Opinion
20-CV-1716 (GBD) (BCM)
06-09-2023
MONROE STAFFING SERVICES, LLC and STAFFING 360 SOLUTIONS, INC., Plaintiffs, v. PAMELA D. WHITAKER, Defendant.
REPORT AND RECOMMENDATION TO THE HON. GEORGE B. DANIELS
Barbara Moses, United States Magistrate Judge
Plaintiff Monroe Staffing Services, LLC (Monroe) and its parent, plaintiff Staffing 360 Solutions, Inc. (Staffing 360) purchased a staffing agency known as Key Resources Inc. (KRI) from defendant Pamela D. Whitaker for just over $12 million. In this action, plaintiffs allege that Whitaker misrepresented material facts about KRI's compliance with certain immigration-related laws, thereby breaching representations and warranties made in the parties' share purchase agreement (SPA). Whitaker asserts two counterclaims. The first counterclaim alleges that plaintiffs breached the SPA when they refused to make two post-closing "earnout payments" totaling approximately $4 million. The second counterclaim alleges that plaintiffs' failure to make the earnout payments was part of a larger scheme to acquire staffing agencies at a discount by making an initial payment and then fabricating reasons to avoid paying the rest of the purchase price, in violation of the North Carolina and New York statutes prohibiting unfair business practices.
Now before me for report and recommendation (see Dkt. 64) is plaintiffs' motion (Dkt. 84) to dismiss the second counterclaim pursuant to Fed.R.Civ.P. 12(b)(6). Plaintiffs contend that the SPA's choice-of-law provision precludes Whitaker from pursuing any claims under North Carolina law, see Pl. Mem. (Dkt. 85) at 11-17, and that New York's General Business Law (GBL) does not reach their alleged conduct. Id. at 17-22. Because plaintiffs are correct on both points, the motion should be granted.
I. BACKGROUND
A. The Parties
Plaintiff Monroe, a Delaware limited liability company, is a "highly successful staffing agency" with a presence in six states, including North Carolina. Am. Compl. (Dkt. 40) ¶¶ 6, 12. Staffing 360, which is Monroe's parent company, see SPA (Am. Compl. Ex. A) at 1, is a publicly traded Delaware corporation headquartered in New York City. Am. Compl. ¶ 7. Staffing 360 is a "rapidly growing international staffing company engaged in the acquisition and integration of U.S. and U.K. staffing agencies." Id. ¶ 16.
Defendant Whitaker is a resident of North Carolina. Answer and Counterclaims (Ans.) (Dkt. 80) at 21, ¶ 2. From 1997 to 2018, Whitaker owned nonparty KRI, "a North Carolina corporation and employee staffing agency." Id. ¶ 3.
Citations to the Answer and Counterclaims include both page numbers and paragraph numbers because the paragraph numbers restart and repeat.
B. Facts Alleged in the Complaint
In the spring of 2018, plaintiffs were interested in expanding Monroe's operations in North Carolina. Am. Compl. ¶ 23. As part of these efforts, they began discussions with Whitaker, who was seeking potential buyers for KRI with the assistance of the investment banking firm Anderson, LeNeave & Co. (Anderson). Id. ¶ 24. The parties continued discussions "[o]ver the course of several months," id. ¶ 28, during which Anderson provided information regarding KRI's operations to plaintiffs, including a confidential "Information Memorandum" discussing KRI's ability to provide its clients with "expertise" with respect to "I-9 Compliance," i.e., the verification of "identity and employment authorization of individuals hired for employment in the United States." Id. ¶¶ 30-32. Plaintiffs further allege that, during negotiations, Whitaker personally assured them that KRI had "very tight controls over all of [its] administrative activities" and has "never had any legal issues in relation to [its] temporary workers." Id. ¶¶ 38-39.
1. The SPA
On August 27, 2018, the parties entered into the SPA, pursuant to which Whitaker sold all of her shares in KRI to Monroe for a total purchase price of $12,163,188. Am. Compl. ¶ 50; SPA § 1.02. Staffing 360, which was a party to the SPA, "guaranteed the full and timely performance of Monroe's payment obligations" under the contract, Am. Compl. ¶ 55, and was "entitled to assert any and all rights, remedies and defenses which would otherwise be available to [Monroe] under" the SPA. Id. ¶ 56 (alteration in original); see SPA § 1.05(b). The purchase price was to be paid in three installments:
Payment of Purchase Price. Subject to the terms and conditions of this Agreement, the Purchase Price shall be paid as follows:
(a) on the Closing Date, Buyer shall pay to Seller the amount of $8,108,794 (the "Closing Date Payment");
(b) on the first anniversary of the Closing Date, Buyer shall pay to Seller an amount $2,027,198, subject to adjustment as set forth in subsection 1.04 below (the "First Year Earnout"); and
(c) on the second anniversary of the Closing Date, Buyer shall pay to Seller an amount $2,027,198, subject to adjustment as set forth in subsection 1.04 below (the "Second Year Earnout" and, together with the First Year Earnout, the "Earnout Payments").SPA § 1.03. After the parties executed the SPA, "Monroe promptly tendered the Closing Date Payment[.]" Am. Compl. ¶ 78.
The SPA includes a New York choice-of-law and consent-to-jurisdiction provision:
Governing Law; Submission to Jurisdiction. This Agreement, and all matters arising out of or relating to this Agreement, shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction). Any legal suit, action, proceeding, or dispute arising out of or related to this Agreement, the other transaction documents, or the transactions
contemplated hereby or thereby may be instituted in the federal courts [] or the courts of the State of New York in each case located in the city and county of New York, and each party irrevocably submits to the exclusive jurisdiction of such courts in any such suit, action, proceeding, or dispute.SPA § 8.08.
2. The Amendment Agreement
The first earnout payment was due on or about August 27, 2019, see SPA ¶ 1.03(b), but was not paid. See Am. Compl. ¶ 82. On September 11, 2019, the parties entered into an Amendment Agreement, id. ¶ 81, which delayed the deadline for the first earnout payment but required Monroe to pay interest during the period of delay, and accelerated the deadline for the second earnout payment, as follows:
(a) The First Year Earnout in the amount of [$2,027,198] and the Second Year Earnout in the amount of [$2,027,198] is hereby deemed earned and payable in full.
(b) [Monroe] may delay the payment of the First Year Earnout, provided, however, that for each full calendar month that such payment is delayed, [Monroe] shall pay [Whitaker] interest in the amount of $10,000/full calendar month and the first payment shall be due on September 30, 2019, with subsequent payments due on or before the last business day of each calendar month....[Monroe] expects that it will pay the First Year Earnout on or around November 29, 2019, but failure to make payment shall not be a breach of the [SPA] so long as [Monroe] continues to pay interest as set forth in [this section] and such payment is made in full by February 27, 2020.
(c) The Second Year Earnout shall be due and payable on February 27, 2020.Am. Ag. (Am. Compl. Ex. B) § 2. Section 8.08 of the SPA, regarding choice of law and consent to jurisdiction, was incorporated by reference into the Amendment Agreement and "made a part hereof." Am. Ag. § 3. The SPA otherwise remained "in full force and effect." Id. § 4.
Plaintiffs allege that Monroe paid Whitaker interest in the amount of $10,000 per month, pursuant to the terms of the Amendment Agreement, from September 2019 through January 2020. Am. Compl. ¶ 82.
3. Defendant's Breaches of the SPA's Representations and Warranties
In September 2019 - the same month the Amendment Agreement was signed - plaintiffs "prepared to conduct a routine audit of its operating units including, for the first time, KRI." Am. Compl. ¶ 85. During that audit, plaintiffs discovered that KRI had failed to comply with certain requirements of the Immigration Reform and Control Act, Pub. L. No. 99-603, 100 Stat. 3359 (1986), in that it failed to "create or maintain completed Forms I-9 for all employees," failed to "complete all required sections of the Forms I-9, for those employees with Form I-9s," failed to "complete I-9 paperwork for employees within three days of hire," and failed to "complete ReVerification Form I-9s for employees whose work authorization expired during their employment, on or before the date the employment authorization expired[.]" Am. Compl. ¶ 100.
According to plaintiffs, "[t]his discovery also meant that many of the warranties and representations set forth in the SPA included material misstatements of present facts and/or omitted material facts." Am. Compl. ¶ 115. Plaintiffs point to § 3.02 of the SPA, in which Whitaker represented that KRI had "full corporate power and authority . . . to carry on its business as it has been and is currently conducted," id. ¶ 116; § 3.07 of the SPA, in which she represented that "'[t]he Company has no liabilities, obligations, or commitments of any nature whatsoever . . . except . . . those which are adequately reflected or reserved against in the Balance Sheet' . . . provided to Plaintiffs," id. ¶ 124; and § 3.08 of the SPA, in which she represented that "there has not been . . . any change, event, condition, or development that is, or could reasonably be expected to be, individually or in the aggregate, materially adverse to the business, results of operations, condition (financial or otherwise), prospects, or assets of [KRI]." Id. ¶ 125.
On November 25, 2019, plaintiffs notified Whitaker that "certain of the representations made to them in connection with the Purchase appeared to be false," and told her that they "were initiating an investigation into Defendant's potential fraud." Am. Compl. ¶ 88. On February 26, 2020, plaintiffs informed defendant that they "were electing to exercise their rights to terminate the Agreement and sue for breach[.]" Id. ¶ 153. At that time, according to plaintiffs, they had fully performed their own obligations under the SPA and the Amendment Agreement (together, the Agreements) by, inter alia, "making the Closing Date Payment and, in accordance with the [Amendment Agreement], tendering interest to Defendant" from September 2019 through January 2020. Id. ¶ 154. Plaintiffs also made interest payments in February and March 2020, but, they allege, these payments were "inadvertent." Id. at 35 n.6.
Plaintiffs assert a single claim against defendant, for breach of contract, alleging that she "breached her obligations under the [SPA] by, among other things, breaching the representations and warranties set forth under Sections 3.02, 3.07, 3.08, 3.14, 3.15, 3.18 and 3.22 of the SPA[.]" Am. Compl. ¶ 158. Plaintiffs seek damages "in an amount to be determined at trial, but believed to be no less than $6 million, plus interest from the date of breach." Id. ¶ 161.
C. Facts Alleged in the Answer and Counterclaims
Whitaker alleges that, after she hired Anderson to "help [her] locate prospective buyers for [KRI]," Ans. at 22, ¶ 11, "Staffing 360 and KRI signed a Summary Term Sheet on May 17, 2018," id. ¶ 13, and Staffing 360 sent Anderson "a list of due diligence information for KRI to upload into an electronic 'data room' so that Staffing 360 and its advisors could access and review the information." Id. at 22-23, ¶ 14. The "due diligence list" requested "financial information, customer information, material agreements, corporate records, pending litigation, and tax returns," id. at 23, ¶ 16, but did not include "any request for information concerning Form I-9 paperwork or KRI's Form I-9 compliance processes and procedures," or "Forms I-9 maintained by KRI." Id. ¶ 15.
Staffing 360's due diligence process also included six days on site at KRI's Greensboro, North Carolina office, during which its personnel "conducted private meetings with any KRI staff members of their choosing, and had physical access to any and all files in any of KRI's offices for their review, including temporary employee files," which - according to Whitaker - "provid[ed] ample opportunity to detect any purported violations relating to Forms I-9." Ans. at 23, ¶ 17. The parties then entered into the SPA. Id. ¶ 18.
On or about August 27, 2019, Staffing 360's Chief Executive Officer, Brendan Flood, contacted Whitaker to advise that "Monroe and Staffing 360 did not presently have the funds to pay the First Earnout Payment," and requested an extension of time to make that payment. Ans. at 24, ¶ 21. During that conversation, Flood "never disputed that the First Earnout Payment was owed in full, nor did he indicate that there were any problems with KRI's Forms I-9 on file for their employees." Id. Whitaker alleges that she agreed to enter into the Amendment Agreement "[b]ased on Flood's representations[.]" Id. ¶ 22. Whitaker notes that, in the Amendment Agreement, Monroe and Staffing 360 "agreed that both Earnout Payments were deemed earned and payable in full." Id. ¶ 23 (citing Am. Ag. § 2(a)).
1. Breach of Contract Counterclaim
According to Whitaker, plaintiffs "repeatedly failed to timely make the interest payments as required by" the Amendment Agreement. Ans. at 25, ¶ 27. Then, "merely days before the First Earnout Payment was expected to be made pursuant to the Amendment, on November 25, 2019, [plaintiffs] sent Whitaker a letter from their counsel notifying her of a purported potential buyer setoff claim." Id. ¶ 28. Defendant alleges, on information and belief, that plaintiffs "concocted this pretextual buyer setoff claim and the purported Form I-9 deficiencies to avoid making the First Earnout Payment to Whitaker, because they still lacked the funds necessary to make the payment." Id. ¶ 30. In support of this assertion, defendant alleges that plaintiffs "never indicated they were making any efforts to cure any purported deficiencies in the Forms I-9." Id. ¶ 31.
On February 26, 2020, "the day before the Earnout Payments were due," plaintiffs "sent Whitaker a letter claiming that they were terminating the agreements and filed the instant action solely to avoid making the Earnout Payments." Ans. at 26, ¶ 33. In Whitaker's view, she "has performed her obligations" under the Agreements, Id. ¶ 38, but plaintiffs have "failed to make the required Earnout Payments," Id. at 27, ¶ 39, and have thereby "materially breached" the Agreements, Id. ¶ 40, causing her damages in the amount of $4,054,396, plus interest. Id. ¶ 41.
2. Unfair Business Practices Counterclaim
According to Whitaker, "KRI did not lose any business, nor were any KRI workers terminated, as a result of any purported I-9 deficiencies that Staffing 360 and Monroe allegedly uncovered." Ans. at 26, ¶ 34. Rather, she avers, "Staffing 360 and Monroe's claims that KRI was not in compliance with Form I-9 requirements and that the company they purchased is 'far less valuable than the amount paid by Monroe,' are pretextual reasons to terminate the [A]greements, which were fabricated by [plaintiffs] in an attempt to leverage a substantial reduction of the Earnout Payments." Id. ¶ 34 (quoting Am. Compl. ¶ 4). Whitaker further alleges that, "[a]t the time that [plaintiffs] entered into the [Agreements], [they] had no intent to perform the promises they made in those [A]greements." Id. at 28, ¶ 50.
Whitaker notes that Staffing 360 and Monroe "are engaged in the business of purchasing employee staffing companies and establishing employee staffing offices in the Southeastern United States and elsewhere," Ans. at 27, ¶ 43, and alleges that while pursuing that business strategy (conduct which "was in, or affected, trade or commerce," Id. ¶ 44), they have "exhibited a pattern and practice of making payment through a method of deferred compensation or earnouts, based on the performance of the purchased entity following purchase." Id. ¶ 45. As part of this pattern and practice, plaintiffs "endeavor[] to acquire the purchased company at a discount of the agreed-upon purchase price by making an initial down payment, then reneging on payment of deferred compensation or earnouts and fabricating a pretextual reason for nonpayment at the time the deferred compensation or earnouts become due." Id. ¶ 46. Without specifics, Whitaker alleges that plaintiffs "have engaged in [this] practice in the past several years with at least three other companies in addition to KRI that they have purchased in this fashion," Id. at 28, ¶ 47, and that they have "even boasted in the media and to Staffing 360's shareholders about the savings they obtained by such misconduct." Id. ¶ 48. Whitaker further alleges that, in connection with the purchase of KRI, a representative of plaintiffs "initiated telephone calls to Whitaker threatening her with criminal prosecution in connection with [plaintiffs'] asserted claims." Id. ¶ 51. She characterizes this conduct as a "further effort to avoid their obligations under the [Agreements] and improperly acquire KRI at a significant discount on the agreed-upon purchase price." Id.
Whitaker does not identify the "three other companies," and does not specify the nature of the pretextual reasons that plaintiffs raised in order to avoid paying the full purchase price for those companies. Nor does she allege that plaintiffs entered into amended agreements with any of the three other companies, to delay their deferred payment obligations, or that plaintiffs threatened the three other companies with criminal prosecution.
Plaintiffs' conduct, according to Whitaker, "amounts to an unfair or deceptive act or practice in or affecting commerce," in violation of N.C. Gen. Stat. § 75-1.1. Ans. at 28, ¶ 52. Defendant further alleges that plaintiffs' "acts or practices were consumer-oriented, and were deceptive or misleading in a material way," in violation of GBL § 349(h). Id. ¶ 53.
D. Procedural History
1. Both Parties File Lawsuits
After the parties' dispute arose, Whitaker sued first, filing an action for breach of contract against Monroe and Staffing 360 in a North Carolina state court on December 5, 2019. Plaintiffs removed that case to the United States District Court for the Middle District of North Carolina (MDNC) on January 7, 2020, on diversity grounds, and then moved to dismiss the case or transfer it to this District, arguing - among other things - that it was filed in violation of the SPA's mandatory New York forum selection clause. See Whitaker v. Monroe Staffing Servs., LLC, 2021 WL 663716, at *2 (M.D. N.C. Feb. 19, 2021), vacated and remanded, 42 F.4th 200 (4th Cir. 2022). Plaintiffs then filed the instant action, in this Court, on February 26, 2020, alleging claims for breach of contract and fraud in the inducement. Compl. (Dkt. 1) ¶¶ 87-99.
On February 19, 2021, the MDNC denied the motion to dismiss or transfer, and instead directed that Whitaker's case be remanded to state court. Whitaker, 2021 WL 663716, at *4. The district court relied on a carve-out in § 8.08 of the SPA, permitting Whitaker to sue in the federal or state courts located in Guilford County, North Carolina, if the suit arises out of or relates to a "buyer setoff." Id. at *1-2 (quoting SPA § 8.08).
On March 12, 2021 - while appealing the decision of the MDNC to the Fourth Circuit -plaintiffs filed their Amended Complaint in this District - dropping the fraud claim - and on April 9, 2021, Whitaker moved to dismiss this case for improper venue and lack of subject matter jurisdiction or, in the alternative, to stay this action pending a decision by the Fourth Circuit. (Dkt. 43.) On March 7, 2022, I granted Whitaker's motion to the extent of staying this action pending a decision. (Dkt. 68.) That decision came on July 22, 2022, when the Fourth Circuit vacated the decision of the MDNC and directed that the case be transferred to this District, pursuant to 28 U.S.C. § 1404(a), to "enforce the forum selection clause" in the SPA. Whitaker, 42 F.4th at 211.
2. Relevant Proceedings in this District
On August 3, 2022, I lifted the stay of this action (Dkt. 72), and on August 23, 2022, I so-ordered a stipulation by the parties requiring Whitaker to dismiss the MDNC action "without prejudice to [her] right to reassert the same causes of action . . . as counterclaims in this action." Stip. & Order (Dkt. 78) ¶ 1. Other than defenses based on the statute of limitations, which they waived, plaintiffs reserved all of their rights and defenses as to Whitaker's counterclaims. Id. ¶ 3. On September 1, 2022, Whitaker dismissed the MDNC action (which by that time had been transferred to this District and docketed as Case No. 22-CV-7130), (Dkt. 48 in 22-CV-7130), and on September 30, 2022, she filed her Answer and Counterclaims herein.
On November 11, 2022, plaintiffs filed the motion now before me, to dismiss Whitaker's second counterclaim, supported by their memorandum of law and the Declaration of Jonathan D. Pressment. (Dkt. 86.) On December 8, 2022, Whitaker filed her opposition memorandum (Def. Mem.) (Dkt. 89), and on December 22, 2022, plaintiffs filed a reply (Pl. Reply) (Dkt. 91).
On December 9, 2022, defendant filed a second version of her memorandum of law, including a table of authorities, which had been omitted from the first version. (Dkt. 90.)
II. ANALYSIS
A. Jurisdiction
The parties have invoked this Court's diversity jurisdiction pursuant to 28 U.S.C. § 1332(a)(1). Am. Compl. ¶ 9; Ans. at 21, ¶ 6. Section 1332(a)(1) provides that a federal district court has original jurisdiction in cases among "citizens of different States," where the matter in controversy exceeds $75,000. The statute requires "complete diversity," that is, "all plaintiffs must be citizens of states diverse from those of all defendants." Pennsylvania Pub. Sch. Emps.' Ret. Sys. v. Morgan Stanley & Co., 772 F.3d 111, 118 (2d Cir.), as amended (Nov. 12, 2014) (citing Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 553 (2005)).
Because subject matter jurisdiction goes to "a court's power to hear a case," the issue "can never be forfeited or waived," United States v. Cotton, 535 U.S. 625, 630 (2002), and "federal courts have a duty to inquire into their subject matter jurisdiction sua sponte" even if the parties do not raise it. Hermes of Paris, Inc. v. Swain, 867 F.3d 321, 324 n.3 (2d Cir. 2017) (quoting F5 Capital v. Pappas, 856 F.3d 61, 75 (2d Cir. 2017)). "[T]he party seeking to invoke jurisdiction under 28 U.S.C. § 1332 bears the burden of demonstrating that the grounds for diversity exist and that diversity is complete." Herrick Co., Inc. v. SCS Commc'ns, Inc., 251 F.3d 315, 322-23 (2d Cir. 2001) (citations omitted).
"An individual's citizenship, within the meaning of the diversity statute, is determined by his domicile." McKie v. Kornegay, 2022 WL 4241355, at *1 (2d Cir. Sept. 15, 2022) (quoting Van Buskirk v. United Grp. of Cos., Inc., 935 F.3d 49, 53 (2d Cir. 2019)). A corporation is a citizen "of every State and foreign state by which it has been incorporated and of the State or foreign state where it has its principal place of business." 28 U.S.C. § 1332(c)(1). "[T]he citizenship of an artificial business entity other than a corporation is determined by reference to the citizenship of its members." WGH Commc'ns, Inc. v. Penachio Malara LLP, 2020 WL 4274741, at *1 (S.D.N.Y. July 23, 2020) (citing C.T. Carden v. Arkoma Assocs., 494 U.S. 185 (1990)) (citations omitted). Thus, where a party is an LLC or an LLP, the citizenship of each individual member or partner must be pleaded or otherwise identified. See Bayerische Landesbank, New York Branch v. Aladdin Cap. Mgmt. LLC, 692 F.3d 42, 49 (2d Cir. 2012) (LLCs); Hoguet Newman Regal & Kenney, LLP v. Lowe, 2021 WL 4638539, at *1 (S.D.N.Y. Oct. 6, 2021) (LLPs).
In this case, the undisputed allegations set forth in the pleadings show that Staffing 360 is a citizen of Delaware, where it is incorporated, and New York, where it has its principal place of business. Am. Compl. ¶ 7; Ans. at 21, ¶ 5. Similarly, the pleadings show that Whitaker is a citizen of North Carolina. Am. Compl. ¶ 8; Ans. at 21, ¶ 2. However, Monroe has pled only that it is a "Delaware limited liability company whose principal place of business" is in Connecticut. Am. Compl. ¶ 6. Defendant agrees that Monroe is an LLC and alleges that it has "an office" in North Carolina. Ans. at 21, ¶ 4.
Neither side identifies or pleads the citizenship of each of Monroe's members, upon which the LLC's citizenship turns. Although plaintiffs allege that "Monroe became a division and wholly-owned subsidiary of Staffing 360" in or about January 2014, Am. Compl. ¶¶ 21-22, their pleading is unclear as to whether this ownership was direct or indirect, which could be significant for diversity purposes. On May 16, 2023, the Court directed Monroe to file a revised corporate disclosure statement pursuant to Fed.R.Civ.P. 7.1 (Dkt. 101), which it did on May 18, 2023, disclosing that its "direct parent and sole owner" is Faro Recruitment America, Inc. (Faro), a New York corporation, which is, in turn, a wholly owned subsidiary of Staffing 360. Rule 7.1 St. (Dkt. 102) at 1-2. However, the Rule 7.1 Statement does not disclose Faro's principal place of business, and thus does not settle the issue of Monroe's citizenship. Consequently, plaintiffs have not borne their "burden of demonstrating that the grounds for diversity exist and that diversity is complete." Herrick, 251 F.3d at 322-23.
Under these circumstances, the Court could dismiss the case sua sponte. See, .e.g., Fleming v. Laakso, 2019 WL 959521, at *4 (S.D.N.Y. Feb. 5, 2019) (assessing subject matter jurisdiction sua sponte and recommending dismissal because "plaintiff [did] not allege that she satisfie[d] the jurisdictional minimum" to establish diversity jurisdiction), report and recommendation adopted sub nom. Fleming v. Laasko, 2019 WL 952349 (S.D.N.Y. Feb. 26, 2019); Neat-N-Tidy Co. v. Tradepower (Holdings) Ltd., 777 F.Supp. 1153, 1155-57 (S.D.N.Y. 1991) (raising subject matter jurisdiction sua sponte and dismissing case without prejudice due to lack of adequate jurisdictional allegations). Alternatively, the Court can permit the pleadings to be amended. See Fund Liquidation Holdings LLC v. Bank of Am. Corp., 991 F.3d 370, 389 (2d Cir. 2021) ("a plaintiff may cure defective jurisdictional allegations, unlike defective jurisdiction itself, through amended pleadings"), cert. denied, 142 S.Ct. 757 (2022); Durant, Nichols, Houston, Hodgson & Cortese-Costa P.C. v. Dupont, 565 F.3d 56, 64-66 (2d Cir. 2009) (noting that a party's failure to include "adequate allegations to show that the district court has subject matter jurisdiction" does not "always require that the action be dismissed," and granting plaintiff leave to amend to add missing jurisdictional facts).
Here, because the Court has no particular reason to believe that Faro's principal place of business is in North Carolina (which would make Monroe a citizen of North Carolina and destroy diversity), I will permit plaintiffs to further amend their pleading to include adequate jurisdictional allegations.
B. Legal Standards Applicable to Plaintiffs' Motion to Dismiss
1. Rules 8(a)(2) and 12(b)(6)
Fed. R. Civ. P. 8(a)(2) requires that a pleading contain "a short and plain statement of the claim showing that the pleader is entitled to relief." If that "short and plain statement" fails to present "sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face," the deficient claims may be dismissed pursuant to Fed.R.Civ.P. 12(b)(6). Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 65 (2d Cir. 2012) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678. If the plaintiff has not "nudged [his] claims across the line from conceivable to plausible, [the] complaint must be dismissed." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). The same standards apply where, as here, the pleading at issue is a counterclaim. Morgan Art Found. Ltd. v. Brannan, 2020 WL 469982, at *7 (S.D.N.Y. Jan. 28, 2020) (citing A.V.E.L.A., Inc. v. Est. of Marilyn Monroe, LLC, 131 F.Supp.3d 196, 203 (S.D.N.Y. 2015)).
When faced with a motion made pursuant to Rule 12(b)(6), the court must "accept as true all factual statements alleged" and "draw all reasonable inferences in favor of the non-moving party." McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir. 2007). However, those factual allegations "must be enough to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555. "A pleading that offers 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action will not do.' Nor does a complaint suffice if it tenders 'naked assertion[s]' devoid of 'further factual enhancement.'" Iqbal, 556 U.S. at 678 (alteration in original) (internal citations omitted) (quoting Twombly, 550 U.S. at 555, 557). The courts will not "unlock the doors of discovery for a plaintiff armed with nothing more than conclusions." Id. at 678-79. Thus, while Rule 8(a) "does not require 'detailed factual allegations,'" it requires "more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Geldzahler v. New York Med. Coll., 663 F.Supp.2d 379, 385 (S.D.N.Y. 2009).
In addition to the facts alleged in the body of the pleading, the court may consider documents "attached to [the pleading] as an exhibit or any statements or documents incorporated in it by reference," Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002) (quoting Int'l Audiotext Network, Inc. v. Am. Tel. & Tel. Co., 62 F.3d 69, 72 (2d Cir. 1995)); "documents that, although not incorporated by reference, are 'integral' to the [pleading]," Sierra Club v. Con-Strux, LLC, 911 F.3d 85, 88 (2d Cir. 2018) (quoting L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 422 (2d Cir. 2011)); and documents of which judicial notice may be taken. Chambers, 282 F.3d at 153.
2. Choice of Law
"A federal court sitting in diversity . . . must apply the choice of law rules of the forum state." Licci ex rel. Licci v. Lebanese Canadian Bank, SAL, 672 F.3d 155, 157 (2d Cir. 2012) (quoting Rogers v. Grimaldi, 875 F.2d 994, 1002 (2d Cir. 1989)). Where, as here, the parties' contract contains a choice-of-law clause, a federal court sitting in diversity determines the scope of that clause "under the same law that governs the clause's validity - the law of the forum." Fin. One Pub. Co. v. Lehman Bros. Special Fin., Inc., 414 F.3d 325, 333 (2d Cir. 2005); see also TD Bank, N.A. v. Miller, 2020 WL 5441323, at *11 (S.D.N.Y. Sept. 9, 2020) (a district court in New York, sitting in diversity, applies New York law to determine the scope of contractual choice-of-law clause).
"An exception to this standard mandates that a transferee court use the choice-of-law rules of the transferor court's state following a change of venue effected under section 1404(a)." J&R Multifamily Grp., Ltd. v. U.S. Bank Nat'l Ass'n, 2019 WL 6619329, at *2 (S.D.N.Y. Dec. 5, 2019) (citing Atl. Marine Const. Co. v. U.S. Dist. Court for W. Dist. of Texas, 571 U.S. 49, 65 (2013)). However, "when a party bound by a forum-selection clause flouts its contractual obligation and files suit in a different forum, a § 1404(a) transfer of venue will not carry with it the original venue's choice-of-law rules." Id. (quoting Atl. Marine Const. Co., 571 U.S. at 64); see also Monterey Bay Mil. Hous., LLC v. Ambac Assurance Corp., 531 F.Supp.3d 673, 704 (S.D.N.Y. 2021) ("when an action that could not have been maintained in the transferor court is transferred, the applicable law, including choice of law rules, is the state law of the transferee court") (quoting Cohain v. Klimley, 2010 WL 3701362, at *13 (S.D.N.Y. Sept. 20, 2010)) (cleaned up). Given the procedural history of this case, including the Fourth Circuit's determination that Whitaker's claims were not properly brought in North Carolina, see Whitaker, 42 F.4th at 210-11, the choice-of-law rules of New York apply.
The parties here do not dispute the validity of the choice-of-law provision, only its scope. See Def. Mem. at 9-10; Fin. One Pub. Co., 414 F.3d at 332.
In New York, "[t]he primary objective of a court in interpreting a contract is to give effect to the intent of the parties as revealed by the language of their agreement." Meda AB v. 3M Co., 969 F.Supp.2d 360, 378 (S.D.N.Y. 2013) (quoting Compagnie Financiere de CIC et de L'Union Europeenne v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 232 F.3d 153, 157 (2d Cir. 2000)). Thus, when the contract includes a valid choice-of-law clause, the courts "should not engage in any conflicts analysis[.]" Ministers & Missionaries Benefit Bd. v. Snow, 26 N.Y.3d 466, 474, 25 N.Y.S.3d 21, 26 (2015). "To do otherwise - by applying New York's statutory conflict-of-laws principles . . . would contravene the primary purpose of including a choice-of-law provision in a contract - namely, to avoid a conflict-of-laws analysis and its associated time and expense." Id., 26 N.Y.3d at 475, 25 N.Y.S.3d at 27. "Absent fraud or violation of public policy, a court is to apply the law selected in the contract as long as the state selected has sufficient contacts with the transaction." Hartford Fire Ins. Co. v. Orient Overseas Containers Lines (UK) Ltd., 230 F.3d 549, 556 (2d Cir. 2000).
The "public policy" exception applies only where the agreement's chosen law "violates 'some fundamental principle of justice, some prevalent conception of good morals, some deep-rooted tradition of the common weal[.]'" Welsbach Elec. Corp. v. MasTec N. Am., Inc., 7 N.Y.3d 624, 629-30, 825 N.Y.S.2d 692, 694-95 (2006) (quoting Cooney v. Osgood Mach., Inc., 81 N.Y.2d 66, 78, 595 N.Y.S.2d 919, 926 (1993)).
Notwithstanding the strong preference to honor the forum chosen by the parties, New York law also provides that "language in a choice-of-law provision indicating that the contract will be governed by a certain body of law is insufficient to determine which law will govern tort claims arising out of that contract." Fleetwood Servs., LLC v. Ram Cap. Funding, LLC, 2022 WL 1997207, at *16 (S.D.N.Y. June 6, 2022) (quoting Bausch & Lomb Inc. v. Mimetogen Pharms., Inc., 2016 WL 2622013, at *8 (W.D.N.Y. May 5, 2016)). When determining whether a choice-of-law clause applies to an extra-contractual dispute, New York courts consider "tort claims [to be] outside the scope of [a] contractual choice-of-law provision" unless the provision is "drafted broadly enough to reach such tort claims." Fin. One Pub. Co., 414 F.3d at 335. "As a general rule of thumb, provisions applying to disputes 'arising out of' or 'relating to' a contract are capacious enough to reach related tort claims, while provisions stating that a contract will be 'governed by' or 'construed in accordance with' the law of a state are not." Ramiro Aviles v. S & P Glob., Inc., 380 F.Supp.3d 221, 270-71 (S.D.N.Y. 2019) (quoting Chigirinskiy v. Panchenkova, 2015 WL 1454646, at *6 (S.D.N.Y. Mar. 31, 2015)) (cleaned up). Thus, only "[a]bsent a contractual choice-of-law provision covering [extra-contractual] claims" does the court "look[] to New York's ordinary conflict-of-laws principles." Ramiro Aviles, 380 F.Supp.3d at 271 (emphasis added).
See also Obra Pia Ltd. v. Seagrape Invs. LLC, 2020 WL 5751195, at *6, *11 (S.D.N.Y. Sept. 25, 2020) (choice-of-law provision stating that "all disputes or controversies arising out of or relating to" the agreement is "sufficiently broad" to encompass a claim for breach of fiduciary duty); Bausch & Lomb, 2016 WL 2622013, at *8 (applying New York law to all of MPI's counterclaims, including a statutory consumer protection claim, where the parties' contract stated that "[t]his Agreement and all claims related to it, its execution or the performance of the parties under it, shall be construed and governed in all respects according to the laws of the State of New York") (alteration in original); Frazer Exton Dev., LP v. Kemper Env't, Ltd., 2004 WL 1752580, at *10 (S.D.N.Y. July 29, 2004) ("In order to achieve broad coverage, parties utilize choice of law provisions that employ expansive language such as 'arising out of or relating to' the contract") (quoting Turtur v. Rothschild Registry Int'l, 26 F.3d 304, 310 (2d Cir. 1994)), aff'd sub nom. Frazer Exton Dev., L.P. v. Kemper Env't, Ltd., 153 Fed.Appx. 31 (2d Cir. 2005); Cap. Z Fin. Servs. Fund II, L.P. v. Health Net, Inc., 43 A.D.3d 100, 109, 840 N.Y.S.2d 16, 23 (1st Dep't 2007) (applying Delaware law to fraud claims because they fell "squarely within the broad terminology used in the choice of law provisions," which mandated the application of Delaware law to "all issues" concerning "enforcement of the rights and duties of the parties").
Under those "ordinary" principles, "the first question to resolve . . . is whether there is an actual conflict of laws." Holborn Corp. v. Sawgrass Mut. Ins. Co., 304 F.Supp.3d 392, 398 (S.D.N.Y. 2018) (quoting Curley v. AMR Corp., 153 F.3d 5, 12 (2d Cir. 1998)). Where an actual conflict exists, and the claim at issue is one sounding in tort, Fin. One Pub. Co., 414 F.3d at 336, "New York courts have adopted a flexible choice of law approach and 'seek to apply the law of the jurisdiction with the most significant interest in, or relationship to, the dispute.'" Howard Univ. v. Borders, 588 F.Supp.3d 457, 471 (S.D.N.Y. 2022) (citation omitted). When the laws at issue are "conduct-regulating laws," the "law of the jurisdiction where the tort occurred will generally apply because that jurisdiction has the greatest interest in regulating behavior within its borders." GlobalNet Financial.Com, Inc. v. Frank Crystal & Co., Inc., 449 F.3d 377, 384 (2d Cir. 2006) (quoting Cooney, 81 N.Y.2d at 72, 595 N.Y.S.2d at 922).
3. GBL § 349
Under New York's unfair business practices statute, GBL § 349(a), "[d]eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state are [] declared unlawful." GBL § 349(h) permits "any person who has been injured by reason of any violation of this section" to "bring an action in his own name to enjoin such unlawful act or practice, an action to recover his actual damages or fifty dollars, whichever is greater, or both such actions." If the violation was willful, "[t]he court may, in its discretion, increase the award of damages to an amount not to exceed three times the actual damages up to one thousand dollars," and may also "award reasonable attorney's fees to a prevailing plaintiff." Id.
"To successfully assert a section 349(h) claim, a plaintiff must allege that a defendant has engaged in (1) consumer-oriented conduct that is (2) materially misleading and that (3) plaintiff suffered injury as a result of the allegedly deceptive act or practice." Nungesser v. Columbia Univ., 244 F.Supp.3d 345, 377 (S.D.N.Y. 2017) (quoting City of New York v. Smokes-Spirits.Com, Inc., 12 N.Y.3d 616, 622, 883 N.Y.S.2d 772, 776 (2009)); see also Yellow Book Sales & Distrib. Co. v. Hillside Van Lines, Inc., 98 A.D.3d 663, 664-65, 950 N.Y.S.2d 151, 153 (2d Dep't 2012) (a § 349 plaintiff "must allege that its adversary has engaged in consumer-oriented conduct that is materially misleading, and that the party suffered injury as a result of the allegedly deceptive act or practice").
"A defendant engages in consumer-oriented activity if [the company's] actions cause any consumer injury or harm to the public interest." Hawkins v. Coca-Cola Co., 2023 WL 1821944, at *4 (S.D.N.Y. Feb. 7, 2023) (alteration in original) (quoting New York v. Feldman, 210 F.Supp.2d 294, 301 (S.D.N.Y. 2002)) (cleaned up). See also Plavin v. Grp. Health Inc., 35 N.Y.3d 1, 10, 124 N.Y.S.3d 5, 9 (2020) (a plaintiff suing under § 349 must "demonstrate that the acts or practices have a broader impact on consumers at large") (quoting Oswego Laborers' Loc. 214 Pension Fund v. Marine Midland Bank, N.A., 85 N.Y.2d 20, 25, 623 N.Y.S.2d 529, 532 (1995)). "Accordingly, private contractual disputes which are unique to the parties do not fall within the ambit of the statute." Yellow Book Sales, 98 A.D.3d at 665, 950 N.Y.S.2d at 154. Thus, in New York Univ. v. Cont'l Ins. Co., 87 N.Y.2d 308, 639 N.Y.S.2d 283 (1995), where the parties were sophisticated businesses and the insurance policy at issue was "tailored to meet the purchaser's wishes and requirements," the Court of Appeals held that Continental's conduct in selling the policy to NYU, denying a claim thereunder, and then refusing to renew the policy "do[es] not constitute consumer-oriented conduct." Id., 87 N.Y.2d at 321, 639 N.Y.S.2d at 290. As the court noted, "this was not the 'modest' type of transaction the statute was primarily intended to reach." Id., 87 N.Y.2d at 321, 639 N.Y.S.2d at 291. Instead, it was a private contract dispute "which is unique to these parties, not conduct which affects the consuming public at large." Id.
"The typical violation contemplated by the statute involves an individual consumer who falls victim to misrepresentations made by a seller of consumer goods usually by way of false and misleading advertising." Teller v. Bill Hayes, Ltd., 213 A.D.2d 141, 146, 630 N.Y.S.2d 769, 773 (2d Dep't 1995) (quoting Genesco Ent. v. Koch, 593 F.Supp. 743, 751 (S.D.N.Y. 1984)). "That General Business Law § 349 was primarily intended to apply to more modest transactions 'is evidenced by the remedies it provides. Section 349(h) provides parties with the opportunity to receive the greater of actual damages or $50.'" Id., 213 A.D.2d at 146-47, 630 N.Y.S.2d at 773 (quoting Genesco Ent., 593 F.Supp. at 751-52).
C. Whether This Court Must Apply New York Law or North Carolina Law
Plaintiffs contend that defendant's North Carolina unfair business practices claim is barred by § 8.08 of the SPA, which was incorporated by reference into the Amendment Agreement at § 3. Pl. Mem. at 11-14. Under § 8.08, "all matters arising out of or relating to" the Agreements are governed by New York law. The breadth of this language, plaintiffs assert, is "fatal to Defendant's effort to assert a claim under North Carolina law." Pl. Mem. at 13.
In response, Whitaker argues: (1) that her second counterclaim "does not 'arise out of or relate to'" the Agreements, but rather is "premised on" plaintiffs' conduct in "manufactur[ing] claims" about KRI's operations, making a threatening phone call to defendant, and manufacturing similar claims "against other sellers of staffing agencies," Def. Mem. at 9-10; (2) that New York's traditional choice-of-law analysis would point to North Carolina law, because "North Carolina has 'the greatest interest in regulating' the conduct at issue," Id. at 14 (quoting GlobalNet, 449 F.3d at 384); and (3) that if the SPA's choice-of-law provision were read to require the application of New York law, it would "violate[] public policy," because it would insulate plaintiffs from liability under N.C. Gen. Stat. § 75-1.1 for conduct that was "directed towards a North Carolina resident." Id. at 14.
All of these arguments fail. In § 8.08 of the SPA, the parties deployed "precisely the kind of language previous courts have suggested should be used in order to ensure the broadest application of a choice-of-law provision." Bausch & Lomb, 2016 WL 2622013, at *8. By utilizing that "expansive" language, extending to all matters arising out of or relating to their contracts, the parties aimed to "achieve broad coverage," Frazer Exton Dev., 2004 WL 1752580, at *10, and "avoid a conflict-of-laws analysis and its associated time and expense," Ministers, 26 N.Y.3d at 475, 25 N.Y.S.3d at 27, i.e., the precise analysis that Whitaker now asks the Court to undertake.
Whitaker's reliance on SA Luxury Expeditions, LLC v. Schleien, 2022 WL 3718310 (S.D.N.Y. Aug. 29, 2022), for the proposition that § 8.08 does not reach her unfair business practices claim, see Def. Mem. at 10, is misplaced. The parties in SA Luxury had resolved a previous lawsuit by means of a settlement agreement prohibiting defendants from making disparaging statements about SA Luxury. 2022 WL 3718310, at *1. The settlement agreement stated that New York law would apply to "any dispute resulting in a legal proceeding arising out of, relating to, or to enforce any term of this Settlement Agreement." Id. at *5. Thereafter, defendants allegedly orchestrated a campaign of "fraudulent clicks" and "fake leads" on SA Luxury's website. Id. at *4-5. SA Luxury sued again, asserting that the fraudulent clicks and fake leads violated, inter alia, California's unfair competition law. Id. at *2. Notwithstanding the breadth of the parties' choice-of-law clause, the court held that SA Luxury could sue under the California statute, because, although "[t]he claims at issue here may be part and parcel of the same poisonous relationship that gave rise to the [prior] action," the unfair competition claim was "premised on newly submitted false leads that are unconnected to the [prior] action or the settlement of it." Id. at *5.
Here, by contrast, Whitaker's counterclaim for unfair business practices is tightly interwoven with her counterclaim for breach of the Agreements. The claims that plaintiffs allegedly "manufactured" were not merely "claims that Defendant did not operate KRI in compliance with the law," Def. Mem. at 9; they were claims for breach of the representations and warranties contained in the SPA. Moreover, according to defendant, plaintiffs fabricated those claims "as a pretextual reason to terminate the SPA and Amendment [Agreement]" and to "evade their obligation," under the same Agreements, to make the earnout payments. Ans. at 28, ¶ 49. Similarly, the "threatening" phone call was allegedly made "in a further effort to avoid [plaintiff's] obligations under the [Agreements]" and to "acquire KRI at a significant discount on the agreed-upon purchase price[.]" Ans. at 28, ¶ 51. Indeed, Whitaker alleges the same injury in both of her counterclaims: loss of the $4,054,396 earnout payments owed under the SPA and the Amendment Agreement. Compare Ans. at 27, ¶ 41 with id. at 28, ¶ 54.
Defendant's allegation that plaintiffs engaged in similar conduct when purchasing other businesses, see Ans. at 27, ¶ 45, does not directly implicate the Agreements between the parties here. However, Whitaker's assertion that her unfair business practices claim is "premised" on that allegation, see Def. Mem. at 9-10, is a considerable overstatement, given that plaintiffs' conduct with respect to other acquisitions did not injure her in any way. Her injury - and hence her standing to sue - derives entirely from plaintiffs' alleged breach of the Agreements. See Ans. at 28, ¶ 54. At best, therefore, defendant's allegation as to the other companies functions to provide support for her claim that plaintiffs "had no intent to perform the promises they made" in the Agreements. Ans. at 28, ¶ 50.
In short, Whitaker's unfair business practices counterclaim would not exist but for plaintiffs' negotiation of, entry into, and alleged breach of the parties' Agreements. It therefore "arises out of" and "relates to" those Agreements, requiring the application of New York law. See Bausch & Lomb, 2016 WL 2622013, at *8 (applying New York law to all of MPI's claims, including tort and statutory consumer protection claims, because all arose out of "B+L's failure to pay the $20 million fee," which "MPI contend[ed] was a breach" of the parties' contract).
Whitaker's contention that the cases enforcing broad choice-of-law clauses "do not concern Unfair Business Practices claims," Def. Mem. at 11, is without basis. See, e.g., Radiology & Imaging Specialists Lakeland, P.A. v. FUJIFILM Med. Sys., U.S.A., Inc., 2021 WL 149027, at *5 (S.D.N.Y. Jan. 15, 2021) (dismissing plaintiff's claim for violation of the Florida Deceptive and Unfair Trade Practices Act because the parties' contract "contains a broad choice-of-law provision selecting New York law as the governing law for 'any claims arising under or relating in any way' to the agreement"); Bausch & Lomb, 2016 WL 2622013, at *13 (relying on a broad New York choice-of-law clause in the parties' contract to dismiss MPI's counterclaim under the Massachusetts Consumer Protection Act).
This result does not violate public policy. As plaintiffs correctly point out, see Pl. Reply at 6 n.4, the public policy exception to the enforceability of contractual choice-of-law provisions applies only where "the laws of the foreign state are truly obnoxious to the public policy of the forum state." EMA Fin., LLC v. NFusz, Inc., 444 F.Supp.3d 530, 542 (S.D.N.Y. 2020) (cleaned up) (emphasis added) (quoting Galeotti v. Cianbro Corp., 2013 WL 3207312, at *16 (N.D.N.Y. June 24, 2013)); see also Madden v. Midland Funding, LLC, 237 F.Supp.3d 130, 149 (S.D.N.Y. 2017) ("The party opposing enforcement of a contractual choice of law [provision] bears a heavy burden of demonstrating that the foreign law is offensive to New York's public policy.") (quoting Finucane v. Interior Const. Corp., 264 A.D.2d 618, 620, 695 N.Y.S.2d 322, 325 (1st Dep't 1999)) (cleaned up) (emphasis added).
Defendant does not (and could not) argue that the application of New York law to her counterclaims would offend the public policy of New York. Rather, she urges this Court to jettison New York law so as not to "nullify[] North Carolina's Unfair Business Practices Law," Def. Mem. at 14, thereby misapprehending the doctrine upon which she relies. The only remaining question, therefore, is whether the law chosen by the parties "has sufficient contacts with the transaction." 2002 Lawrence R. Buchalter Alaska Tr. v. Philadelphia Fin. Life Assur. Co., 96 F.Supp.3d 182, 207 (S.D.N.Y. 2015) (quoting Hartford Fire Ins. Co., 230 F.3d at 556). Staffing 360, one of the architects of the alleged scheme, is headquartered in New York, Ans. at 21, ¶ 5, which is also where Flood (who signed the Agreements for both plaintiffs and who allegedly induced Whitaker to enter into the Amendment Agreement) has his office, and where defendant agreed to send any notices required or permitted by the parties' contract. See SPA § 8.02. This is more than sufficient. See Champion Auto Sales, LLC v. Polaris Sales Inc., 943 F.Supp.2d 346, 351 n.3 (E.D.N.Y. 2013) ("as Polaris's principal place of business is in Minnesota . . ., the state has sufficient contacts with the transaction" to enforce the parties' Minnesota choice-of-law clause).
Because the application of New York law to both of defendant's counterclaims is required by the broad language that the parties used in SPA § 8.08, there is no need to perform a traditional choice of law analysis under New York's "interest-analysis test." GlobalNet, 449 F.3d at 384. For the same reason, defendant's second counterclaim should be dismissed to the extent it is asserted pursuant to N.C. Gen. Stat. § 75-1.1.
D. Whether Whitaker Has Adequately Pled a Violation of GBL § 349
Plaintiffs argue that the second counterclaim should be dismissed altogether, because it "does not allege any deceptive conduct directed at the general public or consumers-at-large," Pl. Mem. at 19; it does not arise from "the type of low-dollar amount, consumer-oriented transaction that [GBL § 349] is designed to address," Id. at 20; and therefore it does not state a claim under GBL § 349. They add that the GBL § 349 counterclaim is duplicative of defendant's breach of contract counterclaim, in that both allege that plaintiffs used defendant's asserted breaches of her representations and warranties "as pretextual reasons to renege on their agreement to make the Earnout Payments." Id. at 23.
Defendant responds that the "consumer-oriented" prong of GBL § 349 is "broadly defined," Def. Mem. at 21 (citing Himmelstein, McConnell, Gribben, Donoghue & Joseph, LLP v. Matthew Bender & Co., Inc., 37 N.Y.3d 169, 177, 150 N.Y.S.3d 79, 84-85, reargument denied, 37 N.Y.3d 1020, 154 N.Y.S.3d 27 (2021), and is satisfied here by her allegations that plaintiffs' conduct "affected not only the Defendant, but other similarly situated parties who entered into agreements with Plaintiffs and were thereafter confronted with specious buyer setoff claims." Id. According to defendant, plaintiffs' conduct also affected "consumers of staffing agencies," that is, "other potential buyers" of KRI who were out-bid by plaintiffs at a price that plaintiffs never intended to pay. Id.
Whitaker is correct that New York courts do not confine the application of GBL § 349 to "statutory definitions of 'consumer' or 'consumer good,'" Himmelstein, 37 N.Y.3d at 177, 150 N.Y.S.3d at 84-85 (citation omitted), and that "'consumer-oriented conduct' need not be 'directed to all members of the public.'" Id., 37 N.Y.3d at 178, 150 N.Y.S.3d at 85; see also Elacqua v. Physicians' Reciprocal Insurers, 52 A.D.3d 886, 888, 860 N.Y.S.2d 229, 231 (3d Dep't 2008) (an insurance company's "routine practice that affected many similarly situated insureds" was consumer-oriented conduct). And she has alleged - albeit in general terms - that plaintiffs employed the same deceptive acquisition strategy with "at least three other companies in addition to KRI." Ans. at 28, ¶ 47.
However, these facts are insufficient to nudge her counterclaim into the world of consumer-oriented conduct. Such a claim "does not require a repetition or pattern of deceptive behavior." Oswego, 85 N.Y.2d at 25, 623 N.Y.S.2d at 532. It does require conduct that has the potential to affect "the public at large, as distinguished from merely a private contractual dispute." Elacqua, 52 A.D.3d at 888, 860 N.Y.S.2d at 231; see also Oswego, 85 N.Y.2d at 25, 623 N.Y.S.2d at 532 (consumer-oriented conduct must "have a broader impact on consumers at large"); New York Univ., 87 N.Y.2d at 321, 639 N.Y.S.2d at 291 (consumer-oriented conduct is "conduct which affects the consuming public at large").
Moreover, GBL § 349 does not reach complex business transactions individually negotiated between sophisticated parties, "in which each side was knowledgeable and received expert representation and advice." New York Univ., 87 N.Y.2d at 321, 639 N.Y.S.2d at 290. Compare, e.g., Oswego, 85 N.Y.2d at 26-27, 623 N.Y.S.2d at 533 (union could sue bank under § 349 after bank allegedly steered union into disadvantageous interest-capped savings accounts through the use of "standard documents," presented to "any customer entering the bank to open a savings account," in transactions that were "not unique to these two parties") with New York Univ., 87 N.Y.2d at 314-15, 320-21, 639 N.Y.S.2d at 286, 290-91 (NYU could not sue Continental under § 349 for misconduct in connection with NYU's $1.6 million claim under a $10 million policy that was negotiated by its director of insurance, with the assistance of an insurance broker, and was "tailored to meet the purchaser's wishes and requirements," even though Continental allegedly engaged in similar "bad-faith practices with respect to policyholders nationwide").
Here, defendant asserts that the alleged misconduct affected two extremely narrow groups: the owners of three other staffing agencies, "who entered into agreements with Plaintiffs and were thereafter confronted with specious buyer setoff claims," and "other potential buyers" of the staffing agencies, who were outbid by plaintiffs. Def. Mem. at 21. Even under a liberal definition of "consumer," it is difficult to characterize this rarified company as a meaningful subset of the "public at large." Moreover, the $12 million SPA was individually negotiated over a period of months between sophisticated parties, with the assistance of investment bankers and attorneys, and thereby "tailored" to meet Whitaker's requirements (as well as plaintiffs'), as was the Amendment Agreement the following year. The "three other companies" referenced in defendant's pleading undoubtedly engaged in individual negotiations as well, with the assistance of their own professional advisors.
Because Whitaker's second counterclaim "is essentially a 'private' contract dispute" arising from a complex transaction which is "unique to these parties, not conduct which affects the consuming public at large," New York Univ., 87 N.Y.2d at 321, 639 N.Y.S.2d at 291, that counterclaim should be dismissed in its entirety. There is no need to consider plaintiff's alternative argument that the GBL § 349 claim is duplicative of Whitaker's first counterclaim, for breach of contract.
III. CONCLUSION
For the reasons set forth above, I recommend, respectfully, that plaintiffs' motion (Dkt. 84) be GRANTED and that the second counterclaim be DISMISSED. By separate order, I will permit plaintiffs to further amend their complaint to adequately allege the facts supporting their invocation of this Court's diversity jurisdiction.
NOTICE OF PROCEDURE FOR FILING OF OBJECTIONS TO THIS REPORT AND RECOMMENDATION
The parties shall have 14 days from this date to file written objections to this Report and Recommendation pursuant to 28 U.S.C. § 636(b)(1) and Fed.R.Civ.P. 72(b). See also Fed.R.Civ.P. 6(a) and (d). A party may respond to another party's objections within fourteen days after being served with a copy. Fed.R.Civ.P. 72(b)(2). Any such objections shall be filed with the Clerk of the Court, with courtesy copies delivered to the Hon. George B. Daniels, United States District Judge, at 500 Pearl Street, New York, New York 10007. Any request for an extension of time to file objections must be directed to Judge Daniels. Failure to file timely objections will result in a waiver of such objections and will preclude appellate review. See Thomas v. Arn, 474 U.S. 140, 155 (1985); Frydman v. Experian Info. Sols., Inc., 743 Fed.Appx. 486, 487 (2d Cir. 2018) (summary order); Wagner & Wagner, LLP v. Atkinson, Haskins, Nellis, Brittingham, Gladd & Carwile, P.C., 596 F.3d 84, 92 (2d Cir. 2010).