Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. Ill.: Issues of fact abounded in distributor’s breach of contract and fraud claims, (Oct 31, 2013)

By Peter Reap, J.D., LL.M.

Genuine issues of material fact precluded summary judgment on distributor Soroof Trading Development Company Ltd.’s claims for breach of contract and fraudulent inducement against Plug Power, Inc., GE Microgen, Inc., and General Electric Company, the federal district court in New York City has decided (Soroof Trading Development Company Ltd. v. GE Microgen Inc., October 30, 2013, Schofield, L.). However, Soroof’s claim that the Defendants continued their misrepresentations throughout the term of the parties’ contract was barred, as this theory was duplicative of Soroof’s claim for breach of contract.

Background. The claims arise from disputes regarding a distributor agreement that Soroof and GE Fuel Cell Systems LLC (GEFCS) entered into on June 6, 2000, providing Soroof, in exchange for a $1 million fee, the exclusive right to distribute a fuel cell meeting certain contractual specifications that was to provide continuous residential power in Saudi Arabia.

GEFCS is a now-dissolved Delaware limited liability company that was formed in 1999 by members Plug Power and GE Microgen, a wholly-owned subsidiary of GE, for the purpose of developing and marketing fuel cell products. GE Microgen’s role was to manage sales and marketing, while Plug Power’s role was to develop and manufacture the products. In May 2000, Soroof, a newly-formed Saudi Arabian company, began negotiating with GEFCS to become a distributor of the fuel cell product. At this time, the product was still in development, which Soroof knew.

On June 6, 2000, Soroof and GEFCS entered into the distributor agreement, which provided Soroof the exclusive right to distribute the product in Saudi Arabia. Soroof paid GEFCS a $1 million Distributor Fee, which the distributor agreement provided was “non-refundable.” The distributor agreement required GEFCS to “[u]se reasonable efforts to supply” the product to Soroof. The distributor agreement also required the parties to “share promptly relevant information, including but not limited to product performance” and contained limited liability provisions and a merger clause.

“At the signing of the contract,” GEFCS informed Soroof that the product would be ready in the last quarter of 2001 instead of 2000. Then, in August 2000, GEFCS informed Soroof that the product’s delivery had further “shifted to the right by six months.” The product continued to experience delays in production throughout the course of the distributor agreement.

The term of the distributor agreement expired on December 31, 2005. On December 31, 2006, GEFCS was formally dissolved. Soroof was not informed that GEFCS was going to be dissolved. Mr. Jackson testified that Soroof did not become aware of GEFCS’ dissolution until 2007. To date, Plug Power has not created a commercial product meeting the specifications in the distributor agreement, but has sold similar products.

Soroof commenced arbitration against GEFCS on July 1, 2008. The parties then stipulated to dismiss the arbitration and bring the dispute to this court. Soroof filed its second amended complaint on May 14, 2012, which pleads a claim for breach of contract by alleging (1) a breach of section 5.2 of the distributor agreement, requiring GEFCS to “use reasonable efforts to supply” the Product and (2) a breach of section 7.4 of the distributor agreement, requiring the parties to “share promptly relevant information” with each other. Second, Soroof alleges its claim for misrepresentation by alleging (1) misrepresentation consisting of fraudulent inducement to enter into the distributor agreement and (2) misrepresentation during the course of the distributor agreement.

Breach of Contract

Section 5.2. Section 5.2 of the distributor agreement required GEFCS to use “reasonable efforts to supply” the product. Soroof claimed that the Defendants breached section 5.2 by “abandoning development” of the Product as early as “less than one year from the signing” of the distributor agreement and “no later than 2003.”

Soroof offered sufficient evidence that a reasonable jury could find that defendants breached section 5.2, including evidence that Plug Power shifted its efforts from developing the product to developing other products, such as backup generators, and evidence that GE withdrew its support of Plug Power and the product in 2003, causing GEFCS to become inactive, the court determined. Thus, the defendants’ motion for summary judgment with respect to breach of Section 5.2 was denied as genuine issues of material fact existed for trial, including, whether the defendants “abandoned” development of the product at any time during the course of the distributor agreement.

Section 7.4. Section 7.4 of the distributor agreement required both parties to “share promptly relevant information, including but not limited to product performance, failure and liability issues.”

Soroof offered sufficient evidence that a reasonable jury could find that the defendants breached section 7.4, including evidence that the defendants possessed the following information and did not share it with Soroof: (1) independent tests were conducted on the product, showing it could not be developed on schedule, or possibly ever; (2) the product fell short of developmental milestones before and after the parties signed the distributor agreement, causing the defendants to realize they could not build the product; and (3) GE withdrew its support from Plug Power, which ceased development of the product, and GEFCS became inactive.

Therefore, with respect to Soroof’s claim that the defendants breached section 7.4 of the agreement, the defendants’ motion for summary judgment was denied as genuine issues of material fact existed, such as whether and when the defendants knew that the product could not, or likely could not, be developed and/or commercialized, the court explained.

Misrepresentation

Fraudulent inducement. Soroof claimed that the defendants “in order to induce Plaintiff to sign the Agreement and pay the $1 million … made material misrepresentations and failed to disclose material facts.” Specifically, Soroof claimed that the defendants, in contract negotiations, (1) represented, knowing it to be false, that the product was almost ready for production and (2) failed to disclose the significant problems with the product’s development, including the fact it may never be produced at all.

Soroof offered sufficient evidence that a reasonable jury could find that the defendants fraudulently induced Soroof to enter into the distributor agreement, including evidence that the defendants represented to Soroof in contract negotiations that the product was close to commercialization while knowing it was actually very early in its development, as well as evidence that the defendants withheld material information from Soroof during negotiations, such as the product’s failure to meet technical milestones and the results of the independent testing, the court held.

The defendants’ argument that a merger clause in the distributor agreement would bar this evidence was incorrect, according to the court. New York permits the use of parol evidence to prove a claim of fraud in the inducement, even where the written contract contains an integration, or merger, clause. Moreover, a general merger clause was generally insufficient to bar parol evidence of a fraudulent misrepresentation.

In addition, the defendants’ argument that this claim must be dismissed because it was duplicative of plaintiff’s claim for breach of contract also was incorrect. Under New York law, a claim based on fraudulent inducement of a contract was separate and distinct from a breach of contract claim, the court observed.

Thus, as to Soroof’s claim that the defendants fraudulently induced Soroof to enter into the distributor agreement, defendants’ motion for summary judgment was denied as genuine issues of material fact existed.

Misrepresentation during course of the agreement. Soroof claimed that the defendants “continued in their misrepresentations and omissions” throughout the term of the distributor agreement. Specifically, Soroof claimed that the defendants (1) never disclosed to Soroof that GE lost confidence in Plug Power, pulled its financial support and caused GEFCS to become inactive and (2) misrepresented to Soroof that the product was forthcoming when they knew it was not.

Under New York law, where a claim for misrepresentation arose out of the same facts as plaintiff’s breach of contract claim, the misrepresentation claim was redundant and plaintiff’s sole remedy was for breach of contract. Here, the theory that the defendants continued in their misrepresentations during the course of the distributor agreement and the theory that the defendants breached section 7.4 of the distributor agreement were the same, and they were based on the same facts, the court explained. Both alleged, in essence, that the defendants did not disclose the whole truth to Soroof about the product’s development, or lack thereof, and that the defendants strung Soroof along, saying the product would be delivered when they knew it would not.

Therefore, while Soroof’s claim for misrepresentation survived under a fraudulent inducement theory, recovery under the theory that the defendants continued their misrepresentations throughout the term of the distributor agreement was barred, as this theory was duplicative of Soroof’s claim for breach of contract.

Statute of limitations. Soroof initiated arbitration proceedings in this matter on July 1, 2008, which was the operative date for the statute of limitations on this motion. For the reasons discussed below, the court determined that the statute of limitations applicable to the breach of contract claim is four years, and the statute of limitations applicable to Soroof’s misrepresentation claim is the longer of six years from the misrepresentations or two years from the time Soroof discovered or should have discovered the misrepresentations. Here, the fact-finder must answer questions of fact detailed below before the court could determine if the statute of limitations has run.

The statute of limitations period applicable to Soroof’s breach of contract claim is four years under the New York Uniform Commercial Code. Under New York law, a limitation period is tolled when a plaintiff fails to bring suit as a result of blameless ignorance or culpable action by the defendant.

What Soroof knew and when were questions of fact, the court noted. Soroof presented sufficient evidence that a reasonable jury could find that Soroof was blamelessly ignorant of the alleged breaches and/or that the defendants’ misconduct caused Soroof to delay bringing suit, including evidence that the defendants repeatedly assured Soroof that the product would be delivered when they knew it would not be, and evidence that the defendants concealed the product’s true development status.

Therefore, questions of fact existed regarding whether the statute of limitations should be tolled for the breach of contract claim, and for how long, including when Soroof knew the defendants were in breach of the distributor agreement.

The statute of limitations period applicable to Soroof’s fraudulent inducement claim was, under New York law, the greater of six years from the misrepresentations or two years from the time Soroof discovered or should have discovered them. Soroof claimed that it did not become aware of the alleged misrepresentations until 2007.

The defendants, however, argued that Soroof should have known of any alleged misrepresentations as early as 2000, considering the statements in Plug Power’s Form 10-K from March 2000, but failed to do adequate due diligence. Determining when Soroof knew, or should have known, of the alleged misrepresentations involved questions of fact, including whether Soroof performed adequate due diligence, the court explained.

Limitation of liability clauses. The distributor agreement states that GEFCS’ “total liability … shall not exceed the amount that has been paid to GEFCS by [Soroof] under this Agreement,” which was $1 million. The distributor agreement also states that “[i]n no event … shall GEFCS … be liable to [Soroof] … for loss of profit or revenues, downtime costs, cost of capital, cost of facilities or services, or any other costs or damages which may be categorized as indirect, incidental, exemplary, or consequential damages.”

Clauses limiting liability are perfectly common and acceptable, the court noted. But under public policy, these provisions will not apply to exonerate a party from willful or grossly negligent acts.

If defendants engaged in “willful or grossly negligent acts,” the limited liability provisions in the distributor agreement would be disregarded. In the absence of such a finding, damages in this action would be capped at $1 million and would exclude any damages of the types expressly prohibited by the distributor agreement. Whether the defendants engaged in willful or grossly negligent acts involved genuine questions of material fact such as whether and when the defendants knew commercialization of the product was not possible or at least unlikely.

The distributor agreement also characterized the distributor fee as “non-refundable.” This provision was also subject to the public policy considerations discussed above, the court determined.

Piercing GE Microgen’s corporate veil. Soroof moved for summary judgment to pierce GE Microgen’s corporate veil in order to hold GE liable. The defendants, in turn, requested in their Opposition that the veil piercing claim be dismissed. Both requests were denied, as there are genuine questions of material fact to be answered before this claim could be decided, according to the court.

Specifically, Soroof provided evidence that GE diverted funds, including the distributor fee, directly from GEFCS to fund the salaries of GE employees, that GE’s senior management directed the dissolution of GEFCS, that the President of GEFCS was not employed by GEFCS or GE Microgen but by GE and that GE was a major shareholder of Plug Power and occupied a seat on its Board. On the other hand, the Defendants offered contradictory evidence creating genuine issues of material fact. For example, the Defendants provided evidence showing that GE Microgen was a corporation distinct from GE that was managed separately.

The case is No. 10 Civ. 01391.

Attorneys: James R. Lynch (Lynch Daskal Emery, LLP) for Soroof Trading Development Company Ltd. Thomas Edward Healy (Pino & Associates, LLP) for GE Microgen Inc.

Companies: Soroof Trading Development Company Ltd.; GE Microgen Inc.

Cases: FranchisingDistribution NewYorkNews