Opinion
03 Civ. 3357 (LAK)(JCF)
March 19, 2004
REPORT AND RECOMMENDATION
The plaintiff, Peter Felfe, brings this action alleging that CIBA Vision Corporation ("CIBA") engaged in intentional and negligent misrepresentation in connection with a settlement agreement reached between CIBA and a third party, Detlev Baurs-Krey. The agreement concerned Mr. Baurs-Krey's claims against CIBA for royalties from the sale of contact lenses. The plaintiff alleges that CIBA misrepresented the value of those claims in a letter issued to Mr. Baurs-Krey, and that the plaintiff relied on CIBA's misrepresentation to settle his own claims against Mr. Baurs-Krey for a lower amount than what he was entitled to receive.
CIBA has moved to dismiss the Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim for relief. For the reasons that follow, I recommend that the defendant's motion be granted.
Background
The plaintiff, a patent attorney, provided legal representation in the late 1970's to a predecessor of CIBA, a German company. (Amended Complaint ("Am. Compl."), ¶¶ 8, 12). At the time, Mr. Baurs-Krey was a personal acquaintance of the plaintiff, providing consultation to foreign pharmaceutical companies that sought to obtain regulatory approvals from the United States. (Am. Compl., ¶ 13). Mr. Felfe introduced Mr. Baurs-Krey to the defendant in exchange for an agreement that the plaintiff would receive one-third of any commissions, royalties, or other profits that Mr. Baurs-Krey might garner by serving as a consultant to CIBA. (Am. Compl., ¶ 14).
The defendant does not appear to dispute the successor relationships between CIBA and the predecessor companies named in the Complaint. Accordingly, both CIBA and its predecessors-in-interest will be referred to as "CIBA" or "the defendant."
On or about August 18, 1978, Mr. Baurs-Krey entered into a separate agreement with CIBA entitling him to receive royalties from the sale of various products, including soft contact lenses made from CIBA's "Weicon-38" material. (Am. Compl., ¶ 16). The "Weicon-38" contact lenses proved to be a popular product, and as the sales of those lenses increased, so did the value of Mr. Baurs-Krey's royalties. (Am. Compl., ¶ 17).
In 1983, CIBA offered to provide Mr. Baurs-Krey a lump sum payment in exchange for terminating his right to continued royalties. (Am. Compl., ¶ 20). Following a series of negotiations, Mr. Baurs-Krey ultimately agreed to a one-time payment of $3.4 million, and a settlement agreement was signed on March 22, 1985 ("the 3/22/85 Settlement"). (Am. Compl., ¶ 26).
On March 21, 1985, the defendant issued a letter to Mr. Baurs-Krey ("the 3/21/85 Letter") stating the following:
As requested we confirm that, in our negotiations concerning the buy-out of Baurs-Krey Associates, Inc. from the contract of 18 August 1978, which we had taken up in June 1984, we represented that the discounted present value of the commission claims of Baurs-Krey Associates for the contact lenses made from WEICON 38 material and sold in the USA was to be estimated at US $799,000.00 in consideration of all relevant circumstances.
(Am. Compl., ¶ 31 Exh. 6).
Following his settlement with the defendant, Mr. Baurs-Krey represented to Mr. Felfe that the amount of the settlement was $1.8 million. (Am. Compl., ¶ 33). Mr. Baurs-Krey showed the plaintiff a copy of the 3/21/85 Letter, and he stated that the difference between $1.8 million and the $799,000 cited in the letter was attributable to amounts due to him other than for the royalties. (Am. Compl., ¶ 33). Mr. Baurs-Krey stated that confidentiality provisions in the settlement agreement prevented him from disclosing the terms of the settlement to Mr. Felfe. (Am. Compl., ¶ 40). Mr. Felfe thereafter settled his claims against Mr. Baurs-Krey for $288,000, or roughly one-third of $799,000. (Am. Compl., ¶ 35).
Nearly 15 years later, in September 2000, Mr. Felfe was told by Mr. Baurs-Krey's estranged wife that Mr. Baurs-Krey had lied to the plaintiff about the amount of his settlement with the defendant. (Am. Compl., ¶ 42). Upon further investigation, the plaintiff obtained evidence suggesting that Mr. Baurs-Krey had received over $3 million from the defendant. (Am. Compl., ¶ 43). He commenced a lawsuit against Mr. Baurs-Krey in August 2001. (Am. Compl., ¶ 44).
Beginning in October 2000, the plaintiff communicated with the defendant's in-house counsel, seeking to obtain information relating to the 3/22/85 Settlement. (Am. Compl., ¶ 48). In response to a subpoena issued on January 11, 2002, the defendant produced, among other papers, internal documents and notes reflecting the defendant's valuations of Mr. Baurs-Krey's royalty claims during the period of January to June 1985. (Am. Compl., ¶¶ 52, 53 Exhs. 1-5). The plaintiff commenced this action on May 12, 2003.
Discussion
In considering a motion to dismiss pursuant to Rule 12(b) of the Federal Rules of Civil Procedure, the court must accept as true all factual allegations in the complaint and must draw all inferences in favor of the plaintiff. Leatherman v. Tarrant County Narcotics Intelligence and Coordination Unit, 507 U.S. 163, 164 (1993);York v. Association of the Bar of the City of New York, 286 F.3d 122, 125 (2d Cir. 2002); Hernandez v. Coughlin, 18 F.3d 133, 136 (2d Cir. 1994). Accordingly, the complaint may not be dismissed "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."Conley v. Gibson, 355 U.S. 41, 45-46 (1957) (footnote omitted).
A. Adequacy of the Pleadings
1. Intentional Misrepresentation
The defendant contends that the plaintiff's pleadings are inadequate in alleging the falsity of CIBA's representation and reasonable reliance by the plaintiff. (Memorandum of Law in Support of Defendant CIBA Vision Corporation's Motion to Dismiss the Amended Complaint ("Def. Memo.") at 14-18).
a. Falsity
Under New York law, the elements of a fraud claim premised on an intentional misrepresentation are that: (1) the defendant made a false statement of material fact, (2) with knowledge of its falsity, (3) and with intent to defraud the plaintiff, (4) the plaintiff reasonably relied on the misrepresentation, and (5) the plaintiff suffered damages as a result of the misrepresentation. See Kaye v. Grossman, 202 F.3d 611, 614 (2d Cir. 2000). The "circumstances constituting fraud" must be pled with particularity. Fed.R.Civ.P. 9(b).
The defendant contends that its statement in the 3/21/85 Letter is not false because it merely sets forth a "negotiating position" taken by the defendant during its settlement discussions with Mr. Baurs-Krey, not the ultimate amount of the 3/22/85 Settlement or any "internal beliefs or estimates" by CIBA. (Def. Memo, at 14). The plaintiff asserts that the 3/21/85 Letter reflects the defendant's internal valuation of Mr. Baurs-Krey's royalties at $799,000 as of the date of the letter, and that the falsity of CIBA's statement is shown by the fact that just two months earlier, CIBA had valued the royalties at $3.06 million. (Plaintiff's Memorandum in Opposition to Defendant's Motion to Dismiss the Amended Complaint ("Pl. Memo.") at 20-21; Am. Compl., ¶ 23 Exh. 2).
The dispute over the proper interpretation of the 3/21/85 Letter need not be resolved because, under either interpretation, the plaintiff has adequately alleged the falsity of the defendant's statement in that letter. The theory of Mr. Felfe's case is not that CIBA directly misrepresented the amount of the 3/22/85 Settlement — i.e., the figure on which the plaintiff's own settlement with Mr. Baurs-Krey was based — but that it falsely stated an alternative figure (either a prior negotiating position or prior valuation of royalties by CIBA) that enabled Mr. Baurs-Krey to misrepresent the settlement amount and induce Mr. Felfe into a reduced settlement. (Am. Compl., ¶¶ 33-34). The allegation of falsity is based on an inference that the plaintiff draws from CIBA's internal documents, which purportedly show that CIBA did not value Mr. Baurs-Krey's royalties in the range of $799,000 around the time of the 3/22/85 Settlement; the inference, therefore, is that contrary to its statement in the 3/21/85 Letter, CIBA never represented to Mr. Baurs-Krey during their settlement negotiations that it valued the disputed royalties at $799,000, nor did CIBA ever take a "negotiating position" at that level. Therefore, the plaintiff's theory of the case is consistent with either party's interpretation of the 3/21/85 Letter. Even if the plaintiff ultimately fails to prove his theory at trial, his allegations of falsity are sufficient at this stage of litigation. See Swierkiewicz v. Sorema, N.A., 534 U.S. 506, 511 (2002) ("The issue [at the pleading stage] is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.") (citation omitted).
b. Reasonable Reliance
The plaintiff's allegations, however, are insufficient on the issue of reasonable reliance. Under New York law, "[w]hen matters are held to be peculiarly within defendant's knowledge, it is said that plaintiff may rely without prosecuting an investigation, as he has no independent means of ascertaining the truth." Lazard Freres Co. v. Protective Life Insurance Co., 108 F.3d 1531, 1542 (2d Cir. 1997) (quotingMallis v. Bankers Trust Co., 615 F.2d 68, 80 (2d Cir. 1980)). However, even if a party does not have access to information, a sophisticated plaintiff is "under a further duty to protect itself from misrepresentation":
[W]here, as here, a party has been put on notice of the existence of material facts which have not been documented and he nevertheless proceeds with a transaction without securing the available documentation or inserting appropriate language in the agreement for his protection, he may truly be said to have willingly assumed the business risk that the facts may not be as represented. Succinctly put, a party will not be heard to complain that he has been defrauded when it is his own evident lack of due care which is responsible for his predicament.Id. at 1543 n. 11 (quoting Rodas v. Manitaras, 159 A.D.2d 341, 343, 552 N.Y.S.2d 618, 620 (1st Dep't 1990)) (emphasis omitted); see also Emergent Capital Investment Management, LLC v. Stonepath Group, Inc., 343 F.3d 189, 195-96 (2d Cir. 2003).
Here, Mr. Felfe principally contends that he had no means of verifying the defendant's statement in the 3/21/85 Letter because the statement related to information solely within CIBA's control and possession, namely, CIBA's internal valuations of Mr. Baurs-Krey's royalties. (Pl. Memo, at 25). Also, Mr. Baurs-Krey purportedly told the plaintiff that the confidentiality provisions of the 3/22/85 Settlement prevented him from disclosing the settlement documents to the plaintiff. (Pl. Memo, at 25-26).
While all this may be true, the plaintiff was also a sophisticated party with respect to business matters, as he was a patent attorney representing large companies like CIBA and its predecessors-in-interest. (Am. Compl., ¶ 12). Moreover, the plaintiff was obviously on notice that the amount of the 3/22/85 Settlement was a material fact relevant to his claims against Mr. Baurs-Krey; indeed, Mr. Felfe's very assertion here is that he settled his claims based on the amount Mr. Baurs-Krey had purportedly received in royalties as part of the 3/22/85 Settlement. (Am. Compl., ¶¶ 33-35). Yet, the plaintiff chose to rely solely on Mr. Baurs-Krey's oral representations as to that amount, and on CIBA's statement in the 3/21/85 Letter, which Mr. Baurs-Krey allegedly portrayed to be documentary evidence of the royalty amount.
As noted above, Mr. Baurs-Krey allegedly represented to the plaintiff that the difference between the $799,000 cited in the 3/21/85 Letter and $1.8 million, the purported amount of the settlement, was attributable to sums due to Mr. Baurs-Krey other than for the royalties. (Am. Compl., ¶ 33). The plaintiff therefore settled his claims for $288,000, roughly one-third of $799,000. (Am. Compl., ¶ 35).
Mr. Felfe's reliance on CIBA's representation was unreasonable as a matter of law because he made no efforts to verify the amount of Mr. Baurs-Krey's royalties or to "insert appropriate language in the agreement for his protection." Lazard, 108 F.3d at 1543 (quotation marks and citation omitted). For instance, the plaintiff could have conditioned his settlement on Mr. Baurs-Krey's obtaining permission to disclose the amount of the 3/22/85 Settlement to him, or he could have negotiated a lump sum mark-up on his own settlement as compensation for the lack of disclosure. Instead, the plaintiff chose to rely on the 3/21/85 Letter, which he concedes does not directly report the amount of the 3/22/85 Settlement and which merely reiterates a representation about estimated royalties made by CIBA during its negotiations with Mr. Baurs-Krey. These circumstances demonstrate that Mr. Felfe "willingly assumed the business risk that the facts may not be as represented." Id. Moreover, in the absence of a fiduciary relationship, the personal friendship between the plaintiff and Mr. Baurs-Krey does not render Mr. Felfe's reliance on the 3/21/85 Letter reasonable. Emergent Capital, 343 F.3d at 196.
The defendant's contention that he had no direct relationship with CIBA and therefore could not have protected himself from CIBA's misrepresentations (Def. Memo. at 25) misses the point because it is the amount of the 3/22/85 Settlement, not CIBA's internal valuations, that was material to the plaintiff's settlement with Mr. Baurs-Krey. The plaintiff relied on CIBA's letter insofar as it suggested to him — and as it was portrayed by Mr. Baurs-Krey as showing — the amount Mr. Baurs-Krey received in royalties as part of the 3/22/85 Settlement.
2. Negligent Misrepresentation
To prove negligent misrepresentation under New York law, a plaintiff must show that: (1) the defendant had a duty to give correct information pursuant to a "special relationship" with the plaintiff, (2) the defendant made a false statement that it should have known was incorrect, (3) the defendant knew that the plaintiff wanted the information for a serious purpose, (4) the plaintiff intended to rely and act on the information, and (5) the plaintiff reasonably relied to his detriment. Hydro Investors, Inc. v. Trafalgar Power Inc., 227 F.3d 8, 20 (2d Cir. 2000).
For the same reasons stated above, the plaintiff's pleadings do not adequately allege that Mr. Felfe reasonably relied on CIBA's representation in the 3/21/85 Letter. Accordingly, the plaintiff's negligent misrepresentation claim fails.
B. Statute of Limitations
The defendant also contends that the plaintiff's claims of intentional and negligent misrepresentation are untimely as they were not brought within six years of the alleged misrepresentation or, alternatively, within two years of the plaintiff's discovery of fraud. (Def. Memo, at 6-13). Having found that Mr. Felfe's pleadings are inadequate to state a claim for relief on both of his claims, the issue of timeliness need not be reached.
Conclusion
For the reasons set forth above, I recommend that the defendant's motion be granted and that the plaintiff's Amended Complaint be dismissed in its entirety. Pursuant to 28 U.S.C. § 636(b)(1) and Rules 72, 6 (a), and 6(e) of the Federal Rules of Civil Procedure, the parties shall have ten (10) days from this date to file written objections to this Report and Recommendation. Such objections shall be filed with the Clerk of the Court, with extra copies delivered to the chambers of the Honorable Lewis A. Kaplan, Room 1310, and to the chambers of the undersigned, Room 1960, 500 Pearl Street, New York, New York 10007. Failure to file timely objections will preclude appellate review.