Knightek, LLC v. Jive Communications, Inc. ( 2020 )

IN THE SUPREME COURT OF THE STATE OF DELAWARE
KNIGHTEK, LLC, §
§ No. 570, 2018
Plaintiff Below, §
Appellant, § Court Below: Superior Court
§ of the State of Delaware
v. §
§ C.A. No. N18C-04-260
JIVE COMMUNICATIONS, INC., §
§
Defendant Below, §
Appellee. §
Submitted: November 20, 2019
Decided: January 27, 2020
Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, Justices; and
SLIGHTS, Vice Chancellor,* constituting the Court en Banc.
Upon appeal from the Superior Court. REVERSED.
Ryan P. Newell, Esq., (argued) Lauren P. DeLuca, Esq., CONNOLLY
GALLAGHER LLP, Wilmington, Delaware; Attorneys for Plaintiff-Appellant
KnighTek, LLC.
Rudolf Koch, Esq., Robert L. Burns, Esq., (argued) Nicole K. Pedi, Esq.,
RICHARDS, LAYTON & FINGER P.A., Wilmington, Delaware; William Trach,
Esq., LATHAM & WATKINS LLP, Boston, Massachusetts; Attorneys for
Defendant-Appellee Jive Communications, Inc.
SEITZ, Chief Justice:
*
Sitting by designation under Del. Const. art. IV, § 12.
As alleged in the complaint, when Erik Knight sold KnighTek, LLC to Jive
Communications, Inc., Jive agreed to pay Knight $100,000 upfront and a revenue-
based payment stream capped at $4.6 million. The continuing payments would
convert to a lump sum payment if Jive’s ownership changed. Years later, Jive
offered to cash out KnighTek for $1.75 million, a substantial discount from the
remaining cap amount. According to Knight, Jive’s representatives told him the
buy-out money depended on KnighTek accepting the proposal right away. If it did
not, Jive would use the funds for other buyouts. Jive’s representatives also told
Knight if he turned down the offer, it would take five years for Jive to make the
remaining payments. Two days after KnighTek agreed to accept $1.75 million, Jive
announced publicly it was being acquired by LogMeIn for $342 million—a change
of control that according to KnighTek would have netted it a $2.7 million immediate
payment under their earlier agreement.
Believing it had been misled and shorted about $1 million, KnighTek filed
suit against Jive, alleging that Jive fraudulently induced KnighTek to take the
discounted payout. According to KnighTek, Jive and its representatives knew about
the imminent change of control, misrepresented the availability of buyout funds, and
duped KnighTek into accepting a discount when KnighTek could have received
almost $1 million more and an immediate payment after the LogMeIn transaction.
2
The Superior Court dismissed the complaint. As the court held, some of Jive’s
alleged misrepresentations lacked particularity and others failed to state a claim
under Utah law, the law governing their agreements. We disagree, and find that,
viewing the complaint in the light most favorable to KnighTek, accepting as true its
well-pleaded allegations, and drawing all reasonable inferences that logically flow
from those allegations, KnighTek alleged fraud with sufficient particularity and
stated a claim for fraudulent misrepresentation under Utah law. Thus we reverse the
Superior Court’s dismissal and remand to the Superior Court for further proceedings.
I.
As alleged in the complaint, in March 2014, Jive purchased certain
communication equipment and services businesses from KnighTek and a related
entity. Under the Asset Purchase Agreement, KnighTek received $100,000 up front,
payments based on future revenues subject to a $4,616,063.10 Cap Amount,1 and
warrants for 15,000 shares of Jive common stock if Jive met certain revenue goals.
A related Agency Agreement accelerated the unpaid balance up to the Cap Amount
1
The parties dispute the amount owed. KnighTek alleged that the Cap Amount, as defined under
the Agency Agreement, was $4,616,063.10. App. to Opening Br. at A13 (Complaint ¶ 13, n.1
(hereinafter “Compl.”)). Jive disputes this figure and points out that the Agency Agreement
defines the Cap Amount as the product of certain financials, but “it does not state the Cap Amount
directly.” Appellee’s Answering Br. at 7–8 (citing App. to Opening Br. at A57). This Court need
not determine the correct amount of the Cap Amount to resolve this appeal.
3
upon any “Change of Control,” which included a sale of substantially all of Jive’s
assets or a change in more than 50% of Jive’s ownership.2
In September 2017, Knight, the sole owner of KnighTek before Jive’s
acquisition, contacted Jive to ask whether Jive would consider an accelerated lump-
sum payment in return for a discount on the remaining Cap Amount. Jive declined
Knight’s proposal. Several months later, however, Jive’s management changed their
mind. On January 25, 2018, Jive’s Vice President of Finance, Samuel Simmons,
sent Knight an email offering to accelerate the unpaid balance of the Cap Amount in
exchange for a discount. Simmons initially proposed discounting the $2,748,442.89
owed to a $964,928 lump-sum payment.3 “[I]nstill[ing] a sense of urgency,”
Simmons also wrote that “[t]he proposal outlined above is based on availability of
funds across multiple acquisitions and with a goal to complete by the end of January
2018.”4
Negotiations between Simmons and Knight moved quickly. According to the
complaint, “Simmons repeatedly emphasized that Jive had limited funds and that
Jive was considering several other discount acceleration requests from other
businesses that Jive had acquired.”5 For example, in a January 25, 2018 email,
2
App. to Opening Br. at A46, A52 (Agency Agreement); App. to Opening Br. at A13 (Compl. ¶¶
14–15).
3
Id. at A14 (Compl. ¶¶ 19–20).
4
Id. (Compl. ¶ 21).
5
Id. (Compl. ¶ 22).
4
Simmons repeated his statement that he aimed to close “by the end of January” and
stated that he was “juggling a number of other offers (some of which have already
been accepted), so the sooner the better as availability of funds depends on who
moves quickest and how beneficial the economics are.”6 Also, KnighTek alleged
that at some point during negotiations Jive represented “that if he failed to
immediately agree to a discounted lump-sum payment, he would have to wait more
than five years before the Cap Amount due would be fully satisfied.”7
According to the complaint, Jive had been negotiating a sale to another
company, LogMeIn, the entire time, and Jive’s representatives knew about the
acquisition while negotiating with Knight. This sale transaction would trigger the
“Change of Control” provision under the Agency Agreement, leading to an
acceleration of the amount due under the Asset Purchase Agreement.
After some back and forth on price, Simmons and Knight reached a tentative
agreement. On February 5, 2018, Simmons sent Knight an email stating that the Jive
board agreed to buy out KnighTek’s interest for $1,750,000. He emphasized again
the need for speed: “I was able to get your buyout approved conditional on speedy
completion, or they want me to move forward with someone else at this time given
our goal date of the 31st that we’re a little behind on.”8 On February 6, after
6
Id. at A14–15 (Compl. ¶ 23).
7
Id. at A17 (Compl. ¶ 37).
8
Id. at A15 (Compl. ¶ 24).
5
negotiating other terms, the parties executed the Acceleration Agreement. Jive
wired $1,750,000 to KnighTek on February 7.
On February 8, a press release announced that LogMeIn was acquiring Jive
for $342 million. According to the complaint, “[t]he preparation necessary to
negotiate a large-scale acquisition of a company such as Jive requires weeks, if not
months, of lead time.”9 After learning about the LogMeIn acquisition, KnighTek
filed suit against Jive in the Superior Court for rescission of the Acceleration
Agreement based on fraudulent misrepresentation and fraudulent concealment. The
dispute is governed by Utah law.10 The crux of KnighTek’s complaint is that “Jive
intentionally misrepresented to [Knight] that if he failed to immediately agree to a
discounted lump-sum payment, Jive would use its limited funds to pay other
businesses that were willing to accept a discounted payoff of monies still due from
their acquisition by Jive,” and that KnighTek “would have to wait more than five
years before the Cap Amount due would be fully satisfied.”11
Jive moved to dismiss under Superior Court Civil Rule 9(b) for failure to plead
fraud with particularity and under Rule 12(b)(6) for failure to state a claim. As the
9
Id. at A16 (Compl. ¶ 32).
10
The Acceleration Agreement contains a Utah choice of law clause, and the parties do not dispute
that Utah law applies to KnighTek’s claims in this case.
11
Id. at A17 (Compl. ¶¶ 37–38). KnighTek also claimed that Jive owed it fiduciary duties because
KnighTek was a Jive warrant holder, and that Jive was obligated to disclose the merger even in
the absence of any misrepresentation. See id. at A18–19 (Compl. ¶¶ 48–49).
6
Superior Court described it, Jive argued that “there is no well-ple[aded] allegation
(1) of a false representation of presently existing fact, (2) that a ‘representor’ made
a statement which they knew to be false or made recklessly, or (3) that KnighTek
acted in a reasonable reliance.”12 The Superior Court granted Jive’s motion and held
that KnighTek failed to plead a number of its allegations with particularity and that
the remainder of the allegations failed to state a claim for fraud.
As to particularity, the court found that, besides the statements expressly
attributed to Simmons, the other alleged misrepresentations failed to meet the
particularity requirement because they failed to name the individual who made the
misrepresentations or the time and place they were made.13 For the representations
attributed to Simmons, the court found that “they constitute forward-looking
predictions, opinion-type statements or subjective opinions, not statements
concerning a presently existing material fact.”14 Further, the court held that
“nowhere in the [c]omplaint does KnighTek allege Simmons’[s] representations
were false, that Simmons knew them to be false, or made them recklessly, knowing
he had insufficient knowledge upon which to base such representation.”15 And
finally, the court found that KnighTek waived its ability to enforce the Change of
12
KnighTek, LLC v. Jive Commc’ns, Inc., 197 A.3d 493, 499 (Del. Sup. Ct. 2018). Jive also
addressed KnighTek’s fraudulent concealment claim, which is not on appeal.
13
Id. at 502.
14
Id. at 502–03 (citation omitted).
15
Id. at 503.
7
Control provision because the Acceleration Agreement extinguished any claim and
it “got what it negotiated and bargained for.”16 In response to a motion for
clarification by KnighTek, the Superior Court clarified that it dismissed KnighTek’s
complaint with prejudice.17
II.
This Court reviews the Superior Court’s dismissal of KnighTek’s complaint
de novo.18 “Dismissal is appropriate only if it appears with reasonable certainty that,
under any set of facts that could be proven to support the claims asserted, the plaintiff
would not be entitled to relief.”19 We must “view the complaint in the light most
favorable to the non-moving party, accepting as true its well-pled allegations and
drawing all reasonable inferences that logically flow from those allegations.”20 We
may “not, however, simply accept conclusory allegations unsupported by specific
facts, nor . . . draw unreasonable inferences in the plaintiff’s favor.”21
16
Id. at 505.
17
Opening Br. Ex. B.
18
Clinton v. Enter. Rent-A-Car Co., 977 A.2d 892, 895 (Del. 2009).
19
Id. (citing Feldman v. Cutaia, 951 A.2d 727, 731 (Del. 2008)) (internal quotations omitted).
20
Id.
21
Id.
8
A.
KnighTek argues that the Superior Court erred when it dismissed its
fraudulent misrepresentation claim.22 According to KnighTek, its complaint
“addresses each element required under Utah law to adequately state a claim for
fraudulent misrepresentation, including allegations specifying the time, place, and
contents of Jive’s representations, the facts misrepresented, the identity of the person
making the misrepresentations, and what Jive gained as a result of its malfeasance,
as required under Rule 9(b).”23 KnighTek points to Jive’s misrepresentation of “its
financial condition to cajole KnighTek to accept its discounted offer,” while
knowing “that it was only days away from its February 7, 2018 announcement of its
$342 million sale to LogMeIn which would trigger its obligation to pay KnighTek
in full,” and its “repeated[] warn[ings]” that KnighTek “would not see full payment
for at least another five years” even though the LogMeIn sale was imminent.24
Jive responds that the Superior Court properly dismissed KnightTek’s
complaint because the complaint “did not allege any false statements regarding
presently existing material facts.”25 Jive argues that the complaint did not allege that
22
KnighTek does not appeal the dismissal of the fraudulent concealment claim. Oral Argument
Video at 2:34–58, https://livestream.com/accounts/5969852/events/8882483/videos/199124463
(“And just to avoid any confusion that may have arisen from the briefing, KnighTek is only
pursuing its claim as to fraudulent misrepresentation.”).
23
Opening Br. at 3–4.
24
Id. at 4–5.
25
Answering Br. at 4.
9
Simmons’s statements “were knowingly false,” and at any rate, the statements were
“non-actionable opinion or puffery-type statements” or “forward-looking
projection[s].”26 Jive also argues that the Superior Court correctly determined that
certain of KnighTek’s allegations fail Rule 9(b)’s particularity requirement.
B.
Under Superior Court Civil Rule 9(b), when pleading fraud claims, “[t]he
circumstances constituting fraud . . . shall be stated with particularity,” although
“[m]alice, intent, knowledge and other condition of mind of a person may be averred
generally.”27 Under the particularity requirement, a plaintiff must plead “the time,
place, and contents of the false representations, as well as the identity of the person
making the representation.”28
We find that KnighTek has pled its fraud claim with sufficient particularity to
meet the purpose of Rule 9(b)—“to enable an opponent to be informed of charges
so as to be able to prepare a defense to them.”29 First, for Simmons’s alleged
misrepresentations—that Jive had limited funds to buy out KnighTek and Jive was
26
Id.
27
Super. Ct. Civ. R. 9(b).
28
Nutt v. A.C. & S., Inc., 466 A.2d 18, 23 (Del. Super. Ct. 1983) (internal quotations omitted); see
also Browne v. Robb, 583 A.2d 949, 955 (Del. 1990) (“In cases of fraud the particularity required
by Rule 9(b) includes ‘the time, place and contents of the false representations . . . .’” (quoting
Nutt, 466 A.2d at 23)).
29
Chesapeake and Potomac Tel. Co. of Md. v. Chesapeake Utils. Corp., 436 A.2d 314, 338 (Del.
1981); see also Brown, 583 A.2d at 955 (“The entire purpose of Rule 9(b) is to put the defendant
on notice so that he can adequately prepare a defense.”).
10
satisfying requests on a first-come, first-served basis—Jive does not contest the
Superior Court’s finding that these alleged representations meet Rule 9(b)’s
requirements. The complaint attributes them to specific, dated emails from
Simmons—providing the time, place, contents, and representor’s identity.30
Second, we disagree with the Superior Court that KnighTek failed to allege
the other misrepresentations with sufficient particularity. The Superior Court
decided that Jive’s alleged misrepresentations directed to the time KnighTek would
have to wait to receive payment were deficient because KnighTek did not name the
individual(s) who made the other representations or the time or place of the
misrepresentations.31 The complaint, however, attributes the alleged
misrepresentation to “Jive.”32 While Jive is not a specific individual, when the
complaint is read as a whole, the time, place, and individuals involved are set forth
in the complaint. According to the complaint, the misrepresentations occurred
during the Acceleration Agreement negotiations;33 negotiations occurred with
Simmons and Jive’s General Counsel;34 and they occurred over a short period of
time, from January 25 to February 7 of 2018.35 The complaint also refers to
30
KnighTek, 197 A.3d at 502.
31
Id.
32
App. to Opening Br. at A10 (Compl. ¶ 2), A17 (Compl. ¶¶ 37, 40).
33
Id.
34
Id. at A15 (Compl. ¶ 25), A14–15 (Compl. ¶¶ 20–24).
35
Id. at A14 (Compl. ¶ 22), A16 (Compl. ¶ 30).
11
Simmons as speaking for Jive.36 While the complaint could have been more specific
about the details of the alleged misrepresentations, we find that the allegations were
sufficiently particular to put Jive on notice that at least Simmons made such
misrepresentations during the Acceleration Agreement negotiations. Thus, viewing
the complaint in the light most favorable to KnighTek, we find that the complaint
satisfies Rule 9(b)’s particularity requirement.
C.
The Superior Court also found that KnighTek failed to plead adequately
fraudulent misrepresentation. To state a claim for fraudulent misrepresentation
under Utah law, a plaintiff must allege:
(1) that a representation was made (2) concerning a presently existing
material fact (3) which was false and (4) which the representor either
(a) knew to be false or (b) made recklessly, knowing that there was
insufficient knowledge upon which to base such a representation, (5)
for the purpose of inducing the other party to act upon it and (6) that the
other party, acting reasonably and in ignorance of its falsity, (7) did in
fact rely upon it (8) and was thereby induced to act (9) to that party’s
injury and damage.37
Applying these requirements here, KnighTek must have alleged that the
representations were false, concerned presently existing material facts, the
36
Id. at A14 (Compl. ¶ 22) (“Mr. Simmons and [Knight] thereafter engaged in negotiations . . . in
which Mr. Simmons repeatedly emphasized that Jive had limited funds and that Jive was
considering several other discount acceleration requests from other businesses that Jive had
acquired.”).
37
Gold Standard, Inc. v. Getty Oil Co., 915 P.2d 1060, 1066–67 (Utah 1996); see also Pace v.
Parrish, 247 P.2d 273, 274–75 (Utah 1952).
12
representor knew they were false, and KnighTek acted reasonably and in ignorance
of their falsity.38
i.
Starting with the falsity issue, the Superior Court held that KnighTek did not
allege that Simmons’s statements about Jive’s limited funds and satisfaction of a
limited number of requests were false.39 We disagree. Although the complaint does
not use the words “this representation was false,” it does allege that Jive
“misrepresented” those facts.40 To call something a “misrepresent[ation]” means
that it is false.41 To hold otherwise would elevate form over substance—relying on
the technical absence of a particular word when the actual words used convey the
same meaning.42
Further, a reasonable inference drawn from the complaint is that Jive was not
short of cash and thus was not satisfying acceleration requests on a first-come, first-
served basis. Instead, Jive made those misrepresentations to dupe KnighTek into a
discounted payment when shortly thereafter KnighTek would be entitled to receive
38
The Superior Court did not address the allegations attributed to Jive because it found that they
did not meet the particularity requirement. Because we find that they do meet the requirement,
and we review this dismissal de novo, we consider these allegations on appeal.
39
KnighTek, 197 A.3d at 503.
40
See, e.g., App. to Opening Br. at A17 (Compl. ¶¶ 37–38).
41
See Misrepresentation, Black’s Law Dictionary (11th ed. 2019) (“The act or an instance of
making a false or misleading assertion about something, usu. with the intent to deceive.”).
42
See Super. Ct. Civ. R. 8(f) (“All pleadings shall be so construed as to do substantial justice.”).
13
almost $1 million more. The same reasoning applies to Jive’s alleged
misrepresentation that KnighTek would have to wait five years to be paid the net
Cap Amount.43
The Superior Court also found the complaint deficient because KnighTek did
not allege that Simmons knew his statements were false. But the complaint alleged
that “the officers and directors of Jive, including the individuals who negotiated the
Acceleration Agreement with [Knight], knew at all relevant times that a Change of
Control was imminent which would have required Jive to make full payment to
KnighTek of the Cap Amount due.”44 It is not necessary under Rule 9(b) to plead
knowledge or intent with particularity,45 and as an “individual[] who negotiated the
Accelerated Agreement with [Knight],” that allegation includes Simmons.46
KnighTek also alleged that Jive “intentionally” misrepresented its financial
position and its intention to pay off other businesses—meaning the representor, Jive,
intended to provide false information.47 The same is true for Jive’s representation
that KnighTek would have to wait five years for a full payout. KnighTek alleged
43
Jive contests the importance of the merger announcement because an announcement would not
have triggered the Change of Control provision. Answering Br. at 13. But Jive does not contest
that the actual merger would have been the triggering event under the Change of Control provision,
and the merger occurred on April 3, 2018, two months after the announcement.
44
App. to Opening Br. at A16 (Compl. ¶ 35).
45
See Super. Ct. Civ. R. 9(b) (“Malice, intent, knowledge and other condition of mind of a person
may be averred generally.”).
46
App. to Opening Br. at A16 (Compl. ¶ 35).
47
Id. at A17 (Compl. ¶ 38).
14
that Jive “intentionally misrepresented,”48 and the individual negotiators knew “at
all relevant times that a Change of Control was imminent.”49 A reasonable inference
from those allegations is that the representations were false and that the representor
knew they were false.
ii.
The Superior Court also held that Simmons’s representations did not concern
any presently existing material fact. Instead, the court found that these statements
were “forward-looking predictions, opinion-type statements or subjective opinions,”
which “do not constitute fraud” under Utah law.50
Although subjective opinions and forward-looking predictions generally do
not constitute actionable fraud under Utah law,51 there is a distinction between
forward-looking predictions or opinions that are subject to uncertainty and
predictions or opinions that the speaker knows are false. For example, in Crookston
v. Fire Insurance Exchange,52 a representative from the defendant insurance
company told the plaintiff insureds that the insurance company was not yet in a
48
Id. (Compl. ¶ 37).
49
Id. at A16 (Compl. ¶ 35).
50
KnighTek, 197 A.3d at 502.
51
See Wright v. Westside Nursery, 787 P.2d 508 (Utah Ct. App. 1990) (finding that the defendant’s
representation about a property’s value was not actionable as fraud because the evidence supported
that the defendant’s valuation was done in good faith as it was consistent with property tax
assessments and otherwise lacked evidence of bad faith).
52
817 P.2d 789, 800 (Utah 1991).
15
position to settle certain claims, and he would include the plaintiffs in any settlement
negotiations. It turned out, however, that the insurance representative knew that he
was prepared to settle and, contrary to his assurances, did so the same day without
the plaintiffs’ involvement in an agreement with the loss payee.53 The Utah Supreme
Court held that such evidence supported a jury’s finding that the insurance
representative’s statements were actionable fraud.54
In this case, KnighTek alleged that Simmons represented that “Jive had
limited funds[,] . . . Jive was considering several other discount acceleration requests
from other businesses,” and Jive’s “availability of funds depend[ed] on who moves
quickest.”55 These representations, along with the allegations about the five-year
wait as an alternative to a discounted payment, are no less representations
concerning “presently existing material fact[s]” than the representations in
Crookston. Like the company in Crookston that represented the company’s
readiness to settle certain insurance claims, Simmons represented that Jive’s position
53
Id. at 793–95, 800.
54
Id. at 800; see also Cerritos Trucking Co. v. Utah Venture No. 1, 645 P.2d 608, 611 (Utah 1982)
(“The jurisprudence of this state has long recognized as actionable deceit a promise accompanied
by the present intention not to perform it, made for the purpose of deceiving the promissee, thereby
inducing him to act where otherwise he would not have done so . . . .”); Andalex Res., Inc. v. Myers,
871 P.2d 1041, 1047 (Utah Ct. App. 1994) (“A misrepresentation of intended future performance
is not a ‘presently existing fact’ upon which a claim for fraud can be based unless a plaintiff can
prove that the representor, at the time of the representation, did not intend to perform the promise
and made the representation for the purpose of deceiving the promisee.”).
55
App. to Opening Br. at A14–15 (Compl. ¶¶ 22–23), A17 (Compl. ¶ 38) (“Jive intentionally
misrepresented to [KnighTek] that if he failed to immediately agree to a discounted lump-sum
payment, Jive would use its limited funds to pay other businesses that were willing to accept a
discounted payoff . . . .”).
16
did not allow it to satisfy all acceleration requests. Jive also represented that
KnighTek would have a five-year wait for full payment if it did not accept the
discount. In both cases, the speaker made what could be construed as a forward-
looking statement but the representor knew it would not occur—in Crookston, the
plaintiffs would be in settlement negotiations; here, Jive was juggling multiple
acceleration requests with limited funds, and KnighTek would have to wait five
years for payment if it did not accept the discount.
Jive’s representations were objective and verifiable.56 They describe how Jive
intended to use the funds and what would happen if KnighTek did not accept the
discount quickly. Viewing the facts in the light most favorable to KnighTek, the
reasonable inference is that KnighTek’s allegations involve presently existing
material facts.
iii.
Turning to whether KnighTek acted reasonably and in ignorance of the
representations’ falsity, KnighTek alleged that it acted in ignorance of the
representations’ falsity.57 The Superior Court found, however, that KnighTek did
56
See Boud v. SDNCO, Inc., 54 P.3d 1131, 1135–36 (Utah 2002) (finding that a statement was an
affirmation of fact if it was “objective in nature, i.e., verifiable or capable of being proven true or
false,” as opposed to an opinion, which is subjective and open to reasonable disagreement).
57
App. to Opening Br. at A17–18 (Compl. ¶¶ 42–43) (KnighTek “was purposefully kept in
ignorance of the impending Change of Control” and “relied on Mr. Simmons’[s]
misrepresentations and was thereby induced to sign the Acceleration Agreement.”).
17
not act reasonably. According to the court, because KnighTek was negotiating at
arm’s length with Jive, it “was obligated to take reasonable steps to inform itself
with respect to its preexisting contractual rights”—the Change of Control
provision.58 As the court held, the complaint did not allege that KnighTek performed
any due diligence into whether the Change of Control provision might soon be
triggered.59 As a result, the court concluded that “KnighTek cannot reasonably rely
on a representation it failed to seek.”60 We disagree.
The Superior Court correctly observed that Utah law, like the law of most
jurisdictions, generally expects that a party engaged in arms-length contract
negotiations will make reasonable inquiries of its contractual counter-party before
committing to a final agreement.61 But a party need not make inquiry when the
counter-party “knows [certain facts] to be necessary to prevent his partial or
ambiguous statement of the facts from being misleading.”62
The misrepresentations alleged in the complaint, taken together, support a
reasonable inference that Jive led KnighTek away from any inquiry by intentionally
concealing the LogMeIn sale negotiations and pressing for a quick decision on the
58
KnighTek, 197 A.3d at 503.
59
Id. at 503–04.
60
Id. at 504.
61
Id. at 503 (citing Sugarhouse Finance Co. v. Anderson, 610 P.2d 1369, 1373 (Utah 1980)).
62
First Sec. Bank of Utah N.A. v. Banberry Dev. Corp., 786 P.2d 1326, 1330–31 (Utah 1990)
(citing RESTATEMENT (SECOND) OF TORTS § 551 (1977)).
18
discounted cash-out proposal. As noted earlier, Jive represented that its ability to
pay depended on the availability of funds and KnighTek’s speed.63 The alternative
to taking a discounted payment was to wait five years for full payment.64 These
allegations raise a fair inference that, from KnightTek’s perspective, Jive could only
make these representations truthfully if Jive were not contemplating an imminent
Change of Control transaction that would trigger a right to full payment. Because
KnighTek reasonably relied on the truthfulness of Jive’s affirmative representations
about the availability of funds and its alternative, the complaint raises a fair inference
that KnighTek likewise reasonably relied on the implicit representation that there
was no imminent Change of Control. If these pled facts are proven, then KnightTek
would have no reason or obligation to inquire whether any of those representations,
express or implicit, were truthful.65
63
App. to Opening Br. at A14 (Compl. ¶ 21).
64
Id. at A17 (Compl. ¶ 37).
65
See Pace, 247 P.2d at 276 (“Defendants suggest that the plaintiffs had no right to rely on the
representations made by defendant, but were bound to make more careful and complete inquiry
concerning such matters. . . . The full measure of the plaintiffs’ duty was to use reasonable care
and observation in connection with these representations. Having done so, it does not lie in
defendant’s mouth to say that they were too gullible and shouldn’t have believed him.”). In
Sugarhouse Finance Co. v. Anderson, 610 P.2d 1369, 1373 (Utah 1980), the Utah Supreme Court
found that a plaintiff is obligated “to take reasonable steps to inform himself” when dealing at
arm’s length. There, however, the court found that the plaintiff could not reasonably rely on the
defendant’s alleged omissions when there was no duty to speak. Id. at 1373–74 (plaintiff alleged
fraud “in defendant’s failure to state . . . and in his failure to disclose”). The case here is different.
Rather than omissions, KnighTek relied on Jive’s affirmative representations and their necessary
implications, which were strong enough to reasonably lead KnighTek astray from inquiring
further. Jive cannot claim later that KnighTek “shouldn’t have believed [it].” Pace, 247 P.2d at
276.
19
KnighTek and Jive are both sophisticated parties, there was a significant
percentage of the Cap Amount in dispute, and having a contractual representation
regarding future changes in control might have been more prudent and efficient. But
under these alleged facts and Utah law, KnighTek’s reliance on the truth of Jive’s
assertions and the associated implication that there was not an imminent Change of
Control—especially under Jive’s manufactured deadline—deserves a pleading stage
inference of reasonableness.
D.
Finally, KnighTek argues that the Superior Court erred when it found that the
Acceleration Agreement barred KnighTek’s fraud claim. The Superior Court found
that KnighTek waived its Change of Control rights by entering into the Acceleration
Agreement because, under the agreement, the receipt of payment deemed all of
Jive’s obligations “fully paid, discharged, satisfied, released and terminated.”66 The
court held that any post-Agreement transaction was irrelevant because “KnighTek
got what it negotiated and bargained for”—a lump sum payment immediately, which
KnighTek believed was discounted, rather than future payments that KnighTek
believed would be higher.67
66
KnighTek, 197 A.3d at 505 (quoting App. to Opening Br. at A60 (Acceleration Agreement)).
67
Id.
20
Under Utah law, however, “a release will be voidable if it was an integral part
of a scheme to defraud.”68 Jive knew it would soon be liable for its entire obligation
under the Change of Control provision, but misrepresented the circumstances to
reduce its obligations prior to the merger. The release of future obligations was
necessary for the alleged fraud to benefit Jive. And because KnighTek has
adequately pleaded fraudulent misrepresentation under Utah law, the release would
be void if Jive defrauded KnighTek.
III.
KnighTek’s complaint alleged adequately a claim for fraudulent
misrepresentation, and the claim was not waived. We reverse the Superior Court’s
dismissal and remand for further proceedings consistent with this opinion.
Jurisdiction is not retained.
68
Ong Intern. (U.S.A.) Inc. v. 11th Ave. Corp., 850 P.2d 447, 453 (Utah 1993); see Lamb v.
Bangart, 525 P.2d 602, 608 (Utah 1974) (“[A] contract clause limiting liability will not be applied
in a fraud action. The law does not permit a covenant of immunity which will protect a person
against his own fraud on the ground of public policy. A contract limitation on damages or remedies
is valid only in the absence of allegations or proof of fraud.”).
21