Opinion
NO. 1:05-CV-00732.
August 14, 2008
OPINION AND ORDER
This matter is before the Court on Defendants' Motion for Summary Judgment Regarding Liability (doc. 149), Plaintiff's Response in Opposition (doc. 169), and Defendants' Reply in Support (doc. 192). For the reasons stated herein, the Court DENIES Defendants' Motion.
I. Background
The following facts, drawn from the pleadings and motions, are summarized as follows. Plaintiff ATM Exchange, Inc. ("ATME" or "Plaintiff") is a business that has traditionally bought, refurbished, and resold older model ATMs (doc. 149). Defendants Visa USA, Inc. and Visa International Service Association, Inc. ("Defendants" or "Visa") are privately held "membership corporations" which are owned by member financial institutions ("Members") (doc. 169).
As part of the "payment card industry", Visa is concerned with the security of ATM transactions, including the protection of the four digit personal identification numbers ("PINs") associated with each individual's Visa or other payment card through encryption, as well as the physical security of the PIN entry device ("PED") (docs. 149, 169).
Prior to 1999, throughout the payment card industry, PIN security was maintained by use of an encryption algorithm known as Data Encryption Standard or "DES" (doc. 169). After that time, the payment card industry began to migrate towards using a new encryption algorithm called Triple DES ("TDES"). In January 2001, MasterCard took the lead in publishing new PIN and TDES requirements, instructing its members as follows:
• April 1, 2002 — All-newly installed ATMs, including replacements, must be "Triple DES" compliant.
• April 1, 2003 — All member and processor host systems must support "Triple DES."
• April 1, 2005 — All ATMs must be "Triple DES" Compliant (doc. 149).
In response to the change in the industry standards, Plaintiff began developing a TDES product that would upgrade existing ATMs to TDES capabilities and comply with the MasterCard security requirements (Id.). Plaintiff worked for several years to develop a TDES product which met the MasterCard standards, and in October, 2003, entered into a purchase agreement with Thales, an electronics manufacturing company, for the purchase of 2000 TDES products for $800,000 (Id.). However, in late 2003, Plaintiff abandoned this effort, in part because MasterCard did not establish a certification process (docs. 149, 169). Defendants state that the product developed during that period is essentially the same product at issue in this case (doc. 149). To the contrary, Plaintiff states that while ATME worked on a concept, it "never produced a product, not even a prototype, in connection with developing this concept to deal with the MasterCard TDES requirements" (doc. 169).
Visa also published updated security requirements for its Members. On May 8, 2002, Visa announced the dates by which all ATMs and other PIN entry devices ("PEDs") must be capable of supporting TDES encryption of customer PINs:
• Effective 1 January 2003, all newly deployed ATMs (including replacement devices) must support TDES
• Effective 1 January 2004, all newly deployed PEDs (including replacement devices) must support TDES (Id.).
Then, on August 19, 2003, Visa announced that, effective July 1, 2004, all Members must only deploy ATMs and cash dispensing machines which had been tested in a Visa-approved laboratory and approved by Visa as complying with its new ATM security requirements, or face penalties (Id.). On October 2, 2003, Visa published their new ATM requirements to the ATM vendor community through a Visa vendor website, stating for the first time that all vendors must submit their PIN entry devices to be tested against Visa's enhanced security requirements by one of three independent testing labs selected by Visa (Id.). The announcement stated:
New: Effective 01 July 2004, all newly deployed ATMs, and Cash Dispensing PIN acceptance device models (including replacement devices and encrypting PIN pads) must have passed laboratory testing by a Visa-recognized laboratory and be approved by Visa (doc. 146).
Thereafter, in mid-November, 2003, Visa released the technical specifications against which the devices would be tested in the lab (Id.). Plaintiff describes those requirements necessary to get Visa's ATM-specific security approval known as the "Class B" rating, pertinent to this action, as:
1. Encrypting PIN pad (EPP). This is a PIN pad into which a cardholder enters his/her PIN number and other transaction-related information. An EPP must encrypt PINs using the TDES algorithm to meet Visa's requirement;
2. Secure and effective (cryptographic) control of the ATM display. This required secure control of the ATM video display so that it was not possible to fraudulently change the screen displays so as to trick a customer into entering his or her PIN when the EPP was in a non-encrypting state (The so-called A2 requirement); and
3. A physical shield. This was intended to limit the viewing angle of the EPP so as to limit the ability of persons to observe the keys which a customer is pressing when entering his or her PIN on an EPP. (The so-called A6 requirement) (doc. 169).
Plaintiff states that while the requirement that an approved product have TDES encryption at the PIN pad was common to the MasterCard and Visa mandates, the cryptographically secure control of display (A2) and the privacy shield (A6) requirements were unique to Visa (Id.).
On December 18, 2003, Plaintiff's representatives Craig Payne, Kelly Horton, and Doug Grote, an employee of Thales, met with Visa personnel Robert Tang, Marc Cleven, Leon Fell, and Min Tran, employees of Visa International, and Stoddard Lambertson, Director of Enterprise Risk and Compliance, Visa USA, Inc., to discuss Plaintiff's development of a product, which Plaintiff called 3DES Plus(r), that could meet Visa's Class B approval (doc. 149). At the conclusion of this meeting, Defendants suggested that Plaintiff submit its product for a "security review," or a test run of 3DES Plus(r), by one of the approved testing laboratories (doc. 169). On January 22, 2004, Plaintiff submitted 3DES Plus(r) for a detailed security review in a Visa approved testing laboratory, T Systems, located in Germany (Id.). To meet Visa Class B approval, Plaintiff needed to add the cryptographically secure control of display (A2) and the privacy shield (A6) to the 3DES Plus(r) product (doc. 149).
Also in January, 2004, Visa employee Robert Tang sent an email to Doug Grote, an employee of Thales, which stated:
. . . I am constantly fielding inquiries about whether/when this company's TDES upgrade is approved by Visa. There is serious interest in our marketplace for a cost effective upgrade solution that passed Visa testing program. We certainly would like to see your product get a favorable evaluation as soon as possible. Do not hesitate to contact me again should you have further questions (doc. 149).
Plaintiff states that there were numerous conversations with Defendants about the progress of 3DES Plus(r) during the approval process, as reflected in several of Defendants' internal emails (doc. 169).
For example, Plaintiff cites an email date March 15, 2004 reporting the progress of vendor testing from Mark Cleven, stating "[w]e have had a number of conversations with [Plaintiff] because they are the first to take their product to the lab."
On March 31, 2004, Plaintiff and Thales executed a Change of Scope to the ATME-Thales Contract, to account for the modifications needed to make 3DES Plus(r) meet the Visa Class B approval specifications (doc. 149). These changes added $40,100 to the charge contemplated in the original contract between Plaintiff and Thales (Id.). Thales agreed, in this new agreement, that it would produce a Visa-only approved product, that it would hold off on production of 3DES Plus(r) until Visa approved the product, and that Plaintiff was not obligated to pay Thales for producing 3DES Plus(r) until Visa approved it (doc. 169).
On May 12, 2004, Robert Tang wrote to the President of ATME:
My colleagues, Marc Cleven, Leon Fell, and I would like to arrange for a conference call with ATM Exchange this Friday so that we can exchange some thoughts and questions regarding Class B and Class C approvals. This is to help ensure that your needs are fully met during the evaluation process (doc. 169).
On May 13, 2004, Defendant Visa International asked Plaintiff to provide the testing center, T Systems, with written authorization that would permit direct communication between Visa International and T Systems regarding 3DES Plus(r) during the testing process (Id.).
Other ATM vendors, including Diebold, Triton, and NCR, also worked to develop a product that would meet Visa's requirements (doc. 169). However, these companies were unable to meet the July 1, 2004 Visa deadline, and by March, 2004, began expressing their concerns to Visa, particularly over the A2 and A6 requirements (doc. 149). In March, 2004, Marc Cleven told Diebold, Triton, and NCR, that they were considering deferring the A2 and A6 ATM security requirements for at least two years (Id.). From March, 2004, to May, 2004, Marc Cleven and Robert Tang exchanged a series of emails with Diebold, confirming that the A2 and A6 requirements would be deferred (Id.). Defendants state that by May, 2004, "Visa became acutely aware that the large ATM manufacturers, relied on by many member banks and financial institutions, had not successfully completed Visa certification" (Id.). In May, 2004, Visa employee Leon Fell wrote to his colleagues that "NCR and Triton were close to getting ATMs approved, but since they were informed of the plan to defer, they aren't trying . . . anymore" (doc. 169). Plaintiff states that it was unaware of any plan to defer the Visa deadline (Id.). However, Plaintiff was aware that the other vendors had not secured Visa approval (doc. 169).
On June 24, 2004, Plaintiff received formal written Class B approval of 3DES Plus(r) from Visa, and was the only vendor to do so (Id.). Plaintiff was thereafter listed on the visa.com website under the Visa Pin Entry Device Approved List for 3DES Plus(r) (doc. 149). On June 25, 2004, Defendants announced that they were deferring the July 1, 2004 deadline and the associated security requirements for ATMs (Id.). In press releases and other marketing efforts after June 25, 2004, Plaintiff advertised their Visa approval (doc. 149). After Visa deferred the July 1, 2004 deadline, Plaintiff states that it was given repeated assurances that the deferral was temporary, and in November, 2004, was told that the requirements would be implemented in early 2006 (doc. 169). Eventually, Visa abandoned the Class B requirements completely (Id.).
On November 14, 2005, Plaintiff filed a complaint, making claims for (1) Promissory Estoppel; (2) Fraudulent Misrepresentation; and (3) Negligent Misrepresentation (doc. 1). Thereafter, Defendants filed the instant motion for summary judgment regarding liability on each of Plaintiff's claims (doc. 149).
II. Applicable Legal Standard
Although a grant of summary judgment is not a substitute for trial, it is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56; see also, e.g., Poller v. Columbia Broadcasting System, Inc., 368 U.S. 464 (1962);LaPointe v. United Autoworkers Local 600, 8 F.3d 376, 378 (6th Cir. 1993); Osborn v. Ashland County Bd. of Alcohol, Drug Addiction and Mental Health Servs., 979 F.2d 1131, 1133 (6th Cir. 1992) (per curiam). In reviewing the instant motion, "this Court must determine whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Patton v. Bearden, 8 F.3d 343, 346 (6th Cir. 1993), quoting in part Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986) (internal quotation marks omitted).
The process of moving for and evaluating a motion for summary judgment and the respective burdens it imposes upon the movant and the non-movant are well settled. First, "a party seeking summary judgment . . . bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact[.]"Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); see also LaPointe, 8 F.3d at 378; Guarino v. Brookfield Township Trustees, 980 F.2d 399, 405 (6th Cir. 1992); Street v. J.C. Bradford Co., 886 F.2d 1472, 1479 (6th Cir. 1989). The movant may do so by merely identifying that the non-moving party lacks evidence to support an essential element of its case. See Barnhart v. Pickrel, Schaeffer Ebeling Co., L.P.A., 12 F.3d 1382, 1389 (6th Cir. 1993).
Faced with such a motion, the non-movant, after completion of sufficient discovery, must submit evidence in support of any material element of a claim or defense at issue in the motion on which it would bear the burden of proof at trial, even if the moving party has not submitted evidence to negate the existence of that material fact. See Celotex, 477 U.S. 317; Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986). As the "requirement [of the Rule] is that there be no genuine issue of material fact," an "alleged factual dispute between the parties" as to some ancillary matter "will not defeat an otherwise properly supported motion for summary judgment." Anderson, 477 U.S. at 247-48 (emphasis added); see generally Booker v. Brown Williamson Tobacco Co., Inc., 879 F.2d 1304, 1310 (6th Cir. 1989). Furthermore, "[t]he mere existence of a scintilla of evidence in support of the [non-movant's] position will be insufficient; there must be evidence on which the jury could reasonably find for the [non-movant]." Anderson, 477 U.S. at 252; see also Gregory v. Hunt, 24 F.3d 781, 784 (6th Cir. 1994). Accordingly, the non-movant must present "significant probative evidence" demonstrating that "there is [more than] some metaphysical doubt as to the material facts" to survive summary judgment and proceed to trial on the merits. Moore v. Philip Morris Cos., Inc., 8 F.3d 335, 339-40 (6th Cir. 1993); see also Celotex, 477 U.S. at 324;Guarino, 980 F.2d at 405.
Although the non-movant need not cite specific page numbers of the record in support of its claims or defenses, "the designated portions of the record must be presented with enough specificity that the district court can readily identify the facts upon which the non-moving party relies." Guarino, 980 F.2d at 405, quoting Inter-Royal Corp. v. Sponseller, 889 F.2d 108, 111 (6th Cir. 1989) (internal quotation marks omitted). In contrast, mere conclusory allegations are patently insufficient to defeat a motion for summary judgment. See McDonald v. Union Camp Corp., 898 F.2d 1155, 1162 (6th Cir. 1990). The Court must view all submitted evidence, facts, and reasonable inferences in a light most favorable to the non-moving party. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986);Adickes v. S.H. Kress Co., 398 U.S. 144 (1970); United States v. Diebold, Inc., 369 U.S. 654 (1962). Furthermore, the district court may not weigh evidence or assess the credibility of witnesses in deciding the motion. See Adams v. Metiva, 31 F.3d 375, 378 (6th Cir. 1994).
Ultimately, the movant bears the burden of demonstrating that no material facts are in dispute. See Matsushita, 475 U.S. at 587. The fact that the non-moving party fails to respond to the motion does not lessen the burden on either the moving party or the Court to demonstrate that summary judgment is appropriate.See Guarino, 980 F.2d at 410; Carver v. Bunch, 946 F.2d 451, 454-55 (6th Cir. 1991).
II. Defendants' Motion for Summary Judgment Regarding Liability
In their motion for summary judgment regarding liability, Defendants contend that summary judgment is proper on each of Plaintiff's claims for promissory estoppel, fraudulent concealment, and negligent misrepresentation (doc. 149). The Court will address each argument seriatum.
A. Plaintiff's Promissory Estoppel Claim
Under Ohio's promissory estoppel doctrine, a promise that the promisor "should reasonably expect to induce action or forbearance on the part of the promisee or a third person and . . . [that] does induce such action or forbearance is binding" if one can avoid injustice only by enforcing the promise. The Andersons, Inc. v. Consol, Inc., 348 F3d 496, 503 (6th Cir.) (citing McCroskey v. Ohio, 456 N.E.2d 1204, 1205 (1983); Restatement (Second) of Contracts § 90 (1973)). To establish a claim of promissory estoppel, a plaintiff must prove: "[1] a promise, clear and unambiguous in its terms; [2] reliance [on the promise] by the party to whom the promise is made; [3] that the reliance was reasonable and foreseeable; and [4] that the party claiming estoppel was injured by the reliance." Id. (quoting Rigby v. Fallsway Equip. Co., Inc., 779 N.E.2d 1056, 1061 (2002); Connolly v. Malkamaki, No. 2001-L-124, 2002 WL 31813040, at *3 (Ohio App. Dec. 13, 2002)).
Defendants argue that Plaintiff has failed to establish each of the four elements necessary to sustain a claim for promissory estoppel (doc. 149).
1. Clear and unambiguous promise
Defendants contend that Plaintiff is unable to prove that Defendants made Plaintiff a "clear and unambiguous" promise (Id.). Defendants argue that "[t]his case presents, at most, a statement of future intentions, and not any specific manifestation of commitment" (Id., citing McCroskey, 456 N.E.2d at 1205; and Brown v. American Ecology Corp, 1997 U.S. App. LEXIS 15518, *2 (6th Cir. June 24, 1997), for the propositions that specific manifestations of commitment are necessary to establish a promise, and that announcements of future intentions do not constitute a "clear and unambiguous" promise). Defendants set forth four arguments in support of the contention that Visa's announcement of a deadline for members to deploy only lab-tested and Visa approved ATMS, and any communications encouraging Plaintiff to develop 3DES Plus(r), cannot constitute a "clear and ambiguous" promise necessary to establish a promissory estoppel claim (Id.).
First, Defendants argue that Visa's announcement contained no promise at all, much less a "clear and unambiguous" one (Id.). Defendants note that Visa did not state that the deadline would never be delayed, modified, or even canceled, thus making the Visa's announcement merely a statement of its intention to implement a change in requirements regarding member deployment of ATMs in the future (Id., citing in support Brown, 1997 U.S. App. LEXIS 15518, at *7; McCroskey, 456 N.E.2d at 1205).
Second, Defendants contend that Visa's announcement was not directed to ATM vendors like Plaintiff, but instead was plainly directed to "Members and their Agents" (Id.). Next, Defendants argue that Plaintiff cannot predicate its claim on any words of encouragement that Visa offered as Plaintiff proceeded with submitting its product for lab testing because these were not promises of anything (Id.).
Finally, Defendants contend that Plaintiff's promissory estoppel claim is erroneously based on implicit promises (Id.). Defendants state that "implicit promises are far too attenuated to establish the clear and unambiguous promise required to prove liability for promissory estoppel" (Id., citing The Andersons, Inc., 348 F.3d at 503-04; Brown, 1997 U.S. App. LEXIS 15518, at *7).
In response, Plaintiff argues that to the contrary, the record demonstrates that, at the very least, there exist genuine issues of material fact as to whether a clear and unambiguous promise was made (doc. 169). First, Plaintiff contends that Visa's ATM security requirements and testing deadline were directed to and intended for vendors like Plaintiff, as evidenced by Visa's vendor website which published the deadline, and the requirement that vendors, not members, submit their devices for Visa approval (Id.). Regardless, Plaintiff states that this argument is inapposite because under Ohio law, a third party who reasonably relies on a promise, not made directly to them, can bring a promissory estoppel claim (Id., citing Green v. Jackson National Life Ins. Co., 2006 U.S. App. LEXIS 21239 (6th Cir. 2006)).
Second, Plaintiff challenges Defendants' contention that their statements "simply [announced] an intention to act or refrain from acting" and therefore do not constitute a promise (Id.). Plaintiff argues that the Brown and McCroskey cases relied on by Defendants are distinguishable from the circumstances in this case, and that more closely on point is Bluegrass Center, LLC v. U.S. Intec, Inc., 2002 U.S. App. LEXIS 21277 (6th Cir. 2002) (doc. 169). Plaintiff contends that the Sixth Circuit inBluegrass Center found a promise established through actions and statements, similar to the encouragement and information Defendants provided to Plaintiff over a period of time regarding 3DES Plus® (Id.).
Further, Plaintiff argues that Defendants' statements and representations regarding the deadline and the new ATM security requirements easily constitute the requirement that a promise be "clear and unambiguous" (Id., citing Karnes v. Doctors Hosp., 51 Ohio St. 3d 139, 142 (1990)). Plaintiff first points to the statements posted on the Visa vendors website in October 2003, which outlined the July 1, 2004 deadline, and the new ATM security requirements, as proof of the clear and unambiguous representation made by Defendants (Id.). Likewise, Plaintiff details the communications and interactions with Defendants about 3DES Plus® and the deadline, which Plaintiff argues, together with Visa's security requirements "constituted a sufficiently `clear and unambiguous' representation or `promise' which is legally cognizable under Ohio law to support a claim based upon promissory estoppel" (Id.).
Thus, it is for the Court to determine whether Defendants made a promise "clear and unambiguous" on its face, a promise which Defendants should have reasonably expected to induce action or forbearance on the part of a promisee or a third person and . . . [that] did induce such action or forbearance. The Andersons, Inc. v. Consol, Inc., 348 F.3d 496, 503 (6th Cir.) (citing McCroskey v. Ohio, 456 N.E.2d 1204, 1205 (1983); Restatement (Second) of Contracts § 90 (1973)). A promise is defined in Restatement of the Law 2d, Contracts (1981) 8, Section 2(1), as "* * * a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made." Stull v. Combustion Engineering, Inc., 595 N.E.2d 504, 507 (Ohio App. 3 Dist., 1991). A "representation" is a presentation of fact made to induce someone to act. Shoshone Indian Tribe of Wind River v. United States, 58 Fed. Cl. 542, 546 (2003). The Court finds, under this standard, that a reasonable jury could find that such a promise was made.
The October 2, 2003 announcement on Visa's vendor website stated in part:
Effective 01 July 2004, all newly deployed ATMs, and Cash Dispensing PIN acceptance device models (including replacement devices and encrypting PIN pads) must have passed laboratory testing by a Visa-recognized laboratory and be approved by Visa (doc. 169).
Defendants likewise published the specific security requirements necessary for obtaining Visa approval. Until the deferral, Visa's message remained consistent. The Court finds that a reasonable jury could conclude that these statements were intended to and did, in fact, induce Visa vendors to develop Visa approved products by July 1, 2004. Therefore, the Court finds summary judgment inappropriate on this basis.
2. Reliance on the promise
Defendants also contend that Plaintiff is unable to prove reliance on a promise for two reasons (doc. 149). First Defendants argue that ATME's President, David Parlin, admitted that Plaintiff would have developed 3DES Plus even without the Visa member deadline (Id.). Second, Defendants contend that the historic development of 3DES Plus shows that Plaintiff had effectively already developed this product before the complained of deadline even existed (Id.). Defendants claim that Plaintiff's pre-January 2004 actions could not be in reliance of the July 1, 2004 deadline because "as ATME management, technical, and marketing personnel admit, ATME did not take any action pursuant of Visa approval before that first meeting at T-Systems in January 2004" (Id.).
In response, Plaintiff argues that there is substantial evidence which contradicts Defendants' position (doc. 169). Plaintiff refutes Defendants' contention that Plaintiff had already developed and decided to make 3DES Plus(r), pointing to the cryptographically secure control of display (A2) and privacy shield (A6) requirements which were unique to Visa, and which were included in the approved 3DES Plus(r) product (Id.). Plaintiffs likewise state that the agreement Plaintiff entered into with Thales in October 2003 is distinct from the agreement entered into in March, 2004 to manufacture 3DES Plus® (Id.).
Further, Plaintiff argues that Defendants mischaracterize David Parlin's testimony that Plaintiff would have inevitably developed a Triple DES product as proof that there was no reliance (Id.). Plaintiff contends that even if Plaintiff had developed a product that included a Triple DES encryption without Defendants' deadline, it still would not have included the A6 requirement and or the A2 feature, which Visa employee Marc Cleven characterized as "one of the most `technically difficult challenges' presented by Visa's new ATM security requirements" (Id.).
Finally, Plaintiff contends that the communication between Plaintiff and Visa representatives throughout the Spring of 2004 about the development and testing of 3DES Plus(r) demonstrates that "[n]ot only did the Plaintiff reasonably rely on the Defendants' new ATM security requirements, Visa took an active role in encouraging the Plaintiff to do so" (Id.).
Plaintiff's argument is well taken. Particularly persuasive is that Plaintiff developed 3DES Plus(r) to include Defendants' specifications, namely the A6 and A2 features. Even if, as Defendants argue, Plaintiff had already developed, or would have inevitably developed, a Triple DES product, these features were unique to the Visa requirements. The Court finds that a reasonable jury could conclude that Plaintiff relied on the announcement of Defendants' deadline and security requirements and the communication between the parties in developing 3DES Plus®.
3. Reliance must be objectively reasonable
Defendants further argue that Plaintiff's promissory estoppel claim fails because any purported reliance was objectively unreasonable as a matter of law because Plaintiff knew the risks of deferral (doc. 149, citing Miami Packaging, Inc. v. Processing Sys., Inc., 792 F. Supp. 560, 565 (S.D. Ohio 1991)). Defendants point to several facts as evidence that Plaintiff was aware that the July 1, 2004 deadline might not be feasible (doc. 149). First, Defendants state that Plaintiff knew that Defendants were concerned with compliance with the deadline when Plaintiff wrote in December 2003 "[i]t sounds like Visa is getting worried that no ATMs have yet passed the testing requirements and they obviously have need to have solutions they can certify for their members" (doc. 149). As further evidence, Defendants state that Plaintiff knew in the Spring of 2004 that Visa and MasterCard agreed to align their ATM security testing and approval processes (Id.). Likewise, Defendants argue reliance was objectively unreasonable because deferral and modification of payment card association deadlines was not uncommon, and therefore "ATME knew or should have known that, as a general matter, there existed an [sic] historical risk that any payment card association's ATM security deadlines, including those Visa, may be delayed, deferred or modified to allow member financial institutions additional time to comply" (Id.). Defendants state that Plaintiff was aware that immediately preceding the deadline that leading ATM manufacturers had not received Visa approval for their ATMs (Id.). Defendants argue that "in this complete context . . . reliance on the intended compliance deadline was not objectively reasonable," but that Plaintiff took an opportunistic risk that should not bind Visa (Id.).
In response, in addition to the arguments made in support of reliance, Plaintiff contends that it was Defendants' intention that Plaintiff rely on the Visa requirements, so that Visa Members could purchase and deploy them (doc. 169). Plaintiff argues that Defendants benefitted in several ways from vendors developing products that met the ATM security requirements (Id.).
Plaintiff contends that Defendants benefitted in that: 1) Plaintiff vetted the testing process for Defendants, 2) Plaintiff's product provided an inexpensive upgrade for Visa Members, 3) Plaintiff's product addressed member's objections to the upgrades about cost, 4) Plaintiff argues that Defendants could use the success of Plaintiff's development of the product as leverage with other vendors, and 5) with Plaintiff's product available to upgrade older non-compliant ATMs, there would be more ATMs available to generate fees for Defendants (doc. 169).
Having reviewed the parties' arguments, the Court finds summary judgment is not warranted on this basis. Defendants cite the Court's previous order in Miami Packaging, Inc., 92 F. Supp. at 565, for the proposition that "[w]hen the beneficiary of a promise knows or reasonably should know that the promise might not come to fruition, reliance in spite of that known risk is unreasonable as a matter of law" (doc. 149). Absent the communication between the parties, the Court might agree that Plaintiff should have known that Visa's deadline could be deferred. However, here, Defendants were in communication with Plaintiff during the development and testing process, with Plaintiff pointing to several emails between the parties, which Plaintiff argues show Defendants encouraging Plaintiff's development of 3DES Plus(r) (doc. 169). When viewed in complete context, the Court finds a reasonable jury could find that Plaintiff's reliance on the compliance deadline is objectively reasonable.
4. Injury due to reliance
Defendants next argue that far from proving injury, Plaintiff's witnesses and documents show that Plaintiff obtained a clear benefit from submitting 3DES Plus(r) for testing in a Visa-approved lab and obtaining Visa's official approval for the product (doc. 149). First, Defendants argue that because in the Spring of 2004, MasterCard agreed to "grandfather" Visa-approved ATM products, any reliance Plaintiff placed on Visa's announcement of the July 1, 2004 deadline ultimately enabled Plaintiff to sell 3DES Plus(r) to MasterCard members (Id.). Second, Defendants contend that the benefit of obtaining Visa certification is evident from Plaintiff's press releases and marketing materials that touted this achievement, and from the acknowledgment of ATME's President, Dan Parlin, as early as January 15, 2004, that Visa approval would be valuable (Id.). Defendants argue that from these facts, the Court can conclude, as a matter of law, that enforcement of any promise made by Visa is not "required to prevent injustice" (Id., citing Telxon Corp., 2005 Ohio App. LEXIS 4475, at *68).
In response, Plaintiff argues that it incurred expenses in excess of $4.8 million in its pursuit of Visa approval for 3DES Plus®, including items such as the costs associated with the T Systems security review in January 2004, formal testing in May and June 2004, and expenses incurred with vendors who supplied services, components and parts necessary to manufacture 3DES Plus(r) in quantity (doc. 169). Plaintiff states that its obligations to its suppliers and vendors were tied to the most part to Visa's approval of 3DES Plus(r), which happened just one day before Defendants announced the deadline deferment on June 25, 2005 (Id.). Plaintiff further argues that the expenses incurred after Defendants dropped the deadline and requirements were done so because Defendants continued to assure Plaintiff that the deferral was temporary, and that Class B requirements could be the standard for ATM security (Id.).
The Court finds Plaintiff's position well taken. If a jury concludes that Plaintiff reasonably relied on Defendants' compliance deadline and security requirements, then at minimum, the costs of developing the A2 and A6 features can be attributed to this reliance. Therefore, the Court finds that summary judgment is not appropriate on this basis.
B. Plaintiff's Fraudulent Concealment Claim
To establish a claim for fraudulent concealment under Ohio law, a plaintiff must establish each of six elements: (1) a representation or, where there is a duty to disclose, concealment of a fact, (2) which is material to the transaction at hand, (3) made falsely, with knowledge of its falsity, or with such utter disregard and recklessness as to whether it is true or false that knowledge may be inferred, (4) with the intent of misleading another into relying upon it, (5) justifiable reliance upon the representation or concealment, and (6) a resulting injury proximately caused by the reliance. Micrel, Inc. v. TRW, Inc., 486 F.3d 866 (6th Cir. 2007); Scotts Co. v. Central Garden Pet Co., 403 F.3d 781 (6th Cir. 2005).
While there is some confusion as to whether Plaintiff's claim is for Fraudulent Misrepresentation or Fraudulent Concealment, Defendants make arguments against both claims, and Plaintiff argues solely on the grounds of Fraudulent Concealment, and therefore the Court will construe this claim as one alleging Fraudulent Concealment.
A. Duty to Disclose
Defendants first argue that Plaintiff's fraudulent concealment claim must fail because it cannot prove that there was a fiduciary or similar relationship of trust between the parties that would give rise to a duty to disclose (doc. 149). Under Ohio law, concealment of a fact does not constitute fraud unless there was a duty to disclose the concealed fact to the plaintiff.Federated Mgmt. Co. v. Coopers Lybrand, 738 N.E.2d 842, 854-55 (Ohio Ct.App. 2000). The Supreme Court of Ohio in Blon v. Bank One, Akron, N.A., 519 N.E. 2d 363, 367-68 (Ohio 1988) stated that a duty to disclose may arise in a situation where:
a party to a business transaction in a fiduciary relationship with another is bound to make a full disclosure of material facts known to him but not to the other. Such a duty may also arise out of an informal relationship where both parties to a transaction understand that a special trust or confidence has been reposed. Full disclosure may also be required of a party to a business transaction `where such disclosure is necessary to dispel misleading impressions that are or might have been created by partial revelation of facts.'
Defendants cite to the Ohio Supreme Court's decision in Umbaugh Pole Bldg. Co. v. Scott, 390 N.E.2d 320 (Ohio 1979), where the defendant negotiated a mortgage with the plaintiffs, and then later gave plaintiffs advice when the mortgage became delinquent (doc. 169). In Umbaugh, the Ohio Supreme Court found that under those circumstances "the offering and giving of advice was insufficient to create a fiduciary relationship." 390 N.E.2d at 323. Defendants contend that Plaintiff is in an even weaker position than the plaintiff in Umbaugh, because there the parties had entered into an actual business transaction, whereas in this matter there was no such relationship (doc. 149).
Likewise, Defendants argue that because Plaintiff was not in a business relationship with Defendants, Plaintiff cannot prove fraudulent concealment by alleging that Defendants had an obligation and, then failed, to dispel "misleading impressions" (Id., citing Blon, 519 N.E. 2d at 367). In support, Defendants quote Moore v. Fenex, Inc., 809 F.2d 297, 303 n. 2 (6th Cir. 1987), which stated "[w]e are aware of no case, nor has any been cited, where a party has been held liable for fraudulent nondisclosure that had no direct dealings with the plaintiff" (Id., also citing Chrysler Credit Corp. v. First Nat'l Bank Trust Co., 582 F. Supp. 1436, 1442-43 (W.D. Pa. 1984); In re.: TMJ Implants, 880 F. Supp. 1311, 1317-18 (D. Minn. 1995)). Defendants again contend that because Visa does not buy or deploy ATMs, there existed no business transaction between the parties, and thus a fraudulent concealment claim must fail as a matter of law (Id.).
In response, Plaintiff argues that they can establish the necessary elements for a fraudulent concealment claim, including that Defendants had a duty to disclose (doc. 169). Plaintiff concedes there was no fiduciary relationship between the parties, but argues that Defendants did partially reveal facts during a business transaction, information that "was necessary to dispel misleading impressions that were or might have been created by partial revelation of facts" (Id., citing Interim Healthcare of Northeast Ohio, Inc., 12 F. Supp. 2d 703, 712 (N.D. Ohio 1998)). To show there were partially revealed facts, Plaintiff states that before the deferment of Visa's deadline, at the same time Defendants were encouraging Plaintiff's development of 3DES Plus(r) and representing to Plaintiff that the deadline was firm, Defendants were telling other vendors that deferment of the deadline was imminent (Id.). Likewise, Plaintiff argues that a business relationship did exist between the parties (Id.). Plaintiff contends the cases cited by Defendants are distinguishable, because unlike the circumstances here, in Moore, 809 F.2d 297, Chrysler Credit Corp., 582 F. Supp. 1436, and In re.: TMJ Implants, 880 F. Supp. 1311, there was little to no direct dealings between the plaintiff and defendants (Id.). Here, Plaintiff argues the parties had an ongoing and lengthy business relationship concerning the development of Plaintiff's product and the July 1, 2004 deadline (Id.). Plaintiff cites to cases where, Plaintiff contends, the parties had much less of a business connection, and yet a "business transaction" was found to exist (Id. citing Central States Stamping Co. v. Terminal Equipment Co., Inc., 727 F.2d 1405, 1408 (6th Cir. 1984); Sallee v. Fort Know National Bank, N.A., 286 F.3d 876 (6th Cir. 2002);General Acquisition Corp. v. Gencorp, Inc., 766 F.Supp. 1460 (S.D. Ohio 1990)).
In reply Defendants argue that under Ohio law, a duty of full disclosure only arises between parties engaged in a business transaction, not merely a business relationship (doc. 192). Defendants aver that even in the cases relied on by Plaintiff there were actual business transactions, and "not some lesser business relationship or `back and forth communication' standard" (Id., stating that in Interim Healthcare there was a franchise agreement between the parties, in Sallee, plaintiff and defendant bank were parties to a loan agreement, and in General Acquisition Corp. the defendant was plaintiff's investment and financial advisor). Defendants reiterate that they never negotiated or entered into a business transaction with Plaintiff, and therefore did not have a duty to disclose (Id.).
Defendants also dispute that information about Visa's deadline was withheld from Plaintiff while at the same time being shared with other vendors (Id.). Defendants argue that Plaintiff mischaracterizes the emails sent to other vendors, stating that those communications instead are evidence that Visa had not reached a conclusion about the deadline, and that neither of the emails' authors had authority to defer the deadline (Id.). Further, Defendants state that the emails were sent by Visa in response to specific inquiries by a vendor during the testing process, and that when Plaintiff similarly asked when the deadline would be deferred, Defendants told Plaintiff what it had told other vendors (Id.).
In considering whether Defendants had a duty to disclose the Court must determine, first, whether the parties were engaged in a business transaction, and second, whether full disclosure was necessary to dispel misleading impressions that were or might have been created by partial revelation of facts. Blon v. Bank One, Akron, N.A., 519 N.E. 2d 363, 367-68 (Ohio 1988).
First, the Court finds that there exists a genuine issue of material fact as to whether Defendants derived benefit from their relationship with Plaintiff during the development and testing of 3DES Plus(r). The situation here is distinct from the cases cited by both parties. While there was no direct financial component to the parties' relationship, as Visa was not in the market to buy or sell Plaintiff's product, according to Plaintiff, the parties worked together closely during the development and testing of 3DES Plus(r) at a Visa approved testing facility, and Visa benefitted from this relationship (doc. 169, see footnote two above). The Court therefore finds summary judgment is not appropriate on the question of whether the parties were engaged in a business transaction.
Second, having reviewed the parties' arguments and the evidence submitted, the Court finds there exists genuine issues of material fact as to whether Defendants concealed information about the deadline deferral from Plaintiff, while informing other vendors that a deferral was planned. Also, the Court finds that there is a question as to when Defendants made the decision to defer the compliance deadline. For these reasons, it is not appropriate to grant summary judgment on the question of whether Defendants failed to disclose information "necessary to dispel misleading impressions that were or might have been created by partial revelation of facts." Interim Healthcare of Northeast Ohio, Inc., 12 F. Supp. 2d at 712.
C. Plaintiff's Negligent Misrepresentation Claim
Defendants argue that Plaintiff's claim for negligent misrepresentation must fail because the claim is specifically barred by Ohio's economic loss doctrine, and because the evidence demonstrates that Plaintiff cannot establish the required elements of the claim (doc. 149).
1. Economic Loss Rule
Defendants first claim that Plaintiff cannot sustain the claim for negligent misrepresentation because under Ohio law, tort liability may not be imposed for purely economic damages (doc. 149, citing among others Floor Craft Floor Covering, Inc. v. Parma Comm. Gen. Hosp. Ass'n. 560 N.E. 2d 206, 208 (Ohio 1990)). Defendants argue that Plaintiff has not alleged, and cannot prove "injury to persons or damages to property" and therefore cannot recover under a claim of negligent misrepresentation (Id., quoting Picker Int'l v. May Found., 6 F. Supp. 2d 685, 688-89 (N.D. Ohio, 1998)).
In response, Plaintiff cites National Mulch Seed, Inc. v. Rexius Forest By-Products, Inc., 2007 U.S. Dist. LEXIS 24904 (S.D. Ohio Mar. 22, 2007), in which the district court addressed the economic loss rule and negligent misrepresentation, stating:
The Supreme Court of Ohio had yet to specifically address the economic loss rule in the context of a claim for negligent misrepresentation claim directly contradicts the express wording of the cause of action of negligent misrepresentation as stated by the Supreme Court of Ohio in Haddon View. McCarthy, Lebit, 87 Ohio App. 3d at 632. Under the tort of negligent misrepresentation, a person who supplies false information to others in breach of the common law duty not to do so is liable for "pecuniary loss" to them. Id. Because "pecuniary loss" is by its very definition `ecomonic loss,'" the economic loss rule cannot logically be applied to a negligent misrepresentation claim.
Plaintiff contends that the cases relied on by Defendants, Floor Craft and Picker, were specifically addressed and distinguished by the district court in National Mulch (doc. 169).
As Defendants note, under Erie R.R. v. Tompkins, 304 U.S. 64 (1933), when deciding a diversity case, a federal court must apply the substantive law of the state's highest court. Thus, Defendants argue that the Court must follow the Ohio Supreme Court's decision in Floor Craft (doc. 192).
While the Court agrees with Defendants that the Court must apply Ohio law in determining whether the economic loss rule bars Plaintiff's claim of negligent misrepresentation, the Court finds Plaintiff's position well-taken. The Court is persuaded by the district court's reasoning in National Mulch in concluding that under Ohio law, a negligent misrepresentation claim is not barred by the economic loss rule. 2007 U.S. Dist. LEXIS 24904 at *9. Defendants are correct that the economic loss rule generally prevents recovery of damages for purely economic loss in connection with a tort claim. Corporex, 106 Ohio St.3d at 414;Floor Craft, 54 Ohio St. 3d at 3. However, as the court inNational Mulch noted, the Supreme Court of Ohio has yet to specifically address the economic loss rule in the context of a claim for negligent misrepresentation, but several Ohio appellate courts have done so, and a majority of these courts have recognized that a claim for negligent misrepresentation is actionable even when the plaintiff's damages consist only of economic loss. Id. at *6 (citing E.g. Universal Contracting Corp. V. Aug., 2004 WL 3015325, at *3 (Ohio App. 1st Dist., Dec. 30, 2004), Ferro Corp. V. Blaw Knox Food Chem Equp. Co., 121 Ohio App.3d 434, 440-41 (1997); McCarthy, Lebit, Crystal Haiman Co. v. First Union Mgmt., Inc., 87 Ohio App. 3d 613, 631-32 (1993)). As the Ohio Court of Appeals reasoned in McCarthy, Lebit, "the application of the economic loss rule to a negligent misrepresentation claim directly contradicts the express wording of the cause of action of negligent misrepresentation as stated by the Supreme Court of Ohio in Haddon View." National Mulch, 2007 U.S. Dist. LEXIS 24904 (citing McCarthy, Lebit, 87 Ohio App.3d at 632). Therefore, the Court adopts the reasoning of the court in National Mulch, and finds that the economic loss rule does not preclude Plaintiff's claim of negligent misrepresentation.
2. Negligent Misrepresentation Elements
Second, Defendants argue that Plaintiff is unable to establish the elements required for a negligent misrepresentation claim. To establish a claim for negligent misrepresentation, a plaintiff must prove that the defendant supplied false information for the guidance of others in their business transactions, causing pecuniary loss to the plaintiff, while the plaintiff justifiably relied upon the information, and defendant failed to exercise reasonable care or competence in obtaining or communicating the information. Picker, 6 F.Supp.2d at 689; Gutter v. Dow Jones, 490 N.E. 2d 898, 899-900 (Ohio 1986).
A. Representations
In addition to arguments previously addressed by the Court, Defendants first contend that Plaintiff cannot establish their claim of negligent misrepresentation because Plaintiff's claim is based on alleged omitted or concealed facts, which cannot sustain a negligent misrepresentation claim (doc. 149, citing The Andersons, Inc. v. Consol, Inc., 348 F.3d 496, 506 (6th Cir. 2003)).
Defendants cite to previous portions of their brief to support their arguments that there is no evidence that Visa supplied any false information, that Plaintiff suffered no pecuniary loss, that Plaintiff did not rely on Defendants statements and any reliance would be unreasonable, and that Defendants did not fail to exercise reasonable care when communicating information about the deadline (doc. 149).
In response, Plaintiff first contends that their negligent misrepresentation claim is not based on omitted or concealed facts, but instead on representations about the deadline made directly to Plaintiff (doc. 169). Plaintiff points to the notice on the Visa Vendors website, the registration and non-disclosure agreement needed to register for the website, the instruction for Vendors to submit their products to a Visa approved testing facility, and finally to the repeated contact between Plaintiff and Defendants, as evidence of direct representations (Id.).
The Court finds Plaintiff's position well-taken. Construing the above evidence in a light most favorable to the Plaintiff, as the Court must do at this stage in the proceedings, the Court finds that a reasonable jury could agree that Defendants made representations about the deadline and security requirements directly to Plaintiff.
B. Special Relationship
Defendants further argue that Plaintiff cannot establish its claim of negligent misrepresentation because Defendants did not owe Plaintiff a duty of care. Defendants contend that under Ohio law, Plaintiff must show that there existed a "special relationship" between the parties under which Defendants supplied information to the Plaintiff for guidance in the Plaintiff's business transactions, and that this special relationship does not exist in normal business transactions (Id., citing among others Picker, 6 F.Supp.2d at 689). Defendants contend that Ohio courts have narrowly construed the types of business relationships sufficient to give rise to such a duty, as one who renders opinions to others for their use in guiding their own business transactions, such as accountants or attorneys (Id., citing among others Ziegler v. Findlay Indus., Inc., 464 F.Supp.2d 733, 738 (N.D. Ohio 2006)) Defendants argue that no such special relationship existed, and that they owed Plaintiff no duty that could be breached by alleged negligence (Id.).
In response, Plaintiff cites National Mulch and Seed, Inc., which recently held that a "special relationship" is not required to succeed in a negligent misrepresentation claim (doc. 169, citing 2007 U.S. Dist. LEXIS 24904 at *30-31).
The district court in National Mulch and Seed, Inc. stated:
This Court agrees that a special relationship is not a formal element of a negligent misrepresentation claim under Ohio law.
. . .
To the extent Ohio courts discuss a special relationship in connection with a negligent misrepresentation claim, the discussion appears to be related to the requirement that a defendant supply false information for the guidance of the plaintiff in its business transactions. The "for the guidance of" language directs the court's attention to the duty owed and serves to limit the class of potential plaintiffs. As explained by the Supreme Court of Ohio, liability for negligent misrepresentation is limited to "the person or one of a limited group of persons for whose benefit and guidance [the defendant] intends to supply the information or knows that the recipient intends to supply it." Gutter v. Dow Jones, Inc., 22 Ohio St. 3d 286, 288 (1986); accord Haddon View, 70 Ohio St. 2d at 157 (not requiring any special relationship but limiting liability to misrepresentations made to a foreseeable class of persons).2007 U.S. Dist. LEXIS 24904 at *30-31. In a footnote, the district court further reasoned:
[S]imilar to Ohio Courts in addressing a "special relationship," the court in Picker specifically defined the "special relationship" as "the defendant suppl[ying] information to the plaintiff for the latter's guidance in its business transactions." Picker, 6 F.Supp.2d at 689. This is merely a reiteration of one of the elements of the cause of action for negligent misrepresentation.Id. at F.N.8.
Having reviewed the relevant case law, the Court adopts the reasoning in National Mulch and Seed, Inc., and therefore finds summary judgment inappropriate on this basis.
I. Conclusion
For the foregoing reasons, the Court DENIES Defendants' Motion Summary Judgment Regarding Liability (doc. 192).
SO ORDERED.