olson, 387 N.W.2d
168, 174 (Minn. 1986)) (internal quotation marks omitted).
B. Alleged Misrepresentations
It is, in plaintiff’s counsel’s own words, “difficult to pinpoint” the specific
misrepresentations on which Ascente bases its proposed additional claims. (Audio of
2/7/2019 Hr’g (“Hr’g Audio”) at 11:27:35 (on file with the Court).) However, the
Proposed Amended Complaint outlines the alleged misrepresentations forming the fraud,
fraudulent-inducement, and reckless-misrepresentation claims in paragraph 102, which
are summarized on page 16 of the plaintiff’s supporting memorandum. (Proposed Am.
Compl. ¶¶ 102, 111.) The Court analyzes whether it would be futile to allow Ascente to
add claims based on these alleged misrepresentations by determining whether they fail
to state a claim upon which relief can be granted. And in several respects, the
allegations in Ascente’s Proposed Amended Complaint are simply insufficient.
6
1. “Ready for Commerce”
The first misrepresentations Ascente points to are statements made by DRM
employees Chad Johnson and Cory Husfeldt to Brett Busse (Ascente) on October 28 and
29, 2014 that the web portal delivered was “ready for launch and ‘ready for commerce’
as required by the parties Statement of Work.” (Proposed Am. Compl. ¶¶ 28, 102(c);
see also Pl.’s Mem. at 16.) Ascente appears to suggest that it relied on these
representations “launching the product in October 2014....” (Pl.’s Mem. at 16; Proposed
Am. Compl. ¶ 33.) And Ascente alleges that as a result of the problems that
accompanied the launch of the web portal its “very first customers were unable to
register for Ascente’s identity-theft services” and it had to delay launching a largescale business-to-consumer campaign. (Proposed Am. Compl. ¶¶ 35–37.)
Based on the facts alleged, the Court finds that this statement cannot form the
basis of a fraud, fraudulent-inducement, or reckless misrepresentation claim. The
problem for Ascente is that the Proposed Amended Complaint contains no factual
allegations indicating that the DRM employees responsible for telling Mr. Busse that the
web portal was ready for launch, ready for commerce, and met all the requisite
specifications knew that their statements were false at the time they made them or
made any statements without regard for their truth or falsity. Ascente argues otherwise,
pointing to internal DRM emails from Christine Roe to Jim Swenson and Joe Ruterbories,
which allegedly show that DRM had not completed the work on the web portal.
(Proposed Am. Compl. ¶¶ 29–30.) But these messages were sent in January of 2015,
several months after the representations were allegedly made to Mr. Busse about the
product’s readiness. There are no facts suggesting that Chad Johnson and Corey
Husfeldt were or should have been aware of the alleged problems at the time they told
Mr. Busse the web portal was ready to go live.
2. Cost Overruns and “Wild Math”
Next, Ascente claims that the defendants “falsely claimed on at least January 28
and 29, 2015 that they had incurred $187,336.25 in cost overruns, despite admitting
internally that they did some ‘wild math’ after the fact to come up with that figure.”
(Pl.’s Mem. at 16; see also Proposed Am. Compl. ¶¶ 40, 72.) Ascente asserts that the
defendants represented a present material fact when stating that they incurred over
7
$187,000 in cost overruns while developing the web portal. According to the Proposed
Amended Complaint, after making that representation during the January 28, 2015
meeting in Denver, the defendants realized that the internal calculation of that number
was based on a $75/hour rate. However, by February 17, 2015, the defendants’
personnel realized that the cost-overruns number should have been calculated using a
$73/hour rate instead. (See Proposed Am. Compl. ¶ 72; Emmons Decl., ECF No. 60,
Ex. 16 (internal DRM email chain).) Internal communications indicate that DRM engaged
in “wild math” to arrive at the same $187,336 figure using the $73/hour rate. (Emmons
Decl., Ex. 16.) The defendants did not inform Ascente of this discrepancy and instead
allegedly provided an invoice to Ascente that simply omitted any reference to the
hourly rate or number of hours worked. (See Letter from James Sawtelle to Menendez,
M.J. (Feb. 22, 2019), ECF No. 63.) Ascente asserts that it relied on DRM’s
representation of the amount of its cost overruns in negotiating and signing the SDA and
in making the additional payments to the defendants contemplated by the agreement.
(Pl.’s Mem. at 16; see Proposed Am. Compl. ¶ 44.)
These allegations essentially lay out a fraudulent-inducement claim. The Court
finds that the facts set forth in the Proposed Amended Complaint adequately state a
claim that the defendants’ alleged misrepresentation regarding the amount of their cost
overruns induced Ascente to enter the SDA. More specifically, Ascente articulates a
sufficient claim that the allegedly inflated value of the cost overruns led it to enter an
SDA with a higher payment due than it would have absent the falsity.
The defendants raise three challenges to this aspect of Ascente’s attempt to
amend the complaint. The defendants argue that the statement that they incurred costs
totaling $187,336.25 is “not a false representation.” (Defs.’ Resp. at 16, ECF No. 59.)
This argument raises a fact question that cannot be resolved when applying the
standard for a motion to dismiss for failure to state a claim. It may ultimately be correct,
as the defendants contend, that the dollar figure is merely a flat fee that was agreed
upon for development services. But it may also be that the dollar figure represents a
false statement of historical fact by the defendants that was intended to induce Ascente
to enter the SDA on terms more favorable to DRM than if the cost overruns had been
accurately represented. Taking the facts alleged in the Proposed Amended Complaint as
true and accepting the reasonable inferences from them in the light most favorable to
8
Ascente, the Court concludes, at this stage, that Ascente has adequately pled that the
defendants made a false representation regarding the amount of the cost overruns.
Second, the defendants argue that the fraudulent-inducement claim is futile
because the SDA, which includes the $187,336 fee contains a complete integration or
merger clause. (Defs.’ Mem. at 17.) That clause states:
[The SDA is] the entire understanding between the Parties with respect
to the subject matter thereof, and supersedes any and all prior or
contemporaneous proposals, communications, agreements, negotiations,
whether written or oral, related thereto.
(See 7/26/2018 Order at 5 (quoting section 10.g. of the SDA).) During oral argument,
defense counsel referenced Crowell v. Campbell’s Soup Co., 264 F.3d 756 (8th Cir.
2001), and argued that where parties have entered an agreement containing a complete
integration clause, then it is not reasonable for one party to rely on any assertion
outside that agreement. (Hr’g Audio 11:53:00–11:54:00, 11:58:50–11:59:10.) Therefore,
they argue, that any dispute about the calculus that led to the dollar value in the SDA is
vitiated by the integration clause.
In Crowell, several chicken growers brought suit against a processor for breach
of contract, fraudulent inducement, and misrepresentation. 264 F.3d at 759–60. The
growers alleged that the processor terminated their agreements without cause despite
having made an oral promise, prior to entering the agreements, to only terminate the
contracts “for cause.”3 Id. at 760. They claimed to have relied on the processor’s
promise to only terminate “for cause” in entering the agreements. Id. The written
agreements did not contain a “for cause” provision, gave the processor a unilateral right
to terminate the agreements at virtually any time, and contained an integration clause
stating “this Agreement constitutes the entire agreement between the parties relating to
the subject matter hereof and no oral agreement shall alter or add to any part thereof.”
Id. at 762–63. The Eighth Circuit upheld the district court’s conclusion that it was
3
The growers in Crowell also alleged that the processor made precontract oral
promises/misrepresentations: (1) of a long-term commitment to continue placing flocks
with the growers beyond the numbers provided for in the agreements; and (2) of a
certain amount of profits per year throughout the useful life of the buildings where the
flocks would be housed. 264 F.3d at 763–64.
9
unreasonable for the for the growers to rely on the processor’s allegedly false
precontract promises that “completely contradicted ... the terms of the written
contract.” Id. at 762 (“We agree with the district court that any reliance by the Growers
on the three alleged oral promises made by [the processor] was unreasonable as a
matter of law because each of the alleged oral promises plainly contradicted the terms
of the written contract.”).
In Crowell the growers’ complaint said one thing—that the processor promised
only to terminate their contracts for cause—and the agreement said another—that the
processor could terminate the contract at will. Under those circumstances, the
integration clause made it unreasonable as a matter of law for the growers to rely on an
oral promise that directly contradicted the written agreement. Here, Ascente’s
Proposed Amended Complaint alleges that the defendants misrepresented the amount of
their cost overruns, but unlike the processor in Crowell, the defendants in this case do
not point to any term of the SDA that plainly contradicts that allegedly false statement.
Indeed, the $187,336 to be paid by Ascente that is reflected in the SDA matches, rather
than contradicts, the alleged precontract falsehood identified in the Proposed Amended
Complaint. This distinction means that Crowell’s holding about the unreasonableness of
reliance on a precontract promise that plainly contradicts the terms of the written
agreement offers little guidance. Indeed, Crowell cites Commercial Prop. Invs., Inc. v.
Quality Inns Int’l, Inc., 938 F.3d 870, 876 (8th Cir. 1991), for the proposition that under
Minnesota law, “[w]hen a promise is not in plain contradiction of a contract, or if
contradictory, when it is accompanied by misrepresentations of other material facts in
addition to the contradictory intent, the question of reliance is for the trier of fact.”
Crowell, 264 F.3d at 762. In Commercial Prop. Invs., the Eighth Circuit found that
summary judgment on the plaintiff’s fraud claim was inappropriate even though the
parties’ contract contained an integration clause; the fraud claim should have gone to a
jury because the defendant made repeated false statements about the viability of a hotel
franchise to the plaintiff that were not in plain contradiction of the contract. 938 F.2d at
875–76. Similarly, the Court concludes that the defendants have failed to demonstrate
that it was unreasonable as a matter of law for Ascente to have relied on the
defendants’ alleged false representation of the amount of their cost overruns prior to
entering the SDA. And the integration clause against this factual backdrop does not
preclude Ascente’s fraud claim on this point.
10
Finally, the defendants argue that “[t]here is no allegation or proof that
Defendants knew that their cost overruns were inaccurate when they estimated them in
January 2015.” (Defs.’ Mem. at 17.) They note that the internal DRM emails discussing
the discrepancy between the $75/hour rate and the $73/hour rate occurred one month
after the representations made by DRM regarding the cost overruns during the January
2015 meeting in Denver. (Id.) However, the Court notes that the allegations in the
Proposed Amended Complaint and the email communications that are embraced by the
pleadings, indicate that the defendants adhered to the inflated cost-overrun figure even
after realizing the error, attempted to engage in “wild math” to justify sticking with the
higher number, and eventually submitted invoices to Ascente that relied on the
artificially high number, and concealed the calculus that led to it. Under these
circumstances, the Court concludes that Ascente has adequately alleged that the
defendants knew their representation regarding the amount of their cost overruns was
false at the time it was made or made the representation without regard to its truth or
falsity. Accordingly, Ascente’s fraudulent-inducement claim is not futile to the extent it
is based on the assertion that the defendants falsely represented their cost overruns,
thereby inducing Ascente to enter the SDA at an inflated price.
3. “Campaign of Fraud”
Ascente next alleges that the defendants fraudulently represented in late January
2015 and on July 23, 2015 that they would complete unfinished work on the web portal,
“despite admitting internally before and after they signed the SDA that they would
‘divest’ and ‘get rid of’ the Ascente web portal without doing ‘any additional’ work.”
(See Pl.’s Mem. at 16; Proposed Am. Compl. ¶¶ 40, 102(h).) At times during the hearing,
Ascente’s counsel referred to the Proposed Amended Complaint as describing a
“campaign of fraud” perpetrated by the defendants, and stated that what “emerg[es]
from the fog” of the allegations in the proposed amended pleading are numerous
statements showing that the defendants attempted to present a rosy picture to Ascente,
while its internal communications tell a very different story. (Id. at 11:07:00–11:08:00,
11:28:15.)
Even taking the factual allegations in the Proposed Amended Complaint as true
and taking the reasonable inferences from those facts in Ascente’s favor, Ascente has
failed to state an actionable claim of fraud, fraudulent inducement, or reckless
11
misrepresentation based on these allegations. Ascente’s “campaign of fraud” claim
depends on the assertion that the defendants promised Ascente that they were capable
of creating the portal and they would do the required work, but they knew they lacked
the ability and expertise to build the online tool and never intended to do so. The
factual allegations in the Proposed Amended Complaint do not show that the defendants
falsely represented DRM’s capabilities and expertise. Nor do the allegations show that
DRM engaged in fraud by promising to do work it had no intention to perform at the
time any promises were made. See Vandeputte v. Soderholm, 216 N.W.2d 144, 147
(Minn. 1974) (providing that a promissory fraud requires an affirmative showing “that
the promisor had no intention to perform at the time the promise was made”). Instead,
while it may be true that the defendants were ultimately unable to complete the work,
there is no new specific allegation to support the claim that, in January and July, they
knew they would fail.
First, none of the new allegations in the Proposed Amended Complaint address
the defendants’ capabilities and expertise. Ascente does not introduce any new facts to
suggest that the defendants knew they lacked the ability and know-how needed to build
the portal. In fact, the only paragraphs of the Proposed Amended Complaint that relate
to this aspect of the defendants’ purported “campaign of fraud” are identical to those in
the original Complaint. (Compare Compl. ¶¶ 23, 33, 37, 41, 67(a), ECF No. 1, with
Proposed Am. Compl. ¶¶ 24, 43, 48, 54, 102(a).) The District Court has already
concluded that Ascente’s claims based on the defendants’ alleged statements regarding
DRM’s capability and expertise were not pled with sufficient particularity. (7/26/2018
Order at 10 (noting that Asente “points to claims by at least seven named DRM
representatives as to the company’s capability and expertise” and dismissing Ascente’s
fraud claim for failure to “clear the Rule 9 bar”).) Nothing has changed about this aspect
of Ascente’s putative fraud claim, so it would be futile to allow it to go forward.
Second, the problem with Ascente’s assertion that the defendants promised to
work on the web portal yet never intended to perform is that the internal emails
Ascente references in its Proposed Amended Complaint do not support such a claim.4
4
Because Ascente has relied on and quoted directly from the defendants’ emails in
its amended pleading, the Court considers those matters to be embraced by or
incorporated into the Proposed Amended Complaint.
12
For example, Ascente relies on a January 22, 2015 email, which was about a week
before the Denver meeting, in which a DRM employee stated: “I wish we could get rid
of Ascente.” (Proposed Am. Compl. ¶ 65.) According to Ascente, this message
demonstrates that DRM never intended to perform any additional work on the web
portal, but it shows little more than one employee’s frustration with a difficult project.
Ascente also attempts to show that the defendants never intended to perform the work
that was promised as part of the SDA by reference to an internal email dated January
28, 2015, the same day as the Denver meeting. In that message, a DRM employee states
that “Rodney [Salazar] will try to get out of the contract with Ascente today.” ( Id.
¶ 67.) The reasonable inference to be drawn from this message is that the defendants
were contemplating declining any further involvement with Ascente at the time of the
Denver meeting, but instead the parties were able to work out an arrangement that both
sides believed would be beneficial. This does not make that agreement a lie. It is not
reasonable to infer that DRM had no intention to perform when it represented at the
Denver meeting that it would do additional work in exchange for additional payment by
Ascente.
Ascente also relies on internal emails in which DRM representatives discussed
“divesting” DRM from the Ascente work. For example, Ascente references an internal
DRM email from February 4, 2015, in which Matthew Kleinsasser wrote to Stefan
Weber and Jim Swenson: “If we don’t have a solid handover timeline by the end of April
we’ll have to do PCI for Ascente regardless of our intent to divest ourselves of it.”
(Proposed Am. Compl. ¶ 68(d).) However, this statement does not show that DRM
secretly harbored an intention not to perform. Mr. Kleinsasser made the statement in
the email in response to an ongoing discussion between DRM and Ascente about
arranging for a third party to have access to the code DRM had written so that a vendor
would be able to modify and support the portal’s functioning. (See Emmons Decl., Ex. 10
at 1–3.) Other emails from early February 2015 in which various DRM employees
discuss a “hold” on development work similarly do not show that DRM never intended
to perform work for Ascente. (See Proposed Am. Compl. ¶¶ 59, 68(e), 69, 70.) These
February 2015 discussions concern a temporary hold on work so that Ascente could
engage in its own testing of the web portal. (Emmons Decl., Exs. 11, 14.) Emails from
March, April, June, and August of 2015 that are referenced in the Proposed Amended
Complaint similarly provide no basis to infer that the defendants never intended to
13
perform the work that was promised at the Denver meeting or in the SDA. (Proposed
Am. Compl. ¶¶ 75–78, 80; see Emmons Decl., Exs. 18, 20, 24, 25.) For these reasons,
the Court concludes that Ascente has failed to state a claim for fraud, fraudulent
inducement, or reckless misrepresentation based on the assertion that they promised to
do certain work on the web portal, but never intended to perform.
4. “Fully Functional Code”
The final misrepresentation on which Ascente relies to support its fraud
allegations is an October 4, 2016 statement in which Rodney Salazar told an Ascente
representative that: (1) certain problems with the web portal were attributable to a third
party; and (2) that DRM has “performed as required by the agreement” and “produced
and supported fully functional code....” (Proposed Am. Compl. ¶ 85; Pl.’s Mem. at 16.)
These allegations fail to state a claim for fraud, fraudulent inducement, or reckless
misrepresentation because Ascente does not assert any detrimental reliance on
Mr. Salazar’s statements made more than a year after the SDA was signed. Instead,
these alleged misrepresentations appear to be little more than Mr. Salazar’s opinions
about DRM’s performance under the contract. Nothing in the Proposed Amended
Complaint suggests that Mr. Salazar intended to induce Ascente into taking any action at
all when he made these claims. See Specialized Tours, Inc. v. Hagen, 392 N.W.2d 520,
532 (Minn. 1986) (including as an element of fraud that the defendant made a false
representation that was intended to induce the plaintiff to act in reliance on it); Flora v.
Firepond, Inc., 260 F. Supp. 2d 780, 786 (D. Minn. 2003) (“Under Minnesota law, a
plaintiff must allege and prove defendant intended to induce reliance and that the
reliance was reasonable.”) (citing Florenzano v. Olson, 387 N.W.2d 168, 174 n.4 (Minn.
1986), and Davis v. Re-Trac Mfg., 146 N.W.2d 37, 38–39 (Minn. 1967)).
5. Conclusion
For all these reasons, the Court concludes that Ascente’s fraud, fraudulentinducement, and reckless-misrepresentation claims are futile, except in one respect.
Ascente has plausibly alleged that DRM fraudulently induced Ascente to enter the
agreement memorialized in the SDA based on a misrepresentation that DRM had
incurred $187,336 in cost overruns.
14
It is essential to note that the value of the alleged fraudulent-inducement claim
that the Court will permit Ascente to add through amendment is quite small. According
the allegations before the Court, Ascente was induced by the defendants’ alleged false
statements to enter a contract for $187,336, while had Ascente been told the truth
about the cost overruns, the amount owed under the contract would have been just over
$182,339.5 Therefore, the damages attributable to the only fraud claim that survives
futility analysis are approximately $5,000. Given this very small potential recovery, the
parties should be advised that the scope of permissible discovery related to this claim
will be cabined by the amount in controversy. See Fed. R. Civ. P. 26(b)(1) (defining
proportionality in the discovery context to include consideration of “the amount in
controversy”)
C. The Scope of the Breach-of-Contract Claim
Finally, Ascente’s Proposed Amended Complaint creates some confusion
regarding the scope of its breach-of-contract claim. As the District Court previously
noted in this litigation, the SDA contains a complete integration clause. (7/26/2018
Order at 5.) The District Court also concluded that “[b]ecause of this clause, the [SDA]
is the only contract under which Ascente can claim a breach.” (7/26/2018 Order at 5.)
Included in the District Court’s ruling on this point are any breach-of-contract claims
based on the Statement of Work or the Publisher Agreement. Though Ascente’s
Proposed Amended Complaint is not entirely clear on this point, plaintiff’s counsel
confirmed at the hearing that Ascente was not attempting through its motion to amend
to resurrect any of the breach-of-contract claims that the District Court dismissed from
the original complaint.
In addition, the original Complaint asserted the contract claim against only DRM,
which was a signatory to the superseded Statement of Work, Publisher Agreement, and
the operative SDA. However, beneath the heading “First Claim for Relief: Breach of
Contract” in the Proposed Amended Complaint, Ascente has indicated that this claim is
5
The $187,336 reflects 1,697 hours of work building the portal for Ascente and
800.8 hours “for development tied to the commerce engine,” both at a rate of $75/hour.
(Emmons Decl., Ex. 16 at 3.) The same number of hours multiplied by a rate of $73/hour
results in a contract price that would represent just under $5,000 in savings to Ascente
(2,497.8 hours x $73/hour).
15
“(Against DR and Digital River).” Each of the numbered paragraphs setting forth this
claim alters the language so that the allegations are made against both “Defendants”
rather than just DRM.
Digital River was not a signatory to the SDA, a fact which Ascente’s counsel
confirmed at the February 7, 2019 hearing is not in dispute. Nor does Ascente attempt
to hold Digital River liable for the breach of a contract signed by DRM, for example, by
piercing the corporate veil between the two entities. Counsel for Ascente suggested
instead that Digital River was added to the breach-of-contract claim based on language
in the District Court’s July 26, 2018 Order on the motion to dismiss. (See Hr’g Audio
11:04:00–11:06:45.) In the dismissal order, the District Court observed that Ascente
was permitted to plead unjust enrichment as an alternative remedy to the breach-ofcontract claim against DRM. (7/26/2018 Order at 8–9.) The District Court also noted
that “the breach of contract claim was brought against DRM only, not against Digital
River. Therefore, the unjust enrichment claim against Digital River does not require
pleading in the alternative to proceed.” (Id. at 9 n.2.)
To the extent Ascente believed that the District Court’s discussion of alternative
pleading required, permitted, or invited it to add Digital River as a defendant to its claim
for breach of contract, it is mistaken. The District Court merely observed that the
unjust-enrichment claim against Digital River could go forward without reference to the
rule permitting alternative pleading that justified partial denial of the defendants’ motion
to dismiss. Simply put, no alternative pleading was required as to Digital River because
it is only a possible defendant in one of the two related claims. Nothing in this Order
should be read to suggest that a viable breach-of-contract claim was alleged against
Digital River.
IV.
Conclusion
For all the foregoing reasons, IT IS HEREBY ORDERED THAT Ascente’s Motion
for Leave to Amend the Complaint (ECF No. 54) is GRANTED IN PART and DENIED IN
PART. Subject to the discussion above regarding the futility of a number of Ascente’s
proposed claims, Ascente shall file the Proposed Amended Complaint as the First
Amended Complaint within 7 days of the date of this Order.
16
s/Katherine Menendez
Date: April 8, 2019
Katherine Menendez
United States Magistrate Judge
17
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?