Stockholders of OvaScience Inc. sought class certification for a securities fraud action alleging that a registration statement and prospectus issued in connection with a secondary stock offering on January 8, 2015 contained false statements and material omissions regarding an experimental fertility treatment. The plaintiffs requested either nationwide or Massachusetts-only class certification under the Securities Act of 1933.
The court denied the motion for class certification. Following Moelis v. Berkshire Life Insurance Co., the court held that because Massachusetts does not permit absent class members to opt out of class actions, nonresident class members must satisfy the traditional minimum contacts test to establish personal jurisdiction. The court found that nonresident stockholders lacked sufficient contacts with Massachusetts. Their only connection was stock ownership in a Massachusetts corporation, which alone is insufficient. Unlike cases involving localized transactions, the shares were purchased primarily through New York-based underwriters and are incorporated in Delaware. The court distinguished the case from precedents involving bonds or insurance tied to state activities.
Additionally, certification of a statewide Massachusetts class was impractical. Undisputed evidence showed only 13 known Massachusetts purchasers, insufficient to satisfy numerosity requirements under Rule 23. Speculation that institutional investors held shares in street name on behalf of thousands of beneficial owners could not substitute for concrete evidence. The motion was denied.
The full text of the opinion follows below. Slip opinions are subject to formal revision; the official version is published in the official reports.
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss SUPERIOR COURT
CIVIL ACTION
NO. 2015-3087-BLS2
(Consol. with 16-0645)
IN RE OVASCIENCE INC.
STOCKHOLDER LITIGATION
MEMORANDUM OF DECISION AND ORDER ON
PLAINTIFFS’ MOTION FOR CLASS CERTIFICATION
This is a putative class action arising under Sections 11, 12, and 15 of the Securities Act of 1933. Plaintiffs Westmoreland County Employee Retirement System, Phillip Hofmann, Carlos Rivas, and Cesar Castellanos are investors who purchased stock in the defendant OvaScience, Inc. (OvaScience). They allege that a Registration Statement and Prospectus issued in connection with a secondary offering of OvaScience stock on January 8, 2015 contained false statements and material omissions of fact concerning an experimental fertility treatment that OvaScience was in the process of developing. The case is now before the Court on the plaintiffs’ Motion for Class Certification pursuant to Mass R. Civ. P. 23. The plaintiffs seek to certify a nationwide class that consists of all persons who purchased OvaScience stock “pursuant and/or traceable to” the January 8 2015 secondary offering.1 Alternatively, they seek statewide class certification consisting of the Massachusetts-based purchasers. This Court concludes that the plaintiffs’ Motion must be DENIED.
1 Excluded from the proposed class are each of the defendants, past and current officers and directors of OvaScience, J.P. Morgan Securities LLC, Credit Suisse Securities (USA) LLC, and Leerink Partners LLC, their affiliates or sponsors, the members of their families, and any entity which any defendant has or had a controlling interest, and the legal representatives, heirs, successors, or assigns of any such excluded party.
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Certification of this class requires this Court to exercise personal jurisdiction over absent class members who are not residents of Massachusetts. Whether that can be done consistent with due process was first addressed by the Supreme Court in Phillips Petroleum Co v. Stutts, 472 U.S. 797 (1985) (Stutts). The Court reasoned that, “[b]ecause a state places fewer burdens upon an absent class plaintiff than it does upon an absent defendant in a nonclass suit, the Due Process Clause need not and does not afford the former as much protection from state-court jurisdiction as it does the latter.” 472 U.S. at 811. The Court went on to hold that the forum state may exercise jurisdiction over the absent class member even in the absence of minimum contacts so long as it provides certain basic due process protections. Id. At a minimum, that means that the absent plaintiff must have the opportunity to remove himself from the class. Because the case before it was brought in a state (Kansas) that permitted absent class members to opt out, the Supreme Court held that the state court could properly assert personal jurisdiction over nonresident class members.
Massachusetts, of course, does not permit individual parties to remove themselves or opt out of a class action. See Mass.R.Civ. P. 23. Interpreting and applying Stutts, the Supreme Judicial Court in Moelis v. Berkshire Life Ins. Co., 451 Mass. 483 (2008) held that a Massachusetts state court judge may therefore certify a national class only if absent class members satisfy the “traditional minimum contacts test” first articulated in International Shoe Co.v. Washington, 326 U.S. 310, 319-320 (1945). That test requires that the nonresident plaintiff must have engaged in “some act by which the nonresident purposefully availed himself of the privilege of conducting activities in Massachusetts, thus invoking the benefits and protections of its laws.” Moelis, 451 Mass. at 488, citing Good Hope Industries, Inc. Ryder Scott, Co., 378 Mass. 1, 7 (1979). In Moelis, the SJC upheld the lower court’s refusal to certify
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a nationwide class because the absent class members did not have sufficient contacts with Massachusetts to satisfy constitutional requirements.
The absent class members in Moelis had all purchased life insurance policies from the defendant Berkshire Life Insurance Company (Berkshire) based on a “disappearing premium” concept. Plaintiffs alleged that Berkshire had marketed the policies based on false representations that dividends paid on the policies would eventually cover the policyholder’s obligation to pay premiums after a set number of years, when in fact the premium obligation continued for much longer. In concluding that these contacts were insufficient to permit the assertion of personal jurisdiction, the SJC noted that the only contact that the nonresident class members had with this state was the purchase, through agents in their own states, of an insurance policy from Berkshire, a Massachusetts company, and their mailing of annual premium payments to Berkshire. 451 Mass. at 488. This was simply not enough to warrant the assetion of personal jurisdiction over them. Given the similarities between Moelis and the instant case, this Court is compelled to reach the same conclusion here.
In arguing that this Court may assert personal jurisdiction over the nonresident class members, plaintiffs rely on Kramersmeier v. R.G. Dickinson & Co., 440 N.W.2d 873, 877 (Iowa 1989). That class was a putative class action brought by individuals who had purchased tax-free bonds in a municipal bond offering from Iowa agents of the defendants. The bondholders received periodic payments of principal and interest from funds generated in Iowa, and relied on a prospectus that was prepared by an Iowa underwriter and an Iowa limited partnership for the sole purpose of selling bonds to develop Iowa real estate for the benefit of an Iowa city. The Iowa Supreme Court concluded that these contacts with the state were sufficient to meet the minimum contacts test as articulated in Stutts. The instant case is quite different.
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Indeed, the nonresidents in this action have even less connection to Massachusetts than those in Moelis. Their only contact with this state is that they own stock in a Massachusetts company, but “stock ownership in or affiliation with a corporation, without more is not a sufficient minimum contact.” Cent. States Se. and Sw. Areas Pension Fund v. Reimer Express World Corp., 230 F.3d 934, 943 (7th Cir. 2000); see also cases cited in Defendants’ Memorandum in Opposition to Plaintiffs Motion for Class Certification, page 4, fn. 3. Unlike Moelis, there is no evidence that they mailed any payment to Ovascience in Massachusetts. The vast majority of these stockholders purchased their shares from defendants J.P. Morgan Securities LLC and Credit Suisse Securities (USA) LLC, both of which are based in New York.2 The current situs of the shares is Delaware, where OvaScience is incorporated. Neither the nature of the stock itself nor any benefits accruing from stock ownership are so uniquely tied to or affected by a policy of the Commonwealth that a nonresident class member would expect this dispute to be adjudicated in Massachusetts. In short, to include nonresidents in the class would run afoul of the Due Process clause.
Plaintiffs point to several Massachusetts cases in which trial courts approved settlements between defendants and “nationwide” classes of plaintiffs. There is nothing to indicate those courts adjudicated the issue (much less considered it) before approving the settlements, however. In any event, the settlement context is not analogous. Before a settlement is approved, all class members are notified and have an opportunity to object to it – itself a due process protection. Here, absent class members are not notified before the court determines whether to certify the class and (absent a settlement), they will be bound by the result, without any chance to be heard, much less to opt out.
2 The third underwriter defendant, Leerink Partners LLC, is a Boston based company but it only sold 10 shares during the secondary offering.
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If nonresidents are not included in any class, then there are simply not enough Massachusetts members of the putative class to permit this case to proceed as a class action. The defendants have submitted undisputed evidence that a statewide class would consist of only 13 known members – eleven individual purchasers, plus Wellington Management Company (Wellington) and Fidelity Management Trust Company (Fidelity), both of which made multiple purchases during the January 2015 secondary offering.3 Courts have routinely denied class certification in cases involving twenty or fewer plaintiffs. The plaintiffs argue that the class is far larger because Wellington and Fidelity hold their stock “in street name” on behalf of tens of thousands of beneficial owners (the actual investors who would form the class). But this Court has no evidence of that. “’The party instituting the action need not show the exact number of potential members in order to satisfy’ the numerosity prerequisite, but she ‘does bear the burden of showing impracticability and mere speculation as to the number of parties involved is not sufficient to satisfy Rule 23(a)(1).’” Swack v. Credit Suisse First Bos., 230 F.R.D. 250, 258 (D. Mass. 2005), quoting 7A Wright, Miller & Kane, Federal Practice and Procedure § 1762 (2004). Plaintiffs here has failed to satisfy that burden.
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Janet L. Sanders
Justice of the Superior Court
3 This number could further be reduced if this Court allows the defendants’ motion for summary judgment as to four of the named plaintiffs. That motion is currently under advisement.