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Scm Group, Inc v. Mckinsey & Company

March 28, 2011


The opinion of the court was delivered by: Paul G. Gardephe, U.S.D.J.:


This action concerns a fee dispute arising from an alleged 1994 oral agreement between Plaintiff SCM Group, Inc. and Defendant McKinsey & Company, Inc. The Amended Complaint pleads claims for unjust enrichment and breach of contract. McKinsey has moved to dismiss the Amended Complaint under Federal Rule of Civil Procedure 12(b)(6). For the reasons stated below, McKinsey's motion to dismiss will be granted.


SCM, a Missouri corporation with its principal place of business in Michigan, is a management consulting firm founded and owned by sole shareholder Robert Schmidt, formerly an executive at First National Bank and American Express. (Am. Cmplt. ¶¶ 1, 6-7) McKinsey, a management consulting firm, is a New York corporation with its headquarters in New York. (Id. ¶¶ 2, 10, 26)

In the fall of 1994, Peter Flaherty, a senior McKinsey managing director, met with Schmidt in New York to discuss McKinsey's interest in developing a new long-term investment product. (Id. ¶¶ 8, 12, 20-21) Flaherty was then the chair of the investment board for the McKinsey Investment Office ("MIO"), a captive investment unit at McKinsey that manages private assets for McKinsey's managing directors. (Id. ¶¶ 14, 20) The MIO invests largely in private hedge funds that it creates and manages. (Id. ¶ 16)

During the fall 1994 meeting, Flaherty told Schmidt that the MIO was interested in developing a new investment vehicle for McKinsey's investor directors. Because short term trading generated much of the MIO's returns, and thus was taxed as ordinary income, the directors' MIO investments resulted in high annual tax liability. (Id. ¶¶ 19-23) The MIO sought an investment product that "mimicked the investing flexibility and returns of private hedge funds" but that offered "the tax privileged status of certain insurance products." (Id. ¶ 22) Flaherty allegedly told Schmidt, during the fall 1994 meeting, that the MIO "was prepared to invest [] $100 million of [the] MIO's portfolio into such a new tax-deferred hybrid financial product." (Id. ¶ 23) Schmidt agreed to "think about" the product Flaherty described, and to contact him later. (Id.)

Schmidt arranged a second meeting to discuss the hybrid financial product Flaherty sought. This second meeting, attended by Flaherty and Roger Kline, another senior McKinsey director, took place at McKinsey's New York headquarters. (Id. ¶ 26) At this meeting, Flaherty and Kline again expressed interest in having Schmidt and SCM develop the hybrid financial product that had been discussed, and Schmidt agreed to do so. (Id. ¶¶ 27-28) Schmidt explained that he believed a private placement variable annuity would satisfy the MIO's needs. (Id. ¶¶ 30-31) Flaherty and Kline agreed that Schmidt should explore the variable annuity idea on McKinsey's behalf, and Schmidt "stated that he would begin researching and identifying prospective insurance companies immediately." (Id. ¶¶ 36-37) At this meeting, Flaherty and Kline represented that the MIO would invest $100 million in the new hybrid financial product "soon after its launch." (Id. ¶ 38)

At this second New York meeting, Flaherty, Kline, and Schmidt also discussed SCM's compensation for developing the new investment product for the MIO. (Id. ¶ 40) Schmidt "proposed a flat fee together with a percentage of the amount invested by the MIO in the product to be developed by SCM." (Id. ¶ 41) Although the specifics of SCM's compensation were not discussed, Flaherty and Kline "generally agreed with Mr. Schmidt's concept for SCM's fee." (Id. ¶ 42)

Schmidt and SCM then began work on developing a variable annuity product, identifying insurance companies that could provide the necessary "platform." (Id. ¶¶ 43-55) SCM prepared a request for proposal ("RFP") -- reviewed and approved by McKinsey -- which it sent to thirty insurance companies. The RFP stated, inter alia, that the amount of McKinsey's "initial investment would be at least $100,000,000." (Id. ¶¶ 45, 47) The Amended Complaint alleges that the $100 million initial investment was "the only factor that made it feasible for the prospective insurance companies" to participate and for "SCM to provide its extensive services." (Id. ¶ 49)

While Schmidt searched for an appropriate insurance company partner, he also further discussed SCM's compensation with Richard Moskowitz, the MIO's manager. (Id. ¶¶ 15, 29, 56) "In reliance on McKinsey's repeated commitment to initially fund the Variable Annuity with $100,000,000, Mr. Schmidt proposed a flat fee of $110,000 (including expenses) plus an 'elevator ride' equal to 3 basis points (or 3/100ths of one percentage point) of the money invested in the Variable Annuity pool." (Id. ¶ 57) Moskowitz allegedly "indicated that Mr. Schmidt's [fee] proposal was reasonable, and accepted the terms." (Id. ¶ 58)

On February 1, 1995, at a meeting attended by Schmidt and Moskowitz, SCM and McKinsey advised Security Benefit Life Insurance Company ("SBL") that it had been selected to develop the variable annuity product. (Id. ¶¶ 60, 65) Over the next year and a half, SCM, SBL, and McKinsey worked to prepare the variable annuity for introduction to McKinsey's directors. (Id. ¶¶ 66-69)

On March 11, 1997, McKinsey, SBL, and certain of their subsidiaries entered into three agreements which govern the marketing of the variable annuity to McKinsey directors as well as the parties' "overall relationship" (the "McKinsey Agreements"). (Id. ¶ 75; see also Declaration of Karin A. DeMasi in Support of Defendant's Motion to Dismiss ("DeMasi Decl."), Ex. 3 (Product Development and Master Agreement); Ex. 4 (Administrative Services Agreement); Ex. 5 (Advisory Agreement)).*fn1 SCM is not a party to the McKinsey Agreements. (DeMasi Decl., Ex. 3 (Product Development and Master Agreement); Ex. 4 (Administrative Services Agreement); Ex. 5 (Advisory Agreement))

On June 2, 1997, when the variable annuity was ready for launch, SCM and SBL entered into a "Consulting Agreement." (Am. Cmplt. ¶ 74; DeMasi Decl., Ex. 6 (Consulting Agreement) at 1) The Consulting Agreement notes that SBL has entered into the McKinsey Agreements and that SCM has "provided consulting services to [SBL] relating to the creation of the McKinsey Agreements." (DeMasi Decl., Ex. 6 (Consulting Agreement) at 1) The Consulting Agreement further recites that "[SBL] and SCM desire that SCM be available to provide certain services to [SBL] from and after the date of this Agreement." (Id. at 1) The Consulting Agreement expressly acknowledges, however, that "SCM is not a party to the McKinsey Agreements." (Id. at § 6(b)). With respect to SCM's fee, the Consulting Agreement provides that SBL will pay SCM a fee "equal, on an annual basis to .03% (3 basis points) of the average daily net assets of all accounts which support [the group variable annuity contract]." (Id. at § 2) Fees are to be paid "within: (i) sixty (60) days after the end of each calendar quarter; or (ii) 15 days of the date [SBL] receives payment from McKinsey, whichever is later." The first payment was scheduled for the calendar quarter ending June 30, 1997. (Id.) The Amended Complaint alleges that the fee described above is "the same fee that Mr. Schmidt had proposed to McKinsey, and that McKinsey had accepted, as SCM's fee for its work" in developing the variable annuity. (Am. Cmplt. ¶¶ 77, 79) By its terms, the Consulting Agreement terminates on March 17, 2007. (Id. ¶ 81; DeMasi Decl., Ex. 6 (Consulting Agreement) at § 5)

The Amended Complaint alleges that McKinsey "breached its commitment to fund the Variable Annuity at $100,000,000 soon after its launch [in June 1997]." (Am. Cmplt. ¶ 82) "[B]y December 1997, six months after the Variable Annuity was eligible for investments, McKinsey had allocated only $13.7 million from [the] MIO to the Variable Annuity." (Id. ¶ 83) By June 2000, three years after launch, "McKinsey had allocated only $36.3 million to the Variable Annuity." (Id. ¶ 84) "It was not until March of 2006, more than nine years after the Variable Annuity was launched, that the Variable Annuity reached the $100,000,000 level." (Id. ¶ 85) SCM alleges that the McKinsey directors participating in the variable annuity program have reaped "extraordinary, tax deferred, results." (Id. ¶ 86)

Between early 2007 and mid-2009, Schmidt met with a number of McKinsey directors to complain that -- because McKinsey had "failed to fund the Variable Annuity as anticipated" -- SCM would not be fairly compensated for the services it had rendered. (Id. ¶¶ 90-92) Although Kline allegedly told Schmidt "that McKinsey would make good on its promise to compensate SCM based on McKinsey's original funding representations," this promise was not fulfilled. (Id. ¶¶ 93-96) SCM filed this action on March 17, 2010.


The Amended Complaint sets forth causes of action for unjust enrichment and for breach of contract, based on SCM's contention that the parties intended that SCM be a third-party beneficiary of the McKinsey Agreements. McKinsey has moved to dismiss on numerous grounds, including that SCM's claims are time-barred; that SCM's unjust enrichment claim is precluded by the Consulting Agreement; that McKinsey did not breach any of the McKinsey Agreements; and that SCM is not a third-party beneficiary of the McKinsey Agreements.


"To survive a motion to dismiss, a claim must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "In considering a motion to dismiss . . . the court is to accept as true all facts alleged in the complaint," Kassner v. 2nd Ave. Delicatessen Inc., 496 F.3d 229, 237 (2d Cir. 2007) (citing Dougherty v. Town of N. Hempstead Bd. of Zoning Appeals, 282 F.3d 83, 87 (2d Cir. 2002)), and must "draw all reasonable inferences in favor of the plaintiff." Id. (citing Fernandez v. Chertoff, 471 F.3d 45, 51 (2d Cir. 2006)).

A complaint is inadequately pled "if it tenders 'naked assertion[s]' devoid of 'further factual enhancement,'" Iqbal, 129 S. Ct. at 1949 (quoting Twombly, 550 U.S. at 557), and does not provide factual allegations sufficient "to give the defendant fair notice of what the claim is and the grounds upon which it rests." Port Dock & Stone Corp. v. ...

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