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Ascente Business Consulting, LLC v. Mycommerce

United States District Court, D. Minnesota

April 8, 2019



          Katherine Menendez United States Magistrate Judge

         This matter is before the Court on Ascente Business Consulting LLC's (“Ascente”) motion for leave to amend the complaint. (ECF No. 54.) Ascente seeks permission to add claims for fraud, fraudulent inducement, and reckless misrepresentation against the defendants, DR MyCommerce (“DRM”) and Digital River, Inc. (“Digital River”), which is DRM's parent company. In an Order dated July 26, 2018, the District Court granted the defendants' motion to dismiss a fraud claim that Ascente included in its original Complaint. (7/26/2018 Order, ECF No. 36.) Now that the parties have engaged in discovery, Ascente argues that it can adequately plead fraud and fraudulent-inducement claims as well as a reckless-misrepresentation claim. DRM and Digital River argue that Ascente's motion to amend should be denied because the proposed claims are futile-i.e., they would not survive a motion to dismiss for failure to state a claim. For the reasons that follow, the motion to amend is granted in part and denied in part.

         I. Background [1]

         Ascente provides identity-theft protection products to consumers. DRM is a software development company and a wholly owned subsidiary of Digital River. Ascente approached DRM in January 2014 to develop a web portal so that individual consumers could go online and purchase an identity-monitoring subscription service from Ascente. The parties negotiated and, in May 2014, agreed to a “Statement of Work, ” by which Ascente would pay DRM $44, 822 to develop the web portal. The parties also entered a “Publisher Agreement, ” which provided that DRM would receive 10 percent of the revenue that was generated by the web portal. The development of the web portal was to be completed in approximately five months, by October 2014.

         In October, DRM told Ascente that it exceeded projected costs in developing and building the portal. On October 28, 2014, Jennifer Manwarren and Thomas Peterson, both of DRM, exchanged an email indicating that the web portal was “on schedule” to be launched before the end of the month. (Proposed Am. Compl. ¶ 27.) On October 28th and 29th, Chad Johnson and Cory Husfeldt of DRM told Ascente employee Bret Busse that the portal was ready for launch and “ready for commerce” as required by the parties' agreement. (Id. ¶ 28.)

         Around the same time, DRM delivered the web portal to Ascente. Unfortunately, when it went live on October 29, 2014, the web portal did not function as intended. (Proposed Am. Compl. ¶ 34.) Several months later, on January 20, 2015, DRM employee Christine Roe emailed her coworker, Jim Swenson, and stated that certain work on the portal had not been completed. (Id. ¶¶ 29-31.) Ms. Roe also stated that the software that was delivered was not the end product, and she believed that Ascente was “getting a little screwed.” (Id.)

         Ascente informed DRM of the problems it was having with the web portal and representatives of both sides met in Denver on January 28, 2015 to negotiate a new agreement. (Proposed Am. Compl. ¶¶ 35, 38.) According to Ascente, prior to the meeting in Denver, DRM employees Matthew Kleinsasser and Stefan Weber exchanged internal messages regarding the need to bring the web portal software up to compliance with security standards to protect credit card information. Recognizing that this would take a considerable amount of work, Mr. Weber stated: “I wish we could get rid of Ascente[.]” (Id. ¶ 65.) Ascente claims that the Defendants then “hatched a plan to dump the web portal, ” claiming that they would complete the web portal if they received additional money from Ascente, but really “had no intention to do so.” (Id. ¶ 66.) On January 28, 2015, Mr. Weber emailed Swenson, Kleinsasser, and other DRM personnel indicating that DRM employee Rodney Salazar would “try to get out of the contract with Ascente today.” (Id. ¶ 67.)

         However, at the January 28, 2015 Denver meeting, Ascente and DRM did not break off their business relationship. Chad Johnson (DRM) told Ascente representatives that DRM had outstanding development costs of $187, 336.25, which they had incurred in working on the project. (Proposed Am. Compl. ¶¶ 39-40.) Mr. Johnson offered that the defendants would complete the work necessary to get the web portal up and running in exchange for Ascente's agreement to pay the outstanding development costs. (Id. ¶ 40.) Based on the internal DRM communications before the Denver meeting and several others that occurred afterward, Ascente asserts that DRM never intended to do any additional work on the portal. (Id. ¶¶ 68-71, 74-85.) For example, in early February 2015, several DRM employees internally discussed getting rid of or “divesting” from Ascente as well as placing a hold on development work. (Id. ¶¶ 68-71.)

         Moreover, Ascente alleges that the $187, 336[2] the Defendants said they incurred as DRM's outstanding development costs was not the actual amount. Ascente alleges:

On February 17, 2015, [Chad] Johnson [of DRM] reviewed a draft [bill] and pointed out that Ascente's “most recent contract/SOW call[s] for $73 hour versus the $75 that's called out in the invoice.” [Jennifer] Manwarren [of DRM] responded, “Are you serious?” Johnson wrote “Yep. We can try to submit to them as is but they will likely question it.” Manwarren: “No. They agreed to a dollar amount-, so you saw the wild math I had to do to get there.” ... Instead, Johnson suggested, “What if I deleted the rate and just left the total?”

(Proposed Am. Compl. ¶ 72.) The defendants did not tell Ascente that the $187, 336 “was not an accurate figure, nor did they ever tell Ascente the true amount of their alleged cost overruns.” (Id. ¶ 73.) Ascente eventually paid $187, 336 to DRM, with the last installment payment occurring on May 4, 2016. (Id. ¶¶ 41, 44.)

         Out of the agreement reached at the Denver meeting, the parties reached a new contractual arrangement. In July 2015, the parties executed a Software Development Agreement (“SDA”), which formalized Ascente's agreement to pay an additional $187, 336 in exchange for the defendants delivering a web portal that met certain specifications laid out in an Appendix A that was attached to the agreement. (Proposed Am. Compl. ¶ 52.) According to Ascente, it never received a web portal that worked as intended, and the defendants' communications that followed the SDA's execution allegedly show that the defendants did not intend to provide a functioning portal after DRM was paid the $187, 336. (Id. ¶¶ 80-87.) For example, in an August 27, 2015 email, Christine Roe suggested to a colleague that “Ascente access can probably be dropped.... We're not planning any additional coding changes....” (Id. ¶ 80.) Other internal messages among the defendants' personnel from April, June, and October of 2016 allegedly confirm that DRM never intended to do additional work on the project, but instead falsely claimed to have delivered a working portal. (Id. ¶¶ 81-82, 84-85.) Ascente claims it has not been able to launch its business-to-consumer marketing campaign as a result of the defendants' failure to provide a functioning web portal, costing it millions of dollars in revenue. (Id. ¶ 88.)

         II. Futility Standard

         Federal courts should freely give leave to a party moving to amend its pleadings “when justice so requires.” Fed.R.Civ.P. 15(a)(2). However, there are several reasons a court may deny leave to amend. See, e.g., Roberson v. Hayti Police Dep't, 241 F.3d 992, 995 (8th Cir. 2001) (“[D]denial of leave to amend pleadings is appropriate only in those limited circumstances in which undue delay, bad faith on the part of the moving party, futility of the amendment, or unfair prejudice to the non-moving party can be demonstrated.”). Here, the defendants rely solely on their argument that the proposed amendment would be futile to support their opposition to amendment. A futility challenge will defeat a motion to amend when “the proposed amended complaint cannot survive a motion to dismiss for failure to state a claim.” Lunsford v. RBC Dain Rauscher, Inc., 590 F.Supp.2d 1153, 1158 (D. Minn. 2008).

         A complaint survives a motion to dismiss for failure to state a claim under Fed.R.Civ.P. 12(b)(6) when, accepting the factual allegations as true, it states a facially plausible claim for relief. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A court determining whether the claim has facial plausibility draws reasonable inferences in the plaintiff's favor. Blankenship v. USA Truck, Inc., 601 F.3d 852, 853 (8th Cir. 2010). However, a court may disregard legal conclusions in a complaint that are couched as factual allegations. See Iqbal, 556 U.S. at 678-79.

         Generally, courts ignore matters outside the pleadings when considering the sufficiency of a complaint under Fed.R.Civ.P. 12(b)(6). Porous Media Corp. v. Pall Corp., 186 F.3d 1077, 1079 (8th Cir. 1999). However, courts may “consider some material that are part of the public record or do not contradict the complaint as well as materials that are necessarily embraced by the pleadings.” Id. (quotations and citation omitted); see also Enervations, Inc. v. Minn. Mining & Mfg. Co., 380 F.3d 1066, 1069 (8th Cir. 2004) (“[D]ocuments ‘necessarily embraced by the complaint' are not matters outside the pleading.”). Consideration of such materials is discretionary. Stahl v. United States Dep't of Agric., 327 F.3d 697, 701 (8th Cir. 2003).

         III. Analysis

         Ascente seeks leave to amend its complaint to add claims for fraud, fraudulent inducement, and reckless misrepresentation. The defendants argue that Ascente's proposed amendments should not be permitted because they cannot survive a motion to dismiss for failure to state a claim. As discussed below, with one narrow exception, the Court concludes that Ascente's proposed amended complaint fails to state a claim for fraud, fraudulent inducement, or reckless misrepresentation.

         A. ...

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