Opinion
C19-1848-JCC-MLP
01-29-2021
COGNIZANT WORLDWIDE LIMITED, et al., Plaintiffs, v. BARRETT BUSINESS SERVICES, INC., Defendant.
REPORT AND RECOMMENDATION
MICHELLEL-PETERSON, UNITED STATES MAGISTRATE JUDGE
I. INTRODUCTION
This matter is before the Court on Plaintiff Cognizant Worldwide Limited and Cognizant Technology Solutions U.S. Corporation's (collectively, “Cognizant”) motion to dismiss Defendant Barrett Business Services, Inc.'s (“BBSI”) second amended counterclaims pursuant to Federal Rule of Civil Procedure 12(b)(6). (Mot. (Dkt. # 84).) BBSI filed a response (Resp. (dkt. # 85)) and Cognizant filed a reply (Reply (dkt. # 86)). The Court heard oral argument on January 19, 2020. (Dkt. # 88.) Having considered the parties' arguments, submissions, the balance of the record, and the governing law, the Court recommends Cognizant's motion be granted, in part, and denied in part, for the reasons discussed below.
KBACE, Technologies, Inc. (“KBACE”), a former subsidiary of Cognizant, merged into Cognizant in 2017. (SAC (Dkt. # 83) at ¶ 5.) BBSI's amended complaint alleges both Cognizant and KBACE made the misrepresentations at issue in this matter. This Report and Recommendation therefore refers to Plaintiffs as both Cognizant and KBACE.
II. PROCEDURAL BACKGROUND
Cognizant filed this action on February 22, 2019 in the United States District Court for the Southern District of New York to recover fees arising out of a contract between Cognizant and BBSI. Cognizant alleges that pursuant to a “Statement of Work” or “Accelerate Agreement” (“SOW”) between the parties, Cognizant provided specific deliverables regarding an analysis of the feasibility of implementing a cloud-based software product, human capital management software (“HCM Cloud”), that BBSI purchased from Oracle America, Inc. (“Oracle”). (Compl. (Dkt. # 1); SOW (Dkt. # 68-2).) Cognizant alleges BBSI failed to pay approximately $300,000 in outstanding invoices for that work. (Mot. at 1.)
On November 13, 2019, the court transferred this action to the Western District of Washington pursuant to 28 U.S.C. § 1404. (Dkt. ## 34, 35.) BBSI submitted an answer and counterclaims on December 16, 2019 (dkt. # 47) and an amended answer and counterclaims on January 6, 2020 (Amend. Countercl. (dkt. # 54)). BBSI's first amended counterclaims alleged the following: (1) rescission for fraud in the inducement, failure of consideration, and frustration of purpose; (2) rescission for negligent misrepresentation, failure of consideration, and frustration of purpose; (3) rescission for innocent misrepresentation, failure of consideration, and frustration of purpose; (4) intentional misrepresentation; (5) negligent misrepresentation; (6) negligence; and (7) breach of the SOW. (Id. at ¶¶ 53-92.) BBSI's counterclaims alleged the SOW required Cognizant to fully implement the HCM Cloud, not just conduct diagnostic work regarding the feasibility of implementation. (Id.)
On January 13, 2020, Cognizant moved to dismiss BBSI's amended counterclaims. (Dkt. # 58.) The Court submitted a report and recommendation recommending BBSI's counterclaims for breach of the SOW and rescission of the CSA be dismissed and that BBSI be granted leave to amend. The Honorable John. C. Coughenour adopted the report and recommendation and granted BBSI leave to amend. (Order (Dkt. # 80).) On September 28, 2020, BBSI filed its second amended counterclaims. (See SAC (Dkt. # 83).) Cognizant subsequently filed a motion to dismiss BBSI's counterclaims. (See generally Mot.)
III. FACTUAL BACKGROUND
BBSI is a professional employer organization (“PEO”) that establishes relationships with small and medium-sized companies to assume responsibility for their human resource functions including payroll, payroll taxes, workers' compensation coverage, and employee benefits. (SAC at ¶ 15.) In 2017, BBSI elected to upgrade its integrated human resources and payroll system. (Id. at ¶ 19.) BBSI interviewed Oracle, who allegedly represented that its HCM Cloud product would best fit BBSI's requirements. (Id. at ¶ 23.) BBSI alleges Oracle represented that KBACE was a consulting and technology services company that specialized in cloud strategy and was both certified and experienced in Oracle's HCM Cloud product implementation. (Id. at ¶ 25.) Oracle purportedly advised BBSI that KBACE would need to implement the HCM Cloud. (Id. at ¶¶ 24, 25.)
BBSI alleges that between June 2017 and February 2018, it met with Oracle and KBACE on numerous occasions to educate them on the nature and needs of its PEO business. (Id. at ¶ 28.) BBSI alleges it communicated to KBACE and Oracle that it was ignorant about Oracle's HCM Cloud product and how it would perform with BBSI's system. (Id. at ¶ 29.) BBSI alleges both companies assured BBSI that the HCM Cloud would meet, and could be configured to comply with, BBSI's needs. (Id. at ¶¶ 30, 32.) BBSI alleges that at a December 2017 meeting, KBACE presented BBSI with pricing options for various HCM Cloud implementation packages, including a package with an estimated cost range of $5,410,000 to $5,950,000. (Id. at ¶ 37.) KBACE's presentation reflected an Accounts Payable/General Ledger “go live” date of July 29, 2018 and a “pilot population” and Accounts Receivable/Platform as a Service “go live” date of January 7, 2019. (Id.)
Several contracts are involved in BBSI's acquisition of the HCM Cloud. BBSI first entered into a Master Services Agreement (“MSA”) with Cognizant in July 2017 to allow the parties to develop and enter into future statements of work. (MSA (Dkt. # 68-1) at § 1.1.) In February 2018, BBSI executed a Cloud Services Agreement (“CSA”) with Oracle to purchase the HCM Cloud. (SAC at ¶ 39.) BBSI alleges that it did so based on the representations by Oracle and KBACE that the HCM Cloud would meet BBSI's business needs. (Id.) In March 2018, BBSI and Cognizant entered into the SOW. (Id. at ¶ 40.)
BBSI alleges that after entering into these contracts, it learned the HCM Cloud had deficiencies that did not meet BBSI's specific business requirements. (Id. at ¶ 50.) BBSI also alleges that in June 2018, KBACE representatives conceded the HCM Cloud was not the correct system for BBSI and that it would need to employ the resources of its parent company, Cognizant, to find a solution. (Id. at ¶¶ 55, 56.) Thereafter, KBACE presented BBSI with a revised implementation proposal with a new cost of $33,059,274 and two-phase completion dates of April 15, 2019 and May 10, 2021. (Id. at ¶¶ 58, 60.) BBSI also hired an independent consultant who confirmed the HCM Cloud was an ill-suited system for BBSI. (Id. at ¶ 62.) As a result, BBSI informed Oracle and KBACE that it would make no further payments and was rescinding its contracts. (Id. at ¶ 65.)
BBSI's second amended counterclaims contain additional allegations regarding the relationship between Cognizant and Oracle. BBSI asserts, inter alia, the following: KBACE, Cognizant, and Oracle were the principal, agent, subcontractor, partner, or employee of each other (id at ¶ 6); Oracle and KBACE jointly undertook a sales campaign to sell BBSI the HCM Cloud from Oracle and retain KBACE to implement the system (id. at ¶ 11); Oracle and KBACE agreed that Oracle would receive revenue from BBSI's payments for the HCM Cloud license and KBACE would receive revenue from BBSI's payments for implementation services (id. at ¶ 12); Oracle and KBACE represented KBACE as Oracle's partner (id. at ¶ 13); Oracle and KBACE were in discussions about the HCM Cloud configuration and workarounds to fit BBSI's needs (id. at ¶ 34); BBSI's contracts with Oracle and KBACE were a single transaction (id. at ¶ 41); Oracle and Cognizant insisted BBSI sign the CSA before signing the SOW (id. at ¶ 42); and Oracle and KBACE coordinated specific terms and conditions for the CSA and SOW to present to BBSI (id. at ¶ 79).
IV. DISCUSSION
A. Rule 12(b)(6) Standard
Dismissal under Rule 12(b)(6) may be based on either the lack of a cognizable legal theory or absence of sufficient facts alleged under a cognizable legal theory. Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). To survive a motion to dismiss, BBSI's counterclaims “must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim has facial plausibility if the party pleads factual content that “allows the Court to draw the reasonable inference that [the opposing party] is liable for the misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556). It must contain “more than labels and conclusions, and a formulaic recitation of a cause of action's elements will not do.” Twombly, 550 U.S. at 545. The Court must accept all material allegations in the counterclaims as true and construe them in the light most favorable to BBSI. Wickland Oil Terminals v. Asarco, Inc., 792 F.2d 887, 889-90 (9th Cir. 1986) (citing North Star International v. Arizona Corporation Commission, 720 F.2d 578, 580 (9th Cir. 1983)). However, the “tenet that a court must accept as true all of the allegations contained in a [claim] is inapplicable to legal conclusions.” Ashcroft, 556 U.S. at 678 (citing Twombly, 550 U.S. at 555).
When ruling on a motion to dismiss, a court ordinarily may not consider matters outside the pleadings without converting it into a motion for summary judgment. Fed.R.Civ.P. 12(b)(6); Hal Roach Studios, Inc. v. Richard Feiner & Co., Inc., 896 F.2d 1542, 1555 n.19 (9th Cir. 1990). But a court may consider documents that are essential to the pleadings and whose validity is not questioned. See Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001). Here, the Court considers the CSA, SOW, and MSA that are at issue in BBSI's second amended counterclaims and whose validity is not questioned by the parties. (See Dkt. ## 58-5, 68-1, 68-2.)
B. Breach of Contract Counterclaim
BBSI previously argued that pursuant to the SOW, Cognizant agreed to fully implement the HCM Cloud for a price of $5,410,000 to $5,950,000, plus or minus 20%, within a reasonable time frame and failed to do so. (Amend. Countercl. at ¶ 89.) Cognizant moved to dismiss BBSI's counterclaim, arguing the SOW only required Cognizant to provide an initial diagnostic assessment to advise BSSI about the feasibility of implementing the HCM Cloud. (Dkt. # 58.) The Court found the terms of the SOW did not require Cognizant to fully implement the HCM Cloud and dismissed BBSI's counterclaim because it failed to identify a specific provision that Cognizant allegedly breached, as required by both New York and Washington law. (Report and Recommendation at 8 (citing Elliott Bay Seafoods v. Port of Seattle, 124 Wash.App. 5, 12 (Wash.App. Div. 1 2004); Westchester Cty. Corr. Officers Benevolent Ass'n., Inc. v. Cty of Westchester, 953 N.Y.S.2d 623, 625 (2012); Trump on the Ocean, LLC v. State of New York, 913 N.Y.S.2d 792, 794 (2010)).)
BBSI's second amended counterclaims cite to multiple provisions of the SOW that it alleges Cognizant breached. (Resp. at 8.) Specifically, BBSI alleges Cognizant breached: (1) § I of the SOW by failing to lead the design of Oracle Cloud modules and functional areas; (2) § IV of the In-Scope Services of the SOW by failing to establish a Cloud foundation and project plan to allow for an easy transition to the Oracle Cloud implementation process; and (3) § I and § IV of the SOW by failing to address functionality gaps and failing to lead the design of the Oracle Cloud. (Id. (citing SAC at ¶¶ 48, 110, 112, 115).)
In support of its argument, BBSI asserts Cognizant admitted the HCM Cloud was not the right product for BBSI. (Id.) BBSI asserts that Cognizant therefore effectively admitted it had not, and could not, design a project plan to allow for an easy transition to implement the HCM Cloud or that it closed the identified alleged functional gaps. (Id. (citing SAC at ¶ 52).) BSSI cites to a functionality spreadsheet it sent Oracle that inquired as to whether the HCM Cloud could do, among other things, time entry and record time edits. (Id. (citing at SAC at ¶ 36).) BBSI alleges that after conferring with Cognizant, Oracle represented this functionality was available. (Id.) BBSI asserts that because Cognizant and Oracle were unable to follow through with this functionality, Cognizant knew of its “shortcoming in its performance under the SOW, and never delivered the key Oracle structures and Project Plan required by the SOW.” (Id.)
Cognizant contends BBSI's allegations are conclusory and therefore fail to adequately allege specific facts regarding how Cognizant breached the SOW. (Mot. at 11.) Cognizant further argues BBSI failed to use mechanisms provided by the MSA and SOW that require written notice of any purported deficiency and provide that if proper notice is given, the MSA provides the sole and exclusive remedy for any such deficiency. (Id. at 12-14 (citing MSA § 8.2).)
Here, the Court finds that even if BBSI's allegations are sufficient to state a breach of contract counterclaim, its counterclaim fails because BBSI failed to notify Cognizant of the alleged deficiencies as required by both the SOW and MSA:
[i]f the deliverable does not conform to the description for such deliverable, [BBSI] shall have five (5) business days after [Cognizant's] submission of the deliverable (“Acceptance Period”) to give [Cognizant] written notice which shall specify the deficiencies in detail.... If you fail to provide written notice of any deficiencies within the Acceptance Period, as provided above, such deliverable shall be deemed accepted at the end of the Acceptance Period.(SOW at § II C.)
With respect to any Deliverable or Services, Cognizant warrants the following for a period of thirty (30) days following delivery of the particular Deliverable or the performance of such other Services (the “Warranty Period”):
8.1.1 the applicable Services rendered hereunder will be performed by qualified personnel; 8.1.2 the Services performed will substantially conform to any applicable requirements set forth in the State of Work; and 8.13 the Deliverable will materially conform to the corresponding product specification set forth in the applicable Statement of Work for such Deliverable.(MSA at § 8.1.) There are no allegations in BBSI's second amended counterclaims that it provided sufficient notice to Cognizant pursuant to the applicable contracts. Although BBSI asserts it communicated with Cognizant daily regarding the problems BBSI identified with the HCM Cloud (Resp. at 10), this communication fails to meet the written notice requirements.
Further, the sole and exclusive remedy for any alleged deficiency provided by the MSA does not include a suit for damages. The MSA provides:
In the event that any Deliverable or Service fails to conform to the foregoing warranty in any material respect, the sole and exclusive remedy of Client will be for Cognizant, at its expense, to promptly use commercially reasonable efforts to cure or correct such failure. The foregoing warranty is expressly conditioned upon (i) Client providing Cognizant with prompt written notice of any claim thereunder prior to the expiration of the applicable Warranty Period ....(MSA at § 8.2.) BBSI's counterclaims do not allege Cognizant failed to use commercially reasonable efforts to cure any identified deficiency. Accordingly, the Court recommends BBSI's breach of contract counterclaim be dismissed.
The parties also disagree as to whether BBSI's breach of contract counterclaim should be dismissed because BBSI responded in its answer that BBSI signed approval for certain deliverables from Cognizant. The Court need not address this argument because BBSI failed to provide adequate written notice regarding any alleged deficiencies.
C. Rescission Counterclaims
BBSI previously argued in its counterclaim that it could seek rescission claims against Cognizant for the CSA because the CSA and SOW should be considered a single transaction. (Dkt. # 62 at 10-11.) The Court dismissed BBSI's counterclaim, finding Cognizant was not a party to the CSA, BBSI did not allege Cognizant was involved in the execution of the CSA, the CSA and SOW were entered into at different times, and neither the terms in the CSA or SOW suggest they were intended to be executed or read together. (Id.) BBSI again asserts the CSA and SOW were a single transaction, arguing the HCM Cloud had no value to BBSI without Cognizant's implementation of the HCM Cloud. (Resp. at 4.) BBSI's new allegations do not alter the Court's prior finding. The two contracts were entered into at different times, involve different parties, and do not reference each other. Accordingly, the Court finds the CSA and SOW were not a single transaction.
BBSI also previously argued it could seek recession of the CSA because Cognizant and Oracle were partners. (Dkt. # 62 at 10-11.) BBSI asserted Cognizant held out to be Oracle's “Cloud Premier Partner” and “Platinum Level Partner for all Oracle Cloud Needs, ” and that KBACE representatives had the name “Oracle” in their titles. (Amend. Countercl. at ¶¶ 34, 38.) BBSI also alleged both entities had a profit motive to induce BBSI to enter into the CSA to purchase the HCM Cloud and the SOW to implement it. (Id. at ¶¶ 57-58.) The Court previously concluded BBSI failed to assert sufficient allegations that Cognizant and Oracle were partners because it failed to allege they were co-owners of a business as required by RCW 25.05, or that either entity manifested consent for the other to act on its behalf, or that either entity in fact had any control over the other. (Report and Recommendation at 10-11 (citing, e.g., N.Y. Marine &Gen. Ins. Co. v. Tradeline, L.L.C., 266 F.3d 112, 122 (2d Cir. 2001) (“an agency relationship results from a manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and the consent by the other to act.”); Matsumura v. Eilert, 74 Wash.2d 362, 368 (1968) (an agency relationship may exist, either expressly or by implication, when one party acts at the instance of and, in some material degree, under the direction and control of another)).) Further, the Court found BBSI expressly agreed in the CSA that third parties are not Oracle's agents. (Id. at 12 (citing CSA (Dkt. # 58-5, Ex. A) at § 17.2 (“Our business partners and other third parties, including any third parties with which the Services have integrations or that are retained by You to provide consulting services, implementation services ... are independent of Oracle and are not Oracle's agents.”)).)
As noted by Cognizant, BBSI generally asserts Oracle and Cognizant were subcontractors of each other (SAC at ¶ 6) but does not identify any subcontracting agreement between the two entities.
BBSI reasserts its rescission counterclaim, arguing the additional facts in its second amended counterclaims show Cognizant and Oracle had an actual or purported partnership, an agency relationship, and a joint venture. (Resp. at 2-6.) Specifically, BBSI asserts Cognizant and Oracle sought to convince BBSI to purchase and implement the HCM Cloud to generate a profit. (Id. at 2-3.) In support of its argument, BBSI cites Malnar v. Carlson, 128 Wn.2d 521 (1996), in which the court found a partnership can be established in absence of direct evidence. In that case, the court denied summary judgment, relying on a sworn declaration provided under oath by an individual that asserted he had a verbal partnership with the defendant regarding a piece of property at issue. Id. at 457, 462. The court held there was an issue of credibility between the two alleged partners and that the defendant failed to show there was no material dispute of fact. Id. at 462.
BBSI also cites RCW 25.05.135(1) to support its allegation of a purported partnership, which provides that “[i]f the representation, either by the purported partner or by a person with the purported partner's consent, is made in a public manner, the purported partner is liable to a person who relies upon the purported partnership even if the purported partner is not aware of being held out as a partner to the claimant.” (Resp. at 6.) BBSI argues that Oracle publicly held Cognizant out to be its partner on its website and that Cognizant used Oracle's name in the title of its representatives, thereby establishing a purported partnership. (Id. at 6-7.)
Under New York agency law, “an agency relationship results from a manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and the consent by the other to act.” N.Y. Marine & Gen. Ins. Co. v. Tradeline, L.L.C., 266 F.3d 112, 122 (2d Cir. 2001) (citation omitted). “Such authority to act for a principal may be actual or apparent.” Dover Ltd. v. A.B. Watley, Inc., 423 F.Supp.2d 303, 318 (S.D.N.Y. 2006). The existence of actual authority “depends upon the actual interaction between the putative principal and agent, not on any perception a third party may have of the relationship.” Cromer Finance Ltd. V. Berger, 245 F.Supp.2d 552, 560 (S.D.N.Y. 2003).
Under Washington law, an agency relationship may exist, either expressly or by implication, when one party acts at the instance of and, in some material degree, under the direction and control of another. Matsumura v. Eilert, 74 Wash.2d 362, 368 (1968). Both the principal and agent must consent to the relationship. Moss v. Vadman, 77 Wash.2d 396, 403 (1969). The burden of establishing the agency relationship rests upon the party asserting its existence. Id. Consent and control are the essential elements of the relationship. Id.
Partnership law generally applies to joint ventures as well. Paulson v. McMillan, 8 Wash.2d 295, 298 (1941). “The essential elements of a joint venture are an agreement manifesting the intent of the parties to be associated as joint ventures, a contribution by the coventurers to the joint undertaking (i.e., a combination of property, financial resources, effort, skill or knowledge), some degree of joint proprietorship and control over the enterprise, and a provision for the sharing of profits and losses.” Mawere v. Landau, 130 A.D.3d 986, 988 (N.Y.App.Div. 2015) (internal quotation marks and citation omitted); see also Adams v. Fed. Deposit Ins. Corp., No. C10-1962-JCC, 2011 WL 13228992, at *4 (W.D. Wash. Sept. 20, 2011) (“To show the existence of a joint venture, [p]laintiffs must allege an express or implied contract, a common purpose, a community of interest, and an equal right to a voice and to control.”).
Although BBSI now presents additional allegations that Cognizant and Oracle coordinated the sale of the HCM Cloud and Cognizant's diagnostic work to BBSI, this coordination is insufficient to allege a partnership, purported partnership, agency relationship, or joint venture. As the Court previously found, there are no allegations that Cognizant and Oracle co-owned a business. Rather, Oracle received revenue for the sale of the HCM Cloud pursuant to the CSA and Cognizant received revenue for its diagnostic services pursuant to the SOW. This matter is distinguishable from Malnar because here, the CSA explicitly and directly states third parties are not agents of Oracle. Therefore, there is no lack of direct evidence and, in addition, there is no sworn declaration regarding an alleged partnership. While BBSI alleges Cognizant used Oracle's name in the titles of its representative and that Cognizant was referenced on Oracle's website as a partner, these allegations fall short of showing either entity manifested consent for the other to act on its behalf or had control over the other.
The Court also finds BBSI's reliance on RCW 25.05.135 to show a purported partnership unpersuasive. RCW 25.05.135(1) provides a purported partner is “liable to a person is liable to a person to whom the representation is made, if that person, relying on the representation, enters into a transaction with the actual or purported partnership.” As noted by Cognizant, BBSI seeks rescission of the CSA, a contract between only BBSI and Oracle. Thus, even if BBSI sufficiently pleaded a purported partnership, BBSI did not enter into the CSA with Cognizant and therefore Cognizant is not liable under RCW 25.05.135. Accordingly, the Court recommends BBSI's counterclaim be dismissed.
BBSI also argues it can recover amounts it paid to Oracle under the CSA even if the Court finds there was no partnership or agency relationship. (Resp. at 7.) The Court finds this argument premature at this stage in the litigation.
D. Misrepresentation Counterclaims
It is the general rule that representation of opinions or predictions of something which it is hoped or expected will occur in the future will not sustain an action for fraud. See Chase Manhattan Bank, N.A. v. Perla, 411 N.Y.S.2d 66, 68 (1978). “To constitute actionable fraud, the false representation relied upon must relate to a past or existing fact, or something equivalent thereto, as distinguished from a mere estimate or expression of opinion.” Benz v. Kaderbeck, 272 N.Y.S. 558 (App. Div. 1934) (quoting Bareham & McFarland, Inc. v. Kane, 240 N.Y.S. 123 (App. Div. 1930.)); Stiley v. Block, 130 Wash.2d 486, 505-06 (1996) (promises of future performance are not representations of existing fact). Claims for negligent misrepresentation or innocent misrepresentation must similarly assert a misrepresentation that is factual in nature, and not promissory or relating to future events. Stern v. Satra Corp., 539 F.2d 1305, 1308 (2d. Cir. 1976); Havens v. C. & D. Plastics, Inc., 124 Wash.2d 158, 182 (1994).
With regard to misrepresentations about expertise or experience, New York and Washington courts have found they can be actionable representations relating to past or existing facts. (See, e.g., Federal Ins. Co. v Mallardi, 696 F.Supp. 875, 881 (S.D.N.Y. 1988) (“A broker's misrepresentation of his status is actionable where it goes to the investment's quality); Marybury Mgmt., Inc. v. Kohn, 629 F.2d 705 (2d Cir. 1980) (trainee in brokerage firm made actionable misrepresentations about his expertise by claiming that he was a stockbroker and portfolio management specialist which induced plaintiffs to purchase recommended securities despite misgivings about the stock); ETM IV Special LLC v. Pedigree Cats, Inc., C13-5044-RBL (W.D. Wash. Nov. 7, 2014) (yacht builder's statement regarding being the most qualified available was potentially actionable where there was evidence they had no boatbuilding experience). Other courts have held these claims inactionable: see, e.g., Hamilton Exhibition, LLC v. Imagine Exhibitions, Inc., C19-1470-LLS (S.D.N.Y. June 11, 2019) (dismissing fraud claim because representation that exhibition could be produced on a budget of $6 million “is a prediction of future events”); BP W. Coast Prods. LLC v. SKR Inc., C11-6074-MJP (W.D. Wash. Oct. 22, 2013) (estimation of profit margins not actionable because “[a]n estimate of what someone or something will do in the future does not constitute an[] existing fact”)).)
Here, the Court previously found BBSI plausibly alleged Cognizant made misrepresentations by overstating its past experience in implementing the HCM Cloud with PEOs. (Report and Recommendation at 14-15.) The Court found these allegations concerned a past or existing material fact regarding Cognizant's experience at the time the representations were made. (Id.) The Court finds BBSI has again plausibly alleged Cognizant misrepresented its past experience with implementing the HCM Cloud for PEOs.
BBSI also argues Cognizant made misrepresentations about the functionality of the HCM Cloud for BBSI's needs. (Resp. at 13.) In its first report and recommendation, the Court declined to address this argument. The parties disagree as to whether Judge Coughenour's Order adopting the report and recommendation dismissed these counterclaims. The Court addresses BBSI's functionality misrepresentation counterclaims below.
BBSI asserts a number of arguments in support of its counterclaims. It first asserts the alleged misrepresentations are actionable because they relate to existing facts regarding the functional capabilities of the HCM Cloud. (Id.) Specifically, BBSI alleges that before signing the SOW, it sent Oracle a spreadsheet regarding the HCM Cloud's functionality, referenced above with regard to BBSI's breach of contract counterclaim. (Id.) BBSI asserts Cognizant collaborated with Oracle in answering BBSI's questions and stated the HCM Cloud could do timesheet entry and record all time edits. (Id.; see also SAC at ¶ 36.) BBSI asserts that after entering the SOW, it discovered the HCM Cloud did not have this functionality. (Resp. at 13.)
Cognizant contends any alleged misrepresentations regarding the HCM Cloud's suitability are expressions of future events and therefore are not actionable statements of existing fact, including any representation that the HCM Cloud “would” best fit BBSI's needs and “could” be implemented to meet those needs. (Reply at 6.) With regard to the spreadsheet cited by BBSI, Cognizant argues that Oracle, not Cognizant, made the alleged misrepresentations regarding functionality. (Id. at 7.) Cognizant also argues BBSI failed to plead with particularity pursuant to Rule 9(b) that Oracle's representations were actually false, citing BBSI allegations that: “[d]uring the early stages of the implementation process, BBSI learned for the first time that . . . the HCM Cloud . . . (iv) did not have a grid-style screen for rapid time entry by either the customer or BBSI; . . . (ix) did not have the ability to enter time as a grid for a specific client's department, division, worksite location or project; (x) did not have the ability to include both positive and negative wages, deductions, and hours within an employee's time sheet entry ....” (Id. (citing SAC at ¶ 50).) Cognizant asserts BBSI's allegations are not inconsistent with the answers in the spreadsheet regarding timesheet entry and recording time edits. (Id.)
Rule 9(b) provides that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.”
Here, the Court finds BBSI has sufficiently alleged that Cognizant misrepresented the HCM Cloud's functionality before entering into the SOW. Taking BBSI allegations as true, BBSI alleges that both Oracle and Cognizant conferred with each other to answer BBSI's functionality questions and represented that the HCM Cloud could already do timesheet entry and record time edits, even though it could not. Accordingly, the Court finds BBSI has sufficiently pleaded a misrepresentation related to an existing fact.
BBSI next argues that even if some of its alleged misrepresentations were opinions or future promises, they were made for the purpose of deceiving with no intention of actually being performed and are therefore actionable under Markov v. ABC Transfer & Storage Co., 76 Wn.2d 388 (1996). BBSI asserts that under Washington law, a promise is actionable if a “promise is made without care or concern whether it will be kept, and the promisor knows or under the circumstances should know that the promisee will be induced to act or refrain from acting to his detriment.” (Resp. at 14 (citing Markov, 76 Wn.2d at 396).) In Markov, the defendant stated he would renew plaintiffs' lease even though he was negotiating with another individual to sell the property. 76 Wn.2d at 396. BBSI argues that if Cognizant did not know whether the HCM Cloud would meet BBSI's needs or if it could be implemented before the parties entered the SOW, as it claims, it acted without care or concern when it continued to assure BBSI that the HCM Cloud met its needs and could be implemented. (Resp. at 14 (citing, e.g., Ritchie Bros. Auctioneers (America) v. Suid, No. C17-1481-MAT, 2018 U.S. Dist. LEXIS 64731, at *5, 17 (W.D. Wash. Apr. 17, 2018) (auctioneer alleged actionable misrepresentation by alleging that defendants submitted bid for heavy equipment at auction when they “lacked the intention to comply with the terms of the bidder agreements”)).)
Cognizant argues the allegations in this matter are distinguishable from Markov. (Reply at 7-8.) Specifically, Cognizant argues that in Markov, the defendant made an express promise about a future action to renew the lease even though the defendant did not intend to perform that promise because it was negotiating to sell the property to someone else. (Id.) Cognizant argues that in this matter, BBSI merely alleges Cognizant offered opinions that the HCM Cloud would be suitable and could be implemented to meet BBSI's needs, and do not constitute promises to take future action. (Id. at 8.)
As discussed above, the Court finds Cognizant has alleged misrepresentations of existing fact. However, even if the alleged misrepresentations constitute opinions, the Court finds BBSI has sufficiently pleaded that Cognizant's misrepresentations were made without care or concern. BBSI has alleged that KBACE misrepresented to it that the HCM Cloud could meet BBSI's needs and be successfully implemented. For example, BBSI alleges Oracle and KBACE were in constant discussions about the HCM Cloud configuration and that in October 2017, Oracle concluded the HCM Cloud could not support BBSI's needs as a PEO. (SAC at ¶ 34.) BBSI alleges that despite learning of this conclusion, a KBACE representative stated that KBACE would be able to do workarounds to fit BBSI's needs.” (Id. at ¶ 35.) At this stage in the litigation, the Court finds that BBSI has alleged an actionable misrepresentation counterclaim relating to whether the HCM Cloud could meet BBSI's needs.
E. Justifiable Reliance
Cognizant also asserts BBSI's misrepresentation counterclaims fail because it has not alleged justifiably reliance. (Reply at 8.) In order to make out a claim of fraudulent inducement or fraudulent misrepresentation, a party must allege that it reasonably relied upon the alleged misrepresentation. Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375 F.3d 168, 186-87 (2d Cir. 2004); see also Wall v. CSX Transp., Inc., 471 F.3d 410, 415-16 (2d Cir. 2006); Lawyers Title Ins. Corp. v. Baik, 147 Wash.2d 536, 545 (2002). Justifiable reliance means that the “reliance was reasonable under the surrounding circumstances.” Baik, 147 Wash.2d at 545 (quoting ESCA Corp. v. KPMG Peat Marwick, 135 Wash.2d 820, 827-28 (1998)).
Circumstances that may preclude a claim of justifiable reliance include a party's experience and sophistication with the subject matter and the specificity of a disclaimer. Puget Sound Nat'l Bank v. McMahon, 330 P.2d 559, 561 (Wash. 1958); LBBW Luxemburg S.A. v. Wells Fargo Sec. LLV, 10 F.Supp.3d 504, 517 (S.D.N.Y. 2014). But a disclaimer is insufficient to defeat a claim of justifiable reliance when the disclaimer is not sufficiently specific to the particular facts misrepresented, even if the relying party is a sophisticated party. See Abrams v. Blackstone and Sons Realty Capital Corp., 2019 WL 8640656, (C.D. Cal. 2019). Whether reliance is justifiable is generally a question of fact. Havens, 876 P.2d at 447; Country World, Inc. v. Imperial Frozen Foods Co., 589 N.Y.S.2d 81, 82 (2d Dep't 1992).
1. Disclaimer
Cognizant reasserts its argument that BBSI cannot plead justifiable reliance on the alleged misrepresentations because the MSA states Cognizant “does not make or give any representation or warranty or condition of any kind . . . including any warranty of merchantability, quality, or fitness for a particular purpose.” (Mot. at 15-16 (citing MSA at § 8.3).) Cognizant cites to Hitachi Data Systems Credit Corp. v. Precisions Discovery, Inc., 331 F.Supp.3d 130 (S.D.N.Y. 2018). (Reply at 8.) In Hitachi, the parties entered into a master lease agreement under which the defendant agreed to lease data storage equipment from plaintiff to be identified in future negotiated schedules. 331 F.Supp. at 137. The plaintiff brought a breach of contract action against the defendant for failure to make payments under a lease schedule executed years after the master lease agreement. Id. The defendant countersued claiming fraudulent inducement and misrepresentation because the plaintiff knowingly misrepresented the suitability of leased equipment, inducing the defendant to enter into the schedule. Id. at 137, 145. The court dismissed the defendant's counterclaims, finding that the express disclaimer in the master lease agreement specifically stated that plaintiff made no representation regarding the suitability of leased equipment and therefore the defendant could not have reasonably relied on such a misrepresentation. Id. at 148. Cognizant argues that similarly, the MSA's disclaimer precludes BBSI from relying on any representations regarding the suitability of the HCM Cloud.
BBSI contends the disclaimer in the MSA does not bar its counterclaims because it lacks the required specificity and the misrepresentations were peculiarly within Cognizant's knowledge. (Resp. at 16 (citing Trainum v. Rockwell Collins, Inc., 2017 WL 1093986, at *49 (S.D.N.Y. May 30, 2017) (upholding fraud claim despite presence of both disclaimer of warranties and disclaimer of reliance because misrepresented facts were peculiarly within defendant's knowledge)).) BBSI also argues Hitachi is distinguishable for several reasons. BBSI asserts that the master lease agreement containing the disclaimer in Hitachi stated the subsequent lease schedule was a separate and independent lease incorporating terms from the master lease. (Resp. to Objections (Dkt. # 79) at 9.) BBSI argues that unlike in Hitachi, the SOW became part of the MSA upon execution, and BBSI asserts all contractual obligations regarding Cognizant's HCM Cloud services were induced through Cognizant's misrepresentations. (Id.) BBSI also argues disparity in knowledge and sophistication between the parties were not factors in Hitachi, unlike this matter. (Id.) BBSI further argues the disclaimer in Hitachi identified the leased equipment and specified that the two contracts were the exclusive statement of the agreement for that equipment, whereas the MSA does not refer to the HCM Cloud. (Id.)
BBSI further argues that its fraud misrepresentation claims survive under Washington law despite the MSA's disclaimer, citing McInnis & Co. v. W. Tractor & Equip. Co., 63 Wn.2d 652, 655-56 (1964), and that even when there is an agreement stating a buyer is not relying on a seller's representations, it does not bar reasonable reliance as a matter of law, citing Helenius v. Chelius, 131 Wn.App. 421, 442 (2005). (Resp. at 16.)
As the Court previously found, the disclaimer in the MSA does not preclude BBSI's counterclaims that Cognizant overstated its expertise because the disclaimer does not clearly disclaim liability for relying on representations of Cognizant's qualifications and experience. With regard to BBSI's remaining misrepresentation counterclaims, the Court also finds BBSI has alleged justifiable reliance. BBSI alleges it was ignorant as to how cloud products would work with its PEO needs, that it informed Cognizant of its ignorance, and that Cognizant held itself out to be an expert in implementing the HCM Cloud with PEOs. BBSI further alleges Cognizant repeatedly communicated to BBSI about its abilities to successful implement the product. BBSI alleges Cognizant was aware the HCM Cloud was ill-suited for BBSI but continued to represent to BBSI that it was suitable for its needs. Based on BBSI's allegations, it appears this information was peculiarly within Cognizant's knowledge. Further, although the MSA was entered into before discussions of the HCM Cloud began, the SOW is “part of and incorporated into the [MSA]” (SOW at 1) and BBSI alleges all contractual obligations were induced by Cognizant's alleged misrepresentations. In light of the specific allegations in this case, the Court finds Hitachi distinguishable.
Further, the Court finds the disclaimer's language that Cognizant does not give any representation or warranty regarding fitness or quality lacks specificity. The parties entered into the MSA in order to execute subsequent SOWs, before discussions of the HCM Cloud product. Therefore, the disclaimer makes no mention of the HCM Cloud or Cognizant's ability to implement it. The Court also finds BBSI alleges reasonable reliance on Cognizant's representations about the suitability and implementation of the HCM Cloud given the difference in the parties' experience with Cloud products. Accordingly, given the circumstances, BBSI has alleged justifiable reliance despite the MSA's disclaimer.
2. Due Diligence
Cognizant also argues BBSI failed to conduct due diligence before purchasing the HCM Cloud and admitted so in its second amended counterclaims by alleging it made clear to Oracle and Cognizant that it was ignorant regarding the HCM Cloud system. (Mot. at 16 (citing SAC at ¶ 29); Reply at 8 (citing Stephenson v. Terron-Carrera, 957 N.Y.S.2d 266 (table), No. 09-2465, 2012 WL 2400756, at *4 (N.Y. Sup. Ct. June 5, 2012) (“a fraud or fraudulent inducement claim cannot be established for lack of justifiable reliance where a party fails to conduct due diligence, ask questions, and otherwise make use of means available to verify representations.”)).)
Cognizant argues that BBSI's alleged lack of due diligence is evidenced by its allegations that after it purchased the HCM Cloud, it hired an independent consultant who determined the HCM Cloud was not a good fit for BBSI's needs. (Reply at 9-10 (citing SAC at ¶¶ 61-63).) Cognizant asserts BBSI therefore could have conducted this diligence prior to purchasing the HCM Cloud. Cognizant also asserts this demonstrates the suitability of the HCM Cloud was not peculiarly within its knowledge because BBSI could have discovered the HCM Cloud's limited functionality with due diligence, as it did after it hired an independent contractor.
BBSI contends that it conducted months of due diligence in educating Oracle and Cognizant about its functionality requirements and obtaining assurances from them that the HCM Cloud had those functionalities. (Resp. at 16.) BBSI further argues that despite its due diligence, it was not required to do so because Cognizant allegedly misrepresented facts that were peculiarly within its knowledge. (Resp. at 16-17 (citing, e.g., Jenness v. Moses Lake Development Co., 39 Wn.2d 151, 158 (1951) (buyers of tavern and hotel business could rescind contract based on seller's misstatements about business's financial results although books were purportedly made available to buyers; if “a positive, distinct, and definite representation has been made, ” plaintiff is entitled to rely and it is “immaterial that the means of knowledge are open to the complaining party”)).)
BBSI also argues that if the Court finds its allegations are statements of opinion, they are actionable because Cognizant is an expert in Cloud implementation and had special knowledge regarding the suitability of the HCM Cloud, and further knew BBSI relied on its representations. (Resp. at 15 (citing, e.g., Pickard & Anderson v. YMCA, 500 N.Y.S.2d 874, 876 (App. Div. 1986) (YMCA could recover for fraud based on architectural firm's expression of opinion about fees associated with renovation where it knew YMCA was relying)).) As noted above, the Court finds Cognizant possessed special knowledge regarding the suitability of the HCM Cloud and that BBSI relied on its representations.
The Court finds BBSI has alleged it conducted due diligence. BBSI alleges that over at least a seven-month period, it had numerous discussions with Oracle and Cognizant about its needs as a PEO and was assured by multiple employees that the HCM Cloud could meet those needs. (See SAC at ¶¶ 29-37.) BBSI's efforts include multiple in-person meetings, numerous telephonic conferences, status calls, presentations, and exchanging of documents such as the spreadsheet regarding the HCM Cloud's functionality. The fact that BBSI later hired an independent contractor after discovering the HCM Cloud's deficiencies does not negate its prior efforts to verify the suitability of the HCM Cloud. Based on the allegations before the Court, it appears BBSI viewed Cognizant as an expert in the HCM Cloud and diligently worked with Cognizant to confirm it would work with its needs.
3. Assumption of Business Risk
Cognizant further argues BBSI failed to add appropriate language in the relevant contracts to protect itself from the alleged misrepresentations and thereby willingly assumed the business risk that the facts may not be as represented. (Mot. at 16.) Cognizant cites Lazard Freres & Co. v. Protective Life Ins. Co., 108 F.3d 1531 (2d Cir. 1997), in which two sophisticated bank debt traders engaged in the sale of bank debt. 108 F.3d at 1543. The deal was conducted over the phone and based on one party's representations regarding a related report who allegedly misrepresented the report's contents. Id. The court found that “where . . . a party has been put on notice of the existence of material facts which have not been documented and he nevertheless proceeds with a transaction without . . . inserting appropriate language in the agreement for his protection, he may truly be said to have willingly assumed the business risk that the facts may not be as represented.” In coming to this conclusion, the court noted that as a substantial and sophisticated professional in the bank debt market, the injured party could have made review of the report a condition of closing. Id.
Cognizant also cites Shepherd v. Whispering Pines Inc., 591 N.Y.S.2d 246, 249 (N.Y.App.Div. 1992). In that matter, defendants purchased a campground based on representations regarding revenue from operation of the campground. 591 N.Y.S.2d at 248. The income from the campground was ultimately far less than represented. Id. The court found the defendants were experienced campground operators, were aware income of the campground was “a material fact about which they had received no documentation, ” that the prior owners had defaulted on their mortgage, and that they admitted they viewed plaintiffs' representation regarding income to be a guess. Id. at 249. The court found that under those circumstances, defendants could have protected themselves by including a condition that the sale would be rescinded if that actual gross income was less than represented. Id The Court finds the circumstances of this case different than those cited by Cognizant. BBSI is not sophisticated in the purchase or implementation of Cloud products, and in fact, alleges it was ignorant on the subject. Unlike a sophisticated debt trader purchasing debt or experienced campground operators purchasing a new campground, BBSI was inexperienced and unaware that Cognizant did not have the represented experience or ability to assess and implement the HCM Cloud for PEOs. Accordingly, the Court finds BBSI has sufficiently pleaded justifiable reliance.
F. Leave to Amend
Rule 15(a)(1) allows a party to amend its answer once as a matter of course within 21 days of serving its original answer. Fed.R.Civ.P. 15(a)(1)(A), (B). “In all other cases, a party may amend its pleading only with the opposing party's written consent or the court's leave.” Fed.R.Civ.P. 15(a)(2). Leave to amend a before trial should be “freely give[n] ... when justice so requires.” Id. Factors relevant to whether leave to amend should be granted are whether the moving party acted in bad faith or unduly delayed in seeking amendment, whether the opposing party would be prejudiced, whether an amendment would be futile, and whether the movant previously amended the pleading. See, e.g. United States v. Corinthian Colleges, 655 F.3d 984, 995 (9th Cir. 2011).The district court is afforded discretion to grant leave to amend pleadings and “should freely give leave when justice so requires.” Fed.R.Civ.P. 15(a)(2). The generosity in granting leave to amend is “to be applied with extreme liberality.” Eminence Capital, LLC v.Aspeon, Inc., 316 F.3d 1048, 1051-52 (9th Cir. 2003).
Here, because BBSI has amended its counterclaims twice and the discovery deadline is only several months away, the Court finds leave to amend is not warranted at this time.
V. CONCLUSION
The Court recommends Cognizant's motion to dismiss (dkt. # 84) be GRANTED, in part, and BBSI's counterclaims for breach of the SOW and rescission with regard to the CSA be DISMISSED. The Court further recommends Cognizant's motion to dismiss BBSI's misrepresentation counterclaims be DENIED. A proposed order accompanies this Report and Recommendation.
Objections to this Report and Recommendation, if any, should be filed with the Clerk and served upon all parties to this suit within fourteen (14) days of the date on which this Report and Recommendation is signed. Failure to file objections within the specified time may affect your right to appeal. Objections should be noted for consideration on the District Judge's motions calendar for the third Friday after they are filed. Responses to objections may be filed within fourteen (14) days after service of objections. If no timely objections are filed, the matter will be ready for consideration by the District Judge on February 15, 2021.
The Clerk is directed to send copies of this Report and Recommendation to the parties and to the Honorable John C. Coughenour