Declude, Inc. v. Perry, 08-11072-NMG.

593 F.Supp.2d 290

DECLUDE, INC. and DNSstuff, LLC, Plaintiffs, v. R. Scott PERRY, Defendant.

Civil Action No. 08-11072-NMG.

United States District Court, D. Massachusetts.

December 22, 2008.

COPYRIGHT MATERIAL OMITTED

Asha A. Awad, Eric D. Levin, Hinckley, Allen and Snyder, LLP, Boston, MA, for Counter Defendant/Plaintiffs.

Natalie U. Luongo, Steven T. Sager, Sager & Schaffer LLP, Westborough, MA, for Counter Claimant/Defendant.

MEMORANDUM & ORDER

GORTON, District Judge.

On June 25, 2008, plaintiffs Declude, Inc. ("Declude") and DNSstuff, LLC ("DNS"), companies which took their name from the software they produce, filed a complaint against software designer R. Scott Perry ("Perry"). Perry has denied the allegation against him and filed a counterclaim with respect to certain counts of which the counterclaim defendants have moved to dismiss.

I. Background

This suit arises out of two software programs, known as "Declude Software" and "DNSstuff Software", developed by Perry in 2000. The Declude Software uses a particular kind of source code ("the Declude Source Code"), a verbatim copy of which is contained in the DNS Software ("the DNS Source Code").

As memorialized in the "Asset Purchase Agreement" dated April 9, 2004, Perry sold all the assets used in and associated with the Declude Software, including the Declude Source Code, to plaintiff Declude, which at that time was known as Computerized Horizons, LLC.¹ In consideration, Perry received $700,000, a four-year employment contract and royalties. The purchase price was paid in the form of a $60,000 deposit, a $265,000 payment at the closing and a promissory note for $375,000. The employment contract provides that Perry would serve as Director of Software Architecture of Declude and receive an annual salary of $125,000. It also contains a liquidated damages provision whereby Perry is entitled to a minimum of $500,000 for his employment so long as he is not terminated for cause or does not voluntarily resign.

Almost immediately, Declude failed to comply with the terms of the promissory note and subsequently defaulted on it. Moreover, in January, 2005, Perry resigned from his position at Declude. He alleges that, in fact, he was constructively discharged due to a hostile work environment created by Declude but he continued to provide services to the company even after he had officially resigned.

Pursuant to the "Asset Contribution Agreement" dated August 30, 2006, Perry sold the DNSstuff Software to DNS, a company organized at that time. Under that Agreement, Declude and Perry both received an "ownership stake" in DNS (consisting of 60,000 "Class A units" for Declude and 40,000 "Class A units" and 10,000 "Class B units" for Perry).² Contemporaneously, under a "Stock Subscription Agreement", Perry received one percent (1%) of the total issued and outstanding stock of Declude and, under a "Contribution Agreement", Declude agreed to provide certain services in support of DNS. Finally, Declude and Perry entered into an "Operating Agreement" with respect to the management of DNS.

The plaintiffs allege they discovered for the first time in January, 2008, that the Declude Source Code was copied into the DNS Source Code. Believing that they had, in effect, purchased from Perry the same source code twice, Declude and DNS brought suit alleging counts of copyright infringement, breach of contract, misrepresentation, conversion, unjust enrichment and conduct in violation of the Massachusetts Consumer Protection Act, M.G.L. c. 93A. Perry denies all material allegations of the complaint and asserts numerous affirmative defenses and a ten-count counterclaim against the plaintiffs and three officers of Declude and DNS, namely, Charles K. Stefanidakis ("Stefanidakis") Arik Keller ("Keller") and Richard Person ("Person").

The counterclaim defendants, in turn, have filed a motion to dismiss Counts II, IV, V, VI and X of the counterclaim for failure to state a claim under Fed.R.Civ.P. 12(b)(6) and/or for failure to meet the heightened pleading requirements of Fed. R.Civ.P. 9(b). Perry opposes that motion, which is now before the Court.

II. Legal Analysis

A. Legal Standard

In order to survive a motion to dismiss for failure to state a claim upon which relief may be granted under Fed. R.Civ.P. 12(b)(6), a complaint must contain factual allegations sufficient "to raise a right to relief above the speculative level". Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1965, 167 L.Ed.2d 929 (2007). In considering the merits of a motion to dismiss, the court may look only to the facts alleged in the pleadings, documents attached as exhibits or incorporated by reference in the complaint and matters of which judicial notice can be taken. Nollet v. Justices of the Trial Court of Mass., 83 F.Supp.2d 204, 208 (D.Mass.2000) aff'd, 248 F.3d 1127 (1st Cir.2000). Furthermore, the court must accept all factual allegations in the complaint as true and draw all reasonable inferences in the plaintiffs favor. Langadinos v. American Airlines, Inc., 199 F.3d 68, 69 (1st Cir.2000). If the facts in the complaint are sufficient to state a cause of action, a motion to dismiss the complaint must be denied. See Nollet, 83 F.Supp.2d at 208. Mere "bald assertions, unsupportable conclusions, periphrastic circumlocutions, and the like" do not constitute sufficient allegations. Doyle v. Hasbro, Inc., 103 F.3d 186, 190 (1st Cir.1996) (citation and internal quotation marks omitted).

In order to survive a motion to dismiss pursuant to Fed.R.Civ.P. 9(b), a complaint alleging fraud or mistake must do so with particularity. Under that heightened standard, a plaintiff must identify the fraudulent statement or representation, the person making the statement, and when the statement was made. See Rodi v. S. New England Sch. of Law, 389 F.3d 5, 15 (1st Cir.2004). The purpose of that standard is three-fold:

(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., Inc. v. Becher, 829 F.2d 286, 289 (1st Cir.1987).

B. Application

1. Count II

Count II of the counterclaim alleges that Declude breached express and implied provisions of its employment agreement with Perry by constructively discharging Perry and failing to pay him liquidated damages. Perry claims that he was forced to resign from his position at Declude because he was

forced to endure intolerable and hostile work conditions, including an excessive workload, impossible demands and deadlines, humiliation by the repeated assignment of menial tasks, and verbal abuse directed towards him by Stefanidakis.

Perry's employment agreement with Declude states, in the two relevant parts,

(1) The Employer employs Employee as Director of Software Architecture to perform such acts and duties for the Employer that are customarily performed

in connection with and related to that position....

5(b) Upon the Termination Date, unless such results from Discharge for Cause or a Termination by Employee pursuant to Paragraph 5(a)(ii), the Employer shall pay the Employee a lump sum equal to (i) any Base Salary accrued through the Termination Date, and (ii) Five Hundred Thousand Dollars ($500,000) less all Base Salary prior paid to or for the benefit of Employee through the Termination Date.

The counterclaim defendants allege that Perry resigned from Declude (constituting a "Termination by Employee") and that, therefore, he has no claim for liquidated damages. They present three arguments in support of their contention that Count II should be dismissed pursuant to Fed. R.Civ.P. 12(b)(6).

First, they claim that Perry has failed to demonstrate a breach of an express provision of the employment contract because the employment agreement does not prohibit Declude from assigning deadlines or menial tasks to Perry. Perry responds that having to perform menial tasks, such as providing technical support, are not duties befitting a Director of Software Architecture. Neither party has specified exactly what are the duties of such a Director. Although the duties of a "director", in the typical sense of the term, usually involve complex tasks, many jobs, even high-ranking ones, inevitably require some amount of menial work. Without more information, the issue of whether the assignment of menial work to Perry constitutes a breach of the employment agreement cannot be resolved at this stage of the case.

The counterclaim defendants' second argument for dismissal is that Perry has failed to demonstrate a breach of Declude's implied covenant of good faith and fair dealing. They argue that such an obligation extends only to contractual duties actually contained in the agreement and does not impose additional duties. Perry responds that the counterclaim defendants' definition of the covenant would make it a mere redundancy of the underlying contract and, moreover, the covenant can be breached even in the absence of a breach of the express terms of the contract.

Although Perry is correct, the requirements of the covenant are "circumscribed by the obligations in the contract". See Speakman v. Allmerica Financial Life Ins., 367 F.Supp.2d 122, 132 (D.Mass. 2005). Massachusetts courts have not yet determined whether constructive discharge is sufficient to support a claim for breach of the covenant. Vonachen v. Computer Associates Intern., Inc., 524 F.Supp.2d 129, 137 (D.Mass.2007). Therefore, Count II may not rest entirely upon a breach-of-the-covenant theory.

The counterclaim defendants' final argument is that Perry has failed to allege facts sufficient to support a claim of constructive discharge. They contend that constructive discharge usually occurs in employment discrimination cases and that courts have refused to...