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Devon It, Inc., et al v. Ibm Corp.

March 31, 2011

DEVON IT, INC., ET AL, PLAINTIFFS,
v.
IBM CORP., ET AL, DEFENDANTS.



The opinion of the court was delivered by: Slomsky, J.

OPINION

I. INTRODUCTION

On June 16, 2010, Plaintiffs Devon IT, Inc. ("Devon IT "), Devon AD Tech, Inc. ("Devon AD"), and Devon IT (Europe), Ltd. ("Devon Europe") (collectively "Plaintiffs") commenced this action against Defendants International Business Machine Corp. ("IBM"), Thomas S. Bradicich, Bernard S. Meyerson, James A Gargan, and Rodney C. Adkins (collectively "Defendants"), asserting nine claims upon which Plaintiffs allege relief should be granted. On August 17, 2010, Defendants filed a Motion to Dismiss the Complaint (Doc. No. 22). On September 24, 2010, Plaintiffs filed a Response in Opposition to Defendants' Motion to Dismiss (Doc. No. 27). On October 18, 2010, Defendants filed a Reply (Doc. No. 33). On November 2, 2010, the Court held a hearing on Defendants' Motion, and on November 9, 2010, the parties filed supplemental briefs (Doc. Nos. 37 & 38).

Plaintiffs make the following claims in the Complaint: Count I--Conduct and Participation in a RICO Enterprise Through a Pattern of Racketeering in violation of 18 U.S.C. § 1962(c) by Defendants Bradicich, Meyerson, Gargan and Adkins; Count II--Conspiracy to Engage in a Pattern of Racketeering in violation of 18 U.S.C. § 1962(d) by Defendants Bradicich, Meyerson, Gargan and Adkins; Count III--Breach of Fiduciary Duty by Defendant Bradicich; Count IV--Breach of Contract by Defendant IBM; Count V--Fraud in the Inducement by all Defendants; Count VI--Prima Facie Tort Under the Restatement (Second) of Torts § 870 by all Defendants; Count VII--Negligence by Defendant IBM; Count VIII--Participation in a Breach of Fiduciary Duty by Defendant IBM; Count IX--Aiding and Abetting A Pattern of Racketeering Activity and Conspiracy to Engage in a Pattern of Racketeering Activity in violation of 18 U.S.C. § 1962(c) and (d) by Defendant IBM.

For the following reasons, Defendants' Motion to Dismiss will be granted in part and denied in part.

II. FACTUAL BACKGROUND

A. Blade Agreement

In September 2005, Defendants*fn1 approached Plaintiffs*fn2 regarding a potential investment in a new IBM server project referred to as "Blade." (Doc. No. 1 ¶¶ 19-20.) The project involved the development of a Blade computer or workstation, designed to replace the typical stand-alone desktop personal computer. (Id. ¶ 21.) Blade was intended to save space, reduce energy costs, increase efficiency and security, as well as provide business clients with flexible information technology solutions based on individual needs. (Id.) In a presentation to Plaintiffs, Defendant Bradicich represented that Blade would be available for sale during the first quarter of 2006 at the competitive price of $1,500 a unit. (Id. ¶ 24.) He also projected that 500,000 units would be sold over the first three years, and informed Plaintiffs that several prominent companies such as Honda and Merrill Lynch were interested in purchasing Blade once it was available for sale. (Id. ¶¶ 25-26.) Total revenue was projected by Defendants to be $33,800,000 in the first year. (Id. ¶ 28.) Defendants represented that any investment by Plaintiffs in the Blade project would be applied to the design, development, and marketing of Blade. (Id. ¶ 29.) On November 7, 2005, Plaintiffs entered into an agreement (the "Blade Agreement") in reliance on Defendants' representations regarding market potential. (Id. ¶ 30.)

The Blade product itself was designed to function based on a link between a desktop computer terminal and a centralized server. Plaintiffs agreed to develop the desktop computer terminal, and Defendant IBM agreed to develop the centralized server. This relationship would give Plaintiffs an opportunity to enter the PC market in conjunction with IBM's valuable brand name and well established sales channels. (Id. ¶ 32.) Pursuant to the Blade Agreement, Plaintiffs made $4,000,000 in development payments to IBM between January 2006 and October 2007. (Id. ¶ 34.)

B. iDataPlex Agreement

In February 2007, Defendants approached Plaintiffs about another investment opportunity. This time the investment was to be in a complex data server called "iDataPlex." (Id. ¶ 37.) This device was intended to be a state of the art computer rack, which would be used to store servers, switches, and other equipment. (Id. ¶ 38.) iDataPlex would provide exceptional density and would be energy efficient. (Id.)

The sales projection given to Plaintiffs for this project was 85,000 units to be sold in the first year, 540,000 to be sold in the second year, and 1,000,000 to be sold in the third year. (Id. ¶ 49.) In April 2007, Plaintiffs were advised that an $11,000,000 investment was required in order to become a partner in the iDataPlex project. (Id. ¶ 50.) Plaintiffs were further advised that their investment would be applied to the design, development, and marketing of the project, and that another company, Intel Corporation, would also invest in the project in order to ensure the use of Intel chips in the units. (Id. ¶ 51.)

On June 7, 2007, Plaintiffs entered into an agreement with Defendants (the "iDataPlex Agreement") for the design, development, and marketing of the iDataPlex project. (Id. ¶ 52.) iDataPlex also appears to involve a link between an end point terminal unit and a centralized server, similar to the overall structure of Blade. Again, Plaintiffs agreed to focus on the development of the end point device, while IBM focused on the development of the centralized server components. Pursuant to the iDataPlex Agreement, Plaintiffs made $8,000,000 in payments to Defendants by wire transfer between June 2007 and March 2008.

On October 3, 2007, Plaintiffs sent an email to Defendant Meyerson seeking a confirmation that Intel was committed to investing in the project. (Id. ¶ 55.) The Complaint alleges that Defendant Meyerson emailed back in the affirmative, stating that Intel was fully committed and the project was "fully funded and going," when in fact this statement was false.

(Id.) In reliance on these assurances, Plaintiffs wired another $2,000,000 to Defendants on October 24, 2007 and on December 20, 2007. (Id. ¶ 56.) Plaintiffs now claim that the project was not fully funded at the time the representations were made, and Defendants knew it would not be fully funded. (Id. ¶ 56.)

C. Breakdown Of Blade And iDataPlex Agreements

The Blade release date was delayed many times. Plaintiffs were finally advised that units would be available for sale in the third quarter of 2007. According to Plaintiffs, Defendants knew that this representation was not true. (Id. ¶ 62.) The Complaint states that Defendants were dishonest about the ongoing viability of the Blade project, which had in fact been terminated, so that Plaintiffs would not be deterred from making payments under the iDataPlex Agreement. Defendants then used the payments for a purpose other than designing, developing and marketing iDataPlex, all in violation of the iDataPlex agreement. (Id. ¶¶ 62-63.) During a meeting held on February 2008, when asked why Blade sales were so low, Defendant Meyerson advised that low numbers were typical at the start of any project. (Id. ¶ 65.) Contrary to this assertion, Plaintiffs maintain that the real reason for the poor number of sales was the termination of the Blade project by Defendants. (Id.) According to Plaintiffs, Defendants concealed the fact that they had already terminated the Blade project in order to induce Plaintiffs to continue to invest in Blade and iDataPlex. (Id.) For example, Defendants solicited and accepted a wire transfer payment of $3,000,000 on March 1, 2008 under the iDataPlex Agreement, a date after the Blade project was cancelled but before it was made known to Plaintiffs. (Id. ¶ 67.) Ultimately, in April 2008, Defendants advised Plaintiffs that the Blade project was at the "end of life," and that the future of iDataPlex was also in doubt. (Id. ¶ 66.)

D. Restructured Agreements And Releases

Subsequent to the disclosure that the Blade project was cancelled and that the iDataPlex project was struggling, and the revelation in the spring of 2008 that both projects failed to meet robust sales projections, the parties began to negotiate new agreements. On July 10, 2008, the parties entered into new agreements ("July 2008 Agreements") that restructured the previous Blade Agreement and iDataPlex Agreement.*fn3 (Id. ¶¶ 97-98.) These agreements provided for a lump sum payment to Plaintiffs. (Id. ¶¶ 99-102.) They also gave Plaintiffs the right to use sixty IBM part numbers that would be readily available worldwide. (Id.) Plaintiffs wanted to use an IBM Original Equipment Manufacture ("OEM") part number because it would allow another product Plaintiffs produced, a terminal referred to as TC-5, to be marketed and sold as a standard IBM product under IBM's valuable logo. This is significant because an IBM part number is a unique identification number that would give the product immediate name recognition by virtue of its association with IBM. (Id. ¶ 99.)

In addition to assigning to Plaintiffs' products valuable IBM part numbers, the July 2008 Agreements allowed Plaintiffs to receive a substantial royalty stream for each individual server node installed into the iDataPlex terminal, called a planar. (Id. ¶ 100.) Individual Defendants again projected high profit sales for these planars and a lucrative arrangement for Plaintiffs. (Id. ¶¶ 101-103.) According to the Complaint, during the negotiations that led to the July 2008 Agreements, Individual Defendants knew Plaintiffs would not be given actual IBM part numbers, that the corresponding parts would not be available worldwide, and that the projections were inaccurate. Plaintiffs claim they would not have signed the July 2008 Agreements had they been told the truth. (Id. ¶ 104.)

In any event, the July 10, 2008 Agreements contain a broad release. They are nearly alike in each agreement and provide:

In exchange for the payment of $4,760,000 pursuant to Section 19.0 of this Agreement, Devon Entities hereby release and forever discharge the IBM Entities, and its assigns, stockholders, as well as their respective distributors, sub-distributors, agents and contractors, in each case, on a worldwide basis (collectively, "IBM" Releases") and each of them, from any and all claims, suits, actions, liabilities, damages, costs or losses of any kind or nature whatsoever, known or unknown, suspected or unsuspected, in law, in equity, or otherwise, whether individual or otherwise in nature, including but not limited to those arising under state, federal, or other law, that the Devon Entities ever had, now have or hereafter can, shall or may have, arising from or relating in any way to the IBM Releases (or any of them) for the time up to and including the date of the execution of this Agreement including, but not limited to any and all after-discovered claims, and whether directly or indirectly in connection with the Prior Agreement, and all related agreements including the CDA and any prior or successor confidentiality agreements, the Blade or any of the activities contemplated by the Prior Agreement (the "Devon Released Claims"). (Doc. No. 1 Ex. F § 15.3; Ex. G § 15.)

On February 23, 2009, the parties entered into an addenda to the July 2008 Agreements, which added and modified certain terms ("Addenda"). Specifically, the Addenda provided that IBM's hardware division would be prohibited from proactively enabling thin client hardware products which are "similar or reasonably equivalent in function to [Plaintiffs'] TC-5 and/or TC-2 product."*fn4 (Id. ¶ 106.) This provision prohibited IBM from promoting products of third parties similar to designated products of Plaintiffs. Essentially, between the July 2008 Agreements and the date of the Addenda in 2009, aside from lump sum payments and substantial royalties, Plaintiffs believed that their thin client hardware products were going to have great success because they expected to receive worldwide recognition through the use of IBM part numbers without any competition from IBM. However, Plaintiffs allege that the competition prohibition was not complied with, the part numbers were not properly supplied, and notably, Individual Defendants knew that these terms would not be fulfilled when the July 2008 Agreements and Addenda were signed. (Doc. No. 1 ¶¶ 107-108.)

Plaintiffs allege a violation of RICO, breach of agreements and a fiduciary duty, as well as being subjected to various misrepresentations by Defendants that induced Plaintiffs to invest with them and agree to restructure agreements and releases. In their Motion to Dismiss, Defendants deny these claims and assert that the releases contained in the July 2008 Agreements and the subsequent Addenda should be enforced, and seek the dismissal of the Complaint in its entirety. Defendants also advance other arguments, apart from relying on the releases, in support of dismissal of the Complaint.

III. LEGAL STANDARD

The motion to dismiss standard under Federal Rule of Civil Procedure 12(b)(6) has been the subject of recent examination, culminating with the Supreme Court's Opinion in Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009). After Iqbal it is clear that "threadbare recitals of the elements of a cause of action, supported by mere conclusory statements do not suffice" to defeat a Rule 12(b)(6) motion to dismiss. Id. at 1949; see also Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). Applying the principles of Iqbal and Twombly, the Third Circuit in Santiago v. Warminster Twp., No. 10-1294, 2010 WL 5071779 (3d Cir. Dec. 14, 2010), set forth a three-part analysis that a district court in this Circuit must conduct in evaluating whether allegations in a complaint survive a 12(b)(6) motion to dismiss. 2010 WL 5071779, at *4; see also Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir. 2009) (applying the principles of Iqbal and articulating the 12(b)(6) analysis as a two-part test).

"First, the court must 'tak[e] note of the elements a plaintiff must plead to state a claim.' Second, the court should identify allegations that, 'because they are no more than conclusions, are not entitled to the assumption of truth.' Finally, 'where there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief.'" Santiago v. Warminster Twp., 2010 WL 5071779, at *4 (quoting Iqbal, 129 S. Ct. at 1947-50). A complaint must do more than allege a plaintiff's entitlement to relief, it must "show" such an entitlement with its facts. Fowler, 578 F.3d at 210-11 (citing Phillips v. County of Allegheny, 515 F.3d 224, 234-35 (3d Cir. 2008)). "Where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged--but it has not 'shown'-- 'that the pleader is entitled to relief.'" Iqbal, 129 S Ct. at 1950. The "plausibility" determination is a "context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id.

IV. DISCUSSION

The crux of Defendants' argument is that eight of the nine claims are barred by the plain terms of the releases and covenants not to sue entered into by the parties. The releases are included in the July 2008 Agreements (Doc. No. 1, Ex, "F" & "G") and extended and acknowledged in the February 2009 Addenda to the July 2008 Agreements (Doc. No. 1, Ex. "H" & "I") and contain substantially similar language. Defendants agree that the only claim not barred by the releases is the breach of contract claim in Count IV. In the alternative, Defendants argue that Plaintiffs have failed to state a claim in Count IV. As noted, Defendants maintain that even if the barred claims were allowed to proceed, the claims should be dismissed on other grounds.

A. The Releases Do Not Bar The Claims Because Plaintiffs Have Sufficiently Alleged Fraud In The Inducement

Defendants initially contend that eight of the nine claims in the Complaint are barred by the releases contained in the July 2008 Agreements and the Addenda. Plaintiffs assert that the releases should be set aside because they were fraudulently induced.

Under New York law,*fn5 "a valid release constitutes a complete bar to an action on a claim which is the subject of the release. However, a release is treated just as any other contract . . . and may be set aside on the traditional basis of fraudulent inducement, misrepresentations, mutual mistake or duress." Id. A general release does not bar suits seeking damages for fraud in the inducement of the release itself. Id.(citing Goldsmith v. Nat'l Container Corp., 287 N.Y. 443, 440 (1942)). However, conclusory allegations of fraudulent inducement are insufficient to overcome a release's unambiguous language. Consorcio Prodipe, S.A. v. Vinci, S.A., 544 F. Supp. 2d 178, 189 (S.D.N.Y. 2008). When a party releases claims, it can later challenge that release for fraudulent inducement only by identifying a separate and distinct fraud from that contemplated by the agreement. Id. at 190; DirectTV Group, Inc. v. Darlene Investments, LLC., No. 05-5819, 2006 WL 2773024, at *4 (S.D.N.Y. Sept. 27, 2006).

Here, Plaintiffs have alleged fraudulent inducement that is separate and distinct from the matters which the agreements were meant to settle. The Complaint initially alleges various misrepresentations throughout the course of the parties' relationship regarding the Blade and iDataPlex projects. Thereafter, given the lack of success and alleged misconduct by Defendants in relation to the projects, the parties engaged in negotiations in an attempt to address Plaintiffs' dissatisfaction with the handling of the Blade and iDataPlex projects by Defendants. The July 2008 Agreements were the product of these negotiations. These agreements provided for, among other things, a refund to Plaintiffs as well as the right to use valuable IBM part numbers for their own products. This is significant because an IBM part number is a unique identification number that would give the product immediate name recognition by virtue of its association with IBM. However, Plaintiffs allege that at the time of the negotiations over the terms of the July 2008 Agreements, Defendants knew that Plaintiffs would not receive the promised IBM part numbers, made misrepresentations that the part numbers would be available in geographical areas across the world, and knew that these representations would induce Plaintiffs to sign the new agreements.

Moreover, the February 23, 2009 Addenda modified certain terms of the July 2008 Agreements. Notably, they provided that IBM's hardware division would be prohibited from proactively enabling thin client hardware products which are "similar or reasonably equivalent in function to [Plaintiffs'] TC-5 and/or TC-2 product." (Doc. No. 1 ¶ 106.) However, the Complaint alleges that Defendants knew at the time that they would not be able to get the hardware division of IBM to comply with this prohibition, and made the false representation to induce Plaintiffs to sign the Addenda, which included releases similar to the ones in the July 2008 Agreements.

The misrepresentations that induced the July 2008 Agreements and subsequent Addenda are separate and distinct from previous misrepresentations made by Defendants in regard to the Blade and iDataPlex projects. Plaintiffs apparently were aware to some extent of the previous false representations when they entered into the July 2008 Agreements and the Addenda. They entered into the new agreements in an effort to move on and continue their relationship with Defendants. Plaintiffs ...


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