Highground v . Cetacean CV-02-462-M 05/22/03 UNITED STATES DISTRICT COURT

DISTRICT OF NEW HAMPSHIRE

Highground, Inc., Plaintiff

v. Civil N o . 02-462-M Opinion N o .

Cetacean Networks, Inc., Defendant

O R D E R

In March of 2000, Highground, Inc., a public relations and

marketing firm, and Cetacean, Inc., a start-up networking

company, entered into a one-year contract pursuant to which

Highground would provide Cetacean with various consulting

services (the “March Contract”). Seven months later, the parties

executed a second contract which differed from the first in only

a few material ways (the “October Contract”). The major

differences related to the terms of Highground’s compensation

(which was augmented), the duration of the contract (which was

lengthened to two years), and the conditions under which it could

be terminated. After the relationship between the parties soured,

Highground brought this suit, seeking compensation to which it

says it is entitled under both the March and October contracts.

Its complaint advances six claims against Cetacean: breach of the

March Contract (count o n e ) ; breach of the March Contract’s

implied covenant of good faith and fair dealing (count t w o ) ;

breach of the October Contract (count three); breach of the

October Contract’s implied covenant of good faith and fair

dealing (count four); violation of the Massachusetts Consumer

Protection Act (count five); and violation of the New Hampshire

Consumer Protection Act (count s i x ) . Cetacean moves to dismiss

counts one, two, five, and six. See Fed. R. Civ. P. 12(b)(6).

Highground objects.

Standard of Review

When ruling on a motion to dismiss under Fed. R. Civ. P.

12(b)(6), the court must “accept as true the well-pleaded factual

allegations of the complaint, draw all reasonable inferences

therefrom in the plaintiff’s favor and determine whether the

complaint, so read, sets forth facts sufficient to justify

recovery on any cognizable theory.” Martin v . Applied Cellular

2 Tech., Inc.,

, 6 (1st Cir. 2002). Dismissal is

appropriate only if “it clearly appears, according to the facts

alleged, that the plaintiff cannot recover on any viable theory.”

Langadinos v . American Airlines, Inc.,

8 , 69 (1st Cir.

2000). See also Gorski v . N.H. Dept. of Corrections,

(1st Cir. 2002) (“The issue presently before u s ,

however, is not what the plaintiff is required ultimately to

prove in order to prevail on her claim, but rather what she is

required to plead in order to be permitted to develop her case

for eventual adjudication on the merits.”) (emphasis in

original).

Background

Accepting the allegations set forth in Highground’s

complaint as true, the material facts appear as follows. On

March 1 , 2000, the parties entered into a contract under which

Highground would provide various consulting services to Cetacean.

In exchange, Highground would receive a fixed fee of $10,000 each

month between March 1 , 2000, and February 2 8 , 2001. The contract

also provided that Highground would receive a “deferred service

bonus” in the form of cash and stock warrants in Cetacean.

3 Complaint, Exhibit 1 at para. 8 a . The contract also provided

that:

Monthly fees will be increased to $15,000/mth [sic] if total investment in the Company exceeds $8 million during the life of the contract. A new twelve month contract will then be initiated to provide the Work outlined in [paragraph] 4.0.

at para. 8 .

In order to facilitate Cetacean’s ability to secure venture

capital funding, the parties agreed that the compensation

provisions of the contract would become effective immediately

after Cetacean closed on its first round of funding. Had

Highground not agreed to that modification (or clarification) of

the contract (and assuming Cetacean had actually been able to

secure funding under those conditions), it would have been

entitled to approximately $450,000, plus a 0.4% equity stake in

Cetacean, as a result of the first round funding of $15 million.

After the first round of funding closed, consistent with

paragraph 8 of the March Contract (since “total investment in the

Company exceed[ed] $8 million”), the parties began negotiating a

4 new agreement - the October Contract. The services that

Highground would provide to Cetacean were identical to those

described in the March Contract. But, because the parties

recognized that Highground had waived its right to substantial

compensation under the March Contract, the terms of the October

Contract provide for significantly higher levels of monthly

compensation than the parties contemplated when they executed the

March Contract (i.e., up from the anticipated sum of $15,000 per

month, to $25,000 per month). Additionally, the terms under

which the contract could be terminated were drafted in a way that

was much more beneficial to Highground than were similar

provisions in the March Contract, and the contract term was

lengthened from one year (as anticipated in paragraph 8 of the

March Contract) to two years.

Unlike the “deferred service bonus” provision in paragraph

8a of the March Contract, the corresponding paragraph in the

October Contract obligates Cetacean to provide Highground with

“additional compensation” in the form of options to purchase up

to 30,000 shares of Cetacean stock, subject to certain

limitations. See Complaint, Exhibit 2 at paragraph 8 a . The

5 October Contract does not, however, incorporate the “deferred

service bonus” provisions of the March Contract, under which

Highground was to have received cash and equity in Cetacean. The

October Contract (unlike the March Contract) also includes an

integration clause, which provides that, “This agreement

constitutes the entire agreement of the parties with regard to

its subject matter, and may only be amended by a writing signed

by both parties.” Complaint, Exhibit 2 at para.

Discussion

Initially, it probably bears noting that neither the March

Contract nor the October Contract contains a choice of law

provision. And, neither party has addressed whether New

Hampshire or Massachusetts law governs this dispute. Instead,

the memoranda submitted by the parties tend to invoke

Massachusetts common law when i t , rather than New Hampshire

common law, favors their respective positions; and, perhaps not

surprisingly, the parties point to New Hampshire law when i t ,

rather than that of Massachusetts, provides greater support for

their respective views - a decidedly unhelpful practice. In the

absence of any meaningful guidance from the parties, the court

6 has, for the purpose of addressing the pending motion to dismiss,

assumed that New Hampshire law applies.

I. Highground’s Claims under the March Contract.

Generally speaking, Cetacean asserts that, as a matter of

law, after the parties’ executed the October Contract (which

contained an integration clause), its obligations under the

earlier contract ceased. Accordingly, it says that, as a matter

of law, it could not have “breached” the terms of the March

Contract after the October Contract went into effect.

Highground, on the other hand, denies that the October Contract

represents a total integration of the parties’ agreement and

insists that, at a minimum, the “deferred service bonus”

provisions set forth in paragraph 8a of the March Contract

survived the execution of the October Agreement. In short, it

says the October Contract “was in addition t o , and did not

supercede, the March Agreement.” Highground’s memorandum at 5 .

And, it naturally follows that Highground claims it is entitled

to compensation under paragraph 8a of both contracts.

7 In opposing Cetacean’s motion to dismiss, Highground asserts

that it is entitled to introduce parol evidence to demonstrate

that, notwithstanding the presence of an integration clause, the

October Contract was not intended to represent a total

integration of the parties’ agreement. In other words,

Highground says it should be afforded the opportunity to present

evidence supportive of its claim that “[a]t all times material

hereto, it was understood that the new contract was in addition

t o , and did not supercede, the March Agreement.” Complaint at

para. 2 7 . See also Complaint at para. 34 (“At all times material

hereto, it was Highground’s understanding that the incentives set

forth in Paragraph 8a of the October Amendment were in addition

to the deferred service bonus set forth in Paragraph 8a of the

March Agreement.”).

Under New Hampshire law, parol evidence is admissible to

show that a written contract was not intended to describe all of

the parties’ respective rights and obligations.

Even when an integration clause is included in the writing, as in this case, this court will allow the admission of parol evidence to prove that the writing was not a total integration. [Previously] this court held that the parties’ intent to create a total

8 integration can be proved by the circumstances surrounding the writing; the document alone will not suffice. The integration clause, however, is some evidence that the parties intended the writing to be a total integration.

Lapierre v . Cabral,

0 1 , 306 (1982) (citations and

internal quotation marks omitted) (emphasis supplied). See also

Richey v . Leighton,

6 1 , 664 (1993) (“A lack of

integration of an instrument may be proved by reference to the

circumstances surrounding the writing.”); Restatement (Second)

Contracts § 214 (1981) (“Agreements and negotiations prior to or

contemporaneous with the adoption of a writing are admissible in

evidence to establish (a) that the writing is or is not an

integrated agreement; . . . . ” ) . See generally Restatement

(Second) Contracts § 209 and comments a - c (1981) (discussing,

among other things, the distinction between an “integrated

agreement” and a “completely integrated agreement,” as well as

the means by which it is determined whether an agreement is

“integrated”).

At this juncture, the issue before the court is not whether

Highground is likely to succeed on the claims advanced in counts

one and two, or even whether it can demonstrate that the October

9 contract is not a fully integrated memorialization of the

parties’ respective rights and obligations. Rather, the issue is

far more limited: whether Highground has stated viable causes of

action. It has.

Notwithstanding the presence of an integration clause in the

October Contract, Highground is entitled, under New Hampshire

law, to present evidence that the parties did not intend that

contract to supercede or otherwise void the compensation scheme

memorialized in the March Contract. Whether Highground actually

has such evidence and/or whether it can survive a motion for

summary judgment are, of course, entirely different questions

that are not before the court.

II. Highground’s Consumer Protection Act Claims.

As for Highground’s consumer protection act claims, Cetacean

says a mere breach of contract is not, as a matter of law,

actionable under either the Massachusetts or the New Hampshire

statute. Highground, on the other hand, says that its consumer

protection act claims are based not upon Cetacean’s alleged

breach of contract, but instead upon its alleged breach of the

10 implied covenant of good faith and fair dealing. And, it has

cited some legal authority (albeit precedent exclusively from

Massachusetts) which stands for the proposition that a violation

of the implied covenant of good faith and fair dealing may

constitute a violation of the state consumer protection act.

As is the case with Highground’s counts alleging breach of

the March Contract, its consumer protection act claims lend

themselves to more appropriate disposition in the context of

summary judgment, when the factual background underlying the

parties relationship, the circumstances surrounding their

negotiation of the October Contract, and their subsequent

falling-out are more fully developed.

Conclusion

The court cannot conclude that, as a matter of law,

Highground has failed to state viable claims in counts one, two,

five, and six of its complaint. Accordingly, Cetacean’s motion

to dismiss (document n o . 10) is denied.

11 Should the parties disagree with the court’s assumption that

New Hampshire (and not Massachusetts) law governs the resolution

of all claims in Highground’s complaint, they should fully brief

the choice of law issue in connection with future motions, where

there might be a material difference in the governing law of New

Hampshire and Massachusetts.

SO ORDERED.

Steven J. McAuliffe United States District Judge

May 2 2 , 2003

cc: George R. Moore, Esq. Steven E . Hengen, Esq. Michele A . Whitham, Esq.

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