Delaware Business Litigation Report

Federal Court Dismisses Consumer Fraud And Punitive Damages Claims In Diversity Suit Under Arizona Law

J-Squared Technologies, Inc. v. Motorola, Inc., 364 F.Supp.2d 449 (D.Del. Apr. 13, 2005). Plaintiff brought this suit alleging: (1) breach of contract; (2) promissory estoppel; (3) negligent misrepresentation; (4) breach of the duty of good faith and fair dealing; and (5) violation of Arizona's Consumer Fraud Act. Plaintiff sought compensatory and punitive damages. The defendant moved to transfer the action to the District of Arizona or alternatively dismiss the case under Fed.R.Civ.P. 9(b) and 12(b)(6). The Court denied the motion in part and granted it in part with respect to the Arizona Consumer Fraud Act and punitive damages claim. The Court declined to dismiss the negligent misrepresentation and estoppel claims. Plaintiffs include J-Squared Technologies, Inc. ("JST"), a Canadian corporation with its principal place of business in Ontario, Canada and J-Squared Technologies (Oregon), Inc. ("JSO"), with its principal place of business in Oregon. Plaintiffs are commissioned sales agents selling various products to computer manufacturers. The defendant is a Delaware corporation, with its headquarters in Illinois. Motorola Computer Group ("MCG") is a business unit of defendant, that manufactures computer products. MCG negotiated a Manufacturer's Representative Agreement ("MRA") with JST in 2002 and another with JSO. The plaintiffs alleged that MCG led them to believe that it intended to "maintain a long-term independent sales network with plaintiffs." The plaintiffs further alleged that MCG should have known that it had no such intentions. The agreements were for a term of one year. In reliance on MCG's long-term promise, JST invested over $500,000 in sales-support expenses in Canada and JSO similarly expended $300,000 in the U.S. Subsequently, at the end of the first year, defendant sent a notice to JST and JSO that the agreements had expired. In addition, defendant sent JSO a notice that it had failed to meet performance standards under their agreement. The plaintiffs alleged that the defendant intended to eliminate commission payments to them while seeking to enjoy the good will created by plaintiffs in the first year of their respective agreements. The Court examined the Arizona Consumer Fraud Act and held that both agreements did not fall within its purview because, the plaintiffs did not purchase any products under their agreements; rather, they were hired as representatives of the manufacturer to market their products. Therefore, this count failed and was dismissed. The Court did however find that the plaintiffs had established a claim for promissory estoppel under Arizona law because plaintiffs Complaint had alleged each element of the claim. The allegations included: (1) defendant's promise of a long term relationship; (2) that the defendant should have known that the plaintiffs would rely on that promise and incur expenses; and (3) that plaintiffs had lost money because of defendant-MCG's promises. The court also found that a claim had been properly stated for the negligent misrepresentation count under Arizona law because plaintiffs had alleged that the defendant should have known that it had no intention of maintaining a long term relationship with the plaintiffs. The defendant argued that the claim failed because plaintiffs could not bring a tort claim for mere economic loss. The Court held that Arizona did recognize "the 'economic loss' doctrine with respect to contracts for sale of goods." The Court dismissed the punitive damages claim for the alleged breach of implied covenants as barred by the specific provisions of the JSO and JST agreements. Authored by: Raj Srivatsan 302.888.6831 rsrivatsan@morrisjames.com Share