Brown v. Building Engines, Inc.

Background

Michael Brown sued Building Engines, Inc. over Building Engines’s 2021 acquisition of LogCheck, a software company Brown co-founded. The transaction provided for $10 million in cash, $1 million in Building Engines equity, and a possible earnout of up to $1.5 million. The earnout depended on a formula based on contracted annual recurring revenue during a defined period.

Six months after the transaction closed, JLL acquired Building Engines. Brown alleged that Building Engines had known about the possible JLL acquisition during the LogCheck negotiations but had not disclosed it. He also alleged that Building Engines later diverted resources from LogCheck and otherwise hindered its ability to generate revenue qualifying for the earnout. Building Engines ultimately calculated the earnout as $0.

Brown’s amended complaint asserted three breach-of-contract counts, a claim for breach of the implied covenant of good faith and fair dealing, a deceptive-trade-practices claim, a claim seeking rescission based on mistake, and a fraudulent-inducement claim. Building Engines moved to dismiss Counts III through VII, but did not move against Counts I and II.

Res Judicata

Building Engines argued that Brown’s deceptive-trade-practices, rescission, and fraudulent-inducement claims were barred by res judicata, also called claim preclusion. This doctrine can prevent a party from bringing claims that were or could have been litigated in an earlier case after a final judgment on the merits.

The court rejected that argument. In the earlier related proceeding, the court had dismissed Brown’s complaint for failure to state a claim and had granted leave to amend. Brown appealed instead of amending. After the appeal, the parties entered a stipulation dismissing the earlier case without prejudice and providing that Brown would refile the amended complaint as a new action. The court concluded that the earlier dismissal without prejudice was not a final judgment on the merits and therefore did not bar the claims in this case.

Failure to State a Claim

The court dismissed Count III, which alleged that Building Engines breached the LogCheck Merger Agreement by failing to pay severance under Brown’s Offer of Employment. The Offer of Employment provided severance if Brown resigned for “Good Reason,” including after a material breach of “this Agreement.” The court held that “this Agreement” unambiguously referred to the Offer of Employment itself, not the separate LogCheck Merger Agreement. Therefore, an alleged breach of the Merger Agreement did not trigger severance under the Offer of Employment and did not support Count III.

The court dismissed Count IV, the claim for breach of the implied covenant of good faith and fair dealing. Brown’s allegations supporting that claim duplicated the allegations in Counts I and II, which alleged breaches of the Merger Agreement. Because Brown did not identify a separate gap in the contract supporting an implied-covenant claim, the court held that Count IV was subsumed within the non-dismissed contract claims.

The court also dismissed Count V, the deceptive-trade-practices claim. Under the Delaware Uniform Deceptive Trade Practices Act, the court explained, the alleged conduct must involve an ongoing pattern and the plaintiff must plead facts showing a reasonable apprehension of a future wrong. Brown alleged completed merger transactions and did not allege an ongoing pattern or a reasonable apprehension of future wrongdoing. The court also noted that one alleged injury appeared to concern JLL stakeholders rather than Brown or the former equity holders he represented.

Fraudulent Inducement and Rescission

The court dismissed Count VII, the fraudulent-inducement claim, because Brown did not plead the alleged fraud with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure. That rule requires specific details about the alleged fraud, including who made the statement, what was said, when and where it was said, and how it was misleading.

Brown identified one specific statement by Building Engines’s chief executive, Tim Curran, at a July 28, 2021 employee meeting. But the statement occurred after the LogCheck Merger Agreement had been signed and the transaction had closed, so it could not have induced Brown to enter that agreement. Brown’s other allegations identified people who allegedly made fraudulent statements but did not identify specific statements or when and where they were made.

The court dismissed Count VI because rescission is a remedy, not an independent legal claim. The court did not state a separate prejudice qualifier for that dismissal.

Disposition

Judge P. Kevin Castel granted Building Engines’s motion to dismiss. The court dismissed Count III for failure to state a breach-of-contract claim, Count IV for failure to state an implied-covenant claim, Count V for failure to state a deceptive-trade-practices claim, Count VI because rescission is a remedy rather than a claim, and Count VII for failure to plead fraudulent inducement with the required particularity. The court rejected Building Engines’s res judicata argument, and Counts I and II survived because Building Engines had not moved against them.