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Lipson v. UP Inc.

United States District Court, S.D. New York

March 28, 2017

CHARLES LIPSON, DOUG POTOLSKY, SAMUEL COOPER and STEVE ISRAEL, Plaintiffs,
v.
UP, INC. and CHRISTOPHER J. JEFFERY, Defendants.

          OPINION & ORDER

          KIMBA M. WOOD United States District Judge.

         Charles Lipson, Doug Potolsky, Samuel Cooper, and Steve Israel (collectively, “Plaintiffs”) bring this securities fraud action against OrderUp, Inc. (“OrderUp”) and Christopher Jeffery (collectively, “Defendants”). Plaintiffs assert claims of fraudulent misrepresentations under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 (the “Exchange Act”), and Section 20(a) of the Exchange Act. Compl. ¶¶ 80-91, 92-94. Plaintiffs also plead common law fraud against both Defendants. Id. ¶¶ 95-99.

         Defendants move dismiss the Complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure, citing an enforceable release between parties, a lack of reliance, an absence of an actionable misrepresentation or damages, and seeking attorneys' fees. For the reasons stated below, because the release that the parties agreed to is enforceable, and accordingly bars the claims alleged in the Complaint, Defendants' motion is GRANTED in its entirety.

         I. BACKGROUND

         Plaintiffs are a group of early investors in Defendant OrderUp, an online restaurant ordering and delivery service. Compl. ¶ 1. Defendant Chris Jeffery and his Penn State classmate founded OrderUp to serve students in the College State region, before the company expanded to new collegiate markets across the country. Id. ¶¶ 12-13. Jeffery moved the business to Baltimore in 2009, in order to work on its expansion, where he was later introduced to Plaintiff Lipson, a Penn State alumnus interested in supporting Jeffery's burgeoning business. Id. ¶¶ 13-14. Lipson invested $350, 000 in the company in April of 2011. Id. ¶ 17. In turn, Lipson received a series of convertible notes, with the right to receive annual interest. Id. Lipson also had the right to convert his investment to equity equal to 10% if the company were to receive a venture capital investment of sufficient value within two years.[1] Additionally, if OrderUp were to change control or merge with another company, Lipson had the right to be paid out in cash, or convert his shares. Id. ¶ 18.

         In early 2012, Lipson invested another $150, 000 into OrderUp. Id. ¶ 22. Upon Lipson's recommendation, Plaintiffs Cooper, Potolsky, and Israel invested a collective $350, 000, for a total new investment of $500, 000. Id. All of these investments were also made in exchange for convertible notes, with a 10% premium in the event of an acquisition. MTD at 3. The convertible notes Lipson received in 2011 were set to mature in 2013, which he later extended to mature in February of 2015, and those received in 2012 were also set to mature in February of 2015.

         Jeffery's promotional brochure stated that the company's goal was to be acquired by a conglomerate within three to five years. Id. ¶ 14.

         A. March 2014 Email

         Jeffery sent OrderUp's investors an email on March 27, 2014, informing them of his wish to move forward with various new investors who promised to strategically revamp OrderUp's business. In order to do so, Jeffery needed to reach an agreement to buy out the notes that were set to mature in February of 2015. Doc. 16-7 at 1-2, Ex. G to MTD.

         The Complaint details various incidents leading up to the March 27, 2014 email, including Jeffery's meetings with potential investors, Compl. ¶¶ 36-37, 41, OrderUp's inability to go public or merge with a more successful restaurant delivery company, id. ¶¶ 44-46, 53, and the challenges that the merger of GrubHub and Seamless posed to OrderUp's ability to be an acquisition target. Id. ¶¶ 45-46. Specifically, the Complaint alleges that Jeffery met with various professionals with connections to LivingSocial Inc., an online company that offered daily coupon deals for restaurants, hotels, and products and services. Id. ¶¶ 37-38. Plaintiffs allege that Jeffery failed to disclose these connections-which would ultimately land OrderUp in the hands of Groupon, LivingSocial's primary competitor-when he approached Lipson about commencing an early buy-out of the investor's interests, and when he ultimately informed investors that he would be buying out their convertible notes. Id. ¶¶ 1, 43, 46, 59.

         In February of 2014, shortly before Jeffery's March 27, 2014 email, GrubHub issued an initial public offering (“IPO”). Id. ¶ 54. Jeffery's email begins by describing the implications of GrubHub's IPO for OrderUp. The good news, he states, is that the IPO “validated the industry as a successful marketplace, ” although GrubHub's success might prove it to be a formidable competitor. Doc. 16-7 at 1. Jeffery notes the company's recent business impediments: GrubHub previously declined to acquire OrderUp, due to OrderUp's unique business model of using local franchises to expand to various regional markets. Id. The email also states that Lipson's idea for OrderUp to follow GrubHub and go public was not possible, given OrderUp's revenue of under $5 million. Id.; see also Compl. ¶ 54.

         In order to “hit[] the ‘reset' button” with Jeffery's new investors, Jeffery wanted to buy out the original investors' 2012 notes at a premium of 10%, in advance of the maturity date in February of 2015. Doc. 16-7 at 2. The investors had three options: (1) have their notes bought out for their value with a 10% premium; (2) wait until February 2015 to be paid on the note's date of maturity, without the premium; or (3) wait for the option to convert their notes to equity in the event of an IPO, merger, or change of control, without the premium. Id. The second option bore the risk that the company would be unable to pay on the note, and the third option bore the risk that such a conversion option might never eventuate. Jeffery noted his worry that investors would lose interest if Plaintiffs delayed on agreeing to the note payout. Id.

         Lipson reached out to Jeffery on behalf of Plaintiffs, expressing surprise and disappointment at the company's forecast, and requesting a five-year warrant in the event OrderUp became successful one day. Compl. ¶¶ 65-66. Jeffery refused. Id. ¶ 67. The Complaint states that the investors doubted that Jeffery was telling the truth. Id. ¶ 68. Afraid of losing the value of their investments, Plaintiffs tendered their notes, and in doing so agreed to be bought out for their investments plus the 10% premium. Id.

         In August of 2014, the venture capital firm Revolution Ventures and former LivingSocial president Tim O'Shaughnessy invested $7 million into OrderUp. Id. ΒΆ 76. Nearly a year later, on July 16, ...


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