Toa Systems, Inc. v. International Business Machines Corporation

Background

Toa Systems, Inc. sued International Business Machines Corporation (IBM), which the opinion identifies as successor in interest to WSI Corporation. Toa asserted New York state-law claims for breach of contract and conversion. The court had subject-matter jurisdiction under 28 U.S.C. § 1332(a).

Toa alleged that it entered an agreement with WSI on January 11, 2007. The agreement allowed WSI to use Toa’s data sensors and technology to develop, install, and maintain a worldwide lightning data transmission platform. The parties amended the agreement three times. Although the agreement was suspended from January 2013 through December 2016, it resumed in January 2017 and was expected to continue until 2022. The opinion states that IBM acquired WSI sometime after September 2014 and thereby acquired WSI’s contract with Toa. IBM terminated the contract on June 22, 2017.

Toa alleged that, after the termination, IBM’s customers continued using Toa’s goods and services without compensating Toa. In its second amended complaint, Toa alleged that IBM failed to provide monthly usage reports, failed to make annual payments of $25,000 for 2017 and 2018, and failed to compensate Toa for customers’ use of Toa’s software after the termination.

Breach-of-Contract Claims

IBM moved to dismiss the second amended complaint under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. The court accepted Toa’s well-pleaded factual allegations as true for purposes of the motion and drew reasonable inferences in Toa’s favor.

The court held that Toa plausibly alleged the elements of breach of contract: an agreement, Toa’s performance, IBM’s breach, and resulting damages. Although the complaint was “hardly a model of clarity,” the court found that it alleged IBM breached the agreement by unilaterally terminating it and stopping payments and monthly reports. The court also found that allegations about IBM customers’ continued use of Toa’s software supported the claims.

The court rejected IBM’s arguments that the claims should be dismissed because Toa had not used the contract’s audit provision, because a contract provision limited the annual fee to IBM’s internal use of Toa’s lightning data, and because Toa had not adequately alleged damages. The court treated the audit issue and the scope of the annual-fee obligation as factual disputes unsuitable for resolution on a motion to dismiss. It also held that Toa adequately alleged damages by alleging that IBM failed to pay amounts it owed; Toa did not yet have to specify the precise amount or measure of damages.

The court further rejected IBM’s argument that IBM’s termination defeated any contract claim based on later conduct. The court noted that the parties expected the agreement to run until 2022 and found that Toa plausibly alleged IBM’s unilateral termination did not relieve IBM of its obligations to provide payments and monthly reports.

Conversion Claim

The court granted IBM’s motion to dismiss the conversion claim. Under New York law, conversion generally involves intentionally and without authority exercising control over someone else’s personal property in a way that interferes with the owner’s right to possess it. But a conversion claim does not arise when the plaintiff is essentially seeking enforcement of a contract.

The court found that Toa’s conversion claim was coextensive with its contract claims. Both claims concerned the continued use of Toa’s software after June 2017 and sought damages for failure to pay for Toa’s goods and services. Because Toa did not plead a separate wrong apart from the alleged contract breach, the conversion claim was not plausibly stated.

Leave to Amend and Disposition

Toa asked for permission to file a third amended complaint. The court denied that request. It found that Toa could not plausibly allege a conversion claim and that another amendment would cause undue delay and undue prejudice to IBM because Toa had already amended its pleading twice.

The court concluded that IBM’s motion to dismiss was granted in part and denied in part. Toa’s breach-of-contract claims were allowed to proceed, while the conversion claim was dismissed. The court also denied Toa’s request for leave to file a third amended complaint. IBM was ordered to answer the second amended complaint by June 9, 2020.