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Graffiti Entertainment, Inc. v. Speed Commerce Inc.

United States District Court, D. Minnesota

November 6, 2014

Graffiti Entertainment, Inc., Plaintiff,
v.
Speed Commerce Inc., Navarre Distribution Services, Inc., and Does 1-10, Defendants.

Andrew D. Winghart, Esq., Winghart Law Group, Redwood City, CA and Larry A Frost, Esq., Paladin Law, PLLC, Bloomington, MN, on behalf of Plaintiff.

Jeffrey R. Ansel, Esq., Winthrop & Weinstine, P.A., Minneapolis, MN, on behalf of Defendants.

MEMORANDUM OPINION AND ORDER

ANN D. MONTGOMERY, District Judge.

I. INTRODUCTION

On September 16, 2014, the undersigned United States District Judge heard oral argument on Defendants Speed Commerce Inc., Navarre Distribution Services, Inc., and Does 1-10's (collectively, "Defendants") Motion to Dismiss [Docket No. 16]. Plaintiff Graffiti Entertainment, Inc. ("Graffiti") opposes the motion. For the reasons set forth below, the motion is granted in part and denied in part.

II. BACKGROUND

A. The Named Parties

Graffiti is a Wyoming corporation which acquired the assets, rights, and interests of Graffiti Entertainment, LLC. Am. Compl. [Docket No. 7] ¶ 4. Speed Commerce Inc. ("Speed") is a Minnesota corporation with its principal executive office in Richardson, Texas. Id . ¶ 6. Navarre Distribution Services, Inc. ("Navarre") was a wholly owned subsidiary of Speed until April 2014, when it was administratively dissolved. Id . ¶ 5. Graffiti alleges that a series of corporate name changes, mergers, and acquisitions demonstrate Navarre was an alter ego of Speed and any liability attributable to Navarre should be legally and equitably assigned to Speed.

B. The Factual History

Graffiti is a software developer founded in 2006. Id . ¶ 11. Graffiti developed and published, among other things, video games for gaming consoles created by Nintendo, Sony, and Microsoft. Id . Graffiti's products were published and manufactured for some of the world's leading video game publishers, including Electronic Arts and Activision. Id . Like many smaller software developers, Graffiti did not directly distribute the products it developed. Id . ¶¶ 12, 17.

On December 6, 2007, Graffiti executed a Distribution Agreement with Navarre. Id . ¶ 32, Ex. A. The Distribution Agreement made Navarre an authorized distributor of Graffiti's products and obligated Navarre to market and sell Graffiti's entire line of interactive video game software. Id . ¶ 16. In effect, Graffiti would sell video games to Navarre which in turn sold the video games to retail outlets including Wal-Mart and GameStop.

In addition to the Distribution Agreement, Graffiti contracted with Universal Funding ("Universal") on or about April 9, 2010 for accounts receivable factoring (the "Factoring Agreement").[1] Id . ¶ 89. The Factoring Agreement supplied Graffiti with essential financing for its daily operations. Id . ¶ 91. Navarre allegedly possessed knowledge of the Factoring Agreement through communications with Graffiti and from tendering payment of Graffiti invoices to Universal. Id . ¶ 85.

The Distribution Agreement required Navarre to remit payment for video games within 60 days from receipt of the games. Id . ¶ 38. On July 11, 2011, Graffiti issued invoice number 32373 to Navarre for $584, 755.20. Id . ¶ 48. On July 25, 2011, Graffiti issued invoice number 32374 to Navarre for $146, 549.76 (collectively, the "Invoices"). Id . ¶ 49. Graffiti alleges Navarre failed to tender payment for either invoice. Without these funds, Graffiti's ability to pay its own creditors suffered. Id . ¶¶ 48-49, 51. Moreover, Graffiti alleges the timing of Navarre's failure to pay caused significant financial damage because Graffiti was in the process of a public stock offering. Id . ¶¶ 78-82.

Graffiti also alleges that beginning on or about October 2011, Navarre employees began misrepresenting the state of Graffiti's inventory to retail vendors. Id . ¶ 19. Specifically, Graffiti claims Navarre employees told retail vendors that Graffiti was only providing updates to Reader Rabbit, an existing educational title. Id . The vendors were not informed that other Graffiti titles in other game categories were available. Graffiti asserts these misrepresentations were intended to prevent the sale of Graffiti's products, which would have obligated Navarre to settle outstanding debts owed to Graffiti. Id . ¶ 21. These misrepresentations were allegedly motivated by Defendants' assessment that Navarre's agreement with GameStop was unfavorable. Id . ¶ 23.

In addition to the alleged statements to retail vendors, Graffiti claims Navarre made false and defamatory statements to Universal, Graffiti's factoring provider. Id . ¶¶ 86-88. These statements caused a rift in Graffiti's relationship with Universal and prompted Universal to sue Graffiti. Id . ¶¶ 88-90. Graffiti claims millions of dollars in damages as a result of losing the day-to-day funding Universal had previously provided. Id . at ¶¶ 91-92.

Graffiti asserts two claims for breach of contract, alleging Defendants' breached the contract by failing to pay Graffiti for the Invoices (Count I) and violating the confidentiality clause by disclosing terms of the Distribution Agreement to third parties (Count II). Id . ¶¶ 55-68. Graffiti also asserts a claim for breach of the covenant of good faith, alleging Defendants breached the covenant by intentionally rendering impossible Graffiti's further performance of the Distribution Agreement (Count III). Id . ¶¶ 69-82. Further, Graffiti asserts a claim for tortious interference with contract, alleging Defendants' false and defamatory statements to Universal caused a breach of the Factoring Agreement (Count IV). Id . ¶¶ 83-92. Finally, Graffiti asserts a trade libel claim, alleging Defendants' statements to third parties were false and unprivileged (Count V). Id . ¶¶ 93-99. In addition, Graffiti alleges Navarre was an alter ego of the company presently known as Speed and that equity demands any liability of Navarre be legally assigned to Speed. Id . ¶ 9.

Defendants move to dismiss under Rule 12(b)(1) and 12(b)(6). Defendants claim Graffiti lacks standing to sue Navarre for its failure to pay the Invoices because Graffiti sold, assigned, and transferred the Invoices to Universal. Defendants also argue Graffiti's remaining claims must be dismissed because these claims have not been sufficiently pled, and because any damages resulting from the alleged injuries are prohibited by the Limitation of Liability clause in the Distribution Agreement. See id. Ex. A ¶ 9.4.

III. DISCUSSION

A. Dismissal under Rule 12(b)(1) for Lack of Standing

Defendants' argue Graffiti lacks standing to assert Claims I and III and that those claims must be dismissed under Rule 12(b)(1). Standing is "an essential and unchanging part of the case-or-controversy requirement of Article III" of the U.S. Constitution. Lujan v. Defenders of Wildlife , 504 U.S. 555, 560 (1992) (citation omitted). "The party invoking federal jurisdiction bears the burden of establishing [standing]." Id . at 561 (citations omitted). "A court may exercise jurisdiction only if a plaintiff has standing to sue on the date it files suit." Abraxis Bioscience, Inc. v. Navinta LLC , 625 F.3d 1359, 1364 (Fed. Cir. 2010).

Because standing is a jurisdictional requirement, Defendants request dismissal of Count I and III under Rule 12(b)(1) of the Federal Rules of Civil Procedure. A motion under Rule 12(b)(1) to dismiss for lack of subject matter jurisdiction may challenge the complaint either on its face or on the factual truthfulness of its averments. See Titus v. Sullivan , 4 F.3d 590, 593 (8th Cir. 1993); Osborn v. United States , 918 F.2d 724, 729 n.6 (8th Cir. 1990). Defendants attack the factual truthfulness of Graffiti's allegation that it owns the Invoices and has standing to assert claims based on their non-payment. Therefore, Graffiti does not receive the benefits of Rule 12(b)(6)-namely to have only the pleadings considered and to have them construed in their favor. See Osborn, 918 F.3d at 729 n.6. Rather, the Court may consider matters outside the pleadings. Id . (citing Menchaca v. Chrysler Credit Corp. , 613 F.3d 507, 511 (5th Cir. 1980)).

In a factual challenge to standing, when a defendant produces facts that call the plaintiff's standing into question, the plaintiff bears the burden of affirmatively demonstrating competent proof that standing exists. Apex Digital, Inc. v. Sears, Roebuck & Co. , 572 F.3d 440, 444 (7th Cir. 2009) (citing Lee v. City of Chi. , 330 F.3d 456, 468 (7th Cir. 2003); Retired Chi. Police Ass'n v. City of Chi. , 76 F.3d 856, 862 (7th Cir. 1996), cert. denied, 117 S.Ct. 305 (1996)).

1. Count I - Breach of Contract for Failure to Pay Invoices

Defendants argue Graffiti lacks standing to bring the breach of contract claim in Count I because Graffiti sold, assigned, and transferred the Invoices to Universal. In support of its position, Defendants produced: (1) the Factoring Agreement between Universal and Graffiti; (2) images of the Invoices showing payment is due to Universal; (3) a Notification Agreement from Universal to Navarre stating payments originally due to Graffiti had been sold and assigned to Universal; and (4) a Settlement Agreement and Release (the "Settlement") executed by Universal and Navarre ...


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