Tellez v. OTG Interactive, LLC, et al.
Filing
83
MEMORANDUM OPINION AND ORDER: For the foregoing reasons, Defendants' motion for summary judgment is granted to the extent it seeks dismissal of Tellez's SOX and Dodd-Frank claims. Tellez is directed to file, no later than ten (10) days from the date of entry of this Memorandum Opinion and Order, an affidavit demonstrating a basis for this Court's exercise of subject matter jurisdiction of his state law breach of contract claim as of the time this action was commenced. Any responsive submission must be filed within seven (7) days of the date of filing of the affidavit. SO ORDERED. (Signed by Judge Laura Taylor Swain on 6/03/2019) (ama)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------------------------x
OMAR TELLEZ,
Plaintiff,
-v-
No. 15 CV 8984-LTS-KNF
OTG INTERACTIVE, LLC, et al.,
Defendants.
-------------------------------------------------------x
MEMORANDUM OPINION AND ORDER
Plaintiff Omar Tellez brought this action against his former employer, OTG
Interactive, LLC n/k/a Flo Solutions, LLC (“OTGI”), two related corporations, OTG
Management, Inc. (“OTG”), and OTG Management, LLC, as well as the Chief Executive Officer
of OTG, Rick Blatstein a/k/a Eric J. Blatstein (collectively, “Defendants”), alleging that Tellez’s
demotion and ultimate termination from OTGI violated the Sarbanes-Oxley Act (“SOX”), the
Dodd-Frank Act (“Dodd-Frank”), and the severance provisions of Tellez’s employment contract.
This Court has jurisdiction of the SOX and Dodd-Frank claims pursuant to 28 U.S.C. § 1331 and
may exercise supplemental jurisdiction of the state-law claims pursuant to 28 U.S.C. § 1367.
Before the Court is Defendants’ motion for summary judgment dismissing all of
Tellez’s claims, as well as Tellez’s cross-motion for partial summary judgment on his breach of
contract claim. (Docket entry nos. 53, 59.) The Court has considered all of the parties’
submissions carefully and, for the reasons that follow, Defendants’ motion for summary
judgment is granted to the extent that it seeks dismissal of Tellez’s SOX and Dodd-Frank claims.
Because the pleadings are insufficient to demonstrate that the Court has independent subject
matter jurisdiction of Tellez’s breach of contract claim, the Court declines to consider at this time
TELLEZ - MSJ.DOCX
VERSION JUNE 3, 2019
1
the parties’ motions for summary judgment with respect to that state law claim and instead grants
Tellez an opportunity to file an affidavit demonstrating a basis for subject matter jurisdiction in
this Court.
BACKGROUND
Unless otherwise indicated, the following material facts are undisputed.1
Defendant OTG operates restaurants and concessions in various airports throughout North
America by providing Apple iPad stations that allow customers to, among other things, order
food and check their flight status. (Docket entry no. 54, Def. 56.1 St. ¶ 1.) Defendant OTGI
provides the software system used on the iPads. (Id. ¶ 2.) Defendant Blatstein is the Chief
Executive Officer of OTG and OTGI. (Id. ¶ 3.)
On September 9, 2014, Tellez commenced his employment as President of OTGI
pursuant to an employment agreement dated August 8, 2014. (Id. ¶ 8, 12; see also docket entry
no. 48, Schmidt Decl. Ex. K, the “Employment Agreement.”) Tellez’s employment agreement
provides that “[i]n the event of a termination of your employment with [OTGI] for reasons other
than “Cause” (if initiated by [OTGI] or its parent) . . . we will provide you with a severance of
twelve (12) months base salary and health benefits.” (Employment Agreement ¶ 6.) The
agreement defines “cause” as including, among other things, the “engagement in any course of
conduct that could reasonably be expected to materially and adversely damage the business or
reputation of [OTGI].” (Id. ¶ 6a.)
1
Facts characterized as undisputed are identified as such in the parties’ statements
pursuant to S.D.N.Y. Local Civil Rule 56.1 or drawn from evidence as to which there has
been no contrary, non-conclusory factual proffer. Citations to the parties’ respective
Local Civil Rule 56.1 Statements (“Def. 56.1 St.” or “Pl. 56.1 St.”) incorporate by
reference the parties’ citations to underlying evidentiary submissions.
TELLEZ - MSJ.DOCX
VERSION JUNE 3, 2019
2
In the fall of 2014, shortly after Tellez joined OTGI, Defendants decided to
implement a “model test” to determine whether OTGI could generate additional revenue by
charging customers for games offered on Defendants’ iPads. (Def. 56.1 St. ¶ 28.) As part of the
test, Defendants developed a software application that would launch a paywall asking for
payment before directing a customer to certain games. (Id. ¶¶ 30-32.) Once a payment was
made, the application would launch a game already downloaded onto the iPad. (Id. ¶ 33.) The
paywall test was implemented at a Delta airlines concourse in the Minneapolis-St. Paul
International Airport for a five-week period from October 30, 2014, to December 5, 2014, on
iPads that displayed the Delta logo. (Id. ¶¶ 40, 43.) Delta did not request or direct Defendants to
conduct the paywall test, nor was Delta aware that any such test had been created or
implemented. (Id. ¶¶ 45-46.)
On October 16, 2014, individuals from the Defendants’ software development
team approached Tellez to discuss their concern that the paywall model test might breach thirdparty licensing agreements between Defendants and certain iPad game manufacturers. (Id. ¶ 51.)
That same day, Tellez emailed Defendants’ General Counsel Christopher Redd to notify Redd of
Tellez’s concern that the paywall test might breach Defendants’ obligations under licensing
agreements with certain game manufacturers. (Id. ¶¶ 7, 56-57.) Tellez also approached
Defendants’ Chief Technology Officer, Albert Lee, about the same concern regarding
Defendants’ licensing agreements. (Id. ¶¶ 58-59.) Tellez contends that, during an in-person
meeting with Lee, he informed Lee “of the illegality of the work that was being done” and that
the paywall “was fraudulent and illegal.” 2 (Schmidt Decl. Ex. F (“Tellez Dep.”) at 29-30, 41.)
2
When asked what aspect of the paywall Tellez considered “illegal,” he testified that “[i]t
was pretty clear that [the paywall] was illegal and there were red flashing lights about it.
End user license agreements from both Apple and these game publishers . . . forbid in a
very clear sentence to commercialize these games and charge for them. This is standard
TELLEZ - MSJ.DOCX
VERSION JUNE 3, 2019
3
In addition to contacting Redd and Lee, Tellez also called Blatstein on October 16, 2014. (Def.
56.1 St. ¶ 60.) During that conversation, Tellez notified Blatstein about his belief that
Defendants were breaching certain licensing agreements “and had created some hacking scripts
to do so.” (Tellez Dep. at 44, 64.) After notifying Redd, Lee, and Blatstein of his concerns,
Tellez instructed members of Defendants’ software team to stop development of the software
application for the paywall test. (Tellez Dep. at 45-51.)
On October 17, 2014, Blatstein met with Tellez and was “completely infuriated
because [Tellez] had stopped [the] development [of the paywall].” (Tellez Dep. at 66.) Tellez’s
employment with Defendants was terminated on November 3, 2014. (Def. 56.1 St. ¶¶ 12, 74.)
The parties dispute the reasons for Tellez’s termination. Defendants contend that Tellez was
terminated because, among other things, Tellez’s performance was “scattered” and “lacked
focus,” because Tellez lacked familiarity with certain financial concepts, and because Tellez was
aggressive towards and shared inaccurate information with Apple, an important business partner.
(See id. ¶¶ 18-27, 75.) Tellez contends that he was terminated because he raised concerns about
Defendants’ “illegal and fraudulent scheme” to commit wire fraud, and argues that Defendants’
proffered reasons are pretextual. (Docket entry no. 75, Pl. Mem. at 24-30.) In support of that
contention Tellez cites, among other things, positive communications between Blatstein and
Tellez, as well as testimony from co-workers acknowledging that Tellez’s presentations were
“strong,” that there was a “learning curve” associated with Tellez’s role at OTGI, and assertions
procedure for any game publishing company. This is an obscene violation of their
intellectual property rights.” (Tellez Dep. at 42.) Software developer Gino Wu testified
that it “felt dishonest” to charge users for the games, and that he and other members of
the software development team “felt like it was not right to do.” (Docket entry no. 74,
Dinnocenzo Decl. Ex. E (“Wu Dep.”) at 20-21, 35-36.) Wu also testified that he was
concerned the paywall might not be “legal.” (Wu Dep. at 41.)
TELLEZ - MSJ.DOCX
VERSION JUNE 3, 2019
4
that Apple’s sales of iPads to Defendants were not affected by Tellez’s communications with
Apple. (Pl. Mem. at 26, 28-29, 32-33.)
DISCUSSION
A motion for summary judgment should be granted “if the movant shows that
there is no genuine dispute as to any material fact and the movant is entitled to judgment as a
matter of law.” Fed. R. Civ. P. 56(a). A genuine dispute of material fact exists where “the
evidence is such that a reasonable jury could return a verdict for the nonmoving party.”
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). By contrast, if “the record taken as
a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine
issue for trial,” and summary judgment is appropriate. Matsushita Elec. Indus. Co., Ltd. v.
Zenith Radio Corp., 475 U.S. 574, 587 (1986).
Sarbanes-Oxley Act
Section 806 of SOX protects employees of publicly traded companies, and
employees of contractors and agents of publicly traded companies, against retaliation where the
employee has provided information to supervisors about conduct that the employee “reasonably
believes constitutes a violation of [18 U.S.C.] section 1341 [mail fraud], 1343 [wire fraud], 1344
[bank fraud], or 1348 [securities fraud], any rule or regulation of the Securities and Exchange
Commission [“SEC”], or any provision of Federal law relating to fraud against shareholders . . .
.” 18 U.S.C.S. § 1514A(a)(1) (LexisNexis 2008). To succeed on a claim under Section 806, an
employee “must prove by a preponderance of the evidence that (1) [he] engaged in protected
activity; (2) the employer knew that [he] engaged in the protected activity; (3) [he] suffered an
unfavorable personnel action; and (4) the protected activity was a contributing factor in the
TELLEZ - MSJ.DOCX
VERSION JUNE 3, 2019
5
unfavorable action.” Bechtel v. Admin. Review Bd., U.S. Dep’t of Labor, 710 F.3d 443, 447 (2d
Cir. 2013).
Defendants argue that summary judgment is warranted because OTGI is not a
publicly traded company, and Plaintiff has failed to adduce any evidence that OTGI was acting
on behalf of Delta, a public company, when implementing the paywall model test. Citing the
Supreme Court’s decision in Lawson v. FMR LLC, 571 U.S. 429 (2014), Tellez argues that
Section 806 does not require that fraud be carried out at the direction of, or for the benefit of, a
publicly traded company and that, even if such a requirement were imposed, evidence of
Defendants’ contractual relationship with Delta is sufficient to show that OTGI operated as
Delta’s contractor when implementing the paywall model test. Under Lawson, a public
company’s privately-owned contractor may be held liable for retaliatory action taken against that
private company’s employees. Id. at 441 (“A contractor may not retaliate against its own
employee for engaging in protected whistleblowing activity.”). In Lawson, the Supreme Court
held that the SOX claim against the private contractor, which managed a publicly-traded mutual
fund and had been accused by its employee of deception directed toward shareholders of the
fund, was a “mainstream application” of SOX’s prohibition. Id. at 454. Declining to determine
“the bounds” of SOX liability of a contractor for retaliating against its own employees, the Court
noted arguments that any potential overbreadth in subjecting a privately-owned contractor to
liability for actions taken toward its own employees might be addressed by “limiting principles,”
including a requirement that the contractor be “fulfilling its role as a contractor for the public
company” in engaging in the conduct complained of by the putative whistleblower. Id. at 45354. Courts evaluating SOX claims against private contractors have since applied this limitation,
recognizing that SOX, which was enacted in response to the Enron accounting fraud scandal, is
TELLEZ - MSJ.DOCX
VERSION JUNE 3, 2019
6
principally focused on protecting public company and contractor employees who reveal fraud
committed by or on behalf of the public company. See Baskett v. Autonomous Research LLP,
2018 WL 4757962, at *8 (S.D.N.Y. Sept. 28, 2018) (“[T]he contractor provision does not apply
where a public company has no involvement in the conduct Congress sought to curtail by
passing SOX.”) (citing cases).
Here, it is undisputed that Delta did not request or direct Defendants to conduct
the paywall model test, nor was Delta aware that any such test had been created or implemented.
(Def. 56.1 St. ¶¶ 45-46.) Although Defendants contracted with Delta to provide restaurant and
concession services to Delta’s customers, and Delta stood to benefit financially from that
arrangement, the record contains no facts from which a reasonable juror could infer that the
paywall model test, of which Delta had no knowledge, was undertaken by or on behalf of Delta,
or that Delta had any specific involvement, control, or expectations with respect to the test.
Under these circumstances, it would be inconsistent with the statute’s purpose, as discussed in
Lawson and as interpreted by subsequent lower court decisions, to impose SOX liability, because
the alleged whistleblowing did not concern fraud related to or engaged in by a public company.
As the Lawson Court explained, one of the purposes of SOX is to “encourage whistleblowing by
contractor employees who suspect fraud involving the public companies with whom they work.”
571 U.S. at 449; see also id. at 448 (noting that it is “clear from the legislative record . . .
Congress’ understanding that outside professionals bear significant responsibility for reporting
fraud by the public companies with whom they contract”). Where, as here, the alleged fraud did
not involve any activity by a publicly traded company, Defendants’ contractual relationship with
Delta alone is an insufficient basis upon which to impose SOX liability. See Anthony v.
Northwestern Mut. Life Ins. Co., 130 F. Supp. 3d 644, 652 (N.D.N.Y. 2015) (observing that
TELLEZ - MSJ.DOCX
VERSION JUNE 3, 2019
7
SOX liability is limited to “situations where a contractor employee is functionally acting as an
employee of a public company, and in that capacity, is a witness to fraud by the public
company”). Accordingly, Tellez’s SOX claim is dismissed.
Dodd-Frank Act
The Dodd–Frank Act prohibits an employer from terminating a whistleblower
for “making disclosures that are required or protected under the Sarbanes–Oxley Act of
2002.” 15 U.S.C.S. § 78u–6(h)(1)(A)(iii) (LexisNexis 2018). “To sue under Dodd–Frank’s antiretaliation provision, a person must first ‘provid[e] . . . information relating to a violation of the
securities laws to the [Securities and Exchange] Commission.’” Digital Realty Trust, Inc. v.
Somers, 138 S. Ct. 767, 772-73 (2018). Because Tellez did not provide any information
regarding the paywall model test to the Securities and Exchange Commission, his Dodd-Frank
claim is dismissed.
Subject Matter Jurisdiction
Defendants and Tellez each move for summary judgment on Tellez’s breach of
contract claim. However, in light of the dismissal of Tellez’s federal SOX and Dodd-Frank
claims, the Court must examine whether it has independent subject matter jurisdiction of Tellez’s
breach of contract claim. The Second Amended Complaint asserts that the Court has diversity
jurisdiction of Tellez’s breach of contract claim, but only alleges that Tellez is a “resident” of
New Jersey. (Docket entry no. 20 ¶¶ 2, 20.) “It is axiomatic that, for diversity jurisdiction to be
available, all of the adverse parties in a suit must be completely diverse with regard to
citizenship.” E.R. Squibb & Sons v. Accident & Cas. Ins. Co., 160 F.3d 925, 930 (2d Cir.
TELLEZ - MSJ.DOCX
VERSION JUNE 3, 2019
8
1998). For purposes of diversity jurisdiction, “a statement of the parties’ residence is insufficient
to establish their citizenship.” Leveraged Leasing Admin. Corp. v. PacifiCorp Capital, Inc., 87
F.3d 44, 47 (2d Cir. 1996) (citation omitted). Because the pleadings are insufficient to
demonstrate an independent basis for subject matter jurisdiction of Tellez’s breach of contract
claim, the Court grants Tellez ten (10) days from the date of entry of this Memorandum Opinion
and Order to file an affidavit demonstrating the existence of diversity jurisdiction at the time this
action was commenced. Any responsive submission must be filed within seven (7) days of the
date of filing of the affidavit. If the parties’ filings are insufficient to demonstrate an
independent basis for subject matter jurisdiction of Tellez’s remaining claim, the Court will
decline to exercise supplemental jurisdiction of the breach of contract claim.
CONCLUSION
For the foregoing reasons, Defendants’ motion for summary judgment is granted
to the extent it seeks dismissal of Tellez’s SOX and Dodd-Frank claims. Tellez is directed to
file, no later than ten (10) days from the date of entry of this Memorandum Opinion and Order,
an affidavit demonstrating a basis for this Court’s exercise of subject matter jurisdiction of his
state law breach of contract claim as of the time this action was commenced. Any responsive
submission must be filed within seven (7) days of the date of filing of the affidavit.
SO ORDERED.
Dated: New York, New York
June 3, 2019
/s/ Laura Taylor Swain
LAURA TAYLOR SWAIN
United States District Judge
TELLEZ - MSJ.DOCX
VERSION JUNE 3, 2019
9
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?