FPP, LLC v. Xaxis, Inc.

Filing 80

MEMORANDUM OPINION AND ORDER re: 21 MOTION to Dismiss pursuant to Fed. R. Civ. P. 12(b)(6), dismissing Count two of Plaintiff's Amended Complaint. filed by Xaxis US, LLC f/k/a 24/7 Real Media US, Inc. For the foregoing reasons, D efendant's motion to dismiss Count Two of the Amended Complaint is denied in its entirety. This Order resolves docket entry no. 21.The final pre-trial conference in this case is scheduled for April 8, 2016, at 10:00 a.m. SO ORDERED. (As further set forth within this Opinion.) (Signed by Judge Laura Taylor Swain on 9/1/2015) (ajs)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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FPP, LLC (“FPP”), f/k/a Panther Panache, LLC,
Plaintiff,
-v-

No. 14-CV-6172-LTS

Xaxis US, LLC (“Xaxis”), f/k/a 24/7 Real Media US, Inc.,
Defendant.
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MEMORANDUM OPINION AND ORDER
Plaintiff FPP, LLC, f/k/a Panther Panache, LLC (“Plaintiff”), is a limited liability
company organized under the laws of Nevada. As an operating company, it created and patented
software and related products and provided video advertising insertion and rendering
technology, advertising fulfillment software, and related products and services. This action
arises out of Plaintiff’s sale of substantially all of its operating assets to Defendant Xaxis US,
LLC, f/k/a 24/7 Real Media US, Inc. (“Defendant”), for which transaction Plaintiff contends it
was not fully paid. Plaintiff asserts claims against Defendant for breach of contract and, in the
alternative, fraud. The Court has jurisdiction of this action pursuant to 28 U.S.C. § 1332(a)(1).
Defendant moves, pursuant to Federal Rule of Civil Procedure 12(b)(6), to
dismiss Count Two of the Amended Complaint, Plaintiff’s claim for fraud, as duplicative of the
breach of contract claim and for failure to state a viable fraud claim. For the following reasons,
Defendant’s motion to dismiss the fraud claim is denied.

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BACKGROUND
Unless otherwise indicated, the following facts are drawn from the Amended
Complaint and are assumed true for purposes of this motion. When Plaintiff was exploring
options for selling the company’s operating assets, Plaintiff received proposed letters of intent
from two finalists, including Defendant. (Amended Complaint (“Am. Compl.”) ¶ 67.) In
November 2011, Plaintiff and Defendant executed an Asset Purchase Agreement (“Agreement”
or “APA”), which provided for the sale of substantially all of Plaintiff’s assets to Defendant.
(Am. Compl. ¶ 1.) The Agreement stipulated terms for the Purchase Price of the sale, part of
which would be paid up front (the “Closing Payment”) and the remainder of which would be
paid after closing based on an earn-out formula (the “Earn-Out Payment”). The Earn-Out
Payment was to be calculated as two times the 2013 Net Revenue, minus the initial Closing
Payment, to be paid after the 2013 operating year. (APA § 2.1.1(b).) The Agreement set forth a
maximum Purchase Price of $18 million and a Closing Payment of $5 million, thereby capping
the Earn-Out Payment at $13 million. (APA § 2.1.1(c).) The Net Revenue was to equal the
aggregate of seven (7) enumerated items, including Basic Video Media Fees. (APA § 2.1.2.)
The Agreement was negotiated by business representatives of Plaintiff (Steven
Robinson and James H. McGuire) and Defendant (Sheila Schneider and Robert Spence). On
November 1, 2011, Spence sent Robinson a draft definition of the term “Basic Video Media
Fees” that provided for the determination of such fees “on a CPM basis, which shall be equal to
twenty-five percent (25%) of the average CPM for video ad serving earned under third-party
agreements.”1 (See Am. Compl. ¶ 73.) Robinson rejected the draft language, stating that the

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“CPM” is an abbreviation for cost per thousand impressions. Plaintiff contends
that, as used in the agreement, it referred to the price charged to customers for ad
displays (impressions). Defendant contends that, for purposes of the disputed
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definition had to reflect the actual revenue earned by Defendant through advertisers’ video ad
serving fees rather than a portion of revenues based on third-party benchmarks. (Am. Compl. ¶
75.)
On November 4, 2011, the parties held a telephone conference that included
negotiations over the definition of Basic Video Media Fees. Robinson reiterated that Plaintiff
must receive credit for actual revenues earned from Basic Video Media, and the group discussed
what Defendant’s capabilities after the acquisition would be for tracking and verifying Basic
Video Media impressions and CPM. (Am. Compl. ¶¶ 76, 77.) Schneider rejected McGuire’s
suggestion to use an agreed, fixed CPM rate such as $10.00, stating it would be too difficult to
determine a fixed rate since CPM rates vary and it would be difficult to predict the CPM rate two
years in the future. (Am. Compl. ¶ 78.) The participants tasked Schneider with drafting a Basic
Video Media Fees definition based on customer CPM. (Am. Compl. ¶ 79.)
In a telephone conference on November 11, 2011, Spence confirmed that
Schneider was revising the Basic Video Media Fees definition in response to the prior
discussion. (Am. Compl. ¶ 81.) On November 18, Spence emailed Robinson, stating that
Schneider had revised the language to reflect Plaintiff’s “‘actual’ concept re display.” (Am.
Compl. ¶ 83.) On November 23, Spence emailed Robinson to confirm the inclusion of a final
definition in the APA, stating that it “ is responsive to [FPP’s] request.” (Am. Compl. ¶ 84.)
Robinson agreed with Spence. (Am. Compl. ¶ 85.) Plaintiff and Defendant signed the APA and
closed the deal.

provision of the agreement, it was to be calculated based on internal operating
cost allocations. (See, e.g., Am. Compl. ¶¶ 56-57.)

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At the end of 2013, Robinson sent his calculations of the Earn-Out Payment to
Defendant, showing that the maximum Earn-Out Payment was due. (Am. Compl. ¶ 95.) On
January 16, 2014, Spence responded that Defendant’s auditors were calculating the Earn-Out
Payment. (Am. Compl. ¶ 96.) On March 27, 2014, Schneider informed Robinson that no EarnOut Payment was due. (Am. Compl. ¶ 97.) Defendant stated that it was using an operating
expense calculation as a measure for the Basic Video Media Fees. (Am. Compl. ¶ 98.)
Defendant stated that this expense calculation was used as an internal cross charge and had been
implemented prior to the November 2011 asset sale. (Am. Compl. ¶ 98.) According to Plaintiff,
Defendant used a one cent ($0.01) measure as the “applicable CPM” in determining Basic Video
Media Fees for purposes of the Earn-Out Payment computation. (Am. Compl. ¶ 100.)
The parties dispute the meaning of, and reference point for, the calculation of
Basic Video Media Fees under the APA. In the event Defendant’s construction of the Earn-Out
Payment definition is upheld, Plaintiff asserts in the alternative its claim of fraud, including
fraudulent inducement – specifically that (1) Defendant knowingly and intentionally
misrepresented to Plaintiff that the Basic Video Media Fees would be calculated on the basis of
actual revenues and applicable CPM rate; and that (2) Defendant knowingly and intentionally
hid from Plaintiff its November 2011 operating cost calculations regarding a one-cent ($0.01)
charge and its intent to use the one cent measure as the operative CPM rate.
DISCUSSION
To survive a Rule 12(b)(6) motion to dismiss a complaint for failure to state a
claim, a complaint must contain sufficient factual matter, accepted as true, to “‘state a claim to
relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell

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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 the reasonable inference that the
defendant is liable for the misconduct alleged.” Id. In order to survive a motion to dismiss, the
complaint must state a plausible claim for relief. Id. at 679. “When there are well-pleaded
factual allegations, a court should assume their veracity and then determine whether they
plausibly give rise to an entitlement to relief.” Id.
Defendant’s Reliance on Matters Extraneous to the Complaint
Defendant has attached a document, labeled “Projections for Illustration and
Discussion Purposes Only,”2 to its reply papers. Defendant contends that the document supports
dismissal of Plaintiff’s fraud claim because it contains certain projected fees and rates that
Defendant sent to Plaintiff prior to execution of the Agreement, and that these fees and rates
contradict Plaintiff’s claimed understanding of how the parties intended to calculate the Basic
Video Media Fees. Plaintiff argues that the Court may not consider this document in connection
with the motion.
In deciding motion to dismiss under Rule 12(b)(6), “a district court may consider
the facts alleged in the complaint, documents attached to the complaint as exhibits, and
documents incorporated by reference in the complaint.” DiFolco v. MSNBC Cable L.L.C., 622
F.3d 104, 111 (2d Cir. 2010). The court may consider a document not incorporated by reference
if the complaint relies heavily upon the terms and effect of the document, rendering it “integral”
to the complaint. Id. at 111 (citations omitted). Mere notice or possession of the document by
the plaintiff is not, however, sufficient. Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d
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(Exhibit A to Decl. Of Paul F. Corcoran.) The parties refer to the document as
the “Projection Sheet” in their briefing, and the Court adopts that nomenclature.
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Cir. 2002). Even if a document is “integral” to the complaint, it must be clear on the record that
there is no dispute regarding the authenticity or accuracy of the document, and that there are no
material disputed issues of fact regarding its relevance. Faulkner v. Beer, 463 F.3d 130, 134 (2d
Cir. 2006).
The Projection Sheet attached to Defendant’s reply papers was not attached to the
Amended Complaint, nor was it specifically referenced in the Amended Complaint, although
Defendant asserts that it was the source of certain figures quoted in the pleading. To warrant
treatment of a document as incorporated by reference, “the complaint must make ‘a clear,
definite and substantial reference to the document[].’” See Madu, Edozie & Madu, P.C. v.
SocketWorks Ltd. Nigeria, 265 F.R.D. 106, 123 (S.D.N.Y. 2010) (quoting Helprin v. Harcourt,
Inc., 277 F. Supp. 2d 327, 331 (S.D.N.Y. 2003)). While Defendant claims, and Plaintiff
concedes in its Sur-Reply, that paragraphs 44 and 58 of the Amended Complaint mention figures
pertaining to License Fees and Net Revenue calculations, and these categories of calculations are
also contained in the Projection Sheet, neither paragraph of the Amended Complaint explicitly
refers to the Projection Sheet, nor does the Amended Complaint cite the Projection Sheet as a
source for calculations or the basis of any understandings the parties reached during
negotiations. Because there is no “clear, definite, and substantial reference” to the Projection
Sheet, the Projection Sheet was not incorporated by reference to the Amended Complaint.
Nor is the Projection Sheet “integral” to the complaint. There is no indication
that the Amended Complaint relies heavily on the terms and effect of the Projection Sheet; to the
contrary, Plaintiff asserts that the document only represents revenue estimates reflecting
Defendant’s understanding of the calculations well before the alleged fraud took place. (SurReply at 7). Plaintiff also contends, and Defendant concedes, that the document contains some

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inaccuracies. (Sur-Reply at 4; 5 Sur-Sur-Reply at 4, 5). Because of the inaccuracies in the
document and because the Plaintiff proffers that the calculations do not represent a mutual
understanding of the parties regarding the disputed calculation of fees, the Court will not treat
the document as “integral” to the Amended Complaint in connection with the motion.
Accordingly, the Court will not consider Defendant’s arguments insofar as they
rely on the Projection Sheet.
Plaintiff’s Fraud Claim Is Not Duplicative of Plaintiff’s Breach of Contract Claim
Plaintiff alleges that Defendant fraudulently induced Plaintiff to enter into the
contract by knowingly and intentionally misrepresenting to Plaintiff that Basic Video Media
Fees would be calculated on the basis of actual revenues and a customer price-based CPM rate.
Plaintiff also alleges that Defendant fraudulently concealed its November 2011 operating cost
calculations regarding a one-cent ($0.01) charge and its intent to use the one-cent measure as the
operative CPM rate. To state a fraud claim that is distinct from a breach of contract claim, a
plaintiff must (1) demonstrate a legal duty separate from the duty to perform under the contract;
or (2) demonstrate a fraudulent misrepresentation collateral or extraneous to the contract; or (3)
seek special damages that are caused by the misrepresentation and unrecoverable as contract
damages. Bridgestone/Firestone, Inc. v. Recovery Credit Servs., Inc., 98 F.3d 13, 20 (2d Cir.
1996). Defendant focuses on the second and third grounds, arguing that the Amended Complaint
satisfies neither. The Court finds, however, that the Amended Complaint pleads factual matter
sufficient to support either of those grounds.
The Court first notes that, while Plaintiff’s contract interpretation argument
regarding CPM rests on the same factual premises as its claim that Defendant fraudulently

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represented that Defendant was agreeing to base Earn-Out computations on customer revenue
figures, the fraudulent inducement cause of action is pleaded in the alternative and would come
into play only if the Court were to reject Plaintiff’s contract interpretation argument. The causes
of action therefore are not facially duplicative; the Court will address the sufficiency of
Plaintiff’s fraud pleading later in this Memorandum Opinion and Order.
With respect to the Bridgestone/Firestone issues, Plaintiff has pleaded facts
sufficient to satisfy the second prong. New York law “distinguishes between a promissory
statement of what will be done in the future that gives rise only to a breach of contract cause of
action and a misrepresentation of a present fact that gives rise to a separate cause of action for
fraudulent inducement.” Merrill Lynch & Co. Inc. v. Allegheny Energy, Inc., 500 F.3d 171, 184
(2d Cir. 2007). “‘[A] misrepresentation of present facts is collateral to the contract (though it
may have induced the plaintiff to sign the contract) and therefore involves a separate breach of
duty.’” Id. (quoting First Bank of the Americas v. Motor Car Funding, Inc., 257 A.D.2d 287
(1999)). Here, Plaintiff alleges that, at the time Defendant was representing to Plaintiff that it
had drafted the definition to reflect Plaintiff’s position that Basic Video Media Fees must be
based on actual revenue generated from the CPM, it was utilizing a one-cent charge as the
operative CPM rate for internal purposes, information that Defendant knew would affect the
eventual Earn-Out calculation and concealed from Plaintiff because Defendant knew that this
method of analysis was inconsistent with Defendant’s representations about its approach to the
key calculation. (Am. Compl. ¶¶ 99, 100, 127). These alleged misstatements and omissions
could support a determination that Defendant made misrepresentations of present facts (i.e. the
nature of the internal formula it referenced in the proffered contractual language) that were

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materially pertinent to the pre-contractual negotiations, and upon which Plaintiff relied when
entering the Agreement.
Plaintiff has also pleaded sufficient facts to allege plausibly that it suffered
damages different from those it claims under its interpretation of the Earn-Out provision. In this
connection, Plaintiff alleges that Defendant fraudulently induced it to reject another specific
proposed transaction that would have paid a value higher than the total payment under
Defendant’s interpretation of the Asset Purchase Agreement.
Plaintiff States a Cause of Action For Fraud
Defendant further argues that Plaintiff’s fraud claim must be dismissed for failure
to state a cause of action. To state a claim for fraud under New York common law, a plaintiff
must show “‘(1) a misrepresentation or a material omission of fact which was false and known to
be false by defendant, (2) made for the purpose of inducing the other party to rely upon it, (3)
justifiable reliance of the other party on the misrepresentation or material omission, and (4)
injury.’” Premium Mortgage Corp. v. Equifax, Inc., 583 F.3d 103, 108 (2d Cir. 2009) (quoting
Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413, 421 (1996)). Federal Rule of Civil
Procedure 9(b) requires that claims of fraud be pleaded with particularity. In order to satisfy the
heightened pleading requirement of Rule 9(b), a complaint must: “(1) specify the statements that
the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the
statements were made, and (4) explain why the statements were fraudulent.” Mills v. Polar
Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993). The Court finds that the Amended
Complaint meets these requirements for stating a cause of action for fraud.

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The Amended Complaint identifies sufficiently the allegedly fraudulent
statements and explains why they were fraudulent. Defendant argues, however, that Plaintiff’s
fraudulent inducement claim and fraudulent concealment claim fail because Plaintiff’s reliance
on Defendant’s alleged misrepresentations was unreasonable. Specifically, Defendant argues
that Plaintiff’s alleged revenue-based understanding of the Earn-Out provision is inconsistent
with the plain language of the key provision, which refers to an internal formula, and that, as a
sophisticated party, Plaintiff should have required language incorporating an outside-revenue
reference or specifically investigated the internal CPM computation that was referred to in
Defendant’s language.
Plaintiff’s allegations are, however, sufficient to state plausibly the reasonable
reliance element of its fraud claim. Plaintiff alleges that, in several discussions leading up to the
Agreement, representatives of the Plaintiff and Defendant explicitly addressed their views
concerning the Basic Video Media Fees definition. When Defendant first proposed draft
language, Robinson rejected it and expressed Plaintiff’s position that the definition had to reflect
actual revenue. (Am. Compl. ¶ 75). The parties held telephonic conferences in which they
referred to how the Basic Video Media Fees would be calculated. Again, Robinson emphasized
Plaintiff’s precondition that the Basic Video Media Fees must allow for the tracking of revenue
(Am. Compl. ¶ 76). Defendant made affirmative representations that it was drafting and had
drafted the language of the Basic Video Media Fees definition to embrace Plaintiff’s
precondition regarding revenue. If a fact finder is persuaded that, as Plaintiff alleges, Defendant
deliberately misled Plaintiff as to the meaning and operation of the language that Defendant had
proposed and concealed the nature of the referenced CPM calculation, the fact finder could
conclude that Plaintiff’s reliance was reasonable, since the language of the provision does not

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explicitly state that the “internal CPM charge[]” was cost-, rather than revenue-based or that it
was a fixed figure unrelated to actual customer transactions.
CONCLUSION
For the foregoing reasons, Defendant’s motion to dismiss Count Two of the
Amended Complaint is denied in its entirety. This Order resolves docket entry no. 21.
The final pre-trial conference in this case is scheduled for April 8, 2016, at
10:00 a.m.
SO ORDERED.
Dated: New York, New York
September 1, 2015
/s/ Laura Taylor Swain
LAURA TAYLOR SWAIN
United States District Judge

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