IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
PACIRA BIOSCIENCES, INC. and )
PACIRA CRYOTECH, INC., )
)
Plaintiffs, )
)
v. ) C.A. No. 2020-0694-PAF
)
FORTIS ADVISORS LLC, SOLELY )
IN ITS CAPACITY AS )
REPRESENTATIVE OF THE )
FORMER SECURITYHOLDERS OF )
MYOSCIEINCE, INC., TIMOTHY )
STILL, GUMBALLA KRIS KUMAR, )
JESSICA PRECIADO, and THE )
FORMER SECURITYHOLDERS OF )
MYOSCIENCE, INC., )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: June 2, 2021
Date Decided: October 25, 2021
Lisa A. Schmidt, Raymond J. DiCamillo, Megan E. O’Connor, RICHARDS,
LAYTON & FINGER, P.A., Wilmington, Delaware; Randy M. Mastro, Declan T.
Conroy, GIBSON, DUNN & CRUTCHER LLP, New York, New York; Attorneys
for Plaintiffs.
R. Judson Scaggs, Jr., Lauren K. Neal, Sarah P. Kaboly, MORRIS, NICHOLS,
ARSHT & TUNNELL LLP, Wilmington, Delaware; Christopher J. Marino, DAVIS
MALM & D’AGOSTINE, P.C., Boston, Massachusetts; Attorneys for Defendant
Fortis Advisors LLC.
Henry E. Gallagher, Jr., Shaun Michael Kelly, Jarrett W. Horowitz, CONNOLLY
GALLAGHER LLP, Wilmington, Delaware; Attorneys for Defendants Timothy
Still, Gumballa Kris Kumar, and Jessica Preciado.
FIORAVANTI, Vice Chancellor
Pacira BioSciences, Inc. (“Pacira”) acquired MyoScience, Inc.
(“MyoScience”) in a 2019 merger (the “Merger”). The merger agreement provided
for an up-front cash payment to MyoScience’s former securityholders along with
contingent consideration if certain post-closing milestones have been achieved.
Pacira has made certain milestone payments but seeks a declaration that it is not
required to make further milestone payments. That claim is not the subject of this
opinion. This opinion addresses a motion to dismiss the other six counts of the
complaint.
Pacira contends that the securityholders’ representative and three former
employees and securityholders of MyoScience owed and breached contractual
obligations, either direct or implied, not to interfere with Pacira’s operation of the
acquired company, now Pacira CryoTech, Inc. (“Pacira CryoTech” and together
with Pacira, the “Plaintiffs”). The defendants have moved to dismiss those claims,
and this opinion concludes that no such contractual obligation exists under the plain
language of the merger agreement. Nor does the complaint state a claim under the
implied covenant of good faith and fair dealing that the defendants made bad faith
demands for milestone payments, interfered with Plaintiffs’ relationships with their
employees, or impermissibly retained MyoScience’s former outside legal counsel.
Plaintiffs have also asserted breach of contract and breach of fiduciary duty claims
against two of the individual defendants based on post-merger conduct, and a claim
against the other individual defendant for aiding and abetting those breaches of
fiduciary duty. This opinion dismisses those claims for lack of personal jurisdiction
over the individual defendants.
I. BACKGROUND
Unless otherwise specified, the facts recited in this Memorandum Opinion are
drawn from the Verified Complaint (the “Complaint” or “Compl.”) and documents
integral thereto. 1
A. The Parties
Pacira is a “provider of non-opioid pain management solutions.” 2 Pacira is a
Delaware corporation based in Parsippany, New Jersey.3 Pacira CryoTech is a
Delaware corporation based in Fremont, California and a wholly owned subsidiary
of Pacira. 4 Pacira CryoTech is a successor to MyoScience, a Delaware corporation
that Pacira acquired pursuant to an Agreement and Plan of Merger, dated March 4,
2019, by and among Pacira Pharmaceuticals Inc., 5 PS Merger, Inc., MyoScience,
1
Dkt. 1. Exhibits attached to the Complaint will be cited as “Ex.”
2
Compl. ¶ 3.
3
Id. ¶ 26.
4
Id. ¶¶ 27, 191.
5
Pacira Pharmaceuticals, Inc. changed its name upon completion of the Merger to Pacira
Biosciences, Inc. (i.e., Pacira). See Pacira BioSciences, Inc. Annual Report (Form 10-K)
at 7 (filed March 1, 2021). Under Rule 201 of the Delaware Uniform Rules of Evidence,
the court can take judicial notice of this fact for purposes of the pending motions. See Wal-
Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 n.28 (Del. 2004) (holding that
2
Inc., and Fortis Advisors LLC (“Fortis”), as the Securityholders’ Representative (the
“Merger Agreement”). 6 MyoScience, and now Pacira CryoTech, manufactures
iovera® (“iovera”), a medical device that “applies controlled doses of extreme cold
to targeted nerves to relieve pain.”7
Fortis (or the “Securityholders’ Representative”) serves as the representative
of the MyoScience Securityholders (as defined below) pursuant to the Merger
Agreement. 8 Defendants Timothy Still (“Still”), Gumballa Kris Kumar (“Kumar”),
and Jessica Preciado (“Preciado”) were MyoScience employees prior to the Merger.
Kumar, Preciado, and Still all reside in California, and they are collectively referred
to as the “Individual Defendants.” None of the Individual Defendants is a party to
the Merger Agreement.
Still was the CEO of MyoScience.9 Following the Merger, Still became a
member of a three-person “Advisory Committee” to Fortis.10
the court may take judicial notice of public documents such as SEC filings required by law
to be filed).
6
Ex. A. (“Merger Ag’t.”). The Merger Agreement refers to Pacira as the “Parent”,
MyoScience as the “Company” or the “Surviving Corporation”, and Fortis as the
“Securityholders’ Representative.” Id.
7
Compl. ¶ 3.
8
Id. ¶ 28.
9
Id. ¶ 29.
10
Id. ¶ 122.
3
Kumar is a former head of Marketing & Product Management at
MyoScience. 11 “Following Pacira’s acquisition of MyoScience, Kumar worked for
six months as a consultant for Pacira [CryoTech].”12
Preciado is the former Principal Scientist at MyoScience.13 Following
Pacira’s acquisition of MyoScience, Pacira retained Preciado as Senior Director,
Health Outcomes Value Assessment. 14
B. Pacira Acquires MyoScience
Pacira acquired MyoScience in the Merger for $120 million in cash, subject
to certain adjustments, and contingent payments (“Milestone Payments”) of up to
$100 million to former MyoScience stockholders or option holders. 15 The Merger
closed on April 9, 2019.16 The former MyoScience stockholders or option holders
entitled to Milestone Payments executed either a Letter of Transmittal for Securities
of MyoScience or an Option Holder Letter of Transmittal for Company Options of
MyoScience (the “Option Holder Letter”).17 The foregoing signatories are referred
11
Id. ¶ 30.
12
Id. ¶¶ 30, 124.
13
Id. ¶ 31.
14
Id.
15
Id. ¶ 4; Merger Ag’t. § 1.11.
16
Pacira Biosciences, Inc., Current Report (Form 8-K) (Apr. 9, 2019).
17
Compl. ¶¶ 32, 95; Merger Ag’t. §§ 1.15(a)–(c).
4
to as the “Escrow Participants” or “MyoScience Securityholders.” 18 Among other
milestones triggering Milestone Payments, the Merger Agreement required Pacira
to pay up to $50 million to the Escrow Participants if treatments involving iovera in
certain specified medical settings could be reimbursed at certain specified levels
within a certain period of time. 19
C. The iovera Product and CPT Codes
iovera is a patented Class II FDA-cleared handheld medical device that
administers “cryoanalgesia” or “cryoneurolysis”—the application of “controlled
doses of extreme cold temperature to targeted nerves to relieve pain.” 20 iovera goes
under several technical names that the Merger Agreement refers to as “Smart Tip
Products.” 21 Pacira alleges that
[a]ccording to the [FDA’s] Indication Statement for the product, iovera can
be used to (i) “destroy tissue during surgical procedures,” (ii) “produce lesions
in peripheral nervous tissue by the application of cold to the selected site for
the blocking of pain,” and (iii) “relie[ve] [] pain and symptoms associated
with osteoarthritis of the knee for up to 90 days.” 22
18
“Escrow Participants” are defined in the Merger Agreement as “the holders of Series G
Preferred Stock, Series F Preferred Stock, and Carve-Out Common Stock, Qualifying
Warrant Holders and Qualifying Option Holders.” Merger Ag’t. Ex. A.
19
Compl. ¶¶ 8, 102–04; see Merger Ag’t. §§ 1.15(a)(iv), (b)(i).
20
Compl. ¶ 36; see id. ¶ 59.
21
Id. ¶ 102 n.2.
22
Id. ¶ 37.
5
The success of iovera “was closely tied” to reimbursement rates and guidance
issued by the Centers for Medicare and Medicaid (“CMS”). 23 In order to be
reimbursed by an insurance payer (e.g., Medicare or Medicaid) for performing a
medical procedure on a patient, a medical provider must be able to describe that
procedure using a generalized description known as a Current Procedural
Terminology code (“CPT Code”).24 The responsibility for maintaining and
publishing the list of CPT Codes falls to American Medical Association (“AMA”),
which also provides guidance on how to apply the codes.25 CMS sets the
reimbursement rates for each CPT Code pursuant to Section 1848(b) of the Social
Security Act.26 The reimbursement rates must be updated each year and are
published in the Medicare Physician Fee Schedule.27
The CPT Codes have national reimbursement rates as well as locality-specific
reimbursement rates. To determine the national reimbursement rate for a given CPT
Code, CMS quantifies and aggregates the costs of applying the procedures
associated with the CPT Code across several categories. 28 CMS also develops a
23
Compl. ¶ 39.
24
Id. ¶¶ 38–39.
25
Id. ¶¶ 5, 41.
26
Social Security Act § 1848(b), 42 U.S.C. § 1395w–4.
27
Id.; Compl. ¶ 39.
28
Compl. ¶ 44.
6
geographic practice cost index for each of more than 110 different localities that is
used to determine locality-adjusted reimbursement rates.29 According to Plaintiffs,
“[w]hen CMS publicizes the reimbursement rates for various CPT Codes, it
consistently cites to the standard, nationwide reimbursement rates for those codes,
not to the dozens of different locality-adjusted reimbursement rates.”30
As part of the annual process for updating the reimbursement rates, CMS
solicits “feedback from practitioners and industry groups regarding the costs
associated with types of procedures performed under the various CPT codes.”31
CMS then publishes draft reimbursement rates in July for a public comment period.32
After the comment period closes, “CMS reviews the feedback from industry
participants, updates reimbursement rates as appropriate, and then publishes the final
rules” for the upcoming calendar year in November. 33
The usage of a medical procedure depends in part on at least two factors. First,
it is important that the CPT Codes reflect the actual costs of the medical procedure
to ensure that the provider will be fully reimbursed for the costs of the procedure.34
29
Id. ¶¶ 46, 47.
30
Id. ¶ 48.
31
Id. ¶ 49.
32
Id. ¶¶ 51, 52.
33
Id. ¶ 52.
34
Id. ¶ 53.
7
Second, the popularity of a particular procedure depends on the clarity of guidance
from the AMA on the reimbursement rate for that procedure; “[p]ractitioners who
assign the wrong CPT Codes to procedures risk costly audits of their reimbursement
requests, as well as possible clawback of reimbursement payments.”35 With
inconsistent or ambiguous guidance, medical device manufacturers face the risk that
the usage of their device will “plummet.” 36
D. MyoScience Seeks New CPT Codes and Favorable Reimbursement
Rates
Prior to the Merger, the Individual Defendants, on behalf of MyoScience,
mounted a campaign in 2018 and 2019 to clarify which CPT Codes “should apply
to procedures that used the [iovera] product to treat knee pain” and to persuade the
AMA to rescind its “confusing” prior guidance.37 The Individual Defendants
worked with Gail Daubert, MyoScience’s “outside reimbursement counsel” to
persuade the AMA to rescind prior 2018 guidance recommending that practitioners
use a vague catch-all code for cryoneurolysis.38 The effort succeeded; in April 2019,
the AMA published a document clarifying that cryoneurolysis may be reported using
35
Id. ¶ 54.
36
Id. ¶ 55.
37
Id. ¶¶ 58–59, 64–72.
38
Id. ¶¶ 7, 15, 64, 69–72, 72 n.1.
8
a more specific code, CPT Code 64640, 39 which covers “[d]estruction by neurolytic
[i.e., nerve blocking] agent; other peripheral nerve or branch.” 40
A new opportunity to come under a favorable CPT Code emerged in May
2018, when “CMS announced a number of new CPT Codes that would become
available to practitioners on January 1, 2020.” 41 Among the new additions was CPT
Code 64xx1, a “placeholder code”42 specifically dedicated to a procedure that
“destr[oys]” the “genicular nerve branches” by a “neurolytic agent.” 43 CMS uses
“x”s instead of numbers in the placeholder codes to signify that the code is still in
draft form; CMS then replaces the “x”s with numbers when the code is finalized.44
Plaintiffs assert that, because CPT Code 64xx1 applied specifically to knee-
related cryoneurolysis, both MyoScience and the Individual Defendants understood
the development of the code to be “highly relevant to reimbursement rates for the
use of iovera.”45 MyoScience and the Individual Defendants thus teamed up with
39
Id. ¶ 72.
40
Id. ¶ 63.
41
Id. ¶ 74.
42
Id. ¶ 76.
43
Id. ¶ 75.
44
Id. ¶ 76.
45
Id. ¶ 82.
9
Daubert again to “influence CMS as it drafted the reimbursement rates that would
apply to CPT Code 64xx1 pre-merger.”46
These efforts were ongoing while the representatives of MyoScience
(including Still) negotiated the terms of Pacira’s acquisition of MyoScience. 47 The
Plaintiffs maintain that this backdrop “led to the inclusion of the CMS
Reimbursement Milestones in the Merger Agreement.” 48
E. The Mechanics of the Milestone Payment Provisions
1. The Milestone Payments
Section 1.15(a) of the Merger Agreement requires that certain Milestone
Payments be made to the Escrow Participants “in the event the corresponding
milestones” are achieved “at any time following the Closing.”49 The milestones fall
into four categories: (i) “Regulatory Milestones”; (ii) “Costs of Goods Sold”; (iii)
“Sales Milestones”; and (iv) “CMS Reimbursement Milestones.” Most pertinent
here, Section 1.15(a)(iv) (“CMS Reimbursement Milestones”) requires Pacira to pay
the Escrow Participants an amount equal to:
(1) in the case of reimbursement related to use of the Smart Tip Products to
treat a patient in the office setting . . . $20,000,000, if CMS Reimbursement is
effective in fiscal year 2020 in an amount equal to or greater than $600.00 per
such procedure using such product pursuant to CPT Code 64xx1 (or a different
46
Id. ¶ 84; see id. ¶ 86.
47
Id. ¶ 91.
48
Id. ¶ 92.
49
Merger Ag’t., § 1.15(a).
10
code that is appropriate to describe a procedure in which the Smart Tip
Products are used) . . .
(2) in the case of reimbursement related to use of the Smart Tip Products to
treat a patient in the ambulatory surgery centers setting . . . $20,000,000, if
CMS Reimbursement is effective in fiscal year 2020 in an amount equal to or
greater than $800.00 per such procedure using such product pursuant to CPT
Code 64xx1 (or a different code that is appropriate to describe a procedure in
which the Smart Tip Products are used) . . . [and]
(3) in the case of reimbursement related to use of the Smart Tip Products to
treat a patient in the out-patient hospital setting, $10,000,000, if CMS
Reimbursement is effective at any time during the Milestone Achievement
Period in an amount equal to or greater than $1,400.00 per such procedure
using such product pursuant to CPT Code 64xx1(or a different code that is
appropriate to describe a procedure in which the Smart Tip Products are used).
Sections 1.15(a)(iv)(i) and (ii) also provide for reductions in payments if the
relevant milestone is met “after the end of fiscal year 2020” but before December
31, 2023. 50 The obligation to make any Milestone Payments terminates after
December 31, 2023.51 The Milestone Payments must be paid “[n]o later than 60
days after the end of the fiscal quarter in which the applicable Milestone is
achieved.”52
50
Id. § 1.15(b)(i) (defining the “Milestone Achievement Period” as the period starting on
January 1, 2019 and ending on December 31, 2023). The Merger Agreement does not
define the phrase “fiscal year 2020.”
51
Id.
52
Id. § 1.15(c)(i).
11
2. The Parties’ Rights Under the Milestone Provisions
Section 1.15(d) of the Merger Agreement requires that “[f]ollowing the
Closing and for the duration of the Milestone Achievement Period, [Pacira] shall
operate [Pacira CryoTech] in good faith in the context of this Section 1.15 and shall
use commercially reasonable efforts to achieve the Milestones.”53 Further, Section
1.15(e) provides, in pertinent part, that:
(i) the sole and exclusive right of the Escrow Participants under this Section
1.15 will be to receive, subject to the other terms of this Agreement, the
Milestone Payments payable pursuant to this Section 1.15 if [Pacira
CryoTech] achieves such Milestone Payments within the time periods set
forth herein and subject to each of the other conditions and qualifications
contemplated herein;
(ii) [Pacira] will have the right to operate the business of [Pacira CryoTech]
as it chooses, in its sole discretion, except as expressly set forth in this Section
1.15; [and]
(iii) [Pacira] is not under any obligation to provide any specific level of
investment or financial assistance to [Pacira CryoTech] or to undertake any
specific actions (or to refrain from taking any specific actions) with respect to
the operation of the Surviving Corporation, except as expressly set forth in
this Section 1.15.54
3. The Option Holder Letter
As a precondition to receiving its portion of the merger consideration,
including the Milestone Payments, each MyoScience Securityholder was required to
53
Id. § 1.15(d).
54
Id. §§ 1.15(e)(i)–(iii).
12
execute either a Letter of Transmittal for Securities of MyoScience or an Option
Holder Letter. 55 Pursuant to those agreements, the signatory’s “MyoScience shares
or options to purchase MyoScience shares, respectively, were converted into the
right to receive payments pursuant to the Merger Agreement.”56 Each of the
Individual Defendants executed a copy of the Option Holder Letter. 57 The Option
Holder Letter incorporates certain sections of the Merger Agreement, to which the
Individual Defendants agreed to be bound in their capacities as “Escrow
Participants”, “Indemnifying Securityholders”, “Qualifying Option Holders” or
“Securityholders.”58
Section (a) of the Option Holder Letter also provides that, by executing the
Option Holder Letter, the signatory appoints Fortis as “its true and lawful attorney-
in-fact with full power of substitution . . . and exclusive agent pursuant to the terms
of the Merger Agreement, the Escrow Agreement and related documents.” 59 The
signatory of each Option Holder Letter “consents to the taking of any and all actions
55
Compl. ¶ 32; see Merger Ag’t. §§ 1.11, 1.18(b). The Merger Agreement also required
the holders of certain “Qualifying Company Warrants” for shares in MyoScience to
execute a Warrant Cancellation Agreement as a precondition for receiving cash
consideration for their warrants. Merger Ag’t. § 1.10.
56
Compl. ¶ 32.
57
Exs. B–D (“Option Holder Ltrs.”). When referring to the actions of the Individual
Defendants in connection with the Option Holder Letter, this Opinion refers to the actions
taken by Kumar, Preciado, and Still with respect to their respective Option Holder Letters.
58
Id. § (a).
59
Id. § (a)(i).
13
and the making of any decisions required or permitted to be taken by the
Securityholders’ Representative under the Merger Agreement, the Escrow
Agreement and related documents as if expressly confirmed and ratified in writing
by the undersigned.”60
Section (d) of the Option Holder Letter states that the payment of the merger
consideration “is conditioned on multiple items, including (i) closing of the
Transaction and, if applicable, receipt of the [proceeds] by the [paying agent] and
(ii) receipt by the Company, Paying Agent and Parent, as applicable, of an accurately
completed [Option Holder Letter] and required attachments.”61
The Option Holder Letter is governed by Delaware law, and each signatory
“consents to the exclusive jurisdiction of the state and federal courts sitting in the
State of Delaware and consents to personal jurisdiction of and venue in such courts
with respect to any and all matters or disputes arising out of this [agreement].” 62
F. Post-Merger Conduct of the Parties Leading to the Present Dispute
1. The Post-Merger Roles of the Individual Defendants
Following the merger, Kumar worked as a consultant for Pacira CryoTech for
six months starting on April 9, 2019. 63 The terms of that agreement are contained
60
Id. § (a)(ii).
61
Id. § (d).
62
Id. § (g).
63
Compl. ¶¶ 30, 124.
14
in a consulting agreement (the “Consulting Agreement”). Among other terms, the
Consulting Agreement required Kumar to “refrain from publishing, distributing, or
disclosing”64 information defined as “Confidential” without the company’s prior
written consent for a period of three years. 65 The Consulting Agreement states that
Kumar’s “relationship with Company is and shall be that of an independent
contractor, and neither party is authorized to nor shall act as the agent of the other.”66
After the Merger closed, Preciado became a “Senior Director, Health
Outcomes Value Assessment” at Pacira. 67 In that role, Preciado “led the
development of research and quality improvement programs” and “research
partnerships with key global, national, and regional health care executives across the
medical device industry.” 68 She also “regularly provides updates to senior
management at Pacira, for whom she is authorized to fill in during both internal and
external meetings.”69
64
Id. ¶ 126.
65
Id. ¶127; see Ex. F.
66
Ex. F. ¶ 6. The Consulting Agreement is governed by New Jersey law. Id. ¶ 13.
67
Compl. ¶ 31.
68
Id. ¶ 132.
69
Id.
15
Still joined what the Complaint describes as a three-person “Advisory
Committee” to Fortis. 70 Still held no formal position at Pacira or Pacira CryoTech
after the Merger. 71 Plaintiffs allege that, notwithstanding this fact, “Still sent
multiple messages to former MyoScience employees who had transitioned to
working for Pacira, demanding concrete action to reach various milestone goals.”72
In particular, Plaintiffs point to a May 1, 2019, email from Kumar to Still and
Andrew Jones, a former MyoScience employee who had remained at Pacira
CryoTech after the Merger, asking Jones for “the exact language in our final
purchase agreement on the reimbursement mile stones.”73 In the email, Kumar
stated that his “primary focus” would be to achieve “just that.”74 Plaintiffs maintain
that this comment shows that the Individual Defendants sought to implement a
strategy of achieving “the minimum threshold necessary to trigger the CMS
Reimbursement Milestones.”75
70
Id. ¶ 122. The Merger Agreement provides for an “Advisory Group” to “provide
direction to the Securityholders’ Representative in connection with its services” under the
Merger Agreement. Merger Ag’t. § 5.4(b).
71
Compl. ¶¶ 123, 141.
72
Id. ¶ 140.
73
Id. ¶ 163; see id. ¶ 258.
74
Id. ¶ 164.
75
Id. ¶ 165.
16
2. The Individual Defendants Coordinate After CMS Publishes
Draft Reimbursement Rates and Fortis Hires Daubert
On July 29, 2019, CMS released the draft reimbursement rates for CPT Code
64xx1.76 Plaintiffs allege that “[e]ach of those draft rates failed to meet the threshold
for triggering the CMS Reimbursement Milestone.” 77
The release of the draft reimbursement rates prompted the Individual
Defendants to commence what Plaintiffs describe as a coordinated campaign to
ensure the final rates, when published, would trigger the CMS Reimbursement
Milestones.78 On July 29, “Kumar provided Still with internal Pacira
correspondence containing a Pacira consultant’s preliminary assessment of the draft
reimbursement rates.” 79 The Individual Defendants then exchanged “numerous
emails” and agreed to “get clarity” and “find out” additional information.80 Also on
July 29, 2019, Still emailed Gail Daubert, MyoScience’s former outside counsel,
stating, “I might need to consider engaging your expertise” on the draft
reimbursement rates for CPT Code 64xx1.81 Daubert wrote to Still that her acting
76
Id. ¶ 167.
77
Id.
78
Id. ¶ 174.
79
Id. ¶ 173.
80
Id.
81
Id. ¶ 194.
17
on behalf of the MyoScience Securityholders “would be adverse to Pacira.”82
Shortly thereafter, Still formally retained Daubert “on behalf of the Individual
Defendants”83 to persuade CMS and the AMA to “adjust the reimbursement rates
applicable to CPT Code 64xx1.”84 There is no allegation that, at the time of her
email exchange with Still, Daubert had been employed or retained by Pacira or
Pacira CryoTech in any capacity.
At roughly the same time, Pacira began to formulate its own response to the
draft reimbursement rates using Pacira’s pre-merger reimbursement counsel,
Latham & Watkins LLP (“Latham”).85 Unbeknownst to Pacira, Kumar and Preciado
sent Still a number of updates on Pacira’s internal discussions and shared documents
that the Complaint alleges were confidential. 86
• On July 30, 2019, Kumar “forwarded to Still an email with Pacira’s
General Counsel concerning the draft reimbursement rate for CPT code
64xx1” that had been intended for Latham.87
82
Id. ¶ 195. Still disagreed with this statement, responding “[n]o.” Id.
83
Id. ¶¶ 197.
84
Id. ¶¶ 199.
85
See id. ¶ 174 (referencing email from Pacira’s General Counsel to Latham concerning
the draft reimbursement rate).
86
Id. ¶¶ 174–88.
87
Id. ¶ 174.
18
• On August 1, 2019, Kumar sent Still “an email reflecting information
provided to Pacira by Latham.” 88 The message reflected “Latham’s
impressions and advice regarding reimbursement procedures under
CPT Code 64xx1 and the reimbursement calculations proposed by
CMS.” 89
• On August 5, 2019, Preciado participated in a call with Pacira’s General
Counsel and Latham regarding the draft reimbursement rates that she
secretly recorded. 90 After the call, Preciado sent Kumar a file entitled
“Call with Latham Watkins re:646XX1 - 2019-8-5.m4a” from her
personal email account.91 Kumar then sent Still a “[s]ummary of our
discussion today with Latham & Watkins” for “[his] records.” 92
• On August 6, 2019, Preciado forwarded to Still a draft letter Pacira had
planned to send to CMS regarding the draft reimbursement rates for
CPT Code 64xx1.93 The Complaint does not describe the contents of
the letter and neither party has entered the document into the record.
88
Id.
89
Id.
90
Id. ¶¶ 181–82.
91
Id. ¶ 182.
92
Id. ¶ 186.
93
Id. ¶ 174.
19
• On August 10, 2019, Kumar sent Still “an email reflecting competitive
intelligence that Pacira had gathered about industry competitors,
including potential actions those competitors might take during the
CMS comment period.” 94
Still also sought to enlist Pacira’s support. On August 22, 2019, Still sent an
“unsolicited” email to Pacira’s CEO Dave Stack, listing “all the steps that he would
take, if he were in Stack’s position, to influence the draft reimbursement rates.”95
Still told Stack that MyoScience had worked with Daubert in the past and had “been
successful in the past with sending a memo; scheduling a phone call; and getting
clarification where AMA and CMS had misread / misinterpreted information
regarding iovera.”96
On August 28, 2019, Pacira’s General Counsel emailed Daubert asking if she
would “join the team” that was “formulating [Pacira’s] response to the iovera CM[S]
reimbursement proposed rule.”97 Daubert declined, telling Pacira that “we have a
conflict.” 98 Plaintiffs contend that “Still’s retention of Daubert led to significant
increased costs, inefficiencies, and duplicative work” because Pacira would not have
94
Id.
95
Id. ¶ 170 (emphasis omitted).
96
Id.
97
Id. ¶ 205.
98
Id. ¶ 207.
20
had to perform certain work that Daubert had already completed for MyoScience
before the merger if Pacira had been able to hire Daubert. 99
3. CMS Publishes Final Reimbursement Rates and Fortis Makes
Demands for Milestone Payments
On November 1, 2019, CMS finalized CPT Code 64xx1 as CPT Code 64624
and published the final reimbursement rates. 100 CMS set the following
reimbursement rates:
• $417.56 for procedures that used CPT Code 64624 in the office
setting, compared to a CMS Milestone threshold of $600;
• $471.33 for procedures that used CPT Code 64624 in an ambulatory
surgery center setting, compared to a CMS Milestone threshold of
$800; and
• $1,872.01 for procedures that used CPT Code 64624 in an out-
patient hospital setting, compared to a CMS Milestone threshold of
1,400.00. 101
On January 3, 2020, Pacira sent Fortis a letter stating that the CMS Milestone
set forth in Section 1.15(a)(iv)(3) of the Merger Agreement (tied to “reimbursement
. . . in an out-patient hospital setting”) had been satisfied and that it would pay the
99
Id. ¶ 208.
100
Id. ¶¶ 155, 210, 214–15.
101
Id. ¶¶ 215–16.
21
MyoScience Securityholders $10 million on June 1, 2020. 102 Pacira made that
payment on May 27, 2020. 103
On May 29, 2020, Fortis sent Pacira a letter demanding $40 million in
Milestone Payments under both Section 1.15(a)(iv)(1) (tied to “reimbursement . . .
in the office setting”) and Section 1.15(a)(iv)(2) (tied to “reimbursement . . . in the
ambulatory surgery centers setting”).104 The letter demanded a response within one
week. 105 In the letter, Fortis asserted that, with respect to the 1.15(a)(iv)(1)
milestone, “where a Smart Tip procedure destroys three nerves (other than the
genicular nerve) in a single procedure . . . and is billed under CPT Code 64640, the
payment for that procedure will exceed the $600 milestone threshold in many
localities.”106 Fortis also contended that the local reimbursement rates for “CPT
code 64625 or 64635,” “CPT code 64640,” “CPT 64635 and 64636,” or “CPT 64633
+ 64634 + 64634” satisfied the Milestone Payment thresholds, justifying its demand
for payment.107
102
Id. ¶ 217.
103
Id. ¶ 218.
104
Id. ¶ 222.
105
Id.
106
Fortis Opening Br. Ex. 3; see also Compl. ¶ 226.
107
Compl. ¶ 229.
22
Attorneys for Pacira responded to Fortis on June 5, 2020, asserting that
“neither of the requested milestone payments is warranted” under Section
1.15(a)(iv)(1) or 1.15(a)(iv)(2) of the Merger Agreement.108 On June 8, 2020, Fortis
responded, stating that its “reimbursement experts” were “putting together a package
of background data” that was “supportive of the many ways we have identified in
which the milestones were reached.” 109
Plaintiffs allege that Fortis made this and other demands in bad faith.110 In
support of that position, Plaintiffs cite to a November 4, 2019 email to Still from
Chris Anson, the Director of M&A at Fortis, stating: “I agree that it makes sense to
use the ambiguous language to pressure them to pay quickly (and I will do so).” 111
Plaintiffs aver the reference to ambiguous language refers to the provisions in the
Merger Agreement governing the Milestone Payments.112
Since the closing of the Merger, Pacira has made three Milestone Payments
to the Escrow Participants. 113 The first, $7 million for satisfaction of the Regulatory
Milestone involving CE Markings in Section l.15(a)(i)(1), occurred in November
108
Id. ¶ 233.
109
Id. ¶ 236.
110
Id. ¶¶ 147, 156–57, 261–62.
111
Id. ¶ 148 (emphasis omitted). In the Complaint, Anson’s name is misspelled as “Anon.”
112
Pls.’ Ans. Br. 32.
113
Compl. ¶ 152.
23
2019 following a back-and-forth between Pacira and Fortis’s legal counsel about
whether the milestone had been met in the second or third quarter of that year.114
Pacira alleges that this initial disagreement evinced Still and Fortis’s willingness to
make bad faith payment demands without any justification.115 The second Milestone
Payment of $5 million occurred in either February or March 2020 after Pacira
obtained approval to use iovera in Canada, as set forth in Section l.15(a)(i)(2).116
The third milestone payment, $10 million for the satisfaction of the CMS
Reimbursement Milestone in Section l.15(a)(iv)(3), occurred in May 2020 as
described above.117
G. Procedural History
On August 21, 2020, Plaintiffs filed their Complaint. 118 The Individual
Defendants have moved to dismiss the Complaint in its entirety and Fortis has
moved to dismiss Count III.119 After briefing on the motions, the court heard oral
argument on June 3, 2021.
114
Id. ¶¶ 143–46; Merger Ag’t. § 1.15(a)(i)(1).
115
Compl. ¶¶ 144, 147.
116
Compare id. ¶ 150 (stating the payment was made on March 2, 2020), with id. ¶ 152
(stating that Pacira made payments in November 2019, February 2020, and May 2020).
117
Id. ¶¶ 151, 217, 221.
118
Dkt. 1.
119
Dkt. 13, 14. Fortis filed its Answer and Verified Counterclaim on October 5, 2020,
alleging that Pacira breached the Merger Agreement and owes the Escrow Participants $40
million in Milestone Payments. Dkt. 12.
24
II. ANALYSIS
The Complaint contains seven counts. Count I seeks a declaratory judgment
that the MyoScience Securityholders are not entitled to Milestone Payments under
Sections 1.15(a)(iv)(1) or 1.15(a)(iv)(2) of the Merger Agreement. Count II asserts
that the Individual Defendants breached the Option Holder Letter. Count III is a
claim for breach of the implied covenant of good faith and fair dealing against Fortis
and the Individual Defendants. Count IV alleges that Kumar breached the
Consulting Agreement. Count V alleges Kumar breached his fiduciary duties.
Count VI alleges Preciado breached her fiduciary duties. Count VII alleges Still
aided and abetted Kumar and Preciado in breaching their fiduciary duties.
A. Standard of Review
On a motion to dismiss for failure to state a claim under Court of Chancery
Rule 12(b)(6):
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are well-pleaded if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and ([iv]) dismissal is inappropriate
unless the plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (cleaned up). Although
the pleading standards are minimal, Central Mortg. Co. v. Morgan Stanley Mortg.
Cap. Hldgs. LLC, 27 A.3d 531, 536 (Del. 2011), “a trial court is required to accept
only those ‘reasonable inferences that logically flow from the face of the complaint’
25
and ‘is not required to accept every strained interpretation of the allegations
proposed by the plaintiff.’” In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d
162, 168 (Del. 2006) (quoting Malpiede v. Townson, 780 A.2d 1075, 1083 (Del.
2001)). “[A] claim may be dismissed if allegations in the complaint or in the exhibits
incorporated into the complaint effectively negate the claim as a matter of law.”
Malpiede, 780 A.2d at 1083.
B. Alleged Breach of the Option Holder Letter
Count II alleges that each of the Individual Defendants breached the Option
Holder Letter by violating Section 1.15(e) of the Merger Agreement. The parties do
not dispute that the Option Holder Letter incorporates Section 1.15(e). Section
1.15(e)(i) (the “Exclusive Right Provision”) provides that the “sole and exclusive
right of the Escrow Participants under this Section 1.15 will be to receive, subject to
the other terms of this Agreement, the Milestone Payments payable pursuant to this
Section 1.15.” Section 1.15(e)(ii) (the “Sole Discretion Provision”) provides that
Pacira “will have the right to operate the business of [Pacira CryoTech] as it chooses,
in its sole discretion, except as expressly set forth in this Section 1.15.” Plaintiffs
fuse these provisions to impose contractual obligations upon the Individual
Defendants.
“In order to survive a motion to dismiss for failure to state a breach of contract
claim, the plaintiff must demonstrate: first, the existence of the contract, whether
26
express or implied; second, the breach of an obligation imposed by that contract; and
third, the resultant damage to the plaintiff.” VLIW Tech., LLC v. Hewlett-Packard
Co., 840 A.2d 606, 612 (Del. 2003).
Plaintiffs argue the Merger Agreement (through the Option Holder Letter)
imposes an obligation on the Individual Defendants to refrain from interfering in
Pacira’s internal affairs or operations. The Merger Agreement does not provide for
such an express obligation. Plaintiffs derive that obligation, however, from the Sole
Discretion Provision, which they claim gives Pacira “the exclusive right to operate
Pacira CryoTech free from interference,”120 and the Exclusive Right Provision,
which Plaintiffs assert imposes on the Individual Defendants an obligation to “limit
their post-merger role to potentially receiving milestone payments.”121 According
to Plaintiffs, the Individual Defendants breached this obligation in two ways. First,
they attempted to “influence and instruct”122 Pacira CryoTech employees to achieve
the “minimum threshold necessary to trigger the CMS Reimbursement
Milestones.”123 Second, the Individual Defendants “prevented Pacira from working
with Gail Daubert” by retaining her first.124 Plaintiffs allege that Pacira suffered
120
Pls.’ Ans. Br. 15–16.
121
Id. at 49.
122
Compl. ¶ 258.
123
Id. ¶ 165.
124
Id. ¶ 258.
27
damages “including, but not limited to, the deprivation of Pacira’s negotiated
contractual rights, the loss of valuable, confidential information, and the time and
money Pacira has been forced to expend due to the Individual Defendants’ retention
of Daubert.”125
The Individual Defendants respond that Section 1.15(e) “does not impose any
obligations on Individual Defendants or prohibit them from taking any action.”126
Section 1.15(e), on their reading, serves instead as a “disclaimer of any obligation”
by Pacira to “make payments to the former MyoScience securityholders under
Section 1.15 other than the Milestone Payments if they are achieved or . . . [to]
operate the company in a specific way following the Merger except as otherwise set
forth in Section 1.15.” 127
Where, as here, the meaning of a contract is in dispute, the court must “give
priority to the parties’ intentions as reflected in the four corners of the agreement,
construing the agreement as a whole and giving effect to all its provisions.”
Salamone v. Gorman, 106 A.3d 354, 368 (Del. 2014) (internal quotations omitted).
In doing so, the court must read a contract so as not to render any part of the contract
“mere surplusage,” Kuhn Const., Inc. v. Diamond State Port Corp., 990 A.2d 393,
125
Id. ¶ 296.
126
Indiv. Defs.’ Opening Br. 36.
127
Id. at 34–35.
28
396–97 (Del. 2010), or “illusory or meaningless.” O’Brien v. Progressive Northern
Ins. Co., 785 A.2d 281, 287 (Del. 2001). The court must also “interpret clear and
unambiguous terms according to their ordinary meaning.” Riverbend Cmty., LLC v.
Green Stone Eng’g, LLC, 55 A.3d 330, 335 (Del. 2012). “A contract is not rendered
ambiguous simply because the parties do not agree upon its proper construction.
Rather, a contract is ambiguous only when the provisions in controversy are
reasonably or fairly susceptible of different interpretations or may have two or more
different meanings.” Rhone–Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co.,
616 A.2d 1192, 1196 (Del. 1992).
Plaintiffs argue that “[o]n its face, Section 1.15(e) imposes a clear obligation
on the Escrow Participants.”128 As evidence for this proposition, Plaintiffs cite to
the Exclusive Right Provision. This argument ignores the plain language of Section
1.15(e). Nowhere does that section use the term “obligation” with respect to the
Escrow Participants. The only pertinent reference in Section 1.15(e) to any
obligation concerns Pacira:
[MyoScience] and the Securityholders’ Representative on behalf of each
Escrow Participant acknowledge and agree that, without limiting the
provisions and obligations of [MyoScience] in this Section 1.15 . . . [Pacira]
is not under any obligation to provide any specific level of investment or
financial assistance to the Surviving Corporation or to undertake any specific
actions (or to refrain from taking any specific actions) with respect to the
128
Pls.’ Ans. Br. 50.
29
operation of the Surviving Corporation, except as expressly set forth in this
Section 1.15. 129
Plaintiffs also fail to explain how a reference to the Escrow Participants’ “sole
and exclusive” right to receive the Milestone Payments could reasonably be read as
imposing an affirmative obligation on them. Because the agreement does not
contain any language demonstrating that the parties intended to impose obligations
on the Escrow Holders, I conclude that Section 1.15(e) of the Merger Agreement
unambiguously does not impose any obligation on the Individual Defendants.
Read within the context of the other provisions of Section 1.15, the Sole
Discretion Provision defines the scope of Pacira’s obligations to make Milestone
Payments to the Escrow Holders under the Merger Agreement’s Milestone Payment
provisions in Section 1.15(a). Section 1.15(d) provides that Pacira “shall operate
[Pacira CryoTech] in good faith in the context of this Section 1.15 and shall use
commercially reasonable efforts to achieve the Milestones.”130 Further refining
Pacira’s specific obligations, Section 1.15(e)(iii) states that Pacira need not “provide
any specific level of investment or financial assistance” to Pacira CryoTech to
achieve the milestones or to “undertake any specific actions (or to refrain from taking
any specific actions) with respect to [its] operation.”
129
Merger Ag’t. § 1.15(e).
For a detailed discussion of efforts clauses, see Akorn, Inc. v. Fresenius Kabi AG, 2018
130
WL 4719347, at *85–86 (Del. Ch. Oct. 1, 2018), aff’d, 198 A.3d 724 (Del. 2018).
30
Section 1.15(e) operates as a disclaimer of Pacira’s obligations to engage in
any conduct beyond that specified in the Merger Agreement. As this court has noted
when interpreting a similar provision giving the purchaser “sole discretion with
regard to all matters relating to the operation of the Business,” these provisions “set
a contractual standard by which to evaluate whether [the buyer’s] failure to achieve
and pay [the] Milestones was improper.” Himawan v. Cephalon, 2018 WL 6822708,
at *8 (Del. Ch. Dec. 28, 2018) (“paraphras[ing]” Fortis Advisors LLC v. Dialog
Semiconductor PLC, 2015 WL 401371, at *5 (Del. Ch. Jan. 30, 2015)); see also,
e.g., Neurvana Med., LLC v. Balt USA, LLC, 2020 WL 949917, at *2, *14 (Del. Ch.
Feb. 27, 2021) (earn-out provision gave buyer the “sole discretion and authority
post-closing to make decisions concerning all matters relating to [the acquired
product]” provided it used commercially reasonable efforts to achieve a CE marking
milestone (internal quotations omitted)); Lazard Tech. P’rs., LLC v. Qinetiq N. Am.
Operations LLC, 114 A.3d 193, 196 (Del. 2015) (earn-out provision “left the buyer
free to conduct its business post-closing in any way it chose so long as it did not act
with the intent to reduce or limit the earn-out payment”); ev3, Inc. v. Lesh, 114 A.3d
527, 528 (Del. 2014) (earn-out provision imposed obligation on buyer to fund and
pursue certain regulatory milestones in its “sole discretion, to be exercised in good
faith”).
31
The Plaintiffs ask this court to read the Sole Discretion Provision as imposing
an obligation on the Escrow Holders to refrain from making any efforts to
communicate with Pacira employees or the authorities that determine reimbursement
rates which affect the calculation of the Milestone Payments. Plaintiffs cite no case
where the court read a similar provision as imposing the obligation Plaintiffs seek to
impose here. If that is what the parties had intended, they could have easily provided
for such an obligation in the Merger Agreement or the Option Holder Letter.
Section 1.15(e) demonstrates that the parties knew how to specify whether a party is
required “to refrain from taking any specific actions” in the post-closing operations
of the business. 131 Likewise, the parties’ use of the phrase “shall” in Section 1.15(d)
to impose legal obligations on Pacira indicates that, had the parties intended to
impose an obligation on the Individual Defendants, they would have used the same
construction.132 “[A]s a matter of contractual interpretation, [courts] should refrain
from writing a provision into a contract when the parties could have done so
themselves, but chose not to.” Vintage Rodeo Parent, LLC v. Rent-a-Center, Inc.,
2019 WL 1223026, at *21 (Del. Ch. Mar. 14, 2019). Absent any reference to the
131
Merger Ag’t. § 1.15(e)(iii) (“Parent is not under any obligation to provide any specific
level of investment or financial assistance to the Surviving Corporation or to undertake any
specific actions (or to refrain from taking any specific actions) with respect to the operation
of the Surviving Corporation, except as expressly set forth in this Section 1.15.”).
132
Id. § 1.15(d) (“Following the Closing and for the duration of the Milestone Achievement
Period, Parent shall operate the Surviving Corporation in good faith in the context of this
Section 1.15 and shall use commercially reasonable efforts to achieve the Milestones.”).
32
obligations of the Escrow Holders, the plain meaning of Section 1.15 is not
susceptible to the Plaintiffs’ interpretation.
Because Section 1.15(e) plainly does not impose any obligation on the
Individual Defendants, the Plaintiffs have failed to specify an obligation that the
Individual Defendants breached. Count II is accordingly dismissed for failure to
state a claim.
C. Claim for Breach of the Implied Covenant of Good Faith and Fair
Dealing
Count III alleges that Fortis and the “MyoScience stockholders, through Fortis
Advisors” violated an implied covenant that Fortis “would only make proper, good-
faith demands for payments under the Merger Agreement’s milestone
provisions.”133 The Complaint further alleges that Fortis and the Individual
Defendants have breached the implied covenant of good faith and fair dealing by
engaging “in conduct intended to frustrate Pacira’s rights to receive the full benefits
of the Merger Agreement by making demands for Milestone Payments, that are not,
in fact, due.”134
The implied covenant of good faith and fair dealing “attaches to every contract
by operation of law,” Metro. Life Ins. Co. v. Tremont Grp. Hldgs, Inc., 2012 WL
133
Compl. ¶ 261.
134
Id. ¶ 263.
33
6632681, at *15 (Del. Ch. Dec. 12, 2012), and is “best understood as a way of
implying terms in the agreement.” E.I. DuPont de Nemours & Co. v. Pressman, 679
A.2d 436, 443 (Del. 1996). The doctrine “ensures that the parties deal honestly and
fairly with each other when addressing gaps in their agreement.” Glaxo Grp. Ltd. v.
DRIT LP, 248 A.3d 911, 919 (Del. 2021). It requires “a party in a contractual
relationship to refrain from arbitrary or unreasonable conduct which has the effect
of preventing the other party to the contract from receiving the fruits of the bargain.”
Dunlap v. State Farm Fire and Cas. Co., 878 A.2d 434, 442 (Del. 2005) (internal
quotations omitted).
The doctrine most often “comes into play in two situations”: (1) “when it is
argued that a situation has arisen that was unforeseen by the parties and where the
agreement’s express terms do not cover what should happen” or (2) “when a party
to the contract is given discretion to act as to a certain subject and it is argued that
the discretion has been used in a way that is impliedly proscribed by the contract’s
express terms.” Oxbow Carbon & Minerals Hldgs., Inc. v. Crestview-Oxbow
Acquisition, LLC, 202 A.3d 482, 504 n.93 (Del. 2019).
“In order to plead successfully a breach of an implied covenant of good faith
and fair dealing, the plaintiff must allege a specific implied contractual obligation, a
breach of that obligation by the defendant, and resulting damage to the plaintiff.”
Fitzgerald v. Cantor, 1998 WL 842316, at *1 (Del. Ch. Nov. 10, 1998). “When
34
presented with an implied covenant claim, a court first must engage in the process
of contract construction to determine whether there is a gap that needs to be filled.”
Allen v. El Paso Pipeline GP Co., 113 A.3d 167, 183 (Del. Ch. 2014). “During this
phase, the court decides whether the language of the contract expressly covers a
particular issue, in which case the implied covenant will not apply, or whether the
contract is silent on the subject, revealing a gap that the implied covenant might fill.”
Id. “[O]ne generally cannot base a claim for breach of the implied covenant on
conduct authorized by the terms of the agreement.” Glaxo Grp. Ltd., 248 A.3d at
920. Put differently, the court may not use the doctrine to recognize any obligations
that “negate an unrestricted contractual right authorized by an agreement” or prohibit
conduct that the contract authorizes. Id. at 921.
“Even where the contract is silent as to the conduct in question, an interpreting
court cannot use an implied covenant to re-write the agreement between the parties,
and should be most chary about implying a contractual protection when the contract
could easily have been drafted to expressly provide for it.” Oxbow, 202 A.3d at 507
(cleaned up). Doing so would give the parties “contractual protections that they
failed to secure for themselves at the bargaining table.” El Paso Pipeline, 113 A.3d
at 183–84 (quoting Aspen Advisors LLC v. United Artists Theatre Co., 843 A.2d 697,
707 (Del. Ch. 2004), aff’d, 861 A.2d 1251 (Del. 2004)). Permissible considerations
at this stage include, for example, whether the “expectations of the parties were so
35
fundamental that it is clear that they did not feel a need to negotiate about them,”
Allied Cap. Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1033 (Del. Ch. 2006), or
whether the gap arises due to reasonably unforeseeable contingencies. El Paso
Pipeline, 113 A.3d at 184 (noting that “[e]ven the most skilled and sophisticated
parties will necessarily fail to address a future state of the world”) (cleaned up).
“Assuming a gap exists and the court determines that it should be filled, the
court must determine how to fill it.” Id. At this stage, the court “seeks to enforce
the parties’ contractual bargain by implying only those terms that the parties would
have agreed to during their original negotiations if they had thought to address
them.” Gerber v. Enter. Prods. Hldgs., LLC, 67 A.3d 400, 418 (Del. 2013). Because
“a court can only imply a contractual obligation when the express terms of the
contract indicate that the parties would have agreed to the obligation had they
negotiated the issue, the plaintiff must advance provisions of the agreement that
support this finding in order to allege sufficiently a specific implied contractual
obligation.” Fitzgerald, 1998 WL 842316, at *1. The court “must assess the parties’
reasonable expectations at the time of contracting and not rewrite the contract to
appease a party who later wishes to rewrite a contract [s]he now believes to have
been a bad deal.” Nemec v. Shrader, 991 A.2d 1120, 1126 (Del. 2010).
Proving breach of the implied claim “does not depend on the breaching party’s
mental state.” ASB Allegiance Real Est. Fund v. Scion Breckenridge Managing
36
Member, LLC, 50 A.3d 434, 442 (Del. Ch. 2012), rev’d on other grounds, 68 A.3d
665 (Del. 2013). The implied covenant therefore “does not require that a party [to]
have acted in subjective good faith.” El Paso Pipeline, 113 A.3d at 183.
1. Bad Faith Claim Against Fortis for Improper Demands
Plaintiffs argue that the Complaint states a claim for breach of the implied
covenant because: (1) Fortis had an obligation to refrain from making “premature,
bad-faith, and/or baseless demands” for payment under the Merger Agreement;135
(2) Fortis violated that obligation by making such demands; 136 and (3) Pacira
suffered damages because it was denied the “full benefits” 137 of the Merger
Agreement and because it had to “expend resources” to respond to such demands.138
Plaintiffs advance two broad points to support this claim. First, they argue the
Merger Agreement contains a “gap” regarding payment demands from Fortis as the
Securityholders’ Representative insofar as the “parties did not contract for Fortis to
submit demands for payment” and “did not appear even to have contemplated that
possibility.”139 Second, Plaintiffs urge the court to fill that gap with an implied
135
Compl. ¶ 262; see id. ¶ 261.
136
Id. ¶ 262.
137
Id. ¶ 263; see id. ¶ 267.
138
Id. ¶ 268.
139
Pls.’ Ans. Br. 21–22.
37
prohibition against the making of “bad-faith payment demands” because Pacira will
otherwise be denied “numerous post-merger benefits.” 140
The Plaintiffs’ argument fails at step one of the implied covenant analysis
because the Merger Agreement addresses the issue of demands from the
Securityholders’ Representative. There is no gap. Plaintiffs did contract for specific
circumstances in which Fortis is entitled to make demands of Pacira related to the
satisfaction of milestones, and to which Pacira has an obligation to respond. Section
1.15(f) of the Merger Agreement expressly provides that, “in the event of a dispute
with respect to any audit conducted or report provided under Section 1.15(f)” the
Securityholders’ Representative “shall deliver an objection notice” to Pacira.141
Section 1.15(f) also requires both parties to “work in good faith to resolve” the
disagreement and provides that, if the parties fail to reach agreement, they shall
submit their dispute to a mutually agreed upon accounting firm for resolution.142
Section 1.15(f) also imposes an express limitation on Fortis’s ability to lodge
objections under Section 1.15—“in no event shall the Securityholders’
140
Id. at 29; see id. at 18–19.
141
Merger Ag’t § 1.15(f)(ii).
142
Id.
38
Representative be entitled to submit a Milestone Objection Notice more than once
in any fiscal year.”143
Plaintiffs argue that Section 1.15(f) addresses a different subject matter—not
payment demands, but milestone reports—and is limited to a narrow range of
disputes involving “audits” of financial information. 144 But that point only serves to
undermine Plaintiffs’ argument. Plaintiffs’ argument thus concedes that the parties
contracted for specific circumstances in which Fortis’s ability to make demands of
Pacira is circumscribed. And they did so in the narrow context of Fortis demanding
financial information from Pacira to confirm whether certain milestones involving
“calculations” and “measurements” have been satisfied. What follows from this is
not that the contract contains a gap regarding Fortis’s demands in all other
circumstances. To the contrary, it confirms both that the parties agreed to place no
restrictions on the ability of Fortis to make demands for payment from Pacira and,
correspondingly, placed no obligation on Pacira to respond to any such demands.145
143
Id. In addition, Section 1.15(f)(i) expressly provides that “no more than once per fiscal
year” the Securityholders’ Representative shall have the right to access “the financial books
and records of Parent to the extent relating to the achievement or non-achievement of the
Milestones.” Merger Ag’t § 1.15(f)(i). It also provides that, under certain circumstances,
“Parent may restrict the foregoing access” in the exercise of its “good faith, reasonable
judgment.” Id.
144
Pls.’ Ans. Br. 22–23.
145
Plaintiffs offer no authority for their assertion that the absence of any provision
addressing unsolicited payment demands “suggests, at a minimum, that they are
disfavored, if not outright disallowed.” Pls.’ Ans. Br. 24. Using the implied covenant to
39
That is particularly apt here. “We do not ordinarily speak of one’s entitlement to
make a demand of any sort; demands are simply made and, once they are made, the
question is not whether one was entitled to make the demand, but whether there is a
legal obligation to comply with it.” Schick Inc. v. Amalgamated Clothing & Textile
Workers Union, 533 A.2d 1235, 1240 (Del. Ch. 1987). The existence of Section
1.15(f) demonstrates that had the parties wanted to curtail or restrain Fortis’s ability
to make the types of demands for payment about which Pacira now complains, the
contract “could easily have been drafted to expressly provide for it.” Oxbow, 202
A.3d at 507.
Plaintiffs respond that the parties failed to provide for a prohibition against
bad faith demands not because they intended to leave all demands outside of the
narrow context of Section 1.15(f) unregulated, but rather because such a prohibition
was “too obvious to need expression.” 146 In support of that proposition, Plaintiffs
point to what they extol as “clear Delaware precedent”147—a bench ruling by then-
Vice Chancellor Strine in HCP CH1 Saddle River, LLC v. Sunrise Senior Living
create such a rule would “create a free-floating [negative] duty . . . unattached to the
underlying legal document.” Dunlap v. State Farm Fire and Cas. Co., 878 A.2d 434, 441
(Del. 2005).
146
Pls.’ Ans. Br. 26 (quoting Dieckman v. Regency GP LP, 155 A.3d 358, 368 (Del. 2017)).
147
Id. at 20.
40
Services, Inc., C.A. No. 4691-VCS (Del. Ch. Dec. 9, 2009) (TRANSCRIPT)
(“Saddle River”).
Setting aside Plaintiffs’ assertion that a transcript ruling is “clear Delaware
precedent,” 148 Saddle River does not support the Plaintiffs’ argument. In Saddle
River, the counterclaim-defendant, “HCP”, acquired a portfolio of senior living
facilities operated by counterclaim-plaintiff, “Sunrise”, pursuant to certain
management agreements.149 HCP tried to renegotiate the agreements but Sunrise
resisted. 150 HCP then tried to pressure Sunrise to renegotiate the agreements by
exercising certain discretionary contractual rights in a manner that Sunrise alleged
was oppressive—such as serial demands for audits and other irrelevant
information.151 In denying a motion to dismiss an implied covenant claim alleging
that HCP had “repeatedly made demands of Sunrise in bad faith,” 152 the court held
that Sunrise had sufficiently pleaded that “HCP used its contractual discretion in bad
faith by engaging in harassing conduct designed to put financial and other kinds of
pressure on Sunrise to renegotiate.” Saddle River, C.A. No. 4691-VCS Hrg. Tr. at
148
Cf. Day v. Diligence, Inc., 2020 WL 2214377, at *1 (Del. Ch. May 7, 2020) (“Transcript
Rulings generally have no precedential value in this Court and they should ordinarily not
be relied on as precedent—at most they offer persuasive authority.”).
149
Saddle River, C.A. No. 4691-VCS (Dkt. 44 (Ans. & Verified Countercl.) ¶¶ 1–4).
150
Id. ¶¶ 5, 15.
151
Id. ¶¶ 8–9, 18–19, 24, 28, 35–36.
152
Id. ¶ 35.
41
55:7–10. The court made clear that the violation of the implied covenant claim
concerned HCP’s abuse of its “contractual power.” Id. at 11:16–21; see id. at 12:2–
6 (“THE COURT: . . . They point to the provisions of the contract that deal with
these things, and, yeah, they have a right to ask for information, they don’t have a
right to change their mind a million times, basically to do it pretexturally [sic] just
to drive us crazy.” (emphasis added)).
Unlike in Saddle River, where the counterclaim defendant had express,
unconditional contractual rights to seek books and records and discretionary rights
to refuse to approve the counterclaim plaintiff’s operating budget and capital
expenditures, the Merger Agreement here does not require Pacira to respond to any
unsolicited communication from Fortis outside the limited context of Section
1.15(f). In Saddle River, the express contractual rights were the necessary factual
predicate for the implied obligation not to exercise those rights in a harassing manner
with the aim of depriving the counterparty of its contract rights. Here, by contrast,
Pacira has no obligation to respond to any of Fortis’s demands until after Pacira
sends Fortis a written report pursuant to Section 1.15(f). Because Fortis’s demands
for milestone payments were not in response to a written report pursuant to Section
1.15(f)(i), Pacira was free to dismiss any requests related to the CMS Milestones out
42
of hand.153 Saddle River is thus consistent with well-established authority that
“[w]hen a contract confers discretion on one party, the implied covenant requires
that the discretion be used reasonably and in good faith.” See Airborne Health, Inc.
v. Squid Soap, LP, 984 A.2d 126, 146–47 (Del. Ch. 2009); see id. at 147 n.1
(collecting authorities). 154
In any event, Plaintiffs have failed to plead sufficient facts to show that the
communications sent to Pacira by Fortis or by Still on behalf of Fortis constituted
harassment or “oppressive or underhanded tactics.” Chamison v. HealthTrust-Hosp.
Co., 735 A.2d 912, 920 (Del. Ch. 1999); see id. at 920–23 (noting that defendant
HealthTrust, Inc. acted oppressively by refusing to “pay the reasonable fees and
expenses of [defense] counsel selected by [HealthTrust]” pursuant to an
indemnification provision by demanding that plaintiff Chamison accept an attorney
who “contemplated a group defense strategy that ignored Chamison’s unique
153
Merger Ag’t § 1.15(f)(i). Plaintiffs likewise have not alleged or argued that Pacira had
a contractual obligation to respond to any of what Pacira characterizes as Fortis’s allegedly
“premature, bad-faith, and/or baseless demands” made between April and August 2019.
Compl. ¶¶ 144, 261.
154
Compare Travel Servs. Network, Inc. v. Presidential Fin. Corp. of Mass., 959 F.Supp.
135, 141 (D. Conn. 1997) (observing that “Massachusetts courts have left open the
possibility that in certain circumstances lenders may violate the implied covenant by the
manner in which they exercise express contractual rights” (emphasis in original)), with
CSL Behring, LLC v. Bayer Healthcare, LLC, 2019 WL 4451368, at *4 (D. Del. Sept. 17,
2019) (“A defendant does not violate the implied covenant of good faith and fair dealing
merely by acting in its own self-interest while also performing its express obligations under
the contract.” (applying New York law) (internal quotations omitted)).
43
defenses” (emphasis omitted)), aff’d, 748 A.2d 407 (Del. 2000). Nor have Plaintiffs
alleged that Fortis’s demands for Milestone Payments were a pretext for some other
purpose. Cf. Saddle River, C.A. 4691-VCS Hrg. Tr. at 12:2–6 (describing claim that
demands were made pretextually).
The Complaint describes four separate instances of correspondence directed
at Pacira by or on behalf of Fortis. While the Complaint asserts that counsel for the
Securityholders’ Representative, Davis Malm, sent Pacira “multiple emails and
letters to Pacira between April and August 2019 prematurely demanding
payment”155 related to one of the Regulatory Milestones not at issue here, the
Complaint cites just two. The first is an August 26, 2019 email stating that Fortis
“expects to receive payment for the Milestone on Friday, August 30, 2019.”156 The
second is an August 28, 2019 email stating that “[a] failure to receive a CMS
reimbursement in 2020 is by all means unacceptable.” 157
With respect to the CMS Milestone Payments, Plaintiffs point to two letters
from Fortis—a May 29, 2020 letter requesting that Pacira “inform [the MyoScience
Securityholders] of the plans for the payment of $40 million within one week”158
and a June 8, 2020 reply to Pacria’s response letter, expressing “confiden[ce] . . .
155
Compl. ¶ 144.
156
Id. ¶ 145.
157
Id. ¶ 154.
158
Id. ¶ 222.
44
that all of the codes identified can be used for procedures using iovera, and that they
include codes under which iovera procedures were billed in the past.” 159
These emails are non-threatening business communications. Even when the
two emails from 2019 are considered in connection with Fortis’s 2020 demand
letters related to the CMS Milestone Payments—sent ten months later—these
communications fall far short of a “conscious, persistent campaign to put pressure
on somebody to renegotiate by making their life hellacious.” Saddle River at 10:6–
8. “Despite the appearance in its name of the terms ‘good faith’ and ‘fair dealing,’
the covenant does not establish a free-floating requirement that a party act in some
morally commendable sense . . . [n]or does satisfying the implied covenant
necessarily require that a party have acted in subjective good faith.” El Paso
Pipeline, 113 A.3d at 182–83 (internal citations omitted).
Plaintiffs’ other argument, that these emails constitute “bad faith” because
Fortis understood them to be baseless, is itself without merit. Plaintiffs’ only ground
for that assertion is an excerpt from a November 4, 2019 email to (not from) Still
from Chris Anson, the Director of M&A at Fortis, expressing an intent to use
“ambiguous language [in the Merger Agreement] to pressure [Pacira] to pay
159
Id. ¶ 235.
45
[milestone payments] quickly.”160 Plaintiffs offer no context for the email. 161 Even
if I draw the inference that Anson was referring to the CMS Regulatory Milestone
payments in light of CMS’s publication of the finalized reimbursement rates on
November 1, 2019, the statement fails to establish that Anson or Still understood
Fortis’s demands to be baseless. At most, it shows that they understood the contract
to be susceptible to multiple meanings, some of which were more favorable to its
position than others. Fortis was and remains free to leverage perceived ambiguities
in the contract to advance its positions—just as Plaintiffs have sought to do in this
action. See ASB Allegiance, 50 A.3d at 442 (“Proving a breach of contract claim
does not depend on the breaching party’s mental state.”).
Plaintiffs have also failed to plead sufficient facts to support their assertion
that Pacira was denied “multiple benefits of the bargain.” 162 Plaintiffs assert that
Fortis denied Pacira the right to operate Pacira CryoTech “as it chooses, in its sole
discretion.”163 But Plaintiffs have failed to allege facts from which it can be
reasonably inferred that any letters from Fortis demanding Milestone Payments
160
Compl. ¶ 148.
161
Aside from the language quoted, neither side to this action has submitted the email into
the record on this motion.
162
Pls.’ Ans. Br. 27.
163
Id. at 29.
46
under the Merger Agreement deprived Pacira of its ability to operate Pacira
CryoTech as it chose or the benefits of the Merger.
For these reasons, the motion to dismiss Count III as to Fortis for failure to
state a claim is granted in its entirety.
2. Improper Interference Claims
Plaintiffs separately argue that the Individual Defendants “frustrated Pacira’s
rights to receive the full benefits of the Merger Agreement” by “interfering in
Pacira’s relationships” and “denying Pacira the rights and privileges it acquired
pursuant to Section 1.4 of the Merger Agreement.”164 Specifically, Plaintiffs argue
that Individual Defendants have interfered in Pacira’s internal affairs by “attempting
to commandeer and misdirect Pacira employees.”165 Plaintiffs also contend that the
“rights” and “privileges” Pacira obtained in Section 1.4 of the Merger Agreement
includes an implied covenant protecting any “external relationships” that
MyoScience had—specifically, the relationship with Daubert. 166 Plaintiffs then
assert that this implied covenant extends to the Individual Defendants.
The Individual Defendants contend that they are not proper defendants for the
implied covenant claims under the Merger Agreement because Fortis is the
164
Compl. ¶ 264.
165
Pls.’ Ans. Br. 1.
166
Id.
47
Securityholders’ Representative and the only party against whom these claims can
be asserted.167 Plaintiffs argue, however, that their implied covenant claims can
proceed against the Individual Defendants. 168 Plaintiffs rely on Shareholder
Representative Services, LLC v. RSI Holdco, LLC, 2019 WL 2207452, at *6-7 (Del.
Ch. May 22, 2019), where the court permitted unjust enrichment claims to proceed
against a group of former stockholders who also had a designated stockholder
representative representing their interests under the merger agreement. In that case,
the court allowed the unjust enrichment claims to proceed against the individuals
because the seller alleged that the contract itself was a product of fraud. Thus, the
sellers sought to recover monies that the individuals had received from the merger
in excess of the value of the company at the time the merger closed. Id. at *6. Unlike
in RSI Holdco, Plaintiffs’ implied covenant claim is based upon the terms of the
Merger Agreement and assumes its validity.
Even if the claims could be asserted directly against the Individual
Defendants, Plaintiffs have not identified a gap in the contract or to any “express
terms of the contract” indicating that the parties would have agreed to impose
167
Indiv. Defs.’ Opening Br. 40 (citing Fortis Advisors LLC v. Allergan W.C. Holding Inc.,
2020 WL 2498068, at *3 (Del. Ch. May 14, 2020) (“The contractual appointment of a
shareholder representative to bring certain actions makes that representative the real party
in interest in those actions.”)).
168
Pls.’ Ans. Br. 54–56.
48
obligations on the Individual Defendants to refrain from communicating with or
recruiting Pacira’s current or former employees. Fitzgerald, 1998 WL 842316 at
*1. “[A] court should be cautious when implying a contractual obligation and do so
only where obligations which can be understood from the text of the written
agreement have nevertheless been omitted from the agreement in the literal sense.”
Id. If the parties had wanted to prohibit the selling stockholders from engaging with
or soliciting information from Pacira or Pacira CryoTech employees, “the contract
could easily have been drafted to expressly provide for it.” Oxbow, 202 A.3d at
507.169 Implying such a covenant would grant Plaintiffs contractual protections they
“failed to secure for themselves at the bargaining table.” Aspen Advisors LLC, 843
A.2d at 707.170
169
See, e.g., EBP Lifestyle Brands Hldgs., Inc. v. Boulbain, 2017 WL 3328363, at *2 (Del.
Ch. Aug. 4, 2017) (describing non-compete covenant in Stockholders’ Agreement
prohibiting a stockholder and former employee from “directly or indirectly (i) solicit[ing]
or induc[ing], or attempt[ing] to solicit or induce or assist any Person in soliciting or
inducing any employee or sales representative of [EBP] or any subsidiary to leave the
employ or engagement of [EBP] or such subsidiary, or in any way interfere with the
relationship between [EBP] or any subsidiary and any such employee or sales
representative thereof”).
170
See Angela C. Zambrano, Robert Velevis & Frank J. Favia Jr., What Private Equity
Sponsors Need to Know About an Implied Permanent Nonsolicitation Covenant Under
New York Law, WESTLAW TODAY, Mar. 16, 2020, Doc. No. 2020 PRINDBRF 0055
(“Noncompetition and nonsolicitation restrictive covenants are familiar tools often used in
mergers and acquisitions to encourage retention of key employees of a sold business and
to discourage the seller or key employees from poaching important customers or suppliers
post-sale.”); Krishna Veeraraghavan & Bradley S. King, Considerations in Carve-Out
Transactions, THE M&A LAW., Nov./Dec. 2019, at 7 (noting that a “no-poach” or “non-
49
Nor can Plaintiffs rely on Section 1.4 to support their claim that Still’s hiring
of Daubert on behalf of Fortis violated the implied covenant. Section 1.4 of the
Merger Agreement provides that, as a result of the Merger, “all the property, rights,
privileges, powers and franchises of the Company and Merger Sub will vest in
[Pacira CryoTech]” and the debts and liabilities of the Company and Merger Sub
will become debts and liabilities of the Pacira CryoTech.171 Section 1.4 is not among
the provisions of the Merger Agreement to which the Individual Defendants became
bound under Paragraph “a” of the Option Holder Letter. It does not impose any
affirmative obligations on the Individual Defendants.
Even if the Individual Defendants had consented to Section 1.4, Plaintiffs
have again failed to identify a gap in the Merger Agreement that would license the
application of the implied covenant to prohibit Still’s interactions with Daubert—
whether in his individual capacity or on behalf of Fortis. Section 1.4 mirrors Section
259 of the Delaware General Corporation Law, which provides that following a
merger, “all property, rights, privileges, powers and franchises, and all and every
other interest shall be thereafter as effectually the property of the surviving or
resulting corporation . . . .” 172 In interpreting the statute, this court has held that
solicitation” covenant is “[a]nother post-closing commitment commonly sought by buyers”
in carve-out M&A transactions).
171
Merger Ag’t. § 1.4.
172
8 Del. C. § 259.
50
“attorney-client privilege—like all other privileges—passes to the surviving
corporation in the merger as a matter of law.” Great Hill Equity P’rs. IV, LP v. SIG
Growth Equity Fund I, LLLP, 80 A.3d 155, 159 (Del. Ch. 2013). Plaintiffs seek to
transform Pacira’s contracted-for right to privileged information obtained by
Daubert over the course of her representation of MyoScience into an exclusive
implied contractual right to prohibit Fortis from hiring Daubert when she was no
longer engaged by MyoScience or Pacira. But Section 1.4 shows that the Merger
Agreement already addresses that issue; the Merger Agreement provides for Pacira’s
right to the privileged information in Daubert’s possession. Plaintiffs’ effort to
expand the terms “rights” and “privileges” in Section 1.4—a provision to which the
Individual Defendants are not parties—to create an implied covenant claim against
the Individual Defendants for retaining a former outside counsel to MyoScience is
untenable. This court may not imply a valuable term that Plaintiffs failed to secure
for themselves.173 There is no gap in the contract to be filled.174
For the foregoing reasons, the motion to dismiss Count III for failure to state
a claim against the Individual Defendants is granted in its entirety.
173
See Lou R. Kling & Eileen T. Nugent, Negotiated Acquisitions of Companies,
Subsidiaries and Divisions § 18.07[4], at 18-44 (2021 ed.) (“Restrictive covenants such
as non-competition and non-solicitation agreements are often valued elements of a
corporate transaction.”).
174
Plaintiffs do not allege that Daubert violated, or that Still sought to induce Daubert to
violate, her duty to safeguard Pacira CryoTech’s privileged information.
51
D. The Individual Defendants’ Motion to Dismiss Claims for Breach
of Contract, Breach of Fiduciary Duty, and Aiding and Abetting
The Individual Defendants have moved to dismiss Counts IV, V, VI, and VII
for lack of personal jurisdiction over each of the Individual Defendants. 175 None of
the Individual Defendants is a Delaware resident, and the Complaint alleges no facts
indicating they have had any contacts with Delaware.
1. Motion to Dismiss for Lack of Personal Jurisdiction
“On a motion to dismiss under Rule 12(b)(2), the plaintiff has the burden to
show a basis for the court’s jurisdiction over the nonresident defendant.” EBG
Hldgs. LLC v. Vredezicht’s Gravenhage 109 B.V., 2008 WL 4057745, at *4 (Del.
Ch. Sept. 2, 2008). “When evaluating whether plaintiffs have met their burden of
showing a basis for jurisdiction over a nonresident defendant, Delaware courts
invoke a two-prong test.” Eagle Force Hldgs., LLC v. Campbell, 187 A.3d 1209,
1228 (Del. 2018) (internal quotations omitted). “In the first step, the court must
determine whether the plaintiff has identified a legally cognizable basis for asserting
jurisdiction over the defendant. Typically this involves identifying and meeting the
requirements of a statute, such as Delaware’s long-arm statute. Terramar Retail
175
In Section II of their Opening Brief, the Individual Defendants argued that they had not
been served in compliance with 10 Del. C. § 3104. Indiv. Defs.’ Opening Br. 27–30. On
December 7, 2020, the Individual Defendants stipulated and agreed to accept service of the
Complaint and withdrew all arguments in Section II. Dkt. 28. The stipulation and
proposed order related to service of process was granted on the same day. Dkt. 29.
52
Ctrs., LLC v. Marion #2-Seaport Tr. U/A/D/ June 21, 2002, 2017 WL 3575712, at
*8 (Del. Ch. Aug. 18, 2017), aff’d, 184 A.3d 1290 (Del. 2018). 176 Next, the Court
must engage in a due process inquiry to determine whether the “nonresident
defendant has sufficient minimum contacts with Delaware” so as to “reasonably
anticipate being required to defend itself in Delaware’s courts.” Eagle Force Hldgs.,
187 A.3d at 1228 (cleaned up). Yet “[w]here a party commits to the jurisdiction of
a particular court or forum by contract, such as through a forum selection clause, a
‘minimum contacts’ analysis is not required as it should clearly anticipate being
required to litigate in that forum.” Id. (citations omitted). In evaluating a motion to
dismiss for lack of personal jurisdiction, the “court may consider the pleadings,
affidavits, and any discovery of record.” EBG Hldgs., 2008 WL 4057745, at *4. If
“no evidentiary hearing has been held and discovery has not been taken, plaintiffs
need only make a prima facie showing of personal jurisdiction, and the record will
be construed in the light most favorable to the plaintiff.” Id.
176
If the Long Arm Statute does not permit the exercise of general jurisdiction over the
defendant, then the Court must examine whether there is a “sufficient nexus” between the
defendant’s “forum-directed conduct and [each] claim being asserted.” Terramar Retail
Ctrs., LLC, 2017 WL 3575712, at *8.
53
2. The Scope of the Individual Defendants’ Consent to
Jurisdiction Under the Merger Agreement
Plaintiffs argue that this court has jurisdiction over the breach of fiduciary
duty claims against Kumar and Preciado because they agreed, by signing the Option
Holder Letter, to the exclusive forum provision in Section 9.7 of the Merger
Agreement. 177 The Individual Defendants respond that they did not agree to be
bound by Section 9.7 of the Merger Agreement, and even if they did, Counts IV-VII
do not “arise out of the Merger Agreement or the matters contemplated [t]herein.”178
Section 9.7 of the Merger Agreement provides, in pertinent part:
Each Party irrevocably consents to the exclusive jurisdiction of . . . any
state . . . court located in the state of Delaware in connection with any
matter based upon or arising out of, or with respect to, this Agreement
or the matters contemplated herein . . . .
The exclusive forum provision in Section 9.7 of the Merger Agreement
does not, by its terms, apply to the Individual Defendants. That provision
expressly applies to each “Party” to the Merger Agreement. None of the
Individual Defendants is a Party to the Merger Agreement.
The Option Holder Letter binds the Individual Defendants to certain
provisions of the Merger Agreement, but Section 9.7 is not one of them. Paragraph
“a” of the Option Holder Letter provides that the Option Holder:
177
Pls.’ Ans. Br. 43–44.
178
Indiv. Defs.’ Opening Br. 22–23 (internal quotations omitted).
54
agrees to be bound by the terms and conditions of the Merger
Agreement . . . applicable to “Escrow Participants” . . . in their
capacities as such, as applicable to a holder of securities of the type held
by the undersigned . . . including the following: Section 1.8 (Company
Options, Section 1.11 (Merger Consideration); Section 1.12 (Merger
Consideration Payments); Section 1.13 (Working Capital Adjustment
Escrow; Indemnity Escrow), Section 1.14 (Post-Closing Adjustment to
Merger Consideration), Section 1.15 (Milestone Consideration) . . .
Article VIII (Certain Remedies) (and all defined terms used in any of
the foregoing provisions and Article IX to the extent applicable
thereto).179
***
The undersigned consents to the exclusive jurisdiction of the state and
federal courts sitting in the State of Delaware and consents to personal
jurisdiction of and venue in such courts with respect to any and all
matters or disputes arising out of this [Option Holder Letter]. 180
Paragraph “a” binds the signatories to specific provisions of the Merger
Agreement. Section 9.7 is not among the enumerated provisions. Undeterred,
Plaintiffs claim that the Option Holder Letter incorporates all of Article IX,
including Section 9.7. 181 That argument is based upon a mischaracterization and
partial quotation of the parenthetical in paragraph “a”. The parenthetical
unambiguously includes only the “defined terms” of Article IX.182
179
Option Holder Ltrs. ¶ (a).
180
Id. ¶ (g).
181
Pls.’ Ans. Br. 46.
182
The reference to Article IX in the parenthetical is most naturally read as the indirect
object in the prepositional phrase “defined terms used in.” Thus, the only part of Article
55
In signing the Option Holder Letter, the Individual Defendants agreed to be
bound to certain terms of the Merger Agreement in their capacities as Escrow
Participants, Indemnifying Security Holders, Qualifying Option Holders, and
Securityholders. Section 9.7 of the Merger Agreement makes no reference to any of
these groups. It only mentions each “Party” to the Merger Agreement. The breach
of contract, breach of fiduciary duty, and aiding and abetting claims in Counts IV
through VII are not asserted against the Individual Defendants in their capacities as
stated in the Option Holder Letter.
Plaintiffs argue that, even if the Individual Defendants have not consented
directly to the jurisdictional provision in the Merger Agreement, they are still bound
by proxy. Plaintiffs maintain that the Individual Defendants are subject to personal
jurisdiction because the (i) the Individual Defendants consented to have Fortis, as
the Securityholders’ Representative, serve as their agent and (ii) Fortis, as a Party to
the Merger Agreement, consented to be bound by Section 9.7.183
This argument is unpersuasive for several reasons. First, Plaintiffs’ legal
support for this argument is inapposite. In Aveta v. Cavallieri, 23 A.3d 157 (Del.
Ch. 2010), the court held that a signatory to a purchase agreement who appoints a
IX that the Option Holder Letter incorporates are the “defined terms used in . . . Article
IX.”
183
Pls.’ Ans. Br. 47.
56
stockholder representative is bound by the decisions of the stockholder
representative as a matter of agency law. See Aveta, 23 A.3d at 163, 168, 170–71.
The decision did not involve a party contesting personal jurisdiction, and unlike in
Aveta, the Individual Defendants are not signatories to the Merger Agreement. In
McWane, Inc. v. Lanier, 2015 WL 399582, at *9 (Del. Ch. Jan. 30, 2015), former
stockholders who had asserted claims in Alabama relating to the merger agreement
were held subject to the Delaware forum clause in the merger agreement under an
estoppel theory. McWane, 2015 WL 399582, at *6–7. Plaintiffs here are not
advancing an estoppel theory for jurisdiction. Neither Aveta nor McWane is
applicable here.
Second, Pacira’s argument ignores the plain terms of the Option Holder Letter
establishing the scope of Fortis’s permissible action.184 Under Section (a) of the
Option Holder Letter, the Individual Defendants agreed to be bound by “any and all
actions and the making of any decisions required or permitted to be taken by the
Securityholders’ Representative under the Merger Agreement.”
184
See, e.g., Concors Supply Co., Inc. v. Gieske Int’l, 1990 WL 28567, at *2 (Del. Super.
Ct. Mar. 5, 1990) (“In general, a principal is only responsible for the acts of his agent which
were done within the course of the agent’s employment and within the scope of his
authority.”); see also Restatement (Second) Agency § 144 (1958) (“A disclosed or partially
disclosed principal is subject to liability upon contracts made by an agent acting within his
authority if made in proper form and with the understanding that the principal is a party.”);
id. § 219(1) (“A master is subject to liability for the torts of his servants committed while
acting in the scope of their employment.”).
57
Read together, the Option Holder Letter and the Merger Agreement give
Fortis a role in the distribution of the merger consideration to the Option Holders
and authorize Fortis to enforce the Option Holders’ right to receive that
consideration. That is consistent with Section (g) of the Option Holder Letter, which
grants this court jurisdiction over any claims “arising out of” the Option Holder
Letter, including the provisions of the Merger Agreement that the Option Holder
Letter incorporates. Plaintiffs point to nothing in the Merger Agreement that
“require[s] or permits” Fortis to bind the Option Holders to the jurisdiction of
Delaware courts for the resolution of disputes beyond what the Individual
Defendants agreed. To accept Plaintiffs’ theory, the court would render the
provision in the Option Holder Letter granting consent to be bound by the
enumerated provisions mere surplusage.185 And it would flip on its head a structure
designed to efficiently enforce the rights of the Option Holders against Pacira. 186
Even if this court were to assume, arguendo, that the Individual Defendants
consented to be bound by Section 9.7, the Plaintiffs have failed to establish that the
fiduciary duty claims are covered by the exclusive forum provision.
185
See e.g., NAMA Hldgs, LLC v. World Mkt. Ctr. Venture, LLC, 948 A.2d 411, 419 (Del.
Ch. 2007) (“Contractual interpretation operates under the assumption that the parties never
include superfluous verbiage in their agreement, and that each word should be given
meaning and effect by the court.”), aff’d, 945 A.2d 594 (Del. 2008).
186
See, e.g., Ballenger v. Applied Digit. Sols., Inc., 2002 WL 749162, at *10 (Del. Ch. Apr.
24, 2002) (“To accomplish such efficiency, the merger agreement empowers plaintiffs . . .
to act as ‘Stockholders’ Representatives’ for all the selling . . . stockholders.”).
58
Plaintiffs assert that, because Section 9.7 expressly covers both claims “based
upon” and matters “contemplated []in” the Merger Agreement, it must be “read
broadly” so as to encompass any claim that “touch[es] on” its rights or the
performance of its contractual obligations under the Merger Agreement. 187 In
support for that proposition, Plaintiffs cite to two cases by this court interpreting
forum selection provisions much broader than Section 9.7. In CA, Inc. v. Ingres
Corp., 2009 WL 4575009 (2009), aff’d, 8 A.3d 1143 (Del. 2010), the forum clause
covered “any claim directly arising out of or related to this Agreement.” Id. at *46.
The court observed that “[t]his is a broad forum selection clause sweeping in all
claims that ‘arise out of’ or ‘relate to’ the Legacy Support Agreement.” Id.
Similarly, in ASDC Hldgs., 2008 WL 4552508, the relevant provision extended to
“any claim or cause of action arising under or relating to this Agreement.” Id. at *5.
The court explained that “[b]road forum selection clauses . . . which expressly cover,
for example, all claims between the contracting parties that ‘arise out of’ or ‘relate
to’ a contract, apply not only to claims dealing directly with the terms of the contract
itself, but also to any issues that touch on contract rights or contract performance.
(internal quotations omitted). Id. These cases are inapposite because the provisions
they interpret, unlike the provision here, cover all claims that “relate to” the contract.
187
Pls.’ Ans. Br. 44–45.
59
“The phrase “relating to” is broader than the phrase ‘arising out of.’” Fla. Chem.
Co. v. Flotek Indus, Inc., 2021 WL 3630298, at *10 (Del. Ch. Aug. 19, 2021). The
Merger Agreement does not extend that far. By contrast, in Ruggiero v. FuturaGene,
plc., 948 A.2d 1124 (Del. Ch. 2008), the court held that a forum selection provision
in a shareholder agreement covering claims made “in connection with any matter
based upon or arising out of this Agreement or the matters contemplated herein” did
not reach contractual claims brought against a selling shareholder in his capacity as
“an officer or director” of the company. Id. at 1130, 1132-33, 1138.
Plaintiffs concede that “the Individual Defendants’ fiduciary obligations did
not technically arise from the Merger Agreement.”188 Other than the MyoScience
Securityholders’ right to receive Milestone Payments, nothing in the Merger
Agreement contemplates any fiduciary or contractual relationship between or among
the Plaintiffs on the one hand and any of the Individual Defendants on the other.
The Complaint does not base the fiduciary duty claims against Kumar and Preciado
upon duties arising under the Merger Agreement. As to Kumar, the claim is based
upon alleged duties “[a]s an agent of Pacira CryoTech pursuant to the Consulting
Agreement . . . with access to confidential information provided by that
agreement.”189 Similarly, as to Preciado, the fiduciary duty claim is based upon
188
Pls.’ Ans. Br. 47.
189
Compl. ¶ 280.
60
alleged duties “[a]s an agent of Pacira CryoTech in her capacity as a key manager at
Pacira CryoTech.”190 Accordingly, the resolution of the dispute about whether
Kumar and Preciado breached their fiduciary duties does not require the
interpretation of the Merger Agreement. See Ashall Homes Ltd. v. ROK Ent. Grp.
Inc., 992 A.2d 1239, 1252 n.66 (2010) (describing the test for whether a claim is
“based on the contract containing the [forum] selection clause” as “whether the
plaintiff’s claims depend on rights and duties that must be analyzed by reference to
the contractual relationship.”); Flotek, 2021 WL 3630298, at *10 (“For a claim to
stem from the contractual relationship, it must be based upon the rights and
obligations created by the underlying agreement.” (internal quotations omitted)).
Plaintiffs argue that their fiduciary duty claims are “based on” the Merger
Agreement because “viable causes of action for breach of fiduciary duty would not
exist absent the Merger Agreement.” 191 This is the same “but for” theory that
Ruggiero rejected, noting that the fiduciary duty claims over decision to approve
stock options were—as here—“only tangentially related to the Merger Agreement”).
948 A.2d at 1130–31, 1138. Section 9.7 cannot serve as the jurisdictional hook for
Counts IV through VII.
190
Id. ¶ 286.
191
Id. at 45.
61
3. Ancillary Personal Jurisdiction Theory
It is well-established that once a nonresident director or officer of a Delaware
corporation or a manager of a Delaware LLC is properly subject to personal
jurisdiction for a claim for breach of fiduciary duty pursuant to 10 Del. C. § 3114 or
6 Del. C. § 18-109(a), the court may subject that defendant to personal jurisdiction
for claims that are “‘sufficiently related’ or ‘[not] distantly related’ to the breach of
fiduciary duty claim.” Neurvana Med., LLC v. Balt USA, LLC, 2020 WL 949917,
at *9 (Del. Ch. Feb. 27, 2020) (quoting Hazout v. Tsang Mun Ting, 134 A.3d 274,
292 n.63 (Del. 2016)). The doctrine has also been extended outside this
paradigmatic context in a small set of cases where (i) the defendant had consented
to the Court’s jurisdiction by signing a contract with a jurisdictional provision; (ii)
the pendent claim was found to be “sufficiently related”192 to the anchor claim; and
(iii) the Court found that the exercise of ancillary jurisdiction would comport with
Fitzgerald v. Chandler, 1999 WL 1022065, at *4 (Del. Ch. Oct. 14, 1999); Cap. Grp.
192
Companies, Inc. v. Armour, 2004 WL 2521295, at *2 (Del. Ch. Oct. 29, 2004).
62
due process.193 Plaintiffs seek to invoke this doctrine here, which has been referred
to as “ancillary personal jurisdiction”194 or “pendent personal jurisdiction.” 195
The doctrine of pendent personal jurisdiction has its roots in the jurisprudence
of pendent subject matter jurisdiction. Olin v. Fisons PLC, 47 F.Supp.2d 151, 155
(D. Mass. 1999). It is described as “a federal case law doctrine.” Nam Chuong
Huynh v. Aker Biomarine Antarctic AS, 2017 WL 2242299, at *13 (Wash. App. May
22, 2017) (declining to apply the doctrine and noting that “even if due process
permits a [state] court to exercise pendant personal jurisdiction . . . the long arm
statute must also permit jurisdiction”); see also United States v. Botefuhr, 309 F.3d
1263, 1272–75 (10th Cir. 2002) (exploring the doctrine and its origin); Laurel
Gardens, LLC v. Mckenna, 948 F.3d 105, 123-24 (3d Cir. 2020) (discussing the
Third Circuit’s recognition of the doctrine in 1973).
193
See Chandler, 1999 WL 1022065, at *2, *4 (noting that the court’s “discretion emanates
from a policy of achieving maximum judicial economy and efficiency of effort where
substantive due process rights of the parties are not affected” and finding that the exercise
of ancillary jurisdiction over pendent claims would comport with “traditional notions of
fair play and substantial justice”); Armour, 2004 WL 2521295, at *2 (considering whether
“the exercise of jurisdiction, in the context presented, comport[s] with due process.”). In
each of these cases, the court held that it had jurisdiction and declined to dismiss the anchor
claims. See Chandler, 1999 WL 1022065, at *3 (“No one can dispute that the Partnership
Agreement’s forum selection clause gives this Court personal jurisdiction over the
defendants as a result of claims that the defendants breached the Partnership Agreement.”);
Armour, 2004 WL 2521295, at *2 (“[T]his court can exercise jurisdiction over Ritter in her
capacity as trustee.”).
194
Ruggerio, 948 A.2d at 1138.
195
N. Am. Cath. Educ. Programming Found., Inc. v. Gheewalla, 2006 WL 2588971, at *7
n.73 (Del. Ch. Sept. 1, 2006), aff’d, 930 A.2d 92 (Del. 2007).
63
The exercise of personal jurisdiction under this doctrine is “entirely
discretionary.” Ruggerio, 948 A.2d at 1139. When deciding whether to exercise its
discretion over the pendent claim, the court considers (i) whether it would have to
consider a “significant number of facts wholly unrelated to those necessary to
determine” the merits of the anchor claim; (ii) whether the claims seek similar or
different relief; (iii) whether the claims are governed by Delaware law; and (iv)
whether Delaware courts have a “strong interest” in adjudicating the issues raised
by the pendent claim. Id. “Of course, if the only jurisdictionally sufficient claim is
dropped or dismissed, particularly if that occurs early in the litigation, the pendent
claim should be dismissed as well.” Gheewalla, 2006 WL 2588971, at *7 n.73
(quoting 4A CHARLES ALAN WRIGHT ET. AL., FEDERAL PRACTICE AND PROCEDURE
§ 1069.7 (2d ed. 1995)); see id., 2006 WL 2588971, at *7 (dismissing claims brought
under ancillary personal jurisdiction theory after finding court lacked personal
jurisdiction over anchor claim); see also Botefuhr, 309 F.3d at 1273 (discussing
pendent personal jurisdiction and noting: “Generally, when a district court dismisses
the [anchor] federal claims, leaving only supplemented state claims, the most
common response . . . has been to dismiss the [ancillary] state claim or claims
without prejudice.”) (cleaned up); Lisowski v. Henry Thayer Co., Inc., 501 F. Supp.
3d 316, 326 (W.D. Pa. 2020) (citing Botefuhr, 309 F.3d at 1273, for the same
proposition); Int’l Union, United Mine Workers of Am. v. CONSOL Energy, Inc.,
64
465 F. Supp. 3d 556, 581 (S.D.W. Va. 2020) (declining to exercise pendent personal
jurisdiction, reasoning that “if the court were to decide to exercise pendent personal
jurisdiction in this case despite the obvious deficiencies in the claim serving as the
source of jurisdiction, this would serve as an incentive to all plaintiffs who may lack
personal jurisdiction to add meritless claims where federal personal jurisdiction is
present to try to use them as a jurisdictional loophole.”).
Plaintiffs have not established a statutory basis for personal jurisdiction over
the Individual Defendants for any of their claims in Counts IV through VII. Nor
have they demonstrated that subjecting these defendants to personal jurisdiction in
Delaware for these claims would satisfy due process. Having granted the motion to
dismiss the anchor claims against the Individual Defendants, I decline to exercise
personal jurisdiction over the remaining counts against the Individual Defendants.
For these reasons, the motion to dismiss Counts IV through VII against the
Individual Defendants is granted for lack of personal jurisdiction.
III. CONCLUSION
For the foregoing reasons, the motions to dismiss by the Individual
Defendants and by Fortis are granted in their entirety.
IT IS SO ORDERED.
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Pacira Biosciences, Inc. v. Fortis Advisory LLC
Combined Opinion