Court finds that a CEO of buyer had no duty to disclose speculative patent infringement litigation when CEO sold thermometer technology to buyer from CEO’s selling company

Buyer is a public company with its principal place of business in Lafayette Parish, Louisiana. Buyer, through its subsidiaries, engages in sale and distribution of medical devices; and sale of branded generic pharmaceutical drugs in the United States and the United Kingdom.

Buyer’s CFO and Buyer’s CEO/board of director member owned a majority of Buyer.

Seller owned the exclusive rights to distribute certain non-contact thermometers in North, Central, and South America. Buyer’s CFO and Buyer’s then CEO/board of director member were majority owners of Seller.

In March 2014 Buyer purchased Seller’s exclusive rights to distribute the thermometer technology through an asset purchase agreement. Buyer paid for the rights with Buyer’s stock, representing about a 50% interest in Buyer. Seller had the right to designate who was to receive that stock and it designated that Buyer issue part of this stock to Buyer’s CEO/director, both directly and to a trust for his benefit.

After the closing, Buyer discovered patent infringement issues that significantly impaired the value of the distribution rights.

On January 31, 2017, Buyer sued Buyer’s now former CEO/director and part owner of Seller in a Louisiana federal district court, alleging, among other items, that he failed to disclose possible patent infringement litigation that significantly impaired the value of the distribution rights assigned to Buyer. Buyer claimed that this failure violated the Buyer CEO/director’s fiduciary duty that he owed to Buyer as an officer and director of Buyer.

The court said that to prevail on a claim for breach of fiduciary duty under Louisiana law, Buyer had to prove that there was a fiduciary duty owed to Buyer by its CEO/director, the CEO/director acted in a way to violate that duty, and that Buyer was damaged as a result of those actions.

The court noted that is well established that fiduciary duties are owed when there is a relationship between a director or officer and a corporation. However, the court said that there is no violation of fiduciary duties when there is no duty to disclose.

In this case the court held that there was no duty to disclose the patent infringement problems because it amounted to speculative litigation. Specifically, the court said that at the time of the court’s decision, there had been no patent infringement claims brought against Buyer. The court rejected Buyer’s conclusory allegations that Buyer would have been sued had it sold the thermometers.

Therefore, the court granted summary judgement in favor of Buyer’s former CEO/director.

This case is referred to as RedHawk Holdings Corp. v. Schreiber, Civil Action No. 17-819, United States District Court, E.D. Louisiana (October 15, 2018).

Comment. There are risks when a company does a deal with one of its officers or directors. In this case, the court did not think that disclosing potential patent infringement problems was required because no infringement claims had been made. Can’t tell from the written decision whether any infringement claims had been threatened.

The better practice in this case would have been to disclose the potential patent infringement problem in the asset purchase agreement. Best to resolve the issue before closing and minimize the risk of post-closing litigation.

By John McCauley: I help people start, grow, buy and sell their businesses.



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Posted in doing deal with company's officer or director, officer or director's fiduciary duty to disclose

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