Opinion
1884CV00868BLS2
07-16-2018
DIGITAL STRATEGISTS, LLC et al. v. LEAP PAYMENTS, INC. et al.
File Date: July 17, 2018
MEMORANDUM AND ORDER ON DEFENDANTS’ MOTION TO DISMISS AND SCHEDULING ORDER
Kenneth W. Salinger, Justice of the Superior Court
Digital Strategists, LLC, alleges that it "provides strategic management for digital and website development to business and individuals worldwide." Digital and its president and owner Debra Lessard retained Leap Payments, Inc., and Elavon, Inc., in February 2018 to process credit card and debit card payments. Defendants terminated Plaintiffs’ account five and half weeks later, on March 18, 2018. This lawsuit arises from that brief business relationship.
Defendants have moved to dismiss all claims under Mass.R.Civ.P. 12(b)(6).
The Court concludes that Digital has stated viable claims for violation of c. 93A, breach of contract, and intentional interference with contractual relations. The facts alleged in the complaint plausibly suggest that Defendants engaged in unfair trade practices and did not act in good faith when they told Northeastern University that they were investigating Digital for fraud, that as a result Digital lost Northeastern as a customer and lost profits on that account, and that Defendants understood it was substantially certain that their communications with Northeastern would have such a result.
However, the court will allow the motion to dismiss with respect to Plaintiffs’ claims of negligence and fraud. Digital’s negligence claim is barred by the "economic loss" rule. And Plaintiffs’ fraud claims fail because the facts alleged do not plausibly suggest that Defendants’ purportedly false promises caused any compensable injury.
1. Legal Standard
To survive a motion to dismiss under Rule 12(b)(6), a complaint must allege facts that, if true, "plausibly suggest" the plaintiff has a viable claim. Lopez v. Commonwealth, 463 Mass. 696, 701 (2012), quoting Iannacchino v. Ford Motor Co., 451 Mass. 623, 636 (2008), and Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007). In deciding this motion, the Court must assume that the factual allegations in the complaint are true and must draw "every reasonable inference in favor of the plaintiff" from those allegations. Rafferty v. Merck & Co., Inc., 479 Mass. 141, 147 (2018). In so doing, however, it must "look beyond the conclusory allegations in the complaint and focus on whether the factual allegations plausibly suggest an entitlement to relief." Maling v. Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, 473 Mass. 336, 339 (2015), quoting Curtis v. Herb Chambers I-95, Inc., 458 Mass. 674, 676 (2011).
2. Factual Allegations
Plaintiffs allege the following facts in their complaint.
Digital retained Defendants on February 8, 2018, to provide payment processing services. Plaintiffs did so in reliance on false promises by Leap to provide same-day payment processing of credit and debit card payments, that Plaintiffs would only have to deal with Leap for their payment processing services, and that all material terms of the agreement had been disclosed. Leap knew that these promises were false. More specifically, Leap knew that it could not process payments on the same day it received a transaction, that Leap was marketing payment processing services that would actually be provided by Elavon, and that Elavon’s terms of service included a mandatory arbitration provision that was never disclosed to Plaintiffs, who were not allowed to view Elavon’s terms of service before contracting with Leap.
Digital processed and transmitted to Defendants a credit card payment by Northeastern University, which was a significant new client of Digital.
Instead of processing the payment, Defendants contacted Northeastern and said they were conducting a fraud investigation of Digital. Defendants asserted that Digital had provided a fake address and telephone number and was not operating under its own website. Those accusations were false. Defendants made no attempt to investigate those charges before making these false accusations to Northeastern. Northeastern responded to Defendant’s misrepresentations by terminating its contract with Digital.
Plaintiffs repeatedly complained to Defendants about their failure to provide same-day payment processing. Defendants responded to these complaints by terminating Digital’s account on May 18, 2018.
3. Analysis
3.1. Chapter 93A, § 11, Claim
Digital claims in Count III that Defendants violated G.L.c. 93A, in part by telling Northeastern that Digital may be a sham without first conducting any due diligence to verify Digital’s corporate existence, business location, website, and telephone number.
Plaintiffs’ allegations that Defendants conveyed false information to Northeastern while carrying out their business relationship with Digital, and that Defendants could easily have determined that these representations were false if they had done some rudimentary fact checking, state a viable claim that Defendants committed an unfair trade practice in violation of c. 93A.
Carelessly relaying false information in trade or commerce can violate c. 93A. See Kirkland Const. Co. v. James, 39 Mass.App.Ct. 559, 564 (1995) (reversing dismissal of c. 93A claim against lawyer who conveyed alleged misrepresentation by client that lawyer "knew or should have known" was false, and thereby induced plaintiff to contract with client). "A negligent misrepresentation of fact may ... constitute an unfair or deceptive act within the meaning of G.L.c. 93A, if the truth could have been reasonably ascertained." Quinlan v. Clasby, 71 Mass.App.Ct. 97, 102, rev. denied, 451 Mass. 1103 (2008); accord Marram v. Kobrick Offshore Fund, Ltd., 442 Mass. 43, 62 (2004) (reversing dismissal).
Defendants’ assertion that the c.93A claim is entirely derivative of Plaintiffs’ other claims is incorrect. "General Laws c. 93A ‘is a statute of broad impact which creates new substantive rights and provides new procedural devices for the enforcement of those rights.’" Auto Flat Car Crushers, Inc. v. Hanover Ins. Co., 469 Mass. 813, 822 (2014), quoting Slaney v. Westwood Auto, Inc., 366 Mass. 688, 693 (1975). "Recovery under the statute is not ‘limited by traditional tort and contract law requirements.’" Id., quoting Commonwealth v. DeCotis, 366 Mass. 234, 244 n.8 (1974). Plaintiffs have stated a viable claim under c. 93A, separate and apart from whether any of their common-law claims can survive the motion to dismiss.
3.2. Breach of Contract
Digital claims in Count IV that Defendants breached their express contractual obligation to provide same-day payment credit card processing and their implied obligation to act in good faith in carrying out its obligations under the parties’ contract.
Digital has not stated a viable claim for breach of the express obligation to provide same-day processing, because it has not alleged any facts plausibly suggesting that it suffered any cognizable injury as a result.
But Digital’s allegations that Defendants recklessly conveyed false information to Northeastern, and thereby drove away one of Digital’s significant clients, states a viable claim for breach of the implied covenant of good faith and fair dealing.
Like all contracts in Massachusetts, the alleged contract between Digital and the Defendants agreement includes an implied covenant of good faith and fair dealing. See, e.g., Weiler v. PortfolioScope, Inc., 469 Mass. 75, 82 (2014). This implied covenant provides "that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract ..." Id., quoting Druker v. Roland Wm. Jutras Assocs., Inc., 370 Mass. 383, 385, 348 N.E.2d 763 (1976). Digital need not allege or prove that Defendants acted in bad faith; this claim is made out if Defendants failed to act in good faith and thereby deprived Digital of at least some of what it bargained for. See, e.g., A.L. Prime Energy Consultant, Inc. v. Massachusetts Bay Transp. Auth., 479 Mass. 419, 434 (2018).
Digital has alleged facts plausibly suggesting that it was deprived of its contractual right to same-day processing of a credit card payment because Defendants told Northeastern University that Digital may be a fraudulent enterprise, and that Defendants had no good faith basis for making such an accusation. Those allegations state a viable claim for breach of the implied covenant of good faith.
Defendants undoubtedly had the discretion, under its alleged agreement with Digital, to conduct a fraud investigation if warranted. But the implied covenant requires that such discretion be exercised in good faith and not in a manner that unfairly deprives Digital of its contractual right to prompt payment processing. See generally S.M. v. M.P., 91 Mass.App.Ct. 775, 782-83 (2017) (implied covenant requires that when party is exercise discretionary right it must do so in good faith); see also Gerber v. Enterprise Products Holdings, LLC, 67 A.3d 400, 419 (Del. 2013) (implied covenant requires that when party is "exercising a discretionary right, [it] must exercise its discretion reasonably"); Airborne Health, Inc. v. Squid Soap, LP, civ. action 4410-VCL, 984 A.2d 126, 146-47 (Del.Ch. 2009) ("When a contract confers discretion on one party, the implied covenant requires that the discretion be used reasonably and in good faith").
Defendants argue that they had no express contractual duty not to damage Digital’s good will and that the implied covenant does not add new substantive contractual duties. Cf. Boston Med. Ctr. Corp. v. Secretary of Executive Office of Health & Human Servs., 463 Mass. 447, 460 (2012) (implied covenant "does not create rights or duties beyond those the parties agreed to when they entered into the contract") (affirming dismissal of claim) (quoting Curtis v. Herb Chambers I-95, Inc., 458 Mass. 674, 680 (2011)).
Although the Court agrees with this legal argument, it is beside the point. Though Defendants may not have had an abstract contractual duty not to damage Digital’s good will, the facts alleged plausibly suggest that Defendants did have a contractual obligation to act in good faith in processing credit card payment. If Defendants breached that contractual duty, they may be liable for all consequential damages-including any resulting lost profits-that can be proved with reasonable certainty. See Brewster Wallcovering Co. v. Blue Mountain Wallcoverings, Inc., 68 Mass.App.Ct. 582, 609-11 (2007).
The Court recognizes that damage to one’s professional or business reputation is not the kind of damage that can be recovered on a claim for breach of contract, even under the implied covenant of good faith and fair dealing. See McCone v. New England Tel. and Tel. Co., 393 Mass. 231, 234 n.8 (1984).
But Digital claims that it lost a specific customer relationship because of Defendants’ alleged breach of the implied covenant. That sort of alleged harm is recoverable on a claim for breach of contract, even if alleged damage to reputation caused by a breach of contract is the claimed reason why the business opportunity was lost. See Redgrave v. Boston Symphony Orchestra, Inc., 855 F.2d 888, 893 (1st Cir. 1988) (applying Massachusetts law, and distinguishing McCone on this ground).
3.3. Tortious Interference Claim
Digital claims in Count II that Defendants intentionally interfered with Digital’s contractual relationship with Northeastern University by conducting a baseless "fraud" investigation of Digital that scared away Northeastern.
To state a claim for intentional interference with contractual relations, a party must allege facts plausibly suggesting four elements: "(1) a contract between the plaintiff and a third party, (2) the defendant’s purposeful inducement of the third party to breach the contract in whole or in part, (3) the interference must be not only intentional, but also improper in motive or means of accomplishment, and (4) resulting harm to the plaintiff." JNM Hosp., Inc. v. McDaid, 90 Mass.App.Ct. 352, 354 (2016); accord, e.g., Weiler v. PortfolioScope, Inc., 469 Mass. 75, 84 (2014).
Defendants argue that they cannot be sued for intentional interference unless Digital can allege facts plausibly suggesting that Defendants had the specific intent to interfere with the contract between Digital and Northeastern. The Court disagrees.
One can reasonably infer from the facts alleged in the complaint that Defendants knew or were substantially certain that Northeastern would terminate its contractual relationship with Digital if Defendants told Northeastern that Digital was engaged in a fraud involving use of a false mailing address, phone number, and website. That is sufficient to state a claim that Defendants purposefully induced Northeastern to terminate its contract.
Tortious interference with contractual relations does not require specific intent to interfere with a contract. Korea Supply Co. v. Lockheed Martin Corp., 63 P.3d 937, 951-52 (Cal. 2003). This tort also applies where the defendant "does not act for the purpose of interfering with the contract or desire it but knows that the interference is certain or substantially certain to occur as a result of his action. [It] applies, in other words, to an interference that is incidental to the actor’s independent purpose and desire but known to him to be a necessary consequence of his action." Id., quoting Restatement (Second) of Torts, § 766, comment j (1965); accord, e.g., Williams v. Chittenden Trust Co., 484 A.2d 911, 914 (Vt. 1984).
Section 766 of the second Restatement of torts "reflect[s] the law of Massachusetts." Shafir v. Steele, 431 Mass. 365, 368 (2000). More generally, the Supreme Judicial Court has embraced the Restatement’s notion that in the tort sense "intentional" means "that the actor desires to cause the consequences of his act, or that he believes that the consequences are substantially certain to result from it." Deas v. Dempsey, 403 Mass. 468, 471 (1988) (quoting Restatement (Second) of Torts, § 8A (1965)); see also Quincy Mut. Fire Ins. Co. v. Abernathy, 393 Mass. 81, 84 (1984) (insurance exclusion for intentional harm applies where insured "specifically intend[ed] to cause the resulting harm" or was "substantially certain that such harm will occur").
3.4. Negligence
Digital claims in Count V that some or all of Defendants’ alleged acts or omissions constitute negligence.
This claim is barred by the so-called economic loss rule because the complaint alleges no facts suggesting that Digital suffered any personal injury or property damage as a result of Defendants’ alleged negligence.
The economic loss doctrine generally provides that "purely economic losses are unrecoverable in tort and strict liability actions in the absence of personal injury or property damage." Aldrich v. ADD, Inc., 437 Mass. 213, 222 (2002), quoting FMR Corp. v. Boston Edison Co., 415 Mass. 393, 395 (1993). This rule "was developed in part to prevent the progression of tort concepts from undermining contract expectations," on the theory that contracting parties are free to allocate the risk of economic loss as they see fit. Wyman v. Ayer Properties, LLC, 469 Mass. 64, 70 (2014); accord, e.g., Hunt Const. Group, Inc. v. Brennan Beer Gorman/Architects, P.C., 607 F.3d 10, 14 (2d Cir. 2010) (economic loss doctrine "serves to maintain the boundary between contract law, which is designed to enforce parties’ contractual expectations, and tort law, which is designed to protect citizens and their property" from physical harm) (quoting Hamill v. Pawtucket Mut. Ins. Co., 892 A.2d 226, 228-29 (2005)).
The economic loss rule applies with full force to claims of negligence in providing services. See FMR Corp. v. Boston Edison Co., 415 Mass. 393, 395 (1993) (applying economic loss doctrine to provision of electrical service). The narrow exception that has been recognized for claimed legal malpractice, i.e., negligence in providing legal services, does not apply here. Contrast Clark v. Rowe, 428 Mass. 339, 342 (1998).
3.5. Fraud Claim
Plaintiffs claim in Count I that Defendants committed fraud by falsely promising that they would provide same-day payment processing, that Plaintiffs would only have to deal with Leap (when in fact Elavon was the entity that actually provided payment processing), and that all material terms of the parties’ agreement had been disclosed (when in fact Defendants concealed the mandatory arbitration provision in Elavon’s terms of service).
Under Mass.R.Civ.P. 9(b), a plaintiff must "at a minimum" support their claim for fraud by specifically alleging "the identity of the person(s) making the" allegedly fraudulent "representation, the contents of the misrepresentation, and where and when it took place," and must also "specify the materiality of the misrepresentation, [his] reliance thereon, and resulting harm." Equipment & Systems for Industry, Inc. v. NorthMeadows Constr. Co., Inc., 59 Mass.App.Ct. 931, 931-32 (2003) (rescript).
The Court must dismiss this claim because Plaintiffs have not alleged with particularity how the alleged fraud caused any harm. Plaintiffs’ conclusory allegations of harm are not sufficient and do not satisfy the requirements of Rule 9(b).
ORDER
Defendants’ motion to dismiss is ALLOWED IN PART and DENIED IN PART. The motion is allowed with respect to the claims for fraud (Count I) and negligence (Count V). The motion to dismiss is denied with respect to the claims for tortious interference with a contractual relationship (Count II), under G.L.c. 93A, § 11 (Count III), and for breach of contract (Count IV).
The parties shall complete all fact discovery by December 31, 2018. The session clerk shall schedule a further Rule 16 scheduling conference in early December 2018.