FinancialApps, LLC v. Envestnet, Inc.

FINANCIALAPPS, LLC, Plaintiff, v. ENVESTNET, INC. and YODLEE, INC., Defendants.

Civil Action No. 19-1337-CFC-CJB

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE

July 30, 2020

REPORT AND RECOMMENDATION

Plaintiff FinancialApps, LLC ("Plaintiff" or "FinApps") filed this action against Defendants Envestnet, Inc. ("Envestnet") and Yodlee, Inc. ("Yodlee" and collectively with Envestnet, "Defendants") asserting various federal and state law causes of action. (D.I. 2) Presently pending before the Court is Plaintiff's Motion to Dismiss Defendants' Counterclaims, filed pursuant to Federal Rule of Civil Procedure 12(b)(6) (the "Motion"). (D.I. 46) For the reasons set forth below, the Court recommends that the District Court GRANT-IN-PART and DENY-IN-PART Plaintiff's Motion.

I. BACKGROUND

The Court assumes familiarity herein with its July 6, 2020 Report and Recommendation ("July 6, 2020 R&R"), in which, inter alia, it described the general nature of the instant suit. (D.I. 109 at 1-4) Below, it will include additional factual and procedural background that is particularly relevant to the instant Motion.

In January 2017, Yodlee entered into the Master Services Agreement (the "MSA")¹ with FinApps that is at issue in this case. (D.I. 21 at ¶ 34) It alleges it did so in reliance on FinApps'representations that FinApps' Risk Insight software was configurable, utilized modern software models, was capable of updates every two to three weeks and could generate asset reports. (Id. at ¶¶ 3, 26-29, 47)² However, Yodlee thereafter learned that the Risk Insight product was not close to being ready to launch, that its design could not be adapted easily to client demands, that FinApps stored customer financial data in a manner that put the information at risk and that FinApps required weeks of lead time to address even minor problems. (Id. at ¶¶ 2-4, 29-32, 43, 46-48) This led to substantial problems and client complaints. (Id. at ¶¶ 5, 60) In an April 3, 2019 letter to FinApps, Yodlee described the various significant technical issues with the Risk Insight software; Yodlee also explained that it was going to pause marketing of Risk Insight (though it would commit to servicing existing clients) and asked FinApps, in the meantime, to solve these various technical issues. (Id. at ¶¶ 5, 60-62 & ex. D)

Defendants allege that after FinApps realized that Yodlee might terminate the contract between them, FinApps demanded over $1.6 million for unspecified work dating back to the beginning of the parties' relationship. (Id. at ¶¶ 5, 63) However, FinApps provided "no backup information [regarding these invoices], including information tying the invoices to specific work." (Id. at ¶ 63) FinApps then allegedly sought to destroy Yodlee's relations with its clients and investors, as it suspended access to Risk Insight suddenly on June 11, 2019 without providing advance notice or offering substitute products to those clients. (Id. at ¶¶ 6, 66) On June 12, 2019, Yodlee sent FinApps a letter terminating the MSA and its related SOW #1 andSOW #3 (together, the "Contracts") because FinApps had not remedied the above-referenced technical issues and because FinApps had suddenly suspended Risk Insight. (Id. at ¶¶ 35, 42, 69-71) Yodlee alleges that as a result of FinApps' conduct, many clients of Risk Insight have stopped using Yodlee's products and have requested reimbursement from Yodlee. (Id. at ¶ 72)

On July 17, 2019, FinApps filed the instant litigation. (D.I. 2; D.I. 21 at ¶ 73) Soon after, FinApps allegedly defamed Defendants in the trade press in various ways. (D.I. 21 at ¶¶ 74-76)

On October 30, 2019, Defendants filed four counterclaims (the "Counterclaims"). (D.I. 21) These include Yodlee's claim for breach of contract (Count One), Yodlee's claim for breach of the implied covenant of good faith and fair dealing (Count Two), both Defendants' claims for defamation (Count Three) and Yodlee's claim for fraud (Count Four). (Id.)³

In response, FinApps filed the instant Motion, seeking dismissal of all four Counterclaims. (D.I. 46) Briefing on the Motion was completed by February 28, 2020. (D.I. 77)

Further relevant facts related to resolution of the Motion will be set out as needed in Section III.

II. STANDARD OF REVIEW

The Court incorporates by reference its summary of the standard of review for motions to dismiss set out in the July 6, 2020 R&R. (D.I. 109 at 4-5)

III. DISCUSSION

As noted above, FinApps seeks dismissal of each of Defendants' four Counterclaims. The Court will consider the Counterclaims in the order they were addressed by FinApps in its briefing.

A. Yodlee's Breach of Contract Counterclaim (Count One)

In Count One, Yodlee alleges breach of contract. (D.I. 21 at ¶¶ 77-83) To sufficiently set out this claim pursuant to Delaware law, a party must plead facts plausibly showing: (1) the existence of the contract; (2) the breach of an obligation imposed by that contract; and (3) resultant damage to it. Anderson v. Wachovia Mortg. Corp., 497 F. Supp. 2d 572, 581 (D. Del. 2007); VLIW Tech., LLC. v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del. 2003).⁴

FinApps challenges the sufficiency of Count One on three grounds. The Court addresses each of those grounds below.

1. Whether the Counterclaim Alleges that Yodlee Breached the Contracts

FinApps first asserts that Yodlee's allegations expressly admit three types of material breaches of the Contracts by Yodlee, which if true would preclude Yodlee from asserting this breach of contract claim against FinApps. (D.I. 47 at 6-7; D.I. 77 at 1-2); College Health & Inv., L.P. v. Diamondhead Casino Corp., C.A. No. N15C-01-119 WCC, 2015 WL 5138093, at *3 (Del. Super. Ct. July 2, 2015) ("It is also well settled in contract law that a party who first commits a material breach of a contract cannot enforce the contract going forward.") (internal quotation marks and citations omitted).

As an initial matter, FinApps argues that Yodlee admits to a breach of the MSA's "Exclusivity" and "Restricted Activities" subsections by pleading that Yodlee developed a product known as "Snapshot" and that one client used this product continuously from 2015 to the present. (D.I. 47 at 6 & n.3 (citing D.I. 21 at ¶¶ 18-22, 36); D.I. 77 at 2) The "Exclusivity" provision states that Risk Insight "shall be the only and exclusive Software and or related services used and promoted by Yodlee to Yodlee's Clients and prospective Clients in connection with or related to Yodlee's Risk Insight Product and that offer substantially similar functionality[.]" (MSA at § 2(c)) And the "Restricted Activities" section provides that "Yodlee shall not build, or engage a third party to build, a competitive product which copies any features, functions, or rules of the Services, Software, or Platform." (Id. at § 6(g)) Yet Yodlee's allegations do not expressly establish breaches of these provisions. With regard to the "Exclusivity" provision, it only prohibits Yodlee from using and promoting any product, inter alia, "in connection with or related to" Risk Insight; the Counterclaims do not allege that Snapshot was a product used or promoted by Yodlee in connection with or related to Risk Insight. (D.I. 73 at 4 & n.2) And as for the "Restricted Activities" provision, Yodlee alleges that it "built" or developed Snapshot in 2015 (and sold the product in that year)—i.e., years before the parties entered into the Contracts. (D.I. 21 at ¶¶ 21-22)

Next, FinApps suggests that Yodlee admitted that it "pause[d] marketing Risk Insight to new clients until [continuing problems] could be fixed"; it asserts that these allegations establish a breach of the Contracts, because Yodlee also alleged that the "gist of the [MSA] was that Yodlee would market Risk Insight to potential clients[.]" (Id. at ¶¶ 37, 61 (cited in D.I. 47 at 7); D.I. 77 at 2) But as Yodlee rightly counters, FinApps does not point to a specific provision in the Contracts that Yodlee purportedly breached in this way. (D.I. 73 at 4-5) Nor does FinAppsexplain why any such provision required Yodlee to continue to market Risk Insight "no matter what [happens thereafter.]" (Id. (emphasis in original))

Finally, FinApps argues that Yodlee's failure to pay FinApps over $1.6 million in requested fees, referenced in the Counterclaims, establishes a breach of the Contracts. (D.I. 47 at 7 (citing D.I. 21 at ¶¶ 63-64); D.I. 77 at 2) But while the Counterclaims do note FinApps' request for payment of these monies, they also allege that: (1) FinApps provided no backup information regarding that request (i.e., information tying FinApps' invoices to specific work done on the project), and (2) Yodlee "told [FinApps] it would pay any money it owed" after receiving confirmatory paperwork indicating that Yodlee actually did owe FinApps this money. (D.I. 21 at ¶¶ 63-64) Read in the light most favorable to Yodlee, these sound like allegations that FinApps made an unfounded and unsupported request for payment, nothing more. They do not preclude Yodlee from pursing a breach of contract counterclaim. (D.I. 73 at 5)

For all of these reasons, this first basis for dismissal of Count One is insufficient.

2. Whether the Counterclaim Identifies the Provisions that FinApps Breached and How FinApps Breached Them

Second, FinApps argues that Yodlee fails to allege a sufficient nexus between any specific conduct by FinApps and any specific provisions of the Contracts that were allegedly breached by such conduct. (D.I. 47 at 7-10; D.I. 77 at 2-4) Courts applying Delaware law to breach of contract claims have dismissed claims that fail to identify the express contract provision that was breached, and why such a provision was breached. Anderson, 497 F. Supp. 2d at 581; see also Somersault Snack Co., LLC v. Baptista Bakery, Inc., Case No. 19-cv-03131-DMR, 2019 WL 6173168, at *2 (N.D. Cal. Nov. 20, 2019) (assessing a breach of contract claim governed by Delaware law and requiring plaintiff to amend its complaint to: (1) identify the...