Stan Winston Creatures, Inc. v Toys "r" Us, Inc.

[*1] Stan Winston Creatures, Inc. v Toys "R" Us, Inc. 2004 NY Slip Op 50969(U) Decided on September 1, 2004 Supreme Court, New York County Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on September 1, 2004
Supreme Court, New York County

STAN WINSTON CREATURES, INC. and STAN WINSTON, Plaintiffs,

against

TOYS "R" US, INC., WARREN KORNBLUM, ANDREW R. GATTO, GREG STALEY, and JOHN EYLER, Defendants.



604183/02

Herman Cahn, J.

Defendants move to dismiss the amended complaint for failure to state a cause of action, CPLR 3211 (a) (7), and for failure to plead fraud and negligent misrepresentation with the requisite detail, id., 3016 (b). The complaint essentially claims that defendants made false representations in order to induce plaintiffs to enter into a licensing agreement.

The Facts as Alleged:

Plaintiff Stan Winston is an award winning creator of creature-figures for the film industry. Plaintiff Stan Winston Creatures, Inc., is a production company, wholly-owned by Winston. Defendant Toys "R" Us is a retailer of toys and children's products. The individual defendants were executives at Toys "R" Us.

In the fall of 2000, plaintiffs were designing monster figures for the production of a motion picture series called "Creature Features," to be aired on the Cinemax and Home Box Office ("HBO") cable networks. The figures created for these movies were to become the basis of a new line of high-quality collectible toys.

In February 2001, the figures were displayed at a toy industry fair. They evoked significant interest from retailers (Complaint ¶ 11). At that time, plaintiffs and Toys "R" Us discussed a possible license for Toys "R" Us to market, promote, and sell the figures. A licensing agreement was entered into on July 3, 2001 between Stan Winston Creatures, Inc., and Toys "R" Us (id., ¶ 21, Ex. A).

Plaintiffs allege that defendants made fraudulent representations to induce them to enter into the agreement (Complaint ¶¶ 13-18). They allege that on April 3, 2001, defendants Eyler, Kornblum, and Staley met with Winston to discuss entering into an agreement. Eyler brought a scale model of the new Toys "R" Us store located in Times Square, to the meeting, and stated that Toys "R" Us would create a permanent Stan Winston "store within a store" at that prominent retail location (id., ¶¶ 13-14). Eyler asserted that the Winston store would "grow as [*2]the business grew"and would be in place for the opening ceremony of the new Times Square store, which was to be a major public relations extravaganza (id., ¶ 15). Plaintiffs assert that they were told by Eyler that he planned to create a new image for Toys "R" Us, and change the store from a toy supermarket to a more upscale store that sold exclusive products (id., ¶ 16). Eyler, Kornblum, and Staley are further alleged to have represented that the Winston figures would be sold in all Toys "R" Us stores (id., ¶ 17).

Kornblum is alleged to have told Winston, on a June 1, 2001 conference call with Staley and defendant Gatto, that Toys "R" Us had 708 stores in the United States and stores in 26 other countries "and that the toys would be sold in all of these countries and stores throughout the world and that hundreds of thousands of collectors came into Toys 'R' Us to buy such toys" (Complaint ¶ 18). Gatto is alleged to have claimed that Toys "R" Us "had an established customer base for the toys and that Toys 'R' Us could bring down the cost of making the toys because Toys 'R' Us had leverage with factories" (id.).

The Licensing Agreement is for an initial term of three years with an option to renew, and contains (1) a general merger clause; (2) indemnification clauses for both licensee and licensor; (3) a requirement for Toys "R" Us to make an advance payment of $1,000,000.00 to Stan Winston Creatures, Inc.; (4) a clause stating that the territory covered by the Agreement was "[w]orldwide, in all distribution channels currently existing or hereafter developed, including, without limitation, retail stores and the internet;" (5) a provision that the licensor would source the factories to manufacture the first two series;[FN1] (6) a provision that the parties would mutually select the factories for all series thereafter, with the licensor having final approval over the selection; (6) a requirement that the licensee purchase a minimum of 125,000 units for resale in each series during the term; and (7) a termination provision for the licensee, providing that the licensor has 30 days to cure; but that if the default went uncured, the licensor would receive all accrued royalties and the licensee would obtain a partial refund of the $1,000,000.00 original payment minus $1.00 for each item already produced (Complaint Ex. A).

The Agreement also included a specific "Promotions" clause stating, in part, that:

Licensee shall use its best efforts to market and promote the sale of

Licensed Articles, including, without limitation, conducting a public relations campaign to announce the launch of each new series of Licensed Articles, the placement of Licensed Articles on end cap display fixtures in

each store in which the Licensed Articles are sold and the placement for

sale of Licensed Articles in Licensee's store in Times Square, New York

City after such store is open.

(Agreement at 5.)

Plaintiffs allege that after executing the Agreement, they discovered that Toys "R" Us (1) did not own or control stores outside the United States and, therefore, could not require foreign stores to sell the figures; (2) did not have a ready market for high quality collectibles or [*3]hundreds of thousands of customers for the figures; (3) did not have leverage with factories, thereby resorting to the same manufacturer that plaintiffs had originally found; and (4) never intended to create a permanent "store within a store" for plaintiffs at its Times Square location. Plaintiffs assert that Toys "R" Us only designed their project to be temporary, and that it only briefly featured the Stan Winston figures as part of a retail exhibit (Complaint ¶ 19).

Plaintiffs further allege that Toys "R" Us refused to manufacture, market, and sell the figures, and to pay royalties and design costs (Complaint ¶ 45).

The amended complaint asserts five causes of action: (1) fraud against all defendants; (2) negligent misrepresentation against all defendants; (3) breach of contract against Toys "R" Us; (4) a demand for a declaration that the Agreement be deemed terminated due to breach by Toys "R" Us; and (5) a permanent injunction against Toys "R" Us, restraining it from any further use of plaintiffs' name in connection with the manufacturing, marketing, or sale of plaintiffs' products.

Plaintiffs seek damages in excess of $25,000,000.00.

Discussion:

On a motion to dismiss for failure to state a claim, CPLR 3211(a) (7), "the court should accept as true the facts as alleged in the complaint, accord plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory" (Ark Bryant Park Corp. v Bryant Park Restoration Corp., 285 AD2d 143, 150 [1st Dept 2001] [citations omitted]). "Moreover, the interpretation of an unambiguous contract is a question of law for the court, and the provisions of the contract delineating the rights of the parties prevail over the allegations set forth in the complaint" (id. [citations omitted]).

Fraud

To plead a cause of action for fraud, plaintiffs must allege: (1) a representation of material fact; (2) the falsity of that representation; (3) knowledge by the party that made the representation that it was false when made; (4) justifiable reliance; and (5) injury (Kaufman v Cohen, 307 AD2d 113, 119 [1st Dept 2003]). In addition, CPLR 3016 (b) requires that a fraud claim be pleaded in sufficient detail to give adequate notice of the incidents complained of (Houbigant, Inc. v Deloitte & Touche LLP, 303 AD2d 92, 97 [1st Dept 2003]; Fort Ann Cent. School Dist. v Hogan, 206 AD2d 723, 724 [3d Dept 1994]).

Defendants respond that the alleged misrepresentations are not actionable in light of an express "Promotions" provision in the Agreement (at 5), making no mention of a permanent "store within a store." Rather, that provision obligates Toys "R" Us to implement the "placement" of the Winston figures on display fixtures, and "in Licensee's store in Times Square, New York City after such store is opened" (Complaint Ex. A at 5).

Defendants also argue that the merger clause in the Agreement (at 12) bars plaintiffs from asserting any reasonable reliance upon oral representations which may have preceded the Agreement.

Defendants' position is correct. The Agreement is permeated with details of the parties' working relationship under numerous chapter headings, including "Licensed Property," Licensed Articles," "Territory," "Series," "Royalties," "Sourcing," "Promotions," and even a provision entitled "Stan Winston Website," which addresses the licensor's right to maintain an Internet website (Complaint Ex. A at 1-6). The Agreement also sets forth, in similar detail, [*4]matters such as "Representations," consisting of the parties' representations to each other in connection with their business relationship (id., at 6-8), "Indemnification," "Insurance," and "Miscellaneous" points of agreement (id., at 8-12). All the provisions are clear and unambiguous and are, therefore, enforceable no more or no less to the extent of the "plain meaning" of their terms (Greenfield v Philles Records, Inc., 98 NY2d 562, 569 [2002]). "Evidence outside the four corners of the document as to what was really intended but unstated or misstated is generally inadmissible to add or vary the writing" (W.W.W. Assocs., Inc. v Giancontieri, 77 NY2d 157, 162 [1990]).

The Agreement contains both a no-oral-modification clause (at 11) and a merger clause (at 12). The merger clause provides:

This Agreement constitutes the entire agreement between the parties

regarding the subject matter hereof and supersedes and replaces any

and all prior agreements and understandings between them regarding

such subject matter.

Plaintiffs' assertions of alleged pre-contractual representations, forming the foundation of the fraud claims, are not actionable because to recognize them would be to impermissibly add to the parties' written agreement, running afoul of the aforestated principles. In addition, any possible reliance upon such representations would have been unjustified (Kaufman v Cohen, supra) due to the fact that the Agreement clear and unambiguous as it is is fully integrated, and permits of no other terms which are not expressed therein (Pine Equity NY, Inc. v. Manhattan Real Estate Equities Group LLC, 2 AD3d 248 [1st Dept 2003]). Indeed, this is especially so here, where the parties took pains to articulate their "Representations," which do not include the various alleged pre-contractual representations alleged herein (Complaint Ex. A at 6-8). Nor, as noted, do those representations appear in the specific provisions addressing the parties' "Business Terms and Conditions" (id., at 1-6).

Distinct of the foregoing, certain of the allegations fail to make out a viable claim under the pleading requirements peculiar to fraud. For example, it is alleged that defendants falsely represented that Toys "R" Us had an established customer base for the figures and an ability to keep manufacturing costs at a minimum due to its leverage with factories. Plaintiffs allege that Toys "R" Us representatives informed them, after they entered into the Agreement, "that sales could not be expected to be better because Toys 'R' Us' primary demographic was not the more mature collectors of such toys but was actually 'mothers buying for 6 and 7 year olds'" (Complaint ¶ 19 [b]), and that Toys "R" Us would use the same manufacturer that Winston originally used to make the figures (id., ¶ 19 [c]).

It is plaintiffs' burden to provide sufficient particularized allegations of all the essential elements of fraud, including a false statement (Lovett v Allstate Ins. Co., 86 AD2d 545, 546 [1st Dept 1982] ["In proving an allegation of fraud, an essential element is that the representation must have been false when it was made"], affd 64 NY2d 1124 [1985]). Plaintiffs fail to plead in sufficient detail how the above representations are false.

The information regarding Toys "R" Us' primary demographic does not contradict Toys "R" Us' alleged statement of having an established customer base for the figures. Even if it were true that Toys "R" Us customers primarily consisted of mothers buying toys for their 6 and [*5]7 year olds, and that the figures did not appeal to these type of customers, this did not necessarily mean that there was no established customer base for the figures.

In like fashion, the information regarding Toys "R" Us' intention to use the same manufacturer originally located by Stan Winston, does not necessarily run afoul of defendants' alleged representation of having leverage with factories to produce the figures more profitably. More importantly, the provision entitled "Sourcing" (Agreement at 4) provides that: (1) plaintiffs were responsible for sourcing the factories to manufacture the first two series; (2) the parties would mutually select the factories for all series thereafter; and (3) plaintiffs would retain final approval rights over the selection of factories. Plaintiffs' allegations, which are contradicted by the express terms of the Agreement, cannot be presumed to be true (e.g., Skillgames, LLC v Brody, 1 AD3d 247 [1st Dept 2003]).

Accordingly, the motion to dismiss the causes of action for fraud is granted.

Negligent Misrepresentation

A claim for negligent misrepresentation exists where: (1) a special relationship of trust or confidence existed, thereby creating a strict duty for the defendant to impart correct information to the plaintiff; (2) the information given was false; and (3) there was reasonable reliance upon the information given (Hudson River Club v Consolidated Edison Co., 275 AD2d 218, 220 [1st Dept 2000]). This claim cannot be predicated on a duty arising out of a contract; the duty must arise independent of contract ( Rodin Props. - Shore Mall N.V. v Ullman, 264 AD2d 367, 368 [1st Dept 1999]; Winter v Beale, Lynch & Co., 198 AD2d 124, 125 [1st Dept 1993], lv denied 83 NY2d 944 [1994]). CPLR 3016 (b) also requires negligent misrepresentation claims to be pleaded in sufficient detail (Tarzia v Brookhaven Natl. Lab., 247 AD2d 605 [2d Dept 1998]).

Plaintiffs argue that the negligent misrepresentation claim is properly pleaded, based on an asserted special relationship resulting from: (1) Toys "R" Us' superior knowledge; (2) the fact that the statements were made during face-to-face negotiations; and (3) defendants' intent to change Winston's position in reliance on those statements. In support, plaintiffs rely on R. Freedman & Son, Inc. v A.I. Credit Corp. (226 AD2d 1002 [3d Dept 1996]) an action alleging nonpayment under an equipment lease. Plaintiff in that action did not claim negligent misrepresentation based on statements regarding the lease. Rather, it based the claim on defendants' statements made after the action was over, during the course of settlement negotiations. The court held that the statements made during the course of settlement negotiations established a special relationship between the parties (id., at 1003).

Here, by contrast, at the time the alleged representations were made, there was no special relationship between the parties. Plaintiffs fail to show anything more than arms' length dealing between separate business entities, which does not give rise to a special relationship to support a cause of action for negligent misrepresentation (Andres v LeRoy Adventures, Inc., 201 AD2d 262 [1st Dept 1994]; Deven Lithographers, Inc. v Eastman Kodak Co., 199 AD2d 9, 10 [1st Dept 1993]). Given the arms' length nature of the parties' relationship, the mere allegation that plaintiffs relied on advice received from Toys "R" Us about the production and marketing of toy figures, and that Toys "R" Us was aware of any such reliance, does not suffice to state a claim for negligent misrepresentation (Ravenna v Christie's Inc., 289 AD2d 15, 16 [1st Dept 2001]).

Moreover, as held above, any possible reliance upon the alleged negligent [*6]representations would have been unreasonable (Hudson River Club v Consolidated Edison Co., supra) due to the fact that are inconsistent with clear, unambiguous, and fully integrated terms of the parties' written agreement (Pine Equity NY, Inc. v Manhattan Real Estate Equities Group LLC, supra).

Accordingly, the motion to dismiss the causes of action for negligent misrepresentation is granted.

Breach of Contract

Defendants first move to dismiss the breach of contract claim to the extent that it is brought by Stan Winston in his individual capacity. This is based on the fact that the Agreement is executed by him, in his official capacity, on behalf of Stan Winston Creatures, Inc. (Complaint Ex. A at 12; see also, id., at 1 [defining only Stan Winston Creatures, Inc., as the "Licensor"]). Only the corporation has standing to sue for breach where it, as opposed to the individuals, is party to the contract (Laing Logging Inc. v International Paper Co., 228 AD2d 843 [3d Dept 1996]; Del Castillo v Bayley Seton Hosp., 172 AD2d 796 [2d Dept 1991]). Thus, the motion to dismiss the claims asserted by Stan Winston in his individual capacity is granted.

Defendants further move to dismiss the breach of contract claim to the extent that

it seeks to recover damages in excess of those purportedly limited in the "Indemnification" section of the Agreement (at 8-9). Subdivision (iv) thereof provides: Neither party hereto shall have any liability to the other parties pursuant to this Agreement for any indirect, incidental or consequential damages of any nature whatsoever, including without limitation loss of income, profits or savings, and this limitation of liability shall extend to the parties' indemnification obligations hereunder.

(Complaint Ex. at 9.)

The court does not construe this portion of the Indemnification provision as applying to the breach of contract claim. "The gravamen of an action for indemnity is that both parties, indemnitor and indemnitee, are subject to a duty to a third person under such circumstances that one of them, as between themselves, should perform it rather than the other" (City of New York v Lead Indus. Assoc., Inc., 222 AD2d 119, 125 [1st Dept 1996]). It is undisputed that defendants drafted the Agreement. Defendants fail to demonstrate how the above subdivision of the Indemnification provision waives plaintiffs' right to sue for damages sustained by defendants' own actions, as alleged, constituting breach of the contract.

Defendants further posit that certain of the allegations supporting the breach of contract claim are contradicted by the terms of the Agreement. Contrary to that position, the court finds that the first allegation that "Toys 'R' Us has failed and refused to market, promote and sell the Creatures throughout the world" is consistent with page 2 of the Agreement, which expressly defines the "Territory" covered by the Agreement as "Worldwide . . . ." (Complaint Ex. A at 2.) By the same token, plaintiffs' second allegation that "Toys 'R' Us has failed and refused to proceed with the manufacture and production of additional series of Creatures" is consistent with the "Series" provision of the Agreement (at 3), which defines a variety of series of figures which are subject to the license granted by Winston to Toys "R" Us, and which, accordingly, Toys "R" Us bears a contractual duty to promote. [*7]

Accordingly, the motion to dismiss the breach of contract claim is denied.[FN2]

Declaratory and Injunctive Relief

Defendants seek dismissal of the declaratory and injunctive claims to the extent that the underlying claim for breach of contract is dismissed. In light of the above disposition, this branch of the motion to dismiss is likewise denied.

Conclusion:

Accordingly, it is

ORDERED that the motion to dismiss the causes of action for fraud is granted; and it is further

ORDERED that the motion to dismiss the causes of action for negligent misrepresentation is granted; and it is further

ORDERED that the motion to dismiss the causes of action asserted by Stan Winston, individually, is granted; and it is further

ORDERED that the motion to dismiss all causes of action as to the individual defendants is granted; and it is further

ORDERED that the motion to dismiss is, in all remaining respects, denied, and the action shall continue accordingly; and it is further

ORDERED that the clerk shall enter judgment accordingly.

Dated:September 1, 2004

E N T E R :

/S/

J. S. C. Footnotes

Footnote 1:"Series" is defined as a set of related action figures pertaining to the same motion picture; the first set was required to include five figures and later series were required to consist of no less than five (Agreement at 3).

Footnote 2:In view of the dismissal of the fraud and negligent misrepresentation claims, which were the only claims asserted against the individual defendants (Complaint at 7, 8), those defendants are severed from this action as parties (CPLR 1003).