Orlando v. Nxt-ID, Inc.

Background

Michael Orlando and other stockholders of Fit Pay, Inc. sold Fit Pay to Nxt-ID under a merger agreement. The agreement provided that the sellers would receive an earnout payment equal to 12.5% of defined gross revenue from October 2017 through September 2021. It also said that the payment could not be reduced because of an internal ownership, organizational, or operational change within Nxt-ID, and that Nxt-ID could not act primarily to reduce or eliminate the payment. The agreement did not require Nxt-ID to maximize the earnout payment and allowed decisions based on normal business considerations.

Nxt-ID later sold Fit Pay to Garmin for $3.2 million after entering into a loan agreement with CrowdOut Capital that required Nxt-ID to sell or spin off Fit Pay. Nxt-ID stopped making earnout payments after the sale. The plaintiffs sued Nxt-ID, Garmin, and CrowdOut. The court had previously granted Garmin’s and CrowdOut’s motions to dismiss. The remaining claim against Nxt-ID alleged breach of the merger agreement.

Nxt-ID also asserted four counterclaims against Orlando: breach of contract, breach of fiduciary duty, negligent misrepresentation, and prima facie tort. Nxt-ID alleged that Orlando misrepresented Fit Pay’s business prospects, failed to act in Nxt-ID’s best interests, interfered with efforts to sell Fit Pay, and pursued claims against Garmin and CrowdOut to harm Nxt-ID.

Ruling on the Earnout Claim

The court granted Nxt-ID summary judgment, which resolves a claim without a trial when there is no genuine dispute about a material fact and the moving party is entitled to judgment under the law. The court held that the merger agreement unambiguously did not require Nxt-ID to continue making earnout payments after it sold Fit Pay to an outside company.

The court relied on the agreement’s references to internal changes within Nxt-ID and its use of revenue derived from Nxt-ID’s use of Fit Pay’s technology. Once Garmin owned Fit Pay, Nxt-ID could no longer prepare the contractually required revenue statement based on its own revenue from the technology. The court also found that the undisputed reason for the sale was Nxt-ID’s financial condition and the CrowdOut loan requirement, not primarily an effort to eliminate the earnout payments. The court therefore concluded that Nxt-ID did not breach the merger agreement.

Ruling on the Counterclaims

The court granted Orlando’s motion to dismiss Nxt-ID’s counterclaims. A motion to dismiss tests whether the pleaded facts, accepted as true for this purpose, state a legally sufficient claim.

Breach of contract. Applying Delaware law, the court held that Nxt-ID could not enforce Orlando’s employment agreement because Nxt-ID was not a contracting party, was not Fit Pay’s successor, and was not alleged to be an intended beneficiary. The agreement identified Fit Pay and Orlando as the parties and required Orlando to promote the interests of Fit Pay, not Nxt-ID. The court also held that the code of conduct was not an enforceable contract because it expressly stated that it was not an employment contract.

Negligent misrepresentation. The court held that Nxt-ID did not adequately allege the required special relationship, false statement or omission, reasonable reliance, or resulting loss. The alleged pre-merger statements were made before the required relationship existed; the alleged post-merger omission was not described with enough factual detail; and the allegations about information given to Garmin did not show that Nxt-ID relied on it. The allegation that Orlando made a false statement to Nxt-ID’s board also did not allege reliance or a resulting loss.

Breach of fiduciary duty. The court recognized that Orlando owed Nxt-ID a duty of loyalty as a member of its board. But it held that Nxt-ID did not plausibly allege a breach. Nxt-ID did not explain what Orlando should have disclosed about his earlier financial projections, and its allegations that Orlando pursued the Garmin transaction for personal benefit were conclusory. The court also noted that Nxt-ID’s board approved the transaction despite Orlando’s objection.

Prima facie tort. Under New York law, this claim requires intentional harm, special damages, no justification, and an otherwise lawful act. The court held that Nxt-ID’s allegations showed Orlando was motivated by money or other self-interest, not by the sole intent to harm Nxt-ID. The court also explained that New York generally does not allow a retaliatory lawsuit based on the filing of an earlier civil action.

Disposition

The court granted Nxt-ID’s motion for summary judgment. It also granted the plaintiffs’ motion to dismiss Nxt-ID’s counterclaims. The counterclaims were dismissed with prejudice, and the court directed the clerk to terminate the motions and close the case.