Opinion
04 Civ. 3723 (JSR).
February 23, 2005
MEMORANDUM ORDER
By order dated February 22, 2005, the Court granted plaintiffs' motion to dismiss certain of defendants' counterclaims and also granted plaintiffs' motion for summary judgment in their favor on their breach of contract claims (necessarily requiring in addition the dismissal of defendants' other, remaining counterclaims). This Memorandum Order will set forth the reasons for granting the motion to dismiss. A separate Memorandum Order, setting forth the reasons for granting the summary judgment motion, will issue shortly.
This action stems from a contract to license online rights for video games, a contract which each side claims the other breached. The allegations relevant to the motion to dismiss, as set forth in the defendants' Counterclaims or in portions of the Complaint not contested by defendants, are as follows:
In January of 2004, Atari, Inc. ("Atari") and Games, Inc. ("Games") signed an agreement under which Games would acquire certain assets, including the Internet domain name "Games.com," the website located at that address, and an exclusive license to offer online play of games owned by Atari's affiliate Atari Interactive, Inc. ("Atari Interactive") and Hasbro, Inc. ("Hasbro"). In consideration thereof, Games was, inter alia, to transfer 30,000 shares of its own stock to Atari, of which 10,000 shares could be redeemed by Atari for $1.025 million in cash by March 29, 2004. Games also was to make an additional payment of $3 million in cash by March 31, at which time it would acquire its exclusive licenses. See Complaint ¶¶ 33-34; Agreement, attached as Exhibit 1 to Complaint, at ¶¶ 14-15. Until this final payment was made, Games would have non-exclusive licenses. Complaint ¶ 36; Agreement ¶ 20.2. In the meantime, Atari was to operate the website, including placing advertising on it. Counterclaims ¶ 16.
On January 12, Games made the payments and transfers that were due immediately. Complaint ¶ 35. According to defendants, however, Atari never managed to place advertising on Games.com. Counterclaims ¶ 26. Even after Games devised a technique and instructed Atari employees how to utilize it, Atari, according to defendants, still did not place enough advertising on the site to meet its obligations, hampering Games's ability to generate advertising revenues. Counterclaims ¶¶ 27-29, 31. Meanwhile, the website continually crashed, preventing Games from showing it to potential investors. Counterclaims ¶¶ 30-32. Also, Atari did not provide Games with updated versions of Hasbro games, or with source codes for the Atari games, as were its obligations. See Counterclaims ¶¶ 34-36; Agreement ¶ 20.2. In general, Atari failed to cooperate in consummating the transaction in a timely way. Counterclaims ¶¶ 37-38.
Defendants assert, moreover, that Atari never intended to fulfill its obligations, and indeed, even as it signed the agreement, was already negotiating deals with other parties that were incompatible with Games's obtaining exclusive licenses. Counterclaims ¶¶ 57, 72-76.
Prior to its March 31 deadline to make its remaining payments, Games informed Atari that it believed Atari had failed to comply with the agreement. Counterclaims ¶¶ 35, 39. On March 31, however, the parties entered into a settlement agreement in which Games released Atari from any liability related to Atari's alleged non-performance to that point and agreed that Atari would not have further responsibility for updating the website. Counterclaims ¶ 41; Settlement, attached as Exhibit 2 to Declaration of Paul G. Gardephe, 9/17/04, ¶¶ 3(c), 4(a). In return, Games received an additional month, until April 30, to make its remaining payment of $3 million and to exchange $1.025 million for the redeemable shares. Complaint ¶¶ 50-53; Settlement ¶ 3(b).
Games never made these payments. Complaint ¶ 61. Instead, on April 28, 2004, it informed Atari that online versions of Scrabble were available elsewhere, a situation it said violated its exclusive rights to all online versions of Hasbro games. Counterclaims ¶ 49. After some further correspondence, Atari, on May 3, 2004, provided written notice of Games's breach of both the original agreement and the settlement agreement, and exercised its right to terminate the deal. Counterclaims ¶¶ 49-55. On May 17, Atari and the other plaintiffs filed their complaint, alleging trademark and copyright infringement, unfair competition and breach of contract. On June 16, defendants filed their counterclaims against all three plaintiffs. The counterclaims include breach of contract, both for violating the initial agreement and for violating the settlement agreement, breach of the implied obligations of good faith and fair dealing in connection with the same alleged conduct of plaintiffs, and unfair competition.
Against this background, plaintiffs filed a two-pronged motion to dismiss certain of the counterclaims. First, two of the plaintiffs — Atari Interactive and Hasbro — move to dismiss as to them the breach of contract claims and the claims relating to breaches of implied covenants. It is uncontested on the pleadings that Atari Interactive, while affiliated with Atari, is separate and distinct from Atari. Atari Interactive's parent corporation, Infogrames Entertainment, S.A., is the majority shareholder in Atari. See Complaint ¶ 11. Atari Interactive was originally spun off from Hasbro, and it continues to share many intellectual property assets with Hasbro, including the ones at issue in this suit. See Complaint ¶¶ 10-14. Atari Interactive is headquartered in Massachusetts, while Atari is headquartered in New York. Counterclaims ¶¶ 4-5. Most importantly, neither Atari Interactive nor Hasbro are parties to the Atari-Games agreement or settlement.
Under New York law, which both sides agree applies, the general rule is that "a non-signatory to a contract cannot be named as a defendant in a breach of contract action unless it has thereafter assumed or been assigned the contract." Crabtree v. Tristar Auto. Group, Inc., 776 F. Supp. 155, 166 (S.D.N.Y. 1991). Similarly, a non-signatory cannot be held liable for breach of the implied covenant of good faith and fair dealing, because there is no contract between the two parties under which to find such an implied term. Levine v. Yokell, 258 A.D.2d 296, 296-97 (N.Y.App.Div. 1999).
While it is true that a non-signatory can be named as a defendant if it "is in privity with the plaintiff or has assumed the obligations of the contract," ESI, Inc. v. Coastal Corp., 61 F. Supp. 2d 35, 73 (S.D.N.Y. 1999), neither Atari Interactive nor Hasbro is in privity with the defendants, nor have they assumed any obligations under the Atari-Games agreement. Although a non-signatory can also be named as a defendant if it is the alter ego of the signatory, see Int'l Customs Assocs. v. Ford Motor Co., 893 F. Supp. 1251, 1256-57 (S.D.N.Y. 1995) (collecting cases), the alter ego test is a stringent one, requiring, inter alia, that the non-signatory have no real identity independent of the signatory, not simply that the entities are closely related. Here, the Counterclaims include no allegations on which such a test could be met. Accordingly, all the counterclaims for breach of contract and for breach of the covenant of good faith and fair dealing must be dismissed as to Atari Interactive and as to Hasbro.
Defendants cite several cases establishing the uncontested fact that Hasbro and Atari Interactive are third-party beneficiaries of the contract. However, New York law treats the ability to sue on a contract and liability for being sued on a contract as distinct analyses. See, e.g., Abraham Zion Corp. v. Lebow, 761 F.2d 93, 103 (2d Cir. 1985).
Second, all plaintiffs move to dismiss the unfair competition counterclaims as to all of them.Under New York law, "the gravamen of a claim of unfair competition is the bad faith misappropriation of a commercial advantage belonging to another dilution by infringement or of a trademark or trade name or by exploitation of proprietary information or trade secrets." Eagle Comtronics, Inc. v. Pico Prods., Inc., 256 A.D.2d 1202, 1203 (N.Y.App.Div. 1998) Therefore, the party bringing the claim must own a trademark, trade name, trade secret or other proprietary information to misappropriate. Games claims that Atari misappropriated the labor and know-how of Games employees, who figured out how to place advertising on the Games.com Website, thus enriching Atari; but it does not allege that anything was unique about the Games.com website, or that Games employed any proprietary technique that could not have been provided by many other companies. The alleged misappropriation is therefore of Games's services, not its knowledge, and this will not support an unfair competition claim.
Defendants cite several cases that suggest that this tort is broader and covers any "misappropriat[ion] of the results of the labor, skill, and expenditures of another" when combined with "bad faith." Linkco, Inc. v. Fujitsu Ltd., 230 F. Supp. 2d 492, 500 (S.D.N.Y. 2002); see also Nat'l Basketball Ass'n v. Motorola, Inc., 105 F.3d 841, 851 (2d Cir. 1997) (stating that New York unfair competition law stands for "broader principle that property rights of commercial value are to be and will be protected from any form of commercial immorality"). But these statements are all dicta. Every case cited by the parties, including Linkco and Motorola, involves the misuse of trademarks, other intellectual property, or proprietary information. Indeed, even possessing proprietary information may not confer property rights for purposes of this tort when held informally without legal recognition. See Commercial Data Servers, Inc. v. IBM Corp., 166 F. Supp. 2d 891, 895 (S.D.N.Y. 2001) (finding that misappropriation of technological innovation stated no unfair competition claim since no patent had been issued).
Games's unfair competition claims also rest on a second theory, that Atari infringed rights held exclusively by Games. This facially meets the requirements of an unfair competition claim, as outlined above. According to Games, it already had exclusive rights to the online use of the games as of April 26, when it learned that other websites were offering the games online. Counterclaims ¶ 43.
However, an examination of the contract at issue reveals that Games never held such exclusive rights. The contract provides that Games would get exclusive rights to the online use of the games at issue only after making its final payment of $3 million, which admittedly never was made. See Agreement ¶ 11 (stating that license to use games would be non-exclusive until transfer date); id. ¶ 20.1 (stating that licenses would be assigned after full payment of the asset purchase fee and the minimum installment set forth elsewhere); id. ¶ 15(a) (defining minimum installment payment as, inter alia, $3 million in cash before March 31). Nothing in the March 31 settlement changes this situation. Because Games never had exclusive ownership of the assets in question, it cannot claim infringement of them.
The court may consider the contract without converting this motion into one for summary judgment because its "terms and effect are relied upon by the plaintiff in drafting the complaint." Gryl ex rel. Shire Pharms. Group PLC v. Shire Pharms., 298 F.3d 136, 140 (2d Cir. 2002).
For the foregoing reasons, all counterclaims against Atari Interactive, Inc. and Hasbro, Inc. are dismissed with prejudice, as is the counterclaim against Atari, Inc. for unfair competition. The counterclaims against Atari, Inc. for breach of contract and breach of the implied obligations of good faith and fair dealing are is decision, but do not survive plaintiffs' summary judgment motion, which, as noted above, will be the subject of a further Memorandum Order forthcoming shortly.
SO ORDERED.