NOTICE: All slip opinions and orders are subject to formal revision and are superseded by the advance sheets and bound volumes of the Official Reports. If you find a typographical error or other formal error, please notify the Reporter of Decisions, Supreme Judicial Court, John Adams Courthouse, 1 Pemberton Square, Suite 2500, Boston, MA, 02108-1750; (617) 557-1030; SJCReporter@sjc.state.ma.us
15-P-1117 Appeals Court
CENTRAL CEILINGS, INC. vs. SUFFOLK CONSTRUCTION COMPANY, INC. & others.
Suffolk. October 7, 2016. – March 29, 2017.
Present: Agnes, Maldonado, & Desmond, JJ.
Contract, Construction contract, Subcontractor, Damages. Damages, Breach of contract, Attorney’s fees. Practice, Civil, Attorney’s fees, Discovery.
Civil action commenced in the Superior Court Department on October 3, 2006.
Shrine of Our Lady of La Salette Inc. v. Board of Assessors of Attleboro (Lawyers Weekly No. 10-049-17)
SHRINE OF OUR LADY OF LA SALETTE INC. vs. BOARD OF ASSESSORS OF ATTLEBORO.
Suffolk. December 5, 2016. – March 22, 2017.
Present: Gants, C.J., Lenk, Hines, Gaziano, Lowy, & Budd, JJ.
Taxation, Real estate tax: abatement, Real estate tax: exemption, Real estate tax: classification of property. Real Property, Tax.
Appeal from a decision of the Appellate Tax Board.
The Supreme Judicial Court granted an application for direct appellate review.
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT.
KIRIN PRODUCE CO., INC.
LUN FAT PRODUCE, INC. and PETER TAM, AS TRUSTEE OF TAM REALTY TRUST
RICHARD Q. CHEN, Intervenor
MEMORANDUM AND ORDER ALLOWING MOTIONS TO DISMISS
Kirin Produce Co., Inc., alleges that it contracted with Lun Fat Produce, Inc., and its owner Peter Tam to purchase Lun Fat’s assets and to lease for three years and then purchase the property where Lun Fat is located. Kirin asserts that Tam and Lun Fat refused to carry out their alleged contractual obligations to Kirin, and that Tam instead agreed to sell all shares of Lun Fat stock and the property in question to Richard Chen. Kirin seeks specific performance of its alleged contract, a declaratory judgment that Lun Fat and Tam entered into an enforceable agreement with Kirin, liquidated damages for breach contract, and compensatory and punitive damages under G.L. c. 93A, § 11. Mr. Chen intervened to protect his interests, prompting Kirin to seek declaratory relief against him as well.
Defendants have moved to dismiss all claims under Mass. R. Civ. P. 12(b)(6). Tam and Lun Fat argues that the facts alleged in the complaint make clear that they never entered into any enforceable contract with Kirin, and thus Kirin has not stated any claim upon which relief can be granted. Chen joins in Tam’s arguments.
The Court will ALLOW the motions to dismiss because Kirin has not alleged facts plausibly suggesting that Kirin, Tam, and Lun Fat entered into a contractual agreement that satisfies the Statute of Frauds. To the contrary, the detailed allegations in the amended complaint make clear that Kirin never entered into an enforceable agreement with Mr. Tam and Lun Fat. Since there is an actual controversy among the parties and Kirin has standing to bring this action, the Court will order that judgment enter declaring that Kirin and Defendants did not enter into an enforceable contract and dismissing all other claims with prejudice.
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1. Legal Standard. To survive a motion to dismiss under Rule 12(b)(6), a complaint must allege facts that “plausibly suggest” the plaintiff has a viable claim. Lopez v. Commonwealth, 463 Mass. 696, 701 (2012), quoting Iannacchino v. Ford Motor Co., 451 Mass. 623, 636 (2008), and Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007). “Conclusory allegations” that a defendant has acted illegally are not enough; judges must disregard such assertions and “focus on whether the factual allegations plausibly suggest an entitlement to relief.” Maling v. Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, 473 Mass. 336, 339 (2015), quoting Curtis v. Herb Chambers I-95, Inc., 458 Mass. 674, 676 (2011).
When deciding a motion to dismiss under Rule 12(b)(6), a judge must “accept as true the facts alleged in the … complaint”—or that are apparent from documents attached to, referenced in, or otherwise relied upon in framing the complaint1—“as well as any favorable inferences that reasonably can be drawn from them.” Partanen v. Gallagher, 475 Mass. 632, 635 (2016), quoting Galiastro v. Mortgage Elec. Registration Sys., Inc., 467 Mass. 160, 164 (2014).
But where a “complaint sets out with clarity and precision the detailed factual allegations [that] the plaintiff contends entitle him to relief,” dismissal is appropriate “if [those] allegations ‘clearly demonstrate that plaintiff does not have a claim.’ ” Fabrizio v. City of Quincy, 9 Mass. App. Ct. 733, 734 (1980), quoting 5 Wright & Miller, Federal Practice and Procedure: Civil § 1357 at 604 (1969); accord Harvard Crimson, Inc. v. President and Fellows of Harvard Coll., 445 Mass. 745, 748 (2006).
2. Contract Claims. To state a viable claim to enforce a contract, or to obtain damages for alleged breach of contract, a plaintiff’s complaint must allege facts plausibly suggesting that the parties entered into a binding contract. “Except in circumstances not relevant here, ‘the formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.’ ” Kirkpatrick v. Boston Mut. Life Ins. Co., 393 Mass. 640, 652 (1985),
1 See Melia v. Zenhire, Inc., 462 Mass. 164, 166 (2012) (documents attached to the complaint); Johnston v. Box, 453 Mass. 569, 581 n.19 (2009) (documents referenced in complaint) (dictum); Golchin v. Liberty Mut. Ins. Co., 460 Mass. 222, 224 (2011) (documents used in framing complaint).
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quoting Restatement (Second) of Contracts § 17 (1981). “[T]he element of agreement or mutual assent is often referred to as a ‘meeting of the minds.’ ” I & R Mech., Inc. v. Hazelton Mfg. Co., 62 Mass. App. Ct. 452, 455 (2004), quoting Restatement (Second) of Contracts § 17 comment c (1981). “The manifestation of mutual assent between contracting parties generally consists of an offer by one and the acceptance of it by the other.” Id.; accord Restatement (Second) of Contracts § 22(1) (1981).
Kirin’s amended complaint alleges the following facts. Kirin and Lun Fat both sell produce on a wholesale and retail basis. In May 2015 these companies began to discuss the possibility of Kirin purchasing Lun Fat’s business assets as well as the property where Lun Fat is located, which is owned by the Tam Realty Trust (the “Trust Property”). The negotiations went nowhere for fifteen months. In August 2016 Kirin learned that a group of investors from New York had expressed interest in buying Lun Fat and the Trust Property. This prompted Kirin to make a series of three proposals regarding terms under which it would be willing to buy Lun Fat’s assets, to lease the Trust Property for three years, and to purchase the Trust Property at the end of that three-year period. Kirin laid out the terms of these proposals in spreadsheets that it sent to Peter Tam on August 22, September 7, and September 12, 2016. Several days later (September 15), a lawyer for Mr. Tam and Lun Fat (Ted Wong) responded in an email specifying nine terms in Kirin’s most recent proposal that Tam wanted to change. The next day (September 16) Kirin replied by email, stating that it was “OK” with five of the proposed changes, and proposing new terms with respect to the other four items.2 Two days later (September 18) Kirin’s principals had dinner with Tam. That evening Mr. Tam made an oral offer to sell Lun Fat and the Trust Property if Kirin would agree to all nine of the terms outlined in Mr. Wong’s September 15 email. Several days later (September 23) Mr. Wong sent an email stating that Mr. Tam is still “NOT ready to accept the latest Offer on the table,” and further explaining Tam’s position with
2 Although the September 16 email by Kirin was not attached to the complaint, Kirin stated at oral argument that it had no opposition to the Court considering that email in deciding the motion to dismiss. The Court then allowed Defendants’ motion to submit a copy of the September 16 email. Kirin attached the other emails and attachments at issue here to its amended complaint.
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respect to the four issues as to which the parties were still negotiating and that Wong had addressed in his prior email. The next day (September 24) Mr. Chan sent an email stating that Kirin “accepted” all nine of the terms that Lun Fat had proposed in Mr. Wong’s September 15 email, and also stating that Kirin wanted to add a new “item #10” that would revise the liquidated damage terms previously listed in Kirin’s spreadsheet.
The first three proposals by Kirin (on August 22, September 7, and September 22) were not offers capable of being accepted by Lun Fat and Mr. Tam. All three of the spreadsheets proposing Kirin’s terms of a possible deal stated that they were “Draft Only, Subject to Confirmation, Verification & Change by both Seller & Buyer.” The term sheets also stated that “All dates, $ $ and Terms are estimated ONLY, to be finalized by both parties!! Subject to change[.]” Since Kirin made clear in all three of these proposals that it had no “present intention to be bound” by the terms it had outlined, these proposals were insufficient “to create an enforceable contract.” See Lambert v. Fleet Nat. Bank, 449 Mass. 119, 123 (2007), quoting Situation Mgt. Sys. Inc. v. Malouf, Inc., 430 Mass. 875, 878 (2000).
The September 15 email from Lun Fat’s lawyer does not appear to express any intent to be bound either. This email identifies nine specific items in the last term sheet from Kirin that Mr. Tam would “like to change.” But nothing in the email clearly states that Tam was offering to sell Lun Fat and the Trust Property if Kirin would accept those changes.
Even if the September 15 email could be construed as an offer to sell Lun Fat and the Trust Property, Kirin rejected that offer. In its email response the next day, Kirin stated that five of the terms proposed by Lun Fat and Mr. Tam were “OK,” but proposed alternative versions of the other four terms. Since Kirin proposed to further revise the terms of the deal “in more than trifling detail,” its response was a counter offer, not an acceptance of Defendant’s alleged offer. Tull v. Mister Donut Development Corp., 7 Mass. App. Ct. 626, 631 (1979); accord, e.g., Bank of United States v. Thomson & Kelly Co., 290 Mass. 224, 228 (1935) (“An acceptance which varies substantially from the offer does not make a binding agreement.”). “Under fundamental principles of contract law, a counteroffer operates as a rejection of the
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original offer.” Uno Restaurants, Inc. v. Boston Kenmore Realty Corp., 441 Mass. 376, 388 n.6 (2004). And “an offer once rejected cannot thereafter be revived by an attempted acceptance thereof.” Peretz v. Watson, 3 Mass. App. Ct. 727, 727 (1975) (rescript).
Kirin alleges that during a conversation on September 18 Mr. Tam said “that he would definitely sell the package if Kirin agreed to all of the terms in Mr. Wong’s email.” This allegation plausibly suggests that Mr. Tam made an oral offer to sell Lun Fat’s assets, and to lease and then sell the Trust Property, on the terms as proposed in Kirin’s September 12 term sheet and then revised in Mr. Wong’s responsive email.
Kirin’s alleged acceptance of this purported oral offer was ineffective as a matter of law because the proposed deal was subject to the Statute of Frauds. See generally Bibi v. Courville, 357 Mass. 782 (1970) (rescript) (contract subject to statute of frauds is unenforceable if allegedly formed when defendant made oral offer that was accepted in writing by plaintiff). The portion of the alleged contract that involves the lease and sale of land to Kirin would be subject to the statute of frauds and thus would only be enforceable if it were properly memorialized in a writing signed by Mr. Tam or his authorized agent. See G.L. c. 259, § 1; First Nat. Bank of Boston v. Fairhaven Amusement Co., 347 Mass. 243, 245 (1964) (“leasehold [is] an interest in land and subject to the statute of frauds”); Cellucci v. Sun Oil Co., 2 Mass. App. Ct. 722, 727 (1974) (sale of land). The rest of the contract, concerning the sale of Lun Fat’s business, would not be subject to the statute of frauds if it stood alone because it could have been performed within one year (since the last term sheet distributed in September 2016 called for the “business sale closing” to take place “around 2/15/2017”) and would not implicate any other provision of the statute. But, under the circumstances alleged in the complaint, the sale of Lun Fat’s business was inseparable from the lease and sale of the Trust Property and thus the entire contract was subject to the statute of frauds. See Sarkisian v. Teele, 201 Mass. 596, 608 (1901) (contract to sell all assets of a going business enterprise, including full possession of leased premises, was subject to statute of frauds; “the stipulation for the plaintiff’s assumption of the lease of the store for the remainder
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of the term cannot be separated from the sale of the merchandise and business, of which it evidently formed an essential part, and the contract, being entire, was within the statute”); McMullen v. Riley, 72 Mass. 500 (1856) (contract to lease store for a year and purchase fixtures was subject to statute of frauds; since parties “made no agreement … for the fixtures except with a view to the lease,” contract was indivisible).
The further email sent by Mr. Wong on behalf of Mr. Tam on September 23 is a writing, but it does not satisfy the requirements of the Statute of Frauds. Wong did not say in this email that Tam was offering to sell Lun Fat and the Trust Property. To the contrary, the email states instead that Tam was not prepared to accept Kirin’s “latest Offer,” and goes on to explain why. This email can only be understood as conveying a binding offer if read in the context of Mr. Tam’s alleged oral statements on September 18. But that is not enough to satisfy the statutory requirements. To satisfy the statute of frauds, a “writing must incorporate the promise that the plaintiff seeks to enforce.” Harrington v. Fall River Housing Auth., 27 Mass. App. Ct. 301, 306 (1989). Since the September 23 email from Mr. Wong does not “contain all the provisions of the oral contract with which the plaintiff is seeking to charge the defendant,” this writing does not satisfy the statute of frauds and the alleged contract cannot be enforced. See A.B.C. Auto Parts, Inc. v. Moran, 359 Mass. 327, 329 (1971); see also, e.g., Lampasona v. Capriotti, 296 Mass. 34, 38 (1936) (“a contract partly oral does not meet the requirement of writing under the statute of frauds”).
In sum, since the detailed facts alleged in the amended complaint show that the parties never entered into any enforceable contract, Kirin cannot seek specific performance or monetary damages for breach of contract. Nor may it assert a claim for breach of the implied covenant of good faith and fair dealing, because “this covenant pertains to bad faith in the performance of a contract, not in its execution.” Sheehy v. Lipton Indus., Inc., 24 Mass. App. Ct. 188, 194 n.6 (1987). The Court will therefore dismiss Kirin’s various claims for breach of contract.
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3. Declaratory Judgment Claim. Although Kirin does not have a viable claim for breach of contract, that does not mean that its claim for declaratory judgment should be dismissed. Instead, since Kirin has standing and there is an actual controversy between the parties regarding whether Kirin entered into an enforceable contract with Lun Fat and the Tam Realty Trust, the Court is obligated to declare the rights of the parties. See, e.g., Attorney General v. Kenco Optics, Inc., 369 Mass. 412, 418 (1976); Gennari v. City of Revere, 23 Mass. App. Ct. 979 (1987) (rescript).
4. Claim under G.L. c. 93A. Finally, since Kirin’s claim under c. 93A is based solely on and thus “is wholly derivative of” its claims for breach of contract, and Kirin has not alleged facts plausibly suggesting that Defendants ever entered into an enforceable contract with Kirin, the proposed claim under c. 93A would necessarily be futile as well. See Pembroke Country Club, Inc. v. Regency Savings Bank, F.S.B., 62 Mass. App. Ct. 34, 40-41 (2004) (ordering judgment in favor of defendant); accord, e.g., Macoviak v. Chase Home Mortgage Corp., 40 Mass. App. Ct. 755, 760, rev. denied, 423 Mass. 1109 (1996) (c. 93A claim “necessarily fail[s]” where it “is solely based upon … underlying claim for common law” tort, and that tort claim fails as a matter of law).
The motions by Defendants to dismiss this action are both ALLOWED. Final judgment shall enter: (1) declaring that Kirin never entered into an enforceable contract with Lun Fat Produce, Inc., or Peter Tam, as Trustee of the Tam Realty Trust, and therefore has no right to challenge any agreement between those defendants and Richard Q. Chen; and (2) dismissing with prejudice Plaintiff’s claims for specific performance, for breach of express and implied contractual obligations, and under G.L. c. 93A.
February 6, 2017
Kenneth W. Salinger
Justice of the Superior Court
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT.
NETSCOUT SYSTEMS, INC.
MEMORANDUM AND ORDER ON PLAINTIFF’S MOTION FOR RECONSIDERATION OF ITS REQUEST FOR A PRELIMINARY INJUNCTION
A week ago the Court decided a motion by NetScout Systems, Inc., for a preliminary injunction that would enforce non-competition and other covenants (the “Agreement”) that Carl Hohenstein entered into when he was employed by Danaher Corporation’s subsidiaries. In support of its motion, NetScout argued and presented evidence that Danaher had assigned to NetScout all of Danaher’s rights under Hohenstein’s non-competition agreement. The Court concluded, based on NetScout’s own evidence, that Hohenstein’s obligations under the disputed provisions of his non-competition agreement expired on July 14, 2016, one year after Hohenstein’s employment with any Danaher subsidiary ended. The Court therefore denied NetScout’s motion to the extent that it sought to enforce the non-competition and non-solicitation covenants, but allowed the other relief sought without any opposition by Hohenstein.1
1. Reconsideration. NetScout seeks reconsideration with respect to enforcement of the non-competition and non-solicitation covenants based on a new legal theory as to why it is entitled to enforce the Agreement.
When it first sought a preliminary injunction, NetScout filed an affidavit by its Director of Human Resources to explain why NetScout was entitled to enforce Danaher’s rights under the Agreement. She stated that Hohenstein had been employed by a Danaher subsidiary called Fluke Networks and that “[o]n July 14, 2015, NetScout acquired Danaher’s communications business, which included Fluke
1 At oral argument, Hohenstein said he did not contest the issuance of an injunction that would bar him from using or disclosing any NetScout proprietary information, helping to develop products or services that would compete with NetScout’s offerings, helping to hire away NetScout’s employees or contractors, or interfering in any relationship with NetScout’s vendors.
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Networks.” The HR Director did not say that Fluke Networks, Inc., had been merged into NetScout or a subsidiary of NetScout. If that had happened, then of course Hohenstein would still be employed by the same company as before the NetScout/Danaher transaction, and NetScout would be entitled to enforce the Agreement as the legal successor to Fluke Networks. But that is not what NetScout contended. Instead, its HR Director swore that as part of the NetScout/Danaher transaction Hohenstein became a NetScout employee and “Danaher’s rights under the Agreement were assigned to NetScout.”
This characterization of the transaction between Danaher and NetScout suggested that NetScout was acquiring selected assets and liabilities of Danaher. As NetScout now recognizes, if whatever Danaher subsidiary that employed Hohenstein had been merged into NetScout or one of its subsidiaries, there would have been no need for Danaher to assign to NetScout its rights against Hohenstein under the Agreement. But NetScout represented that Hohenstein had been employed by Fluke Networks, and the Form 8-K that NetScout filed with the Securities and Exchange Commission at time it closed its transaction with Danaher makes clear that Fluke Networks was not merged into NetScout. Instead, the Form 8-K states that the transaction was structured as follows: (i) Danaher agreed to and did “transfer … certain assets and liabilities of Danaher’s communications business, including … certain parts of Fluke Networks Enterprise,” to a new Danaher subsidiary that the parties referred to as “Newco;” (ii) a NetScout subsidiary referred to as Merger Sub merged with and into Newco, with Newco as the surviving entity; and (iii) immediately thereafter, Newco then merged with and into a second NetScout subsidiary referred to as Merger Sub II. This meant that NetScout’s subsidiary Merger Sub II was the legal successor in interest to whatever legal rights belonged to Newco at the time of these statutory mergers.
Significantly, however, when NetScout originally sought a preliminary injunction it did not present any evidence or make any argument that Hohenstein had ever been employed by Newco. To the contrary, NetScout showed and argued that Hohenstein had gone directly from being a Fluke Networks employee one day to being a NetScout employee the next. Given this evidence, the Court concluded that
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Hohenstein’s employment relationship with any Danaher subsidiary ended when he started working for NetScout, and thus that the twelve-month post-employment non-competition period started to run as of July 2015.
In its motion for reconsideration, NetScout asks the Court to consider new evidence and arguments that are inconsistent with its prior submissions. For the first time NetScout asserts that it is entitled to enforce Hohenstein’s Agreement not because Danaher assigned its rights under that contract to NetScout, but instead because it succeeded to Danaher’s rights under that Agreement as a result of a statutory merger.
The mere fact that the NetScout/Danaher transaction included two statutory mergers is, of course, not sufficient to show that NetScout is the legal successor to Danaher with respect to its rights and obligations under its Agreement with Hohenstein. If the Danaher subsidiary that employed Hohenstein was never merged into NetScout, the fact that NetScout merged with some other Danaher subsidiary (Newco) would not give NetScout any right to enforce the Agreement.
But NetScout has now shown that Hohenstein’s employment relationship with Fluke Networks was transferred to Newco before that entity was merged into a NetScout subsidiary. In support of its motion for reconsideration, NetScout provided a copy of the “Employee Matters Agreement” by and among Danaher, Newco, and NetScout. That contract provides that all employees of any Danaher subsidiary who were primarily dedicated to Danaher’s communications business would become an employee of Newco as of the date that Danaher transferred its communications business assets and liabilities to Newco, and that to the extent allowed by local employment law the rights and obligations of the Danaher subsidiary that had the employment relationship with the employee would all be transferred to Newco as well. It is undisputed that Hohenstein was employed by Fluke Networks to work on part of Danaher’s communications business.
In sum, NetScout has shown that its prior assertion and evidence that it received an assignment of Danaher’s rights under Hohenstein’s Agreement were incorrect, and that instead Hohenstein’s employment was transferred to a Danaher subsidiary (Newco) that was then merged into a wholly-owned subsidiary of
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NetScout. Therefore, one effect of the statutory merger of Newco into Merger Sub II is that NetScout, through its subsidiary, became the legal successor to the last Danaher subsidiary that was entitled to enforce the Agreement against Hohenstein.
The Court concludes, in the exercise of its discretion, that it is appropriate to reconsider its prior ruling in light of this new evidence. NetScout does not explain why its legal theory this week differs from and is inconsistent with the legal theory it presented last week. But it appears that this week’s theory is correct, because it comports with the governing contracts that NetScout filed for the first time in support of its motion for reconsideration. Since final judgment has not entered, the Court has “broad discretion” to reconsider all prior rulings in this case. Genesis Technical & Fin., Inc. v. Cast Navigation, LLC, 74 Mass. App. Ct. 203, 206 (2009); accord Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 439 Mass. 387, 401 (2003) (“it is within the inherent authority of a trial judge to ‘reconsider decisions made on the road to final judgment.’ ”) (quoting Franchi v. Stella, 42 Mass. App. Ct. 251, 258 (1997)). And since the Court is now convinced that it should have allowed NetScout’s motion for a preliminary injunction, it is appropriate to correct its prior order. See Jones v. Boykan, 464 Mass. 285, 292 (2013) (“if a judge determines that ‘he has erred in an announced decision, he ought to correct his error while he still has the power [to do so]’ ”) (quoting Sheriff v. Gillow, 320 Mass. 46, 49 (1946)).
2. NetScout’s Rights to Enforce the Agreement. For the reasons discussed above and in the Court’s original memorandum, Hohenstein’s contract with Danaher is an enforceable contract and NetScout is entitled to enforce Hohenstein’s obligations under that Agreement as the legal successor in interest to the Danaher subsidiary that last employed Hohenstein.
3. Scope of Injunctive Relief. The Agreement’s non-competition and non-solicitation provisions may only be enforced to the extent they are reasonable in scope in terms of the activities they restrict, the geographic limitations they impose on those activities, and the length of time they are in effect. See New England Canteen Services, Inc. v. Ashley, 372 Mass. 671, 673-676 (1977); All Stainless, Inc. v. Colby, 364 Mass. 773, 778-780 (1974).
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The Court concludes that the Agreement is reasonable with respect to the scope of activities it restricts and the length of time (one year) that those provisions remain in effect after Hohenstein stopped working for NetScout.
But the Agreement’s restrictions on completion and solicitation are overbroad geographically. Hohenstein worked for NetScout as a principal sales engineer for the mid-Atlantic region, which consisted of the District of Columbia and the states of Pennsylvania, Maryland, Virginia, West Virginia, Ohio, Michigan, Indiana, and Kentucky. Although Hohenstein occasionally dealt with customers located outside the mid-Atlantic region, NetScout has not met its burden of proving “that its good will” is likely to suffer irreparable harm of Hohenstein supervises sales engineers who engage in or support sales activity “outside of the sales territory formerly assigned to him.” All Stainless, 364 Mass. at 780.
NetScout argues that Hohenstein had access to technical information about its products, and that this is an independent reason for not limiting the geographical scope of the Agreement’s non-competition and non-solicitation provisions. But NetScout has not met its burden of proving that this information was in fact confidential, as opposed to something that is routinely shared with customers. To the contrary, NetScout submitted a marketing papers published by Riverbed Technologies that compares the architecture and performance of Riverbed’s products with those sold by NetScout. This suggests that competitors and customers are well aware of the kind of technical information that Hohenstein had access to and used while he was part of NetScout’s sales team. NetScout is not entitled to enforce such an agreement to keep former sales engineers from making use of publicly available information or knowledge that they happened to learn while they were employed by NetScout. See, e.g., Abramson v. Blackman, 340 Mass. 714, 715-16 (1960); Folsum Funeral Service, Inc. v. Rodgers, 6 Mass. App. Ct. 843 (1978) (rescript).
The Court therefore concludes that the non-competition and non-solicitation provisions of the Agreement may only be enforced within the mid-Atlantic region that was the focus of Hohenstein’s sales efforts while employed by NetScout. Cf. All Stainless, 364 Mass. at 780. It will not require NetScout to post any bond because
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Hohenstein stipulated, in ¶ 9 of the Agreement, that NetScout could obtain and enforce preliminary or final injunctive relief “without the posting of a bond.”
Plaintiff’s motion for reconsideration is ALLOWED. The Court will enter an amended preliminary injunction that contains all of the provisions of the original preliminary injunction and that, in addition, bars Defendant from soliciting Plaintiff’s customers in the mid-Atlantic states or attempting to sell products that compete with those of the Plaintiff to customers or potential customers in the mid-Atlantic states until January 12, 2018. Plaintiff shall submit a proposed form of an amended preliminary injunction consistent with this order within ten business days.
February 22, 2017
Kenneth W. Salinger
Justice of the Superior Court
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT.
JOHN J. MEUNIER, CHRISTY M. WHITE, and the JOHN J. MEUNIER 2012 IRREVOCABLE TRUST
MARKET STRATEGIES, INC.
MARKET STRATEGIES, INC.
COGENT RESEARCH HOLDINGS LLC
MEMORANDUM AND ORDER ALLOWING MOTION TO DISMISS CLAIM AGAINST COGENT RESEARCH HOLDINGS, LLC
Market Strategies, Inc. (“MSI”) claims that Cogent Research Holdings LLC (which the parties refer to as “Holdco”) is liable for breaching a covenant not to sue not because Holdco itself filed a lawsuit, but instead because the three members of Holdco sued MSI in their individual capacities. The two lawsuits have been consolidated. The Court will ALLOW Holdco’s motion to dismiss the one claim against it because MSI has not alleged facts plausibly suggesting that Holdco can be held liable for breach of contract.
1. Factual Background. These consolidated actions arise from the May 2013 sale of Cogent Research LLC to MSI. At the time of the transaction, John Meunier, Christy White, and the John J. Meunier 2012 Irrevocable Trust were the sole owners of Cogent Research. They agreed to sell Cogent Research to MSI in exchange for an “Initial Payment” of $ 8.0 million, a “Delayed Payment” of $ 2.0 million, and a “Contingent Payment” of roughly $ 3.14 million that was due after MSI received additional audited financial statements of Cogent Research. Meunier and White also agreed to work for MSI for three years and entered into a non-competition agreement.
Meunier, White, and the irrevocable trust created Holdco in connection with this transaction. They transferred ownership of Cogent Research to Holdco, which in turn was the entity that actually sold Cogent Research to MSI. The parties’ purchase agreement provides that MSI was required to pay the Initial Payment, Delayed
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Payment, and Contingent Payment to Holdco. MSI does not have any contractual obligation to make any of these payments to Meunier, White, or the irrevocable trust.
Although the parties’ purchase agreement provides that MSI was to make the Deferred Payment and Contingent Payment to Holdco no later than April 30, 2016, a separate subordination agreement executed at the same time modifies those terms. The parties to the subordination agreement were Holdco, MSI, and an administrative agent representing Senior Lenders of MSI. Meunier and White signed this contract on behalf of Holdco. The subordination agreement provides that the obligations of MSI to make the Delayed and Contingent Payments “shall be subordinate and subject in right and time of payment … to the prior Payment in Full of all Senior Debt” held by the Senior Lenders. It further provides that MSI shall not make and Holdco shall not accept payment of any part of the Deferred and Contingent Payments until the Senior Lenders are paid in full. It also provides that the subordination agreement trumps any conflicting provisions in the purchase agreement and any other agreements pertaining to the Deferred and Contingent Payments.
The subordination agreement also contained a covenant not to sue. It provides that Holdco “shall not … take any Enforcement Action with respect to” the Deferred Payment and Contingent Payment obligations of MSI “without the prior written consent” of the administrative agent representing the Senior Lenders. The phrase “Enforcement Action” is defined to include bringing a lawsuit, or initiating or participating with others in a lawsuit, to collect all or any part of the Deferred Payment or Contingent Payment amounts.
In May 2016 Meunier, White, and the irrevocable trust all sued MSI in their own names, purporting to assert their own rights under the purchase agreement rather than rights belonging to Holdco. In their complaint, Meunier, White, and the trust allege they are third-party beneficiaries under the purchase agreement governing the sale of Cogent Research to MSI. They claim, among other things, that MSI breached the purchase agreement by failing to make the Deferred Payment and Contingent Payment by April 1, 2016. Meunier, White, and the trust sought a preliminary injunction against MSI, but that motion was denied in October 2016.
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MSI responded to the first lawsuit by suing Holdco for breaching the covenant not to sue that Holdco entered into as part of the subordination agreement. This is the claim that Holdco now moves to dismiss. The two actions were consolidated for all purposes in January 2017.
2. Legal Analysis. MSIC’s complaint does not allege facts plausibly suggesting that Holdco is liable for breaching its covenant not to sue with respect to MSI’s Deferred Payment and Contingent Payment obligations. Cf. Lopez v. Commonwealth, 463 Mass. 696, 701 (2012) (to survive a motion to dismiss under Mass. R. Civ. P. 12(b)(6), a complaint or counterclaim must allege facts that, if true, would “plausibly suggest … an entitlement to relief”) (quoting Iannacchino v. Ford Motor Co., 451 Mass. 623, 636 (2008), and Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007)).
The Court must apply New York law in construing the covenant not to sue because another term in the subordination agreement says that the contract “shall be governed by and shall be construed and enforced in accordance with the internal laws of the State of New York[.]”
The lawsuit by Meunier, White, and the irrevocable trust does not violate the subordination agreement. The plain language of the covenant not to sue bars Holdco, not its individual members, from filing suit to compel MSI to make the Deferred and Contingent payments. MSI does not allege that Holdco itself has ever filed a lawsuit or taken any other enforcement action in violation of its covenant not to sue. Neither the subordination agreement nor the purchase agreement contain a covenant barring Meunier, White, and the irrevocable trust from bringing suit in an attempt to compel MSI to pay over the Deferred Payment and Contingent Payment amounts to Holdco. Presumably it never occurred to MSI that it needed such a covenant, since the purchase agreement specifies that those payments are owed to Holdco, and not to the individual owners and members of Holdco. Nonetheless, the only covenant not to sue binds Holdco but not Meunier, White, or the trust. The Court may not construe the parties’ written contract to “add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing.” Bailey v. Fish & Neave, 8 N.Y.3d 523, 528, 868 N.E.2d 956, 959 (N.Y. 2007),
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quoting Reiss v. Financial Performance Corp., 97 N.Y.2d 195, 199 764 N.E.2d 958, 961 (N.Y. 2001).
MSI cannot create a viable claim for breach of contract merely by making the conclusory and incorrect assertion that Holdco breached the covenant not to sue. The interpretation of the parties’ unambiguous written contracts “is a question of law” that the court may resolve when deciding whether a party has asserted a viable contract claim. See, e.g., Eigerman v. Putnam Investments, Inc., 450 Mass. 281, 287 (2007) (affirming dismissal of complaint for failure to state a viable claim for breach of contract); accord Bailey, 8 N.Y.3d at 528, 868 N.E.2d at 959 (applying New York law). Similarly, whether language used in a contract “is ambiguous is also a question of law for the court.” Berkowitz v. President & Fellows of Harvard College, 58 Mass. App. Ct. 262, 270, rev. denied, 440 Mass. 1101 (2003) (ordering dismissal of complaint for failure to state a viable claim for breach of contract); accord Bailey, supra. Where the material provisions of a contract are unambiguous, as they are here, a court “cannot accept the bare assertion in the plaintiff’s complaint” that the opposing party violated the contract, when that assertion is based on a misreading of the contract. Eigerman, supra; accord Flomenbaum v. Commonwealth, 451 Mass. 740, 751-752 & n.12 (2008) (granting motion to dismiss contract claim because plain language of contract made clear that Commonwealth could terminate chief medical examiner before completion of full five year term).
MSI argues with some force that the subordination agreement must be read in conjunction with the purchase agreement, and that Meunier, White, and the irrevocable trust have no right under the purchase agreement to compel MSI to make the contested payments to Holdco. The first of these points is certainly correct; the two contracts were executed together and the subordination agreement specifies that it will govern whenever its provisions conflict with the purchase agreement. The second of these points may also be correct. If so then MSI may have a simple and complete defense to the claims asserted in the first lawsuit by Meunier, White, and the trust: since the purchase agreement specifies that MSI owes the Deferred and Contingent Payments only to Holdco, and Holdco executed a subordination agreement providing that those payments cannot and need not be made until MSI
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has paid off its senior lenders, it is not at all clear that Meunier, White, and the trust have any legal right to sue MSI on the ground that it has not made these payments to Holdco.
But these arguments have nothing to do with the pending motion to dismiss, which challenges the legal viability of MSI’s breach of contract claim against Holdco. Given the plain language of the covenant not to sue, which applies only to Holdco and not to its individual members, the facts alleged in the complaint fail to state a viable claim for relief against Holdco. Whether MSI is entitled to judgment in its favor on the claims asserted against it by Meunier, White, and the irrevocable trust is a question for another day.
Under New York law, the facts alleged by MSI do not plausibly suggest any sufficient basis to pierce the corporate veil in reverse and impose liability on Holdco for actions taken by its members in their individual capacities. (Although MSI does not expressly invoke the theory of reverse veil piercing, it does seek to impose liability on Holdco for actions taken by its members in their individual capacities.)
New York law allows courts to act on “reverse” piercing claims, “disregard the corporate form,” and hold the corporation liable based on misconduct by its owners “whenever necessary to prevent fraud or achieve equity.” State v. Easton, 647 N.Y.S.2d 904, 909 (N.Y. App. Div. 1995) (denying motion to dismiss action seeking to hold corporations liable for $ 7.5 million Medicaid fraud judgment against their president), quoting Walkovszky v. Carlton, 18 N.Y.2d 414, 417, 223 N.E.2d 6, 7 (N.Y. 1966). “As with conventional veil-piercing claims, in a reverse veil-piercing claim, the plaintiff must allege (1) that the owner exercised complete domination over the corporation with respect to the transaction at issue; and (2) that such domination was used to commit a fraud or wrong that injured the party seeking to pierce the veil.” Liberty Synergistics, Inc. v. Microflo, Ltd., 50 F.Supp.3d 267, 297 (E.D.N.Y. 2014), quoting JSC Foreign Economic Ass’n Technostroyexport v. International Dvpt. and Trade Svcs., Inc., 295 F.Supp.2d 366, 379 (S.D.N.Y. 2003); accord Easton, supra, at 910. “While complete domination of the corporation is the key to piercing the corporate veil, especially when the owners use the corporation as a mere device to further their personal rather than the corporate business, such domination, standing
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alone, is not enough; some showing of a wrongful or unjust act toward plaintiff is required.” Morris v. New York State Dept. of Taxation & Fin., 82 N.Y.2d 135, 141–142, 623 N.E.2d 1157, 1161 (N.Y. 1993).
The facts alleged by MSI easily satisfy the pleading requirements for the first prong of this test, but do not plausibly suggest that MSI can satisfy the second prong. The allegation that Holdco’s members filed the kind of law suit that Holdco is barred by contract from bringing itself cannot justify reverse-piercing the corporate veil. Under New York law, “a simple breach of contract, without more, does not constitute a fraud or wrong warranting the piercing of the corporate veil.” Skanska USA Bldg. Inc. v. Atl. Yards B2 Owner, LLC, 146 A.D.3d 1, 40 N.Y.S.3d 46, 54 (N.Y. App. Div. 2016), quoting Bonacasa Realty Co., LLC v. Salvatore, 109 A.D.3d 946, 947, 972 N.Y.S.2d 84 (N.Y. App. Div. 2013); contrast Liberty Synergistics, supra, at 299 (allegation of malicious prosecution “satisfies the second prong for veil-piercing”). Here, MSI does not even claim that Meunier, White, or the trust committed a breach of contract themselves by bringing the first lawsuit. And it does not allege facts plausibly suggesting that they committed any other wrongful act that would justify imposing liability on Holdco for their conduct.
The motion by Cogent Research Holdings LLC to dismiss the breach of contract claim against it is ALLOWED. No separate and final judgment shall enter at this time. Whenever final judgment enters in these consolidated cases, it shall dismiss the claim against Cogent Research Holdings LLC with prejudice.
February 23, 2017
Kenneth W. Salinger
Justice of the Superior Court
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT.
NETSCOUT SYSTEMS, INC.
MEMORANDUM AND ORDER ON PLAINTIFF’S MOTION FOR A PRELIMINARY INJUNCTION
NetScout Systems, Inc., seeks a preliminary injunction that would enforce non-competition and other covenants agreed to by Carl Hohenstein when he was employed by Danaher Corporation’s subsidiaries. When NetScout acquired Danaher’s communications business, Hohenstein became a NetScout employee and Danaher assigned its rights under the contract with Hohenstein to NetScout. Eighteen months later, Hohenstein left NetScout to work for a competitor. Hohenstein agrees he was bound by NetScout’s code of business conduct, including its restrictions on the use or disclosure of NetScout’s proprietary information. At oral argument, Hohenstein said he does not contest the issuance of an injunction that would bar him from using or disclosing any NetScout proprietary information, helping to develop products or services that would compete with NetScout’s offerings, helping to hire away NetScout’s employees or contractors, or interfering in any relationship with NetScout’s vendors. But Hohenstein contends that NetScout is not entitled to an injunction that would bar Hohenstein from selling or trying to sell products or services that compete with NetScout.
The Court concludes that, although NetScout is entitled to enforce the non-competition agreement assigned to it by Danaher, that contract does not bar Hohenstein from selling or trying to sell products or services that compete with those of NetScout. In any case, the contract provisions that barred Hohenstein from selling products and services that compete with those of Danaher and its subsidiaries lapsed in July 2016, twelve months after Hohenstein’s employment with Danaher subsidiaries came to an end. The Court will therefore deny NetScout’s motion to the extent it seeks to bar Hohenstein from selling products that compete with NetScout’s offerings (covered in paragraphs 2 and 3 of the form of order proposed by NetScout).
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It will allow the motion only to the extent it seeks to protect NetScout’s proprietary information and to obtain other relief that is not opposed by Hohenstein (covered in paragraphs 1, 4, 5, 6, and 7 of the proposed order, which the Court will renumber as paragraphs 1 through 5).
1. Findings of Fact. The Court makes the following findings of fact based on the affidavits submitted by NetScout and Mr. Hohenstein.
Hohenstein worked for subsidiaries of Danaher Corporation from January 2001 through July 2015. Throughout this time he was employed at-will, with no fixed contract term. Hohenstein worked for Fluke Networks, Inc., as a sales engineer from September 2004 to April 2014, and as a senior systems engineer through April 2015. He then worked for AirMagnet, Inc. (an affiliated company, also owned by Danaher) as senior systems engineer.
In late 2011 Hohenstein and Danaher entered into an “Agreement Regarding Solicitation and Protection of Proprietary Interests” that governed Hohenstein’s continued employment by Danaher or any of its subsidiaries. This Agreement included provisions requiring Hohenstein not to use or disclose any confidential information belonging to “the Company” for any purpose other than performing his duties as a Danaher employee, and not to compete with “the Company” by soliciting potential customers to purchase, selling or offering to sell, or helping to develop competing products while employed by “the Company” and for twelve months thereafter. The Agreement defined “the Company” to mean “Danaher Corporation including its subsidiaries and/or affiliates.” The phrase “the Company” did not include any assigns of Danaher or its subsidiaries or affiliates.
NetScout acquired Danaher’s communications business, which included Fluke Networks and AirMagnet, on July 14, 2015. This was structured as an asset deal, in which Danaher transferred certain assets and liabilities to NetScout, not as a stock transaction.1 As of that date Hohenstein became a NetScout employee and his
1 See the Form 8-K that NetScout filed with the Securities and Exchange Commission on July 14, 2015, which is available at https://www.sec.gov/ Archives/edgar/data/1078075/000119312515253647/d36264d8k.htm (last visited February 13, 2017). A court may take judicial notice of matters of public record, Schaer v. Brandeis Univ., 432 Mass. 474, 477 (2000), including SEC filings that are
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employment relationship with any Danaher subsidiary came to an end. As part of this transaction, Danaher assigned to NetScout its rights under the 2011 Agreement between Danaher and Hohenstein. (NetScout has not presented any documentation of this assignment. But Hohenstein does not dispute NetScout’s evidence that Danaher assigned its contract rights to NetScout, at least for the purpose of resolving the pending motion for a preliminary injunction.) Hohenstein and NetScout never entered into any non-competition or non-solicitation agreement of their own. During 2016 NetScout asked Hohenstein to sign a “Commission Plan” that contained a statement that the plan was not valid unless it was accompanied by a signed non-compete agreement. Hohenstein never signed the Commission plan or any non-competition agreement with NetScout. But Hohenstein did agree to abide by NetScout’s code of business conduct, which limits the use or disclosure of NetScout’s proprietary information.
NetScout says that it sells “application and network performance management products and solutions.” Hohenstein worked for NetScout as a principal sales engineer for the mid-Atlantic region, which consisted of the District of Columbia and the states of Pennsylvania, Maryland, Virginia, West Virginia, Ohio, Michigan, Indiana, and Kentucky. He served in a pre-sales and support role in which he made technical presentations to prospective or current customers about NetScout’s products, learned about the prospect’s or customers IT infrastructures, and helped to explain to prospects and customers how NetScout’s products could help them better manage their IT networks. Hohenstein had access to confidential financial information about NetScout’s sales and customer accounts in his territory, including information about the customer’s networks and technical requirements. He did not have access to similar information about other regions or about customers located outside of his region. He had complete access to information about NetScout’s product
publicly accessible. See, e.g., Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000); Schmidt v. Skolas, 770 F.3d 241, 249 (3d Cir. 2014); Yates v. Municipal Mortg. & Equity, LLC, 744 F.3d 874, 881 (4th Cir. 2014); Northstar Financial Advisors Inc. v. Schwab Investments, 779 F.3d 1036, 1043 (9th Cir. 2015); Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1276-1277 (11th Cir. 1999); see also G.L. c. 23, § 76A (authenticated copies of SEC filings are admissible in evidence).
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offerings. (Given the Court’s rulings below, it need not make any findings as to whether NetScout has met its burden of proving that the technical product information to which Hohenstein was privy was confidential, as opposed to something that is routinely shared with customers.) Hohenstein accompanied NetScout’s account managers on customer visits and built relationships with customers located in NetScout’s mid-Atlantic region. He was well compensated by NetScout, which paid him more than $ 200,000 per year.
In January 2017 Hohenstein left NetScout to work for a competitor called Riverbed Technologies, Inc. Like NetScout, Riverbed markets information technology solutions for network performance management, application performance management, and cloud virtualization. Riverbed has published at least one marketing paper that compares the architecture and performance of its products with those sold by NetScout.
Riverbed employs Hohenstein as its sales engineer director/manager for the New England states (excluding western Connecticut), North New York state, and Eastern Canada. At Riverbed, Hohenstein has no direct customer interaction. Instead he supervises other sales engineers who do have customer contact
2. Legal Standards.
2.1. Motions for Preliminary Injunction. “A preliminary injunction is an extraordinary remedy never awarded as of right.” Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 24 (2008). To the contrary, “the significant remedy of a preliminary injunction should not be granted unless the plaintiffs had made a clear showing of entitlement thereto.” Student No. 9 v. Board of Educ., 440 Mass. 752, 762 (2004). “Trial judges have broad discretion to grant or deny injunctive relief.” Lightlab Imaging, Inc. v. Axsun Technologies, Inc., 469 Mass. 181, 194 (2014).
A plaintiff is not entitled to preliminary injunctive relief if it cannot prove that it is likely to succeed on the merits of its claim. See, e.g., Fordyce v. Town of Hanover, 457 Mass. 248, 265 (2010) (vacating preliminary injunction on this ground); Wilson v. Commissioner of Transitional Assistance, 441 Mass. 846, 858-859 (2004) (same). Nor may a plaintiff obtain a preliminary injunction without proving that it will suffer irreparable harm in the absence of such an order, and that such harm to the plaintiff
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from not granting the preliminary injunction would outweigh any irreparable harm that defendants are likely to suffer if the injunction issues. See, e.g., American Grain Products Processing Institute v. Department of Pub. Health, 392 Mass. 309, 326-329 (1984) (vacating preliminary injunction on this ground); Nolan v. Police Comm’r of Boston, 383 Mass. 625, 630 (1981) (same). “The public interest may also be considered in a case between private parties where the applicable substantive law involves issues that concern public interest[s].” Bank of New England, N.A. v. Mortgage Corp. of New England, 30 Mass. App. Ct. 238, 246 (1991). Under Massachusetts law, “[a] covenant not to compete contained in a contract for personal services” is only enforceable to the extent that it is consistent with the public interest. All Stainless, 364 Mass. at 778.
2.2. Non-Compete and Non-Solicitation Agreements. An employee’s agreement not to compete with his or her employer by soliciting away customers or potential customers may only be enforced under Massachusetts law to the extent necessary to protect the employer’s legitimate business interests—which include guarding against the release or use of trade secrets or other confidential information, or other harm to the employer’s goodwill, but do not include merely avoiding lawful competition—and to the extent it is reasonable in scope in terms of the activities it restricts, the geographic limitations it imposes on those activities, and the length of time it is in effect. See New England Canteen Services, Inc. v. Ashley, 372 Mass. 671, 673-676 (1977); All Stainless, Inc. v. Colby, 364 Mass. 773, 778-780 (1974). The employer has the burden of proving that the agreement protects legitimate business interests and thus is enforceable. New England Canteen Services, supra, at 675; Folsum Funeral Service, Inc. v. Rodgers, 6 Mass. App. Ct. 843 (1978) (rescript).
“Protection of the employer from ordinary competition … is not a legitimate business interest,” however, “and a covenant not to compete designed solely for that purpose will not be enforced.” Marine Contractors, Inc. v. Hurley, 365 Mass. 280, 287-288 (1974); accord, e.g., Boulanger v. Dunkin’ Donuts, Inc., 442 Mass. 635, 641 (2004), cert. denied, 544 U.S. 922 (2005).
Thus, “[a]n employer may prevent his employee, upon termination of his employment, from using, for his own advantage or that of a rival and to the harm of
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his employer, confidential information gained by him during his employment; but he may not prevent the employee from using the skill and general knowledge acquired or improved through his employment.” Abramson v. Blackman, 340 Mass. 714, 715-16 (1960); accord, e.g., Richmond Bros., Inc. v. Westinghouse Broadcasting Co., Inc., 357 Mass. 106, 111 (1970); Woolley’s Laundry v. Silva, 304 Mass. 383, 387 (1939). “The ‘right (of an employee) to use (his) general knowledge, experience, memory and skill’ promotes the public interest in labor mobility and the employee’s freedom to practice his profession and in mitigating monopoly.” Dynamics Research Corp. v. Analytic Sciences Corp., 9 Mass. App. Ct. 254, 267 (1980), quoting J. T. Healy & Son v. James A. Murphy & Son, 357 Mass. 728, 740 (1970); accord Club Aluminum Co. v. Young, 263 Mass. 223, 226-227 (1928).
A contractual covenant restraining competition by a former employee “will be enforced ‘only to the extent that is reasonable and to the extent that it is severable for the purposes of enforcement.’ ” Blackwell v. E-M. Helides, Jr., Inc., 368 Mass. 225, 229 (1975), quoting All Stainless, supra, at 778.
3.1. NetScout’s Rights to Enforce the Agreement. Hohenstein’s contract with Danaher is an enforceable contract. And NetScout is entitled to enforce Hohenstein’s obligations under that contract as Danaher’s assignee.
The 2011 Agreement was supported by adequate consideration, even though Hohenstein had already been working for a Danaher subsidiary for almost twelve years and was not given any additional compensation in exchange for executing the new contract. Hohenstein was an employee at will. Continued at-will employment is sufficient consideration to support a non-compete agreement in Massachusetts, just as it is sufficient consideration to support other contractual terms. Economy Grocery Stores Corp. v. McMenamy, 290 Mass. 549, 552 (1935) (covenant not to compete signed eighteen months after defendant began working for plaintiff as at-will employee “was not void for lack of consideration” because “it implied … a promise on the part of the plaintiff to employ the defendant” thereafter); accord Sherman v. Pfefferkorn, 241 Mass. 468, 473 (1922); see also Smith v. Graham Refrigeration Products Co., Inc., 333 Mass. 181, 186 (1955) (agreement to forego salary until
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employer’s financial condition improved); Horner v. Boston Edison Co., 45 Mass. App. Ct. 139, 143 (1998) (release of claims). Since Hohenstein was employed at will by Fluke, his employer “”could modify [the] terms [of employment] or ‘terminate … [the employment] at any time for any reason or for no reason at all,’ with limited exceptions, such as public policy considerations.” York v. Zurich Scudder Investments, Inc., 66 Mass. App. Ct. 610, 614 (2006) (enforcing change of incentive compensation terms for sales person employed at will), quoting Gram v. Liberty Mut. Ins. Co., 384 Mass. 659, 668 n. 6 (1981).
Hohenstein cannot avoid his obligations under the 2011 Agreement on the ground that his employment relationship with Danaher’s subsidiary changed materially over the next several years. Hohenstein has demonstrated that after signing the non-competition agreement he was promoted from sales engineer to senior systems engineer, he assumed additional responsibilities, and his salary increased by a third. The Court is not convinced that the nature of Hohenstein’s duties changed so fundamentally that his prior employment relationship with Danaher was effectively terminated and as a result the prior non-competition agreement could not be enforced unless it is expressly renewed by the parties. See F.A. Bartlett Tree Co. v. Barrington, 353 Mass. 585, 586-587 (1968). In any case, Hohenstein expressly agreed in his written contract “that any change in my position or title with the Company shall not cause this Agreement to terminate and shall not effect any change in my obligations under this Agreement.” Hohenstein is bound by that stipulation.
Danaher’s assignment of its contractual rights to NetScout is valid even though Hohenstein never consented to it. In his contract, Hohenstein agreed that such an assignment by Danaher “may be done without my consent.” He also agreed that if Danaher assigned its rights under the contract then “this Agreement shall remain binding upon me.” Having waived by contract any right to veto or need to consent to an assignment of Danaher’s rights under the 2011 Agreement, Hohenstein cannot now challenge NetScout’s legal authority to act as Danaher’s assignee.
Hohenstein complains that he is the first former Fluke employee that NetScout has sued for violating his Danaher non-competition agreement, even though at least
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two other former Fluke employees who then worked for NetScout went on to work for competitors of NetScout. But he cites no authority and identifies no legal principle suggesting that as a result NetScout is legally barred from enforcing its rights against Hohenstein as Danaher’s assignee.
3.2. Scope and Duration of the Non-Competition Obligations. Although NetScout is entitled to enforce Hohenstein’s obligations under his non-competition agreement with Danaher, that does not mean that NetScout has any right to bar Hohenstein from working for a competitor of NetScout.
The non-competition provisions in the 2011 Agreement barred Hohenstein from soliciting potential customers to purchase and from offering, providing, or selling any products or services that are “competitive with or similar to products or services offered by, developed by, designed by or distributed by the Company.” These restrictions applied so long as Hohenstein was employed by “the Company, and for a period of 12 months thereafter.” As noted above, “the Company” was defined in the contract to mean “Danaher Corporation including its subsidiaries and/or affiliates,” but did not include its assignees. NetScout is not and never was a subsidiary or affiliate of Danaher.
Since Hohenstein’s non-competition agreement only barred him from competing with Danaher, or with Danaher’s subsidiaries and affiliates, Danaher had no contractual right to bar Hohenstein from working for a company that instead competes with NetScout. As a result, NetScout cannot do so either in its capacity as Danaher’s assignee. “[A]n assignee of contract rights must stand in the shoes of the assignor and has no greater rights than the assignor.” Unisys Fin. Corp. v. Allan R. Hackel Org., Inc., 42 Mass. App. Ct. 275, 281 (1997); accord, e.g., Ford Motor Credit Co. v. Morgan, 404 Mass. 537, 545 (1989). NetScout has presented no evidence that Riverbed, Hohenstein’s new employer, competes with Danaher.
In any case, Hohenstein’s obligations under the disputed provisions of the 2011 Agreement expired by their terms twelve months after Hohenstein stopped working for any Danaher subsidiary. Hohenstein’s employment by any Danaher company ended on July 14, 2015, when he became an employee of NetScout. His obligations not to compete with Danaher therefore expired one year later, on July 14, 2016. Since
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Hohenstein did not stop working for NetScout until January 2017, the non-competition provisions of Hohenstein’s contract with Danaher had already expired. This is an independent reason why they cannot be enforced by NetScout.
NetScout correctly notes that Hohenstein agreed that his obligations under the 2011 Agreement would continue and not terminate merely because of a change in his position or title with “the Company,” meaning Danaher and its subsidiaries and affiliates. But this does not help NetScout prove its claims. Hohenstein never agreed that he would remain bound by his non-competition and non-solicitation covenants if a corporate transaction caused him to become employed by a new business that is not a subsidiary or affiliate of Danaher and that sells different products and services to different customers. To the contrary, paragraph 20 of the contract states that the Agreement was “intended to benefit each and every subsidiary, affiliate or business unit of the Company.” NetScout, or any other potential future buyer of part of Danaher’s business operations, was not an intended beneficiary of Hohenstein’s non-competition agreement with Danaher. Indeed, NetScout makes no claim that it can enforce the contract as a third-party beneficiary. Its only claim is made in its capacity as Danaher’s assignee.
In sum, the plain language of the 2011 Agreement indicates that NetScout cannot prevail on its claim that Hohenstein has violated the non-competition provisions in that contract.
Even if the 2011 Agreement were ambiguous in this regard, which it is not, that would not mean that NetScout has any likelihood of succeeding on its claim. Any ambiguity in applying the non-competition agreements must be construed “strongly against” NetScout because the contract was drafted by the contracting party (Danaher) that NetScout now contends was representing its future interests. See Leblanc v. Friedman, 438 Mass. 592, 599 n.6 (2003) (ambiguity in written contract must be construed “strongly against the party who drew it” (quoting Bowser v. Chalifour, 334 Mass. 348, 352 (1956)); accord, e.g., Costa v. Brait Builders Corp., 463 Mass. 65, 76 (2012) (where contract “provision is ambiguous, we construe it against the drafter” (citing Restatement (Second) of Contracts § 206, at 105 (1981)). This general rule of contract construction applies with full force to employment
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contracts, perhaps especially those imposing “a post-employment restraint imposed by the employer’s standard form contract.” Sentry Ins. v. Firnstein, 14 Mass. App. Ct. 706, 707 (1982). Under Massachusetts law, such contracts must be “scrutinized with particular care because they are often the product of unequal bargaining power and because the employee is likely to give scant attention to the hardship he may later suffer through the loss of his livelihood.” Id., quoting Restatement (Second) of Contracts § 188, comment g (1981). Since the Court must construe the relevant contractual provisions “strongly against” NetScout, if those provisions were ambiguous the Court would still conclude that NetScout has not shown that it is likely to succeed on the merits of its claim.
Plaintiff’s motion for a preliminary injunction is DENIED IN PART and ALLOWED IN PART. The motion is denied with respect to the provisions of the proposed preliminary injunction that would have barred Defendant from soliciting Plaintiff’s customers or attempting to sell products that compete with those of the Plaintiff. The motion is allowed only with respect to the portions of the proposed injunction that Defendant did not oppose.
February 14, 2017
Kenneth W. Salinger
Justice of the Superior Court
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT.
ANTHONY FORTUNATO, Individually and on Behalf of All Others Similarly Situated
AKEBIA THERAPEUTICS, INC., and Others1
MEMORANDUM AND ORDER ALLOWING DEFENDANTS’ MOTION TO DISMISS
Anthony Fortunato asserts claims on behalf of himself and a putative class of investors in Akebia Therapeutics, Inc. The amended complaint alleges that Akebia’s final registration statement and prospectus for its initial public offering were misleading because they did not disclose interim results from an ongoing clinical drug trial. Fortunato claims that as a result Akebia, senior executives and directors who signed the offering materials, and the investment banks that acted as underwriters for the IPO all violated the federal Securities Act of 1933.
Defendants move to dismiss this action on the grounds that: (1) the federal courts have exclusive jurisdiction over Securities Act class actions; (2) Fortunato’s claims sound in fraud and he has failed to state the factual basis for his claims with sufficient particularity; and (3) if particularity is not required, Fortunato has failed to allege facts that plausibly suggest he and the putative class are entitled to relief.
The Court concludes that the first two arguments are without merit. State courts have concurrent jurisdiction to hear Securities Act class actions; the Securities Litigation Uniform Standards Act of 1998 did not take that power away. And Fortunato need not meet the heightened pleading standard that applies to fraud claims because he alleges only negligent misrepresentations and expressly disclaims any claim of intentional or reckless fraud.
But the Court will ALLOW the motion to dismiss because the facts alleged by Fortunato do not plausibly suggest that he is entitled to any relief under the
1 John P. Buler, Jason A. Amello, Muneer A. Satter, Campbell Murray, M.D., Jack Nielsen, Anupam Dalal, M.D., Giovanni Ferrara, Kim Dueholmd, Ph.D, Duane Nash, M.D., Morgan Stanley & Co. LLC, Credit Suisse Securities (USA) LLC, UBS Securities LLC, and Nomura Securities, International.
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Securities Act. Fortunato claims that the offering materials issued by Akebia for its March 2014 IPO were misleading because they failed to disclose preliminary information from Akebia’s ongoing Phase 2b clinical trial of its first potential pharmaceutical product suggesting that patients receiving the test drug were more likely to experience serious adverse events than patients who received a placebo. But the complaint and the materials it cites make clear that this Phase 2b study was a double-blind, placebo controlled, randomized trial. They also indicate that this trial was not completed, and thus the study results were not unblinded to reveal which patients received the trial drug and which received a placebo, until six months or more after the IPO. Fortunato alleges no facts plausibly suggesting that Defendants knew or could have known any material information about the double-blind Phase 2b trial before Akebia’s IPO or, indeed, at any time before Akebia publicly released the final trial results in October 2014.
1. Subject Matter Jurisdiction. Fortunato asserts claims on behalf of himself and a proposed class of more than fifty investors under sections 11, 12(a)(2), and 15 of the federal Securities Act of 1933; these provisions are codified as 15 U.S.C. §§ 77k, 77l, and 77o, respectively. “The Securities Act ‘was designed to provide investors with full disclosure of material information concerning public offerings.’ ” In re Ariad Pharm., Inc. Sec. Litig., 842 F.3d 744, 755 (1st Cir. 2016), quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976). “Section 11 advances this goal by creating virtually strict liability for any ‘untrue statement’ or misleading omission of material fact in a registration statement.” Id., quoting 15 U.S.C. § 77k(a).”[S]ection 12(a)(2) imposes similar liability on sellers who make such statements in a prospectus or oral communication.” Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 632 F.3d 762, 766 (1st Cir. 2011), citing 15 U.S.C. § 77l(a)(2). “Section 15 creates liability for any individual or entity that ‘controls any person liable’ under sections 11 or 12.” Id., quoting 15 U.S.C. § 77o. Thus, “a liability finding under either §§ 11 or 12 is a prerequisite for success under § 15.” Silverstrand Investments v. AMAG Pharm., Inc., 707 F.3d 95, 107 (1st Cir. 2013).
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Defendants argue that the Securities Act gives federal courts exclusive jurisdiction and deprives the Massachusetts courts of subject matter jurisdiction over Fortunato’s class claims. (Defendants have actually moved to dismiss all of Fortunato’s claims for lack of subject matter jurisdiction. But their jurisdictional argument only pertains to the claims he seeks to assert on behalf of the putative claims, not to his personal claims under the federal Securities Act.)
Fortunato makes two responses. First, he points out that Akebia made the same jurisdictional argument after attempting to remove this action to federal district court; notes that Judge Saris rejected the jurisdictional argument and remanded the case to the Superior Court; and argues that Judge Saris’s ruling is binding and may not be revisited. Second, Fortunato asserts in the alternative that Judge Saris’s ruling was correct and that state and federal courts have concurrent jurisdiction over class actions brought under the federal Securities Act.
The Court concludes that it must make its own determination as to its subject matter jurisdiction, and not merely defer to Judge Saris’s prior ruling. It would also be inappropriate to skip over the jurisdictional question and decide whether Fortunato has stated a viable claim without first determining whether the Court has the power to resolve that question. Turning to that question, the Court concludes that state courts retain concurrent jurisdiction to hear and decide Securities Act class actions.
1.1. Law of the Case. Defendants tried to remove this action to federal court. They ran afoul of a Securities Act provision that bars removal of any case under the federal statute that is “brought in any State court of competent jurisdiction.” See 15 U.S.C. § 77v(a). Fortunato sought a remand under this provision. Defendants opposed the remand request on the ground that the Superior Court is not a “court of competent jurisdiction” because Congress has given federal courts exclusive jurisdiction over class actions under the federal Securities Act. Judge Saris disagreed. She held that the state and federal courts have concurrent jurisdiction over Fortunato’s class claims. She therefore ordered that the case be remanded to the Suffolk County Superior Court. See Fortunato v. Akebia Therapeutics, Inc., 183 F.Supp.3d 326 (D.Mass. 2016). By law, Defendants cannot
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appeal or otherwise seek review of this remand order. See Kircher v. Putnam Funds Trust, 547 U.S. 633, 640-644 (2006).
Fortunato insists that, under the “law of the case” doctrine, the prior jurisdictional ruling by Judge Saris “controls here” and therefore “precludes” and “prevents” any further consideration of the issue. That is not correct.
The decision to remand this case has no preclusive effect, with respect to Judge Saris’s jurisdictional ruling or otherwise, because Defendants had no right to seek any appellate review. Kircher, supra, at 646-647; see also Alicea v. Commonwealth, 466 Mass. 228, 234 (2013) (whether federal court judgment or order has preclusive effect in state court proceeding “is governed by Federal common law,” not by state law). “While the state court cannot review the decision to remand in an appellate way, it is perfectly free to reject the remanding court’s reasoning[.]” Kircher, at 647. Furthermore, a federal judge has no more power to “confer jurisdiction” on Massachusetts courts than does the secretary of a state agency, and her “opinion with respect to the existence of jurisdiction” is similarly “neither controlling nor entitled to special weight.” Cf. Cummings v. Secretary of Exec. Office of Envtl. Affairs, 402 Mass. 611, 613–14 (1988) (state agency cannot confer jurisdiction on courts by regulation).
The law of the case doctrine does not prevent a second judge from revisiting “an earlier ruling by another judge.” Martin v. Roy, 54 Mass. App. Ct. 642, 644, (2002); accord Gleason v. Hardware Mut. Cas. Co., 331 Mass. 703, 710 (1954). Since final judgment has not entered, the Court has “broad discretion” to revisit any prior ruling in this case. Genesis Technical & Fin., Inc. v. Cast Navigation, LLC, 74 Mass. App. Ct. 203, 206 (2009); accord Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 439 Mass. 387, 401 (2003) (“it is within the inherent authority of a trial judge to ‘reconsider decisions made on the road to final judgment.’ ”) (quoting Franchi v. Stella, 42 Mass. App. Ct. 251, 258 (1997)).
There are several reasons why it makes sense for the Court to make its own determination as to whether it has subject matter jurisdiction, rather than merely adopt Judge Saris’s thoughtful decision.
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As Judge Saris recognized, there is a sharp disagreement among federal district judges as to whether federal courts have exclusive jurisdiction over federal Securities Act class actions or, alternatively, whether state courts share concurrent jurisdiction over such claims. Fortunato, 183 F.Supp.3d at 328; accord, e.g., Rosenberg v. Cliffs Natural Resources, Inc., No. 1:14CV1531, 2015 WL 1534033, *2-*3 (N.D. Ohio 2015); Toth v. Envivo, Inc., No. C 12-5636 CW, 2013 WL 5596965, *1 n.1 (N.D. Cal. 2013). It appears that no federal appellate court has addressed the issue.2 The Supreme Court is considering whether to step in and resolve this split among federal district judges.3 It has invited the Acting Solicitor General to express the views of United States as to whether certiorari should be granted.4 But at present the issue remains hotly contested and unsettled.
2 Defendants quote the United States Court of Appeals for the Second Circuit as saying that the 1998 amendments to the Securities Act “made federal court the exclusive venue for class actions alleging fraud in the sale of certain securities.” California Pub. Employees’ Ret. System v. WorldCom, Inc., 368 F.3d 86, 98 (2d Cir. 2004) (“CalPERS”).
But that is pure dictum. See Fortunato, 183 F.Supp.3d at 33. The CalPERS case had nothing to do with securities class actions. The issue before the Second Circuit was whether individual actions brought in state court around the country under the Securities Act could be removed to federal bankruptcy court (under the bankruptcy removal statute) even though they could not otherwise be removed to federal district court (because it was undisputed that state courts had concurrent jurisdiction over the claim and thus removal was barred under the Securities Act removal provision). See CalPERS, 368 F.3d at 91-95. This appellate decision had nothing to do with jurisdiction over class actions under the Securities Act.
In any case, Massachusetts courts are not bound to follow either holdings or dicta by United States Courts of Appeals. Cf. Commonwealth v. Pon, 469 Mass. 296, 308 (2014) (Massachusetts courts “give respectful consideration to such lower Federal court decisions as seem persuasive,” but “are not bound by decisions of Federal courts except the decisions of the United States Supreme Court on questions of Federal law.”) (quoting Commonwealth v. Hill, 377 Mass. 59, 61 (1979), and Commonwealth v. Montanez, 388 Mass. 603, 604 (1983)). As explained below, the CalPERS dictum quoted by Defendants is incorrect.
3 See Petition for Writ of Certiorari filed in Cyan, Inc. v. Beaver Cnty Employees Ret. Fund, No. 15-1439, available at http://www.scotusblog.com/wp-content/uploads/2016/06/15-1439-petition.pdf (last visited February 10, 2017).
4 See case docket at https://www.supremecourt.gov/search.aspx?filename=/ docketfiles/15-1439.htm (last visited February 21, 2017).
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Furthermore, since “the question of subject matter jurisdiction may be raised by the parties at any time,” is therefore “certain to reappear” on appeal if Fortunato were to prevail on the merits, and has been fully briefed and argued by the parties, it makes little sense to allow the case to proceed without considering the merits of Defendants’ assertion that Massachusetts courts lack subject matter jurisdiction over Fortunato’s claims. See Maxwell v. AIG Domestic Claims, Inc., 460 Mass. 91, 99 (2011) (deciding interlocutory challenge to subject matter jurisdiction, even though Defendant had no right to seek interlocutory review on that ground).
1.2. Subject Matter Jurisdiction as Prerequisite. The Court must decide Defendants’ jurisdictional challenge under Mass. R. Civ. P. 12(b)(1) before it can address their arguments for dismissal under Rule 12(b)(6) “[b]ecause the question of subject matter jurisdiction goes to the power of the court to hear and decide the matter.” Ginther v. Commissioner of Ins., 427 Mass. 319, 320 n.4 & 322 n.6 (1998). “Courts … have both the power and the obligation to resolve questions of subject matter jurisdiction whenever they become apparent[.]” HSBC Bank U.S.A., N.A. v. Matt, 464 Mass. 193, 199 (2013), quoting Nature Church v. Assessors of Belchertown, 384 Mass. 811, 812 (1981). “The question at the heart of subject matter jurisdiction is, ‘Has the Legislature [or the Constitution] empowered the [court] to hear cases of a certain genre?’ ” Ten Persons of the Commonwealth v. Fellsway Development LLC, 460 Mass. 366, 375 (2011), quoting Doe, Sex Offender Registry Bd. No. 3974 v. Sex Offender Registry Bd., 457 Mass. 53, 56–57 (2010), and Wachovia Bank, Nat’l Ass’n v. Schmidt, 546 U.S. 303, 316 (2006). “Without jurisdiction the court cannot proceed at all in any cause. Jurisdiction is power to declare the law, and when it ceases to exist, the only function remaining to the court is that of announcing the fact and dismissing the cause.” Steel Co. v. Citizens for a Better Environment, 523 U.S. 83, 94 (1998), quoting Ex parte McCardle, 74 U.S. (7 Wall.) 506, 514 (1868).
Massachusetts courts sometimes skip over difficult jurisdictional issues, and instead resolve a case on the merits, where doing so will make “no difference in the result.” See Boston Gas Co. v. Department of Pub. Utils. 368 Mass. 780, 805 (1975); accord Mostyn v. Department of Envtl. Prot., 83 Mass. App. Ct. 788, 792 & n.12
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(2013). The plaintiffs in Boston Gas and Mostyn were seeking to challenge decisions by administrative agencies. The defendant agencies argued that the plaintiffs did not have standing. Whether a plaintiff has standing raises an “issue of subject matter jurisdiction.” Indeck Maine Energy, LLC v. Commissioner of Energy Resources, 454 Mass. 511, 516 (2009). In a case involving judicial review of an administrative decision, however, it often does not matter whether the claim fails because no plaintiff has standing or because the plaintiffs have not asserted a meritorious claim. Either way, the result is typically the same: a judgment will enter that leaves the agency decision intact, and strict statutory time limits will bar anyone else from seeking judicial review thereafter. Compare Indeck, supra (affirming judgment that dismissed action for lack of standing) with Mostyn, supra (affirming judgment that affirmed agency’s decision).5
In this case, however, it would make a big difference whether the Court dismisses the action for lack of subject matter jurisdiction or does so because Fortunato has failed to state any claim upon which relief can be grant. A dismissal for lack of subject matter jurisdiction would be without prejudice, leaving Fortunato free to refile this class action in federal court. See Abate v. Fremont Inv. & Loan, 470 Mass. 821, 836 (2015) (“Dismissals for lack of subject matter jurisdiction are ordinarily without prejudice because dismissal for lack of jurisdiction is typically not an adjudication on the merits.”). But a dismissal for failure to state a claim would be with prejudice, and bar any further claim by Fortunato personally. See Mestek, Inc. v. United Pacific Ins. Co., 40 Mass. App. Ct. 729, 731, rev. denied, 423 Mass. 1108 (1996) (“Under Massachusetts law, as elsewhere, a dismissal for failure to state a claim, under Mass. R. Civ. P. 12(b)(6), operates as a dismissal on the merits, see Mass. R. Civ. P. 41(b)(3), with res judicata effect”) (quoting Isaac v.
5 Federal courts, in contrast, must resolve any question of subject matter jurisdiction, including whether a plaintiff has standing, before deciding whether a plaintiff has asserted a viable cause of action or otherwise reaching the merits. Steel Co. v. Citizens for a Better Env’t, 523 U.S. at 93-102. The Supreme Court has held that reaching the merits without having subject matter jurisdiction would violate Article III of the Constitution and therefore is not permitted even where “the merits question is more readily resolved” and “the prevailing party on the merits would be the same as the prevailing party were jurisdiction denied.” Id. at 93.
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Schwartz, 706 F.2d 15, 17 (1st Cir. 1983)). Since no class has been certified, such a dismissal would not have preclusive effect with respect to the putative class. See Massachusetts General Hosp. v. Rate Setting Comm’n, 371 Mass. 705, 713 (1977).
It would be inappropriate to decide whether this action must be dismissed with prejudice under Rule 12(b)(6) for failure to state a claim without first deciding whether the Court has subject matter jurisdiction adjudicate the merits. If the Court lacked subject matter jurisdiction, any judgment dismissing Fortunato’s claims with prejudice would be void and have no effect. See Everett v. 357 Corp., 453 Mass. 585, 612 (2009) (vacating judgment entered after jury trial and ordering dismissal because Superior Court lacked subject matter jurisdiction).
1.3. State Court Jurisdiction. So let’s turn to the jurisdictional question. According to Defendants, Congress established concurrent state and federal court jurisdiction over suits brought to enforce the Securities Act of 1933, but then eliminated state court jurisdiction over larger Securities Act class actions when it amended that statute in 1998. Defendants say that Congress originally established concurrent jurisdiction by providing that “[t]he district courts of the United States … shall have jurisdiction … , concurrent with State and Territorial courts, of all suits in equity and actions at law brought to enforce any liability or duty created by this subchapter.” See 48 Stat. 86, § 22(a) (now codified at 15 U.S.C. § 77v(a)); see also Wilko v. Swan, 346 U.S. 427, 433 n.16 (1953). Congress amended this provision in 1998. It now says that federal district courts “shall have jurisdiction … , concurrent with State and Territorial courts, except as provided in section 77p of this title with respect to covered class actions, of all suits … brought to enforce any liability or duty created by this subchapter” (emphasis added). 15 U.S.C. § 77v(a), as amended by the Securities Litigation Uniform Standards Act of 1998, Pub. L. No. 105-353, § 101(a)(3) 112 Stat. 3227 (1998) (“SLUSA”). Defendants say this amendment “extinguished” state court jurisdiction over Securities Act class actions seeking damages on behalf of more than fifty people.
The Court disagrees. Congress did not have to and did not in fact establish concurrent state and federal jurisdiction over Securities Act claims, because state courts have the inherent power under our federal system to decide such claims.
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And nothing in the 1998 statutory amendment deprives state courts, either expressly or by necessary implication, of concurrent jurisdiction to hear and decide class actions of any size brought under the Securities Act.
1.3.1. Concurrent Jurisdiction Is Presumed. State courts do not need permission from Congress to hear and decide questions of federal law, including causes of action created by federal statute. As the Supreme Judicial Court explained long ago, “[t]he jurisdiction assumed by the state courts, in matters arising under the United States laws, has not been limited to the case where jurisdiction has been expressly conferred upon them by the statute itself.” Ward v. Jenkins, 51 Mass. (10 Metcalf) 583, 588 (1846). So long as no statutory or constitutional provision gives federal courts exclusive jurisdiction, “the fact that the cause of action arose under certain rights acquired by a statute of the United States [is] no sufficient objection to the jurisdiction of a state court.” Id. The United States Supreme Court has long agreed. See Claflin v. Houseman, 93 U.S. (3 Otto) 130, 136-137 (1876); Houston v. Moore, 18 U.S. (5 Wheat.) 1, 32 (1820). It has “consistently held that state courts have inherent authority, and are thus presumptively competent, to adjudicate claims arising under the laws of the United States.” Tafflin v. Levitt, 493 U.S. 455, 458 (1990) (state courts may decide civil actions under the Racketeer Influenced and Corrupt Organizations Act); accord, e.g., Yellow Freight Sys., Inc. v. Donnelly, 494 U.S. 820, 821(1990) (state courts may decide civil actions under Title VII of the Civil Rights Act of 1964).
This presumption that “State courts are adequate forums for the vindication of federal rights” is “a foundational principle of our federal system.” Burt v. Titlow, 134 S. Ct. 10, 15 (2013). “Federal law is enforceable in state courts … because the Constitution and laws passed pursuant to it are as much laws in the States as laws passed by the state legislature. The Supremacy Clause makes those laws ‘the supreme Law of the Land,’ and charges state courts with a coordinate responsibility to enforce that law according to their regular modes of procedure.” Mulhern v. MacLeod, 441 Mass. 754, 756 (2004), quoting Howlett v. Rose, 496 U.S. 356, 367 (1990), quoting in turn U.S. Const. art. VI. “State courts have jurisdiction over federal causes of action not because it is ‘conferred’ upon them by the Congress”
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(emphasis added), but instead because the Constitution contemplates that federal claims and questions may be decided in state judicial proceedings. Tafflin, 493 U.S. at 469 (Scalia, J., concurring).
“It therefore takes an affirmative act of power under the Supremacy Clause to oust the States of jurisdiction—an exercise of what one of our earliest cases referred to as ‘the power of congress to withdraw’ federal claims from state-court jurisdiction” (emphasis in original). Id. at 470, quoting Houston, 18 U.S. (5 Wheat.) at 26; accord Yellow Freight Sys., 494 U.S. at 823 (“To give federal courts exclusive jurisdiction over a federal cause of action, Congress must, in an exercise of its powers under the Supremacy Clause, affirmatively divest state courts of their presumptively concurrent jurisdiction.”). “Only ‘an explicit statutory directive, [an] unmistakable implication from legislative history, or … a clear incompatibility between state-court jurisdiction and federal interests’ will rebut the presumption” of concurrent jurisdiction. Hathorn v. Lovorn, 457 U.S. 255, 266 (1982), quoting Gulf Offshore Co. v. Mobil Oil Corp., 453 U.S. 473, 478 (1981).
1.3.2. Parsing the Statutory Text. Nothing in the Securities Act expressly says or even clearly suggests that federal courts have exclusive jurisdiction over claims brought under that statute. Like any statute, the Securities Act must be construed in accord with the ordinary meaning of its words, considered in the context of the relevant statutory scheme as a whole, to produce a meaning that best reflects the apparent purpose of the statute. Securities and Exchange Comm’n v. C. M. Joiner Leasing Corp., 320 U.S. 344, 350-351 (1943); see generally Abramski v. United States, 134 S.Ct. 2259, 2267 (2014); Commonwealth v. Hanson H., 464 Mass. 807, 810 (2013). When read in this manner, the 1998 amendment relied upon by Defendants did not withdraw federal Securities Act claims from state-court jurisdiction.
As noted above, Defendants’ jurisdictional argument is based on a provision in section 22 of the Securities Act of 1933 stating that federal district courts “shall have jurisdiction …, concurrent with State and Territorial courts, except as provided in section 77p of this title with respect to covered class actions, of all suits….” See 15 U.S.C. § 77v(a), as amended by SLUSA § 101(a)(3)(A). Section 77p,
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in turn, provides that “[n]o covered class action based upon the statutory or common law of any State or subdivision thereof in any State or Federal court by any private party alleging” certain broad categories of securities fraud. 15 U.S.C. § 77p(b), as amended by SLUSA § 101(a)(1). The term “covered class action” is defined in § 77p(f)(2) to mean, in substance, “a lawsuit in which damages are sought on behalf of more than 50 people.” Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 83 (2006) (“Dabit”) (construing 15 U.S.C. § 78bb(f)(5)(B) of the Securities Exchange Act of 1934, as amended by SLUSA § 101(b)(1)(B), which is identical to § 77p(f)(2) of the Securities Act). Thus, § 77p has the effect of doing away with larger securities fraud class actions brought under state law, by providing that neither state nor federal courts may hear such claims. Id.6
On its face, the plain language of § 77v(a) does nothing to restrict the subject matter jurisdiction of state courts. To the contrary, the first sentence of this provision is a grant of authority to federal district courts that was amended in 1998 to specify that the federal courts may not hear certain categories of securities fraud class actions that are brought under state law. “[T]he reference to § 77p in the amendment to the concurrent jurisdictional provision in § 77v(a) does not constitute an ‘explicit statutory directive’ ” barring state courts from hearing class actions under the federal Securities Act. Fortunato, 183 F.Supp.3d at 332 (Saris, J.), quoting Gulf Offshore, 453 U.S. at 478. When Congress wants to grant exclusive jurisdiction to federal courts, it knows how to say so expressly. It did so, for example, in section 27 of the Securities Exchange Act of 1934, which provides that:
The district courts of the United States and the United States courts of any Territory or other place subject to the jurisdiction of the United States shall have exclusive jurisdiction of violations of this chapter or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder (emphasis added).
6 “SLUSA does not actually pre-empt any state cause of action. It simply denies plaintiffs the right to use the class-action device to vindicate certain claims. The Act does not deny any individual plaintiff, or indeed any group of fewer than 50 plaintiffs, the right to enforce any state-law cause of action that may exist.” Dabit, 547 U.S. at 87.
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15 U.S.C. § 78aa(a). No similar language or any other express abrogation of state court jurisdiction over class actions appears anywhere in the Securities Act, which creates different obligations and therefore different potential causes of action than the Securities Exchange Act. The omission from the Securities Act of any statutory provision “that expressly confines jurisdiction to federal courts or ousts state courts of their presumptive jurisdiction … is strong, and arguably sufficient, evidence that Congress had no such intent.” Yellow Freight Sys., 494 U.S. at 823.
Defendants protest that reading § 77v(a) as defining the jurisdiction of federal courts, but not limiting the jurisdiction of state courts, makes the language added by the 1998 amendment superfluous. They point out that § 77v(a) only grants federal courts jurisdiction over federal Securities Act claims, not over state law claims, and that there was thus no need for Congress to add language stating that federal courts now lack jurisdiction over certain kinds of state law claims. Defendants are implicitly invoking the principle that courts should try to “interpret a statute to give effect to all its provisions, so that no part will be inoperative or superfluous.” Shirley Wayside Ltd. Partnership v. Board of Appeals of Shirley, 461 Mass. 469, 477 (2012), quoting Connors v. Annino, 460 Mass. 790, 796 (2011) (internal quotation marks omitted); accord, e.g., Clark v. Rameker, 134 S.Ct. 2242, 2248 (2014). The Supreme Court calls this principle the “canon against surplusage” or the “canon against superfluity.” Marx v. General Revenue Corp., 133 S.Ct. 1166, 1177 (2013) (surplusage); Microsoft Corp. v. i4i Ltd. Partnership, 564 U.S. 91, 107 (2011) (superfluity).
The fact that § 77v(a) does not itself create federal court jurisdiction over state law claims does not make superfluous the clause stating that federal courts do not have jurisdiction over state law securities fraud class actions on behalf of more than fifty people. We cannot interpret § 77v in isolation, but instead must read it in the context of other statutes that give the federal courts jurisdiction over state law securities claims. Cf. Branch v. Smith, 538 U.S. 254, 281 (2003) (“courts do not interpret statutes in isolation, but in the context of the corpus juris [body of law] of which they are a part”). Federal courts can hear securities fraud claims arising under state law by exercising supplemental jurisdiction in cases involving related
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claims arising under federal law, or by exercising diversity jurisdiction where there is the requisite diversity of citizenship among the parties. See Anderson v. Aon Corp., 614 F.3d 361, 364 (7th Cir. 2010) (supplemental jurisdiction under 28 U.S.C. § 1367(a)), and Hargrave v. Oki Nursey, Inc., 646 F.2d 716 (2d Cir. 1980) (diversity jurisdiction under 28 U.S.C. § 1332). When Congress decided in 1998 to bar federal courts from exercising jurisdiction over larger securities class actions brought under state law, it had to put that provision somewhere. Though Congress could have amended the general statutes authorizing supplemental and diversity jurisdiction, it was free instead to add the new language to a statute addressing federal jurisdiction over securities claims. The mere placement of this provision does not drain it of all meaning and thus make it superfluous.
Although the phrase “except as provided in section 77p of this title with respect to covered class actions” is not superfluous for the reason argued by Defendants, on the Court’s reading of § 77v(a) this phrase is nonetheless duplicative. Section 77p(b) expressly deprives both federal and state courts of any power to hear a “covered class action based upon the statutory or common law of any State.” There was no need for Congress to say the same thing a second time by adding parallel language to § 77v(a).
But the inclusion of parallel provisions in two different sections of the same statutory chapter does not mean that one of the provisions should be read in a manner inconsistent with the plain language used by Congress, just to give it some independent meaning. See Connecticut Nat. Bank v. Germain, 503 U.S. 249, 253-254 (1992). When “interpreting a statute a court should always turn first to one, cardinal canon before all others. … [C]ourts must presume that a legislature says in a statute what it means and means in a statute what it says there.” Id. “Redundancies across statutes are not unusual events in drafting, and so long as there is no ‘positive repugnancy’ between two laws, … a court must give effect to both.” Id. at 253, quoting Wood v. United States, 41 U.S. (16 Pet.) 342, 363 (1842). Statutory “provisions that, although ‘technically unnecessary,’ are sometimes ‘inserted out of an abundance of caution—a drafting imprecision venerable enough to have left its mark on legal Latin (ex abundanti cautela).’ ” Smith v. City of
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Jackson, Miss., 544 U.S. 228, 252 (2005) (Scalia, J., concurring in part and concurring in the judgment), quoting Fort Stewart Schools v. Federal Labor Relations Auth., 495 U.S. 641, 646 (1990). Thus, a statutory phrase is not superfluous if Congress “simply intended to remove any doubt” about an issue, or make sure that a legal rule is not overlooked by repeating it in several relevant statutes. Ali v. Federal Bureau of Prisons, 552 U.S. 214, 226 (2008); accord Marx, 133 S.Ct. at 1176-1177. “Congress could sensibly have seen some practical value in the redundancy.” Corley v. United States, 556 U.S. 303, 325 (2009), quoting Gutierrez de Martinez v. Lamagno, 515 U.S. 417, 445-446 (1995) (Souter, J., dissenting).
In any case, Defendants’ proposed interpretation of § 77v(a) would itself make the language at issue superfluous. Defendants argue that the relevant provision should be read as establishing concurrent state and federal court jurisdiction over suits brought to enforce the federal Securities Act, and thus that the 1998 amendment should be understood as extinguishing state court jurisdiction over class actions on behalf of fifty or more people brought under the Securities Act. As discussed above, however, state courts have inherent power to decide claims brought under the federal Securities Act. “Because there was, consequently, no need for Congress to specify that [state] courts have this power,” the relevant clause in § 77v(a) “is superfluous” if read as conferring jurisdiction on state courts. Cf. Marx, 133 S.Ct. at 1177; accord Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S.Ct. 1749, 1758 (2014) (fee shifting statutes would be superfluous if construed narrowly to apply only where losing party acted in bad faith, because courts have inherent power to order fee-shifting in such cases). “[T]he canon against surplusage ‘assists only where a competing interpretation gives effect to every clause and word of a statute.’ ” Marx, supra, quoting i4i Ltd. Partnership, 564 U.S. at 107. Since “no interpretation” of § 77v(a) “gives effect to every word,” it makes since to read the statute as written even if doing so makes one clause redundant. Marx, supra.
1.3.3. Legislative History and the Federal Interest in Uniform Standards. Reading § 77v(a) in the manner described above is consistent with the legislative history and expressly stated purpose of the Securities Litigation Uniform
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Standards Act. There is neither an “unmistakable implication from the legislative history” that the SLUSA amendment to § 77v(a) was intended to bar state courts from hearing class actions brought under the federal Securities Act, nor any “clear incompatibility between state-court jurisdiction and federal interests” and having uniform standards apply to all larger securities fraud class actions. Cf. Hathorn, 457 U.S. at 266.
The relevant legislative history is as follows. “SLUSA is part of a series of reforms targeted at costly securities litigation. Congress first passed the Private Securities Litigation Reform Act of 1995 (PSLRA)7 to deter the filing of so-called strike suits—frivolous securities class actions that put defendants to the unappealing choice of settling claims, however meritless, or risking extravagant discovery and trial costs.” Freeman Investments, L.P. v. Pacific Life Ins. Co., 704 F.3d 1110, 1114 (9th Cir. 2013). This statute “placed special burdens on plaintiffs seeking to bring federal securities fraud class actions.” Dabit, 547 U.S. at 82. “Its provisions limit recoverable damages and attorney’s fees, provide a ‘safe harbor’ for forward-looking statements, impose new restrictions on the selection of (and compensation awarded to) lead plaintiffs, mandate imposition of sanctions for frivolous litigation, and authorize a stay of discovery pending resolution of any motion to dismiss.” Id. at 81 (citing 15 U.S.C. § 78u–4). It “also imposes heightened pleading requirements” in private securities fraud actions brought under § 10(b) of the Securities Exchange Act8 or SEC Rule 10b-5.9 Id.
The PSLRA had the “unintended consequence” of encouraging lawyers to bring securities fraud “class actions under state law, often in state court.” Dabit, 547 U.S. at 92. “By bringing state law class actions in state courts,” lawyers representing securities fraud plaintiffs “avoided the procedural steeplechase erected by the PSLRA.” Freeman Investments, supra.
So in 1998 Congress enacted SLUSA to “curtail plaintiffs’ ability to evade the PSLRA’s limitations on federal securities-fraud litigation by bringing class-
7 Pub. L. 104-67, 109 Stat. 737, codified at 15 U.S.C. § 77z–1 and § 78u-4.
8 Codified at 15 U.S.C. § 78j(b).
9 Codified at 17 C.F.R. § 240.10b-5.
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action suits under state rather than federal law.” Amgen Inc. v. Connecticut Ret. Plans & Trust Funds, 133 S. Ct. 1184, 1200 (2013). The stated purpose of SLUSA is “to prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives” of PSLRA by “enact[ing] national standards for securities class action lawsuits involving nationally traded securities[.]” SLUSA § 2(5), 112 Stat. 3227. That is why this 1998 statue was called a “uniform standards” act.
In sum, the purpose of SLUSA was to limit the use of securities class actions brought under state law, whether in state or federal court; it was not enacted to bar state courts from hearing larger class actions brought under the federal Securities Act. This is apparent from the legislative history, and made explicit by Congress in § 2 of the legislation as enacted and signed into law.
Defendants’ assertion that trying federal Securities Act class actions in state court is incompatible with achieving uniform national standards for such claims is without merit. That Congress enacts a federal law to establish a “uniform system of regulation” does not mean that state courts lack jurisdiction to apply that statute; the Supreme Court’s “ability to review state court decisions of federal questions … sufficiently protect[s] federal interests” in developing and applying uniform national standards. Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning, 136 S. Ct. 1562, 1574 (2016). Defendants’ argument to the contrary is “unsound.” Pan Am. Petroleum Corp. v. Superior Court of Del. In and For New Castle County, 366 U.S. 656, 665 (1961), quoting Great Northern R. Co. v. Merchants Elevator Co., 259 U.S. 285, 290 (1922). State court judgments in federal Securities Act class actions will not “result in any more inconsistency than [the] multimembered, multi-tiered federal judicial system already creates.” Tafflin, 493 U.S. at 465 (rejecting uniformity argument against state court jurisdiction over civil RICO claims).
2. Plaintiff’s Claims Do Not Sound in Fraud. Defendants next argue that Fortunato’s allegations and claims sound in fraud and that the amended complaint is therefore subject to, but fails to meet, the requirement under Mass. R. Civ. P. 9(b) that “averments of fraud … shall be stated with particularity.” The Court disagrees.
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Fortunato does not allege that Akebia’s final registration statement and prospectus were purposefully misleading. Rather, he claims that Defendants had a duty to determine whether any interim results from the ongoing Phase 2b clinical trial might be inconsistent with or cast doubt upon the Phase 2a results that were disclosed in the offering materials, and that they negligently failed to do so. The amended complaint expressly states that Fortunato makes no claim that Defendants engaged in “fraud or [other] intentional or reckless misconduct.”
Since Fortunato has alleged only negligent misrepresentation and expressly disclaimed any allegation of intentional or reckless fraud, the heightened pleading standard of Rule 9(b) does not apply. See Hutchison v. Deutsche Bank Securities Inc., 647 F.3d 479, 484 (2d Cir. 2011) (motion to dismiss Securities Act claim); Lenartz v. American Superconductor Corp., 879 F.Supp.2d 167, 189 (D.Mass. 2012) (Young, J.) (same). “Although the complaint does assert that defendants actually possessed the information that they failed to disclose, those allegations cannot be thought to constitute ‘averments of fraud,’ absent any claim of scienter and reliance.” Shaw v. Digital Eqpt. Corp., 82 F.3d 1194, 1223 (1st Cir. 1996).
Under Massachusetts law, the heightened pleading requirements of Rule 9(b) apply to claims for intentional or reckless misrepresentation but not to claims of negligent misrepresentation. See DeWolfe v. Hingham Centre, Ltd., 464 Mass. 795, 798 n.8 (2013) (construing complaint that alleged “material misrepresentation” as stating claim for negligent misrepresentation because “fraud has not been pleaded with sufficient particularity to state a claim for intentional or reckless misrepresentation”). And Massachusetts procedural rules apply when a plaintiff brings federal claims in a Massachusetts court, “ unless those rules are pre-empted by federal law.” St. Fleur v. WPI Cable Sys./Mutron, 450 Mass. 345, 352 (2008), quoting Howlett, 496 U.S. at 372.
3. The Complaint Does Not State a Viable Claim. This brings us to the substantive meat of Defendants’ motion to dismiss under Mass. R. Civ. P. 12(b)(6): whether Fortunato’s amended complaint states a claim upon which relief can be granted. The Court concludes that it does not.
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3.1. Legal Standard. To survive a motion to dismiss under Rule 12(b)(6), a complaint must allege facts that “plausibly suggest” the plaintiff has a viable claim. Lopez v. Commonwealth, 463 Mass. 696, 701 (2012), quoting Iannacchino v. Ford Motor Co., 451 Mass. 623, 636 (2008), and Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007). When deciding a motion to dismiss under Rule 12(b)(6), a judge must “accept as true the facts alleged in the … complaint”—or that are apparent from documents attached to, referenced in, or otherwise relied upon in framing the complaint10—“as well as any favorable inferences that reasonably can be drawn from them.” Partanen v. Gallagher, 475 Mass. 632, 635 (2016), quoting Galiastro v. Mortgage Elec. Registration Sys., Inc., 467 Mass. 160, 164 (2014). However, “[c]onclusory allegations” that a defendant has acted illegally are not enough; judges must disregard such assertions and “focus on whether the factual allegations plausibly suggest an entitlement to relief.” Maling v. Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, 473 Mass. 336, 339 (2015), quoting Curtis v. Herb Chambers I-95, Inc., 458 Mass. 674, 676 (2011).
3.2. Factual Allegations. The following facts are either alleged in Fortunato’s amended complaint or are apparent from documents cited in the complaint.11
Akebia is a biopharmaceutical company. To date it has focused on trying to develop and obtain Food and Drug Administration (“FDA”) approval of a single product that Akebia calls AKB-6548. This drug aims to great anemia in patients with chronic kidney disease or “CKD” by increasing the production of red blood cells
10 See Melia v. Zenhire, Inc., 462 Mass. 164, 166 (2012) (documents attached to the complaint); Johnston v. Box, 453 Mass. 569, 581 n.19 (2009) (documents referenced in complaint) (dictum); Golchin v. Liberty Mut. Ins. Co., 460 Mass. 222, 224 (2011) (documents used in framing complaint).
11 In addition to the complaint itself, the Court has also considered the Akebia press releases, Akebia’s final prospectus issued on March 19, 2014, the transcript of Akebia’s public call with press and investors on October 27, 2014, regarding the results of the Phase 2b trial results, and two guidance documents published by the Food & Drug Administration regarding clinical drug trials. All of these documents are referred to in the complaint and expressly used by Fortunato as the basis for his key allegations. As a result, the Court may consider them without converting Defendants’ motion to dismiss into a motion for summary judgment. See, e.g., Golchin, 460 Mass. at 224.
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and hemoglobin. There are FDA-approved and commercially available drugs that treat anemia in CKD patients. All of those drugs have known side effects that are sufficiently serious that the FDA requires that prescription information for those drugs contain so-called “black box warnings” that prominently list those risks. Akebia is hoping that AKB-6548 will prove not just to be an effective treatment but to be safe enough not to require any black box warning.
Akebia had a successful initial public offering (“IPO”) on March 20, 2014. It sold 6.762 million shares of common stock for $ 17.00 per share, allowing it to raise over $ 100 million of capital. Fortunato and the other putative class members have all purchased Akebia common stock pursuant or traceable to the prospectus issued and registration statement filed by Akebia in connection with its IPO (which Fortunato refers to as the “Offering Materials”).
Akebia’s Offering Materials made various representations and disclosures to prospective investors regarding past and continuing clinical testing of AKB-6548. Akebia told investors that this drug “has compelling clinical data demonstrating a best in class profile with several potential safety and efficacy advantages” over current drugs used to treat anemia resulting from CKD. It explained that Akebia had “successfully completed a Phase 2a proof of concept study” involving 91 patients, that “[n]o drug-related serious adverse events were reported,” and that “dosing was well-tolerated.” The Offering Materials also disclosed that as of March 2014 Akebia was “currently conducting a Phase 2b clinical trial for AKB-6548.” Akebia warned potential investors that “[s]erious adverse events deemed to be caused by our product candidates could have a material adverse effect on the development of our product candidates and our business as a whole.” It also warned that further clinical testing could reveal a pattern of serious adverse events related to taking the drug rather than the placebo, but stated that, “[t]o date, no such pattern has emerged in our AKB-6548 trials.”
The Phase 2b trial conducted by Akebia was a double-blind, placebo-controlled, randomized clinical trial. The study enrolled 209 patients, each of whom were given either the drug or a placebo once daily for twenty weeks. The study patients were all non-dialysis subjects with CKD stages 3, 4, or 5. Two-thirds of
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these patients were chosen at random to receive active treatment using AKB-6548. The other third received a placebo. The “double-blind” nature of the study meant that neither the patients nor the investigators (i.e. physicians and other clinicians providing treatment) knew whether any particular patient was being given the drug or a placebo. The first patient was dosed in late July 2013. Eighty percent of the patients were enrolled in the study by the end of February 2014. All the patients were enrolled by April 15, 2014. Thus it appears that the dosing of patients in the Phase 2b study was completed in late September or early October 2014.
On October 27, 2014, some seven months after the IPO, Akebia publicly reported efficacy and safety results from the now-completed Phase 2b trial. It reported positive efficacy results. Over half (54.9 percent) of the patients who received the drug (the “active treatment group”) met the study’s hemoglobin improvement endpoint, while only 10.3 percent of the patients who received a placebo (the “placebo group”) did so. But Akebia also disclosed that the Phase 2b study had identified potential safety risks not seen in the earlier trial. Specifically, Akebia’s press release reported that: (i) “[t]here was a higher incidence of serious adverse events (SAEs) reported in the active treatment group versus the placebo group (23.9 percent and 15.3 percent, respectively),” and (ii) “[o]f the 49 SAEs reported in the active treatment group, one was considered probably related to active treatment and two were considered possibly related, including one death.” During a conference call for investors and journalists the day this press release was issued, Akebia indicated that one of the two SAEs that was possibly related to the drug involved a patient “who developed abnormal liver function tests three months into the study;” this appears to mean that the patient showed liver function problems within three months after first receiving the drug, which could have been either before or some months after Akebia’s IPO.
This public report of differences in SAEs between the treatment and placebo groups caused Akebia’s stock price to fall by the end of trading on October 27 from $ 18.72 to $ 13.97 per share. The stock price continued to fall. When the amended complaint was filed in August 2016 Akebia was trading at around $ 8.00 per share.
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Fortunato alleges that, under the FDA rules and regulations cited in the complaint, Akebia had an ongoing obligation throughout the Phase 2b trial to monitor serious adverse events and assess whether there was a reasonable possibility that the drug caused the event. He notes that the FDA requires drug companies like Akebia to perform an “aggregate analysis” of adverse events to determine whether they occur more frequently in the treatment group than in the placebo group. And he points out that FDA rules allow clinical trial sponsors like Akebia to establish an independent “Data Monitoring Committee” that, unlike the trial sponsor and investigators, can look at unblinded results (i.e. results identifying patients as part of the treatment or the placebo group) and monitor while the trial progresses whether patients receiving the drug are experiencing a disproportionate number of serious adverse events. Akebia concedes that it had in fact established such a Data Monitoring Committee to review interim and final results of its Phase 2b trial.
Fortunato asserts that, “[g]iven that the Phase 2b study had already made substantial progress by the time of the IPO, and that a significant number of patients in the study suffered serious adverse events, it is a reasonable inference that many of those serious adverse events occurred before the IPO.” He further asserts that, since study investigators were required to report serious adverse events to Akebia, “[i]t is therefore a reasonable inference that Akebia should have been aware of the serious adverse events in the Phase 2b study as of the IPO,” including “that the proportion of patients in the drug group who had suffered serious adverse events was greater than the proportion of such patients in the placebo group.” On this basis, Fortunato claims that Akebia’s Offering Materials “were materially false and misleading because they failed to disclose the heightened safety risks for AKB-6548 already uncovered in the ongoing Phase 2b study” by the time of the IPO.
3.3. Facts Not Known or Knowable. The facts alleged by Fortunato do not plausibly suggest that Akebia knew or could have known about the number or proportion of serious adverse events experienced by Phase 2b patients who were receiving AKB-6548 by the time of the IPO in March 2014.
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Since the Phase 2b trial was a double-blind study, there is no reason to believe (and Fortunato alleges no facts plausibly suggesting) that Akebia knew or had any way of knowing until after the study was completed which SAEs were experienced by patients receiving AKB-6548, which were experienced by those receiving the placebo, and whether there was any disproportion between the two groups in the incidence of SAEs. As the FDA’s “Guidance for Clinical Trial Sponsors” explains, “[k]knowledge of unblinded interim comparisons from a clinical trial is generally not necessary for those conducting or sponsoring the trial; further, such knowledge can bias the outcome of the study by inappropriately influencing its continuing conduct or the plan of analyses.”12 The reason to have a data monitoring committee or “DMC”, as Akebia did with respect to the Phase 2b trial, is to have an independent body that can review unblinded data throughout the trial to ensure that the drug being studied is not causing adverse events. But the FDA instructs “that any part of the interim report to the DMC that includes comparative effectiveness and safety data presented by study group,” i.e. that identifies which patients are in the treatment group and which are in the placebo group, “whether coded or completely unblinded, [should] be available only to DMC members during the course of the trial, including any follow-up period—that is, until the trial is completed and the blind is broken for the sponsor and the investigators.”13 “In other words, the purpose of having an independent data monitoring committee is to protect the validity of the double-blind trial results by avoiding disclosure of trial data to the sponsors and investigators prior to the trial’s completion.” Weinstein v. Kirkman, No. C13-0769-JCC, 2013 WL 12121125, *3 (W.D. Wash. 2013).
Fortunato alleges no facts plausibly suggesting that Akebia disregarded, or that it should have disregarded, the FDA rules requiring double-blind clinical trial data to remain blinded until the study is finished. The mere fact that Akebia learned and reported after the Phase 2b study was complete that drug recipients experienced a higher incidence of serious adverse events than patients in the
12 Food & Drug Admin., Guidance for Clinical Trial Sponsors: Establishment and Operation of Clinical Trial Data Monitoring Committees, § 4.2 at 10 (“Data Monitoring Committee Guidance”).
13 Id. § 4.2.2. at 11.
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placebo group, and that three out of the 49 serious adverse events may have been related to the taking of the study drug, does not suggest that Akebia knew or should have known materially adverse interim study results at the time of its IPO.
An allegation that serious adverse events occurred during a double-blinded, placebo-controlled drug study does not plausibly suggest that the study sponsor was or could have been aware of that information, in the absence of some further alleged reason to believe that the study results had been unblinded and thus that the sponsor had reason to know that any of the SAEs had been experienced by subjects who received the drug being studied rather than the placebo. See Weinstein, supra (dismissing shareholder derivative action with prejudice); In re Intrabiotics Pharm. Inc. Sec. Litig., No. C 04-02675 JSW, 2006 WL 2192109, *10-*11 (N.D. Cal. 2006) (dismissing Securities Act claims with prejudice); In re Columbia Labs., Inc. Sec. Litig., 144 F.Supp.2d 1362, 1370 (S.D. Fla. 2001) (same); see also Twinde v. Threshold Pharms, Inc., No. C 07-4972 CW, 2008 WL 2740457, *12 (N.D. Cal. 2008) (dismissing portion of Securities Act claims without prejudice).
Fortunato cannot state a claim merely by pointing out that FDA regulations require study investigators to report all serious adverse events to the study sponsor. In a double-blind study neither the investigator nor the sponsor will know which patients are receiving the placebo rather than the study drug. A sponsor nonetheless has an obligation to make an independent assessment of a serious adverse event to determine whether there appears to be a reasonable possibility that the study drug—rather than, say, the patient’s pre-existing medical condition or totally unrelated factors—caused the SAE and thus that the outcome qualifies as a “serious and unexpected adverse reaction.” In such cases the sponsor must unblind the data as to that single event, and if it turns out that the patient was receiving the trial drug then the sponsor must report the episode to the FDA. See 21 C.F.R. § 312.32; Food & Drug Admin., Guidance for Industry and Investigators: Safety Reporting Requirements for INDs and BA/BE Studies, App. B. But Fortunato does not allege that ever occurred during Akebia’s Phase 2b trial.
Fortunato has therefore failed to state a viable Securities Act claim. Plaintiffs pleading Sections 11 and 12 claims must “at a minimum, plead facts to demonstrate
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that allegedly omitted facts both existed, and were known or knowable, at the time of the offering.” Scott v. General Motors Co., 46 F.Supp.3d 387, 394 (S.D.N.Y. 2014) (dismissing securities act claims with prejudice), quoting Lin v. Interactive Brokers Grp., Inc., 574 F. Supp. 2d 408, 421 (S.D.N.Y. 2008), quoting in turn Castlerock Mgmt. Ltd. v. Ultralife Batteries, Inc., 114 F. Supp. 2d 316, 323 (D.N.J. 2000) (dismissing securities act claims with prejudice). Thus a plaintiff may not state a viable claim “by relying solely on hindsight to prove a misstatement.” Scott, supra. “Defendants are not expected to know the un-knowable, nor are they expected to disclose it.” Panther Partners, Inc. v. Ikanos Communications, Inc., 538 F.Supp.2d 662, 670 (S.D.N.Y. 2008) (dismissing securities act claim), aff’d, 347 Fed. App’x 617 (2d Cir. 2009). As noted above, “a liability finding under either §§ 11 or 12 is a prerequisite for success under § 15.” Silverstrand Investments, 707 F.3d at 107. Thus, where a complaint fails to state a viable claim under § 11 or § 12, a related § 15 claim must be dismissed as well. In re Ariad Pharmaceuticals, Inc., 98 F.Supp.3d 147, 179 (D.Mass. 2015) (Young, J.), aff’d, 842 F.3d 744, 756 n.8 (1st Cir. 2016).
Fortunato’s assertion that Defendants breached their duty of disclosure under Item 303 of SEC Regulation S-K fails to state a claim for much the same reason. That rule requires that a registrant disclose “any known trends or uncertainties” that are likely to have a material impact on future sales, revenues, or income from continuing operations. 17 C.F.R. § 229.303(a)(3)(ii). It therefore “only imposes a duty to make forward-looking projections regarding information known to the registrant.” J & R Mktg., SEP v. General Motors Corp., 549 F.3d 384, 392 (6th Cir. 2008) (affirming dismissal of complaint for failure to state a claim).
3.4. Dismissal With Prejudice. The pending motion to dismiss was served over four months ago. Fortunato has had ample time to serve and file a motion to further amend his complaint, if he believed that he could cure any defect in his pleading by augmenting the factual allegations of his first amended complaint. In his memorandum of law, Fortunato says in a footnote that if the Court were to grant the motion to dismiss then he would like the opportunity “to replead.” But Fortunato has never sought leave to file a second amended complaint nor done anything else to identify or describe any potential further
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amendment that would state a viable claim. Given the double-blind nature of the Phase 2b clinical trial, it appears that any further amendment Fortunato might propose would be futile because he still would be unable to identify any facts plausibly suggesting that Defendants could have known material adverse information regarding interim Phase 2b trial results at the time of Akebia’s initial public offering.
Under these circumstances, the Court concludes in the exercise of its discretion that Fortunato’s claims should be dismissed with prejudice. See Johnston v. Box, 453 Mass. 569, 582-584 (2009) (where complaint fails to state a viable claim, plaintiff has neither moved to amend its complaint nor “ ‘adequately describe[d] [any] contemplated amendment’ ” in enough detail to allow “court to determine the merits of the motion,” and in any case filing an amended complaint “would likely have been futile as a matter of law,” court may dismiss action with prejudice and without first giving plaintiff opportunity to seek leave to amend complaint) (quoting Nett v. Bellucci, 437 Mass. 630, 645 (2002)).
As noted above, however, since no class has been certified the dismissal of this action will have no preclusive effect with respect to the putative class. See Massachusetts General Hosp., 371 Mass. at 713.
Defendants’ motion to dismiss is ALLOWED. Final judgment shall enter dismissing with prejudice Plaintiff’s claims on behalf of himself. Since no class has been certified, the final judgment only applies to Plaintiff individually.
February 21, 2017
Kenneth W. Salinger
Justice of the Superior Court
15-P-1543 Appeals Court
COMMONWEALTH vs. TRADITION (NORTH AMERICA) INC.; RONALD JAMPEL & others, third-party defendants.
Suffolk. October 5, 2016. – February 21, 2017.
Present: Meade, Milkey, & Kinder, JJ.
Bonds, Tax-exempt. Contribution. Contract, Performance and breach, Implied covenant of good faith and fair dealing, Indemnity, Bidding for contract, Misrepresentation, Unjust enrichment, Interference with contractual relations, Settlement agreement, Release from liability. Indemnity. Massachusetts False Claims Act. Consumer Protection Act, Unfair or deceptive act. Deceit. Fraud. Conspiracy. Unjust Enrichment. Unlawful Interference. Release. Limitations, Statute of. Practice, Civil, Enforcement of liability on bond, Joinder of claims, Damages.