Connaughton v. Chipotle Mexican Grill, Inc.

• Decision Date: 02 May 2017
• Citation: 53 N.Y.S.3d 598,75 N.E.3d 1159,29 N.Y.3d 137
• Parties: Kyle CONNAUGHTON, Appellant, v. CHIPOTLE MEXICAN GRILL, INC., et al., Respondents.
• Court: New York Court of Appeals Court of Appeals

29 N.Y.3d 137

75 N.E.3d 1159

53 N.Y.S.3d 598

Kyle CONNAUGHTON, Appellant,

v.CHIPOTLE MEXICAN GRILL, INC., et al., Respondents.

Court of Appeals of New York.

May 2, 2017.

Kaiser Saurborn & Mair, P.C., New York City (Daniel J. Kaiser and Henry L. Saurborn, Jr., of counsel), for appellant.

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

OPINION OF THE COURT

RIVERA, J.

Plaintiff Kyle Connaughton appeals, as limited by his brief, from an Appellate Division order affirming the dismissal of his complaint under CPLR 3211(a)(7) for failure to state a cause of action for fraudulent inducement against defendants Chipotle Mexican Grill and its Chief Executive Officer, Steven Ells. We affirm because plaintiff failed to adequately plead compensable damages.

I.

Plaintiff is a well-known chef who, prior to his employment with Chipotle, was developing a concept for a ramen restaurant chain. Plaintiff prepared a business plan and actively pursued potential buyers until Ells showed interest in the concept. Plaintiff then turned his efforts to developing ideas specifically for Chipotle's restaurant platform. Thereafter, Ells offered to purchase the concept, and plaintiff, with the assistance of legal counsel, negotiated an agreement whereby he would work on the restaurant design for Chipotle with the title of Culinary Director based out of New York City.

The agreement expressly states that plaintiff's employment was at-will, and that both plaintiff and Chipotle had the right to terminate the contract at any time without notice or cause. The agreement details plaintiff's compensation. Chipotle agreed to pay plaintiff an annual salary of $150,000, and monthly car and housing allowances totaling $2,700. Plaintiff was also eligible for a merit bonus, increased salary, and a defined number of shares in Chipotle stock, which vested based on years of uninterrupted employment. Some stocks were scheduled to vest after two years, and another set would vest after plaintiff reached his three-year anniversary with Chipotle.

Plaintiff diligently worked to develop the ramen restaurant concept with Chipotle, and traveled widely to perfect his ideas and to purchase equipment and proprietary systems. In preparation for the launch of the flagship restaurant, Chipotle promoted the hiring of plaintiff as its new high-level chef. Plaintiff appeared in various widely-circulated and noted publications, spoke to journalists, and attended Chipotle-sponsored events to help market Chipotle restaurant brands.

All seemed to be going well and, in accordance with the agreement, plaintiff received his annual salary, monthly allowances, a first year-end bonus, and first set of vested stock. It appeared that defendants were on schedule to launch the restaurant in New York City by the end of plaintiff's third year of employment. However, things took a very different turn.

While plaintiff was working on staffing for the new restaurant, he learned from Chipotle's Chief Marketing Officer (CMO) that Ells had a non-disclosure agreement (NDA) with another well-known chef, who previously worked with defendants on a ramen restaurant concept, similar in both purpose and design to the one defendants contracted plaintiff to develop. The prior project fell apart when that chef and defendants failed to agree on financial terms. Defendants remained subject to the NDA with the other chef. Chipotle's CMO confided in plaintiff that the chef would sue under the NDA if Chipotle opened the ramen restaurant. Plaintiff further alleged that defendants converted, without authorization, the other chef's design for what became the Washington, D.C. flagship restaurant for one of Chipotle's other brands.

When plaintiff confronted Ells about the NDA, Ells told him to continue with the work on the ramen restaurant, but plaintiff refused. Soon thereafter, Ells fired plaintiff.

As relevant to this appeal, plaintiff sued defendants for fraudulent inducement.¹ Plaintiff claimed that by virtue of his reasonable reliance on Ells' omissions about the business arrangement with the other chef, defendants fraudulently induced him to work for Chipotle and to share his restaurant concept to his detriment. He alleged that he would not have entered into the agreement with defendants had he known about the prior business arrangement. He further asserted that the ideas the Chipotle staff contributed to plaintiff's design for the restaurant concept actually belonged to the other chef, and that using those ideas to launch plaintiff's project would subject plaintiff to legal action. Plaintiff claimed he was "damaged in an amount to be determined at trial, including, but not limited to, the value of his Chipotle equity and lost business opportunities in connection with his ramen concept." He further requested compensatory and punitive damages in amounts to be determined at trial, as well as attorneys fees and disbursements.

Defendants moved to dismiss the complaint under CPLR 3211(a)(1) based on the documentary evidence that established plaintiff's at-will employment status, and under 3211(a)(7) for failure to state a cause of action. Defendants argued, in part, that a cause of action for fraudulent inducement may be maintained only where a party has suffered out-of-pocket pecuniary loss, not, as in plaintiff's case, where damages are speculative or consist of lost business opportunities.

Supreme Court granted the motion and the Appellate Division affirmed with two Justices dissenting (135 A.D.3d 535, 23 N.Y.S.3d 216 [1st Dept.2016] ). The majority held that plaintiff's damages were speculative and the facts alleged did not support an inference of calculable damages. The dissent concluded that because the pleading must be construed liberally and damages need not be proved during the pleading stage, the case should proceed to discovery to allow plaintiff to accumulate evidence of a pecuniary loss. The dissent also maintained that, if successful, plaintiff would be entitled to nominal damages (135 A.D.3d at 546–547, 23 N.Y.S.3d 216 [Saxe, J., dissenting] ).

Plaintiff appealed to this Court as of right under CPLR 5601(a), based on the two-Justice dissent on a question of law. We now affirm.

II.

On a motion to dismiss for failure to state a cause of action under CPLR 3211(a)(7), "[w]e accept the facts as alleged in the complaint as true, accord plaintiff[ ] the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory" (Leon v. Martinez, 84 N.Y.2d 83, 87–88, 614 N.Y.S.2d 972, 638 N.E.2d 511 [1994] ). "At the same time, however, allegations consisting of bare legal conclusions ... are not entitled to any such consideration" ( Simkin v. Blank, 19 N.Y.3d 46, 52, 945 N.Y.S.2d 222, 968 N.E.2d 459 [2012] [internal quotation marks omitted] ). Dismissal of the complaint is warranted if the plaintiff fails to assert facts in support of an element of the claim, or if the factual allegations and inferences to be drawn from them do not allow for an enforceable right of recovery (see e.g. Basis Yield Alpha Fund [Master] v. Goldman Sachs Group, Inc., 115 A.D.3d 128, 134, 980 N.Y.S.2d 21 [1st Dept.2014] ; see also John R. Higgitt, Practice Commentaries, McKinney's Cons. Laws of N.Y., CPLR C3211:22 ["(T)he (CPLR 3211[a] [7] ) motion is useful in disposing of actions ... in which the plaintiff has identified a cognizable cause of action but failed to assert a material allegation necessary to support the cause of action"] ).

To allege a cause of action based on fraud, plaintiff must assert "a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury" (Lama Holding Co. v. Smith Barney, 88 N.Y.2d 413, 421, 646 N.Y.S.2d 76, 668 N.E.2d 1370 [1996] [citations omitted] ). Critically,

"[a] false representation does not, without more, give rise to a right of action, either at law or in equity, in favor of the person to whom it is addressed. To give rise, under any circumstances, to a cause of action, either in law or equity, reliance on the false representation must result in injury....

"If the fraud causes no loss, then the plaintiff has suffered no damages" (Sager v. Friedman, 270 N.Y. 472, 479–481, 1 N.E.2d 971 [1936] ).

In New York, as in multiple other states, " ‘[t]he true measure of damage is indemnity for the actual pecuniary loss sustained as the direct result of the wrong’ or what is known as the ‘out-of-pocket’ rule" (Lama Holding, 88 N.Y.2d at 421, 646 N.Y.S.2d 76, 668 N.E.2d 1370, quoting Reno v. Bull, 226 N.Y. 546, 553, 124 N.E. 144 [1919] ). Under that rule, "[d]amages are to be calculated to compensate plaintiffs for what they lost because of the fraud, not to compensate them for what they might have gained.... [T]here can be no recovery of profits which would have been realized in the absence of fraud" (id. at 421, 646 N.Y.S.2d 76, 668 N.E.2d 1370 citing Foster v. Di Paolo, 236 N.Y. 132, 140 N.E. 220 [1923], AFA Protective Sys. v. American Tel. & Tel. Co., 57 N.Y.2d 912, 456 N.Y.S.2d 757, 442 N.E.2d 1268 [1982], and Cayuga Harvester v. Allis–Chalmers Corp., 95 A.D.2d 5, 465 N.Y.S.2d 606 [4th Dept.1983] ). Moreover, this Court has "consistent[ly] refus[ed] to allow damages for fraud based on the loss of a contractual bargain, the extent, and, indeed, ... the very existence of which is completely undeterminable and speculative" (Dress Shirt Sales v. Hotel Martinique Assoc., 12 N.Y.2d 339, 344, 239 N.Y.S.2d 660, 190 N.E.2d 10 [1963] ).

Here, plaintiff's pleading is fatally deficient because he did not assert compensable damages resulting from defendants' alleged fraud. The...