F. McConnell & Sons, Inc. v. Target Data Systems

• Decision Date: 09 February 2000
• Docket Number: No. 1:98-CV-312.,1:98-CV-312.
• Citation: 84 F.Supp.2d 980
• Parties: F. McCONNELL & SONS, INC., Plaintiff, v. TARGET DATA SYSTEMS, INC., Defendant.
• Court: U.S. District Court — Northern District of Indiana

84 F.Supp.2d 980

F. McCONNELL & SONS, INC., Plaintiff, v.TARGET DATA SYSTEMS, INC., Defendant.

No. 1:98-CV-312.

United States District Court, N.D. Indiana, Fort Wayne Division.

February 9, 2000.

Alan VerPlanck, James Fenton, Eilbacher Scott Inc, Fort Wayne, IN, for F. McConnell and Sons, Inc., Plaintiff.

Martin T Fletcher, Sr, Rothberg and Logan, Fort Wayne, IN, Brian P Daniels, Brenner Saltzman and Wallman, New Haven, CT, for Target Data Systems Inc, defendants.

MEMORANDUM OF DECISION AND ORDER

WILLIAM C. LEE, Chief Judge.

This matter is before the Court on plaintiff/counterdefendant F. McConnell & Sons, Inc.'s (M & S)April 27, 1999"Motion to Dismiss Portions of Defendant's Counterclaim."Also before the Court is plaintiff's "Motion to Strike the First Affirmative Defenses of DefendantTarget Data Systems, Inc." filed that same date.DefendantTarget Data Systems, Inc.(Target) —after a stay pending mediation was entered then lifted — responded to those motions on December 16, 1999 to which plaintiff filed its reply on January 11, 2000.For the following reasons, the motion to strike will be granted while the motion to dismiss will be granted in part and denied in part.

Discussion

This diversity action was filed by plaintiff M & S alleging that defendant Target did not pay appropriate commissions in connection with certain software development purportedly conducted by M & S pursuant to an agreement entered into between Target and M & S in June 1994.After briefing and subsequent ruling on a motion to dismiss, M & S filed its First Amended Complaint on February 22, 1999 to which Target filed its Answer, Affirmative Defenses and Counterclaims on March 24, 1999.It is that latter filing which is the subject of the present motions with plaintiff moving to dismissdefendant's fraud, I.C. 34-24-3-1, rescission, and reformation counterclaims, and with plaintiff moving to strike defendant's fraud in the inducement defense.That defense and those counterclaims all flow from defendant's allegations that plaintiff intentionally misrepresented its then-present state of mind with respect to plaintiff's purported acceptance of the commission structure proposed by defendant.¹

In considering a motion to dismiss, this Court takes as true the well-pleaded factual allegations of the non-movant and draws all reasonable inferences in its favor.See, Ogden Martin Systems of Indianapolis, Inc. v. Whiting Corp.,179 F.3d 523, 526(7th Cir.1999).A motion to dismiss should not be granted unless it appears that the claimant can prove no set of facts in support of its claim which would entitle it to relief.Lachmund v. ADM Investor Services, Inc.,191 F.3d 777, 781(7th Cir.1999)(citing, Conley v. Gibson,355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80(1957)).²

While "Rule 8(a)(2) of the Federal Rules of Civil Procedure requires only that a [claimant] plead a `short and plain statement of the claim showing that the pleader is entitled to relief'" and does "`not require a claimant to set out in detail the facts upon which he bases his claim,' ... FRCP 9(b) embodies the exception to this otherwise lenient rule" by requiring that fraud be pleaded with particularity.Payton v. Rush-Presbyterian-St. Luke's Medical Center,184 F.3d 623, 626-27(7th Cir.1999)(internal citations omitted)."The higher standard in those cases is warranted by the `great harm to the reputation of a business firm or other enterprise' a fraud claim can do."Id.Other reasons advanced for the heightened pleading requirement for fraud allegations are that "fraud is frequently charged irresponsibly by people who have suffered a loss and want to find someone to blame for it" and that "charges of fraud (and also mistake, the other charge that Rule 9(b) requires to be pleaded with particularity) frequently ask courts in effect to rewrite the parties' contract or otherwise disrupt established relationships...."Ackerman v. Northwestern Mutual Life Insurance Co.,172 F.3d 467, 469(7th Cir.1999)(internal citations omitted).

"Rule 9(b) requires heightened pleading of fraud claims in all civil cases brought in the federal courts, whether or not the applicable state or federal law requires a higher standard of proving fraud, which sometimes it does and sometimes it does not."Id.By its terms, Rule 9(b) provides that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity."F.R.Civ.P. 9(b)."The circumstances of fraud or mistake `include the identity of the person who made the misrepresentations, the time, place and content of the misrepresentation, and the method by which the misrepresentations was communicated to the plaintiff.'"General Electric Capital Corp. v. Lease Resolution Corp.,128 F.3d 1074, 1078(7th Cir.1997).These requirements have been described as "the who, what, when, where, and how: the first paragraph of any newspaper story."DiLeo v. Ernst & Young,901 F.2d 624, 627(7th Cir.1990).

With those standards in mind, the Court turns to the presently pending motions.Because the affirmative defense and all of the counterclaims which plaintiff finds objectionable flow from the allegations contained in Target's first affirmative defense, subsequent analysis will be aided by setting out those allegations verbatim:

1.Target was incorporated in or about 1988 and has been at all relevant times in the business of developing and licensing computer software design to assist food service distributors in managing every aspect of their business.

2.The first program developed and marketed by Target was the "Distributor 4GL" program which included order processing, routing, payroll, receiving, purchase order processing, inventory control, bin tracking, accounts payable, accounts receivable, general ledger, sales analysis, contracts management, food show processing, bid systems, sheltered income process, and system management modules.

3.Broadline food service distributors (that is, entities which distribute foodrelated products to wholesale distributors) can run every aspect of their company on Distributor4GL.

4.Distributor 4GL, however, was not designed for entities who distributed products to retail sales locations.

5.In or about March, 1994, Target was contacted by M & S to discuss M & S's licensing from Target certain rights in the Distributor 4GL program.

6.Representatives of M & S, including James McConnell, met with Target representatives in Connecticut in or about May 1994 to see a demonstration of Distributor 4GL and to further discuss the licensing of that product.

7.At the May 1994 meeting in Connecticut, M & S proposed that M & S develop a retail sales module (the "Retail Sales Module") to be incorporated into certain Distributor 4GL packages and that M & S thereafter make itself available as a demonstration site and sales resource upon successful development and incorporation of such a Retail Sales Module.

8.During the negotiations regarding the details of the relationship proposed by M & S, M & S did request a compensation structure whereby M & S, in exchange for its own performance, would receive a commission on all licensing by Target of Distributor 4GL, regardless of whether the licensed product included the Retails Sales Module, but Target rejected that compensation structure and such rejection was communicated to M & S.

9.As a counteroffer, Target proposed a compensation structure whereby M & S would be paid a commission on the licensing of only those Distributor 4GL programs which included the Retails Sales Module.

10.The specific compensation structure proposed by Target was that M & S would receive a commission of 10% of only those license fees received with respect to the contemplated Distributor 4GL/Retail Sales Module Package.

11.The exception to this 10% commission rate (that is, payment of only a 5% commission) would apply if the licensee prospect was a member of a buying group with a prior royalty arrangement because of additional expenses which would be incurred by Target in commercial dealings with any such group member.

12.The counteroffer was accepted by M & S during a June 2, 1994 telephone conversation with a representative of Target.

13.On or about June 3, 1994, the letter attached to M & S's First Amended Complaint as Exhibit A(without handwritten notations) was forwarded to M & S confirming, as a proposal, the general terms of the agreement reached on June 2, 1994(the "Proposal Letter").

14.Upon information and belief, upon M & S's receipt of the Proposal Letter, M & S, contrary to its prior representation as described above, secretly viewed the language set forth in Paragraph 3 of the Proposal Letter as creating the opportunity for M & S to claim at some subsequent date an entitlement to commissions on all Distributor 4GL license fees received by Target, not simply an entitlement to commissions on only those fees derived from the Distributor 4GL package which included M & S's Retail Sales Module.

15.With the fraudulent, undisclosed intent of subsequently making such a claim if it were in M & S's best interests, M & S immediately signed and returned the Proposal Letter fraudulently representing M & S's agreement to the terms thereof (rather than negotiating the terms of a formal contract in which more detailed language would appear).

16.The above 1994 beliefs and intentions of M & S were disclosed to a representative of Target in a telephone conversation in or about August 1998, in which conversation M & S admitted, inter alia, that, upon receipt of the Proposal Letter, M & S "couldn't sign it fast enough."

17.At no time prior to August 1998 did M & S ever advise Target that M & S believed that Target owed M & S 10% of the license fees being received by Target with respect to those Distributor 4GL programs which did not include M & S's proposed Retail Sales Module.

18.At no time to the present has M & S ever...