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.
B. Procedural History
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the motion be withdrawn, without prejudice and with leave to renew after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 in regard to Arista's fraudulent misrepresentation claim:
75. Iggulden made false representations about the
quality, nature, and extent of the services he was
providing Arista under the IMA Contract. In reliance
on those false representations, Arista continued to
make payments to Iggulden and was damaged thereby.
(Amended Complaint, ¶ 75). Although paragraph 75 refers to multiple
"false representations," the Amended Complaint describes only one
specific alleged misrepresentation by Iggulden. Arista alleges that on
August 18, 1993, Iggulden met with Arista to discuss Arista's marketing
plans for the January 1994 CES. According to Arista, at that meeting,
Iggulden told Arista that the purpose of the meeting was "`so that we are
all reading from the same script'" (Amended Complaint ¶ 54).
Clearly, this portion of the Amended Complaint, read together with
paragraph 75, alleges the date, speaker, place, and content of the alleged
misrepresentation. Ouaknine, 897 F.2d at 79; Di Vittorio, 822 F.2d at
1247; Luce, 802 F.2d at 54. Accordingly, Arista's allegation of fraud,
with respect to this statement only, satisfies the particularity
requirement of Rule 9(b).