BESTHOFF v. MITTA et al

Filing 48

OPINION. Signed by Judge John Michael Vazquez on 07/16/2018. (ek)

Not for Publication
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY

ANTHONY W. BESTHOFF, JR. derivatively
and on behalf of WORLD WATER WORKS
HOLDINGS, INC.,
Civil Action No. 17-1449 (JMV) (MF)
Plaint
OPINION
V.

REDDY,
RAVI
PRASHANT
MITTA,
RAVISHANKAR TUMULURI, and WORLD
WATER WORKS HOLDINGS, INC.,
Defendants.

John Michael Vazguez, U.S.D.J.
This matter is a shareholder derivative action.

Currently pending before the Court is

Defendants Prashant Mitta, Ravi Reddy, Ravishankar Turnuluri, and World Water Works
Holdings, Inc.’s motion to dismiss the Verified Shareholder Complaint filed by Plaintiff Anthony
W. Besthoff, Jr. D.E. 10, 29. The Court reviewed all submissions regarding the motion and
considered the motion without oral argument pursuant to L. Civ. R. 78.1(b).1 For the reasons that
follow, Defendants’ motion is DENIED.

The following were filed and considered in connection with the motion: (1) Defendants’
Memorandum in Support of Motion to Dismiss Plaintiffs Verified Shareholder Complaint and
Jury Demand, D.E. 10; (2) Plaintiffs Brief in Opposition to Defendants’ Motion to Dismiss and
in Support of Plaintiffs Cross-Motion for Preliminary Injunctive Relief, D.E. 15; (3) Defendants’
Memorandum in Further Support of Motion to Dismiss Plaintiffs Complaint and in Opposition to
Plaintiffs Cross-Motion for Preliminary Relief, D.E. 19; (4) Plaintiffs Letter Brief in Further
Support of the Cross-Motion for Preliminary Relief, D.E. 21; (5) Plaintiffs Supplemental
Memorandum of Law in Further Support of Motion for Injunctive Relief, D.E. 28; (6) Defendants’
Memorandum in Support of Supplemental Motion to Dismiss, D.E. 29; (7) Plaintiffs Letter Brief

I.

factual Background & Procedural History

The following facts are taken from the Verified Shareholder Complaint.

D.E. 1,

(“Complaint” or “Compi.”). Plaintiff is a shareholder of World Water Works Holdings, Inc.
(“WWW”), a company that develops and makes “wastewater treatment solutions.” Compi. at

¶J

9-10, 2. WWW is a Delaware corporation with a principal place of business in Oklahoma. Id. at

¶J 9.

WWW is the owner of World Water Works, Inc. (“WWW Inc.”), a New York corporation

that is the operating ann of WWW. Id. at ¶J 9, 25.
Mitta, Reddy, and Tumuluri (collectively “Defendants”) are members of the WWW board
of directors. Id. at ¶ 11-13. Mitta is also the Chief financial Officer (“CFO”) of WWW. Id. at

¶

11. Defendants became associated with WWW after making investments in the company. Id.

at ¶ 31, 33. Mark Fosshage is the founder of WWW and also served as Chief Executive Officer
(“CEO”) and board member until his removal in November 2016. Id. at

¶ 26.

James Fosshage,

Mark’s father, is a preferred shareholder of WWW and also a board member. Id. at

¶ 32, 35.

Tn 2012, Defendants formed WWW India PVT Ltd. to expand WWW’s business in India
and the Middle East. Id. at ¶ 37. In 2015, Defendants formed WWW Holdings India LLC, a “fully
owned subsidiary of WWW,” which in turn owns WWW India PVT Ltd. (collectively, the “India
Operations”). Id. at

¶ 37-39.

The Complaint refers to WWW Holdings India LLC and WWW

India PVT Ltd. as the “India Operations.”2 Id. at

¶ 39.

Mitta is the CEO of the India Operations.

in Opposition, D.E. 30; (8) Defendants’ Memorandum in Opposition to Plaintiffs Second CrossMotion for Preliminary Relief, D.E. 31; (9) Defendants’ Reply Letter Brief, D.E. 32; (10)
Plaintiffs Letter Reply to Defendants’ Opposition, D.E. 33; (11) Defendants’ Letter Brief for
Leave to File Further Support of the Supplemental Motion to Dismiss, D.E. 41; (12) Plaintiffs
Letter Brief in Opposition, D.E. 46; and (13) Defendants’ Letter Brief in Reply, D.E. 47.
2

Defendants’ ownership of the India Operations is through three entities referred to in the
Complaint as the “Think Companies.” Id. at ¶J 33, 50, 60. In addition, Defendants’ investments
2

Id. at

¶ 41.

The Complaint alleges that the India Operations were a “drain” on WWW, and that

WWW resources (totaling approximately $2,000,000) were “redirected” to the India Operations
to the detriment of WWW. Id. at ¶J 42-43.
In July 2015, the India Operations were successfully “spun off’ from WWW as separate
entities owned by Defendants. Id. at

¶ 50.

Plaintiff alleges that Defendants were improperly on

“both sides” of the spin off, negotiating on behalf of WWW and the India Operations. Id. at

¶J

49-52. Plaintiff adds that WWW had no “independent counsel, valuations, or projections{.]” Id.
As part of the spin-off transition, the India Operations were granted a license to use WWW
intellectual property in “India and other designated territories,” but could not use any “new
technologies developed by [WWW]” afier the license had been signed. Id. at ¶ 54-5 5.
The spin-off transaction was accomplished through the following documents: a
Membership Interest Purchase Agreement (“MIPA”), a License Agreement, a Intercompany
Services Agreement (“ISA”), and a Side Letter. Id. at ¶ 51, 54, 58, 64. Mitta signed the License
Agreement and the ISA for the India Operations. Id. at

¶ 59.

Pursuant to the MIPA, Defendants

agreed to purchase the India Operation for a total of $910,000, which was comprised of $120,000
cash and a $790,000 promissory note. Id. at

¶ 60.

The Side Letter granted the India Operations

the option to require WWW to repurchase a 25% interest in the India Operations. Id. at ¶ 64. The
Side Letter also provided the India Operations the option to expand its territory, to all of Asia and
Africa, under the License Agreement. Id. at ¶ 66.
In January 2016, Mitta notified Mark Fosshage that Defendants intended to exercise the
option to have WWW repurchase a 25% interest in the India Operations. Id. at ¶ 67. In December

in WWW were made through either the Think Companies or Mitta Water Holdings, LLC. Id. at

¶f 31, 34.
3

2016, Reddy demanded that WWW finalize the repurchase. Id. at ¶ 69. Defendants also proposed
that the promissory note for the purchase of the India Operations be reduced from $790,000 to
$540,000 to account for WWW’s 25% share of capitalization costs for the India Operations. Id.
atiJil 70-71. The India Operations have never paid the $790,000 or the reduced amount, $540,000.
Id. at ¶ 72. Plaintiff contends that WWW lacks an “unconflicted, non-biased” majority of its board

to properly respond to Reddy’s December 2016 demand. Id. at

¶ 73.

The Complaint also accuses Defendants of engaging in self-dealing and misuse of WWW’s
resources, including:

(1) Mitta’s use of WWW’s credit card and expense account for India

Operations expenses, (2) Defendants’ use of WWW’s assets ($13,000) for legal fees as to personal
matters. (3) directions to a WWW vice president to travel to India to close deals for the India
Operations; (4) violations the License Agreement by improper expansion of the covered territory;
(5) use of WWW computer systems for the India Operations; (6) failure to demand audited
financial statements from the India Operations for review by WWW; and (7) failure to demand
payment of the $790,000 (or the lesser $540,000) from the India Operations. Id. at ¶ 74-96.
In 2015, WWW won a bid for the “exclusive global rights to market and sell” technology
developed by the “water and sewage authority [ofi one of the world’s largest advanced municipal
wastewater treatment providers.” Id. at ¶J 3. The Complaint refers to the water sewage authority
as the “Authority[.]” The Complaint alleges impropriety as to the WWW’s “exclusive global
rights” marketing rights. Id. at

¶J 97-99. Plaintiff contends that Mitta, in breach of his fiduciary

duty to WWW, negotiated directly with the Authority so that the India Operations could gain rights
to the technology in violation of WWW’ s exclusive rights. Id. at

¶ 101. Plaintiff adds that Mitta

has wrongfully interfered with WWW’s efforts to negotiate additional licensing rights with the
Authority. Id. at ¶ 102-103.

4

On November 15, 2016, Plaintiff sent a demand letter to WWW’s board of directors setting
forth the foregoing allegations of self-dealing and fiduciary breaches by Defendants. Id. at ¶ 105,
Ex. A. The board did not provide a response to the demand letter within thirty days, passed a
resolution denouncing the allegations in the demand letter, and appointed independent counsel to
investigate the claims made in the demand letter. Id. at

¶J

107-109. As a of the filing of the

Complaint, the board had not taken any further action in response to the demand letter. Id. at

¶

109.
Plaintiff filed his Complaint on March 2, 2017.
following: Count One
Three

—

—

D.E. 1.

breach of fiduciary duty, Count Two

—

waste of corporate assets, Count

unjust enñchrnent (against Mitta only), and Count Four

contract (against Mitta only). Id. at

¶J

The Complaint alleges the

—

tortious interference with

112-130. Defendants’ motion to dismiss followed, D.E.

10, with Defendants arguing that a subsequent investigation and report by an outside law

finTi

revealed that Plaintiffs claims were moot, incorrect, or did not warrant litigation. Defendants
argued, alternately, that New York is the proper forum for the action. D.E. 10-1 at 14-17. Plaintiff
filed an Opposition and also cross-moved for a preliminary injunction. D.E. 15. The Court heard
argument as to the preliminary injunction and denied the motion on May 19, 2017, D.E. 27, and
also denied Plaintiffs “supplemental cross-motion for injunctive relief’ on June 28, 2017, D.E.
35. In addition, and with the Court’s permission, D.E. 27, Defendants also moved to dismiss the
Complaint for a separate reason, arguing that James Fosshage, not Plaintiff, was the real party in
interest. D.E. 29.

5

H.

Legal Standard
a. Rule 12(b)(1)

federal Rule of Civil Procedure 12(b)(1) permits a party to move for “lack of subjectmatter jurisdiction.” Plaintiff invokes the Court’s diversity jurisdiction. Compi. at
establish diversity jurisdiction pursuant to 28 U.S.C.

¶ 21. To

§ 1332(a), “the party asserting jurisdiction

must show that there is complete diversity of citizenship among the parties” as well as an amount
in controversy exceeding the statutory threshold. Schnelter ex rd Schneller v. Crozer Chester
Med. Ctr., 387 Fed. App’x 289, 292 (3d Cir. 2010). Regardless of whether the issue is raised by

the parties, the “Court has the ability and obligation to address concerns of subject matter
jurisdiction sua sponte.” Doitghteiy, Clifford & Wadsworth Corp. v. Magna Grp. Inc., 2007 WL

2300719, at *1 (D.N.J. Aug. 6, 2007). Importantly, “[o]ne of the most basic principles of our
jurisprudence is that subj ect-matter jurisdiction cannot be conferred upon a court by consent of the
parties.” Gosa v. Mayden, 413 U.S. 665, 707 (1973). “If at any time before final judgment it
appears that the district court lacks subject matter jurisdiction, the case shall be remanded.” 28
U.S.C.

§ 1447(c).
b. Rule 12(b)(6)

Rule 12(b)(6) of the Federal Rules of Civil Procedure permits a defendant to move to
dismiss a count for “failure to state a claim upon which relief can be granted[.]” To withstand a
motion to dismiss under Rule 12(b)(6), a plaintiff must allege “enough facts to state a claim to
relief that is plausible on its face.” Bell At!. Corp. v. Twornbty, 550 U.S. 544, 570 (2007). A
complaint is plausible on its face when there is enough factual content “that allows the court to
draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft V.
Iqbal, 556 U.S. 662, 678 (2009). Although the plausibility standard “does not impose a probability

6

requirement, it does require a pleading to show more than a sheer possibility that a defendant has
acted unlawfully.” Connelly v. Lane Const. Corp., $09 F.3d 780, 786 (3d Cir. 2016) (internal
quotation marks and citations omitted). As a result, a plaintiff must “allege sufficient facts to raise
a reasonable expectation that discovery will uncover proof of [his] claims.” Id. at 729.
In evaluating the sufficiency of a complaint, a district court must accept all factual
allegations in the complaint as true and draw all reasonable inferences in favor of the plaintiff.
P/il/lips v. Ctv. of Allegheny, 515 F.3d 224, 231 (3d Cir. 2008).

A court, however, is “not

compelled to accept unwarranted inferences, unsupported conclusions or legal conclusions
disguised as factual allegations.” Baraka v. McGreevey, 481 F.3d 187, 211 (3d Cir. 2007). If,
afier viewing the allegations in the complaint most favorable to the plaintiff, it appears that no
relief could be granted under any set of facts consistent with the allegations, a court may dismiss
the complaint for failure to state a claim. Defazio v. Leading Edge Recovery Sols., 2010 WL
5 146765, at *1 (D.N.J. Dec. 13, 2010).
III.

Analysis
As noted, Defendants provide three separate reasons for dismissal: (1) Plaintiff is not the

real party in interest; (2) the Complaint was improperly filed in the District of New Jersey; and (3)
the subsequent outside law finn report reveals that Plaintiff’s claims lack merit.

The Court

addresses each in turn.
A. Real Party in Interest

Relying on Federal Rule of Civil Procedure 19, Defendants argue that this matter should
be dismissed because James Fosshage, rather than Plaintiff, is the real party in interest. D.E. 291. Defendants continue that if Fosshage, a New Jersey resident, was a party, he would destroy the
diversity jurisdiction of the Court. Id. at 1. In support, Defendants note, among other things, that

7

Plaintiff relied on Fosshage’s affidavit in support of Plaintiffs cross-motion for summary
judgment. Id. at 3. More recently, Defendants added that Fosshage has admitted that he is funding
Plaintiffs litigation. D.E. 41. As to the recent submission, Defendants curiously fail to include
any legal authority in support of their position. Plaintiff argues, among other things, that he is the
appropriate party pursuant to Rule 23.1 of the Federal Rules of Civil Procedure. D.E. 46.
This shareholder derivative action was brought pursuant to Federal Rule of Civil Procedure
23.1. Compl. at 1. Subsection (a) of Rule 23.1, which applies to derivative actions, provides in
part that “[t]he derivative action may not be maintained if it appears that the plaintiff does not
fairly and adequately represent the interests of shareholders or members who are similarly situated
in enforcing the right of the corporation or association.” Fed. R. Civ. P. 23.1(a). Moreover,
pursuant to subsection (b)(2), the verified complaint must “allege that the action is not a collusive
one to confer jurisdiction that the court would otherwise lack[.]” Id. at (b)(2). Thus, the Rule 23.1
expressly contemplates the potential for collusion for jurisdictional purposes in bringing a
derivative suit. Defendants fail to cite to the rule, much less analyze it, in support of their motion.3
While a shareholder brings a derivative suit, the suit is actually on behalf of and for the
benefit of the corporation. Ross v. Bernhard, 396 U.S. 531, 538-39 (1970) (citing Koster v.
Lttmbermens Mitt. Cas. Co., 330 U.S. 518, 522 (1947)). In other words, the corporation “is the
real party in interest” while a shareholder plaintiff is “at best the nominal plaintiff.” Id. at 53$.
The corporation receives any recovery from the suit. Id; see also Kamen v. Kemper financial
Ser”ices, Inc., 500 U.S. 90, 95 (1991) (“[T]he purpose of the derivative action was to place in the
hands of the individual shareholder a means to protect the interests of the corporation from the

To be clear, Defendants do cite to the rule in analyzing the outside law firm’s investigation and
report. D.E. 10-1 at 17. However, they do not do so as to their real party in interest argument.
$

misfeasance and malfeasance of ‘faithless directors and managers.”) (quoting Cohen v. Beneficial
Loan Corp., 337 U.S. 541, 548 (1949)). Thus, WWW is the real party in interest in this matter.
In Amar v. Gamier Enterprises, Inc., 41 F.R.D. 211, 215-17 (C.D. Cal. 1966), the court
found that the plaintiff had violated Rule 23.1 by engaging in collusion for purposes of conferring
diversity jurisdiction on the court. Among other things, the court inAmar noted that a shareholder
transferred shares to the plaintiff because the shareholder desired “to find a new shareholder who
could pursue the litigation” and that the shareholder transferred the minimum number of shares
necessary to meet the jurisdictional requirements. Id. at 215-16. In addition, the court noted, the
plaintiff did not see the written assigmi1ent of his shares until his deposition even though the
transaction purportedly took place months before. Id. In other words, the plaintiff was not a prior
shareholder and was only assigned shares for the purposes of bringing the action.
In contrast, “the fact that a party plaintiff has been solicited to bring suit and also has been
indemnified against liability for costs and fees is not enough to make a case collusive so as to
deprive a federal court of jurisdiction.” Allstate Ins. Co. v. Lttmbermens Mitt. Cas. Co., 204 F.
Supp. 83, $6 (D. Conn. 1962) (citations omitted). In fact, in a relatively recent decision, a federal
court has ruled that the collusion necessary under Rule 23.1 occurs “when a party who wishes to
sue, but would be unable to bring a diversity action, recruits someone living in another jurisdiction
to become a shareholder for the purpose of initiating a derivative suit with diversity jurisdiction.”
Enterprises Intern., Inc. v. Pasaban, LA., 2012 WL 2576359, *$ (W.D. Wash. July 3, 2012)

(emphasis added) (citing Walden v. Elrod, 72 F.R.D. 5, 13 (W.D. Okla.1976)).
The Court denies Defendants’ motion as to James Fosshage being the real party in interest.
It appears that Defendants should have moved pursuant to Rule 23.1 rather than Rule 19. D.E. 291 at 4. Defendants have also not shown that Plaintiff was recruited to become a shareholder of

9

WWW for the purposes of initiating the current suit. Instead, Plaintiff was already a shareholder
long before the filing of the current matter.
B. Forum Selection Clause
Defendants next argue that this matter should be dismissed because of a forum selection

clause in the Amended and Restated Voting Agreement of World Water Works Holdings, Inc. (the
“Agreement”). D.E. 10-1 at 15; 10-3 at 14-15. Plaintiff responds that his claims are not covered
by the Agreement.

D.E. 15-1 at 8-9.

Plaintiff, however, refers to an “Investor’s Rights

Agreement,” which appears to be different than the Agreement cited by Defendants. Id. at 5.
Defendants argue that Plaintiff cited to the wrong agreement. Yet, Defendants also rely on Mitta’s
affidavit, and he refers to the document as the “Investor Voting Agreement,” D.E. 10-2 at 1,
although the Agreement is instead attached to the affidavit. D.E. 10-3 at 2.
Plaintiff signed the Agreement, which is dated November 30, 2012. D.E. 10-3 at 5, 17.
The Agreement refers to different series of WWW’s preferred stock. Id. at 5. Section 1 of the
Agreement is entitled “Voting Provisions Regarding Board of Directors” and reviews, among other

things, the size of the WWW’s board, the board’s composition, and the removal of board members.
Id. at 5-7. Section 2 addresses votes to increase the common stock of WWW, Section 3 concerns

the sale of WWW, Section 4 discusses remedies, and Section 5 refers to the term of the Agreement.
Id. at 8-11.
Section 6, entitled “Miscellaneous,” contains a provision that Delaware law governs the

Agreement.

Id. at 12.

Section 6.11 indicates that the Agreement along with the “Restated

Certificate constitute the full and entire understanding and agreement between the parties with
respect to the subject matter hereofi.]” Id. at 13-14. Section 6.16, captioned “Dispute Resolution,”

provides in pertinent part as follows:

10

The parties hereby irrevocably and unconditionally submit to the
jurisdiction of the federal and state courts located within the
geographical boundaries of the United States District Court for the
Southern District of New York for the purpose of any suit, action or
other proceeding arising out of or based upon this Agreement, (b)
agree not to commence any suit, action or other proceeding arising
out of or based upon this Agreement except in the federal and state
courts located within the geographical boundaries of the United
States District Court for the Southern District of New York [.].
Id. at 14-15.

At the outset, the Court notes that Defendants do not make a motion to transfer this case,
pursuant to 2$ U.S.C.

§ 1404, to the Southern District of New York. Instead, they move to dismiss

this matter pursuant to Rule 12(b)(6) “in accordance with the forum selection clause” in the
Agreement. D.E. 10-1 at 15. Although not expressly indicated, the Court construes this as a
motion to dismiss for forum non conven lens.
In Atlantic Marine Constrttction Co. v. United States District Court, the United States
Supreme Court expressly indicated that it was not determining whether Rule 12(b)(6) was an
appropriate vehicle for a motion to dismiss pursuant toforîtm non conveniens. 571 U.S. 49, 61
(2013). The Court, in fact, indicated that if a defendant used Rule 12(b)(6) in such circumstances,
it would be “sensible” for the defendant to also move to dismiss based on forum non conveniens.
Id. at 61 n. 4. However, in a recent nonprecedential opinion, the Third Circuit indicated that Rule

12(b)(6) could be used to dismiss a case for forum non conveniens. Podesta v. Hanzel, 684 F.
Appx 213, 216 (3d Cir. 2017) (finding that while a party could move “under 28 U.S.C.

§ 1404(a)

to transfer a case to another federal court based on a valid forum selection clause, a Rule 1 2(b)(6)
dismissal is also an acceptable means of enforcing such a clause when, as here, the clause allows
for suit in either a state or federal forum”) (citing Atlantic Marine, 571 U.S. at 61; Salovaara v.
Jackson Nat. Lfe Ins. Co., 246 f.3d 289, 298 (3d Cir. 2001)); see also Breslow v. Klein, 201$ WL

11

3031854, at 6 (D.N.J. June 19, 2018). Moreover, the Third Circuit inPodesta also instructed that
a court should focus on a motion’s function, not its caption. Fodesta, 684 F. App’x at 216 (citing
Turner v. Evers, 726 F.2d 112, 114 (3d Cir. 1984)). Here, the function of Defendants’ motion is

clearly a dismissal based on forttm non conveniens. In addition, Plaintiffs have not challenged
Defendants’ use of Rule 12(b)(6). Accordingly, the Court will decide the motion pursuant to Rule
12(b)(6). However, the Court alternately views the motion as one to dismiss pursuant to the forum
non conveniens doctrine, without reference to Rule l2(b)(6).
The Court must next determine whether the Complaint’s claims fall within the purview of
the Agreement’s forum selection clause. As a threshold matter, the Court must decide which
state’s substantive law applies. Defendants indicate that law of New Jersey applies, D.E. 10-1 at
20, and Plaintiff does not address the issue. The Court, however, finds that Delaware law is
appropriate.
In Collins v. Maiy Kay, Inc., the Third Circuit addressed choice of law provisions and
forum selection clauses. 874 F.3d 176 (3d Cir. 2017). The defendant was a Texas-based cosmetic
company. Id. at 179. Plaintiff was a New Jersey resident who had worked for the defendant in
various capacities in New Jersey. Id. at 179. The parties had entered into two written agreements.
Id. Each contained a choice of law provision specifying that Texas law would apply to a relevant
dispute. Id. Further, each agreement contained a forum selection clause specifying that a Texas
state court would have jurisdiction and venue over any such dispute. Id. After the parties’ business
relationship soured, the plaintiff filed a putative class action in the United States District Court for
the District of New Jersey. Id. The defendant moved to dismiss the plaintiff’s complaint pursuant
to both Rule l2(b)(6) and forum non conveniens. Id. at 180. The district court granted defendant’s

12

motion on forum non conven lens grounds, finding that Texas was the appropriate forum under the
forum selection clauses. Id.
On appeal, the Third Circuit addressed the scope of the forum selection clauses. The
Circuit affirmed that “a court considering the interpretation of a forum selection clause applies
principles of contract law to determine the scope of the clause.” Id. (citing John Wyeth & Bro.
Ltd. v. CIGNA Int’l Corp., 119 F.3d 1070, 1073 (3d Cir. 1997)).

However, before applying

contract law and determining the scope of the forum selection clauses, the Collins court stated that
it had to determine the appropriate law to apply. Id. at 181. The Circuit applied the Erie doctrine,
whereby a federal court sitting in diversity jurisdiction applies state law to substantive issues and
federal law to procedural issues. Id. (citing Erie Railroad v. Tompkins, 304 U.S. 64, 78 (1938)).
Applying Erie, the Third Circuit observed that issues concerning enforcement of forum selection
clauses were subject to federal law. Id. The court in Collins, by comparison, ruled that issues
concerning interpretation of such clauses were subject to state law because the analysis called for
contract interpretation, a substantive matter. Id. at 182. The Circuit added that state law applied
unless the questions of contract law fell within “certain restricted areas,” including when “uniquely
federal interests” are at stake. Id. at 182 (internal quotations omitted).
Afler determining that state contract law governed their interpretation of the forum
selection clauses, the Third Circuit next decided which state’s contract law to apply. Id. at 183.
The Circuit affinued that in a diversity case, a court looks “to the choice-of-law rules of the forum
state—the state in which the District Court sits—in order to decide which body of substantive law
to apply to a contract provision, even where the contract contains a choice-of-law clause.” Id.
Therefore, the Collins court applied New Jersey choice-of-law rules even though the underlying
agreements indicated that Texas law controlled. Id.

13

The Circuit observed that under New Jersey law, “when parties to a contract have agreed
to be governed by the laws of a particular state, New Jersey courts will uphold the contractual
choice.” Id. at 183-84 (quoting Instructional Sys., Inc. v. Comp. Curriculum Corp., 130 N.J. 324,

341 (1992)). However, the court in Collins noted that New Jersey will not uphold a choice-of-law
clause when either of the following two exceptions are present:
(a) the chosen state has no substantial relationship to the parties or
the transaction and there is no other reasonable basis for the parties’
choice, or (b) application of the law of the chosen state would be
contrary to a fundamental policy of a state which has a materially
greater interest than the chosen state in the determination of the
would be the state of the applicable
particular issue and which
law in the absence of an effective choice of law by the parties.
.

.

.

Collins, 874 F.3d at 184 (quoting Instructional Sys., 130 N.J. at 342 (quoting Restatement (Second)

of Conflicts of Laws

§ 187 (Am. Law Inst. 1969))). In light of New Jersey’s standard, the Third

Circuit found that Texas law applied. Id.
In light of the guidance in Collins, the Court applies New Jersey choice-of-law rules.
Following the New Jersey standard, the parties’ contractual choice of law applies, unless one of
the two noted exceptions is present. The parties do not assert any such exception applies, and the
Court finds that the exceptions are inapplicable. Further, WWW is a Delaware company. The
Agreement provides that Delaware law governs, so the Court will apply Delaware law in
interpreting the Agreement’s forum selection clause.
Having determined that Delaware law applies, the Court turns to the critical issue of the
impact of the Agreement’s forum selection clause. Delaware law supports interpreting multiple
contracts together if the contracts cross-reference one another. Dziffv. Innovative Discovery LLC,
2012 WL 6096586, at *12 (Del. Ch. Dec. 7, 2012) (“Delaware law holds that where a contract
incorporates another contract by reference, the two contracts will be read together as a single

14

contract.”); Brastor Mercantile, Ltd., 1989 WL 70971, at *4 (“Utilization of the doctrine of
incorporation by reference will avoid a tortured reading of these documents and will, in this Court’s
opinion, avoid frustrating the parties’ intent.”). Here, the Agreement expressly indicates that the
entire agreement also includes the Revised Certificate of Incorporation. Defendants, however, fail
to analyze the Revised Certificate and how it effects their argument. Without this necessary
information, the Court cannot properly review Defendants’ argument. As a result, the Court finds
that Defendants’ motion is insufficient.
Moreover, the critical question is whether the Complaint arises “out of or [is] based upon”
the Agreement. The Complaint does not cite, nor does it allege a violation of, the Agreement.
Instead, the Complaint claims that Defendants engaged in self-dealing and breached their fiduciary
duties to WWW. The Agreement, among other things, refers to the composition of WWW’s board,
designation of board members, and the removal of board members. But the Agreement does not
address self-dealing or breaches of fiduciary duty nor does it indicate how to resolve such issues.
To this end, Defendants’ substantive analysis of the Agreement’s forum selection clause vis-à-vis
the Complaint is noticeably lacking. D.E. 10-1 at 15-17; D.E. 19 at 10-12. Indeed, Defendants
essentially refer to the Agreement and then assert in conclusory fashion that the Agreement
“encompasses both Plaintiffs contract and tort claims.” D.E. 10-1 at 15 n.4; see also D.E. 19 at
6. Defendants, as the moving party, have fallen well short of their obligation to demonstrate that
the forum selection clause applies to the counts in the Complaint. For this additional reason,
Defendant’s motion is denied.
Finally, the Court notes that even if the forum selection clause applied to the Complaint,
Defendants also completely fail to address Atlantic Marine (or its progeny) in either their moving
brief or initial reply papers. D.E. 10, D.E. 19. The Supreme Court’s decision in Atlantic Marine

15

changed the analytical framework for aforttm

non

conveniens motion when a valid forum selection

clause is involved. 571 U.S. at 59-67. Defendants should have also included an appropriate
analysis under Atlantic Marine and related cases in support of their motion.
C. The Outside Law firm’s Report

Defendants finally move to dismiss the Complaint because the “[b]oard’s [d]ecision [njot
to [p]roceed with [l]itigation [c]onstitutes a [v]alid [e]xercise of its [b]usiness [j]udgrnent[.]” D.E.
10-1 at 21. The Complaint indicates that on November 15, 2016, Plaintiff sent a demand letter to
WWW’s board of directors. Compl. at ¶ 105, Ex. A. The board did not provide a response to the
demand letter within thirty days but did appoint independent counsel to investigate the claims
made in the demand letter. Id. at ¶ 107-109. As of the filing of the Complaint, the board had not
taken any further action in response to the demand letter, id. at ¶ 109, and Plaintiff contended that
any additional demand would be futile, id. at ¶ 8. However, on March 10, 2017, Dilworth Paxson
submitted a report (the “Dilworth Report”) to WWW concerning the allegations in Plaintiffs
demand letter. D.E. 10-2 at 2; D.E. 10-3 at 35.
The Dilworth Report indicates that the law firm was hired by WWW’s board as
“independent counsel” to investigate and evaluate Plaintiffs allegations. D.E. 10 at 35. The
Dilworth Report concludes that the allegations were either moot,4 incorrect, not supported by
sufficient evidence, or were not in the best interests of WWW to pursue. D.E. 10-3 at 47, 49-51,
53. In light of the Dilworth Report, counsel for Mitta and Reddy demanded that the Complaint be
dismissed. D.E. 10-2 at 3; D.E. 10-3 at 55. Defendants now assert that the WWW board’s decision
not to go forward with the current litigation is a valid exercise of its business judgment. D.E. 101 at22.

Defendants never moved to dismiss any portion of the Complaint on mootness grounds.
16

The United States Supreme Court has ruled that the demand doctrine is a matter of
substance rather than procedure. Kamen, 500 U.S. at 96-97 (citations omitted).

Moreover, the

Supreme Court has observed that corporation law is a matter of state law. Id. at 98-99 (citations
omitted). As a result, pursuant to the Erie doctrine, Erie Railroad, 304 U.S. at 78, the Court looks
to the law of Delaware in deciding the issue.
Defendants argue that the Court can consider the Dilworth Report in the current motion to
dismiss because the report is “integral to the Complaint and must not be ignored for purposes of
this motion.” D.E. 10-1 at 14. Defendants add that consideration of the report does not convert
its motion to dismiss to one for summary judgment. Id. at 14. In resolving a motion to dismiss, a
district court may consider “exhibits attached to the complaint and matters of public record” as
well as “an undisputedly authentic document that a defendant attaches as an exhibit to a motion to
dismiss if the plaintiffs claims are based on the document.” Pension Ben. Gitar. Corp. v. White
Consot. Inthts., Inc., 998 F.2d 1192, 1196 (3d Cir. 1993). Here, the Dilworth Report is not

referenced in the Complaint and was not in existence at the time Plaintiff filed, as Defendants’
admit. D.E. 10-1 at 1$ n. 14. Yet, whether the Court reviewed the report in the context of a motion
to dismiss or for summary judgment, the outcome would not change.
Defendants’ argument suffers from a fatal flaw: no action has been taken by independent
members of WWW’s board. The Supreme Court of Delaware has on numerous occasions delved
into the area of shareholder derivative actions. See, e.g., Speigel V. Btrntrock, 571 A.2d 767 (Del.
1990); Kaplan v. Peat, Man’’ick, !vlitcheil & Co., 540 A.2d 726 (Del. 1988); Aronson v. Lewis,

473 A.2d $05 (Del. 1984); Zapata Corp. v.Maldonado, 430 A.2d 779 (Del. 1981). However, the

The standard of review applied by the Aronson court was subsequently changed in Brehm v.
Eisner, 746 A.2d 244 (Del. 2000).
17

Delaware Supreme Court has never waivered on the fact that self-interested board members cannot
cause a derivative suite to be dismissed. See Aronson, 473 A.2d at $12 (“[P]rotections [of the
business judgment nile] can only be claimed by disinterested directors whose conduct otherwise
meets the tests of business judgment.”); Zapata Corp., 430 A.2d at 783 (“Board members, owing
a well-established fiduciary duty to the corporation, will not be allowed to cause a derivative suit
to be dismissed when it would be a breach of their fiduciary duty”). Instead, conflicted board
members may delegate review to independent board members. Aronson, 473 A.2d at $13 (“[A]
board has the power to appoint a committee of one or more independent disinterested directors to
determine whether the derivative action should be pursued or dismissal sought.”). If the conflicted
board members delegate the authority to disinterested directors, the court’s inquiry becomes one
of “independence, good faith, and reasonable investigation.” Zapata Corp., 430 A.2d at 787. See
also Spiegel, 571 A.2d at 777. Moreover, the independent directors may rely on experts, but the
directors may not abdicate their duties to those outside professionals. Aronson, 473 A.2d at 816
(While directors may

easonabl[y] rel[y] upon the expertise of.

.

.

other qualified persons, the

end result, nonetheless, must be that each director has brought his or her own informed business
judgment to bear with specificity upon the corporate merits of the issues without regard for or
succumbing to influences which convert an otherwise valid business decision into a faithless act.”).
According to the Complaint, when the action was filed, WWW’s board consisted of four
members: James Fosshage and Defendants. The Complaint states with particularity Defendants’
alleged conflicts and self-dealing.

However, Defendants have submitted no evidence from

independent, disinterested directors6 indicating that the Complaint should be dismissed. Instead,

6

In fact, Defendants have not even shown that the WWW board took any official action in
response to the Dilworth Report. Instead, Defendants indicate that counsel for Mitta and Reddy
demanded that the Complaint be dismissed. D.E. 10-2 at 3; D.E. 10-3 at 55.
1$

Defendants indicate that the WWW board hired independent outside counsel to review the
allegations in Plaintiffs demand letter. Yet, as noted above, while a disinterested director may
reasonably rely on independent counsel, outside counsel cannot usurp the ultimate role of the
independent director. Because Defendants have failed to show that their motion to dismiss is
premised on the decision of directors with the necessary independence, good faith, and reasonable
diligence, their motion to dismiss on this ground is denied.
IV.

CONCLUSION
For the foregoing reasons, Defendants’ motion to dismiss is denied. An appropriate Order

accompanies this Opinion.

L.4 (

Dated: July 16, 2018

John Michael Vazquez,TiL.J.

19