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CounselNow, LLC v. Deluxe Small Business Sales Inc.

United States District Court, D. Utah

December 20, 2019

COUNSELNOW, LLC, a Utah limited liability corporation, Plaintiff,
v.
DELUXE SMALL BUSINESS SALES INC., a Minnesota corporation and wholly owned subsidiary of DELUXE CORPORATION, and ORANGESODA, INC., a Nevada corporation that merged with DELUXE SMALL BUSINESS SALES, INC., Defendants.

          MEMORANDUM DECISION AND ORDER

          DALE A. KIMBALL United States District Judge.

         This matter is before the court on Defendants Deluxe Small Business Sales, Inc. and OrangeSoda, Inc.'s Motion to Dismiss Plaintiff CounselNow, LLC's Third Amended Complaint for failure to state a claim pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. The court held a hearing on the motion on November 26, 2019. At the hearing, Defendants were represented by Peter J. intiff was represented by Leah Jordana Aston. The court took the matter under advisement. The court considered carefully the memoranda and other materials submitted by the parties, as well as the law and facts relating to the motion. Now being fully advised, the court issues the following Memorandum Decision and Order.

         BACKGROUND

         Plaintiff CounselNow, LLC (“CounselNow”) is a legal software development firm located in Orem, Utah. Defendant Deluxe Small Business Sales, Inc. (“DSBS”) is a Minnesota corporation and a wholly owned subsidiary of Deluxe Corporation (“Deluxe”). Defendant OrangeSoda, Inc. (“OrangeSoda”) was a Nevada corporation that was purchased by Deluxe in 2012 making it another wholly owned subsidiary of Deluxe. DSBS and OrangeSoda merged in 2015.

         In 2011, CounselNow established relationships with four consumer rights law firms: Lincoln Law, Borowitz & Clark, Kirkpatrick and Associates, and The Law Offices of John T. Orcutt. These law firms are members of a larger group of consumer law firms from across the country called the American Consumer Bankruptcy College (“ACBC”). A few law firms from the ACBC, including Lincoln Law, hired CounselNow to create websites for their businesses. However, neither CounselNow nor the law firms had any expertise in digital marketing or search engine optimization[1] (“SEO”) that would allow for potential customers to locate the websites. Accordingly, the firms appointed CounselNow to find an SEO company that could help with the law firms' websites.

         As it began its search, CounselNow was adamant that any SEO company that it introduced to its client law firms use only acceptable SEO methods. More specifically, CounselNow would not do business with a company that utilized what major search engines call “black hat” or “gray hat” SEO strategies, i.e., strategies and practices that go against search engine guidelines and which violate search engine terms of service. Instead, CounselNow sought an SEO company that utilized only “white hat” SEO strategies, i.e., tactics that are approved by major search engines and comply with their terms and conditions.

         In conducting its search, CounselNow came across OrangeSoda and began negotiating with it regarding the services that the law firms needed. Throughout the parties' negotiations, CounselNow represented that it would only bring its clients to OrangeSoda if OrangeSoda agreed that it would not use any black hat or gray hat SEO tactics. Eventually, OrangeSoda drafted a Memo of Understanding (“MoU”) memorializing the terms that would govern CounselNow's and OrangeSoda's relationship. In the MoU, OrangeSoda represented that, among other things, (1) it was an expert in the SEO field and (2) it would not engage in any black hat or gray hat SEO tactics. Based on the parties' negotiations and OrangeSoda's representations in the MoU, CounselNow advised the law firms to retain OrangeSoda.

         In February 2011, OrangeSoda entered into an Advertiser Insertion Order (“AIO”) with Lincoln Law and two other law firms wherein it agreed to market the law firms' websites. Importantly, Andrew Gustafson (“Gustafson”), the Manager of CounselNow, signed the agreement on behalf of the law firms. The first five pages of the AIO contain boilerplate language. The sixth page consists of a fee schedule that is referenced in the first five pages. The seventh page is a revenue sharing and partnership agreement between OrangeSoda and CounselNow in which OrangeSoda agreed to pay CounselNow 40% of all net revenue that it received from any contracts of advertisers that engaged OrangeSoda through CounselNow. CounselNow intended to use the revenue it received under the agreement to develop a software program for bankruptcy law firms called CounselKit and an associated product called SiteKit.

         To fulfill its contractual obligations to the law firms, OrangeSoda hired third-party SEO providers, one of which was called BuildMyRank. Unbeknownst to CounselNow or the law firms, however, both BuildMyRank and OrangeSoda engaged in prohibited black hat tactics in the work that they performed for the law firms. Eventually, in early 2012, Google punished BuildMyRank by deindexing the networks that it had created and maintained. In other words, Google removed the networks created by BuildMyRank from the search engine index used by Google to find and list websites in search engine results. Consequently, many of the websites using BuildMyRank networks would no longer appear on any search engine results. And for the websites that did appear, they would not appear until the fourth, fifth, or even tenth page of the search results. Shortly thereafter, BuildMyRank went out of business.

         Because the law firms' websites were heavily connected to BuildMyRank networks and because OrangeSoda directed and paid BuildMyRank to attach low quality links that it created to those websites, the web presence and prominence of the law firms plummeted after Google deindexed BuildMyRank. During the subsequent months, OrangeSoda was unable to restore any of the law firms' websites to the traffic position and keyword ranking that they had been prior to hiring OrangeSoda. Given the precipitous fall of the websites' search result rankings, one of the law firms cancelled its contract with OrangeSoda in December 2012. Eventually, all the law firms followed suit and cancelled their agreements with OrangeSoda, and in 2016, Lincoln Law and Borowitz & Clark sued OrangeSoda for breach of contract. While the cancellation of the contracts obviously resulted in a rapid decline in the revenue that CounselNow received pursuant to the revenue sharing agreement, OrangeSoda still made at least thirty-seven payments to CounselNow over the course of their relationship, totaling $155, 701.91.

         When the law firm websites' search result rankings plummeted, CounselNow initiated an investigation to ascertain the cause behind the drop. As part of the investigation, CounselNow had various conversations with employees of OrangeSoda, each of which reassured CounselNow that it had only utilized permissible SEO strategies. Thus, after concluding the investigation, CounselNow determined that OrangeSoda may have used black hat tactics on the law firms' websites, but that it had done so unknowingly. Then, years later, in January 2019, several OrangeSoda employees were deposed. In those depositions, CounselNow learned that despite its original representations, OrangeSoda paid little attention to major search engine guidelines, implemented whatever SEO strategies it desired, and directed its employees to attach low-quality weblinks to the law firms' websites.

         CounselNow instituted the present suit in November 2018 in Utah state court. After being served with a summons and second amended complaint in April 2019, Defendants removed the case to this court. Following removal, CounselNow filed a third amended complaint wherein it asserts five causes of action: (1) breach of contract as a party to the contract; (2) breach of contract as a third-party beneficiary to the contract; (3) fraud; (4) negligent misrepresentation; and (5) tortious interference with prospective business relations. CounselNow contends that by using black hat and gray hat SEO strategies, OrangeSoda breached its agreement to use only white hat SEO strategies for the law firms' websites. Moreover, CounselNow avers that OrangeSoda fraudulently and negligently misrepresented to CounselNow and the law firms that it would not use black hat or gray hat tactics. Lastly, CounselNow claims that OrangeSoda knew that CounselNow anticipated securing SEO business from other law firms and developing CounselKit, but OrangeSoda intentionally interfered with those prospective business relationships by utilizing improper SEO tactics.

         DISCUSSION

         Defendants now move to dismiss each of CounselNow's five causes of action for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure. “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim for relief that is plausible on its face.” Bixler v. Foster, 596 F.3d 751, 756 (10th Cir. 2010) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)) (quotation marks omitted). “[A]ll well-pleaded factual allegations in the complaint are accepted as true and viewed in the light most favorable to the nonmoving party.” Acosta v. Jani-King of Oklahoma, Inc., 905 F.3d 1156, 1158 (10th Cir. 2018) (quoting Moore v. Guthrie, 438 F.3d 1036, 1039 (10th Cir. 2006)). “[M]ere ‘labels and conclusions,' and ‘a formulaic recitation of the elements of a cause of action' will not suffice; a plaintiff must offer specific factual allegations to support each claim.” Kansas Penn Gaming, LLC v. Collins, 656 F.3d 1210, 1214 (10th Cir. 2011) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). In addition, “[a] federal court sitting in diversity must apply the law of the forum state . . . with the objective that the result obtained in the federal court should be the result that would be reached in [a forum state] court.” Siloam Springs Hotel, L.L.C. v. Century Sur. Co., 906 F.3d 926, 930 (10th Cir. 2018). Accordingly, the court will apply Utah law in resolving the pending motion.

         A. Breach of Contract

         In order to properly state a claim for a breach of contract under Utah law, a plaintiff must allege “(1) [the existence of] a contract, (2) performance by the party seeking recovery, (3) breach of the contract by the other party, and (4) damages.” Am. W. Bank Members, L.C. v. State, 2014 UT 49, ¶ 15, 342 P.3d 224, 230-31. Importantly, Utah law imposes a six-year statute of limitations on breach of contract claims. Utah Code Ann. § 78B-2-309. “Generally, a cause of action accrues and the relevant statute of limitations begins to run upon the happening of the last event necessary to complete the cause of action.” S & G Inc. v. Intermountain Power Agency, 913 P.2d 735, 740 (Utah 1996) (internal quotation marks omitted). “However, ‘[i]n a breach of contract action the statute of limitations ordinarily begins to run when the breach occurs.'” Clarke v. Living Scriptures, Inc., 2005 UT App 225, ¶ 9, 114 P.3d 602, 603 (quoting Butcher v. Gilroy, 744 P.2d 311, 313 (Utah Ct. App. 1987)). This is because “[a] contract action ordinarily accrues at the time of breach.”[2] S & G, 913 P.2d at 740.

         In this case, Defendants first argue that CounselNow's breach of contract claim should be dismissed because it is time-barred by the six-year statute of limitations. In order to address this argument, the court must first ascertain when the relevant breach occurred. In the Third Amended Complaint, CounselNow alleges that Google deindexed BuildMyRank in early 2012. Thus, OrangeSoda allegedly breached the agreement in early 2012. Following this initial breach, one of the law firms cancelled its agreement with OrangeSoda in December 2012. Defendants therefore contend that, at the very latest, the breach forming the basis of CounselNow's claim for breach of contract occurred in December 2012. As such, Defendants argue that CounselNow was required to file suit before December 2018. Luckily, that is precisely what CounselNow did. CounselNow filed the instant suit in Utah state court in November 2018-one month before Defendants claim that the statute of limitations expired. Accordingly, for purposes of the pending motion, the court finds that CounselNow's breach of contract claim is timely.[3]

         Notwithstanding their statute-of-limitations argument, Defendants contend that CounselNow has failed to state a breach of contract claim because the AIO constituted two separate agreements: (1) an SEO services agreement between OrangeSoda and the law firms; and (2) a revenue sharing agreement between OrangeSoda and CounselNow. Thus, because CounselNow was neither a party to the SEO services agreement, nor has it alleged that OrangeSoda violated the revenue sharing agreement, Defendants contend that CounselNow has failed to state a claim based on either of those contracts. Moreover, Defendants aver that the MoU cannot serve as a basis for CounselNow's claim given that it was an unenforceable agreement to agree and because the SEO services agreement contained an integration clause. Conversely, CounselNow contends that the AIO constituted one agreement because both the SEO services agreement and the revenue sharing agreement were stored as a single document and maintained a consistent header and footer across all pages. Further, it contends that the revenue sharing agreement was nothing more than a negotiated term between CounselNow and OrangeSoda. Because it avers that the AIO constitutes one agreement, CounselNow claims that it has stated a claim for breach of contract because it has alleged (1) the existence of a contract; (2) that it performed its part of the contract; (3) OrangeSoda breached the contract; and (4) that it was damaged by OrangeSoda's breach.

         Given that this is a motion to dismiss and the court must accept all of CounselNow's well-pleaded facts as true, the court concludes that CounselNow has properly stated a claim for a breach of contract. First, whether the AIO constituted one or two agreements is a question of fact that would be more appropriately resolved at a later stage of the case, not on a motion to dismiss. Second, assuming that the AIO was one agreement, CounselNow has adequately pleaded each element of its breach of contract claim. Therefore, ...


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