Label Health v. United American Supply

Background

Label Health, LLC, a New York limited liability company, brokered personal protective equipment during the COVID-19 pandemic. It alleged that United American Supply, LLC, a Kentucky limited liability company, and its members David Underwood, Arleta Taylor, and Al Taylor induced Label to place orders for disposable nitrile gloves by making false statements about UAS’s relationships with McKesson and broker Diem Nguyen, and by assuring Label that its 50% deposit would be held in escrow.

Label alleged that it ordered about $6.54 million in PPE and paid UAS $2.37 million. UAS delivered no PPE. UAS returned some money, and Label alleged that $1,075,094.50 remained unpaid when it filed its amended complaint.

The amended complaint asserted breach of contract and two fraudulent-inducement counts. Count Two alleged that UAS, Underwood, and Al Taylor falsely described their relationships with the manufacturer and Nguyen. Count Three alleged that UAS and Arleta Taylor falsely represented that an escrow account would be created. Label conceded that Count Three was not viable.

Personal jurisdiction

Defendants moved under Federal Rule of Civil Procedure 12(b)(2) to dismiss for lack of personal jurisdiction. The court did not decide whether defendants’ New York contacts alone would establish jurisdiction. Instead, it held that the confidentiality agreement’s forum-selection clause supplied jurisdiction.

The clause gave state or federal courts in New York County exclusive jurisdiction over any lawsuit relating in any way to the PPE transaction, confidential information, or the agreement. The court held that the clause covered Label’s claims because they concerned the sale and distribution of PPE. It also held that all defendants were bound by the clause, including the Taylors, even though the opinion states that Underwood signed the agreement for UAS.

Fraudulent inducement

Defendants alternatively sought dismissal of Count Two under Rule 12(b)(6), which tests whether a complaint states a legally sufficient claim. The court applied New York law, under which fraudulent inducement requires a material false statement or omission, knowledge of falsity, an intent to defraud, reasonable reliance, and resulting damage.

The court held that the alleged statements about 25-year relationships with the manufacturer and Nguyen were concrete statements capable of being true or false, not non-actionable “puffery.” It also held that the allegations plausibly showed materiality because the statements concerned UAS’s ability to fulfill a large, time-sensitive PPE order.

The court rejected dismissal based on lack of reasonable reliance at the pleading stage. It noted that the transaction appeared informal and quickly arranged and that the complaint did not establish that Label had unusually heightened duties to investigate. The court also noted that Label’s failure to investigate after learning that UAS’s relationship was with Nguyen rather than the manufacturer could become relevant after discovery. Whether Label reasonably relied on the statements was fact-intensive and could not be resolved on the complaint alone.

Disposition

The court denied defendants’ motion to dismiss for lack of personal jurisdiction. It denied the motion to dismiss Count Two, the fraudulent-inducement claim against UAS, Al Taylor, and Underwood, without prejudice to defendants’ right to seek summary judgment after discovery. On consent, the court dismissed Count Three, the fraudulent-inducement claim concerning the escrow agreement against UAS and Arleta Taylor. The court did not decide the merits of Label’s breach-of-contract claim in this opinion. It also denied Label’s request at that time for leave to file a second amended complaint adding a conversion claim.

Judge Paul A. Engelmayer directed the Clerk of Court to terminate the pending motion and amend the caption to use the spelling “Arleta Taylor.”