Ensoftek, Inc. v. Southwest Behavioral & Health Services, Inc.

Filing 44

Opinion and Order: Upon review, I DENY Plaintiff/Counter-Defendant Ensoftek's Motion to Dismiss 35 for the reasons discussed in this opinion. Signed on 1/23/2020 by Judge Michael W. Mosman. (kms)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF OREGON

ENSOFTEK, INC.,
an Oregon corporation,
Plaintiff/Counter-Defendant,

Case No. 3:19-cv-00615-MO
OPINION AND ORDER

v.
SOUTHWEST BEHAVIORAL &
HEALTH SERVICES, INC.,
an Arizona corporation,
Defendant/Counter-Claimant.

MOSMAN, J.,
Plaintiff/Counter-Defendant Ensoftek, Inc. (“Ensoftek”) filed a Motion to Dismiss
[ECF 35] that sought dismissal of two claims for relief brought by Defendant/Counter-Plaintiff
Southwest Behavioral & Health Services, Inc. (“SW Behavioral”). For reasons discussed below,
I DENY EnSoftek’s Motion to Dismiss.
PROCEDURAL BACKGROUND
Plaintiff, EnSoftek, is an Oregon software company. Contract [ECF 1-1] at 1. Defendant,
SW Behavioral, is a non-profit healthcare services provider. Id. On December 27, 2016, the
parties entered into a contract for Electronic Medical Records services. Id. The relationship
between the parties soured, and on April 12, 2019, SW Behavioral filed suit against EnSoftek in
Arizona state court. Stip. [ECF 31] ¶ 1. On April 22, 2019, EnSoftek filed suit against SW

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Behavioral in this court. Compl. [ECF 1]. Following a stay of proceedings, the parties stipulated
that the Arizona lawsuit would be dismissed without prejudice, and SW Behavioral would bring
its claims for relief as counterclaims in this, the Oregon lawsuit. Stip. [31] ¶¶ 10, 13. EnSoftek
has now moved to dismiss two of those counterclaims. Mot. to Dismiss [35] at 2.
DISCUSSION
I.

Choice of Law
EnSoftek seeks to dismiss SW Behavioral’s claim for fraudulent inducement and its

related claim for declaratory relief. Mot. to Dismiss [35] at 2. Fraudulent inducement sounds in
tort—a state law claim—and the parties disagree as to which body of law should govern SW
Behavioral’s claim. EnSoftek argues that Arizona law should apply because SW Behavioral
initially filed its case in that state and argued that it intended to bring its claims under Arizona
law. See Mot. to Dismiss [35] at 7; Reply Br. [ECF 43] at 2-3, 3 n.1. For its part, SW Behavioral
argues that Oregon law should apply, an issue that it claims was already decided in an earlier
Arizona proceeding. Resp. Br. [ECF 39] at 2-3.
I decline to apply Arizona law to this case, for several reasons. First, the parties’ contract
contains a choice of law provision that provides: “This Agreement shall be governed by and
construed in accordance with the laws of the State of Oregon.” Contract [1-1] at 7 ¶ 15.2. Neither
of the parties disputes that this clause is valid.1 And while fraudulent inducement is a tort and is
therefore collateral to the contract, it is sufficiently related that the choice of law provision
informs the inquiry. Second, the parties have provided no argument as to why a different body of

1

SW Behavioral does allege in its First Counterclaim for Relief that EnSoftek fraudulently
induced SW Behavioral into adopting the choice of law provision, which, if true, would render it
void. Answer [ECF 33] ¶ 99. However, SW Behavioral does not make that argument in its
briefing on this motion, and I decline to infer an argument that neither party has made.
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law should govern claims arising from the contract versus claims arising from its formation, and
I can identify no principled distinction. Finally, by agreeing to refile its claims in Oregon, SW
Behavioral implicitly consented to allow its claims for relief to be decided pursuant to Oregon
law. Certainly, if SW Behavioral—the Arizona-based party that initially filed suit in Arizona—
believes that Oregon law applies to its tort claim, it would seem an odd result to allow Oregonbased EnSoftek to insist that this court apply Arizona law. Accordingly, I hold that Oregon state
law governs this case unless otherwise specified, and I will decide EnSoftek’s Motion to Dismiss
pursuant to that holding.
II.

Fraudulent Inducement
In its Answer to the Complaint, SW Behavioral brought nine counterclaims for relief.

Answer [ECF 33] at 18-27. The first of these claims is for fraudulent inducement, which alleges
that EnSoftek employees knowingly made several false representations about the company’s
product and about the abilities of its personnel. Id. ¶¶ 86-96. SW Behavioral argued that these
allegedly false representations induced it to enter into the contract and to fail to exercise its
termination rights under the contract. Id. ¶¶ 97-99. SW Behavioral seeks to have this court
declare the contract void, and therefore unenforceable, at least in part due to the alleged
fraudulent inducement. Id. at 27.
EnSoftek seeks to dismiss both claims for relief. In its motion, EnSoftek argued that the
economic loss doctrine bars a claim for fraudulent inducement, and, in the alternative, that SW
Behavioral has not pleaded the facts necessary to state a claim for fraudulent inducement. Mot.
to Dismiss [35] at 7, 11. EnSoftek then withdrew its argument as to the economic loss doctrine,
in light of SW Behavioral’s insistence that Oregon law should apply. Reply [43] at 3 n.3.
EnSoftek stated that its motion now “focuses on the remaining bases for dismissal of that claim.”

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Id. In light of this withdrawal, I consider only EnSoftek’s theory that SW Behavioral has failed
to plead the facts necessary to state a claim for fraudulent inducement.
To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) 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 Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A pleading that offers only
“labels and conclusions” or “‘naked assertion[s]’ devoid of ‘further factual enhancement’” will
not suffice. Id. (quoting Twombly, 550 U.S. at 555, 557). While the plaintiff does not need to
make detailed factual allegations at the pleading stage, the allegations must be sufficiently
specific to give the defendant “fair notice” of the claim and the grounds on which it
rests. Erickson v. Pardus, 551 U.S. 89, 93–94 (2007) (per curiam) (citing Twombly, 550 U.S. at
555).
Oregon courts recognize two types of fraud on a contract. First, the courts recognize an
action for fraudulent inducement. The elements of this action are: (1) a representation; (2) its
falsity; (3) its materiality; (4) the speaker’s knowledge of its falsity or ignorance of its truth; (5)
his intent that it should be acted on by the person and in the manner reasonably contemplated; (6)
the hearer’s ignorance of its falsity; (7) his reliance on its truth; (8) his right to rely thereon; and
(9) his consequent and proximate injury. Green v. Uncle Don’s Mobile City, 568 P.2d 1375,
1378 (Or. 1977). Put another way, a party must show that he was (1) induced to enter a contract
by an (2) intentional (3) misrepresentation. Gearhart v. Goehner, 701 P.2d 461, 465 (Or. Ct.
App. 1985) (quoting Bodenhamer v. Patterson, 563 P.2d 1212, 1216 (Or. 1977)). The
misrepresentation must also be material. Bodenhamer, 563 P.2d at 1215. Mere “puffing” or
“dealers talk” is not fraudulent inducement because it does not constitute a misrepresentation. Id.

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at 1216 (citing Johnson v. Cofer, 281 P.2d 981 (Or. 1955)). An incomplete or misleading answer
to a material question may constitute fraudulent inducement. Id.
The second type of fraud on a contract is promissory fraud. A party to a contract may
bring an action for damages based upon another party’s failure to keep a promise. Sproul v.
Fossi, 548 P.2d 970, 972-73 (Or. 1976). It is sufficient if the evidence shows either an intent not
to perform the promise or that the promise is “made with a reckless disregard whether the
promisor can or cannot perform the promise.” Id. at 972 (quoting Elizaga v. Kaiser Found.
Hosp., Inc., 487 P.2d 870, 874 (Or. 1971)). A fraudulent intent to renege on a promise may be
inferred from the circumstances. Sproul, 548 P.2d at 973; see also Strawn v. Farmers Ins. Co. of
Oregon, 258 P.3d 1199, 1209 (Or. 2011) (holding that false promise to pay future medical
expenses amounted to fraud).
I hold that SW Behavioral has pleaded sufficient facts to support a claim for fraudulent
inducement under Oregon law. It has identified specific representations that, if proven to be
false, could have reasonably induced reliance. For example, SW Behavioral alleges that
EnSoftek employees represented that the medical records software would allow for accurate and
timely billing claims, Answer [33] ¶ 13; that the product would comply with Arizona laws,
id. ¶ 17, and that the employees could correct any issues with the product, id.; that employees
could quickly resolve any issues that may arise, id. ¶ 24; and that the existing product would
meet SW Behavioral’s needs, id. ¶ 26. SW Behavioral has also pleaded facts that, if proven true,
show that it did rely on these representations when it entered into the contract. See, e.g., ¶¶ 29,
32, 33.
EnSoftek’s argument largely amounts to a debate over the merits of SW Behavioral’s
claims. Reply Br. [43] at 4-9. But whether the claim ultimately succeeds is not the proper inquiry

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on a motion to dismiss. EnSoftek also argues that the alleged misrepresentations all relate to
“future conduct and statements of opinion,” which, it says, do not give rise to a claim for fraud.
Mot. to Dismiss [35] at 11. That may potentially be correct under Arizona law, as EnSoftek has
argued. Id. But promises of future conduct can constitute a claim for fraud in Oregon, as
discussed above. EnSoftek’s argument therefore fails, and its motion to dismiss the claim for
fraudulent inducement is denied.
I also dismiss its motion to dismiss SW Behavioral’s claim for declaratory relief. As
EnSoftek recognizes, that claim is tied to the fraudulent inducement claim. Mot. to Dismiss [35]
at 13. The fraudulent inducement claim is valid, and therefore so is the claim for declaratory
relief.
CONCLUSION
Upon review, I DENY Plaintiff/Counter-Defendant Ensoftek’s Motion to Dismiss [35]
for the reasons discussed in this opinion.
IT IS SO ORDERED.
DATED this 23 day of January, 2020.

w.

____________________________
~
JnD~
MICHAEL W. MOSMAN
United States District Judge

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