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Sekisui America Corp. v. Hart


October 17, 2012


The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.



Richard Hart and Marie Louise Trudel-Hart bring this motion to dismiss claims for breach of contract and fraud by Sekisui America Corporation ("SAC") and Sekisui Medical Co., Ltd. ("SMD," together "Sekisui") under Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the following reasons, the Harts' motion to dismiss is granted in part and denied in part.


SAC is a Delaware corporation with its principal place of business in New Jersey.*fn1 SMD is a sister company of SAC with its principal place of business in Japan.*fn2 Hart and Trudel-Hart are Connecticut residents.*fn3 Hart founded American Diagnostics, Inc., ("ADI") a company engaged in the discovery, manufacture and marketing of novel medical diagnostic products,*fn4 in 1982.*fn5 The Harts owned 95.94% of ADI.*fn6 Hart served as the President of ADI and oversaw theoperation of the company.*fn7

In 2007, the Harts sought a buyer for ADI.*fn8 In September 2008, ADI's advisory company, Crosstree Capital Partners, contacted SMD to determine SMD's interest in acquiring ADI.*fn9 In October 2008, ADI sent SMD a Confidential Memorandum containing information about ADI's financial situation and products.*fn10 Specifically, the memorandum contained information regarding the development of a new breast cancer diagnostic known as FEMTELLE.*fn11

On December 10, 2008, SMD sent the Harts a Letter of Intent expressing its interest in acquiring ADI, including FEMTELLE, for $25,500,000.*fn12

SMD and the Harts executed the Letter of Intent on December 10, 2008.*fn13 SMD then retained KPMG to conduct due diligence of ADI.*fn14 The due diligence revealed that Hart had fired ADI's Chief Financial Officer as well as two junior accountants in the week before ADI sent SMD the Confidential Memorandum.*fn15

SAC later learned that Hart had ordered ADI's primary contact with the FDA to "stay away" from KPMG during this period.*fn16

On March 5, 2009, SAC executed a Stock Purchase Agreement ("SPA") with the Harts and the other shareholders of ADI to purchase the shares of ADI for $25,500,000.*fn17 Hart remained the CEO of ADI following the transaction.*fn18 On March 15, 2009, ADI submitted a 510(k) premarket notification for FEMTELLE to the FDA.*fn19 The FDA requested additional information regarding studies and device history on May 27, 2009.*fn20 SAC then learned that ADI had submitted a FEMTELLE 510(k) in 2007 based on the same studies and tests that SAC relied on in its 2009 submission.*fn21 The FDA deemed the submission withdrawn on May 19, 2008, because ADI had provided insufficient information.*fn22 Sekisui now alleges that the Harts fraudulently induced them into executing the SPA by failing to notify them of the previous submission and that the Harts breached the warranties and representations in the SPA.*fn23

Jurisdiction is premised on diversity of citizenship.*fn24 Venue in this district is proper because the SPA that defendants allegedly breached provides that all actions arising out of that agreement must be litigated only in a state or federal court located in New York County*fn25 and because the dispute arises out of the transaction of business in this district.*fn26 As this matter is here on diversity of citizenship, the substantive law of New York applies.*fn27


In deciding a motion to dismiss pursuant to Rule 12(b)(6), the court must "accept[ ] all factual allegations in the complaint as true, and draw[ ] all reasonable inferences in the plaintiff's favor."*fn28 The court evaluates the sufficiency of a complaint under the "two-pronged approach" advocated by the Supreme Court in Ashcroft v. Iqbal.*fn29 First, "[a] court 'can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth.'"*fn30 "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice" to withstand a motion to dismiss.*fn31 Second, "[w]hen there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief."*fn32

To survive a Rule 12(b)(6) motion to dismiss, the allegations in the complaint must meet a standard of "plausibility."*fn33 A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."*fn34

Plausibility "is not akin to a probability requirement;" rather, plausibility requires "more than a sheer possibility that a defendant has acted unlawfully."*fn35


A. Breach of Contract

Under New York law, a party asserting a breach of contract must allege: "(1) a contract; (2) performance by the party seeking recovery; (3) breach of the contract by the other party; and (4) damages attributable to the breach."*fn36

B. Fraud

1. Particularity

A claim for fraud under New York law requires a showing of: "(1) a misrepresentation or material omission of fact which was false and known to be false by defendant, (2) made for the purpose of inducing the other party to rely upon it, (3) justifiable reliance of the other party on the misrepresentation or material omission, and (4) injury."*fn37 "Where sophisticated businessmen engaged in major transactions enjoy access to critical information but fail to take advantage of that access, New York courts are particularly disinclined to entertain claims of justifiable reliance."*fn38 "An omission is actionable only in the context of a duty to disclose."*fn39

Federal Rule of Civil Procedure 9(b) provides that: "In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." To satisfy the particularity requirement, "the complaint must: '(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.'"*fn40 Thus, "allegations [of fraud] must be supported by the pleadings of specific facts tending to show that, at the time the defendant made the asserted representations and promises, it never intended to honor its stated intentions."*fn41 "Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally."*fn42

2. Overlapping Claims

"It is black letter law in New York that a claim for common law fraud will not lie if the claim is duplicative of a claim for breach of contract."*fn43 "[A] duplicative fraud claim may not be brought alongside a breach of contract claim unless the plaintiff distinguishes the two by (1) demonstrating a legal duty separate from the duty to perform under the contract, (2) demonstrating a fraudulent misrepresentation collateral or extraneous to the contract, or (3) seeking special damages caused by the misrepresentation and unrecoverable as contract damages."*fn44 "A general request for punitive damages is not enough to differentiate the damages recoverable for fraud from those sought for breach of contract."*fn45

3. Disclaimers of Representation

"Where a party specifically disclaims reliance upon a particular representation in a contract, that party cannot, in a subsequent action for common law fraud, claim it was fraudulently induced to enter into the contract by the very representation it has disclaimed reliance upon."*fn46 However, courts enforce disclaimers only if they track 'the substance of the alleged misrepresentation.'*fn47

C. Leave to Replead

Rule 15(a)(2) of the Federal Rules of Civil Procedure provides that other than amendments as a matter of right, "a party may amend its pleading only with the opposing party's written consent or with the court's leave." Although "[t]he Court should freely give leave when justice so requires," it is "within the sound discretion of the district court to grant or deny leave to amend."*fn48 "When a motion to dismiss is granted, the usual practice is to grant leave to amend the complaint."*fn49 "However, it is well established that leave to amend a complaint need not be granted when amendment would be futile."*fn50


A. Breach of Contract

Sekisui alleges that the Harts breached four promises in the SPA.*fn51

First, Sekisui argues that the Harts breached a promise that ADI complied with relevant federal regulations. Paragraph 4.14(a) provides that: "The Company and its Subsidiaries are, and have since January 1, 2006, been, in compliance in all material respects with all applicable Laws."*fn52 Paragraph 4.14(d) of the SPA also represents that ADI's products comply with federal regulations: "The Products are not misbranded or adulterated within the meaning of the Federal Food, Drug, and Cosmetic Act, 21 U.S.C. § 321, et seq."*fn53

Second, Sekisui alleges that the Harts breached a representation that ADI's facilities were sufficient to conduct its business activities. Paragraph 4.12 provides that:

The buildings, plants, leasehold improvements, structures, facilities, equipment and other property and assets which are owned, leased or used by the Company or any of its Subsidiaries are (a) sufficient to conduct, and the Non-core Assets are not necessary to conduct, the Business as currently conducted and currently proposed to be conducted, (b) conform in all material respects to all Laws and Permits relating to their construction, use and operation and (c) except as set forth on Schedule 4.12(c), are in good operating condition, ordinary wear and tear excluded.*fn54

Paragraph 4.14(c) provides that:

[t]he buildings, plants, leasehold improvements, structures, facilities, equipment and other property and assets which are owned, leased, or used by the company are (a) sufficient to conduct, and the Non-core assets are not necessary to conduct, the Business as currently conducted and currently proposed to be conducted, (B) conform in all material respects to all Laws and Permits relating to their construction, use and operation and (c) except as set forth on Schedule 4.12(c), are in good operating condition, ordinary wear and tear excluded.*fn55

Third, Sekisui alleges that the Harts breached paragraph 4.11 of the SPA, which contains representations and warranties regarding ADI's products:

There are no express warranties outstanding with respect to any products currently or formerly manufactured, sold, distributed, provided, shipped or licensed, or any services rendered (collectively, "Products"), by the Company or any of its Subsidiaries, beyond that set forth in the standard conditions of sale or service, copies of which are included in Schedule 4.11. Each Product has been in conformity in all material aspects with all applicable contractual commitments and warranties. There are no material design, manufacturing or other defects, latent or otherwise, with respect to any Products . . .*fn56

Fourth, Sekisui alleges that the Harts breached a promise that ADI maintained good commercial working relationships with its key customers. Paragraph 4.26 of the SPA represents that: (a) [T]he relationships of each of the Company and its Subsidiaries with each Key Customer are good commercial working relationships; (b) no Key Customer has cancelled or otherwise terminated or, to the Knowledge of the Company, threatened to cancel or otherwise terminate, its relationship with the Company or any of its subsidiaries, in each case, by written or, to the Knowledge of the Company, other notification; (c) neither the Company, other notice from any Key Customer to the effect that any such Key Customer intends to terminate, renegotiate, materially reduce or otherwise materially and adversely modify its relationship with the Company or any of its Subsidiaries; and (d) neither the Company nor any of its Subsidiaries have been involved in any material dispute with a Key Customer.*fn57

Sekisui states plausible claims for breach of all four promises. Sekisui alleges that specific ADI products and facilities, including its In-Vitro Diagnostic products and its Clean Room, did not comply with federal regulations.*fn58 Sekisui also alleges that ADI's facilities were not sufficient to conduct its business because, inter alia, its storage areas were insufficient, its Clean Room did not have an adequate air supply, and manufacturing areas were exposed to air ducts.*fn59

Sekisui alleges that the Harts breached paragraph 4.11 because ADI's Product 822 was defective as a result of the fact that ADI manufactured it using expired raw materials.*fn60 ADI recalled Product 822 after SAC acquired the company because the product provided false readings and risked misdiagnosis.*fn61 Finally, Sekisui alleges that the Harts breached paragraph 4.26 because ADI had pre-existing problems with key customers that caused a decline in business after SAC acquired the company.*fn62

In response, the Harts argue that Sekisui fails to state a claim because the record does not show that the alleged problems existed at the time of ADI's acquisition. Therefore, the Harts argue, the problems more likely arose after SAC purchased ADI.*fn63 The Harts support this argument by noting that SAC did not discover the alleged breaches until 2010.*fn64

Accepting the Harts' argument would require the court to move beyond a plausibility analysis and engage in probabilistic determinations. SAC's discovery that ADI's products and facilities did not comply with federal regulations in 2010 gives rise to an inference that ADI's products and facilities did not comply with federal regulations in 2009. That ADI's In-Vitro Diagnostic products were not properly validated in 2010 gives rise to an inference that they lacked appropriate validation prior to that time. To infer that SAC invalidated the products in 2010 would require the Court to question SAC's well-pleaded factual allegations rather than accept them as true. Moreover, that Hart continued running the day-to-day operations of ADI after SAC's acquisition lends credence to the claim that the alleged breaches predate SAC's ownership.*fn65

The Harts also argue that the Exclusivity Agreement and the AQSOL Report attached to their motion to dismiss as Exhibits B and D are integral to Sekisui's Complaint and demonstrate that Sekisui has failed to state a claim for breach.*fn66 "In considering a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6), a district court may consider the facts alleged in the complaint, documents attached to the complaint as exhibits, and documents incorporated by reference in the complaint."*fn67 While the court may consider a document that is not incorporated by reference "where the complaint 'relies heavily upon its terms and effect,' thereby rendering the document 'integral' to the complaint,"*fn68 "it must also be clear that there exist no material disputed issues of fact regarding the relevance of the document."*fn69 I decline to consider these at this stage in the proceedings because Sekisui does not explicitly reference them in the Complaint and disputes their relevance.*fn70

B. Fraud

Sekisui alleges that the Harts fraudulently misrepresented and omitted material facts in order to induce Sekisui to purchase ADI.*fn71 Specifically, Sekisui argues that the Harts made false representations regarding the marketability of FEMTELLE in the Confidential Memorandum and failed to disclose numerous defects at the ADI facility.*fn72 Sekisui also alleges that the Harts' failure to disclose the failed 2007 FEMTELLE premarket notification constituted a fraudulent omission.*fn73 SAC argues that the Harts concealed the alleged problems by firing key employees and telling ADI's FDA contact to "stay away" during due diligence.*fn74

1. The Disclaimers in the SPA Bar Sekisui's Fraudulent Misrepresentation Claim The Harts argue that the SPA's disclaimer of representations bars Sekisui's fraud claim.*fn75 Paragraph 4.29 provides:

Except as otherwise expressly set forth in this Article IV (including the Schedules attached hereto), neither the Principal Shareholders nor the Company makes any representation or warranty, express or implied, at law or in equity, in respect of the Company or any of its assets, liabilities or operations. The representations and warranties in this Article IV supersede and replace all prior statements, representations, projections, forecasts, warranties and other understandings (whether written or oral) that may have been previously given or made by the Principal Shareholders or the Company that may have related in any way to the subject matter of this Agreement including the projections set forth in the Confidential Memorandum.*fn76

This language expressly disclaims the projections set forth in the Confidential Memorandum, which form the basis of Sekisui's fraudulent misrepresentation claim. Aside from the projections contained in the Confidential Memorandum, Sekisui does not allege any affirmative misrepresentations upon which it relied as an inducement to purchase ADI. The disclaimer in paragraph 4.29 renders Sekisui's reliance upon the Confidential Memorandum unreasonable and bars Sekisui's fraudulent misrepresentation claim.

2. Sekisui's Fraudulent Omission Claim Fails Rule 9(b)'s Heightened Pleading Requirement Sekisui also alleges that the Harts' failure to disclose the failed 2007 FEMTELLE 510(k) premarket notification submission constitutes a fraudulent omission.*fn77 This claim fails as well. First, Sekisui has not pled the existence of a legally cognizable duty to disclose.*fn78 Second, Sekisui's claim centers on the Harts' alleged statement to ADI's FDA contact to "stay away" during due diligence. While Sekisui pleads both the identity of the speaker and to whom the statement was made, Sekisui does not identify where and when the statement was made. This statement - even if true - constitutes neither a false statement nor an omission.*fn79 Nor does the Complaint explain why the firing of key employees prior to due diligence constituted a fraudulent representation or omission.*fn80 Third, Sekisui, a sophisticated commercial entity, conducted a round of due diligence before entering into the SPA, and had the right to conduct a second round of due diligence with complete access to ADI's records and employees. New York courts are reluctant to find fraud in such cases.*fn81

3. Sekisui's Fraud Claim Duplicates Its Breach of Contract Claim

Sekisui also fails to state a claim for fraud because the SPA addresses both FEMTELLE premarket approval and SAC's access to ADI's records. Paragraph 2.6(a) provides for "Earn-Out" payments from SAC to the Harts for 2010-2013 based on FEMTELLE revenue.*fn82 Paragraph 2.6(b) provides for a $2,000,000 payment from SAC to the Harts "[i]n the event that the FDA grants FEMTELLE Clearance on or before November 30, 2009."*fn83 The SPA limits SAC's losses in the event that FEMTELLE does not obtain FDA approval because in that event the Harts do not receive compensation based on FEMTELLE's revenues.*fn84

Furthermore, the SPA places the burden of marketing FEMTELLE on SAC. Under paragraph 2.6(d)(i)(A), SAC agrees to "undertake commercially reasonable efforts to market and sell, or to cause the marketing and sale of, the FEMTELLE Product, including providing commercially reasonable personnel, technical and financial resources therefor and submitting to the FDA . . . submissions and filings."*fn85 Having expressly assumed the risk of a marketing failure in the SPA, Sekisui cannot now argue that the Harts' failure to adequately prepare the product for FDA submission prior to the time of contracting constitutes fraud. The SPA allocates that risk to Sekisui.

Moreover, the SPA addresses SAC's access to personnel and documents during due diligence. Paragraph 6.14 provides:

The Company shall . . . afford the officers, employees and agents of the Purchaser and its Affiliates complete access upon reasonable prior notice at all reasonable times, from the date hereof to the Closing Date, to the Company's and its Subsidiaries' officers, employees, agents, properties, books and records (which shall include access for conducting environmental due diligence, examinations and investigations of the Company and Company Leased Property), and shall furnish the Purchaser with all financial, operating and other data and information as the Purchaser may reasonably request.*fn86

Sekisui's allegations regarding the unavailability of key employees during due diligence might support a claim for the breach of paragraph 6.14 rather than for fraud. Even assuming the veracity of the facts in the Complaint, SAC has not alleged that it requested access to ADI's FDA contact or to the records regarding prior FEMTELLE premarket FDA submissions.*fn87 Nor has SAC alleged that the Harts misrepresented the availability of ADI's employees or facts pertaining to FEMTELLE's previous failure to receive FDA approval.

Additionally, paragraph 4.28 of the SPA addresses omissions of material facts. It provides:

No representation or warranty by the Shareholders or the Company in this Agreement, and no statement made by the Shareholders or the Company in any schedule attached hereto or certificate or other document to be furnished pursuant hereto or in connection with the execution or performance of this Agreement, contains or will at the Closing contain any untrue statement of a material fact or omits or will omit to state a material fact required to be stated herein or therein or necessary to make any of them, in light of the circumstances in which it was made, not misleading.*fn88

If, as Sekisui alleges, the Harts failed to disclose the prior FEMTELLE 510(k) submission, such failure constitutes a breach of paragraph 4.28 rather than fraud. Sekisui's fraud claim therefore concerns the performance of the contract instead of fraudulent inducement.

Finally, Sekisui fails to plead any special damages that cannot be recovered as contract damages. Sekisui's general request for punitive damages does not differentiate the damages recoverable on a fraud claim from those sought for breach of contract. Sekisui's request for rescission also fails to distinguish between the claims for fraud and breach of contract. While Sekisui seeks rescission as a remedy only for its fraud claim,*fn89 courts may also grant rescission as a remedy where a party commits a material and willful breach of contract.*fn90

C. Leave to Replead

Leave to replead is typically granted unless amendment would be futile. Here, the disclaimer of representations and warranties in the SPA bars Sekisui's misrepresentation claims based on either the Confidential Memorandum or other written or oral statements. Paragraphs 4.28 and 6.14 of the SPA render fraudulent omission claims related to the prior FEMTELLE 510(k) submission duplicative of Sekisui's breach of contract claim. Paragraphs 4.12, 4.14(a), and 4.14(d) similarly render fraudulent omission claims stemming from the Harts' failure to disclose latent defects in ADI's facilities duplicative of Sekisui's breach of contract claim. Because Sekisui cannot state a fraud claim collateral to its breach of contract claim, Sekisui's fraud claim is dismissed with prejudice.


For the foregoing reasons, defendants' motion to dismiss is granted in part and denied in part. TheClerk of the Court is directed to close the motion to dismiss (Docket Entry # 5). A conference is scheduled for November 1 at 5:00 p.m.


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