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The company once considered the “Netflix of China” must face a fraud lawsuit over its failed $2 billion merger with American smart TV manufacturer Vizio. On Friday, a California federal judge largely rejected LeEco’s motion to dismiss.
Vizio alleges that when the two companies agreed to merge in the middle of 2016, LeEco was in worse financial state than it was letting on publicly. The lawsuit in California further contends that LeEco needed the merger to create the public impression of its own financial health, and even further, that the merger was used as part of a “secret plan” to obtain information about Vizio’s large corporate clients.
But that’s only a part of Vizio’s story of fraud. There’s also the break-up, which LeEco has insisted was spurred by Chinese authorities withholding its approval.
The merger agreement called for a $100 million termination fee, but allegedly LeEco attempted to get this down to $40 million by coming to a second deal with Vizio — called the “Framework Agreement” — in which the parties agreed to instead pursue a joint venture.
LeEco argued that the second agreement had a section wherein Vizio released claims against LeEco, but U.S. District Court Judge David Carter writes that “Vizio alleges with specificity that the Framework Agreement was executed under fraud on the basis that specific, false promises were made on behalf of Defendants to secure the execution of the Framework Agreement.”
Carter also sees enough in the complaint to allow the other fraud claims to move forward and rejects the argument that its actions were shielded because Vizio was ably represented by sophisticated counsel during merger negotiations. The judge also won’t let California’s economic loss rule stop Vizio from pursuing claims other than breach of contract.
“Vizio alleges that not only did Defendants not have any intent of performing the contract, they also deceived Vizio into abandoning the Merger Agreement under false pretenses,” writes the judge. “Thus, Vizio has alleged more than a simple breach of contract, and and Defendants’ allegedly reprehensible behavior goes against California’s policy of preserving a business climate free of fraud and deceptive practices. Vizio asks not only for the $10 million in escrow and the $50 million for the proposed joint venture in China, but also requests punitive and exemplary damages for the fraud-based claims. For these reasons, Vizio’s separate tort claims for fraud and negligent misrepresentation under the Framework Agreement are not barred by California’s economic loss rule.”
Here’s the full decision, which provides more wins for Vizio including on the jurisdiction, service of process, and alter ego fronts.
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