Volt Delta Resources LLC v Soleo Communications Inc.
Annotate this CaseDecided on March 29, 2006
Supreme Court, New York County
Volt Delta Resources LLC, Plaintiff,
against
Soleo Communications Inc., Defendant.
601443/05
For Plaintiff:
Troutman Sanders LLP
405 Lexington Avenue
New York, New York 10174
(Sharon H. Stern)
For Defendant:
Wilmer Cutler Pickering Hale and Dorr LLP
399 Park Avenue New York, New York 10022
(Nels T. Lippert, Dyan Finguerra-
DuCharme, Alexis Gorton)
Bernard J. Fried, J.
This action involves plaintiff Volt Delta Resources LLC's intellectual property rights to software allegedly misappropriated by defendant Soleo Communications Inc. Defendant moves, pursuant to CPLR 3211 (a) (7), for an order dismissing nine causes of action for failure to state a cause of action. Plaintiff cross-moves to dismiss defendant's counterclaims on the same ground.
Plaintiff and defendant allege the following in their pleadings: Plaintiff is in the operator services systems business, meaning that it creates and sells software applications for use by telephone companies (Amended Complaint, ¶¶ 4, 5). Plaintiff has acquired from non-party Nortel Networks Inc. (Nortel) certain license rights to intellectual property in connection with the provision of operator services and applications (id., ¶ 5). Some of plaintiff's applications transfer data from the caller to the operator's computer, known as the Intelligent Work Station (IWS), for the operator's use in searching for telephone number listings (id., ¶¶ 12-14). Plaintiff's other applications transfer data from a searchable database to the IWS (id.). The data is routed through switches in a system referred to as the Traffic Operator Position System (TOPS) (id., ¶ 12).
Defendant is one of plaintiff's competitors (id., ¶ 19). On February 15, 2003, non-party [*2]Nortel entered into a license agreement (the License) with defendant, pursuant to which Nortel licensed the Software Development Kit Application Programmer's Interface (SDK API) (id.). The SDK API enabled defendant to develop applications that communicate with Nortel's TOPS system (id.). Under the License, defendant was provided with the rights and software enabling it to develop, manufacture and/or market applications that communicate with the TOPS system using plaintiff's IWS (id., ¶¶ 20, 25). Plaintiff alleges that the License does not grant defendant the right to interface or communicate with any of plaintiff's applications except the IWS application (id., ¶ 21). The License gives the licensor the right to terminate the agreement if defendant breaches the agreement and fails to cure the breach within 30 days from notice of a breach (id., ¶¶ 37, 39). Upon termination of the agreement, defendant was obligated to return the software and documentation or destroy them (id., ¶ 27).
In July 2004, Nortel informed defendant of its intent to assign the License to plaintiff, and requested defendant's consent (Answer, ¶ 11). Defendant requested and was allegedly given assurances that plaintiff would continue to support the License as Nortel had done for the previous two years (id., ¶¶ 12-13). Based on these assurances, defendant consented to the assignment on October 27, 2004 (id., ¶ 13).
Plaintiff alleges that defendant has breached the License by engaging in activities that are outside the scope and grant of the agreement (Amended Complaint, ¶¶ 44-47). Specifically, plaintiff alleges that defendant has impermissibly accessed plaintiff's applications other than the IWS application through an unnamed common customer (id., ¶¶ 6, 31-32, 47 [b]). Defendant has allegedly overridden some of plaintiff's data and intercepted data packets or buffers containing the data for telephone listings (id., ¶¶ 29-30, 47 [b]). Plaintiff alleges that defendant has used this proprietary information in selling or planning to sell its own products (id., ¶ 47 [a]). Plaintiff further claims that defendant has failed to abide by its contractual confidentiality obligations and has failed to acknowledge that plaintiff's applications are the sole property of plaintiff (id., ¶ 47 [c]). In addition, plaintiff alleges that defendant has failed to pay royalties to plaintiff (id., ¶ 47 [e]).
Moreover, plaintiff claims that defendant has misappropriated some of plaintiff's trade secrets by inducing the customer to provide defendant with access to those trade secrets (id., ¶¶ 6, 31-32, 53). The customer allegedly agreed not to divulge such confidential information in its contract with plaintiff (id., ¶ 71).
On April 21, 2005, plaintiff notified defendant of its breaches of the License and advised it that the License would be terminated unless defendant cured the breaches within 30 days (id., ¶ 37). In a letter dated May 16, 2005, defendant denied that it had breached the License (id., ¶ 38). Thereafter, on June 10, 2005, plaintiff advised defendant that it failed to cure its breaches of the License, and that the License was therefore terminated (id., ¶ 39). Plaintiff demanded the immediate return of the "software and documentation" delivered to defendant (id.). By letter dated June 14, 2005, defendant informed plaintiff that it did not consider the agreement to have been terminated, and that it would not return the software and documentation (id., ¶ 40).
In support of its own claim against plaintiff for breach of the License, defendant alleges that it has developed its own product from information contained in documentation and modifiable software that Nortel provided to it upon execution of the License (Answer, ¶ 42). Defendant also alleges that it developed other products based solely on other Nortel license [*3]agreements (id., ¶ 43).
Defendant further alleges that, in December 2004, defendant received orders for new applications from a customer that had dealt with plaintiff in the past (id., ¶ 45).
Defendant moves to dismiss plaintiff's causes of action for conversion, replevin, declaratory judgment, unjust enrichment, tortious interference with contract, and tortious interference with prospective economic relationships. Defendant also seeks dismissal of plaintiff's request for punitive damages on its breach of contract claim.
Plaintiff seeks dismissal of the counterclaims, which allege breach of contract and unfair competition theories, and defendant's own request for punitive damages.
In determining a motion to dismiss pursuant to CPLR 3211 (a) (7), the court's task is to determine whether, " accepting as true the factual averments of the complaint, plaintiff can succeed upon any reasonable view of the facts stated'" (Campaign for Fiscal Equity, Inc. v State of New York, 86 NY2d 307, 318 [1995], quoting People v New York City Tr. Auth., 59 NY2d 343, 348 [1983]; see also Chan v Louis, 303 AD2d 151, 152 [1st Dept 2003]). A court may freely consider affidavits submitted by the plaintiff to remedy any defects in the complaint (Leon v Martinez, 84 NY2d 83, 88 [1994]). The standard is whether the plaintiff has a cause of action, not whether the plaintiff has stated one (Wiener v Lazard Freres & Co., 241 AD2d 114, 120 [1st Dept 1998]). Viewed in this context, I am satisfied that the causes of action in the amended complaint are sufficient to withstand this CPLR 3211 (a) (7) motion. Plaintiff's punitive damages request, however, is dismissed in connection with the breach of contract claim. With respect to the cross motion, the counterclaim for breach of contract is sufficiently stated. On the other hand, the counterclaim for unfair competition and defendant's request for punitive damages are legally insufficient.
Conversion and Replevin (Thirteenth and Fourteenth Causes of Action)
The thirteenth cause of action, labeled conversion, alleges that plaintiff has demanded the return of its software and documentation, and that defendant has wrongfully refused to return both (Amended Complaint, ¶¶ 81-83). Conversion is an " unauthorized assumption and exercise of the right of ownership over goods belonging to another to the exclusion of the owner's rights'" (Vigilant Ins. Co. of Am. v Housing Auth. of City of El Paso, Texas, 87 NY2d 36, 44 [1995], quoting Employers' Fire Ins. Co. v Cotten, 245 NY 102, 105 [1927]; Peters Griffin Woodward, Inc. v WCSC, Inc., 88 AD2d 883 [1st Dept 1982]). The plaintiff must allege that the defendant converted a specific, identifiable piece of property in order to sustain the cause of action (Republic of Haiti v Duvalier, 211 AD2d 379, 384 [1st Dept 1995]; Manufacturers Hanover Trust Co. v Chemical Bank, 160 AD2d 113, 124 [1st Dept 1990], appeal denied 77 NY2d 803 [1991]). A cause of action can only be maintained where the plaintiff alleges that a demand for the property has been made and that the defendant has refused (see Tache-Haddad Enters. v Melohn, 224 AD2d 213 [1st Dept 1996]). However, a claim of conversion cannot be merely a restatement of a breach of contract claim, but rather must allege independent facts sufficient to give rise to tort liability (Fesseha v TD Waterhouse Investor Servs., Inc., 305 AD2d 268, 269 [1st Dept 2003]).
Plaintiff has adequately stated the cause of action for conversion. The amended complaint alleges that defendant breached the License by engaging in activities that are outside [*4]the scope and grant of the License, and by failing to pay royalties. By contrast, the cause of action for conversion alleges that defendant has improperly retained software and documentation over which plaintiff has exclusive rights. Thus, plaintiff has alleged independent facts sufficient to give rise to tort liability (cf. Fesseha, 305 AD2d at 269).
In the fourteenth cause of action, plaintiff seeks an order of seizure for the software and documentation, pursuant to CPLR Article 71 (Amended Complaint, ¶¶ 86-88). To establish a cause of action for replevin under CPLR Article 71, the plaintiff must plead that "[it] has an immediate and superior right to possession of the [chattel]" (Dubied Mach. Co. v Vermont Knitting Co., Inc., 739 F Supp 867, 872 [SD NY 1990] [internal quotation marks omitted]). To be sure, in a replevin action, the issue is strictly whether the plaintiff or the defendant has the superior possessory right (id.). " [R]eplevin is based upon a tortious act [of the defendant] and is an action ex delicto. . . . This is true whether the action is founded on a trespass, an unlawful taking from plaintiff's possession, a conversion, or merely a wrongful detention'" (Smith v Scott, 294 AD2d 11, 18 [2d Dept 2002], quoting Clark v City of New York, 98 Misc 2d 660, 661 [Civil Court, Kings County 1979]). Given that the amended complaint states a cause of action for conversion, as noted above, the cause of action for replevin is also stated.
Declaratory Judgment (Fifteenth Cause of Action)
The fifteenth cause of action seeks a declaratory judgment declaring that plaintiff validly terminated the License, and thus, defendant has no right to hold itself out as a licensee, maintain applications or upgrades developed in connection with the License, transfer applications, or to possess any copies of the software or documentation (Amended Complaint, ¶¶ 90-92).
"The primary purpose of declaratory judgments is to adjudicate the parties' rights before a wrong' actually occurs in the hope that later litigation will be unnecessary" (Klostermann v Cuomo, 61 NY2d 525, 538 [1984]). A cause of action for a declaratory judgment is unnecessary and inappropriate when the plaintiff has an adequate alternative remedy in another form of action, such as breach of contract (Artech Info. Sys., L.L.C. v Tee, 280 AD2d 117, 125 [1st Dept 2001]; Apple Records, Inc. v Capitol Records, Inc., 137 AD2d 50, 54 [1st Dept 1988]). Here, plaintiff does not have an adequate alternative remedy in the form of a cause of action for breach of contract. The declaratory judgment claim does not merely seek a determination of the rights and obligations of the parties for the alleged breaches of contract. It also seeks a declaration that defendant is prohibited from holding itself out as a licensee. As a result, this cause of action is sufficient.
Unjust Enrichment (Seventh and Eighth Causes of Action)
The seventh cause of action alleges that defendant has been unjustly enriched by its acts of misappropriation and breach of contract (Amended Complaint, ¶ 65). The eighth cause of action, also labeled unjust enrichment, seeks injunctive relief enjoining defendant from improperly accessing plaintiff's applications (id., ¶ 68).
"A cause of action for unjust enrichment is stated where [plaintiff has] properly asserted that a benefit was bestowed . . . by [plaintiff] and that [defendant] will obtain such benefit without adequately compensating [plaintiff] therefor" (Sergeants Benevolent Assn. Annuity Fund v Renck, 19 AD3d 107, 111 [1st Dept 2005] [internal quotation marks omitted]). The existence [*5]of a valid and enforceable written contract governing the subject matter in dispute precludes recovery on a theory of unjust enrichment (id. at 112; De La Cruz v Caddell Dry Dock & Repair Co., Inc., 22 AD3d 404, 405 [1st Dept 2005]; West End Interiors, Ltd. v Aim Constr. & Contr. Corp., 286 AD2d 250, 252 [1st Dept 2001]; Unisys Corp. v Hercules Inc., 224 AD2d 365, 370 [1st Dept 1996], appeal withdrawn 89 NY2d 1031 [1997]).
While the License clearly covers the alleged breaches of the provisions of that agreement, the amended complaint also alleges that defendant benefited from using plaintiff's applications that were not covered by the agreement. Accordingly, the amended complaint states causes of action for unjust enrichment.
Tortious Interference with Contract and Prospective Economic Relationships (Ninth, Tenth, Eleventh, and Twelfth Causes of Action)
The ninth cause of action alleges that defendant has intentionally interfered with plaintiff's contract with its customer, causing the customer to provide defendant access to plaintiff's applications and abandon its contract with plaintiff by acquiring defendant's product to service its end users (Amended Complaint, ¶¶ 70-71). The tenth cause of action seeks injunctive relief enjoining defendant from interfering with plaintiff's contracts (id., ¶ 74).
In opposition to the motion, plaintiff submits an affidavit of its senior vice president, Richard Oldach, who avers that plaintiff entered into an agreement with one of its telephone company customers, pursuant to which the customer received confidential information from plaintiff. The customer agreed to keep that information confidential and to not "reverse engineer." Oldach states that defendant knew of this contractual relationship, because defendant's founders and other employees are former employees of Nortel, plaintiff's predecessor in interest, and because defendant also employed one executive who was formerly a high-ranking executive of the customer (Oldach Aff., ¶ 2). Oldach states that defendant induced the customer to provide confidential information by falsely representing to the customer that it had a license from Nortel. According to Oldach, the customer then gave defendant access to its test facilities, where plaintiff's software applications are installed. Defendant used the customer's facilities to learn how the Nortel Networks Directory Assistance (NTDA) application, one of plaintiff's applications, interacted with the Windows operating system. Based upon this information, defendant underbid plaintiff's proposals and existing maintenance prices (id., ¶¶ 3-4). Consequently, in December 2004, the customer terminated its maintenance services agreement with plaintiff, resulting in approximately $9 million in lost revenues for plaintiff (id., ¶ 5).
"Tortious interference with contract requires the existence of a valid contract between the plaintiff and a third party, defendant's knowledge of that contract, defendant's intentional procurement of the third-party's breach of the contract without justification, actual breach of the contract, and damages resulting therefrom" (Lama Holding Co. v Smith Barney Inc., 88 NY2d 413, 424 [1996]). An essential element of the claim is that the breach of contract would not have occurred but for the activities of the defendant (Cantor Fitzgerald Assocs., L.P. v Tradition N. Am., Inc., 299 AD2d 204 [1st Dept 2002], lv denied 99 NY2d 508 [2003]).
Here, the amended complaint and Oldach affidavit assert that plaintiff had a contract with a customer, of which defendant was aware. Plaintiff further alleges that the customer would not [*6]have violated the confidentiality provision in its agreement with plaintiff but for defendant's misrepresentation that it had a license from Nortel.
Defendant contends that this cause of action fails, because the amended complaint does not allege any actual breach. To the contrary, the amended complaint states that defendant's misrepresentations caused the customer to "violate" its agreement. This is sufficient to allege an actual breach. In any event, the Oldach affidavit states that defendant induced the customer to breach the confidentiality and "reverse engineering" provisions of its agreement. Nor is plaintiff required to specifically allege that defendant's acts were "without justification." Here, plaintiff has adequately alleged that defendant misappropriated plaintiff's property in order to gain the customer's business.
In the eleventh cause of action, plaintiff alleges that defendant has interfered with plaintiff's prospective economic relationships with its customer (Amended Complaint, ¶ 76). The cause of action repeats much of the allegations in the tortious interference with contract claims. The twelfth cause of action seeks injunctive relief (id., ¶ 79).
Oldach avers that plaintiff had an existing contractual relationship with a major telephone company in the Midwest, and based on recent orders, had a realistic expectation that a directory assistance automation project would be awarded to plaintiff. However, the customer awarded defendant the project because its prices for the system were significantly lower and because defendant misrepresented to the customer that it has a license to interface with the NTDA application, the customer's existing directory assistance system (Oldach Aff., ¶ 6).
As compared with tortious interference with contract, tortious interference with prospective economic relations requires an allegation that plaintiff would have entered into an economic relationship, but for the defendant's wrongful conduct (Vigoda v DCA Prods. Plus Inc., 293 AD2d 265, 266 [1st Dept 2002]), or that defendant acted for the sole purpose of harming the plaintiff (Snyder v Sony Music Entertainment, Inc., 252 AD2d 294, 300 [1st Dept 1999]). "Wrongful means" includes physical violence, fraud, misrepresentation, civil suits, criminal prosecutions and some degree of economic pressure, but more than simple persuasion is required (id., citing Guard-Life Corp. v S. Parker Hardware Mfg. Corp., 50 NY2d 183, 191 [1980]).
In the instant case, Oldach states that plaintiff would have entered into a contract with a telephone company customer based upon an existing relationship with that company. Plaintiff asserts that the contract was awarded to defendant based upon its false representation that it was a licensee of one of plaintiff's applications. Thus, plaintiff has proper causes of action for tortious interference with prospective economic relations. Moreover, the fact that the amended complaint fails to identify the relationship that was allegedly interfered with is of no consequence at the pleadings stage of litigation (see Shred-It USA, Inc. v Mobile Data Shred, Inc., 202 F Supp 2d 228, 237 [SD NY 2002]).
Accordingly, that portion of the motion seeking dismissal of the tortious interference with contract and precontractual relations claims is denied.
Punitive Damages
Defendant also moves to dismiss the request for punitive damages in the prayer for relief as to the breach of contract claim. "Punitive damages are not recoverable for ordinary breach of contract as their purpose is not to remedy private wrongs but to vindicate public rights" [*7](Rocanova v Equitable Life Assur. Socy. of U.S., 83 NY2d 603, 613 [1994], citing Garrity v Lyle Stuart, Inc., 40 NY2d 354, 358 [1976]; see also Fulton v Allstate Ins. Co., 14 AD3d 380, 381 [1st Dept 2005]). However, punitive damages may be recoverable if necessary to vindicate a public right (New York Univ. v Continental Ins. Co., 87 NY2d 308, 315 [1995]). The amended complaint fails to allege that any of defendant's conduct was generally directed at the public. Accordingly, plaintiff's request for punitive damages in connection with the first cause of action for breach of contract (whereas clause 1, p. 24) is dismissed.
Breach of Contract (First Counterclaim)
Turning to the cross motion, plaintiff moves to dismiss the two counterclaims alleged in the answer. The first counterclaim alleges that plaintiff has breached the License by failing to support the agreement as Nortel had done, and that plaintiff has attempted to wrongfully terminate the agreement and demand that defendant return the software and documentation (Answer, ¶¶ 57-58).
To state a cause of action for breach of contract, the proponent of the pleading must specify the making of an agreement, the performance by that party, breach by the other party, and resulting damages (see Furia v Furia, 116 AD2d 694, 695 [2d Dept 1986]). The essential terms of the parties' purported contract, including the specific provisions of the contract upon which liability is predicated, must be alleged (Sud v Sud, 211 AD2d 423, 424 [1st Dept 1995]; Caniglia v Chicago Tribune-New York News Syndicate Inc., 204 AD2d 233, 234 [1st Dept 1994]). Here,
defendant has stated the counterclaim for breach of contract in that it alleges that plaintiff breached the License by wrongfully terminating it and by demanding that it return the software and documentation. Therefore, that portion of the cross motion is denied with respect to this counterclaim.
Unfair Competition (Second Counterclaim)
The second counterclaim alleges that plaintiff has engaged in unfair competition. In particular, defendant alleges that it has entered into contracts with a customer to provide new applications. Plaintiff has allegedly refused in bad faith to change certain internet protocol addresses, as requested by the customer. According to defendant, this bad faith refusal has caused certain delays in defendant's deployment of its new applications at the customer's site (Answer, ¶¶ 63-66).
A cause of action for unfair competition is generally predicated upon the alleged bad faith misappropriation of a commercial advantage belonging to another " by exploitation of proprietary information or trade secrets'" (Beverage Mktg. USA, Inc. v South Beach Beverage Co., Inc., 20 AD3d 439, 440 [2d Dept 2005], quoting Eagle Comtronics, Inc. v Pico Prods., Inc., 256 AD2d 1202, 1203 [4th Dept 1998], lv denied 688 NYS2d 372 {251 AD2d 1102} [1999]). Bad faith is an essential element of the cause of action (Eagle Comtronics, Inc., 256 AD2d at 1203; see also Empresa Cubana del Tabaco v Culbro Corp., 399 F3d 462, 485 [2d Cir 2005]). Defendant has failed to allege that plaintiff exploited any proprietary information or trade secrets. Thus, this counterclaim is dismissed. Defendant is granted leave to replead upon a proper evidentiary showing (see CPLR 3211 [e]).
[*8]Punitive Damages
Defendant's request for punitive damages is dismissed. This controversy is essentially between two private contracting parties, and none of plaintiff's alleged conduct was directed at the public (see New York Univ., 87 NY2d at 315).
Accordingly, it is
ORDERED that defendant Soleo Communications Inc.'s motion to dismiss is granted to the extent of dismissing the request for punitive damages in connection with the first cause of action for breach of contract, and is otherwise denied; and it is further
ORDERED that plaintiff Volt Delta Resources LLC's cross motion to dismiss is granted to the extent of dismissing the second counterclaim for unfair competition and the request for punitive damages, and is otherwise denied.
Dated: March 29, 2006ENTER:
____________________
J.S.C.
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