E-Alert Case Updates

Claim by Baltimore City for Intentional Misrepresentation and Punitive Damages Permitted to Proceed Against Software Developer

The Mayor and City Council of Baltimore v. Unisys Corporation
Case No.: 12-614 (U.S. District Court of Maryland, August 16, 2012)
by Eric M. Leppo, Associate
Semmes, Bowen & Semmes (www.semmes.com)

In this recently issued Memorandum Opinion from the U.S. District Court for the District of Maryland, Judge Bredar granted in part and denied in part, Defendant’s motion to dismiss certain counts of the City’s suit. The Court found that the City’s claim of intentional misrepresentation and punitive damages were adequately pled to survive.

This suit arose out of a 2002 contract between the City of Baltimore (Plaintiff herein) and the Defendant software developer, Unisys. The City entered a contract to pay approximately $7 million for the development and installation of an “Integrated Property Tax System” or “IPTS” from Unisys. The system was intended to integrate a number of functions and databases related to tax assessment and billing that were previously independent.

The contract contemplated an initial “Go-live” date for the program of November 1, 2003. The Defendant could not meet that date, and the deadline was pushed to June 2004. Defendant failed to meet that deadline, and according to the City, failed to meet numerous others over the course of seven (7) years. During that time, the City paid eight (8) million dollars to Unisys. In March 2011 the City informed Unisys that it was in default of the contract, and in response the Defendant claimed it had successfully fixed all previous problems. The City was given “test scripts” as evidence that the system worked. The City tested the system, and it failed in several key respects.

The City filed this instant action in Baltimore City Circuit Court alleging breach of contract and numerous other counts including breach of warranties, unjust enrichment, negligent and intentional misrepresentation, and punitive damages. Unisys removed the action to Federal Court and filed a motion to dismiss the unjust enrichment, misrepresentation, and punitive damages claims.

To survive a motion to dismiss, a complaint need only present facts sufficient to render its claims “plausible on [their] face” and enable the court to “draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). A complaint may not simply rely on naked assertions, speculation, or legal conclusions. Bell Atlantic v. Twombly, 550 U.S. 544, 556-57 (2007).

The trial court quickly dispensed with the unjust enrichment claim, noting that an unjust enrichment claim generally cannot be maintained when the subject matter is governed by an express contract, and no exceptions to that rule applied here. As such, the claim was dismissed. The Court also applied the economic loss rule to hold that the Plaintiff’s claim of negligent misrepresentation could not proceed, as Plaintiff claimed nothing more than economic damages arising from an arm’s length transaction between sophisticated parties.

The Court then turned to the intentional misrepresentation claim. Defendant argued that the claim should be dismissed because it was not pled with the specificity required by FED. R. CIV. P. 9(b), which applies to all actions sounding in fraud. The Court held that many of the allegations regarding fraud were too vague and did not include the required specificity, however, the March 2011 representation by Unisys that the system was fixed, was pled with the requisite specificity.

The Court then held that the City’s claim for punitive damages could also proceed based on the intentional misrepresentation claim. In Maryland a plaintiff cannot recover punitive damages for breach of contract, even if the breach is shown to be malicious. Biktasheva v. Red Square Sports, Inc., 366 F.Supp.2d 289, 295 (D. Md. 2005). Punitive damages are only available in a tort action where “actual malice” is pled. The Court noted that the elements of such malice existed in the allegations of intentional misrepresentation, and therefore the punitive damages claim could proceed