Summary
concluding that a $2 billion transaction was not consumer-oriented
Summary of this case from Orellana v. Macy's Retail Holdings, Inc.Opinion
02 Civ. 8613 (LAK).
July 15, 2003.
ORDER
The general nature of this dispute is evident from the opinion at 256 F. Supp.2d 224 (S.D.N.Y. 2003). The core of the action is the contractual claims set forth in Stryker's amended counterclaim. Pfizer now moves to dismiss counts 8 through 11 of the amended counterclaim, which purport to assert a variety of tort theories based on substantially the same conduct at issue in the contract claims.
"Stryker" refers to defendants collectively.
"Pfizer" refers to plaintiffs collectively.
Fraud Claims
Counts 8 and 9 contend that (i) Pfizer's representation in Section 5.9 and Schedule 5.9 of the Purchase Agreement that it was in compliance with all laws applicable to the ownership or operation of its assets and the transferred business was false and (ii) Pfizer, at the time the covenants set forth in Sections 7.2 and 7.18 were made, had no intention of performing them. Am CClaim ¶¶ 96-98, 12-15. Count 8 purports to state a claim for deliberate fraud while Count 9 alleges culpable recklessness. Pfizer contends that both should be dismissed because they reflect an improper attempt to convert breach of contract claims into tort claims and, in any case, because Section 8.9 of the Purchase Agreement limits Stryker to the remedies provided under the contract.
Misrepresentation of Present Existing Facts
In considering the first of the arguments, it is important to differentiate between paragraphs 96 and 97 of the amended counterclaim, which assert that Pfizer made fraudulent misrepresentations of then existing fact, and paragraph 98, which alleges that it covenanted and agreed to render certain performance with the intention that it would not do so. As Pfizer argues, a claim of breach of contract may not be transformed into a fraud claim simply by an allegation that the promissor, at the time the contract was agreed upon, did not intend to perform or that it deliberately breached its obligations. In such circumstances, there must be a legal duty separate and apart from the contractual duty to perform, a fraudulent representation collateral or extraneous to the contract, or special damages proximately caused by the fraud that are not recoverable under a contract measure of damages. E.g., Papa's-June Music, Inc. v. McLean, 921 F. Supp. 1154, 1160 (S.D.N.Y. 1996). But the assertions made in paragraphs 96 and 97 do not claim fraud based on an alleged intention not to perform or a deliberate breach. Rather, they assert that Pfizer deliberately and knowingly misrepresented present, existing facts. That is a horse of an entirely different color. Where, as here, a party warrants and represents a present existing fact, there simply is no reason why it should not have a remedy in contract for breach of the warranty and a remedy in tort for deliberate, fraudulent misrepresentation, assuming the facts otherwise justify such relief. E.g., Frontier-Kemper Constructors, Inc. v. American Rock Salt Co., 224 F. Supp.2d 520, 529 (W.D.N.Y. 2002); First Bank of Americas v. Motor Car Funding, Inc., 257 A.D.2d 287, 291, 690 N.Y.S.2d 17, 21 (1st Dept. 1999); J.A.O. Acquisition Corp. v. Stavitsky, 192 M.2d 7, 11-12, 745 N.Y.S.2d 634, 639 (Sup.Ct. N.Y. Co. 2001); see Jo Ann Homes at Bellmore, Inc. v. Dworetz, 25 N.Y.2d 112, 302 N.Y.S.2d 799 (1969); contra, Dyncorp v. GTE Corp., 215 F. Supp.2d 308, 324 (S.D.N.Y. 2002). Bridgestone/Firestone, Inc. v. Recovery Credit Services, Inc., 98 F.3d 13, 20 (2d Cir. 1996), dealt only with a claim of misrepresentation of an intention to perform and therefore does not bear on this question. See VTech Holdings Ltd. v. Lucent Technologies, Inc., 172 F. Supp.2d 435, 440-41 (S.D.N.Y. 2001). In consequence, there is no basis for dismissal of so much of counts 8 and 9 as relies on the misrepresentations alleged in paragraphs 96 and 97 of the amended counterclaim unless it is to be found in Section 8.9 of the Purchase Agreement limitation of remedies.
Misrepresentation of Intention to Perform
So much of the fraud claims as rests on the allegation that Pfizer did not intend to perform the covenants referred to in paragraph 98 are subject to the restriction on the transformation of contract into tort claims that is referred to above. Stryker contends that it comes within those limitations because Pfizer owed it, and breached, "a legal duty separate and apart from the contractual duty to perform." Def. Mem. 16. It argues that the nature of the property sold by Pfizer — prosthetic devices intended for implantation in human beings — obligated Pfizer, quite apart from its contractual duty, to perform with due care in order to protect the public interest. It relies principally upon Sommer v. Federal Signal Corp., 79 N.Y.2d 540, 583 N.Y.S.2d 957 (1992), and its progeny, which make clear that there is a limited class of cases in which a strong public interest in the careful performance of particular contractual obligations may give rise to a tort duty of due care.
Stryker's argument conflates two somewhat different concepts, a duty to perform one's consensual obligations, which arises out of one's promise, and a duty to perform with due care, which may arise not only out of one's promise, but also out of the public importance of careful performance given the nature of the promise involved. Sommer and its progeny deal with the latter, but not the former and so arguably are not pertinent here. But even assuming arguendo that those cases properly may ground a conclusion that a misrepresentation of an intention to perform may run afoul of a tort as well as a contractual duty in an appropriate case, this would not be such an instance.
Sections 7.2 and 7.18 of the Purchase Agreement, the covenants given by Pfizer allegedly without the intention to perform, obligated it to conduct the business that was the subject of the sale in the ordinary and usual course pending the closing and to give prompt notice to Stryker of events likely to cause any representation or warranty given by it to be inaccurate at or prior to closing or to comply in any material respect with any obligation under the Purchase Agreement. The Court is not persuaded that the public interest in Pfizer's performance of these covenants was so exceptional as to warrant the creation of an independent, extra-contractual duty. Rather, these covenants were intended principally for the benefit of Stryker as the purchaser of Pfizer's implant business. Cf. Aniero Concrete Com. v. New York City Construction Authority, No. 94 Civ. 3506 (CSH), 2000 WL 863208, at *34-35 (S.D.N.Y. June 27, 2000). Accordingly, so much of counts 8 and 9 as rests on the alleged intention not to perform these covenants is legally insufficient.
Limitation of Remedies
Section 8.1 of the Purchase Agreement obligates Pfizer to defend and indemnify Stryker against losses arising from retained liabilities and, inter alia, any breach by Pfizer of any of its covenants or agreements, representations or warranties. Section 8.9 in substance limits the remedies "with respect to the subject matter of this Agreement" to those provided in Section 8.1. There remains the question whether the claims of misrepresentation of present existing facts referred to in paragraphs 96 and 97 should be dismissed in light of Section 8.9.
Regrettably, the papers before the Court do not address this question adequately. Pfizer's brief assumes that any tort claim is foreclosed by Section 8.9. But Section 8.9 does not foreclose categories of claims. Rather, it limits the remedies available. While it may be that the contract is properly construed as meaning that indemnification for a loss attributable to a fraudulent misrepresentation is coextensive with indemnification for a breach of contract based on a warranty theory, neither side has dealt with that matter.
As a motion to dismiss must be denied unless it is clear that the claimant could not recover on any facts provable under its pleading, this Court is not in a position to dispose of the remaining fraud claims on the basis of Section 8.9 at this time.
New York General Business Law
Count 10 alleges that Pfizer's alleged actions, described above, also violated and gives rise to a claim under Section 349 of the New York General Business Law, which makes unlawful "[d]eceptive acts or practices in the conduct of any business, trade or commerce . . . in this state." N.Y. GEN. Bus. L. § 349(a) (McKinney 1988).
Section 349 is limited to consumer-oriented conduct. As the New York Court of Appeals wrote in New York University v. Continental Insurance Co., 87 N.Y.2d 308, 639 N.Y.S.2d 283 (1995):
"In Oswego Laborers' Local 214 Pension Fund v. Marine Midland Bank, 85 N.Y.2d 20, 623 N.Y.S.2d 529, 647 N.E.2d 741, we stated that parties claiming the benefit of the section must, at the threshold, charge conduct that is consumer oriented. The conduct need not be repetitive or recurring but defendant's acts or practices must have a broad impact on consumers at large; `[p]rivate contract disputes unique to the parties * * * would not fall within the ambit of the statute' (id., at 25, 623 N.Y.S.2d 529, 647 N.E.2d 741; see also, Teller v. Bill Hayes, Ltd., 213 A.D.2d 141,630 N.Y.S.2d 769; Quail Ridge Assocs. v. Chemical Bank, 162 A.D.2d 917, 558 N.Y.S.2d 655, Iv dismissed 76 N.Y.2d 936, 563 N.Y.S.2d 64, 564 N.E.2d 674). If a plaintiff meets this threshold, its prima facie case may then be established by proving that defendant is engaging in an act or practice that is deceptive in a material way and that plaintiff has been injured by it (id.; Varela v. Investors Ins. Holding Corp., 81 N.Y.2d 958, 598 N.Y.S.2d 761, 615 N.E.2d 218).
"Plaintiff has not met the threshold requirement because defendants' acts in selling this policy and handling the claim under it do not constitute consumer-oriented conduct. The parties were a major university acting through its director of insurance, and a large national insurance company. The policy was not a standard policy, although it contained standard provisions, but was tailored to meet the purchaser's wishes and requirements. The premiums were in excess of $55,000 and the policy provided coverage for losses up to $10 million against various acts of employee dishonesty. The sale was handled by one of the largest brokerages in the Nation, Johnson Higgins, which managed, through negotiation, to obtain several enhancements to the policy for plaintiff's benefit and assisted it in presenting its loss claim to Continental.
"Manifestly, this transaction is wholly unlike that in Oswego, which involved a bank customer receiving the standard forms and advice supplied to the consuming public at large, and in which the parties occupied disparate bargaining positions. The case before us involves complex insurance coverage and proof of loss in which each side was knowledgeable and received expert representation and advice. Although relief under the statute is not necessarily foreclosed by the fact that the transaction involved an insurance policy (see, Riordan v. Nationwide Mut. Fire Ins. Co., 977 F.2d 47, 51-52), this was not the "modest" type of transaction the statute was primarily intended to reach (see, Teller v. Bill Hayes, Ltd., supra, at 146, 147, 630 N.Y.S.2d 769). It is essentially a `private' contract dispute over policy coverage and the processing of a claim which is unique to these parties, not conduct which affects the consuming public at large (see, Oswego, supra; Teller, supra; Quail Ridge Assocs., supra)." 87 N.Y.2d at 320-21, 639 N.Y.S.2d at 290.
So too here. Although consumers eventually stood to be affected by any defects in the product at issue, the questions whether Pfizer told Stryker the truth when it represented that the business was in compliance with law and whether it intended to comply with its notice and related obligations are essentially private matters. This was a custom-crafted, $2 billion transaction between two large, sophisticated parties. It does not come within Section 349.
Negligent Performance of Transitional Services Agreement
At the time the parties entered into the Purchase Agreement, they entered also into a Transitional Services Agreement ("TSA") in which Pfizer contracted provide the business acquired by Stryker with certain services for a transitional period in order to allow Stryker to continue operations without interruption. It undertook to perform those services "in a competent, businesslike manner." Am CClaim ¶ 23. Count 11 alleges that it breached this obligation through reckless and grossly negligent actions and seeks recovery in tort as well, it appears, as in contract. In particular, it asserts that Pfizer negligently shipped expired implants that, under its own policies, had been barred from shipment for over a year and that a number of claims have been brought against Stryker with respect to such items. Pfizer seeks dismissal on the ground that it owed no independent tort duty.
The negligence alleged here involved shipment of arguably defective prosthetic devices for implantation in patients. This therefore is a circumstance — in contrast to that involving Counts 8 and 9 and aspects of the Purchase Agreement that were concerned predominantly with the private relationship between Pfizer and Stryker, in which the Court cannot exclude the possibility that the threat of injury to members of the public was sufficiently great that Pfizer's obligation to perform with due care arose out of tort as well as contract under Sommer and its progeny.
While evidence may show that the potential consequences to members of the public of the alleged negligence, as Pfizer claims, are far from catastrophic, in which case Sommer might not justify the imposition of a tort duty, it is too soon in the litigation to be certain of this. Accordingly, Count 11 will stand for the present.
Conclusion
Pfizer's motion to dismiss [docket item 57] the tort claims in the amended counterclaim is granted to the extent that:
1. So much of counts 8 and 9 as rest on the alleged intention not to perform the covenants referred to in paragraph 98 of the amended counterclaim, and
2. Count 10 of the amended counterclaim are dismissed. It is denied in all other respects.
SO ORDERED.