United States District Court, S.D. New York
CHARLES LIPSON, DOUG POTOLSKY, SAMUEL COOPER and STEVE ISRAEL, Plaintiffs,
UP, INC. and CHRISTOPHER J. JEFFERY, Defendants.
OPINION & ORDER
M. WOOD United States District Judge.
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.
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.
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. 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.
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.
promotional brochure stated that the company's goal was
to be acquired by a conglomerate within three to five years.
Id. ¶ 14.
March 2014 Email
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.
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,
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.
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.
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%
August of 2014, the venture capital firm Revolution Ventures
and former LivingSocial president Tim O'Shaughnessy
invested $7 million into OrderUp. Id. ¶ 76.
Nearly a year later, on July 16, ...