RvD: dismissal of 3rd party claims

As matters stood when the claim was dismissed:

11/23/2016 0078-0_3rd_amended_ih_answer
12/19/2016 0090.0_3rd_party_MTD
01/03/2017 0101.0_IH_Opposition_to_3rdP_MTD
01/10/2017 0110.0_3pD_Reply_to_IH_response_to_MTD
And then the Order:
01/17/2017 0120.0_Order_on_3rd_Party_MTD

There were three third party claims, III, IV, and V. III was kept, IV and V were struck. With respect to III, IH had presented the Compliance notice signed by Johnson, but it was undated and did not assert when it was signed. Because of that, it was not shown that IH relied on this notice to enter the Term Sheet agreement. Because the Term Sheet was heavily marked up, with the markup initialled by both Johnson and Vaughn, I assume that the Compliance was provided during or in connection with the signing of the Term Sheet, and preceded any shipment of the reactor(s) to Doral. The judge did not notice this.

The provision of the actual Term Sheet, which then revealed the lack of date (something I noted as far back as April of 2016), damaged IH’s ability to maintain the claim. However, notice: that they alleged a meeting at which the Term Sheet was signed, and what Rossi and Johnson claimed at that meeting, without proof of that (though there is a little circumstantial evidence in the JMP letterhead about “Johnson Matthew” — but this was obviously later), was enough to maintain Count III.

Less is more.

This should not be confused with failure to disclose evidence and trial intention in Discovery. By the time Discovery is complete, opposing parties should know what they are facing, with high specificity. On Planet Rossi, there has been some opinion that IH has been grandstanding. Maybe. I have seen nothing from them on this point. Dewey has been claiming that they have much more evidence than what they have asserted so far. I don’t doubt it. On the other hand, they have cluttered the Docket with, now, five copies of their AACT and similarly the exhibits, and if their motion is granted, count on a sixth. The large majority of this was not legally necessary to maintain their defense (careful denial is generally enough for that, i.e., accept whatever is true of what is claimed, and deny the rest, or claim no knowledge).

Overwhelming a Judge with masses of evidence, as distinct from presenting, clearly and concisely, precisely what the Judge needs to see to maintain a claim under dismissal rules, is a technique for alienating the Judge. So I’m puzzled., unless their goal is public relations and they have made a choice to take the hit. Yet IH does not depend for its operation on public opinion, it is heavily insulated from it. So I remain puzzled here.

As to Count IV, the FDUPTA claim, the Judge points out the law:

To state a claim for a FDUTPA violation, a plaintiff must show: (1) a deceptive act or unfair practice; (2) causation; and (3) actual damages.

As to (1), she wrote:

The crux of the alleged FDUTPA violation is the manipulation of testing and performance data in order to obtain the final $89 million payment and related payments.

That is her conclusion as to the “crux.” The claims against Fabiani and Bass are that they conspired to support a continued appearance, supporting the continued payment of expenses to Fabiani and Penon (and for Barry West). She writes:

Counter-Plaintiffs have not satisfied the first element as to Fabiani and Quantum Leap. While Counter-Plaintiffs lump Fabiani and Quantum Leap into the “FDUTPA Defendants” group, these Third-Party Defendants were not involved in the substantive acts mentioned in Count IV.

Is fraudulent support of continued “related payments” a “substantive act”?  I will need to review what IH actually claimed, searching on this particular point. There are two issues: did IH present what was needed, and did they present it skillfully, so that the Judge would immediately see what she would need to see? From the point of view of my training, Jones Day did fail on the second point, and obviously, because we see strong evidence: the opinion of the Judge. As to the first, what is remarkable here is that the Judge has ruled strictly here, not asking for or waiting for full discovery, whereas with the original IH MtD, she bent over backwards to allow Rossi opportunity to show, in discovery, sufficient evidence to carry on. Something is odd here. I am not claiming (nor do I think) she is prejudiced, though she might have some sense of allowing the obvious underdog, Rossi, every facility, the boutique lawyer Annesser faced with highly skilled and experienced counsel. She might be expecting much more from Jones Day.

At most, the Third-Party Claims suggest in conclusory fashion the failure to provide information was tantamount to affirmatively misrepresenting the nature of operations at the facility. Counter-Plaintiffs do not attribute any specific deceptive statements or acts to Fabiani or Quantum Leap.

Jones Day remains less than crystal clear on this. However, that belongs in an analysis of their new motion, not here. I will, before completing this, review the pleadings, but my impression now is that the Judge was arguably correct on this, and her ruling might still stand on appeal. However, she did not rule “with prejudice,” explicitly. I don’t know if that matters, is a ruling with no statement as to prejudice “without” or “with” prejudice? Here, she dismisses based on something missing from the pleadings. In moving for amendment, IH appears to be correct. They should be allowed to amend, but … they are on notice that the amendment should be completely clear on what they are alleging, and, this is important: no exhibits are needed. (And they don’t provide any on the specific point here, they merely make noises about utility bills, indicating, at the least, sloppy work on the part of Fabiani. “Sloppy work,” however, can cover deceptive intent. I would give them the opportunity to establish what they clearly suspect, deceptive intention, that is, initially, based on a pattern of behavior (i.e., not mere suspicion, which is not enough). If they do not show actual evidence, in or from Discovery, they would then be open for a Motion for Judgment on the part of Fabiani (and Bass, though the matter is more clear regarding Bass. He was, at least, unwittingly deceptive, if the IH claims are true, as she must assume, and that deception reasonably contributed to an IH choice to continue support for a fraudulent “test.”

The Judge does accept that the first FDUPTA test was passed as to the JMP defendants. Then,

Turning to the second and third elements, Counter-Plaintiffs fail to plausibly allege causation between Johnson’s, J.M. Products’s, and Bass’s complained-of deceptive acts and actual damages in the form of service payments, expense reimbursements, and equipment costs. 8

According to Counter-Plaintiffs, Johnson and J.M. Products contributed to the scheme by inducing the Plant’s move to Florida, while Bass allegedly made false statements about J.M. Products and the confidential operations at the facility. While these actions may have contributed to the scheme, none directly resulted in Counter-Plaintiffs’ damages.

This was strange, because her note 8 has:

8 Counter-Defendants and Third-Party Defendants charged for work and equipment related to the Plant’s operation, causing Counter-Plaintiffs to pay for expenses not truly incurred for their benefit. (See ThirdParty Claims ¶ 145; Resp. 12 n.12). These expenses at least constitute actual damages, which flowed directly from the false representation the E-Cat was performing at exceptional levels.

The damage alleged here is continued payment of expenses, not the initial expense of moving the Plant to Doral (and the accompanying loss of control and ability to supervise or closely monitor an alleged test, an issue that she seems to understand).

Plaintiffs do not allege how Bass’s statements and his posing as an employee — while misleading — directly caused Counter-Plaintiffs to believe the Plant was performing at the promised productivity rate, and hence, did not directly cause them to incur damages. As a result, Count IV is dismissed as to all Third-Party Defendants.

Her comment misses a middle position. The middle position would be that Rossi behavior would cause any reasonable person to suspect problems. However, the representations of Johnson and Bass led them to postpone confrontation; after all, if these were not misleading, then the “problems” were only in some appearance, with possible explanations other than fraud. A independent customer willing to pay $1000 per day for power, allegedly based on their own measurements, is a very strong argument for reality, and Johnson and Bass clearly contributed to that (if what IH has alleged is true).

As to Fabiani, Fabiani was their insurance policy, one might think. Again, because Fabiani was an old friend of Rossi, they might have suspected him, but they may also have thought, “We are paying him well, surely he would not defraud us, it would be unlawful.” Whether or not Fabiani actually conspired with Rossi, or was merely negligent or sloppy, would be a matter that would need to be shown. Negligence might be actionable, and that could be Count V. It would not be relevant to Count IV.

(Rossi has frequently claimed that Fabiani was one of “IH’s men” in Doral, as an argument that IH knew everything going on.)

Counter-Plaintiffs allege Fabiani and Quantum Leap breached the Quantum Leap Agreement by disregarding contractual obligations to Industrial Heat in assisting Rossi and Leonardo’s deceptive operations in Florida and failing to disclose complete and accurate information related to their work on the Plant. (See id. ¶¶ 86–88, 153–55). Third-Party Defendants argue Count V should be dismissed because: (1) it does not state a cause of action since the alleged breaches occurred after the Quantum Leap Agreement terminated on August 31, 2014; (2) the contract is void as a matter of law with regard to Fabiani; and (3) Fabiani is not bound by the entire agreement, since the Joinder only bound him to certain sections. (See Mot. 17–19). Although the first issue is dispositive, the Court addresses each argument in turn.

The Judge here relies on the 3rd Party Defendants’ claim that the USQL contract terminated. Here is an example where including the contract as an Exhibit created that appearance. This was somewhat contradicted by the Fabiani emails, which appeared to expect that the contract was in force.

What had IH asserted? 11/23/2016 0078-0_3rd_Amended_AACT — links added.

[Paragraph] 63. Shortly after the Plant was delivered, Industrial Heat retained Fabiani, who had long worked with Rossi, as an independent contractor. More specifically, on September 1, 2013, Industrial Heat entered into a Technical Consulting Agreement with USQL, through its sole member, Fabiani (“USQL Agreement”). The USQL Agreement is attached hereto as Exhibit 11. Industrial Heat engaged USQL and Fabiani – who joined the USQL Agreement in his individual capacity – to “provide services related to the manufacture and development” of the Plant and related E-Cat IP. USQL Agreement at 1. […]

83. Leonardo, Rossi, JMP, Johnson, USQL, Fabiani, and Bass also restricted access to the JMP area at the Doral location, claiming that there was a secretive manufacturing process being conducted there, when in fact it was simply recycling steam from the Plant and sending it back to the Plant as water.
84. Fabiani, USQL and Penon also played critical roles in the scheme to hide the fact that the Plant does not perform up to the standards set forth in the License Agreement.
85. The USQL Agreement imposes an affirmative obligation upon USQL and Fabiani promptly to disclose information relating to their work on the Plant or the E-Cat IP. See USQL Agreement § 7. The USQL Agreement also makes clear that information obtained by USQL or Fabiani during the course of their work under the USQL Agreement is the sole property of Industrial Heat. Id. § 6.

83 and 84 are apparently conclusory and possibly confused. How did Fabiani restrict access? 85 would rest on an allegation that the USQL Agreement was still in effect. IH did not specifically allege this. However:

88. As just one example, in late February 2016, shortly after the conclusion of the purported Guaranteed Performance test, USQL and Fabiani committed to send certain data and a report by the end of March 2016 that would “bring to light all the flaws and functional deficiencies of the system” and identify “the plant stop periods (total or partial).” In later emails, USQL and Fabiani also committed to provide Industrial Heat with the raw data that USQL and Fabiani collected while working with the Plant in Doral, Florida. Despite repeated reminders, however, USQL and Fabiani have refused to provide either the report or the raw data to Industrial Heat. See, e.g., Ex. 21.

Exhibit 21 shows that there was an ongoing relationship. In context, the default would be to assume the continuation of the prior Agreement. If IH had not asserted the Agreement as an Exhibit, creating something that any competent attorney would immediately notice (the expiration), the issue might not have come up. They would simply have claimed that there was an agreement between IH and USQL and Fabiani to provide stated services for stated compensation. If this is to be performed short-term, and if it can be established by testimony, it need not be in writing.

But there was an agreement in writing, which provided for termination and extension only with written agreement. Was IH obligated to disclose that and then deal with the detail? My opinion is no, they were not. The parties behaved as if the Agreement were continued. Classic estoppel.

IH, in Count V, again referred to the USQL Agreement, quoting part of it. They do not refer to any evidence that the agreement had been renewed. The paradox here is that a plaintiff is not required to show evidence to make an effective pleading, they must merely establish the possibility of evidence. Stating that there was an agreement could be enough. So more was less.

In the 3rd Party Motion to Dismiss, as to Count V, we have:

Although the Technical Consulting Agreement provides that it may be extended if the parties agree in writing (id.), IH has not alleged that any extension occurred nor has IH attached a copy of any written agreement extending such contract. Accordingly, based solely upon the allegations contained in the Counterclaims and Third-Party Claims, and exhibits thereto, IH’s claim for breach of contract fails. Clearly, any actions and/or inactions occurring after the stated termination of the Technical Consulting Agreement on August 31, 2014, cannot give rise to a claim for breach of contract. Moreover, by the plain and unambiguous terms of the Technical Consulting Agreement, upon termination of the Agreement, USQL and/or Fabiani had no further obligations to IH. For the foregoing reason, IH’s claim for breach of contract fails.

There is an irony here, I’ll briefly mention. The Second Amendment to the License Agreement between Rossi, IH, and Ampenergo provided that the date of the Guaranteed Performance Test was to be set by a signed agreement of the parties. Rossi did not (and has not) alleged that such an agreement exists. On the other hand, IH has never specifically raised that particular issue, there was only a hint of it in the withdrawn Motion for Judgment.

Responding to the MtD, IH had:

A. The USQL Agreement Was In Force During The Relevant Period.

USQL and Fabiani’s argument that the USQL Agreement was not in effect during 2015 and 2016 is unavailing. […] Accepted as true, the emails in Exhibit 21 demonstrate and allow the Court to draw the reasonable inference that the USQL Agreement was in effect in 2015 and early 2016, and thus Counter-Plaintiffs may allege that USQL and Fabiani breached the USQL Agreement during that time.

There is a semantic error here. The original USQL Agreement expired August 31, 2014. What the USQL attorney asserted was not that there was no agreement, but an obvious truth: without a written extension, that Agreement expired. Yet there was obviously an ongoing relationship, with IH paying Fabiani and expecting services, and Fabiani acknowledging the right of IH to services, and promising them, from Exhibit 21. IH may allege violation of an agreement, but not “the USQL Agreement,” without alleging something further, which they did not allege. The objection of the USQL attorney was an obvious one, any attorney who did not pick up on it would be incompetent, brain-dead, or both. Yet IH doesn’t face it directly. It is possible that Jones Day was unaware of the renewal, yet they would surely have asked about it. Did IH really pay over $11,000 per month with no agreement?

It seems unlikely, but it could have happened. IH vaguely asserts estoppel here. A claim of estoppel should not be vague, if I’m correct. It is not enough that IH paid Fabiani. It must have been upon an agreed expectation (written or otherwise). IH did not assert such, clearly, but relied on the Exhibits, and, as I’ve pointed out before in studying this case, and in spite of it being a common lawyer trope, Exhibits do not speak for themselves.

As might have been expected, the USQL attorney comes back with clarity. This is not Annesser.

Third Party Defendants Fabiani and USQL do not disagree with Defendants that they entered into a contractual relationship with IH to perform services, but re-assert that the Technical Consulting Agreement was not the operative agreement and did not bind any of the parties after it expired. The Agreement expressly provided: The Agreement shall commence as of September 1, 2013 and shall
continue in effect for an initial term through and including August 31, 2014 (the “Initial Term”). This Agreement shall terminate upon expiration of the Initial Term unless the parties agree in writing to extend it. (ECF No. 78, Ex. 11.) “The cardinal rule of contractual construction is that when the language of a contract is clear and unambiguous, the contract must be interpreted and enforced in
accordance with its plain meaning.”

IH may have been lulled to sleep by dealing with Annesser. The behavior of the parties after August 31, 2014, showed a continued relationship but does not, itself, show if an Agreement is being followed and, if so, what Agreement, specifically. Inventing this, if, in a conversation between Fabiani and someone with authority at IH, they verbally agreed to continue “as before,” this would be a new agreement, that merely incorporates the old one by reference. Strictly, speaking, it would not be the old agreement being enforced, but the new one. Such a new agreement may not have an expiration date, and would be, defacto, renewed and continued at will.

The Judge simply agreed with the USQL attorney, who was correct. The problem is that IH did not clearly establish what agreement was in force. Absent more specific claim, it was not the original Agreement, as the IH language implies. If it existed, it was a new agreement created mutually. If they had asserted that, the Count may have been allowed to stand. They did not.

However, I do think the Judge erred. A more proper response, my opinion, would have been to note the obvious defect and request IH to remedy it on pain of dismissal if they did not.

As this stands now, with the request to amend, they have provided evidence of renewal. What they gave before was only conclusory, “the Agreement was in force,” and was, strictly speaking, incorrect, because “the Agreement” referred to the original agreement. What was in force was an extension, now Exhibit 28.

That document also shows explicit and immediate Joinder of Fabiani. Key, however, is what is in the pleadings.

The 4th amended AACT contains the same weakness as the 3rd (and probably previous). Paragraph 85 in the 3rd refers to “the USQL Agreement” but does not state what agreement, there were probably three, probably continuous. Agreement executed what date? They do not refer, there, to the Exhibit they had provided, which was, originally, the wrong agreement, it was the old, obsolete one. They have not fixed these defects. (The fix would have modified Paragraph 84 of the draft 4th Amended AACT.)

However, under Count V, they do assert renewal — though not joinder! However, the Judge dismissed arguments based on alleged joinder issues. Fabiani is personally on the hook, if the Motion is granted.

I predict that the Judge will now allow Claim V, because, now, the basis for dismissal is clearly incorrect, and it is not clear that IH cannot appeal that dismissal to her. They can appeal it to a higher court, and could possibly win (I’d say probably), and I’m told that Judges hate to be reversed. Besides, sense of fairness and all that.