USCA11 Case: 20-10085 Date Filed: 02/16/2021 Page: 1 of 13
[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT ________________________
No. 20-10085 Non-Argument Calendar ________________________
D.C. Docket No. 1:18-cv-22576-MGC
THE AFFILIATI NETWORK, INC., SANJAY PALTA,
Plaintiffs - Counter Defendants - Appellees,
versus
JOSEPH WANAMAKER, FITCREWUSA INC.,
Defendants - Counter Claimants - Appellants,
WELLS FARGO BANK, N.A.,
Defendant.
________________________
Appeal from the United States District Court for the Southern District of Florida ________________________
(February 16, 2021)
Before JORDAN, GRANT, and BLACK, Circuit Judges. USCA11 Case: 20-10085 Date Filed: 02/16/2021 Page: 2 of 13
PER CURIAM:
The Affiliati Network, Inc. and Sanjay Palta filed suit against FitCrewUSA
Inc. and Joseph Wanamaker (collectively, FitCrew) for breach of a settlement
agreement resolving a prior action for unpaid commissions. FitCrew now appeals
the district court’s orders dismissing its counterclaims for fraud and granting
summary judgment in favor of Affiliati and Palta on their claim for breach of the
settlement agreement. The central issue on appeal is whether the district court
erred in applying the rule from Mergens v. Dreyfoos, 166 F.3d 1114 (11th Cir.
1999), in which we held a party that has agreed to resolve a controversy involving
fraud cannot later maintain a fraud claim concerning the agreement against the
opposing party. FitCrew argues Mergens is distinguishable and that it is no longer
good law.1 After review,2 we affirm the district court.
1 Affiliati has moved to strike FitCrew’s argument, made for the first time in its reply brief, that Mergens is no longer good law. Ordinarily, we do not consider an argument raised for the first time in a reply brief. United States v. Levy, 379 F.3d 1241, 1244 (11th Cir. 2004). However, in this diversity action concerning Florida state-law claims, we are required to apply the law as declared by the Florida Supreme Court. CSX Transp., Inc. v. Trism Specialized Carriers, Inc., 182 F.3d 788, 790 (11th Cir. 1999). And while we are generally bound by prior panel precedent unless this Court en banc or the United States Supreme Court overrules a prior decision, we are “free to reinterpret state law” where a subsequent Florida Supreme Court decision casts doubt on our prior interpretation of state law. Hattaway v. McMillian, 903 F.2d 1440, 1445 n.5 (11th Cir. 1990). As FitCrew’s new argument presents a pure question of law and our refusal to consider it could result in failing to apply the law as declared by the Florida Supreme Court, Affiliati’s “Motion to Strike New Arguments Presented in Appellants’ Reply Brief” is DENIED. 2 We review both the dismissal of a counterclaim and the grant of summary judgment de novo. See First Union Disc. Brokerage Servs., Inc. v. Milos, 997 F.2d 835, 841 (11th Cir. 1993). 2 USCA11 Case: 20-10085 Date Filed: 02/16/2021 Page: 3 of 13
I. BACKGROUND
A. The Prior Litigation and Settlement Agreement
Affiliati is an online marketing company that provides clients with a network
of third-party affiliates that promote products and drive sales through online
content. In 2016, FitCrew, a fitness supplement company, entered into a marketing
agreement with Affiliati, in which FitCrew agreed to pay Affiliati commissions on
sales resulting from Affiliati’s marketing efforts. Later that year, however,
Affiliati filed suit for breach of contract, alleging FitCrew had failed to pay
approximately $1.4 million in commissions owed pursuant to the parties’
agreement. See The Affiliati Network, Inc. v. Wanamaker, et al., No. 1:16-cv-
24097-UU (S.D. Fla.) (the Prior Litigation).
FitCrew alleged Affiliati and its president—Palta—had engaged in
fraudulent advertising practices by falsely claiming professional athletes had
endorsed FitCrew’s supplements, using intellectual property owned by ESPN and
the NFL without authorization, and removing or hiding relevant terms and
conditions, all resulting in “massive customer dissatisfaction” and over $1 million
in chargebacks. These allegations formed the basis for FitCrew’s fraud-based
affirmative defense, counterclaims against Affiliati for fraudulent
misrepresentation, civil conspiracy to defraud, breach of oral contract, and
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fraudulent inducement, as well as third-party claims against Palta individually for
fraudulent misrepresentation and civil conspiracy to defraud.
Ultimately, the parties entered into a settlement agreement (the Settlement
Agreement or the Agreement) under which FitCrew agreed to pay Affiliati and
Palta (collectively, Affiliati) just over $1 million over a six-year period. The
Agreement contained a non-disparagement provision, confidentiality provision,
and a provision that the parties’ stipulated confidentiality order would continue to
govern their conduct. Pursuant to these clauses, the parties agreed not to make any
disparaging or negative remarks that would impugn or damage one another’s
character, reputation, or business acumen, and to keep confidential details of their
Agreement and the underlying conduct. However, the clauses contained
exceptions for certain truthful statements, with the non-disparagement provision
broadly excluding any truthful statement made “in connection with any legal
proceeding or investigation by either Party or any governmental authority.” The
Agreement also provided that in the event of a default by FitCrew on any term of
the Agreement—including a failure to meet its payment obligations or comply with
the confidentiality and non-disparagement provisions—Affiliati would be “entitled
to accelerate the entire sum due . . . and submit an ex-parte final consent judgment
against [FitCrew] . . . for the total principal sum of $1,400,766.00” plus attorney’s
fees, costs, and prejudgment interest.
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B. The Instant Lawsuit for Breach of the Settlement Agreement
Shortly after entering into the Settlement Agreement, FitCrew learned the
primary affiliate assigned to the FitCrew marketing campaign had been arrested for
conspiracy to commit advertising fraud and money laundering. FitCrew began
communicating with prosecutors in the affiliate’s criminal case, who asked
FitCrew to provide the name of other Affiliati clients that may have been subjected
to similar false advertising practices. FitCrew cooperated and later asked other
former Affiliati clients to sign complaint forms to be filed with the Florida
Attorney General.
In June 2018, Affiliati filed the instant lawsuit against FitCrew for breach of
the Settlement Agreement’s confidentiality and non-disparagement provisions
based, in part, on FitCrew’s communications with current and former Affiliati
clients. During the litigation, FitCrew missed its October 2018 installment
payment, prompting Affiliati to amend its complaint to include failure to pay as an
additional ground for breach. In Count I, for breach of the Settlement Agreement,
Affiliati sought accelerated payment of $1.4 million, and in Count II, for injunctive
relief, it sought to enjoin FitCrew from further breaches of the confidentiality and
non-disparagement provisions.
In its affirmative defenses and counterclaims against Affiliati, FitCrew again
claimed fraud. This time, FitCrew asserted Affiliati had made misrepresentations
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during discovery in the Prior Litigation to conceal its knowledge of the fraudulent
ad content and induce FitCrew to settle. Specifically, through a privilege log,
discovery responses, meet and confer letters, and deposition testimony, Affiliati
misrepresented that it had no access to affiliate ad content and had redacted only
the names of affiliates from its discovery production. However, FitCrew later
discovered that a redacted tracking report produced by Affiliati contained links to
affiliate websites displaying fraudulent and deceptive advertisements. Based on
this conduct, FitCrew counterclaimed to have the Settlement Agreement declared
void and unenforceable, for fraudulent inducement, and for fraudulent
misrepresentation.
Affiliati moved to dismiss the counterclaims, and the district court granted
its motion. The court concluded that under Mergens, FitCrew could not show
reasonable reliance on Affiliati’s statements during the Prior Litigation—and
therefore could not prevail on its fraud-based counterclaims—because FitCrew had
accused Affiliati of fraud and dishonesty in that action.
Affiliati then moved for partial summary judgment as to Count I and
FitCrew moved for summary judgment on both counts. The district court granted
Affiliati’s motion. The court found FitCrew had breached the Settlement
Agreement based on its failure to make a required payment and rejected all of
FitCrew’s fraud-based affirmative defenses under Mergens, for the same reasons it
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had dismissed FitCrew’s counterclaims. The court further concluded Affiliati was
entitled to entry of a judgment of $1.4 million pursuant to the Settlement
Agreement’s default clause. However, the court deferred ruling on Count II and on
FitCrew’s third and fifth affirmative defenses, which concerned the breach of the
Agreement’s confidentiality and non-disparagement provisions.
Pursuant to a joint stipulation in which Affiliati agreed to withdraw Count II
without prejudice and the parties agreed to an award of attorney’s fees and costs,
the district court entered a “consent final judgment” in favor of Affiliati. This
appeal followed.
II. DISCUSSION
In dismissing FitCrew’s counterclaims and concluding FitCrew’s fraud-
based affirmative defenses did not shield it from liability for nonpayment under the
Agreement, the district court relied on our decision in Mergens, where we held “a
settlement fraud claimant cannot prove reasonable reliance on a party’s
misrepresentations if he settles a dispute involving accusations that the other party
was guilty of fraud or other dishonest conduct.” Green Leaf Nursery v. E.I.
DuPont De Nemours & Co., 341 F.3d 1292, 1300 (11th Cir. 2003) (citing
Mergens, 166 F.3d at 1118). In Mergens, a corporation’s minority shareholders
entered into a stock repurchase agreement with majority shareholder Dreyfoos
after accusing Dreyfoos of “a shocking waste of corporate assets” and threatening 7 USCA11 Case: 20-10085 Date Filed: 02/16/2021 Page: 8 of 13
litigation if Dreyfoos did not buy back their shares. Mergens, 166 F.3d at 1116,
1118. After executing the agreement, plaintiffs brought an action for securities
fraud, fraudulent inducement, and breach of fiduciary duty, alleging Dreyfoos had
misrepresented the corporation’s cash flow and assets to induce them to sell at a
price below market value. Id. at 1116. We affirmed the district court’s grant of
judgment on the pleadings in favor of Dreyfoos on the fraud claims, concluding
plaintiffs were not justified in relying on Dreyfoos’s representations, given: (1)
they were sophisticated sellers who were represented by counsel, (2) they were in
an untrusting and adversarial relationship with Dreyfoos, and (3) they had agreed
to settle a threatened lawsuit involving claims of fraud. Id. at 1118.
These same considerations were relevant in Green Leaf. There, plaintiff
plant growers settled state-law claims for fraud and products liability relating to the
use of a DuPont fungicide, despite their knowledge of discovery abuses in their
own case and numerous others throughout the country involving the fungicide.
Green Leaf, 341 F.3d at 1296. Later, plaintiffs brought claims for fraud, alleging
DuPont had engaged in “a massive scheme of perjury, falsification of evidence,
and fraudulent concealment of evidence” to induce plaintiffs to settle for less than
the value of their case. Id. We affirmed the district court’s dismissal of plaintiffs’
fraud claims, concluding plaintiffs could not “reasonably or justifiably rely on any
of DuPont's misrepresentations” where they “were represented by counsel, were in
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an antagonistic and distrusting relationship with DuPont, and settled litigation that
included accusations of fraud and other dishonest conduct by DuPont.” Id. at
1305.
FitCrew argues that Mergens and Green Leaf are distinguishable because the
fraud claims in this case are based on different conduct than those alleged against
Affiliati in the Prior Litigation—namely, they are based on misrepresentations
made by Affiliati’s attorney during discovery. FitCrew argues attorneys must be
able to rely on representations made by opposing counsel, especially when, as here,
the representations concern discoverable material within the opposing party’s
exclusive control.
The district court did not err in applying the Mergens rule even though
FitCrew’s fraud claims were based on misconduct that occurred during discovery
through Affiliati’s attorneys. In Green Leaf, we observed plaintiffs’ past and
current claims involved “the same type of fraudulent conduct” by DuPont—the
concealment of information concerning the fungicide’s defects. Green Leaf, 341
F.3d at 1304. In the prior action, those defects were concealed from the public and
the Environmental Protection Agency, while in the latter action, they were hidden
from the court and opposing counsel. Id. Nevertheless, we rejected plaintiffs’
argument that their reliance was reasonable because the latter misrepresentations
were made during litigation. Id. at 1304-05 (“To argue in the abstract that litigants
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should be able to rely on an opponent to tell the truth in discovery responses is not
enough to make reliance upon an opponent’s representations reasonable in a
separate fraud claim for damages.”). While sanctions or bar admonitions might be
available as remedies for the discovery abuses, a separate claim of fraud could not
be sustained under the circumstances. Id. at 1305.
Despite our observation in Green Leaf that plaintiffs’ prior and current fraud
claims involved the same type of conduct, neither Green Leaf nor Mergens require
an exact parallel between the fraud claims resolved by a settlement agreement and
those alleged to have induced the settlement. Rather, what was central to our
analysis in both cases was that the plaintiffs were represented by counsel, “in an
antagonistic and distrusting relationship” with the defendants, and had settled
litigation, or threatened litigation, “that included accusations of fraud and other
dishonest conduct.” See Green Leaf, 341 F.3d at 1305; Mergens, 166 F.3d at 1118.
The same circumstances are present in this action, and the fact the underlying
misrepresentations were made in the course of discovery does not render FitCrew’s
reliance reasonable.
FitCrew argues that Mergens is no longer good law in light of Butler v.
Yusem, a 2010 case in which the Florida Supreme Court held that “[j]ustifiable
reliance is not a necessary element of fraudulent misrepresentation.” 44 So. 3d
102, 105 (Fla. 2010). In Butler, the plaintiff brought claims for fraudulent and
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negligent misrepresentation against several real estate developers after previously
attempting to verify their reputation in construction and commercial development,
which the trial court dismissed based on lack of due diligence. Butler, 44 So. 3d at
103-04. Following remand from the Florida Supreme Court, Florida’s Fourth
District Court of Appeal affirmed the dismissal of Butler’s fraud claims,
concluding the trial court’s finding regarding the lack of due diligence translated
into a lack of justifiable reliance. Id. at 104-05. The Florida Supreme Court
quashed the Fourth District Court of Appeal’s decision, holding justifiable reliance
was not an element of fraudulent misrepresentation. Id. at 105.
In holding a settlement fraud claimant could not reasonably rely on
misrepresentations made by the allegedly dishonest party with whom it settled,
both Mergens and Green Leaf cited Florida case law indicating that justifiable
reliance is an element of fraudulent misrepresentation. Green Leaf, 341 F.3d at
1304 n.11; Mergens, 166 F.3d at 1117. The rule from Mergens derived from
Pettinelli v. Danzig, 722 F.2d 706, 709 (11th Cir. 1984), which held that a “right to
rely” is another element of common law fraud under Columbus Hotel Corp. v.
Hotel Mgmt. Co., 156 So. 893, 901 (Fla. 1934). Regardless of whether reliance is
justifiable or reasonable, Florida courts have long held that “[t]o be remediable, a
representation must have been of such a nature and made under such circumstances
that the injured party had a right to rely upon it.” Columbus Hotel, 156 So. at 901.
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Even after Butler, Florida intermediate courts have continued to hold that
“following accusations of fraud, the accuser may not then ‘justifiably rely’ on the
representations of the accused in subsequent negotiations aimed at resolving the
dispute.” Diaz v. Kosch, 250 So. 3d 156, 167 (Fla. 3d DCA 2018). We, like
Florida’s Third District Court of Appeal, “do not read Butler as receding from the
well-established and common sense principle of law espoused in Columbus Hotel
and its progeny: generally, adverse parties negotiating a settlement agreement in
an attempt to avoid litigation cannot rely upon the representations of one another.”
Moriber v. Dreiling, 194 So. 3d 369, 374 (Fla. 3d DCA 2016). We reject
FitCrew’s argument that Mergens is no longer good law.
FitCrew argues that when a party fails to turn over information in discovery
that the opposing party cannot otherwise obtain, a settlement should be disallowed.
Under Florida law, a court may discourage discovery misconduct “by disallowing
the settlement which is the fruit of such misconduct.” See Garvin v. Tidwell, 126
So. 3d 1224, 1230 (Fla. 4th DCA 2012) (reversing denial of motion to rescind
settlement agreement). However, although discovery misconduct may support a
claim of recission under certain circumstances, it does not allow a party to assert
independent settlement fraud claims against a dishonest party with whom it has
settled prior claims for fraud. See Green Leaf, 341 F.3d at 1305.
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FitCrew also argues that because it had sufficiently alleged reasonable
reliance, a motion to dismiss or motion for summary judgment is “not the
appropriate vehicle” for disputing this factual issue. We disagree. Whether
FitCrew had a right to rely on Affiliati’s discovery responses in the Prior
Litigation, where it had accused Affiliati of fraud—is a question of law. Green
Leaf, 341 F.3d at 1305 n.12. The district court did not err in dismissing FitCrew’s
counterclaims, or in granting Affiliati’s motion for summary judgment, in
concluding that FitCrew had no such right to rely under the circumstances.
III. CONCLUSION
For the reasons above, the district court did not err in dismissing FitCrew’s
counterclaims and granting summary judgment in favor of Affiliati on Count I of
the amended complaint. Accordingly, we affirm.
AFFIRMED.