Update: Broad Releases and The Duplication Doctrine

• Posted on: Jan 10 2022

By: Jeffrey M. Haber

Last April, this Blog wrote about Sodhi v. IAC/InterActiveCorp, 2021 N.Y. Slip Op. 31220(U) (Sup. Ct., N.Y. County Apr. 8, 2021) (here), an action to recover money claimed to be improperly withheld by IAC/Interacticecorp (“IAC”).

The primary issue in the Sodhi was whether the releases in a settlement letter covered the claims asserted in the action. The motion court held that the releases were broad and covered plaintiffs’ claim to the money alleged to be wrongfully withheld by IAC. Plaintiff appealed. The Appellate Division, First Department, unanimously affirmed.

Background: A Refresher   

Plaintiffs are former employees of Hatch Labs, Inc. (“Hatch”), a subsidiary of IAC. Hatch was a startup incubator company that developed applications for mobile phones. Among other applications, Hatch launched Tinder, the popular mobile dating application, in 2012. At the time they were hired, plaintiffs were granted so-called phantom equity units in Hatch (the “Units”). The Units represented the right to participate in Hatch’s “upside” through the financial equivalent of a non-ownership stock grant.

In 2014, Plaintiffs cashed their Units, with each receiving $166,566.42. In accepting their payout, each plaintiff signed a settlement letter agreeing to the value of the Units, the number of vested Units to be settled, and the aggregate purchase price that IAC was to pay as consideration for settling their vested Units. The settlement letter contained a broad release in favor of IAC (the “Releases”), in which Plaintiffs “release[d] and forever discharge[d] IAC . . . from any and all causes of actions, suits, claims, charges, complaints, promises and contracts which [they] may now have, or hereafter can, shall or may have against IAC … with respect to [their] interest in the Units.…”

Approximately six years after receiving the payouts for their Units, plaintiffs commenced an action against IAC, claiming that IAC grossly misrepresented the value of the Units they held in defendant’s subsidiary.

The motion court dismissed plaintiffs’ claims because they were “covered by the expansive language of the subject releases they signed.” In doing so, the Court rejected plaintiff’s “narrow interpretation of the scope of [those] releases”. 

The motion court also rejected, as a matter of law, plaintiffs’ alternative argument that the Releases should be set aside as fraudulently induced. The Court found that plaintiffs failed to allege a fraud “separate from that which was the subject of the releases they signed, whether known or unknown to the plaintiffs at the time.” 

The First Department’s Decision

As noted, the First Department unanimously affirmed.

The Court found, like the motion court, that the Releases were broad and covered the claims plaintiffs asserted in the action. As such, the Court held that the Releases “bar[red] plaintiffs’ claims for breach of contract, breach of the implied covenant, and fraud arising from the alleged misrepresentation of the value of the units.”¹

The Court also rejected plaintiffs’ argument that the Releases should be invalidated because plaintiffs “were fraudulently induced to enter into them”.² The Court found that “the alleged misrepresentations made to the senior participant regarding the units’ value did not constitute a ‘separate fraud’ from the subject of the release.”³

[Ed. Note: To allege a fraud independent of a contract, the plaintiff must plead “a legal duty independent of the contract” or a misrepresentation that is “collateral or extraneous to the terms of the parties’ agreement.”⁴] 

Takeaway

A “release is … a species of contract” that “is governed by the same principles of law applicable to other contracts.”⁵ Therefore, in the absence of duress, illegality, fraud, or mutual mistake, a release will not be set aside.⁶ 

In Sodhi, plaintiffs broadly released all claims they had against defendant. The release language was expansive and released “any and all claims” whether “known or unknown” “against IAC and [Hatch] and their respective directors, officers and employees with respect to [plaintiffs’] interest in the Units….” Such language was broad enough to cover their claims for non-payment.

In addition to the broad release language, plaintiffs could not demonstrate a fraud separate from the claim for breach of the Equity Incentive Plan. As noted by the Court, Plaintiffs could not allege a breach of any duty collateral to or independent of the parties’ agreement.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

Footnotes

1. Slip Op. at *1 (citation omitted).
2. Id.
3. Id. (citing Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V., 17 N.Y.3d 269, 277, 280 (2011).
4. Dormitory Auth. v. Samson Constr. Co., 30 N.Y.3d 704 (2018) (citation omitted).
5. Schuman v. Gallet, Dreyer & Berkey, L.L.P., 180 Misc. 2d 485, 487 (N.Y. Co. 1999), aff’d, 280 A.D.2d 310 (1st Dept. 2001).
6. Toledo v. W. Farms Neighborhood Hous. Dev. Fund Co., Inc., 34 A.D.3d 228, 229 (1st Dept. 2006).