Sale of Domain Names Used for Online Health Food Retail Leads to Lawsuit for Fraud, Breach of Contract - Inventory Recovery Corp. v. Gabriel

640px-Broccoli_in_a_dish_2.jpgA business sued two individuals in a New Jersey federal district court in Inventory Recovery Corp. v. Gabriel, alleging that the defendants materially misrepresented the details of a sale of several hundred internet domain names. The plaintiff asserted multiple causes of action, including fraud, breach of fiduciary duty, and breach of contract. The court dismissed all but two of the causes of action on the defendants’ motion.

The plaintiff, Illinois-based Inventory Recovery Corporation (IRC), sought to purchase 324 internet domain names from the defendants, Richard Gabriel and Ashley Gabriel. The defendants used the domain names in the business of selling nutraceutical food, which the court describes as food with health benefits. IRC’s president met with the defendants in January 2010 to discuss the purchase of the domain names and the associated business, and negotiations continued into February. Richard Gabriel provided IRC with financial documents related to business income and expenses. This included expenses for Google advertising, the business’ main marketing activity. He allegedly described robust sales and a positive relationships with the merchant banks that serviced customer payments for the business.

The parties entered into a series of contracts on February 26, 2010 for the sale of the domain names. They closed the same day, and the plaintiff paid the $5.6 million purchase price with a real estate parcel in the Bahamas, an airplane, and a sum of cash. According to testimony presented in the case, the plaintiff allegedly later discovered that the business did not have good relationships with its merchant banks, its Google advertising account was suspended, and the defendants had allegedly artificially inflated the business’ revenues.

The plaintiff sued the defendants in federal court in the District of New Jersey, asserting diversity jurisdiction. The lawsuit listed eleven causes of action, including fraud, breach of fiduciary duty, breach of contract, and breach of the duty of good faith and fair dealing. The defendant filed a motion to dismiss all eleven claims under Rule 12(b)(6) of the Federal Rules of Civil Procedure. The court dismissed all but two: breach of contract, and breach of the duty of good faith and fair dealing.

The court dismissed three causes of action with prejudice, meaning the plaintiff was barred from attempting to re-file the same cause. It held that the plaintiff had no claim for breach of fiduciary duty because it had an “arms-length business relationship” with the defendants. This means that the defendants owed no fiduciary duty to the plaintiff. The court also dismissed claims for unjust enrichment and rescission of contract, finding that they were inappropriate to the case.

The court rolled four causes of action under the broader category of “fraud,” and dismissed those four causes and one additional cause with prejudice. A claim for fraud requires a plaintiff to plead the specific circumstances of the alleged fraud, including the “date, time, and place,” or some other fact or allegation to put a defendant on notice of the exact allegations. The court held that the plaintiff failed to plead enough specific facts to allow the court to identify the act or statement that allegedly amounted to fraud. The court also dismissed the negligent misrepresentation claim for similar reasons.

The business litigation attorneys at DiTommaso Lubin represent business owners and professionals throughout the Chicagoland area including Cook, DuPage, Lake, Kane, McHenry and Will Counties and in the Mid-West region including Indiana, Wisconsin and Iowa. To schedule a confidential consultation with one of our attorneys, please contact us online, at (630) 333-0000, or at (877) 990-4990.

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Photo credit: 'Broccoli in a dish 2' by Quadell [GFDL or CC BY-SA 3.0], via Wikimedia Commons.