United States District Court, D. Delaware
GREGORY M. SLEET, District Judge.
On October 5, 2012, plaintiffs OpenGate Capital Group LLC and its subsidiaries ("OpenGate") contracted with defendant Thermo Fisher Scientific Inc. ("Thermo") to purchase a Jab workstation business (the "Business") owned by Thermo's three subsidiaries ("Hamilton Entities"). (D.I. 14 at 19; D.I. 19, Ex. 1 at 17.) On May 10, 2013, six and a half months after the sale, OpenGate filed a suit against Thermo in the United States District Court for the Central District of California.
On July 5, 2013, Thermo moved to dismiss the first amended complaint for failure to state the claim under Federal Rules of Civil Procedure 8(a), 9(b), and 12(b)(6) ("FED. R. CIV. P."), as well as 15 U.S.C. § 78u-4. (D. I. 17.) In the alternative, Thermo moved to dismiss or transfer the case to the United States District Court for the District of Delaware. (D.I. 18.) On August 23, 2013, the California court granted Thermo's motion to transfer and stayed its motion to dismiss. (D.I. 30 at 5.)
For the reasons set forth below, the court will deny Thermo's motion to dismiss Claims Ill. IV, VI, and VII, and partially deny Thermo's motion to dismiss Claim I of OpenGate's first amended complaint.
A. The Parties
OpenGate Capital Group LLC is a Delaware limited liability company with its principal place of business in California. (D.I. 14 at 5.) Of its five subsidiaries named as plaintiffs in this action, one is organized under California law, while the other four are Delaware LLCs. ( Id. at 5-6.)
Thermo is a publicly-traded Delaware corporation with its principal place of business in Massachusetts. ( Id. at 6.) Thermo's annual revenues allegedly exceed $12 billion. ( Id. at 2.) Other defendants named are Does 1 through 50. ( Id. at 1.)
At the heart of this matter is the sale of Thermo's lab workstation Business to OpenGate. Thermo controlled the Business through Hamilton Entities, which are organized under Delaware law. (D.I. 19, Ex. 1 at § 1(i).) The Business manufactured laboratory furniture at two American facilities and one facility in Reynosa, Mexico (the "Reynosa facility"). (D.I. 14 at 2.) The Reynosa facility employed a workforce of approximately 1, 000 and generated about 40-50% of the Business' revenue. ( Id. ) The Reynosa facility is located in an area "plagued by drug cartel violence." (D.I. 17 at 1.)
The sale of the Business to OpenGate proceeded in three stages. On June 28, 2012, Thermo announced its intent to sell the Business. (D.I. 14 at 2.) On July 2, 2012, OpenGate expressed interest in acquiring the Business. ( Id. at 8.) The parties signed a confidentiality agreement ("the Confidentiality Agreement") and began negotiations. ( Id. at 12, 14.)
On October 5, 2012, the parties signed a contract for the sale of the Business to Open Gate ("the Contract") in exchange for $3 million in cash, 10% of OpenGate's fully diluted equity at the time of the closing, and a $10 million promissory note. ( Id. at 20; D.I. 19, Ex. 1 at 9-10.)
B. Pertinent Contract Terms
The Contract contained a forum selection/choice of law clause, a merger clause, and representations and warranties of both parties.
Pursuant to the forum selection/choice of law clause,
[the Contract] shall be governed by and construed in accordance with the internal laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of laws of any jurisdiction other than those of the State of Delaware.
(D.I. 19, Ex. 1 at § 10.9.)
In the merger clause, the parties agreed the "[Contract] (including the documents referred to herein) and the Confidentiality Agreement constitute the entire agreement between [the parties]. This agreement supersedes any prior agreements and representations by or between [the parties], whether written or oral, with respect to the subject matter hereof (other than the Confidentiality Agreement.)" ( Id. at § 10.4.) The Confidentiality Agreement, incorporated into the Contract by reference, disclaimed accuracy and completeness of any express or implied representation or warranty Thermo and Hamilton Entities may have made to OpenGate during the negotiations and conduct of due diligence. ( Id. at § 10.4.)
The Contract included twenty-five representations and warranties by Thermo. ( Id. at §§ 2.1-2.25.) Among other things, Thermo represented that "since the Balance Sheet Date, there had not been any adverse changes in the financial conditions or results of operations of the Business, except for any adverse changes that would not reasonably be expected to result in a Business Material Adverse Effect." ( Id. at § 2.7.) The Contract defined a "Business Material Adverse Effect" as "any change, effect, or circumstance that... is materially adverse to the business, financial condition or results of operations of the business taken as a whole...." ( Id. at § 2.1.)
Thermo also represented "all of the [Business'] properties and buildings, fixtures and improvements thereon... are in good operating condition... and all mechanical and other systems located thereon are in good operating condition... and no condition exists requiring material repairs, alterations or corrections...." ( Id. at § 2.11.) All buildings, fixtures, and improvements were "suitable, sufficient and appropriate in all material respects for their current and contemplated uses." ( Id. ) The title to the Business properties was purportedly in order, and the Business did not have undisclosed liabilities. ( Id. at §§ 2.10, 2.11.)
In its representations and warranties, OpenGate agreed not to rely on Thermo's forward-looking statements, business projections ( id. at § 3.10), and representations and warranties not incorporated into the Contract ( id. at § 3.11).
C. OpenGate's Contentions
OpenGate alleges Thermo decided to sell the Business in 2012. The primary reason behind Thermo's decision was the Gulf drug cartel activities at and around the Reynosa facility. The drug cartel activities were becoming increasingly disruptive to the point that they threatened the physical safety of the employees and jeopardized the Business. (D.I. 14 at 32.) OpenGate insists the cartel activities also threatened the title to the Reynosa facility and describes them as "encroachments, " illegal easements, or an illegal right-of-way. ( Id. at 12, 17, 30.)
The cartel encroachments purportedly started at the latest on October 9, 2011. On that day, members of the Gulf drug cartel brandished weapons to gain access to the Reynosa facility's parking lot and left a vehicle there for approximately nine hours. ( Id. at 21.) In the following months, the cartel members regularly left vehicles and tractor-trailers with unknown cargo in the parking lot overnight. ( Id. at 22.) As of November 11, 2011, at least ten executives of Thermo and Hamilton Entities knew about the increasing drug cartel activities at the Reynosa facility, either through communications with Roberto Enriquez ("Enriquez") or from another source. ( Id. at 2.)
In early 2012, Thermo hired a security company, PROSOL, to stop the cartel from entering the Reynosa facility parking lot. ( Id. at 22, 26.) PROSOL suggested shielding the existing guard booths, modifying windows and doors, and installing remote guard booths, perimeter fencing, and parking lot access ramps. ( Id. ) The estimated cost for these security measures amounted to $218, 425. ( Id. at 26.) OpenGate argues that Thermo's plans to upgrade the security system at the Reynosa facility involved "capital expenditures, " which should have been disclosed to OpenGate. ( Id. at 26, 32.)
On June 28, 2012, Thermo announced its decision to sell the Business in a Form 8-K filed with the Securities and Exchange Commission ("SEC"). ( Id. at 7.) Thermo allegedly concealed the cartel activity from potential buyers. ( Id. at 2.) OpenGate claims it had no independent knowledge of the cartel activities and relied on Thermo's reports and representations in its decision to purchase the Business. ( Id. at 9-11.)
Thermo purportedly insisted on a rushed sale with minimal due diligence and orchestrated the due diligence process to prevent discovery of problems with the cartel activities. ( Id. at 3, 13.) Thermo also furnished inconsistent reports of its past financial performance, overly optimistic financial projections, and plans to consolidate production at Reynosa. ( Id. at 11-12.)
Disclosures about the Reynosa facility ranged from the facility's geographic location to the level of employee satisfaction. ( Id. at 3, 12.) Although Thermo advised of certain problems, such as the bankruptcy of a key supplier, its numerous projections, disclosures, and representations did not indicate the cartel presence or reflect expenditures on necessary improvements of the security system. ( Id. )
In addition, OpenGate contends that Thermo restricted OpenGate's access to the Reynosa facility. According to OpenGate, "[a]t the same time it was drafting and negotiating... [the Contract with OpenGate, Thermo] was giving direct orders to employees not to disclose information related to the situation at the plants. On information and belief... Webb... Vice President of Manufacturing Operations, Sourcing [a]nd Logistics, told numerous employees not to answer questions if asked about the security situation and encroachments at the facilities." ( Id. at 18.)
Some of the reports and disclosures OpenGate relied on in its decision to purchase the Business came from Thermo's leadership team. ( Id. at 9.) The team comprised Hamilton Entities' executives with expertise in specific areas of the Business. ( Id. ) Certain representations made by the leadership team later became part of the Contract. ( Id. at 31.) Other representations came from unidentified Thermo's representatives. For example, when OpenGate inquired "about criminal activity on adjacent land, Thermo... responded... it was not a worry." ( Id. at 12.)
Drug cartel encroachments continued after the parties began negotiations for the sale of the Business. On September 23, 2012, in the midst of due diligence and more than two weeks before the closing, a Gulf cartel vehicle was chased by Mexican soldiers, or another cartel, and entered the Reynosa facility by the employees' parking lot. ( Id. at 18.) Members of the Gulf cartel then entered the facility and remained there for about an hour. ( Id. ) Enriquez later reported this incident to Wood and John Mitchell, Thermo's Director of Corporate Security ("Mitchell"). Enriquez also inquired whether Thermo would disclose the incident to OpenGate. ( Id. at 22-23.) In response, Wood allegedly stated that due diligence was completed and it was not "the time to raise the issue." ( Id. at 19.) In the same e-mail, Mitchell acknowledged "security measures... must be taken." ( Id. )
Following the sale, Thermo secreted the evidence of its misconduct. ( Id. at 4.) Approximately three weeks after the closing, a Thermo's representative, Darla Phillips ("Phillips"), "extracted an unknown number of original files from the Hamilton Entities' records... [in] a direct violation of paragraph 9.1 (a) of the [Contract], which provides Thermo... only with the right to copy documents, with prior notice." ( Id. at 27.) Thermo also removed the hard drive from Davis' computer and did not return either the hard drive or the files removed by Phillips. ( Id. at 21, 27.)
On October 23, 2012, within hours of assuming possession and ownership of the Reynosa facility, OpenGate's representatives first learned about the cartel from a Reynosa facility employee who asked them to address the problem with the cartel. ( Id. at 20.) In the following months, the presence of the cartel at the Reynosa facility remained "widespread and pervasive" to the point members of the cartel monitored the facility "24 hours a day, 7 days a week, even taking comfort in the air conditioned security booth...." ( Id. at 23.)
Following the sale, OpenGate also learned Thermo had failed to pay certain Mexican taxes. ( Id. at 28.) The non-payment was contrary to the Contract terms and allegedly resulted in $2.6 million penalties. ( Id. )
On May 10, 2013, six and a half months after purchasing the Business, OpenGate filed a complaint against Thermo in the United States District Court for the Central District of California seeking special damages, punitive damages, and costs. (D.I. 1 at 26-27.) On June 21, 2013, OpenGate filed the first amended complaint alleging (1) violation of Section 10(b) of the 1934 Securities Exchange Act (15 U.S.C. § 78j(b)) ("SEA") and Rule 10b-5 (17 C.F.R. § 240.10b-5); (2) fraudulent misrepresentation; (3) concealment; (4) negligent misrepresentation; (5) violation of Section 25400, et seq. of the California Corporations Code (the "CAL. CORPS. ...