Opinion
CIVIL ACTION NO. 02-11383-RWZ
May 19, 2003
MEMORANDUM OF DECISION AND ORDER
Plaintiff Lycos, Inc., provides a wide range of internet services, and in the late 1990s, it attempted to capitalize on the dot-com boom by investing in other internet companies. From April 1998 until December 1999, Robert O. Frasca held a number of high-level positions at Lycos. During that time, Lycos planned the creation of an "internet incubator" to help start-up firms develop new, commercially viable online business technologies. In December 1999, however, Frasca resigned from Lycos to start his own internet incubator, defendant Internet Venture Works, Inc. ("IVW"). Lycos accused Frasca of violating a Nondisclosure and Developments Agreement, but by early January 2000, Frasca, IVW and Lycos entered into a Settlement Agreement to avoid litigation. The Agreement forbade Frasca and IVW from soliciting and hiring Lycos employees for one year and required IVW to sell Lycos a five-percent ownership stake. The Agreement further mandated that IVW "shall diligently negotiate in good faith to enter into an agreement or agreements" to purchase "no less than $5 million" in services from Lycos or its corporate affiliates. In the event that no such agreement was reached within a year, IVW was obliged to sell Lycos an additional five-percent ownership stake. Under the terms of the Settlement Agreement, Lycos released IVW "from all liabilities . . . in connection with the negotiation, formation, and execution of this Agreement, . . . to the extent known or unknown. . . ."
IVW dissolved in December 2001.
The Settlement Agreement is attached to the First Amended Complaint and incorporated by reference therein.
In June 2002, Lycos sued IVW in Massachusetts court, alleging that IVW failed to negotiate the purchase agreement in good faith, never intended to do so, and fraudulently induced Lycos into entering the Settlement Agreement. Plaintiff seeks recovery of "no less than $5,000,000" for breach of contract and the implied covenant of good faith and fair dealing, fraud, and unfair trade practices under Mass. Gen. L. ch. 93A. Defendant timely removed the action to this Court on diversity grounds and has filed a motion to dismiss for failure to state a claim for which relief can be granted and for failing to plead a fraud claim with the particularity required by Fed.R.Civ.P. 9(b).
Defendant first argues that the waiver in the Settlement Agreement defeats plaintiff's fraud claims in Counts III and IV of the First Amended Complaint. Although the plain language of the contract relieves IVW of liability for all causes of action "in connection with the negotiation, formation, and execution" of the Settlement Agreement, a contract term cannot exempt a party from liability for fraud. "We continue to believe that parties to contracts, whether experienced in business or not, should deal with each other honestly, and that a party should not be permitted to engage in fraud to induce the contract. . . . In obedience to the demands of a larger public policy the law long ago abandoned the position that a contract must be held sacred regardless of the fraud of one of the parties in procuring it." McEvoy Travel Bureau, Inc. v. Norton Co., 408 Mass. 704, 712-13 (1990) (citations and internal quotation marks omitted). In spite of the Settlement Agreement's waiver provision, Count III and the fraud allegations of Count IV state claims for which relief can be granted.
Defendant next argues that the fraud allegations do not satisfy the pleading requirements of Fed.R.Civ.P. 9(b). Rule 9(b) states that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." The rule requires "specification of the time, place, and content of an alleged false representation, but not the circumstances or evidence from which fraudulent intent could be inferred." McGinty v. Beranger Volkswagen, Inc., 633 F.2d 226, 228 (1st Cir. 1980). The rationale underlying this particularity requirement is "(1) to place the defendants on notice and enable them to prepare meaningful responses; (2) to preclude the use of a groundless fraud claim as a pretext to discovering a wrong or as a `strike suit'; and (3) to safeguard defendants from frivolous charges which might damage their reputations." New England Data Servs. v. Becher, 829 F.2d 286, 289 (1st Cir. 1987). In the present case, plaintiff has alleged that the parties negotiated the Settlement Agreement in December 1999 and early January 2000, that plaintiff entered into the Agreement because of defendant's representations that it would negotiate the purchase order in good faith, and that defendant never negotiated or intended to negotiate in good faith. Without a doubt, these allegations put defendant on notice about the scope of the fraud claims with the requisite degree of precision. To require more would place an undue burden on plaintiff to allege facts that are "peculiarly within the defendant's control." Id. at 289. The First Amended Complaint satisfies Fed.R.Civ.P. 9(b).
Regarding Counts I and II, which allege breach of contract and of the covenant of good faith and fair dealing, defendant contends that the monetary relief plaintiff seeks is too speculative. Plaintiff seeks damages of "no less than $5 million." That figure echoes language in the Settlement Agreement, which bound defendant to "negotiate in good faith to enter into an agreement or agreements with Lycos . . . for the purchase of services . . . under which [defendant] shall pay Lycos no less than $5 million." But the Settlement Agreement also included a contingency in case the negotiations did not bear fruit: "In the event that [IVW] and Lycos fail . . . to enter into such agreement . . . following such good faith negotiations . . .," IVW was required to sell Lycos an additional five-percent stake in the company. It is unnecessary to decide whether plaintiff's claim for $5 million is speculative, because at the very least the contingency appears to provide one concrete measure of damages: the profit plaintiff could have made had it bought and then resold the additional five-percent stake in defendant. Therefore, Counts I and II survive defendant's motion to dismiss.
Finally, defendant argues that plaintiff fails to state a claim under Mass. Gen. L. ch. 93A because the fraud claims were waived by the Settlement Agreement and the breach of contract, without more, does not violate chapter 93A. As decided above, plaintiff did not waive its fraud claims, so its 93A count alleges more than mere breach of contract.
Accordingly, the motion to dismiss is denied.