Opinion
CIVIL ACTION No. 02-07983.
May 7, 2003.
MEMORANDUM AND ORDER
In this case, Plaintiff Jeffrey Greenhouse is suing Defendants About.com and Primedia, Inc., alleging violations of an employment contract. In the complaint, Greenhouse asserts the following four claims: (1) breach of contract ("Count I"); (2) fraud in the inducement ("Count II"); (3) breach of the covenant of good faith and fair dealing ("Count III"); and (4) failure to pay wages due under the Pennsylvania Wage Payment and Collection Law, 43 Pa.Cons.Stat.Ann. §§ 260.1-260.45 (West 1992 Supp. 2002) ("WPCL") ("Count IV"). Presently before the Court is Defendants' Motion to Dismiss the Second and Third Counts of Plaintiff's Complaint (Docket No. 4). In the alternative, Defendants, pursuant to Federal Rule of Civil Procedure 9(b), seek a more definite statement as to Count II, Plaintiff's fraud claim. In response, Plaintiff withdraws Count III of the complaint, but contests Defendants' motion as to Count II. For the following reasons, Defendants' Motion is granted in part and denied in part as to Count II of the complaint.
I. BACKGROUND
To the extent the material facts are disputed, they are presented in the light most favorable to the non-moving party, Plaintiff Greenhouse. See Markowitz v. Northeast Land Co., 906 F.2d 100, 103 (3d Cir. 1990) (citing Ransom v. Marrazzo, 848 F.2d 398, 401 (3d Cir. 1988)).
On April 1, 2000, Plaintiff Jeffrey Greenhouse entered into an employment agreement with Glowbug.com, Inc., to serve as the company's Senior Vice President for Product Development. The employment agreement provided, inter alia, that upon Plaintiff's "qualifying termination" from employment with Glowbug.com, all options to purchase stock in the company would become immediately exercisable. See Compl. at Ex. A. § 13.1. For purposes of the agreement, "qualifying termination" meant: (1) the company's termination of Plaintiff for cause or for any reason other than disability or death; or (2) Plaintiff's termination of the agreement within 60 days of certain qualifying events. Id. at § 26.
Subsequent to Plaintiff joining Glowbug.com, the company was purchased by another internet firm, About.com. On October 26, 2000, Plaintiff entered into a Letter Employment Agreement with About.com. Section 11 of the Agreement provides that Plaintiff is an "at will" employee of About.com, but also states that the company will "honor [Plaintiff's] current employment contract [with Glowbug.com] through its termination date, March 31, 2001." See Compl. at 2.
Defendant Primedia, Inc., is the parent company of Defendant About.com. See Compl. at 3.
The About.com Agreement also contains two provisions awarding stock options to Plaintiff. First, Plaintiff was granted options to purchase 10,000 shares of common stock at an exercise price equal to the stock's fair market value as of the date of the Agreement. Id. at Ex. B. § 4. Fifteen percent of the options vested after six months. Id. The remaining options vested monthly over the subsequent 36 months. Id. Second, Plaintiff was granted options to purchase an additional 10,000 shares at a $5.00 per share exercise price. Id. These options vested on the one year anniversary of Plaintiff's employment agreement.Id.
Less then two months later, on December 20, 2000, Plaintiff received a Termination Notice from About.com. Id. at Ex. C. The company informed Plaintiff that he was terminated pursuant to his prior Employment Agreement with Glowbug.com. Id. About.com also stated that although Plaintiff's About.com employment agreement granted him options to purchase 20,000 shares of company stock, none of those options had vested before his termination date. As a result, About.com refused to award Plaintiff any stock options under his employment agreement.
On October 21, 2002, Plaintiff initiated this action against Defendants About.com, Inc., and Primedia, Inc. The gravamen of the Complaint is that Defendants breached Plaintiff's employment contract with Glowbug.com by failing to award his stock options pursuant to Section 13.1 of the agreement. Moreover, Plaintiff claims that Defendants fraudulently induced him into joining their company so that they could exploit his knowledge and abilities. Presently before the Court is Defendants' Motion to dismiss Counts II and III of the Complaint. In the alternative, Defendants, pursuant to Federal Rules of Civil Procedure 9(b) and 12(e), move to have Plaintiff file a more specific statement regarding his fraud claim, Count II. Plaintiff does not contest Defendants' Motion as to Count III of the complaint, but he opposes the Motion as to Count II.
II. LEGAL STANDARD
A. Motion to Dismiss for Failure to State a Claim
When considering a motion to dismiss a complaint for failure to state a claim under Rule 12(b)(6), the Court must accept as true all facts alleged in the complaint and any reasonable inferences that can be drawn therefrom. Markowitz v. Northeast Land Co., 906 F.2d 100, 103 (3d Cir. 1990) (citing Ransom v. Marrazzo, 848 F.2d 398, 401 (3d Cir. 1988)); See also H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 249-50 (1989). A court may only dismiss a complaint where plaintiff can prove no set of facts, consistent with his allegations, which justifies relief. See ALA, Inc. v. CCAIR, Inc., 29 F.3d 855, 859 (3d Cir. 1994); Crighton v. Schuylkill County, 882 F. Supp. 411, 414 (E.D. Pa. 1995).
Federal Rule of Civil Procedure 12(b)(6) provides that a court may dismiss a complaint "for failure to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6).
The court is not required to credit a plaintiff's "bald assertions" or "legal conclusions" when deciding a motion to dismiss. See Id. The Federal Rules merely require "a short and plain statement of the claim showing that the pleader is entitled to relief," enough to "give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests." Fed.R.Civ.P. 8(a)(2) (West 2001).
B. Rule 9(b) Standards for Pleading Fraud
Federal Rule of Civil Procedure 9(b) states, in part: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." The Rule's purpose is "to provide defendants with notice of the precise misconduct with which they are charged, and to safeguard defendants against spurious charges of immoral and fraudulent behavior." Seville Indus. Mach. Corp. v. Southmost Mach. Corp., 742 F.2d 786, 791 (3d Cir. 1984). Rule 9(b)'s requirements are satisfied when a plaintiff pleads the "date, place, or time" of the fraud, but plaintiffs may also satisfy the rule "by injecting precision and some measure of substantiation into their allegations of fraud." Id.
In applying Rule 9(b), the United States Court of Appeals for the Third Circuit has cautioned that district courts must take into account the "'general simplicity and flexibility contemplated by the rules'" and "be sensitive to the fact that [Rule 9(b)] . . . may permit sophisticated defrauders to successfully conceal the details of their fraud." Christidis v. First. Penn. Mortgage Trust, 717 F.2d 96, 99-100 (3d Cir. 1983) (quoting Charles A. Wright Arthur R. Miller, Federal Practice and Procedure § 1298 at 407 (1969). Thus, application of Rule 9(b) is relaxed when the factual information regarding the fraud is peculiarly within the defendant's control. Wiener v. Quaker Oats Co., 129 F.3d 310, 319 (3d Cir. 1997). Even in situations where a relaxed application applies, a plaintiff must at least outline "the nature and scope of [the] effort to obtain . . . the information needed to plead with particularity. . . ."Shapiro v. UJB Financial Corp., 964 F.2d 272, 285 (3d Cir. 1992). Finally, in all cases, plaintiffs must state the facts upon which their allegations are based. Id.
III. DISCUSSION
A. Motion to DismissDefendants seek dismissal of Count II of the complaint. In that count, Plaintiff alleges that Defendants fraudulently induced him into joining their company. Defendants argue that Count II must be dismissed because it is little more than a disguised breach of contract claim, which Plaintiff pleaded in Count I. Defendants base their argument on Pennsylvania's "gist of the action" doctrine.
Under Pennsylvania law, to prove a fraud claim, Plaintiff must establish by clear and convincing evidence: (1) a misrepresentation; (2) which is material to the disputed transaction; (3) made falsely, with knowledge of its falsity or recklessness for its truth; (4) made with the intent of misleading another into reliance upon it; (5) justifiable reliance on the misrepresentation; and (6) injury which was proximately cause by reliance on the representation. See Bortz v. Noon, 556 Pa. 489, 729 A.2d 555 (1999).
The Court notes that the Pennsylvania Supreme Court has neither accepted nor rejected the "gist of the action doctrine."See eToll, Inc. v. Elias/Savion Advertising, Inc., 811 A.2d 10, 14 (Pa.Super.Ct. 2002). The doctrine has been consistently applied by Pennsylvania intermediate appellate courts and federal courts applying Pennsylvania law. See, e.q., Bohler-Uddeholm America, Inc. v. Ellwood Group, Inc., 47 F.3d 79, 103-07 (3d Cir. 2001); Good v. American Heritage Life Ins. Co., No. Civ.A. 02-3725, 2002 WL 31385820, at *2 (E.D. Pa. Sept. 26, 2002); Phico Ins. Co. v. Presbyterian Med. Servs. Corp., 663 A.2d 753, 227-30 (Pa.Super.Ct. 1995).
In Pennsylvania, "[w]hen a plaintiff alleges that the defendant committed a tort in the course of carrying out a contractual agreement, . . . courts examine the claim and determine whether the 'gist' or gravamen of it sounds in contract or tort." Sunquest Info. Sys., Inc. v. Dean Witter Reynolds, Inc., 40 F. Supp.2d 644, 651 (W.D. Pa. 1999) (Smith, J.). Simply put, the doctrine prevents plaintiffs from recasting ordinary breach of contract claims into tort claims. eToll, Inc. v. Elias/Savion Advertising, Inc., 811 A.2d 10, 14 (Pa.Super.Ct. 2002) (citing Bash v. Bell Tel. Co., 601 A.2d 825, 829 (Pa.Super.Ct. 1992)). To maintain a tort action under the doctrine, the defendant's wrongful conduct, rather than the contract itself, must be the impetus of the suit. Id. (citingBash, 601 A.2d at 829).
The gist of the action doctrine requires a court to determine the source of the duties allegedly breached by the defendant.Bohler-Uddeholm America, Inc. v. Ellwood Group, Inc., 247 F.3d 79, 105 (3d Cir. 2001). If the alleged breach implicates "the duties imposed by law as a matter of social policy," then the action sounds in tort. Bash, 601 A.2d at 829. In contrast, "breaches of duties imposed by mutual consensus agreements between particular individuals" sound in contract. Id. Claims of fraud in the performance of a contract are subject to the gist of the action doctrine. See eToll, 811 A.2d at 17-20 (collecting cases).
Turning to the allegations in the complaint, Plaintiff alleges in Count II that Defendants "fraudulently induced Plaintiff to join their company offering, inter alia, options on 20,000 shares of company stock as part of his compensation package when they had no intention of delivering [these options] ." See Compl. at 5. Plaintiff further asserts that Defendants induced him to join their company for the sole purpose of acquiring his "valuable knowledge, information, and resources" regarding the industry. Id. at 6. According to Plaintiff, once Defendants gained control of this information, they terminated his employment, as they planned to do all along. Id. Plaintiff claims that, had he known of Defendants' intentions, he would never have joined About.com. Id.
The Court finds Plaintiff's fraud allegations are sufficiently collateral to the contract such that they may be maintained in a separate claim. In cases where plaintiffs allege both fraud and breach of contract claims, courts look to see whether the fraud claims are intertwined with the defendant's contractual obligations. See, e.g., Maschinenfabrik v. Max Levy Autograph, Inc., No. Civ.A. 01-1083, 2002 WL 126634, at *7 (E.D. Pa. Jan. 31, 2002), Polymer Dynamics, Inc. v. Bayer Corp., No. Civ.A. 99-4040, 2000 WL 1146622, at *7 (E.D. Pa. Aug. 14, 2000), Amer. Guar. and Liab. Ins. Co. v. Fojanini, 90 F. Supp.2d 615, 623-24 (E.D. Pa. 2000), Factory Market, Inc. v. Schuller Int'l, Inc., 978 F. Supp. 387, 395 (E.D. Pa. 1998);eToll, 811 A.2d at 21.
Courts routinely dismiss fraud claims where the alleged "fraud" is, in truth, a violation of a contract provision. For example, in Factory Market, the plaintiff alleged fraud and breach of contract stemming from a leaky roof installed by the defendant. 987 F. Supp. at 390-91. The plaintiff's fraud claims were based on the defendant's failure to disclose that the roof would never be watertight. Id. at 395. The court dismissed the fraud claims, finding that the issue was more properly dealt with under the contract's warranties and guarantees section.Id. Similarly, in Max Levy, the court dismissed the plaintiff's fraud allegations because the contract itself created the duties allegedly breached by the defendant's fraud. 2002 WL 126634, at *6; Accord eToll, 811 A.2d at 21 (dismissing plaintiff's fraud claims based on billing duties created by contract)
In contrast, fraud claims are not dismissed if they stem from conduct not governed by the contract. In Polymer Dynamics, the plaintiff invested millions of dollars and provided confidential proprietary information to the defendant in hopes that the defendant would repair plaintiff's machinery. 2000 WL 1146622, at *2. When those repairs failed, the plaintiff brought fraud and breach of contract claims against the defendant. The court held that, despite a significant factual overlap, the fraud claims could be maintained because they were based on conduct outside the scope of the contract, namely an inducement to reveal commercial information in the hope of future business transactions. Id. at 6-7. Similarly, in Fojanini, the court found the plaintiff's fraud claims, which were based on a theory of fraudulent inducement to invest time and resources, sounded in tort rather than contract. 90 F. Supp.2d at 622-24.
In this case, Plaintiff's fraud claim is more analogous to those in Polymer Dynamics and Fojanini because it is based on Defendants' conduct during the employment negotiations with Plaintiff, rather than on the terms of the employment contract itself. Plaintiff alleges that, during his employment negotiations with About.com, Defendants fraudulently induced him into turning down other employment opportunities to join their company. Specifically, Plaintiff claims that Defendants offered him the prospect of long term employment with the company for the fraudulent purpose of extracting business information from him. Thus, even if Defendants had honored the stock options provisions of the various employment agreements at issue in this case, Plaintiff could still bring the instant fraud claim because it is not intertwined with the terms of the contract, but rather rests on Defendants' conduct. In contrast to the fraud claims in Factory Market and Max Levy, Plaintiff's fraud claim is not governed by a provision of the disputed contract. Accordingly, Defendants' motion is denied as to Count II of the complaint.
B. Motion for a More Definite Statement
Having determined that Plaintiff may maintain his fraud claim, the Court must now determine whether Plaintiff has pled his fraud allegations with the particularity required under Fed.R.Civ.P. 9(b). As noted above, under Rule 9(b), a plaintiff must plead the particular circumstances surrounding the alleged fraud, such as the date, place, and time of the events, or otherwise inject some measure of precision into the fraud allegations. Rolo v. City Inv. Comp. Liquidating Trust, 155 F.3d 644, 658 (3d Cir. 1998); Saporito v. Combustion Eng'g, Inc., 843 F. Supp.2d 666, 673-74 (3d Cir. 1988); Seville, 742 F.2d at 791. The Court finds that Plaintiff's generalized pleadings resemble the vague pleadings previously rejected by the Third Circuit.
In Saporito, the plaintiffs sued their former employer for inducing them to accept an inferior employment package without informing them that another package was being developed by the company. The court found that the complaint failed to meet Rule 9(b)'s pleading requirements, despite providing some detail regarding the fraudulent scheme. Saporito, 843 F.2d at 674-75. Specifically, the court held that the complaint was lacking because it did not reveal the identity of the speakers or recipients of the fraudulent information. Id.
Recently, in Rolo, the court also affirmed a dismissal under Rule 9(b). 155 F.3d at 658-59. The court, while noting that the complaint contained a somewhat detailed discussion of the fraudulent scheme, found that the complaint lacked sufficiently detailed pleading. Id. Specifically, the court noted that the allegations contained no details regarding the content of the misrepresentations, the identity of the speakers, or when the misrepresentations occurred. Id. at 659.
Similarly, in this case, Plaintiff makes general allegations that "Defendants About.com and Primedia" induced him into joining their company through fraudulent "representations."See Compl. at 5-6. First, Plaintiff fails to identify the individuals who made the allegedly fraudulent statements. Second, Plaintiff provides scant detail as to the content of the alleged misrepresentations. Third, Plaintiff fails to explain exactly when and how the alleged misrepresentations occurred.
Having failed to plead the "date, place, or time" of the alleged fraud, Plaintiff must either (1) use some other method to inject precision into his fraud pleadings, See Seville, 742 F.2d at 791, or (2) demonstrate that information needed to provide more detailed pleadings is under the Defendants' control. Weiner, 129 F.3d at 329. In Seville, the court found that the plaintiff's complaint satisfied Rule 9(b) by providing specific detail regarding certain manufacturing equipment that was the subject of the alleged fraud. Id. Despite the plaintiff's failure to provide time, place, or date information, the court held that the information about the equipment's role in the alleged fraud injected the necessary degree of specificity into the complaint. Id. In contrast, Plaintiff Greenhouse provides only scant detail regarding the subject of the alleged fraud. He avers only that certain unnamed officials at About.com promised him large responsibilities and long-term employment, without providing information regarding how these statement were fraudulent. Moreover, Plaintiff's complaint does not allege that this information is in Defendants' control. Accordingly, Count II of Plaintiff's complaint is dismissed with leave to amend so that Plaintiff may put forth a more detailed fraud claim.
IV. CONCLUSION
Defendant moves the Court to dismiss Counts II and III of Plaintiff's Complaint. First, because Plaintiff does not oppose the motion as to Count III, that count is dismissed. Second, applying Pennsylvania's gist of the action doctrine, the Court finds Count II should not be dismissed as duplicative of Plaintiff's breach of contract claim. Third, the Court finds that Count II was not pled with the degree of specificity required by Federal Rule of Civil Procedure 9(b). Accordingly, Count II is dismissed with leave to amend.
An appropriate Order follows.
ORDER
AND NOW, this 7th day of May, 2003, upon consideration of Defendants' Motion to Dismiss the Second and Third Counts of Plaintiff's Complaint (Docket No. 4), IT IS HEREBY ORDERED that Defendants' Motion is GRANTED IN PART AND DENIED IN PART, as follows:
(1) Count II of the complaint is DISMISSED WITH LEAVE TO AMEND pursuant to Federal Rule of Civil Procedure 9(b);
(2) Plaintiff may file an amended complaint, if any, within THIRTY (30) DAYS of the Date of this Order; and
(3) Count III of the complaint is DISMISSED.