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Ecommission Solutions LLC v. CTS Holdings Inc.

United States District Court, S.D. New York

March 13, 2017

eCOMMISSION SOLUTIONS, LLC, Plaintiff,
v.
CTS HOLDINGS, INC. and CTS SYSTEMS, INC., Defendants.

          OPINION & ORDER

          KATHERINE B. FORREST, District Judge.

         On April 6, 2015, plaintiff, eCommission Solutions, LLC (“ECS”), commenced this diversity action against defendants, CTS Holdings, Inc. (“CTS Holdings”) and CTS Systems, Inc. (“CTS Systems, ” collectively, “CTS”). ECS's claims arise from a soured business arrangement and an unsuccessful acquisition attempt.

         ECS is in the business of collecting outstanding commissions for travel agents; in 2005 it contracted with a company (Dell Marketing, LP (“Dell”)) who in turn subcontracted to CTS, to provide, inter alia, certain invoicing services. Over time, ECS grew unhappy with CTS's services and determined that it would be best to acquire it. Negotiations ensued-but a transaction was never consummated. In this action, ECS claims, inter alia, that CTS made false statements to its clients, lied about data storage, misused ECS's proprietary information in order to compete with it, and then led it down the garden path with regard to CTS's intention to proceed with an acquisition. Finally, ECS alleges that after CTS rejected a letter of intent regarding an acquisition, Dell terminated its agreement, leaving ECS without CTS's subcontracted services. ECS alleges further that to make matters worse, Dell and CTS thereafter began to solicit its clients and made a number of misrepresentations in connection therewith. This lawsuit followed.

         ECS has asserted claims for promissory fraud, negligent misrepresentation, unfair competition, defamation, intentional interference with contractual relations, breach of contract, and unjust enrichment. For the reasons set forth, ECS's motion is GRANTED IN PART and DENIED IN PART.

         I. PROCEDURAL HISTORY

         This action was first commenced in New York State Court on March 26, 2015, by eCommission Solutions, LLC against CTS. The action was timely removed to federal court on April 6, 2015; an amended complaint was filed on May 29, 2015. (ECF Nos. 1, 13.)

         On August 5, 2015, CTS moved to dismiss all claims on virtually identical bases as those now before the Court, with the exception, inter alia, of arguments in support of dismissal of a Lanham Act claim. On March 25, 2016, the Court granted dismissal of that claim but allowed ECS to amend the complaint to allege diversity as a basis for subject matter jurisdiction. (ECF No. 40.) The Court did not reach the other asserted bases for dismissal.

         ECS filed its second amended complaint (“SAC”) on April 22, 2016. (ECF No. 41.) The instant motion to dismiss was brought on June 6, 2016, and was fully briefed as of June 27, 2016. (ECF Nos. 46, 48, 51, and 53.) This motion replicates the bases for dismissal raised in the 2015 motion practice. In support of its motion, CTS has provided two of the relevant agreements between the parties, the Data Entry and Reconciliation Services Agreement (ECF No. 47-1), and the January 19, 2015 Letter of Intent (ECF No. 47-2). In opposition, ECS argues that both are outside of the complaint and the Court should disregard them. ECS further argues that consideration of one of the agreements (the Data Entry and Reconciliation Services Agreement) would be improper because it is incomplete. Following transfer of this action to this Court, on December 2, 2016, the Court notified the parties that it was converting the motion to one pursuant to Rule 56 of the Federal Rules of Civil Procedure to allow consideration of CTS's arguments regarding the agreements. In light of such conversion, the parties were provided an opportunity to make additional arguments they deemed appropriate. The parties did so. (ECF Nos. 95, 100). This matter was fully submitted as of December 19, 2016. (ECF No. 100.)

         II. BACKGROUND

         The following facts are drawn from the SAC.

         A. The Parties

         ECS is in the business of “collect[ing] and reconcil[ing] . . . commissions from hotels within the travel agency industry.” (Id. ¶ 12.) In practice, this means that ECS offers travel agencies a suite of services that helps them determine which commissions have been paid and which are outstanding. (Id. ¶¶ 12-14.)

         CTS Holdings and CTS Systems are separately incorporated under Delaware law; they each have a principal place of business in Georgia. (Id. ¶¶ 7-8.) ECS alleges that CTS Holdings is the “the principal and alter ego of defendant CTS Systems and stands in the shoes of CTS Systems in its dealings with ECS, ” but fails to allege facts supporting such a legal characterization. (Id. ¶ 9.) Carl Roberts (“Roberts”) is the President and Owner of CTS, (id. ¶ 62), and Mark Lewington (“Lewington”) is its CEO, (id. ¶ 31).

         B. The Eight-Year Business Relationship

         On March 11, 2005, a predecessor of ECS executed a Reseller Agreement with Perot Systems, Inc. (“PSI”), a predecessor of Dell Marketing, LP (“Dell”). (Id. ¶ 14.) Pursuant to the terms of this agreement, Perot Systems (later, Dell) contracted to provide services to assist ECS in delivering reconciliation and commission recovery services to its clients. (Id.) At some point, Perot Systems or Dell entered into a subcontract with CTS (the “Subcontract”). Pursuant to this agreement, CTS agreed to provide account receivables and invoicing services to ECS's clients and to operate a software platform to complement ECS's services. (Id. ¶ 15.)

         Both Dell and ECS compensated CTS for its services. (Id. ¶¶ 16-18.) For instance, ECS alleges that it “directly compensated CTS for World Payment Services [debt collection] and for CTS's services provided for ECS's clients, including but not limited to rental car transactions by Atlas Travel and Travel Leaders and all transactions for American Express Platinum Cruise.” (Id. ¶ 17.) But in certain instances, “ECS paid Dell, and Dell compensated CTS.” (Id. ¶ 18.)

         ECS alleges that starting in July 2010, CTS misrepresented its data security protocols. Specifically, Lewington, the CEO of CTS, is alleged to have told Paul Hoffmann (“Hoffmann”), the President and CEO of ECS, that “CTS stored its servers at ‘Peak 10, ' a secure data facility protected against catastrophes.” (Id. ¶ 31.) CTS further alleges that Lewington represented to ECS that CTS used Peak 10 “(a) in or around November 2011 in connection with ECS securing [another client]; and (b) in or around October 2010 and November 2013 in connection with ECS securing additional business from [an existing client].” (Id. ¶ 32.) ECS alleges that because CTS stored some of this data at its headquarters, rather than in a secure data facility, these statements were false. (Id. ¶ 35.)

         Next, ECS alleges that in 2011 it began experiencing a “substantial spike” in issues with some services CTS provided, leading to its loss of a major client and a need to make financial concessions to others. (Id. ¶¶ 19, 21.) According to ECS, in or around October 2013 and in response to the service problems, ECS, Dell, and CTS began negotiations to amend the Reseller Agreement. (Id. ¶ 46.)

         On February 27, 2014, CTS's headquarters were destroyed in a fire. (Id. ¶ 35.) ECS alleges that the fire destroyed information that CTS had represented was stored safely, and that the loss of this information adversely impacted its business. (Id. ¶¶ 36-39.) After the fire, ECS determined that “it could no longer rely on CTS” and abandoned the negotiations relating to the Reseller Agreement; it proposed that it acquire CTS instead. (Id. ¶ 47.)

         Thereafter, “in or around March 2014, the negotiations focused on the acquisition of CTS by ECS.” (Id. ¶ 48.) The negotiations continued via “numerous telephone calls, e-mails, and in-person meetings, ” and included discussions about the “terms of the acquisition and valuation methods.” (Id.¶ 49.)

         On or about October 8, 2014, ECS delivered to CTS a Letter of Intent (“LOI”) “for the acquisition of CTS;” CTS refused to execute the LOI. (Id. ¶ 52.) “[O]n or about December 10, 2014, ECS submitted a second Letter of Intent to CTS, ” consisting of “renegotiated terms.” (Id. ¶ 53.) In December 2014, ECS and CTS signed a nondisclosure agreement and shared documents relevant to the acquisition. (Id.)

         ECS alleges further that in January 2015, through “the course of numerous telephone calls and e-mails, ” “CTS reaffirmed its commitment to the acquisition.” (Id. ¶ 54.) In this regard, ECS alleges that, on December 11, 2014, Roberts, the President and Owner of CTS, “stated his commitment to the acquisition of CTS, ” and then a month later, on January 11, 2015, Roberts stated that he was comfortable with the terms and agreed that the parties should proceed to exchange due diligence requests to further the process of the acquisition of CTS by ECS. (Id. ¶ 70.) ECS further alleges that on January 19, 2015, “Roberts verbally agreed to the terms of the acquisition of CTS by ECS.” (Id.)

         Also, on January 19, 2015, “ECS provided CTS with executable copies of the final Letter of Intent reflecting the terms verbally agreed upon by ECS and CTS.” (Id. ¶ 53.) However, on January 27, 2015, “CTS informed ECS that CTS was no longer willing to proceed with the final Letter of Intent or the acquisition.” (Id. ¶ 56.) And on February 5, 2015, “Dell terminated its Reseller Agreement negotiations with ECS and notified ECS that Dell would not renew the Reseller Agreement, which purportedly expired on March 10, 2015.” (Id. ¶ 58.)

         C. The Alleged “Scheme to Steal Clients”

         After the acquisition fell through, ECS alleges that CTS tried to steal ECS's clients by (1) refusing to return data that was necessary to aid in the transition process following Dell's termination of the Reseller Agreement; (2) defaming ECS to ECS's clients; and (3) misusing information that belonged to ECS to solicit ECS's clients. (Id. ¶¶ 1, 60, 65.) ECS alleges that as a result of CTS's acts “some of [it's] clients have terminated their relationships [] and directly contracted with CTS.” (Id. ¶ 64.)

         Regarding the alleged defamation, ECS alleges the following: In February 2015, Roberts contacted ECS client Travel Leaders and told them “ECS would be unable to provide commissions reconciliation services to its clients without the input of CTS and Dell.” (Id. ΒΆ 62.) Roberts also suggested that ...


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