Shree Veer Corp. v. Oyo Hotels, Inc.

MEMORANDUM OPINION AND ORDER

Sam A. Lindsay, United States District Judge.

Before the court is Defendant's Motion to Dismiss Plaintiffs' First Amended Complaint Pursuant to Rules 12(b)(6) and 9(b) (Doc. 14), filed on December 22, 2020. After careful consideration of the motion, brief, response, reply, pleadings, and applicable law, the court grants Defendant's Motion to Dismiss with respect to Plaintiffs' fraud by nondisclosure and, jointly pled, fraud and fraudulent inducement claims brought against Defendant on behalf of themselves and putative class members, and grants Plaintiffs leave to amend their Frist Amended Complaint. The amended pleadings must be filed by October 14, 2021.

I. Factual and Procedural Background

On October 28, 2020, Defendant OYO Hotels, Inc. (“OYO” or “Defendant”) removed this action filed by Shree Veer Corporation (“Shree Veer”) and Chief Hospitality, LLC (“Chief Hospitality”) (collectively, “Plaintiffs”) to federal court pursuant to 28 U.S.C. §§ 1332(a)(1) and 1441, and alternatively under § 1332(d)(2). Plaintiffs' action, filed on behalf of themselves and a Putative Class, arises out of a contract dispute between the parties and OYO's alleged fraudulent inducement, misrepresentations, and nondisclosure. First, Plaintiffs contend that Defendant

breached its contracts with them “by, at a minimum, improperly withholding the guaranteed revenue payments required by the contracts between each Plaintiff and Defendant.” Pl.'s First Am. Compl. 10, ¶ 31.

Second, they contend that OYO committed fraud by nondisclosure causing them injury when it “partially disclosed [] information to Plaintiffs” through Defendant's CEO, Mr. Ritesh Agarwal (“Mr. Agarwal”) including, but not limited to:

a. Defendant's sophisticated revenue management and guest stay booking software platforms would increase the property owners' business

b. Defendant's guest stay booking algorithms and revenue modeling tools were state-of-the-art and drew on data and sophisticated modeling from hotel operations around the world and were developed using the best artificial intelligence and/or machine learning talent and resources available anywhere

c. Defendant's software was incomparable and bolstered by Defendant's employment of over two thousand software engineers around the world that continually optimize the revenue management and booking software;

d. Defendant's revenue management and booking software mechanisms were so accurate that Defendant could predict, down to the dollar, major revenue growth for each hotel that entered into an agreement with Defendant (which would allow Defendant to offer the guaranteed revenue agreement more fully described below);

e. The opportunity to work with Defendant (by converting their properties to OYO-branded hotels) was infallible because even if Defendant's revenue management and booking software did not operate as promised and could not yield the guaranteed revenue, Plaintiffs and all other prospective franchisees could rely on the contractual guaranteed minimum revenue as backstop mechanism.^[1]

Id. 12, ¶¶ 34-38.

Third, Shree Veer and Chief Hospitality contend that OYO committed common law fraud and fraudulent inducement because it knew the statements above and a statement in a March 27,

2020^[2] letter Plaintiffs received from Defendant “[r]epresenting Plaintiffs' available rooms to be ‘unavailable' because of the COVID-19 pandemic.” Id. at 14, ¶ 45b; see Id. at 13-14, ¶¶ 43-45. On November 17, 2020, Defendant OYO filed its motion to dismiss Plaintiffs' original petition. In response, Plaintiffs filed their First Amended Complaint on December 8, 2020. On December 22, 2020, Defendant OYO filed its Motion to Dismiss Plaintiff's First Amended Complaint Pursuant to Rules 12(b)(6) and 9(b).

In 2019, Defendant OYO began its market expansion into the United States. Id. at 2, ¶ 8. OYO's basic business model relied on “[s]uccessfully inducing small, independent-minded hotel property owners to re-open as an OYO-franchised hotel.” Id. at 3, ¶ 9 (emphasis in original). As part of its expansion strategy, in June or July 2019, OYO held a meeting in San Francisco, California, for small and independent hotel property owners, including Plaintiffs' representative, where Mr. Agarwal “used this captive audience opportunity to make affirmative representations about the quality of their business model and specifically about the sophistication and superiority of Defendant's revenue management and guest stay booking software platforms.” Id. at 4, ¶ 13. Plaintiffs contend that Mr. Agarwal's statements at this meeting-the Agarwal Statements-were fraudulent and “an attempt to induce small or independent property owners [including Plaintiffs] to hand control over all bookings and revenue management over to Defendant by entering into contracts similar to those signed by Plaintiffs.” Id. ¶ 14. OYO also established a Minimum Revenue Guarantee Mechanism (“Revenue Guarantee”) as an incentive to guarantee a minimum revenue margin for newly franchised properties. See Id. at 5, ¶ 15. According to Plaintiffs, by late 2019, these guaranties turned out to be more than OYO could maintain, so “it was forced to offer

rooms at up to 75% discounts in order to achieve the online engagement from prospective hotel guests it was targeting, ” which affected the hotels' clientele and negatively impacted, consequently, Plaintiffs' businesses. Id. at 6-7, ¶¶ 20-21.

When the World Health Organization declared COVID-19 a global pandemic, Defendant OYO informed Plaintiffs in its March 27, 2020 letter that “legal orders and other developments related to the Coronavirus (COVID-19) crisis makes the guest rooms of your OYO hotel ‘unavailable'” under the contracts and it would therefore suspend the Revenue Guarantee. Id. at 7, ¶ 23; id., Ex. 3. Plaintiffs contend that their rooms were not “unavailable” or, in the alternative, the word “unavailable” in the contracts is ambiguous. Id. at 8, ¶¶ 24-25. Between April 2020 and September 2020, OYO withheld Revenue Guarantee payments from Chief Hospitality and Shree Veer, totaling $769, 500 and $329, 059, respectively. Id. at 8-9, ¶ 26; see id., Ex. 1 at 6; Ex. 2 at 6. According to Plaintiffs, Defendant Oyo “quietly and fraudulently sought to force their franchisees to bear the financial losses and the associated risks that were contractually allocated to OYO in the entirely foreseeable scenario of reduced travel and tourism.” Id. at 9, ¶ 27.

Defendant contends that Plaintiffs' second claim regarding fraud by nondisclosure and third claim regarding fraud and fraudulent inducement should each be dismissed for failure to “plead facts with requisite particularity to establish their claims as required by Rule 9(b).”^[3] Def. Br. in Supp. of Mot. to Dismiss Pl. First Am. Compl. (“Def. Br. in Supp. of Mot.”) 17, 23. Moreover, Defendant OYO contends that Plaintiffs' Response does not address its arguments that

they failed to plead facts to support each element of their fraud claims. Def. Reply Br. in Supp. of Mot. 2, 5.

II. Rule 12(b)(6) - Failure to State a Claim

To defeat a motion to dismiss filed pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, a plaintiff must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007); Reliable Consultants, Inc. v. Earle, 517 F.3d 738, 742 (5th Cir. 2008); Guidry v. American Pub. Life Ins. Co., 512 F.3d 177, 180 (5th Cir. 2007). A claim meets the plausibility test “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a ‘probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal citations omitted). While a complaint need not contain detailed factual allegations, it must set forth “more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555 (citation omitted). The “[f]actual allegations of [a complaint] must be enough to raise a right to relief above the speculative level . . . on the assumption that all the allegations in the complaint are true (even if doubtful in fact).” Id. (quotation marks, citations, and footnote omitted). When the allegations of the pleading do not allow the court to infer more than the mere possibility of wrongdoing, they fall short of showing that the pleader is entitled to relief. Iqbal, 556 U.S. at 679.

In reviewing a Rule 12(b)(6) motion, the court must accept all well-pleaded facts in the complaint as true and view them in the light most favorable to the plaintiff. Sonnier v. State Farm Mut. Auto. Ins. Co., 509 F.3d 673, 675 (5th Cir. 2007); Martin K. Eby Constr. Co. v. Dallas Area Rapid Transit, 369 F.3d 464, 467 (5th Cir. 2004); Baker v. Putnal, 75 F.3d 190, 196 (5th Cir.

1996). In ruling on such a motion, the court cannot look beyond the pleadings. Id.; Spivey v. Robertson, 197 F.3d 772, 774 (5th Cir. 1999). The pleadings include the complaint and any documents attached to it. Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498-99 (5th Cir. 2000). Likewise, “‘[d]ocuments that a defendant attaches to a motion to dismiss are considered part of the pleadings if they are referred to in the plaintiff's complaint and are central to [the plaintiff's] claims.'” Id. (quoting Venture Assocs. Corp. v. Zenith Data Sys. Corp., 987...