HDtracks.com, LLC v. 7digital Group PLC
Filing
41
OPINION & ORDER re: 33 MOTION to Dismiss filed by 7digital Group PLC, 7Digital Limited. For the reasons stated above, Defendants' motion to dismiss the complaint is GRANTED with respect to Defendant 7d Group and Counts I (breach of contract) and III (fraudulent inducement). Defendants' motion is DENIED with respect to Counts II (breach of implied contract), IV (declaratory judgment), and V (unjust enrichment). The Clerk of Court is directed to terminate the motion docketed at ECF No. 33 and terminate 7d Group as a defendant. 7digital Group PLC terminated. (Signed by Judge John F. Keenan on 11/19/2019) (mro)
Case 1:09-md-02013-PAC Document 57
Filed 09/30/10 Page 1 of 45
USDC SDNY
UNITED STATES DISTRICT COURT
DOCUMENT
SOUTHERN DISTRICT OF NEW YORK
ELECTRONICALLY FILED
------------------------------- X
DOC #: _________________
HDTRACKS.COM, LLC,
:
DATE FILED: 11/19/2019
UNITED STATES DISTRICT COURT
:
SOUTHERN DISTRICT OF NEW YORK
Plaintiff,
:
-----------------------------------------------------------x
:
In re FANNIE MAE 2008 SECURITIES
08 Civ. 7831 (PAC)
-against::
No. 18 Civ. 5823 (JFK)
LITIGATION
09 MD 2013 (PAC)
::
OPINION & ORDER
7DIGITAL GROUP PLC, and
::
7DIGITAL LIMITED, a UK private : :
OPINION & ORDER
limited company,
:
-----------------------------------------------------------x
:
Defendants.
:
------------------------------- X
APPEARANCES PAUL A. CROTTY, United States District Judge:
HONORABLE
FOR PLAINTIFF HDTRACKS.COM, LLC
Richard S. Busch
BACKGROUND1
KING & BALLOW
The early years of this decade saw a boom in home financing which was fueled, among
FOR DEFENDANTS 7DIGITAL GROUP PLC and 7DIGITAL LIMITED
William L. Charron
other things, by low interest rates and lax credit conditions. New lending instruments, such as
Matthew S. Barkan
PRYOR CASHMAN LLP
subprime mortgages (high credit risk loans) and Alt-A mortgages (low-documentation loans)
JOHN F. KEENAN, United States District Judge:
kept the boom going. Borrowers played a role too; they took on unmanageable risks on the
Plaintiff HDtracks.com, LLC (“HDT”), a New York online
assumption that the market would continue to rise and that refinancing options would always be
music store, brings suit against 7digital Group PLC (“7d Group”)
available in the future. Lending discipline was lacking in the system. Mortgage originators did
and its subsidiary, 7digital Limited (“7d Limited”), United
not hold these high-risk mortgage loans. Rather than carry the rising risk on their books, the
Kingdom music label service providers (collectively,
originators sold their loans into the secondary mortgage market, often as securitized packages
“Defendants”), for breach of contract, fraudulent inducement,
known as mortgage-backed securities (“MBSs”). MBS markets grew almost exponentially.
and unjust enrichment. HDT alleges that Defendants falsely
But then the housing bubble burst. In 2006, the demand for housing dropped abruptly
promised to build a first-of-its-kind music streaming platform
and home prices began to fall. In light of the changing housing market, banks modified their
and, by failing to do so, Defendants caused HDT to lose its
lending practices and became unwilling to refinance home mortgages without refinancing.
dominant market position, suffer reputational harm, and lose
millions of dollars in future profits.
1
Jurisdiction is based on
Unless otherwise indicated, all references cited as “(¶ _)” or to the “Complaint” are to the Amended Complaint,
dated June 22, 2009. For purposes of this Motion, all allegations in the Amended Complaint are taken as true.
1
1
diversity of citizenship pursuant to 28 U.S.C. § 1332(a).
Before the Court is Defendants’ motion to dismiss the Second
Amended Complaint (“the SAC”) pursuant to Rule 12(b)(2) or, in
the alternative, 12(b)(6) of the Federal Rules of Civil
Procedure.
For the reasons set forth below, Defendants’ motion
is GRANTED in part and DENIED in part.
I.
Background
Unless stated below, the Court takes the following facts
and allegations from the SAC and, for the purpose of this
motion, deems them to be true.
HDT is a New York-based high-resolution music download
store and a well-respected member of the audiophile community
and consumer electronics industry.
(SAC ¶ 17.)
7d Limited is a
private UK company and a subsidiary of 7d Group, a public UK
company that owns and controls at least 75 percent of 7d
Limited.
(Id. ¶¶ 10-12.)
Defendants are based in London, where
they share the same address, website, and logo, and many of the
same directors and officers.
(Id.)
Defendants offer technical
infrastructure and global music rights licensing and hosting
services to help customers create music streaming and radio
services.
(Id. ¶ 23.)
Since at least 2012, HDT sought to capitalize on its
success in the music industry and strong user base by being the
first to market a high-resolution music streaming service (“the
2
streaming service”).
(Id. ¶¶ 19-22.)
In 2014, Defendants
contacted HDT with an offer to build and support the technical
platform for the streaming service (“the Platform”).
24.)
(Id. ¶
Defendants assured HDT that it would be the first to offer
the streaming service and, as the first to market, it would
enjoy a competitive advantage and substantial profits as a
result.
(Id. ¶ 25.)
Defendants also made numerous assurances
and representations to HDT regarding Defendants’ ability to
build, deliver, and support the streaming service.
24.)
(Id. ¶¶ 3,
Many of these representations, however, were false because
Defendants had no history of building or running a highresolution streaming service.
(Id. ¶ 36.)
In January 2016, Defendants suggested that HDT engage a 7d
Group board member to provide a valuation of the streaming
service prior to entering into a formal agreement with
Defendants.
(Id. ¶ 27.)
HDT agreed and, in February 2016, it
payed approximately $45,000 to the board member for his
consulting and advisory services.
(Id. ¶ 28.)
The board member
projected that the streaming service would be highly successful
and profitable and that a conservative valuation showed profits
in the millions of dollars during the first five years of
business.
(Id. ¶¶ 29-30.)
reliance on Defendants.
This solidified HDT’s trust and
(Id. ¶ 31.)
3
In June 2016, after two years of negotiations, HDT and
Defendants signed a term sheet to memorialize their agreement
(“the Term Sheet”).
(Id. ¶ 38.)
Defendants were aware of the
importance of launching the Platform no later than January 2017.
(Id. ¶ 32.)
Further, HDT was induced to enter into the
agreement because Defendants falsely represented that they had
invested millions of dollars into a music streaming platform and
they were equipped with the manpower and expertise to quickly
complete the project.
A.
(Id. ¶¶ 34-36.)
The Term Sheet 1
The Term Sheet was between 7d Limited and HDT.
(Ex. A to
Decl. of William L. Charron in Supp. of Mot. to Dismiss (Nov. 5,
2018), ECF No. 35-1 (“Term Sheet”) at 1.)
page stated:
The top of the first
“This Term Sheet does not constitute an offer, is
non-binding and is solely for discussion purposes.
No agreement
or obligation will arise for either party, except as set forth
in a definitive written agreement executed by the parties.”
(Id.)
A little further down the page, the Term Sheet stated:
1
Copies of the Term Sheet and draft “long-form” agreements were not
attached to the SAC. Defendants, however, provided the documents with
their motion to dismiss which the Court recognizes because the
agreements are incorporated in the SAC by reference and they are
integral to the SAC. See Subaru Distributors Corp. v. Subaru of Am.,
Inc., 425 F.3d 119, 122 (2d Cir. 2005) (“In determining the adequacy
of the complaint, the court may consider any written instrument
attached to the complaint as an exhibit or incorporated in the
complaint by reference, as well as documents upon which the complaint
relies and which are integral to the complaint.”).
4
“Company [HDT] and 7digital [7d Limited] . . . wish to enter
into this term sheet . . . to govern the provision of the
Services by 7digital to Company, with a view to both Parties
entering into a long-form agreement.”
(Id.)
The Term Sheet included a “Schedule 1” that provided the
“Scope of Work.”
(Id. at 4.)
The Schedule 1 stated:
“The Work
Breakdown Structure, High Level Scope of Work and Timeline
contained in this Schedule and which form part of the Services
(as defined in the Term Sheet above) are for illustrative
purposes ONLY.
The Parties acknowledge and agree that the
Breakdown Structure, High Level Scope of Work and Timeline may
be subject to change from time to time as this project evolves.”
(Id. (emphasis in original).)
In exchange for 7d Limited building and supporting the
Platform, HDT agreed to pay a “Set-Up Fee” of $100,000 on the
effective date of the agreement, $100,000 upon completion of the
build work, and $50,000 upon launch of the music service.
at 2-3.)
(Id.
The Term Sheet stipulated that ownership of
intellectual property belonged to 7d Limited, “except as to
grant a non-exclusive, revocable access license” to HDT.
at 2.)
(Id.
The Term Sheet included a “Schedule 2” with “Post-Launch
Terms” that stated:
“Subject to the negotiation, agreement and
execution of any Long-Form, the Parties intend for” HDT to pay a
5
monthly license and maintenance fee of $10,000 and certain other
subscriber and bandwidth fees.
(Id. at 3, 11-12.)
The SAC alleges that the Term Sheet created an enforceable
contractual relationship between HDT and Defendants because
after it was signed the parties’ course of dealing affirmed
their obligations and expectations, which were reiterated in
numerous in-person meetings, phone calls, and email exchanges.
(SAC ¶¶ 42-43.)
As provided by the Term Sheet and requested by 7d Group, on
or around July 26, 2016, HDT paid the initial $100,000 “Set-Up
Fee” to 7d Limited.
(Id. ¶ 45.)
In October 2016, the 7d Group
board member that HDT had engaged as a consultant provided an
updated valuation that showed HDT could anticipate profits of
over $30 million during the first five-year period.
(Id. ¶ 46.)
In December 2016, however, a 7d Group executive advised HDT that
it was low on cash and demanded the second installment payment
of $100,000.
(Id. ¶ 48.)
Relying on the executive’s
representations regarding the progress of the project and its
anticipated launch in early 2017, HDT paid another $100,000 to
7d Limited.
(Id. ¶ 49.)
The SAC alleges that Defendants’
statements were knowingly false and were made to induce the
second payment.
(Id. ¶ 48.)
Defendants continuously assured HDT that the Platform was
forthcoming, but, because Defendants had no history of building
6
such a streaming service, nor the ability or expertise to
complete the project as promised, Defendants nevertheless failed
to deliver.
(Id. ¶¶ 50-57.)
As a result, HDT lost its
competitive advantage and missed the opportunity to be the first
to launch the streaming service at popular technology tradeshows
in January and March 2017.
B.
(Id.)
The Draft Long-Form Agreements 2
In March 2017, Defendants sent HDT a proposed long-form
agreement that included substantially different terms than those
of the Term Sheet.
(Id. ¶ 57.)
HDT was “shocked” by the
contents of the long-form agreement and its removal of certain
essential services that the Term Sheet had promised Defendants
would build.
(Id.)
HDT told Defendants that the proposed long-
form agreement was not the agreement the parties had reached,
Defendants agreed, and the parties continued to operate under
the terms of the Term Sheet.
(Id.)
2
HDT argues that it would be improper for the Court to consider the
draft long-form agreements because HDT did not rely on the terms of
the agreements when drafting the SAC and the agreements may be
excluded under the parol evidence rule. (Opp. at 16-17, 22 (ECF No.
36).) “[T]he complaint is deemed to include any written instrument
attached to it as an exhibit or any statements or documents
incorporated in it by reference.” Chambers v. Time Warner, Inc., 282
F.3d 147, 152 (2d Cir. 2002) (quoting Int’l Audiotext Network, Inc. v.
Am. Tel. & Tel. Co., 62 F.3d 69, 72 (2d Cir. 1995) (per curiam)). The
SAC includes specific allegations regarding the terms of the March
2017 and September 2017 draft long-form agreements in no less than
three separate paragraphs. (SAC ¶¶ 57, 64, 65.) Accordingly, HDT’s
assertion that it did not rely on the terms of the agreements to draft
the SAC is without merit.
7
In May 2017, Defendants proposed issuing a press release to
highlight a July 2017 launch of the streaming service.
58.)
(Id. ¶
HDT was reluctant to make a public announcement but
Defendants persisted and said the press release was needed for
Defendants’ business growth, stability, and desire for
investors.
(Id. ¶¶ 59-60.)
The press release was ultimately
issued, bringing positive attention to Defendants but
embarrassment to HDT when the streaming service was not released
on time.
(Id. ¶ 61.)
Throughout the Summer of 2017, HDT and Defendants continued
to negotiate the terms of the long-form agreement, and the
parties had daily and weekly conversations regarding the
building and testing of the Platform.
(Id. ¶¶ 63-64.)
In
September 2017, Defendants sent a revised draft long-form
agreement that was closer to the original terms of the Term
Sheet.
(Id. ¶ 65.)
The September 2017 draft long-form
agreement included the following terms, which were unchanged
from the March 2017 draft:
[N]either Party shall be liable to the other Party under
or in connection with this Agreement, or any collateral
contract, whether arising under statute or out of breach
of contract, tort (including negligence), breach of
statutory duty, or otherwise, for: (a) any loss of
profits,
business,
goodwill,
anticipated
savings,
revenue, reputation or loss of, damage to, or corruption
of data; or (b) any special, indirect or consequential
losses.
8
(Ex. B to Decl. of William L. Charron in Supp. of Mot. to
Dismiss (Nov. 5, 2018), ECF No. 35-2 (“March LFA”) at 10; Ex. C
to Decl. of William L. Charron in Supp. of Mot. to Dismiss (Nov.
5, 2018), ECF No. 35-3 (“September LFA”) at 10.)
And, “[t]his
Agreement and any dispute or claim arising out of or in
connection with it or its subject matter or formation (including
non-contractual disputes or claims) shall be governed by and
construed in accordance with the law of England and Wales.”
(March LFA at 15; September LFA at 14.)
In September 2017, HDT learned that Defendants had only
assigned one programmer to work on the Platform, which was in
stark contrast to representations Defendants had made about
their manpower and commitment to building the Platform.
65.)
(SAC ¶
Nevertheless, HDT continued to allow Defendants to work on
the Platform and, in October 2017, Defendants assured HDT that
it could launch the streaming service the following month.
¶¶ 66-67.)
Once again, Defendants failed to deliver.
(Id.
(Id.)
By April 2018, it was abundantly clear to HDT that
Defendants could not deliver the Platform as promised.
69-70.)
(Id. ¶¶
That month, HDT notified Defendants that they would not
continue the business relationship.
(Id. ¶ 70.)
Defendants
expressed remorse and requested an in-person meeting with HDT to
apologize and resolve outstanding issues.
(Id. ¶¶ 71-73.)
During the parties’ meeting at HDT’s New York offices on May 14,
9
2018, HDT requested compensation for its losses.
(Id. ¶ 73.)
Defendants agreed to respond with an offer, but no such offer
was ever made.
(Id.)
Defendants have not returned the $200,000
that HDT paid based on Defendants’ promise to build and deliver
a launch-ready music streaming service.
(Id.)
On June 27, 2018, HDT filed its original complaint, which
was only against 7d Group.
(ECF No. 1.)
On August 9, 2018, HDT
filed a first amended complaint that added 7d Limited as a
defendant.
(ECF No. 19.)
On September 10, 2018, HDT filed the
SAC to address issues relating to subject matter jurisdiction.
(ECF No. 26.)
The SAC alleges five counts against Defendants:
(1) breach of contract; (2) breach of implied contract; (3)
fraudulent inducement; (4) declaratory judgment; and (5) unjust
enrichment.
HDT seeks consequential damages in the form of
millions of dollars of lost future profits, compensatory damages
(including the $200,000 HDT paid to Defendants), and punitive
damages.
On November 5, 2018, Defendants moved to dismiss
pursuant to Federal Rules of Civil Procedure 12(b)(2), 12(b)(6),
and 9(b).
II.
(ECF No. 33.)
Personal Jurisdiction
“When the Court is confronted by a motion raising a
combination of Rule 12(b) defenses, it will pass on the
jurisdictional issues before considering whether the Complaint
states a claim.” Minnie Rose LLC v. Yu, 169 F. Supp. 3d 504, 512
10
(S.D.N.Y. 2016).
Accordingly, the Court first addresses
Defendants’ Rule 12(b)(2) lack of personal jurisdiction defense.
A.
Legal Standard
On a Rule 12(b)(2) motion to dismiss, “plaintiff bears the
burden of showing that the court has jurisdiction over the
defendant.” Siegel v. Ford, No. 16-cv-8077 (JPO), 2017 WL
4119654, at *3 (S.D.N.Y. Sept. 15, 2017) (quotation marks
omitted).
Prior to discovery, a plaintiff may defeat a Rule
12(b)(2) motion to dismiss by “a prima facie showing of
jurisdiction.” Id.
“This showing may be made through the
plaintiff’s own affidavits and supporting materials, containing
an averment of facts that, if credited, would suffice to
establish jurisdiction over the defendant.” S.N. Eng. Telephone
Co. v. Global NAPs, Inc., 624 F.3d 123, 138 (2d Cir. 2010)
(internal quotation marks omitted).
“In determining whether a
plaintiff has met this burden, we will not draw argumentative
inferences in the plaintiff’s favor, nor must we accept as true
a legal conclusion couched as a factual allegation.” In re
Terrorist Attacks on Sept. 11, 2001, 714 F.3d 659, 673 (2d Cir.
2013) (citation and internal quotation marks omitted).
In diversity cases, “personal jurisdiction is determined in
accordance with the law of the forum in which the federal court
sits.” Minnie Rose, 169 F. Supp. 3d at 512.
apply a two-step analysis:
New York courts
First, the Court must “determine
11
whether personal jurisdiction is appropriate pursuant to the
State’s general jurisdiction statute, Civil Practice Law and
Rules (“C.P.L.R.”) § 301, or its long-arm jurisdiction statute,
C.P.L.R. § 302(a).” Id.
“If and only if the Court’s exercise of
personal jurisdiction is deemed appropriate according to New
York law, the second step is an evaluation of whether the
Court’s exercise of personal jurisdiction comports with the
Fifth Amendment Due Process Clause of the United States
Constitution.” Id.
B.
New York’s Long-Arm Statute
“To establish personal jurisdiction under section
302(a)(1), two requirements must be met: (1) The defendant must
have transacted business within the state; and (2) the claim
asserted must arise from that business activity.” Eades v.
Kennedy, PC Law Offices, 799 F.3d 161, 168 (2d Cir. 2015)
(quotation marks omitted).
“A defendant transacts business
within the meaning of § 302(a)(1) when it purposefully ‘avails
itself of the privilege of conducting activities [in New York],
thus invoking the benefits and protections of its laws.’” Minnie
Rose, 169 F. Supp. 3d at 513-14 (quoting Fischbarg v. Doucet,
880 N.E.2d 22, 26 (N.Y. 2007)) (alteration in original).
“Section 302(a)(1) is a ‘single act’ statute:
‘[P]roof of one
transaction in New York is sufficient to invoke jurisdiction,
even though the defendant never enters New York, so long as the
12
defendant’s activities here were purposeful and there is a
substantial relationship between the transaction and the claim
asserted.’” Id. at 514 (quoting Kreutter v. McFadden Oil Corp.,
522 N.E.2d 40, 43 (N.Y. 1988)) (alteration in original).
“To
determine whether a party has ‘transacted business’ in New York,
courts must look at the totality of circumstances concerning the
party’s interactions with, and activities within, the state.”
Bank Brussels Lambert v. Fiddler Gonzalez & Rodriguez, 171 F.3d
779, 787 (2d Cir. 1999).
“Rule 302(a)(1) jurisdiction ‘requires
only a minimal quantity of activity, provided that it is of the
right nature and quality.’” Siegel, 2017 WL 4119654 at *4
(quotation marks omitted).
Here, the totality of the circumstances alleged forms a
basis for long-arm jurisdiction under § 302(a)(1).
First,
Defendants purposefully solicited and created a long-term and
important business relationship with HDT, a New York resident.
(SAC ¶¶ 3-4, 24, 38, 73.)
The business relationship began in
2014 and continued through 2018, and during that time Defendants
entered into a signed agreement with HDT that memorialized
Defendants’ intent to provide a service to HDT for its use in
New York.
Further, Defendants received payment from HDT in
accordance with that agreement.
Second, during this years-long
business relationship, Defendants traveled to HDT’s New York
office on numerous occasions and routinely communicated with HDT
13
in New York via telephone and email.
(Id ¶ 24, 38, 57-61, 65,
71-73; Decl. of David Chesky in Supp. of Pl.’s Opp. to Defs.’
Mot. to Dismiss (Nov. 5, 2018), ECF No. 36-1 ¶¶ 5-24.)
Finally,
the scope of Defendants’ business relationship with HDT was
substantial:
Defendants received $200,000 from HDT to build the
Platform and envisioned a long-term relationship after it was
built that could have earned HDT millions of dollars in revenue.
(SAC ¶¶ 27-30, 45-49.)
Accordingly, personal jurisdiction over Defendants is
proper under New York’s long-arm statute. See, e.g., Siegel,
2017 WL 4119654 at *5 (finding personal jurisdiction where a
business relationship continued for at least ten months,
defendant traveled to New York to meet with plaintiff at least
three times, defendant sent a product sample to plaintiff in New
York, the parties frequently talked on the phone, and the scope
of the business relationship was substantial where plaintiff
claimed to have paid $340,000 directly to defendant and an
additional $200,000 in related expenditures); Minnie Rose, 169
F. Supp. 3d at 513-14 (finding a similar purposeful business
relationship was sufficient to establish personal jurisdiction).
C.
Due Process
“To establish personal jurisdiction over a defendant, due
process requires a plaintiff to allege (1) that a defendant has
certain minimum contacts with the relevant forum, and (2) that
14
the exercise of jurisdiction is reasonable in the
circumstances.” SPV Osus Ltd. v. UBS AG, 882 F.3d 333, 343 (2d
Cir. 2018) (quoting In re Terrorist Attacks, 714 F.3d at 674).
“The requisite ‘minimum contacts’ analysis ‘overlaps
significantly’ with New York’s § 302(a)(1) inquiry into whether
a defendant transacted business in the State.” Minnie Rose, 169
F. Supp. 3d at 515 (quoting Brown v. Web.com Group, Inc., 57 F.
Supp. 3d 345, 358 (S.D.N.Y. 2014)).
1.
Alter Ego Liability
As discussed above, the totality of the circumstances
establishes Defendants’ sufficient contacts under § 302(a)(1).
Defendants, however, argue that HDT has not established
constitutionally permitted “substantial” minimum contacts over
both 7d Group and 7d Limited where the basis of HDT’s claims are
centered on 7d Limited’s contacts with New York due to its—and
not 7d Group’s—failed efforts to build the Platform as provided
in the Term Sheet.
“Lumping all the ‘defendants’ together for purposes of
alleging connections to New York is . . . patently
insufficient.” Giuliano v. Barch, No. 16-cv-0859 (NSR), 2017 WL
1234042, at *14 (S.D.N.Y. Mar. 31, 2017).
To exercise personal
jurisdiction over a defendant, “[a] court must look to ‘whether
there was some act by which the defendant purposefully availed
itself of the privilege of conducting activities within the
15
forum State[.]’” SPV Osus, 882 F.3d at 344 (quoting Goodyear
Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915, 924
(2011)).
HDT argues that sufficient contacts exist with respect
to 7d Group, notwithstanding that it was not a party to the Term
Sheet and it did not receive any payments from HDT, because 7d
Group is the alter ego of 7d Limited.
a.
The Court disagrees.
Applicable Law
Whether 7d Group is the alter ego of 7d Limited such that
personal jurisdiction can be exercised over 7d Group, or that it
can be held jointly and severally liable for wrongdoing by 7d
Limited, requires HDT to “adequately plead that circumstances
exist that warrant ‘piercing the corporate veil’ of the
Corporations.” Sofi Classic S.A. de C.V. v. Hurowitz, 444 F.
Supp. 2d 231, 239-40 (S.D.N.Y. 2006).
“Under New York’s choice
of law principles, the law of the jurisdiction having the
greatest interest in the litigation will be applied.” Id.
(citing Kalb, Voorhis & Co. v. Am. Fin. Corp., 8 F.3d 130, 132
(2d Cir. 1993)).
Here, England has the greatest interest in
whether one of its corporations is subject to personal
jurisdiction in a United States district court.
Accordingly,
the Court applies English law to its analysis of whether 7d
Group is the alter ego of 7d Limited.
See Kalb, 8 F.3d at 132
(“The law of the state of incorporation determines when the
corporate form will be disregarded and liability will be imposed
16
on shareholders[.]”) (citing Restatement (Second) of Conflict of
Laws § 307 (Am. Law Inst. 1971)).
b.
Analysis
HDT does not dispute that English law permits corporate
veil-piercing only under exceptional circumstances where a
company’s separate legal personality is being abused for the
purpose of some relevant wrongdoing.
In FR 8 Singapore Pte.
Ltd. v. Albacore Maritime Inc., 794 F. Supp. 2d 449 (S.D.N.Y.
2011), the court examined Judge Cote’s analysis of English law
on this subject in In re Tyson, 433 B.R. 68 (S.D.N.Y. 2010).
FR
8 Singapore explained that “veil piercing is quite rare under
English law” and “the fact that a person engages in the carrying
on of a business using a duly incorporated, yet seemingly
artificial, entity is not sufficient to justify piercing that
entity’s veil.” 794 F. Supp. 2d at 459-60 (quoting Tyson, 433
B.R. at 86).
“Second, courts may pierce the corporate veil only
where special circumstances exist indicating that it is a mere
façade concealing the true facts.” Id. at 460 (quoting Tyson,
433 B.R. at 87).
Finally, “where a corporate structure is
interposed for the purpose of shielding a defendant from
liability . . ., the plaintiff’s ability to recover from the
defendant on a veil-piercing theory turns on whether the
defendant had already incurred some liability to the plaintiff
17
at the time he interposed the corporate structure.” Id. (quoting
Tyson, 433 B.R. at 88).
Applying English law to the SAC in this case, HDT does not
plausibly allege circumstances in which an English court would
pierce the corporate veil.
The SAC merely alleges that 7d Group
and 7d Limited share the same address, website, logo, and
directors and officers, and that 7d Group owns and controls a
significant portion of 7d Limited.
The SAC does not contain any
allegations that 7d Group abuses 7d Limited for the purpose of
wrongdoing, or “that impropriety was linked to the corporate
structure.” Id.
Accordingly, the Court will not pierce the
corporate veil and, instead, it will consider whether personal
jurisdiction exists for 7d Group and 7d Limited, on an
individual basis.
2.
Sufficient Minimum Contacts
The SAC alleges that top-level officials of both 7d Group
and 7d Limited sought out HDT in its only place of business, New
York, and both entities promised to build and deliver a $250,000
product for HDT’s use in New York.
Further, Defendants do not
contest that 7d Limited signed the Term Sheet and, as discussed
below, 7d Limited now admits that an implied and legally
enforceable contract arose between itself and HDT related to
performance of the Term Sheet.
The SAC also alleges that all
18
payments HDT provided were requested by 7d Group and paid to 7d
Limited.
“The defendant’s suit-related conduct must create a
substantial connection with the forum State.
A defendant’s
general connections with the forum are not enough to support the
exercise of specific jurisdiction.” SPV Osus, 882 F.3d at 344
(citation, alterations, and internal quotation marks omitted).
Here, 7d Limited’s connections to New York and HDT’s claims are
sufficient minimum contacts for the same reasons as those that
form the basis of the Court’s long-arm jurisdiction under §
302(a)(1).
7d Group’s connections, by contrast, are too tenuous to
support the exercise of specific personal jurisdiction.
HDT
contends that 7d Group operated in concert with 7d Limited, as
reflected by the SAC’s allegation that 7d Group always requested
the payments, which HDT then paid to 7d Limited.
not persuaded.
The Court is
The SAC does not plausibly allege that 7d Group
was a party to the business relationship between HDT and 7d
Limited that gives rise to 7d Limited’s sufficient minimum
contacts, especially where, as here, the relevant document that
served to implicitly bind the parties was expressly between HDT
and 7d Limited.
Drawing all reasonable inferences in favor of
HDT, the overwhelming inference is that the contacts relating to
the litigation were performed solely by 7d Limited, HDT’s only
19
counterparty to the Term Sheet.
“At bottom, the contacts
alleged by [HDT] between [7d Group], the forum and the
litigation amount to a handful of communications and transfers
of funds.” Id. at 345.
This is not enough. Id.
Accordingly, 7d
Group is dismissed for lack of personal jurisdiction.
3.
Reasonableness
“Part two of the due process inquiry—the reasonableness of
a Court’s assertion of personal jurisdiction—depends on a
consideration of ‘(1) the burden that the exercise of
jurisdiction will impose on the defendant; (2) the interests of
the forum state in adjudicating the case; (3) the plaintiff’s
interest in obtaining convenient and effective relief; (4) the
most efficient resolution of the controversy; and (5) the
interests of the state in furthering substantive social
policies.’” Siegel, 2017 WL 4119654 at *5 (quoting Minnie Rose,
169 F. Supp. 3d at 515).
“Where a plaintiff makes the threshold
showing of the minimum contacts . . . a defendant must present a
compelling case that the presence of some other considerations
would render jurisdiction unreasonable.” Bank Brussels, 305 F.3d
at 129 (internal quotation marks omitted).
Defendants do not present a compelling argument that
personal jurisdiction over 7d Limited is unreasonable.
First,
as discussed below, 7d Limited has accepted the existence of an
implied contract with HDT.
Second, “New York has a strong
20
interest in adjudicating cases of alleged fraud perpetrated
against New York corporations.” Minnie Rose, 169 F. Supp. 3d at
516.
Finally, 7d Limited has essentially agreed to resolve the
parties’ dispute in this Court by asserting that it “looks
forward to proving at summary judgment that [HDT’s] implied in
fact contract claim is meritless.”
(Reply at 1 (ECF No. 37).)
Accordingly, specific personal jurisdiction over 7d Limited
comports with due process.
III.
Failure to State a Claim
A.
Legal Standard
To survive a motion to dismiss under Rule 12(b)(6), “a
complaint must contain sufficient factual matter . . . to ‘state
a claim to relief that is plausible on its face.’” Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007)).
A claim is plausible “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. (citing Twombly, 550 U.S. at 556).
On a motion to dismiss, the Court must accept the factual
allegations in the complaint as true and draw all reasonable
inferences in the plaintiff’s favor. Chambers v. Time Warner,
Inc., 282 F.3d 147, 152 (2d Cir. 2002).
“[T]he purpose of
Federal Rule of Civil Procedure 12(b)(6) ‘is to test, in a
streamlined fashion, the formal sufficiency of the plaintiff’s
21
statement of a claim for relief without resolving a contest
regarding its substantive merits.’” Halebian v. Berv, 644 F.3d
122, 130 (2d Cir. 2011) (quoting Glob. Network Commc’ns, Inc. v.
N.Y.C., 458 F.3d 150, 155 (2d Cir. 2006)).
In addition to the requirements of Rule 12(b)(6), a
complaint alleging fraud must satisfy the heightened pleading
requirements of Federal Rule of Civil Procedure 9(b) by stating
the circumstances constituting fraud “with particularity.” ECA &
Local 134 IBEW Joint Pension Trust of Chi. v. JP Morgan Chase
Co., 553 F.3d 187, 196 (2d Cir. 2009).
The adequacy of
particularized allegations under Rule 9(b) is “case- and
context-specific.” Espinoza ex rel. JPMorgan Chase & Co. v.
Dimon, 797 F.3d 229, 236 (2d Cir. 2015).
B.
Duplicative Claims
Defendants accept the existence of an implied contract
between 7d Limited and HDT regarding 7d Limited’s efforts to
build and launch the Platform. 3
Accordingly, the SAC’s breach of
implied contract claim survives.
The terms of the implied
contract and the obligations the parties incurred under it are
3
The SAC alleges that an implied contract existed based on (1) the
time spent negotiating the terms of the long-form agreement; (2) the
Term Sheet’s detail regarding the scope of work to be performed and
the obligations of the parties; (3) the parties’ actions under the
Term Sheet, including Defendants’ demanding payment to perform, and
HDT providing payments; (4) Defendants’ acceptance of the two $100,000
payments; and (5) Defendants’ assurance that it was working to build
and deliver the streaming service. (SAC ¶ 3.)
22
disputed questions of fact, which the Court cannot resolve at
this time.
Defendants argue that, because they have acknowledged an
implied contract existed, HDT’s claims for breach of express
contract, unjust enrichment, and damages for fraudulent
inducement must be dismissed because they rely on the same facts
as HDT’s breach of implied contract claim.
Each additional
claim is discussed in turn below.
1.
Breach of Contract
To state a cause of action for breach of contract under New
York law, a plaintiff must allege: “(1) the existence of a
contract between itself and th[e] defendant; (2) performance of
the plaintiff’s obligations under the contract; (3) breach of
the contract by th[e] defendant; and (4) damages to the
plaintiff caused by th[e] defendant’s breach.” Diesel Props
S.r.l. v. Greystone Bus. Credit II LLC, 631 F.3d 42, 52 (2d Cir.
2011).
By its plain terms, the Term Sheet was a “non-binding”
agreement that contemplated the preparation and execution of a
future “definitive written agreement” between HDT and 7d
Limited.
(Term Sheet at 1.)
The Term Sheet therefore belongs
to a class of agreements known as “preliminary agreements” that,
in some circumstances, “can create binding obligations.”
Adjustrite Sys., Inc. v. GAB Bus. Servs., Inc., 145 F.3d 543,
23
548 (2d Cir. 1998).
For the Term Sheet to have been a binding
contract between HDT and 7d Limited depends on whether the
parties were “fully bound to carry out the terms of the
agreement even if the formal instrument is never executed,” or
whether “the parties are bound only to make a good faith effort
to negotiate and agree upon the open terms and a final
agreement.” Id.
“The key, of course, is the intent of the
parties: whether the parties intended to be bound, and if so, to
what extent.” Id. at 548-49.
Courts consider four factors when determining whether a
preliminary agreement is enforceable as to the “ultimate
contractual objective”:
(1) whether there is an expressed reservation of the
right not to be bound in the absence of a writing; (2)
whether there has been partial performance of the
contract; (3) whether all of the terms of the alleged
contract have been agreed upon; and (4) whether the
agreement at issue is the type of contract that is
usually committed to writing.
Brown v. Cara, 420 F.3d 148, 154 (2d Cir. 2005) (quoting
Adjustrite, 145 F.3d at 549).
HDT claims that the Term Sheet created a fully binding
agreement that 7d Limited then breached by failing to deliver a
high-resolution music streaming service to HDT.
(SAC ¶ 104.)
Drawing all reasonable inferences in HDT’s favor, however, the
clear language of the Term Sheet and the parties’ actions after
signing it, do not evidence an intent by 7d Limited to be bound
24
to such a contract.
First, the Term Sheet expressly said it was
non-binding. Cf. Brown, 420 F.3d at 154 (stating the first
factor “is frequently the most important”).
Second, HDT and
Defendants continued to negotiate the terms of the formal, longform agreement for more than a year after the Term Sheet was
executed, and the parties ultimately never agreed on all the
points that required negotiation.
(SAC ¶¶ 57, 64-65.)
Finally,
although HDT and 7d Limited partially performed under the Term
Sheet, this fact is not dispositive, especially where the other
factors demonstrate that the parties did not agree on all
material elements of the transaction, intend to be fully bound
when they signed the agreement, nor consider the formal
agreement to be an unnecessary formality. See Adjustrite, 145
F.3d at 551; see also Brown, 420 F.3d at 156.
Partial
performance by a party signals the existence of an implied
contract, but this fact alone does not establish an express
contract.
Accordingly, the Term Sheet was not a fully binding
agreement that obligated 7d Limited to deliver the streaming
service to HDT, and thus, HDT’s breach of contract claim must be
dismissed.
2.
Unjust Enrichment
To state a cause of action for unjust enrichment, a
plaintiff must allege: “(1) that the defendant was enriched; (2)
25
that the enrichment was at the plaintiff’s expense; and (3) that
the circumstances are such that in equity and good conscience
the defendant should return the money or property to the
plaintiff.” Golden Pac. Bancorp v. F.D.I.C., 273 F.3d 509, 519
(2d Cir. 2001).
Although 7d Limited has accepted the existence
of an implied contract, it has not stipulated to it, nor to the
obligations that arose under such a contract.
“While a party
generally may not simultaneously recover upon a breach of
contract and unjust enrichment claim arising from the same
facts, it is still permissible to plead such claims as
alternative theories.” Singer v. Xipto Inc., 852 F. Supp. 2d
416, 426 (S.D.N.Y. 2012) (citing Fantozzi v. Axsys Techs., Inc.,
No. 07-cv-2667 (LMM), 2008 WL 4866054, at *3 (S.D.N.Y. Nov. 6,
2008)).
Accordingly, at this stage, the SAC’s unjust enrichment
claim is permitted under Federal Rule of Civil Procedure 8(d)(3)
as an alternative pleading.
3.
Fraudulent Inducement
“To state a claim for fraud in the inducement, [plaintiff]
must allege: (i) a material misrepresentation of a presently
existing or past fact; (ii) an intent to deceive; (iii)
reasonable reliance on the misrepresentation by [plaintiff]; and
(iv) resulting damages.” Johnson v. Nextel Commc’ns, Inc., 660
F.3d 131, 143 (2d Cir. 2011).
Such claims are subject to Rule
9(b) which “requires that a plaintiff set forth the who, what,
26
when, where and how of the alleged fraud.” Minnie Rose, 169 F.
Supp. 3d at 511.
“[T]he point of Rule 9(b) is to ensure that
there is sufficient substance to the allegations to both afford
the defendant the opportunity to prepare a response and to
warrant further judicial process.” United States ex rel.
Chorches for Bankr. Estate of Fabula v. Am. Med. Response, Inc.,
865 F.3d 71, 87 (2d Cir. 2017) (quoting United States ex rel.
Heath v. AT&T, Inc., 791 F.3d 112, 125 (D.C. Cir. 2015)).
HDT identifies five alleged misrepresentations by
Defendants that fraudulently induced the parties’ business
relationship:
1.
In 2014, Pete Downton promoted Defendants to HDT by
touting how HDT could be first in the market to offer a
high-resolution music streaming service. (SAC ¶ 24.)
2.
Simon Cole assured HDT that everyone was fully committed
to the project. (Id. ¶ 29.)
3.
Unnamed individuals told HDT that Defendants had invested
millions of dollars into developing a platform for a highresolution music streaming service and Defendants had the
manpower and expertise to provide the Platform to HDT.
(Id. ¶¶ 3, 24, 33-34, 65.)
4.
Unnamed individuals assured HDT that it would enjoy a
competitive advantage and substantial profits. (Id. ¶
25.)
5.
Eric Cohen projected that HDT’s profits would grow by
millions of dollars during the first five years. (Id. ¶
30.)
HDT’s fraudulent inducement claim must be dismissed for
failure to state a claim with particularity.
First,
misrepresentations #1, #4, and #5 are forward-looking
27
predictions, not material misrepresentations of a presently
existing or past fact.
Such allegedly false statements are not
actionable under a fraudulent inducement claim. See New York
Univ. v. Factory Mut. Ins. Co., No. 15-cv-8505 (NRB), 2018 WL
1737745, at *8 (S.D.N.Y. Mar. 27, 2018) (“[F]raudulent
inducement requires ‘a material misrepresentation of a presently
existing or past fact[.]’ . . . Such a representation is either
true or false at the time it is made and cannot become false
(i.e., the prediction fails to come to pass) with the passage of
time.”).
Second, the SAC’s alleged misrepresentations fail to meet
the requirements of Rule 9(b).
To satisfy Rule 9(b) a plaintiff
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.” Chorches, 865 F.3d at 81 (quotation
marks omitted).
Here, misrepresentations #3 and #4 fail to
identify the speaker. See Pilkington N. Am., Inc. v. Mitsui
Sumitomo Ins. Co. of Am., et al., No. 18-cv-8152 (JFK), 2019 WL
5595042, at *14 (S.D.N.Y. Oct. 30, 2019) (finding Rule 9(b) was
not met where the complaint did not identify the individual
speaker or where the misrepresentations were made).
Further,
HDT fails to sufficiently identify the “where” and “when” for
any of the alleged misrepresentations. See id.
28
Finally, misrepresentation #2 fails to allege that Cole
acted with scienter.
“Rule 9(b)’s heightened particularity
requirement does not apply to allegations regarding fraudulent
intent, also known as scienter, which may be alleged generally.”
Minnie Rose, 169 F. Supp. 3d at 511.
Plaintiffs, however, “are
still required to plead the factual basis which gives rise to a
‘strong inference’ of fraudulent intent.” Stephenson v.
PricewaterhouseCoopers, LLP, 482 Fed. App’x 618, 622 (2d Cir.
2012) (emphasis in original).
“An inference is ‘strong’ if it
is ‘cogent and at least as compelling as any opposing inference
one could draw from the facts alleged.’” Loreley Financing
(Jersey) No. 3. Ltd. v. Wells Fargo Securities, LLC, 797 F.3d
160, 176-77 (2d Cir. 2015) (quoting Tellabs, Inc. v. Makor
Issues & Rights, Ltd., 551 U.S. 308, 324 (2007)).
Here, the SAC
does not identify when Cole made the allegedly false statement
and, thus, it is impossible to infer whether, at the time Cole
made the statement, Defendants were or were not fully committed
to the project.
Further, the SAC does not offer a factual basis
for any inference, much less a strong one, that Cole acted with
the requisite intent to defraud HDT.
Accordingly, the SAC’s
fraudulent inducement claim must be dismissed.
C.
Consequential Damages
“In New York, a party is entitled to recover [consequential
damages in the] form of lost profits only if (1) it is
29
demonstrated with certainty that the damages have been caused by
the breach, (2) the extent of the loss is capable of proof with
reasonable certainty, and (3) it is established that the damages
were fairly within the contemplation of the parties.” Tractebel
Energy Mktg., Inc. v. AEP Power Mktg., Inc., 487 F.3d 89, 109
(2d Cir. 2007).
“Lost profits are consequential damages when,
as a result of the breach, the non-breaching party suffers loss
of profits on collateral business arrangements.” Id.
7d Limited argues that HDT’s consequential damages prayer
for relief must be dismissed because the SAC does not plausibly
allege a basis for finding it liable for millions of dollars in
lost profits.
HDT argues that, absent clear contractual
language to the contrary, whether consequential damages are
available is a question of fact inappropriate for resolution at
this procedural stage.
Drawing all reasonable inferences in favor of HDT, the
Court declines to dismiss the SAC’s request for consequential
damages at this time.
First, as 7d Limited has accepted, an
implied contract existed between the parties relating to 7d
Limited’s efforts to build the Platform.
Neither the parties’
conduct that gave rise to the implied contract, the signed Term
Sheet, nor other elements of the business relationship alleged
by HDT, clearly demonstrate that consequential damages were not
contemplated by the implied contract.
30
The Court notes that
similarities between the March 2017 and September 2017 draft
long-form agreements may convince a fact-finder that the implied
contract did not intend for liability for “(a) any loss of
profits . . . or (b) any special, indirect or consequential
losses.”
(March LFA at 10; September LFA at 10.)
But, because
no agreement was ever reached regarding the long-form agreement,
the Court will not draw the inference against HDT that it waived
consequential damages under the terms of the implied contract
simply because the draft long-form agreements were unchanged in
this one section.
Second, although the Term Sheet and the draft long-form
agreements envisioned that Defendants would have granted HDT a
“non-exclusive, revocable access license” to the Platform after
it was built and launched, (Term Sheet at 2), the SAC plausibly
alleges a strong business relationship between HDT and
Defendants that would have continued indefinitely.
Indeed,
Defendants’ own executives were the ones who forecasted and
predicted HDT’s future profits.
Such facts, presumed to be true
at this stage of the litigation, give rise to the inference that
Defendants would not have revoked HDT’s ability to earn income
from the streaming service had they been able to build the
Platform.
Finally, the difference between the $200,000 that HDT paid
to Defendants and the tens of millions of dollars now sought in
31
damages is not sufficient reason to dismiss HDT’s entire
consequential damages request without first allowing an inquiry
into the terms of the implied contract.
Such grounds for
dismissal, however, may be appropriate after completion of
discovery. See, e.g., Awards.com, LLC v. Kinko’s, Inc., 42
A.D.3d 178, 184 (1st Dep’t 2007), aff’d, 925 N.E.2d 926 (N.Y.
2010) (stating, on a motion for summary judgment, “[i]t would be
highly speculative and unreasonable to infer an intent to assume
the risk of lost profits in what was to be a start-up venture”).
Accordingly, HDT’s consequential damages prayer for relief
survives, for now.
D.
Declaratory Judgment
HDT requests a declaration pursuant to 28 U.S.C. § 2201
that Defendants were obligated to deliver the Platform to HDT
and, because Defendants did not, HDT is owed substantial damages
for its lost future profits.
7d Limited argues that this claim
should be dismissed because it has accepted that an implied
contract existed and HDT is not owed consequential damages.
The declaratory judgment is a remedy the availability of
which is committed to the discretion of the district
court. It need not be granted unless (1) the judgment
will serve a useful purpose in clarifying and settling
the legal relations in issue, or (2) it will terminate
and afford relief from the uncertainty, insecurity, and
controversy giving rise to the proceeding.
Bristol-Myers Squibb Co. v. SR Int’l Bus. Ins. Co., 354 F. Supp.
2d 499, 506 (S.D.N.Y. 2005) (citation and internal quotation
32
marks omitted).
As discussed above, a case or controversy
exists regarding the terms of the implied contract and whether
HDT is entitled to seek consequential damages.
Accordingly,
declaratory judgment may serve a useful purpose and the claim
therefore survives.
IV.
Leave to Amend
Rule 15 of the Federal Rules of Civil Procedure instructs
courts to “freely give leave” to amend “when justice so
requires.” Fed. R. Civ. P. 15(a)(2).
Amendment is not
warranted, however, “absent some indication as to what [a
plaintiff] might add to [its] complaint in order to make it
viable.” Shemian v. Research In Motion Ltd., 570 F. App’x 32, 37
(2d Cir. 2014) (quoting Horoshko v. Citibank, N.A., 373 F.3d
248, 249 (2d Cir. 2004) (per curiam)).
Accordingly, should HDT
wish to amend the SAC, HDT must demonstrate (1) how it will cure
the deficiencies in its claims by filing a proposed third
amended complaint and (2) that justice requires granting leave
to amend.
Such demonstration shall be filed within 30 days of
the date of this Opinion.
V.
Conclusion
For the reasons stated above, Defendants’ motion to dismiss
the complaint is GRANTED with respect to Defendant 7d Group and
Counts I (breach of contract) and III (fraudulent inducement).
Defendants’ motion is DENIED with respect to Counts II (breach
33
of implied contract), IV (declaratory judgment), and V (unjust
enrichment) .
The Clerk of Court is directed to terminate the motion
docketed at ECF No. 33 and terminate 7d Group as a defendant.
SO ORDERED.
Dated:
New York, New York
November 19, 2019
CltfLJl.~
(}£
John F. Keenan
United States District Judge
34
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