Court: District Court, S.D. Illinois; September 21, 2018; Federal District Court
Foros Advisors LLC (Foros), a financial advisory boutique, has filed a lawsuit against Digital Globe, Inc. (DGI) for breach of contract, quantum meruit, and unjust enrichment. The lawsuit stems from an Engagement Letter where Foros was contracted to provide financial advisory services to DGI at a reduced fee, with the understanding that Foros would be offered the chance to act as a financial advisor for any resulting acquisition or strategic transaction. Foros claims it fulfilled its obligations but was not given the promised opportunity to serve as a financial advisor for the subsequent transaction.
DGI has moved to dismiss the Amended Complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure, arguing that it fails to state a legally sufficient claim. In evaluating this motion, the court must accept the allegations in the complaint as true and draw reasonable inferences in favor of the plaintiff, without weighing the evidence that may be presented at trial. A claim is considered plausible if it contains enough factual content to allow the court to infer the defendant's liability.
The court may also consider documents referenced in the complaint, those relied upon by the plaintiff, or matters that can be judicially noticed. The facts accepted as true for this motion indicate that DGI, a commercial satellite imagery provider, was facing revenue growth challenges in early 2015 and engaged Foros for strategic advisory services in mid-2015. The Engagement Letter signed on August 1, 2015, outlined Foros's role in reviewing DGI's strategic plan and developing an acquisition strategy, with a fee structure of a $250,000 retainer for the first three months and $125,000 per quarter thereafter starting on November 1, 2015.
The Engagement Letter included an Offer Clause stipulating that if DGI considers strategic transactions during or up to 18 months after the agreement's termination, it must offer Foros the chance to act as a financial advisor, with the understanding that Foros would evaluate such opportunities. Upon accepting a role, DGI and Foros would formalize an agreement with standard terms, including fees and indemnification provisions.
Following the engagement, Foros assisted DGI in refining its business framework, categorizing revenue streams, and developing a strategic roadmap for market positioning. Foros created a financial model, termed the "Sandbox," enabling DGI to analyze various business strategies and assess the viability of transitioning to an online platform business. This model concluded that a merger would be necessary for DGI to transition profitably to the platform model.
In September 2015, Foros presented three operational scenarios and financial projections to DGI's board, with DGI management indicating the platform model showed the most promise. Concurrently, discussions about a potential leveraged buyout (LBO) took place, with DGI's CFO assuring Foros of its inclusion in the advisory team if the LBO succeeded. However, these discussions were ultimately terminated.
By October 2016, DGI began negotiating a merger with MacDonald, Dettwiler and Associates Ltd. (MDA) and engaged Barclays and PJT Partners as financial advisors. Foros claims that Barclays utilized its financial model to inform its fairness opinion on the merger. Despite ongoing discussions, DGI did not inform Foros about the merger with MDA nor offered Foros the opportunity to advise on it. The merger was finalized on February 24, 2017, for approximately $3.6 billion.
Barclays and PJT received financial advisory fees of $36 million and $18 million, respectively, from the MDA merger. The plaintiff, Foros, alleges that DGI breached the Offer Clause of their Engagement Letter by not offering Foros the chance to act as a financial advisor for the merger. Foros claims breach of contract, quantum meruit, and unjust enrichment, seeking at least $18 million in damages plus pre-judgment interest, with alternative damage claims to be determined at trial. DGI contends that the breach of contract claim should be dismissed, arguing that the Offer Clause is unenforceable under New York common law as an "agreement to agree" lacking definiteness. New York law requires contracts to be explicit, allowing for reasonable ascertainment of mutual intent and potential remedies. Courts should avoid overly strict interpretations, but if an agreement is too vague to provide an objective standard for resolution, it is deemed unenforceable. DGI asserts that the Offer Clause did not establish clear terms, thus failing to create a binding obligation.
Foros and DGI will establish a formal agreement if Foros agrees to serve as a financial advisor for a transaction, which will include standard terms like fees and indemnification, negotiated in good faith. The Offer Clause lacks specificity regarding the type of advisory role, scope of services, and compensation, making it non-binding. Various financial advisors can provide differing services at varied compensation levels, as evidenced by the differing fees for Barclays and PJT during the DGI and MDA merger. The absence of critical terms renders the Offer Clause an unenforceable agreement to agree, consistent with New York law as demonstrated in case law such as Clifford R. Gray, Inc. v. LeChase Const. Servs. LLC and Trianco, LLC v. Int'l Bus. Machines Corp. The plaintiff's claim that customary terms can clarify the ambiguous Offer Clause fails, as there is no defined type of advisor or scope of services, nor an objective standard for compensation. Unlike precedents where specific terms allowed for the application of industry standards, the Offer Clause does not provide sufficient detail for such determination.
The Offer Clause in this case is inadequate as it does not specify the financial advisory role intended for Foros, contrasting with the clear contractual definitions seen in Cobble Hill and Bear Stearns. In Cobble Hill, the contract provided a definite method for determining the purchase price, while the only issue was the price itself, not the nature of the obligations. In Bear Stearns, the contract explicitly defined the plaintiff's duties as the defendant's exclusive agent for real estate options. The Offer Clause, however, lacks clarity regarding Foros's advisory role, scope of work, and compensation. The plaintiff claims that the Offer Clause constitutes a binding agreement to negotiate in good faith. Nevertheless, the enforceability of such a provision hinges on the materiality of the unresolved terms and their discernibility from the agreement. Since the Offer Clause leaves essential terms open, it is deemed an unenforceable "agreement to agree." Additionally, the defendant contends that the plaintiff's breach of contract claim should be dismissed for failing to comply with New York's Statute of Frauds, which requires that agreements be in writing and subscribed by the party to be charged.
The excerpt addresses the enforceability of a contract under New York's Statute of Frauds. It highlights that a contract that cannot be performed within one year or involves compensation for services related to negotiating a business sale must meet specific writing requirements. A valid memorandum must include the parties involved, describe the subject matter, and state all essential terms. The Offer Clause obligates DGI to provide Foros with an opportunity for financial advisory roles in strategic transactions for a period extending beyond 18 months, thus falling under the Statute of Frauds as per N.Y. Gen. Oblig. Law. 5-701(a)(1) and (a)(10).
Foros's claim, seeking compensation as a financial advisor, also falls under the Statute since it pertains to services rendered in negotiating a business sale, which is defined to include facilitating introductions and assisting in negotiations. However, Foros's Engagement Letter lacks critical terms, such as pricing and the specific advisory role, failing to satisfy the Statute's requirements for completeness. As a result, the Supreme Court granted summary judgment for the defendants, ruling that the plaintiff's breach of contract claim is unenforceable. Additionally, the plaintiff's claims for quantum meruit and unjust enrichment are challenged based on the assertion that the Engagement Letter governs compensation fully.
Under New York law, quantum meruit and unjust enrichment claims can be treated as a single quasi-contract claim. To establish unjust enrichment, a claimant must demonstrate that the other party was enriched at their expense and that retaining the benefit would be inequitable. For quantum meruit recovery, the claimant must show good faith performance of services, acceptance of those services, an expectation of compensation, and the reasonable value of the services provided. A valid contract precludes quasi-contract claims, as these remedies apply only in the absence of a valid contract.
Foros claims that DGI's potential future contracting was part of the consideration for Foros's services, and asserts entitlement to additional compensation due to a reduced rate paid under the Engagement Letter, linked to an expected advisory role in DGI's merger with MDA, which did not materialize. However, the Offer Clause referenced an anticipated future contract distinct from the Engagement Letter, which means the invalidity of the Offer Clause does not affect Foros’s right to the compensation already agreed upon in the Engagement Letter. Consequently, the quasi-contract claims must be dismissed.
Foros cites a Second Circuit ruling that allowed a quasi-contract claim due to an unenforceable compensation clause directly related to work performed. However, in Foros's case, the unenforceable Offer Clause does not pertain to compensation for work already done under the Engagement Letter, which was compensated as agreed. Thus, the invalidity of the Offer Clause does not leave Foros without compensation for the services it rendered.
The Engagement Letter between Foros and DGI outlines the compensation structure for services rendered, including a retainer fee of $250,000 for initial work and ongoing fees of $125,000 per quarter. Foros has acknowledged receipt of compensation as per this agreement. Consequently, the Engagement Letter precludes Foros from pursuing quasi-contract claims since the contract explicitly addresses the dispute. The court cites precedents indicating that Foros has not demonstrated the performance of additional distinct services that would justify further compensation outside the agreed terms. The unenforceability of the Offer Clause does not permit Foros to renegotiate compensation. As the Engagement Letter is an enforceable contract, it governs the payment owed to Foros, and claims for quantum meruit and unjust enrichment are dismissed. Additionally, the court notes that services rendered with the expectation of future contracts do not qualify for quantum meruit recovery. Any claims attempting to bypass the Statute of Frauds related to the Engagement Letter are also invalid. Foros has not requested to amend its complaint formally but expressed a potential interest in doing so during the motion hearing. Any such request must be made within 21 days; otherwise, the case will be dismissed with prejudice.
