the Matsushita license required no other payments or commitments and allegedly was a one-sided agreement permitting each licensee to use Projectavision's technology if they wished. The plaintiffs describe these agreements as "adverse," (Pls'. Mem. of L. in Opp'n at 20), and argue that the Individual Defendants' concealment of these features of the license agreements is circumstantial evidence of conscious misbehavior.
The fact that the terms of the license agreements were confidential does not in and of itself imply anything sinister or adverse about them--and the defendants disclosed the fact that the terms of the agreements were confidential. Moreover, knowledge that the agreements imposed no immediate obligations upon the licensees to pay royalties or to put Projectavision's technology into their products is not inconsistent with a belief that the licenses would eventually become profitable. The plaintiffs do not allege that the defendants made any representations that the licenses required minimum royalty payments or imposed commitments on the licensees. In short, the plaintiffs have not identified anything in the license agreements that is inconsistent with the defendants' statements in a way that represents conscious misbehavior of a kind that would support a strong inference of fraud.
The nearest the plaintiffs come to pleading scienter under the conscious misbehavior approach is the allegation that the defendants knew that the payment of $ 105,000 in royalties from Matsushita was a one-time fee. The plaintiffs also allege that Matsushita removed certain features from its product line to avoid further infringements of Projectavision's patents. Therefore, the plaintiffs argue, the defendants knew Matsushita was unlikely to ever resume using the Projectavision technology and they knew their public statements about the Matsushita license representing a shift from product development to marketing were misleading. The defendants argue that an equally plausible inference to draw would be that Matsushita was more likely to employ Projectavision's technology having done so already, justifying a belief that the Matsushita license would become profitable. In light of the fact that the plaintiffs have not alleged any specific misrepresentations by the defendants that the Matsushita license would generate minimum royalty payments, the fact that the $ 105,000 royalty payment was accurately disclosed in Projectavision's financial statements, the fact that Maslow publicly linked the Matsushita license to its alleged prior infringement of a Projectavision patent, and the fact that Projectavision's public SEC filings included frequent caveats about the uncertainty of the future profitability of the license agreements and the developmental stage of the company, it cannot be said that the defendants' knowledge of the origins of the Matsushita license is circumstantial evidence of conscious misbehavior or recklessness from which a strong inference of fraud may be drawn.
Accordingly, the plaintiffs have failed to plead scienter under either of the two approaches permitted for securities fraud claims. Therefore, the defendants' motion to dismiss for failure to plead fraud with particularity pursuant to Fed. R. Civ. P. 9(b). is granted.
The plaintiffs' claims for common law fraud and negligent misrepresentation under New York state law are also dismissed. Because all of the claims arising under federal law are dismissed, the Court declines supplemental jurisdiction over the state law claims pursuant to 28 U.S.C. § 1367(c)(3). See United Mine Workers v. Gibbs, 383 U.S. 715, 726, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966) ("Certainly, if the federal claims are dismissed before trial, . . . the state claims should be dismissed as well."); Block v. First Blood Assoc., 988 F.2d 344, 351 (2d Cir. 1993) (no abuse of discretion to refuse supplemental jurisdiction over state law claims when federal claims were dismissed before trial).
The plaintiffs' seek leave to replead to cure any pleading deficiencies in the First Amended Complaint. It is appropriate to grant the plaintiffs' request because a dismissal based on failure to plead fraud with particularity under Fed. R. Civ. P. 9(b) is ordinarily without prejudice to plaintiff's filing an amended complaint to cure the deficient pleading. See Acito, 47 F.3d at 54-55 ("Leave to amend should be freely granted, especially where dismissal of the complaint [is] based on Rule 9(b)."); Luce v. Edelstein, 802 F.2d 49, 56-57 (2d Cir. 1986) ("Complaints dismissed under Rule 9(b) are 'almost always' dismissed with leave to amend." (citation omitted)).
In this case, both grounds for dismissal of the First Amended Complaint implicate Rule 9(b). With respect to the statute of limitations, the plaintiffs allege fraudulent concealment by the defendants, albeit in a conclusory manner and without complying with Rule 9(b). The other ground for dismissal is Rule 9(b) applied directly to the plaintiffs' § 10(b) claim. With respect to that aspect of the motion, the plaintiffs expressly request leave to replead.
Because both grounds for dismissal in this case implicate Rule 9(b), dismissal of the First Amended Complaint is without prejudice to the plaintiffs' filing an amended complaint curing the pleading deficiencies.
For all of the foregoing reasons, the defendants' motions to dismiss the Amended Complaint are granted and the First Amended Complaint is dismissed without prejudice to the plaintiffs' filing a Second Amended Complaint in accordance with the foregoing within thirty (30) days of the date of this Opinion.
Dated: New York, New York
July 25, 1996
John G. Koeltl
United States District Judge