On March 15, 2017, the Appellate Division of the Supreme Court of the State of New York, First Judicial Department affirmed summary judgment for Morgan Stanley in a case commenced by IDT Corporation over twelve years ago asserting hundreds of millions of dollars of damages. This is the latest in a series of New York Court of Appeals and Appellate Division decisions in this matter, dating back to 2009, which together have affirmed the complete dismissal of IDT’s case.

The case stems from a memorandum of understanding (“MOU”) signed between Telefónica Internacional, S.A. and IDT Corporation on August 11, 1999, pursuant to which IDT was going to purchase capacity and equity on Telefónica’s undersea fiber optic cable network called SAm-1. Final contracts were never signed, and IDT sued Telefónica for breach of contract in an arbitration that ran from 2001 through 2003. During the arbitration, IDT served Morgan Stanley, Telefónica’s investment banker on the deal, with a subpoena duces tecum, and Morgan Stanley made a limited production in response. Ultimately, the arbitration panel found that Telefónica had repudiated the contract as of October 2000 and issued an award to IDT.

Unsatisfied with the size of the award, in 2004, IDT sued Morgan Stanley, Telefónica’s investment adviser, for tortious interference, breach of fiduciary duty, misappropriation of confidential information, and unjust enrichment. The Court of Appeals dismissed all of IDT’s original claims. However, IDT later amended its complaint to add claims for fraudulent misrepresentation and fraudulent concealment based on Morgan Stanley’s failure to produce two so-called “smoking gun” documents in response to the arbitration subpoena. According to IDT, had Morgan Stanley produced those documents, the arbitration panel would have determined that Telefónica breached the MOU in June 2000, rather than in October 2000. According to IDT, the size of the arbitration award would have been exponentially larger, because the fiber optic cable sector was at its peak in June 2000 but crashed by October 2000.

After discovery closed, Morgan Stanley moved for summary judgment. The motion argued that IDT’s fraud claims failed for lack of causation, lack of actual or justifiable reliance, and lack of cognizable damages. The trial court granted Morgan Stanley’s motion, finding that IDT had failed to adduce any evidence of both actual and justifiable reliance. The trial court also found that Morgan Stanley’s statement to IDT regarding its compliance with the arbitration subpoena was not a misrepresentation. The trial court did not reach Morgan Stanley’s other arguments.

IDT appealed, arguing that there were triable issues on the existence of a misrepresentation, actual reliance, and justifiable reliance. Morgan Stanley contested IDT’s appeal. First, Morgan Stanley argued that the alleged misrepresentation was not false. Rather, Morgan Stanley truthfully represented that it was unable to locate additional documents responsive to the arbitration subpoena in light of Morgan Stanley’s burden and breadth objections. Second, Morgan Stanley argued that IDT only offered its own unfounded speculation, rather than triable evidence, that the reason it arbitrated without seeking more documents from Morgan Stanly was reliance on the alleged misrepresentation. Third, Morgan Stanley argued that any such reliance could not have been justifiable in light of the small production Morgan Stanley made in the arbitration, which included no emails. Finally, Morgan Stanley argued for affirmance based on the causation and damages grounds that the trial court had not reached.

The Appellate Division affirmed the trial court’s ruling, agreeing that Morgan Stanley did not make a misrepresentation to IDT with respect to its document production, and that even if it did, IDT could not demonstrate that it actually and reasonably relied on Morgan Stanley’s misrepresentation. The Appellate Division further held that there was no triable issue of causation. The Appellate Division recognized that under the doctrine of anticipatory repudiation, whether Telefónica planned not to perform under the MOU is irrelevant unless Telefónica told IDT that it would not perform. The Appellate Division ruled that even if, based on Morgan Stanley’s advice, Telefónica intended to breach the MOU in June 2000, Telefónica did not then communicate its intent not to perform to IDT.

The Davis Polk team on the appeal included partner Benjamin S. Kaminetzky (who argued the appeal), counsel Jonathan K. Chang, and associates Alicia C. Llosa Chang, Alan J. Tabak, Patrick W. Blakemore and William Lawrence.

David Boies of Boies Schiller Flexner LLP represented IDT and argued the appeal.

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