July 11, 2012
FABRAU, L.L.C., A LIMITED LIABILITY COMPANY OF NEW JERSEY, A/K/A ETUITIVE,*FN1 PLAINTIFF-APPELLANT,
PRASHANT SHAH AND SRINIVISA NALLAMATU,*FN2 DEFENDANTS-RESPONDENTS.
On appeal from the Superior Court of New Jersey, Law Division, Middlesex County, Docket No. L-1202-10.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued February 28, 2012
Before Judges Payne, Reisner and Accurso.
Fabrau, L.L.C., appeals from a no-cause verdict that was entered following a bench trial of its complaint against two of its alleged members, Prashant Shah and Srinivisa Nallamotu seeking an injunction, liquidated damages and attorney's fees. Fabrau alleges that Shah and Nallamotu breached the confidentiality and non-competition provisions of Fabrau's operating agreement by attempting to sell government pricing software that was the property of Fabrau to Polaris Management, a venture capital firm. The court held that Shah and Nallamotu did not become members of Fabrau, and therefore, they did not breach Fabrau's operating agreement. We affirm.
The record reveals that, in 2002, Laszlo Fabriczi and Vyasa Rau established a limited liability company that they registered as Fabrau, L.L.C. However, the business enterprise in which the company was to engage was unsuccessful, and the company remained dormant until late 2006 or early 2007, when Fabriczi and Rau became interested in developing low-cost, transparent software to assist in setting prices for pharmaceuticals sold by smaller pharmaceutical companies to government entities. The two men approached Chester Schwartz, a person with considerable sales experience in the pharmaceutical industry, and then, in late January 2007, they approached Nallamotu, who was working in government pricing for Hoffmann-La Roche, had just implemented a high-priced government pricing system known as I-many, and was similarly interested in a less expensive alternative for use by smaller companies. Initially, the men envisioned having the software for their product developed outside of the United States. However, when they determined that such a step would be cost-prohibitive, at Nallamotu's suggestion, they approached Nallamotu's friend, Shah, an experienced programmer, who joined the group in late February 2007.
As matters progressed, Shah agreed to develop a prototype government pricing system for Schwartz to use in marketing to customers that he had, at that point, allegedly lined up. It was planned that Shah and Nallamotu would focus on the technical aspects of the project, Schwartz would find the customers, and Fabriczi and Rau would work with those customers to customize the pricing system for their use. On April 1, 2007, Shah completed and delivered a prototype to Fabriczi, Rau and Nallamotu.
There is no evidence in the record that, prior to the time that the prototype was delivered, the parties had commenced to discuss a revenue-sharing agreement. However, it appears that, in April 2007, a draft amended operating agreement for Fabrau naming as members Fabriczi, Rau, Nallamotu, Schwartz, and Shah was circulated. In or around April 24, 2007, Shah referred the agreement to his attorney for comment, and at 12:15 p.m. on May 14, 2007, Shah sent an e-mail to Rau, Fabriczi and Nallamotu stating:
Is it possible to meet and discuss changes/additions that my lawyer suggested to the LLC document? It would be a good idea to meet and discuss them. Please let me know. Thanks.
Attached to the e-mail was a copy of the amended operating agreement containing multiple comments and proposed changes.
A further e-mail from Rau to Shah, Fabriczi and Nallamotu, dated May 15, 2007, appears in the record that states "Hey this is the document after our discussion last night." Although a document was attached, it is not identified in the record.
At some point, either before or after the May 14-15, 2007 exchange, an undated, draft operating agreement, containing a handwritten interpolated provision eliminating the requirement of capital contributions and establishing twenty-percent ownership shares for each partner, was executed by Fabriczi, Rau and Shah in a parking lot following either work or a meeting.
It was later signed by Schwartz, who was not present at the initial signing. The agreement was never executed by Nallamotu.
Fabrau contends that the signed agreement was the final product of the parties' negotiations and was binding on Shah and, by operation of limited liability company law, upon Nallamotu. It supports its position as to Shah with evidence of his initials on each page of the agreement, as well as his signature at its end. Additionally, as evidence that Nallamotu considered himself bound, Fabrau points to a marketing e-mail by Nallamotu to a prospective customer on June 17, 2007, announcing that a "couple of us from the industry have got together and formed a company." In contrast, Shah contends that he was induced to sign the agreement by Fabriczi's and Rau's representations that Schwartz would not commence marketing the prototype unless an agreement were signed, and that all who signed in the parking lot acknowledged that the agreement was not binding. Nallamotu points to the fact that he never executed the agreement at issue, and he contends that, as he testified at trial, he was dissatisfied with the agreement's terms, which did not include the changes requested by Shah's attorney. Further, he objected to the agreement's elimination of cash contributions, which Nallamotu felt were necessary, and their replacement with a sweat equity contribution that he lacked the time to perform.
While an issue of fact as to the binding nature of the operating agreement exists, evidence in the record provides support for the position of Shah and Nallamotu. First, the agreement contains none of the provisions that were the subject of negotiations on May 14 and 15, thereby suggesting either that Shah conceded Fabriczi's and Rau's position on all points raised by Shah's attorney - a conclusion that is belied by Shah's testimony at trial - or that the execution of the agreement preceded the substantive negotiations that were the subject of the May 14 and 15 e-mails and the meeting held in that period of time, thereby providing evidence that the parties did not regard their signatures as binding.
Events occurring after the middle of May provide additional support for the latter position. At some point, most likely in July 2007, an additional salesperson, Christopher Biddle, was recruited for the venture. Initially it was proposed that he become a member of Fabrau, L.L.C., and its operating agreement was amended to add his name as a member. In a July 12, 2007 e-mail to Schwartz, Shah, Biddle, Nallamotu and Fabriczi, Rau wrote: "I would like all of you to review and if acceptable please sign the LLC. If you could return it as a pdf that would be perfect." No mention of any prior agreement appears in the e-mail. Further, in a July 16, 2007 e-mail from Fabriczi to Biddle, with copies to the remaining participants, Fabriczi listed as one of the "Company Action Items": "(1) Signing of LLC (All) - still outstanding."
The second agreement was never executed in any fashion. Fabriczi and Rau claim that fact was the result of a decision by Biddle to be compensated with commissions, rather than a share of the enterprise. Shah and Nallamotu point to the unexecuted document as further evidence that no agreement was ever reached.
Although the government pricing prototype had been launched on May 1, 2007, by August 2007, no sales had taken place. In an e-mail, dated July 11, 2007, from Nallamotu to Fabriczi, Nallamotu projected twenty-five clients purchasing the government pricing system software for an average price of $500,000, resulting in revenues of $12,500,000 and profits for each party of $2,000,000, assuming six partners. However, those hopes were soon adjusted downward. In an e-mail, dated August 10, 2007, from Nallamotu to Fabriczi, Shah, Rau and Schwartz, he said:
I took a stab at the potential pricing options for our GP solutions. I know one of our prospective client[s] had expressed shock over our pricing of the software. Here is something we can discuss with our clients going forward about their requirements and price the software based on their need. Feel free to discuss any changes or thoughts you have.
Nallamotu testified at trial that, in addition to the client mentioned in his e-mail, "Schwartz also said we have to go lower and lower because [the software] won't sell at that price." Eventually, at Schwartz's suggestion, in August 2007, the price was lowered to $25,000. However, no systems were sold at that price, either. Further, at that price, Schwartz lost interest in the project, claiming that the income produced would not be worth his consideration.
In support of their marketing efforts, in August 2007, Shah was directed to establish a website to market the product. Although work on the project was slow, e-mails establish that the site, under the name "etuitivetech," was established by September 25, 2007. By that time, however, it appeared that, as the result of a lack of sales, interest in the project had waned. In a September 24, 2007 e-mail, Fabriczi stated:
Guys - also want to have a bit of a heart-to-heart with everyone. I've noticed that since I have let go of our Thursday meeting, not one of you has asked why. I was curiously waiting to see if any of you would question why we haven't continued, but it almost seems that no one seems to care about moving forward. Rather than causing frustration can all of you please let me know if you're still interested in moving forward. I realize that we don't have a lot of prospectives right now, but I know for a fact that we won't be able to get clients with the commitment we've shown so far. So can you all please just let me know if you're still willing to put in the sweat equity to continue, or if you don't want to be involved anymore.
On November 26, 2007, Fabriczi wrote the following e-mail to Shah regarding the "eTuitive Website":
Hope all is well with you. We haven't talked in quite a while, so I wanted to get in touch with you to talk about the website you setup for us. It seems pretty clear that you and Srini [Nallamotu] do not want to go forward with this venture, so I thought it would be unfair for you to keep paying the fee for the website on a monthly basis.
Rather than getting rid of it, I would like to take over the ownership for it if that would be ok with you. I tried calling your cellphone, but I wasn't sure if it was still your number since it didn't have the same message on it that it used to. It basically goes to a generic message.
Anyway, hope you had a good Thanksgiving break. Please get back to me and let me know if taking over the account would be ok with you and how we can achieve that.
Fabriczi did not mention Fabrau or Shah's membership in that company in the e-mail. Additionally, Fabriczi did not discuss in any fashion Fabrau's alleged ownership of the government pricing system or request the source codes used in the design of the prototype, despite the fact that Shah had never given up possession of them. In fact, Shah testified that, to maintain his ownership interest in the product and right to payment for his work, he had built a sunset date into the prototype that would cause it to be inoperable after that date. E-mails establish that a sunset date disabled the prototype on at least one occasion.
In accordance with Fabriczi's request, Shah transferred ownership in the website.
The trial record discloses that in November 2007, Fabriczi and Rau contacted an outside vendor to obtain a price estimate on the conversion of the Shah-designed government pricing system to a web-based application. Fabriczi testified that Shah "did not have the capability of developing a web-based product" but that the concept was "definitely" discussed with him and Nallamotu, and Shah was told that, "if we were going to do this, [he] would be the lead developer, since he already had so much significant experience in developing the prototype, so that he could lead the other web developers building out the web-based application." No documentary evidence in the record supports this assertion. In any case, Fabriczi testified that, when they learned that the price for development would be prohibitive, the "team" determined that it would be necessary to obtain venture capital.
The year 2008 was spent completing a business plan. When asked about Nallamotu's and Shah's involvement, Fabriczi testified:
They were - they were all aware of what we were looking to achieve. They weren't involved in building out the business plan because, again, I believe it was multiple reasons. One idea really stemmed from us originally. We had a vision for the idea, but in addition, at this point, we were the only two individuals really pushing the progress of the company forward.
While Fabriczi testified that "through an entire duration of trying to formalize this venture, we've never veered off the path of excluding anyone," company literature suggests otherwise. The business plan formulated by Fabriczi and Rau for the further development and marketing of Shah's system, dated February 29, 2008, makes no reference, whatsoever, to Fabrau, L.L.C., but instead refers to "eTuitive," a technology company "[f]ounded by Vyasa Rau and Laszlo Fabriczi," whose resumes appear in the company's description. When asked why Nallamotu, Shah and Schwartz were not profiled, Fabriczi claimed that he and Rau had sought biographies in June 2007, but only Shah had responded. However, that response was not made part of the business plan because:
It was not in the similar layout and the details of the summary did not match what I was looking for to add in. If you were to compare, it really speaks to specific experience rather than just a verbose layout of the summary.
Fabriczi claimed that he requested a revision that he did not receive. He made no follow-up efforts with Nallamotu and Schwartz.
Fabriczi testified that, throughout 2008, he was in communication with Shah and Nallamotu, urging them "to develop out the product and look for ways to create a . . . web version design of the application." However, they were unwilling to engage in that endeavor. No documentary evidence supports Fabriczi's testimony in that regard. In any event, after no demonstrable contact between the two groups of men in one and one-half years, in June 2009, virtually simultaneous contacts were made by Fabriczi and Rau and by Shah and Nallamotu with a venture capital company known as Polaris Management Partners. Ben Barrameda, a member of that company, recognized similarities in the products being promoted by the two groups*fn3 and, as a result of intellectual property concerns, made further inquiries that led to knowledge by each group that the other was promoting the product. The result was abandonment by Polaris of any interest in the product, the generation of July 14, 2009 cease and desist letters by Fabrau's counsel to Shah and Nallamotu and, on October 9, 2009, institution of suit claiming breach of fiduciary duty and violation of the operating agreement's provisions regarding confidentiality and non-competition.*fn4
Fabriczi and Rau claim as additional evidence of breach of contract and bad faith by Shah and Nallamotu a June 18, 2009 e-mail to Barrameda and Shah from Nallamotu asking: "Does Lazlo [Fabriczi] know it is Peter [Shah] and I have approached you." Shah and Nallamotu, on the other hand, claim an ownership interest in the software, which was admittedly developed solely by Shah.
In addition to the foregoing, evidence was produced at trial that no certificate of formation of Fabrau, L.L.C. from 2002 to 2010 named Shah, Nallamotu or Schwartz as members of the company. Further, the company issued no tax returns, and it kept no business records and issued no quarterly reports in compliance with the operating agreement.*fn5
At the completion of the trial in the matter, the court issued an oral opinion, in which it detailed the facts of the matter and then concluded that a viable partnership agreement had never been reached by the parties and, in any event, the stipulated damage provision of that agreement constituted an unenforceable penalty. Fabrau has appealed.
In reviewing the court's decision in the matter, we adopt the familiar standard of Rova Farms Resort, Inc. v. Investors Insurance Co., 65 N.J. 474, 484 (1974), and as a consequence, we consider binding the court's findings of fact if they are supported by adequate, substantial and credible evidence. We will reverse only if we are convinced that those findings are "so manifestly unsupported by or inconsistent with the competent, relevant and reasonably credible evidence as to offend the interests of justice." Ibid. (citing Fagliarone v. Twp. of No. Bergen, 78 N.J. Super. 154, 155 (App. Div. 1963)). We accord no such deference to the trial court's legal conclusions, reviewing them anew. Manalapan Realty v. Manalapan Twp. Comm., 140 N.J. 366, 378 (1995).
On appeal, Fabrau argues that the court misstated the facts in its opinion, failed to articulate its credibility determinations, and that it misstated or failed to cite the law in ruling in favor of Shah and Nallamotu. We disagree.
Fabrau argues that the evidence at trial disclosed the existence of a team effort under the company's aegis extending from late 2006 when Fabriczi and Rau formulated their unique concept to 2008 when the two men developed their business plan. It asserts that both Nallamotu and Shah acknowledged their membership in Fabrau - Shaw explicitly; Nallamotu implicitly - and as a consequence they were bound by the confidentiality and non-competition provisions of the company's operating agreement. And, while acknowledging that Shah developed the pricing system at issue, Fabrau claims an ownership interest in it with which Shah and Nallamotu interfered by attempting to market the system to Polaris.
However, evidence can also be interpreted as demonstrating that there never was a meeting of the minds with respect to the operating agreement, which, in the parties' eyes, remained unexecuted at the time it was presented to Biddle, and thereafter. It can also be interpreted as showing an unequal distribution of work among those involved in the venture, with product development undertaken solely by Shah, who at all times maintained an ownership interest in the source codes that he had developed - a fact that was implicitly acknowledged by Fabriczi when he did not seek those codes while requesting a transfer of ownership of the eTuitive website in November 2007. Evidence thereafter strongly suggests an effort throughout 2008 and 2009 by Fabriczi and Rau to cut Shah and Nallamotu out of any participation that they may have had in the government pricing system endeavor.
It is evident that the court adopted this latter view and in doing so, found the version of events described by Fabriczi and Rau to have lacked credibility. On appeal, Fabrau challenges the accuracy of its finding of facts. However, as Shah and Nallamotu have demonstrated in the detailed analysis contained in their brief, the court's factual findings solidly reflect testimony and evidence in the record. While the court's factual findings differ from those set forth on behalf of Fabrau in its brief on appeal, our independent review of the record satisfies us that Shah and Nallamotu's analysis of the record is accurate and that the court's findings have a substantial factual foundation.
In reaching this conclusion, we find that the evidence amply supports
the court's determination that the partial execution of the operating
agreement by Fabriczi, Rau and Shah in the parking lot was a sham,
designed to mislead Schwartz into believing that his economic
interests would be protected if he
were to proceed with marketing Shah's pricing system*fn6
and that, in their subsequent conduct, the parties failed to
manifest an intent to be bound by their agreement. Weichert Co.
Realtors v. Ryan, 128 N.J. 427, 435 (1992) (finding an enforceable
contract to have been formed only when the parties agree on essential
terms and manifest an intention to be bound thereby); see also
Restatement (Second) of Contracts § 18, comment c (discussing sham
contracts); § 21 (stating that "a manifestation of intention that a
promise shall not affect legal relations may prevent the formation of
a contract.") (1981). We reject Fabrau's argument that the parol
evidence rule barred the court's consideration of the conduct of the
parties in determining whether an enforceable contract existed,
finding that rule applicable to the interpretation of the content of
an integrated agreement, not to the issue of whether an agreement
existed in the first place. See Conway v. 287 Corporate Ctr. Assocs.,
187 N.J. 259, 268-69 (2006).
Because the court found as a matter of fact that no contract existed between the parties, there was no need for it to further address Fabrau's claims for damages, all of which depended on the existence of a contractual relationship.