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Avve Inc. v. Upstack Technologies, Inc.

Superior Court of Delaware

April 12, 2019

AVVE, INC., Plaintiff,

          Submitted: March 4, 2019

         On Defendant's Motion to Dismiss Count 3 of Plaintiff s Amended Complaint.

          Tiffany M. Shrenk, Esquire, and Andrew R. Silverman, Esquire, MacElree Harvey, LTD, Centreville, Delaware, Attorneys for Plaintiff Awe, Inc.

          Barry M. Klayman, Esquire, and Matthew Bleich, Esquire, Cozen O'Connor P.C., Wilmington, Delaware, Attorneys for Defendant Upstack Technologies, Inc.


          Richard R. Cooch, R.J.


         Upstack Technologies, Inc. ("Defendant") has moved to dismiss Count 3 of Awe, Inc.'s ("Plaintiff) Amended Complaint, pursuant Superior Court Civil Rule 12(b)(6). Plaintiffs complaint arises out of an alleged breach of a commercial services contract between Plaintiff and Defendant. Plaintiff alleges that Defendant breached the contract in a number of ways and committed fraud. The breach of contract claims, Counts 1 and 2 of the Amended Complaint, are unchallenged by Defendant in the instant motion to dismiss, and a Trial Scheduling Order has been issued for those counts.

         Count 3 claims that Defendant committed fraud under Delaware law by allegedly misrepresenting certain aspects of Defendant's business prior to the parties entering into the service contract. Defendant's primary argument is that Plaintiff has failed to satisfy the heightened pleading requirements for fraud claims under Superior Court Civil Rule 9(b). Defendant argues that Plaintiff has not plead fraud with sufficient particularity and specificity as required by Rule 9(b). Plaintiff counters that the complaint sufficiently apprises Defendant of the nature of the claim and thus satisfies Rule 9(b).

         The Court concludes that Count 3 of Plaintiff s Amended Complaint does not meet the heightened pleading standards of Rule 9(b). Accordingly, Defendant's Motion to Dismiss Count 3 of the Amended Complaint is granted.


         Awe, Inc. provides digital layaway services for e-commerce retailers and their customers. Ms. Patricia Hauseman served as Awe's Chief Executive Officer. Upstack Technologies, Inc. provides website-building and maintenance services by providing software developers for its clients. Upstack advised potential clients that it selects the developer from a network of engineers, and all undergo a rigorous hiring process to ensure that each engineer "possess[es] top tier communication, personality, and tech skills."[1] Mr. Yossi Mlynsky served as Upstack's Chief Executive Officer.

         In August 2016, Hauseman contacted Mlynsky to inquire about Upstack's services. Hauseman wished to hire Upstack to develop an application and website for Awe. During this initial "telephone conversation[, ]" Hauseman explained the nature of Awe's business and that Awe desired a developer to build a website and an application to improve Awe's business practices.[2] Over the next six months, the two CEOs communicated "via email" in which Hauseman provided further detail regarding the nature of Awe's business and the products Awe wanted Upstack to develop.[3] Hauseman explained that Awe's business depended on a quick and simple e-commerce environment for its customers, and that Awe envisioned an intuitive and effortless process for customers to access applications. The two CEOs also met at the end of January 2017. At this meeting Hauseman provided Mlynsky with specific webpages the website should have, and the specific steps and actions that the developed products would need to accomplish in order to satisfy Awe's business needs.

         On February 27, 2017, the parties entered into a written agreement for the development of a website and an application for Awe. The contract designated an individual, "Dragos S.," to develop the website and application. Unbeknownst to Awe, Dragos apparently suffered from a serious medical condition which hampered his ability to consistently work on the Awe project. Awe discovered Dragos' medical issue about six months after the parties entered into the contract. Awe also claims that Dragos was not fluent in English, as allegedly evidenced by numerous alleged spelling and grammatical errors.

         By October 2017 development progressed at a crawl. Dragos had not provided a working product in over six months and Awe was forced, it claims, to secure an independent senior developer to take over the work. Thereafter, Awe says that it was made aware of a slew of problems with Dragos' work. Awe claims that Dragos' performance was substandard because, inter alia, he used outdated programming techniques, failed to prevent overwriting of user data, used excess code which unnecessarily lengthened development time, and failed to properly document code for future developers.[4] By November 2017, nine months after the parties entered into the contract, Awe asserts that it did not have a working website or application. Awe terminated the contract in November 2017.

         Thereafter, Awe filed suit claiming Defendant breached the service contract, breached the covenant of good faith and fair dealing, and committed common law fraud.[5] Specifically, Count 3 alleges that Defendant committed fraud throughout the course of the pre-contract discussions from August 2016 to January 2017. Mlynsky allegedly committed fraud by making false promises and assurances regarding the quality of Upstack's services. In the complaint, Awe alleges that:

         57. From August 2016 through February 2017, in its course of dealing with Plaintiff (as described above in paragraphs 5 through 37), Defendant [through Mlynsky] made the following misrepresentations of fact to Plaintiff:

a. that Defendant engages only developers within the top 1% in their domain. Upstack would designate a senior level developer to develop Awe's website and application;
b. that Defendant only hires senior engineers;
c. that Defendant pre-vets their developers to ensure that they have the necessary skillset to perform the services for Defendant's customers;
d. that Defendant assigns only top-tier developers to perform services for Defendant's customers;
e. that the developer designated for Plaintiffs project would be fluent in English;
f. that [Mlynsky] will be involved in the development of products bargained-for by Plaintiff;
g. that Plaintiff would be matched with a senior Upstack expert in their domain; and/or
h. that the development of Plaintiffs website and application would be completed within approximately four (4) months.[6]

         Awe asserts that Mlynsky "knew that the aforementioned misrepresentations were false, or made the representation[s] with a reckless indifference to the truth."[7]Based on Dragos' substandard work, Defendant allegedly "knew or should have known" that Dragos lacked the skills to complete the project.

         Defendant has moved to dismiss Count 3 of the Amended Complaint under Rule 12(b)(6), alleging that the allegations within Count 3 do not meet the heightened pleading standards of Rule 9(b). Briefing on Defendant's motion started off in an orderly manner, with Plaintiff filing its Response on February 8, 2019, and Defendant filing its Reply Brief on February 22. However, after the parties had submitted their briefs, and after the close of business March 1, 2019-the Friday before oral argument on March 4-Plaintiff filed an affidavit from Hauseman purportedly to supplement Plaintiffs Answering Brief to Defendant's Motion to Dismiss. The affidavit sought to explain in further detail the misrepresentations of fact that Plaintiff alleged that Defendant had stated. No permission was sought from or given by the Court to file the affidavit.


         A. Defendant's Contentions

         First, Defendant argues that Count 3 of the Amended Complaint does not satisfy the Rule 9(b) heightened pleading requirements. Rule 9(b) requires that allegations of fraud to "be stated with particularity."[8] Defendant contends that Plaintiff has not met the Rule 9(b) burden because Plaintiff failed to state the time, place, or manner of the communications with sufficient particularity. Defendant argues that Plaintiff has only asserted a broad six-month time frame in which the misrepresentations occurred. Defendant contends that the complaint does not set forth exactly when within the six-month time frame each misrepresentation is alleged to have occurred, does not set forth how the misrepresentations were communicated, and does not sufficiently explain to whom the misrepresentations were stated.

         Furthermore, Defendant argues that Plaintiffs use of the phrase "and/or," at the end of subparagraph 57(g), to join the six examples of alleged fraud, makes it unclear and otherwise ambiguous whether all or some of the alleged misrepresentations are claimed to have occurred.[9] Lastly, as it relates to particularity, Defendant objects to the Court considering Plaintiffs affidavit, on the grounds that was untimely filed. Defendant further contends that even if the Court were to consider the affidavit, it would not correct the deficiencies in Count 3 that Defendant has alleged. With all such ambiguity, with or without the affidavit, Defendant argues that Plaintiffs fraud claim must be dismissed.

         Defendant also argues that Plaintiffs fraud claim impermissibly seeks the same damages allegedly caused by the breach of contract. Defendant asserts that Plaintiff cannot rehash the breach of contract claim and seek "materially identical damages" in the fraud claim.[10] Defendant contends that Plaintiff has merely "copy- and-paste[d]" its breach of contract damages into its fraud claim.[11] Without any distinction between the damages, Defendant argues, Plaintiffs claim must be dismissed.

         Lastly, Defendant contends that Plaintiffs fraud claim is impermissible '"bootstrap[ing]' a claim of breach of contract into a claim of fraud[.]"[12] Defendant argues that Plaintiff has failed to set forth specific factual allegations to support a reasonable inference that Defendant never intended to comply with the contract. Defendant argues that Plaintiff "simply add[ed] the term 'fraudulently induced' to [the] complaint[.]"[13] As such, Defendant argues that Plaintiffs fraud claim must be dismissed.

         B. Plaintiff's Contentions

         In defense of Count 3, Plaintiff argues that the fraud claim is sufficiently particularized for Rule 9(b) purposes. Plaintiff urges the Court to review the complaint as a whole, particularly the sections that Count 3 incorporates by reference. Plaintiff argues that the complaint illustrates the specific identities of the involved parties, and the specific time, location, and content of the alleged misrepresentations. Plaintiff alleges that Mlynsky misrepresented facts to Hauseman. Plaintiff contends that the alleged misrepresentations occurred during telephone conversations, by email, and face-to-face from August 2016 to January 2017.[14] Plaintiff relies on its characterization of the contents of the misrepresentations in subparagraph 57(g) of the complaint.[15] Plaintiff contends that if the Court would require anything more at this stage, Plaintiff would be required "to plead evidence, which is beyond the pleadings requirement at this early stage of the proceedings."[16]

         Plaintiff further argues that because the alleged misrepresentations occurred prior to the parties entering into the contract-and were allegedly intended to induce Plaintiff to enter into the contract-the alleged misrepresentations constitute "separate and distinct" conduct from which a fraud claim can stand separately and alongside a breach of contract claim.[17] Plaintiff contends that the separate and distinct nature of the conduct makes the potential damages separate from any breach of contract damages. For example, at oral argument Plaintiffs counsel stated that Hausman took steps in reliance on the alleged misrepresentations prior to entering into the contract, which would result in separate damages. For the same reasons, Plaintiff argues that Count 3 does not constitute impermissible bootstrapping.

         Regarding Plaintiffs affidavit, Plaintiff contends that it should be considered by the Court as it addresses the particularity issues alleged by Defendant. As for its untimeliness, Plaintiffs counsel explained that affidavit "wasn't something [the client] was able to provide to [Plaintiffs counsel] until [a few days before oral argument]."[18] Plaintiff maintained that Count 3 is still sufficient without the affidavit. Plaintiff in its Answering Brief did not request, in the alternative, to potentially later amend its complaint if Count 3 was dismissed. Plaintiff addressed this at oral argument, and stated that if the Court were to find that Count 3 was fatally deficient under Rule 9(b), then Plaintiff "would [] have to amend" its complaint to include the allegations contained in the affidavit.[19]

         IV. ...

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