Molina Information Systems LLC v. Unisys Corporation
Filing
47
MEMORANDUM OPINION re 39 MOTION to Dismiss. Signed by Judge Richard G. Andrews on 9/2/2014. (nms)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
MOLINA INFORMATION SYSTEMS,
LLC,
Plaintiff,
Civil Action No. 12-1022-RGA
v.
UNISYS CORPORATION,
Defendant.
MEMORANDUM OPINION
A. Thompson Bayliss, Esq., ABRAMS & BAYLISS LLP, Wilmington, DE; James N. Kramer,
Esq. (argued), ORRICK, HERRINGTON & SUTCLIFFE LLP, San Francisco, CA; Justin
Bagdady, Esq. (argued), ORRICK, HERRINGTON & SUTCLIFFE LLP, San Francisco, CA.
Attorneys for Plaintiff Molina Information Systems, LLC.
Philip Trainer, Jr., Esq., ASHBY & GEDDES, Wilmington, DE; Stephen R. Neuwirth, Esq.,
(argued), QUINN EMANUEL URQUHART & SULLIVAN, LLP, New York, NY.
Attorneys for Defendant Unisys Corporation.
September
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ANDllbW.lilCt!f&;:Before the Court is Defendant Unisys Corporation's Motion to Dismiss the Second
Amended Complaint (D.I. 39) filed on October 30, 2013. The motion is fully briefed (D.I. 40,
41 & 42) and the Court had the benefit of oral argument on June 27, 2014. (D.I. 46). For the
reasons that follow, the Court will grant the Defendant's motion to dismiss Count IL The
remainder of the motion is denied.
I. BACKGROUND
This dispute between plaintiff Molina Information Systems, LLC ("Molina") and
defendant Unisys Corporation arises out of an asset purchase agreement. Molina, a California
corporation, "provides design, development, implementation, and business process outsourcing
solutions to state governments for their Medicaid information systems." (D.I. 36 if 16). Unisys
is an information systems company that designs, builds, and manages information systems and is
incorporated under the laws of Delaware. (Id.
if 17). Unisys's Health Information Management
("HIM") division, the unit at the center of the case, develops complex Medicaid Management
Information Systems ("MMIS") that allow state governments to manage their Medicaid
programs. (Id.
if 1).
Molina Healthcare, Inc. 1 entered into the Asset Purchase Agreement ("AP A") with
Unisys on January 18, 2010, which transferred Unisys's HIM division to Molina. (Id.
ml 2-4).
Included in the HIM division were contracts with six states for MMIS services. (D.I. 40, pp. 34). The Idaho MMIS was one of the major contracts included in the deal, and Unisys
represented that it would be ready for operation by June 1, 2010. (D.I. 36 if 2). Molina alleges
that prior to the June 1, 2010 "go-live" date, "key management personnel" at Unisys "knew or
1
Molina Healthcare, Inc. assigned the AP A to Molina, a wholly-owned subsidiary. (D.I. 36 iJ 7).
1
recklessly disregarded" that the Idaho MMIS would be unable to meet Idaho's implementation
standards on time because the program was in complete disarray. (Id.
iMf 3-4). Despite its
knowledge of the issues with the Idaho MMIS, Unisys sent Molina updates representing that the
Idaho MMIS would be ready for on-time delivery as planned and actively blocked Molina from
obtaining information by instructing its employees to limit the flow of information to Molina.
(Id.
iMf 3-6).
Molina closed the transaction on April 30, 2010, in part based on Unisys's false
representations that: no material adverse effect had occurred, Unisys was not in breach of any
material agreement, and Unisys had not received any notice of material service or performance
problems with any products or services being sold to Molina. (Id.
ii 7).
The Idaho MMIS commenced operations on schedule but did not function as intended.
According to Molina, the malfunctions associated with the Idaho MMIS resulted in costly
Medicaid enrollment delays and caused inaccurate communications to health care providers,
which severely disrupted Idaho's Medicaid program in the process. (Id.
ii 9).
Molina claims it
incurred substantial costs in correcting the numerous urgent problems caused by the faulty Idaho
MMIS and suffered severe reputational harm. (Id.
i! 11 ).
Molina asserts four counts against Unisys in its Second Amended Complaint ("SAC"):
common law fraud, negligent misrepresentation, breach of contract, and an action seeking
declaratory relief. 2 Unisys has moved to dismiss the Complaint in its entirety for failure to state
a claim upon which relief can be granted. (D.I. 39). Each count will be addressed in order.
2
The parties did not devote any space in their briefs, nor any time during oral argument, to the declaratory judgment
count. Therefore, the Court does not further address that count.
2
II. LEGAL STANDARD
When reviewing a motion to dismiss pursuant to Federal Rule of Civil Procedure
12(b)(6), the Court must accept the Complaint's factual allegations as true. See Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 555-56 (2007). Rule 8(a) requires "a short and plain statement of the
claim showing that the pleader is entitled to relief." Id. at 555. The factual allegations do not
have to be detailed, but they must provide more than labels, conclusions, or a "formulaic
recitation" of the claim elements. Id. ("Factual allegations must be enough to raise a right to
relief above the speculative level ... on the assumption that all the allegations in the complaint
are true (even if doubtful in fact)."). Moreover, there must be sufficient factual matter to state a
facially plausible claim to relief. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The facial
plausibility standard is satisfied when the complaint's factual content "allows the court to draw
the reasonable inference that the defendant is liable for the misconduct alleged." Id. ("Where a
complaint pleads facts that are merely consistent with a defendant's liability, it stops short of the
line between possibility and plausibility of entitlement to relief." (internal quotation marks
omitted)).
III. DISCUSSION
A. Common Law Fraud (Count I)
To state a claim for common law fraud, Molina must plead facts supporting an inference
that: "(1) the defendant falsely represented or omitted facts that the defendant had a duty to
disclose; (2) the defendant knew or believed that the representation was false or made the
representation with a reckless indifference to the truth; (3) the defendant intended to induce the
plaintiff to act or refrain from acting; (4) the plaintiff acted in justifiable reliance on the
representation; and (5) the plaintiff was injured by its reliance." See Abry Partners V, L.P. v. F
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& W Acquisition LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006). Molina asserts two bases for its
common law fraud claim against Unisys in the SAC. First, Molina alleges Unisys knowingly
made false statements in the APA and the Officer's Certificate. (D.I. 36 ii 118). Second, Molina
contends that Unisys provided knowingly false and misleading reports during the due diligence
period prior to Closing. (Id.
ii 119).
Unisys counters that Molina's fraud claim must be
dismissed because the SAC fails to plausibly plead corporate scienter, fails to plead an actionable
misstatement in the Officer's Certificate, and because Molina is contractually barred from
alleging extra-contractual fraud. (D.I. 40, pp. 7-18). For the following reasons, Unisys's motion
to dismiss Molina's common law fraud claim is denied.
1. Corporate Scienter Is Plausibly Pied
Federal Rule of Civil Procedure 9(b), in pertinent part, requires: "In alleging fraud or
mistake, a party must state with particularity the circumstances constituting fraud or mistake.
Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally."
FED. R. CIV. P. 9(b). A plaintiff seeking to satisfy this standard with respect to a corporation's
fraudulent statement "may do so adequately by alleging that the declarant or anyone at the
corporation advising or assisting the declarant or anyone participating in any way in preparation
of the allegedly false statement knew or should have known it was false." ING Bank, FSB v.
PNC Fin. Servs. Grp., Inc., 629 F. Supp. 2d 351, 355 (D. Del. 2009) ("[T]he factfinder's
attention is not limited to the subjective understanding of the corporate representative who made
the statement-although the factfinder's consideration also does not stretch so far as to include
everyone who was ever affiliated with the corporation.").
As an initial matter, Molina's contention regarding the impact of"the Knowledge of the
Seller" provision is not persuasive. Molina argues that the Officer's Certificate was a
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representation made "to the Knowledge of the Seller," and therefore Unisys expressly affirmed
that it had inquired of the necessary MMIS personnel prior to signing the Certificate. (D.I. 41, p.
10). Pursuant to section 4.2(e) of the APA, Unisys was required to deliver at closing an Officer's
Certificate certifying the satisfaction of the conditions set forth in sections 9.2(a), (b), and (e).
(D.I. 36-1, p. 22). The phrase "to the Knowledge of the Seller" is not present in either the
Officer's Certificate or the AP A provisions certified by the Officer's Certificate. (Id. at pp. 22,
50-51). It makes little sense to infer that this phrase, which does not appear in the pertinent
sections of the APA, creates an independent burden on Unisys with respect to the Officer's
Certificate. This conclusion is consistent with the Court's understanding of similar "knowledge
of the seller" provisions, which are typically used to confine a seller's potential exposure in an
M&A deal to the knowledge of select individuals within the seller's corporation.
However, this does not mean that M. Lazane Smith3 can sign the Officer's Certificate
without making any attempt to determine, perhaps by asking those in the corporation with firsthand knowledge, whether the representations contained in the Officer's Certificate are accurate.
Molina does not expressly state which individuals it believes assisted in preparing the Officer's
Certificate and what those persons knew, but what Molina has done is provide copious facts
detailing the numerous bugs in the Idaho MMIS and the HIM management team's knowledge of
these issues and their severity:
34. By mid-March, it was clear to Unisys managers that the project was in
danger. On March 17, 2010, in response to the large number of remaining
unresolved defects, Peter G. wrote to a Project Manager on the Idaho MMIS team
that"[ w]e are at a huge risk." On March 18, 2010, he reiterated to key members of
the Idaho MMIS team that "[w]e are now at a high risk." Twelve days later, he
again wrote to the Idaho MMIS team: "This project is at risk."
3
Ms. Smith is the Senior Vice President of Corporate Development at Unisys.
5
45. Indeed, the Idaho MMIS team missed the April 5, 2010 deadline for
completing the [User Acceptance Testing]. This was "not good," Peter G. wrote,
for there was now a clear risk that the go-live date would be delayed by 30 days.
46. Things looked even worse on April 22, 2010, when a claims testing
report showed that only 22 out of 2000 tested claims had been successful.
"Unacceptable is a gross understatement," responded Program Lead Warren I.
47. Given the state of the project, the upcoming May 17, 2010 deadline for
pilot testing was "premature," Idaho MMIS Business Excellence Manager Traci T.
reported to management team members Peter G., Del B., and Wayne K.
48. On April 28, 2010, two days prior to Closing, the Idaho MMIS team
identified a "critical defect" related to claims processing that would impact the golive date. With no capacity to handle additional problems, Peter G. instructed the
team to save the resolution of the defect for after the go-live date.
55. That same day, [March 26, 2010,] in discussions with the President of
Unisys's HIM business, the Vice President and Chief Information Officer of HIM,
another Vice President and Partner of HIM, and an Implementation Manager for
the Idaho MMIS about how to respond to the State's letter, Del. B wrote that "100%
of the reports failed in their testing ... [e]ach had multiple issues and we stopped
having them test while we regrouped on a plan to retest and validate them before
having the state test them." He added that during "the internal retesting of the 60
reports so far, only 4 have passed without us having to fix defects on them." Del.
B further informed them that "we have been juggling the balls for some time to
keep this going while teams finished construction and testing and filled holes in
integration and processing. I thought we could make it, but the last couple of weeks
the defects have been piling up."
56. On April 1, 2010, Peter G. disclosed to the management team additional
communications from the [Idaho Department of Human Welfare ("IDHW")]. In
testing the reporting functions, the agency determined that all of the reports tested
as of March 23, 2010 had "severe or major defects." Even more importantly, testers
found that features that Unisys claimed to have fixed still had defects. The IDHW
admonished Unisys and noted that it was "unclear" as to how Unisys could have
passed any reports as "production ready" when all of them had defects.
57. On April 30, 2010, the closing date of the transaction, Del[] B. wrote,
in an email to Unisys management, that the State of Idaho was "freaked out" about
the status of the Idaho MMIS. That same day, Unisys represented (again) to Molina
that there were no material problems with the HIM business.
(D.I. 36 W 34, 45-48, 55-57). This strikes the Court as a very large number of critical issues in
close proximity to the June 1, 2010 "go-live" date. Not only were there numerous documented
problems, but the glitches affected a significant piece of the parties' deal-Idaho was one of only
six states with MMIS contracts that were transferred to Molina by the AP A. Drawing all
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reasonable inferences in favor of Molina, the Court finds it difficult to believe that Ms. Smith
was not aware of the very real threat of delay or failure facing the Idaho MMIS. If she was not
aware, it seems to me that she should have been prior to signing the Officer's Certificate.
Molina ought to be granted the opportunity to flesh out these details in discovery.
2. Molina Has Pled Misrepresentations in the Officer's Certificate
Molina has sufficiently alleged that the AP A and Officer's Certificate contained false
representations and warranties. Included among the allegedly false representations are those
contained in sections 5. 7, 5 .21, 7.2 and 7 .12 of the AP A. The veracity of the representations
contained in these provisions cannot be properly adjudicated at this juncture.
Section 5.7(a) represents that no Material Adverse Effect4 has occurred, nor to the
Knowledge of Seller, "has any event, development or state of circumstances or facts occurred
that could reasonably be expected to result in a Material Adverse Effect." (D.I. 36-1, p. 25).
Whether the various problems with the Idaho MMIS qualify as a Material Adverse Effect or
could reasonably be expected to result in one is not something the Court can adequately address
on a motion to dismiss. See In re Adams Golf, Inc. Sec. Litig., 381F.3d267, 274 (3d Cir. 2004)
("Materiality is ordinarily an issue left to the factfinder and is therefore not typically a matter for
Rule 12(b)(6) dismissal.").
Subject to certain exceptions, section 5.21 states that Unisys has not "received any
written notice (nor to the Knowledge of Seller, any non-written notice) regarding unresolved,
material service or performance problems or deficiencies or unresolved, material claims against
Seller" within the last two years. (D.I. 36-1, p. 36). Unisys contends the "claims against Seller"
4
The AP A defines "Material Adverse Effect" as "any changes, circumstances, events or conditions ("Effect") that
have had or would reasonably be expected to have, individually or in the aggregate, a material adverse effect on the
operations, assets, liabilities, financial condition or results of operations of the Business, taken as a whole." (D.I.
36-1, p. 8).
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language clearly indicates that this section applies only to communications received from third
parties and not internal communications. (D.I. 40, pp. 16-17). Molina counters that "material
claims against Seller" are limited to claims by third parties, but that Unisys breached the earlier
clause, which recites unresolved "material service or performance problems or deficiencies" and
is not limited to third parties. (D.I. 41, p. 14). Molina's interpretation is reasonable, and the
Court cannot definitively say it is erroneous at this stage of the litigation.
In section 7 .2, Unisys represented that it would grant Molina "reasonable access" to
Unisys's books and records, as well as access to Unisys employees "upon reasonable advance
request." (D.I. 36-1, p. 40). Molina alleges Unisys interfered with this access by directing
employees to withhold documents and other materials and tightly controlling the flow of
information from Unisys employees to Molina. (D.I. 36 iM! 74-80). Whether the steps Unisys
took to restrict Molina's access to information were "reasonable," as permitted by the AP A, is
not a determination that is well-suited for resolution on a motion to dismiss.
Section 7 .12 requires a party to give prompt notice of the occurrence of any event of
which it becomes aware that would reasonably be expected to prevent or materially delay the
Closing. (D.I. 36-1, p. 47). According to the allegations in the SAC, Molina would have reopened negotiations ifit had known the truth about the Idaho MMIS's status. (D.I. 36 ~ 8). This
is sufficient to survive a motion to dismiss based on the language in section 7.12.
3. Molina's Extra-Contractual Representations Survive the Anti-Reliance Provision(s)
Unisys contends the anti-reliance provisions in the AP A and Confidentiality Agreement
bar Molina's reliance on any extra-contractual representations. Contracts resulting from arms'
length transactions, including those with anti-reliance provisions, are generally upheld under
Delaware law, especially when the transaction involves sophisticated parties. H-M Wexford LLC
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v. Encorp, Inc., 832 A.2d 129, 142 n.18 (Del. Ch. 2003) ("The Court of Chancery has
consistently held that sophisticated parties to negotiated commercial contracts may not
reasonably rely on information that they contractually agreed did not form a part of the basis for
their decision to contract.").
There are two anti-reliance provisions at issue in this case. They are arguably not 100%
consistent. On May 6, 2009, the parties entered into a Confidentiality Agreement containing the
following anti-reliance language:
[Molina] understand[s] and acknowledge[s] that neither Unisys nor any of
its directors, officers, advisors, representatives or employees are making any
representation or warranty, express or implied, as to the accuracy or completeness
of the Confidential Information, and nothing contained herein or in the Confidential
Information is intended to be, or shall be relied upon as, a promise, representation
or warranty, whether as to the past or the future. Only those representations or
warranties that are made in a written definitive agreement, if, when and as executed
and delivered, and subject to such limitations and restrictions as may be specified
therein, will have any legal effect.
(D.I. 40-2, p. 3). Section 5.26 of the APA, signed on January 18, 2010, contains its own antireliance provision:
Except for the representations and warranties expressly contained in this Article V
or in any other document or instrument delivered by Seller pursuant to this
Agreement, neither Seller, nor any other Person makes any other express or implied
representation or warranty on behalf of Seller, including any representation or
warranty as to the probable success or profitability of the ownership, use or
operation of the Business or the Assets by Buyer after the Closing.
(D.I. 36-1, pp. 36-37). The APA expressly incorporates the Confidentiality Agreement through
section 12.5: "This Agreement, the Schedules and Exhibits, the Confidentiality Agreement and
the other Transaction Documents set forth the entire understanding of the Parties, and supersede
all prior agreements and understandings, both written and oral, with respect to the subject matter
hereof (other than the Confidentiality Agreement)." (Id. at p. 59).
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Unisys argues these provisions are clear and should be enforced. The Confidentiality
Agreement states that neither Unisys nor any of its employees are making any representations or
warranties whatsoever regarding the accuracy or completeness of the information it provided to
Molina outside of the written agreements. (D.I. 40, p. 13). This, Unisys contends, has the
practical effect of barring Molina from relying on extra-contractual information regarding the
status of the Idaho MMIS, namely the weekly status reports Unisys issued to Molina. In
response, Molina points to language in the AP A's anti-reliance provision exempting
representations contained "in any other document or instrument delivered by Seller pursuant to
this Agreement." According to Molina, the weekly status reports Unisys provided are "other
document[s] or instrument[s] delivered by Seller pursuant to this Agreement," and therefore
Molina maintains it was permitted to rely on them. (D.I. 41, p. 16). Unisys has a different
interpretation of this language, suggesting instead that it exempts only the express
representations and warranties contained in the agreements between Unisys and Molina
delivered pursuant to the AP A's closing requirements. (D.I. 42, pp. 6-7 n.8).
The Court cannot discern who has the correct interpretation of the contractual language at
this juncture. Looking at section 5.26, it is not clear what falls within the "documents and
instruments" the AP A requires Unisys to deliver. Unisys may very well be correct in its position
that only closing documents are included. This is Molina's Complaint, however, and reasonable
inferences are to be drawn in its favor. Reading the provisions in the light most favorable to
Molina, its reliance on the weekly status reports is permissible under the anti-reliance provisions.
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B. Negligent Misrepresentation (Count II)
Molina's negligent misrepresentation claim is dismissed with prejudice. I previously
dismissed several counts in Molina's First Amended Complaint, including the negligent
misrepresentation count, because I found that they were barred by the AP A's statute of
limitations. (D.I. 35 at 77). Section 11.1 of the AP A exempts only "fraud or intentional or
willful misrepresentation" from the 18 month post-Closing survival period, not negligent
misrepresentation. (D.I. 36-1, p. 53). However, I permitted Molina to replead the counts I
dismissed, provided Molina could show that those claims were not subject to the 18 month
survival period.
The SAC did not do this. Instead, it simply regurgitates its previous negligent
misrepresentation count, nearly word for word. Molina defends this in its opposition brief by
suggesting that negligent misrepresentation is a tort claim and a functional subset of fraud
instead of"a creature of contract law." (D.I. 41, p. 18). This does nothing to alter the fact that
the AP A's statutory language governs the survival period for the parties' representations and
warranties, including negligent misrepresentations. The claim remains time-barred. Molina's
attempt to reclassify the claim as a tort to circumvent the AP A and my previous order of
dismissal is ineffective.
C. Breach of Contract (Count III)
Molina alleges Unisys breached sections 5.11 and 11.2 of the APA. Unisys's motion to
dismiss addresses each of those allegations in tum. First, Unisys asserts that the portion of
Molina's breach of contract claim that is based on section 5.11 relating to the provision of
refurbished hardware and an inadequate number of servers is time-barred by the AP A.
Second,
Unisys contends that the monetary damages caused by a file transmission error constitute an
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"Assumed Liability" pursuant to section 2.3(b) of the APA, i.e., a liability assumed by Molina
for which Unisys is not responsible.
Molina's breach of contract claim turns on matters that are more amenable to a
determination at the summary judgment stage. The first issue requires the Court to determine
whether the notice described Molina's claim against Unisys in "reasonable detail," as required by
the APA's indemnification procedure. This is a factual inquiry. With respect to the second
issue, identifying the party liable for the transmission error depends on whether a parenthetical
phrase on one side of the word "or" in section 2.3(b) nonetheless modifies the clauses on both
sides of the conjunction. Molina's reading is more plausible than the one advanced by Unisys,
and at best the provision is susceptible to multiple interpretations. Thus, a ruling on the
pleadings against Molina is not appropriate.
Because these questions involve disputed issues of fact and contract interpretation not
suitable to resolution on a motion to dismiss, Unisys's motion is denied with respect to the
breach of contract claim.
IV. CONCLUSION
For the reasons stated above, Count II is dismissed with prejudice. An appropriate Order
will follow.
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