In Facie Libre Assocs. I, LLC v. Secondmarket Holdings, Inc., No. 651696-2011E (N.Y Sup. Ct. August 10, 2012), the New York Supreme Court granted defendant SecondMarket Holding’s (“SecondMarket”) motion to dismiss on all but one claim. Plaintiffs, Facie Libre Associates I, LLC and Facie Libre Associates II, LLC (collectively “Facie Libre”), which is coincidentally Latin for “Facebook,” were Delaware LLCs organized for the purpose of buying shares of Facebook before it went public. SecondMarket created an online marketplace and brought together buyers and sellers of shares in privately held companies. Facie Libre brought claims against SecondMarket for breach of contract as a third party beneficiary, negligence, breach of fiduciary duty, intentional misrepresentation, professional malpractice and unjust enrichment.
According to the complaint, the dispute arose when a Facebook employee sought and was granted permission from Facebook to sell 75,000 Class B common shares. The employee entered into a Stock Transfer Agreement (“STA”) with Facie Libre that valued the shares at $33 per share for a total purchase price of $2,475,000. SecondMarket entered into an Intermediary Services Agreement (“ISA”) with the Facebook employee whereby SecondMarket would design, implement, and facilitate the entire transaction in exchange for $75,000.
Facie Libre alleged that SecondMarket had a duty under the ISA to deliver a legal opinion and obtain Facebook’s signature to authorize the transaction. This task needed to be completed by a deadline of March 26, 2010. Facie Libre’s expectations were based on twenty previous transactions with SecondMarket in the past.
Three months after SecondMarket represented to Facie Libre that the transaction had closed, SecondMarket recanted and revealed that it had failed to present Facebook with the legal opinion by the deadline and that the transaction never closed. Shortly after the missed deadline, Facebook instituted an insider trading policy that prevented employees from selling shares to company outsiders.
SecondMarket initially sought dismissal of the claims based on a one-year limitation of liability provision in its User Agreement and the argument that the User Agreement barred liability on the claims in this case. The court rejected both arguments because the User Agreement governed use of SecondMarket’s website, while the STA governed the transaction.
Facie Libre’s breach of contract claim was dismissed because the agreement at issue was not breached. To succeed as a third-party beneficiary of a contract, the plaintiff must establish that (1) a contract existed between other parties; (2) the contract was intended for the plaintiff’s benefit; and (3) that benefit was direct rather than incidental. The ISA, however, was not breached. It did not require SecondMarket to obtain and deliver the legal opinion; that duty was the Facebook employee’s under the STA. Accordingly, the claim was dismissed.
The court dismissed the claim for negligence because no duty existed. The court held that the only potential duty was contractual and that a breach of contract claim may be appropriate, but a negligence claim is “improperly duplicative.”
Similarly, Facie Libre’s breach of fiduciary duty claim failed because a fiduciary relationship was never created. Facie Libre alleged that because it relied on SecondMarket’s expertise, a special relationship of trust, confidence, and responsibility arose that created a fiduciary duty. The court reasoned that “‘[p]laintiff’s alleged reliance on defendant’s knowledge and expertise . . . ignores the reality that the parties engaged in arm’s-length transactions pursuant to contracts between sophisticated entities that do not give rise to fiduciary duties.’”
The plaintiffs sufficiently pled the elements of an intentional misrepresentation claim. The elements of an intentional misrepresentation claim are (1) a material misrepresentation; (2) falsity; (3) scienter; (4) reliance; and (5) injury. SecondMarket allegedly made a “clearly false” statement when it told Facie Libre that the deal had closed, and Facie Libre’s reliance on SecondMarket was reliable because SecondMarket was in the best position to know whether the deal closed. Finally, Facie Libre properly pled that its injury was proximately caused by SecondMarket’s misrepresentation because if SecondMarket had been truthful, Facie Libre could have obtained the legal opinion, closed the deal, and realized the gain in Facebook’s stock price.
Facie Libre withdrew its professional malpractice claim during oral argument.
Facie Libre’s claim for unjust enrichment was also dismissed. A successful claim of unjust enrichment alleges a benefit conferred upon the defendant that the defendant obtained without adequately compensating the plaintiff. Facie Libre’s claim failed because the benefit conferred on SecondMarket came from the Facebook employee, not Facie Libre.
The primary materials for this case may be found on the DU Corporate Governance website.