Opinion
650092/10.
Decided August 12, 2011.
The attorneys on the matter are Dan J. Schulman, Esq. of Salans (for the plaintiff) and Laura C. Rowntree, Esq. of Chadbourne Parke LLP (for the defendants).
Defendant Oleg Afonin ("Defendant") moves to dismiss the complaint pursuant to CPLR section 214 and rules 3211 (a) (1), 3211 (a) (7) and 3016 (b). Plaintiff First Games Publisher Network, Inc. ("Plaintiff") opposes.
BACKGROUND
Plaintiff is a New York corporation with its principal place of business in New York. Plaintiff was incorporated in April 2006 for the purpose of creating and publishing a "massively multiplayer online role-playing game," or "MMPORG." MMPORG's are internet-based games that many different users play simultaneously. Plaintiff sought to develop a MMPORG that was to be called "Ragnesis."
Defendant is a Ukrainian citizen residing in Ukraine. In 2006, Defendant was appointed as Plaintiff's Vice President, Chief Development Officer and as one Plaintiff's three directors.
Plaintiff hired a company called Lucky Soft LLC ("Lucky Soft") to develop software for Ragnesis. Lucky Soft's responsibilities included writing millions of lines of source code, documentation for that source code and related intellectual property (the "Ragnesis IP").
Plaintiff claims to own all of the Ragnesis IP.
Plaintiff contends that it sought to purchase Lucky Soft so that Plaintiff would have an in-house video game development studio. Plaintiff alleges that Defendant had an ownership interest in Lucky Soft and had indicated that he would arrange for Plaintiff to purchase Lucky Soft.
On December 2, 2007, Plaintiff and Defendant executed a confidentiality agreement. Amended Complaint, Ex. A (the "Confidentiality Agreement"). Pursuant to section 2 of the Confidentiality Agreement, Defendant agreed not to use Plaintiff's proprietary data or other intellectual property for his benefit or the benefit of third parties. Plaintiff contends that section 2 restricted the use of Ragnesis IP.
In October 2008, Plaintiff discovered that Lucky Soft had been sold to a third party. When Plaintiff's two directors, Craig Rose and Igor Kokorine, confronted Defendant with the information of Lucky Soft's sale, Defendant resigned from his position as Plaintiff's officer and director.
Plaintiff alleges that Defendant maintains an interest in Lucky Soft through the third party to whom it was sold.
In December 2008, Plaintiff demanded that Defendant and Lucky Soft turn over the Ragnesis IP. Plaintiff alleges that it received incomplete Ragnesis source code a year later and has received no further Ragnesis IP. Plaintiff further contends that reviewing the source code it received and completing development of Ragnesis would be cost-prohibitive.
Plaintiff discovered in November 2009 that Lucky Soft was developing a computer game called "Elementals: The Magic Key" ("Magic Key"). Plaintiff alleges that Defendant is Magic Key's producer and that Magic Key's source code was derived from Ragnesis IP.
Plaintiff seeks to hold Defendant liable for breach of the Confidentiality Agreement, breach of fiduciary duty and violation of Business Corporation Law (BCL) §§ 717 and 720.
Defendant moves to dismiss.
ANALYSIS
CPLR 3211 (a) (1) permits a party to move for dismissal of one or more causes of action on the ground that "a defense is founded upon documentary evidence."
CPLR 3211 (a) (7) permits a party to move for dismissal of one or more causes of action on the ground that "the pleading fails to state a cause of action."
Dismissal under CPLR 3211 (a) (1) is only appropriate where the "documentary evidence submitted conclusively establishes a defense to the asserted claims as a matter of law." Leon v. Martinez, 84 NY2d 83, 88 (1994). Documentary evidence must be "essentially undeniable" to warrant dismissal under this rule. Fontanetta v. Doe , 73 AD3d 78 , 85 (2d Dep't 2010) (quoting Siegel, Practice Commentaries, McKinney's Cons. Laws of NY, Book 7B, CPLR C3211:10, at 21-22).
On a motion to dismiss pursuant to CPLR 3211 (a) (7), "the sole criterion is whether the pleading states a cause of action, and if from [the pleading's] four corners factual allegations are discerned which taken together manifest any cause of action cognizable at law, a motion for dismissal will fail." Guggenheimer v. Ginzburg, 43 NY2d 268, 275 (1977).
On a motion to dismiss pursuant to either CPLR 3211 (a) (1) or (a) (7), the "pleadings must be liberally construed and the facts alleged accepted as true; the court must determine only whether the facts as alleged fit within any cognizable legal theory.'" Wiener v. Lazard Freres Co., 241 AD2d 114, 672 N.Y.S2d 8, 13 (1st Dep't 1998) (quoting Leon, 84 NY2d at 87-88).
1. Breach of Confidentiality Agreement
Plaintiff's first cause of action alleges that Defendant breached the Confidentiality Agreement. Plaintiff contends that Defendant used the Ragnesis IP and other information gained in his capacity as Plaintiff's officer and director to "thwart the transfer of ownership of Lucky Soft to First Games," to register the Ragnesis domain name in Defendant's name and to assist Lucky Soft in developing Magic Key. Plaintiff also alleges that Defendant's relationship with Lucky Soft constitutes a conflict of interest in violation of section 5 of the Confidentiality Agreement. Plaintiff claims to have been damaged in that Defendant's alleged breaches rendered further development of Ragnesis cost-prohibitive and otherwise unfeasible and caused Plaintiff to lose the money it had expended in developing and marketing Ragnesis. Amended Complaint, ¶¶ 62, 68-79.
Defendant contends that Plaintiff's cause of action for beach of the Confidentiality Agreement must be dismissed. Defendant claims that he registered the Ragnesis domain name in his name several years before the Confidentiality Agreement was executed and, therefore, that registration cannot constitute a breach thereof. Defendant disputes that the Ragnesis IP belonged to Plaintiff and contends that Plaintiff failed to pay Lucky Soft the requisite contract price. Defendant thus contends that any alleged breach based on the use of the Ragnesis IP must be dismissed.
Defendant further contends that the Confidentiality Agreement solely covers intellectual property and other proprietary information transferred to Defendant. Defendant argues that Plaintiff's cause of action does not allege that any such information or property was transferred to Defendant. Lastly, Defendant contends that the Confidentiality Agreement does not forbid the existence of a conflict of interest, but, rather, the use of proprietary information in pursuit of Defendant's personal goals.
To plead a cause of action for breach of contract, the claimant must state four elements: (1) the existence of a valid contract; (2) non-performance by the defendant; (3) performance by the plaintiff; and (4) damage to the plaintiff as a result of defendant's non-performance. JP Morgan Chase v. J.H. Elec. of New York, Inc. , 69 AD3d 802 , 803 (2d Dep't 2010).
Registration of the Ragnesis Domain Name
Plaintiff contends that "In October 2009, [Plaintiff] discovered that [Defendant] had re-registered the domain name ragnesis.com in his own name, and that he was seeking to auction off the domain name for his own benefit." Plaintiff's Memorandum of Law in Opposition to Defendant's Motion to Dismiss the Amended Complaint ("Plaintiff's Memo"), p. 7; see also Amended Complaint, ¶¶ 52, 73. Citing exhibits to the Amended Complaint, Defendant contends that he registered ragnesis.com in his own name in 2005, before Plaintiff had come into existence. Defendant's Memorandum of Law in Support of Motion to Dismiss ("Defendant's Memo"), p. 6.
The parties to this action previously addressed their rights to the domain name ragnesis.com. The parties arbitrated the issue before the National Arbitration Forum, in accordance with the Internet Corporation for Assigned Names and Numbers' ("ICANN") dispute resolution policy, in late 2009 and early 2010. See Amended Complaint, Ex. A (National Arbitration Forum Decision [the "ICAAN Decision"]), pp. 1-2. The ICANN Decision, which resulted from that arbitration, shows that Defendant registered ragnesis.com in his own name on September 22, 2005. Id., p. 3. Furthermore, the Amended Complaint states that Plaintiff was incorporated and established in April 2006. Amended Complaint, ¶ 11. Defendant is therefore correct that his initial registration of Ragnesis.com cannot constitute a breach of the Confidentiality Agreement.
However, neither Defendant nor the ICANN Decision address Plaintiff's allegations that Defendant re-registered and attempted to auction off ragnesis.com after the parties executed the Confidentiality Agreement. Therefore, to the extent that Plaintiff is arguing that it was the rightful owner of ragnesis.com at the time when Defendant allegedly re-registered and attempted to auction that domain name, Plaintiff has stated a cause of action for breach of the Confidentiality Agreement.
The Existence of a Conflict of Interest
Plaintiff contends that, "pursuant to Section 5 of the Confidentiality Agreement, Defendant was required to avoid any conflict of interests while performing his duties as an Officer and Director of [Plaintiff]." Plaintiff argues that Defendant "breached Section 5 of the Confidentiality Agreement by failing to resolve the conflict of interest created by his ownership of Lucky Soft[.]" Amended Complaint, ¶¶ 75-76.
Defendant claims that the Confidentiality Agreement does not forbid the mere existence of conflicts of interest, but, rather, seeks to mitigate certain hazards that might arise by way thereof. Defendant's Memo, pp. 8-9.
Section 5 of the Confidentiality Agreement states that Defendant "admits that[,] in the course of realization of his powers, he finds himself in a situation where a conflict of interests may occur. [Defendant] takes up the obligation not to create conflicts of interest[.]" That language is indefinite and does not unambiguously support either Plaintiff's or Defendant's interpretation and arguments based on that language. Section 5 therefore does not irrefutably provide a basis for dismissal of Plaintiff's cause of action for breach of the Confidentiality Agreement based on conflicts of interest.
Breach of the Confidentiality Agreement
Plaintiff states that the Confidentiality Agreement is a valid and binding agreement. Amended Complaint, ¶ 71. Plaintiff has thus pled the first element of its cause of action for breach of the Confidentiality Agreement.
Plaintiff states that Defendant agreed in Section 2 of the Confidentiality Agreement not to use Plaintiff's proprietary data and intellectual property for his own benefit or for the benefit of third parties. Id., ¶ 72. Plaintiff claims to own the Ragnesis IP. Id., ¶ 62. Plaintiff contends that Section 2's prohibitions cover the use of Ragnesis IP. Plaintiff alleges that Defendant used Ragnesis IP and other proprietary information to benefit himself and Lucky Soft. Plaintiff has thus pled the second element of its cause of action, a breach by Defendant.
Plaintiff states that it employed Defendant as an officer and director and has therefore stated the third element of its cause of action, performance by Plaintiff.
Finally, Plaintiff alleges that Defendant's alleged breaches have damaged Plaintiff by rendering further development of Ragnesis impracticable. Plaintiff contends that the time, effort and funds it has expended in developing Ragnesis have been wasted. Plaintiff has thus pled the final element of damage in its cause of action.
Plaintiff has stated a cause of action for breach of the Confidentiality Agreement, and Defendant's motion to dismiss is denied.
2. Breach of Common Law Fiduciary Duty and Violation of BCL § 717
Plaintiff's second cause of action alleges that Defendant owed Plaintiff a fiduciary duty in his capacity as Plaintiff's vice-president and director. Plaintiff contends that the same alleged circumstances forming the basis of Plaintiff's claim for breach of the Confidentiality Agreement constitute breaches of that duty. Plaintiff seeks restitution of all compensation paid to Defendant and an award of punitive damages. Amended Complaint, ¶¶ 80-88.
Plaintiff's third cause of action asserts that Defendant's alleged misconduct shows that he failed to perform his duties as a director in good faith and with the degree of care which an ordinarily prudent person would use under similar circumstances. Plaintiff therefore claims Defendant violated BCL § 717 . Id., 89-93. Defendant argues that Plaintiff's cause of action for violation of BCL § 717 is "simply a variant of the breach of fiduciary duty claim" and interposes the same arguments in seeking each claim's dismissal. Defendant's Memo, p. 12.
BCL § 717 requires, inter alia, that "a director shall perform his duties . . . In good faith and with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances."
Defendant does not dispute that he owed Plaintiff a fiduciary duty while he was Plaintiff's officer and director. Defendant's basis to dismiss Plaintiff's second and third causes of action is threefold. First, Defendant claims that Plaintiffs' allegations do not meet the heightened pleading requirements imposed by CPLR 3016 (b). Second, Defendant claims that the alleged wrongdoing all occurred after he had resigned from his position as Plaintiff's officer and director. Third, Defendant claims that Plaintiff "fails to allege that Afonin's position as Plaintiff's officer and director played any role in any personal profit alleged." Defendant's Memo, p. 9; Defendant's Reply Memorandum of Law in Support of Motion to Dismiss ("Defendant's Reply Memo."), pp. 5-10.
CPLR 3016 (b)Defendant argues that Plaintiff's second and third causes of action do not meet the heightened pleading requirements of CPLR 3016 (b). Defendant's Memo, pp. 9-10; Defendant's Reply Memo, pp. 5-6. Citing Neiman v. Felicie, Inc., 55 AD2d 521, 521 (1st Dep't 1976), Defendant argues that Plaintiff's second and third causes of action does not enable it to "prepare to meet the pleader's contention." Defendant's Reply Memo., p. 6. Similarly, Defendant argues that Plaintiff "fails to allege that Afonin' position as Plaintiff's officer and director played any role in any personal profit alleged." Defendant's Memo, p. 9.
The court disagrees.
CPLR 3016 (b) requires that "where a cause of action is based upon . . . breach of trust . . . the circumstances constituting the wrong shall be stated in detail." However, this rule does not require a plaintiff to have perfect knowledge of the facts underlying its claim at the initial stage of a litigation, when little if any disclosure may have occurred. Indeed, the First Department stated in Foley v. D'Agostino that the directive of CPLR 3016 (b) constitutes "no more than a directive that the transactions and occurrences' constituting the wrong' shall be pleaded in sufficient detail' to give adequate notice thereof." 21 AD2d 60, 64 (1st Dep't 1964).
The Amended Complaint gives adequate notice of the transactions and occurrences underlying Plaintiff's second and third causes of action. Plaintiff asserts that its claims arise from Defendant's alleged interest in Lucky Soft, his alleged role in transferring ownership of Lucky Soft to a third-party instead of Plaintiff, Defendant's alleged role in Lucky Soft's use of Ragnesis IP in developing Magic Key and the alleged benefits Defendant derived therefrom. Complaint, ¶¶ 16-18, 35-62, 80-88.
Finally, Defendant argues in a footnote that "at least some of the allegations in the Amended Complaint appear to" be outside the three-year statute of limitations imposed by CPLR § 214. Id., n 3. Defendant neither points to any specific allegation nor provides any further substance to its statute of limitation contentions. Defendant's half-hearted CPLR § 214 argument thus provides no basis for dismissal of Plaintiff's cause of action for fiduciary duty.
Defendant has not provided grounds for dismissal of Plaintiff's causes of action alleging breach of common law fiduciary duty or violation of BCL § 717.
Continuing Fiduciary Obligation
Defendant claims that much of the complained-of conduct occurred after he resigned as Plaintiff's officer and director, that he owed Plaintiff no fiduciary duty after resigning and, therefore, that conduct cannot form the basis of a claimed breach of fiduciary duty.
New York courts have recognized that, under certain circumstances, a fiduciary duty can continue after the fiduciary relationship terminates. See 7th Sense, Inc. v Liu, 220 AD2d 215, 216 (1st Dep't 1995) (finding that the defendant's resignation as the plaintiff's officer and director "did not relieve him of his fiduciary obligations or liability for his acts of misappropriation. Said defendant was not entitled to directly and unfairly compete with that corporate entity in bad faith for the very purpose of misappropriating the confidential information pertaining to plaintiff's business obtained during his employment."); Albert A. Volk Co. v. Fleschner Bros., 60 N.Y.S.2d 244, 245 (Sup. Ct. NY County 1945) (finding that "resignation from an office or position burdened with a confidential or fiduciary obligation does not sever accountability for a transaction which had its inception prior to resignation."). Plaintiff has alleged Defendant's bad faith. Amended Complaint, ¶ 82, 90. Plaintiff also has alleged that the alleged misconduct relates to a transaction of business commenced while Defendant owed Plaintiff a fiduciary duty. Amended Complaint, ¶¶ 16-62, 72-73.
Defendant argues that 7th Sense, Inc. and Albert A. Volk Co. are factually distinguishable from the instant case. Such factual distinctions may be relevant at a later stage in this litigation. At this stage of the pleadings, its suffices that New York law has recognized fiduciary duties that outlive the fiduciary relationship and Plaintiff has adequately pleaded a violation of those obligations. Therefore, dismissal of Plaintiff's second and third causes of action on the basis that some portion of the alleged conduct occurred after Defendant resigned as Plaintiff's officer and director is not warranted.
3. BCL § 720 (a)
Plaintiff's fourth cause of action seeks an accounting pursuant to BCL § 720 (a). That section permits Plaintiff to commence an action to compel its directors and officers to account for their failure to perform their duties or for their own acquisition, transfer or waste of corporate assets. Plaintiff argues that Defendant should be held liable under BCL § 720 for his "acquisition by himself, transfer to others, loss or waste of corporate assets, including First Game's rights in and to Lucky Soft stock and to Ragnesis [Intellectual Property]." Amended Complaint, ¶¶ 94-98.
Defendant seeks dismissal on the ground that an accounting is equitable in nature, and that Plaintiff cannot obtain equitable relief without alleging that it has no adequate remedy at law. Defendant's Memo, p. 13; Defendant's Reply Memo, pp. 10-12. Defendant similarly alleges that "the accounting Plaintiff seeks is entirely contingent on Plaintiff's ability to establish an act of wrongdoing, whether it be defendant's breach of the Confidentiality Agreement or a breach of his fiduciary duties." Defendant's Reply Memo, p. 11. Defendant thus argues that a necessary predicate to Plaintiff's sought accounting would give Plaintiff an adequate remedy at law.
At this stage, Plaintiff must only state a cause of action. Plaintiff has done so. "The fact that the pleading does not include the actual language that plaintiff has no legal remedy is not fatal to the equitable claims at this point in the litigation [, although] certainly . . . plaintiff is required to prove this element in order to obtain any actual equitable relief." Evans v. Perl, 19 Misc 3d 1119(A), *9 (Sup. Ct. NY County 2008) (Gische, J.) (denying the defendant's motion to dismiss). Contrary to Defendant's assertions, it is conceivable that Plaintiff could show wrongdoing such that it is entitled to the equitable relief it seeks without prevailing on its other causes of action. The parties' arguments do not give the court occasion to "conclude at the pleading stage that an adequate legal remedy exists otherwise warranting dismissal" of Plaintiff's fourth cause of action. Id.
The court has considered Defendant's remaining arguments and finds them unavailing.
Accordingly, it is
ORDERED that Defendant Oleg Afonin's motion to dismiss is DENIED; and it is further
ORDERED that Defendant is directed to serve an answer to the complaint within 20 days after service of copy of this order with notice of entry.
This constitutes the decision and order of the court.