Vtech Holdings Ltd. v. Lucent Technologies, Inc.

• Decision Date: 27 October 2001
• Docket Number: No. 01 Civ. 0612(JGK).,01 Civ. 0612(JGK).
• Citation: 172 F.Supp.2d 435
• Parties: VTECH HOLDINGS LIMITED and VTech Electronics Netherlands, B.V., Plaintiffs, v. LUCENT TECHNOLOGIES INC. and Lucent Technologies Consumer Products, L.P., Defendants.
• Court: U.S. District Court — Southern District of New York

172 F.Supp.2d 435

VTECH HOLDINGS LIMITED and VTech Electronics Netherlands, B.V., Plaintiffs, v. LUCENT TECHNOLOGIES INC. and Lucent Technologies Consumer Products, L.P., Defendants.

No. 01 Civ. 0612(JGK).

United States District Court, S.D. New York.

October 27, 2001.

Ridley M. Whitaker, New York City, for plaintiffs.

Sandra Goldstein, Cravath, Swaine & Moore, New York City, for defendants.

OPINION AND ORDER

JOHN G. KOELTL, District Judge.

This action arises out of the purchase by the plaintiffs, VTech Holdings Ltd. and VTech Electronics Netherlands, B.V. (collectively "VTech") of the consumer telephone business of defendant Lucent Technologies ("Lucent").¹ The plaintiffs allege claims of fraud (Count I), breach of warranties (Count II), breach of covenant causing certain representations and warranties to be untrue and incorrect (Count III), breach of covenants (Count IV), and rescission (Count V). The plaintiffs also seek attorney's fees (Count VI). Pursuant to Fed.R.Civ.P. 12(b)(6), Lucent has moved to dismiss Counts I, II (insofar as the claim for relief exceeds $45 million), and III of the complaint for failure to state a claim upon which relief can be granted.

I.

On a motion to dismiss, the allegations in the complaint are accepted as true. See Grandon v. Merrill Lynch & Co., 147 F.3d 184, 188 (2d Cir.1998). In deciding a motion to dismiss, all reasonable inferences must be drawn in the plaintiff's favor. See Gant v. Wallingford Bd. of Educ., 69 F.3d 669, 673 (2d Cir.1995); Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir.1989). The court's function on a motion to dismiss is "not to weigh the evidence that might be presented at trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir.1985). Therefore, the defendants' present motion should only be granted if it appears that the plaintiff can prove no set of facts in support of its claim that would entitle it to relief. See Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Grandon, 147 F.3d at 188; see also Goldman, 754 F.2d at 1065.

In deciding the motion, the court may consider documents referenced in the complaint and documents that are in the plaintiff's possession or that the plaintiff knew of and relied on in bringing suit. See Brass v. American Film Technologies, Inc., 987 F.2d 142, 150 (2d Cir.1993); Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d Cir.1991); I. Meyer Pincus & Assoc., P.C. v. Oppenheimer & Co., Inc., 936 F.2d 759, 762 (2d Cir.1991); Skeete v. IVF America, Inc., 972 F.Supp. 206, 208 (S.D.N.Y.1997).²

II.

The following facts are accepted as true for the purposes of the motion to dismiss. In the fall of 1998, VTech entered into negotiations to acquire the defendants' consumer telephone business (the "Business"). (Compl. ¶ 10.) In February 1999, VTech submitted to the defendants a proposal for the purchase of the Business. (Compl. ¶ 12.) VTech and the defendants continued negotiations until June 1999, when the defendants announced their intention to sell the Business to a group of insiders who had formed a management buyout group. (Compl.¶¶ 12, 14.) However, in September 1999, AT & T separately informed VTech and the management buyout group that it had decided to award its Consumer Wireless Telephone Brand License, under which Lucent had formerly marketed its consumer telephone products, to VTech. (Compl.¶¶ 11, 15.) At that point, the defendants abandoned their efforts to sell the Business to the management buyout group and reentered negotiations with VTech. (Compl.¶ 16.)

On January 19, 2000, VTech signed an agreement with the defendants (the "Agreement") whereby VTech was to acquire the Business on March 31, 2000 in exchange for $121,266,000 on the condition that, among other things, Lucent's warranties in the Agreement were still true in all material respects at the time of closing and there had been no material adverse changes in the condition of the Business by that time. (Compl. ¶ 17; see also Agreement §§ 8.2(a) & (c).) VTech now contends that the defendants made certain false affirmative representations, warranties, and covenants in the Agreement regarding the actual value and condition of the Business in order to induce VTech to enter into the Agreement. (Compl.¶ 20.) VTech also contends that the Officers' Certifications provided to VTech by the defendants at the closing omitted statements of material fact that were needed to make the statements in the Agreement not misleading, despite representations in the Officer's Certifications that there were no such omissions. (Compl. ¶ 42.) VTech claims that these misrepresentations and omissions were willful and material and that it reasonably and justifiably relied on them to its detriment. (Compl.¶ 43, 45.) On March 31, 2000 VTech paid the defendants $121,266,000 to purchase the Business from the defendants. (Compl.¶ 46.) VTech alleges that, as a result of the defendants' willful misrepresentations of present fact, VTech has suffered out-of-pocket losses in excess of $170,000,000 which are continuing. (Compl.¶ 48.)

Furthermore, VTech alleges that these misrepresentations and material omissions of facts caused the warranties in Sections 3.9(c) and 3.25 of the Agreement to be untrue and incorrect, leading to substantial and continuing damages in excess of $300,000,000. (Compl.¶¶ 50-52.) VTech also alleges that the defendants breached a covenant in the Agreement whereby the defendants covenanted not to take any action, or omit to take any action, or cause their affiliates to take any action or not to take any action, which would cause the defendants' representations and warranties in the Agreement to be untrue and incorrect, resulting in damages in excess of $300,000,000. (Compl.¶¶ 54-55.)

In Section 9.3 of the Agreement, the parties agreed to indemnify each other as follows:

9.3 General Agreement to Indemnify

(a) From and after the Closing Date, each Seller or Buyer, as applicable, shall indemnify, defend and hold harmless, on an after-tax basis, the other party hereto and each of its respective Affiliates, officers, directors, agents and employees (each a "Buyer Indemnified Party," "Seller Indemnified Party" or "Indemnified Party," as the context requires) from and against any and all claims, actions, suits, proceedings, liabilities, obligations, losses, and damages, amounts paid in settlement, interest, costs and expenses (including reasonable attorney's fees, court costs and other out-of-pocket expenses incurred in investigating, preparing or defending the foregoing) (collectively, "Losses") incurred or suffered, directly or indirectly, by any Indemnified Party (through the application of the assets of the Business, or the Assumed Liabilities or otherwise) to the extent that the Losses arise by reason of, or result from or relate to (i) the failure of any representation or warranty (other than representations and warranties set forth in Sections 3.14, the failure of which is covered by paragraph (d), below) of such party contained in this Agreement to have been true in all respects when made and as of the Closing Date (without regard to any materiality, material adverse effect or other similar qualifier contained therein) or (ii) the breach by such party of any covenant or agreement of such party contained in this Agreement to the extent not waived by the other party.

* * * * * *

(f) Sellers' aggregate liability for all claims made under Section 9.3(a)(i) shall be subject to the following limitations: (i) Sellers shall have no liability for such claims until the aggregate amount of the Losses incurred shall exceed $1,000,000 (the "Indemnity Basket"), in which case Sellers shall be liable only for the portion of the Losses exceeding the Indemnity Basket, and (ii) Sellers' aggregate liability for all such claims shall not exceed $45,000,000 (the "Indemnity Cap") [with certain exceptions not relevant here]. Buyer may not make a claim for indemnification under Section 9.3(a)(i) for breach by either Seller of a particular representation or warranty after the expiration of the survival period specified in Section 9.2 to such representation or warranty.

* * * * * *

(h) The indemnification provided in this Article 9 shall be the sole and exclusive remedy after the Closing Date with respect to claims for monetary relief based on or arising out of this Agreement (other than any claim for intentional tort or willful misrepresentation).

(Compl. Ex. 1, at 50-53.)

III.

A.

Lucent moves to dismiss the plaintiff's claim of fraud on the ground that it is duplicative of the plaintiff's breach of contract claim. A claim for fraud under New York common law consists of the following elements: (1) a material representation or omission of material fact; (2) that is false or misleading; (3) made with knowledge or reckless disregard of its falsity; (4) reliance; and (5) injury. See Small v. Lorillard Tobacco Co., Inc., 94 N.Y.2d 43, 698 N.Y.S.2d 615, 720 N.E.2d 892, 898 (1999); New York Univ. v. Continental Ins. Co., 87 N.Y.2d 308, 639 N.Y.S.2d 283, 662 N.E.2d 763, 769 (1995); Vermeer Owners, Inc. v. Guterman, 78 N.Y.2d 1114, 578 N.Y.S.2d 128, 585 N.E.2d 377, 378 (1991). The mere allegation that "a defendant did not intend to perform a contract with a plaintiff when he made it" generally fails to state a claim for fraud, however, and will be dismissed as duplicative under New York law. See Gordon v. Dino De Laurentiis Corp., 141 A.D.2d 435, 529 N.Y.S.2d 777, 779 (N.Y.A.D.1988); PI, Inc. v. Quality Prods., Inc., 907 F.Supp. 752, 761-62 (S.D.N.Y.1995) (collecting New York cases). The rationale for this rule is that a party need not be expressing an unconditional intention to perform by contracting, and may instead be expressing an intention either to perform or suffer the ordinary contractual consequences for a breach. See generally Briefstein v. P.J. Rotondo Constr. Co., 8 A.D.2d 349, ...