Alexsam, Inc. v. Mastercard International Incorporated

Filing 132

ORDER ADOPTING REPORT AND RECOMMENDATIONS 113 re 67 Notice of MOTION to Amend/Correct/Supplement Complaint, filed by Alexsam, Inc., and 86 Notice of MOTION for Sanctions filed by Mastercard International Incorporated. The Plaintiff's objections to the Report and Recommendations is dismissed. Plaintiff's motion to amend the Complaint and Defendant's cross-motion for sanctions are DENIED. Ordered by Judge I. Leo Glasser on 8/17/2017. (Weitzer, Iliza)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
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ALEXSAM, INC.,
MEMORANDUM AND ORDER
15-CV-2799

Plaintiff,
- against MASTERCARD INTERNATIONAL INC.,
Defendants.
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GLASSER, Senior United States District Judge:

Alexsam, Inc. (“Alexsam” or “Plaintiff”) initiated this case on May 15, 2015, alleging a
single cause of action for breach of contract against MasterCard International, Inc.
(“MasterCard” or “Defendant”). ECF 1. The parties had entered into a license agreement
related to two patents owned by Alexsam, and Alexsam alleged that MasterCard failed to pay
royalties in breach of the agreement. On July 29, 2016, Alexsam moved to amend the complaint
to add causes of action for fraud, negligent misrepresentation and breach of the covenant of good
faith and fair dealing. ECF 67.
On March 6, 2017, Magistrate Judge Gold issued a Report and Recommendation
recommending that Plaintiff’s motion be denied for futility. ECF 113 (“R&R”). Plaintiff timely
objected to the R&R, which motion is now before the Court. ECF 123 (“Objections”). Alexsam
contends that the R&R includes five specific mistakes of fact and that its proposed causes of
action are not futile and should be allowed to proceed. Id.
LEGAL STANDARDS
In reviewing a report and recommendation from a Magistrate Judge, the District Court
“may adopt those portions of the Report to which no objections have been made and which are
not facially erroneous.” La Torres v. Walker, 216 F.Supp.2d 157, 159 (S.D.N.Y. 2000); see
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also Gesualdi v. Mack Excavation & Trailer Serv., Inc., No. 09–CV–2502, 2010 WL 985294, at
*1 (E.D.N.Y. Mar. 15, 2010). The District Court reviews de novo “those portions of the report
. . . to which objection is made.” 28 U.S.C. § 636(b)(1).
Under Fed. R. Civ. P. § 15(a), when more than twenty-one days have passed since
responsive pleadings have been served, “a party may amend its pleading only with the opposing
party's written consent or the court's leave. The court should freely give leave when justice so
requires.” However, the court may deny a motion to amend if it determines that the amendment
would be futile, and would therefore be subject to “immediate dismissal.” Jones v. N.Y. State
Div. of Military and Naval Affairs, 166 F.3d 45, 55 (2d Cir. 1999). The standard for determining
legal futility is identical to the standard for dismissing a claim under Fed. R. Civ. P. § 12(b)(6).
Lucente v. Int'l Bus. Mach. Corp., 310 F.3d 243, 258 (2d Cir. 2002). Thus, accepting the facts
pleaded as true, Alexsam’s proposed amended complaint must state a claim that is plausible on
its face from which the Court can draw the reasonable inference that the claims have merit.
“Threadbare recitals of the elements of a cause of action, supported by mere conclusory
statements, do not suffice.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation omitted).
ANALYSIS
The uncontested portions of the R&R are not facially erroneous and are adopted by the
Court. Regarding the contested portions, the Court has undertaken a de novo review and adopts
the R&R in all material respects. The R&R provides a thorough review of the facts and
procedural history of this case, familiarity with which is assumed. R&R at pp. 1-7. 1

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Alexsam objects to five alleged mistakes of fact in the R&R, none of which bears on the
survival of their claims and are taken as true for the purpose of this motion only. Those alleged
mistakes of fact are: (1) MasterCard concedes to owing more than $21,858.40 in royalty
payments to Alexsam, (2) Alexsam delayed in commencing this action and serving MasterCard
because the parties were engaged in settlement negotiations, (3) Alexsam requested to exercise
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A. Plaintiff’s Proposed Fraud and Misrepresentation Claims Are Futile
The basis of the proposed fraud and misrepresentation claims is a February 12, 2015
letter from Eliot D. Williams, one of MasterCard’s attorneys, to Alexsam (the “Williams Ltr.”)
stating that MasterCard was prepared to pay $21,858.40 in overdue royalties for the period
between August and November 2014 and requesting instructions for how to complete that
payment. ECF 69-1, Proposed Amended Complaint (“PAC”), at ¶¶ 23, 36-44, 46-54. Plaintiff
argues that the Magistrate’s holding that those claims are futile is incorrect on three bases.
First, Alexsam contends that, contrary to the Magistrate’s finding, there are facts alleged
to support a “strong inference of fraudulent intent.” Objections at p. 7. In the Proposed
Amended Complaint, Alexsam alleges that Williams knew his letter was false and intended for it
to “keep Alexsam from taking actions against MasterCard” that Alexsam would have otherwise
taken. PAC at ¶¶ 36-41. Plaintiff further argues that as a “continuing course of conduct,”
MasterCard has failed and refused to pay royalties when they became due and at any point
thereafter, even though MasterCard admits it owes overdue royalties and is in regular
communication with Alexsam. Objections at pp. 7-8.
Even assuming their truth, these assertions do not plead fraud or misrepresentation. That
MasterCard may have incurred royalty obligations in addition to and outside of the date range
specified in the Williams Ltr. has no bearing on veracity of the Williams Ltr. Nor does it matter
whether Williams and MasterCard actually intended to pay Alexsam the $21,858.40. “[W]here a
fraud claim arises out of the same facts as plaintiff's breach of contract claim, with the addition
only of an allegation that defendant never intended to perform the precise promises spelled out in

its audit rights on May 20, 2015, which MasterCard denied, (4) Alexsam provided MasterCard
with payment instructions in response to the Williams Ltr., and (5) Alexsam’s motion is not
intended to disqualify MasterCard’s law firm from this suit. Objections at pp. 2-7.
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the contract between the parties, the fraud claim is redundant and plaintiff's sole remedy is for
breach of contract.” Telecom Int’l. Am., Ltd. v. AT&T Corp., 280 F.3d 175, 196 (2d Cir. 2001)
(internal citations omitted); see also Rabin v. Mony Life Ins. Co., 387 Fed. App’x 36, 40 (2d Cir.
2010) (“[T]he alleged false representations are the essential terms of the contract and failure . . .
to honor these terms gives rise to an action for breach of contract, not one in tort.” (internal
citations omitted)). Plaintiff simply alleges that there is a dispute over how much MasterCard
owes it in royalties and MasterCard’s refusal to pay that amount. This is the basis of the breach
of contract action, not a separate claim for fraud or misrepresentation.
Second, Plaintiff objects to the Magistrate’s holding that it did not detrimentally rely on
the Williams Ltr. Objections at p. 8. The PAC alleges that Alexsam delayed its filing of a
lawsuit against MasterCard in reliance on the Williams Ltr. PAC at ¶¶ 40, 51. In finding that
Alexsam failed to plead detrimental reliance, the Magistrate noted that Plaintiff commenced this
action approximately three months after the Williams Ltr. and then waited another three months
to secure a waiver of service from MasterCard. R&R at p. 11. This chronology, the R&R held,
undermines Alexsam’s claim that it delayed initiating this lawsuit because of the Williams Ltr.
This Court agrees. There is nothing to suggest that waiting just three months to file this lawsuit,
and then another three months to serve MasterCard, was detrimental to Alexsam. To hold
otherwise would open the door for every good faith attempt at settlement negotiations to serve as
the basis for a fraud or misrepresentation claim. Moreover, Plaintiff does not allege that it
incurred any damage as a result of that delay separate and apart from the breach of contract
damages. Rosen v. Spanierman, 894 F.2d 28, 34 (2d Cir. 1990) (“[U]nder New York law, a
plaintiff must establish that he relied on the defendant's misrepresentations and that this reliance
caused him injury.”).

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Third, Plaintiff contends that the R&R incorrectly held that MasterCard did not owe a
duty to Alexsam separate from the license agreement. Objections at pp. 9-10. The Magistrate
held that the “provision in the Agreement that affords Alexsam the right to audit and inspect
MasterCard’s books and records, and to impose the cost of the audit on MasterCard . . . ” belied
Alexsam’s argument that it was disadvantaged because Mastercard held “all of the knowledge
and information regarding transactions on its network.” R&R at p. 14. Plaintiff maintains that
the Magistrate overlooked the fact that on May 20, 2015, its counsel filed a written request to
conduct an audit, pursuant to the terms of the license agreement, and that MasterCard denied the
request. Objections at pp. 4, 9-10. Therefore, Alexsam did not “either enjoy access to critical
information or fail to take advantage of that access.” Id. at p. 10, citing Merrill Lynch & Co.,
Inc. v. Allegheny Energy, Inc., 500 F.3d 171, 181 (2d Cir. 2007).
“The principle that access bars claims of reliance on misrepresentations has been
expressly recognized by this Court . . . and New York State courts.” Grumman Allied Indus.,
Inc. v. Rohr Indus., Inc., 748 F.2d 729, 737 (2d Cir. 1984) (citing cases). Alexsam’s request to
audit on May 20, 2015 post-dated the Williams Ltr., dated February 12, 2015, and the
commencement of this lawsuit on May 14, 2015. That MasterCard refused to allow Alexsam to
audit its records on May 20, 2015 is inconsequential because Alexsam’s audit rights were intact
at the time of the alleged fraud or misrepresentation, months earlier. Therefore, Plaintiff could
have independently confirmed the veracity of the Williams Ltr. before relying on it, which it
failed to do. “Where sophisticated businessmen engaged in major transactions enjoy access to
critical information but fail to take advantage of that access, New York courts are particularly
disinclined to entertain claims of justifiable reliance.” Id.; see also Abrahami v. UPC Const. Co.,

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224 A.D.2d 231, 234 (1st Dep’t 1996); Miller v. Doniger, 272 A.D.2d 73, 73-74 (1st Dep’t
2000).
Plaintiff also argues that MasterCard owed a separate duty to it by nature of its “unilateral
decision to assume responsibility for holding past due royalty payments indefinitely . . . [and]
maintain possession of the funds after they were due and MasterCard had and was continuing to
refuse remittance.” Objections at p. 9 (emphasis in original). As the Magistrate correctly
articulated, however, MasterCard’s failure to remit royalties when due did not create a separate
duty to control those assets indefinitely into the future, rather it constituted a breach of contract
for which Alexsam now seeks damages. See R&R at p. 15, citing DynCorp v. GTE Corp., 215
F.Supp. 2d 308, 324 (S.D.N.Y. 2002).
A de novo review of Plaintiff’s objections to the Magistrate’s thorough and well-reasoned
R&R reveals that both the fraud and misrepresentation claims would be futile if allowed to
proceed.
B. Plaintiff’s Proposed Claim for the Breach of the Covenant of Good Faith and Fair
Dealing is Futile
Plaintiff also objects to the Magistrate’s holding that its claim for breach of the covenant
of good faith and fair dealing is futile. The R&R provides a careful overview of the relevant
case law, which Plaintiff does not contest and the Court adopts. R&R at pp. 18-23. Plaintiff
argues only that the R&R failed to address “whether a licensee can be found liable for breaching
the implied covenant even though he or she is not foreclosed from doing so.” Objections at p.
11. In other words, without citing any precedent in support, Plaintiff asks the Court to hold that
MasterCard had the right to challenge the patents’ validity but can still be held liable to Alexsam
for doing so.

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This argument is circular, and was expressly addressed by the R&R and rejected. R&R
at p. 23. Indeed, well-established Supreme Court precedent bars Alexsam’s proposed claim for
breach of the covenant of good faith and fair dealing. The equities of the licensor are
outweighed by “the important public interest in permitting full and free competition in the use of
ideas which are in reality a part of the public domain.” Lear, Inc. v. Adkins, 395 U.S. 653, 670
(1969). To that end, licensees like MasterCard are uniquely situated to “challenge the
patentability of an inventor’s discovery,” and “[i]f they are muzzled, the public may continually
be required to pay tribute to would-be monopolists without need or justification.” Id. To hold,
as Plaintiff urges, that licensees may challenge patents but also be simultaneously liable for
breach of the covenant of good faith and fair dealing would surely chill the licensee’s willingness
to challenge those patents at all, to the detriment of the public at large. As a result, the “technical
requirements of contract doctrine must give way before the demands of the public interest.” Id.
CONCLUSION
For the foregoing reasons, Plaintiff’s Objections to the R&R are dismissed. The R&R is
adopted in its entirety and Plaintiff’s motion to amend the Complaint is denied. Repleading the
proposed causes of action would be futile because the problem with those claims is substantive,
and “better pleading will not cure it.” Cuoco v. Moritsugu, 222 F.3d 99, 112 (2d Cir. 2000).
Plaintiffs are thus foreclosed from repleading these causes of action in the future.
SO ORDERED.
Dated:

Brooklyn, New York
August 17, 2017
/s/
I. Leo Glasser

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