Opinion
No. X08 CV 0194566
November 1, 2004
MEMORANDUM OF DECISION RE MOTIONS TO STRIKE (122.00, 124.00)
I. Background
The plaintiff Jeffrey Brandt, a patent lawyer, was employed by Walker Digital Corporation (WDC) from 1996 to 2000. WDC is now a defunct corporation. In April 2000 Brandt and WDC executed a letter agreement which, among other things, established that Brandt's employment by WDC would end on October 24, 2000 and dealt with the vesting and purchase of certain of Brandt's WDC stock options. Brandt has brought this law suit against Walker Digital, LLC (WDLLC) and Jay Walker, the founder of WDC and Chairman of the Board of WDLLC. In October 1999 WDC formed WDLLC, a Delaware limited liability company. WDC contributed all, or nearly all, of its assets to WDLLC and was, at the time of its formation, the only owner of WDLLC. The law suit seeks compensatory and punitive damages and attorneys fees for losses Brandt incurred as a result of the defendants' allegedly wrongful actions which deprived him of the value of his stock options.
II. The Complaint and The Motion To Strike
The rather convoluted facts alleged in the twenty-nine page complaint are summarized as follows. During his employment with WDC Brandt functioned as a general in-house and patent lawyer for WDC and its affiliate, priceline.com. Walker represented to Brandt and other WDC executives that there would be a plan to reward their work with an equity participation in WDC. In 1999 Brandt was awarded 1 million employee options to purchase WDC shares at $1.00 per share, 250,000 investor options to purchase WDC stock at $20 per share and 25,000 options to purchase WDC shares at $1.00 per share.
On April 25, 2000 Brandt and WDC executed the above-noted letter agreement which established that all of Brandt's options were fully vested as of that date. The agreement also stated that WDC "will arrange for the sale of 250,000 shares of [Brandt's WDC] employee options. This sale is to be consummated no later than the next third party financing round, expected to close by June 30, 2000." The sale price would be at the highest price of shares sold in that financing, but no less than $10.00 per share.
Between November 1999 and April 2000 WDLLC had two separate financings selling shares at $7.00 and $10.00 per share, and WDC's ownership of WDLLC fell to 79%. In November 2000, an investor in WDLLC extended $3 million in financing to WDLLC which Brandt contends was the "next third party financing." Neither Walker, WDC nor WDLLC did anything about arranging for the purchase of Brandt's option during or after this $3 million transaction.
In 2001 it is alleged that WDC and the defendants Walker and WDLLC promulgated a refinancing and reorganization plan which essentially rendered WDC worthless while cancelling WDLLC's debt to WDC of over $40 million. The defendants subsequently dissolved WDC at the end of 2001, and Brandt's options were worthless.
The Brandt complaint alleges against both defendants a prima facie tort, fraudulent conveyance, tortious interference, a violation of the Connecticut Unfair Trade Practices Act, General Statutes § 42-110a et seq. (CUTPA) contract breach, unjust enrichment, wrongful withholding of compensation in violation of General Statutes § 31-72, and statutory theft pursuant to General Statutes § 52-564. A claim for breach of fiduciary duty is alleged against Walker alone.
The defendants jointly move to strike the counts alleging prima facie tort (First Count) tortious interference (Third and Fourth Counts) CUTPA violation (Sixth Count) breach of contract (Eighth Count) violation of Section § 31-72 (Ninth Count) a cause of action melding the theories of the First and Eighth Counts (Tenth Count) and statutory theft (Eleventh Count). Walker moves to strike the breach of fiduciary count (Fifth Count).
III. Standard of Review
The court's analysis of a motion to strike is guided by well accepted standards:
The purpose of a motion to strike is to contest . . . the legal sufficiency of the allegations of any complaint . . . to state a claim upon which relief can be granted. (Internal quotation marks omitted.) Faulkner v. Untied Technologies Corp., 240 Conn. 576, 580, 693 A.2d 293 (1997); see Practice Book § 10-39. A motion to strike challenges the legal sufficiency of a pleading, and, consequently, requires no factual findings by the trial court . . . We take the facts to be those alleged in the complaint . . . and we construe the complaint in the manner most favorable to sustaining its legal sufficiency. Thus, [i]f facts provable in the complaint would support a cause of action, the motion to strike must be denied. (Citations omitted; internal quotation marks omitted.) Vacco v. Microsoft Corp., 280 Conn. 59, 64-65, 793 A.2d 1048 (2002). "A motion to strike is properly granted if the complaint alleges mere conclusions of law that are unsupported by the facts alleged. Novametrix Medial Systems, Inc. v. BOC Group, Inc., 224 Conn. 210, 215, 618 A.2d 25 (1992)."
Fort Trumbull Conservancy, LLC v. Alves, 262 Conn. 480, 498 (2003).
IV. Discussion
A. Tortious interference with contract.
In his fourth count Brandt alleges that WDLLC and Walker intentionally interfered with Brandt's contractual rights with WDC and did so with malice and improper motive. The elements of a tortious interference claim are that the defendant know of a contractual relationship and intentionally seek to interfere with it in a tortious manner such as through fraud or malicious conduct, causing loss to the plaintiff. See Blake v. Levy, 191 Conn. 257 (1983). The defendants contend that this court should be guided by Boulevard Associates v. Sovereign Hotels, Inc., 72 F.3d 1029 (2d Cir. 1995) in which the United States Court of Appeals for the Second Circuit, applying Connecticut law, held that a parent corporation was not liable in tortious interference when it induced its subsidiary to breach a contract by not paying rent. The Second Circuit noted that the Connecticut Supreme Court had not addressed the precise issue faced in Boulevard Associates but referred to a Superior Court decision Baum v. United Cable Television Corp. of E.Conn., Superior Court, judicial district of Tolland at Rockville, CV 90 0044673 (July 20, 1992, Dunn, J.) holding that there can be no tortious interference by someone who is directly or indirectly a party to a contract. The Second Circuit also set forth the limits of its holding by explaining that a sole shareholder in a corporation could not, with impunity, force its chief executive officer, at gun point, to breach a contract or to induce a corporation to breach a contract through fraud or deception. Boulevard Associates v. Sovereign Hotels, Inc., supra, 72 F.3d 1037.
In this case, the relationship between WDC and the defendants is not so clearly analogous to parent corporation and subsidiary or sole shareholder to the corporation. WDLLC did not own WDC, in fact, WDC owned varying percentages of WDLLC. Nevertheless, Brandt alleges in his complaint that on or after November 2000 WDLLC and Walker controlled and directed the actions of WDC with respect to its obligations under the April 25, 2000 letter agreement (Complaint, Count Four, ¶ 22.
The key concept in the Boulevard Associates decision is the concept of the existence or nonexistence of a unity of interest between the contracting party (here, WDC) and the alleged tortious interferer (WDLLC, Walker). Boulevard Associates, supra, 1036. This court does not equate control with unity of interest, and in this case the defendants, as the facts are alleged, had no unity of interest with WDC, indeed, WDC was being pushed out of its dominant ownership position in WDLLC through various third-party financings, even though WDC had contributed all its assets to WDLLC. Therefore, the court determines that the reasoning and holding of Boulevard Associates does not apply and the motion to strike the Fourth Count is denied.
Walker individually argues that there are no facts alleged to support a tortious interference claim against him. The court disagrees. The allegations that he acted with malice and for personal gain are sufficient.
B. Third Count.
This count appears to allege that WDLLC and Walker effectuated a change of control of WDC which rendered Brandt's options worthless. The allegations are similar in nature and in substance to those in the Fourth Count. Brandt's memorandum in opposition concedes that "conceptually" the two counts "can be merged." Memorandum, 14, n. 1. Perhaps conceptually, but not under Connecticut pleading practice. Because the count does not set forth a recognizable cause of action, and is, to a degree, duplicative, it is stricken.
C. Sixth Count, CUTPA.
In the Sixth Count Brandt claims that the actions of the defendants, including those alleged in the Second Count setting forth a fraudulent conveyance cause of action which is not the subject of this motion to strike, are in violation of CUTPA. CUTPA prohibits "unfair methods of competition and unfair and deceptive acts or practices in the conduct of any trade or commerce." General Statutes § 42-110b(a). The defendants move to strike this count primarily on the basis that the claims arise in the employer-employee relationship which courts have held not to be in the conduct of trade or commerce. See discussion of case law in Tanner v. Darly Custom Tech, Inc., Superior Court, judicial district of Danbury, CV00 0340177, 29 Conn. L. Rptr. 415 (February 8, 2001).
The defendants point to several cases where courts have found that disputes over employment contracts are not within the purview of CUTPA. For example, in Reynolds, Pearson Co. v. Miglietta, Superior Court, judicial district of Hartford at Hartford, CV 00 0801247, 29 Conn. L. Rptr. 481 (March 27, 2001, Berger J.) the court struck a CUTPA claim involving a proposed employment and shareholders agreement and an un-executed settlement agreement purportedly resolving claims under the employment agreement. In that case, the dispute primarily involved a dispute about an alleged failure to honor the terms of the employment agreement giving the plaintiff an ownership interest in the employing company.
Brandt's complaint has some obvious similarities to Reynolds, Pearson but what is at issue in Brandt's CUTPA count is not his employment status. While the April 25, 2000 letter agreement involved his continued employment for several months and some severance benefits, the claim being made in the Sixth Count is not employment related. Rather, Brandt alleges that the defendants unfairly and deviously undermined any opportunity for him to recover the promised value of his stock options. The court finds that the Sixth Count states a claim under CUTPA and the motion to strike that count is denied.
D. Eighth Count.
In this count, Brandt seeks to hold WDLLC and Walker liable for WDC's alleged breach of contract through the claim that the defendants so controlled and dominated WDC that they should be held accountable for the breach. This theory uses the equitable approach known as "piercing the corporate veil." The defendants initially moved to strike this count because they contended it set forth no recognizable legal theory. In reply to Brandt's explication of theory in his opposition papers, the defendants now contend that the factual allegations are insufficient to support the theory. While the allegations are somewhat thin on specific facts, they are sufficient to overcome a motion to strike.
E. Ninth Count, Violation of Section 31-72.
Brandt alleges that the defendants violated General Statutes § 31-72 by wrongfully withholding wages. WDLLC and Walker contend that this statute is inapplicable to this case, and the court agrees. The letter agreement effected the vesting of all of Brandt's options. Brandt's claim is based on the failure of WDC to "arrange for" his sale of a portion of these options. There was no restriction alleged on Brandt selling the options on his own and no allegations concerning the intrinsic value of the options. Indeed, it is difficult to perceive what was withheld from Brandt.
Brandt argues that the transfer of assets from WDC to WDLLC rendered the stock options worthless. However, that occurred in October 1999 well before the April 2000 letter agreement. Brandt also argues that the letter agreement promise to arrange a sale of certain of his options at a price of $10.00 or more was, in effect, wages or compensation payable to him. This is simply too attenuated an argument and the court cannot accept it.
F. Eleventh Count, Statutory Theft Pursuant to Section 52-564.
General Statutes § 52-564 provides that anyone "who steals property of another, or knowingly receives and conceals property of another, shall pay the owner treble his damages." Brandt's Eleventh Count alleges that the defendants have intentionally and knowingly deprived him of his "entitlements" under the letter agreement and wrongfully received the value of such assets.
In Hi-Ho Tower, Inc. v. Com-Tronics, Inc., 225 Conn. 20 (2000) the Connecticut Supreme Court said that statutory theft under § 52-564 is synonymous with larceny and noted that under our statutes larceny is committed when a person, with intent to deprive another of property takes such property from the owner. Id. 44. That decision also noted but did not decide that traditionally under Connecticut law intangible property interests have not been subject to conversion except those evidenced in a document. Id.
The court concludes that § 52-564 does not apply to this case. Brandt has not been deprived of any "property" in the sense that word is used in § 52-564. There is no allegation that any physical property has been taken nor that any property evidenced by a document has been taken. As far as the court can tell, Brandt still has the vested stock options. What Brandt alleges has been taken or converted is the "value" of the options. To expand the meaning of property subject to § 52-564 to include the decline or loses of value of the property as well as the physical loss would, as defendants point out, include many, if not all, breach of contract cases. It might also arguably include losses due to obsolescence or technical advancement. This count is ordered stricken.
G. First Count, Prima-Facie Tort.
In his First Count Brandt details the several allegedly intentional and wrongful acts of the defendants which resulted in financial harm to him. The defendants moved to strike the count which it described as "vague and unintelligible" citing several Connecticut Supreme Court cases stating the requirement that a plaintiff must allege some recognizable cause of action in his complaint; see Weiss v. Wiederlight, 208 Conn. 525 (1988); Stavnezer v. Sage Allen and Co., 146 Conn. 460 (1959). In response thereto, Brandt identified the legal theory of the First Count as prima facie tort. WDLLC and Walker argue that Connecticut law does not recognize the theory of prima facie tort and furthermore, that the theory requires an allegation that the alleged acts be in contravention of some recognized public policy.
United States District Court Judge Robert Chatigny has characterized a claim of prima facie as "essentially unknown to modern tort law in Connecticut." Grigorenko v. Pauls, 297 F.Sup.2d 446, 450 (D.Conn. 2003). Indeed the only reference to it in Connecticut case law that this court has found or which has been brought to its attention is Connors v. Connally, 86 Conn. 641 (1913) which recognized the theory but imposed, according to defendants, the public policy requirement, a brief non-consequential mention of the theory in a dissenting opinion footnote in Waters v. Autuori, 236 Conn. 820, 841 n. 7 (1996) and S.A. Candelora Enterprises v. Wild, Superior Court, judicial district of New Haven, CV01 0447877, 31 Conn. L. Rptr. 397 (February 4, 2002, Thompson, J.) (striking a prima facie tort count).
The theory of a prima facie tort requires an intentional, wrongful or culpable act causing injury if the conduct is not justifiable under the circumstances. Liability may be imposed on the actor under this theory if the actor's conduct does not come within a traditional category of tort liability. Restatement 2d Torts § 870.
In his First Count Brandt has alleged that the defendants knowingly caused his options to become worthless for their own financial gain, that they caused WDC not to arrange for their purchase and that they intended to prevent Brandt from receiving the consideration owed him under the letter agreement, that such conduct treated Brandt less favorably than other WDC employees with claims against the company and was intended to put assets of WDC beyond Brandt's reach.
Justice Oliver Wendell Holmes seems to have succinctly stated the theory of prima facie tort: "It has been considered that, prima facie, the intentional infliction of temporal damage is a cause of action, which, whatever may be the form of pleading, requires a justification if the defendant is to escape." Aikens v. Wisconsin, 195 U.S. 194, 204 (1904).
In Connors v. Connally, supra the Connecticut Supreme Court recognized a cause of action "against those who, . . . acting with intent, caused . . . damage. Recovery, however, might be defeated by the establishment by these persons of a justification, the burden being upon them to do so." Id., 86 Conn. 647 (citing Aikens v. Wisconsin). There is no case that overrules or diminishes this authority, and it remains good law in Connecticut.
Having said that, however, does not end the analysis. As noted, the defendants contend that the prima facie tort claim requires an allegation that the defendants' acts were in violation of public policy. They base their argument on the language in Connors which they state sets forth a requirement that the defendants' actions must not only be intentional but also "contrary to public policy." Def. Reply Memo. 4. They also point to Grigorenko v. Pauls, supra, in which the court assumed without deciding that Connecticut would continue to recognize a cause of action for prima facie tort but dismissed the claim because the plaintiff has not alleged a basis for finding that the defendants had violated a recognized public policy.
This argument is incorrect. Connors did refer to public policy considerations but not in the manner that defendants contend nor Grigorenko supposed. In Connors the Connecticut Supreme Court had before it, in a different era of labor-management relations, a plaintiff who alleged he was discharged from employment as a hat maker and unable to obtain other employment in that line of work due to an agreement between a labor union and hat manufacturers that the latter would not employ non-union workers. The Court discussed the defendants'-appellees' position that their actions must be judged by a standard of reasonableness and it concluded that acts or means which were contrary to public policy were manifestly unreasonable: "It is manifest that those means must be regarded as both unreasonable and unlawful which are contrary to public policy . . ." Id., 650. Later in the opinion the court decided that the defendants'-appellees' actions were contrary to public policy. Id., 651. The Connecticut Supreme Court in these passages was considering the viability of the defendants'-appellees' justification for their actions and did not establish any rules that the plaintiff had to allege that the defendants had violated public policy. Indeed, the court made clear as noted above, that it was defendants' burden to prove their actions were justified. Id., 647.
Moreover, this court concludes that the allegations that WDCLLC and Walker acted with intent and for their own personal benefit to deprive Brandt of compensations can be read broadly to give rise to the inference that the acts were not in conformance with public policy.
Nevertheless, the conclusion that a prima facie tort is a viable pleading in Connecticut and that the plaintiff has met all pleading requirements does not mean it is a proper pleading in this case. As set forth in Restatement 2d Torts, § 870 and the commentary thereto, such a cause of action is interstitial in nature, that is, it is appropriate only when intentional, culpable and unjustified conduct causing injury does not fall into any other theory of tort liability. It is clear that plaintiffs assert many other claims in this action including contractual and statutory claims. However, the First count is the only common-law tort claim other than the tortious interference claim in the Fourth Count. While a court should not countenance a party's efforts to circumvent the pleading and proof requirements of recognized causes of action, the circumstances in this case are such, including the dissolution of WDC, the party who contracted with Brandt, as to warrant its inclusion in this case.
Lastly, the defendants argue that Connecticut law prohibits recovery of tort damages when the cause of action is essentially based on breach of contract. This argument involves an analysis of whether Connecticut has adopted the so-called "economic loss doctrine." The "economic loss doctrine" would limit damages to purely economic losses where the relationship between the parties is contractual. This court is not convinced that Connecticut appellate courts have embraced or authorized such a doctrine, particularly when the alleged acts of the defendants are intentional. See, Williams Ford, Inc. v. Hartford Courant Co., 232 Conn. 559 (1995); Connecticut Mutual Life Ins. Co. v. New York and New Haven R. Co., 25 Conn. 265 (1856).
H. Tenth Count.
The plaintiff states that the allegations of this count combine the allegations and causes of action set forth in the First and Eighth Counts. The court concludes that the count is duplicative and should be stricken.
I. Fifth Count against Walker only. Breach of Fiduciary Duty.
Walker moves to strike the breach of fiduciary duty claim against him. In that count, Brandt alleges that Walker had a fiduciary duty to Brandt arising out of "Walker's representation to plaintiff soliciting him to leave his employment with IBM and join WDC as an executive [his] representatives (sic) to plaintiff about . . . compensation . . . at WDC and pursuant to Walker's responsibilities as Chairman of the Board of Directors of WDC and as someone charged with the duty of administering the stock option plans."
Walker contends that Brandt's factual allegations are insufficient to establish a fiduciary relationship between the two. The court agrees. There are many factual scenarios which can give rise to a fiduciary relationship. However, they must involve a special "degree of trust and confidence between the parties one of whom has superior knowledge, skill or expertise and is under a duty to represent the interests of the other" Dunham v. Dunham, 224 Conn. 303, 322 (1987). What is missing in the Fifth Count is any allegation of fact that would support the existence of a duty on the part of Walker.
The letter agreement was the product of an arms-length negotiation involving attorneys. In that agreement Brandt released all claims arising prior to that date against WDC and Walker including those for compensation. Complaint, Ex. A, ¶ 14. Any fiduciary relationship arising before that time would seem to be extinguished by the agreement, and there are no factual allegations to support that one arose later.
V. Conclusion
For the reasons stated herein the relevant motion or motions to strike are granted as to the Third, Ninth, Tenth and Eleventh Counts and are denied otherwise.
TAGGART D. ADAMS SUPERIOR COURT JUDGE