Genetec, Inc. v. PROS, Inc.

Genetec, Inc., Plaintiff, v. PROS, Inc., Defendant.

No. 20-cv-07959 (AJN)

United States District Court, S.D. New York

September 21, 2021

MEMORANDUM OPINION & ORDER

ALISON J. NATHAN, UNITED STATES DISTRICT JUDGE

After contracting to purchase Defendant's software, Plaintiff filed a complaint against Defendant for negligent and intentional misrepresentation and breach of contract under New York law. Defendant moves to dismiss for failure to state a claim. For the reasons that follow, that motion is GRANTED IN PART and DENIED IN PART.

I. BACKGROUND

A. Factual Summary

The following allegations are drawn from Plaintiff Genetec's Amended Complaint, Dkt. No. 10, and are accepted as true for the purposes of this motion. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

Genetec is a company that sells software and hardware related to video surveillance and license plate recognition. Dkt. No. 10 at ¶ 7. In 2019, Genetec was itself in the market for a new software to help streamline and integrate its process for providing quotes to customers for its various products. Id. Genetec evaluated a number of vendors that sold this kind of software, including Plaintiff PROS. Id. Beginning in September 2019, the parties entered into a “pre-sale due diligence phase” wherein PROS provided a number of sales presentations to Genetec regarding its software, which was called “Smart CPQ.” Id. ¶¶ 7-8.

The complaint alleges that during this period, PROS made various misrepresentations. PROS gave a presentation on September 18, 2019 in which it made significant false claims about its customer base to Genetec. Id. ¶ 9. First, PROS presented a slide deck which said that it had numerous satisfied customers using the software, including a case study of an unnamed company that had 6, 000 customers in 24 countries. Id. It also represented during that presentation that the company Honeywell was a satisfied customer. Id. Finally, Jorge Garza, a representative of PROS, stated that PROS had over 900 successful implementations of the software. Id. Almost a year later, on June 12, 2020, PROS would reveal to Genetec that PROS had only one active customer that had purchased the software product that Genetec was using, which was not Honeywell, and that a second customer was projected to “go live” later that month. Id.

The complaint also alleges that PROS made misrepresentations during this phase about the software program Genetec was purchasing and its functionality. On October 17, 2019, PROS provided Genetec with a document entitled “Help Topic - Integration - Microsoft CRM” which described the sync mechanism for processing data. Id. ¶ 10. According to this document, the mechanism involved two separate “Customer Records Management” entities: PROS Quote Content IN and PROS Quote Content OUT. Id. In reality, the software product that PROS would later implement did not include those entities and had a different sync mechanism- meaning that the software that Genetec received had a materially different architecture than the software that it was promised. Id. Moreover, that same document represented that the software could be used on a mobile device using the Dynamics 365 app. Id. As PROS would later admit, the software could not be used through the Dynamics 365 app but instead could only function on a mobile device through a browser with decreased functionality. Id. ¶ 11. That same day, Mr. Garza represented at a pre-sales meeting that once the software was implemented, it would be easy for Genetec to maintain the software without ongoing help from PROS. Id. ¶ 12. He even noted that PROS was in the business of selling software, not professional services. Id. After implementation began, however, the PROS project manager assigned to Genetec would concede that Genetec would have to continue to pay PROS on a frequent and extensive basis in order to maintain and update the software. Id.

Finally, PROS also represented in the parties' contract that the implementation process would take five months to complete. Id. ¶¶ 13-14. However, after five months, it would become clear that the software was far from ready. Id.

Because of the materially false misrepresentations alleged above, Genetec decided to purchase the software and executed a contract with PROS to implement the software into its system. Id. ¶ 7. Five months into the implementation process, Genetec asked PROS to conduct a “smoke test” as required by the parties' contract, which is where the software is tested for basic functionality under common circumstances. Id. ¶ 16. The software failed the smoke test for five straight weeks in June and July of 2020. Id. Genetec then began to learn that various representations made above were false, that the software product did not have the same functionality and user-friendly interface that was promised, and that the product was very far away from being successfully implemented. Id. ¶ 17. Essentially, Genetec learned that the product that PROS was implementing into its system was not the same product that it had previously sold to other customers, but instead that Genetec had been “made an unwitting ‘beta tester' of a new version of the software” that was significantly inferior and undeveloped. Id. ¶ 18. PROS had induced Genetec into purchasing the new software because so far it only had one existing customer and needed additional customers so it could successfully market its product. Id. ¶ 14.

On July 10, 2020, Genetec notified PROS that it had entered into the contract in reliance on material false representations and that the contract was null and void or otherwise had been breached. Id. ¶ 19. Genetec demanded that PROS refund the approximately $300, 000 in payments it had made thus far and reserved its right for consequential damages, which it estimated to be approximately $1, 000, 000. Id. PROS has refused to comply with this demand. Id.

B. Procedural History

On September 25, 2020, Genetec filed a complaint in this Court based on diversity jurisdiction. In Genetec's Amended Complaint, the operative complaint in this action, Genetec asserts claims against PROS for intentional and negligent misrepresentation, as well as breach of contract and breach of the covenant of good faith and fair dealing. Dkt. No. 10. PROS moved to dismiss. Dkt. Nos. 7, 11. That motion is now fully briefed. Dkt. Nos. 13, 15.

II. LEGAL STANDARD

A. Fed.R.Civ.P. 12(b)(6)

In deciding a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), the Court accepts the factual allegations in the Complaint as true and draws all reasonable inferences in favor of the non-moving party. See McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir. 2007). To survive a motion to dismiss, the complaint must include “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A plaintiff's complaint “requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Id. At 555.

B. Fed.R.Civ.P. 9(b)

For claims sounding in fraud, Federal Rule of Civil Procedure 9(b) requires that a plaintiff plead the circumstances of the alleged fraudulent activity with particularity. See Fed. R. Civ. P. 9(b). This means they must “(1) detail the statements (or omissions) that the plaintiff contends are fraudulent, (2) identify the speaker, (3) state where and when the statements (or omissions) were made, and (4) explain why the statements (or omissions) are fraudulent.” Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co., 375 F.3d 168, 187 (2d Cir. 2004) (internal quotation marks and citation omitted).

III. DISCUSSION

Before the Court is PROS's 12(b)(6) motion dismiss Genetec's complaint in its entirety for failure to state a claim under New York law.^[1] For the reasons that follow, the Court grants PROS's motion as to Genetec's breach of contract and breach of the implied covenant or good faith and fair dealing claims, but otherwise holds that Genetec has stated a claim for both intentional and negligent misrepresentation.

A. Intentional and Negligent Misrepresentation Claims

To state a claim for intentional misrepresentation under New York law, a plaintiff must allege “(1) a material misrepresentation or omission of fact (2) made by defendant with knowledge of its falsity (3) and intent to defraud; (4) reasonable reliance on the part of the plaintiff; and (5) resulting damage to the plaintiff.” Riker, Danzig, Scherer, Hyland & Perretti, LLP v. Premier Capital, LLC, No. 15-cv-8293 (ALC), 2016 WL 5334980, at *4 (S.D.N.Y. Sept. 22, 2016) (internal quotation marks and citation omitted). For a claim for negligent misrepresentation, the plaintiff must also plead the elements of (1) a material misrepresentation or omission, (2) reasonable reliance, and (3) resulting damages. See Hydro Investors, Inc. v. Trafalgar Power Inc., 227 F.3d 8, 20 (2d Cir. 2000). And while the plaintiff need not allege for a negligent misrepresentation claim that the defendant had knowledge of the falsity and an intent to defraud, the plaintiff must plausibly allege that the defendant should have known that the information was false. Id. Lastly, the plaintiff must allege that the defendant “had a duty, as a result of a special relationship, to give correct information” to the plaintiff. Id.

Moreover both claims must be plead in accordance with the heightened standard of Federal Rule of Civil Procedure Rule 9(b). Claims for intentional misrepresentation under New York law must be plead in accordance with Rule 9(b). See Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d 160, 179 (2d Cir. 2015)). While it is an unsettled question whether Rule 9(b) applies to claims for negligent...