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PetEdge, Inc. v. Garg

United States District Court, S.D. New York

February 10, 2017

PETEDGE, INC., Plaintiff,
v.
VIJAY GARG Defendant.

          MEMORANDUM OPINION AND ORDER

          GREGORY H. WOODS, United States District Judge

         In 2012, Plaintiff PetEdge, Inc. (“PetEdge”), a pet supply company, hired The Principal Consulting, Inc. (“TPC”) to implement a new software system that it had licensed from SAP America, Inc. According to PetEdge, TPC's work on this project was a “train wreck, ” resulting in millions of dollars of damages. TPC is not currently a party to this action. Instead, PetEdge and TPC have agreed to resolve their dispute in binding arbitration. In this action, PetEdge seeks to hold TPC's CEO, Vijay Garg, liable for its injuries on theories of fraudulent inducement, negligent misrepresentation, and breach of fiduciary duty. Mr. Garg has moved to dismiss PetEdge's second amended complaint. Because the second amended complaint strains to impose liability for acts in which Mr. Garg played no personal role and to impose duties on Garg where none are to be found, the motion to dismiss is GRANTED, and PetEdge's second amended complaint is DISMISSED in its entirety.

         I.BACKGROUND[1]

         A. The Facts Alleged

         PetEdge is a “small family owned pet supply company.” ECF No. 37, Second Am. Compl. (“SAC”) ¶ 1. In 2012, PetEdge embarked on a search for a new software system to replace its “aging and outdated legacy computer system.” SAC ¶ 5. After reviewing a number of competing products, PetEdge selected SAP America, Inc. (“SAP”) as its enterprise resource planning (“ERP”) software vendor. Id. As a general matter, ERP software “consists of numerous ‘applications' designed to perform a variety of tasks, including financial accounting, human resources, distribution planning functions, online store functions and billing functions.” SAC ¶ 5 n.1.

         During its search for new software vendors, PetEdge also sought a consultant with “extensive experience and expertise in installing and implementing SAP's software for catalogue businesses like PetEdge's.” Id. Included among the functionality set in the ERP software that PetEdge licensed from SAP were applications called Web Channel Experience Management (“WCEM”) and Customer Relationship Management (“CRM”). SAC ¶ 5. According to the second amended complaint, “[i]t was important to PetEdge that any consultant not only be knowledgeable about the scope and the deliverables required in an implementation of the SAP software generally but that the consultant had successfully implemented the SAP CRM and WCEM functionality PetEdge was licensing from SAP.” Id. PetEdge eventually engaged TPC―of which Defendant Vijay Garg is co-founder and CEO―to fill this consultant role. SAC ¶¶ 3, 13. This dispute arises out of TPC's efforts to secure this engagement, the negotiation of the contract and statement of work with PetEdge, and TPC's work for PetEdge.

         1. TPC's Sales Pitch

         Upon learning that PetEdge was seeking a third-party consultant to install and implement the SAP software, Garg “sent Brendon O'Malley and Mark Dooley to aggressively pitch TPC's services to PetEdge to induce PetEdge to purchase TPC's software consulting services.” SAC ¶ 6. O'Malley and Dooley “conducted numerous site visits to learn about PetEdge's needs and concerns and were aware of these needs and concerns.” Id. PetEdge alleges that it advised O'Malley and Dooley that it sought a consulting company that “had successfully implemented SAP's software generally and SAP WCEM and CRM in particular” and that “understood PetEdge's catalogue business model and the impact that unique business model would have on a software implementation.” SAC ¶ 7. PetEdge also informed them that it “had not been involved with an ERP implementation since 1997 and therefore had very limited experience with software implementations, lacked the knowledge or experience necessary to perform such a project by itself and would be relying on TPC's expertise, experience, advice, and guidance on even the most basic software implementation issues.” Id. “Throughout the pre-contract sales-cycle, Messrs. Dooley and O'Malley responded by representing that they understood each of PetEdge's concerns and touted the suitability of TPC's software consulting services for PetEdge's needs.” Id.

         PetEdge alleges that it made its specific business needs and requirements for the project clear during its pre-contract discussions with TPC and other potential vendors by providing a “Project Requirements” spreadsheet listing them in detail. SAC ¶ 12 & Ex. B-3. Examples of the requirements include: “Full integration of the CRM and WCEM functionality with the ERP system, ” “Implementing to match code functionality that would enable PetEdge to determine if a customer is new or duplicate, ” “Implementing ‘bounce-back' email tracking functionality, ” and “Implementing credit card payment and ship-to functionality.” SAC ¶ 12.

         According to the second amended complaint, Garg directed O'Malley and Dooley to “bill[] TPC as being a go-to SAP partner for SAP CRM, having team members with 10 years experience in SAP CRM, and having successfully upgraded nearly every combination and permutation of SAP CRM.” SAC ¶ 8. “With Garg's knowledge and at his direction, ” PetEdge alleges, they “positioned TPC as a leading expert in CRM components, technology and integration, and as having extensive experience in implementing Web UI and integrating Web Services, e-Selling, and e-Service.” Id.

         On August 30 and 31, 2012, O'Malley, Dooley, and other unspecified TPC employees met via telephone with Trish Keller, PetEdge's Vice President of IT, and Mark Dow, PetEdge's CFO, to discuss “the implementation of the SAP software, the scope of the SAP implementation project, the deliverables that TPC would provide, PetEdge's catalogue business model and the impact that business model would have on the implementation.” SAC ¶ 9. PetEdge alleges that this telephonic meeting was “part of Mr. Garg's scheme to defraud PetEdge.” Id.

         On October 3, 2012, O'Malley and Dooley traveled to PetEdge's Massachusetts office to meet with Keller and Dow in person. SAC ¶ 10. PetEdge alleges that, during this meeting, and “[a]t Mr. Garg's direction, ” they made mispresentations with respect to TPC's understanding of the SAP WCEM software PetEdge had licensed, TPC's understanding of the catalogue business model used by PetEdge, and the impact that business model would have on the deliverables, including modifications necessary to successfully implement the SAP software at PetEdge. Id.

         On October 4, 2012 and October 12, 2012, O'Malley and Dooley met with Keller and Dow again via telephone to “aggressively pitch TPC's consulting services to PetEdge.” Id. PetEdge again alleges that they did so “at Mr. Garg's direction.” Id.

         “Mr. Garg's representatives” also provided PetEdge with a budget for their services. According to the second amended complaint, however, PetEdge was unaware at the time that TPC's budget “was a wild guess that had no relation to the unique requirements of the implementation, the scope of the implementation or the deliverables that would need to be provided to meet PetEdge's business needs and requirements.” SAC ¶ 11.

         2. Negotiation of the Statement of Work and Signing of the Master Service Agreement

         Based upon the above representations―which PetEdge characterizes as misrepresentations―PetEdge began negotiating a contract with TPC. Id. On October 17, 2012, during negotiations of the Statement of Work (“SOW”), Garg allegedly “modified § 8 of the SOW naming himself as the “Consultant/Supplier Project Manager” for the project. SAC ¶ 12 & Ex. A (showing replacement of “xxxxx” with “Vijay Garg” in a track-changes version of SOW). The “Project Requirements” spreadsheet that had been shared with potential vendors during the search process was also attached to the SOW. SAC ¶ 12 & Exs. B-2, B-3. The SOW, including the version allegedly showing changes made by Garg, also contains the following representation: “Consultant/Supplier acknowledges and agrees that it has read the PetEdge Requirements Document attached hereto as an Appendix and agrees that the Deliverables shall comply in all respects with the PetEdge Requirements and that these requirements are within scope.” SAC ¶ 12 & Exs. A & B-2 (Art. 4).

         On October 22, 2012, PetEdge signed TPC's Master Service Agreement (the “Agreement”) and the associated SOW, with PetEdge's Requirements Document attached. SAC ¶ 13 & Ex. B.

         3. The Project Begins, and Problems Arise

         By December of 2012, it “became apparent to PetEdge that TPC was having difficulty implementing the SAP software and the SAP CRM and WCEM functionality, ” and PetEdge “became concerned with TPC's lack of competence.” SAC ¶¶ 15-16. In mid-December, PetEdge's Keller had a “pointed discussion” with TPC's Project Leader, Sreedhar Sambatur, about issues that PetEdge was experiencing with the implementation project and with TPC's provision of consulting services. SAC ¶ 15. As the implementation progressed, PetEdge also became concerned about “the failure of . . . Sambutar[] to even attend project meetings.” SAC ¶ 16. On December 19, 2012, PetEdge's Project Manager, Don Bacon, emailed Sambutar to request that he attend the project meetings, even if only by phone. Id. On the same day, Keller also emailed Sambutar to express her concern and to request that TPC “look into its other implementations of WCEM and CRM to find someone on [its] staff that understood PetEdge's catalogue business model.” Id. According the second amended complaint, TPC “was unable to do so.” Id.

         PetEdge alleges that TPC's failures continued, despite Keller's and Bacon's attempts to address the issues that had arisen. SAC ¶ 17. By February of 2013, Keller requested a call with TPC's Managing Director, Greg Kull, to discuss her concerns regarding “disconnects between the TPC team that initially ‘scoped' the implementation and the TPC team that was implementing the SAP software.” Id. During the call, she “pointedly advised Mr. Kull that she was raising a ‘yellow flag' and that failure was not an option.” Id. Kull allayed Keller's concerns, PetEdge alleges, by “assuring her that the project would be successful and that PetEdge was the perfect customer.” Id.

         The second amended complaint alleges that TPC's “failure to implement the SAP software” caused PetEdge to push back the implementation go-live date, and when it finally went live, it was a “complete failure.” SAC ¶ 18. The software lost and duplicated orders. Id. It also replicated surcharges and credit card authorizations. Id. Customers were unable to login to PetEdge's online store, unable to request new passwords, and unable to check out. Id. PetEdge alleges that this resulted in a 67% decline in its web volume and an approximately 45% decline in its SEO volume. Id.

         The second amended complaint also alleges that “TPC's failure to properly integrate WCEM, CRM and ECC resulted in thousands of orders getting stuck in the system and PetEdge unable to release them.” SAC ¶ 19.[2] Customers called “en masse” about missing orders, and in many cases, PetEdge “sent out replacement orders free of charge via next day air only to have the original order ultimately ship out.” Id.

         PetEdge further alleges that TPC “failed to properly configure CRM in accordance with PetEdge's business needs and requirements resulting in application crashes and lock ups that prevented PetEdge from taking customers' orders.” SAC ¶ 20. This required PetEdge to double its call center staff and send thousands of calls to an outside call center. Id. Even then, average hold times rose to 30 minutes with abandon rates in the 80% range. Id.

         These problems also allegedly resulted in PetEdge's system over-authorizing customers' credit cards and tying up all of their available credit, which caused customers to report PetEdge to the police. SAC ¶ 21.

         According to PetEdge, Garg was “fully aware of TPC's failures and the damage his misrepresentations were causing and would cause PetEdge, ” because he received weekly “project status reports” from November 2012 until at least April 2013 that “detailed the train wreck his misrepresentations had wrought on PetEdge's business.” SAC ¶ 14. Despite having received these reports, Garg “failed to advise PetEdge of the impending disaster it faced.” Id.

         4. TPC Walks Away from the Project

         PetEdge alleges that TPC initially attempted to assist with the “multiple problems that had resulted from Mr. Garg's scheme to defraud PetEdge, ” but that “the complexity of the project was too much for TPC.” SAC ¶ 22. As a result, TPC removed its consultants from the project, reduced support, and “simply walked away from the project leaving PetEdge to fend for itself.” Id. PetEdge was then “forced to look to third parties to assist it with the disaster that Mr. Garg's misrepresentations had caused.” Id.

         B. Procedural History

         PetEdge initiated this action on December 8, 2015 against TPC and Garg. ECF No. 1, Compl. In its initial complaint, PetEdge brought claims for breach of contract, breach of warranty, fraudulent inducement, negligent misrepresentation, and breach of fiduciary duty. Id. On February 16, 2016, the parties stipulated to the dismissal of the claims against TPC, and the Court granted PetEdge leave to amend its complaint. ECF No. 22. PetEdge filed its first amended complaint on March 1, 2016, naming only Garg as a defendant and bringing only claims for fraudulent inducement, negligent misrepresentation, and breach of fiduciary duty. ECF No. 24, First Am. Compl.[3] Garg moved to dismiss the first amended complaint on April 8, 2016. ECF No. 31. Rather than opposing the motion, PetEdge elected to amend its complaint once again, filing its second amended complaint on April 29, 2016. ECF No. 37, SAC.

         In its second amended complaint, PetEdge asserts claims against Garg for fraudulent inducement, negligent misrepresentation, and breach of fiduciary duty, seeking damages of at least $11, 000, 000. SAC ¶¶ 23-51. Garg moved to dismiss the second amended complaint in its entirety pursuant to Fed.R.Civ.P. 12(b)(6) on May 20, 2016. ECF No. 39, Mot. to Dismiss; ECF No. 40, Mem. of Law in Supp. of Mot. to Dismiss (“Def.'s Mem.”); ECF No. 41, Decl. of Evan Mandel in Supp. of Mot. to Dismiss (“Mandel Decl.”). PetEdge filed an opposition brief on June 17, 2016. ECF No. 44, Mem. of Law in Opp'n to Mot. to Dismiss (“Pl.'s Mem.”), and Garg filed a reply brief on June 24, 2016. ECF No. 45, Reply Mem. in Supp. of Mot. to Dismiss (“Def.'s Reply Mem.”); ECF No. 46, Decl. of Evan Mandel in Supp. of Mot. to Dismiss (“Mandel Reply Decl.”).

         II. DISCUSSION

         A. Choice of Law

         A federal court sitting in diversity must apply the choice of law rules of the forum state, which in this case is New York. See Licci ex rel. Licci v. Lebanese Canadian Bank, SAL, 672 F.3d 155, 157 (2d Cir. 2012).[4] Under New York choice-of-law rules, “the first step in any case presenting a implied consent is, of course, sufficient to establish the applicable choice of law.” Arch Ins. Co. v. Precision Stone, Inc., 584 F.3d 33, 39 (2d Cir. 2009) (quoting Golden Pac. Bancorp v. FDIC, 273 F.3d 509, 514 n.4 (2d Cir. 2001)); see also Guardian Life Ins. Co. v. Gilmore, 45 F.Supp.3d 310, 323 (S.D.N.Y. 2014) (collecting cases). “[I]n the absence of a strong countervailing public policy, the parties to litigation may consent by their conduct to the law to be applied.” Walter E. Heller & Co. v. Video Innovations, Inc., 730 F.2d 50, 52 (2d Cir. 1984).

         In his opening brief, Garg “consents to New York law being applied to this motion.” Def.'s Mem. at 7.[5] Garg also cites to New York law throughout his opening and reply briefs. Although PetEdge does not explicitly consent to the application of New York in its opposition brief, it does so implicitly by citing exclusively to New York law. See Pl.'s Mem. Because the parties' briefs rely on and indicate their assent to the application of New York law, and the Court has not identified a strong countervailing public policy, the Court will apply New York law to the tort claims at issue here.

         B. Legal Standard for Dismissal Pursuant to Rule 12(b)(6)

         Under Federal Rule of Civil Procedure 8(a)(2), a complaint must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Rule 8 “does not require detailed factual allegations, but it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). To survive a motion to dismiss pursuant to Rule 12(b)(6), a complaint “must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Iqbal, 556 U.S. at 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556). “To survive dismissal, the plaintiff must provide the ...


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