Stanley Works Isr. Ltd. v. 500 Grp., Inc.

• Decision Date: 01 August 2018
• Docket Number: 3:17-cv-01765 (CSH)
• Citation: 332 F.Supp.3d 488
• Parties: The STANLEY WORKS ISRAEL LTD. f/k/a ZAG Industries, Ltd., Plaintiff, v. 500 GROUP, INC. and Paolo Tiramani, Defendants.
• Court: U.S. District Court — District of Connecticut

332 F.Supp.3d 488

The STANLEY WORKS ISRAEL LTD. f/k/a ZAG Industries, Ltd., Plaintiff,

v.500 GROUP, INC. and Paolo Tiramani, Defendants.

3:17-cv-01765 (CSH)

United States District Court, D. Connecticut.

Signed August 1, 2018

John Cordani, McCarter & English LLP, Hartford, CT, Brian A. Daley, Peter M. Nolin, Carmody Torrance Sandak & Hennessey, LLP - STMFD, Stamford, CT, for Plaintiff.

Benjamin C. Jensen, Peter E. Strniste, Jr., Robinson & Cole, LLP-HTFD, Hartford, CT, for Defendant.

RULING ON MOTION TO DISMISS

CHARLES S. HAIGHT, JR., Senior United States District Judge

The Stanley Works Israel Ltd., f/k/a ZAG Industries, Ltd. ("Plaintiff"), an Israeli limited liability company, brings this diversity action against Defendants 500 Group, Inc., a New York corporation, and Paolo Tiramani, a citizen of Nevada (collectively, "Defendants"). Plaintiff and Defendant 500 Group were parties to certain product license agreements that related generally to patent rights owned by 500 Group. Plaintiff's claims against Defendants arise from a dispute over monies paid pursuant to a settlement agreement between the parties.

Defendants now move pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure to dismiss the Amended Complaint for failure to state a claim upon which relief can be granted, Doc. 26. Plaintiff has resisted the motion, Doc. 29, and Defendants have filed a reply brief, Doc. 32. This Ruling resolves Defendants' motion.

I. BACKGROUND

The following facts are derived from Plaintiff's Amended Complaint, and are assumed true for the purposes of this motion.

Plaintiff and Defendant 500 Group were parties to certain product license agreements and a letter agreement (collectively, the "License Agreements"), which related generally to patent rights owned by 500 Group. Amended Complaint, Doc. 24 ¶ 7. The License Agreements were silent on the tax treatment of royalty payments made under their terms. Id. ¶ 8. However, under Israeli law, Plaintiff was required to withhold certain percentages of such royalty payments to 500 Group, and to then remit that amount to the Israeli tax authority to satisfy 500 Group's tax obligations in Israel. Id. Therefore, during the term of the License Agreements, with 500 Group's consent and agreement, Plaintiff withheld the appropriate amounts from 500 Group's royalty payments, and remitted the tax to the Israeli tax authority. Id.

Disputes between the parties relating to the License Agreements arose; these disputes resulted in a demand for arbitration. Id. ¶ 9. The disputes were then negotiated and the parties ultimately reached a settlement. Id. ¶ 10. Plaintiff and 500 Group entered into a Settlement Agreement on March 31, 2017, which provided, among other things, that Plaintiff would pay a sum of ten million dollars to Defendant 500 Group. Id. ¶¶ 11-12. The parties agreed that of this total, six million dollars constituted payment for Plaintiff's purchase of 500 Group's patent rights; the remaining four million dollars constituted royalty payments to 500 Group. Id. ¶ 12.

Plaintiff was required to withhold a portion of total amount payable under the Settlement Agreement for tax purposes, and then remit the tax to the Israeli tax authority on behalf of 500 Group. Id. ¶ 13. In this situation, pursuant to Israeli law, Plaintiff was required to withhold $2,500,000, or 25% of the total payment amount, unless the parties obtained prior approval from the Israeli tax authority for a different withholding arrangement. Id. ¶ 14. 500 Group would then be responsible to seek a refund of any portion of the withheld amount that was not taxable directly from the Israeli tax authority. Id. ¶ 14.

The parties decided to delay the payment of the amount due under the Settlement Agreement so that they could obtain pre-approval from the tax authority for "structuring a reduced amount of withholding, in view of the agreed-upon structure of the Settlement Agreement." Id. ¶ 15. This agreement was made in mutually-signed electronic writings. Id. The parties believed that under Israeli law, the six million dollar patent rights payment should not be taxed, and the four million dollar royalty payment should be taxed at the prior royalty rate of 15%. Id. Thus, if pre-approval was obtained, 500 Group's total tax burden would be $600,000. Id. According to the signed electronic agreements between the parties, that amount would be withheld by Plaintiff and remitted to the Israeli tax authority. Id.

500 Group hired Ernst & Young to act on its behalf to assist in obtaining the aforementioned pre-approval. Id. ¶ 17. Defendant Tiramani and other agents of 500 Group confirmed the parties' agreement relating to the tax withholdings multiple times in writing, including in emails signed by Tiramani and other agents of 500 Group. Id. ¶ 18. Tiramani was personally involved in efforts to further the parties' tax withholdings agreement, and agreed that the parties should continue to seek approval for the withholdings under the current Settlement Agreement, rather than re-execute the Agreement to explicitly split the payments into two categories. Id. ¶ 20.

Pre-approval was ultimately obtained by Ernst & Young, acting on behalf of 500 Group for the parties' proposal. Id. ¶ 21. 500 Group agreed that Plaintiff was to retain $600,000 from the payment total under the Settlement Agreement. The parties' agreement to seek preapproval and proceed with withholding 15% of the royalty payment was "acted on to completion." Id. 500 Group's agreements, representations and conduct regarding the tax withholding issue induced Plaintiff's reliance, in that Plaintiff aided 500 Group to obtain the preapproval, and Plaintiff performed its obligation under the agreement by remitting $600,000 to the Israeli tax authority in satisfaction of 500 Group's tax obligations. Id. ¶ 22.

Under the Settlement Agreement, 500 Group was to provide Plaintiff with instructions for wiring the payment from Plaintiff to 500 Group called for by the Agreement. Id. ¶ 23. 500 Group instructed Plaintiff to wire the payment to its account at Patriot Bank in Stamford, Connecticut. Id. ¶ 24. The settlement funds were wired to this bank account on June 1, 2017. Id. ¶ 25. However, Plaintiff mistakenly failed to deduct $600,000 from the total as the agreed-upon tax withholdings. Id. Thus, Plaintiff overpaid 500 Group by $600,000. Id.

On June 5, 2017, Plaintiff's bank requested that the funds which were erroneously transmitted be recalled; this request was denied. Id. ¶ 26. On or about June 7, 2017, Plaintiff explained to 500 Group that it had mistakenly overpaid, and asked 500 Group to return the $600,000 overpayment. Id. ¶ 27. 500 Group "failed to diligently respond" to Plaintiff's request. Id. ¶ 28. Plaintiff then made multiple follow-up requests to 500 Group for it to return the money. Id. ¶ 29. Although Tiramani initially indicated by email that he intended to return the funds and asked about the logistics of such a transfer, all of Plaintiff's follow-up communications and requests were either ignored or refused, without any legal explanation by Defendants. Id. ¶ 30.

Plaintiff was still liable on behalf of 500 Group to the Israeli tax authority for the full amount of the pre-approved withholdings under the Settlement Agreement. Id. ¶ 31. Accordingly, Plaintiff paid $600,000 to the tax authority on or about August 15, 2017. Id. Defendants continue to refuse to return Plaintiff's $600,000, despite continued and repeated requests and demands. Id. ¶ 32.

II. STANDARD OF REVIEW

"On a motion to dismiss, the issue is ‘whether the claimant is entitled to offer evidence to support the claims.’ " Patane v. Clark , 508 F.3d 106, 111 (2d Cir. 2007) (quoting Scheuer v. Rhodes , 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1984) ). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim that is plausible on its face.’ " Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (" Iqbal ") (quoting Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (" Twombly ") ). This pleading standard creates a "two-pronged approach," Iqbal , 556 U.S. at 679, 129 S.Ct. 1937, based on "[t]wo working principles." Id. at 678, 129 S.Ct. 1937.

First, all factual allegations in the complaint must be accepted as true and all reasonable inferences must be drawn in the favor of the non-moving party. See id. ; see also Gorman v. Consolidated Edison Corp. , 488 F.3d 586, 591-92 (2d Cir. 2007) (citation omitted). The presumption of truth does not extend, however, to "legal conclusions" or "[t]hreadbare recitals of the elements of a cause of action supported by mere conclusory statements[.]" Iqbal , 556 U.S. at 678, 129 S.Ct. 1937. Second, "a complaint that states a plausible claim for relief" will survive a motion to dismiss and "[d]etermining whether a complaint states a plausible claim for relief will ... be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Harris v. Mills , 572 F.3d 66, 72 (2d Cir. 2009) (quoting Iqbal , 556 U.S. at 679, 129 S.Ct. 1937 ) (quotation marks omitted). "Dismissal under Federal Rule of Civil Procedure 12(b)(6) is appropriate when ‘it is clear from the face of the complaint, and matters of which the court may take judicial notice, that the plaintiff's claims are barred as a matter of law.’ " Associated Fin. Corp. v. Kleckner , 480 F. App’x 89, 90 (2d Cir. 2012) (quoting Conopco, Inc. v. Roll Int'l , 231 F.3d 82, 86 (2d Cir. 2000) ).

III. DISCUSSION

Plaintiff's Amended Complaint raises counts sounding in breach of contract, unjust enrichment, unfair trade practices, conversion, and civil theft. The Court will address each of Defendants' arguments for Rule 12(b)(6) dismissal of the claims asserted by Plaintiff, based on the well-pled factual allegations of the Amended Complaint.

A. Choice of Law

Defendants argue that New...