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In my April 26, 2017 post, I discussed an interesting decision of the New York County Commercial Division, by Hon. Saliann Scarpulla, dismissing a fraud claim because the plaintiff had not adequately alleged the necessary pecuniary damages to sustain a fraud cause of action.  The First Department has now affirmed that decision in Electron Trading, LLC v Morgan Stanley & Co. LLC, 2018 NY Slip Op 00380 (1st Dep’t Decided on January 23, 2018).

Case Facts

In Electron, plaintiff, a developer of intellectual property relating to “spread” trading, a type of electronic securities trading, entered into two agreements with defendant: (1) an exclusive license agreement (ELA) whereby plaintiff granted defendant an exclusive license for its alternative trading system (ATS) and (2) a consulting services agreement whereby plaintiff agreed to perform related consulting services. The ELA required defendant to use commercially reasonable efforts to develop and implement necessary software and systems, to operate and market the ATS, and to launch the ATS by a defined deadline.

While the First Department decision does not flesh out the allegations or facts relating to the fraud claims, the motion court’s decision does – Electron Trading LLC v Morgan Stanley & Co. LLC, 2017 NY Slip Op 30845(U), April 25, 2017 (Supreme Court, N.Y Co.).  On the fraud claims, plaintiff alleged that defendant had not taken action that it represented it would to promote plaintiff’s ATS and represented that it would not use plaintiff’s ATS in various (allegedly improper) ways to benefit itself and its investors.

Dismissal of Fraud Claims

The First Department’s decision focused primarily on whether the limitation of damages clause in the contract was enforceable or whether plaintiff could recover damages beyond the contractual limit based upon alleged improper conduct on the part of the defendant in how it intended to misuse and manipulate plaintiff’s ATS.  In a shorter review, the First Department affirmed Justice Scarpulla’s dismissal of the fraud claims as follows:

The fraud and negligent misrepresentation claims fail to allege “actual pecuniary loss sustained as the direct result of the wrong” (see Lama Holding Co. v Smith Barney, 88 NY2d 413, 421 [1996] [internal quotation marks omitted]; Serino v Lipper, 123 AD3d 34, 42 [1st Dept 2014]). Moreover, even if the alleged loss in the ATS’s value could be construed as the requisite out-of-pocket loss, plaintiff’s alleged damages are inherently speculative; a factfinder would have to engage in conjecture (see Connaughton v Chipotle Mexican Grill, Inc., 135 AD3d 535, 538 [1st Dept 2016], affd 29 NY3d 137 [2017]; Rather v CBS Corp., 68 AD3d 49, 58 [1st Dept 2009] [“loss of an alternative contractual bargain . . . was undeterminable and speculative'”] [internal quotation marks omitted]). The complaint fails to allege facts showing that the ATS actually lost value. It does not allege that plaintiff was defrauded into relinquishing to defendant the ATS for value less than its worth; nor does it allege subsequent developments that would show that plaintiff can no longer license the ATS at the price it could command when it executed the ELA and the CSA.

Commentary

Once again, as in similar decisions I have commented upon, here, plaintiff could have potentially preserved its fraud claims by engaging the services of a valuation expert and offering a theory based upon accepted data and expert opinion that its ATS had in fact lost compensable value due to defendant’s alleged fraud.  As reflected in the decisions of both the lower court and the First Department in Electron, courts will not look favorably on claims for damages when a proper non-speculative basis is not offered.  Hiring an expert early on and getting the benefit of that advice in drafting the complaint’s allegations of damage would certainly be prudent in such circumstances.

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Meyer Suozzi

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