Opinion
X10UWYCV136019817
08-19-2016
Ralph D'Arinzo et al. v. North American Power & Gas, LLC et al
UNPUBLISHED OPINION
MEMORANDUM OF DECISION
Kari A. Dooley, Judge.
Preliminary Statement
This action arises out of plaintiffs' prior working relationship with the defendant North American Power & Gas, LLC (NAP), and NAP's now Chairman, defendant Kerry Breitbart (Breitbart). The plaintiffs, Ralph D'Arinzo (D'Arinzo) and his now former wife Rhonda Faoli (collectively, " the D'Arinzos") worked as Independent Representatives (IRs) for NAP as part of NAP's network marketing efforts. Plaintiffs claim that they entered into an oral contract with Breitbart and NAP relating to their compensation as IRs and that Breitbart and NAP breached the terms of that oral contract. Plaintiffs' claims sound in breach of contract (count one), negligent misrepresentation (count two), intentional misrepresentation (count three), unjust enrichment (count four), quantum meruit, (count five) and CUTPA (count six). The defendants deny the allegations. The court heard evidence from eight witnesses over the course of five days in March 2016 and received numerous documents into evidence. Post-trial briefing was completed on June 10, 2016. The court has considered the testimony and evidence introduced, the arguments set forth in the parties' memoranda, the authorities cited therein, and renders this decision based thereupon. For the reasons set forth below, judgment will enter in favor of the defendants.
Although the plaintiffs are no longer married, they were married at the time of the events in question. Rhonda was then known as Rhonda D'Arinzo and the plaintiffs were referred to throughout the testimony as " the D'Arinzos." Therefore, for ease of reference, the plaintiffs are collectively referred to as the " D'Arinzos."
The court previously bifurcated the issues of liability from the issue of damages. The trial was held as to liability only.
FACTUAL FINDINGS
" In a case tried before a court, the trial judge is the sole arbiter of the credibility of the witnesses and the weight to be given specific testimony . . . It is within the province of the trial court, as the fact finder, to weigh the evidence presented and determine the credibility and effect to be given the evidence." (Citation omitted; internal quotation marks omitted.) Cadle Co. v. D'Addario, 268 Conn. 441, 462 (2004). The court makes the following factual findings by a fair preponderance of the evidence, unless otherwise indicated, based upon the better, more credible evidence presented.
The court does not attempt to include in this decision all of the evidence relied upon in the court's factual findings. The court has considered all of the evidence admitted. The reference to any subset of the evidence presented should not be construed as identifying the exclusive basis for the court's finding, and the court's failure to identify or mention specific evidence should not give rise to an inference that such evidence has not been considered.
In 2009, Breitbart decided to start a new company which would sell energy, to include electric and gas, to residential and commercial customers in Connecticut and other states where the sale of energy had been deregulated. With deregulation came the opportunity for competition in the supply of energy. Companies such as NAP purchased electricity off the grid and then resold it to individual customers. Breitbart was joined in this endeavor by an investor, Carey Turnbull.
NAP was formed in November 2009. It had multiple channels through which it planned to (and ultimately did) market its products, to include direct mailing, door to door sales, digital advertising, partnerships with charities or businesses, and a network marketing channel. At issue in this case is the network marketing channel also referred to by witnesses as the multilevel marketing or MLM channel.
In approximately November 2009, Breitbart approached D'Arinzo about becoming an IR for NAP as part of NAP's network marketing efforts. D'Arinzo was known to Breitbart through previous business endeavors and Breitbart believed that D'Arinzo had enjoyed success in network marketing on behalf of other entities. Breitbart also hired Fred Stevens as a consultant to design a compensation plan for the network marketing channel.
The network marketing channel was composed of IRs, each of whom was tasked with adding additional IRs to the channel as well as new individual customers. It was designed to be a pyramid structure with each customer or IR procured by an IR falling below that IR in what was referred to as the IR's downline. Thus, if D'Arinzo recruited five additional IRs, each would be placed below D'Arinzo in the pyramid structure and each customer or additional IR brought in by those five would also appear below D'Arinzo in the pyramid structure. The compensation plan devised by Stevens contemplated that a portion of each new IR or customer's energy usage would be paid by commission to the procuring IR as well as some of those above the procuring IR in the pyramid structure. Therefore, the bigger the IR's downline, the more income would be generated on a monthly basis. Steven's compensation plan paid one-one-hundredth of a penny for each kilowatt hour purchased by customers or IRs in an IR's downline. Those quantities are called " mils." The percentage of mils attributable to each IR in the downline depended upon where in the downline the IR was positioned. Under the compensation plan, an IR could continue to receive residual commissions for however long a customer remained with NAP as long as the IR was " eligible" to receive such commissions and was in good standing under the plan.
In addition, the compensation plan paid a onetime sum, known as a Customer Acquisition Bonus (CAB) to an IR for each new customer brought to NAP. The CAB varied depending on whether the customer was residential or commercial, and if commercial, the size of the entity or its monthly kilowatt usage.
Under the compensation plan, IRs had various classifications to include: " Energy Broker, " " Area Manager, " and " Regional Sales Manager (RSM)." Each had its own prerequisites and each had a different compensation structure. RSMs earned the most under the compensation plan.
Even though they had not " earned" the title, the D'Arinzos were placed in the compensation plan pyramid as RSMs. They were offered this position as part of the inducement to have them join NAP's network marketing channel. Several other IRs recruited at the same time were placed in the same level, while still other IRs were placed under the D'Arinzos so that the D'Arinzos could reap the benefit of their efforts under the compensation plan. This was so even though the D'Arinzos did not recruit these IRs.
Under the terms of the compensation plan, only those IRs recruited by another IR would be placed in the downline of the recruiting IR. Successful recruitment was one of the ways an IR could rise up the ranks from Energy Broker to Area Manager to Regional Sales Manager.
In addition to being compensated as RSMs, the D'Arinzos allege that Breitbart promised them 5% of the annual profits attributable to their downline and 5% of the equitable value of their downline upon the sale of NAP. The plaintiffs further allege that Breitbart told them that this agreement would be reduced to writing. Although D'Arinzo made occasional inquiry over the course of the first year of operations, no written agreement was drafted or presented. Indeed, the offer to pay the D'Arinzos this additional compensation was never reduced to any kind of writing. Notwithstanding, Breitbart testified that he in fact made such an offer to D'Arinzo. He testified however that the specifics of the offer and the terms under which it would become an agreement were never made firm or reduced to writing.
The plaintiffs also claim that they were promised payment of residual commissions for however long the NAP customer in their downline remained with NAP without restriction. The defendants categorically deny any such promise.
By March 1, 2010, NAP was ready to launch. The D'Arinzos and other IRs began the effort of soliciting customers and IRs for NAP. As NAP IRs, the D'Arinzos began active recruitment, holding informational and recruitment meetings at their home and elsewhere. They began to build their downline and in a relatively brief period of time had added new IRs as well as many new energy customers.
In order to become an IR for NAP, each IR was required to undergo a background check. Therefore, NAP combined into a single form, the Application to become an IR as well as the authorization to perform the necessary background check. The back of this combined form included all of the terms and conditions imposed upon an IR in the event the application was successful and the individual became an IR for NAP. The front of the form had two places for each potential IR to sign--the first signature authorized the background check; the second signature was an acknowledgement and acceptance of the terms and conditions of becoming an IR for NAP. The D'Arinzos knew that every IR was required to sign the IR Agreement. The D'Arinzos brought multiple copies of the forms to their recruitment meetings because a recruit could not become an IR without signing both sections of the IR Agreement. Notwithstanding, the D'Arinzos did not sign the acknowledgement and acceptance portion of the IR Agreement. Ralph D'Arinzo signed only the background check authorization. (Exhibit 1.) D'Arinzo testified that they did not sign it because they believed they would have a separate written contract which would include the additional promises regarding compensation. Although they had not signed the IR Agreement, the plaintiffs conducted themselves in accordance with NAP's Policies and Procedures for IRs (Exhibits B, D), as required under the IR Agreement. Ralph D'Arinzo acknowledged that those Policies and Procedures applied to all IRs, the plaintiffs included.
The form that Ralph D'Arinzo partially signed was initially dated February 24, 2010 but this date was crossed out and February 6, 2010 was substituted. The incorrect date is not, as urged by the defendants, a basis upon which to infer that the document had been fully signed but was subsequently stolen from NAP's offices and replaced with the unsigned version, located by NAP after this litigation was commenced. Aside from the very tenuous nature of such an inference, the court notes that the suggested purloining occurred prior to NAP's commencement of operations and well over a year before there was any discord between the parties, and therefore any reason to engage in such chicanery.
As the customer base grew, so did the D'Arinzos' downline. They began receiving commissions under the compensation plan as RSMs. The D'Arinzos' work on behalf of NAP continued apace through the remainder of 2010 and into 2011. During this time period, a call center named " Nexgen" was added to the network marketing channel as an IR. Although not typically permitted, Kerry Breitbart allowed Nexgen to be placed in the network marketing channel under the D'Arinzos' downline. After a brief period, for a variety of reasons, Kerry Breitbart removed Nexgen from the network marketing channel, though he left behind any customers procured by Nexgen in the downline. The largely undisputed and credible evidence is that Breitbart was completely within his discretion and authority with respect to how Nexgen was to be treated. Placing Nexgen under the D'Arinzos in the channel was not required and removing Nexgen from their downline was entirely his choice. The plaintiff has no claim arising out of the Nexgen transactions and the transactions will not be addressed further herein.
In January 2011, Steven's consulting arrangement with NAP was terminated. Stevens went to work for a direct competitor of NAP, Starion Energy, LLC, performing essentially the same task of developing a network marketing channel.
In March 2011, NAP hired John Costino to review and revamp the compensation plan for the network marketing channel. The plan designed by Stevens was very customer oriented, with significant compensation being paid to IRs on a per new customer basis through the CABs. NAP determined that the plan should be more focused on the addition of IRs and less on the addition of new energy customers. The CAB was significantly reduced or eliminated from the compensation plan and new layers of calculations were devised to spread the commissions further and farther among the IRs. The new compensation plan was designed to increase the benefit to those with many IRs in their downline as an incentive to IRs to develop such a downline. The D'Arinzos had a significant number of IRs in their downline. The credible testimony is that the D'Arinzos' commissions would have gone up under the new compensation plan, as they did for one IR and witness, Kevin Marino. Indeed, Marino was under the D'Arinzos in the pyramid structure set up under the compensation plan.
By his own account, D'Arinzo did not understand the new, very complicated, compensation plan being implemented at NAP. He did not believe that his compensation would increase as he was being told, because, as he put it " they couldn't show me how." He was also concerned that many of those in his downline would leave the organization, further reducing his commissions.
Meanwhile, Stevens and the D'Arinzos began discussions about the D'Arinzos joining Starion. Stevens offered the D'Arinzos a position in the network marketing channel equivalent to a national manager. The D'Arinzos agreed to work for Starion and thereafter orchestrated their departure from NAP. On May 10, 2011, D'Arinzo accessed the NAP " back office" software and printed a list of all of the customers and IRs in the D'Arinzos' downline, to include their energy usage. (Exhibits 46, J.) This list makes readily ascertainable those IRs which are productive and those whose customers use the most energy. Also on May 10, 2011, NAP was holding a regional meeting for IRs in Darien or Norwalk. The meeting was scheduled to begin at 7:00 p.m. At 6:55 p.m. the D'Arinzos sent a blast email to all of the IRs in their downline, many of whom were at the meeting. (Exhibit 6.) The email read as follows:
Urgent Message from RSMs: Ralph and Rhonda D'Arinzo
To Our Dearest and Closest Friends,
With regrets, we want to inform you that after many discussions amongst our family, we feel the need to pursue other opportunities outside of North American Power. As North American Powers NUMBER ONE BROKER, we wish you the very best with all your endeavors and please feel free to CONTACT U.S. if there is anything we can do personally for you at any time or if you need further clarification.
The email included both telephone and email contact information for the D'Arinzos. Notably, prior to sending this email to their entire downline of IRs, the D'Arinzos sent drafts of the email to both Fred Stevens and Robert Zappone at Starion for their approval. (Exhibit 7.)
It appears the email may have been resent two days later. (Exhibit Q.)
Prior to their departure from NAP, the D'Arinzos had not expressed any unhappiness or concern to NAP with respect to their agreement, other than skepticism regarding the new compensation plan. Indeed, on May 2, 2011, just eight days before the blast email in which they announce their departure, the D'Arinzos sent a decidedly different email to NAP management and various IRs in their downline in which they enthusiastically embrace the future for all of them with NAP. (Exhibit I.)
In connection with the D'Arinzos' departure from NAP, Kerry Breitbart sent them an email in which he expresses that he is sorry they are leaving NAP and indicates that he does not understand why. (Exhibit M.) He then addresses some " loose ends" which need to be addressed. In response, on May 11, 2011, Rhonda D 'Arinzo sent an email which stated, inter alia, " You will never know how much my husband and I respected and loved you and your family . . . and will be forever . . . grateful for all you did. However, I promise you we will handle our departure as a true first class couple that we are! We will never tolorate (sic) anyone mocking or critizing (sic) NAP as we depart." (Exhibit M.)
The D'Arinzos began work at Starion almost immediately upon departing from NAP. They entered into a written contract with Starion dated May 19, 2011. Starion advanced the D'Arinzos approximately $60,000.00 which was to be repaid from commissions earned.
As suggested in the blast email, several IRs at NAP contacted the D'Arinzos. (Exhibits O, R.) In one email exchange, Rhonda D'Arinzo disparages the new compensation plan at NAP and encourages an NAP IR in Maryland to contact Starion regarding their network marketing opportunities. (Exhibit O.) Within a couple of days of the blast email, Ralph D'Arinzo also invited Michael O'Brien, an NAP RSM, to his home and invited him to join Starion. He suggested that there was a way that O'Brien could join Starion without NAP learning of it. O'Brien declined the invitation and left the home. Soon thereafter, NAP learned that the D'Arinzos had joined Starion and were attempting to solicit NAP IRs to join them. NAP stopped paying the D'Arinzos' commissions, reassigned significant portions of their downline to other regional managers, and sent two letters to the D'Arinzos, a cease and desist letter (Exhibit 24) and notification that they would receive no further compensation from NAP. (Exhibit 12.) At that time, NAP did not take any further action with respect to the D'Arinzos and it appears that communications between NAP, Breitbart and the D'Arinzos, came to a halt, until December 2011.
The anticipated growth and commensurate commissions at Starion did not materialize as hoped. The D'Arinzos' commissions were insufficient to repay Starion the advances they had received and money was tight.
On December 14, 2011, the D'Arinzos sent a letter to Kerry Breitbart and Carey Turnbull (Exhibit W), in which, for the first time since having their commission checks halted, they request all past due commissions, certain printouts relating to their downline and a final settlement on " future projected earnings" from their downline.
In addition, on December 30, 2011, the D'Arinzos sent another blast email to their former NAP downline, the subject line of which read: " Don't FORGET Where YOU Came FROM!! (Exhibit X.) Attached was a video, recorded at the D'Arinzos' home in the " Christmas Tree" room where many recruitment meetings had taken place. The video is a greeting from the D'Arinzos, in which they state:
Ralph D'Arinzo: How are you? Ralph and Rhonda here. We just want to wish you a merry Christmas and happy New Year and say how proud we are of each and every one of you guys that made a decision to take control of your own business and your own future and your own destiny through the vehicle of deregulation. And 2011 was exciting and so many of us made a lot of money, but nothing close to what we're about to earn in 2012.
Rhonda D'Arinzo: Happy holidays everybody, and look at where we're standing--where we all started from 2 years ago, the Christmas tree room. We're thinking of you all and we are looking forward to a great, phenomenal 2012. And one last thing, don't forget where you all came from. Happy Holidays.
Both Rhonda and Ralph D'Arinzo testified that this was a simple holiday greeting and was not an effort to recruit their NAP IRs to Starion. Such testimony is utterly incredible. The video was unquestionably a poorly veiled sales pitch designed to leave the unmistakable impression that the plaintiffs were flourishing financially with Starion, (which was not true), and that 2012 was poised to be even better (which turned out to be inaccurate as well). It was sent only to NAP IRs in the D'Arinzos' downline; conjured up the specter of loyalty to the D'Arinzos (" don't forget where you came from"), and was filmed where many of the recipients had been originally recruited by the D'Arinzos.
The relationship between the D'Arinzos and Starion eventually came to an end in early 2012.
The plaintiffs commenced this action by writ, summons and complaint dated June 4, 2013.
Discussion
The plaintiffs bring six claims: breach of contract, negligent misrepresentation; intentional misrepresentation, unjust enrichment, quantum meruit and CUTPA violations. Each of the claims is premised upon the promises made by Kerry Breitbart at the time the D'Arinzos joined NAP and NAP and Breitbart's failure to keep those promises in due course. The court's first inquiry is whether these purported promises were made; whether they created a binding contract and if so, whether that contract was breached.
The plaintiffs sued Kerry Breitbart in his personal and individual capacity. The defendants contend that throughout the events in question, Kerry Breitbart was acting solely on behalf of NAP and thus cannot be found personally or individually liable at all. In light of the rulings contained herein, the court need not decide this issue and NAP and Breitbart are simply referred to collectively as " the defendants."
A. The Existence of an Enforceable Contract
It is well established that " [t]he elements of a breach of contract action are the formation of an agreement, performance by one party, breach of the agreement by the other party and damages." (Internal quotation marks omitted.) Pelletier v. Galske, 105 Conn.App. 77, 81 (2007). " [I]n order to form a binding contract there must be an offer and acceptance based on a mutual understanding by the parties." Cavallo v. Lewis, 1 Conn.App. 519, 520 (1984).
It is a fundamental principle of contract law that the existence and terms of a contract are to be determined from the intent of the parties . . . The parties' intentions manifested by their acts and words are essential to the court's determination of whether a contract was entered into and what its terms were. (Internal quotation marks omitted.) MD Drilling & Blasting, Inc. v. MLS Construction, LLC, 93 Conn.App. 451, 454, 889 A.2d 850 (2006); see also Otto Contracting Co. v. S. Schinella & Son, Inc., 179 Conn. 704, 709, 427 A.2d 856 (1980) (" whether a contractual commitment has been undertaken is ultimately a question of the intention of the parties").Auto Glass Express, Inc. v. Hanover Ins. Co., 293 Conn. 218, 225 (2009). " The existence of a contract is a question of fact to be determined by the trier on the basis of all of the evidence." Ullman, Perlmutter and Sklaver v. Byers, 96 Conn.App. 501, 504 (2006).
Here, prior to joining NAP as IRs, the plaintiffs negotiated their compensation with Breitbart. The oral offer they claim to have received from Brietbart included: (a) payment under the compensation plan as Regional Sales Managers; (b) 5% of the profit of their downline; and (c) 5% of the equitable value of their downline upon sale of NAP. They claim to have accepted this offer and so began working as IRs for NAP.
The plaintiffs have met their burden of proof as to the formation of this oral contract. First, Kerry Breitbart acknowledged that the D'Arinzos were offered and accepted the position of Regional Sales Managers for purposes of calculating their commissions under the compensation plan. Indeed, they were, in fact, compensated as Regional Sales Managers under the compensation plan even though they did not " earn" that position as contemplated under the plan.
With respect to the promise of an annual payment of 5% of their downline profits and 5% of the equity value of their downline upon the sale of NAP, Breitbart acknowledges making this offer as well, but testified that it was contingent upon a written agreement being finalized. NAP's claim that these promises were not binding until a written agreement was drafted and agreed upon is not persuasive. While the plaintiffs and the defendants agree that a written agreement was contemplated, the more compelling evidence is that a written agreement was not a prerequisite to creation of the contract in the first instance.
First, the plaintiffs were compensated as Regional Sales Managers even though no written contract was drafted or signed. Second, over the course of the ensuing year, Ralph D'Arinzo made several inquiries about the status of the written agreement memorializing their compensation agreement. Breitbart confirms these inquiries. This is compelling evidence that the compensation agreement already existed. Breitbart testified that he did not get around to drafting the agreement but had he done so, it would have included these additional compensation components but would have also included additional terms as well. In short, the more credible and compelling evidence is that NAP became bound by the offer when the plaintiffs accepted the terms and began working as IRs on behalf of NAP. Thus, the plaintiffs have met their burden of proof that they were promised and accepted, as part of their compensation plan, 5% of the annual profits of their downline as well as 5% of the equitable value of their downline upon the sale of NAP.
Finally, the plaintiffs claim that their oral agreement with NAP included a term whereby they would be and are entitled to their residual monthly commissions for however long the customers in their downline remain with NAP, without any restriction.
At the outset, the court notes that this claim appears nowhere in the operative Second Revised Complaint dated February 24, 2014. On the issue of commissions, this complaint alleges that the plaintiffs were to receive weekly Customer Acquisition Bonuses as well as monthly residuals ultimately agreed upon and outlined in Section 6 of the Training Guide entitled " Compensation Plan ." (Emphasis added.) (Complaint, para. 10.) The complaint further provides that the plaintiffs were to be compensated " over and above" the compensation plan with the equity and profit interests discussed above. Finally, the plaintiffs allege that " from the beginning" the defendants " failed to pay not only the written formal compensation plan to the plaintiffs but the 5% aforementioned and secretly maintained and manipulated the software that calculated the kilowatt hours on which the compensation and commissions were to be paid." (Emphasis added.) (Complaint, para. 15.)
The court recognizes that trial counsel appeared in this case shortly before trial and had no involvement in the drafting of the pleadings or the conduct of discovery in this matter.
No " Training Guide" was offered or introduced. However, the NAP " Compensation Plan" was introduced by the plaintiff at Exhibit 3. It is, presumably, this compensation plan under which the plaintiffs assert their entitlement.
Thus, there is simply no reading of this complaint that includes an oral promise to pay residual commissions for however long the customer remained with NAP, without restriction. The only claim regarding entitlement to commissions are those commissions which are due and owing under the compensation plan. However, the compensation plan (Exhibit 3) does not contain any provision for the payment of residual commission in perpetuity and without restriction. To the contrary, the evidence was uncontested that the payment of such residuals under the plan was contingent upon compliance with both the IR Agreement as well as the Policies and Procedures of NAP.
Further, the complaint's allegation of unpaid commission arises from the defendants' nefarious manipulation of the software by which those commissions were calculated. However, the plaintiffs offered no evidence of any such treachery and indeed acknowledged that while they were at NAP they were paid their due commissions under the compensation plan.
It is well established in our case law that " judgment must ordinarily be restricted to issues reasonably within the scope of the pleadings." Doublewal Corp. v. Toffolon, 195 Conn. 384, 390-91 (1985). In Connecticut, " [p]leadings are intended to limit the issues to be decided at the trial of a case and [are] calculated to prevent surprise. Harris v. Shea, 79 Conn.App. 840, 842-43, 832 A.2d 97 (2003); see also 71 C.J.S. 38 Pleadings § 3 (2000) (" [The] purpose of pleadings is to frame, present, define, and narrow the issues and to form the foundation of, and to limit, the proof to be submitted on the trial . . .")" Birchard v. New Britain, 103 Conn.App. 79, 83 (2007).
It would be contrary to these principles, to now consider a claim for relief not sought in the operative complaint. That said, even if this complaint could be broadly read to include such a claim, the claim is not proven. Ralph D'Arinzo testified that Kerry Breitbart promised them residual commissions, without restriction, for however long customers in the D'Arinzos' downline remained with NAP. He testified that this promise was " everything" to him in accepting NAP's offer. Kerry Breitbart testified that he never made any such promise to either of the plaintiffs. Breitbart's testimony is credited. D'Arinzo's is not.
The defendants did not raise this issue and the court recognizes that the failure to do so might be considered a waiver of any claim based upon the scope of the pleadings. See, e.g., Doublwal Corp. v. Toffolon, supra, 195 Conn. at 391. (" Hence, it follows that the parties may, by consent, enlarge the scope of the litigation to include issues not raised in the pleadings"); Birchard v. New Britain, supra, 103 Conn.App. at 85 (On appeal, the plaintiff could not rely on implied admissions in the defendant's answer when such implied admissions were not brought to the trial court's attention). This court does not herein decide the question of waiver.
D'Arinzo's testimony is internally inconsistent. On the one hand, D'Arinzo testified that this promise was critically important to the plaintiffs in deciding to join NAP and that it was this same promise he passed along to other IR recruits. In his opinion, this promise was also " everything" to those recruits. However, D'Arinzo also acknowledged that each one of those recruits would be subject to the terms and conditions of the IR Agreement as well as the Policies and Procedures for NAP, both of which place significant restrictions on an IR's entitlement to residual commissions. Thus, the promise he purports to have received and passed along is not at all a promise of residuals in perpetuity without restriction.
In crediting Breitbart's testimony, the court relies upon the body of evidence that demonstrates such a promise or representation would be wholly inconsistent with industry practice; would violate NAP Policies and Procedures (to which Ralph D'Arinzo acknowledges being bound); would be inconsistent with the compensation plan under which the plaintiffs' residuals were being calculated; and would be contradicted by the terms of the IR Agreement which governed every other NAP IR. Generally, the continued receipt of residual commissions, had prerequisites, to include, i.e. a current and active IR relationship; non-competition or non-solicitation agreements; compliance with a variety of regulatory or policy provisions; and a host of others. It simply makes no sense that NAP would offer to pay residual commissions without restriction and thereby abandon all of the safeguards and protections afforded NAP through these other avenues.
Furthermore, plaintiffs' own conduct establishes that they did not believe they were entitled to these commissions after they left NAP and joined Starion. First, plaintiffs voiced no complaint when NAP stopped paying residual commissions in May 2011. They did not respond to NAP's letter of May 23, 2011 in which NAP advises them that they " have no rights to further payments from NAPG, will not receive any further payments from NAPG, and have no further rights or interests in your former downline marketing organization with NAPG." Nor did the plaintiffs contest or respond to the cease and desist letter they received on May 12, 2011. Indeed, the plaintiffs did not make any effort to receive commissions until December of that year after their hopes for financial success at Starion had faltered.
Plaintiffs' conduct after they left NAP further establishes that they themselves understood that they would not continue to receive commissions if they competed with NAP or solicited NAP customers or IRs away from NAP in violation of the NAP Policies and Procedures. This is particularly manifest in the plaintiffs' repeated efforts to mask their recruitment of NAP IRs for the benefit of Starion. The May 10, 2011 blast email contained a thinly veiled invitation to contact the D'Arinzos to learn more about the new " opportunity" they were pursuing. The email blast in December 2011 was another effort to conduct recruitment of NAP IRs under the guise of a holiday greeting. If the plaintiffs believed, that they were entitled to commissions, without any restrictions, why the pretense? And why did that pretense continue through trial when both plaintiffs maintained that the December 2011 video was nothing more than a Christmas card? If plaintiffs believed they were entitled to commissions without restriction, as argued, there would be no reason whatsoever not to acknowledge the genesis and purpose of this video--to recruit NAP IRs.
In sum, the plaintiffs' enforceable contract was that they be paid under the compensation plan. Payment of residuals under the compensation plan required that IRs be eligible and in good standing. The plaintiffs were neither eligible nor in good standing when they went to Starion and attempted to recruit NAP IRs to join them. As to the claimed additional oral promise that they would be entitled to residual commissions notwithstanding the terms of the compensation plan or otherwise without restriction, for the reasons stated above, the plaintiffs have not met their burden of proof.
The plaintiffs also argue that since they did not sign the IR Agreement they are not bound by the restrictive covenants contained therein regarding the payment of residual commissions. And if not so bound, then the residuals remain payable to this day. This argument is misplaced. Whether the plaintiffs were contractually bound by the IR Agreement is irrelevant to whether, separate and distinct from that inquiry, they had an enforceable contract to receive commissions for however long their downline customers remained with NAP, without restriction. The plaintiffs cannot have it both ways. They cannot disavow the obligations under the IR Agreement because they did not sign it and then rely on its provisions to create a contractual right that they have not otherwise demonstrated they had.
B. Breach
The next inquiry is whether the plaintiff has proven a breach of the contractual obligation to pay the plaintiffs 5% of the annual profit generated by their downline and 5% of the equity value of the plaintiffs' downline upon the sale of NAP. Payment of 5% of the profits generated by the plaintiffs' downline presupposes that the downline generated a profit. Similarly, the obligation to pay the plaintiffs a 5% equity interest in the value of their downline presupposes that the plaintiffs' downline had equitable value and further that NAP was sold. Thus, the existence of an annual profit from the plaintiffs' downline, equitable value of the downline and a sale of NAP are all conditions precedent to NAP's obligation to pay additional compensation to the plaintiffs.
" A condition precedent is a fact or event which the parties intend must exist or take place before there is a right to performance." Lach v. Cahill, 138 Conn. 418, 421 (1951). If a condition precedent " is not fulfilled, the right to enforce the contract does not come into existence." Christophersen v. Blount, 216 Conn. 509, 512 (1990). " Whether the performance of a certain act by a party to a contract is a condition precedent to the duty of the other party to act depends on the intent of the parties as expressed in the contract and read in light of the circumstances surrounding the execution of the instrument." (Internal quotation marks omitted.) Pullman, Comley, Bradley & Reeves v. Tuck-it-away, Bridgeport, Inc., 28 Conn.App. 460, 467-68 (1992).
First, unless and until the plaintiffs' downline generated a profit, NAP had no additional obligations to compensate the plaintiffs. See, e.g., Dimension Serv. Corp. v. Don Jacobs Imports, Inc., 2014 WL 97465, at *11 (Ky.Ct.App. Jan. 10, 2014) (Summary judgment erroneously granted where there was an absence of evidence as to the existence of any profits, such profits being a condition precedent to the payment of a percentage of profits to plaintiff); Virginia Properties, Inc. v. Rose, 210 Ga.App. 878, 880, 437 S.E.2d 835, 836 (1993) (Company's obligation to pay bonus occurred only upon satisfaction of condition precedent that company had achieved a certain level of profits.).
As to whether the plaintiff's downline was profitable, the evidence was conflicting. There was substantial evidence that NAP is a profitable business. It has continued to grow; has paid substantial salaries and bonuses to its employees; and has generated significant returns for the equity owners. Further, NAP paid Brad Tayles approximately $25,000 in 2014 as a purported percentage of the network marketing channel profits for the year 2012.
However, there was additional, credible, testimony that the payment to Tayles ought not to have been made and was the result of an accounting error, by the now former Chief Financial Officer. Further, as noted above, NAP employed many different marketing channels, the most profitable of which was direct mailing. Greg Breitbart testified that the direct marketing channel was the most successful and accounted for over 50% of NAP customers. The second most successful channel was telemarketing and the third was the digital advertising program. Last and least profitable, in fact, not profitable, was the network marketing channel. Both Greg and Kerry Breitbart testified that the network marketing channel, from inception, never generated any profit. The network marketing channel was shut down completely in January 2015 for that reason. Indeed, Kerry Breitbart testified that the network marketing channel resulted in a total loss of $10 million to NAP. The court credits the testimony of Greg and Kerry Breitbart on these issues. Finally, plaintiffs offered no fiscal analysis of the plaintiffs' downline or its profitability to NAP. Although not the defendants' burden to prove, the more reliable evidence and the inferences to be drawn from the evidence is that, like the rest of the network marketing channel, the plaintiffs' downline was never profitable to NAP.
In the final analysis, the plaintiffs have failed to prove this condition precedent or any breach of the contract by NAP.
Similarly, neither has the plaintiff proved the conditions precedent to the obligation to pay them a percentage of the equity value of their downline upon the sale of NAP. First, NAP has not been sold. Second, for the reasons set forth above, nor have the plaintiffs established that their downline had or has equity value to NAP.
Notably Greg Breitbart testified that of the majority of customers originally signed up through the network marketing channel have since left NAP.
While the plaintiffs have proven that they had an enforceable contract for compensation over and above their compensation as RSMs, the better evidence is that they have received all that was due them under that contract. The plaintiffs have therefore failed to establish a breach of contract and judgment will enter in favor of the defendants as to count one.
Count Two--Negligent Misrepresentation
The plaintiffs next assert a claim for negligent misrepresentation. The complaint first incorporates the first 17 paragraphs of the breach of contract claim and thereafter avers:
18. The defendants . . . represented to the plaintiffs they would be treated fairly and honestly paid in accordance to a schedule and provided a percentage of the net income and equity pursuant to a written contract.
19. Upon information and belief, the defendants . . . created the accounting management software so that it could be manipulated so that the defendant could skim funds off of the Broker/Distributor/Salesman amounts owed and thus cause monetary damage to the plaintiff. The defendants further never provided the written contract for the net profits and equity promised.
20. Said actions by the defendants were after material misrepresentations made to the plaintiffs that the commissions were by schedule and their promised additional income and equity position.
21. The defendants should have known the plaintiffs would so rely and should have known their representations were false and knew the plaintiffs would continue to work in reliance thereon and misrepresented the forthcoming payments and contract for profit and equity for which plaintiffs are damaged.
Connecticut courts have long recognized claims for negligent misrepresentation. Sturm v. Harb Development, LLC, 298 Conn. 124, 143-44 (2010). Our courts have adopted § 552 of the Restatement (Second) of Torts (1977) which provides: " One who, in the course of his business, profession or employment . . . supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information." Id., citing, Kramer v. Petisi, 285 Conn. 674, 681 (2008).
Here plaintiffs allege that the defendants negligently misrepresented: (1) that they would be paid under the compensation plan; (2) that they would be given a 5% profits interest in their downline; (3) that they would receive a 5% equity interest in their downline, and (4) that they would receive a written contract containing each such provision.
Given the factual findings made above, the plaintiffs' claims fail as none of these statements were false at the time they were made. The plaintiffs acknowledged being paid as required under the compensation plan and offered no evidence of any nefarious manipulation of those commissions by the defendants. Similarly, that they would be paid under the compensation plan as regional sales managers was also true. The court also found that the promise of additional compensation was not false, and was an enforceable oral contract. The testimony was also consistent and credible that at the time the plaintiffs went to work at NAP, everyone expected and contemplated the creation of a written contract.
Judgment will enter in favor of the defendants on count two.
Count Three--Intentional Misrepresentation
Plaintiffs next assert that the defendants made intentionally false statements to them in order to induce them to work in NAP's network marketing channel. Intentional misrepresentation is essentially common law fraud. " The essential elements of an action in common-law fraud, . . . are that: (1) a false representation was made as a statement of fact; (2) it was untrue and known to be untrue by the party making it; (3) it was made to induce the other party to act upon it; and (4) the other party did so act upon that false representation to his injury." Sturm v. Harb Development LLC, supra, 142; Suffield Development Associates Ltd. Partnership v. National Loan Investors, L.P., 260 Conn. 766, 777-78 (2002). " In contrast to a negligent representation, [a] fraudulent representation . . . is one that is knowingly untrue, or made without belief in its truth, or recklessly made and for the purpose of inducing action upon it." (Internal quotation marks omitted.) Kramer v. Petisi, 285 Conn. 674, 684 n.9 " This is so because fraudulent misrepresentation is an intentional tort." Id., at 684.
Count three incorporates the first 18 paragraphs of Count Two (negligent misrepresentation) and then avers in pertinent part:
19. Upon information and belief, the defendants . . . purposely created the accounting management software so that it could be manipulated so that the defendant could skim funds off of the Broker/Distributor/Salesman amounts owed and thus intentionally cause monetary damage to the plaintiff.
20. Said actions by the defendants were after intentional material misrepresentations purposely made to the plaintiffs that their commissions were by schedule and their promised additional income and equity position.
21. The defendants knew their representation were false and misleading and knew plaintiffs would rely thereon and continue to work and the plaintiffs are damaged by this.
22. Defendants, by their actions, to wit, making material misrepresentations to the plaintiffs, acted in bad faith in actual or constructive fraud upon plaintiffs. Defendants' actions were designed to mislead or deceive the plaintiffs, neglecting or refusing to fulfill defendants' duties and obligations.
23. Said actions by the defendants with the intention of wrongful personal gains perpetrated a fraud upon the plaintiffs and the plaintiffs were willfully defrauded and damaged thereby.
This count mirrors the claims in the second count with the exception of the allegation regarding the creation of a written contract, which does not appear herein. The only discernible difference is the defendants' mens rea, intentional versus negligent, when making the alleged misrepresentations. Therefore, the court's ruling with respect to count two is equally applicable to the question of whether the plaintiffs have established liability in count three. For the reasons stated above, they have not. Judgment will enter in favor of the defendants on count three.
Counts Four and Five--Unjust Enrichment and Quantum Meruit
Counts four and five sound in unjust enrichment and quantum meruit and are plead in the alternative to the breach of contract count.
Unjust enrichment and quantum meruit are forms of the equitable remedy of restitution by which a plaintiff may recover the benefit conferred on a defendant in situations where no express contract has been entered into by the parties . . . Quantum meruit is usually a remedy based on implied contract and usually relates to the benefit of work, labor or services received by the party who was unjustly enriched, whereas unjust enrichment relates to a benefit of money or property and applies when no remedy is available based on the contract.(Internal quotations omitted; Internal citations omitted.) Coppola Construction Co. v. Hoffman Enterprises Ltd. Partnership, 157 Conn.App. 139, 161-66 (2015). Although a plaintiff may plead in the alternative, it is well settled that the equitable remedies of unjust enrichment and quantum meruit are not available to a plaintiff if there was an express contract between the parties. Meaney v. Connecticut Hospital Assn., Inc., 250 Conn. 500, 517-18 (1999) (" It is often said that an express contract between parties precludes recognition of an impliedin- law contract governing the same subject matter"). Thus, " '[a] party may not recover the reasonable value of services rendered, pursuant to the doctrine of quantum meruit, when the actions for which it seeks relief were governed by an express contract.' David M. Somers & Associates, P.C. v. Busch, supra, 283 Conn. at 408, 927 A.2d 832." Ed Lally & Associates, Inc. v. DSBNC, LLC, 145 Conn.App. 718, 735-36 (2013). Indeed, " '[t]he lack of a remedy under a contract is a precondition to recovery based on unjust enrichment or quantum meruit.'" Id., quoting, 300 State, LLC v. Hanafin, 140 Conn.App. 327, 330 (2013).
Here, the court has found a valid and enforceable oral contract between the parties under which the plaintiffs' compensation was to be calculated and paid. That the plaintiffs failed to establish a breach of that contract or that they did not receive monies due them under that contract, does not impact the availability of these equitable remedies. See, Meaney v. Connecticut Hospital Association, Inc., supra .
Judgment as to counts four and five will enter in favor of the defendants.
Count Six--CUTPA
Lastly, the plaintiffs rely upon the defendants' breach of contract and other conduct as a basis for a violation of CUTPA.
Section 42-110b(a) provides: " No person shall engage in unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce." Our Supreme Court has adopted the so-called " cigarette rule" when assessing CUTPA claims. Williams Ford, Inc. v. Hartford Courant Co., 232 Conn. 559, 591-92 (1995). That rule requires a determination of: " (1) whether the practice, without necessarily having been previously considered unlawful, offends public policy as it has been established by statutes, the common law, or otherwise--whether, in other words, it is within at least the penumbra of some common-law, statutory, or other established concept of unfairness; (2) whether it is immoral, unethical, oppressive, or unscrupulous; (3) whether it causes substantial injury to consumers, competitors or other businessmen." Id.
Given the findings made above, it is clear that the plaintiffs have not proven a CUTPA violation. The defendants did not breach the plaintiffs' compensation agreement and they did not mislead the plaintiffs either negligently or intentionally. Nor did the defendants engage in any other course of conduct that the court could reasonably describe as immoral, unethical, oppressive or unscrupulous.
Judgment will enter in favor of the defendants on count six.
SO ORDERED.