Churchill Downs, Inc. v. NLR Entm't, LLC

• Decision Date: 23 May 2014
• Docket Number: CIVIL ACTION NO. 3:14-CV-166-H
• Parties: CHURCHILL DOWNS, INC. PLAINTIFF v. NLR ENTERTAINMENT, LLC, et al. DEFENDANTS
• Court: U.S. District Court — Western District of Kentucky

CHURCHILL DOWNS, INC. PLAINTIFF v. NLR ENTERTAINMENT, LLC, et al. DEFENDANTS

CIVIL ACTION NO. 3:14-CV-166-H

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF KENTUCKY AT LOUISVILLE

Date: May 23, 2014

MEMORANDUM OPINION

Plaintiff Churchill Downs, Inc. ("CDI") brought this action in Jefferson Circuit Court alleging breach of contract and fraud against Defendants NLR Entertainment, LLC ("NLR") and Nicholas L. Ribis, NLR's sole member. It arises from an agreement between CDI and NLR under which CDI would become the exclusive vendor of an internet gaming and online gambling system for an NLR-owned casino.

Defendants removed the case to federal court based on diversity jurisdiction. Now, Defendants move to dismiss the Complaint for lack of personal jurisdiction or, in the alternative, to transfer venue to the United States District Court for the District of New Jersey. After reviewing this matter quite carefully, the question of this Court's personal jurisdiction over Defendants does not appear to be a close call. For the reasons discussed below, the Court finds it does not have personal jurisdiction over Defendants and transfers this case to the District of New Jersey.

I.

The Court will summarize the facts as CDI presents them. CDI is a Delaware corporation with its main office in Kentucky. NLR is a Delaware limited liability company, with itsprincipal place of business in New Jersey.¹ Ribis² is a New Jersey resident and principal of NLR.

In July 2013, Jeff Berman, an agent of NLR, contacted Ted Gay, the President of Churchill Downs Interactive Gaming LLC,³ to discuss the possibility of CDI working with NLR on an online gaming system. Berman informed Gay that NLR planned to purchase the Showboat Atlantic City Hotel and Casino in Atlantic City, New Jersey (the "Showboat") from Caesars Entertainment Corporation and was looking for a service provider to develop and operate online gaming services on the Showboat's behalf. CDI had been investigating the prospects for developing an internet gaming and online gambling system. It accepted Berman's offer to introduce it to NLR.

CDI and NLR began discussing the terms of their potential relationship. CDI's President, William Castanjen, primarily discussed "high level" issues with Defendant Ribis by telephone from Kentucky. Ted Gay and Ben Murr, Senior Vice President and Chief Technology Officer for CDI, respectively, discussed technical issues via telephone from Kentucky with Nicholas Ribis, Jr., who was working on behalf of NLR.

On August 4, 2013, CDI and Ribis, on behalf of NLR, signed a binding term sheet, under which CDI paid $2,500,000 as earnest money. On September 4, 2013, Ribis, on behalf of NLR's wholly owned subsidiary NLR Acquisitions, Inc., entered into a License and Operating Agreement (the "Agreement") with Churchill Downs Interactive Gaming. Alan Tse, CDI's General Counsel, led the negotiations of the terms of the Agreement from Kentucky, and out-of-state counsel assisted. Ribis executed the Agreement in New Jersey, and Gay executed the Agreement on CDI's behalf while in California.

Under the Agreement, NLR promised to execute a definitive agreement to purchase the Showboat by October 15, 2013 and to consummate the transaction by January 31, 2014. In the event NLR failed to do so, CDI would be entitled to recover its $2,500,000 earnest money. In addition, CDI would be the exclusive vendor of the online gaming system used by the Showboat. In return, CDI promised to host, manage, operate, and support that system on behalf of NLR for seven years, beginning at a target launch date of April 2, 2014. Thereafter, absent notice from either party, the contract would automatically renew for successive 1-year terms. The Agreement contained provisions on intellectual property, customer information, and revenue sharing. Although it did not contain a forum selection clause, the Agreement specified that New Jersey law would govern.

CDI and NLR agreed to additional terms not set forth in the Agreement. First, the online gaming operation would be based in Louisville, Kentucky, where product and software development, engineering, product management, operations, user interface and graphic design, and marketing activities were to take place. To support the Showboat's online gaming, CDI planned to develop new infrastructure in Kentucky, as well as use some existing infrastructure and a small amount of new infrastructure in New Jersey, as required by New Jersey law.

Shortly after the Agreement was executed, and based upon Ribis's continued assurances that NLR was close to closing the Showboat deal, CDI hired 30 new employees, including 20 engineers, to work on the online gaming operation in Kentucky and purchased and licensed $10 million in equipment and software, which it installed at its Louisville, Kentucky facility. NLRultimately failed to purchase the Showboat by the Agreement's deadline and has refused to return CDI's earnest money.

II.

Before discussing the substance of Defendants' motion, the Court must address a threshold issue: whether certain portions of the affidavit of CDI President William Castanjen (the "Affidavit") must be excluded due to (1) an improper legal conclusion, (2) inadmissible hearsay, and (3) the parol evidence rule.⁴ See ECF No. 7-1.

While the Federal Rules of Civil Procedure specifically address the use of affidavits to support or oppose a motion for summary judgment, the Rules are silent regarding their use in the context of a Rule 12(b) motion to dismiss. Nevertheless, courts considering a motion to dismiss consistently look to Rule 56 for guidance. See Foshee v. Forethought Fed. Sav. Bank, 09-2674-JPM-DKV, 2010 WL 2158454, at *3 (W.D. Tenn. May 7, 2010) (citing Ohio Nat'l Life Ins. Co. v. United States, 922 F.2d 320, 327 (6th. Cir.1990)), report and recommendation adopted, 09-2674-JPM-DKV, 2010 WL 2158776 (W.D. Tenn. May 24, 2010).

Rule 56 states: "An affidavit or declaration used to support or oppose a motion must be made on personal knowledge, set out facts that would be admissible in evidence, and show that the affiant or declarant is competent to testify on the matters stated." Fed. R. Civ. P. 56 (c)(4). A sister court has found that this standard applies to affidavits submitted in connection with a Rule 12(b)(2) motion to dismiss. See Pixler v. Huff, 3:11-CV-00207-JHM, 2011 WL 5597327, at *4 (W.D. Ky. Nov. 17, 2011). This Court, too, sees "no reason why an affidavit or declaration submitted in connection with a motion to dismiss under Rule 12(b)(2) should be treated anydifferently." Id. Therefore, the Court will not consider any portions of the Affidavit that are not based upon personal knowledge or contain inadmissible evidence.

Specifically, Defendants object to the following five paragraphs of the Affidavit:

4. In July 2013, Jeff Berman, an agent of NLR, contacted Ted Gay, the President of Churchill Downs Interactive Gaming, LLC, to discuss the possibility of CDI working with NLR on an online gaming platform.

5. Berman informed CDI that NLR was planning to purchase the Showboat Casino in Atlantic City, New Jersey (the "Showboat"), and was searching for an entity to develop and operate online gaming services on the Showboat's behalf.

6. At that time, CDI had been investigating the prospects for developing an internet gaming and online gambling system, and CDI accepted Mr. Berman's offer to be "introduced" to NLR.

9. Gay and Ben Murr, Senior Vice President and Chief Technology Officer for CDI, discussed technical issues via telephone with Nicholas Ribis, Jr., who was also working on behalf of NLR.

21. Although this was not set forth in the Agreement, CDI and NLR agreed that the online gaming operation, including servers, engineers, and customer service representatives, would be based in Louisville, Kentucky. Functions that were to be performed in Kentucky included product and software development, engineering, product management, operations, user interface and graphic design, and marketing for the online gaming platform.

A.

As to paragraph 4, Defendants argue that Carstanjen's categorization of Berman as an "agent" improperly draws a legal conclusion. See Harrah's Entm't, Inc. v. Ace Am. Ins. Co., 100 F. App'x 387, 394 (6th Cir. 2004) ("It is well settled that courts should disregard conclusions of law (or "ultimate fact") found in affidavits submitted for summary judgment." (quoting F.R.C. Int'l, Inc. v. United States, 278 F.3d 641, 643 (6th Cir. 2002)) (internal quotation marks omitted)). Defendants further argue that the categorization is conclusory. The Court finds that CDI has not alleged any supporting facts regarding any employment relationship between Berman and NLR, any agreement between Berman and NLR, or any other subsequentcommunications between the two parties that could allow the Court to infer an agency relationship. Cf. Luvata v. Electrofin, Inc. v. Metal Processing Int'l, L.P., 3:11-CV-00398, 2012 WL 3961226, at *6 (W.D. Ky. Sept. 10, 2012) (refusing to credit allegation of agency relationship in a motion to dismiss where the factual allegations in plaintiff's pleadings and affidavits simply showed that it was possible that an individual defendant was acting as a defendant company's agent). Because CDI has not alleged facts to support its characterization of Jeff Berman as an agent, this characterization is conclusory, and the Court will disregard it.

B.

Defendants object to the rest of paragraph 4, along with paragraphs 5, 6, and 9, on personal knowledge and hearsay grounds. Although paragraph 2 of the Affidavit states that Carstanjen has "personal knowledge of the matters set forth herein," such a blanket statement cannot save an affidavit provision. See Ortiz v. Anchor Realty Const., Inc., 2:08-CV-800, 2011 WL 2441918, at *6 (S.D. Ohio June 14, 2011) (citing Spencer v. City of Hollywood, Fla., No. 08-60028-CIV, 2009 WL 980274, at *3 n.4 (S.D. Fla. Apr. 10, 2009)). Carstanjen did not allege to have been a party to the conversation...