Van Rees v. Unleaded Software, Inc.

• Decision Date: 27 June 2016
• Docket Number: Supreme Court Case No. 14SC66
• Citation: 2016 CO 51,373 P.3d 603
• Parties: John VAN REES, Sr., d/b/a ExquisiteCrystals.com, Petitioner, v. UNLEADED SOFTWARE, INC., a/k/a The Unleaded Group, Respondent.
• Court: Colorado Supreme Court

373 P.3d 603

2016 CO 51

John VAN REES, Sr., d/b/a ExquisiteCrystals.com, Petitioner

v.UNLEADED SOFTWARE, INC., a/k/a The Unleaded Group, Respondent.

Supreme Court Case No. 14SC66

Supreme Court of Colorado.

June 27, 2016

Attorneys for Petitioner: Westerfield & Martin, LLC, Zachary S. Westerfield, Logan R. Martin, Denver, Colorado

Attorneys for Respondent: Law Offices of Peggy Stevens, P.C., Peggy E. Stevens, Lakewood, Colorado

En Banc

JUSTICE EID

delivered the Opinion of the Court.

¶1 Petitioner John Van Rees, Sr., sells metaphysical crystals through his website, ExquisiteCrystals.com. Van Rees contracted with respondent Unleaded Software, Inc., to perform web-related services and to design additional websites. After Unleaded missed deadlines and failed to deliver the promised services, Van Rees brought suit asserting multiple tort claims, a civil theft claim, three breach of contract claims, and a claim for violations of the Colorado Consumer Protection Act (“CCPA”).

¶2 Granting Unleaded's C.R.C.P. 12(b)(5)

motion, the trial court dismissed all but Van Rees's contract claims, on which the jury found in Van Rees's favor. Van Rees appealed the dismissal of his other claims, and the court of appeals affirmed, determining that the tort and civil theft claims were barred by the economic loss rule because they were related to promises memorialized in the contracts, and the CCPA claim failed to allege a significant public impact. Van Rees v. Unleaded Software, Inc. , 2013 COA 164, ¶¶ 26, 43, 47, ––– P.3d ––––.

¶3 We granted Van Rees's petition for certiorari and now affirm in part and reverse in part. The economic loss rule “serves to maintain a distinction between contract and tort law.” Town of Alma v. AZCO Constr., Inc. , 10 P.3d 1256, 1262 (Colo. 2000)

. The question is not, however, whether the tort claims relate to a contract, as the court of appeals held here, but rather whether they stem from a tort duty independent of the contract. Id. at 1262. In this case, Van Rees's tort claims allege that Unleaded induced him to enter into a contractual agreement with false promises of its capabilities to perform web-related services. These pre-contractual misrepresentations are distinct from the contract itself, and may form the basis of an independent tort claim. See Keller v. A.O. Smith Harvestore Prods., Inc. , 819 P.2d 69, 72 (Colo. 1991). Accordingly, we reverse the court of appeals' judgment as to the tort claims. As to the civil theft claim, we need not reach the question of the application of the economic loss rule to civil theft because we affirm the court of appeals on the ground that the claim fails to adequately allege the knowing deprivation of a thing of value. Finally, we affirm the judgment as to the CCPA claim on the ground that Van Rees failed to allege a significant public impact. Accordingly, we affirm in part and reverse in part, and remand the case for further proceedings consistent with this opinion.

I.

¶4 Van Rees sells metaphysical crystals at ExquisiteCrystals.com. After successfully running the website, Van Rees wanted to add three new websites that would cater to specific customers but tie into the same warehouse and inventory.

¶5 Unleaded advertises itself as a certified Gold Partner of Magento, a leading e-commerce software program. Based on this and Unleaded's representations that it was a web design, search-engine optimization (“SEO”), webhosting, and media company, Van Rees hired Unleaded to redesign ExquisiteCrystals.com and build the three additional websites. The contract¹ signed in early December 2009 outlined that Unleaded would create a new website using Magento; design three new sites; provide ECC Integration (a QuickBooks application), training, and website optimization; and have the sites live on January 22, 2010.

¶6 But January 22 did not bring new websites. Instead, it brought news from Unleaded that the websites would not be ready until at least March 4. On March 2, the parties entered into a second contract for SEO services. March 4 brought another delay and Unleaded said the website would be live and operational on April 1. The parties then entered into a third contract, specifying that Unleaded would host the website on a dedicated server. But SEO services were not performed, the website was not hosted on a dedicated server but on a shared one, and Van Rees alleges that within minutes of going live on April Fools' Day, Unleaded's work caused “irreparable harm” to his website and brand. This included the destruction of natural search rankings, broken sections, and slowness from the shared server.

¶7 Van Rees sued Unleaded for negligence, fraud, constructive fraud, fraudulent concealment, negligent misrepresentation, civil theft, violation of the CCPA, and three breaches of contract. Van Rees alleged that Unleaded made numerous false statements and representations prior to entering into the contracts that induced him to enter the contracts, knew that it lacked sufficient staff to complete the website on time, and did not intend to provide the specified webhosting or SEO work. He alleged that, in fact, Unleaded was not performing any SEO work at the time, and jokingly referred to its SEO department as the “little green ball in the corner.”

¶8 The trial court dismissed all but Van Rees's contract claims, which went to a jury that awarded him damages. The court of appeals affirmed the dismissal, citing the economic loss rule as a bar to his tort and civil theft claims,² and lack of public impact as to his CCPA claim. We now affirm in part and reverse in part, and remand the case for further proceedings consistent with this opinion.³

II.

¶9 We review de novo the granting of a Rule 12(b)(5)

motion for failure to state a claim, accepting the factual allegations contained in the complaint as true and viewing them in the light most favorable to the plaintiff. Bly v. Story , 241 P.3d 529, 533 (Colo. 2010). We first consider the dismissal of Van Rees's tort claims, and then turn to his civil theft and consumer protection claims.

A.

¶10 The court of appeals affirmed the trial court's dismissal of Van Rees's tort claims for fraud, fraudulent concealment, constructive fraud, and negligent misrepresentation,⁴ reasoning that because they were related to Unleaded's promises to perform that were later memorialized in the contracts, they were barred by the economic loss rule. Van Rees , ¶ 20

. Van Rees argues that the court of appeals erred because the tort claims alleged a violation of an independent duty that did not arise from the contracts. We agree with Van Rees.

¶11 The economic loss rule “serves to maintain a distinction between contract and tort law.” Town of Alma , 10 P.3d at 1262

. In the seminal case of Town of Alma , in which we first recognized the economic loss rule, the town had entered into a contract with a construction company to build and maintain a water system. The contract stated that the company would guarantee its materials, equipment, and quality of work. When the water system started leaking, the town sued the construction company under a negligence theory. We held that the economic loss rule barred such a negligence claim because the contract itself—that is, its promise to perform the work with care—was the source of the duty of care. Id. at 1266

. We concluded that “a party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for such a breach absent an independent duty of care under tort law .” Id. at 1264 (emphasis added). The economic loss rule thus prevents tort law from swallowing all of contract law. Id. at 1260.

¶12 The critical question in this case, then, is not whether Van Rees's tort claims are related to the promises that eventually formed the basis of the contract, as the court of appeals held. Van Rees , ¶¶ 17, 20

. Rather, the question is whether the tort claims flow from an independent duty under tort law. We conclude that they do.

¶13 There is an important distinction between failure to perform the contract itself, and promises that induce a party to enter into a contract in the first place. Here, Van Rees claims not only that Unleaded breached its obligations under the contract (claims that are not at issue in this appeal), but also that it wrongfully induced him into entering a contractual relationship knowing that it did not have the capability to perform any of the promised web-related services. Under our caselaw, the latter allegations state a violation of a tort duty that is independent of the contract.

¶14 We explored the distinction between misrepresentations made to induce the formation of a contract and the contract itself in Keller v. A.O. Smith Harvestore Products, Inc. , 819 P.2d 69 (Colo. 1991)

. There, the plaintiffs purchased a grain storage system manufactured by the defendant based upon pre-contractual representations regarding how the system would operate. After the system allegedly caused problems with plaintiffs' milk herd, plaintiffs brought suit for negligent misrepresentation, contending that the manufacturer induced them into purchasing the system with false promises. The manufacturer claimed that the plaintiffs could not bring a negligent misrepresentation claim because the plaintiffs had executed a fully integrated purchase agreement. We rejected the manufacturer's argument, concluding that a negligent misrepresentation claim was not based on the contract itself—fully integrated or not—but on “principles of duty and reasonable conduct.” Id. at 73. Specifically, “a contracting party's negligent misrepresentation of material facts prior to the execution of an agreement may provide the basis for an independent tort claim asserted by a party detrimentally relying on such negligent misrepresentations.” Id. at 72.

¶15 Like the plaintiffs in Keller

, Van Rees's tort claims are based on misrepresentations made prior to the formation of the contracts, which he alleges induced him to enter...