SHERRY R. FALLON, Magistrate Judge.
Presently before the court in this breach of contract action is a motion to dismiss for failure to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6) filed by defendant Ethos Group Consulting Services, LLC ("Ethos"). (D.I. 10) For the following reasons, the court recommends GRANTING-IN-PART and DENYING-IN-PART defendant's motion to dismiss.
Plaintiff VoterLabs, Inc. ("VoterLabs") is a Connecticut corporation with its principal place of business in Branford, Connecticut. (D.I. 2 at ¶ 2) Voterlabs is majority owned and controlled by Walter Kawecki ("Mr. Kawecki"). (Id. at ¶ 6) VoterLabs offers data analytics, microtargeting, and custom software for political organizations and other clients that could benefit from predictive analytics. (Id.) In the case at bar, the proposed software would be used for the purpose of analyzing a customer's financial and purchasing history in order to make recommendations with respect to motor vehicle purchases.
Ethos is a Delaware limited liability company with its principal place of business in Irving, Texas. (Id. at ¶ 3) Ethos is owned and controlled by David Terek ("Mr. Terek"). (Id. at ¶ 7) Ethos provides products and services to car dealerships, selling vehicle service contracts and insurance products to consumers who purchase or lease cars. (Id.)
On March 15, 2019, plaintiff originally filed this action. (D.I. 2) On April 8, 2019, defendant filed the present motion to dismiss. (D.I. 10)
This action arises from an alleged breach of contract and a related claim of tortious breach of duty. Plaintiff has asserted three claims against defendant: breach of contract for failure to remit Engagement Payment number five in Count I, breach of contract for failure to remit a termination payment in Count II, and malicious conduct in aid of an oppressive scheme in Count III. (D.I. 2 at ¶¶ 123-130)
On January 18, 2017, VoterLabs and Ethos entered into a Service Agreement and Statement of Work, wherein VoterLabs agreed to review Ethos' data and perform "Data Enrichment and Analysis," generate "Customer Profiles," and perform "Product Opportunity Analysis." (D.I. 2 at ¶ 10) Following VoterLabs' completion of this work, Mr. Kawecki and Mr. Terek wished to continue VoterLabs and Ethos' business relationship. (Id. at ¶¶ 11-16) On April 6, 2017, Mr. Terek proposed that: (1) Ethos would pay VoterLabs to work with Ethos professionals and develop software at a fixed price, (2) VoterLabs would own intellectual property associated with the software and project, (3) Ethos would receive exclusive rights in automotive sector to use the software and associated intellectual property, and (4) upon completion of the software, Ethos would pay VoterLabs $1 per vehicle sold or leased by Ethos dealerships using the software in perpetuity. (Id. at ¶ 19) Mr. Kawecki and Mr. Terek orally agreed to this proposal. (Id. at ¶ 21)
On or about April 24, 2017, VoterLabs emailed Ethos a document entitled "VoterLabs — Ethos Group Project Overview" (the "Project Overview"), which identified three key software components (the three "Feature Groups") for VoterLabs to develop.
After several months of negotiations, VoterLabs and Ethos memorialized their oral agreement in a Service Agreement (the "Agreement") and Statement of Work ("SOW") on or about December 18, 2017. (Id. at ¶¶ 31, 34, 37-38) The Agreement stated that VoterLabs would employ an agile development model, which allowed for changes and adjustments to be made during the development of software. (Id. at ¶¶ 40-41) Each of the eight payments for VoterLabs' performance of agile development work (the "Engagement Payments") was due ninety days after the receipt of the previous payment. (Id. at ¶¶ 42-43; D.I. 11, Ex. B at § 4(d)) Ethos made the first Engagement Payment on June 12, 2017, and the second Engagement Payment on September 14, 2017. (D.I. 2 at ¶¶ 29-30, 44) On December 22, 2017, Ethos made the third Engagement Payment. (Id. at ¶ 47)
Around December 2017, Ethos hired two new executives, Scarlet Shipp ("Ms. Shipp") and Don Judice ("Mr. Judice"). (Id. at ¶ 70) On April 5, 2018, Mr. Kawecki spoke with Ms. Shipp, who suggested that Ethos and VoterLabs pause development. (Id. at ¶ 78) On April 24, 2018, Ms. Shipp told Mr. Kawecki that Ethos needed to own the software and its associated intellectual property. (Id. at ¶¶ 85-87) Mr. Kawecki expressed a willingness to discuss a possible amendment to the Agreement. (Id. at ¶ 87) On April 26, 2018, Ethos made the fourth Engagement Payment, approximately one month late. (Id. at ¶¶ 88-89)
On May 2, 2018, Ms. Shipp emailed VoterLabs and attached an amendment which eliminated Ethos' obligation to make Engagement Payments. (Id. at ¶¶ 90-91) On May 21, 2018, Ethos mailed a notice of termination, which cited the Agreement's termination clause. (Id. at ¶¶ 95-96; D.I. 11, Ex. A at § 8.2) On May 30, 2018, Mr. Kawecki met with Ethos and noted that the fifth Engagement Payment was payable prior to the date of termination and that Ethos' termination triggered a termination payment under the Agreement. (D.I. 2 at ¶¶ 101-103) On July 13, 2018, Ms. Shipp emailed Mr. Kawecki a "Release Agreement" and a "Patent License," which called for the release of all past, present, and future claims, in addition to a perpetual, irrevocable, worldwide, royalty-free license to VoterLabs' patents. (Id. at ¶¶ 112-113) In exchange, Ethos stated that it would make the fifth Engagement Payment. (Id. at ¶¶ 113-117, 120)
Ethos' termination became effective on July 20, 2018. (Id. at ¶¶ 96-98) To date, Ethos has failed to make the fifth Engagement Payment or the termination payment. (Id. at ¶¶ 121-122)
The Agreement includes a termination clause at section 8.2, which states:
(D.I. 11, Ex. A at § 8.2) The Agreement also includes a remedies provision which sets forth VoterLabs' "earned but unpaid fees" as the exclusive remedy for Ethos' payment breach.
The SOW provides for royalty payments in section 4(a):
(D.I. 11, Ex. B at § 4(a)) Furthermore, the SOW contains a provision on Engagement Payments, wherein Ethos was to make each payment in consideration of development of the Feature Groups ninety days after the receipt of the previous payment. (Id. at § 4(d))
Rule 12(b)(6) permits a party to move to dismiss a complaint for failure to state a claim upon which relief can be granted. See Fed. R. Civ. P. 12(b)(6). When considering a Rule 12(b)(6) motion to dismiss, the court must accept as true all factual allegations in the complaint and view them in the light most favorable to the plaintiff. See Umland v. Planco Fin. Servs., 542 F.3d 59, 64 (3d Cir. 2008).
To state a claim upon which relief can be granted pursuant to Rule 12(b)(6), a complaint must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). Although detailed factual allegations are not required, the complaint must set forth sufficient factual matter, accepted as true, to "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); see also Ashcroft v. Iqbal, 556 U.S. 662, 663 (2009). A claim is facially plausible when the factual allegations allow the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Iqbal, 556 U.S. at 663; Twombly, 550 U.S. at 555-56.
The court's determination is not whether the non-moving party "will ultimately prevail," but whether that party is "entitled to offer evidence to support the claims." United States ex rel. Wilkins v. United Health Grp., Inc., 659 F.3d 295, 302 (3d Cir. 2011). This "does not impose a probability requirement at the pleading stage," but instead "simply calls for enough facts to raise a reasonable expectation that discovery will reveal evidence of [the necessary element]." Phillips v. Cty. of Allegheny, 515 F.3d 224, 234 (3d Cir. 2008) (quoting Twombly, 550 U.S. at 556). The court's analysis is a context-specific task requiring the court "to draw on its judicial experience and common sense." Iqbal, 556 U.S. at 679.
Ethos argues that Count I should be dismissed because, on May 21, 2018, Ethos instructed VoterLabs to immediately cease all services before the fifth Engagement Payment in the amount of $195,450 became due on June 7, 2018, and VoterLabs failed to plead damages as a result of the non-payment. (D.I. 11 at 8-10) Ethos avers that VoterLabs had no authority to continue spending fees or incurring costs in developing the Feature Groups after May 21, 2018, the date that Ethos mailed its notice of termination. (Id. at 9)
However, the Agreement permits termination at any time without cause, "without liability except for required payment for services rendered, and reimbursement for authorized expenses incurred, prior to the termination date, by providing at least 60 days' prior written notice to [VoterLabs]." (D.I. 11, Ex. A at § 8.2) (emphasis added) The complaint alleges that the termination date was July 20, 2018, sixty days after written notice was given on May 21, 2018. (D.I. 2 at ¶¶ 96-98) The Agreement and SOW do not provide for immediate termination upon notice or for VoterLabs to immediately cease spending fees or incurring costs. (D.I. 11, Ex. A at § 8.2; Ex. B) Moreover, although the operative termination date is July 20, 2018, Ethos argues that VoterLabs has not pleaded that it incurred any fees or costs after May 21, 2018, the date that VoterLabs mailed its notice of termination.
(D.I. 2 at ¶ 95) (emphasis in original) Viewing the well-pleaded factual allegations in a light most favorable to plaintiff, the fifth Engagement Payment was due before the effective date of termination and defendant's termination instructions expressly demanded further wrap-up work. This is sufficient to plausibly assert a claim for the fifth Engagement Payment and create an issue for factual determination as to VoterLabs' resulting damages, if any.
Furthermore, Ethos avers that the Engagement Payments were paid ninety days in advance and, therefore, VoterLabs cannot establish damages. (D.I. 11 at 9-10; D.I. 15 at 4) Ethos argues that VoterLabs can only claim damages if it incurred costs in the development of Feature Groups or was unable to cover the costs of wrapping up the project between June 7, 2018, the alleged due date for the fifth Engagement Payment, and July 20, 2018, the termination date. (D.I. 11 at 9-10) Moreover, Ethos argues that section 6(b)(viii) of the SOW required VoterLabs to refund fees for services or products not provided. (Id.) VoterLabs contends that the Engagement Payments are not fees to be refunded under section 6(b)(viii). (D.I. 14 at 13-15 & n.12) Ethos counters that if Engagement Payments are not fees, VoterLabs cannot recover for the fifth Engagement Payment. (D.I. 15 at 4-6) Ethos notes that, under the Agreement, the exclusive remedy for "[Ethos'] payment breach shall be [VoterLabs'] right to damages equal to its earned but unpaid fees." (Id.; D.I. 11, Ex. A at § 11.3) (emphasis added) VoterLabs avers that section 6(b)(viii) of the SOW refers to "Usage Fees" and the use of the word "fees" in section 11.3 of the Agreement encompasses Engagement Payments if a payment is contractually required but not made. (D.I. 19 at 3) "Fee" is not a term defined in the Agreement or the SOW.
VoterLabs seeks recovery of $195,450, the amount due for the fifth Engagement Provision under section 4(d) of the SOW. (D.I. 11, Ex. B at § 4(d)). Ethos' argument on the merits of VoterLabs' damages is not properly before the court. On a motion to dismiss, the court assumes all well-pleaded facts to be true and only tests the sufficiency of the pleadings. See Umland, 542 F.3d at 64. Under the Rule 12 analysis, the court views the damages allegations in the complaint and the contract documents which are incorporated by reference in favor of VoterLabs. See Church of Universal Bhd. v. Farmington Twp. Supervisors, 296 F App'x 285, 288 (3d Cir. 2008); Gould Elec., Inc. v. U.S., 220 F.3d 169, 176 (3d Cir. 2000). Ethos cites Raymark to assert that termination of a contract with notice, makes it "impossible" to continue performance and leaves only the possibility of a quantum meruit claim. (D.I. 15 at 6) Raymark is inapposite because the court addressed the termination of an agreement between a client and attorney. See Raymark Industries, Inc. v. Butera, Beausang, Cohen & Brennan, 1997 WL 746125, at *17 (E.D. Pa. Dec. 1, 1997) ("A client may terminate his relation with an attorney at any time, notwithstanding a contract for fees, but if he does so, thus making performance of the contract impossible, the attorney is not deprived of his right to recover on a quantum meruit a proper amount for the services which he has rendered.").
To state a breach of contract claim, a plaintiff must demonstrate the existence of a contract, the breach of an obligation imposed by that contract, and resultant damage to plaintiff. See Weyerhaeuser Company v. Domtar Corporation, 61 F.Supp.3d 445, 453 (D. Del. 2014). The complaint avers that the first and second Engagement Payments were paid on June 12, 2017 and September 14, 2017, respectively. (D.I. 2 at ¶¶ 29-30, 44) The complaint alleges that pursuant to the SOW, Ethos was thereafter obligated to make payments on "December 9, 2017 (Engagement Payment No. 3), March 9, 2018 (Engagement Payment No. 4), June 7, 2018 (Engagement Payment No. 5), and September 5, 2018 (Engagement Payment No. 6)." (Id. at ¶ 45) The complaint avers that the fifth Engagement Payment was not conditional
Therefore, VoterLabs has plausibly pleaded a claim for breach of contract with respect to the fifth Engagement Payment and the court recommends denying Ethos' motion to dismiss Count I.
Ethos argues that Count II should be dismissed because the termination payment outlined in section 4(a) of the SOW would only be due after all three Feature Groups were completed, but this condition precedent was never satisfied.
The complaint recites a portion of section 4(a) of the SOW:
(D.I. 2 at ¶ 55; D.I. 11, Ex. B at § 4(a)) Furthermore, the complaint alleges that "[t]he precise meaning and purpose of the termination payment language in [SOW] § 4(a) is not immediately apparent." (D.I. 2 at ¶ 57) Plaintiff suggests that parole evidence may be necessary to bring clarity to any ambiguities in this provision. Consequently, the complaint and plaintiff's answering brief discuss the forthright negotiator principal at length.
Ethos argues that Count III should be dismissed because VoterLabs has not alleged a breach of contract, damages, or willful and malicious action by Ethos. (D.I. 11 at 13-14) The parties cite Ripsom, which contemplates punitive damages for "willful or malicious breaches of contract." Ripsom v. Beaver Blacktop, 1988 WL 32071, at *16 (Del. Super. Ct. Apr. 6, 1988). The parties suggest that, according to Ripsom, a plaintiff must allege that "the defendant acted maliciously and without probably [sic] cause for the purpose of injuring the other party by depriving him of the benefits of the contract" in order to state a claim for malicious breach of contract. Ripsom, 1988 WL 32071, at *18. However, the complaint labels Count III "Malicious Conduct in Aid of an Oppressive Scheme," and no such cause of action exists. (D.I. 2 at ¶¶ 129-130) Plaintiff's answering brief does not provide much more clarity for this cause of action, as plaintiff characterizes Count III as "an intentional tort for [Ethos'] scheme of withholding Engagement Payment No. 5 without probable cause and with the express intention of forcing VoterLabs to give up its contractual and property rights in return for nothing." (D.I. 14 at 18) Plaintiff contends that this is an "uncommon tort," but fails to cite any legal authority that recognizes a claim for "malicious conduct in aid of an oppressive scheme." Instead, plaintiff cites Ripsom, which discusses willful and malicious breach of contract. (Id. at 19) Unlike the plaintiff in Good, plaintiff has not pleaded any factual allegations of defendant's willful or malicious conduct. See Good v. Moyer, 2012 WL 4857367, at *7 (Del. Super. Ct. Oct. 10, 2012). However, "[p]unitive damages are potentially available but require complete factual development." Id. Therefore, the court recommends granting defendant's motion to dismiss Count III without prejudice.
For the foregoing reasons, the court recommends granting-in-part and denying-in-part defendant's motion to dismiss.
Given that the court has relied upon material that technically remains under seal, the court is releasing this Report and Recommendation under seal, pending review by the parties. In the unlikely event that the parties believe that certain material in this Report and Recommendation should be redacted, the parties shall jointly submit a proposed redacted version by no later than October 23, 2019, for review by the court, along with a motion supported by a declaration that includes a clear, factually detailed explanation as to why disclosure of any proposed redacted material would "work a clearly defined and serious injury to the party seeking closure." See In re Avandia Mktg., Sales Practices & Prods. Liab. Litig., 924 F.3d 662, 672 (3d Cir. 2019) (quoting Miller v. Ind. Hosp., 16 F.3d 549, 551 (3d Cir. 1994) (internal quotation marks omitted)). If the parties do not file a proposed redacted version and corresponding motion, or if the court determines the motion lacks a meritorious basis, the documents will be unsealed within thirty (30) days of the date the Report and Recommendation issued.
This Report and Recommendation is filed pursuant to 28 U.S.C. § 636(b)(1)(B), Fed. R. Civ. P. 72(b)(1), and D. Del. LR 72.1. The parties may serve and file specific written objections within fourteen (14) days after being served with a copy of this Report and Recommendation. Fed. R. Civ. P. 72(b)(2). The objection and responses to the objections are limited to ten (10) pages each. The failure of a party to object to legal conclusions may result in the loss of the right to de novo review in the District Court. See Sincavage v. Barnhart, 171 F. App'x 924, 925 n.1 (3d Cir. 2006); Henderson v. Carlson, 812 F.2d 874, 878-79 (3d Cir. 1987).
The parties are directed to the court's Standing Order For Objections Filed Under Fed. R. Civ. P. 72, dated October 9, 2013, a copy of which is available on the court's website, http://www.ded.uscourts.gov.