Neala Communications LLC v. Xerox Corporation

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF NEW YORK

_________________________________________

NEALA COMMUNICATIONS LLC (d/b/a

International Minute Press of Plymouth),

on behalf of itself and all others

similarly situated, 22-CV-6088 CJS

DECISION and ORDER

Plaintiff,

vs

XEROX CORPORATION,

Defendant.

_________________________________________

INTRODUCTION

Plaintiff Neala Communications LLC (“Neala”) brings this putative class-action

action alleging breach of contract, breach of the implied covenant of good faith and fair

dealing, violations of New York General Business Law §§ 349 and 350, negligence and

negligent misrepresentation against defendant Xerox Corporation (“Xerox”).1 ECF No. 1.

In broad strokes, Neala alleges that Xerox made, marketed, and leased certain digital

presses and toner that are defective, depriving Neala of the benefit of its bargain. ECF

1. Now before the Court is Defendant’s Motion to Dismiss the Complaint, ECF No. 12.

For the reasons discussed below the motion is granted in part and denied in part.

1 The Complaint also alleged causes of action for unjust enrichment and violations of the Lanham Act, but

Neala voluntarily discontinued both claims. See ECF 14 at 8 n.1 (unjust enrichment); ECF 23 (Neala

declined to defend Lanham Act claim during oral argument).

BACKGROUND

Unless otherwise noted, the following facts are taken from Neala’s Complaint, ECF

1, and the lease agreement (“Lease Agreement”) entered into between the parties on

June 14, 2019, ECF No. 12-2.2

As relevant here, Xerox manufactures, markets, leases, and sells the Versant line

of digital printing presses (the “Presses”). (ECF 1 at ¶ 13). The Presses use a variety of

components, including drums and toner. (Id. at ¶ 28). “To make prints, a laser beams

images onto a drum, which in turn uses static electricity to attract toner from a cartridge

onto the drum.” (Id. at ¶ 29). “The drum rolls the toner onto paper and a fuser melts the

toner into the paper.” (Id.). If the drums or toner are defective, the prints may be flawed.

(Id. at ¶ 30). “[T]he Presses are designed to be used in conjunction with certain toner

products manufactured by” Xerox, and the service contracts between Neala and Xerox

mandate the use of Xerox’s toner products “in conjunction with the Presses.” (Id. at ¶¶

15, 16). Neala alleges that “[d]efects in certain Versant models . . . cause the Presses to

regularly break down and/or produce flawed prints.” (Id. at ¶ 14).

Neala alleges that “[t]he Presses, by virtue of their defects, are susceptible to

inconsistencies in the toner products.” (Id. at ¶ 17). The “inconsistencies, which have

been observed in a substantial percentage of the relevant toner products, trigger the

defects in the Presses and cause damage to various components thereof, including

drums, rollers, and developer housings.” (Id.). The result, Neala alleges, is that “drums

2 On a motion to dismiss for failure to state a claim, a district court “may consider the

facts alleged in the complaint, documents attached to the complaint as exhibits, and

documents incorporated by reference in the complaint.” DiFolco v. MSNBC Cable

L.L.C., 622 F.3d 104, 111 (2d Cir. 2010). The Lease Agreement at issue here is

referenced at multiple points in the complaint and is integral to Neala’s claims, such that

the Court may consider it here. See ECF 1 at ¶¶ 12, 16, 20, 21, 27, 93-100.

in the Presses have routinely and consistently failed much earlier than they are supposed

to.” (Id. at ¶ 33). For example, Neala alleges that “[d]rums in the Presses should last

10,000 to 50,000 prints, however, they often need replacement after far less usage.” (Id.

at ¶ 34). Because of this, replacement parts are scarce. (Id. at ¶ 35). And because “[t]he

problematic toner cannot be ‘flushed’ from devices,” (Id. at ¶ 47), “even after devices are

fully cleaned and affected parts replaced, issues promptly return.” (Id.)

The Lease Agreement requires Xerox to keep the presses in “good working order,”

but Neala alleges that Xerox failed to either adequately repair the Presses or replace

them as required by the Lease Agreement. (Id. at ¶¶ 25, 42; ECF 12-2 at 5). “Without

functional drums, the Presses cannot make prints and/or the prints are flawed and

useless.” (Id. at ¶ 37). “The constant failing of drums prevents the Presses from being

used for the purposes they were leased and/or purchased,” Neala alleges, causing

disruption to plaintiffs’ businesses. (Id. at ¶¶ 38, 39). Moreover, Neala alleges that Xerox

was aware of the problems with the drums, “but has failed to publicly acknowledge or

remedy the problem.” (Id. at ¶¶ 46, 51, 52).

Neala filed its Complaint on February 22, 2022. (ECF ¶ 1). Neala is pursuing four

causes of action: 1) breach of contract (Id. at ¶¶ 90-100); 2) violation of New York General

Business Law sections 349 and 350 (Id. at ¶¶ 101-128); 3) negligence (Id. at ¶¶ 150-158);

and 4) negligent misrepresentation (Id. at ¶¶ 159-173). Neala also seeks class-action

certification. (Id. at ¶¶ 79-89).

Xerox filed its motion to dismiss the complaint pursuant to Federal Rule of Civil

Procedure 12(b)(6) on May 24, 2022, contending that Neala failed to state any viable

claims. (ECF ¶ 12). Xerox argues that Neala does not allege sufficient facts to plead a

breach of the Lease Agreement, and that Neala’s claim for breach of the implied covenant

of good faith and fair dealing is duplicative of its breach of contract claim. (Id. at 9-12).

As for the claims brought pursuant to GBL §§ 349 and 350, Xerox argues they are barred

because (1) Neala does not allege it was deceived in New York, as required by the

statute; and (2) the claims are time barred. (Id. at 12-16). Finally, Xerox argues the

claims for negligence and negligent misrepresentation both fail because (1) Neala does

not allege a duty that arises independently of the Lease Agreement; (2) the claims are

barred by the economic loss doctrine); and (3) the negligent misrepresentation claims do

not meet the heightened pleading standard of Federal Rule of Civil Procedure 9(b). (Id.

at 22-25).

Neala filed its opposition to the motion on June 23, 2022 (ECF ¶ 14). Neala argues

that it adequately pleaded a breach of contract because the Complaint alleges that the

remedy set forth in the Lease Agreement fails of its essential purpose, allowing Neala to

pursue damages not provided for in the Lease Agreement. (Id. at 12-14). It argues that

its claim for breach of the implied covenant of good faith and fair dealing is distinct from

its breach of contract claim. (Id. at 14-16). Moreover, it argues that its §§ 349 and 350

claims are viable because Neala (1) adequately alleges it was deceived in New York; and

(2) its claims are not time barred because of statutory tolling. (Id. at 16-22). As to its

negligence claims, Neala argues that it pleaded Xerox owed it a duty beyond the Lease

Agreement: the statutory duty to not engage in deceptive acts and practices and engage

in false advertising, as set forth in §§ 349 and 350. (Id. at 25-26). It also argues that it

falls within several exceptions to the economic loss rule, and that its negligent

misrepresentation claims are adequately pleaded. (Id. at 25-32). Xerox replied on July

8, 2022. (ECF 17). The Court held oral argument on the motion on June 1, 2023 (ECF

23) and reserved decision.

The Court has carefully considered the parties’ submissions. For the reasons set

forth below, Xerox’s motion is granted in part and denied in part.

DISCUSSION

Standards Applicable to Motions Under Rule 12(b)(6)

Xerox has moved to dismiss the Complaint pursuant to Fed.R.Civ.P. 12(b)(6) and

the standards for such an application are clear:

To survive a motion to dismiss, a complaint must plead “enough facts to

state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly,

550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A claim is

facially plausible “when the plaintiff pleads factual content that allows the

court to draw the reasonable inference that the defendant is liable for the

misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937,

173 L.Ed.2d 868 (2009).

Progressive Credit Union v. City of New York, 889 F.3d 40, 48 (2d Cir. May 1, 2018).

In its review, the Court is entitled to consider facts alleged in the complaint

and documents attached to it or incorporated in it by reference, documents

“integral” to the complaint and relied upon in it, and facts of which judicial

notice may properly be taken under Rule 201 of the Federal Rules of

Evidence.

Heckman v. Town of Hempstead, 568 F. App’x 41, 43 (2d Cir. Jun. 3, 2014) (citations and

internal quotation marks omitted).

While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not

need detailed factual allegations, a plaintiff’s obligation to provide the

grounds of his entitlement to relief requires more than labels and

conclusions, and a formulaic recitation of the elements of a cause of action

will not do. Factual allegations must be enough to raise a right to relief above

the speculative level, on the assumption that all the allegations in the

complaint are true (even if doubtful in fact).

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 1964–65, 167 L.Ed.2d 929

(2007); see also, ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d

Cir. 2007) (“To survive dismissal, the plaintiff must provide the grounds upon which his

claim rests through factual allegations sufficient ‘to raise a right to relief above the

speculative level.’”) (quoting Bell Atl. Corp. v. Twombly) (footnote omitted).

When applying this “plausibility standard,” the Court is guided by “two working

principles”:

First, although a court must accept as true all of the allegations contained

in a complaint, that tenet is inapplicable to legal conclusions, and

threadbare recitals of the elements of a cause of action, supported by mere

conclusory statements, do not suffice. Second, only a complaint that states

a plausible claim for relief survives a motion to dismiss, and determining

whether a complaint states a plausible claim for relief will be a context-

specific task that requires the reviewing court to draw on its judicial

experience and common sense.

Harris v. Mills, 572 F.3d 66, 72 (2d Cir. 2009) (citations and internal quotation marks

omitted). “[W]here the well-pleaded facts do not permit the court to infer more than the

mere possibility of misconduct, the complaint has alleged—but it has not shown—that the

pleader is entitled to relief.” Ashcroft v. Iqbal, 556 U.S. 662, 679, 129 S.Ct. 1937, 1950

(2009) (citation omitted); see also, id. at 556 U.S. at 678 (“The plausibility standard is not

akin to a probability requirement, but it asks for more than a sheer possibility that a

defendant has acted unlawfully. Where a complaint pleads facts that are merely

consistent with a defendant’s liability, it stops short of the line between possibility and

plausibility of entitlement to relief.”) (citations and internal quotation marks omitted.)

“[A]s Iqbal makes clear, a plausible claim must come before discovery, not the

other way around.” Angiulo v. Cty. of Westchester, No. 11-CV-7823 CS, 2012 WL

5278523, at *3 (S.D.N.Y. Oct. 25, 2012) (citation omitted); see also, McBeth v. Porges,

171 F. Supp.3d 216, 236 (S.D.N.Y. 2016) (Observing that pursuant to Iqbal’s pleading

standard, “the Federal Rules of Civil Procedure do ‘not unlock the doors of discovery for

a plaintiff armed with nothing more than conclusions or speculation.’”) (quoting Iqbal ).

see also, In re Myovant Scis. Ltd. Section 16(b) Litig., 513 F. Supp. 3d 365, 373 (S.D.N.Y.

2021) (“The plaintiffs claim that discovery of the relevant disclosure schedule may

establish the portion of the purchase price allocated to Movant shares. . . . But ‘it is only

by taking care to require allegations that reach the level suggesting [a plausible claim]

that we can hope to avoid the potentially enormous expense of discovery in cases with

no reasonably founded hope that the [discovery] process will reveal relevant evidence.’

Twombly, 550 U.S. at 559. Because their unsupported speculation does not amount to a

reasonable foundation, the plaintiffs cannot avoid dismissal by claiming that discovery will

reveal a basis for their claim.”).

Express Breach of Contract

Xerox argues that Neala’s claim for express breach of contract is barred by the

exclusive remedy clause in the Lease Agreement, which provides that Neala’s “exclusive

remedy for Xerox’s failure to provide Maintenance Services” is “replace[ment] [of] the

Equipment with an identical model or at Xerox’s option, another model with comparable

features and compatibilities.” (ECF 12-2 at ¶ 5).

In New York, parties may restrict a “buyer’s remedies to return of the goods and

repayment of the price or to repair and replacement of non-conforming goods or parts.”

N.Y. U.C.C. Law § 2-719(1)(a),(b) (McKinney). However, such restrictions are not

enforceable “[w]here circumstances cause an exclusive or limited remedy to fail of its

essential purpose.” N.Y. U.C.C. Law § 2-719(2) (McKinney). “A remedy fails of its

essential purpose if ‘the circumstances existing at the time of the agreement have

changed so that enforcement of the limited remedy would essentially leave plaintiff with

no remedy at all.’” Maltz v. Union Carbide Chemicals & Plastics Co., 992 F. Supp. 286,

304 (S.D.N.Y. 1998) (quoting American Tel. & Tel. Co. v. New York City Human

Resources Admin., 833 F. Supp. 962, 986 (S.D.N.Y.1993)). “Ordinarily, whether

circumstances have caused a ‘limited remedy to fail of its essential purpose’ . . . is a

question of fact for the jury and one necessarily to be resolved upon proof of the

circumstances occurring after the contract is formed.” Cayuga Harvester, Inc. v. Allis–

Chalmers Corp., 465 N.Y.S.2d 606, 612 (4th Dep't 1983). However, a court may grant a

defendant’s motion to dismiss when the plaintiff cannot show that “enforcement of the

limited remedy clause would effectively deprive them of a remedy.” Maltz, 992 F. Supp.

at 304; see also, e.g., Xerox Corp. v. Graphic Mgmt. Servs. Inc., 959 F. Supp. 2d 311,

320 (W.D.N.Y. 2013) (“Courts have found that where the contract provides for either the

option of replacement of the goods or the contract price, and where the non-breaching

party has not alleged that the limited remedy provision would ‘effectively deprive them of

a remedy,’ the limitation of liability clause does not fail of its essential purpose.”).

Xerox argues that Neala’s claim does not plead that the remedy failed of its

essential purpose, as it fails to plead Neala sought a replacement, or “how replacement

with a different model with comparable features or capabilities would deprive it of a

remedy.” (ECF 17 at 3). Neala responds that “substantially the entirety of” its “complaint

is devoted to alleging why” repair or replacement does not suffice as a remedy. (ECF 14

at 13). It notes that “[a] seller’s inability to effect a successful repair or replacement after

numerous attempts may demonstrate such a failure of the restricted remedy’s essential

purpose.” Bristol Village, Inc. v. Louisiana-Pacific Corp. 170 F. Supp. 3d 488, 508

(W.D.N.Y. 2016) (quoting Waverly Props, v. KMG Waverly, LLC, 824 F.Supp.2d 547,

558 (S.D.N.Y.2011), adopted, 824 F.Supp.2d 547 (S.D.N.Y. 2011) .

While Neala’s responsive brief contends “[t]hat each of the Presses, with their

fungible components, is compromised by defects, [which] prevents the remedy of

replacement from yielding its purported and expected relief,” its Complaint does not

include such an allegation. Rather, the Complaint pleads as its theory of breach that:

98. The lease and purchase agreements provide that in the event

Defendant fails to keep a Press in good working order, Defendant will

replace the Press with an identical model or another model with comparable

features and capabilities.

99. Defendant has failed to replace the Presses of the Plaintiff and

putative Class in breach of its contractual obligation to do so.

100. The Plaintiff and putative Class request injunctive relief whereby

Defendant is ordered to comply with its contractual obligations and replace

their defective Presses.

(ECF 1 at ¶¶ 98-100). There is no allegation in the Complaint that replacement would be

futile.3 Neala cannot amend the Complaint via its response to Xerox’s motion to dismiss.

See Lama v. Meta Platforms, Inc., -- F. Supp. 3d --, 2024 WL 2021896, at *7 (N.D.N.Y.

May 6, 2024) (“Plaintiff does not make any such claim in the Amended Complaint related

to a failure to provide any required notice and cannot (as a party represented by counsel)

constructively amend the Amended Complaint merely by making arguments in a

3 During oral argument, Xerox contended that Neala’s claim also fails because it never requested Xerox

replace the Presses. Neala argues that the Lease Agreement does not include language requiring it

request replacement. The Court agrees with Neala that the Lease Agreement does not state

replacement must be requested. The issues of whether Xerox is in breach of its obligation to provide

maintenance services, or its obligation to provide a replacement press if repair fails, are for later in the

litigation.

response brief.”); Peacock v. Suffolk Bus Corp., 100 F. Supp. 3d 225, 231 (E.D.N.Y. 2015)

(“It is well-settled that a plaintiff ‘cannot amend [its] complaint by asserting new facts or

theories for the first time in opposition to [a] motion to dismiss.’”) (quoting K.D. v. White

Plains Sch. Dist., 921 F.Supp.2d 197, 209 n. 8 (S.D.N.Y.2013)).

Neala argues that the Complaint pleads that defects in the drums and toners

render replacement an ineffective remedy (ECF 14 at 13), but the allegations it relies on

do not support that contention:

17. The Presses, by virtue of their defects, are susceptible to

inconsistencies in the toner products. These inconsistencies, which

have been observed in a substantial percentage of the relevant toner

products, trigger the defects in the Presses and cause damage to

various components thereof, including drums, rollers and developer

housings.

33. Because of ongoing problems with inconsistent toner, drums in the

Presses have routinely and consistently failed much earlier than they

are supposed to.

48. In conversations with [Neala], Defendant personnel admitted to a

widespread toner problem, and further admitted that they are not

disclosing this to the majority of Defendant’s customers.

(ECF 1 at ¶¶ 17, 33, 48). While these allegations suffice to allege that a problem with the

toner renders the Presses defective, they do not allege that replacement is futile. The

Complaint is nearly silent on the issue of replacement: it does not plead that replacement

was sought and denied, or the replacement was offered and rejected; or that replacement

with a different comparable model would not be an adequate remedy.

In contrast, in Bristol-Village the exclusive remedy limited plaintiff’s recovery to “no

more than twice the original purchase price of the affected trim.” 170 F. Supp. 3d at 508-

509. Plaintiff there argued the limited remedy failed of its essential purpose because

defendant failed to offer adequate compensation, instead offering a sum that represented

twice the purchase price for some, but not all, of the allegedly defective product. Id.

Based on this dispute, the court concluded there were “disputed issues of material fact

as to whether the limited remedy provision fails of its essential purpose.” Id. No similar

allegations are made here. Indeed, in its claim for breach of contract, Neala explicitly

seeks replacement as a remedy. (ECF at ¶ 100).

In sum, the Complaint simply does not allege that replacement would fail of its

essential purpose. The Court thus dismisses Neala’s claim for consequential damages.

Neala’s recovery is limited to the replacement remedy provided for in the Lease

Agreement. See, e.g., Xerox Inc. v. JCTB Inc., 787 F. App’x 43, 44 (2d Cir. 2019) (“As to

their breach of contract counterclaim, Defendants’ exclusive remedy for a purported

breach by Plaintiff was not litigation, but to request new equipment.”); Xerox Corp. v.

JCTB Inc., 208 WL 5776423, *8 (W.D.N.Y. Nov. 2, 2018) (dismissing counterclaim where

“Defendants have not explained why, if their chief complaint is that the printers were not

reliable, the limited remedy in the Finance Lease—repair or replacement of the printers—

would effectively deprive them of a remedy.”).

Implied Covenant of Good Faith and Fair Dealing

“Under New York law, ‘implicit in every contract is a covenant of good faith and fair

dealing . . . which encompasses any promises that a reasonable promisee would

understand to be included.’” Spinelli v. Nat’l Football League, 903 F.3d 185, 205 (2d Cir.

2018) (quoting New York Univ. v. Cont’l Ins. Co., 87 N.Y.2d 308, 318 (1995)). “The

implied covenant of good faith and fair dealing includes a promise that ‘neither party to a

contract shall do anything that has the effect of destroying or injuring the right of the other

party to receive the fruits of the contract, or to violate the party’s presumed intentions or

reasonable expectations.’” JN Contemp. Art LLC v. Phillips Auctioneers LLC, 29 F.4th

118, 128 (2d Cir. 2022) (quoting Spinelli, 903 F.3d at 205). “A claim for violation of the

covenant survives a motion to dismiss only if it is based on allegations different from those

underlying the breach of contract claim, and the relief sought is not intrinsically tied to the

damages that flow from the breach of contract.” Id.; see also Skillgames, LLC v. Brody,

767 N.Y.S.2d 418, 423 (1st Dep’t 2003) (“A claim for breach of the implied covenant of

good faith and fair dealing cannot substitute for an unsustainable breach of contract

claim.”).

Neala argues that because of “the limited nature of Plaintiff’s breach of express

contract claim and the broader nature of Plaintiff’s injuries for Defendant’s breach of the

implied covenant[] the claims are not at all coterminous.” (ECF 14 at 14). It argues that

its “breach of express contract claim is based on Defendant’s failure to provide

Maintenance Services,” but its “breach of good faith and fair dealing claim is based on

Defendant affirmatively deceiving Plaintiff with respect to known issues with the Presses,

drums, and toner.” (Id. at 15-16). The damages for the implied breach are separate from

the damages for the express breach, it argues, “as they relate to amounts paid under the

contract that do not relate to the limited category of Maintenance Services.” (Id. at 16).

The Court disagrees. The Complaint does not include a separate cause of action

for breach of the implied covenant, rather, the allegations related to breach of the implied

covenant are contained within the cause of action for express breach—and are the same

allegations supporting the claim for express breach. (ECF 1 ¶¶ 90-100). None allege an

affirmative deception. Instead, the Complaint alleges that Xerox “personnel admitted to

a widespread toner problem,” that was not being “disclos[ed] to the majority of [Xerox’s]

customers.” (Id. at ¶ 48; see also ¶ 46 alleging a “failure to publicly acknowledge . . . the

problem.”)). Moreover, the Complaint does not allege what the alleged deception was in

aid of—persuading Neala to enter in the Lease Agreement, for example, or stringing

Neala along for so long that its claims would be time barred. Compare Zimmerli Textil AG

v. Kabbaz, 2015 WL 5821523, at *7 (E.D.N.Y. Sept. 30, 2015) (allowing claim for breach

of the implied covenant claim to proceed where complaint alleged defendants engaged

in an “affirmative deception by sending [plaintiff] dishonored checks in an attempted to

secure more shipments of [plaintiff’s] product notwithstanding their failure to pay

outstanding invoices.”).

Nor is Stanley v. Direct Energy Services, LLC persuasive. 466 F. Supp. 3d 415

(S.D.N.Y. 2020). In Stanley, plaintiff brought suit against defendant, an electric utility,

alleging that defendant claimed to charge competitive utility rates based on market

conditions in its variable rate plan, but instead charged prices not based on market prices.

Id. at 419-20. Defendant sought to dismiss the claim for breach of the implied covenant

of good faith and fair dealing, arguing it was duplicative of the express breach of contract

claim. The court disagreed, finding the good faith and fair dealing claim distinct because

it went to how defendant exercised its contractual discretion to set prices. Id. at 429.

Plaintiff there “expressly alleg[ed] that “even if contractually, ‘Defendant had unilateral

discretion to set the variable rate for electricity,’ plaintiff ‘reasonably expected that the

variable rates for electricity would, notwithstanding Defendant’s profit goals, reflect the

wholesale and retail market prices for electricity and that Defendant would refrain from

price gouging.’” Id. Plaintiff in Stanley also alleged that “[w]ithout these reasonable

expectations, Plaintiff and other Class members would not have agreed to buy electricity

from Defendant.” Id. No such exercise of discretion is alleged here. Instead, Neala

alleges that Xerox was required, under the terms of the maintenance plan, to keep the

Presses in “good working order,” but has failed to do so. (ECF 1 at ¶¶ 90-100). Those

allegations are the same as those underlying the claim for express breach.

It is well-settled that where, as here, “a complaint alleges both a breach of contract

and a breach of the implied covenant of good faith and fair dealing based on the same

facts, the latter claim should be dismissed as redundant.” Cruz v. FXDirectDealer, LLC,

720 F.3d 115, 124 (2d Cir. 2013); see also Livingston v. Trustco Bank, 2022 WL 798157,

at *15 (N.D.N.Y. March 16, 2022) (“Many courts assessing cases with similar fact patterns

. . . dismiss claims for breach of the implied covenant of good faith and fair dealing where

the plaintiff does not allege facts independent of or separate from those supporting the

breach-of-contract claim.” (collecting cases)); Nazareth College of Rochester v.

Harleysville Preferred Ins. Co., 2017 WL 999214, at *3 (W.D.N.Y. March 15, 2017)

(same).

As Neala’s claims for express breach and breach of the implied covenant of good

faith and fair dealing rest on the same facts, the claim for breach of the implied covenant

is dismissed.

New York General Business Law §§ 349 and 350

New York General Business Law §§ 349 and 350 both contain territorial limitations

on their application. GBL § 349 prohibits “[d]eceptive acts or practices in the conduct of

any business, trade or commerce or in the furnishing of any service in this state.” Similarly,

GBL § 350 prohibits “[f]alse advertising in the conduct of any business, trade or commerce

or in the furnishing of any service in this state is hereby declared unlawful.” To bring a

claim under either statute, then, a plaintiff must allege a “transaction” with sufficient

connections to New York to support jurisdiction. See Goshen v. Mutual Life Ins. Co. of

New York, 98 N.Y.2d 314, 324 (2002) (GBL § 349 “was not intended to police the out-of-

state transactions of New York companies, nor was it intended to function as a per se bar

to out-of-state plaintiffs’ claims of deceptive acts leading to transactions within the state”).

In Goshen, the New York Court of Appeals considered whether “hatching a

scheme” or originating a marketing campaign in New York constituted an actionable

deceptive act or practice under the statute where the entire transaction took place out-of-

state, or whether the statute required that the consumer be deceived in New York. Id. at

324. In one of the two cases on appeal in Goshen, plaintiff alleged that defendant

conceived and orchestrated in New York an elaborate “vanishing premium” insurance

policy that it disseminated to potential customers. Id. at 325. Plaintiff received information

about the policy in Florida, he bought the policy and paid his premiums in Florida, and

used a Florida insurance agent. Id. Even though plaintiff alleged that the marketing

scheme was created in, and disseminated from, New York, the Court of Appeals held that

the transaction and resulting “deception took place in Florida.” Id. It concluded that “[t]he

phrase ‘deceptive acts or practices’ under the statute is not the mere invention of a

scheme or marketing strategy, but the actual misrepresentation or omission to a

consumer (citations omitted). Thus, to qualify as a prohibited act under the statute, the

deception of a consumer must occur in New York.” Id. at 325.

The Second Circuit considered the application of Goshen in Cruz, 720 F.3d 115.

The Circuit held that “the appropriate test . . . is to focus on the location of the transaction,

and in particular the strength of New York’s connection to the allegedly deceptive

transaction, rather than ‘on the residency of the parties.’” Id. at 122. Plaintiff in Cruz was

a Virginia resident who alleged that defendant FCDirectDealer, LLC (“FXDD”),

headquartered in New York City, violated §§ 349 and 350 by failing disclose the actual

risks of participating in the foreign exchange market and engaging in several allegedly

dishonest or deceptive practices Id. at 119. The Circuit found that New York had a strong

connection to the transactions because plaintiff alleged that: (1) FXDD was paid in New

York; (2) FXDD would not release funds from customer accounts until it received the

required forms at its New York office; (3) all customer communications were sent to New

York; (4) the contract specified that New York law governed all disputes; and (5) required

all disputes be adjudicated in New York courts. Id. at 123-24. The Circuit found these

allegations sufficient to survive a motion to dismiss, as they demonstrated that “at this

stage, ‘some part of the underlying transaction ... occur[red] in New York State,’ giving

Cruz statutory standing to sue for deceptive practices and false advertising under sections

349 and 350.” Id. at 124 (quoting Mountz v. Global Vision Prods., Inc., 770 N.Y.S.2d 603,

608 (Sup. Ct. 2003)).

Here, Neala pleads that (1) the Lease Agreement specifies that New York law

applies and requires all disputes be adjudicated in New York courts (ECF 1 at ¶ 122); (2)

“[t]he underlying lease and purchase agreements were developed in, disseminated from,

and financed through New York” (Id. at ¶¶ 20,122); (3) “[t]he subject Presses and their

components were designed, developed, and/or manufactured in New York”; (4) the

allegedly deceptive marketing strategies were developed in New York (¶¶ 65; 125); (5)

the defective Presses were designed, developed and/or made in New York (¶¶ 104, 124);

and (6) Xerox “is a New York corporation with a large physical presence in New York.”4

While acknowledging that choice-of-law and forum selection provisions are not

dispositive, Neala relies on Wright v. Publishers Clearing House, Inc. for the proposition

that “the parties’ agreement to a New York choice-of-law provision certainly enhances the

transactions’ connection to the state.” 439 F. Supp. 3d 102, 112 (E.D.N.Y. 2020). What

Neala fails to acknowledge is that the court in Wright found such provisions inadequate

to sustain jurisdiction where the transactions at issue “have no locus in New York beyond

the Defendants’ residency.” Id.; see also 4 K & D Corp. v. Concierge Auctions, LLC, 2

F. Supp. 3d 525, 547-48 (S.D.N.Y. 2014) (“even though choice-of-law and forum-

selection provisions may be indicative of a transaction in New York when other factors

are presents, the mere fact that parties agreed to be bound by New York law and to

resolve their disputes in courts in New York does not, in itself, provide any indication as

to where the transaction occurred.”). As the Wright court noted, “the fact remains that the

Plaintiffs merely received advertisements and products from New York. Goshen makes

clear that fact alone does not establish that the transaction occurred in New York,

because transactions occur where the consumer viewed the advertisement or purchased

the product.” Id.

Similarly, Neala’s allegations fail to plead that the transactions at issue took place

in New York. Marketing plans created in New York but carried out elsewhere do not

suffice to base a transaction in New York. Goshen, 746 N.Y.2d at 864 (defendant must

do more than “‘hatch[] a scheme’ or originat[e] a marketing campaign in New York”)); see

4 Neala states in its responsive brief that Xerox “receives payments and processes sales through its New

York office” (ECF 14 at 18) but no such allegation appears in its Complaint.

also Wright, 439 F. Supp. 2d at 112 (plaintiffs alleged that “the Defendants hatched the

deceptive scheme in New York; sent the relevant advertising materials from New York;

and received payment and processed orders in New York. These facts neither individually

nor cumulatively establish that some part of the underlying transaction occurred in New

York State”) (collecting cases). Nor does Cruz extend as far as Neala would like, since

the plaintiffs in Cruz plausibly pleaded that defendant was paid in New York, required all

customer communications be sent to its New York office, and “refused to disburse funds

from customer accounts until it receive[d] a “Funds Redemption Form” at its New York

office.” 720 F.3d at 123-24. Similarly, the remaining cases Neala relies also pleaded

greater connections with New York than Neala does here. See Polk v. Del Gatto, Inc.,

2021 WL 3146291, at *10 (S.D.N.Y. July 23, 2021) (jurisdiction existed where defendant

receives, processes and sends payments through New York office and agreement

contains New York choice of law clause); Cline v. TouchTones Music Corp., 211 F. Supp.

3d 628, 633 (S.D.N.Y. 2016) (jurisdiction existed where payments processed in New

York, company provided its services out of New York, and agreement contained New

York choice-of-law clause).

Even if Neala established the “in this state” requirement, its §§ 349 and 350 claims

are also time-barred. The Lease Agreement provided that “[a]ny action you take against

Xerox must be commenced within 2 years after the event that caused it.” (ECF 12-2 at 6

¶ 22). Though the statute of limitations is an affirmative defense, a complaint may be

dismissed for failure to state a claim if the allegations in the complaint “show that relief is

barred by the applicable statute of limitations.” Jones v. Bock, 549 U.S. 199, 215 (2007);

see also Muto v. CBS Corp., 668 F.3d 53, 60 (2d Cir. 2012) (same). Xerox argues, and

Neala does not contest, that the GBL claims are time-barred absent tolling or estoppel.

(ECF 14 at 20) Neala argues the claims are not time barred because (1) Xerox engaged

in a series of continuing wrongs, which tolls the limitations period until the last wrongful

act is committed; and (2) Xerox is estopped from invoking the contractual limitations

period because it engaged in affirmative deceptions. (ECF 14 at 20-22).

“‘Where a [GBL] § 349 claim is based on a series of allegedly deceptive acts, ...

the continuing violations doctrine applies and effectively tolls the limitations period until

the date of the commission of the last wrongful act.’” Stanley, 466 F. Supp. 3d at 432

(quoting Breitman v. Xerox Educ. Servs., LLC, No. 12 Civ. 6583(PAC), 2013 WL

5420532, at *4 (S.D.N.Y. Sept. 27, 2013)). “New York courts have explained that tolling

based on the doctrine ‘may only be predicated on continuing unlawful acts and not on the

continuing effects of earlier unlawful conduct[.]’ “ Miller v. Metro. Life Ins. Co., 979 F.3d

118, 122 (2d Cir. 2020) (quoting Salomon v. Town of Wallkill, 174 A.D.3d 720, 721 (2d

Dep’t 2019)). “The distinction is between a single wrong that has continuing effects and

a series of independent, distinct wrongs[.]” Henry v. Bank of Am., 147 A.D.3d 599, 601

(1st Dep’t 2017) (citations omitted).

Here, the Complaint alleges that Neala “would not have leased or purchased

Presses had the drum defects been disclosed to them or if they had been aware of the

actual output capacities given the frequency in which the Presses are broken down.”

(ECF 1 at ¶ 118) But the Presses were leased in 2019 (ECF 12-2), so any claim based

on that deception is time-barred. Neala argues that the “ongoing misrepresentations

about the defects inherent in the Presses, drums, and toner (and its ability to remedy

them) are “a series of independent, distinct wrongs” that toll the limitations period. (ECF

14 at 20-21) The difficulty for Neala is that the Complaint does not allege that the alleged

ongoing misrepresentations caused it to incur an injury. See, e.g., Stutman v. Chemical

Bank, 95 N.Y.2d 24, 29 (2000) (“A plaintiff under section 349 must prove three elements:

first, that the challenged act or practice was consumer-oriented; second, that it was

misleading in a material way; and third, that the plaintiff suffered injury as a result of the

deceptive act.”). In its opposition brief, Neala alleges “Defendant induced Plaintiff by

deception to believe that the Presses, drums, and toner were not defective and/or could

be remedied and therefore no cause of action existed,” (ECF 14 at 20) (emphasis added),

but there are no allegations to that effect in the Complaint.

Neala also argues that the limitations period is tolled because its continued lease

payments “constitute independent, distinct wrongs.” (ECF 14 at 21). Neala relies on

Stanley for the proposition that “repetitive, allegedly wrongful payments have frequently”

been found to be continuing independent wrongs. 466 F. Supp. 3d at 432. Stanley is

distinguishable: there, the charges themselves each allegedly “violated the quality of

pricing that Plaintiff thought she would receive from Defendant.” Id. “Therefore, each

payment pursuant to each charge constitutes an individual wrongful act.” Id. (quotation

marks omitted). Here, however, payments made under the Lease Agreement cannot be

the wrongful act. The Lease Agreement contains a “hell-or-high water clause” in the

Lease Agreement, which provided that Neala’s:

OBLIGATION TO MAKE ALL PAYMENTS, AND TO PAY ANY OTHER

AMOUNTS DUE OR TO BECOME DUE, IS ABSOLUTE AND

UNCONDITIONAL AND NOT SUBJECT TO DELAY, REDUCTION, SET-

FF, DEFENSE, COUNTERCLAIM OR RECOUPMENT FOR ANY REASON

WHATSOEVER, IRRESPECTIVE OF XEROX’S PERFORMANCE OF ITS

OBLIGATIONS HEREUNDER. ANY CLAIM AGAINST XEROX MAY BE

ASSERTED IN A SEPARATE ACTION AND SOLELY AGAINST XEROX.

(ECF 12-2 at 6 ¶ 20). Unlike the payments at issue in Stanley, the payments here stem

from one alleged wrong act: the lease of defective Presses. The lease payments are

“continuing effects of earlier unlawful conduct,” not “separate occurrences” that restart the

clock for statute of limitations purposes. See, e.g., DuBuisson v. Nat’l Fire Ins. of

Pittsburgh, No. 15-2259, 2021 WL 3141672, at *8 (S.D.N.Y. July 26, 2021) (where

plaintiffs alleged they suffered harm “as a result of false and misleading advertising that

induced them to purchase the insurance policies in the first place. The monthly premiums

are merely “continuing effects of earlier unlawful conduct,” monthly premium payments

were continuing effects).

Nor does equitable tolling apply. “Equitable tolling is only appropriate in rare and

exceptional circumstances in which a party is prevented in some extraordinary way from

exercising his rights.” Zerilli–Edelglass v. N.Y. City Transit Auth., 333 F.3d 74, 80 (2d

Cir.2003) (internal quotation marks, alterations, and citation omitted). That is “generally”

the case “where plaintiff was unaware of his or her cause of action due to misleading

conduct of the defendant.” Id. “Under New York law, equitable tolling is only available if

‘plaintiff was induced by fraud, misrepresentations or deception to refrain from filing a

timely action.’” Orange Transp. Servs., Inc. v. Volvo Group N. Am., LLC, 450 F. Supp.

3d 311, 321 (W.D.N.Y. 2020) (quoting Woods v. Maytag Co., No. 10-CV-559, 2010 WL

4314313, at *4 (E.D.N.Y. Nov. 2, 2010). “Generalized or conclusory allegations of

fraudulent concealment are not sufficient to toll a statute of limitations.” De Sole v.

Knoedler Gallery, LLC, 974 F. Supp. 2d 274, 319 (S.D.N.Y. 2013). “For equitable tolling

to apply, a plaintiff may not rely on the same act that forms the basis for the claim—the

later fraudulent misrepresentation must be for the purpose of concealing the former tort.”

Id. “Equitable tolling ‘is triggered by some conduct on the part of the defendant after the

initial wrongdoing; mere silence or failure to disclose the wrongdoing is insufficient.’” Id.

(quoting Ross v. Louise Wise Servs., Inc., 8 N.Y.3d 478, 492 (2007)). The “burden of

proving that tolling is appropriate rests on the plaintiff.” Chapman v. Choice–Care Long

Island Term Disability Plan, 288 F.3d 506, 512 (2d Cir. 2002).

Neala contends in its brief that Xerox “made numerous affirmative representations

about the capacity and reliability of its Presses, and it was only with the passage of time

that Plaintiff could learn of their falsity.” (ECF 14 at 21). Even assuming arguendo the

Complaint alleges that Xerox made affirmative representations, as opposed to concealing

the issues related to the allegedly defective products, that is not enough for Neala to

invoke equitable estoppel to toll the limitations period. Rather, Neala needed to plead that

Xerox acted to prevent Neala from exercising its rights during the limitations period. As

the Complaint lacks any such allegations, Neala’s claims under §§ 349 and 350 are time

barred.

Negligence and Negligent Misrepresentation

New York does not allow a breach of contract to give rise to a tort claim unless a

legal duty independent of the contract exists and is violated. See Clark–Fitzpatrick v. Long

Island R.R. Co., 70 N.Y.2d 382, 389 (1987). The “legal duty must spring from

circumstances extraneous to, and not constituting elements of, the contract, although it

may be connected with and dependent on the contract.” Id. “Where an independent tort

duty is present, a plaintiff may maintain both tort and contract claims arising out of the

same allegedly wrongful conduct.” Bayerische Landesbank v. Aladdin Capital Mgmt. LLC,

692 F.3d 42, 59–61 (2d Cir. 2012).

Neala argues that Xerox owes it an independent duty under GBL §§ 349 and 350.

As set out above, however, Neala’s claims under those statutes are not cognizable.

Neala relies on Sanchez v. Ehrlich for the proposition that the violation of a statute that

imposes a duty “establishes the duty and breach elements of a negligence claim.” No.

16-CV-8677, 2018 WL 2084147, at *8 (S.D.N.Y. Mar. 29, 2018). However, Sanchez

addresses the use of a statutory violation in the context of a noncontractual negligence

claim. It does not stand for the proposition that a statutory violation may create an

independent duty in tort separate from a defendant’s contractual duties. Neala points to

no other independent duty to support its negligence claim, and thus the claim is

dismissed.

Neala’s claim also fails under the economic loss doctrine. “This doctrine prevents

a plaintiff from recovering purely economic losses in a negligence action.” Cruz v. TD

Bank, N.A., 855 F. Supp. 2d 157, 178 (S.D.N.Y. 2012), aff’d and remanded, 742 F.3d 520

(2d Cir. 2013). “[C]ourts have applied the economic loss rule to prevent the recovery of

damages that are inappropriate because they actually lie in the nature of breach of

contract as opposed to tort.” Hydro Invs., Inc. v. Trafalgar Power Inc., 227 F.3d 8, 16 (2d

Cir. 2000).

Neala argues it falls within two exceptions to the economic loss rule. (ECF 14 at

26-27). The first, the services exception, “exists for claims for negligent performance of

contractual services.” B&M Linen, Corp. v. Kannegiesser USA, Corp., 2013 WL 1142679,

at *6 (S.D.N.Y. March 19, 2013). However, Neala’s briefing omits the fact that a plaintiff

must demonstrate an independent duty separate from the service contract to benefit from

this exception. Id. (“courts have precluded a plaintiff from invoking [the service contract]

exception absent a showing of a duty independent of a contractual relationship”); see also

Betancourt Props. Management Corp. v. Simplex Grinnell LP, 2009 WL 424144, at *5

(S.D.N.Y. Feb. 19, 2009) (same). Neala’s failure to plead a duty independent of the

contract means it cannot avail itself of this exception.

The service exception also does not apply where, as here, the underlying contract

is not “predominately service oriented.” Vitolo v. Dow Corning Corp., 651 N.Y.S.2d 104

(2d Dep’t 1996). “The distinction between goods contracts and service contracts turns on

whether the transaction, taken as a whole, is ‘deemed to be a sale of goods, and thus

falls within U.C.C. article 2;’ or is ‘deemed to be predominantly service oriented,’ in which

case ‘the case falls outside U.C.C. article 2 and plaintiff would have no cause of action

for breach of implied or express warranties but would have a cause of action for

negligence.” Shema Kolainu-Hear Our Voices v. ProviderSoft, LLC, 832 F. Supp. 2d 194,

207 (E.D.N.Y. 2010) (quoting Word Mgmt. Corp. v. AT & T Info. Sys., Inc., 525 N.Y.S.2d

433, 435–36 (3d Dep’t 1988). “The fact that some maintenance and support services are

included in the contract does not change the conclusion that it is not “predominantly

service oriented.” Id. As in Shema, here the Lease Agreement is primarily for the lease

of the Presses, and the provision of maintenance services is incidental to that agreement.

See id. (collecting cases).

Finally, Neala argues that the economic loss rule does not apply because “[c]ourts

have held that a claim for tort liability is available where a product causes damage, not

only to itself, but to other property as well.” Rochester-Genesee Regional Trans. Auth. v.

Cummins, Inc., 2010 WL 2998768, at *9 (W.D.N.Y. July 28, 2010). “Critical to a

determination of whether a tort claim is barred by the economic loss doctrine is whether

damages are sought for the failure of the product to perform its intended purpose, in which

case recovery is barred by the economic loss doctrine, or for direct and consequential

damages caused by a defective and unsafe product.” Praxair, Inc. v. Gen. Insulation Co.,

611 F. Supp. 2d 318, 326 (W.D.N.Y. 2009). That is, the “doctrine does not apply where a

defective product causes damage to other property.” Id. at 326 (quotation marks omitted)

(collecting cases).

In Praxair, the plaintiff brought negligence and strict liability claims against the

manufacturer of an insulation coating product used as a joint sealant for its cryogenic

testing facility. Id. at 321. Plaintiff alleged that the coating caused extensive corrosion to

the piping system employed throughout the facility. Id. The court noted that plaintiff did

not seek damages related to the joint sealant’s “failure to perform its intended purpose as

an insulation joint sealer.” Id. at 327. Rather, plaintiff alleged that the mastic was

defectively manufactured in that included ingredients that damaged the pipes. Id.

Because “Plaintiff [did] not seek to recover under tort for the mastic's failure to perform its

intended purpose as an insulation joint sealant,” the court found it premature to dismiss

the tort claims as barred by the economic loss doctrine. Id. at 327.

Neala alleges that because Xerox failed to properly repair the Presses, it incurred

damages in “the form of . . . wasted materials (e.g. paper) . . ..” (ECF 1 at ¶ 97). But

those damages flow directly from the Presses’ failure to perform its intended purpose.

The allegations are similar to those in Bristol Village, Inc. v. Louisiana-Pacific Corp., 916

F. Supp. 357 (W.D.N.Y. 2013), where plaintiff’s claims were barred by the economic loss

rule. There, plaintiff sued a product manufacturer alleging that, as a result of defective

trim board, plaintiff’s structure sustained significant water damage. Id. The district court

dismissed the claim as barred by the economic loss rule, concluding “that the damage

claimed relates to the expectations of the parties regarding the performance of [the

product], thus relegating these plaintiffs to contractual remedies such as warranty.” Id. at

366; see also Hemming v. Certainteed Corp., 488 N.Y.S.2d 789 (4th Dep’t 1983) (tort

claims barred by the economic loss doctrine where “[t]he essence of plaintiffs’ claims

[was] that the [siding systems] did not perform properly to protect their homes and, as a

consequence, they ... suffered direct loss to the siding itself and consequential damages

to their homes”).

Negligent Misrepresentation

Under New York law, “[a] claim for negligent misrepresentation requires the plaintiff

to demonstrate (1) the existence of a special or privity-like relationship imposing a duty

on the defendant to impart correct information to the plaintiff; (2) that the information was

incorrect; and (3) reasonable reliance on the information.” Mandarin Trading Ltd. V.

Wildenstein, 16 N.Y.3d 173, 180 (2011). “A special relationship may be established by

‘persons who possess unique or specialized expertise, or who are in a special position of

confidence and trust with the injured party such that reliance on the negligent

misrepresentation is justified.’” Id. (quoting Kimmell v. Schaefer, 89 N.Y.2d 257, 263

(1996)). Neala argues that the relationship between itself and Xerox “satisfies that

standard” because Xerox had “superior knowledge,” and “made its misrepresentations

with the awareness that they would be used by printers to make decisions about which

equipment to use to run their businesses.” (ECF 14 at 29). However, New York courts

“regularly hold as a matter of law that an arm’s length business arrangement between

sophisticated and experienced parties cannot give rise to a ‘special relationship.’ “ Fed.

Hous. Fin. Agency v. UBS Ams., Inc., 858 F. Supp. 2d 306, 334 (S.D.N.Y. 2012)

(collecting cases). Further, “knowledge of the particulars of [a] company’s business—

and of the true situation underlying the misrepresentations pertaining to that business ...

does not constitute the type of ‘specialized knowledge’ that is required in order to impose

a duty of care in the commercial context.” JP Morgan Chase Bank v. Winnick, 350 F.

Supp. 2d 393, 402 (S.D.N.Y. 2004).

Nor does Sparago v. Beaver Mountain Log Homes, Inc. provide Neala the support

it seeks. No. 20-276, 2021 WL 965448 (S.D.N.Y. March 15, 2021). There, the district

court found that defendant “essentially stood in the role of project manager for the building

of [plaintiff’s] log cabin home,” and “Defendant made statements to Plaintiff that were to

be ‘used for a particular purpose’ during the builder selection process, namely that [certain

contractors] were reputable and skilled contractors, despite Defendant knowing

information that would show otherwise.” Id. at *8. Additionally, the complaint in Sparago

specifically pleaded that “Defendant’s promotional materials, website, and employees

represent[ed] that the company offers ‘knowledge and expertise’ to ‘put its customers’

minds at ease by assuring them it will find reputable builders for their construction

projects.’” Id. The Complaint here lacks any similar representations, or any other

allegations that would raise the relationship between Xerox and Neala from that of leasor-

leasee to a “special relationship.” See, e.g., Century Pac., Inc. v. Hilton Hotels Corp., No.

03 Civ. 8258 (SAS), 2004 WL 868211, at *8 (S.D.N.Y. Apr. 21, 2004) (“A simple

commercial relationship, such as that between a buyer and seller or franchisor and

franchisee, does not constitute the kind of ‘special relationship’ necessary to support a

negligent misrepresentation claim.”).

CONCLUSION

Xerox's Motion to Dismiss the Complaint is granted as to all but Count One of the

Complaint, which is dismissed without prejudice only insofar as it seeks damages other

than the contractual remedy of replacement. Count One will proceed insofar as it seeks

the remedy of replacement. Count Two (violations of GBL §§ 349 and 350), Count Four

(negligence), and Count Five (negligent misrepresentation) are dismissed without

prejudice. Count Three (violations of the Lanham Act) and Count Six (unjust enrichment)

are dismissed with prejudice, as Neala declined to defend them.

SO ORDERED.

DATED: September 4, 2024

Rochester, New York Sf °

: a?

CHARLES ¥ SIRAG

United States District Judge

28