Just as you can’t make a silk purse from a sow’s ear, so too you can’t make a conspiracy or a breach of fiduciary duty out of a simple breach of contract. (Netologic Inc. v. The Goldman Sachs Group, Inc.)
Netologic is a small company in the business of “developing, promoting and selling complex performance analysis and knowledge management systems … to capture, explore, and evaluate research, sales, and trading ideas for the financial community.”
Goldman, best known in regard to mortgage-backed derivative securities, paid Netologic an “Initial Investment Fee” of $1 million and agreed to use “commercially reasonable efforts” to sell the Netologic Spectrum product to Goldman’s customers. The agreement provided – in the manner of most such agreements – that each party would maintain in confidence any confidential information received from the other and that “the relationship between the parties … is that of independent contractors and not partners, joint venturers or agents.”
Shortly thereafter, Goldman purchased co-defendant WSOD, a website design company in the business of managing research sites for brokerage houses. Netologic asserts that, during the following two-year period, while the agreement was in effect, Goldman failed to use “commercially reasonable efforts” to sell Netologic’s Spectrum product, but instead actively solicited sales of a competing product distributed by WSOD. Goldman’s efforts had resulted in only twelve introductions, yielding only two sales. Goldman had – in retrospect, foolishly – projected much better results.
Netologic, disappointed, to say the least, sued Goldman and WSOD in an eleven (11) count complaint, alleging, inter alia, breach of contract, conspiracy, breach of duty to a partner, unjust enrichment, breach of confidentiality and tortious interference with prospective advantage. Not wishing to be distracted from their continuing efforts to destroy the home mortgage market, Goldman responded to Netologic’s multi-count complaint with a multi-part motion to dismiss.
The Court dealt first with the claim for breach of contract. The defendants argued that a contractual “best efforts” or “reasonable efforts” provision is enforceable only if it includes “objective criteria against which a party’s efforts can be measured.” Therefore, since the subject agreement between the parties did not include any such guidelines or criteria, the “commercially reasonable efforts” provision was unenforceable as a matter of law. The Court agreed – no breach of contract.
Seeking to capitalize on the dismissal of the breach of contract claim, Goldman argued that the allegations of fraud were “indistinguishable from the covenants Goldman is alleged to have breached for purposes of Netologic’s breach of contract claims …” The judge agreed with this as well, “plaintiff’s fraud claim amounts to nothing more than an assertion that Goldman did not intend to fulfill its contractual obligations under the [agreement].”
Following a now-common theme, the Court dismissed Netologic’s claim of unjust enrichment. “The unjust enrichment claims and resulting damages alleged in the Complaint are based on the same ‘bad acts’ of defendants alleged throughout the Complaint and are predicated on the same conduct covered by the contract.” Moreover, “a claim for unjust enrichment … cannot proceed when there is an express agreement between two parties governing the subject matter of the dispute.”
Turning next to the alleged breach of duty to a partner, the defendants asserted that there simply was no partnership relation between themselves and Netologic, pointing to the express – this isn’t a partnership – provision in the agreement. Netologic, in turn, pointed to a single email exchange between the presidents of the respective parties, wherein the Netologic president had written, “I love this partnership!!! *** On a more serious note, many thanks, not only for lunch but the enormous amount of time you have been dedicating to getting us up and running.” The Goldman president responded, “[w]e are partners! Look forward to even more fun working together.” Apparently, wishful thinking and self-serving, jocular writings do not outweigh express contractual provisions. The Court found no partnership existed and, hence, there could be no breach of duty to a partner.
The count alleging conspiracy got exceptionally short shrift. “Since there is no allegation of any specific corrupt agreement or scheme among the defendants in which they jointly participated, this course of action must be dismissed …”
The count alleging breach of the duty of confidentiality fared no better, as “Netologic has failed to articulate the alleged confidential information that [the defendants are] claimed to have disseminated to … third parties.”
Finally, the count alleging tortious interference with prospective advantage was dismissed because “Netologic failed to allege any specific business relationship that was interfered with …”
So to sum it up, because the contract failed to set any performance standard – the “commercially reasonable efforts” – there was no breach of contract. But, because there was a contract, there was no fraud or unjust enrichment; and, because of the contract provisions, there was no partnership and, hence, no breach of duty to a partner. Lastly, the breach of confidentiality and tortious interference with prospective advantage counts failed for lack of sufficient factual allegations in the Complaint.
It would appear that Netologic got screwed twice, once by Goldman and once by its own attorneys, who should have known better.
THE LESSON TO BE LEARNED: Often when a small company gets in bed with a much bigger company, the small company gets screwed – but not in a way to enjoy it.