Opinion
Index No. 657444/2019
04-21-2022
ANEXIA, INC., Plaintiff, v. HORIZON DATA SOLUTIONS CENTER, LLC, d/b/a VAZATA, Defendant.
The following e-filed documents, listed by NYSCEF document number (Motion 004) 46, 47, 48, 49, 54, 64 were read on this motion to/for DISMISSAL.
Upon the foregoing documents, it is ordered that the motion is granted in part and denied in part.
This is an action arising out of the parties’ use and management of a colocation data center known as DC-6 (the "Data Center" or "DC-6 Center"). This decision addresses only defendant VAZATA's counterclaims against plaintiff Anexia.
The counterclaims fall into two groups. The first group relates to VAZATA's business relationship with Science Applications International Corporation ("SAIC"). Counterclaims one and two are for breach of contract. Counterclaim three is for tortious interference with a prospective business relationship. Counterclaim four is for breach of the covenant of good faith and fair dealing. Counterclaim five is for declaratory judgment.
The second group concerns Anexia allegedly improperly exercising control and preventing VAZATA from accessing its equipment located at the DC-6 Facility. Counterclaims six and seven are for breach of contract. Counterclaim eight is for trespass to chattels. Counterclaim nine is for conversion.
Anexia moves to dismiss counterclaims one, two, three, four, five, eight, and nine. Anexia does not move to dismiss counterclaims six and seven.
BACKGROUND
VAZATA was the former data center operator at DC-6. Anexia is the current data center operator. As part of the transition, VAZATA and Anexia entered into a Master Services Agreement (the "MSA"), effective October 1, 2017. In the MSA's Statement of Work, the parties agreed that VAZATA "will be allowed to contract with third parties, including the Department of Energy ("DOE") and Science Applications International Corporation ("SAIC") for no additional charge."
In July 2018, VAZATA and Anexia entered into an amendment of the MSA by which Anexia agreed to provide power and equipment for 50 "racks" of computer servers to VAZATA for resale to SAIC. VAZATA then entered a one-year contract with SAIC for the use of those 50 racks.
VAZATA claims that during the initial one-year term, Anexia negotiated directly with SAIC to cut VAZATA out of the relationship. When VAZATA reached out to Anexia to discuss SAIC renewal terms, one of Anexia's executives responded, "I do not recommend that you provide SAIC a price because I will not be able to honor it." VAZATA then asked Anexia to clarify its position and one of Anexia's executives replied "VAZATA is not authorized to renew with SAIC."
VAZATA nevertheless wished to negotiate a contract renewal with SAIC. So, Anexia quoted a price to VAZATA for the services VAZATA wished to sublease to SAIC. VAZATA then marked up those prices and presented a proposal to SAIC. SAIC rejected VAZATA's proposal. VAZATA asked Anexia to reduce its quoted charges to VAZATA. Anexia declined to reduce its pricing. The first five of VAZATA's counterclaims refer to this dispute.
Counterclaims six through nine involve a separate set of facts involving an alleged lockout of VAZATA by Anexia. When VAZATA approached Anexia about the allegations related to SAIC, Anexia responded by invoicing VAZATA for power theft and remote consulting services. VAZATA declined to pay the alleged power theft invoices. Anexia terminated the power to the VAZATA Cage (an area of DC-6 where VAZATA had its own colocation space), and locked VAZATA out of DC-6.
The Master Services Agreement provides that VAZATA "shall have access to area C-9, C-2, C-7, C-13, C-14, and to its respective access ways, 24 hours a day, 7 days a week and 365 days a year." VAZATA argues that the lock-out by Anexia was an impermissible exercise of a self-help remedy.
DISCUSSION
1. Counterclaim One - Breach of Contract Related to Right to Contract with SAIC
In its first counterclaim, VAZATA alleges that Anexia breached the MSA's Statement of Work agreement by forbidding VAZATA from contracting with SAIC. Anexia argues that the Statement of Work agreement does not give VAZATA the exclusive right to contract with SAIC and that, even if it did, SAIC rejected VAZATA's offer to extend the contract.
The MSA's language does not give VAZATA an exclusive right to contract with SAIC. The agreement says that VAZATA will be allowed to contract with "third parties," and mentions SAIC and DOE as examples. The paragraph is about pricing for cabinet storage. The paragraph is not an explicit reservation of rights. There is no right of first refusal language. The language of the contract does not give VAZATA an unencumbered, exclusive right to contract with SAIC. The motion to dismiss counterclaim one is granted.
2. Counterclaim Two - Breach of Contract for Misuse of Confidential Information Related to SAIC
VAZATA's claim for breach of contract for misuse of confidential information survives a motion-to-dismiss challenge because it involves a factual inquiry.
Section 8.1 of the MSA requires Anexia to use confidential information "for the purpose of performing its obligations under this Agreement and for no other purpose whatsoever." VAZATA claims Anexia gained confidential information throughout the course of the MSA that allowed it to negotiate with SAIC directly and end VAZATA's relationship with SAIC. VAZATA claims the confidential information included, but was not limited to, the knowledge that SAIC required services, the type of services that SAIC required, the fact that the SAIC intended to sign on for additional years with VAZATA with the expectation of nine additional years, and the cost of the services that SAIC was willing and unwilling to accept. At the motion-to-dismiss stage, the court accepts VAZATA's allegations as true.
Anexia contends that the information it used to contract with SAIC was not confidential. Anexia further contends that VAZATA fails to allege how the purported misuse of the information proximately caused any damage to VAZATA. Both arguments involve factual inquiries, which precludes pre-discovery dismissal. The motion to dismiss the second counterclaim is denied.
3. Counterclaim Three - Tortious Inference with Business Relations
This counterclaim is duplicative of the second counterclaim for breach of contract. When a tortious interference claim is grounded in the same conduct as a breach of contract claim, the tortious interference claim "should be dismissed as duplicative of the contract based claims" ( JHH Pictures, Inc. v Rawkus Entertainment LLC , 291 AD2d 356, 357 [1st Dept 2002] ). Here, there is already a breach-of-contract counterclaim based on the same conduct. The claim that confidential information was misused or that misrepresentations were made in connection with such confidential information mirrors the second counterclaim for breach of contract. The motion to dismiss the third counterclaim is granted.
4. Counterclaim Four - Breach of the Implied Covenant of Good Faith and Fair Dealing
Anexia argues New York does not recognize a good faith and fair dealing claim as an independent cause of action (see Cohen v Nassau Educators Fed. Credit Union , 12 Misc 3d 1164[A], [Sup Ct Nassau County 2006] ). VAZATA argues that there are circumstances where New York recognizes good faith and fair dealing as an independent claim and that this is one of those circumstances (see Elmhurst Dairy, Inc. v Bartlett Dairy, Inc. , 97 AD3d 781, 784 [2d Dept 2012] [good faith and fair dealing claim not duplicative of breach of contract claim where party "exercises a contractual right as part of a scheme to realize gains that the contract implicitly denies or to deprive the other party of the fruit (or benefit) of its bargain"]).
New York courts have repeatedly affirmed that a party may be in breach of an implied duty of good faith and fair dealing, even if it is not in breach of its express contractual obligations, when it exercises a contractual right as part of a scheme to realize gains that the contract implicitly denied or to deprive the other party of the fruit of its bargain (see Dalton v Educ. Testing Serv. , 87 NY2d 384, 389 [1995] ; Outback/Empire I, Ltd. Partnership v Kamitis, Inc. , 35 AD3d 563, 563 [2d Dept 2006] ; Richbell Info. Servs., Inc. v Jupiter Partners, L.P. , 309 AD2d 288, 302-03 [1st Dept 2003] [refusing to dismiss cause of action for breach of implied covenant of good faith and fair dealing based on the allegation that defendant exercised contractual veto power "for an illegitimate purpose and in bad faith" as part of scheme to deprive plaintiffs of benefits of their joint venture]).
The First Department in Maddaloni Jewelers, Inc. v. Rolex Watch U.S.A., Inc. confirmed the principle that a claim for breach of the implied covenant of good faith and fair dealing can occasionally stand on its own ( 41 AD3d 269 [1st Dept 2007] ). In Maddaloni , the defendant had moved on summary judgment to dismiss the plaintiff's third amended complaint, which alleged a cause of action for breach of an implied duty of good faith and fair dealing but did not assert a cause of action for breach of contract. The First Department sustained the cause of action for breach of an implied duty of good faith and fair dealing. The Court found that, although the parties’ contract permitted the defendant to accept plaintiff's orders and time its deliveries at its "discretion," the plaintiff's allegations had "raised a triable issue of fact as to whether [the defendant]’s discretion under the [contract] was exercised in bad faith ( id. at 270 ).Maddaloni makes it clear that a plaintiff may bring a cause of action for breach of the implied covenant of good faith and fair dealing alleging that a defendant has exercised its rights under its contract in bad faith in order to realize gains that the contract implicitly denied or to deprive the other party of the fruit of its bargain, even if the plaintiff has not alleged a breach of that contract.
Most of the decisions that appear to reach a contrary result rely on the oft-cited rule that a claim for breach of an implied duty of good faith and fair dealing cannot stand alone if it only substitutes for a nonviable breach of contract claim ( Triton Partners LLC v Prudential Sec. Inc. , 301 AD2d 411, 411 [1st Dept 2003] ; accord Jacobs Private Equity, LLC v 450 Park LLC , 22 AD3d 347, 347-48 [1st Dept 2005] [good faith claim duplicated insufficient breach of contract claim]; Cerberus Int'l, Ltd. v BancTec, Inc. , 16 AD3d 126, 127 [1st Dept 2005] ; Parker E. 67th Assocs., L.P. v Minister, Elders & Deacons of Reformed Protestant Dutch Church , 301 AD2d 453, 454 [1st Dept 2003] ). This rule does not bar VAZATA's good faith counterclaim, where VAZATA alleges that Anexia acted in bad faith as part of scheme to deprive it of the benefit of its bargain.
In Richbell , the First Department acknowledged the "tension between, on the one hand, the imposition of a good faith limitation on the exercise of a contract right and, on the other, the avoidance of using the implied covenant of good faith to create new duties that negate explicit rights under a contract" ( Richbell , 309 AD2d at 302 ). But notwithstanding this tension, it upheld the plaintiffs’ cause of action for breach of implied covenant of good faith and fair dealing, alleging that the defendant had exercised its contractual right malevolently, for its own gain, as part of a purposeful scheme designed to deprive the plaintiffs of the benefits of their contract. Such a claim "do[es] not create new duties that negate [the party’]s explicit rights under a contract, but rather, seeks imposition of an entirely proper duty to eschew this type of bad faith targeted malevolence in the guise of business dealings" (id. ).
In such circumstances, the claim for breach of an implied duty of good faith and fair dealing does not depend on a breach of the contract; therefore, a party may bring such a claim, whether or not there is a viable breach of contract claim ( Chase Manhattan Bank, N.A. v Keystone Distribs. Inc. , 873 F Supp 808, 815 [SD NY 1994] [under New York law, "a party may be in breach of its implied duty of good faith and fair dealing even if it is not in breach of its express contractual obligations," where that party does something to "destroy or injure the right of another party to receive the benefits of the contract"]).
It is worth noting, finally, that one of this court's distinguished predecessors in the Commercial Division, the Honorable Bernard J. Fried, in Gross v Empire Healthchoice Assur., Inc. , 16 Misc 3d 1112(A) [Sup Ct NY County 2007], specifically criticized the holding in Cohen v Nassau Educators , supra, as "reflect[ing] a short-sighted view of the New York law on this subject."
The motion to dismiss the fourth counterclaim is denied.
5. Counterclaim Five - Declaratory Judgment
VAZATA claims that it was entitled to the value of the SAIC contract, which VAZATA alleges would have extended nine additional years at $150,000 per month. The purported damages here are known. Therefore, declaratory judgment is not appropriate.
Additionally, the damages VAZATA seeks for this count are identical to the damages in the contract claim. The motion to dismiss the declaratory judgment counterclaim is granted.
6. Counterclaims Eight & Nine - Trespass to Chattels & Conversion
VAZATA pleads four counterclaims related to an alleged lockout where Anexia purportedly prohibited VAZATA from accessing the cage and cut power to the cage. These are counterclaims six and seven for breach of contract, counterclaim eight for trespass to chattel, and counterclaim nine for conversion. Anexia does not move to dismiss counterclaims six and seven. Anexia moves to dismiss counterclaims eight and nine as duplicative of the contract claims. The motion to dismiss counterclaims eight and nine is granted.
A tort cause of action will be dismissed as duplicative if it "arises from the same facts as an accompanying contract claim, seeks identical damages, and does not allege a breach of any duty collateral to or independent of the parties’ agreements" ( Cronos Group Ltd. v XComIP, LLC , 156 AD3d 54, 62-63, 64 [1st Dept 2017] ). Counterclaims eight and nine arise from the same set of facts as the breach of contract counterclaims. Counterclaims eight and nine are dismissed.
Accordingly, it is
ORDERED that plaintiff's motion to dismiss defendant's counterclaims is granted to the extent that the first, third, fifth, eighth, and ninth counterclaims are dismissed; and it is further
ORDERED that plaintiff's motion to dismiss is otherwise denied; and it is further
ORDERED that plaintiff is directed to serve an answer to the counterclaims within 20 days after service of a copy of this order with notice of entry; and it is further
ORDERED that the parties are directed to appear via Microsoft TEAMS virtual platform for a compliance conference on May 17, 2022 at 10:00 a.m.
This constitutes the Decision and Order of the court.