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Bernstein v. Cengage Learning, Inc.

United States District Court, S.D. New York
Apr 22, 2021
Civil Action 19 Civ. 7541 (ALC) (SLC) (S.D.N.Y. Apr. 22, 2021)

Opinion

Civil Action 19 Civ. 7541 (ALC) (SLC)

04-22-2021

DOUGLAS BERNSTEIN, ELAINE INGULLI, TERRY HALBERT, EDWARD ROY, LOUIS PENNER, and ROSS PARKE, as personal representative of THE ESTATE OF ALISON CLARKE-STEWART, on behalf of themselves and others similarly situated, Plaintiffs, v. CENGAGE LEARNING, INC., Defendant.


TO THE HONORABLE ANDREW L. CARTER, United States District Judge:

REPORT & RECOMMENDATION

SARAH L. CAVE, United States Magistrate Judge.

On August 12, 2019, Plaintiffs Douglas Bernstein, Elaine Ingulli, Terry Halbert, Edward Roy, Louis Penner, and Ross Parke, as personal representative of The Estate of Alison Clarke-Stewart, on behalf of themselves and others similarly situated (collectively, “Plaintiffs”) filed a complaint (the “Complaint”) asserting breach of contract claims against Defendant Cengage Learning, Inc. (“Cengage”). (ECF No. 1). Plaintiffs alleged that Cengage violated the terms of its publishing agreements (the “Contracts”) by failing to pay authors royalties for use of their works in accordance with those Contracts. (Id. at ¶¶ 54-59). By Order dated September 29, 2020, the Honorable Andrew L. Carter, United States District Judge, granted Cengage's motion to dismiss the Complaint in part (the “Motion to Dismiss”) and denied Cengage's motion to strike the class allegations. (ECF No. 52 (the “MTD Order”)). See Bernstein v. Cengage Learning, Inc., No. 19 Civ. 7541 (ALC) (SLC), 2020 WL 5819862 (S.D.N.Y. Sept. 29, 2020).

Plaintiffs now move for leave to file a First Amended Complaint (“FAC”), which would add allegations that Plaintiffs claim were revealed by Defendants' document productions and that aim to correct deficiencies highlighted in the MTD Order. (ECF No. 61 (the “Motion”)). Cengage opposes the Motion. (ECF No. 72). For the reasons set forth below, I respectfully recommend that the Motion be GRANTED IN PART and DENIED IN PART.

The Court granted Plaintiffs' motion (ECF No. 60) for leave to redact confidential information from the FAC and their memorandum of law in support of the Motion. (ECF No. 66). In this Report and Recommendation, the Court cites the unredacted versions of the FAC (ECF No. 64-2) and Plaintiffs' memoranda of law (ECF Nos. 64, 77), redacted accordingly.

I. BACKGROUND

A. Factual Background

The factual background on which Plaintiffs base their claims is set forth in detail in the MTD Order and incorporated here by reference. Bernstein, 2020 WL 5819862, at *1-3. I will focus on the allegations in the FAC pertinent to the Motion.

Plaintiffs, authors of academic textbooks, were parties to publishing Contracts with Cengage, a publisher, seller, and distributor of the textbooks. Bernstein, 2020 WL 5819862, at *1. At issue in this action are royalties to which Plaintiffs claim they are entitled under the Contracts relating to Cengage's digital products, MindTap and Cengage Unlimited (“Unlimited”). Id. at *1- 2. As explained in the MTD Order, “MindTap is an electronic platform through which a student has access to an electronic version of a student textbook, along with homework, quizzes, tests, and multimedia materials[, ]” as well as “feedback and analytics for instructors and students.” Id. at *2. Unlimited “is a subscription service for digital higher education materials, ” which “provides access to most of Cengage's electronic catalog for a flat, per-semester fee.” Id. The materials to which the subscription provides access include “electronic versions of all textbooks within the Unlimited platform, ” and the option to rent a hard copy of a textbook for an additional fee. Id.

As Plaintiffs allege in both the Complaint and the FAC, the Contracts provide that the authors are to receive for their respective “Work” a “royalty percentage based on net receipts from the sale of their works[, ]” with Cengage keeping the remainder of the revenue. (ECF Nos. 1 ¶ 29; 64-2 ¶ 35). A “Work” “is defined as the textbook itself, ” and is the operative product on which the royalties are to be paid under the Contracts. Bernstein, 2020 WL 5819862, at *4. For example, the Contract for Law, Ethics and Responsibility: The American Legal Environment (“Law and Ethics”) includes the following royalty provision:

[Publisher] Will pay the following compensation to the Author: (a) 15% of net paid sales [] paid sales less credits and returns of the Work in book form except as provided for in (b); (b) 7.5% of . . . (iii) net paid sales of the Work in all other forms, including, without limitation: . . . electronic, machine-readable and computerized forms.
(ECF No. 64-2 ¶ 38). The other examples of Contracts quoted in the FAC contain similar provisions. (Id. ¶ 36 (Contract for Introduction to Psychology (“Psychology”) (“On all sales of the Work . . . the Publisher shall pay the Author a royalty based on the Publisher's net receipts . . .”); ¶ 37 (Contract for Essentials of Psychology (“Essentials”) (providing for payment of royalty equivalent to “18% of Net Receipts for all copies of the student text sold during the life of the edition”; ¶ 39 (alleging that all Contracts “contain a substantially identical royalty payment calculation that provides for: (1) a royalty rate or schedule of royalty rates, applied to (2) net receipts, from (3) sales of the [W]orks”)).

In the FAC, Plaintiffs allege that the Contracts “require Cengage, at a minimum, to pay royalties on all net receipts accurately attributable to authors' textbooks, ” and that failure to do so breaches “(a) the express contractual obligation to pay royalties on the net receipts from the sale of [W]orks and (b) the covenant of good faith and fair dealing implied in every contract.” (ECF No. 64-2 ¶ 40). In the FAC, Plaintiffs assert that, with respect to both MindTap and Unlimited, Cengage is breaching both the Contracts and the implied covenant of good faith and fair dealing.

1. MindTap

Plaintiffs allege in the FAC that Cengage “is systematically misallocating revenues earned from MindTap sales between royalty bearing and non-royalty bearing components, ” as a result of which Cengage underpays Plaintiffs the royalties to which they are entitled under the Contracts. (ECF No. 64-2 ¶ 40). Cengage does this by “reduc[ing] the revenue base used to calculate authors' royalties by (1) improperly deeming functionalities intertwined with the electronic [W]ork (such as highlighting and bookmarking) as separate and apart from the [W]ork and (2) overvaluing Cengage's contributions (such as homework, quizzes, and tests) to the MindTap platform.” (Id. ¶ 41). Plaintiffs claim that the “[f]unctionalities like bookmarking are intertwined with the textbook itself, lacking any independent value, and are thus a part of the royalty-bearing [W]ork, ” and that “nothing in the [Contracts] allows Cengage to deem that functionalities enmeshed with a [W]ork are non-royalty bearing.” (Id. ¶ 42; see id. ¶ 46 (“Nothing in the [Contracts] permits Cengage to assign such high values to its own contributions . . .”)). Plaintiffs also allege that Cengage's treatment of functionalities as non-royalty bearing is contrary to “industry custom and practice.” (Id. ¶ 43). Plaintiffs allege that Cengage's misallocation of MindTap revenue has resulted in XXXXX (Id. ¶ 47).

In support of their assertion that Cengage's misallocation of MindTap revenue breaches the Contracts, Plaintiffs point to Cengage's statement in support of the Motion to Dismiss that “‘authors are entitled to royalties based upon the share of revenue that is fairly attributable to their specific work.'” (ECF No. 64-2 ¶ 47 (quoting ECF No. 43 at 4)). In support of their argument that Cengage's conduct breaches the implied covenant of good faith and fair dealing, Plaintiffs allege that Cengage “systematically and in bad faith overvalues Cengage's supposed contributions to authors' [W]orks, in a deliberate effort to enrich Cengage while depriving authors of royalties on revenue that is fairly attributable to student texts.” (Id. ¶ 50).

2. Unlimited

Plaintiffs allege in the FAC that “Cengage collects subscription revenue from students who purchase a subscription to access authors' [W]orks on [Unlimited].” (ECF No. 64-2 ¶ 51). Plaintiffs allege that Cengage has falsely “represented that it allocates all Unlimited revenue to different revenue pools and then allocates revenue from those pools to the royalty-bearing works that comprise them.” (Id. ¶ 52). Instead, Cengage's “ XXXXX in breach of the Contracts' express terms and the implied covenant of good faith and fair dealing. (Id.) Cengage's exclusion of revenue from royalty calculations “systematically hurts all authors whose [W]orks are included on the Unlimited platform because it shrinks the aggregate revenue pool available to authors . . . . ” (Id. ¶ 54).

Plaintiffs allege that Cengage's “systematic exclusion of tens of millions of dollars from royalty calculations from Unlimited sales of authors' [W]orks . . . is thus a clear breach of the contractual requirement for Cengage to pay royalties on the net receipts from sales of authors' [W]orks.” (ECF No. 64-2 ¶ 55). In support of this breach of contract claim, Plaintiffs point to Cengage's statement in support of the Motion to Dismiss that the Contracts require Cengage to “‘pay authors in aggregate a royalty based on the total net receipts from [] Unlimited.'” (Id. (quoting ECF No. 40 at 16)).

In support of its claim that Cengage breached the implied covenant of good faith and fair dealing, Plaintiffs allege in the FAC that “Cengage has no good faith basis for XXXXX, and instead has done so dishonestly in bad faith in order to enrich itself at the expense of authors.” (ECF No. 64-2 ¶ 56). Plaintiffs also allege that Cenga ge 's “ XXXXX” is further evidence of Cengage's bad faith. (Id.) In addition, Plaintiffs allege that “Cengage's allocation methodology depends on a variety of factors found nowhere in the [C]ontracts, and in particular on Cengage's unilateral and subjective determination of the ‘relative of a value' [sic] of authors' [W]orks.” (Id. ¶ 58).

In the FAC, Plaintiffs seek to assert the breach of contract and breach of the implied covenant of good faith and fair dealing claims on behalf of a class consisting of:

All authors of works who entered into a publishing agreement with Cengage Learning, Inc. or one of its predecessors-in-interest whose works have been offered on the MindTap platform and/or as part of the Cengage Unlimited subscription service.
(ECF No. 64-2 ¶ 61).

B. Procedural Background

1. The Complaint and the MTD Order

On August 12, 2019, Plaintiffs filed the Complaint. (ECF No. 1). On October 10, 2019, Cengage filed a letter requesting a pre-motion conference in anticipation of moving to dismiss the Complaint, as required by Judge Carter's Individual Practices. (ECF No. 23). In their letter in response, Plaintiffs asserted arguments in opposition to dismissal of the Complaint, but did not request leave to amend. (ECF No. 29). Following a conference with the parties on November 21, 2019, Judge Carter set a briefing schedule for the Motion to Dismiss. (ECF No. 36). On December 20, 2019, Cengage filed the Motion to Dismiss. (ECF Nos. 39-41). In their opposition to the Motion to Dismiss, Plaintiffs again countered Cengage's arguments but did not request leave to amend the Complaint. (ECF No. 42).

On September 29, 2020, Judge Carter issued the MTD Order, in which he granted the Motion to Dismiss the breach of contract claims as to both MindTap and Unlimited, and the breach of implied covenant of good faith and fair dealing claim as to Unlimited. Bernstein, 2020 WL 5819862, at *4-6. As to Plaintiffs' breach of contract claim, Judge Carter found that it rested on the premise that the royalty clauses in the Contracts “plainly require Cengage to pay royalties based on total net receipts of MindTap and [] Unlimited, ” but that “Plaintiffs have not adequately pleaded that Cengage is contractually obligated to base royalties on total net receipts for MindTap and [] Unlimited.” Id. at *3-4. Judge Carter pointed out that the Contracts “explicitly refer to royalties to be paid on ‘the Work', which is defined as the textbook itself.” Id. at *4. Judge Carter noted that “[t]he plain text of the clauses do not refer to any product Cengage might sell in addition to ‘the Work.'” Id. (emphasis added). Accordingly, because “[t]he royalty clauses in the [Contracts] unambiguously define the ‘Work' as the titles themselves[, ]” Judge Carter found that they “cannot bear Plaintiffs' reading that they literally commit Cengage to pay royalties on total net receipts of MindTap and [] Unlimited.” Id. Having failed to plead that the Contracts prohibited Cengage's “pricing scheme for MindTap and [] Unlimited, ” Judge Carter dismissed the breach of contract claims. Id. at *5.

Judge Carter denied Cengage's motion to strike the class allegations, finding that the dismissal of the breach of contract claims and the Unlimited breach of implied covenant of good faith and fair dealing claim resolved Cengage's concern “that common issues will predominate over individual ones.” 2020 WL 5819862, at *6.

Finding the “decisive question” as to the breach of implied covenant of good faith and fair dealing claims to be “whether Plaintiffs have pleaded a lack of good faith by Cengage, ” Judge Carter concluded that Plaintiffs had pleaded Cengage's lack of good faith as to MindTap, but not Unlimited. Bernstein, 2020 WL 5819862, at *5. Judge Carter cited Plaintiffs' allegation that Cengage, “in exercising its discretion to determine what among net receipts from the sales of MindTap is attributable to the authors and what is attributable to Cengage-made materials, systematically undervalued authors' contributions to enrich themselves.” Id. Because, if true, this allegation suggested that “Cengage has exercised its discretion with the ulterior motive of appropriating what should go to the authors to itself, ” Judge Carter held that Plaintiffs adequately pled bad faith. Id. In the absence of allegations suggesting that Cengage set the subscription price for Unlimited in bad faith or was “in any way taking more of the pie than it is due, ” however, Judge Carter dismissed the breach of the implied covenant of good faith and fair dealing claim as to Unlimited. Id. at *5-6.

At the conclusion of the MTD Order, Judge Carter directed the parties to file a status report proposing a pretrial schedule for this action, Bernstein, 2020 WL 5819862, at *6, which the parties filed on October 30, 2020, and supplemented on November 18, 2020. (ECF Nos. 56, 58). Following a conference with the parties on November 30, 2020, the Court directed Plaintiffs to file the Motion by December 11, 2020, and directed the parties to meet and confer regarding the scope of discovery that would proceed while the Motion was pending, specifically, Plaintiffs' breach of the implied covenant of good faith and fair dealing as to MindTap, and the adequacy and typicality of the class representatives. (ECF No. 59). On December 22, 2020, the Court adopted the parties' proposed Interim Scheduling Order, which limited the discovery Plaintiffs were seeking from Cengage while the Motion was pending to Contracts between Cengage and putative class members, and MindTap-related information. (ECF No. 71).

2. The Motion

In seeking leave to file the FAC, Plaintiffs contend that their amendments seek to correct deficiencies highlighted in the MTD Order and, with respect to Unlimited, are based on documents that Cengage recently produced. (ECF No. 64 at 5). In the absence of a scheduling order in this case, Plaintiffs assert that the Motion is governed by the “liberal standards” of Federal Rule of Civil Procedure 15. (Id.) Under that standard, Plaintiffs first assert that their amendments are not in bad faith because seeking to correct deficiencies in a complaint “is ‘a legitimate reason.'” (Id. at 14 (quoting Duling v. Gristede's Op. Corp., 265 F.R.D. 91, 98 (S.D.N.Y. 2010)). Second, they contend that newly-discovered evidence in Cengage's document production is an additional good-faith basis to amend. (Id. at 14-15). Third, Plaintiffs argue that Cengage will not be prejudiced by the amendments because discovery remains open, the amendments “will not significantly expand the scope of discovery, ” and the allegations in the FAC arise from the same events as pled in the Complaint. (Id. at 15-17). Fourth, Plaintiffs argue that they have not unduly delayed filing the FAC, which comes 16 months after the action commenced, and diligently sought leave to amend after the MTD Order. (Id. at 18-19). Finally, Plaintiffs argue that their amendments are not futile because the FAC “adequately pleads an express breach” under the Contracts, no longer relies “on the premise that Cengage is obligated to pay royalties on the ‘total net receipts' from MindTap sales, ” which Judge Carter rejected in the MTD Order, and adequately XXXXX via XXXXX ” (Id. at 19-26).

Cengage opposes the Motion first on the ground that Plaintiffs unduly delayed seeking to amend and in doing so, attempt to relitigate the MTD Order. (ECF No. 72 at 8). Cengage argues that Plaintiffs' theory that the allocation of MindTap revenue violates the Contracts is not based on any new information but is rather a “newly invented purported interpretation” of the Contracts that Plaintiffs have had for “decades.” (Id.) Cengage maintains that Plaintiffs provide no reason for raising this new interpretation now, a “maneuver” that Judge Carter's Individual Practices specifically admonish against in their warning that if a party elects not to amend in the face of a motion to dismiss, “it is unlikely that the Court will grant [them] leave to amend.” (Id. at 8-9 (citing Judge Carter's Individual Practices Rule 2.D)). Cengage asserts that Plaintiffs' theory that Cengage's allocation between the authors' Works and Cengage-supplied content or features breaches the Contracts runs counter to Judge Carter's “determination that the allocation of MindTap revenue is a matter for Cengage's discretion.” (Id. at 10). Cengage also asserts that this new theory lacks any standard by which to judge Cengage's “accuracy” in its allocation, given that the Contracts contain “no express terms . . . that dictate how that revenue allocation must be done.” (Id. at 10-11).

Second, Cengage argues that Plaintiffs' amendments concerning Unlimited are futile because Judge Carter already rejected them in the MTD Order by holding that the Contracts allowed Cengage to allocate, in good faith, revenue between the Plaintiffs' Works and Cengage-supplied content. (ECF No. 72 at 13-14). See Bernstein, 2020 WL 5819862, at *4-5. Cengage argues that “[i]t follows from the [MTD Order], therefore, that, at a minimum, Cengage is permitted under the [Contracts] to allocate some portion of [] Unlimited revenue - that portion attributable to the non-text portions of MindTap titles available in [] Unlimited - as non-royalty bearing.” (ECF No. 72 at 14). Because the Contracts permit Cengage to allocate, Cengage argues that Plaintiffs' claim that it is not allowed to allocate any Unlimited revenue as non-royalty bearing is therefore futile, as well as lacking any basis in the Contracts themselves. (Id. at 14-15).

Third and finally, Cengage argues that Plaintiffs' amendments do not establish bad faith as a matter of law because Cengage's exercise of its allocation rights under the Contracts cannot constitute bad faith. (ECF No. 72 at 15-16 (citing Lanza v. Fin. Indus. Reg. Auth., 953 F.3d 159, 164 (1st Cir. 2020)). Cengage disputes Plaintiffs' suggestion that it has misrepresented its allocation methodology to authors, and asserts that Plaintiffs have otherwise failed to “plausibly allege facts supporting a claim that Cengage's allocation methodology treats royalty-bearing titles less favorably than non-royalty bearing ones.” (Id. at 17).

II. DISCUSSION

A. Legal Standards

1. Motion to Amend

Federal Rule of Civil Procedure 15 provides that a court “should freely give leave” to amend a pleading “when justice so requires.” Fed.R.Civ.P. 15(a)(2). The Rule encourages courts to determine claims “on the merits” rather than disposing of claims or defenses based on “mere technicalities.” Monahan v. NYC Dep't of Corr., 214 F.3d 275, 283 (2d Cir. 2000). The Second Circuit has explained that “district courts should not deny leave [to amend] unless there is a substantial reason to do so, such as excessive delay, prejudice to the opposing party, or futility.” Friedl v. City of New York, 210 F.3d 79, 87 (2d Cir. 2000). Courts in this District have held that denial of a motion to amend is appropriate where “(1) the movant is guilty of undue delay, (2) the movant has acted in bad faith, (3) the amendment would be futile, or (4) the amendment would prejudice the opposing party.” Procter & Gamble Co. v. Hello Prods., LLC, No. 14 Civ. 649 (VM) (RLE), 2015 WL 2408523, at *1 (S.D.N.Y. May 20, 2015) (citing State Teachers Ret. Bd. v. Fluor Corp., 654 F.2d 843, 856 (2d Cir. 1981)); see Williams v. Citigroup Inc., 659 F.3d 208, 213-14 (2d Cir. 2011) (per curiam) (reiterating Supreme Court precedent explaining proper grounds for denying motion to amend as “undue delay, bad faith or dilatory motive on the part of the movant, . . . undue prejudice to the opposing party by virtue of allowance of the amendment, [or] futility of amendment[.]”).

Because a scheduling order setting a deadline for amendment of pleadings has not yet been entered in this action, only Rule 15(a), and not Rule 16(b), applies. See Soroof Trading Dev. Co. v. GE Microgen, Inc., 283 F.R.D. 142, 147-48 (S.D.N.Y. 2012) (where motion to amend “is timely filed, only Rule 15's liberal standard governs”).

While a motion to amend under Rule 15(a)(2) may be filed at any stage of the litigation, when “a proposed amendment is based on ‘information that the party knew or should have known prior to the deadline [to file an amendment], leave to amend is properly denied.'” Hyo Jung v. Chorus Music Studio, Inc., No. 13 Civ. 1494 (CM) (RLE), 2014 WL 4493795, at *2 (S.D.N.Y. Sept. 11, 2014) (citing Soroof Trading, 283 F.R.D. at 147); Procter & Gamble Co., 2015 WL 2408523, at *1-2 (finding undue delay and prejudice where party was aware of information well before deadline to amend pleadings but waited ten months to move to amend).

Prejudice occurs when an amendment would “(i) require the opponent to expend significant additional resources to conduct discovery and prepare for trial; (ii) significantly delay the resolution of the dispute; or (iii) prevent the plaintiff from bringing a timely action in another jurisdiction.” Soroof Trading, 283 F.R.D. at 147 (citing Block v. First Blood Assocs., 988 F.2d 344, 350 (2d Cir. 1993)).

2. Breach of Contract

It is undisputed for purposes of the Motion that Massachusetts law applies to the Psychology and Essentials Contracts, and Minnesota law applies to the Law and Ethics Contract. (ECF No. 64 at 20 n.4). See Bernstein, 2020 WL 5819862, at *4 (applying Massachusetts and Minnesota law to Motion to Dismiss). As Judge Carter explained:

Massachusetts and Minnesota law require a Plaintiff to plead the same elements to state a claim for breach of contract: (1) the existence of a contract, (2) adequate performance of the contract by the plaintiff, (3) breach of contract by the defendant, and (4) damages. Compare Brooks v. AIG SunAmerica Life Assur. Co., 480 F.3d 579, 586 (1st Cir. 2007) (MA) and Gen. Mills Operations, LLC v. Five Star Custom Foods, Ltd., 703 F.3d 1104, 1107 (8th Cir. 2013) (MN).
Id.

3. Breach of Implied Covenant of Good Faith and Fair Dealing

As Judge Carter explained in the MTD Order:

Under both Minnesota and Massachusetts law, the implied covenant of good faith and fair dealing is implied in every contract. See Latson v. Plaza Home Mortg., Inc., 708 F.3d 324, 326 (1st Cir. 2013); Nat'l Union Fire Ins. Co. v. Donaldson Co., 272 F.Supp.3d 1099, 1109 (D. Minn. 2017). Under Minnesota law, “[a] party breaches the implied covenant when it acts in bad faith, that is, when it ‘refus[es] to fulfill some duty or contractual obligation based on an ulterior motive.' A party does not act in bad faith when it exercises its legal and contractual rights.” Armas v. Fifth Third Bancorp, 315 F.Supp.3d 1118, 1123 (D. Minn. 2018) (citations omitted). Massachusetts law has a similar view: “In order to prevail, the plaintiff must present evidence of bad faith or an absence of good faith. Lack of good faith carries an implication of a dishonest purpose, conscious doing of wrong, or breach of duty through motive of self-interest or ill will.” Young v. Wells Fargo Bank, N.A., 717 F.3d 224, 238 (1st Cir. 2013) (quotations and citations omitted).
Bernstein, 2020 WL 5819862, at *5. Under both Massachusetts and Minnesota law, “[t]he decisive question here is whether Plaintiffs have pleaded a lack of good faith by Cengage.” Id.

B. Breach of Contract

1. MindTap amendments

I recommend that Plaintiffs be denied leave to amend their breach of contract claims as to MindTap for two reasons. First, Plaintiffs do not assert that the MindTap amendments are based on any information they recently uncovered in discovery or are otherwise amendments they could not have sought (i) in their pre-motion letter before the Motion to Dismiss, or (ii) in their opposition to the Motion to Dismiss, in neither of which did Plaintiffs request leave to amend. As Defendants correctly point out, Plaintiffs' proposed theory that the way Cengage allocates MindTap revenue breaches the Contracts is “a newly invented purported interpretation” of the Contracts, which Plaintiffs have had “for literally decades.” (ECF No. 72 at 8). There is no reason why Plaintiffs could not have advanced this interpretation, which is neither “materially different [nor] more detailed” than their original breach of contract theory in the Complaint. Kregler v. City of New York, 821 F.Supp.2d 651, 658 (S.D.N.Y. 2011). This is particularly true given that Plaintiffs had notice of the deficiencies in their allegations not once, but twice, and on neither occasion sought leave to amend; therefore, leave to amend is particularly unjustified. See City of Pontiac Policemen's & Firemen's Ret. Sys. v. UBS AG, 752 F.3d 173, 188 (2d Cir. 2014) (affirming denial of leave to amend where plaintiffs failed to amend after being on notice of deficiencies); Doe v. N.Y. Univ., 438 F.Supp.3d 172, 187 (S.D.N.Y. 2020) (denying leave to amend where plaintiff failed to amend in response to notice of deficiencies in original complaint). Plaintiffs' delay in seeking to amend has prejudiced Cengage by drawing out unnecessarily the pleading stage of this action through two rounds of briefing, thus delaying the timely resolution of this action. See Deng v. N.Y.S. Off. of Mental Health, No.13 C i v. 6801 (ALC) (RLE), 2017 WL 11555249, at *2 (S.D.N.Y. Jan. 10, 2017) (denying leave to amend that was unduly delayed and would require defendants to expend additional resources). Accordingly, Plaintiffs' delay and corresponding prejudice to Cengage warrants denial of the Motion.

Second, the MindTap amendments are futile. To the extent there is any novelty in Plaintiffs' theory in the FAC of Cengage's contractual liability for the way it allocates MindTap revenue, it runs counter to Judge Carter's determination in the MTD Order that the Contracts vest Cengage with “discretion to determine what among net receipts from the sales of MindTap is attributable to the authors and what is attributable to Cengage-made materials, ” subject to the implied covenant of good faith and fair dealing. Bernstein, 2020 WL 5819862, at *5. Plaintiffs purport to allege in the FAC that, even if Cengage's allocations were in good faith, they could nevertheless breach the Contracts (ECF No. 64-2 ¶¶ 59-60), which contradicts Judge Carter's holding that the Contracts give Cengage discretion to make the allocation. Bernstein, 2020 WL 5819862, at *5. Plaintiffs cannot take this opportunity to amend-which they failed to do previously-to relitigate Judge Carter's rulings in the MTD Order. See Deng, 2017 WL 11555249, at *2 (denying amendments that “simply recast[] the dismissed claims”); Benex LC v. First Data Merchant Servs. Corp., No. 14-CV-6393 (JS) (AKT), 2016 WL 6683475, at *4 (E.D.N.Y. Nov. 14, 2016) (denying leave to amend based on “legal arguments-couched as factual allegations-regarding the interpretation of the Contract” that sought to “relitigate” issues court had previously decided); Weslowski v. Zugibe, 96 F.Supp.3d 308, 316 (S.D.N.Y. 2015) (“The mere filing of an Amended Complaint does not entitle Plaintiff to relitigate his claims absent new factual allegations.”), aff'd 626 Fed.Appx. 20 (2d Cir. 2015).

Plaintiffs try to circumvent Judge Carter's MTD Order by casting their claims as no longer based on Cengage's failure to pay royalties based on “total net receipts” from MindTap sales, but rather on the assertion “that Cengage's method of allocating net receipts is inaccurate and systematically undervalues authors' textbooks as part of a MindTap sale[.]” (ECF No. 64 at 22 & 23 n.5). The defect in this formulation, however, is that Plaintiffs fail to allege any metric by which Cengage's discretionary allocations should be judged, nor could they-as Judge Carter found, the applicable metric is good faith, but that “may not be ‘invoked to create rights and duties not contemplated by the provisions of the contract or the contractual relationship.'” Bernstein, 2020 WL 5819862, at *5. (quoting Uno Rests., Inc. v. Bos. Kenmore Realty Corp., 441 Mass. 376, 385 (2004)). Indeed, Plaintiffs admit that “nothing” in the Contracts “allows Cengage to deem that functionalities enmeshed with a [W]ork are non-royalty bearing, ” (ECF No. 64-2 ¶ 42), but the opposite is also true-nothing in the Contracts prevents Cengage from doing so either, and therefore, its allocations cannot, as a matter of law, constitute a breach.

Finally, the language of the Contracts cited in the FAC is exactly the same language providing for royalties to be paid on “the Work” that Judge Carter analyzed in the MTD Order and held “was inconsistent” with a breach of contract claim: “The plain text of the clauses do not refer to any product that Cengage might sell in addition to ‘the Work.'” Bernstein, 2020 WL 5819862, at *4 (emphasis added); see Weslowski, 96 F.Supp.3d at 316 (explaining that law of the case doctrine “counsels against reconsideration” of amended pleadings that are “in large part identical” to prior complaint). In short, Plaintiffs are seeking, through the FAC, to propound a breach of contract claim that Judge Carter's MTD Order forecloses, and thus, the MindTap amendments may be denied as futile.

2. Unlimited amendments

Although Plaintiffs' proposed amendments to their breach of contract claim relating to XXXXX Unlimited do not suffer from the first flaw fatal to the MindTap amendments-Plaintiffs do include new factual allegations as to and are therefore timely (see § I.A.2 supra)-they do suffer from the second, futility. In the FAC, Plaintiffs' theory is that Cengage has breached the Contracts by XXXXX. (ECF Nos. 64 at 24; 64-2 ¶¶ 15, 51-55, 77). Judge Carter expressly held, however, that “Plaintiffs have failed to plead how the [Contracts] prohibit Cengage's pricing scheme for . . . Unlimited, ” and therefore failed to plead a breach of contract claim. Bernstein, 2020 WL 5819862, at *5. In other words, under Judge Carter's analysis of the Contracts, Cengage has the right to allocate Unlimited revenue between royalty bearing and non-royalty bearing, thus precluding Plaintiffs' theory in the FAC that Cengage must calculate royalties based on all Unlimited revenue. Because the MTD Order precludes the theory that Plaintiffs attempt in the FAC, their amendments as to the Unlimited breach of contract claim may also be denied as futile.

C. Breach of Implied Covenant of Good Faith and Fair Dealing

Cengage does not contend that Plaintiffs' proposed breach of the implied covenant of good faith and fair dealing claim with respect to Unlimited is untimely or in bad faith, only that it is futile. (ECF No. 72 at 13). Therefore, as Judge Carter noted in the MTD Order, “[t]he decisive question” in considering whether Plaintiffs' FAC adequately pleads such a claim is “whether Plaintiffs have pleaded a lack of good faith by Cengage.” Bernstein, 2020 WL 5819862, at *5. To plead bad faith under Massachusetts and Minnesota law, Plaintiffs must allege, with respect to Unlimited, that “Cengage has exercised its discretion with the ulterior motive of appropriating what should go to the authors to itself.” Id. In the MTD Order, Judge Carter noted that Plaintiffs failed to plead “any facts that suggest bad faith by Cengage in setting [the] price” for Unlimited, that Cengage is “in any way taking more of the pie than it is due, or otherwise acting with a bad faith motive.” Id.

I find that Plaintiffs' amendments in the FAC sufficiently rectify the deficiencies in pleading bad faith that Judge Carter identified to justify granting leave to amend the breach of the implied covenant of good faith and fair dealing claim relating to Unlimited. First, the FAC alleges that XXXXX. (ECF No. 64-2 ¶¶ 53-60). Second, the FAC alleges that Cengage designed its allocation methodology “to line its own pockets at the expense of authors, by inflating the value of Cengage's own supposed contributions to the [] Unlimited platform and systematically undervaluing royalty-bearing textbooks that are available on the platform.” (Id. ¶ 58; see id. ¶¶ 56, 59). Third, the FAC alleges that Cengage has concealed its allocation methodology from authors who supply Works for the Unlimited platform. (Id. ¶¶ 16, 56, 59). Each of these allegations, if true, evidence the “ulterior motive” requisite for a showing of bad faith under Massachusetts and Minnesota law. Bernstein, 2020 WL 5819862, at *5. Accordingly, Plaintiffs' proposed amendments to their breach of the implied covenant of good faith and fair dealing with respect to Unlimited are not futile, and leave to amend is warranted.

In opposition, Cengage argues that the MTD Order means that the Contracts permit it to allocate “some portion of [] Unlimited revenue-that portion attributable to the non-text portions of MindTap titles available in [] Unlimited-as non-royalty bearing, ” and therefore, Plaintiffs cannot state a claim for breach of the implied covenant of good faith and fair dealing as a matter of law. (ECF No. 72 at 14-15). The fault in Cengage's argument, however, is that Judge Carter explained that Cengage's discretion to allocate was circumscribed by the obligation to act in good faith. Bernstein, 2020 WL 5819862, at *5. As Judge Carter noted, “[a] party may breach the covenant of good faith and fair dealing without breaching any express term of that contract.” Id. (citing Fortune v. National Cash Register Co., 373 Mass. 96, 101 (1977); BP Prod. N. Am., Inc., v. Twin Cities Stores, Inc., 534 F.Supp.2d 959, 967 (D. Minn. 2007)). Thus, the conclusion that Plaintiffs cannot state express breach of contract claims does not preclude their breach of implied covenant claim where, as set forth above, they have added sufficient factual allegations to plausibly show that, in its Unlimited allocation methodology, Cengage had an “ulterior motive of appropriating what should go to the authors to itself.” Id. Therefore, Plaintiffs' Motion as to their breach of the implied covenant of good faith and fair dealing concerning Unlimited should be granted.

III. CONCLUSION

For the reasons set forth above, I respectfully recommend that the Motion be GRANTED IN PART, to the extent that Plaintiffs be permitted to amend their claim for breach of the implied covenant of good faith and fair dealing as to Unlimited, and DENIED IN PART, to the extent that Plaintiffs be denied leave to amend their breach of contract claims.

NOTICE OF PROCEDURE FOR FILING OBJECTIONS TO THIS REPORT AND RECOMMENDATION

The parties shall have fourteen (14) days (including weekends and holidays) from service of this Report and Recommendation to file written objections pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure. See also Fed.R.Civ.P. 6(a), (d) (adding three additional days when service is made under Fed.R.Civ.P. 5(b)(2)(C), (D) or (F)). A party may respond to another party's objections within fourteen (14) days after being served with a copy. Fed.R.Civ.P. 72(b)(2). Such objections, and any response to objections, shall be filed with the Clerk of the Court. See 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 6(a), (d), 72(b). Any requests for an extension of time for filing objections must be addressed to Judge Carter.

FAILURE TO OBJECT WITHIN FOURTEEN (14) DAYS WILL RESULT IN A WAIVER OF OBJECTIONS AND WILL PRECLUDE APPELLATE REVIEW. See 28 U.S.C. § 636(b)(1); Fed. R. Civ. P . 6(a), (d), 72(b); Thomas v. Arn, 474 U.S. 140 (1985).


Summaries of

Bernstein v. Cengage Learning, Inc.

United States District Court, S.D. New York
Apr 22, 2021
Civil Action 19 Civ. 7541 (ALC) (SLC) (S.D.N.Y. Apr. 22, 2021)
Case details for

Bernstein v. Cengage Learning, Inc.

Case Details

Full title:DOUGLAS BERNSTEIN, ELAINE INGULLI, TERRY HALBERT, EDWARD ROY, LOUIS…

Court:United States District Court, S.D. New York

Date published: Apr 22, 2021

Citations

Civil Action 19 Civ. 7541 (ALC) (SLC) (S.D.N.Y. Apr. 22, 2021)