Dartell v. Tibet Pharmaceuticals, Inc. et al
Filing
319
OPINION & ORDER Denying 286 NOTICE OF MOTION TO DISMISS certain lead Plaintiffs by MCCARTHY DOWNS III, Hayden Zou with Certificate of Service; without Prejudice pending the outcome of discovery. It is further Ordered that the discovery is re-opene d as to the limited issue of whether the Challenged Plaintiffs have Article III standing in this matter, and it is further Ordered that challenged Plaintiffs' 289 Motion to Strike is DENIED because the affidavit raises sufficient facts concerning the Court's subject-matter jurisdiction which is not waivable. Signed by Judge John Michael Vazquez on 7/27/2018. (JB, )
Not for Publication
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
ROBIN JOACHIM DARTELL. et al.,
individually and on behalf all others
similarly situated,
Civil Action No. 14-3 620
Plaintiffs,
OPINION & ORDER
V.
TIBET PHARMACEUTICALS, INC., et
al.,
Defendants.
John Michael Vazguez. U.S.D.J.
This matter comes before the Court by way of Defendants L. McCarthy Downs III and
Hayden Zou’s (“Defendants”) motion to dismiss certain lead Plaintiffs for lack of standing
pursuant to Federal Rule of Civil Procedure 12(b)(1). D.E. 286. Obasi Investment Limited, Robin
Dartell, and Lixin Wu (the “Challenged Plaintiffs”) filed a brief in opposition, D.E. 291, to which
Defendants replied. D.E. 292. Challenged Plaintiffs then filed a motion to strike the Affidavit of
Ming Zhu, which forms the basis for Defendants’ motion to dismiss. D.E. 289. Defendants filed
a brief in opposition, D.E. 295, to which the Challenged Plaintiffs replied. D.E. 297.’ The Court
reviewed the submissions in support and in opposition, and considered the motions without oral
In this Opinion, Defendants’ motion to dismiss (D.E. 286) will be referred to as “Def. MTD.”
Plaintiffs’ brief in opposition (D.E. 291) will be referred to as “P1. Opp.” Defendants’ reply brief
(D.E. 292) will be referred to as “Def. Rep.” Challenged Plaintiffs’ motion to strike (D.E. 289)
will be referred to as “P1. MTS.” Defendants’ brief in opposition (D.E. 295) will be referred to
as “Def Opp.” Challenged Plaintiffs’ reply brief(D.E. 297) will be referred to as “P1. Rep.”
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argument pursuant to fed. R. Civ. P. 78(b) and L. Civ. R. 78.1(b). For the reasons stated below,
Defendants’ motion to dismiss is DENIED without prejudice to permit jurisdictional discovery,
and the Challenged Plaintiffs’ motion to strike is DENIED.
I.
FACTUAL AND PROCEDURAL BACKGROUND
The Court’s May 10, 2017 Opinion granting in part and denying in part Defendants’ motion
for summary judgment, includes a detailed recounting of the background of this matter. D.E. 268.
To the extent relevant to this motion, the Court incorporates the factual and procedural history into
this Opinion and summarizes the critical facts and procedural history here.
This matter involves a class action brought by lead Plaintiffs for alleged misrepresentations
in Defendant Tibet Pharmaceuticals, Inc.’s (“Tibet”) Initial Public Offering (“IPO”) registration
documents. Lead Plaintiffs brought suit under Section 11 of the Securities Act of 1933 against a
number of individuals and entities who were involved in the IPO. Plaintiffs claim that Tibet’s IPO
registration statements and prospectus materially misrepresented Tibet’s financial health and
profitability.
The parties have been actively litigating this matter since 2012. In June 2016, the present
Defendants moved for summary judgment. D.E. 207, 210. The Court granted the motion in part
and denied it in part. D.E. 268, 269. Of relevance here, the Court found that:
[u]nder Section 11, “any person acquiring a security issuedpursuant
to a false or misleading registration statement may recover
damages.” Shapiro v. UJB fin, Corp., 964 F.2d 272, 286 (3d Cir.
1992) (emphasis added) (citing 15 U.S.C. § 77k). Plaintiffs bear the
burden of proof to establish that their shares were issued from the
IPO. See id.
Tracing occurs when a plaintiff shows that “his or
her shares were issued under/registered to the allegedly defective
registration statement—regardless of whether the shares were
acquired directly from the issuer or in the afiermarket.” In re Smart
Techs., Inc. S’hotder Litig., 295 F.R.D. 50, 61 (S.D.N.Y. 2013).
Thus, “[t]racing may be established either through proof of a direct
chain of title from the original offering to the plaintiff. or through
.
.
.
.
2
.
proof that the plaintiff bought her shares in a market containing oniy
shares issued pursuant to the allegedly defective registration
statement.” In re Initial Public Offerings Sec. Litig., 471 f.3d at 31
n. I (brackets in original omitted).
May 2017 Opinion (“2017 Op.”) at 11-12; D.E. 26$. The Court then found that the lead Plaintiffs
could not trace their purchased shares to the IPO. Id. at 12.
Nevertheless, the Court determined that four lead Plaintiffs had standing. The parties
agreed that Defendant Zou sold 110,100 pre-IPO shares in 2012. Id.2 Therefore, lead Plaintiffs
Wu, Obasi, and Dartell, who purchased more shares than Zou sold, still had standing. 2017 Op.
at 12. Because “even if any of these individual Plaintiffs bought every share sold by Zou, each
would still have additional shares that could not have been Zou’s shares.” Id. Lead Plaintiff
Carithers also had standing because he purchased 7,000 shares before Zou sold his shares. Id.
On August 1$, 2017, Defendants filed the current motion to dismiss the Challenged
Plaintiffs
-
Wu, Obasi, and Dartell
-
for lack of standing pursuant to Federal Rule of Civil
Procedure 12(b)(1). D.E. 26$. Defendants claim that they became aware that in addition to Zou,
another early stockholder in Tibet. RMCC Investments LLC (“RMCC”), sold 177,288 pre-IPO
Tibet shares in the secondary market from May 13, 2011 to February 27, 2012. Def. MTD at 2-3.
Ming Zhu, a manager of RMCC, provided details of how and when the pre-IPO shares were sold
in the secondary market. Id. Based on Zhu’s information, Defendants believe that the Challenged
Plaintiffs can no longer directly trace their shares to IPO. Defendants reason that if RMCC sold
177,288 pre-IPO shares in 2011 and 2012 and Zou sold 173,318 pre-IPO shares in 2011 and 2012,
then the combined number of 350,606 non-IPO shares exceeds the number of shares the
2
The Court inadvertently stated that the number of pre-IPO shares Zou sold in 2012 was
100,100, instead of the correct amount of 110,000. The Court corrected this error in an Opinion
addressing Defendants’ Motion for Reconsideration. February 2018 Opinion at 5; D.E. 312.
Challenged Plaintiffs purchased during the relevant time period. Id. As a result, Defendants
continue, the Challenged Plaintiffs cannot show that their shares were not simply re-purchases of
the pre-IPO shares available in the secondary market. Id. at 4.
II.
LEGAL STANDARD
In deciding a Rule 12(b)(1) motion for lack ofsubject-rnatterjurisdiction, a court must first
determine whether the party presents a facial or factual attack because the distinction deteniiines
how the pleading is reviewed. A facial attack “contests the sufficiency of the complaint because
of a defect on its face,” whereas a factual attack “asserts that the factual underpinnings of the basis
for jurisdiction fails to comport with the jurisdictional prerequisites.” Etbeco Inc. v. Nat ‘1 Ret.
Fund, 12$ F. Supp. 3d 849, 854(E.D. Pa. 2015) (quoting Moore v. A1?gie’s List, Inc., 11$f. Supp.
3d $02, $06 (E.D. Pa. 2015)).
for a facial attack, “the Court must consider the allegations of the complaint as true,” much
like a Rule 12(b)(6) motion to dismiss. Bd. of Trs. of Trucking Emps ofN. Jersey Welfare Fund,
Inc. v. caliber Attto Transfer, Inc., No. 09-6447, 2010 WL 2521091, at *8 (D.N.J. June 11,2010)
(quoting Fetrttska v. Gannon Univ., 462 F.3d 294, 302 (3d Cir. 2006)). However, for a factual
attack, “the court may consider and weigh evidence outside the pleadings to detemiine if it has
jurisdiction.” Gould Elecs. Inc. v. United States, 220 F.3d 169, 178 (3d Cir. 2000), holding
modified by Simon v. United States, 341 F.3d 193 (3d Cir. 2003). The burden is on the plaintiff to
prove the Court has jurisdiction. Id.
Here, Defendants present a factual attack on the Court’s jurisdiction. As a result, the Court
will consider and weigh evidence beyond the pleadings to determine whether it has jurisdiction.
Gould Flees. Inc. v. United States, 220 F.3d 169, 178 (3d Cir. 2000), holding modified by Simon
v. United States, 341 F.3d 193 (3d Cir. 2003).
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III.
LAW & ANALYSIS
As noted, Defendants claim that the information provided in Zhu’s affidavit, concerning
RMCC’s sale of Tibet shares in the secondary market, destroys the Challenged Plaintiffs’
jurisdictional standing. Def. MTD at 2-4. The Challenged Plaintiffs, in opposition, argue that
Defendants’ motion to dismiss is untimely because Defendants have already filed Answers. P1.
Opp. at 2 (citing Doe v. Bopertown Area Sclz. Dist.,
10 F. Supp. 3d 637, 648-49 (E.D. Pa. 2014)).
Further, the Challenged Plaintiffs claim that Defendants’ motion actually contests their lack of
statutory, not jurisdictional, standing. P1.
Opp.
at 4. The Challenged Plaintiffs conclude that
Defendants have not raised an issue impacting the Court’s subject-matterjurisdiction. Id. In reply,
Defendants reply that the Challenged Plaintiffs are mistaken, and that they are, in fact, raising a
12(b)(l) argument directly impacting Article III standing. Def Rep at 1-5.
Plaintiffs seeking to establish Article III standing “must demonstrate ‘(1) an injury-infact, (2) a sufficient causal connection between the injury and the conduct complained of, and (3)
a likelihood that the injury will be redressed by a favorable decision.” finkelman v. Nat ‘1 Football
League, $10 F.3d 187, 193 (3d Cir. 2016) (quoting Neale v. Volvo Cars of N. Am., LLC, 794 f.3d
353, 358—59 (3d Cir. 2015) (internal quotation marks omitted and punctuation modified)). The
first element, an injury-in-fact, requires Plaintiffs to show “the invasion of a concrete and
particularized legally protected interest’ resulting in harm ‘that is actual or imminent, not
conjectural or hypothetical.” Finkelman, 810 F.3d at 193 (quoting Blunt v. Lower lierion Sch.
Dist., 767 F.3d 247, 278 (3d Cir. 2014)). The second element, causation, “requires the alleged
injury to be ‘fairly traceable to the challenged action of the defendant, and not the result of the
independent action of some third party not before the court.” Finkelman, $10 F.3d at 193 (quoting
Toll Bros., Inc. v. Tup. ofReadington, 555 F.3d 131, 137—38 (3d Cir. 2009)). The Third Circuit
has explained that Article III’s causation requirement is “akin to ‘but for’ causation in tort and may
be satisfied ‘even where the conduct in question might not have a proximate cause of the hanm”
Finkelman, $10 F.3d at 193 (quoting Edmonson v. Lincoln Nat’t Life Ins. Co., 725 F.3d 406, 41$
(3d Cir. 2013)). The third, and final, element, redressability, requires Plaintiffs “to show that it is
‘likely, as opposed to merely speculative,’ that the alleged injury will be redressed by a favorable
decision.” finkelman, 810 F.3d at 194 (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 561
(1992)).
Here, a critical issue is whether Defendants have, in fact, raised an Article III standing
issue. The parties have framed the issue as one of constitutional versus statutory standing. In
Arbaugh v. Y&H Corp., Justice Ginsburg framed the same issue as one of federal-court subjectmatter jurisdiction versus “the essential ingredients of a federal claim for relief.” 546 U.S. 500,
503 (2006). In other words, the Supreme Court addressed the difference between the elements of
a case and subject-matter jurisdiction. The Court held that an “objection that a federal court lacks
subject-matter jurisdiction, see Fed. Rule Civ. Proc. 12(b)(1), may be raised by any party, or by
the court on its own initiative, at any stage in the litigation, even afier trial and the entry of
judgment.” Id. at 506. Because subject-matter jurisdiction “involves a court’s power to a hear a
case, [it] can never be forfeited or waived.” Id. at 514 (quoting United States v. Cotton, 535 U.S.
625, 630 (2002)). “By contrast, the objection that a complaint ‘fail[s] to state a claim upon which
relief can be granted,’ Rule 12(b)(6) may not be asserted post-trial.” Id. at 507. In other words,
an objection for failure to state a claim upon which relief can be granted may be waived if not
raised in a timely fashion.
Arbaugh involved a Title VII suit, in which, the trial court, post-verdict, granted a motion
to dismiss for lack of subj ect-matter jurisdiction on the basis that the defendant company had fewer
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than fifteen employees. Id. at 504. The defendant company had not raised this defense pre-verdict.
Id. The Supreme Court reversed, finding that Title Vii’s employee-numerosity requirement was
an element of a case, rather than a jurisdictional requirement, and had been raised too late. Id.
Specifically, the Arbattgh Court found that the employee-numerosity requirement was in a
provision of Title VII that did “not speak in jurisdictional terms or refer in any way to the
jurisdiction of the district courts.” Id. at 515
(quoting
Zipes v. Trans WoridAirlines, Inc., 455 U.s.
385, 394 (1982)). The Court in Arbaugh noted that, “[o]f course, Congress could make [Title
Vii’s] employee-numerosity requirement ‘jurisdictional,’ just as it has made an amount-incontroversy threshold an ingredient to subject-matter jurisdiction.
VIT’s jurisdiction provision
.
.
.
.
.
[b]ut neither 1331, nor Title
specifies any threshold ingredient akin to 2$ U.S.C. 1332’s
monetary floor.” Id. at 515-16. Therefore, the Supreme Court held that “when Congress does not
rank a statutory limitation on coverage as jurisdictional, courts should treat the restriction as
nonjurisidictional in character” and reversed and remanded the matter. Id.
at
516.
The Court finds that Defendants have sufficiently raised an Article III standing issue. As
the Third Circuit held in finkelman, Plaintiffs’ complained of injury must be fairly traceable to
the challenged actions of Defendants. 810 F.3d at 193. Such traceability3 is needed for causation,
and consequently, is needed for an Article III injury-in-fact. Here, lead Plaintiffs allege that their
injury-in-fact arose from Defendants’ misrepresentations in Tibet’s IPO registration statements
Part of the confusion in the current motion may be due to the fortuitous circumstance that
Article III’s standing requirement and the Section 11 violation both require “traceability.” May
2017 Opinion (“2017 Op.”) at 11-12; D.E. 26$. However, just because the substantive cause of
action requires traceability does not mean that it converts the Article III standing “traceability”
requirement from a jurisdictional requirement to an element of the offense. Instead, due to the
nature of the claim, traceability is required for both jurisdictional standing and for the cause of
action.
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and prospectus. Thus, if lead Plaintiffs’ shares are not from the IPO, but rather are from pre
existing share, their alleged injury fails standing causation.
The Third Circuit’s decision in Fin/ce/man illustrates the requirements for alleging the
element of causation. In finkelman, the named plaintiff Josh F inkelman, bought two tickets to
Super Bowl XLVIII on the resale market for an allegedly unfair high price. Along with another
frustrated consumer, Finkelman brought suit against the National Football League (“NFL”) on the
theory that its ticket prices violated New Jersey law. $10 F.3d at 188-89. The Third Circuit found
that Finkelman did not have standing to pursue his claim because he had chosen to not enter the
NFL ticket lottery. Id. at 198.
Judge Fuentes reasoned as follows:
Irrespective of whether the NFL withheld tickets in violation of the
Ticket Law—a question we do not reach here—Finlcelman chose to
buy his tickets on the secondary market. As a result, there was
always a zero percent chance that he could procure a face-price
ticket [from the ticket lottery]. In this sense, any harm that
Finkelman suffered is properly attributed not to the NFL, but rather
to his own decision not to enter the ticket lottery.
The causation element of standing requires a plaintiff to allege facts
sufficient to show that his or her injury is “fairly traceable” to the
alleged wrongdoing of the defendant. We have explained that
traceability requires, at a minimum, that the defendant’s purported
misconduct was a “but for” cause of the plaintiffs injury. And, if we
treat Finkelman’s injury-in-fact as his inability to obtain face-price
tickets to the Super Bowl, that injury is simply not traceable to the
NFL’s withholding of tickets given that Finkelman sought tickets
only in the resale market.
Id. (first, second, and fourth emphases added).
Like finkelman, Defendants have adequately raised an isstie with the Challenged
Plaintiffs’ ability to demonstrate Article III standing causation. The Court is sympathetic to the
Challenged Plaintiffs’ objection to Defendants bringing new information to the Court’s attention
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at the eleventh hour, almost six years after this case was filed and after summary judgment motions.
And Defendants provide no explanation as to why they could not have discovered the information
earlier. Nevertheless, the requirements of Article III standing are “unyielding” and it is a “bedrock
obligation” of a federal court to assure that it has subject-matter jurisdiction over the matters before
it. See finkelman, $10 F.3d at 189, 193. As the Supreme Court reiterated in Arbaitgh, subjectmatter jurisdiction is not waivable and can be raised at any time.
However, the Court is not prepared to make a definitive ruling on the standing issue without
giving the Challenged Plaintiffs an opportunity to take discovery. Defendants have exclusively
relied on the submission from Zhu, and the Challenged Plaintiffs have not had an opportunity to
challenge the purported facts. Accordingly, discovery is reopened for the limited purpose of
allowing the parties to conduct discovery on whether the Challenged Plaintiffs have Article III
standing in this matter. See CevdetAksut Ogullari Koll, STIe. Cavusoght, No. CV 14-3362, 2017
WL 3013257, at *3 (D.N.J. July 14, 2017) (“Rule 16 vests the Court with broad discretion to
control and manage discovery.”).
For these reasons, and for good cause shown,
IT IS on this 27th day of Jtily, 2018,
ORDERED that Defendants’ motion to dismiss (D.E. 286) is DENIED without prejudice
pending the outcome of discovery; and it is further
ORDERED that discovery is re-opened as to the limited issue of whether the Challenged
Plaintiffs have Article III standing in this matter; and it is further
ORDERED that challenged Plaintiffs’ motion to strike (D.E. 289) is DENIED because
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the affidavit raises sufficient facts concerning the Court’s subject-matter jurisdiction, which is not
waivable.
CN2Q2 J.
John Michael Vazqi(LJ.S.D.J.
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