Opinion
20-cv-11118 (LJL)
06-02-2023
CAMBRIDGE CAPITAL LLC, Plaintiff, v. RUBY HAS LLC, Defendant.
OPINION AND ORDER
LEWIS J. LIMAN, United States District Judge:
This case arises from failed negotiations for the acquisition of an e-commerce fulfillment company during the midst of the COVID-19 pandemic.
Plaintiff Cambridge Capital LLC (“Cambridge” or “Plaintiff”) moves for summary judgment pursuant to Federal Rule of Civil Procedure 56, adjudging Defendant Ruby Has LLC (“Ruby Has” or “Defendant”) liable for Cambridge's claims for breach of a contractual provision requiring exclusivity in negotiations and for breach of the duty to negotiate in good faith. Cambridge also moves for summary judgment dismissing Ruby Has's counterclaims of fraud and breach of a nondisclosure agreement. Dkt. No. 114. Ruby Has moves for partial summary judgment striking Cambridge's request for expectation or lost profit damages on its claim for breach of the duty to negotiate in good faith and dismissing Cambridge's claims for the breach of the exclusivity agreement. Dkt. No. 123.
For the following reasons, Cambridge's motion for summary judgment is granted in part and denied in part and Ruby Has's motion for partial summary judgment is granted.
BACKGROUND
Familiarity with the facts of the case from this Court's two prior Opinions and Orders, dated September 30, 2021 and June 24, 2022, is presumed. Dkt. No. 63 (“September 2021 Opinion”); Dkt. No. 102 (“June 2022 Opinion”). The Court draws all reasonable inferences in favor of the nonmovant.
I. The Parties
Cambridge is a private equity firm, organized under the laws of Delaware with its principal place of business in Florida. Dkt. No. 115 ¶¶ 2-3. It invests in supply-chain related companies. Id. ¶ 3. It is what is commonly described as a “fundless sponsor,” otherwise known as an “independent sponsor,” which is an entity that raises capital on a deal-by-deal basis from outside investors. Dkt. No. 131-7 at 215; Dkt. No. 131-8 at 138; Dkt. No. 131-9 at 63; Dkt. No. 151-61 at 24-26. In practice, Cambridge would at times invest its own money and also had recurring partners that funded deals with Cambridge. Dkt. No. 151-61 at 25.
Cambridge was founded by Benjamin Gordon (“Gordon”). Dkt. No. 115 ¶ 3. For all relevant time periods, Gordon was the Managing Partner of Cambridge and Matt Smalley (“Smalley”) was a Principal of Cambridge. Id. ¶ 4. Both reside in Florida. Id.
Ruby Has, the acquisition target, is a limited liability company organized under the laws of New York with its principal place of business in New York. Id. ¶ 5; Dkt. No. 155 ¶ 1. It is an ecommerce fulfillment company in the business of storing, packing, and shipping its retailer customers' products as they are ordered online by end consumers. Dkt. No. 115 ¶ 6; Dkt. No. 155 ¶ 2. Ruby Has's headquarters and one of its warehouses are in New York. Dkt. No. 115 ¶ 7; Dkt. No. 155 ¶ 11. The remaining warehouses are in New Jersey, Nevada, and Kentucky. Dkt No. 115 ¶ 7; Dkt. No. 155 ¶ 11.
Ruby Has was founded in 2011 by Rafael Zakinov (“Zakinov”). Dkt. No. 115 ¶ 8; Dkt. No. 155 ¶ 2. For all relevant time periods, Zakinov owned approximately 50% of Ruby Has, and Eliyahu (“Eliyahu”) and Avrami Mermelstein (“Avrami,” and together with “Eliyahu,” the “Mermelsteins”) owned the other 50% through an entity known as Hameah LLC (“Hameah”). Dkt. No. 115 ¶ 9; Dkt. No. 144 ¶ 9. For all relevant time periods, Avrami was Ruby Has's Chief Financial Officer, and Esther Kestenbaum (“Kestenbaum”) served as Ruby Has's President. Dkt. No. 144 ¶¶ 8, 10. Kestenbaum was not an owner of Ruby Has but possessed vested options in the business. Id. ¶ 10. She was primarily responsible for “sales, marketing, partnerships, and driving the growth curve.” Dkt. No. 142-15 at 14-16.
II. Discussions Prior to April 2020
In August 2018, Kestenbaum, at the recommendation of her long-time acquaintance in the supply chain industry, Richard Sherman, reached out to Cambridge in connection with a potential investment. Dkt. No. 121-21; Dkt. No. 131-2 at 7, 25, 27. At the time, Ruby Has was in the process of raising financing through an offering of convertible notes to friends and family of the company. Dkt. No. 121-21; Dkt. No. 142-15 at 30. Following her outreach, Kestenbaum had a conversation with Gordon in summer 2018. Dkt. No. 121-22. On April 3, 2019, Dave Stubbs (“Stubbs”), at the time a non-salaried partner at Cambridge, followed up on that conversation to see if Kestenbaum and Zakinov would meet with Cambridge at the eCommerce Ops Summit taking place the following week. Id.; Dkt. No. 121-54 at 36. Kestenbaum, forwarding Stubbs's email invitation to Zakinov, stated “Look up ben gordon he's the guru of 3pl [third-party logistics] financing.” Dkt. No. 121-22. Before forwarding Stubbs's email, Kestenbaum looked up Gordon and vetted his history. Dkt. No. 142-15 at 32-33. She testified that she “had been told by Richard Sherman that Ben Gordon had a reputation of being very active in our space” and that Stubbs's email “felt meaningful.” Id. at 32. She had “looked [Gordon] up and . . . saw that he had made some investments, that there were some investments connected to him,” and she also “saw that there was some . . . events that he led and sometimes in our industry that in itself is meaningful in terms of being connected.” Id. at 33.
Kestenbaum, Zakinov, and Stubbs all met on April 10, 2019, at the E-commerce Ops Summit concerning a potential investment. Dkt. No. 121-23; Dkt. No. 121-59 ¶ 12. Stubbs then followed up later that same day via email, both praising the business and stating that “[r]ecognizing you are talking to potential financial partners; it would be good to see if we would be a good fit for your next stage.” Dkt. No. 121-23. The email included a nondisclosure agreement (“NDA”), a presentation deck on Cambridge, and a request for a follow-up meeting. Id. Stubbs emailed again on April 18, 2019, to follow up and set up another meeting with Kestenbaum. Id.
In late April 2019, the parties exchanged documents, information, and agreements to explore a potential investment by Cambridge in Ruby Has. On April 22, 2019, Ruby Has provided Cambridge with an investor deck containing information about Ruby Has's business. It then provided Cambridge access to an “e-room” with more detailed information on the business on April 30, 2019. Dkt. No. 121-24; Dkt. No. 121-25; Dkt. No. 121-59 ¶¶ 26, 28, 29; Dkt. No. 142 at 44-46. Zakinov also returned an executed NDA to Cambridge on April 23, 2019. Dkt. No. 121-25 at ECF p. 3; Dkt. No. 121-59 ¶ 14. That NDA, dated April 11, 2019, indicated that it “shall terminate one year from the date hereof.” Dkt. No. 22-1.
Cambridge and Ruby Has had an in-person meeting in New York City on or about May 21, 2019. Dkt. No. 144 ¶ 17. Following that meeting, Cambridge sent Ruby Has a proposed Letter of Intent (“LOI”) on or about May 23, 2019 (“2019 LOI”). Dkt. No. 115 ¶ 11; Dkt. No. 121-27; Dkt. No. 144 ¶ 19. Among its terms, the 2019 LOI proposed that Cambridge would invest $17.5M to acquire 63% of the equity of Ruby Has, in which a portion of the investment would be used for growth, with the remaining portion used to purchase equity from the shareholders. Dkt. No. 121-27 at ECF p. 6. The 2019 LOI was subject to the condition that the 2019 unadjusted earnings before interest, taxes, depreciation, and amortization (“EBITDA”) for the company would be at least $5 million. Id. The 2019 LOI also proposed that Ruby Has would pay Cambridge a quarterly management fee in cash of 10% of EBITDA. Id. Ruby Has rejected the 2019 LOI, because the price was too low. Dkt. No. 115 ¶¶ 12-13; Dkt. No. 144 ¶ 20. After the 2019 LOI, Ruby Has sent updated financial information to Cambridge on June 23, 2019 and November 6, 2019. Dkt. No. 121-59 ¶¶ 36, 42; Dkt. No. 144 ¶ 21.
III. Negotiations in April 2020 and the June 2020 LOI
The parties entered negotiations for a subsequent LOI in April 2020. Those negotiations culminated in June 2020 with an executed LOI. During these negotiations in 2020, Zakinov and the Mermelsteins resided in and primarily negotiated from New York, and Gordon and Smalley resided in and negotiated from Florida. Dkt. No. 130 ¶ 25.
On April 23, 2020, Stubbs emailed Kestenbaum to ask how the COVID-19 pandemic had affected Ruby Has's business. Kestenbaum replied that the COVID-19 pandemic had been helpful for business, and the two set up a phone call. Dkt. No. 121-54 at 83; Dkt. No. 130 ¶ 5; Dkt. No. 131-4; Dkt. No. 144 ¶ 23. After several subsequent calls and email exchanges between Cambridge and Ruby Has, on May 18, 2020, Gordon sent Kestenbaum and Zakinov another proposed letter of intent (“May 2020 LOI”) with differing terms from the 2019 LOI, including an increased valuation. Dkt. No. 115 ¶ 14; Dkt. No. 121-6; Dkt. No. 121-59 ¶ 47. The May 2020 LOI proposed, inter alia, that Cambridge would invest $38 million into Ruby Has in exchange for a 51% ownership stake in the company. Dkt. No. 121-6 at ECF p. 4. The parties then continued to discuss and negotiate terms of the May 2020 LOI. Dkt. No. 144 ¶ 25. During these calls, Gordon conveyed that Cambridge had $40 million that had been already “raised and [was] essentially in a bank account,” Dkt. No. 145 ¶ 28, and that “they were eager to deploy the capital to get it to work,” Dkt. No. 142-14 at 75-76, “either by investing in Ruby Has or another company in that sector,” Dkt. No. 145 ¶ 28. Cambridge conveyed that it was “money in [Cambridge's] coffers” and not “invested in some other fashion.” Dkt. No. 142-14 at 76-77. The understanding was that Ruby Has “would be able to deploy the capital and capitalize it going into the holiday.” Dkt. No. 142-17 at 86.
Numerous material terms were changed between the May 2020 LOI and the next draft of the LOI. For example, the cost of the 51% stake increased from $38 million to $40 million; the annual management fee due to Cambridge changed from 10% of EBITDA to a flat $900,000; a term called “Partnership” was added, which stated that “We envision this deal as a partnership. We will only pursue acquisitions if a super-majority, e.g. the CEO as well as Cambridge, agree to do so”; the prospective EBITDA requirements for Ruby Has to be paid the full investment were removed; language stating that “we assume that the Company's balance sheet will be debt free at closing” was changed to “[w]e will mutually agree if we would like to pay off the high-interest debt and refinance it”; and a term requiring exclusive negotiations between Cambridge and Ruby Has was reduced from 120 days to 90 days, with additional language providing that “if Cambridge Capital has completed its core due diligence and is proceeding in good faith toward a closing, then the parties agree to extend the Exclusivity to 120 days.” Dkt. No. 121-27 at ECF pp. 4-9; Dkt. No. 131-13; Dkt. No. 142-6 at ECF pp. 9-14; Dkt. No. 144 ¶ 25.
On or about May 14, 2020, the parties (which included at least Zakinov, Avrami, and Gordon) had a phone call in which they discussed an NDA. Dkt. No. 160-21 at 247. Avrami asked whether there was an NDA in place. Gordon reminded him that there was an NDA and that they should “just continue on with the NDA that [they] have in place.” Id. There was no renegotiation of the terms of the NDA. Id. There was no discussion that addressed the written terms of the prior NDA, including the start date or duration of the NDA. Id. at 248-50. The parties, however, subsequently referred to the NDA in their discussions. Id. For example, Zakinov testified that they “talk[ed] about the NDA in that we are all operating under the condition and assumption and good will that we all have a non-disclosure agreement ....And the negotiations are under a non-disclosure agreement and will be held in confidence. And yes, it was discussed by myself and Matt Smalley and then again subsequently when we met in Vegas as well that everything is held in confidence and will not be used or shared in any way.” Dkt. No. 142-14 at 248; see also Dkt. No. 142-3 (emails between the parties confirming that the agreement would be “subject to our NDA”). Smalley likewise testified as to his understanding that he “thought there was [an NDA] in place,” although he later realized that “[he] was mistaken.” Dkt. No. 142-18 at 75-76.
On or about June 5, 2020, Cambridge and Ruby Has signed the updated draft of the LOI. Dkt. No. 115 ¶ 15. The LOI was re-signed on June 25, 2020 (“June 2020 LOI”). The June 2020 LOI is identical to the LOI dated June 5, 2020, except for its date. Id. It is the June 2020 LOI which is the focus of this litigation.
As previously described, the June 2020 LOI included several pertinent terms: (1) Cambridge agreed to invest $40 million in Ruby Has in exchange for a 51% ownership interest in the company; (2) the $40 million would be invested in the form of a $20 million liquidity payment to the existing owners for part of their equity and a $20 million investment in Ruby Has; (3) the investment was “envisioned” as a “partnership” and Ruby Has would pursue acquisitions only “if a super-majority, e.g. the CEO as well as Cambridge, agree to do so”; (4)
Ruby Has would pay Cambridge an annual management fee of $900,000; (5) the parties would agree whether to pay off the high-interest debt or refinance it; (6) the potential transaction would “be subject to an adjustment for working capital consistent with historical working capital requirements of the Company, including consideration of historic seasonality”; and (7) the investment would be “in the form of Series A convertible preferred units, with an 8% PIK [payment in kind] (downside) dividend and a 1x liquidation preference.” See generally Dkt. No. 121-1. The June 2020 LOI also contained provisions regarding due diligence and timing. It stated that Cambridge would complete due diligence within 90 days of the execution of the June 2020 LOI, and that until the execution of the final purchase agreement, Ruby Has would “conduct its business only in the normal and ordinary course and in a manner consistent with good business practices.” Id. at ECF p. 5. The June 2020 LOI also contained an exclusivity provision effective for the same 90 days, stating the following:
Exclusivity Period
From the date this letter is accepted until the 90th day thereafter, the Company shall not, and shall cause the Company, its officers, directors, employees and other agents not to (i) take any action to solicit or initiate any Investment or Acquisition Proposal (as hereinafter defined), or (ii) continue, initiate or engage in negotiations with, or disclose any nonpublic information, other than in the ordinary course of business, relating to the Company, or afford access to any other person or entity except Cambridge and its respective representatives. The term “Investment or Acquisition Proposal” means any offer, proposal or indication of interest with respect to (a) the acquisition of any assets (other than inventory in the ordinary course of business), operations or stock or units of the Company, or (b) a merger, consolidation or other business combination involving the acquisition of any of the assets or stock of the Company. To the extent anyone at the Company, directly or indirectly, receives any Investment or Acquisition Proposal, the Company will promptly advise such person, by written notice, of the terms of such Investment or Acquisition Proposal and will promptly advise Cambridge, orally and in writing, of all the terms of such Investment or Acquisition Proposal (including, without limitation, the identity of the person making the Investment or Acquisition Proposal and all economic terms of such Acquisition Proposal) and, if in writing, deliver a copy of such Investment or Acquisition Proposal to Cambridge.
In addition, if Cambridge Capital has completed its core due diligence and is proceeding in good faith toward a closing, then the parties agree to extend the Exclusivity to 120 days.Id. The June 2020 LOI was signed by Cambridge on June 22, 2020, and by Ruby Has on June 25, 2020. Id. at ECF p. 7. Ruby Has needed the capital to be invested by Cambridge by the fourth quarter of 2020 to purchase necessary equipment for the winter shopping cycle. Dkt. No. 144 ¶ 27. Ruby Has had no other active prospects for raising capital when it signed the LOI with Cambridge in June of 2020. Dkt. No. 121-59 ¶¶ 55-56; Dkt. No. 144 ¶ 28.
III. Post-June 2020 LOI Negotiations
After both parties signed the June 2020 LOI, Dkt. No. 121-1, Cambridge moved forward with its due diligence process. Cambridge hired an outside accounting firm, Baker Tilly, to conduct a quality-of-earnings analysis on Ruby Has. Dkt. No. 121-10 at ECF p. 2; Dkt. No. 12159 ¶ 78; Dkt. No. 144 ¶ 29. Smalley, in an email on July 24, 2020, indicated that the due diligence thus far had included speaking with “important Ruby Has customers, . . . partners and several market experts,” conducting “two site visits[] and . . . scheduling more,” completing an “initial assessment of the business,” drafting a “value creation plan,” and undertaking tax due diligence through Baker Tilly. Dkt. No. 121-4 at ECF p. 1. Cambridge requested significant amounts of data, engaged in financial modeling, reviewed materials in the data e-room, and conducted other general diligence. Dkt. Nos. 121-5, 121-10, 121-52. Baker Tilly released a report in August 2020 that converted the books of Ruby Has into GAAP accounting figures and assessed the quality of its earnings. Dkt. No. 121-53 at 120.
Ruby Has similarly undertook significant efforts during this due diligence phase. It provided access to years of detailed financial information and made its employees available for numerous diligence calls and communications with Cambridge during the pendency of the negotiation. Dkt. No. 121-59 ¶¶ 73-76, 81; Dkt. No. 144 ¶¶ 30-31. Kestenbaum and Zakinov both testified that Ruby Has never refused to provide Cambridge with any requested information about its business in connection with the due diligence process. Dkt. No. 121-54 at 51; Dkt. No. 121-58 at 124; Dkt. No. 121-59 ¶ 51. Further, in accordance with its obligations under the June 2020 LOI, Ruby Has conducted its business in the normal and ordinary course and used its best efforts to preserve its business organization and keep its existing business relationships intact. Dkt. No. 121-54 at 152; Dkt. No. 121-58 at 124-25; Dkt. No. 121-59 ¶¶ 74-77.
Ruby Has also conducted some due diligence of Gordon and Cambridge during this period. Following the signing of the June 2020 LOI and before the end of 2020, Ruby Has called two other companies that Cambridge had invested in. Dkt. No. 142-14 at 112-13; Dkt. No. 14215 at 135-36; Dkt. No. 142-17 at 77-80. On September 2, 2020, Ruby Has received a “personal track record” from Smalley of investments that Cambridge had made. Dkt. No. 142-31.
Following the signing of the June 2020 LOI, Cambridge continued to report that it had funds on hand that were ready to deploy. Dkt. No. 145 ¶¶ 32-34. Smalley reassured Alexander Kaplun (“Kaplun”), Ruby Has's counsel, on a call on September 4, 2020, that there were funds available. Dkt. No. 146 ¶ 4; Dkt. No. 142-17 at 85-86 (Eliyahu's testimony that their understanding at the time was that the funds were ready to deploy). Similarly, Essa Al-Saleh (“Al-Saleh”), a partner at Cambridge, confirmed with Zakinov that Cambridge had cash on hand. Dkt. No. 145 ¶ 34. However, also in early September 2020, during the midst of negotiations, Zakinov told Kestenbaum and Avrami his understanding, with respect to a disputed term, that a “[limited partner] is not allowing them to proceed” with that term. Dkt. No. 151-37. He then stated that “remember they don't have a fund so they can be twisted for this if they want the money.” Id.
A. The Deal Points Memoranda and their Negotiation
On August 11, 2020, Cambridge sent Ruby Has a list entitled “Legal Documentation Principles and Important Remaining Deal Points” that proposed a number of additional deal terms. Dkt. No. 151-2. The list was separated into sections. Those sections included: (1) “Guiding Principles for Flow of Cambridge Funds,” which addressed whether certain debt would remain on the balance sheet and the working capital that would be delivered with the company; (2) “Basic Legal Principles for Post-Investment Governance,” which addressed board seats, voting rights, and specific approval rights; (3) “Important Ancillary Legal Documentation Items,” which addressed indemnification, representations, warranties, and the placement of investment funds in escrow; and (4) “Important Considerations for Management Team and Existing Shareholders,” which outlined issues concerning management contracts with key employees, compensation for Zakinov and the Mermelsteins, and stock options for employees. Id. Among its provisions, the first section regarding the “Guiding Principles for Flow of Cambridge Funds” provided that all related party debt and all non-convertible note debt with friends and family would have to be settled before Cambridge invested in Ruby Has, and that any cash payments from Ruby Has required to settle that debt would be deducted from the $20 million liquidity investment that would otherwise have been paid to Ruby Has's founders. Id. at ECF p. 2. That section also provided that Ruby Has's “business [would be] delivered to Cambridge with the appropriate amount of working capital to sustain itself, before giving effect to the $20M growth capital investment.” Id. The second section on “Post-Investment Governance” provided that in connection with Cambridge's ownership of 51% of Ruby Has, Cambridge would receive four of seven board seats, with Zakinov to have two seats (including that of the CEO), and Hameah to have the remaining seat. Id. at ECF p. 3. Activities such as the budget and strategic plan and capital investments and use of growth capital proceeds could be approved by a bare majority of the board. Merger and acquisition (“M&A”) activities, however, “[m]ust be approved by a majority of the board including [the] CEO,” and a liquidity event of “selling the company” must be “approved by a board majority, including Cambridge [ ] and [the] CEO.” Id. The third section on “Important Ancillary Legal Documentation Items” provided that 7.5% of Cambridge's investment, or $3 million, would be kept in escrow to be released only after a 36-month survival period for all other representations and warranties. Id. at ECF p. 4. The fourth section had provisions for the employment agreements for Zakinov and Avrami. Id. It also required Ruby Has to establish an option pool, before closing, equal to 10% of fully diluted equity to provide sufficient equity to recruit and retain executives. Id.
On August 19, 2020, Eliyahu sent an email to Gordon on the remaining deal points, raising issues with the fact that they “never discussed having an additional employee option pool that would only dilute [them]” and would have “an economic effect on the value of the shares,” that the provisions did not exemplify a “partnership” because it asked “for complete control of the company and [the current shareholders] have no rights,” and that the treatment of debt did not comport with the June 2020 LOI because it reduced the $20 million payment that otherwise would have been paid to the shareholder founders. Dkt. No. 142-5 at ECF pp. 3-4. Gordon sent Zakinov an email the following day on August 20, 2020, following a phone conversation, reassuring him that he will have a board seat and that “governance will be clean and normal, as befits a 51% deal, and a $40 million investment.” Dkt. No. 142-33 at ECF p. 2.
On August 31, 2020, Gordon sent an email to Ruby Has asking for an increase in its cash and working capital before Cambridge would invest. The email stated as follows:
In June, we all agreed to an LOI whereby we would invest $40 million for a fully-diluted 51% ownership stake. The quality of earnings findings reflect meaningful changes from what we were presented with in May, including less EBITDA, less cash, less working capital, and more debt. That said, we remain committed to every
word in that LOI. And we are not proposing to reduce your proceeds or increase our equity ownership (although many others in this position would do so). We simply need to make sure the balance sheet is not less than the $4.1 million of cash and working capital as reflected in the May balance sheet.Dkt. No. 151-3 at ECF p. 1. The email continued with a defense of the size of the option pool that Cambridge was requiring that Ruby Has establish before Cambridge made its investment, stating “[i]n truth, 10% was already too low, significantly below other companies we've funded, and was intended to be a compromise.” Id. The email also included a set of “Revised Deal Points” (“Revised Deal Points Memo”) indicating that the Ruby Has owners would have to true up the cash balance so that it equaled at least $4.1 million. Id. at ECF p. 3. It also required that there only be a maximum of $5.9 million in debt with any excess to be trued up by Ruby Has. Ruby Has would have to either convert the convertible notes on the balance sheet to equity or pay them out of the Cambridge investment that otherwise would have been payable to the Ruby Has owners. Id. With respect to governance rights, the Revised Deal Points Memo reduced the size of the board from seven to five seats. Cambridge would have held three out of five of the board seats. Id. Zakinov and Hameah both were allowed one seat each, provided that they each maintain a 19% ownership stake in Ruby Has. Id. Further, M&A or liquidity events could be approved by Cambridge with the consent of either Zakinov or Hameah, “provided that neither [Zakinov]'s consent nor Hameah's consent shall be unreasonably withheld.” Id. The escrow holdback was reduced to $2.25 million or approximately 6.25% of the transaction value. Id. at ECF p. 4. Finally, the email included a presentation that concluded that “[Ruby Has] has $6.1 [million] more debt than was represented to us in May” and that there was a “working capital shortage of $4.1 [million].” Id. at ECF p. 16. Cambridge stated that it was “willing to absorb the increased gross debt” and “cover the $3.7 [million] envisioned additional debt” with “part of [its] $20 [million] growth equity,” but asked “that the business be delivered with the appropriate amount of balance sheet cash based on what was presented to us in May, in addition to what is needed to cover the working capital shortfall.” Id. at ECF p. 18. The email also included a “legal due diligence request list.” Id. at ECF p. 24.
The Revised Deal Points Memo continued to be updated throughout this period with changes that often affected the terms of the June 2020 LOI. The record shows another revision on September 14, 2020, that modified the terms outlined in the previous draft dated August 31, 2020. Dkt. No. 121-11; Dkt. No. 151-4; Dkt. No. 151-12. This version appears to have emerged from a conversation on September 11, 2020, followed by an email from Cambridge's counsel and subsequent edits by Ruby Has's counsel. Dkt. No. 121-12 at ECF p. 3. Under the updated terms, Ruby Has's owners again would have to true up the cash balance so that it equaled at least $1 million. Dkt. No. 121-11 at ECF p. 4. The conditions again required that there be a maximum of $5.9 million of total debt with the remainder to be trued up. Id. Ruby Has would also be required to either convert convertible notes to equity and remove them from being classified as debt or pay off the notes from the liquidity proceeds. Id. With respect to governance rights, the memo continued to have Cambridge hold a majority of the board seats (three out of five) and provided that M&A events that were non-exit transactions could be approved by a “majority board vote, which majority must include [Zakinov]'s consent (assuming he remains on the board), and which consent shall not be unreasonably withheld.” Id. at ECF p. 5. The September 14, 2020 Revised Deal Points Memo included an additional separate provision on an “[e]xit transaction or liquidity event” that required any such event “[t]o be approved by Cambridge, provided that [Zakinov] and/or Hameah, LLC may put forward a competing bid for consideration.” Id. In the case that Zakinov or Hameah submitted a competing bid, “[Zakinov] and any Hameah party employed by [Ruby Has]” would “work in good-faith to cooperate on bids in which they do not have an interest.” Id. The escrow holdback provision was deleted in this latest version. The provision was “tabled unless Cambridge determines that obtaining an adequate [Representation and Warranties Insurance] policy is not viable.” Id. at ECF p. 7.
The September 14, 2020 version of the Revised Deal Points Memo was also accompanied by discussions concerning an extension of the exclusivity period. Cambridge's counsel replied to a draft of the Revised Deal Points Memo dated September 14, 2020, with:
Thanks for this. These changes are acceptable to Cambridge. We are prepared to move forward on this basis if the sellers will agree to extend the exclusivity period referenced in the LOI through closing, unless both parties mutually agree to terminate it earlier.Dkt. No. 121-12. Ruby Has's counsel response was that:
RH prefers not to extend the exclusivity period indefinitely at this stage. We are currently under exclusivity until Sep 24. My client's preference is that prior to extended exclusivity, (i) they would like to receive draft definitive agreements that properly incorporates all of our current understandings as memorialized in in [sic] deal points doc we exchanged, and (ii) they reach a meeting of the mind of the financial aspects of Rafi's employment agreement.Id. Cambridge's counsel replied with:
I discussed our conversation with Cambridge. Extending the exclusivity period for thirty days from 9/14 (i.e, through and including October 24, 2020) is acceptable to Cambridge, and is generally consistent with the intent of the original LOI language.Id. Smalley and Gordon confirmed in emails to each other that they were able to achieve the “30 day auto extension from 9/24” of the exclusivity period that was outlined in the June 2020 LOI. Dkt. No. 131-46. Similarly, Smalley confirmed in text messages sent on September 15, 2020, that “[w]e have written mutual agreement to proceed, plus extended exclusivity through October 24th.” Dkt. No. 131-40 at ECF p. 3.
B. Unsolicited Interest from Third Parties
Following the September 2020 extension of the exclusivity provision, Zakinov received two unsolicited emails seeking introductory phone calls. On September 25, 2020, Zakinov received an email from Ricky Roman (“Roman”), a Vice President at Cathay Capital, which expressed that Roman thought that Zakinov had “a really interesting business in Ruby Has” and that he was “not reaching out for anything in particular but just to see if you would be willing to have a conversation to talk about Ruby Has and what trends you are seeing develop within your industry.” Dkt. No. 121-16 at ECF pp. 2-3. Roman later testified that, as to this email, he found Ruby Has as part of “a list of companies online” that operated in Ruby Has's industry and “reached out to all of them.” Dkt. No. 142-23 at 39. On September 30, 2020, Zakinov received another email from Andrew Korn (“Korn”), a partner at Sageview Capital. Dkt. No. 121-15.
After describing trends in the e-commerce industry, Korn's email stated “I'd love to connect for mutual introductions and to see how Sageview can be helpful to you.” Id. at ECF p. 6. The email also touted Sageview Capital by stating that “[e]mployees of Sageview represent 25% of our fund, or $l50 [million] of a total $600 [million] in our current third fund. We only have that one fund and have 12-15 investments. With that level of focus and skin in the game, we are incentivized to deliver on our promise to add value through our networks and operational expertise.” Id.
In both cases, Zakinov replied with a curt email thanking them for reaching out and stating that “at this time I am unable to speak with you, Will reach out once I can. thank you.” Dkt. No. 121-16; see also Dkt. No. 121-15.
Another unsolicited email was sent to Kestenbaum on September 29, 2020. The sender was Jordan Siegal, then an analyst with Norwest Investment Partners (“Norwest”) and one year out of college. Dkt. No. 142-21 at 54. The email from Siegal asked for a “15-20 minute[]” phone call to “see if we can be helpful with M&A, ‘technologization,' introducing you to our portfolio of DTC companies, etc.” Dkt. No. 121-17 at ECF p. 2. The next day, Kestenbaum responded with “we would do a great job for your OTC portfolio companies as that is our CB primary focus.” Id. at ECF p. 1. Kestenbaum and Siegal then had a call together on October 2, 2020, which primarily concerned Ruby Has's typical customer base and its current partners. See Dkt. No. 121-43; Dkt. No. 144 ¶ 55. Following the call, Siegal suggested a call toward the end of October, and Kestenbaum sent Siegal an email indicating that she “would welcome the chance to continue a cadence of conversations regarding topics like your portfolio DTC brands, technology partnerships, and prospective acquisition targets for Ruby Has.” Dkt No. 131-53 at ECF p. 2. Kestenbaum also attached a flyer pitching Ruby Has's services to potential clients. Id. at ECF p. 3. On October 23, the day before the expiration of the extended exclusivity period, Kestenbaum emailed Siegal, asking if he would “have availability for a quick call on [October 26, 2020].” Dkt. No. 121-44. On October 27, 2020, after the end of the extended exclusivity period, Kestenbaum, Zakinov, Siegal, and Ran Ding, another investor at Norwest, then had a conversation about the possibility of an investment in Ruby Has. Dkt. No. 144 ¶ 58. Ding later testified, as to the substance of this discussion and prior conversations with Ruby Has, that “Norwest never reached a point where it came up with what number if it chose to invest in Ruby Has, it would be looking for.” Dkt. No. 142-21 at 48.
C. October Discussions and the Draft Purchase Agreement
Meanwhile, negotiations had advanced to the point where the counsel for the parties drafted a proposed purchase agreement. On October 2, 2020, Cambridge's counsel sent to Ruby Has's counsel drafts of the purchase agreement, Zakinov's employment agreement, and Avrami's employment agreement. Dkt. No. 151-14. Ruby Has sent back edits on October 15, 2020. Dkt. No. 131-20 at ECF p. 3. Cambridge responded with a revised version of the proposed purchase agreement on October 28, 2020 as the parties “work[ed] through the structural matters and await[ed] [Ruby Has's] excel model with specifics.” Id. Cambridge also requested that “Ruby Has provide an updated balance sheet so they [could] understand the improvement in financials.” Id. Ruby Has sent that balance sheet on October 29, 2020. Id.
On October 15, 2020, Gordon and Eliyahu had a late-night conversation at the Wynn Hotel in Las Vegas, Nevada. While it is undisputed that a conversation occurred, the parties disagree as to what was said. Gordon asserts that Eliyahu agreed, in that conversation, that it was “appropriate” to extend the exclusivity provision to “closing.” Dkt. No. 151-61 at 166. Eliyahu testified that the topic did not come up. Dkt. No. 151-63 at 155. Gordon, in his testimony, provided few details on what Eliyahu stated during this conversation as to the exclusivity provision. Gordon testified, “I shared with him why it was important to us and articulated that we normally have exclusivity when we sign the letter of intent, that we had already extended it once, that we were delayed because we were waiting for Ruby Has's lawyers to provide the legal diligence, as well as a second set of Ruby Has lawyers to provide the insurance legal tax structuring that Eli had requested, that we were waiting patiently, that we didn't mind waiting patiently, but that we needed the exclusivity extended until the deal was closed and that that was an important necessary prerequisite for us and he said, I understand and I agree.” Dkt. No. 151-61 at 170. Smalley was not present for the conversation, but he testified during his deposition that Gordon informed him the following morning that the exclusivity period had been extended. Dkt. No. 151-64 at 231-32.
However, on October 22, 2020, near the end of the exclusivity period, Zakinov repeated and confirmed his understanding in a group chat (which included Eliyahu) that the exclusivity period was to end within two days. Eliyahu did not object to that characterization and was prepared to join a call the next day, set up by Kestenbaum, to discuss the “ending” of “the exclusivity period” and “[w]hether [they] want to do anything else during the lapse window,” although it does not appear that the call happened. Dkt. No. 131-55 at ECF p. 2. Eliyahu also testified that no such extension occurred during this period and that he participated in discussions about Ruby Has reaching out to other potential investors after the exclusivity period ended. Dkt. No. 121-55 at 171; Dkt. No. 131-6 at 155. Smalley, on October 23, 2020, also indicated in correspondence with Gordon that he should “[r]emember this is conveniently the day exclusivity expired.” Dkt. No. 131-56 at ECF p. 2.
It is undisputed that Kestenbaum and Zakinov spoke with Norwest on October 27, 2020, about a potential investment by Norwest in Ruby Has. That conversation took place after the date the first extension of the exclusivity provision expired. Dkt. No. 144 ¶ 58. Zakinov also had another conversation with Roman on October 28, 2020, which led to Cathay Capital Private Equity signing an NDA with Ruby Has, accessing Ruby Has's e-room, and receiving an investor deck from Ruby Has. Id. ¶¶ 38-41. Similarly, on November 2, 2020, Kestenbaum spoke with Sageview, and Sageview likewise executed an NDA, accessed the e-room, and received an investor deck. Id. ¶¶ 46-49. None of those engagements resulted in investments in Ruby Has.
Further, at a dinner in Las Vegas in October 2020, Gordon told Zakinov and Eliyahu about a prior failed investment. Dkt. No. 145 ¶¶ 36-37. Zakinov and Eliyahu testified that during this conversation, Gordon depicted himself as a victim of fraud by one of his investment companies, that the fraud had cost him money, and that Gordon had to pay a “nominal” sum of money. Although the name of the company was Ability Computer & Software Industries, Ltd. (“Ability”), neither Zakinov nor Eliyahu recalled Gordon mentioning the name of the company during the conversation. Id. ¶ 41; Dkt. No. 142-17 at 148-51. In reality, however, Gordon had been subject to a U.S. Securities and Exchange Commission (“SEC”) Consent Order (“Consent Order”) instituting cease-and-desist proceedings against him related to the investment. That Consent Order accepted Gordon's offer of settlement and found Gordon in violation of Section 17(a)(2) of the Securities Act of 1933, as well as Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder, in connection with his various officer- and director-level roles with Ability. Dkt. No. 131-30. The Consent Order stated that Gordon “did not exercise reasonable care in ensuring the accuracy of . . . proxy materials, which Cambridge filed with the [SEC] and which were provided to the Cambridge shareholders,” even though the proxy statement indicated that Cambridge had conducted a “thorough due diligence review” of Ability. Id. ¶ 4. Gordon had also failed to disclose certain facts concerning Ability's orders when he conducted a roadshow in support of Ability. Id. ¶¶ 39-40.
D. November 2020 to December 2020 Discussions
On November 1, 2020, counsel for Ruby Has sent Cambridge's counsel a “major issues list” concerning the purchase agreement. Dkt. No. 131-20. That document states that it “is not intended to be exhaustive and therefore does not contain all comments we have.” Id. at ECF p. 5. The document reflected fourteen distinct remaining “Issues” with the draft purchase agreement and Ruby Has's and Cambridge's positions on each respective issue. Among the disputes, the parties had still not settled on the purchase price. Id. at ECF pp. 5-7. Cambridge's position was that it “proposes only downwards purchase price adjustments, i.e., the purchase price is $20,000,000 but it can only be reduced if the Company fails to meet the Net Working Capital, Closing Cash, and Indebtedness targets,” with any net working capital adjustment to be determined “by an accountant selected only by Buyer.” Id. at ECF p. 6. Ruby Has's position was that it “delivered the 9/31 financial statements,” that “[t]he correct indebtedness number should be $10.4mm,” and that the parties can “agree in advance” on an independent accountant to resolve the dispute as to any net working capital adjustment. Id. The parties also diverged on which party would be responsible for the payment of transaction expenses. Cambridge requested “that the Company pay Buyer's transaction expenses from the growth capital investment while the Company's transaction expenses should be deducted from the proceeds payable to Hameah/Rafi.” Id. at ECF p. 5. Ruby Has's position was that “all transaction expenses (including those paid by the Company pre-Closing) should be paid from the growth capital proceeds or credited towards the Closing Date Case.” Id. There were also significant differences regarding indemnification. For example, the parties disagreed on the length of the survival period of the representations and warranties, and whether there could be any full clawback from Zakinov and Hameah for any amounts that not covered by the insurance. Id. at ECF p. 7. The parties also disagreed on the definition of various terms, as well as obligations with respect to disclosures-with Ruby Has frequently asserting that such disclosure obligations would be “onerous” and “unnecessary.” Id. at ECF p. 6. Certain guarantees and representations were also disputed, with Ruby Has only willing to provide representations as to the business conducted prior to closing, and not “forward-looking” representations. Id. at ECF p. 6. On November 3, 2020, Cambridge sent back another revised major issues list responding to Ruby Has's responses in the prior list. That list expressed continued disagreement on terms such as the payment of transaction costs, Dkt. No. 131-21 at ECF p. 7, as well as the purchase price, Id. at ECF pp. 7-8, on which Cambridge argued that the parties should “stick to the terms agreed upon in the deal points memo,” Id. at ECF p. 8. As for the working capital adjustment, Cambridge stated that:
Note that despite the deal points memo agreement of $18mm cash at close, Cambridge is willing to evaluate the Company's position with respect to working capital as set forth in the note to draft in the MIPA. However, in order to come to a firm view, they need a final October balance sheet from the Company (with proper accrual updates that Avrami said were still missing from the one sent yesterday) before opining on this matter.Id. Certain definitions were tabled, as “to be further discussed.” Id. Cambridge, however, indicated that it was amenable or willing to consider items regarding certain representations, disclosures, and guarantees. Id. As for indemnification, on November 10, 2020, counsel for Cambridge sent an email acknowledging “the distance between the parties on the issue of the Seller's indemnification obligations over-and-above the RWI policy.” Dkt. No. 151-54.
The last draft of the purchase agreement circulated between the parties was sent by Cambridge's counsel to Ruby Has's counsel on November 20, 2020. Dkt. No. 131-24; Dkt. No. 155 ¶ 21. The redline version of the purchase agreement reflected the previously described status of negotiations and indicated that several issues remained open. Those included: (1) the purchase price to be paid to the sellers, as the edits reiterated that Cambridge had sought updated financials before agreeing to the $20 million amount in the June 2020 LOI; (2) the scope of the indemnification and length of the survival period; (3) the terms of the working capital adjustment; and (4) whether the sellers would have to pay Cambridge's expenses; and (5) the “accounting principles” applicable. See Dkt. Nos. 131-24, 131-25. Cambridge's internal email messages also evince that there were a significant number of open issues in the agreement. Some of those, in Cambridge's view, were likely to scuttle a deal. For instance, Smalley on November 22, 2020, indicated that with respect to indemnity provisions, “I believe that this is the deal-killing point that we really need him to be reasonable on.” Dkt. No. 131-33 at ECF p. 2.
The last draft of the Stockholders Agreement of RH Holdings (the would-be formed entity, if the parties had closed) and the Certificate of Incorporation circulated between the parties was sent by Cambridge's counsel to Ruby Has's counsel on November 27, 2020. Dkt. No. 155 ¶ 23. A prior draft sent by Ruby Has's counsel had included a “Bad Actor” provision which, in effect, would require persons with the ability to designate a director to represent that they, or any director that they designated, were not subject to a “Disqualification Event” as defined in Rule 506(d)(1)(i)-(viii) promulgated under the Securities Act of 1933. Dkt. No. 13126 at ECF p. 14. It also required that each person with the right to designate a director to agree to not designate anyone who may be disqualified under that Rule. Id. That rule would have included the SEC Consent Order that Gordon was subject to for his involvement with Ability. See 17 C.F.R. § 230.506(d)(1)(i)-(viii). In the final draft, Cambridge struck the “Bad Actor” provision without explanation. Dkt. No. 131-26 at ECF p. 14; Dkt. No. 155 ¶ 24.
On or about November 30, 2020, Eliyahu and Gordon had a telephone conversation in which they discussed the remaining issues needed to resolve the deal. Dkt. No. 151-51 ¶ 157. On November 30, 2020, Gordon sent Eliyahu an email with the subject line of “road to closing,” which stated that “Bottom-line, [Cambridge] will agree to increase the cash at close from $18 million to $20 million. [I still need to talk to my partners, but in the spirit of getting it done I'm going to put that in the document.]” Dkt. No. 151-22 at ECF p. 1. He further stated that “[a]s you and I discussed, we will just drop the working capital adjustment altogether, so long as there's $1M on the balance sheet, we will be fine.” Id. The email also included a “List of Open Issues,” which listed twelve enumerated items. Those items included Cambridge's new purchase price proposal, along with proposals on, inter alia, transaction expenses, purchase price adjustment, post-closing adjustment price adjustments, indemnification, the definition of intellectual property, among others. Cambridge continued to argue that transaction costs should be paid out of the liquidity proceeds due to Ruby Has's owners. Id. at ECF p. 2. Moreover, Cambridge requested that an option pool be funded by the founders, with additional 1% option grants for Al-Saleh, Stubbs, and an individual named Scott Dorfman, all described as “Independent Director[s],” in effect reducing the founders' stake in the resulting company from 49% to 46%. Id. at ECF p. 3. That same day, Gordon sent an internal email indicating that the Ruby Has deal was at “serious risk” in response to an email from Smalley. Dkt. No. 131-36 at ECF p. 2. Smalley stated in an internal email on December 1, 2020, that there were “11 material open issues, from economic to legal,” but that he nonetheless “believe[d] we are at/near agreement.” Dkt. No. 131-35 at ECF p. 2. He stated that after that, “we will open the floodgates on all of the other important items to get to successful closing, including insurance.” Id.
Zakinov has declared that the November 30, 2020 proposal in the “road to closing” email “infuriated us, and sickened me to my core.” Dkt. No. 130 ¶ 18. He noted that:
Cambridge conditioned the return of the $2 million on us caving on other terms that we disagreed with. In addition, for the first time Cambridge demanded that Ruby Has give up an additional 3% equity in the deal, which would mean selling 54%, rather than 51%. The extra 3% was to go to Essa Al-Saleh and Stubbs, who we were told were Cambridge partners, and an advisor, all of whom we understood were to be compensated out of the $900,000 annual management fees in the LOI. Gordon inaccurately called them “independent.” He also called them “directors,” although only one of them, Essa Al-Saleh, was to be on the Board post-closing.Id. That dismay was expressed by Zakinov in an email on December 2, 2020, stating in part “if this is not retreading [sic] I don't know what it is.” Dkt. No. 131-37 at ECF p. 2.
Zakinov also declares that “[t]he November 30 email from Cambridge was the last straw for us. We told Cambridge that we were no longer going to continue the negotiations, and we viewed the proposed deal as dead. I spoke to Essa Al Saleh in those early days of December. I also sent a text to Matt Smalley on December 4, telling him the same.” Dkt. No. 130 ¶ 19.
Zakinov's text to Smalley states that:
On the deal side I think Cambridge dragged this out to [sic] long with all these deal changes and we are different company since the LOI and the market is hotter than ever. I don't know if we can come to an agreement as with every two steps forward Cambridge moves it 10 steps back, not looking to dance and play these games any more. We were looking forward to use the money for peak but managed on our own next cash crunch is 6-8 months from now.Dkt. No. 131-38 at ECF pp. 2-3. An email from Al-Saleh on December 3, 2020, recounting another conversation with Zakinov, stated that Zakinov, while stating that he “[d]oesn't feel the deal is in a good place,” had asked that Cambridge “stick to the LOI” in that discussion. Dkt. No. 142-32 at ECF p. 2. Al-Saleh recounted that Zakinov felt like Cambridge was “nickel and diming them” with “New Terms,” e.g., “Board compensation in addition to the 900k fees, working capital differences, etc.,” and was “[n]ot happy with the perception that [Cambridge] seem[s] to be negotiating new and every detail.” Id.
Eliyahu testified in his deposition that by December 3, 2020, he had separately told Cambridge “that the deal was dead.” Dkt. No. 142-17 at 200. Gordon, in an internal email on December 2, 2022, recalling a conversation earlier that day with Eliyahu, described Ruby Has as the following: “They have stars in their eyes. Bankers are calling them.... The circular process continues. We will speak again yet tomorrow. My guess is they will throw a big ask at us.” Dkt. No. 151-58 at ECF p. 1. Eliyahu also sent a text to Gordon on December 3, 2020, stating that “[a] suggestion might be that we lower the cambridw [sic] management fee and then discuss proper compensation arrangements for all the board members.” Dkt. No. 151-57 at ECF p. 12. On December 4, 2020, Gordon again emailed his colleagues and stated that “[m]y prediction is that RH will come back and ask for a much larger valuation.” Dkt. No. 131-45. Gordon had another conversation with Eliyahu on December 7, 2020. Dkt. No. 131-47. They again spoke on December 9, 2020, during which, according to Gordon, Ruby Has asked for “more than 3x the valuation of the deal [they] agreed to.” Dkt. No. 151-5 at ECF p. 1. Gordon rejected the proposal, concluding in an internal email by stating “[l]et's find something better, with people who are better!” Id.
The parties never executed a share purchase agreement or any other final deal documents in connection with a potential deal based on the June 2020 LOI. Dkt. No. 155 ¶ 16.
PROCEDURAL HISTORY
Cambridge filed its original complaint on December 31, 2020. Dkt. No. 1. Ruby Has filed a partial motion to dismiss counts two through eight of the original complaint, including a memorandum of law and supporting declaration, on February 17, 2021. Dkt. Nos. 10-12. Ruby Has also filed an answer as to count one, which was not subject to its motion to dismiss, along with counterclaims on February 17, 2021. Dkt. No. 14. Cambridge then filed a memorandum in opposition to Ruby Has's motion to dismiss on March 24, 2021. Dkt. No. 34. Cambridge also filed a motion to dismiss Ruby Has's counterclaims with a supporting memorandum of law on April 7, 2021. Dkt. Nos. 36-37. Ruby Has filed its reply memorandum of law in support of its motion to dismiss on April 21, 2021. Dkt. No. 39.
Ruby Has filed amended counterclaims (along with an answer to count one) against Cambridge, Gordon, and Smalley on April 28, 2021. Dkt. Nos. 40-41. Cambridge filed a second motion to dismiss Ruby Has's counterclaims with a supporting memorandum of law on May 12, 2021. Dkt. Nos. 45-46. The Court then terminated Cambridge's prior motion to dismiss Ruby Has's original counterclaims. Ruby Has filed its memorandum of law in opposition to Cambridge's motion to dismiss on June 2, 2021. Dkt. No. 48. Cambridge filed its reply memorandum of law in support of its second motion to dismiss on June 16, 2021. Dkt. No. 52. The Court held oral argument on both motions to dismiss on September 15, 2021. Minute Entry (Sept. 15, 2021).
On September 30, 2021, the Court issued an Opinion and Order granting in part and denying in part both Ruby Has's motion to dismiss and Cambridge's motion to dismiss. Dkt. No. 63. The Court dismissed all of Cambridge's claims except for its claim for the duty to negotiate in good faith. The Court also dismissed the first count for breach of the June 2020 LOI to the extent that it alleged a claim for expenses and a violation of the exclusivity provision after October 25, 2020. Id. at 36-37. The Court dismissed all of Ruby Has's counterclaims, except for the fraud counterclaim, which was dismissed except to the extent it relied on Smalley's statement regarding specific investors and Gordon's statements regarding the SEC investigation and Consent Order. Id. at 65. The Court granted Cambridge leave to replead its first claim with respect to the second extension of the exclusivity period after October 25, 2020, and granted Ruby Has leave to replead its counterclaims for fraud and breach of the NDA. Id. at 82-83.
Cambridge filed an amended complaint on October 20, 2021. Dkt. No. 67. Ruby Has filed an answer with second amended counterclaims on November 10, 2021. Dkt. No. 71. On December 8, 2021, Cambridge moved to dismiss the fraud counterclaim in part and to dismiss the second counterclaim for breach of the NDA. Dkt. Nos. 72-73. Ruby Has filed its opposition on January 12, 2022. Dkt. No. 76. Cambridge replied on February 9, 2022. Dkt. No. 80.
On June 24, 2022, the Court granted in part and denied in part the motion to dismiss.
The Court dismissed the fraud counterclaim to the extent it was based on the representations that “Gordon was a successful investor with a pristine reputation that was his ‘crowning jewel'” and that Cambridge “worked with existing management, rather than replacing them.” Dkt. No. 102 at 5. The Court denied the motion as to the NDA claim. Id. at 16. Cambridge then filed an answer to the remaining counterclaims on July 22, 2022. Dkt. No. 109.
On December 9, 2022, Cambridge filed its motion for summary judgment, along with a supporting memorandum of law, Rule 56.1 Statement, declaration, and an accompanying motion to seal, Dkt. Nos. 113-21, and Ruby Has filed its motion for partial summary judgment, including a supporting memorandum of law, Rule 56.1 Statement, affirmation, declaration, and an accompanying motion to seal, Dkt. Nos. 122-31. On January 20, 2023, Ruby Has filed its opposition to Cambridge's summary judgment motion, including a supporting memorandum of law, Counterstatement to Cambridge's Rule 56.1 Statement, declaration, and an accompanying motion to seal, Dkt. Nos. 141-49, and Cambridge filed its opposition to Ruby Has's summary judgment motion, including a supporting memorandum of law, Counterstatement to Ruby Has's Rule 56.1 Statement, declaration, and an accompanying motion to seal, Dkt. Nos. 150-155. On February 10, 2023, Cambridge filed its reply memorandum of law in support of summary judgment, declaration, and an accompanying motion to seal, Dkt. Nos. 158-62, and Ruby Has filed its reply memorandum of law in support of its motion for partial summary judgment, a reply affirmation, and a response to Cambridge's Rule 56.1 Counterstatement, Dkt. Nos. 163-65. Ruby Has submitted a letter of supplemental authority to the Court on February 17, 2023. Dkt. No. 166. The Court heard oral argument on the motion on April 25, 2023.
LEGAL STANDARD
Under Federal Rule of Civil Procedure 56, a court “shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). “An issue of fact is ‘material' for these purposes if it ‘might affect the outcome of the suit under the governing law,'” while “[a]n issue of fact is ‘genuine' if ‘the evidence is such that a reasonable jury could return a verdict for the nonmoving party.'” Konikoff v. Prudential Ins. Co. of Am., 234 F.3d 92, 97 (2d Cir. 2000) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). In determining whether there are any genuine issues of material fact, the Court must view all facts “in the light most favorable to the non-moving party,” Holtz v. Rockefeller & Co., Inc., 258 F.3d 62, 69 (2d Cir. 2001), and the movant bears the burden of demonstrating that “no genuine issue of material fact exists,” Marvel Characters, Inc. v. Simon, 310 F.3d 280, 286 (2d Cir. 2002) (citations omitted).
If the movant meets its burden, “the nonmoving party must come forward with admissible evidence sufficient to raise a genuine issue of fact for trial in order to avoid summary judgment.” Jaramillo v. Weyerhaeuser Co., 536 F.3d 140, 145 (2d Cir. 2008).
“[A] party may not rely on mere speculation or conjecture as to the true nature of the facts to overcome a motion for summary judgment.” Hicks v. Baines, 593 F.3d 159, 166 (2d Cir. 2010) (quoting Fletcher v. Atex, Inc., 68 F.3d 1451, 1456 (2d Cir. 1995)). Nor may the nonmoving party “rely on conclusory allegations or unsubstantiated speculation.” F.D.I.C. v. Great Am. Ins. Co., 607 F.3d 288, 292 (2d Cir. 2010) (quoting Scotto v. Almenas, 143 F.3d 105, 114 (2d Cir. 1998)). Rather, to survive a summary judgment motion, the opposing party must establish a genuine issue of fact by “citing to particular parts of materials in the record.” Fed.R.Civ.P. 56(c)(1)(A); see also Wright v. Goord, 554 F.3d 255, 266 (2d Cir. 2009). The nonmoving party must also demonstrate more than “some metaphysical doubt as to the material facts.” Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). The non-moving party “cannot defeat the motion by relying on the allegations in [its] pleading, or on conclusory statements, or on mere assertions that affidavits supporting the motion are not credible.” Gottlieb v. Cnty. of Orange, 84 F.3d 511, 518 (2d Cir. 1996) (internal citation omitted).
DISCUSSION
The Court first addresses the parties' cross motions for summary judgment on Ruby Has's liability for breach of the exclusivity provision, including whether the exclusivity provision was extended after October 24, 2020. The Court next addresses whether Ruby Has breached the duty to negotiate in good faith, assuming but not deciding whether there is such a duty under the June 2020 LOI. The Court then addresses the question of whether expectation damages are available for breach of the LOI, including the subsidiary questions of the appropriate choice of law and whether expectation damages would be available under Delaware law. The Court next addresses Ruby Has's counterclaims of fraud with respect to Cambridge's alleged misrepresentation that Cambridge had cash “on hand” and its omission that Gordon was subject to an SEC Consent Order. The Court finally addresses Ruby Has's counterclaim for the breach of an oral NDA.
I. Ruby Has's Liability for Breach of the Exclusivity Provision
Cambridge and Ruby Has cross-move for summary judgment as to Ruby Has's liability for breach of the exclusivity provision in the June 2020 LOI. Cambridge argues that Ruby Has received and failed to disclose several “indications of interest” and that such breaches were material. Dkt. No. 119 at 11-12. Ruby Has argues that there is no evidence that it received any “indications of interest” during the exclusivity period and that there is no evidence that it agreed to an oral extension of exclusivity beyond the exclusivity period provided for in the June 2020 LOI. Dkt. No. 129 at 28-30. For the following reasons, the Court grants summary judgment dismissing the claim premised on a breach of the exclusivity provision.
This issue turns in part on the meaning of the term “indication of interest” in the June 2020 LOI. The exclusivity provision, for the period of 90 days following acceptance of the LOI, requires Ruby Has to not solicit or initiate any “Investment or Acquisition Proposal.” Dkt. No. 121-1 at ECF p. 5. The term “Investment or Acquisition Proposal” is then defined in the LOI as “any offer, proposal or indication of interest with respect to (a) the acquisition of any assets (other than inventory in the ordinary course of business), operations or stock or units of the Company, or (b) a merger, consolidation or other business combination involving the acquisition of any of the assets or stock of the Company.” Id. (emphasis added). The exclusivity provision requires Ruby Has, upon receipt of any “Investment or Acquisition Proposal,” to “promptly advise Cambridge, orally and in writing, of all the terms of such Investment or Acquisition Proposal.” Id. Finally, “if [the Investment or Acquisition Proposal is] in writing,” Ruby Has is obligated to “deliver a copy of such Investment or Acquisition Proposal to Cambridge.” Id.
The parties dispute the meaning of the term “indication of interest.” Id. There is no definition of the term “indication of interest” in the LOI. Cambridge argues that because an “indication of interest” is listed with the terms “offer” and “proposal,” that it follows that “even generalized indications of interest that do not amount to a concrete ‘proposal' or ‘offer' must be disclosed.” Dkt. No. 162 at 9. Ruby Has argues that the term “indication of interest” is a “term of art[ ] referencing a formal document given to a potential seller by an interested buyer to indicate its genuine interest in purchasing the business.” Dkt. No. 143 at 5. Neither “offer” nor “proposal” are defined in the LOI as well.
Cambridge does not contend that an “offer” or a “proposal” occurred during the exclusivity period.
In construing the June 2020 LOI, the Court “must give ‘effect and meaning . . . to every term of [the] contract' and strive ‘to harmonize all of its terms.'” Spinelli v. Nat'l Football League, 903 F.3d 185, 200 (2d Cir. 2018) (citation omitted); see also Restatement (Second) of Contracts § 203(a) (1981) (“[A]n interpretation which gives a reasonable, lawful, and effective meaning to all the terms [of an agreement] is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect.”). The Court should “examine the entire contract and consider the relation of the parties and the circumstances under which it was executed. Particular words should be considered, not as if isolated from the context, but in the light of the obligation as a whole and the intention of the parties as manifested thereby.” Holland Loader Co., LLC v. FLSmidth A/S, 313 F.Supp.3d 447, 469 (S.D.N.Y. 2018) (quoting MBIA Ins. Corp. v. Patriarch Partners VII, LLC, 842 F.Supp.2d 682, 704 (S.D.N.Y. 2012), aff'd, 769 Fed.Appx. 40 (2d Cir. 2019)). “[It is a] well settled principle that a contract should not be interpreted to produce an absurd result, one that is commercially unreasonable, or one that is contrary to the intent of the parties.” Cole v. Macklowe, 953 N.Y.S.2d 21, 23 (1st Dep't 2012).
The result would be the same irrespective of whether New York or Delaware law applies, as the relevant principles of contract interpretation are similar under the two bodies of law. See Weinberg v. Waystar, Inc., 2023 WL 2534004, at *4 (Del. Mar. 16, 2023) (“[I]n giving sensible life to a real-world contract, courts must read the specific provisions of the contract in light of the entire contract.”); see also id. (“[W]e endeavor ‘to give each provision and term effect' and not render any terms ‘meaningless or illusory.'” (quoting Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010))); In re Viking Pump, Inc., 148 A.3d 633, 648 (Del. 2016) (“[C]ourts interpreting a contract will give priority to the parties' intentions as reflected in the four corners of the agreement, construing the agreement as a whole and giving effect to all its provisions.” (internal quotation marks omitted)). Similarly, under Delaware law, “a word in a contract is to be read in light of the words around it.” Smartmatic Int'l Corp. v. Dominion Voting Sys. Int'l Corp., 2013 WL 1821608, at *10 (Del. Ch. May 1, 2013). Finally, under Delaware law, “[c]ontract terms themselves will be controlling when they establish the parties' common meaning so that a reasonable person in the position of either party would have no expectations inconsistent with the contract language.” GMG Cap. Invs., LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776, 780 (Del. 2012).
Cambridge's interpretation of “indication of interest” fails to read the term in context or to give it a reasonable meaning. Under familiar contract interpretation principles, each item in a list of items is interpreted by the company it keeps. See In re Enron Creditors Recovery Corp., 380 B.R. 307, 322 (S.D.N.Y. 2008) (“The principles of ejusdem generis and noscitur a sociis require that the meaning of a general term in a series is determined ‘by the company it keeps.'” (quoting People v. Illardo, 399 N.E.2d 59, 63 (N.Y. 1979))). The LOI does not refer to “indication of interest” in isolation. It is listed with two other terms that both refer to the initiation of discussions with respect to an investment in or an acquisition of Ruby Has. The two other forms of proposals that require reporting include an “offer” to acquire the assets, operations, stock, or units of Ruby Has, or to engage in a merger or acquisition of Ruby Has, and a “proposal” to do the same. Dkt. No. 121 at ECF p. 5. An offer, in common parlance, is the first half of a contractual agreement; once accepted, a contract is formed. The term implies that the offeror will convey all material terms under which it is prepared to engage in a transaction. By its ordinary meaning, it “implies something that is capable of being accepted.” Wells Fargo Bank, N.A. v. Wrights Mill Holdings, LLC, 127 F.Supp.3d 156, 171 (S.D.N.Y. 2015); see also Offer, Black's Law Dictionary (11th ed. 2019) (“A promise to do or refrain from doing some specified thing in the future, conditioned on an act, forbearance, or return promise being given in exchange for the promise or its performance; a display of willingness to enter into a contract on specified terms, made in a way that would lead a reasonable person to understand that an acceptance, having been sought, will result in a binding contract.”). A “proposal” is less formal that an “offer.” It may, but need not, contain all the material terms of an agreement such that if the proposal is accepted an enforceable contract is formed. It may simply be a “suggestion,” or something offered “for consideration” (in the nonlegal sense) and not solely for “acceptance,” unlike an “offer.” See Proposal, Black's Law Dictionary (11th ed. 2019) (defining a “proposal” as “[s]omething offered for consideration or acceptance; a suggestion”).
All forms of a proposal must refer to something specific. When read in conjunction with the company it keeps, the term “indication of interest” refers to the expression by a prospective buyer or investor of an interest in a specific form of transaction and that contains the general contours on which the buyer or investor is prepared to conduct business. It is not enough that the communication merely expresses an interest in learning about the target company. As the exclusivity provision itself makes clear, the communication must express an interest in an acquisition or an investment. The LOI indicates that the communication must address, at minimum, an “acquisition” of assets or stock or proposed “merger” of Ruby Has. The LOI defines an “Investment Acquisition or Proposal” as only those communications “with respect to . . . (a) the acquisition of any assets (other than inventory in the ordinary course of business), operations or stock or units of the Company, or (b) a merger, consolidation or other business combination involving the acquisition of any of the assets or stock of the Company.” Dkt. No. 121-1 at ECF p. 5.
That the communication must express an interest in making an investment or acquisition and lay out at least some general terms on which the investment or acquisition might be made is made even more clear by examining the language in the context of the exclusivity provision as a whole. The sole reporting obligation that the June 2020 LOI imposes on Ruby Has toward Cambridge with respect to the receipt of an offer, proposal, or indication of interest is that Ruby Has must “promptly advise Cambridge, orally and in writing, of all the terms of such Investment or Acquisition Proposal.” Id. (emphasis added). If the proposal is in a written form, Ruby Has is further obligated to provide a “copy of such Investment or Acquisition Proposal” to Cambridge. Id. The language implies that there must be some “terms” for a communication to constitute an “offer, proposal, or indication of interest.” If there are no terms, then there would be nothing to disclose. That an indication of interest must propose specific terms with respect to a proposed acquisition or merger comports with how the phrase has been used in the merger and acquisition context. See, e.g., CKSJB Holdings LLC v. EPAM Sys., Inc., 837 Fed.Appx. 901, 902 (3d Cir. 2020) (“The draft IOI set forth EPAM's estimated valuation of PointSource and a proposed transaction structure.”); Bisel v. Acasti Pharma, Inc., 2022 WL 4538173, at *1-2 (S.D.N.Y. Sept. 28, 2022) (discussing an investment bank's solicitation of indications of interest for purposes of a strategic acquisition); Karp v. SI Fin. Grp., Inc., 2020 WL 1891629, at *2 (D. Conn. Apr. 16, 2020) (noting that “Company A submitted a non-binding indication of interest with respect to the acquisition of the Company in a 100% stock transaction with a fixed exchange ratio”); In re Columbia Pipeline, Inc., 405 F.Supp.3d 494, 501 (S.D.N.Y. 2019) (discussing that one potential acquirer of the company at issue “neither made a formal offer nor expressed a price per share at which he would be interested in acquiring [the company's] stock,” but that another potential acquirer's CEO “made a verbal indication of interest in acquiring Columbia Pipeline at a price of $32.50 to $35.50 per share of Columbia Pipeline common stock on July 20, 2015” (internal quotation marks omitted)); In re PetSmart, Inc., 2017 WL 2303599, at *12 (Del. Ch. May 26, 2017) (stating that a potential target of acquisition was open to engaging with a potential buyer if it “expressed a serious indication of interest”); In re AHT Corp., 292 B.R. 734, 738 (S.D.N.Y. 2003), aff'd, 123 Fed.Appx. 17 (2d Cir. 2005) (“BioShield sent a letter, signed by Moses, containing an initial, non-binding indication of interest in purchasing AHT at a price of $3.50 to $5 per share.”).
This interpretation gains further force from the function of the notice provision in the context of the June 2020 LOI as a whole. The LOI does not require Ruby Has to disclose offers, proposals, and indications of interest during the exclusivity period because they might be items of curiosity to Cambridge. Nor does it require Ruby Has to cease, or to disclose, all of the communications it would have in the ordinary course of its business with those who might be interested in knowing more about the company or potentially doing business with it. See Wells Fargo Bank, N.A., 127 F.Supp.3d 156, 173 (S.D.N.Y. 2015) (“It is black-letter law that courts must reject interpretations of agreement provisions that are commercially unreasonable or illogical.”). For the exclusivity provision to have meaning, it requires Ruby Has to disclose offers, proposals, and indications of interest to allow Cambridge to meet or beat any potentially competitive offer Ruby Has might receive for its business. Otherwise, Ruby Has could negotiate an alternative investment with some other investor and-without giving Cambridge any real opportunity to counter-simply wait out the clock. So understood, the term “indication of interest” cannot be read to refer generally to any indication by a company capable of making an investment in Ruby Has to do business in some form or other with Ruby Has. Such an “indication” would have no value to Cambridge. It would not convey something of substance that would be meaningful to Cambridge in knowing what it would have to offer to consummate a transaction with Ruby Has.
If more evidence were needed, Ruby Has has offered it. Ruby Has has offered “convincing evidence,” Bernard National Loan Investors, Ltd. v. Traditions Management, LLC, 688 F.Supp.2d 347, 365 (S.D.N.Y. 2010), of a common industry practice regarding “indications of interest” that supports that it is a communication from a potential seller to a potential buyer “to indicate its genuine interest in purchasing the business.” Dkt. No. 142-19 at 179. Ruby Has has produced undisputed testimony, from its expert Christopher Bellini and from Stubbs that an indication of interest is a “term of art” and is “generally understood to be a formal document given to a potential seller by an interested buyer to indicate its genuine interest in purchasing the business.” Id. (Bellini testimony). In addition, Stubbs, while not offered as an expert, testified that an indication of interest, or colloquially termed an “IOI,” would “give a much broader range of valuation opportunities, and then [you would] start to look deeper before you get to an LOI.” Dkt. No. 142-16 at 133.
Bellini is qualified as an expert. He has been engaged in the M&A industry “for a long time, 22 years” and has “a lot of experience in this space.” Dkt. No. 142-19 at 183. His work has included “represent[ing] multiple public companies that have received indications of interest,” and that in doing so “the topic has certainly come up.” Id. at 184. He testified “[i]n doing transactions you come across all sorts of terms of art.” Id. at 183. That evidence is sufficient to qualify Bellini as an expert on the meaning of “trade usage,” as “practical experience in the industry may be sufficient to qualify a witness as an expert on ‘trade usage.'” Am. Com. Lines, LLC v. Water Quality Ins. Syndicate, 403 F.Supp.3d 312, 328 (S.D.N.Y. 2018) (citation omitted). The Court need not conclude that that his testimony alone meets the “demanding standard” of establishing that the term “indication of interest” constitutes trade usage, Valtus Cap. Grp., LLC v. Parq Equity Ltd. P'ship, 2022 WL 190755, at *2 (2d Cir. Jan. 21, 2022) (summary order), for the Court to conclude that the evidence lends force to Ruby Has's interpretation, even if it is not independently dispositive.
Measured against these standards, the three unsolicited communications that Ruby Has received from Cathay Capital, Sageview Capital, and Norwest during the exclusivity period were not “indications of interest” as understood by the June 2020 LOI. Dkt. No. 119 at 12.
A. Cathay Capital
The unsolicited email that Zakinov received on September 25, 2020, from Roman, a Vice President at Cathay Capital, reads in full:
Hi Rafael,
I hope you are having a great week so far.
I am reaching out because I think you have a really interesting business in Ruby Has Fulfillment. I have been following the integrated enterprise shipping solutions space and it seems reliable and scalable platforms are becoming more and more important as many native brick and mortar brands migrate online and build a stronger digital presence. We've seen this happen with some of the brand and product oriented companies that have we invested in. It seems Ruby Has is well positioned to continue on a strong growth trajectory within this market.
I am not reaching out for anything in particular but just to see if you would be willing to have a conversation to talk about Ruby Has and what trends you are seeing develop within your industry. My company is called Cathay Capital. We are a global investment firm and we exist to support and be useful to entrepreneurs to help them navigate and grow great global businesses through leveraging our international ecosystem and by providing them with capital.
If you think you would enjoy having a brief discussion, please let me know. I'd certainly look forward to it.
Best regards,
RickyDkt. No. 121-16 at ECF pp. 2-3 (emphasis added). Zakinov responded on October 12, 2020, only stating “thank you for reaching out, an impressive company Cathay is. At this time I am unable to speak with you, Will reach out once I can. Thank you[.]” Id. at ECF p. 2.
Roman's email does not constitute an “indication of interest” within the meaning of the June 2020 LOI. The email is entirely generic. On its face, it does not include any terms of a prospective acquisition or purchase of Ruby Has, let alone any sort of interest in “acquisition of any of the assets or stock” in particular. Dkt. No 121-1 at ECF p. 5. There is nothing in the email indicating that it might be an invitation to negotiate a prospective acquisition. In fact, the email expressly notes that Roman was “not reaching out for anything in particular.” Dkt. No. 121-16. Nor does it self-identify as an “indication of interest,” as in other examples of “indication of interest” letters. See supra Section I. The only purpose for the communication identified in the email was that Roman was reaching out to have a conversation about Ruby Has and the “trends [Zakinov is] seeing develop within [the] industry.” Dkt. No. 121-16 at ECF p. 3. Indeed, there would be no terms to report to Cambridge based on this email alone. The mere fact that Cathay Capital is a “global investment firm” and “provid[es] [entrepreneurs] with capital,” Id., is meaningless for the purposes of showing an “indication of interest.” It might show that Cathay Capital was capable of acquiring Ruby Has's assets or engaging in a transaction with it. But the term “indication of interest” cannot be read to encompass every inquiry made by a company able to engage in a transaction that is curious about Ruby Has's business. The description of Cathay Capital is just that: a description. There is otherwise no description of how Cathay Capital would use any of its capital to acquire Ruby Has. This email fails to reach the level of formality necessary to constitute an “indication of interest” under the LOI. There was thus no duty to disclose this email to Cambridge.
Roman's deposition testimony demonstrates the informal and untargeted nature of his email inquiry to Zakinov. That testimony is undisputed. Roman testified that at the time he sent his email, he “didn't know what Ruby Has was,” Dkt. No. 142-23 at 38, and “didn't know exactly what they did” as “[t]hey were one of many companies operating in the shipping space,” Id. at 32. He further admitted that when his email stated that “[i]t seems Ruby Has is well positioned to continue on a strong growth trajectory,” Dkt. No. 121-16, he was just using “a boilerplate phrase,” Dkt. No. 142-23 at 38. In fact, Roman “wasn't aware of any growth [Ruby Has] had experienced.” Id. at 40. He then explained how he came across Ruby Has. He stated, “I found a list of companies online that seemed to have operated in this space and I reached out to all of them.” Id. at 39. He further stated that Cathay Capital had not done “any due diligence into Ruby Has.” Id. at 51. He disagreed with the notion that he had “reached out to have a discussion because [he] thought potentially Cathay Capital might be interested in investing in Ruby Has,” Id. at 33, and emphasized that “[t]here was no interest to invest in Ruby Has,” Id. at 42. Roman's testimony evinces that his email was not an “indication of interest.” Indeed, it would be difficult to propose terms for a potential acquisition if one had conducted no research on the target company. Roman's email was simply part of an email blast from an investment professional seeking to gather information on companies and knowledge of industry trends.
The Court grants summary judgment denying the claim for breach of the exclusivity provision based on the email dated September 25, 2020 from Cathay Capital.
B. Sageview Capital
Zakinov's email from Korn, a Partner at Sageview Capital, received on September 30, 2020, also is largely generic. The email in full is the following:
Rafael,
I hope you're well. I am a partner at Sageview Capital, a growth equity fund based in Connecticut and California, and I cover supply chain technology /services. Ecommerce penetration jumped during COVID, to state the obvious, and we do not expect a reversion to pre-pandemic levels of utilization, but we rather believe that behaviors have been permanently changed and market adoption of technologies has been rapidly accelerated. We have been following the space for some time, including with an investment in ElasticPath, and I have been impressed with what
you are building. While there are other 3PLs serving e-commerce, including one that just raised a significant amount of capital, you appear to differentiate with capital efficiency, an extensive network of six locations, advanced technological capabilities (APIs, integrations), and a strong approach to customer success. I'd love to connect for mutual introductions and to see how Sageview can be helpful to you.
I know that you get a lot of emails like this from firms like ours. We differentiate ourselves through alignment and focus. Employees of Sageview represent 25% of our fund, or $l50mm of a total $600mm in our current third fund. We only have that one fund and have 12-15 investments. With that level of focus and skin in the game, we are incentivized to deliver on our promise to add value through our networks and operational expertise.
When might you be available for a quick 30-minute call over the next few weeks?
Best,
Andrew KornDkt. No. 121-15 at ECF p. 6. Zakinov responded on October 5, 2020, stating only the following: “HI Andrew, thank you for reaching out, impressive fund you do have, I am currently unable to speak with you. will connect once i can.” Id. at ECF p. 5.
Korn's email does not constitute an indication of interest. While the email could be read to suggest that Sageview Capital was interested in Ruby Has and the means by which it could be “helpful” would include financing, the email is general. It does not reflect that Sageview Capital possessed information as to Ruby Has that would allow Sageview Capital to determine whether to make an investment, nor does it contain any terms upon which Sageview Capital might be willing to make an investment. The only “ask” in the email is for a “quick 30-minute call,” which Sageview Capital sought for “mutual introductions” and to pitch Ruby Has on “how Sageview can be helpful.” Dkt. No. 121-15 at ECF p. 6. It was an invitation to a conversation from which other conversations might ensue and an indication of interest might result. It thus suggests that Sageview Capital had a potential interest in Ruby Has, and nothing more. But that could not have come as a surprise to Cambridge and would not have been anything upon which Cambridge would have acted. The precise assumption underlying an exclusivity provision was that-absent exclusivity-there would be other parties potentially interested in Ruby Has.
It is also noteworthy that Korn caveated his email that Zakinov “get[s] a lot of emails like this from firms like [Sageview Capital],” Dkt. No. 121-15 at ECF p. 6-further indicating that such email blasts are commonplace in the industry, and that it is unlikely that the parties sought to encompass every email blast from investment firms, rather than those that had shown commitment and demonstrable interest in an acquisition or merger transaction by having engaged in due diligence.
Korn's uncontradicted deposition testimony also supports that conclusion. Not unlike Roman at Cathay Capital, Korn testified that “[f]or context, I would have probably sent hundreds or even thousands of e-mails like this in a given year as part of our business model to look for investment opportunities.” Dkt. No. 142-24 at 11. He then stated that “[g]iven we thought it might, from a public facing perspective, have some-we might have some interest in it as an investment opportunity, we decided to reach out to him to try to establish contact.” Id. (emphasis added). Cambridge, according to Korn's deposition, did not press him on the form of that investment opportunity or even on whether it had taken any form at all. Korn testified that Sageview Capital “employed a number of investment strategies over [his] time there,” although during his last few years there, he “focused on growth equity investing.” Id. at 5. He further testified that at the time he sent that email, he had not “had any prior contact with individuals at Ruby Has.” Id. at 12. He also did not recall how he had heard about Ruby Has, only that he had been “examining the industry or other companies in the industry,” but did not recall which source led him to Ruby Has. Id. That sort of cursory and preliminary understanding further indicates that his email does not evince the sort of formalism and deliberation necessary to constitute an “indication of interest.”
The Court thus likewise grants summary judgment denying the claim for breach of the exclusivity requirements based on the email and discussions with Sageview Capital.
C. Norwest Investment Partners
Finally, Ruby Has had a series of contacts with Norwest before the expiration of the exclusivity period. Although Ruby Has's interactions with Norwest are more substantial, the record does not support that Norwest expressed an interest in an acquisition or investment. On September 29, 2020, Jordan Siegal-an analyst at Norwest who had been at Norwest “for approximately one year, fresh out of college,” Dkt. No. 142-21 at 54-sent the following unsolicited email in full to Kestenbaum:
Hi Esther, hope you're having a nice Tuesday afternoon. I wanted to quickly introduce myself. I'm an investor at Norwest, a $9.5B growth equity fund based in California. We partner with bootstrapped businesses to accelerate growth via capital and our value-added resources. We have a great deal of experience partnering with leading enterprise software and consumer businesses-some notable companies in our consumer portfolio include MTN OPS (supplements for outdoor enthusiasts), Kendra Scott (jewelry; recapitalized for $1.1B), PCA Skin (skincare; sold to Colgate) and Vuori (performance apparel), among many others.
We remain very excited about the opportunity in third-party fulfillment. With the ongoing COVID environment, consumer brands are placing more emphasis on their DTC [direct-to-consumer] efforts and thus are turning to companies such as Ruby Has, ShipBob, Quiet Logistics, ShipMonk, Radial, etc. And in my opinion, once the COVID threat ends, I don't think this DTC emphasis will vanish-COVID has changed everything and it creates an exciting opportunity for you and the team at Ruby Has. Would love to see if we can be helpful with M&A, “technologization, ” introducing you to our portfolio of DTC companies, etc.
If you have 15-20 minutes this week or the next, I'd love to introduce you to my group and learn more about your background and the vision for Ruby Has. Looking forward to hopefully hearing back from you.
Best,
JordanDkt. No. 121-17 at ECF p. 2 (emphasis added). On September 30, 2020, the following day, Kestenbaum responded with the following:
Hi Jordan,
Thank you for reaching out. I could not agree more about the state of our industry. We'd love to have a chat-we would do a great job for your OTC portfolio companies as that is our CB primary focus. I'd love to tell you more about us. Please let me know when might be a good time to talk over the coming days.
All the best,
EstherId. at ECF p. 1. The two then had a conversation on or about October 2, 2020, and Siegal took notes of the conversation. Dkt. No. 144 ¶ 55. On October 6, 2020, Siegal emailed Kestenbaum thanking her for the conversation and suggesting a call “toward the end of this month.” Dkt. No. 121-59 ¶ 130. That same day, Kestenbaum also sent a thank you email to Siegal with the following message:
Thank you again for your reaching out to me and for your time last week. Attached as promised is a one pager our sales team shares with prospective clients. As I mentioned, I would welcome the chance to continue a cadence of conversations regarding topics like your portfolio DTC brands, technology partnerships, and prospective acquisition targets for Ruby Has. Please let me know your thoughts on follow-on discussions.Dkt. No. 131-53. The email included a flyer pitching Ruby Has's services. Id. On October 23, 2020, Kestenbaum then emailed Siegal again, with the following message of “Hi Jordan, I hope all is well with you. Would you have availability for a quick call on Monday [October 26, 2020]?” Dkt. No. 121-44. Kestenbaum and Zakinov then met with Siegal and Ran Ding, an investor at Ruby Has, on October 27, 2020, after the lapse of the exclusivity period, on the “possibility of an investment in Ruby Has.” Dkt. No. 144 ¶ 58; see also Dkt. No. 121-30.
Cambridge argues that Ruby Has provided “detailed disclosures concerning Ruby Has's business and Ruby Has subsequently shared the confidential details of Cambridge's offer with Norwest in the hopes that Norwest would propose more favorable terms.” Dkt No. 119 at 1.
Ruby Has contends that the “pre-October 24 conversation with Norwest solely were sales calls conducted in the ordinary course of business seeking introductions to Norwest's portfolio companies.” Dkt. No. 143 at 5. At issue is whether Siegal's email on September 29, 2020, or Siegal's communications during the October 2, 2020 meeting, constituted an indication of interest. The record reveals that Ruby Has has the better end of the argument. Ruby Has did not solicit an offer nor did Norwest provide an “indication of interest” within the meaning of the June 2020 LOI at any point prior to October 24, 2020. First, as to the email on September 29, 2020, Siegal's email provided that he wanted to learn if Norwest could “be helpful with M&A, ‘technologization,' introducing you to our portfolio of DTC companies.” Dkt. No. 121-17. The email proposes a “15-20 minute” call to “introduce you to my group and learn more about your background and the vision for Ruby Has.” Id. The communication cannot reasonably be read to suggest that Norwest was making an indication of interest. The communication reflects that Norwest did not know anything about Ruby Has. Nowhere does the email indicate an intention to acquire Ruby Has and nor does the email provide any terms of such an acquisition. If anything, the email offered growth opportunities to Ruby Has by proposing an introduction to the “portfolio of DTC companies”-an understanding that is also reflected by Kestenbaum's immediate response to the email on September 30, 2020, Id., as well as her later response on October 6, 2020 in which she “welcome[d] the chance to continue a cadence of conversations regarding topics like your portfolio DTC brands, technology partnerships, and prospective acquisition targets for Ruby Has,” Dkt. No. 131-53. The exclusivity provision in the LOI clearly does not encompass, and was not meant to deter engagement with, such opportunities for growth in Ruby Has's business. There was no obligation under the LOI to disclose this email.
In Cambridge's reply brief on summary judgment, Cambridge briefly mentions that Kestenbaum was in violation of the exclusivity provision because she was soliciting an offer. That argument is belatedly raised for the first time in a reply brief. But even if the Court were to consider it, Siegal's notes do not evince that Kestenbaum ever suggested or even mentioned to Siegal that Norwest should acquire Ruby Has. The notes are equally consistent with the notion that Kestenbaum was pitching Ruby Has as a partnership for Norwest's portfolio of companies.
Nor did the subsequent conversation on October 2, 2020 include any indication of interest or solicitation of an offer. Although Cambridge cites a variety of exhibits, see Dkt. No. 153 at 30, only one exhibit-Siegal's notes from the call-contains information relevant to the content of the call between Kestenbaum and Norwest before October 24, 2020, see Dkt. No. 121-43. Those notes show Kestenbaum pitching her business and explaining the sorts of partnerships and clients that it looks for. According to the notes, Kestenbaum first described her background and the business strategy and growth prospects of Ruby Has. Id. The notes then focus largely on the growth of “average customer size,” the general landscape of competition, and that Ruby Has “work[s] with great DTC brands.” Id. Kestenbaum further described Ruby Has's preferences for customers of companies that “are already shipping at least a few thousand orders per month,” what the “typical customer is,” and where they have current partnerships supporting the growth of Ruby Has's customer base. Id. She also described how they are “not typically the cheapest” and are “all about the service level,” and “make sure customers know the breakdown of where the cost is coming.” Id. The notes conclude with a cursory mention that “[w]e are in an exclusivity period; we've had all kinds of offers; we get courted a lot.” Id. There is nothing indicating that Kestenbaum invited Norwest to submit an offer. Moreover, the notes do not include any statements from Siegal-let alone one with any terms of an acquisition-that would evince any “indication of interest.” The general tenor of the conversation and Kestenbaum's follow-up with Siegal demonstrates that Kestenbaum was attempting to pitch Ruby Has's services to Norwest with the ultimate objective of convincing Norwest that some of its portfolio companies should make use of Ruby Has's services. The discussion did not pertain to an investment or acquisition. In short, Cambridge has not pointed to any evidence in the record that there was any “indication of interest” from Norwest to Ruby Has before the end of the exclusivity period.
Cambridge also cites a redacted email string that is undated. Dkt. No. 151-46. Cambridge does not describe who wrote the notes, when the notes were written, and in what context, and whether any of these notes were conveyed or communicated to anyone else, including Norwest. See Dkt. No. 151 at 6. However, judging from the testimony of Ran Ding, the notes appear to be from Siegal and may have arisen from an October 27, 2020 call after the expiration of the exclusivity period. Dkt. No. 142-21 at 29. Further, Ding testified that at some of the notes-in particular, the portion in which the notes provide that “1x multiple of 2020 revenue is where the current valuation is at” -were likely notes of something that Ding said instead of something that Ruby Has said. Id. at 34. The letter shows no evidence of any indication of interest from Norwest or any solicitation from Ruby Has before October 24, 2020.
Indeed, the undisputed testimony of Ran Ding, an investor at Norwest who was present for the October 27, 2020 call (in addition to Siegal), confirms that there was not any materialized interest in investing in Ruby Has at any point, precluding any notion that Norwest sent an “indication of interest” for an acquisition before October 24, 2020. Ding testified, as to Siegal's email, that Siegal “sends many e-mails to many private companies to understand whether they are a fit for either business development purposes with our existing investments and/or potential investment prospects.” Dkt. No. 142-21 at 10-11 (emphasis added). Ding did not believe there were any prior communications with Ruby Has before the email was sent. Id. at 12. He specifically noted other purposes of the email than investment, stating that such emails are not just to identify companies to “invest in,” but also for “[b]usiness development relationships or competitive insights or building relationships with executives.” Id. at 13. As to Ruby Has in particular, Ding noted that Norwest did not “undertake any valuation of Ruby Has” and that “Norwest never reached a point where it came up with what number if it chose to invest in Ruby Has, it would be looking for.” Id. at 48. That undisputed testimony further confirms that there was not any violation of the exclusivity provision before October 24, 2020 through Ruby Has's interactions with Norwest.
D. The Exclusivity Provision After the 90-Day Period
The Court turns to whether there was any exclusivity period in effect after October 24, 2020. Although Cambridge does not move for summary judgment for liability for the breach of an exclusivity provision after October 24, 2020, Dkt. No. 119 at 11-13, Ruby Has moves for summary judgment with respect to any communications after October 24, 2020, on the grounds that there was no exclusivity provision in effect, Dkt. No. 129 at 29. Cambridge argues that the exclusivity period was extended by oral agreement in Las Vegas on October 15, 2020. Dkt. No. 153 at 31-33. Ruby Has disputes that any reasonable jury could find that the parties agreed upon an extension of the exclusivity period. Dkt. No. 129 at 29. For the following reasons, no reasonable jury could find that the exclusivity period had been extended on October 15, 2020.
In support of its claim that the parties orally agreed to extend the exclusivity period past October 24, 2020, until closing, Cambridge points to testimony from Gordon. Dkt. No. 151-61. Gordon did not recall any discussions prior to October 15, 2020, in which the parties discussed a second extension of exclusivity. Id. at 165. The sum and substance of Gordon's testimony is that on October 15, 2020, he and Eliyahu had a lengthy late-night conversation at the Wynn Hotel in Las Vegas “about a variety of topics,” including “what would happen post-investment,” “growth strategy,” “personal relationships,” and “the fact that from [a] deal standpoint, we were still waiting for Eli[yahu], and [Zakinov], and Avrami, their lawyers to finish their work, and that because we were waiting for them to do their work, that it was only appropriate that the exclusivity be extended through closing.” Id. at 166. Gordon stated the discussion about exclusivity lasted “probably a few minutes.” Id. at 169-70. Despite multiple rounds of questioning, Gordon testified little as to what Eliyahu said at the meeting to purportedly agree to such an extension of the exclusivity provision. Indeed, the description as to what Eliyahu stated as acceptance to the proposed contract modification is entirely conclusory. In response to the question of “what did he say to you about the exclusivity? Tell me who said what,” Gordon stated:
I said to him, you know, we've had one extension already; we need another extension because we're still waiting for you and your lawyers to finish your work. And you understand that when we, as Cambridge Capital, a private equity firm, are working on a deal, we do so under exclusivity. We need an extension to cover the terms from now through closing and he said, I understand.”Id. at 166-67 (emphasis added). In a further exchange, he provided an equally cursory account as to his recollection of Eliyahu's statements confirming such a purported extension:
Q. And do you remember anything about exclusivity that was said by him or by you at that time?
A. Like I said, I shared with him why it was important to us and articulated that we normally have exclusivity when we sign the letter of intent, that we had already extended it once, that we were delayed because we were waiting for Ruby Has' lawyers to provide the legal diligence, as well as a second set of Ruby Has lawyers to provide the insurance legal tax structuring that Eli had requested, that we were waiting patiently, that we didn't mind waiting patiently, but that we needed the exclusivity extended until the deal was closed and that that was an important necessary prerequisite for us and he said, I understand and I agree.Dkt. No. 151-61 at 170 (emphasis added). There is no other evidence in the record as to what Eliyahu said at this meeting on the extension of exclusivity. Smalley testified that, following the meeting, Gordon told him that Gordon had a conversation with Eliyahu. Smalley was not at the meeting, but he testified to a prior consistent statement by Gordon. Smalley stated that “[Gordon] said that they -- Eli agreed to extend the exclusivity through the closing.” Dkt. No. 151-64 at 231; see also id. at 232 (“I was also aware that [Gordon] said that [Eliyahu] said that we were good till the closing.”). There is no other documentation or contemporaneous evidence-e.g., discussions within or between Cambridge or Ruby Has-evincing an understanding that there was an extension of the exclusivity period.
The witnesses from Ruby Has corroborate that there was a meeting and that the parties discussed “personal topics,” but deny that there was any discussion of exclusivity. Eliyahu testified that there was discussion on “[a] lot of personal topics. What we thought about philanthropy ....We talked about Matt, how we did not like Matt . . . and how we did not feel comfortable with him on the board.” Dkt. No. 151-63 at 155. Eliyahu, however, testified that “the topic of extended the exclusivity period” “absolutely [did] not” “come up at any point during that visit [to Las Vegas].” Id. Nor did Zakinov, in his deposition, recall Cambridge “ever asking to extend the LOI past October 24th, 2020.” Dkt. No. 131-1 at 252.
Ruby Has points to a bevy of additional evidence demonstrating that, regardless of what Cambridge may have stated in Las Vegas regarding its need for extended exclusivity, Ruby Has never agreed to it. First, during negotiations on the June 2020 LOI, Zakinov had specifically offered a 90-day exclusivity period as opposed to Cambridge's ask of 120 days. Dkt. No. 121-7 at ECF p. 1. The parties eventually compromised in the June 2020 LOI, which provided for 90 days plus a 30-day extension. Id.
Before the Las Vegas conversation, on September 14, 2020, Cambridge proposed that it was prepared to move forward on certain deal points, but only if it was guaranteed exclusivity until there was a closing. Cambridge asked for the sellers to “agree to extend the exclusivity period referenced in the LOI through closing, unless both parties mutually agree to terminate it earlier.” Dkt. No. 131-46 at ECF p. 2. Ruby Has rejected that request. It replied that it “prefers not to extend the exclusivity period indefinitely at this stage,” Id., and would only extend exclusivity on the condition of receiving certain draft definitive agreements and a “meeting of the mind of the financial aspects of Rafi's employment agreement,” Id. Ruby Has agreed only to extend the exclusivity agreement “through and including October 24, 2020,” Id., consistent with the automatic 30-day extension provided in LOI. Smalley confirmed through internal emails and text messages with Kestenbaum that they were only able to “push . . . Rafi to just keep the 30 day auto extension from 9/24, based on the LOI.” Id.; see also Dkt. No. 131-40 at ECF p. 3 (Smalley texting Kestenbaum on September 15th that “[w]e have written mutual agreement to proceed, plus extended exclusivity through October 24th.”). Thus, on the eve of the October 15, 2020 conversation, Cambridge had proposed an indefinite period of exclusivity until closing and Ruby Has had rejected it.
The communications after October 15, 2020, including communications between Smalley and Gordon, further support the conclusion that Ruby Has never agreed to exclusivity until there was a closing. Ruby Has, according to Gordon's recollection, informed Gordon in October 2020 that the “deal may be off because of” their understanding that the “SBA won't forgive [Paycheck Protection Program (“PPP”)] loans if a company sells a 20% or greater stake” and that “JPM Chase will likely take more than 3 months to forgive their loan, which would push this deal into 2021 and cause other problems.” Dkt. No. 131-56 at ECF pp. 2-3. Up until then, Cambridge had insisted that that Ruby Has shareholders would “not take out any cash . . . including the PPP.” Dkt. No. 131-14 at 1. Now faced with the prospect of needing to pay off the loan, in an email to Gordon, Smalley suggested that Cambridge and not Ruby Has pay off the loan precisely because of his understanding that the exclusivity period was coming to an end. On October 23, 2020, he stated “I strongly suggest we tell them we pay it off so they do not break the deal. Remember this is conveniently the day exclusivity expired.” Dkt. No. 131-56 at ECF p. 1. He added in another email: “Or - we will try to solve this and if not we promise to pay it off. And then we spend real time on this with them continuing to do work and not forget about us.” Id. It was not just words. The final draft purchase agreement contains a redline showing that “Cambridge [and not the Ruby Has founders] shall . . . pay out of Growth Capital Proceeds . . . an amount equal to the outstanding balance of the PPP Loan.” Dkt. No. 131-24 at ECF pp. 2223. Further, the definition of “Indebtedness” for which Ruby Has would be responsible for reducing to agreed-upon amounts in the purchase agreement, did not include the PPP loan. Id. at 15-16. In effect, then, the Ruby Has founders' interest in the resulting company (and the proceeds they would obtain from the transaction) would not be diluted by any prior obligation to satisfy the PPP loan. The conduct is that of a party who knows that its period of exclusivity is coming to an end, not that of a party who has obtained the right to preclude its counterpart from entertaining any competing proposals until the counterpart accedes to its demands.
Ruby Has too evinced no understanding that exclusivity had been extended. For example, on October 22, 2020, two days before the written exclusivity period came to an end, Kestenbaum, Eliyahu, Avrami, and Zakinov, all engaged in a group chat, in which they acknowledge (with a statement from Zakinov) that “[Cambridge] ha[s] not asked for [an extension], so we are not talking about it.” Dkt. No. 131-55. Kestenbaum then asked the group whether they could “talk by phone about the exclusivity period ending” and “[w]hether [they] want to do anything else during the lapse window,” with Eliyahu and Avrami confirming that they could participate in such a call (although the call did not appear to happen). Id. Zakinov told also Al-Saleh that “[l]ook, the exclusivity period is expiring and we intend to reach out to other potential investors,” although he did not recall when he did so. Dkt. No. 131-1 at 253. Zakinov did not recall Eliyahu ever telling him that he had agreed to extend the exclusivity period. Id. at 254. Ruby Has also correctly points out that there is “not a single text, email or other writing internally at Cambridge or to anyone else documenting or reflecting this purported oral extension.” Dkt. No. 129 at 14.
There is only a scintilla of evidence, if that, of an agreement to extend exclusivity. The evidence would not support a verdict in Cambridge's favor from a reasonable jury. See Anderson, 477 U.S. at 252 (“The mere existence of a scintilla of evidence in support of the plaintiff's position will be insufficient; there must be evidence on which the jury could reasonably find for the plaintiff.”); see also Gallo v. Prudential Residential Servs., Ltd. P'ship, 22 F.3d 1219, 1223 (2d Cir. 1994) (“[T]he moving party may obtain summary judgment by showing that little . . . evidence may be found in support of the nonmoving party's case.”). The only evidence identified by Cambridge that even goes to whether exclusivity was extended is the snippet of Gordon's testimony in which he stated that when he explained to Eliyahu that continued exclusivity “was an important necessary prerequisite” for Cambridge, Eliyahu “said, I understand and I agree.” Dkt. No. 151-61 at 170. But even that testimony is ambiguous. Read most naturally, it indicates that Eliyahu understood and agreed that exclusivity would be important to Cambridge. It does not convey that Ruby Has agreed that it would accede to Cambridge's demand for continued exclusivity, much less that the conversation was one in which Ruby Has (without consulting with counsel or seeing a document) actually agreed to continued exclusivity. When pressed at deposition, Gordon was unable to identify what it was that Eliyahu said that indicated that he “agreed” and what he was agreeing to.
No reasonable jury could conclude that Ruby Has had agreed to continued exclusivity until closing on this record. See, e.g., Makhoul v. Watt, Tieder, Hoffar & Fitzgerald, L.L.P., 662 Fed.Appx. 33, 35 (2d Cir. 2016) (finding that four affidavits in support of a “verbal retainer agreement” failed to survive summary judgment when there was “no evidence of a fee arrangement between MES and WTH&F, no evidence of any retainer or contract, and no evidence that WTH&F held itself out as MES's counsel”); cf. G.L.M. Sec. & Sounds Inc. v. LoJack Corp., 2014 WL 4675854, at *8 (E.D.N.Y. Sept. 19, 2014), aff'd sub nom. G.L.M. Sec. & Sound, Inc. v. LoJack Corp., 667 Fed.Appx. 339 (2d Cir. 2016) (finding on summary judgment, in the case of a fully integrated agreement with a modification clause, that “there is a complete lack of evidence suggesting that [the parties] acted in accord with the alleged oral modification or believed that the Distribution Agreement had been orally modified”). Ruby Has definitively rejected what Cambridge argues was the identical request when it was made in September 2020. Dkt. No. 131-46 at ECF p. 2. Cambridge does not identify any events between that date and October 15, 2020, that would have led Ruby Has to reconsider that rejection. Cambridge's statements after October 15, 2020, are inconsistent with the two parties having reached an agreement to extend exclusivity. Not much more than a week after Cambridge and Ruby Has supposedly agreed to extend exclusivity until closing, Gordon and Smalley communicated about moderating Cambridge's demands because exclusivity had ended and, as a result, Ruby Has would be able to receive and entertain competing offers. And it was not just Cambridge's words, but its actions. After the October 15, 2020 conversation, Cambridge agreed to make revisions to its demands as if exclusivity had ended. Finally, the uncontradicted evidence from within Ruby Has is that Ruby Has had no understanding that exclusivity had ended.
Further, it is simply inconceivable that Ruby Has could ever have agreed to exclusively entertain bids only from Cambridge until Ruby Has and Cambridge closed a final agreement. On Cambridge's telling, during a late-night conversation, Gordon and Eliyahu orally agreed that Ruby Has would extend exclusivity until closing. And they reached such an agreement orally in a context where in the past, every other communication regarding the terms of the actual and prospective agreement was communicated and consummated in writing. See Winston v. Mediafare Ent. Corp., 777 F.2d 78, 83 (2d Cir. 1985) (describing “whether the agreement at issue here was the type of contract that was usually put in writing” as one of the factors as to whether the parties intended to enter an agreement absent a document). But, at the time of this supposed agreement, there was far from an assurance that there would be a closing. The parties had, at most, formed a Type II agreement to negotiate in good faith. They had not agreed on the “ultimate contractual objective.” Teachers Insurance and Annuity Association of America v. Tribune Company (“Tribune”), 670 F.Supp. 491, 498 (S.D.N.Y. 1987). There were still many terms that needed to be worked out before there could be an assurance that there would be a closing. In October, as shown by the “major issues list,” the parties still had major issues as to the purchase price, the treatment of transaction expenses, indemnification, the definition of various terms, and obligations with respect to disclosures, guarantees, and representations. See Dkt. No. 131-20. Cambridge had no obligation to actually proceed to a closing, and nor did Ruby Has. And Ruby Has, seeking funding in time for the winter shopping cycle, Dkt. No. 144 ¶ 27, had initially offered only a 90-day exclusivity period precisely because if it could not strike a deal with Cambridge, it needed to be free to solicit and entertain alternative competing offers, Dkt. No. 121-7 at ECF p. 1. Viewed in that light, the inference that Cambridge would have the Court (or a jury) draw-that in a late-night conversation that addressed a number of different topics, Ruby Has agreed to maintain exclusivity with Cambridge until there was the closing of a transaction is inherently incredible. As Cambridge would have it, Ruby Has agreed not just to extend the exclusivity provision but that it would never agree to a transaction with another party (or engage in a conversation with another party) forevermore unless Ruby Has had Cambridge's consent. In effect, Ruby Has gave Cambridge a veto as to whether it could engage in a transaction with another company if it did not agree to the terms on which Cambridge wanted to make an investment. Leaving aside whether such an agreement would be enforceable even if it were in writing, no reasonable jury could believe that the parties reached such an agreement, which would go far beyond an agreement by the parties to negotiate the terms of a transaction.
“When opposing parties tell two different stories, one of which is blatantly contradicted by the record, so that no reasonable jury could believe it, a court should not adopt that version of the facts for purposes of ruling on a motion for summary judgment.” Scott v. Harris, 550 U.S. 372, 380 (2007). The Court concludes that no reasonable jury could believe from Gordon's deposition testimony alone (and even with Smalley's testimony of a prior consistent statement) that the parties had reached an agreement to extend the exclusivity period. See, e.g., Fincher v. Depository Tr. & Clearing Corp., 604 F.3d 712, 727 (2d Cir. 2010) (concluding that a “scintilla” of evidence was insufficient to avoid summary judgment).
Finally, even if a jury could find that the parties orally agreed to an extension of exclusivity in perpetuity, such an oral agreement would fail for lack of new consideration. “To be enforceable, an oral modification must possess all of the elements necessary to form a contract, including valid consideration.” Baraliu v. Vinya Cap., L.P., 765 F.Supp.2d 289, 298 (S.D.N.Y. 2011) (quoting Cohan v. Movtady, 751 F.Supp.2d 436, 442 (E.D.N.Y. Nov. 1, 2010)); see also Singapore Recycle Centre Pte Ltd. v. Kad Int'l Mktg., Inc., 2009 WL 2424333, at *7 (E.D.N.Y. Aug. 6, 2009) (“Consideration is necessary to prove the existence of an oral modification to a written agreement.”); see also Cont'l Ins. Co. v. Rutledge & Co., 750 A.2d 1219, 1232 (Del. Ch. 2000) (“the oral modification clearly fails for lack of consideration”); cf. N.Y. Gen. Obl. Law § 5-1103 (“[a]n agreement . . . to change or modify . . . any contract . . . shall not be invalid because of the absence of consideration, provided that the agreement . . . shall be in writing and signed by the party against whom it is sought to enforce the . . . modification ....”). The parties were already under a duty to negotiate in good faith under the LOI. It is further black letter contract law that past consideration does not constitute valid consideration for a contract. Neither Gordon nor Smalley testifies to any consideration offered for modification of the LOI's exclusivity period. See also Hadami, S.A. v. Xerox Corp., 272 F.Supp.3d 587, 597 (S.D.N.Y. 2017) (“The durational length of an exclusivity agreement substantially affects the rights and obligations of both parties.”). At best, Gordon only testifies that the parties mutually assented to extending the exclusivity period. There is nothing in the record indicating that Cambridge, as a result of the extension, undertook any detriment or provided any benefit to Ruby Has as a result of the extension of the exclusivity period. That omission of any consideration is particularly noteworthy given that “[t]he durational length of an exclusivity agreement substantially affects the rights and obligations of both parties.” Xerox Corp., 272 F.Supp.3d at 597. No party contends that there was an additional agreement at the meeting that the deal must be closed; nor could Gordon's testimony be reasonably read as indicating that there was such a transformation of the agreement. Because the only plausible consideration was Cambridge's continued efforts under the LOI, the oral modification of the LOI (if it even occurred) would not be enforceable. See Cont'l Ins. Co., 750 A.2d at 1232 (providing that “benefit to a promisor or a detriment to a promisee pursuant to the promisor's request” and that “[p]ast consideration, as opposed to true consideration, however, cannot form the basis for a binding contract”); see also Lebedev v. Blavatnik, 142 N.Y.S.3d 511, 517 (1st Dep't 2021) (same as to the effect of past consideration); Anesthesia Assocs. of Mount Kisco, LLP v. N. Westchester Hosp. Ctr., 873 N.Y.S.2d 679, 686 (2d Dep't 2009) (same as to the definition of consideration).
The Court initially dismissed the claim that there was an extension in its September 2021 Opinion. Dkt. No. 63 at 36-37.
II. Ruby Has's Liability for Breach of the Duty to Negotiate in Good Faith
Cambridge next moves for summary judgment as to Ruby Has's liability for breach of the duty to negotiate in good faith. Dkt. No. 119 at 13-20. Cambridge contends that the LOI was a Type II agreement with material terms that imposed a duty on the parties to negotiate in good faith. In Cambridge's view, Ruby Has breached that duty by (1) violating the exclusivity provision; (2) shopping the deal to other investors; and (3) in December 2020, demanding that Cambridge pay a figure of $100 million for the same 51% of Ruby Has, more than double the amount stated in the June 2020 LOI. Id. Ruby Has responds that there are factual issues for trial, including whether there was a duty to negotiate in good faith at all, and whether there was a breach, even if such a duty existed. Dkt. No. 143 at 9-20. Cambridge's motion is denied.
In any event, the Court would deny summary judgment on the basis that there are material issues of fact as to whether Ruby Has was fraudulently induced into signing the LOI based on the representations that Cambridge had cash “on hand” or immediately available prior to the signing of the LOI. See infra Section IV; Dkt. No. 143 at 20. That defense would, of course, also have provided an alternate basis for denying Cambridge's motion for summary judgment on Ruby Has's violation of the exclusivity provision. In any event, the Court has granted Ruby Has's motion for summary judgment denying liability on Cambridge's claim for breach of the exclusivity provision. See supra Section I.
Cambridge's motion raises fundamental, and underexplored, issues regarding the content of the duty to negotiate in good faith under a Type II agreement and when and how that duty comes to an end. In analyzing those issues, and Cambridge's motion, it is appropriate to consider together both the language of the June 2020 LOI and the duties it imposed and the conflicting evidence regarding the parties' negotiations after the June 2020 LOI was signed.
At the motion to dismiss stage, the Court accepted (at least for pleading purposes) that the June 2020 LOI imposed on both Ruby Has and on Cambridge enforceable Type II obligations. Dkt. No. 63 at 20. The Court's decision was based on close analysis of the language of the LOI.
The LOI “contain[ed] the parties' agreement on many major terms, including the purchase price, the transaction structure, the agreed percentage of the company that Cambridge Capital receives for its capital infusion, and a due diligence process.” Id. The agreement delineated “obligations and not just goals with respect to diligence,” in that it possessed “words that are mandatory and not merely aspirational” as to the “process each party is required to follow to reach a final agreement.” Id. at 21. It further “expressly state[d] that it is ‘an expression of mutual intent to proceed with the drafting of the share purchase agreement.'” Id. at 22 (quoting Dkt. No. 12-1 at 5). The Court reasoned from this language that “[t]ogether with the agreed upon major terms and the framework established by the LOI, this language suggests that the parties intended to be bound-not to the specific terms contained in the LOI or to the ‘ultimate contractual objective,' but rather to the LOI's framework in which the parties would negotiate the final deal in good faith.” Id. (quoting Tribune, 670 F.Supp. at 498).
The Court's decision also drew force from the language of the exclusivity provision and the obligation in the June 2020 LOI that Ruby Has conduct its business in the ordinary course “[u]ntil the execution and delivery of the share purchase agreement or such earlier date as negotiations may terminate.” Id. at 27 (quoting Dkt. No. 12-1 at 4). Those provisions required Ruby Has-in language that was enforceable-to “take itself out of the market for the [e]xclusivity [p]eriod (during which it alleges it was in critical need of capital)” and limit the business the company could conduct. Id. They thus implied that “Cambridge Capital had a duty to negotiate in good faith and that Ruby Has would have had a claim of a Type II variety if it were revealed, at the end of the [e]xclusivity [p]eriod and after Ruby Has had limited itself to business in the ordinary course, that Cambridge Capital never had an intent to negotiate in good faith.” Id. at 28. And “[i]f the LOI as a whole can be read to admit of an obligation on Cambridge Capital to negotiate in good faith, notwithstanding the language of Non-Binding Agreement, so too it can be read to admit of such an obligation on the part of Ruby Has.” Id.
The Court also concluded that, at the pleading stage, the “context of the negotiations and . . . each parties' partial performance” supported Cambridge's argument that the LOI gave rise to a duty to negotiate in good faith. Id. at 28-29. The LOI stated that “the parties engaged in ‘in person meetings and deep discussions over the past year.'” Id. at 28 (citing Dkt. No. 12-1 at 1).
As to partial performance, the Court relied on the fact that “Cambridge Capital performed due diligence as promised, and Ruby Has made diligence materials available as promised.” Id. at 29.
The Court thus rejected Ruby Has's argument that language in the section entitled “Non Binding Agreement” deprived the June 2020 LOI of any contractual force. That provision states:
This [LOI] is not intended to be a binding contract (other than with respect to the section herein titled Exclusivity Period), and the parties understand that no obligation exists on behalf of either Cambridge to pay the Purchase Price or on behalf of the Company to sell the units prior to entering into the share purchase agreement. This letter is an expression of mutual intent to proceed with the drafting of the share purchase agreement and collateral documents contemplated hereby in accordance with the principles stated herein.Dkt. No. 121-1 at ECF p. 6. The Court reasoned that the Non-Binding Agreement section could be read to indicate that the parties did not agree on any material terms in a final arrangement or those “of a Type I variety,” e.g., an agreement in which “the parties would not ultimately be committed even to the terms that are reflected in the LOI (other than with respect to the section titled Exclusivity Period).” Dkt. No. 63 at 23. The Non-Binding Agreement provision singled out the agreement by Cambridge to pay the purchase price and the agreement of Ruby Has to sell the units as not being binding. Dkt. No. 121-1 at ECF p. 6. For those reasons, the June 2020 LOI could be read as a whole to relieve either party of the obligation to close a transaction on the terms of the proposed deal reflected in the June 2020 LOI, but not of “the obligation to negotiate the open terms in good faith within the framework of the terms agreed in the LOI.” Dkt. No. 63 at 24.
Ruby Has does not contend as part of this motion that the June 2020 LOI did not create, at minimum, a duty on the part of both parties to negotiate the terms of a definitive agreement within the non-binding parameters for a final deal set forth in the LOI. However, that the June 2020 LOI could be read to have created a duty to negotiate the terms of a definitive agreement does not answer the questions raised by Cambridge regarding the content of such an obligation and how such a duty would come to an end. And, to prevail on its motion for summary judgment, Cambridge must show that there is no genuine issue of material fact not only as to the existence of a duty to negotiate in good faith, but also that no such issue of fact exists as to whether Ruby Has breached that duty through the conduct it committed.
In analyzing that second question, the Court follows familiar contract law precepts as it did at the motion to dismiss stage. It attempts to discern and to honor the reasonable expectations of the parties as reflected in their written agreement and to the extent that such expectations can be reduced to a form that is judicially enforceable. See TVT Records v. Island Def Jam Music Grp., 244 F.Supp.2d 263, 277 (S.D.N.Y. 2003) (“The boundaries set by the duty of good faith are generally defined by the parties' intent and reasonable expectations in entering the contract.” (quoting Cross & Cross Props., Ltd. v. Everett Allied Co., 886 F.2d 497, 502 (2d Cir. 1989))); see also Everett Allied Co., 886 F.2d at 502 (describing the covenant of good faith and fair dealing). The case law demonstrates that there is no single form of Type II agreement. In his seminal opinion in Tribune, 670 F.Supp. 491, since adopted by the Second Circuit, see, e.g., Adjustrite Sys., Inc. v. GAB Bus. Servs., Inc., 145 F.3d 543, 548 (2d Cir. 1998), Judge Leval distinguished between Type I and Type II agreements. A Type I agreement is a “fully binding preliminary agreement, which is created when the parties agree on all the points that require negotiation (including whether to be bound) but agree to memorialize their agreement in a more formal document.” Id. A Type II agreement, by contrast, “expresses mutual commitment to a contract on agreed major terms, while recognizing the existence of open terms that remain to be negotiated.” Tribune, 670 F.Supp. at 498. It “does not commit the parties to their ultimate contractual objective but rather to the obligation to negotiate the open issues in good faith in an attempt to reach the alternate objective within the agreed framework.” Id.
The New York Court of Appeals has stated that although it does “not disagree with the reasoning in federal cases,” it does “not find the rigid classifications into ‘Types' useful.” IDT Corp. v. Tyco Grp., 918 N.E.2d 913, 915 n.2 (N.Y. 2009). The Court, however, does “not reach the issue of whether the Type I/Type II approach is proper in light of IDT because both parties agree that there was no Type I agreement and that the issue is only whether there was a binding good faith obligation.” EQT Infrastructure Ltd. v. Smith, 861 F.Supp.2d 220, 227 n.7 (S.D.N.Y. 2012).
To say that an agreement imposes a duty to negotiate “the open issues in good faith,” however, is not necessarily to say that the terms that are not “open” can never be revisited. The parties may not intend all terms of a preliminary writing to be binding. As Cambridge agreed at argument, and as the case law demonstrates, money and contractual terms can be fungible. Oral Argument Transcript (“Tr.”) at 17. The value that may be conveyed by one party in agreeing to a particular contractual provision can be recovered-in the interest of both parties-by the other party's agreement to compromise with respect to a second provision. The law is not so rigid that it precludes either or both parties in a Type II relationship from revisiting one or another element of an agreed preliminary term if necessary to settle an open term. See, e.g., White Winston Select Asset Funds, LLC v. Good Times Restaurants, Inc., 2022 WL 1659161, at *2 (D. Del. May 25, 2022); see generally Albert H. Choi & Georgie Triantis, Designing and Enforcing Preliminary Agreements, 98 Tex. L. Rev. 439 (2020) (“Preliminary Agreements”); see also E. Allan Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations, 87 Colum. L. Rev. 217, 251 (1987) (“Precontractual Liability”) (describing an agreement to negotiate which the parties “set out specific substantive terms of the deal, but . . . do not agree to be bound as to these terms”); see also id. (stating that such agreements are commonly found in the “field of mergers and acquisitions” in which a “letter of intent . . . amounts to an agreement to negotiate”).
Two cases are illustrative of the range of obligations that may be created by a Type II agreement, depending on the language and intent of the parties. In L-7 Designs, Inc. v. Old Navy, LLC, 964 F.Supp.2d 299 (S.D.N.Y. 2013) (“L-7”), Judge Chin, sitting on the district court by designation, granted summary judgment to an apparel retailer accused by the designer of a line of apparel of violating Type II obligations to negotiate in good faith. Id. at 307. In that case, the retailer (Old Navy) had agreed with the designer (L-7) to negotiate an agreement to launch a line of products bearing the marks of the designer at an agreed upon royalty rate and with the agreement intended to be consummated by October 1, 2008. Id. at 304. During the course of the negotiations, L-7 demanded that it be paid the royalty rate but also that there be a minimum guaranteed royalties. Id. On September 30, 2008, Old Navy advised L-7 that it intended to postpone the signing of a license agreement “indefinitely” because Old Navy's business had been weaker than expected. Id. On February 2, 2009, after renewed negotiations, Old Navy rejected an offer by L-7 and on February 6, 2009, Old Navy advised L-7 that material open issues remained and that it did not believe that a collaborative partnership could be established, terminating the negotiations. Id. at 305. Judge Chin accepted the argument that the evidence might support that Old Navy had abandoned negotiations because of changed business conditions, but rejected the claim that such evidence would demonstrate that Old Navy violated its Type II obligations to negotiate in good faith. Id. at 309. “Old Navy had engaged in lengthy and meaningful negotiations with L-7 . . . on and off for approximately ten months.” Id. at 308. He concluded that even if “Old Navy changed its mind about entering into a license agreement for the branded line, a reasonable jury could only find that the decision was motivated by Old Navy's legitimate business concerns,” including that its management had changed significantly, that there was “general economic malaise,” and that “Old Navy had experienced several years of poor sales.” Id. at 309. Notably, no party claimed that seeking to suspend negotiations beyond the anticipated date of the consummated agreement indicated that Old Navy had breached Type II obligations.
Judge Chin delineated the narrow range of Type II obligations that the parties had assumed in that case. First, “good faith requires honesty in fact” and “an honest articulation of interests, positions, or understandings.” Id. at 307 (cleaned up). Second, “the duty to negotiate in good faith obligates a party only to try to reach an agreement; a party does not act in bad faith merely because, in the end, it refuses to capitulate to the other side's demands.” Id. (emphasis in original). Third, “self-interest is not bad faith,” Id. (alterations accepted) (quoting Venture Assocs. Corp. v. Zenith Data Sys. Corp., 96 F.3d 275, 279 (7th Cir. 1996)), and “[a]cting in one's financial self-interest, for example, in response to market changes, does not constitute bad faith,” Id. Thus, “even assuming Old Navy had intended to offer a proposal that would be rejected by L-7,” a decision “motivated by the legitimate business concerns facing the company” would not be bad faith. Id. at 311-12. Fourth, “bad faith requires some ‘deliberate misconduct'-arbitrary or capricious action taken out of spite or ill will or to back out of an otherwise binding contractual commitment.” Id. at 308 (citation omitted).
In SIGA Technologies, Inc. v. PharmAthene, Inc., 67 A.3d 330 (Del. 2013) (“SIGA”), by contrast, the Delaware Supreme Court affirmed the Delaware Chancery Court's finding that there was a breach of a duty to negotiate in good faith arising from a preliminary license agreement term sheet (“LATS”) signed between two drug developers to develop a drug. As described further in Section IV, one of the drug developers (“SIGA”), was developing a drug to treat smallpox, but was running out of cash for development and faced a potential delisting on the NASDAQ. Id. at 334. Both parties estimated the value of the drug, before the signing of any agreements, at approximately $1 billion. Id. SIGA then negotiated and entered into the LATS with the other developer (“PharmAthene”), which was quickly followed by two agreements: a merger agreement, and a bridge loan agreement resolving SIGA's short-term solvency problems. The agreements indicated that the parties would negotiate a license agreement as embodied in the LATS if the merger fell through. Id. at 337. During preparation for the merger, the drug performed positively, SIGA was awarded several grants for further development, and SIGA began experiencing “seller's remorse.” Id. at 338. After the parties missed their drop-dead date for the merger as a result of delay by the SEC, SIGA declined to extend the date. SIGA then announced its grant award and positive trial results and its share price more than tripled as a result. Id. During their subsequent negotiations for a license agreement, SIGA at first proposed an increased upfront payment of $40 to $45 million (from the $6 million in the LATS). Id. at 339. SIGA, however, then submitted a written proposal increasing the upfront payment to $100 million, and an increase in milestone payments to SIGA from $10 million in the LATS to $235 million, among numerous other terms benefitting SIGA. Id. The court held that the “SIGA took that position in bad faith,” id. at 346, and evidence of “seller's remorse” bolstered the finding that SIGA failed to negotiate in good faith, Id. at 347 That was enough to conclude that it was not simply “bad judgment or negligence,” but “conscious doing of a wrong because of dishonest purpose or moral obliquity . . . a state of mind affirmatively operating with furtive design or ill will.” Id. at 346 (citation omitted).
L-7 and SIGA demonstrate that the answers to the questions of what duties are required in a Type II agreement and when those duties are violated cannot be reduced to a simple formula that applies across all forms of Type II agreements and all factual settings. The only general rule that may be stated is that “[i]n the end . . ., ‘[a] primary concern for courts in such disputes is to avoid trapping parties in surprise contractual obligations that they never intended,'” L-7 Designs, Inc., 964 F.Supp.2d at 308, and that while “[c]ourts in this District [have found] bad faith when a party attempts to alter the terms on which the parties have already reached agreement,” Gas Nat., Inc. v. Iberdrola, S.A., 33 F.Supp.3d 373, 383 (S.D.N.Y. 2014), in every instance the issue of whether a party negotiated in good faith depends on the facts and circumstances of the particular case and the nature of the preliminary agreement the parties have reached, see Tractebel Energy Mktg., Inc. v. AEP Power Mktg., Inc., 487 F.3d 89, 98 (2d Cir. 2007) (“[W]hether particular conduct violates or is consistent with the duty of good faith and fair dealing necessarily depends upon the facts of the particular case, and is ordinarily a question of fact to be determined by the jury or other finder of fact.”).
Although not expressly articulated in the opinions of the Delaware courts, the developments in SIGA that resulted in SIGA's decision to increase the required upfront payment by more than 1600% were ones that were foreseeable at the time the Type II agreement was reached. The merger agreement and the LATS involved a drug that was in development. The drug would either have hit its milestones, achieved success in trials, and been a potential blockbuster, or it would have failed those milestones or trials and been unmarketable. It could have been foreseen that there would be developments on the path to one of the two of those results while negotiations were ongoing. The court concluded that the LATS, merger agreement, and bridge loan agreement, together evinced the intent of the parties not just to negotiate in good faith but to formalize an agreement. For either positive or negative developments on the route to drug approval to provide an excuse to cease negotiating could render the agreement to negotiate the license illusory. Either party would be free to walk virtually at any time. By contrast, the business developments in L-7 could well have been considered unexpected-the slowdown in sales at Old Navy, as well as the change in management, occurred at the precipice of the Great Recession. In those circumstances, Judge Chin found that Old Navy was permitted to take them into account in effectively ceasing negotiations.
Viewing the case through this lens, there are genuine issues of material fact as to whether Ruby Has breached a duty to negotiate in good faith. Cambridge bases its claim that Ruby Has is liable for a breach of the duty to negotiate in good faith on three grounds: (1) Ruby Has's violation of the exclusivity provision of the LOI, Dkt. No. 119 at 16-17, (2) Ruby Has's demand that Cambridge “agree[] to a purchase price of over $100 million, more than two and a half times the price agreed-to in the LOI,” Id. at 17-19, and (3) Ruby Has's conduct in shopping the deal to Norwest after the end of the exclusivity period, Id. at 20.
The Court thus need not determine on summary judgment whether the LOI establishes a duty to negotiate in good faith, as Cambridge has failed to demonstrate that undisputed facts show that Ruby Has violated such a duty, even if it existed. The Court thusneed not determine whether Brown v. Cara, 420 F.3d 148 (2d Cir. 2005), and Data Centers, LLC v. 1743 Holdings LLC, 2015 WL 9464503 (Del. Super. Ct. Oct. 27, 2015) are analogous to the circumstances here. Whether the LOI established a duty to negotiate in good faith will remain an issue for trial.
The claim that Ruby Has violated the exclusivity provision does not entitle Cambridge to summary judgment. See Dkt. No. 119 at 11-12. Ruby Has contends that Cambridge cannot “bootstrap” a violation of an express provision of the LOI into one of an implied duty. Dkt. No. 143 at 13-14. The Court need not determine whether the breach of the exclusivity provision may be reasserted as a breach of the duty to negotiate in good faith because, for the reasons previously described, the Court has granted Ruby Has summary judgment on the claims premised on the breach of the exclusivity provision. Cambridge has adduced no evidence raising a genuine dispute of material fact that Ruby Has violated the exclusivity provision.
Cambridge also is not entitled to summary judgment on the theory that Ruby Has breached an obligation to negotiate in good faith by engaging in discussions with Norwest, purportedly to start a bidding war. Dkt. No. 119 at 20. The undisputed evidence is that Ruby Has engaged in those discussions after the end of the exclusivity period. The exclusivity period terminated on October 24, 2020, as provided in the June 2020 LOI and confirmed by Ruby Has's prior rejection of the extension of exclusivity until closing, Dkt. No. 131-46 at ECF p. 2, Cambridge's concession in paying off the PPP loan, which would otherwise not have occurred absent the impending expiration of exclusivity, Dkt. No. 131-56 at ECF p. 2, communications from Smalley confirming Cambridge's understanding that exclusivity was about to expire, Id., and internal conversations in Ruby Has, Dkt. No. 131-55. See supra Section I.D. The June 2020 LOI precluded Ruby Has from taking any action to “solicit or initiate any Investment or Acquisition Proposal” or to engage in negotiations with others for the sale of the company for a period of 90 days (to be extended by an additional 30 days) from the signing of the LOI. Dkt. No. 121-1 at ECF p. 5. The plain negative implication of that provision was that after the expiration of the exclusivity period, Ruby Has was permitted to entertain competing offers. See infra Section III.B.
Indeed, there is evidence that during the entire period that the June 2020 LOI was in effect, Cambridge (which was not bound by the exclusivity period) was exploring alternative investments. In June after the signing of the LOI, Gordon questioned internally with Stubbs and Smalley whether to go with ShipBob versus Ruby Has, Dkt. No. 142-25 at ECF p. 2, and was seeking to raise funds for ShipBob in July, Dkt. No. 142-26 at ECF p. 2. If Cambridge-which was not bound by the exclusivity provision-was free to pursue alternative investments throughout the term of the June 2020 LOI, Ruby Has would have been entitled to do the same after the exclusivity period expired. Were it otherwise, the exclusivity period language would be surplusage. It necessarily follows that Ruby Has was free to negotiate with other counterparties as a means of extracting value during its negotiation with Cambridge. See Schwanbeck v. Fed.-Mogul Corp., 31 Mass.App.Ct. 390, 405 (1991), rev'd on other grounds, 592 N.E.2d 1289 (Mass. 1992) (describing how negotiating parties are in an adversarial, not fiduciary relationship).
Nor would Ruby Has necessarily be required to disclose the identity of that third party or its bids. Cambridge negotiated for such a right, but let it expire. A duty to negotiate in good faith implies a duty to be honest. L-7 Designs, Inc., 964 F.Supp.2d at 307. It does not impose a duty to volunteer. See PSI Energy, Inc. v. Exxon Coal USA, Inc., 17 F.3d 969, 972 (7th Cir. 1994) (“An obligation to negotiate in good faith is not an obligation to be kind to one's trading partner or to refrain from taking commercial advantage of the contractual provisions one has negotiated.”); Gas Nat., Inc. v. Iberdrola, S.A., 33 F.Supp.3d 373, 385 (S.D.N.Y. 2014) (“[B]y attempting to construe the duty of good faith so broadly-to require affirmative disclosure of the existence of interested third parties-[p]laintiff seeks to impose an obligation that, based on the allegations of the Complaint, [d]efendant never accepted.”); SuperValu Inc. v. Associated Grocers, Inc., 428 F.Supp.2d 985, 992 (D. Minn. 2006) (“A generalized duty to negotiate in good faith, as found in the language in the Letter of Intent, does not require disclosure of competing negotiations.”).
Cambridge's most serious argument, and the one as to which it spends the most time, is that Ruby Has violated its duty to negotiate in good faith when, in December 2020, it told Cambridge that it required a “purchase price of over $100 million, more than two and a half times the price agreed-to in the LOI,” in order to close the transaction. Dkt. No. 119 at 18. In particular, on December 9, 2020, Eliyahu told Gordon that the deal was off unless Cambridge agreed to increase its purchase price to over $100 million for 51% of the company. Dkt. No. 165 ¶ 101. In a text message exchange, also on December 9, 2020, Eliyahu states that “[Gordon] felt the deal was done. But it [sic] ShipMonk deal really changed our view” and Kestenbaum responded that “Shipmonk solidified that shipbob wasn't a fluke . . . but rather a shift in the market[.] Cambridge doesn't have the muscle needed to do this[.] If they could come up with what's needed we would totally want to work w[ith] them[.] It's a whole other league.” Dkt. No. 121-20 at ECF pp. 11-12. ShipMonk was an ecommerce fulfillment competitor of Ruby Has and had just announced a capital raise “on something close to a $700 million valuation.” Dkt. No. 142-14 at 195; see also Dkt. No. 142-9 (December announcement of Shipmonk deal). Cambridge argues that the evidence demonstrates that Ruby Has violated the duty to negotiate by demanding a change in a material term that had already been agreed. That evidence, combined with all the other evidence in the case including Ruby Has's solicitation of Norwest, raises a genuine issue of material fact regarding whether Ruby Has breached a duty to negotiate in good faith.
The Court, however, need not determine the precise requirements of the parties' duty to negotiate to determine that there are issues of material fact regarding whether Ruby Has is in breach and therefore that Cambridge is not entitled to summary judgment.
First, there is a genuine issue of material fact whether the June 2020 LOI precludes Ruby Has from demanding a term different from those set forth in the LOI, particularly after the exclusivity period had expired. At the motion to dismiss stage, the Court concluded that the June 2020 LOI implied a duty on both parties to negotiate within the framework of the terms set forth in that document. The June 2020 LOI contained terms with respect to purchase price and the amount of equity that Cambridge would receive with respect to that purchase price. But, as Ruby Has points out, the June 2020 LOI expressly disavowed any duty on the part of Cambridge to actually pay that purchase price and on the part of Ruby Has to exchange equity in exchange for that purchase price. Thus, the agreement can be read to impose on each party the duties, and only those duties set forth in L-7-i.e., honesty in fact and in expression of interests, an attempt to reach agreement, and avoidance of arbitrary or capricious action taken out of spite or ill will to back out-but not to refrain from taking an action in that party's economic self-interest due to changed conditions.
That conclusion could be reinforced to a reasonable jury by the negotiation history between the parties. For example, while Cambridge agreed to pay a purchase price of $20 million to the founders and it argues that it did not deviate from that agreement, it also demanded that the founders return a portion of the $20 million through the funding of cash and working capital and the reduction of debt. In effect, that demand-if it was agreed to-would result in the Ruby Has founders receiving less for the share of Ruby Has that they were trading to Cambridge than what had been agreed in the June 2020 LOI. Cambridge also demanded, in its final communication, that Ruby Has give up an additional 3% in equity, which would have resulted in the Ruby Has founders retaining not 49% in the resulting company as suggested by the June 2020 LOI, but 46%. A reasonable jury could conclude that, if Cambridge felt free because of changed circumstances to make such demands that appear to deviate from the terms of the June 2020 LOI (in effect if not in name), so too would Ruby Has be free, as a result of changed circumstances, to make demands that would deviate from the June 2020 LOI.
That understanding of the reciprocal obligations of the parties gains force from the terms of the exclusivity period of the June 2020 LOI. As noted, that provision expressly permitted Ruby Has to entertain competing bids after 90 days from the date of signing. In effect, a reasonable jury could conclude that the provision gave 90 days (or 120 days) to Cambridge for the negotiation of definitive documentation. After the expiration of that period, all bets were off. The founders of Ruby Has could seek out a better deal for its company, just as Cambridge could seek out a better place to put its investment money. The June 2020 LOI clearly did not obligate Ruby Has to continue to negotiate to infinity; such a duty would, in effect require it to capitulate to Cambridge's demands. That would no longer be a duty to negotiate in good faith, but a duty to capitulate on the open terms-no matter what Cambridge demanded for those terms.
There also is a genuine dispute as to whether, by the time Ruby Has demanded more than $100 million, Ruby Has had already terminated the negotiations and had done so by virtue of what it understood to be Cambridge's breach of its obligations under the June 2020 LOI. Zakinov, in his declaration, states that “[t]he November 30 email from Cambridge was the last straw for us. We told Cambridge that we were no longer going to continue the negotiations, and we viewed the proposed deal as dead. I spoke to Essa Al Saleh in those early days of December. I also sent a text to Matt Smalley on December 4, telling him the same.” Dkt. No. 130 ¶ 19. Zakinov stated to Smalley:
On the deal side I think Cambridge dragged this out to [sic] long with all these deal changes and we are different company since the LOI and the market is hotter than ever. I don't know if we can come to an agreement as with every two steps forward Cambridge moves it 10 steps back, not looking to dance and play these games any more. We were looking forward to use the money for peak but managed on our own next cash crunch is 6-8 months from nowDkt. No. 131-38 at ECF p. 3. Eliyahu also testified in his deposition that by December 3, 2020, he had separately told Cambridge “that the deal was dead.” Dkt. No. 142-17 at 200. He also further testified that Ruby Has had “passed multiple times” on a deal with Cambridge, and characterized the December 9, 2020 negotiation as one in which Gordon “felt that he would be able to get us back to the table and he realized that he couldn't.” Id. at 210-11.
Finally, Ruby Has disputes Cambridge's interpretation of the text message exchange, stating that the “ShipMonk deal really changed our view” from Eliyahu was his description of Gordon's view, not Ruby Has's view. Dkt. No. 142-17 at 212. Ruby Has also contests the meaning of Kestenbaum's statements through her deposition testimony, stating that Kestenbaum was describing the need for an actual partner that would not continually “retrad[e] the deal points all the time.” Dkt. No. 142-15 at 211-12.
These are the kinds of factual disputes that are ill-suited for summary judgment. The Court concludes that there is a genuine dispute of material fact of whether Ruby Has terminated negotiations prior to proposing a price term that deviated from the LOI.
III. Cambridge's Request for Expectation Damages for Breach of the Duty of Good Faith
Ruby Has moves for summary judgment on Cambridge's claim for expectation damages for its alleged breach of the duty to negotiate in good faith, arguing that Cambridge is limited to reliance damages. Dkt. No. 129 at 15-28. Ruby Has first argues that New York law is applicable to Cambridge's claim for damages and that under such law expectation damages are not available for breach of an agreement to agree. Id. at 16-18. Ruby Has further argues that even if Delaware law governs, Cambridge is not entitled to expectation damages on the undisputed facts. Id. at 18-28. For the following reasons, the Court grants summary judgment striking Cambridge's request for expectation damages.
A. Choice of Law
The threshold question before the Court is whether New York or Delaware law applies to the determination of damages for breach of Ruby Has's Type II obligations to negotiate in good faith. It is undisputed that, if New York law applies to Cambridge's claim, then Cambridge would not be entitled to expectation damages. New York law expressly limits a plaintiff to reliance damages for breach of an agreement to negotiate in good faith. See Goodstein Const. Corp. v. City of New York, 604 N.E.2d 1356, 1362 (N.Y. 1992) (“[W]here the claims are founded only on an agreement to negotiate--awarding plaintiff lost profits based on the projected improvements would be even more ‘irrational' and ‘illogical and without any basis.'” (quoting Kenford Co. v. Cnty. of Erie, 73537 N.E.2d 176, 180 (N.Y. 1989))); see also Gorodensky v. Mitsubishi Pulp Sales (MC), Inc., 92 F.Supp.2d 249, 255 n.2 (S.D.N.Y. 2000), aff'd, 242 F.3d 365 (2d Cir. 2000) (“[P]laintiffs are seeking damages for lost future profits, a remedy unavailable for breach of a duty to negotiate in good faith.” (citing Goodstein Const. Corp, 604 N.E.2d at 1361-62)).
The June 2020 LOI has a “Governing Law” provision that states:
This Letter of Intent, and any non-contractual obligations arising out of or in connection with it, shall be governed by and constructed in accordance with the laws of the state of Delaware. Likewise, the Definitive Agreements shall be governed by and construed in accordance with Delaware law.Dkt. No. 121-1 at ECF p. 6. In addition, Ruby Has relied upon Delaware law in moving to dismiss Cambridge's complaint and, on Ruby Has's motion to dismiss, the Court stated that “Delaware law applies to the interpretation of the LOI.” Dkt. No. 63 at 18. Cambridge therefore argues that the application of Delaware law to the damages available for breach of a duty to negotiate in good faith is law of the case and has been consented to by Ruby Has. Dkt. No. 153 at 13-14. It also argues that, under New York choice of law principles, the Governing Law provision should be honored because its application would not violate any fundamental principle of New York law and Delaware has a reasonable relationship to the LOI. Id. at 15-17. The Court rejects Cambridge's first two arguments as to law of the case and consent. Although the question is close (and, in the Court's view, ultimately not dispositive), the Court also concludes that New York law applies to the question of the available damages.
The Court's statement that Delaware law applies to the interpretation of the LOI, made in connection with its decision on the motion to dismiss, does not preclude Ruby Has from arguing for the application of New York law or the Court from concluding that New York law applies. The law of the case doctrine “holds ‘that when a court has ruled on an issue, that decision should generally be adhered to by that court in subsequent states in the same case,' unless ‘cogent' and ‘compelling' reasons militate otherwise.” United States v. Quinteri, 306 F.3d 1217, 1225 (2d Cir. 2002) (first quoting United States v. Uccio, 940 F.2d 753, 758 (2d Cir. 1991), and then quoting United States v. Tenzer, 213 F.3d 34, 39 (2d Cir. 2000)). Application of the doctrine is discretionary. See Cammeby's Mgmt., Co., LLC v. Affiliated FM Ins. Co., 152 F.Supp.3d 159, 163 n.3 (S.D.N.Y. 2016) (citing Corporacion de Mercadeo Agricola v. Mellon Bank Int'l, 608 F.2d 43, 48 (2d Cir. 1979)). The doctrine is “driven by considerations of fairness to the parties, judicial economy, and the social interest in finality.” United States v. Carr, 557 F.3d 93, 102 (2d Cir. 2009).
The Court's statement was made in the context of deciding the motion to dismiss. There, the Court was required to accept the allegations of the complaint as true and not in connection with a motion for summary judgment where the complaining party is required to submit evidence in support of its claim. And the statement was made in the context of determining whether the June 2020 LOI created any binding obligations and, if so, the nature of those obligations. The Court did not address the availability of damages, which was immaterial to the Court's decision. All parties agreed that, for limited purposes of considering the nature of the obligations created by the June 2020 LOI, Delaware law was identical to New York law. The Court did not decide anything more than whether to apply Delaware law with respect to the issue of whether the complaint stated a claim for breach of a duty to negotiate in good faith. It did not decide that Delaware law would apply for all purposes and at all stages of the case. See Kotler v. Daby, 2013 WL 1294282, at *11 (N.D.N.Y. Mar. 28, 2013) (“[T]he Court holds that any findings made in the decision denying Defendants' motion to dismiss pursuant to Rule 12(b)(6) are not law of the case for purposes of the present motion for summary judgment.”); Clalit Health Servs. V. Israel Humanitarian Found., 385 F.Supp.2d 392, 398 n.8 (S.D.N.Y. 2005) (noting the distinction between a motion to dismiss and a motion for summary judgment for law of the case purposes).
Moreover, even if the doctrine could be applicable here, the Court would not exercise its discretion to apply it. Both parties assumed that Delaware law applied at the motion to dismiss stage for the purposes of the argument there and that such law was identical to New York law. That assumption, and the Court's agreement to it, greatly simplified the Court's task at that stage.
The parties effectively relieved the Court of the obligation to engage in a choice of law analysis and the Court therefore did not engage in such an analysis. Thus, where the choice of law issues were never briefed or fully aired, it would disserve the purposes of the law of the case doctrine and not further them, for the Court to preclude Ruby Has from arguing for the application of New York law now. See Corporacion de Mercadeo Agricola, 608 F.2d at 48 (“[T]he law of the case is not a limit on the court's jurisdiction, but a rule of practice which may be departed from in the sound discretion of the district court. The first judge always has the power to change a ruling; further reflection may allow a better informed ruling in accordance with the conscience of the court.”).
For similar reasons, Ruby Has has not “consented” to the application of Delaware law, for the purposes of its motion for summary judgment, “by relying upon Delaware law in its motion to dismiss Cambridge's complaint and supporting papers.” Dkt. No. 153 at 14. A party may waive a choice of law argument or give implied consent sufficient to establish a choice of law when it assumes in its briefs that a particular jurisdiction's law applies. See Tesla Wall Sys., LLC v. Related Companies, L.P., 2018 WL 4360777, at *3 (S.D.N.Y. Aug. 15, 2018); Wultz v. Bank of China Ltd., 811 F.Supp.2d 841, 845 (S.D.N.Y. 2011). Here, however, Ruby Has did not “affirmatively invoke[]” or consistently draw upon Delaware law in a manner that would allow the court to “presume that [Ruby Has] consent[ed]” to its application. See Pac. Indem. Co. v. Kiton Corp., 2022 WL 4237092, at *2 (S.D.N.Y. Sept. 14, 2022). Ruby Has cited both New York law and Delaware law in support of its argument on the motion to dismiss; as noted, it argued that with respect to the question of obligation, the law of the two States was identical. See, e.g., Dkt. No. 11 at 18, 18 n.5, 20, 22-23. Moreover, it expressly reserved its right to argue that for other purposes, including for damages, New York law might apply. Ruby Has stated at oral argument “there are differences [between Delaware and New York law], I think, between damages and between potentially what constitutes a violation if you found that there was a duty. So I don't know if the law is entirely aligned, but I think that for purposes of this motion for deciding whether there is a duty to negotiate in good faith at all that the three states are the same.” Dkt. No. 61 at 5 (emphasis added). By citing to Delaware law for its arguments at the motion to dismiss stage, Ruby Has thus did not impliedly consent to the application of that law with respect to the separate question of damages at the summary judgment stage.
Finally, Cambridge does not identify any prejudice that it would suffer by addressing the choice of law question now at the summary judgment stage. See Reed Const. Data Inc. v. McGraw-Hill Companies, Inc., 49 F.Supp.3d 385, 423 (S.D.N.Y. 2014), aff'd, 638 Fed.Appx. 43 (2d Cir. 2016) (rejecting argument that defendant “waived its argument that Georgia law applies” because in part, “the party seeking to enforce waiver does not argue or show that it has been prejudiced by the late argument”); cf. Tesla Wall Sys., LLC, 2018 WL 4360777, at *3 (finding implicit consent, subsequent waiver, and judicial estoppel when plaintiff had represented to the Court that “Nevada law has nothing whatsoever to do with the claims in this action” and “consistently maintained” that New York law governed the claims).
The Court next turns to whether the Governing Law provision should be applied to the question of damages. Because the Court is sitting in diversity, see Dkt. No. 67 ¶ 20, the Court must “look[ ] to the choice-of-law rules of New York to determine whether and to what extent the parties' contractual choice should be honored.” Woodling v. Garrett Corp., 813 F.2d 543, 551 (2d Cir. 1987); see also Fieger v. Pitney Bowes Credit Corp., 251 F.3d 386, 393 (2d Cir. 2001) (same); Hartford Fire Ins. Co. v. Orient Overseas Containers Lines (UK) Ltd., 230 F.3d 549, 556 (2d Cir. 2000) (same); Curley v. AMR Corp., 153 F.3d 5, 12 (2d Cir. 1998) (same); cf. Fin. One Pub. Co. v. Lehman Bros. Special Fin., 414 F.3d 325, 333 (2d Cir. 2005) (“New York courts decide the scope of such clauses under New York law, not under the law selected by the clause.”). “Moreover, the validity of a contractual choice-of-law provision is ‘decided not under the law specified in the clause, but under the relevant forum's choice-of-law rules governing the effectiveness of such clauses.'” Fleetwood Servs., LLC v. Ram Capital Funding, LLC, 2022 WL 1997207, at *14 (S.D.N.Y. June 6, 2022) (quoting Lehman Bros. Special Fin., Inc., 414 F.3d at 335).
There is no dispute between the parties that the scope of the choice of law clause, with its expansive language, covers the dispute here.
There is no dispute here that there is an “‘actual conflict' between the applicable rules of two relevant jurisdictions,” such that the Court must “embark on a choice-of-law analysis.” Lehman Bros. Special Fin., 414 F.3d at 331 (citing In re Allstate Ins. Co., 613 N.E.2d 936, 937 (N.Y. 1993)). Although New York law categorically prohibits expectation damages in the absence of an agreement on all material terms, see Goodstein Const. Corp., 604 N.E.2d at 1362, Delaware law allows for expectation damages for what it characterizes as breaches of Type II preliminary agreements to negotiate in good faith in some limited circumstances, see SIGA Techs., Inc., 67 A.3d at 351. Each of the two states, New York and Delaware, thus “provid[e] different substantive rules” that are “relevant to the issue at hand” and “have a significant possible effect on the outcome of the trial.” Lehman Bros. Special Fin., 414 F.3d at 331 (emphasis in original) (citation omitted). There also is no dispute that, in the absence of an effective choice-of-law clause, New York law would be applicable to this dispute. New York is the state with the most significant relationship to the transaction. See Matter of Allstate Ins. Co. (Stolarz), 613 N.E.2d 936, 940 (N.Y. 1993) (requiring consideration of “five generally significant contacts in a contract case: the place of contracting, negotiation and performance; the location of the subject matter of the contract; and the domicile of the contracting parties”); Restatement (Second) Conflict of Laws § 188 (1971).
“Under New York law, great deference is to be given a contract's designation of the law that is to govern disputes arising from the contract.” Zerman v. Ball, 735 F.2d 15, 20 (2d Cir. 1984); see also Int'l Bus. Machines Corp. v. Mueller, 2017 WL 4326114, at *4 (S.D.N.Y. 2017). New York courts generally follow the Restatement (Second) of Conflict of Laws. See, e.g., IRB-Brasil Resseguros, S.A. v. Inepar Invs., S.A., 982 N.E.2d 609, 612 (N.Y. 2012). “[C]ourts may refuse to enforce a choice-of-law clause only where (1) the parties' choice has no reasonable basis or (2) application of the chosen law would violate a fundamental public policy of another jurisdiction with materially greater interests in the dispute.” E. Cap. Invs. Corp. v. GenTech Holdings, Inc., 590 F.Supp.3d 668, 677 (S.D.N.Y. 2022) (quoting Beatie & Osborn LLP v. Patriot Sci. Corp., 431 F.Supp.2d 367, 378 (S.D.N.Y. 2006)); see also TGG Ultimate Holdings, Inc. v. Hollett, 2017 WL 1019506, at *4 (S.D.N.Y. Feb. 24, 2017) (discussing the Restatement test in determining whether to enforce parties' choice-of-law selection); Welsbach Elec. Corp. v. MasTec N. Am., Inc., 859 N.E.2d 498, 500-01 (N.Y. 2006); see also United States v, Moseley, 980 F.3d 9, 20 (2d Cir. 2020) (“New York law is unambiguous in the area of express choice of law provisions in a contract. Absent fraud or violation of public policy, contractual selection of governing law is generally determinative so long as the State selected has sufficient contacts with the transaction.” (quoting Int'l Minerals & Res., S.A. v. Pappas, 96 F.3d 586, 592 (2d Cir. 1996))); Medtronic, Inc. v. Walland, 2021 WL 4131657, at *4-6 (S.D.N.Y. Sept. 10, 2022) (explaining that, even after the New York Court of Appeal's decision in Ministers & Missionaries Benefit Bd. v. Snow, 45 N.E.3d 917 (N.Y. 2015)-which stated that “New York courts should not engage in any conflicts analysis where the parties include a choice-of-law provision in their contract”-a court should consider whether a choice-of-law provision bears a reasonable relationship to the parties or transaction or violates a fundamental policy of a state with a materially greater interest than the chosen state). The Court thus considers “the choice-of-law rules of New York to determine whether and to what extent the parties' contractual choice should be honored.” Woodling, 813 F.2d at 551.
There is no merit to Ruby Has's argument that the Court has held that the Governing Law provision is not an “effective choice-of-law provision.” Dkt. No. 129 at 17 (citing E. Cap. Invs. Corp. v. GenTech Holdings, Inc., 590 F.Supp.3d 668, 678 (S.D.N.Y. 2022)). In its opinion denying Ruby Has's motion to dismiss, the Court stated that “[t]he ‘Governing Law' provision expresses the mutual intent of the parties regarding the law to be applied to disputes arising out of their relationship. It does not impose contractual obligations; the application of the Governing Law section and its meaning is a question of conflict of laws and not of contract.” Dkt. No. 68 at 34 (citing Restatement (Second) of Conflict of Laws § 187). That comment was made in response to Ruby Has's argument that because the choice-of-law provision was intended to be binding and it was contained in a portion of the LOI containing “Other Considerations,” so should the other provisions in the “Other Considerations” be considered binding, including the expense provision. The Court rejected the argument because it relied on an incorrect premise - that the enforceability of a choice-of-law provision was a matter of contractual obligation and not a matter of choice of law. Ruby Has's cited case, East Capital Investments Corp. v. GenTech Holdings, Inc., is inapposite. That case deemed the clause ineffective after determining that the clause would fail under the reasonable relationship test under New York choice of law rules. 590 F.Supp.3d at 678. Aside from GenTech Holdings, Inc., Ruby Has also cites in its reply brief, Rembrandt 3D Holding, Ltd. v. Stream TV Network, Inc., 2020 WL 9214290 (S.D.N.Y. Nov. 4, 2020), report and recommendation adopted, 2021 WL 1425355 (S.D.N.Y. Apr. 15, 2021). But there, the court concluded that there was no “actual conflict,” so there was no reason to undergo a choice-of-law analysis. Id. at *4. To the extent that opinion suggests that choice-of-law provisions are inherently ineffective in a Type II agreement, this Court respectfully disagrees. A Type II agreement still constitutes a “contract” with an offer, acceptance, and consideration. Further, in AEI Life LLC v. Lincoln Benefit Life Co., cited in East Capital Investments Corp., the Second Circuit concluded that there was not an effective choice-of-law provision because the provision at issue was in fact, not a choice-of-law provision at all, but a “conformity-to-state-law provision.” 892 F.3d at 135. There is no dispute that the choice of law clause here is indeed a choice-of-law provision.
Ruby Has's argument that application of Delaware law here would violate the fundamental public policy of New York is without merit. Ruby Has bears a “heavy burden” to show that application of Delaware law would violate New York public policy. Schultz v. Boy Scouts of Am., Inc., 480 N.E.2d 679, 688 (N.Y. 1985). It is not sufficient to show that application of Delaware law would violate “individual notions of expediency and fairness” or “that the foreign law is unreasonable or unwise.” Id. “[P]lainly not every difference between foreign and New York law threatens [New York] public policy.” Cooney v. Osgood Mach., Inc., 612 N.E.2d 277, 284 (N.Y. 1993). Ruby Has instead must show that enforcement would “result in approval of transaction that is inherently vicious, wicked or immoral, and shocking to prevailing moral senses.” Boss v. Am. Exp. Fin. Advisors, Inc., 791 N.Y.S.2d 12, 14 (1st Dep't 2005), aff'd, 844 N.E.2d 1142 (N.Y. 2006).
Ruby Has has not met its burden. Ruby Has asserts that application of Delaware law would violate New York public policy because New York “does not permit expectation damages” and “such an award would ‘in effect, be transforming an agreement to negotiate for a contract into the contract itself.'” Dkt. No. 129 at 17 (quoting Goodstein Const. Corp., 604 N.E.2d at 1361). It argues that New York public policy is to “avoid trapping parties in surprise contractual obligations that they never intended,” Dkt. No. 129 at 18 (quoting Adjustrite Sys., Inc., 145 F.3d at 548), and that New York has an interest in maintaining its status as the “preeminent commercial and financial nerve center of the . . . world,” Id. (quoting Ehrlich-Bober & Co., Inc. v. Univ. of Houston, 404 N.E.2d 726, 731 (N.Y. 1980)). The former “public policy,” however, is simply a “notion[ ] of . . . fairness,” or that Delaware law is “unreasonable or unwise.” Schultz, 480 N.E.2d at 688. It is not comparable to instances in which New York courts have found a violation of public policy-e.g., violations of antidiscrimination and human rights law. See Welsbach Elec. Corp., 859 N.E.2d at 501. Ruby Has's argument is merely a statement of the difference between New York and Delaware law. It does not itself demonstrate the existence of a policy, the violation of which would be “shocking to prevailing moral senses.” Boss, 791 N.Y.S.2d at 14. Delaware law permits the award of expectation damages, in limited circumstances, where there is a Type II agreement. New York law categorically does not. The laws of the two states do not impose different obligations on the parties-they just give rise to different measures of damages when those obligations are violated. If New York law here were a “policy” and the application of Delaware law a violation of New York public policy, then potentially application of any foreign law that differed from New York law would be a violation of public policy. Likewise, broad descriptions about the commercial significance of New York does not constitute a policy arising from the “State Constitution, statutes and judicial decisions.” Cooney, 612 N.E.2d at 284. Ruby Has fails to cite any authority from a legal source indicating that awarding expectation damages based on the breach of the duty to negotiate in good faith is offensive to New York's public policy. Because Delaware law, by its terms, is contingent only upon certain narrow factual findings, it is not one of “those foreign laws that are truly obnoxious.” Id. at 285.
Plaintiff's contention that the “heavy burden” of demonstrating the public policy exception does not apply in preliminary agreements has no merit. Dkt. No. 163 at 5. It is immaterial whether the choice-of-law provision arises in fully binding or preliminary agreements for the reasons previously described. The preliminary agreement imposes a binding obligation on the parties to negotiate in good faith.
However, Ruby Has's argument that the LOI and the transaction contemplated by it are not reasonably related to Delaware has merit. In assessing whether there is a reasonable relationship, New York “courts have looked to the location of the following factors: the parties' negotiation of the agreement; performance under the agreement, including where loan payments were received; the parties' places of incorporation; the parties' principal places of business; and the property that is the subject of the transaction.” Madden v. Midland Funding, LLC, 237 F.Supp.3d 130, 148 (S.D.N.Y. 2017) (citing New York law). Here, the only relationship that the LOI or the transaction has to Delaware is that Cambridge, like many corporations in the United States, is incorporated in the State of Delaware. Dkt. No. 115 ¶ 2. All of the other contacts are outside of Delaware; many are tied to New York. Ruby Has is an e-commerce company incorporated in New York with its principal place of business in New York. Id. ¶ 5. Ruby Has's headquarters and one of its warehouses are in Bay Shore, New York. Id. ¶ 7. During the 2020 negotiations, Zakinov and Eliyahu resided in New York and negotiated from there. Dkt. No. 130 ¶ 25. Gordon and Smalley resided in Florida and negotiated from there. Id. On or about May 21, 2019, Cambridge and Ruby Has had an in-person meeting in New York City. Dkt. No. 118 ¶ 17; Dkt. No. 121-26. Cambridge's principal place of business is in Florida. Dkt. No. 115 ¶ 2. There is no evidence that any of the conversations after the parties signed the June 2020 LOI took place in Delaware. There is no evidence that Delaware counsel was involved. There is no evidence that Ruby Has has any facilities in Delaware or that the transaction would involve assets in Delaware.
There is some division of authority in this District regarding whether the state of incorporation of one of two parties to a contract, alone, is sufficient to create a reasonable relationship. Some courts have held that one party's state of incorporation is sufficient for the Court to apply the law of that state if the parties have chosen it in a contract. See, e.g., EMA Fin., LLC v. NFusz, Inc., 444 F.Supp.3d 530, 540-41 (S.D.N.Y. 2020); Power Up Lending Grp., Ltd. v. Danco Painting, LLC, 2016 WL 5362558, at *4 (E.D.N.Y. Aug. 10, 2016), report and recommendation adopted, 2016 WL 534 9784 (E.D.N.Y. Sept. 23, 2016). Other courts have held to the contrary. See, e.g., E. Cap. Invs. Corp., 590 F.Supp.3d at 677 (concluding that a party's incorporation in the contractually agreed upon state was insufficient and that the cases finding otherwise “are distinguishable”); Power Up Lending Grp., Ltd. v. Cardinal Energy Grp., Inc., 2019 WL 1473090, at *3 (E.D.N.Y. Apr. 3, 2019) (“The only contact of this transaction with Virginia is that Plaintiff was incorporated there. By contrast, the state of New York has numerous contacts with this transaction in that the Agreement was negotiated in New York, payments were received by a bank in New York, and Plaintiff's principal place of business is in New York.”); Am. Home Assurance Co. v. Hapag Lloyd Container Linie. GMBH, 2004 WL 1616379, *4 (S.D.N.Y. Jul. 19, 2004) (“The fact that defendant is a corporation formed under the laws of the state selected in the choice of law provision is not alone, enough to trigger the provision.”); see also Ideas v. 999 Restaurant Corp, 2007 WL 3234747 (N.Y. Sup. Ct. Oct. 12, 2007) (declining to give effect to a choice-of-law provision selecting Illinois law where, although the lender was an Illinois corporation, agreements were signed in New York, borrower was a New York corporation, the guarantor was a New York resident, and the action was initiated in New York). The latter cases are consistent with the general proposition that “while . . . a principal place of business being in the selected forum may create the requisite reasonable relationship, a broad statement that a company's ‘headquarters' are located in a state is not sufficient to meet the reasonable relationship requirement.” Fleetwood Servs., 2022 WL1997207, at *18 (citing Cap Gemini Ernst & Young, U.S., L.L.C. v. Nackel, 346 F.3d 360, 366 (2d Cir. 2003)).
The Court concludes that the better reasoned approach is that incorporation alone is insufficient to establish a reasonable relationship. Although parties to a contract have a private interest in ordering their own affairs, which is satisfied by the court's adherence to the agreement they reached as reflected in the words that they chose, choice of law is not a matter of private ordering alone. The state-and by extension the courts which are instrumentalities of the state- has an interest in the law which its courts are asked to apply. See Auten v. Auten, 124 N.E.2d 99, 102 (N.Y. 1954) (describing one of the underlying rationale's for New York's choice of law approach for contract disputes as “enabl[ing] the court . . . to reflect the relative interests of the several jurisdictions involved”); see also Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156, 162 (1946) (“Kentucky's interest in having its own laws govern the obligation cannot be minimized.”). Respect for freedom of contract ends, and the state's independent interest attaches, where the law chosen is “wholly fortuitous and bears no real relation either to the contract or to the parties.” Restatement (Second) of Conflict of Laws § 187, cmt. f. Comment f to the Restatement (Second) of Conflicts of Law states, with respect to the reasonable relationship requirement, that such relationship will be established “for example, when th[e] state is where performance by one of the parties is to take place or where one of the parties is domiciled or ha[s] his principal place of business.” Id. New York law has long held that the “domicile of a corporation for choice-of-law purposes is the State where it maintains its principal place of business,” Dorsey v. Yantambwe, 715 N.Y.S.2d 566, 570 (4th Dep't 2000); see also Gould Electronics Inc. v. United States, 220 F.3d 169, 184 (3d Cir. 2000) (“For purposes of New York choice of law, a corporation is domiciled where it has its principal place of business.”). For choice-of-law purposes, “citizenship is not domicile.” Dargahi v. Hymas, 2007 WL 2274861, at *4 (S.D.N.Y. Feb. 9, 2007) (“[D]omicile rules for business trusts for choice-of-law purposes may differ from domicile rules for business trusts for other purposes.”); Weisberg v. Layne-New York Co., 517 N.Y.S.2d 304, 306 (2d Dep't 1987) (“While the defendant [corporation] is a New York domiciliary by virtue of its having incorporated in New York . . . for choice-of-law purposes, it must be treated as a New Jersey entity inasmuch as it maintains its principal place of business in that State and thus, it may be said that its corporate presence is much more pronounced in that State than in either New York or New Hampshire.”); see also Restatement (Third) of Conflict of Laws § 2.01(3) (Tentative Draft No. 2 (March 25, 2021)) (“A juridical person is presumed to have a domicile in the principal place of business for resolving a particular choice-of-law issue.”); Id. § 2.08(2) (“For choice-of-law purposes only, the juridical person's domicile is presumed to be where it has its principal place of business.”). Further, “New York permits a party to have but one domicile at a time.” Hatfill v. Foster, 415 F.Supp.2d 353, 368 (S.D.N.Y. 2006).
“A domicile is one's principal and permanent place of residence where one always intends to return from wherever one may be temporarily located and from which one has no present intention of moving.” 49 N.Y. Jur. 2d Domicil and Residence § 3 (citations omitted); see also King v. Car Rentals, Inc., 813 N.Y.S.2d 448, 452 (2d Dep't 2006). A corporation's principal place of business will generally have some sense of permanency. It is the location a corporation has chosen to make a home. The law of the principal place of business of one of the parties to a contract thus is entitled to be honored where, in a multi-state transaction, the parties have chosen that law to be applied. See Nackel, 346 F.3d at 366. By contrast, the place of a party's incorporation may be wholly transitory or fortuitous. It may be chosen for historical reasons relating to the internal affairs of the corporation or preferential tax treatment. No person who actually works for the corporation may have ever stepped into the state of incorporation, nor transacted any business from that location. No assets may be located in the state of incorporation. Under New York law, mere incorporation is not the corporation's domicile. It is neither a permanent nor principal home; it may also be readily changed. In that circumstance, application of the state of incorporation to render an otherwise ineffective choice-of-law provision effective would no longer achieve the purpose of the conflict-of-laws doctrine-to allow parties “in multistate transactions [to] choose the law to govern the validity of the contract and the rights created thereby” and thereby to achieve “certainty and predictability” where application of the background conflict of laws principles might not be certain. Restatement (Second) of Conflict of Laws § 187, cmt. e. Application of the law of the state of incorporation would become a means by which one or the other parties can foist on the court a law that might be convenient to it (or to them) but otherwise alien to the transaction.
Tellingly, each of the illustrations within the Restatement (Second) of Conflict of Laws § 187 refers to the parties' domicile, and not specifically to its state of incorporation. Cf. Restatement (Second) of Conflict of Laws § 203 (usury) (indicating as significant contacts the “principal place of business of the lender”).
Here, if Cambridge's state of incorporation was all that sufficed to establish a reasonable relationship to a term in the contract, then any party to a commercial transaction could effectively deprive the state where the transaction was negotiated or is to occur, or where the parties are located and whose resources are thereby asked to be brought to bear on a dispute, of the prerogative to apply and develop its own law to the dispute's resolution. Carried to its limits, application of that principle could drain state law, particularly those jurisdictions with interests in the conflict, of any independent vitality. It would transform the doctrine of conflict of laws into purely a subject of contract. It would also permit parties to opt into and out of choice-of-law provisions willy-nilly, particularly in high stakes transactions or matters, changing its state of incorporation from that chosen by the parties when that law no longer suits it and keeping its state of incorporation with that chosen by the parties when that law is of some particular advantage. See, e.g., Cunningham Charter Corp. v. Learjet, Inc., 870 F.Supp.2d 571, 581 n.5 (S.D. Ill. 2012) (noting a change in state of incorporation as part of choice of law analysis); Matter of Allstate Ins. Co. (Stolarz), 613 N.E.2d at 939 (noting how private interests affect the “center of gravity” analysis for choice of law in contracts cases); see also Auten, 124 N.E.2d at 102; Cooney, 612 N.E.2d at 280 (noting the undergirding goal transforming the choice-of-law regime to “give controlling effect to the law of the jurisdiction which, because of its relationship or contact with the occurrence or the parties, has the greatest concern with the specific issue raised in the litigation”). So understood, application of the state of incorporation as the sole determinant of whether a choice-of-law provision is effective would not necessarily satisfy the interest of parties in knowing ex ante “the extent of their rights and duties under the contract.” Restatement (Second) of Conflict of Laws § 187, cmt. f. It would raise difficult questions of determining when to assess a party's state of incorporation and whether a business's transitory incorporation in a particular state would be sufficient to create a reasonable relationship. At the same time, it would undermine the interest that conflicts-of-law doctrine is designed to achieve-that the state whose law is to be applied has some other-than-fortuitous relationship to the transaction.
The Court concludes that the choice of law clause is unenforceable, and as a result, New York law applies because the center of gravity of contacts resides within New York for the reasons previously described. See Cotiviti, Inc. v. Deagle, 501 F.Supp.3d 243, 257 (S.D.N.Y. 2020) (undertaking a traditional conflict of law analysis once the choice of law clause was disregarded). Accordingly, expectation damages are unavailable for Cambridge even if they show a violation of the duty to negotiate in good faith.
B. Application of Delaware Law
Even if the Court concluded that Delaware was applicable here, Ruby Has would be entitled to summary judgment as expectation damages, on this factual record, are unavailable under Delaware law.
The principal case under Delaware law is SIGA Techs., Inc., 67 A.3d 330. This Court has previously described the facts of SIGA, but reiterates them in greater detail here, with the purpose of explaining the Delaware Supreme Court's award of expectation damages. As previously noted, SIGA involved a complex set of agreements between two companies engaged in biodefense research and development, SIGA and PharmAthene. SIGA owned the rights to an antiviral drug for the treatment of smallpox (“ST-246”) which was still in development, but SIGA was in desperate need of cash. Id. at 334. SIGA's largest shareholder, MacAndrews & Forbes, was unwilling to invest additional money and NASDAQ had threatened to delist its shares. Id. PharmAthene had both the cash and the administrative capabilities that SIGA needed. The LATS, the Type II agreement at issue, was agreed to by the parties in connection with a merger term sheet pursuant to which PharmAthene would acquire SIGA, as well as a bridge loan agreement pursuant to which PharmAthene loaned SIGA $3 million for expenses relating to the merger, developing ST-246, and overhead. Id. at 337. SIGA had asked PharmAthene to provide bridge financing so that SIGA could continue developing ST-246 while merger negotiations proceeded. Id. at 336. PharmAthene agreed on the condition that PharmAthene would obtain at least a license for ST-246 if the merger fell through. Id. The draft merger term sheet had indicated that the parties would also negotiate the terms of a definitive license agreement that would only become effective if the merger fell through. Id. at 336-37. When PharmAthene asked that the parties simultaneously execute a merger agreement and a license agreement for ST-246 in case the merger did not close, SIGA's Board Chairman, Donald Drapkin, told PharmAthene that he was not going to pay lawyers to draft a formal license agreement, and instead suggested that the parties attach the LATS to the merger term sheet and the merger letter of intent. Id. at 337. The parties had previously negotiated the LATS, but had put it aside when PharmAthene decided it wanted to purse a merger rather than a license agreement. Id. Drapkin assured PharmAthene that it would thus get its license if the merger did not close. Id. According to the Vice Chancellor who heard the case, Drapkin told PharmAthene that “this approach would be as good as a license agreement and would guarantee PharmAthene, at a minimum, a license if the negotiations for a merger fell through.” Id. With the merger term sheet thus finalized, with the LATS attached, the parties ten days later entered into the bridge loan agreement for the loan of $3 million from PharmAthene to SIGA. Id. The bridge loan agreement also attached the LATS and included language that the parties would negotiate a definitive license agreement in good faith if the merger fell through. Id. at 337-38.
The terms of the LATS contemplated a license agreement that would grant PharmAthene a worldwide exclusive license to develop, make, and sell products including the right to grant sublicenses, covering ST-246 and all other patents and know-how related to ST-246, in exchange for a license fee of $6 million in total, an additional $10 million in milestone payments, and annual royalty payments. Id. at 336. It also included the establishment of a development committee and various noneconomic terms. Id. It was critical to the court's decision in SIGA that the parties did not just document “the principal terms of their agreement in the LATS [but also] reaffirmed and re-incorporated those terms in their subsequent written agreements,” evincing “a shared intent to be bound.” Black Horse Cap., LP v. Xstelos Holdings, Inc., 2014 WL 5025926, at *16 (Del. Ch. Sept. 30, 2014). Although the LATS included a footer indicating that it was “Non Binding Terms,” SIGA Techs., Inc., 67 A.3d at 336, the bridge loan agreement provided that “[u]pon any termination of the Merger Term Sheet . . ., termination of the Definitive Agreement relating to the Merger, or if a Definitive Agreement is not executed . . ., SIGA and PharmAthene will negotiate in good faith with the intention of executing a definitive License Agreement in accordance with the terms set forth in the [LATS],” id. at 337-38. The bridge loan agreement gave the parties 90 days of exclusivity to execute such an agreement, during which time SIGA would not be able to initiate or engage in discussions regarding a competing transaction. Id. at 338. The LATS did not contain any language, similar to that in the June 2020 LOI, where the parties expressly stated that “no obligation exists on behalf of either Cambridge to pay the Purchase Price or on behalf of the Company to sell the units prior to entering into the share purchase agreement.” Dkt. No. 121-1 at ECF p. 6. While the LATS expressed the intention that the parties would “execut[e]” a definitive license agreement, SIGA Techs., Inc., 67 A.3d at 337-38, the June 2020 LOI at issue here provided only the intent of the parties to “proceed with the drafting of the share purchase agreement and collateral documents contemplated hereby in accordance with the principles stated herein,” Dkt. No. 121-1 at ECF p. 6.
With both the bridge loan agreement and the merger term sheet and their incorporation of the LATS in hand and with Drapkin's assurances, PharmAthene provided SIGA with the financial and administrative support it needed to develop the drug and avoid delisting. SIGA Techs., Inc., 67 A.3d at 338. Moreover, “SIGA's key representatives understood that PharmAthene and SIGA were likely to enter into a lasting relationship, either by a merger agreement or a license agreement,” until- after SIGA had achieved several critical milestones in the development of the drug and received funding-SIGA “began experiencing seller's remorse.” Id. In particular, SIGA “received a $5.4 million dollar grant from the National Institutes of Health,” its audit committee “approved an agreement with a clinical trial organization to perform the first human trial of ST-246,” “the National Institutes of Health awarded SIGA $16.5 million to develop the drug,” id., and, shortly after SIGA rejected PharmAthene's request to extend the drop-dead date for the merger agreement based on the SEC's delay in approving the draft proxy statement for the transaction, SIGA publicly announced that “ST-246 provided 100% protection against smallpox in a primate trial,” id. at 339. SIGA then terminated the merger agreement, and following the ensuing negotiations for the licensing agreement, SIGA proposed a significant increase in payment from the LATS: $40-45 million upfront payment and a 50-50 profit split. Id. at 339. SIGA agreed to draft a formal proposal and send it to PharmAthene. But when SIGA provided such proposal, SIGA further radically increased the price of all of the provisions in its favor. Those changes included increasing the June 2020 LOI upfront payment to $100 million, increasing milestone payments from $10 million to $235 million, more than doubling all of the royalty percentages, among other economic and noneconomic terms benefitting SIGA. Id. at 339-40.
The Vice Chancellor found that SIGA failed to negotiate in good faith and the Supreme Court of Delaware ruled, on these facts, that PharmAthene could receive an award of expectation damages based on the terms of the LATS. The Supreme Court of Delaware stated that “where a trial judge makes a factual finding, supported by the record, that the parties would have reached an agreement but for the defendant's bad faith negotiation . . . a trial judge may award expectation damages.” Id. at 333-34. The Supreme Court relied on “two key factual findings, supported by the record: (1) the parties memorialized the basic terms of a transaction in the LATS, and expressly agreed in the Bridge Loan and Merger Agreements that they would negotiate in good faith a final transaction in accordance with those terms and (2) but for SIGA's bad faith negotiations, the parties would have consummated a license agreement.” Id. at 351.
Courts in Delaware have interpreted SIGA narrowly. In White Winston Select Asset Funds, LLC v. Good Times Restaurants, Inc., 2022 WL 1659161 (D. Del. May 25, 2022), the court read SIGA not as standing for the absolute proposition that expectation damages are available for breach of a preliminary agreement to negotiate but rather for the more limited proposition that “damages for breach of a preliminary agreement depend on the agreement's terms.” Id. at *1 (citing SIGA Techs., Inc., 67 A.3d at 349-50). The letter of intent there, like the June 2020 LOI here, “memorialized the parties' tentative assent to a sale price, deal structure, and financing,” but did not constitute an obligation or commitment to enter the final deal. Id. at *2. The court held that the plaintiff was entitled only to reliance damages, and not expectation damages, for its counterpart's failure to negotiate the final terms of an agreement in good faith. Because the letter of intent in White Winston did not commit the parties to “final terms or offer enough information to calculate expectation damages,” constituting what the court termed a “Type III” agreement, the parties were limited to reliance damages. Id. at *3.
The decision in 37celsius Capital Partners, L.P. v. Intel Corp., 2021 WL 4843858 (E.D. Wis. Oct. 18, 2021), also relied upon by Ruby Has, is less directly on point. In 37celsius, the parties signed a letter agreement which incorporated a sheet containing the terms of a potential transaction which was subject to due diligence and the drafting of a definitive agreement. As here, the parties agreed that the exclusivity provision of their agreement would be legally binding but that they would not be bound to enter into any further binding agreement. Id. at *1. The court held that expectation damages were not available for breach of the exclusivity provision, holding that a factfinder could not find that, but for breach of that provision, the parties would have closed a transaction, and distinguishing SIGA. Id. at *7. But in 37celsius, the parties expressly provided (in a non-disclosure agreement that was incorporated by reference) that neither party would be liable for “lost profits or loss of business, in connection with not moving forward to conclusion of the discussions or negotiations,” id. at *1, 5, and, in language in the term sheet broader than that here, that “unless and until the parties sign and deliver a definitive agreement with respect to a particular transaction, neither party will be under any legal obligation of any kind whatsoever regarding any transaction by virtue of this Term Sheet or any written or oral expression with respect to any transaction . . . except for the matters specifically agreed to in this Term Sheet,” id. at *3 (emphasis added). The court in 37celsius relied on those provisions, reasoning that “[b]ecause the Non-Disclosure Agreement expressly states that under no circumstances will either party be liable to the other for any costs or damages of any kind, including lost profits or loss of business, in connection with not moving forward to conclusion of the negotiations, Intel had no reason to foresee that a probable result of a breach of the Exclusivity provision in the Term Sheet would be exposure to lost profits and lost value resulting from 37celsius not acquiring Care.” Id. at *6. Thus, while 37celsius is supportive of Ruby Has's argument that the appropriate question is what was reasonably foreseeable to the parties at the time of contracting, the decision does not compel a result in favor of Ruby Has. The court in 37celsius does not hold that the language used by the parties, which may be advisable in the future, is necessary to cap relief for breach of an agreement to agree to reliance damages. The question in Black Horse Cap., LP v. Xstelos Holdings, Inc., 2014 WL 5025926 (Del. Ch. Sept. 30, 2014), also relied upon by Ruby Has, was whether the parties had an agreement at all and not what damages would be available for a breach. Thus, while it is instructive for that court's description of its own prior findings in SIGA, it also does not directly bear on the question of the damages available for breach of a Type II agreement of the sort at issue here.
This case is distinguishable from SIGA in several material respects. First, based on the Chancery Court's description of the parties' dealings, the damages sought in SIGA would have been reasonably foreseeable. In essence, the court in SIGA concluded that the set of agreements there performed a risk allocation function. PharmAthene extended $3 million in financing and promised SIGA administrative support in exchange for the understanding that it would share in the proceeds that such financing would help generate, either in the form of a merger or of a licensing agreement. Having taken the financing, and having provided PharmAthene assurances through the merger term sheet, the bridge loan agreement, and Drapkin's statements that if the parties could not execute a merger, they would execute a license agreement, SIGA could not then turn around, when it no longer needed the financing and the drug had hit pay dirt, to say that it was no longer interested in a license on the terms previously envisioned. To do so would be to deprive PharmAthene of the benefit of the bargain it had negotiated. PharmAthene did not just agree to expend time and resources negotiating the terms of a merger agreement and license agreement that was not consummated. It also agreed to give SIGA funding and administrative support on the understanding that while it might lose that investment if the merger was consummated and the drug was a failure, it would reap the benefit of the investment once the merger was consummated, and the drug was a success. See Choi & Triantis, Preliminary Agreements, 98 Tex. L. Rev. at 475 (“By pointing to the ‘seller's remorse' in having given up huge profits from the multibillion-dollar drug, the court implicitly interpreted the term sheet as having allocated most of the upside to PharmAthene. The implication of the court's opinion is that a party such as SIGA could not use supervening events that would improve its bargaining position to extract better terms from PharmAthene.”).
The June 2020 LOI cannot be read to have performed a similar risk allocation function. It did not provide for Cambridge to make any investment in Ruby Has. The only expenditures Cambridge was required to make were on its own account to conduct due diligence and to negotiate the terms of a future investment. Thus, while it would have been reasonably foreseeable to the parties that Cambridge would be damaged in the cost and expense it incurred in due diligence and negotiations from a negotiation that-as a result of Ruby Has's alleged bad faith-was ultimately fruitless, it would not have been within the contemplation of the parties that Cambridge also would be entitled to receive, in the form of damages, compensation for the lost benefits from an investment it never had to make or had any legal right to make. That interpretation is only confirmed by the express terms of the LOI which provided that, just as Ruby Has was not required to accept an investment, Cambridge was not required to make one. Dkt. No. 121-1 at ECF pp. 5-6. As long as Cambridge did not act in bad faith, it could reject even a reasonable proposal by Ruby Has. The parties were not obligated to consummate an agreement. Further, the expiration of the exclusivity period removed any assurance that Cambridge would be the party making the deal. A third-party rival was entitled then to capitalize on the Cambridge's inability to secure the purchase. Cambridge's legal position thus would have it enjoy all of the upside benefit of the parties' failed negotiations without taking any of the downside risk.
Second, unlike in SIGA, where the parties understood that they would reach a lasting relationship and where the court thus was able to make a finding that the parties would have reached an agreement but for the defendant's bad faith negotiation, there is no such evidence here. In SIGA, the Chancery Court's factual finding was based upon the presumption that there was a zone of possible agreement between the parties that would have been reached absent the bad faith behavior of Drapkin. PharmAthene, the plaintiff, “was willing to agree to a license agreement for ST-246 on terms that varied ‘to some extent' from the LATS.” Pharmathene, Inc. v. Siga Techs., Inc., 2011 WL 4390726, at *38 (Del. Ch. Sept. 22, 2011). One variation that PharmAthene would have accepted was “the use of a 50/50 profit split.” Id. After SIGA proposed economic terms that “bore no meaningful resemblance to the LATS,” PharmAthene again “expressed a willingness to consider increasing the upfront payments to SIGA prescribed by the LATS and to introduce a broader profit sharing component.” Id. But here, there is no evidence that at any point within the 120 days of negotiation there was a zone of possible agreement between the parties. During that time, the parties exchanged multiple iterations of their deal points memo. Many of the key terms, such as the purchase price, the amount of equity granted to the Ruby Has founders, the payment of transaction expenses, the insistence on payment of debt and an increase in cash on hand, and indemnification, were never resolved. The Deal Points Memo from August 11, 2020 evinced disagreement over the reduction of certain debt from the liquidity proceeds to Ruby Has, or what the founders would receive from the transaction. Dkt. No. 151-2 at ECF p. 1. That was followed by the Revised Deal Points of August 31, 2020, which again showed disagreement over the true-up of cash and working capital, which would also be taken out of liquidity proceeds otherwise payable to the founders. The final proposal from Cambridge at the original LOI price of $20 million dollars was only at the cost of an additional 3% in equity-a term that was unacceptable to Ruby Has. The Court cannot award expectation damages to Cambridge when the history of extensive negotiations revealed no zone of possible agreement.
IV. Cambridge's Liability for Ruby Has's Fraud Counterclaims
Cambridge moves for summary judgment dismissing its liability on Ruby Has's fraud counterclaims. The fraud counterclaims allege, inter alia, that (1) Cambridge affirmatively misrepresented that it had funds on hand and ready to invest in Ruby Has if a deal was reached and (2) Gordon made an actionable omission when describing himself as a victim in the Ability matter, when in fact he was a defendant in the investor lawsuit and subject to an SEC investigation and Consent Order. Dkt. No. 71 ¶¶ 104-05. Cambridge argues that a reasonable jury could not find that Ruby Has either actually or reasonably relied on either set of misstatements or omissions. Dkt. No. 119 at 21-23.
To show reliance for the purposes of a fraud claim, “[a] plaintiff's burden is twofold. First, he must show actual reliance-that he actually relied on the information being disclosed- and, in addition, he has to show reasonable or justifiable reliance-that a reasonable participant would have considered the withheld information important in making [the] decision.” Banque Arabe Et Internationale D'Investissement v. Maryland Nat. Bank, 850 F.Supp. 1199, 1222 (S.D.N.Y. 1994), aff'd, 57 F.3d 146 (2d Cir. 1995); see also Harris v. Camilleri, 431 N.Y.S.2d 65, 68 (2d Dep't 1980) (“It is well established that to recover in an action grounded upon fraud the plaintiff must be able to demonstrate ‘deception,' i.e., that he relied upon the defendant's representations and that the foregoing was reasonable and justifiable under the facts of the particular case.”). It thus is not sufficient that a party have actually relied on a misstatement. Particularly in a transaction such as this, the party claiming fraud must at least have conducted “minimal diligence” and not have been reckless. See Banque Franco-Hellenique de Com. Int'l et Mar., S.A. v. Christophides, 106 F.3d 22, 27 (2d Cir. 1997) (citing Royal Am. Managers, Inc. v. IRC Holding Corp., 885 F.2d 1011, 1015-16 (2d Cir. 1989)).
The reasonability of a plaintiff's reliance depends on “the entire context of the transaction, including factors such as its complexity and magnitude, the sophistication of the parties, and the content of any agreements between them.” Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189, 195 (2d Cir. 2003). “[B]ecause justifiable reliance ‘involve[s] many factors to consider and balance, no single one of which is dispositive,' it is ‘often a question of fact for the jury rather than a question of law for the court.'” Fed. Hous. Fin. Agency v. JPMorgan Chase & Co., 902 F.Supp.2d 476, 496 (S.D.N.Y. 2012) (quoting STMicroelectronics, N.V. v. Credit Suisse Securities (USA) LLC, 648 F.3d 68, 81 (2d Cir. 2011)).
A. Cambridge's Statements Concerning Cash on Hand
Cambridge argues that it is entitled to summary judgment on Ruby Has's counterclaim that Cambridge falsely stated it had cash “on hand,” on the theory that Ruby Has did not actually rely on Cambridge's statements because Ruby Has knew that Cambridge was an “independent sponsor” and therefore knew that it “raised money on a deal by deal basis.” Dkt. No. 119 at 21.
Cambridge's argument distorts the sequence of events. Ruby Has's claim primarily is based on the notion that Cambridge misrepresented that it had cash on hand at the time Ruby Has was induced to sign the June 2020 LOI and that it was not disabused of that notion until midNovember 2020. Dkt. No. 143 at 23-25. Ruby Has claims that it relied on the misstatements regarding Cambridge's access to cash in agreeing to the June 2020 LOI and, on or about September 15, 2020, in agreeing to extend the period of exclusivity. There is evidence in the record from which a reasonable jury could find that, “before the [LOI] was signed, Gordon told [Zakinov] that Cambridge had the cash on hand needed for this proposed transaction.” Dkt. No. 145 ¶ 28 (Zakinov declaration). Zakinov also testified that in the introductory call between the parties, Cambridge “told us that they specifically raised the capital to make an investment in fulfillment and they were in talks with others, and they were very eager to deploy the capital to make it get to work,” and that “[Gordon] mentioned that they had over $40 million in capital.” Dkt. No. 142-14 at 75-76. Gordon said that it was “money in Cambridge's coffers,” not “invested in some other fashion,” and that it “was Cambridge's money to invest.” Id. at 76-77; see also id. at 81 (describing a subsequent conversation in which Gordon told Zakinov “I actually have $70 million in the bank account. Maybe [the Mermelsteins] would be interested in selling everything.”). Eliyahu similarly testified that he understood that Cambridge “had money in the bank” and that the investors “had given them capital to do so,” and that Cambridge did not raise “money on a deal-by-deal basis.” Dkt. No. 142-17 at 86-87. “The basic gist was that he had the money to be able to close the deal immediately.” Id. at 86. He recalled Gordon stating that “he had [$40 million] to invest,” and that “[w]hen we were going through the LOI, he told us upfront, when he sign[ed] it, he's ready to close, he's got the money, he's ready to close, he wants to do this deal and let's get it done as quickly as possible.” Id. at 85. Eliyahu elaborated that the understanding was “that we would be able to deploy the capital and capitalize it going into the holiday.” Id. at 85-86.
There also is evidence in the record from which a reasonable jury could find that Cambridge continued to represent that it had funds on hand through the time Ruby Has agreed to an extension of the exclusionary period in September 2020. Zakinov declares again that “[w]e received confirmation from Cambridge that the funds were on hand before we agreed to extend the exclusivity period by 30 days,” and that “[w]e would not have agreed to extend the exclusivity period and continue negotiations without confirmation . . . that Cambridge already raised the funds and had it available to close.” Dkt. No. 145 ¶ 35. He declares that he had several conversations at or around that time of September 2020 in which there were several confirmations that the funds were available. Id. ¶¶ 32-34. Kaplun, Ruby Has's counsel for this purchase transaction, declares that on a call with Smalley on September 4, 2020, Smalley told him that “we have the money and we can even raise more if we need.” Dkt. No. 146 ¶ 4. Kaplun also declared that Ruby Has added a representation and warranty entitled “Sufficiency of Funds” to the draft purchase agreement to confirm that Cambridge had already raised the funds to engage in the transaction with Ruby Has. Id. ¶¶ 7-8; see also Dkt. No. 131-25 at ECF p. 9. Eliyahu testified as to his “understanding from [Gordon]” that in October 2020, “the money was already in the bank, it was ready to close and be wired immediately. So our understanding at the time was these were people who invested, including the Muellers who I believe he said put in $30 million for this investment.” Dkt. No. 142-17 at 82-83.
Cambridge relies for its summary judgment motion on text messages between Zakinov, Avrami, and Eliyahu in September 2020. See Dkt. Nos. 151-36, 151-37. In the first text message on September 4, 2020, Zakinov speculates that a limited partner might refuse to provide funds to Cambridge to engage in the transaction unless a certain deal term is changed. Dkt. No. 151-37. The text from Zakinov specifically states, “remember they don't have a fund so they can be twisted for this if they want the money.” Id. In a second text message on November 2, 2020, to Zakinov, Kestenbaum states “Cambridge was getting a great deal yet again and moved too slow . . . Because they ‘re [sic] amateurs and don ‘t [sic] have an actual fund to deploy.” Dkt. No. 151-36. In her deposition, Kestenbaum admitted that when she wrote the message, she understood that Cambridge “hadn't in fact already raised the money” to invest in Ruby Has. Dkt. No. 160-19 at 219-20.
Although the evidence would require a reasonable jury to conclude that by November 2020, after the extension, Ruby Has knew that Cambridge had not raised the necessary funds, a reasonable jury could conclude otherwise as to Ruby Has's knowledge in June 2020 or even in September 2020. While the September 4, 2020 text message standing alone would support the conclusion that Ruby Has knew Cambridge did not have commitments to make an investment (how else would a limited partner be able to “twist” Cambridge's arms?), it does not stand alone. Zakinov states that in September 2020, Cambridge confirmed that it had the funds on hand, Dkt. No. 145 ¶¶ 32-35, and Kaplun states that Cambridge also confirmed that it had the funds on hand in a conversation on September 4, 2020, Dkt. No. 146 ¶ 4. That evidence is sufficient to give rise to a genuine issue of fact.
Cambridge also is not entitled to summary judgment on the issue of reasonable reliance. The Second Circuit has noted that the question of reasonable reliance is “nettlesome” and “factintensive.” Schlaifer Nance & Co. v. Est. of Warhol, 119 F.3d 91, 98 (2d Cir. 1997).
“[A]nalysis of justifiable reliance in fraud cases under New York law has taken account of the degree to which the truth was accessible to the defrauded person.” Banque Franco-Hellenique de Com. Int'l et Mar., S.A. v. Christophides, 106 F.3d 22, 26-27 (2d Cir. 1997). Although the defrauded party must show it exercised minimal diligence and was not reckless, there is no duty to exercise formal due diligence. Id. at 27; see also Ward v. TheLadders.com, Inc., 3 F.Supp.3d 151, 166 (S.D.N.Y. 2014) (same); Amusement Indus., Inc. v. Buchanan Ingersoll & Rooney, P.C., 2013 WL 628533, at *12 (S.D.N.Y. Feb. 15, 2013) (same). “A heightened degree of diligence is required where the victim of fraud had hints of its falsity.” Christophides, 106 F.3d at 27. As a result, “reasonable reliance ‘is a condition which cannot be met where, as here, a party has the means to discover the true nature of the transaction by the exercise of ordinary intelligence, and fails to make use of those means.” Arfa v. Zamir, 905 N.Y.S.2d 77, 79 (1st Dep't 2010), aff'd, 952 N.E.2d 1003 (N.Y. 2011). “Only when matters are held to be peculiarly within defendant's knowledge is it said that plaintiff may rely without prosecuting an investigation,' because the plaintiff would have ‘no independent means of ascertaining the truth.” Ward, 3 F.Supp.3d at 166 (quoting Crigger v. Fahnestock & Co., 443 F.3d 230, 234 (2d Cir. 2006)). Still, “[a]lthough a party may not justifiably rely on obviously false representations, recovery is not barred merely because plaintiff was negligent in such reliance.” Diduck v. Kaszycki & Sons Contractors, Inc., 974 F.2d 270, 278 (2d Cir. 1992), abrogated on other grounds by Gerosa v. Savasta & Co., Inc., 329 F.3d 317 (2d Cir. 2003). Finally, “[i]t is well established that where sophisticated businessmen engaged in major transactions enjoy access to critical information but fail to take advantage of that access, New York courts are particularly disinclined to entertain claims of justifiable reliance.” Lazard Freres & Co. v. Protective Life Ins. Co., 108 F.3d 1531, 1541 (2d Cir. 1997) (cleaned up). “The law is indulgent of the simple or untutored; but the greater the sophistication of the investor, the more inquiry that is required.” Crigger, 443 F.3d at 235.
Cambridge relies on the proposition that “Ruby Has never requested any information from Cambridge itself.” Dkt. No. 119 at 24. That fact certainly would support a jury verdict that Ruby Has was not reasonable. If it truly was important to Ruby Has that Cambridge had the funds available to make the investment, one would have expected it to have inquired whether Cambridge had a fund it was managing or at least had commitment letters from a sufficient number of investors.
At the same time, however, Cambridge overstates the case when it says that Ruby Has exercised no diligence. There is evidence from which a jury could find that the Ruby Has founders were not sophisticated. Smalley himself in emails with Gordon, stated that the Ruby Has founders were “not sophisticated ....” Dkt. No. 142-12 at ECF p. 3. See, e.g., Miller v. Genesco, Inc., 1996 WL 509663, at *5 (S.D.N.Y. Sept. 9, 1996) (“The Court finds a triable issue of fact as to whether Wasserspring and Evins were so experienced in business that they did not, and could not, have relied upon Drexel's purported independence.”). Cambridge stated that it had the funds on hand and it was credible. Before referring Cambridge to Zakinov, Kestenbaum looked up Gordon and vetted his investment history; she told Zakinov to “Look up ben gordon he's the guru of 3pl financing” Dkt. No. 121-22; Dkt. No. 142-15 at 32-33. In her diligence, Kestenbaum “saw that he had made some investments, that there were some investments connected to him,” and she also “saw that there was some . . . events that he led and sometimes in our industry that in itself is meaningful in terms of being connected.” Dkt. No. 142-15 at 33. Zakinov testified that they conducted due diligence through “their word, their website, their proclamations on Linkedin.” Dkt. No. 142-14 at 122. In addition to her own research, Kestenbaum also testified that the recommendation to reach out to Cambridge and work with them came from a long-time and trusted acquaintance in the industry. Dkt. No. 131-2 at 7, 25, 27; see also Dkt. No. 121-21. She testified that she “had been told by Richard Sherman that Ben Gordon had a reputation of being very active in our space” and that the email from Cambridge thus “felt meaningful.” Dkt. No. 142-15 at 32. Ruby Has was also not represented by “knowledgeable counsel” in negotiating the LOI. See Dkt. No. 130 ¶ 11. Cambridge's statements that it had cash on hand, for a private equity firm, would not have been surprising or raised any eyebrows. There is no evidence that in June 2020 Ruby Has had a suspicion that Cambridge's statements were inaccurate. Cambridge does not describe any “hints of . . . falsity” that should have prompted Ruby Has to investigate the claim that Cambridge had cash on hand. Christophides, 106 F.3d at 27. There also is no undisputed evidence that Ruby Has had ready and easy access to knowledge about Cambridge's funding. There thus is sufficient evidence for the jury to conclude that Ruby Has conducted the “minimal diligence” before signing the LOI sufficient for it to have actually relied on Cambridge's statement that it had the necessary funds available. Ward, 3 F.Supp.3d at 166.
Moreover, while Ruby Has had hired Kaplun by the time it agreed to the extension and thus is held to a standard of care greater than that applicable to an unsophisticated investor, there is evidence that, at that time, Ruby Has conducted due diligence on Cambridge. Kaplun asked Cambridge whether Cambridge had the funds available and Smalley stated that “we have the money and we can raise even more if we need.” Dkt. No. 146 ¶ 4. Ruby Has need not have asked for copies of the actual commitment letters for a jury to conclude that it reasonably relied on Cambridge's alleged misstatements.
B. Cambridge's Failure to Disclose the SEC Consent Order
Cambridge moves for summary judgment dismissing Ruby Has's claim of fraud for Gordon's failure to disclose a SEC Consent Order to which he was subject. Dkt. No. 119 at 2224. Cambridge argues that Ruby Has has failed to show, through discovery, either actual or reasonable reliance on the alleged fraudulent omission. Id. at 22-23.
Ruby Has's claim is based on the theory of actionable omission. At a dinner in Las Vegas in October 2020, Gordon told Zakinov and Eliyahu that he had been involved in a failed investment involving an unnamed Israeli company and Cambridge investors. Zakinov declares that Gordon told him and Eliyahu that he had been “defrauded by two individuals associated with the Israeli company, and that Cambridge investors were upset with him as a result.” Dkt. No. 145 ¶ 36. Gordon also “claimed there was a lawsuit and Gordon or Cambridge had paid some minimal amount of money to make it go away.” Id. Gordon did not mention that “he was accused by investors of being part of the fraud” or that he had entered a Consent Order with the SEC arising from the case. Id. ¶ 37. Eliyahu testified that Gordon told them that “[Cambridge] settled a lawsuit . . ., with an Israeli company that somehow screwed him over and defrauded him.” Dkt. No. 142-17 at 148. Gordon also told Eliyahu “[t]hat he lost . . . something like millions of dollars. That this company restated their financials right after they did a deal, and there was complete fraud and he lost millions of dollars....Something had cost him-there was some money in there that it cost him to appease his investors or something like that.” Id.
Eliyahu did not recall Gordon telling him the name of the company, nor did Eliyahu ask, nor was Eliyahu aware of anyone who asked what the name of the company was. Id. at 149-50. When asked whether it was his “understanding from that October conversation with Mr. Gordon that Mr. Gordon's investors were angry with him personally,” Eliyahu answered that “it sounded like the thing that [Mr. Gordon's investors] were angry with the most was the fact that they were defrauded and personally how he was defrauded.” Id. at 150. Eliyahu recalled the payment from Gordon as being “something nominal,” but he didn't recall how much Gordon had to pay, only that “[t]here was something he had to pay,” and “[i]t wasn't something that stood out as being millions of dollars.” Id. at 150-51.
What Gordon did not disclose at the dinner was that he had not just been defrauded, but that he himself had consented to the entry of a SEC Consent Order finding him to have willfully violated the anti-fraud provisions of the Securities Act of 1933, Section 17(a)(2) of the Securities Act of 1933, 15 U.S.C. § 77q(a)(2), as well as Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), and Rule 14a-9 promulgated thereunder, 17 C.F.R. § 240.14a-9, in connection with roadshow materials and the proxy statement issued in connection with the investment. Dkt. No. 131-30 ¶¶ 41-42. In particular, on June 20, 2019, the SEC issued the Consent Order, or an Order Instituting Administrative and Cease-and-Desist Proceedings, accepting Gordon's offer of settlement and finding Gordon in violation of the securities laws in connection with his role as the Chief Executive Officer, secretary, treasurer, and board member of a special purpose acquisition vehicle, Cambridge Capital Acquisition Corp., which merged in 2015 with an Israeli-based company selling cellular interception technology to police and military agencies, Ability. See Dkt. No. 131-30. The Consent Order found that Gordon signed roadshow materials and a proxy statement filed on Form S-4 with the SEC that contained false and misleading statements about Ability's technology and the backlog of customer orders it had received for that technology. Id. ¶¶ 22-40. Gordon agreed to a suspension for a period of twelve months from association with any broker, dealer, among other organizations, and to payment of a civil money penalty in the amount of $100,000 to the SEC. Id. ¶¶ B-C. The SEC found that while Ability supplied the misleading information and Gordon did not know of its falsity, Gordon “did not exercise reasonable care in ensuring the accuracy of . . . proxy materials, which Cambridge filed with the [SEC] and which were provided to the Cambridge shareholders,” even though the proxy statement stated that Cambridge had conducted a “thorough due diligence review” of Ability. Id. ¶ 4. The Consent Order also concluded that Gordon “negligently failed to provide investors complete and accurate information about Ability's backlog of orders and its prospects with its largest customer, [a] Latin American police agency.” Id. The SEC found that “Gordon was aware of sufficient information that should have reasonably required him to make more fulsome disclosures to the shareholders about the lack of additional third-party due diligence,” and that “by at least November 2015-before the second roadshow and the proxy vote-Gordon had learned that managers at the Latin American police agency, who had orally agreed to purchase Ability's products, had been terminated from their positions. Gordon also knew that a significant amount of the backlog that had no purchase orders was with this Latin American police agency. Gordon failed to take reasonable steps to ensure that these important facts were disclosed to all shareholders.” Id. ¶¶ 39-40.
Cambridge argues that Ruby Has's claim fails for proof of actual reliance and reasonable reliance. Dkt. No. 119 at 22-24. More specifically, Cambridge argues that Ruby Has cannot show actual reliance because Zakinov testified at his deposition that he was wholly unaware of any prior investment in Ability, and Eliyahu testified in his deposition that he had only a vague recollection of being told that Cambridge settled a lawsuit and lost millions of dollars and that he did not remember discussing the matters with other Ruby Has executives or asking the name of the company. Id. at 22-23. Cambridge reasons that if the two did not remember a conversation about the Ability transaction, then they could not have relied upon what Gordon said about that transaction. Cambridge also argues that Ruby Has cannot show reasonable reliance because it conducted no due diligence and never requested any information from Cambridge itself. Id. at 24. Had it done any diligence, Ruby Has would have readily discovered the SEC Consent Order as it was publicly available on the internet. Id. Those arguments may have some force at trial, but they are not sufficient to entitle Cambridge to summary judgment.
The fact that Zakinov and Eliyahu did not ascribe significance to Gordon's statements about Ability is not fatal to Ruby Has's claim. Both Zakinov and Eliyahu recalled having a conversation with Gordon in which the latter stated that he had been involved in a failed investment involving “an unnamed Israeli company.” Dkt. No. 145 ¶ 36. At his deposition, Zakinov was only asked whether he had spoken “to anyone at Cambridge concerning an investment [Cambridge] had made in a company called [A]bility.” He replied that he “did not” and that he “d[idn't] recall Ability.” Dkt. No. 160-21 at 245. He was not asked whether Gordon discussed an Israeli company or an investment that lost millions of dollars. Zakinov explains his failure to recall the company in his declaration, claiming that that “[w]hen Gordon told us of these events at the dinner in October 2020, he did not mention by name the company at issue.
After this case commenced, we learned about the SEC Order. At that time, the name was brought to my attention, but I do not recall what it is.” Dkt. No. 145 ¶ 41.
Cambridge argues that the Court should apply the sham affidavit rule to Zakinov's declaration. Dkt. No. 162 at 14. The sham affidavit rule provides “the principle that a party's affidavit, unsupported by any other evidence in the record, fails to raise a triable issue of fact when it conflicts with uncontroverted documentary evidence.” Wegrzyn v. Murphy, 2017 WL 3726480, at *1 (D. Conn. Aug. 29, 2017). There is no conflict with any documentary evidence. Further, Eliyahu's testimony corroborates the recollection within Zakinov's declaration and also the misleading nature of the omission, precluding application of the sham affidavit rule.
Moreover, Ruby Has does not claim here that it relied on Gordon's statements about Ability per se. Rather, it argues that the statements about Ability gave rise to a duty on the part of Gordon to disclose the Consent Order and that, had Ruby Has been told about the Consent Order, it would have refrained from taking action that it ended up taking as a result of its ignorance of that Consent Order. In short, it relies on a theory of omission, and under New York law, “[a] material omission can induce detrimental reliance as effectively as a false statement.” Investor Prot. Corp. v. BDO Seidman, L.L.P., 746 N.E.2d 1042, 1047 (N.Y. 2001).
Ruby Has has adduced sufficient evidence of actual reliance. As in the case of a misrepresentation, Ruby Has “must demonstrate that [it] was induced to act or refrain from acting to [its] detriment by virtue of the alleged . . . omission,” and that such reliance was “justifiable.” Ginsburg Dev. Companies, LLC v. Carbone, 22 N.Y.S.3d 485, 488 (2d Dep't 2015) (citation omitted); see also Connaughton v. Chipotle Mexican Grill, Inc., 75 N.E.3d 1159, 1163 (2017) (same); Spector v. Wendy, 881 N.Y.S.2d 465, 467 (2d Dep't 2009) (same); Shea v. Hambros PLC, 673 N.Y.S.2d 369, 373 (1st Dep't 1998) (stating that a claim of fraudulent inducement requires, inter alia, a “misrepresentation or a material omission of fact which was false . . . [and] justifiable reliance of the other party on the misrepresentation or material omission.” (citation omitted)); cf. Bermuda Container Line Ltd. v. Int'l Longshoremen's Ass'n, AFL-CIO, 192 F.3d 250, 258 (2d Cir. 1999) (stating that a claim for fraudulent concealment requires reliance that must be “reasonable or justifiable” (citing Banque Arabe et Internationale D'Investissement v. Maryland Nat'l Bank, 57 F.3d 146, 156 (2d Cir. 1995))). “The reliance element of fraud is essentially causation in fact.” Diduck v. Kaszycki & Sons Contractors, Inc., 974 F.2d 270, 278 (2d Cir. 1992), abrogated on other grounds by Gerosa v. Savasta & Co., Inc., 329 F.3d 317 (2d Cir.2003). “Thus, defendant's conduct need not have been the ‘exclusive inducing cause' of plaintiff's actions, but only an ‘essential or inducing cause.'” Id. (emphasis in original) (citing Restatement (First) of Torts § 546 (1938)).
It is not sufficient under New York law for Ruby Has to show that the omitted information would have been material to a reasonable person in Ruby Has's shoes. That test has been applied to federal securities cases under Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 151-54 (1972). In lieu of evidence of direct reliance, a presumption of reliance arises through a showing of materiality, which requires there to be “a substantial likelihood that a reasonable shareholder would consider it important in deciding how to act.” DoubleLine Cap. LP v. Construtora Norberto Odebrecht, S.A., 413 F.Supp.3d 187, 206 (S.D.N.Y. 2019) (quoting IBEW Local Union No. 58 Pension Tr. Fund & Annuity Fund v. Royal Bank of Scotland Grp., PLC, 783 F.3d 383, 389 (2d Cir. 2015)). The Affiliated Ute presumption provides an answer to the challenging question of how to permit a person, had it known of omitted information, to prove the counterfactual that it would have acted differently, without allowing every person experiencing sour grapes about a transaction to claim fraud and void the transaction by claiming that, had they known of some particular omitted information, they would have acted differently.
The Affiliated Ute presumption, however, has not been applied to common law fraud claims under New York law. See In re Lehman Bros. Sec. & ERISA Litig., 2013 WL 5730020, at *4 n.44 (S.D.N.Y. Oct. 22, 2013) (citing cases); Int'l Fund Mgmt. S.A. v. Citigroup Inc., 822 F.Supp.2d 368, 387 (S.D.N.Y. 2011) (stating that “[t]he Section 10(b) presumptions serve the specific prophylactic purposes of the federal securities laws, but are not appropriate in the common law context.”); Strauss v. Long Island Sports, Inc., 401 N.Y.S.2d 233, 237 (2d Dep't 1978) (“Accordingly, a distinction can and should be made between securities fraud cases and the case at bar.”). It thus is not enough for Ruby Has to show that the omitted information would have been important to a reasonable person in its position.
It also is not sufficient that Zakinov, in attempting to prove the counterfactual of what Ruby Has would have done had it known about Ability, asserts in his declaration that Ruby Has “would not have continued to negotiate the potential transaction with Cambridge for more than six weeks after that conversation.” Dkt. No. 145 ¶ 39. If that after-the-fact conclusory statement were all that Ruby Has offered, Ruby Has would certainly not have shown a “triable issue of fact as to whether it was induced to act or refrain from acting to its detriment due to any alleged misrepresentation or omission.” Ginsburg Dev. Companies, LLC, 22 N.Y.S.3d at 488-89. Otherwise, every plaintiff asserting a fraud claim on the basis of an omission could escape summary judgment simply by asserting that they would have acted differently had they known about the omission to demonstrate actual reliance. See Zottola v. Eisai Inc., 564 F.Supp.3d 302, 317 (S.D.N.Y. 2021) (dismissing fraud claims at the pleading stage when they “merely allege[d], in conclusory fashion, that she ‘reasonably relied' on Defendants' omissions, and that absent such omissions, she would not have purchased the Medications”); Int'l Fund Mgmt. S.A., 822 F.Supp.2d at 387 (dismissing an omission-based common law fraud claim on the basis of the assertion of reliance being “too conclusory to state a claim to relief”).
Ruby Has has done more, however. It has provided historical evidence from which a jury could find “direct evidence of reliance . . . upon the misrepresentations or omissions in question.” Feinberg v. Katz, 2007 WL 4562930, at *8 (S.D.N.Y. Dec. 21, 2007). Ruby Has was not just silent on issues regarding Gordon's character. Again, before entering the June 2020 LOI and deciding to do business with Cambridge, Kestenbaum looked up Gordon's background and vetted his investment history, Dkt. No. 142-15 at 32-33, and Zakinov testified that their due diligence paid attention to “their word, their website, their proclamations on Linkedin,” Dkt. No. 142-14 at 118. Zakinov declares he relied on Gordon's representation that he was “an honorable person, with an excellent reputation in the industry,” Dkt. No. 145 ¶ 40, and notes that “Gordon even referred to himself as ‘Keter Shem Tov,' which is a Hebrew phrase that means his ‘crowning glory is his good name,'” Id. Evidence of previous inquiries directed towards the omitted information is an indicator that there was actual reliance. See, e.g., Edmar Fin. Co., LLC v. Currenex, Inc., 2023 WL 3570017, at *9 (S.D.N.Y. May 18, 2023) (stating actual reliance allegations were sufficient at pleading stage when plaintiffs “actively monitored” website to review for features); Anderson v. Apple Inc., 500 F.Supp.3d 993, 1006 (N.D. Cal. 2006) (finding allegations sufficient for actual reliance when the “plaintiffs reviewed marketing and similar materials about the iPhone XR prior to making their purchase, which leads to a reasonable inference that they would have encountered the disclosure had it been made”). In that respect, the omitted information would not just have been important to a reasonable investor in Ruby Has's position; Ruby Has has demonstrated evidence from its historical actions from which a jury could find that the omitted information was important to Ruby Has. Indeed, Ruby Has demanded that the ultimate transaction contain a “bad actor” representation under SEC Rule 506, to the effect that board members would not have been subject to, inter alia, an SEC Consent Order such as Gordon's. Dkt. No. 131-26 at ECF p. 14; Dkt. No. 155 ¶ 24. As Zakinov explained in his declaration, “Gordon was central to this potential deal, as he was to sit on the Ruby Has board post-closing, and he was supposed to bring tremendous knowledge and assistance to helping us scale up our operations.” Dkt. No. 145 ¶ 39.
“Rule 506 permits sales of an unlimited dollar amount of securities to be made without Securities Act registration, provided that the requirements of the rule are satisfied.” Disqualification of Felons and Other “Bad Actors” From Rule 506 Offerings, 78 Fed.Reg. 44730-01, 44731 (July 24, 2013). “‘Bad actor' disqualification requirements . . . disqualify securities offerings from reliance on exemptions if the issuer or other relevant persons (such as underwriters, placement agents and the directors, officers and significant shareholders of the issuer) have been convicted of, or are subject to court or administrative sanctions for, securities fraud or other violations of specified laws.” Dkt. No. 63 at 13 n.3 (quoting 78 Fed.Reg. at 44731).
Ruby Has also has demonstrated that a triable issue exists as to reasonable reliance, although the issue is close. Cambridge argues Ruby Has failed to conduct any diligence at all and that, had it conducted any diligence, it would have discovered the Consent Order which was publicly accessible on the internet. It thus argues that Ruby Has could not have reasonably relied on the omission.
A reasonable jury, however, need not conclude that Ruby Has conducted no diligence.
As previously noted, when Cambridge first emailed Kestenbaum, Kestenbaum looked up Gordon, his investments, and presentation history before forwarding his email to Zakinov, and Gordon was recommended by a close long-time acquaintance of hers in the industry. Ruby Has also called other companies that Cambridge had invested in sometime between the signing of the June 2020 LOI and the end of 2020 and researched the company online. See Dkt. No. 142-15 at 135-36 (Kestenbaum's testimony); Dkt. No. 142-17 at 77-78 (Eliyahu ‘s testimony that he called “Guy Bloch at Bringg”); id. at 79-80 (identifying a second company); Dkt. No. 142-14 at 112-13 (Zakinov's testimony that he spoke to “Brian York” of “Lift-It”); see also supra Section IV.A. Ruby Has also received a “personal track record” of investments from Smalley as to investments that Cambridge had made. Dkt. No. 142-31. Although a basic internet search on Gordon might well have been expedient and advisable, Cambridge has cited no law that it was required, particularly for a company like Ruby Has, whom a jury could find was unsophisticated.
Nor were there any red flags in Cambridge's statements generally or in Gordon's statements about Ability, in particular, that would necessarily have required Ruby Has to conduct further diligence. A reasonable jury could conclude that Gordon had convinced Ruby Has to trust him. Again, Gordon was introduced to Kestenbaum through someone she trusted. Dkt. No. 130 ¶ 4. Zakinov declared that Gordon held out his “skill-set . . . and money raised to turn Ruby Has into a major player, even ‘a billion dollar business.'” Id. ¶ 8; cf. Phillips v. Better Homes Depot, Inc., 2003 WL 25867736, at *16 (E.D.N.Y. Nov. 12, 2003) (“If a jury finds that defendants intentionally steered Ms. Phillips to a lawyer, convinced her to trust them and that lawyer, and consciously led her down a false path of trust so as to profit from her ignorance, that is sufficient to establish reasonable reliance.”). The statements Gordon made about Ability were relatively anodyne. At a dinner, Gordon claimed that Cambridge was a victim of a company in which it was induced to invest, but which had misstated its financials, causing Cambridge a large loss. The statements would tend to explain why Cambridge was being careful in its diligence of Ruby Has and would not necessarily convey that Ruby Has should do further diligence before deciding to partner with Cambridge. Cambridge does not provide any reason why Gordon's representations should have placed Zakinov or Eliyahu on guard that something might be amiss or missing from the story. See Royal Am. Managers, Inc. v. IRC Holding Corp., 885 F.2d 1011, 1016 (2d Cir. 1989) (“[D]ecisions holding that reliance on misrepresentations was not justified are generally cases in which plaintiff was placed on guard or practically faced with the facts.” (citation omitted)).
The Court, on this record, cannot conclude that a jury would have to find that Ruby Has's reliance on Gordon's version of events was unreasonable.
V. Cambridge's Liability for Violation of an Oral NDA
Cambridge also moves for summary judgment to dismiss Ruby Has's counterclaim that Cambridge violated a purported oral NDA. Cambridge contends that the parties never agreed to an oral NDA with sufficiently definite terms to constitute a contract, and that even if they did, Ruby Has cannot show any damages from disclosure. Dkt. No. 119 at 24-26. Ruby Has disputes both points but concedes that it is only seeking nominal damages for violation of the oral NDA. Dkt. No. 143 at 28-30. For the following reasons, the Court grants Cambridge summary judgment on Ruby Has's counterclaim for breach of the NDA.
The first preliminary question is whether the parties discussed and reached agreement on an NDA with terms sufficiently definite for judicial enforcement. In April 2019, the parties executed a written NDA. That NDA, which was dated April 11, 2019, provided that it “shall terminate one year from the date hereof.” Dkt. No. 22-1. It thus expired on April 11, 2020.
There is evidence from which a reasonable jury could find that, in May 2020, the parties had discussions about whether to exchange documents pursuant to an NDA and believed that there was an NDA in effect. In particular, Zakinov testified that, on a phone call “on or about May 14, 2020,” “Avrami asked if we have an NDA in place” and that “[Gordon] reminded us that we do and [that] we should just continue on with the NDA that we have in place. And all parties agreed to use that NDA to cover the subsequent information and discussions we would be having.” Dkt. No. 142-14 at 247. Zakinov's testimony was not precise about the date of the call. Eliyahu also corroborated this account, stating that “[w]e talked about it initially, in our first call, that if we had an agreement that we then said we would be under the same agreement that we previously signed” and that “[w]e had previously signed one so we took it.” Dkt. No. 121-55 at 151-52. Eliyahu was not precise about the timing. Zakinov also testified that they “talk[ed] about the NDA in that we are all operating under the condition and assumption and good will that we all have a non-disclosure agreement ....And the negotiations are under a non-disclosure agreement and will be held in confidence. And yes, it was discussed by myself and Matt Smalley and then again subsequently when we met in Vegas as well that everything is held in confidence and will not be used or shared in any way.” Dkt. No. 142-14 at 248.Smalley likewise testified as to his understanding that he “thought there was” an NDA in place, although he later realized that “[he] was mistaken.” Dkt. No. 142-18 at 75-76. As part of Cambridge's due diligence, Smalley in July 2020 requested a copy of an agreement between Ruby Has and UPS, and stated, “As we are a pending major investor, and have NDA . . ., there really should be no issues to show us the contract.” Dkt. No. 142-3 at ECF p. 5. In an email exchange on July 8, 2020, both Ruby Has and Cambridge confirmed that the agreement would be “subject to our NDA.” Id. at ECF pp. 2-3.
Although some questions in Zakinov's testimony later assert that it was a “May 14, 2020 call,” those assertions, in context, were shorthand and occurred only after the deposition described it as “on or about May 14, 2020.” See Dkt. No. 142-14 at 247-48.
Kestenbaum testified that she did not recall any discussion about modifying or extending the initial NDA after it was executed, or “entering into a new NDA after the first NDA was executed.” Dkt. No. 121-54 at 269-70.
It is well settled, however, that “[e]ven if the parties believe that they are bound, if the terms of the agreement are so vague and indefinite that there is no basis or standard for deciding whether the agreement had been kept or broken, or to fashion a remedy, and no means by which such terms may be made certain, then there is no enforceable contract.” Foros Advisors LLC v. Digital Globe, Inc., 333 F.Supp.3d 354, 360 (S.D.N.Y. 2018) (quoting Candid Prods., Inc. v. Int'l Skating Union, 530 F.Supp. 1330, 1333 (S.D.N.Y. 1982)). Here, it is undisputed that the prior written NDA-which some of the parties believed covered their communications-had expired. Their belief, however genuine, that there was an agreement in place cannot substitute for a definite agreement actually being in place.
As to whether the parties formed a new agreement, “for a contract to be valid, the agreement between the parties must be definite and explicit so their intention may be ascertained to a reasonable degree of certainty.” Id. (citation omitted). There must be evidence of a meeting of the minds on all materials terms and a standard by which a party can know its contractual obligations and a court can enforce them. See Starke v. SquareTrade, Inc., 913 F.3d 279, 288-89 (2d Cir. 2019) (“It is a basic tenet of contract law that, in order to be binding, a contract requires a ‘meeting of the minds' and ‘a manifestation of mutual assent.' The manifestation of mutual assent must be sufficiently definite to assure that the parties are truly in agreement with respect to all material terms.”); Caro Cap., LLC v. Koch, 2021 WL 1595843, at *6 (S.D.N.Y. Apr. 23, 2021). Moreover, where as here, the terms of the agreement are never reduced to writing, see Tr. at 65, “[a]s a practical matter . . . for all but the simplest of transactions, the burden of establishing the terms of the verbal contract-which falls to the proponent-presents a formidable obstacle to its enforcement.” Charles Hyman, Inc. v. Olsen Indus., Inc., 642 N.Y.S.2d 306, 309 (1st Dep't 1996). Courts are loathe to trap parties in surprise contractual commitments. Accordingly, the “burden is heavier” to show that a contractual commitment was sufficiently definite based on an alleged oral agreement. Menlo v. Friends of Tzeirei Chabad in Israel, Inc., 2013 WL 1387057, at *3 (S.D.N.Y. Apr. 5, 2013) (quoting Oscar Prods., Inc. v. Zacharius, 893 F.Supp. 250, 255 (S.D.N.Y. 1995)). Under New York law, it is the plaintiff's burden to demonstrate that the terms of any oral agreement are definite to establish that an unwritten contract is binding. See Delaney v. Bank of Am. Corp., 766 F.3d 163, 171 (2d Cir. 2014) (citing Charles Hyman, Inc., 642 N.Y.S.2d at 309).
Ruby Has has not overcome the “formidable obstacle” to showing the definiteness of terms as to the existence of an oral NDA. Charles Hyman, Inc., 642 N.Y.S.2d at 309. It is reasonable for a jury to conclude that, by referring to the prior NDA, the parties agreed and assumed that the documents deemed to be confidential by the prior NDA would also be treated as confidential under an oral NDA. It further would be reasonable for a jury to assume that the restrictions on use contained in the prior NDA would also apply to documents exchanged pursuant to the new oral NDA. Finally, it would be reasonable for a jury to assume that from May 2020 to December 2020, the parties exchanged documents under the shared belief that they were subject to the new NDA. In order for there to be an enforceable agreement, however, there must be a meeting of the minds as to all material terms. Here, there is no evidence from which a jury could find that there was a meeting of the minds on all material terms. One of the critical provisions of any NDA is its term, i.e., the length of time during which the recipient of information is restrained from sharing or using information to which it has been given access. Cf. Reed, RobertsAssocs., Inc. v. Strauman, 353 N.E.2d 590, 592-93 (N.Y. 1976) (stating that for restrictive covenants including restraints on disclosure, that such “negative covenants restricting competition are enforceable only to the extent that they satisfy the overriding requirement of reasonableness”). Even if a jury could find that there was a meeting of the minds and some enforceable standard by which to determine what information was covered by the NDA and how the recipient could use that information, there is no evidence from which a reasonable jury could find a meeting of the minds regarding the duration of the restraint on the use of information. Zakinov did not recall renegotiating any of the terms of the extension and he did not recall going over the extension with Cambridge after the call “on or about” May 14, 2020. Dkt. No. 142-14 at 247-48. Similarly, Eliyahu said that they did not “go through that NDA and discuss the specific terms they contained” and never did so to the best of his recollection. Dkt. No. 121-55 at 152. Even viewing the evidence favorably to the non-moving party, there is no evidence of any discussion regarding the duration of the agreement or of the confidentiality obligation. Those missing terms-i.e., the start date of the agreement-are essential. See, e.g., Haig v. Dartmouth-Hitchcock Med. Ctr., 2023 WL 1325511, at *3 (D. Vt. Jan. 31, 2023) (noting agreement on “material terms of Dr. Haig's employment,” including “the start date”); AMG & Assocs., LLC v. AmeriPride Servs. Inc., 2017 WL 2999683, at *4 (C.D. Cal. June 9, 2017) (“[T]here was still a dispute about a material term of the contract-the start date of the indemnity/guaranty provision.”); In re Gormally, 550 B.R. 27, 40 (Bankr. S.D.N.Y. 2016) (noting that start date of penalty was material). Similarly, the duration of a contract is a material term. See, e.g., Hadami, S.A. v. Xerox Corp., 272 F.Supp.3d 587, 597 (S.D.N.Y. 2017) (“The durational length of an exclusivity agreement substantially affects the rights and obligations of both parties.”); Berkson v. Gogo LLC, 97 F.Supp.3d 359, 392 (E.D.N.Y. 2015) (“In order to be enforceable, a contract must be sufficiently definite as to its ‘material terms,' which include, e.g., subject matter, price, payment terms, quantity, duration, compensation, and the dates of delivery and production, so that the promises and performance to be rendered by each party are reasonably certain.” (citation omitted)); Perfect Trading Co. v. Goldman, Sachs & Co., 653 N.Y.S.2d 116, 116 (1st Dep't 1997) (affirming dismissal of breach of contract claims because, inter alia, material term of duration was not alleged).
Ruby Has also relies on this Court's June 2022 Opinion to sustain its counterclaim. Dkt. No. 102. It asserts that this “Court already ruled that the ‘let's do something like we did last time' discussion . . . is, in fact, sufficient to support a claim.” Dkt. No. 143 at 29. But the Court's holding was premised on the understanding that Ruby Has was alleging a “new, oral agreement” and not an agreement “to continue” the expired agreement, and permitted the parties to take discovery on the issue. Dkt. No. 102 at 15. Discovery has now been taken and the record now shows that there was no “new . . . agreement” because the parties failed to have a meeting of the minds on all material terms for a new agreement.
However, Cambridge's second argument that the NDA claim should be dismissed for absence of any damages is without merit. Under New York law, a party suing for breach of contract can obtain nominal damages where it has not suffered actual damages. See Carney v. Bos. Mkt., 2021 WL 2158016, at *4 (S.D.N.Y. May 27, 2021) (noting that “[d]efendants' argument that the entire case should be dismissed for lack of damages is unavailing” because, in part, “a plaintiff suing for breach of contract can seek nominal damages,” and citing New York law).
Ruby Has, at oral argument, argued that the parties can infer the duration of the confidentiality obligation from the terms of the prior written NDA. Tr. at 67; see also Restatement (Second) of Contracts § 204 (“When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.”). That argument is unavailing. The prior NDA measured the length of time during which the confidential information was restrained from disclosure from the date of the effective date of the agreement, not from the date that the information was received. The critical date under the prior NDA thus was its effective date. But, in this case, there is no evidence from which a jury could find that there was an agreement on the start date, and thus no evidence from which it could be inferred that there was an agreement on the end date. Was it on May 14, 2020? Or was it just around May 14, 2020? “On or about” is not a start date, or an end date. It does not tell a party when it will be free to share or use confidential information. Did the parties intend the NDA to be retroactive, i.e., that it would have an effective date earlier than the date on which the conversation took place? It would be reasonable for a jury to conclude that that was the intent of the parties, i.e., that they intended to cover information that had already been provided. But in that case, the effective date would precede May 14, 2020, and the expiration date would precede May 14, 2021. A jury would have to speculate. Moreover, while a term in an oral agreement may be implied based on the parties' past course of dealing, see, e.g., Schleger v. Treiber Grp. LLC, 757 N.Y.S.2d 271, 272 (1st Dep't 2003), there is no prior course of dealing from which a court could imply either a start date or an end date for the confidentiality obligation. There was only one such prior agreement. The non-disclosure understandings that the parties reached were agreement specific. There is no evidence of a general course of dealing between the parties that they would keep information confidential for a specified period of time. See, e.g., Fleet Cap. Corp. v. Yamaha Motor Corp., U.S.A., 2002 WL 31174470, at *33 n.41 (S.D.N.Y. Sept. 26, 2002) (“[I]t is settled law that a single instance cannot establish a course of dealing.”); Gen. Motors Acceptance Corp. v. Clifton-Fine Cent. Sch. Dist., 647 N.E.2d 1329, 1331 (N.Y. 1995) (holding that single prior incident cannot create course of dealing waiving assignment rights); Rotuba Extruders, Inc. v. Ceppos, 385 N.E.2d 1068, 1072 (N.Y. 1978) (“While Ceppos' lawyer's hearsay affidavit refers to this transaction as a ‘prior course of dealing', it disappears as a possible prop to support any such theory because of Ceppos' own admission in his own affidavit that this was a single ‘instance'.”); V.J. Gautieri Inc. v. State, 599 N.Y.S.2d 766, 768 (3d Dep't 1993) (“[A] single instance without more is insufficient to create the required course of dealing with the State.”). Ruby Has has offered no evidence of a meeting of the minds regarding at least the duration of the confidentiality obligation and there is no standard by which a court can imply such a term. For that reason, Cambridge is entitled to summary judgment on this claim.
CONCLUSION
Plaintiff's motion for summary judgment is GRANTED IN PART and DENIED IN PART. Defendant's motion for summary judgment is GRANTED.
The Clerk of Court is respectfully directed to close Dkt. Nos. 114, 123.
For the reasons explained in an accompanying Order, this Opinion and Order will be filed temporarily under seal until the Court can review any redactions the parties propose. The Clerk of Court is respectfully directed to file this Opinion and Order under seal, viewable only to the Court and the parties to this action.
SO ORDERED.