Geologic Solutions, Inc. v Aether Sys., Inc.
Annotate this CaseDecided on November 2, 2006
Supreme Court, New York County
Geologic Solutions, Inc., Plaintiff,
against
Aether Systems, Inc., Defendant.
600856/2006
Karla Moskowitz, J.
Defendant Aether Systems, Inc. (Aether) moves, pursuant to CPLR 3211 (a) (7), to dismiss the second cause of action for failure to state a claim.
This is an action seeking damages for breach of contract and fraudulent inducement. In the original complaint, the named defendant was Aether Holdings, Inc. In this motion, in addition to moving to dismiss the second cause of action, defendant initially argued for dismissal for failure to name the proper party as defendant and for failure to join a necessary party. However, the parties resolved, by stipulation, the issue of failure to name the proper party defendant, by agreeing to amend the complaint to substitute Aether as defendant in place of Aether Holdings, Inc. At oral argument on June 22, 2006, this court denied that part of this motion based on failure to join a necessary party. Accordingly, the only aspect of this motion still before the court is Aether's motion to dismiss the second cause of action for failure to state a claim.
Until September 17, 2004, Aether operated a business, through its transportation division, in which it sold wireless communication devices to the trucking industry, enabling carriers to track and transmit data concerning their shipments. In addition, for a monthly service fee, Aether provided access to terrestrial and satellite wireless communications networks, enabling wireless transmission of customer data.
The terrestrial network involved a contract between Aether and the terrestrial communications network owner, Motient Communications Company. However, in certain remote areas where the lower-cost terrestrial communications network was not available, Aether resorted to Satellite Communications through a contract between Aether and its satellite service provider, Mobile Satellite Ventures LLC (MSV).
In 2003, Aether decided to sell its mobile and wireless data businesses, including its transportation division. On July 20, 2004, Aether and GeoLogic (then Slingshot Acquisition Corporation) executed an Asset Purchase Agreement (APA). Following execution of the APA, GeoLogic continued its due diligence, culminating in the September 17, 2004 closing of the acquisition the APA contemplated, with GeoLogic as the buyer and Aether as the seller.
The complaint contains four causes of action: three alleging breaches of contract, in which GeoLogic alleges that Aether materially breached representations and warranties the APA contained, and one claim for fraudulent inducement. Only the second cause of action is at issue [*2]on this motion. In that claim, GeoLogic alleges that Aether breached the APA by failing to disclose that MSV's Federal Communication Commission's license (the FCC License) would expire in June 2006. The complaint further alleges that Aether knew and failed to inform GeoLogic
that the major issue in applying for the FCC license was that its mobile devices, because they operated in a half-duplex communication mode, did not comply with the FCC's rules regarding non-interference with maritime mobile-satellite distress communications. Aether also knew that in order to receive the current FCC license, MSV represented to the FCC that by July 2006 Aether would transition its mobile devices to a new full duplex technology that would fully comply with the FCC's rules.
(Complaint, ¶ 38).
GeoLogic alleges that, after it acquired Aether's transportation division and learned of the impending FCC License expiration, it attempted to rectify the situation, costing it both time and money. At GeoLogic and MSV's request, the FCC approved the assignment of the FCC License from MSV to GeoLogic in December 2005. In January 2006, GeoLogic applied to the FCC for an extension of the FCC License through 2010. On May 31, 2006, after making this motion, the FCC granted GeoLogic's request, extending the FCC License through July 2, 2010.
In this motion, Aether argues that the court should dismiss the second cause of action for failure to state a claim. Aether maintains that none of the provisions in the APA created an obligation to disclose that the FCC License was to expire about two years after execution of the APA. Aether further states that MSV's FCC licenses were and are matters of public record that did not require disclosure by an MSV customer such as Aether. Aether also points out that its six-year contract with MSV was set to expire in November 2006, five months after the potential FCC License expiration. Finally, Aether asserts that GeoLogic did not suffer any damages from the alleged breach of contract, in that the FCC License had not yet expired at the time this action started, and the FCC has since extended it for four additional years. Thus, according to Aether, even accepting all of the factual statements in the complaint as true, GeoLogic cannot succeed on the allegations set forth in the second cause of action.
The second cause of action alleges that:
Aether materially breached its representations and warranties to GeoLogic as set forth, inter alia, in §§ 4.7, 4.18 and 4.24 of the APA by failing to disclose that MSV's FCC license would expire in June 2006 and that such expiration would leave the business GeoLogic purchased with obsolescent inventory for which no reserve had been established.
(Complaint, ¶ 68).
GeoLogic further asserts that "[p]ursuant to §§ 8.1 and 8.2 of the APA, Aether agreed to indemnify and hold GeoLogic harmless from any losses arising from or attributable to the breach of any representation or warranty made by Aether." (Id., ¶ 71).
Section 4.7 of the APA states that Aether "possesses all material Permits necessary for the operation of the Business," that it "is the authorized and legal holder of all Permits," and that "[t]he Permits constitute all of the licenses, permits or authorizations necessary to entitle [Aether] to carry on the Business in all material respects as currently conducted." GeoLogic states that, in fact, MSV, not Aether, was the holder of the FCC License.
Section 4.18 of the APA represents that the inventory for sale did "not include items that are obsolete ... for which reserves have not been established." According to GeoLogic, however, [*3]the large quantity of half-duplex inventory that Aether sold GeoLogic was obsolete, because Aether had committed to the FCC that it would stop using those devices and convert to full-duplex devices by the time the MSV FCC License came up for renewal in 2006.
Section 4.24 of the APA states that "no customer or supplier has indicated in writing, or, to the knowledge of [Aether], orally that it will ... materially change the terms on which it does business with the Business in the future." GeoLogic argues, however, that MSV had told Aether that the FCC License would expire in June 2006, leaving MSV unable to continue to provide the business with access to the satellite network.
Finally, GeoLogic states that the falsity of these representations has caused it to incur damages. In order to address the obsolete inventory problem, GeoLogic liquidated the half-duplex inventory it had purchased from Aether at a reduced price and it promised customers who purchased the inventory a free upgrade to full-duplex technology for which GeoLogic would otherwise have charged them. GeoLogic states that it also incurred expenses in connection with arranging for the assignment of the FCC License from MSV to GeoLogic.
In ruling upon a motion to dismiss for failure to state a claim, the court must take the allegations in the complaint as true and accord the plaintiff the benefit of every possible favorable inference. (Leon v Martinez, 84 NY2d 83, 87-88 [1994]).
Aether argues that GeoLogic had opportunities to ask questions of MSV and the FCC and to check the FCC's website regarding the FCC License and its terms and conditions. Aether further maintains that GeoLogic, as a sophisticated entity, is charged with knowledge that its due diligence should have revealed, including the expiration date of the FCC License.
Aether's argument does not apply to this situation, however. A buyer that obtains an express warranty from a seller in a contract is entitled to rely upon the seller's promise as to the truth of the warranted information. (CBS Inc. v Ziff-Davis Publ. Co., 75 NY2d 496, 503 (1990); see also 61 West 62 Owners Corp. v Harkness Apt. Owners Corp., 222 AD2d 358, 360 [1st Dept 1995]).
As to section 4.7, this court finds that GeoLogic cannot state a viable claim because that section itself states that "Schedule 4.7 contains a complete list of all Permits held by Seller used in the Business as currently operated, the date of expiration of each Permit, and whether each such Permit is transferable. Copies of such Permits have been made available to Buyer." Schedule 4.7 lists Certificates of Authority to do Business in several states, as well as a Colorado Sales Tax License and a Registration in Canada. Thus, it is evident from the APA itself that an FCC license for satellite communications was not among the permits and licenses Aether held.
As to GeoLogic's claims related to sections 4.18 and 4.24 of the APA however, the allegations are sufficient to state a cause of action for breach of contract, at this early stage in the action, assuming the truth of all of the allegations in the complaint. Further, GeoLogic has adequately alleged that it suffered damages as a result of the alleged breaches of the warranties in the APA. GeoLogic states that it exerted significant effort to achieve the successful outcome of the extension of the FCC License, including efforts to improve its half-duplex technology to address the FCC's concerns. GeoLogic further maintains that the remedial actions it took were a necessary and reasonable response to the uncertainty created by Aether's misrepresentations, because it could not have known that the FCC would renew the FCC License and that the FCC would choose not to enforce MSV's commitment that half-duplex technology must be phased out before the renewal. GeoLogic states that, because of the extension of the FCC License, it will [*4]not suffer further damage from Aether's misrepresentations, but that the extension does not eliminate or reduce the damages it has already suffered.
Accordingly, it is
ORDERED that defendant's motion to dismiss is denied.
The parties are directed to attend a compliance conference on November 9, 2006 at 10:00 a.m. in the courtroom, room 228, 60 Centre Street, New York, NY.
Dated: November __, 2006
ENTER:
_________________________J.S.C.
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