Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—D. Conn.: CUTPA claims proceed against publishing company, (Jun 3, 2015)

By Michael Menzhuber, J.D., LL.M.

Allegations that a publishing company falsely claimed that one of its elementary school math programs did not comply with “Common Core” standards, wrongfully attempted to convert customers to other programs, and planned to eliminate the program stated claims for violation of the Connecticut Unfair Trade Practices Act (CUTPA), according to the federal district court in Bridgeport, Connecticut. Thus, the CUTPA claims survived a motion to dismiss (NAL, Inc. v. Houghton Mifflin, May 27, 2015, Eginton, W.).

Background. NAL, Inc. is the assignee of the rights, title, and interest in “Saxon Math,” an elementary age math program. Houghton Mifflin Harcourt Publishing Company (HMH) became the exclusive publisher of “Saxon Math” in 2007. According to NAL, HMH refused to devote commercially reasonable efforts to promote the program in favor of its other competing programs and engaged in continuing efforts to destroy the product’s commercial viability.

Pursuant to the Publishing Agreements between the parties, HMH had the right to discontinue its publication and manufacture of “Saxon Math.” If it did, HMH was required to assign the copyright and the rights to publish to NAL. The Publishing Agreements also provided NAL with a contractual audit right which, according to NAL, it was unable to exercise because HML provided two royalty reports annually and NAL could not perform a single audit on both reports within the contractual time period. However, NAL alleged that this audit provision has been waived by the parties due to their consistent course of dealing in reconciling royalty payments.

NAL also alleged that the parties agreed to amend the Publishing Agreements in 2012 to provide for, among other things, a recalculation of royalties for the prior two years and payment of any unpaid royalties. Subsequently, HMH sought a global general release of any and all claims between the parties. NAL had previously not agreed to the general release and refused to sign the release. HMS then refused to comply with the terms of the 2012 Amendment.

NAL brought an action against HMH alleging breach of contract, breach of common law duty of good faith and fair dealing, and breach of implied obligation to devote reasonable efforts to promote “Saxon Math” (count I); breach of contract based on constructive termination of the Publishing Agreements (count II); breach of the Publishing Agreements, as amended by the 2012 Amendment (count III); failure to pay royalties in breach of the Publishing Agreements (count IV); violation of the Connecticut Unfair Trade Practices Act (CUTPA) (counts V, VI, VII); and declaratory judgment (count IX).

HMH sought to dismiss NAL’s complaint in its entirety on the grounds that (1) the audit provision of the Publishing Agreements barred NAL’s claims for underpayment and failure to pay royalties and the parallel claims for declaratory judgment concerning the calculation of royalties; (2) the statute of limitations barred the breach of contract claims; (3) NAL failed to state a plausible claim for breach of contract; and (4) the CUTPA claims were based only upon the alleged breach of contract.

Audit provision. HMH argued that NAL did not comply with the Publishing Agreements’ audit provision’s exclusive dispute resolution mechanism for royalty disputes. NAL countered that HMH waived this provision based on an alleged course of dealing between the parties and the court agreed. It determined that NAL had stated a cognizable claim of implied waiver of the contractual audit provisions.

NAL also contended that the parties intended to amend the Publishing Agreements with the 2012 Amendment. HMH argued that the parties never agreed on the terms to the 2012 Amendment and that the Publishing Agreement required that any modifications be in writing. However, the court determined that NAL stated a plausible claim that the parties made an oral agreement and HMH’s partial performance, the payment of recalculated royalties, constituted a waiver of the agreement’s “anti-waiver” clause.

HMH also argued that the alleged 2012 Amendment violated statute of frauds of Oklahoma (the governing law in the Publishing Agreements “choice of law” provision), which requires contracts providing for express dates beyond one year from execution be in writing. NAL asserted that the Publishing Agreements failed to specify the length of the parties’ relationship and that HMH had the sole and absolute discretion to terminate its publication of “Saxon Math.” HMH countered that the agreement did provide for a specific duration beyond one year because it provided HMH with the full term of copyright and all renewals which is the life of the author plus 70 years. The court was unable to determine the intent of the contractual provision and, therefore, because all inferences of fact must be construed in favor of a plaintiff, found that NAL stated a plausible claim that the oral amendment could be performed within one year.

Breach of contract/implied covenant of good faith and fair dealing. HMS argued that NAL’s breach of contract claim should be dismissed on the basis of the five-year statute of limitations relevant to contract actions under Oklahoma law. NAL countered that the Connecticut six-year state of limitations applied. The court agreed with NAL because Connecticut federal courts apply Connecticut’s statute of limitations to common law diversity actions commenced in Connecticut district court. The court noted HMH’s “choice of law” provision argument. However, it determined that the “choice of law” provisions were ambiguous relevant to their scope of applicability and it, therefore, denied HMH’s motion to dismiss on the ground of the statute of limitations.

The court determined that NAL stated a plausible breach of contract claim on the basis that HMH failed to reassign the “Saxon Math” copyright after it: (1) discontinued its publication or manufacture; or (2) decided to terminate publication and took steps to undermine customer demand.

CUTPA. To determine whether a practice violates CUTPA, Connecticut courts have adopted the criteria set out in the “cigarette rule” for determining when a practice is unfair: (1) whether the practice, without necessarily having been previously considered unlawful, offends public policy as it has been established by statutes, the common law, or otherwise; (2) whether it is immoral, unethical, oppressive, or unscrupulous; and (3) whether it causes substantial injury to consumers. A-G Foods, Inc. v. Pepperidge Farm, Inc., 216 Conn. 200 (1990).

The court noted that, to prove that a practice is unfair, it is sufficient to meet only one of these criteria or demonstrate that the practice meets all three criteria to a lesser degree. The court further noted that substantial aggravating circumstances sufficient to support CUPTA claim include fraudulent representations, fraudulent concealment, false claims and multiple breaches of contract. Building Solutions since 1977, LLC v. New Haven Housing Authority, 2015 WL 1868107.

NAL alleged that HMH (1) falsely advised customers that “Saxon Math” did not comply with Common Core standards; (2) made an effort to convert customers to HMH’s programs; and (3) implemented a plan to eliminate “Saxon Math.” The court determined that these allegations fell within the penumbra of unfair conduct and, thereby, stated plausible claims of CUTPA violations.

The case is No. 3:14cv1132 (WWE).

Attorneys: Jennifer M. Rothschild (Miles & Stockbridge, PC), and Timothy Andrew Diemand (Wiggin & Dana) for NAL, Inc. David J. Lender (Weil, Gotshal & Manges, LLP) for Houghton Mifflin Harcourt Publishing Co.

Companies: NAL, Inc.; Houghton Mifflin Harcourt Publishing Co.

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