Amato et al v. Mesa Laboratories Inc
Filing
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ORDER granting in part and denying in part 16 Motion To Dismiss the Complaint; granting in part and denying in part 29 Recommendation of United States Magistrate Judge. By Judge Robert E. Blackburn on 9/14/2015.(mlace, )
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge Robert E. Blackburn
Civil Action No. 14–cv–03228–REB–KMT
ANTHONY AMATO, an individual, and
AMEGA SCIENTIFIC CORPORATION, a New Jersey corporation,
Plaintiffs,
v.
MESA LABORATORIES, INC., a Colorado corporation,
Defendant.
ORDER CONCERNING RECOMMENDATION OF
UNITED STATES MAGISTRATE JUDGE
Blackburn, J.
The matters before me are (1) the Motion To Dismiss the Complaint [#16]1
filed by the defendant on January 20, 2015; and the corresponding Recommendation
of United States Magistrate Judge [#29] filed August 14, 2015. The plaintiffs filed
objections [#30] to the recommendation and the defendant filed a response to the
objections [#33].
As required by 28 U.S.C. § 636(b), I have reviewed de novo all portions of the
recommendation to which objections have been filed, and have considered carefully the
recommendation, objections, and applicable case law. I approve and adopt the
recommendation in part, respectfully reject the recommendation in part, sustain the
objections of the plaintiff in part, and overrule the objections in part.
1
“[#16]” is an example of the convention I use to identify the docket number assigned to a
specific paper by the court’s case management and electronic case filing system (CM/ECF). I use this
convention throughout this order.
The defendant seeks dismissal of certain claims in the complaint for failure to
state a claim on which relief can be granted. I summarize here the relevant factual
allegations in the complaint [#1]. The factual allegations are described in greater detail
in the recommendation [#29]. Plaintiff Anthony Amato founded Amega Scientific
Corporation, which also is a plaintiff. Amega produced products and provided services
related to centralized environmental monitoring systems. In April 2013, John Sullivan,
the Chief Executive Officer of defendant Mesa Laboratories, Inc., approached Mr.
Amato on behalf of Mesa with an offer to purchase Amega. Over the course of the next
seven months, Mr. Sullivan and other Mesa representatives discussed and negotiated
the structure of the proposed purchase of Amega by Mesa. During the negotiations, Mr.
Sullivan and Mesa’s Vice President, Glenn Adriance, stated that a key element of
Mesa’s post-acquisition plan was for Mr. Amato to serve as Mesa’s Director of
Environmental Sales. Purportedly, this key element of the post-acquisition plan was
based on the industry knowledge and longstanding customer relationships of Mr.
Amato.
Ultimately, the parties came to an agreement which was memorialized in three
separate but related contracts. The acquisition was completed on November 6, 2013,
under the terms of these three agreements. Under the Acquisition Agreement, Mesa
acquired 100 per cent of Amega’s assets in exchange for an up-front payment of ten
million dollars, the assumption of certain Amega liabilities, a future payment of one
million dollars, subject to adjustment for certain losses (Holdback Amount), and a future
earn-out payment calculated under a separate agreement. The earn-out amount is
recited in the Acquisition Agreement as part of the consideration for the Acquisition
Agreement. The Acquisition Agreement specifies that the employment of Mr. Amato by
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Mesa is at-will employment.
The Earn-Out Agreement provided that an earn-out payment would be calculated
based on the revenues of the Mesa total environmental monitoring business for the
three-year period from November 6, 2013, through November 5, 2016. Amega would
be entitled to this earn-out amount. Under the Earn-Out Agreement, Mesa is required to
use its commercially reasonable best efforts to grow, market, and develop its
environmental monitoring business during the Earn-Out Period.
The Stock Option Agreement provides that Mr. Amato had the right to exercise
the certain stock options so long as he was in the continuous employment or service of
Mesa from November 6, 2013, to the date of the exercise of the Option. Under the
terms of the Stock Option Agreement, Mr. Amato was not permitted to exercise any
stock options within the first two years after the Stock Option Agreement was executed,
and he could not exercise all of the options until after November 6, 2017.
Mr. Amato commenced his employment with Mesa on November 6, 2013. His
employment was terminated by Mesa on January 24, 2014. Mr. Amato alleges he was
terminated without notice or cause.
I. FRAUD PLEADING
In its motion to dismiss, Mesa contends the allegations in the complaint are not
sufficiently specific to satisfy the heightened pleading standard of Fed. R. Civ. P. 9(b).
Rule 9(b) requires a plaintiff to set forth the who, what, when, where, and how of the
alleged fraud. Stated differently, the plaintiff must state the time, place, and contents of
the false representations, the identity of the party making the false statements, and the
consequences thereof. U.S. ex rel. Sikkenga v. Regence Bluecross Blueshield of
Utah, 472 F.3d 702, 727 (10th Cir. 2006).
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The plaintiffs plead a state law fraud claim in their First Claim for Relief. In their
Second Claim for Relief, the plaintiffs plead a fraud claim under § 10(b) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10(b)(5) of the Securities and
Exchange Commission, 17 C.F.R. § 240.10b-5. The magistrate judge recommends that
the motion to dismiss both fraud claims be granted because the plaintiffs have not
alleged a representation by Mesa or its representatives that Mr. Amato would become a
long-term employee of of Mesa. In addition, the magistrate judge concludes that, in
light of the at-will employment provision in the Acquisition Agreement, Mr. Amato has
not alleged facts which support his contention that he relied reasonably on a
representation that he would be a long-term Mesa employee.
A. Claim One - Fraud
Pleading their state law fraud claim, the plaintiffs allege that prior to the Purchase
Date, Mesa represented that:
a) Amato would become a long-term top-level management employee of
Mesa with the responsibility of directing and overseeing Mesa’s sales
efforts in the centralized monitoring systems market; b) as the Director of
Environmental Sales, Amato would likely earn substantial commissions on
top of his base salary; c) as the Director of Environmental Sales, Amato
would have a direct role in ensuring that Mesa’s growth met the
benchmark required for Amato to earn the maximum earn-out of $10
Million under the Earn-Out Agreement; and d) Amato would have the right
under the Stock Option Agreement to exercise his option to purchase up
to 10,000 shares of Mesa’s common stock at a favorable purchase price.
Complaint [#1], ¶ 45. The magistrate judge concluded that Mr. Amato did not allege any
representation by Mesa that Mr. Amato would be a long-term employee of Mesa. I
agree. The complaint does not include a specific allegation of such a representation by
Mesa. In addition, the complaint does not include a specific allegation of a
representation that Mr. Amato likely would earn substantial commissions. The
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Acquisition Agreement presents that possibility, but neither the agreement nor the
alleged representations paint that possibility as likely. Similarly, there is no allegation of
a representation that Mr. Amato necessarily or likely would have the right to exercise his
stock options. Rather, the agreements and alleged representations present that as only
a possibility. Finally, Mr. Amato does not allege specifically any representations that Mr.
Amato necessarily would have a direct role in ensuring that the maximum benchmarks
in the Earn-Out Agreement would be met.
Even if the plaintiffs had alleged specifically such representations by Mesa, these
representations would not be actionable as fraud. “(O)ne of the essential elements of
fraud and deceit is that there be a false representation of a material fact, which fact
either exists in the present or has existed in the past; and, conversely, that a mere
expression of an opinion in the nature of a prophecy as to the happening or
non-happening of a future event is not actionable.” Leece v. Griffin, 371 P.2d 264,
265, 150 Colo. 132, 135 (Colo. 1962). In the context of the agreements at issue here,
representations that Mr. Amato would be a long-term employee, would likely earn
substantial commissions, would reach the Earn-Out benchmarks, or would be able to
exercise stock options all constitute expressions of opinion about the future, not
misrepresentations of past or present fact. As pled specifically in paragraph 45 of the
complaint, the fraud claim of the plaintiffs must be dismissed for failure to state a claim
on which relief can be granted. Thus, I approve and adopt the recommendation of the
magistrate judge that the First Claim for Relief be dismissed under Fed. R. Civ. P.
12(b)(6).
In their objection [#30], the plaintiffs focus on the alleged repeated
representations of Mr. Sullivan and Mr. Adriance, high officials of Mesa, that, due to Mr.
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Amato’s industry knowledge and valuable long-standing customer relations, “a key
element of Mesa’s post-acquisition plan was that Amato would serve as a top-level
employee of Mesa after the acquisition, specifically as the Director of Environmental
Sales.” Complaint, ¶ 13. The plaintiffs allege various statements by Mr. Sullivan and
Mr. Adriance, including dates and individuals making certain statements, which fed this
alleged misrepresentation. They allege further that
prior to the Purchase Date, Mesa knowingly misrepresented its intent to
retain Amato in a capacity that would allow him to direct and oversee
Mesa’s sales of continuing monitoring systems after the acquisition and
exercise his Options under the Stock Option Agreement. Axiomatically,
Mesa also knowingly misrepresented the value of the Consideration
Amato accepted in exchange for selling Amega’s assets to Mesa.
Complaint [#1], ¶ 42. According to the plaintiffs, Mesa did not intend to retain Mr.
Amato no matter how Mr. Amato performed as an employee of Mesa. Obviously, if,
before the Purchase Date, Mesa knew it would not continue its employment of Mr.
Amato through the first year following the Purchase Date, then Mesa knew the Earn-Out
Agreement and Stock Option Agreement were worthless to the plaintiffs.
Conceivably, these alleged misrepresentations of the intent of Mesa as it existed
before the contracts were consummated could support a fraud claim. These alleged
misrepresentations are misrepresentations of existing fact - the intent of Mesa - and not
predictions of the future. But in specifying the basis for their state law fraud claim in
paragraph 45 of the complaint, the plaintiffs do not rely on such misrepresentations as a
basis for their fraud claim. Rather, they rely on alleged misrepresentations which are
not actionable as fraud. The plaintiffs may not properly re-plead this claim by citing
different misrepresentations in their objections.
B. Claim Two - Securities Fraud
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The same fraud pleading requirements are applicable to the securities fraud
claim alleged in the Second Claim for Relief. In this claim, the plaintiffs specify a
different alleged misrepresentation as the basis for the claim of securities fraud. They
allege that “at the time it entered into the Stock Option Agreement with Amato, Mesa
intended to terminate Amato’s employment prior to the vesting date of Amato’s right to
purchase Options under the Stock Option Agreement.” Complaint [#1], ¶ 57.
“Accordingly, Mesa knowingly misrepresented the value of the securities transferred to
Amato in the Stock Option Agreement.” Id., ¶ 58. “Mesa used the Stock Option
Agreement, which it knew would be rendered worthless, as a fraudulent means to
induce Amato and Amega to transfer 100 per cent of Amega’s assets to Mesa and enter
into the Asset Acquisition Agreement and Earn-Out Agreement.” Id., ¶ 59.
As discussed above, the alleged misrepresentation of the intent of Mesa when it
entered in to the agreements is a misrepresentation of material present fact which is
actionable as fraud. In the complaint, the who, what, when, where, and how of the
statements made to undergird this misrepresentation are alleged adequately. The
factual allegations stated in the Second Claim for Relief plausibly suggest an entitlement
to relief on the basis of securities fraud. Thus, respectfully, I reject the recommendation
of the magistrate judge that the motion to dismiss be granted as to the Second Claim for
Relief.
II. GOOD FAITH & FAIR DEALING
In their Third Claim for Relief, the plaintiffs allege a breach of the implied
covenant of good faith and fair dealing, citing two factual bases. First, they allege Mesa
violated the covenant when Mesa intentionally misrepresented material facts which
gave Mr. Amato a distorted understanding of the consideration which is the basis of the
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three agreements. Complaint [#1], ¶ 64. Second, they allege Mesa violated the
covenant when it terminated “Amato without cause prior to his ability to purchase any
shares of stock under the Stock Option Agreement.” Id., ¶ 65. They allege also that
this sudden, arbitrary, and unreasonable termination prevented Mr. Amato from
“receiving the reasonable expectations he bargained for” in the three agreements. Id., ¶
66.
As noted by the magistrate judge, the duty of good faith and fair dealing “applies
when one party has discretionary authority to determine certain terms of the contract,
such as quantity, price, or time.” Amoco Oil Co. v. Ervin, 908 P.2d 493, 498 (Colo.
1995). It does not govern pre-contractual negotiations or representations. Id. “The
covenant may be relied upon only when the manner of performance under a specific
contract term allows for discretion on the part of either party. However, it will not
contradict terms or conditions for which a party has bargained.” Id. “Whether a party
acted in good faith is a question of fact which must be determined on a case by case
basis.” Id. at 499.
Correctly, the magistrate judge concludes that this claim fails to the extent it is
based on alleged pre-contractual negotiations or misrepresentations by Mesa, as
alleged in paragraph 64 of the complaint. The allegations in paragraph 64, even if true,
do not state a claim for violation of the covenant of good faith and fair dealing. On this
issue, I approve and adopt the recommendation of the magistrate judge.
The magistrate judge notes also that Colorado does not recognize a covenant of
good faith and fair dealing in employment contracts. Viewing the agreements at issue
here as an employment agreement, the magistrate judge recommends that the good
faith and fair dealing claim be dismissed for failure to state a claim. In addition, the
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magistrate judge notes the at-will employment provision in the Acquisition Agreement
and concludes that the plaintiffs seek to alter that contractual provision via this claim.
Respectfully, I disagree with these two conclusions. The Acquisition Agreement
contains an employment agreement, but it is not purely an employment agreement. It
also is an acquisition agreement. The Earn-Out Agreement and Stock Option
Agreement are tied to the Acquisition Agreement, but they are not purely employment
agreements either. The at-will employment provision gave Mesa discretion over its
manner of performance under all three contracts. The plaintiffs allege Mesa acted in
bad faith in exercising that discretion. As to the non-employment aspects of all three
agreements, this allegation is sufficient to plausibly suggest an entitlement to relief on
the basis of a breach of the covenant of good faith and fair dealing. Respectfully, I
reject the recommendation of the magistrate judge that the motion to dismiss be granted
as to the Third Claim for Relief to the extent that claim is based on the allegation that
Mesa acted in bad faith in exercising its discretion under the agreements.
III. BREACH OF CONTRACT
In the complaint, the plaintiffs allege a claim for breach of contract based on
deductions made by Mesa in payment of the Holdback Amount due under the
Acquisition Agreement. There is no real dispute that this part of the breach of contract
claim, paragraphs 70 to 74 of the Complaint [#1], state a claim for breach of contract.
In paragraph 75, the plaintiffs allege misrepresentation of the intentions of Mesa
in performing the contract and distortion of the value of the earn-out and stock option
agreements. In that context, the plaintiffs allege, the termination of Mr. Amato
constitutes a breach of contract. To the extent the breach of contract claim is based on
the termination of the employment of Mr. Amato, I agree with the magistrate judge that
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the allegations in the complaint do not state a claim for breach of contract. Explicitly,
the termination of Mr. Amato is permitted under the terms of the Acquisition Agreement.
Thus, the termination of Mr. Amato does not breach any explicit provision of any of the
contracts.
Finally, the plaintiffs allege Mesa has breached the provision of the Earn-Out
Agreement which requires Mesa to use commercially reasonable efforts to grow,
market, and develop the business. The plaintiffs allege Mr. Amato was the only
management-level Mesa employee who had a firsthand understanding of the
centralized monitoring systems market and was the only management-level employee
who had personal contacts and relationships with customers in the centralized
monitoring systems industry. According to the plaintiffs, when Mesa terminated Mr.
Amato less than three months after the acquisition, Mesa breached its duty under the
Earn-Out Agreement to use commercially reasonable efforts to grow, market, and
develop business. I agree with the magistrate judge that this portion of the breach of
contract claim is sufficient to state a claim on which relief can be granted.
IV. UNJUST ENRICHMENT
The magistrate judge recommends dismissal of the Fifth Claim for Relief, a claim
of unjust enrichment. The plaintiffs concede this claim should be dismissed. I concur
and will dismiss this claim.
V. CONCLUSION & ORDERS
As pled, particularly in paragraph 45 of the Complaint [#1], the First Claim for
Relief does not include allegations of fact that are sufficient to state a claim for fraud on
which relief can be granted. As to this claim, I approve and adopt the recommendation
of the magistrate judge and grant the motion to dismiss.
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In contrast, the allegations in support of the Second Claim for Relief are sufficient
to state a claim for securities fraud under § 10(b) of the Exchange Act and Rule
10(b)(5). As to this claim, I respectfully reject the recommendation of the magistrate
judge and deny the motion to dismiss.
The claim for breach of the covenant of good faith and fair dealing alleged in the
Third Claim for Relief must be dismissed to the extent it is based on alleged precontractual negotiations or misrepresentations by Mesa. On this point, I approve and
adopt the recommendation of the magistrate judge and grant the motion to dismiss.
However, I respectfully reject the recommendation that the balance of this claim be
dismissed for failure to state a claim.
I approve and adopt the recommendation concerning the Fourth Claim for Relief.
This breach of contract claim must be dismissed to the extent it is based on the
termination of the employment of Mr. Amato. Otherwise, the motion to dismiss is
denied as to this claim.
Finally, the motion to dismiss is granted as to the Fifth Claim for Relief, the unjust
enrichment claim.
THEREFORE, IT IS ORDERED as follows:
1. That the Recommendation of United States Magistrate Judge [#29] filed
August 14, 2015, respectfully is rejected to the extent the magistrate judge recommends
granting the motion to dismiss as to
•
The Second Claim for Relief - securities fraud; and
•
The Third Claim for Relief - breach of the covenant of good faith
and fair dealing - to the extent this claim is not based on alleged
pre-contractual negotiations or misrepresentations by Mesa;
2. That under Fed. R. Civ. P. 12(b)(6), the Motion To Dismiss the Complaint
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[#16] filed by the defendant on January 20, 2015, is denied to the extent the defendant
seeks dismissal of
•
The Second Claim for Relief - securities fraud;
•
The Third Claim for Relief - breach of the covenant of good faith
and fair dealing - except for that portion of this claim which is based
on alleged pre-contractual negotiations or misrepresentations by
Mesa; and
•
The Fourth Claim for Relief - breach of contract - except for that
portion of this claim which is based on the termination of the
employment of Mr. Amato;
3. That otherwise, I approve and adopt the Recommendation of United States
Magistrate Judge [#29] filed August 14, 2015;
4. That under Fed. R. Civ. P. 12(b)(6), the Motion To Dismiss the Complaint
[#16] filed by the defendant on January 20, 2015, is granted as to
•
The First Claim for Relief;
•
The Third Claim relief to the extent this claim is based on alleged precontractual negotiations or misrepresentations by Mesa;
•
The Fourth Claim for relief to the extent this claim is based on the
termination of the employment of Mr. Amato; and
•
The Fifth Claim for Relief; and
5. That consistent with these orders, the objections [#30] of the plaintiffs are
sustained in part and overruled in part.
Dated September 14, 2015, at Denver, Colorado.
BY THE COURT:
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