The opinion of the court was delivered by: Spatt, U.S. District Judge.
MEMORANDUM OF DECISION AND ORDER
This case arose out of a dispute between Arista Technologies, Inc. (the
"plaintiff' or "Arista") and Arthur D. Little Enterprises (a "defendant"
or "ADLE") regarding the licensing agreement of patented technology owned
by ADLE. The technology in question, known as "video spot remover"
("VSR") technology, permits video cassette recorders ("VCRs") to skip
past commercials in videotaped television programs when the videotapes are
Arista hired third-party defendant Michael Harvey ("Harvey"), who was
doing business as third-party defendant Chambord Technologies, Inc.
("Chambord"), to be its project manager and to supervise the integration
of the VSR System into the consumer product called "Commercial Brake,"
which is a device, separate and apart from a VCR, that attaches to a
television and performs the commercial-skipping functions of the VSR
System. Harvey, a former ADLE engineer, retained a team of engineers from
Arthur D. Little ("ADL"), ADLE's parent corporation, to assist him in
developing the VSR System technology. In May 1993, after a meeting with
the ADL engineers, Harvey concluded that the VSR System technology
described in ADLE's `091 patent, did not work as promised; was inadequate
to create a viable consumer product; and would require extensive
engineering to develop it to a point where it would be suitable for
integration into a consumer product.
Later that month, Harvey fired the ADL team and hired Kyle Fields
("Fields") and his company defendant Design Labs, Inc. ("Design Labs") to
develop the VSR System for Commercial Brake. After an initial review of
the technology, Fields concluded that it was virtually useless, and,
therefore, Design Labs began working from scratch.
Meanwhile, Iggulden agreed to help Arista make Commercial Brake in
exchange for a fee of $10,000 per month for ten months; reimbursement of
travel, entertainment, and other expenses, and 40% of the net profits on
products sold by the venture. Iggulden was to provide Arista with
consulting and management services for the development and marketing of
the venture's product.
As a result of the relationship between Iggulden and Arista, Iggulden
gained confidential information regarding Arista's marketing research,
including the results of consumer focus group studies. According to
Arista, Iggulden gave this information to ADLE, which, in turn, used it
to undermine Arista's marketing of Commercial Brake and to benefit ADLE's
own competing efforts to license the VSR System to VCR manufacturers.
Arista asserts that after Harvey hired Fields and Design Labs to
develop the VSR System, Iggulden "mounted a tireless and successful
effort to obtain Arista's confidential technology for ADLE without any
compensation for Arista as required by the license" (Amended Complaint,
¶ 47). Iggulden was included in an August 18, 1993, meeting to
discuss Arista's marketing plans. Iggulden claimed that the purpose of
the meeting was so that everyone could "read from the same script," but
according to the plaintiff, Iggulden actually used this meeting to send
Arista's marketing plans to ADLE.
Also in 1993, Iggulden threatened Arista that if it did not sign an
Invention Rights and Disclosure Agreement, which would have permitted
Design Labs to give the technology it had developed for Arista directly
to ADLE, then ADLE would "conduct a very public launch" of its own
version of the VSR System at the same time and place as the planned
launch of Commercial Brake. Arista approached ADLE and asked for
assurances that it would not conduct a simultaneous launch of a competing
product, and ADLE promised that it would not do so. Based on ADLE's
assurances, Arista chose to continue giving Iggulden confidential
marketing and technical information. Ultimately, at the January 1994
Consumer Electronics Show ("CES"), Arista launched Commercial Brake, and
ADLE, together with Iggulden, introduced its version of the VSR
technology. Iggulden, who was being paid by Arista to promote their
product, used Arista's booth and resources at the CES to promote ADLE's
product and to conduct
meetings with VCR manufacturers on licensing of the VSR technology.
On January 24, 1994, Fields entered into another contract with Harvey,
obligating Design Labs to continue its work for Arista in exchange for a
fee of $20,000 per month. Meanwhile, Iggulden began trying to persuade
Fields and Design Labs to work for ADLE. Iggulden's patent attorney sent
Fields copies of Arista's license with ADLE and Arista's confidential
contract with Harvey and promised to indemnify Design Labs and Fields
against any legal claims by Arista and Harvey.
Throughout February and March 1994, Fields and ADLE exchanged drafts of
contracts, and on March 14, 1994, Fields signed a contract whereby Fields
and Design Labs would help ADLE develop the VSR System so that it could
be integrated into VCRs. Pursuant to the contract, ADLE would pay Fields
the sum of $10,000 per month, and Fields would be able to work directly
with the VCR manufacturers. On March 15, 1994, Fields signed an agreement
with ADLE, promising to keep secret the existence of their March 14
From March through August 1994, Design Labs was working for Arista and
ADLE, though Arista was unaware that Design Labs was also working for
ADLE. During this five-month period, Design Labs disclosed to ADLE all of
the intellectual property Design Labs had acquired from Arista as a
result of working for Arista. In addition, Design Labs assigned to ADLE
all of their rights in patent applications that had been filed based on
Arista's intellectual property. On August 19, 1994, ADLE increased the
compensation to Design Labs to the sum of $25,000 per month. On August
20, 1994, Fields provided Arista with written notice that Design Labs was
terminating its work for Arista on the ground that it owed the company a
few thousand dollars.
On January 10, 1996, this Court granted ADLE's motion to compel
arbitration and stayed the court proceedings pending the arbitration
decision. In addition, the Court denied Arista's motion to amend the
complaint, with leave to renew following the arbitrator's decision
regarding the arbitrability of the respective claims.
On May 16, 1996, the arbitrator held that all of the claims were
arbitrable with the exception of those claims involving the validity of
various patents. In August 1996, Arista renewed its motion to amend the
complaint. In a letter, dated February 5, 1997, the Court directed that
the motion be withdrawn, without prejudice and with leave to renew after
a decision by the arbitrator.
On July 29, 1997, the arbitrator held that although Arista materially
breached the license by failing to pay royalties, neglecting to put
ADLE's patent number on the technology, and failing to disclose certain
technological advances, ADLE must pay Arista approximately $700,000 for
the technology it appropriated from Arista without repaying their costs.
The arbitrator did not find that ADLE had committed fraud, breached the
license, misappropriated Arista's technology, tortiously interfered with
the contract, or violated Massachusetts law. After the Award of
Arbitration was issued, Arista and ADLE requested reconsideration and
modification on various different grounds. In response, the arbitrator
issued a Supplemental Order on August 15, 1997, and a Modified Award on
December 17, 1997 (all three awards collectively will be referred to as
the "Arbitration Award").
On November 13, 1998, the Court granted ADLE's motion to confirm the
Arbitration Award and directed the Clerk of the Court to close the case.
See Arista v. Arthur D. Little Enterprises, Inc., 27 F. Supp.2d 162
(E.D.N.Y. 1998). On November 12, 1999, the Court granted Arista's motion
to amend the complaint and directed the Clerk of the Court to re-open
the case, but denied Arista's motion for a permanent injunction.
Arista alleges five counts in its Amended Complaint. In the first
count, Arista claims that Iggulden breached his contract with Arista by
failing to render any services of value to the plaintiff and breached its
implied covenant of good faith and fair dealing by intentionally and
maliciously harming Arista. As a second count, Arista alleges fraud and
fraudulent non-disclosure by Iggulden on the grounds that (1) Iggulden
falsely described the quality, nature, and extent of the services he was
providing Arista, and Arista continued to pay Iggulden based on those
false representations; (2) Iggulden facilitated the secret diversion of
Arista's intellectual property from Design Labs to ADLE; and (3) Iggulden
knew that ADLE planned to launch a competitive product on the same date
that Arista launched "Commercial Brake" but failed to disclose this fact
in violation of the implied covenant of good faith and fair dealing in
the IMA contract. In the third count, Arista claims fraudulent
non-disclosure by Design Labs, which Arista alleges failed to inform it
that Design Labs was performing competing work for ADLE. In its fourth
cause of action, Arista claims that Design Labs breached its contract
with Arista, because Design Labs agreed to assign all of its inventions
to Harvey and Arista and to keep Arista's intellectual property and trade
secrets confidential, but Design Labs failed to do so. As a fifth cause
of action, Arista seeks a judgment declaring the "091 Patent belonging to
ADLE to be void and invalid.
Presently before the Court are (1) a motion to dismiss Count II of the
Amended Complaint by defendants Iggulden and IMA on the ground that it
fails to plead fraud with the particularity required by Federal Rule of
Civil Procedure 9(b); (2) a motion to dismiss the Amended Complaint by
defendant Design Labs; (3) a cross-motion to for leave to file a Second
Amended Complaint by plaintiff Arista; and (4) a motion to dismiss the
Section Amended Complaint by defendant ADLE.
A. Motion to Dismiss Count II of the Amended Complaint by Defendants
Iggulden and IMA for Failure to Plead Fraud With Particularity
Arista raises two claims in Count Two of the Amended Complaint: a
fraudulent misrepresentation claim (see Amended Complaint ¶ 75), and
a fraudulent nondisclosure claim (see Amended Complaint ¶ 76). In
their original motion papers, Iggulden and IMA moved to dismiss both
claims. However, at oral argument held on December 22, 2000, Iggulden and
IMA withdrew their motion to dismiss the fraudulent nondisclosure claim.
Accordingly, the Court addresses only the motion to dismiss the
fraudulent misrepresentation claim.
When pleading a claim for fraud or misrepresentation, the plaintiff
must aver the alleged fraudulent acts with particularity as required by
Rule 9(b) of the Federal Rules of Civil Procedure. See Luce v.
Edelstein, 802 F.2d 49, 54 (2d Cir. 1986); Asdourian v. Konstantin,
77 F. Supp.2d 349, 353 (E.D.N.Y. 1999). To satisfy the particularity
requirement of Rule 9(b), the "the complaint must allege the time,
place, speaker, and sometimes even the content of the alleged
misrepresentation." Ouaknine v. MacFarlane, 897 F.2d 75, 79 (2d Cir.
1990); Di Vittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242,
1247 (2d Cir. 1987); Luce, 802 F.2d at 54.
Although "knowledge" and "condition of mind" may be stated in general
terms (see Fed.R.Civ.P. 9(b)), "the relaxation of Rule 9(b)'s
specificity requirement for scienter `must not be mistaken for license to
base claims of fraud on speculation and conclusory allegations.'" Shields
v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994) (quoting
O'Brien v. National Property Analysts Partners,
936 F.2d 674, 676 (2d Cir. 1991)); Ouaknine, 897 F.2d at 79-80. Thus,
allegations of scienter are sufficient when they are "supported by facts
giving rise to a `strong inference' of fraudulent intent." Ouaknine, 897
F.2d at 80; see Shields, 25 F.3d at 1128; O'Brien, 936 F.2d at 676. The
"strong inference of fraud," in turn, may be established either "(a) by
alleging facts to show that defendants had both motive and opportunity to
commit fraud, or (b) by alleging facts that constitute strong
circumstantial evidence of conscious misbehavior or recklessness."
Shields, 25 F.3d at 1128 (citing In re Time Warner Inc. Securities
Litig., 9 F.3d 259, 268-69 (2d Cir. 1993)); Beck v. Manufacturers Hanover
Trust Co., 820 F.2d 46, 50 (2d Cir. 1987).
After examining the Amended Complaint and hearing oral argument, the
Court finds that Arista has adequately pled fraud with respect to only
one statement allegedly made by Iggulden. The Amended Complaint states
the following ...