Connaughton v. Chipotle Mexican Grill, Inc.

• Decision Date: 19 January 2016
• Citation: 23 N.Y.S.3d 216,135 A.D.3d 535
• Parties: Kyle CONNAUGHTON, Plaintiff–Appellant, v. CHIPOTLE MEXICAN GRILL, INC., Defendants–Respondents.
• Court: New York Supreme Court — Appellate Division

135 A.D.3d 535

23 N.Y.S.3d 216

Kyle CONNAUGHTON, Plaintiff–Appellant,

v.CHIPOTLE MEXICAN GRILL, INC., Defendants–Respondents.

Supreme Court, Appellate Division, First Department, New York.

Jan. 19, 2016.

Kaiser Saurborn & Mair, P.C., New York (Daniel J. Kaiser of counsel), for appellant.

Messner Reeves LLP, New York (Jean–Claude Mazzola of counsel), for respondents.

ACOSTA, J.P., SAXE, MOSKOWITZ, RICHTER, FEINMAN, JJ.

Order, Supreme Court, New York County (Shirley Werner Kornreich, J.), entered January 29, 2014, which granted defendants Chipotle Mexican Grill, Inc. and Steven Ells's motion to dismiss the complaint asserting claims for fraudulent inducement and unjust enrichment, affirmed, without costs.

Plaintiff, a well-known chef, alleges that in 2010 he sold his concept of a fast food restaurant chain serving ramen cuisine to defendants Chipotle Mexican Grill, Inc., and its founder and CEO, Steven Ells.¹ Plaintiff was then hired as an at-will employee to bring the concept to fruition. He was compensated through an employment contract providing a base salary and the promise that after working with defendants for three years on the project, he would receive a substantial amount of equity in the form of company stock. By its terms, plaintiff was restricted from working on ramen-related projects other than with defendants.

The complaint indicates that a considerable amount of work was done over the next year and a half. At the end of his first year, plaintiff received a full annual bonus and additional stock grants. Defendants informed him that the plan was to open the new restaurants in 2012. A lease was signed in September 2012 for a Manhattan-based flagship store.

In October 2012 plaintiff claims he learned from other Chipotle executives that in 2008 Ells had entered into a confidential agreement with David Chang, the owner of Momofuku Noodle Bar, to develop a ramen restaurant concept. Chang worked on the design for what ultimately became defendants' Washington D.C. flagship ramen cuisine restaurant called ShopHouse. However, the Chang–Ells agreement, containing nondisclosure provisions that have remained in force, fell apart when the parties were unable to agree on financial terms. Although Chang never agreed that his design work could be used for ShopHouse, according to the Chipotle executives, Ells "simply converted" Chang's work, without payment, to open ShopHouse. The Chipotle executives stated that Momofuku would sue Chipotle once Ells opened the ramen restaurant that plaintiff had developed.

Plaintiff confronted Ells with this information. Ells did not deny the previous business dealings. Instead, he "stunned" plaintiff by ordering him to proceed with the ramen concept, even knowing "it would end in litigation." Shortly thereafter, in November 2012, defendants terminated plaintiff's employment. Officially, he was terminated on the ground that he was engaged in outside work, which plaintiff disputes, and because Ells had lost confidence in the ramen project.

The complaint alleges two causes of action against defendants: fraudulent inducement and unjust enrichment. In sum, it alleges that defendants fraudulently induced plaintiff to work with them by purposefully withholding the existence of the nondisclosure agreement and earlier business agreement with Momofuku, material facts which defendants had a duty to reveal. According to the complaint, had plaintiff known of the defendants' prior dealings with Chang, plaintiff would never have accepted employment with Chipotle because the Momofuku agreement "substantially impacted [plaintiff's] ability to implement his own ramen concept with Mr. Ells." The complaint supposes that during the back and forth discussions with defendants during the development of the concept, the Chipotle staff must have communicated information and ideas that had originally come from Momofuku, thus violating the nondisclosure agreement, and also creating the appearance that plaintiff had stolen Momofuku's ramen concept. It also alleges that defendants received the benefit of his ramen concept without compensating him for it, as he did not receive the promised company stock. Plaintiff seeks compensatory damages in the form of a sum equal to his claimed Chipotle equity and his lost business opportunities. He also seeks punitive damages.

Plaintiff now appeals the dismissal of his complaint pursuant to CPLR 3211(a)(7).

To state a legally cognizable claim of fraudulent inducement based on a misrepresentation or omission, the complaint must allege that the defendant intentionally made a material misrepresentation of fact in order to defraud or mislead the plaintiff, and that the plaintiff reasonably relied on the misrepresentation and suffered damages as a result (see Oxbow Calcining USA Inc. v. American Indus. Partners, 96 A.D.3d 646, 650, 948 N.Y.S.2d 24 [1st Dept.2012] ; see also Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559, 883 N.Y.S.2d 147, 910 N.E.2d 976 [2009] ).

Unlike our dissenting colleagues, we conclude that the motion court properly dismissed the claim for fraudulent inducement. Curiously, plaintiff's complaint posits what would be his defense to any potential litigation brought by Chang had he gone forward with defendants' plans and fully carried out the ramen restaurant concept. In particular, it reveals that plaintiff has not been accused of stealing Chang's and Momofuku's ramen concept and that his professional reputation has not been tarnished. Plaintiff does not dispute that he received his agreed-upon salary and an annual bonus. He received what he contracted for in the employment agreement and has no ground to allege wrongful termination.

The facts alleged, even when viewed in a light most favorable to plaintiff, do not give rise to a reasonable inference that he sustained calculable damages based on defendants' actions. Plaintiff's employment was at will, and he has no claim of reasonable reliance on representations concerning continued employment (see Meyercord v. Curry, 38 A.D.3d 315, 316–317, 832 N.Y.S.2d 29 [1st Dept.2007] ; Tannehill v. Paul Stuart, Inc., 226 A.D.2d 117, 640 N.Y.S.2d 505 [1st Dept.1996] ). Any claim that he was deprived of the promised Chipotle stock cannot succeed, given that is undisputed that the express terms of the parties' agreement required him to be an employee for three years. Nor can he seek damages based on the alleged profits that would have been realized had there been no fraud. When a claim sounds in fraud, the measure of damages is governed by the "out-of-pocket" rule, which states that the measure of damages is "indemnity for the actual pecuniary loss sustained as the direct result of the wrong" (Lama Holding Co. v. Smith Barney, 88 N.Y.2d 413, 421, 646 N.Y.S.2d 76, 668 N.E.2d 1370 [1996] ; see Rather v. CBS Corp., 68 A.D.3d 49, 58, 886 N.Y.S.2d 121 [1st Dept.2009], lv. denied 13 N.Y.3d 715, 2010 WL 90258 [2010] [explaining that under Lama Holding Co., plaintiff Rather was "required to plead that he had something of value, was defrauded by CBS into relinquishing it for something of lesser value, and that the difference between the two constituted [his] pecuniary loss"] ). In other words, damages are calculated to compensate plaintiffs for what they lost because of the fraud, not for what they might have gained in the absence of fraud (Lama Holding Co. at 421, 646 N.Y.S.2d 76, 668 N.E.2d 1370 ). Additionally, plaintiff's claim that he would have received better remuneration had he partnered with a different entity is inherently speculative and would require any factfinder to engage in conjecture (see Geary v. Hunton & Williams, 257 A.D.2d 482, 482, 684 N.Y.S.2d 207 [1st Dept.1999] ).

The dissent suggests that the pleadings sufficiently support a reasonable inference that defendants' conduct may cause plaintiff compensable damages, in particular, that plaintiff may suffer injury to his professional reputation, and incur future legal expenses defending himself. However, "[t]he true measure of damage is indemnity for the actual pecuniary loss sustained as the direct result of the wrong" (Lama Holding Co. v. Smith Barney,

at 421, 646 N.Y.S.2d 76, 668 N.E.2d 1370 [quotation marks and citation omitted; emphasis added] ). The loss is computed by ascertaining the " difference between the value of the bargain which a plaintiff was induced by fraud to make and the amount or value of the consideration exacted as the price of the bargain" (Lama Holding Co. at 421, 646 N.Y.S.2d 76, 668 N.E.2d 1370, quotation marks and citation omitted; emphasis added). There are no allegations here that lead to the inference that plaintiff's reputation has been damaged, or that he has accrued defense-related legal fees, or has endured any other type of compensable injury.

For instance, in Caruso, Caruso & Branda, P.C. v. Hirsch, 41 A.D.3d 407, 837 N.Y.S.2d 734 (2d Dept.2007), cited by the dissent, the proposed counterclaim complaint alleged that in the underlying matrimonial action, the law firm should have filed a notice of pendency as to several properties that the matrimonial court had directed be transferred from the husband into the wife's name, when also directing that judgment in the divorce action was to be settled. Before judgment was entered, the properties became subject to bankruptcy proceedings brought by the husband and a family trust; the bankruptcy court held that the wife's interest in the properties never vested. The Second Department ruled that the wife's proposed amended counterclaim complaint sufficiently suggested that she had suffered damages attributable to the law firm's alleged malpractice (41 A.D.3d at 409–410, 837 N.Y.S.2d 734 ).

Here, in contrast, the allegations at best suggest that, depending on the future actions of Chang and Momufuko, plaintiff might suffer injury. Not only is there no suggestion or indication that actual pecuniary damages were sustained (see Hanlon v. MacFadden Publs., 302 N.Y. 502, 510, 99 N.E.2d...