Connaughton v. Chipotle Mexican Grill, Inc.

This opinion is uncorrected and subject to revision before

publication in the New York Reports.

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No. 46

Kyle Connaughton,

Appellant,

v.

Chipotle Mexican Grill, Inc.,

et al.,

Respondents.

Daniel J. Kaiser, for appellant.

Jean-Claude Mazzola, for respondents.

RIVERA, J.:

Plaintiff Kyle Connaughton appeals, as limited by his

brief, from an Appellate Division order affirming the dismissal

of his complaint under CPLR 3211(a)(7) for failure to state a

cause of action for fraudulent inducement against defendants

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Chipotle Mexican Grill and its Chief Executive Officer, Steven

Ells. We affirm because plaintiff failed to adequately plead

compensable damages.

I.

Plaintiff is a well-known chef who, prior to his

employment with Chipotle, was developing a concept for a ramen

restaurant chain. Plaintiff prepared a business plan and

actively pursued potential buyers until Ells showed interest in

the concept. Plaintiff then turned his efforts to developing

ideas specifically for Chipotle's restaurant platform.

Thereafter, Ells offered to purchase the concept, and plaintiff,

with the assistance of legal counsel, negotiated an agreement

whereby he would work on the restaurant design for Chipotle with

the title of Culinary Director based out of New York City.

The agreement expressly states that plaintiff's

employment was at-will, and that both plaintiff and Chipotle had

the right to terminate the contract at any time without notice or

cause. The agreement details plaintiff's compensation. Chipotle

agreed to pay plaintiff an annual salary of $150,000, and monthly

car and housing allowances totaling $2,700. Plaintiff was also

eligible for a merit bonus, increased salary, and a defined

number of shares in Chipotle stock, which vested based on years

of uninterrupted employment. Some stocks were scheduled to vest

after two years, and another set would vest after plaintiff

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reached his three-year anniversary with Chipotle.

Plaintiff diligently worked to develop the ramen

restaurant concept with Chipotle, and traveled widely to perfect

his ideas and to purchase equipment and proprietary systems. In

preparation for the launch of the flagship restaurant, Chipotle

promoted the hiring of plaintiff as its new high-level chef.

Plaintiff appeared in various widely-circulated and noted

publications, spoke to journalists, and attended Chipotle-

sponsored events to help market Chipotle restaurant brands.

All seemed to be going well and, in accordance with the

agreement, plaintiff received his annual salary, monthly

allowances, a first year-end bonus, and first set of vested

stock. It appeared that defendants were on schedule to launch

the restaurant in New York City by the end of plaintiff's third

year of employment. However, things took a very different turn.

While plaintiff was working on staffing for the new

restaurant, he learned from Chipotle's Chief Marketing Officer

(CMO) that Ells had a non-disclosure agreement (NDA) with another

well-known chef, who previously worked with defendants on a ramen

restaurant concept, similar in both purpose and design to the one

defendants contracted plaintiff to develop. The prior project

fell apart when that chef and defendants failed to agree on

financial terms. Defendants remained subject to the NDA with the

other chef. Chipotle's CMO confided in plaintiff that the chef

would sue under the NDA if Chipotle opened the ramen restaurant.

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Plaintiff further alleged that defendants converted, without

authorization, the other chef's design for what became the

Washington, D.C. flagship restaurant for one of Chipotle's other

brands.

When plaintiff confronted Ells about the NDA, Ells told

him to continue with the work on the ramen restaurant, but

plaintiff refused. Soon thereafter, Ells fired plaintiff.

As relevant to this appeal, plaintiff sued defendants

for fraudulent inducement.1 Plaintiff claimed that by virtue of

his reasonable reliance on Ells' omissions about the business

arrangement with the other chef, defendants fraudulently induced

him to work for Chipotle and to share his restaurant concept to

his detriment. He alleged that he would not have entered into

the agreement with defendants had he known about the prior

business arrangement. He further asserted that the ideas the

Chipotle staff contributed to plaintiff's design for the

restaurant concept actually belonged to the other chef, and that

using those ideas to launch plaintiff's project would subject

plaintiff to legal action. Plaintiff claimed he was "damaged in

an amount to be determined at trial, including, but not limited

to, the value of his Chipotle equity and lost business

opportunities in connection with his ramen concept." He further

1

Plaintiff also alleged a cause of action for unjust

enrichment against Chipotle for its failure to compensate him for

his restaurant concept. Plaintiff does not challenge the

dismissal of this cause of action on appeal to our Court.

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requested compensatory and punitive damages in amounts to be

determined at trial, as well as attorneys fees and disbursements.

Defendants moved to dismiss the complaint under CPLR

3211(a)(1) based on the documentary evidence that established

plaintiff's at-will employment status, and under 3211(a)(7) for

failure to state a cause of action. Defendants argued, in part,

that a cause of action for fraudulent inducement may be

maintained only where a party has suffered out-of-pocket

pecuniary loss, not, as in plaintiff's case, where damages are

speculative or consist of lost business opportunities.

Supreme Court granted the motion and the Appellate

Division affirmed with two justices dissenting (135 AD3d 535 [1st

Dept 2016]). The majority held that plaintiff's damages were

speculative and the facts alleged did not support an inference of

calculable damages. The dissent concluded that because the

pleading must be construed liberally and damages need not be

proven during the pleading stage, the case should proceed to

discovery to allow plaintiff to accumulate evidence of a

pecuniary loss. The dissent also maintained that, if successful,

plaintiff would be entitled to nominal damages (135 AD3d at 546-

547 [Saxe, J., dissenting]).

Plaintiff appealed to this Court as of right under CPLR

5601 (a), based on the two-justice dissent on a question of law.

We now affirm.

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II.

On a motion to dismiss for failure to state a cause of

action under CPLR 3211 (a)(7), "[w]e accept the facts as alleged

in the complaint as true, accord plaintiff[] the benefit of every

possible favorable inference, and determine only whether the

facts as alleged fit within any cognizable legal theory" (Leon v

Martinez, 84 NY2d 83, 87-88 [1994]). "At the same time, however,

allegations consisting of bare legal conclusions . . . are not

entitled to any such consideration" (Simkin v Bank, 19 NY3d 46,

52 [2012] [internal quotation marks omitted]). Dismissal of the

complaint is warranted if the plaintiff fails to assert facts in

support of an element of the claim, or if the factual allegations

and inferences to be drawn from them do not allow for an

enforceable right of recovery (see e.g. Basis Yield Alpha Fund

(Master) v Goldman Sachs Group, Inc., 115 AD3d 128, 134 [1st Dept

2014]; see also John R. Higgitt, Practice Commentaries, CPLR §

3211 ["(T)he (CPLR 3211[a][7]) motion is useful in disposing of

actions . . . in which the plaintiff has identified a cognizable

cause of action but failed to assert a material allegation

necessary to support the cause of action."]).

To allege a cause of action based on fraud, plaintiff

must assert "a representation or a material omission of fact

which was false and known to be false by defendant, made for the

purpose of inducing the other party to rely upon it, justifiable

reliance of the other party on the misrepresentation or material

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omission and injury" (Lama Holding Co. v Smith Barney Inc., 88

NY2d 413, 421 [1996] [internal citation omitted]). Critically,

"[a] false representation does not, without more, give

rise to a right of action, either at law or in equity,

in favor of the person to whom it is addressed. To give

rise, under any circumstances, to a cause of action,

either in law or equity, reliance on the false

representation must result in injury . . . . If the

fraud causes no loss, then the plaintiff has suffered

no damages" (Sager v Friedman, 270 NY 472, 480-481

[1936]).

In New York, as in multiple other states, "'[t]he true

measure of damage is indemnity for the actual pecuniary loss

sustained as the direct result of the wrong' or what is known as

the 'out-of-pocket' rule" (Lama Holding, 88 NY2d at 421, quoting

Reno v Bull, 226 NY 546, 553 [1919]). Under that rule,

"[d]amages are to be calculated to compensate plaintiffs for what

they lost because of the fraud, not to compensate them for what

they might have gained . . . . [T]here can be no recovery of

profits which would have been realized in the absence of fraud"

(id. at 421, citing Foster v Di Paolo, 236 NY 132 [1923], AFA

Protective Sys. v American Tel. & Tel. Co., 57 NY2d 912 [1982],

and Cayuga Harvester, Inc. v Allis-Chalmers Corp., 95 AD2d 5 [4th

Dept 1983]). Moreover, this Court has "consistent[ly] refus[ed]

to allow damages for fraud based on the loss of a contractual

bargain, the extent, and indeed . . . the very existence of which

is completely undeterminable and speculative" (Dress Shirt Sales

v Hotel Martinique Assocs., 12 NY2d 339, 344 [1963]).

Here, plaintiff's pleading is fatally deficient because

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he did not assert compensable damages resulting from defendants'

alleged fraud. The complaint alleges that in reliance on

defendants' fraudulent omissions, plaintiff stopped soliciting

potential buyers. However, the complaint fails to allege that, in

doing so, he rejected another prospective buyer's offer to

purchase the concept. Instead, plaintiff avers that once Ells

showed an interest in his ramen restaurant idea, plaintiff turned

to selling the concept to Chipotle. These are factual assertions

of the quintessential lost opportunity, which are not a

recoverable out-of-pocket loss (see Lama Holding, 88 NY2d at

422). As this Court has repeatedly stated, such damage is

"disallowed as too speculative a recovery" (Dress Shirt Sales, 12

NY2d at 344; see also Lama Holding, 88 NY2d at 422).

Similarly inadequate to satisfy his pleading burden are

plaintiff's allegations that he might incur litigation expenses

and potential loss of reputation if named in a civil action by

the other chef. These are not claims of actual out-of-pocket

loss but speculative claims of possible future damages, and fare

no better than his lost profits claim. There are also no facts

alleged in the complaint to support allegations of reputational

harm. For example, plaintiff did not assert or provide facts

from which it could be inferred that he lost standing within the

restaurant industry, or that he is unemployable as a result of

his association with Chipotle.

Nor is plaintiff entitled to nominal damages under this

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Court's holding in Kronos, Inc. v AVX Corp. (81 NY2d 90, 95

[1993]). In that case, the Court explained that while nominal

damages are typically available in a contracts case to vindicate

a party's contractual rights, nominal damages are only available

in tort actions to "protect an important technical right" (id. at

96, quoting Note, Damages Recoverable in an Action for Inducing

Breach of Contract, 30 Colum L Rev 232, 238 [1930] [internal

quotation marks omitted]). Nominal damages are not available when

actual harm is an element of the tort (Restatement [Second] of

Torts § 907; accord 16 NY Practice Series, NY Law of Torts §§

1:74, 21:2 [2016]). Conversely, nominal damages may be available

in an intentional tort case where the plaintiff need not allege

harm to maintain an action against defendant (see Kronos, 81 NY2d

at 95 [explaining that nominal damages are available for

trespass, which does not require a showing of harm]). Since

actual harm is an element of fraudulent inducement (see Eurycleia

Partners, LP v Seward & Kissel, LLP, 12 NY3d 553, 559 [2009]),

and there is no compelling reason to carve out an exception for

such cause of action, as a general matter or specifically in this

case, plaintiff is not entitled to nominal damages.2

Contrary to plaintiff's argument, under the

2

Based on our conclusion that the cause of action was

properly dismissed because plaintiff failed to plead compensable

damages, we have no reason to address defendants' alternative

argument that plaintiff's at-will status bars his action for

fraudulent inducement against his former employer.

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circumstances of this case, discovery is not warranted because

the defect in the pleading is with plaintiff's inability to

recover for the alleged injury. "The mere hope that discovery

might provide some factual support for a cause of action is

insufficient to avoid dismissal of a patently defective cause of

action" (Mandarin Trading Ltd. v Wildenstein, 65 AD3d 448, 451

[1st Dept 2009] [internal citations omitted]). To the extent

plaintiff claims that discovery will provide proof that

defendants' fraud caused him to forgo offers from other potential

purchasers of his ramen restaurant concept, no amount of

discovery will transform these "undeterminable and speculative"

lost opportunities from noncompensable damages to out-of-pocket

losses (see Lama Holding, 88 NY2d at 421-422).

III.

Here, "accept[ing] the facts as alleged in the

complaint as true, and accord[ing] plaintiff[] the benefit of

every possible favorable inference," plaintiff failed to plead a

cause of action for fraudulent inducement (see Leon, 84 NY2d at

87-88). Plaintiff did not allege any out-of-pocket loss, and he

did not otherwise plead a recoverable harm. We may not read into

his allegations a claim for cognizable damages, which he did not

actually incur, under the guise of liberally construing the

complaint. Therefore, the order of the Appellate Division, in so

far as appealed from, should be affirmed, with costs.

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* * * * * * * * * * * * * * * * *

Order, insofar as appealed from, affirmed, with costs. Opinion

by Judge Rivera. Chief Judge DiFiore and Judges Stein, Fahey and

Wilson concur. Judge Garcia took no part.

Decided May 2, 2017

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