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NEW PARADIGM SOFTWARE CORP. v. NEW ERA OF NETWORKS

July 26, 2000

NEW PARADIGM SOFTWARE CORP., PLAINTIFF,
V.
NEW ERA OF NETWORKS, INC. AND VIE SYSTEMS, INC. DEFENDANTS.



The opinion of the court was delivered by: Berman, District Judge.

ORDER

Plaintiff New Paradigm Software Corp. ("New Paradigm" or "Plaintiff") alleges in the instant complaint seven causes of action against Defendants New Era of Networks, Inc. ("NEON") and VIE Systems, Inc. ("VIE") (collectively, "Defendants") relating to the sale of a software program by the Plaintiff to Defendant VIE and the efforts of the both Defendants to avoid paying for this program. Plaintiffs claims include: breach of contract (first, second and fifth claims); tortious interference with the contract between VIE and New Paradigm (third claim); unjust enrichment (fourth claim); rescission (sixth claim); and reimbursement and indemnification (seventh clam). Defendants have moved pursuant to Federal Rules of Civil Procedure ("Fed. R. Civ.P.") 12(b)(6) to dismiss the unjust enrichment, and rescission and tortious interference claims in the First Amended Complaint*fn1 ("Amended Complaint"), as well as the breach of contract claim asserted against Defendant NEON to the extent that it includes punitive damages. Defendants contend that each of these claims fails to state a claim upon which relief can be granted. For the reasons set forth below, the Court grants Defendants' motion with respect to the unjust enrichment and rescission claims and denies Defendants' motion with respect to the tortious interference claim and the punitive damages request.

I. Background

In early 1997, negotiations commenced between New Paradigm and VIE for the sale of "Copernicus," an adaptable computer software program which integrates disparate computer system formats so that information can be shared across systems. Plaintiff states that "in the computer and software industries, Copernicus is commonly and generally known as an enterprise application integration (`EAI') product." (Amended Complaint (`Compl.') ¶ 9). New Paradigm "had received two offers from other companies for Copernicus" (Compl. ¶ 11), but in an agreement dated May 9, 1997 (`Agreement'), New Paradigm sold Copernicus to VIE. (Compl. ¶ 12). The sale of Copernicus included, among other things, the patent rights to Copernicus, all other intellectual property rights to Copernicus, and the software for Copernicus. New Paradigm and VIE agreed that New York law would apply to the interpretation and enforcement of the Agreement.

VIE paid New Paradigm $2,050,000 for the sale of Copernicus at the closing of the Agreement. (Compl. ¶ 15). The Agreement provided that after the first anniversary of the closing date, VIE would be obligated to pay a royalty to New Paradigm "equal to 5% of the net revenue commencing from the first anniversary of the closing date unless a buyout payment was made." (Compl. ¶ 16). "Net revenue was defined in the Agreement as being `equal to the amount of cash received and retained by [VIE] for the sale, license and distribution of the computer programs known/and or marketed as `Copernicus software.'" (Id.) (quoting Agreement, § 2.1(c) & Schedule 2.1(c)). At any time prior to the fourth anniversary of the closing date, VIE could exercise the option of terminating its obligation to pay future royalties by paying New Paradigm the greater of $1,000,000 or the total of all royalties previously paid to New Paradigm (the "Termination Payment" or "Termination fee"). (Compl. ¶ 25). VIE also agreed to pay New Paradigm an amount equal to the Termination Payment in the event that VIE transferred to a third party its rights and interests in Copernicus and such purchaser did not assume VIE's royalty obligations under the Agreement. (Agreement, Schedule 2.1(c), § 5(a)).

VIE's obligation to pay New Paradigm royalties commenced in July 1998, and VIE made such royalty payments during the period from July 1998 to April 1999. On April 6, 1999, NEON purchased all of the stock of VIE for $12,000,000. Plaintiff asserts that "the vast majority or practically all of the purchase price paid by NEON to VIE was for the patent and other intellectual property rights to Copernicus." (Compl. ¶ 48). By letter dated April 12, 1999, Leonard Goldstein, the vice-president and senior counsel of NEON, notified New Paradigm that "NEON has assumed responsibility for paying New Paradigm Software Corporation all royalties due it under the Agreement." (Compl.Ex. C). Plaintiff claims that "by assuming (or purporting to assume) the responsibility to pay the Royalty under the Agreement, NEON was also assuming the responsibility of complying with the terms of the Agreement which relate to the payment of the royalty." (Id. ¶ 54). The terms which Plaintiff claims NEON assumed include: (1) the obligation to make a reasonable effort to market Copernicus; (2) the requirement not to materially alter pricing policies with respect to Copernicus for the purpose of reducing or negating its obligations to New Paradigm; (3) the implied covenant of good faith and fair dealing to undertake reasonable efforts to generate royalty income from Copernicus; (4) the obligation to produce records relevant to royalty payments for up to two years past; and (5) the obligation to indemnify New Paradigm for costs incurred as a result of a breach of any of the foregoing terms. (Id.).

Since April 1999, NEON has made two royalty payments, totaling $7,500, to New Paradigm in connection with revenue generated by Copernicus. Plaintiff contends that since its acquisition of VIE, NEON has not marketed Copernicus by name, but is currently "marketing software which is identical, virtually identical, or substantially similar to Copernicus" without paying royalties for the income generated from these Copernicus-like products. (Id. ¶ 6465). According to the Plaintiff, NEON purchased VIE and Copernicus because "[b]y acquiring Copernicus, NEON would also be able to suppress a competing product to NEONet," (Id. ¶ 78), a software program sold by NEON. Plaintiff claims "NEON's NEONet Formatter seems to carry out the same functions and seems to follow the same methodology as Copernicus." (Id. ¶ 79). Plaintiff argues generally that NEON should either have been paying New Paradigm 5% of the royalties generated by NEONet and NEON's other allegedly Copernicus-like products, or NEON should have paid the Termination fee. (Pl.'s Mem. at 12).

New Paradigm has asserted seven claims against the Defendants: (1) breach of contract for failure to make the Termination Payment; (2) (against NEON only) breach of contract by making no efforts at licensing Copernicus; (3) (against NEON only) tortious interference with the contract between VIE and New Paradigm; (4) unjust enrichment; (5) (against NEON only) breach of contract by actual or constructive licensing of Copernicus, in whole or in part, without payment of royalties to New Paradigm; (6) rescission of the Agreement; and (7) reimbursement and indemnification for all damages and expenses including, but not limited to attorneys' fees arising out of the breaches of the Agreement. (Id. ¶ 128-134). The Defendants' instant motion seeks to dismiss the Third (tortious interference), Fourth (unjust enrichment), and Sixth (rescission) claims for failure to state a claim on which relief can be granted, as well as the Fifth claim (breach of contract), to the extent that it seeks punitive damages.

II. Standard of Review

In resolving a motion to dismiss, the Court must accept the factual allegations set forth in the complaint as true and draw all reasonable inferences in favor of the plaintiff. See Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir. 1996). A complaint should not be dismissed for failure to state a claim "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). In other words, the burden upon the movant is very substantial, as the issue before the Court on a Rule 12(b)(6) motion "is not whether a plaintiff is likely to prevail ultimately, `but whether the claimant is entitled to offer evidence to support the claims. Indeed, it may appear on the face of the pleading that a recovery is very remote and unlikely but that is not the test.'" Gant v. Wallingford Board of Education, 69 F.3d 669, 673 (2d Cir. 1995) (quoting Weisman v. LeLandais, 532 F.2d 308, 311 (2d Cir. 1976) (per curiam)). "The motion to dismiss for failure to state a claim is disfavored . . ." Bower v. Weisman, 639 F. Supp. 532, 539 (S.D.N.Y. 1986) (citing Arfons v. E.I. du Pont De Nemours & Co., 261 F.2d 434, 435 (2d Cir. 1958)). While "`the well-pleaded material allegations of the complaint are taken as admitted . . . conclusions of law or unwarranted deductions of fact are not admitted.'" First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 771 (2d Cir. 1994), cert. denied, 513 U.S. 1079, 115 S.Ct. 728, 130 L.Ed.2d 632 (1995) (citations omitted).

III. Discussion

A. Unjust Enrichment (Fourth Claim)

Plaintiff claims that "[b]y reason of the acquisition and failure of NEON to actually assume the obligation to pay the Royalty, VIE has been enriched at the expense of New Paradigm," (Compl. ¶ 108), and that "NEON has been unjustly enriched at the expense of New Paradigm in the amount of 5% of the net revenue deriving from . . . sales [of products which are actually identical or virtually identical to Copernicus]." (Id.). Relying on Rule 8(e)(2) ("Fed.R. Civ.P."), which allows a party to state multiple, and even inconsistent claims, Plaintiff asserts that pleading breach of contract does not prevent it from also pleading unjust enrichment. (Pl.'s Mem. at 18). Defendants respond that "unjust enrichment is a `quasi-contractual' remedy which is generally not available where a valid and enforceable contract governing the same subject matter exists. This is a substantive rule, not a matter of pleading." (Def.'s Reply Mem. at 5). Therefore, Defendants argue, this claim should be dismissed.

In order to successfully plead unjust enrichment under New York law, "a plaintiff must demonstrate that a) the defendant was enriched; b) the enrichment was at the plaintiffs expense; and c) the defendant's retention of that benefit would be unjust." Van Brunt v. Rauschenberg, 799 F. Supp. 1467, 1472 (S.D.N.Y. 1992) (citing S.S. Silberblatt, Inc. v. East Harlem Pilot Block, 608 F.2d 28, 37 (2d Cir. 1979)). However, "unjust enrichment is a quasi-contractual remedy, so that such a claim is ordinarily unavailable when a valid and enforceable contract governing the same subject matter exists." Mina Investment Holdings Ltd. v. Lefkowitz, 16 F. Supp.2d 355, 361 (S.D.N.Y. 1998); Seiden Associates, Inc. v. ANC Holdings, Inc., 754 F. Supp. 37, 39 (S.D.N.Y. 1991) ("to the extent that there is a valid and enforceable contract between plaintiff and defendants, plaintiff will not be able to seek recovery in quasi contract . . ."). As the New York State Court of Appeals explained in Clark-Fitzpatrick v. Long Island Railroad Company, 70 N.Y.2d 382, 521 N.Y.S.2d 653, 516 N.E.2d 190 (1987), "it is impermissible . . . ...


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