SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK:COMMERCIAL DIVISION

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BRAINSTORMS INTERNET MARKETING, INC.,
BRAINSTORMS INTERNET MARKETING, LLC,
DAVID BLAISE, CLAIRE BLAISE, RICHARD
DRAKE, THOMAS M. FRY, JEAN P. FRY and
JEREMY BARBERA,
                                                                Plaintiffs,
                                                                                                Index No. 604052/01
                              -against-

USA NETWORKS, INC., USA NETWORKS
INTERACTIVE LLC, and USA CABLE,

                                                                Defendants.

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Defendants USA Networks, Inc. (Networks), USA Networks Interactive LLC (USANI) and USA Cable (Cable), hereinafter collectively referred to as USA, move, pursuant to CPLR 3211(a)(7), to dismiss the complaint on the ground that each of the claims alleged fails to state a cause of action.

Brainstorms Internet Marketing, Inc. (Brainstorms) was an Internet marketer and seller of science fiction related products.

David Blaise founded the business in 1988, which he owned with his wife, Claire Blaise. Richard Drake joined the enterprise as chief financial officer. By 1996, Brainstorms had developed a substantial business in merchandise connected to the television show Star Trek, and then it began working with the Sci-Fi Channel and others. As the business expanded to cover other memorabilia, the company expanded its operations center, leasing property from David Blaise and his wife, and borrowing monies from Thomas and Jean Fry and Jeremy Barbera.

In the early part of 2000, Brainstorms began discussions with Fandom, Inc. (Fandom), a California-based Internet company, for the sale of its 800-Trekker assets. In March 2000, Blaise and Drake were dissuaded from reaching a deal with Fandom, after they were approached by Ben Tatta, Senior Vice President of defendant USANI, a subsidiary of Cable and an affiliate of Networks. Blaise and Drake began negotiations for the purchase of Brainstorms= assets by USANI. However, the defendants were not prepared to commit to a full purchase of Brainstorms, and sought to structure the acquisition as a two-step process, whereby USANI would purchase a 16% interest in Brainstorms and have an option to purchase the remainder. This plan was memorialized in a series of agreements, prepared by defendants counsel and executed by USANI, the Blaises and Brainstorms on June 25, 2000, effective June 23, 2000.

Under the Contribution Agreement, Brainstorms contributed all its assets and liabilities to a newly formed company, Brainstorms Internet Marketing LLC (BIMLLC). Under the Membership Interests Option Agreement (the Option Agreement), USANI provided a capital contribution of $404,040.40 in exchange for its 16% share of the newly formed company, with a four-month option to purchase the remaining 84% for the sum of $2,121,212.10, by October 23, 2,000.

During the option period granted to USANI for the contemplated purchase of the remaining interest in the newly formed company, the operations of BIMLLC would be governed by the terms of another agreement, the Brainstorms Internet Marketing, LLC Limited Liability Company Operating Agreement (the Operating Agreement). Paragraph 2.8 of the Operating Agreement provided that USANI would have veto power over any divestiture of business assets, except in the ordinary course of business, creation of any expenditure or liability in excess of $10,000, transfer of any member=s interest in BIMLLC and any contribution of capital other than one proportionate to memberships= interests.

In conjunction with the proposed sale, the parties entered into a Private Site Label Agreement, whereby Brainstorms agreed to perform various services during the option period for USANI, including the creation of web sites and Internet stores for other USANI affiliates. Brainstorms successfully completed all projects assigned to it under the Private Site Label Agreement.

Section 2.3(b) of the Option Agreement provided that USANI could exercise the option as follows:

Purchaser may exercise the Option at any

time prior to the expiration of the Exercise

Period, in whole but not in part, at the

election of Purchaser by delivering written

notice thereof (Aan Exercise_Notice@) to

sellers, specifying the date time and place

for the closing of such purchase and sale

of option interests, such date to be

at least two business days after the date

of such Notice ***

Under Section 8.7, notice would be deemed to have been duly given if personally delivered or mailed by registered or certified mail, return receipt requested, or by recognized overnight courier or by e-mail or facsimile transmission, and with respect to an e-mail, the date of delivery would be deemed the date sent.

The Purchase Agreement provided that, upon the exercise of the option, David Blaise and Richard Drake would be employed by the purchaser at certain salaries and with certain benefits; that the creditors of Brainstorms, the Frys and Barbera, were to have their loans paid; and that certain real property owned by the Blaises would be leased for use by the company at an increased rental.

USANI engaged in due diligence preliminary to completing the transaction and expressed concern over the level of debt that Brainstorms had undertaken. Discussions continued between David Blaise, Tatta of USANI, and Tim Peterman, the chief financial officer of Cable.

The complaint alleges that verbal assurances were given, by Tatta and Peterman, that the deal would was going to close, and that only non-substantive changes remained, such as title being taken by an affiliate of USANI, rather than by USANI itself. To this end, there was an exchange of e-mails between Tatta and Blaise, on September 6, 2000, regarding the final arrangements for a closing. First, Tatta e-mailed Blaise asking if he was available to come to New York on Monday September 11^th to work on finalizing the deal. Blaise responded that there was Anothing to prep@ given that the all the details had been worked out in the purchase agreement, and inquired Ado you mean for closing?@ Tatta replied AAt least final prep for closing. We will aim to close by the end of the week.@ Thereafter, Tatta=s secretary sent the following e-mail:

Subject: Brainstorms closing

When: Monday, September 11, 2000 2:00PM-3:00PM

(GMT-05:00)Eastern Time (US & Canada).

Where: tim peterman=s office

The complaint further alleges that Blaise and Tatta attended the meeting at Peterman=s office on the 11^th, both of them thinking that the deal had been agreed to, and would go forward to closing at that time, or at most there would be non-substantive technical changes discussed, with the final closing and transfer of funds to take place shortly thereafter. However, at the meeting, Peterman announced that the deal would not go through as structured, and that he remained open to restructuring the entire arrangement.

The complaint alleges that, even though Blaise believed the option to have been exercised by the issuance of the September 6, 2000 e-mail, setting the September 11, 2000 closing, he commenced renegotiating the terms of the sale, because he felt that he was left with no choice, if Brainstorms were to survive. After substantially reducing the price, Blaise believed that, once again, an agreement had been reached as confirmed by e-mail from Tatta in October, but USANI failed to complete this transaction as well.

In November 2001, after the option had expired, Tatta left USANI and was replaced by Michael Yorick. Still trying to salvage the deal, Blaise continued to try and negotiate, but these attempts proved unsuccessful when meetings and telephone calls were canceled by Yorick. Finally, in December, Yorick confirmed he had no acquisition budget and could not continue discussions. At this point, Brainstorms was without funding and without any viable means of finding alternative sources of financing with which to remain in business, and so it closed up operations and sold off what assets it could to pay off its existing liabilities.

Plaintiffs seek the monies that they would have been entitled to had the parties completed the sale of Brainstorms to USANI under the Option Agreement and auxiliary related commitments. This action for breach of contract and breach of fiduciary duty arises from USANI=s failure to complete the purchase of Brainstorms after it had purportedly exercised its option in the September 6, 2000 e-mail, which plaintiffs allege appears to set a date for the closing. Plaintiffs assert that the various agreements, particularly the Operating Agreement, created a fiduciary relationship, given the almost total control that USANI was permitted over the operations of Brainstorms during the option period and the inability of Brainstorms to make alternative arrangements to insure its economic viability. Further, plaintiffs claim that Brainstorms was used to help USANI and its affiliates and then discarded, while the plaintiffs placed their trust in defendants and relied to their detriment on the oral assurances that the purchase would be concluded. On the claim for breach of fiduciary duty, plaintiffs seek both compensatory and punitive damages. The complaint asserts that USANI was inadequately funded and totally controlled by Cable and Networks, for whom it was the alter ego.

Defendants move to dismiss, arguing that the complaint fails to allege that the option was never exercised, in accordance with the terms of the Option Agreement, so as to form a binding commitment to purchase the remainder of Brainstorms. Defendants maintain that the September 6, 2000 e-mail, relied on by plaintiffs, did not constitute an Exercise Notice, under Section 2.3(b), in that it did not provide unequivocal written notice that the option was being exercised, but rather was a communication from a secretary, with no binding authority, which merely set the time for a meeting. Defendants claim that the contracts set up an arms-length commercial transaction, that does not give rise to a fiduciary relationship, and that, in any event, the breach of fiduciary duty claim is duplicative of the breach of contract action. Defendants assert that several of the plaintiffs lack standing to raise these claims in that Drake, the Frys and Barbera lack privity, because they are not signatories to the Option Agreement. Further, that even if a claim in favor of Brainstorms and the Blaises should survive, it is in the nature of breach of contract, and there is no basis for punitive damages. They also contend that the allegations of the complaint are insufficient to support claims against Cable and Networks on an alter ego or piercing theory.

Plaintiff counters that the complaint sufficiently pleads both causes of action, because the allegations of the complaint are, for purposes of this motion, deemed true and that they are entitled to all favorable inferences and that defendants objections really raise factual issues. Plaintiffs take the position that the complaint alleges that the September 6, 2000 e-mail constitutes an Exercise Notice, in that it sets a date, time and place for closing as required by the Option Agreement, which is sufficient to support the contract claim; and that, under CPLR 3015 (a), they do not need to plead performance of conditions precedent, because the defendants have the burden of pleading non-performance specifically and with particularity. Plaintiff urges that the two causes of action are not duplicative, but rather alternative theories and that if the breach of fiduciary duty stands, then there is a basis for alleging punitive damages.

On a motion to dismiss the complaint made under CPLR

3211 (a) (7), the court must consider all the allegations of the complaint as true and plaintiff is entitled to all favorable inferences that reasonably flow therefrom. Cron v Hargro Fabrics, Inc., 91 NY2d 362 (1998). If the allegations of the complaint consist of bare legal conclusions, then they would not be entitled to such consideration. Perl v Smith Barney Inc., 230 AD2d 664 (1st Dept), lv denied 89 NY2d 803 (1996).

Here we are dealing with an option contract, which is Aan agreement to hold an offer open; it confers upon the optionee, for consideration paid, the right to purchase at a later date.@

(Leonard v Ickovic, 79 AD2d 603 [2d Dept 1980], affd 55 NY2d 727 [1981]). The unique feature of an option is that Awhile the optionor cannot act in derogation of the terms of the option agreement, the optionee is not bound until the option is actually exercised. Thus, until the optionee gives notice of his intent to exercise the option, the optionee is free to accept or reject the terms of the option.@ (Kaplan v Lippman, 75 NY2d 320,325 [1990], citing 1 Williston, Contracts '61B [3d ed 1957]). The unilateral option agreement will ripen into a fully enforceable bilateral contract only after the optionee exercises the option A>in accordance with its terms within the time and manner specified in the option.=@ Id..

The method for exercising the option is set forth in Section 2.3 (b) of the Option Agreement, as indicated above. Without a statement that defendants were exercising the option by giving "notice thereof," a notice merely specifying a date of closing was not sufficient to constitute an election. Plaintiffs have not stated the elements of a claim for breach of contract.

Generally, where there is an arms length transaction between sophisticated commercial entities, an action premised on contract will not give rise to a fiduciary relationship. National Union Fire Ins. Co. of Pittsburgh v Red Apple Group, Inc., 281 AD2d 296 (1st Dept 2001). A fiduciary relationship will not be imposed absent Aa showing of dramatically unequal bargaining power and fraudulent inducement, or a state of complete domination of one party by the other.@ Societe Nationale D=Exploitation Industrielle des Tabacs et Allumettes v Salomon Brothers Intl. Ltd., 1998 NY Misc Lexis 219, 223(Sup Ct NY County 1998), affd 251 AD2d 137 (1st Dept 1998), lv denied 95 NY2d 762 (2000). Here the allegations of reliance and trust necessary for a finding of a fiduciary relationship are stated in conclusory fashion and will not support a cause of action for breach of fiduciary duty. Gaidon v Guardian Life Ins. Co. of Am., 255 AD2d 101 (1st Dept 1998), mod other grounds 94 NY2d 330 (1999). While plaintiffs allege that the Operating Agreement places significant control or domination over Brainstorms= operations in the hands of USANI, Athe requisite high degree of dominance and reliance must have existed prior to the transaction giving rise to the alleged wrong, and not as a result of it.@ Societe Nationale D=Exploitation Industrielle des Tabacs et Allumettes v Salmon Brothers Intl Ltd., 251 AD2d 137, 138 (1st 1998), lv denied 95 NY2d 762 (2000). The domination alleged by plaintiffs stems from the transaction and does not pre-date it. Moreover, plaintiffs= claims, that USANI dominated Brainstorms ability to obtain outside financing are belied by plaintiffs= failure to allege that USANI acted to block any actual plans or attempts made by the plaintiffs to obtain outside financing. In the absence of exercise of such control and domination, there is no basis for finding that a fiduciary duty has been breached. The second cause of action must be dismissed.

The claim for punitive damages cannot be sustained where there are no allegations of outrageous conduct directed at the general public. New York Univ. v Continental Ins. Co., 87 NY2d 308 (1995).

Accordingly, it is

ORDERED that the motion to dismiss is granted.

Settle judgment on notice.

Dated: October 17, 2002

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J.S.C.