Avazpour Networking Servs., Inc. v. Falconstor Software, Inc.

• Decision Date: 03 April 2013
• Docket Number: No. CV 12–3574.,CV 12–3574.
• Citation: 937 F.Supp.2d 355
• Parties: AVAZPOUR NETWORKING SERVICES, INC., Jim Avazpour and Kim Avazpour, Plaintiff, v. FALCONSTOR SOFTWARE, INC., Defendants.
• Court: U.S. District Court — Eastern District of New York

937 F.Supp.2d 355

AVAZPOUR NETWORKING SERVICES, INC., Jim Avazpour and Kim Avazpour, Plaintiff,

v.FALCONSTOR SOFTWARE, INC., Defendants.

No. CV 12–3574.

United States District Court, E.D. New York.

April 3, 2013.

Lieff, Cabraser, Heimann & Bernstein, LLP, by: Jonathan D. Selbin, Esq., Michael Joseph Miarmi, Esq., Douglas Ian Cuthbertson, Esq., New York, NY, Lieff, Cabraser, Heimann & Bernstein, LLP, by: Eric B. Fastiff, San Francisco, CA, for Plaintiffs.

Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, by: Adam Bialek, Esq., Richard Lyle Reiter, Esq., White Plains, NY, for Defendant.

MEMORANDUM AND ORDER¹

WEXLER, District Judge.

In this diversity action, Plaintiffs assert causes of action arising out of their business relationship with Defendant. The complaint sets forth four causes of action pursuant to the laws of the State of New York, as follows: (1) gross negligence; (2) negligent misrepresentation; (3) breach of contract “(due to gross negligence),” and (4) breach of the implied covenant of good faith and fair dealing. Plaintiffs are Avazpour Networking Services, Inc., (“Avazpour” or “ANS”), Jim Avazpour and Kristy Avazpour (collectively the “Individual Plaintiffs”). The Individual Plaintiffs are the founders of ANS. Jim Avazpour is the President and former CEO of ANS. Kristy Avazpour served as the company's Vice President of Marketing from 2006 through October of 2010. Defendant is Falconstor Software, Inc. (“Falconstor”).

The facts supporting all of Plaintiffs' claims arise out of Defendant's performance in connection with an upgrade it performed to Avazpour's storage area network, i.e. the system that allows ANS to remotely store and protect client data. Plaintiffs' complaint alleges, inter alia, that the analysis of an expert with whom they have consulted demonstrates that when conducting the upgrade Falconstor “recklessly disregarded appropriate practices in the data-security and storage virtualization industry.”

Presently before the court is Defendant's motion, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, to dismiss. Defendant seeks dismissal of all claims asserted on behalf of the Individual Plaintiffs on the ground that they lack standing. Additionally, Defendant seeks dismissal of Plaintiffs' first, second and third causes of action on the grounds that those claims, sounding in tort, are not viable under New York's economic loss doctrine, and fail to allege the existence of any duty separate and apart from Defendant's contractual obligations.

BACKGROUND

I. Factual Background

The facts set forth below are derived from the complaint, as well as documents properly before the court of which both parties have notice. Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir.2002) (on motion to dismiss court may consider pleadings as well as all documents incorporated therein by reference). At this stage in the proceedings, the facts are presumed true and construed in the light most favorable to Plaintiffs, the non-moving parties. Holmes v. Grubman, 568 F.3d 329, 335 (2d Cir.2009).

A. The Parties and Their Business Relationship

ANS is a company located in Overland Park, Kansas that has been engaged, since 1997, in the business of providing information technology services. The Individual Plaintiffs are the founders of ANS and were, at relevant times, officers of that company. Each of the Individual Plaintiffs acted as personal guarantors of loans made to ANS in the course of its business operations.

Falconstor is a company located in this state that is engaged in the business, inter alia, of providing systems for storing and protecting client data. Prior to the incident forming the basis of Plaintiffs' complaint, ANS had been a client of Falconstor for approximately six years. At some point prior to July 13, 2010, ANS entered into an agreement pursuant to which Falconstor was to upgrade ANS's storage area network (the “Upgrade”). A storage area network, referred to as a “SAN” is defined in the complaint as “a collection of computers and storage devices that are connected over a high-speed optical network and are dedicated to storing and protecting data.” The Upgrade was to be performed on a Falconstor system that was then in use by ANS.

The parties' intentions and agreement with respect to the Upgrade are memorialized in two agreements—an “Evaluation Agreement,” entered into on April 22, 2010, and a “Statement of Work,” dated July 8, 2010. Both agreements are referenced in the complaint and have been provided to the court. The Evaluation Agreementallowed ANS to consider Falconstor software products and to borrow its hardware during an “Evaluation Period,” which could last as long as 180 days. After the Evaluation Period, ANS was to either license the evaluated programs and purchase the hardware, or return both to Falconstor.

The Statement of Work, dated July 8, 2010, followed the Evaluation Agreement and reflects the parties' commitment to go forward with the Upgrade. In addition to setting forth and describing particular tasks to be performed by Falconstor, the Statement of Work states the estimated time frame for performance of each task. Tasks performed pursuant to the Statement of Work were estimated to be performed between July 13 and 17, 2010. Falconstor was to provide the hardware and memory upgrade to be used in the Upgrade. The Statement of Work also sets forth the responsibilities of ANS in connection with performance of the Upgrade. ANS was responsible for, inter alia, acquisition of certain hardware, software and cables, making key staff available, and providing access to computer systems and devices necessary to support the Upgrade. Falconstor was to install the hardware and perform the transition from the existing SAN to the new system.

The Statement of Work contains an appendix setting forth specific contractual terms. Those terms include a broad limitation of liability provision stating that Falconstor shall have no liability for, inter alia;

consequential, exemplary, special, indirect, incidental or punitive damages or any other loss or expense (including lost profits) even if it has been advised of the possibility of such damage loss or expense.

The limitation of liability provision further states that it applies to:

all causes of action or claims in the aggregate, including without limitation to breach of contract, breach of warranty, negligence, strict liability, misrepresentations, claims for failure to exercise due care in the performance of services hereunder and any other torts.

The Statement of Work also addresses the issue of Falconstor's warranty. Specifically, it states that Falconstor warrants that its services will be performed in “a good and workmanlike manner,” and further “disclaims all other warranties, express or implied, including any implied warranties of fitness for a particular purpose, merchantability or otherwise.” ²

B. The July 2013 Upgrade and The Consequences of its Failure

In July of 2010, Falconstor was to begin the Upgrade, as set forth in the Statement of Work. Prior to July of 2010, ANS informed its clients of the impending Upgrade, assuring them that with the exception of previously scheduled maintenance periods, the transition would be seamless. The complaint alleges, in great detail, a series of mishaps that occurred during the Upgrade which took place between July 13 and 22, 2010. The Court describes those mishaps below, and for the purpose of this motion, accepts Plaintiffs' version of the facts as true.

During the first phase of the Upgrade, which began on July 13, 2010, Falconstor copied data from the existing SAN to the new storage system. An inconsistency was revealed between the old system's transfer control protocol (“MTCP version 1”) and that of the new system (“MTCP version 2”). For data replication to proceed, a Falconstor engineer rolled back both of ANS's near storage server controllers to the older version of the MTCP, and the Upgrade proceeded.

The second phase of the Upgrade, the attachment of all production servers to the new storage system, was completed on July 18, 2010. Plaintiffs take issue with Falconstor's performance on that date, noting that the process disabled many of its normal back-up and redundancy measures, leaving ANS's system in what is referred to as a “fragile” state. The Upgrade resumed on July 20, 2010, and continued through July 22, 2010. The Complaint refers to a series of problems that occurred during that time period, most of which were addressed though not, according to Plaintiffs, pursuant to the appropriate standard of care.

The phase of the Upgrade that occurred on July 22, 2010, is described as leading to disastrous consequences. On that date, after twice successfully and properly shutting down and re-booting ANS's system, Falconstor is alleged to have re-booted the system without first properly shutting it down. This is alleged to have resulted in the corruption of nearly all e-mail databases and file servers. Plaintiffs further allege that as a result of this re-boot, ANS was left with corrupted client data, outdated tape backups, and a complete and irretrievable loss of certain other client data. Plaintiffs alleged that the extended system downtime associated with the Upgrade resulted in the loss of client trust as well as a week's worth of their data. Although the new system was eventually up and running, it was operating in a crippled state until the replacement of a component part, a month after the Upgrade. Even then, the new SAN is alleged not to have achieved the expected high availability state.

Plaintiffs' complaint includes allegations regarding conclusions reached by a consulting expert specializing in computer networking, computer security, virtualization and file systems. Plaintiffs' expert concludes that Falconstor treated ANS's data with reckless disregard for the appropriate practices in the data security and storage virtualization industries. In...