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@Wireless Enterprises, Inc. v. AI Consulting

October 30, 2006


The opinion of the court was delivered by: Charles J. Siragusa United States District Judge



This is an action for breach of contract and related state-law torts, over which the Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1332. Now before the Court are motions [#19][#23] to dismiss the third-party complaint by third-party defendants Cellco Partnership, doing business as Verizon Wireless ("Verizon"), and 5Linx ("5Linx"), respectively. For the reasons that follow, Verizon's motion is granted, 5Linx's motion is granted in part and denied in part, and AI is given limited leave to re-plead as set forth below.


Unless otherwise noted, the following facts are taken from the Third Party Complaint ("TPC") in this action, and the underlying agency agreement between plaintiff @Wireless Enterprises, Inc. ("@Wireless") and Verizon.*fn1 At all relevant times, Verizon was a wireless communications service provider, which sold cellular radio service and equipment through its own retail stores, as well as through agents. @Wireless sold cellular communications services. In August 2000, Verizon and @Wireless entered into an "Authorized Agency Agreement," in which Verizon appointed @Wireless as a "non-exclusive sales agent" for Verizon's cellular radio service. The agreement provided that @Wireless could delegate its obligations under the contract to "a subcontractor or sub-agent," by written contract, subject to the express written approval of Verizon. The agreement further stated:

"Personnel employed by, or acting under the authority of, Agent shall not be or be deemed to be employees or agents of Verizon Wireless, and Agent assumes full responsibility for their acts and shall have sole responsibility for their supervision and control." (Agency Agreement § 2)

As part of the agreement, @Wireless agreed to certain restrictions on its ability to sell Verizon's products and the products of Verizon's competitors. For example, @Wireless agreed that it would sell Verizon's products only within specified geographic areas. The agreement further stated that the parties could terminate the agreement under certain conditions. For example, the agreement stated that Verizon could "immediately terminate" the agreement upon written notice to @Wireless, if @Wireless breached the agreement. (Id. § 9.1.1) As to that, the agreement also stated that, "[u]pon termination of this Agreement for any reason, all rights and privileges granted to Agent hereunder shall immediately terminate." (Id. § 7.9.2)

Exercising its right to hire sub-agents, @Wireless entered into a franchise agreement with third-party plaintiff AI Consulting ("AI") in March 2002, in exchange for a $145,000 franchise fee payment from AI to @Wireless. Subsequently, AI operated a retail outlet as an @Wireless franchisee in Southington, Connecticut. During the course of the business relationship between AI and @Wireless, AI dealt directly with third-party defendant Craig Jerabeck ("Jerabeck"), who was at all relevant times President of @Wireless. According to AI, Jerabeck told AI that he would "protect the interests of AI." (TPC ¶ 14)

Unbeknownst to AI, between 2002 and 2004, @Wireless repeatedly breached the agreement with Verizon by, for example, selling products and services of Verizon's competitors. Although Verizon gave @Wireless numerous opportunities to cure the breaches, @Wireless continued to breach the agreement. AI contends that third-party defendant 5Linx, of which Jerabeck was the President and sole shareholder, and which was "affiliated" with @Wireless, also made unauthorized sales of Verizon's products on its website during this period. Verizon complained to Jerabeck about the actions of both @Wireless and 5Linx, and, according to AI, Jerabeck indicated that @Wireless and 5Linx would cease making unauthorized sales. AI contends, however, that Jerabeck lied, and that both @Wireless and 5Linx continued as before. Jerabeck did not inform AI of these unauthorized sales by @Wireless and 5Linx, or of the resulting problems with Verizon. For example, Jerabeck did not inform AI that, in July 2004, Verizon had notified @Wireless that it was in breach of the agreement and that Verizon had decided to terminate the agreement. Instead, on or about September 10, 2004, Jerabeck sent an email to AI, informing it only that @Wireless was in the process of negotiating a new contract with Verizon, which would not affect AI's "day to day operations."

Verizon stopped providing service to @Wireless and @Wireless's franchisees, including AI, on or about September 16, 2004. Verizon also simultaneously commenced an action against @Wireless in the United States District Court for the District of New Jersey. @Wireless then sued Verizon in New York State Supreme Court, Monroe County, on or about September 21, 2004. @Wireless and Verizon subsequently settled the lawsuits and terminated their agreement. As a result, @Wireless and its franchisees, including AI, could no longer lawfully sell Verizon products. A short time later, Verizon opened a competing retail store "almost immediately adjacent" to AI's business. AI then commenced an action against Verizon, @Wireless, 5Linx, and Jerabeck in the United States District Court for the District of Connecticut. However, AI later voluntarily discontinued the action.

Subsequently, @Wireless commenced the subject proceeding against AI, seeking monies allegedly owed pursuant to the parties' franchise agreement. AI then commenced the subject third-party action against Jerabeck, 5Linx, and Verizon. In the TPC, AI purports to state 23 separate causes of action. AI alleges eight causes of action against Jerabeck, for: 1) constructive fraud; 2) actual fraud; 3) constructive trust; 4) breach of contract; 5) breach of implied covenant of good faith and fair dealing; 6) interference with contractual relationship; 7) violation of New York State General Business Law ("GBL") § § 349-350; and 8) negligent misrepresentation. As to these claims, AI alleges that, at all relevant times, Jerabeck was the "President, Chief Executive Officer (CEO), owner and alter egos of @Wireless and 5Linx" (TPC ¶ 9), and that he intentionally and/or negligently made various false statements which induced AI to enter into and remain in the franchise agreement with @Wireless, caused @Wireless to breach the agreement with Verizon, and ultimately led to the demise of AI's business.

AI alleges the same eight causes of action separately against 5Linx, and in that regard, contends that 5Linx, @Wireless, and Jerabeck are alter egos, and that 5Linx ratified and approved Jerabeck's actions. Finally, AI asserts all but the negligent misrepresentation claim separately against Verizon. As for the claims against Verizon, AI contends, on one hand, that Verizon's decision to terminate the agreement with @Wireless had "nothing to do" with AI. Nonetheless, AI seeks to hold Verizon liable for its business losses, since the termination of that agreement "killed off" AI's business. AI further suggests that there was some dishonesty by Verizon involving the settlement of @Wireless's lawsuit in Supreme Court, Monroe County, because certain papers are allegedly missing from that court's file, and because Verizon and @Wireless allegedly "hid" the settlement from AI. Finally, AI alleges that it was somehow improper for Verizon to open a competing shop near AI's store, after Verizon had terminated the agency agreement with @Wireless.

Verizon and 5Linx subsequently filed the subject motions to dismiss the third-party complaint, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Jerabeck did not move against the complaint. 5Linx contends that the contractual claims, including the claim for contractual interference, must be dismissed, because 5Linx had no contract with AI, and because AI's allegations that 5Linx and @Wireless are "alter egos" are conclusory and fail to satisfy Rule 8 of the Federal Rules of Civil Procedure. 5Linx maintains that AI based its "alter ego" claim on the mere fact that Jerabeck was an officer and owner of both companies, and on hearsay statements contained in the complaint filed by Verizon against @Wireless in the aforementioned lawsuit in New Jersey, which was later settled.*fn2 5Linx states that the fraud and constructive fraud claims also fail, because they are not pled with particularity, and because the TPC does not adequately allege a basis to impute the actions of Jerabeck and/or @Wireless to 5Linx. 5Linx states that the constructive fraud claim similarly is insufficient because AI has not pled the existence of a confidential or fiduciary relationship between AI and 5Linx. 5Linx maintains that the New York General Business Law claims must be dismissed, because the TPC alleges neither false advertising nor any deceptive practice directed toward the public. Finally, 5Linx contends that the negligent misrepresentation claim is insufficient, since, again, AI has not sufficiently pled a basis to hold 5Linx responsible for Jerabeck's alleged misrepresentations.

As for Verizon's motion, Verizon contends that AI's contractual claims must fail, because there was no contract between them, and because AI had no rights as a third-party beneficiary of the contract between Verizon and @Wireless. Verizon states that the constructive fraud and constructive trust claims must fail because there was no confidential relationship between Verizon and AI, because Verizon made no representations to AI, and because AI transferred no property to Verizon. Verizon alleges that the tortious interference with contract claim must also be dismissed, because AI has not alleged that Verizon did anything improper to interfere with AI's contractual relationships, but rather, it alleges merely that Verizon terminated its contract with @Wireless and opened a competing shop, which Verizon maintains it was entitled to do. Verizon states that the claims pursuant to GBL § § 349 and 350 similarly must fail, since there is no allegation that Verizon engaged in false advertising or other deceptive trade practices, or that such deceptive practices resulted in harm to the public. Finally, Verizon contends that AI's fraud claims should be dismissed pursuant to Rule 9 of the Federal Rules of Civil Procedure, because they fail to state a claim and are not pled with particularity. As to that, Verizon states that the TPC fails to identify any particular fraudulent statement, fails to identify anyone at Verizon who allegedly made fraudulent statements, and fails to allege detrimental reliance by AI.

Counsel for the parties to the third-party action appeared before the undersigned for oral argument of the motions on October 12, 2006. The Court has now thoroughly considered the parties' submissions and the arguments of counsel.


Rule 12(b)(6) Standard It is well settled that in determining a motion under Fed. R. Civ. P. 12(b)(6), a district court must accept the allegations contained in the complaint as true and draw all reasonable inferences in favor of the nonmoving party. Burnette v. Carothers, 192 F.3d 52, 56 (1999), cert. denied, 531 U.S. 1052 (2000). The Court "may dismiss the complaint only if it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Id. (internal quotations omitted)(citing Conley v. Gibson, 355 U.S. 41, 45-46 (1957)). However, while the Court must accept as true a plaintiff's factual allegations, "[c]onclusory allegations of the legal status of the defendants' acts need not be accepted as true for the purposes of ruling on a motion to dismiss." Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1092 (2d Cir. 1995)(citing In re American Express Co. Shareholder Litig., 39 F.3d 395, 400-01 n. 3 (2d Cir.1994)). Moreover, and significantly, for purposes of the instant case, such "[g]eneral, conclusory allegations need not be credited . . . when they are belied by more specific allegations of the complaint." Id.

Choice of Law

The instant case involves events that occurred in both the State of New York and the State of Connecticut, and centers around an agreement containing a New York choice-of-law provision. The principles concerning a choice-of-law analysis are well settled:

A federal trial court sitting in diversity jurisdiction must apply the law of the forum state to determine the choice-of-law. In New York, the forum state in this case, the first question to resolve in determining whether to undertake a choice of law analysis is whether there is an actual conflict of laws. It is only when it can be said that there is no actual conflict that New York will dispense with a choice of law analysis.

Fieger v. Pitney Bowes Credit Corp., 251 F.3d 386, 393 (2nd Cir. 2001) (citations and internal quotations omitted). Accordingly, a court need only perform a choice of law analysis where there is an "actual conflict" between the law of two jurisdictions. Finance One Public Co. Ltd. v. Lehman Bros. Special Financing, Inc., 414 F.3d 325, 331 (2nd Cir. 2005). Such an actual conflict need not be outcome determinative. Id. at 331. Instead, an actual conflict exists where "the applicable law from each jurisdiction provides different substantive rules," the differences are "'relevant' to the issue at hand," and the differences "must have a 'significant possible effect on the outcome of the trial.'" Id. at 331 (citations omitted). In the instant case, the parties have cited the law of both the State of New York and the State of Connecticut, though they agree that there is no actual conflict between the law of the two states. Consequently, the Court will cite New York cases in this Decision and Order.

Contractual Claims

AI alleges that 5Linx and Verizon are each liable for breach of contract and breach of the warranty of good faith and fair dealing. To establish a claim of breach of contract under New York law, a plaintiff must show "(1) a contract; (2) performance of the contract by one party; (3) breach by the other party; and (4) damages." Rexnord Holdings, Inc. v. Biderman, 21 F.3d 522, 525 (2d Cir.1994) (citation omitted). Moreover, "[u]nder New York law, parties to an express contract are bound by an implied duty of good faith, but breach of that duty is merely a breach of the underlying contract." Fasolino Foods Co., Inc. v. Banca Nazionale del Lavoro, 961 F.2d 1052, 1056 (2d Cir. 1992) (citation and internal quotation marks omitted).

As to the claims against Verizon, AI alleges that Verizon "caused the breach in the provisions of the interlocking contracts existing between" AI, @Wireless, and Verizon, and also "violated a number of affirmative or implied representations" to AI. (TPC ¶ ¶ 38-39) However, despite AI's conclusory reference to "interlocking contracts," the complaint does not indicate any privity of contract between AI and Verizon. AI is not a party to the contract between Verizon and @Wireless. Nor is AI a third-party beneficiary of that agreement. As to any third-party beneficiary claims,

[a] party asserting rights as a third-party beneficiary must establish (1) the existence of a valid and binding contract between other parties, (2) that the contract was intended for his benefit and (3) that the benefit to him is sufficiently immediate, rather than incidental, to indicate the assumption by the contracting parties of a duty to compensate him if the benefit is lost.

State of California Pub. Employees' Retirement Sys. v. Shearman & Sterling, 95 N.Y.2d 427, 434, 718 N.Y.S.2d 256, 259 (2000) (citations omitted); see also, Port Chester Elec. Const. Co. v. Atlas, 40 N.Y.2d 652, 655, 389 N.Y.S.2d 327, 330 (1976) ("It is old law that a third party may sue as a beneficiary on a contract made for his benefit. However, an intent to benefit the third party must be shown, and, absent such intent, the third party is merely an incidental beneficiary with no right to enforce the particular contracts.")

It is well settled that sub-contractors and sub-agents are not third-party beneficiaries. See, Subaru Distrib. Corp. v. Subaru of America, Inc., 425 F.3d 119, 125 -126 (2nd Cir. 2005) ("Contract language referring to third parties as necessary to assist the parties in their performance does not therefore show an intent to render performance for the third party's benefit."); see also, Artwear, Inc. v. Hughes, 202 A.D.2d 76, 83, 615 N.Y.S.2d 689, 693 (1st Dept. 1994) ("This court and others have consistently held in instances where the contract in issue makes clear that a third party will be retained to assist in the performance by the promisee that such third parties are not intended beneficiaries of the main contract."); Brownell Steel, Inc. v. Great Am. Ins. Co., 28 A.D.3d 842, 813 N.Y.S.2d 550, 551 (3d Dept. 2006) ("[A] subcontractor is not normally a third-party beneficiary of the contract between the owner and the general contractor."); Capital Nat'l Bank of New York v. McDonald's Corp., 625 F.Supp. 874, 883 (S.D.N.Y. 1986) (Holding that a McDonald's ...

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