Channel MedSystems, Inc. v. Boston Scientific Corp. ( 2019 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
CHANNEL MEDSYSTEMS, INC., )
a Delaware corporation, )
)
Plaintiff and )
Counterclaim Defendant, )
)
v. ) C.A. No. 2018-0673-AGB
)
BOSTON SCIENTIFIC CORPORATION, )
a Delaware corporation, and NXT )
MERGER CORP., a Delaware corporation, )
)
Defendants and )
Counterclaim Plaintiffs. )
MEMORANDUM OPINION
Date Submitted: September 6, 2019
Date Decided: December 18, 2019
Daniel A. Mason, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP,
Wilmington, Delaware; William M. Lafferty, Thomas W. Briggs, Jr., and Richard
Li, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware;
Andrew G. Gordon, Jaren Janghorbani, Paul A. Paterson, and Andrew J. Markquart,
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, New York, New
York; Attorneys for Plaintiff Channel Medsystems, Inc.
Karen L. Pascale, James M. Yoch, Jr., and Paul J. Loughman, YOUNG CONAWAY
STARGATT & TAYLOR LLP, Wilmington, Delaware; Matthew M. Wolf, Edward
Han, Amy DeWitt, Tara Williamson, William Louden, and William Young, Jr.,
ARNOLD & PORTER KAYE SCHOLER LLP, Washington, DC; Attorneys for
Defendants Boston Scientific Corporation and NXT Merger Corp.
BOUCHARD, C.
This post-trial opinion resolves claims arising from Boston Scientific
Corporation’s decision to terminate a merger agreement it entered into on November
1, 2017 (the “Agreement”) to acquire Channel Medsystems, Inc., an early stage
medical device company with one product—a global endometrial ablation device
named Cerene. Under the Agreement, Boston Scientific could only be required to
close the transaction if Cerene received FDA approval by September 30, 2019.
In late December 2017, Channel discovered that its Vice President of Quality,
Dinesh Shankar, had falsified expense reports and other documents as part of a
fraudulent scheme by which he stole approximately $2.6 million from the company.
Unbeknownst to Channel, some of the documents Shankar falsified were contained
in Channel’s submissions to the FDA seeking approval of the Cerene device.
Promptly after discovering Shankar’s fraud, Channel notified Boston
Scientific and the FDA. Channel interacted with both of them in a fully transparent
manner over the next few months as it thoroughly investigated and took actions to
remediate the effects of Shankar’s fraud. On April 18, 2018, the FDA accepted
Channel’s remediation plan, which strongly signaled that Shankar’s fraud would not
be the cause of any failure of the FDA to approve the Cerene device and which made
the FDA’s approval a distinct possibility. Despite this positive development, Boston
Scientific terminated the Agreement on May 11, 2018.
1
On March 28, 2019, consistent with the timeframe for receiving FDA
approval the parties expected when they entered into the Agreement, the FDA
approved the Cerene device. Trial of this action commenced the next month.
The primary issue in this case is whether Boston Scientific was entitled to
terminate the Agreement because (i) certain representations in the Agreement were
inaccurate as of the date it entered into the Agreement and (ii) the failure of such
representations to be true and correct has or reasonably would be expected to have a
“Material Adverse Effect” on Channel. For the reasons discussed below, the court
finds that although Shankar’s fraud caused a number of representations to be
inaccurate as of the date of the Agreement, Boston Scientific failed to prove that the
failure of such representations to be true and accurate reasonably would be expected
to have a Material Adverse Effect. The court thus concludes that Boston Scientific
was not entitled to terminate the Agreement and that Channel is entitled to an order
of specific performance requiring Boston Scientific to close the merger.
This decision reaches two other conclusions of note: first, that Boston
Scientific breached its obligation under the Agreement to use commercially
reasonable efforts to consummate the merger and, second, that Boston Scientific was
not fraudulently induced to invest approximately $11 million in Channel in making
a series of investments from 2015 to 2017.
2
I. BACKGROUND
The facts recited in this opinion are the court’s findings based on the testimony
and documentary evidence presented during a four-day trial held in April 2019. The
record includes stipulations of fact in the Pre-Trial Stipulation and Order, over 900
trial exhibits, twenty-five depositions, and live testimony from seven fact and five
expert witnesses.
A. The Parties
Plaintiff Channel MedSystems (“Channel” or the “Company”) is a Delaware
corporation headquartered in Emeryville, California.1 It is a privately held medical
technology company and the developer of the Cerene device.2
Defendant Boston Scientific Corporation (“Boston Scientific” or “BSC”) is a
Delaware corporation headquartered in Marlborough, Massachusetts.3 It is a
publicly traded medical technology company.4 Defendant NXT Merger Corp., a
wholly owned subsidiary of Boston Scientific, also is a Delaware corporation
headquartered in Marlborough, Massachusetts.5
1
Pre-Trial Stipulation and Order (“PTO”) ¶ II.B.1 (Dkt. 170).
2
Id.
3
Id. ¶ II.B.2.
4
Id.
5
Id. ¶ II.B.3.
3
B. Channel Develops the Cerene Device
In 2011, Channel began to develop Cerene, a device used for global
endometrial ablation, which is a procedure to treat heavy menstrual bleeding by
ablating the uterine lining. Most technologies for this procedure require general
anesthesia and must be performed using large pieces of equipment in a hospital
operating room or ambulatory surgery center.6
The procedure using Cerene is less painful because it uses cryotherapy (cold
temperature) rather than heat-based (burning) techniques.7 Channel designed
Cerene for use in an office setting without general anesthesia. Because Cerene is a
handheld, disposable device, physicians do not need to invest capital to purchase
equipment in order to use the device.8
C. The FDA Approval Process
As Boston Scientific has acknowledged, the FDA “stringently regulates
medical devices by means of a comprehensive regulatory system” that is “designed
to ensure the safety and effectiveness of medical devices.”9 Under this system—
established through the Federal Food, Drug, and Cosmetic Act (“FDCA”) and the
6
JX 403.006.
7
Tr. 6-7 (Coté). All citations to “Tr.” refer to the Trial Transcript Volumes I-IV from April
15-18, 2019 (Dkt. 186; Dkt. 187; Dkt. 188; Dkt. 189).
8
JX 180.006; Tr. 7 (Coté).
9
JX 21.020.
4
1976 Medical Device Amendments, 21 U.S.C. §§ 360c-360k—the FDA is charged
with “regulating the safety and effectiveness of medical devices, and the conditions
for their design, manufacture, performance, labeling, and use.”10
The FDCA divides medical devices into three classes—Class I, II, and III.11
Class III devices, such as Cerene, “are subject to the most stringent regulatory
controls of all device classes.”12 According to Boston Scientific, these devices must
undergo an “indisputably thorough, rigorous, and costly pre-market review (some
1,200 FDA man hours at hundreds of thousands of dollars in cost) by the FDA.”13
Before a company can market a Class III device, the FDA must review and
provide a premarket approval (“PMA”) of the device. In order to conduct a clinical
study on humans to collect data for a PMA, an applicant may obtain an
Investigational Device Exemption (“IDE”). After conducting such a study, an
applicant must submit detailed information about its device to the FDA in a PMA
10
United States/FDA Amicus Brief, Horn v. Thoratec, 2004 WL 1143720, at *2 (“FDA
Brief”).
11
21 U.S.C. § 360c.
12
FDA Brief at *6.
13
JX 21.021; see FDA Brief at *8, *20; Sullivan Dep. 38-39; Pierce Dep. 221-23.
5
application.14 An applicant can apply for a PMA in a single submission or in
multiple submissions known as modules.15
The review process for a PMA is a “massive undertaking” that is “thorough
and scientifically rigorous.”16 “In reviewing a PMA, FDA scientists carefully
evaluate all of the data and information submitted by the manufacturer” and will
often request that the manufacturer provide additional information.17
As part of the FDA’s review, multiple experts scrutinize the applicant’s
compliance with the FDA’s Quality System Regulation (“QSR”).18 For example,
the Center for Devices and Radiological Health’s Office of Compliance conducts a
two-tiered evaluation. It first evaluates the information in the PMA and then
conducts a thorough in-person inspection, called a “pre-approval inspection”:
Inspection will include an assessment of the firm’s capability to design
and manufacture the device as claimed in the PMA and confirm that the
firm’s quality system is in compliance with 21 C.F.R. 820, Quality
System Regulation. The inspectional process considers the extent to
which the firm has established a formal [quality system] program and
has assured that the approved design is properly translated into
specifications via process validation.19
14
21 C.F.R. § 814; JX 755.007 (Ulatowski Expert Report).
15
JX 755.007.
16
FDA Brief at *8; see also Tr. 413 (Ulatowski).
17
FDA Brief at *8 (citing 21 C.F.R. § 814.37); Tr. 413 (Ulatowski); 21 C.F.R.
§ 814.20(b)(14).
18
JX 755.007-008.
19
Id. .010.
6
As part of this process, the FDA also may conduct bioresearch monitoring
inspections to ensure the quality and integrity of clinical trial data submitted in
support of an application for a PMA.20
After completing its review, the FDA will provide a PMA only if the agency
finds, among other things, that there is a reasonable assurance of safety and
effectiveness of the device and that the applicant complies with the QSR. 21 The
FDA’s finding of a reasonable assurance of safety and effectiveness must be based
on “valid scientific evidence.”22
D. Cerene’s Initial FDA Approval and Clinical Study Results
On September 13, 2016, the FDA approved an IDE for CLARITY, Channel’s
clinical study for Cerene.23 CLARITY involved 242 patients and satisfied its
primary safety and effectiveness endpoints, as there were no serious adverse events
and patients experienced successful reduction in bleeding.24
On July 31, 2017, Channel submitted a “shell” to the FDA setting forth the
proposed contents of its four PMA modules, as well as a rough timeline for
20
See id.; Tr. 140 (Yu); Tr. 414-15 (Ulatowski).
21
Tr. 411, 415-16 (Ulatowski), Tr. 555-56 (Pierce), Tr. 683 (Carr).
22
21 C.F.R. § 860.7(c)(1).
23
JX 85.
24
JX 774.006-009; Tr. 112-13 (Yu).
7
submitting the modules.25 Channel submitted Modules 1 and 2 on August 16, 2017
and November 21, 2017, respectively.26
E. Boston Scientific and Channel’s Relationship
1. Boston Scientific’s Initial Investments in Channel
Between 2013 and 2015, Boston Scientific invested approximately $8 million
in Channel, acquiring approximately 15% of Channel’s equity.27 Before making
these investments, Boston Scientific obtained information about Channel’s
operations and finances.28
Boston Scientific’s initial 2013 investment entitled it to have an observer on
Channel’s Board of Directors.29 This right gave Boston Scientific “access to
anything that was presented to the board,” such as information about CLARITY,
regulatory submissions, operations, and financial projections.30
Christopher Kaster, Boston Scientific’s Vice President of Business
Development and Venture Capital, held the observer position until he became a full
25
JX 150; JX 168.
26
JX 171; JX 214.
27
PTO ¶¶ II.E.2; JX 58; JX 49.002; JX 922.001.
28
See, e.g., JX 26 (BSC Presentation dated February 5, 2013 on Channel’s clinical program
timeline and estimated costs).
29
JX 27.004.
30
Tr. 12 (Coté).
8
Board member in late 2017.31 As a Board observer, Kaster provided Boston
Scientific senior executives, including David Pierce, Executive Vice President and
President of Medical/Surgery for Boston Scientific, with updates about Channel.32
2. Channel Provides Boston Scientific with Periodic Updates
After Boston Scientific made its initial investment in Channel, it provided
Boston Scientific with periodic updates on the “status of [Channel’s] business.”33
These presentations covered a variety of topics, including CLARITY, Cerene’s
performance, and Channel’s quality system.34 According to Ulric Coté, Channel’s
CEO, Channel provided these presentations to update Boston Scientific on its
existing investment, not to solicit additional investments.35 These updates included
references to Shankar as part of Channel’s team and as Director of Quality
Assurance.36
31
Kaster Dep. 12-13, 46.
32
Id. at 73; Pierce Dep. 40-43; JX 107.
33
Tr. 13-16 (Coté).
34
See, e.g., JX 901 (Presentation titled ‘Boston Scientific Update,” dated March 25, 2016),
JX 941 (same, dated Dec. 14, 2016).
35
Tr. 13-16 (Coté).
36
JX 36.004; JX 49.042; JX 901.043.
9
In June 2014, Channel stated that it would seek ISO 13485 certification, which
would allow Cerene to be marketed in the European Union.37 On March 13, 2017,
Channel received its ISO 13485 certification.38
3. Boston Scientific Looks to Acquire Channel
Until early 2017, Boston Scientific focused on “monitoring” its investment in
Channel, and did not pursue an acquisition of Channel’s remaining equity.39 In
spring 2017, Boston Scientific learned that “other suitors” might seek to purchase
Channel.40 Boston Scientific then began “to think about buying the company.”41
On June 22, 2017, Boston Scientific and Channel entered into a non-binding
Letter of Intent, which contemplated Boston Scientific purchasing the remaining
equity of the company that it did not already own for up to $275 million, conditioned
on FDA approval of Cerene.42 Although Boston Scientific had “already completed
certain functional due diligence,” the transaction was “subject to satisfactory
completion by [Boston Scientific] of additional diligence.”43
37
JX 1101.026; Tr. 190-91 (Patel).
38
PTO ¶ II.D.2.
39
Tr. 969-71 (Morrison); Tr. 493-95 (Pierce).
40
JX 106; JX 108.
41
Tr. 900, 971, 972-73 (Morrison).
42
JX 135 ¶ 1.
43
Id.¶ 2.
10
4. Boston Scientific Engages in Due Diligence
Before and after signing the Letter of Intent, Boston Scientific conducted
detailed due diligence of Channel. During this diligence, “everything that was
within the company [was] made available” to Boston Scientific, including all
regulatory, financial, and quality documents.44 Boston Scientific had access to
Channel’s “data room” containing, among other records, extensive clinical,
regulatory, quality, and financial information.45 Channel also provided Boston
Scientific with additional information as requested.46 Terence Carr, Boston
Scientific’s Multisite Vice President of Quality,47 acknowledged that Channel
“placed no limitations on Boston Scientific’s access to its quality systems or
materials.”48
On June 5, 2017 and August 24, 2017, Boston Scientific conducted on-site
visits to Channel as part of its due diligence.49 Carr, who was Boston Scientific’s
corporate representative concerning its diligence and interactions with Shankar,50
44
Tr. 17 (Coté).
45
Coté Dep. 90; Bracey Dep. 76-77, 225.
46
Tr. 17 (Coté); Tr. 652-53 (Carr).
47
Tr. 577 (Carr).
48
Id. 653.
49
See JX 121; JX 123; JX 179; JX 180.
50
JX 722.006-007, 009-010.
11
attended the second on-site visit.51 Doug Bachert, a quality manager at Boston
Scientific responsible for the quality-related diligence of Channel, attended the first
on-site visit and met with Shankar for approximately 45 minutes.52
Bachert was satisfied after his June 5 meeting that Channel was “representing
compliance” to certain quality standards, but he “had not made a determination as to
whether [Channel] complied sufficiently or not.”53 On June 13, Bachert told his
colleagues that Channel’s system was “stated as [ISO] 14971 [risk management]
compliant; needs to be confirmed.”54 Boston Scientific thereafter conducted its own
diligence into Channel’s quality system.55
5. The Merger Agreement
On November 1, 2017, Channel and Boston Scientific entered into an
Agreement and Plan of Merger (as defined above, the “Agreement”).56 Under the
Agreement, Boston Scientific agreed, subject to certain conditions, (i) to purchase
immediately Series C-1 preferred stock in Channel for approximately $5.6 million,
increasing its ownership to approximately 20% of the Company’s equity; and (ii) to
51
Tr. 586 (Carr).
52
Tr. 588-90 (Carr); see Bachert Dep. 55, 65, 75; Tr. 974 (Morrison).
53
Bachert Dep. 70.
54
JX 130.001.
55
See Tr. 971 (Morrison); Bachert Dep. 73-74.
56
JX 1 (the “Agreement”).
12
acquire Channel’s remaining equity for up to $275 million pursuant to a put-call
structure.57 Under the put-call provision, Boston Scientific could exercise a “call”
option at any time to acquire Channel and, after obtaining a PMA for Cerene from
the FDA, Channel could exercise a “put” option to close the deal.58
The Agreement also permitted Boston Scientific to designate a director to
Channel’s Board. Boston Scientific named Kaster as its Board designee.59 Tom
Robinson, General Manager of the Boston Scientific Women’s Health Division,
assumed Kaster’s former position as Board observer.60
F. Channel Discovers That Shankar Defrauded the Company
On December 29, 2017, Coté and Rhonda Bracey, Channel’s Vice President
of Finance, discovered certain expense reports from Shankar bearing Coté’s
signature that Coté had never seen before.61 Coté and Bracey looked into the reports
and discovered they were illegitimate.62 Over the course of the New Year’s
weekend, Coté, Bracey, and William Malecki, Channel’s Chief Operating Officer,
57
Agreement §§ 1.1, 1.5(a), 1.6(g); PTO ¶ I.A.
58
Agreement § 1.1.
59
PTO ¶ II.E.4; Kaster Dep. 46.
60
Tr. 18 (Coté); Robinson Dep. 40-41.
61
Tr. 21-22 (Coté).
62
Id. 22-23.
13
conducted an initial investigation into purchase orders, invoices, and expense reports
submitted by Shankar.63
Through this investigation, Channel discovered that six of the vendors for
which Shankar had been submitting purchase orders and invoices were shell
companies registered to Shankar himself.64 Most of these companies were named to
imitate certain legitimate vendors, e.g., Nelson Scientific Research (shell company)
versus Nelson Labs (legitimate company).65 Shankar’s scheme involved paying the
legitimate vendors with his personal credit card and then issuing invoices to Channel
from his shell companies.66 In some cases, Shankar submitted invoices for work that
was never performed; in other cases, he submitted invoices for amounts exceeding
the cost of work that was performed and pocketed the difference.67
Shankar laid the groundwork for his submission of fraudulent invoices during
the regular budgeting process by socializing the names of his shell companies. For
example, Shankar referred to just “BSI” rather than BSI Group (legitimate company)
or BSI America (shell company).68 Shankar also provided inflated estimates for the
63
Id. 22-23; Bracey Dep. 152-56; Malecki Dep. 138-45, 148-51, 156-61.
64
Coté Dep. 123-24; Bracey Dep. 154-56; Malecki Dep. 157-60.
65
Tr. 30 (Coté); Malecki Dep. 160; JX 400.009; JX 576.004.
66
JX 430.004.
67
Tr. 23-24 (Coté); JX 355.008.
68
Tr. 30 (Coté).
14
costs of services during the budget process so that, when he later issued purchase
orders from his shell companies seeking approval for those services, the amounts
already appeared in Channel’s budget and did not arouse suspicion.69 The
subsequent invoices for payment of those same amounts thus did not arouse
suspicion either.70
Through this part of his scheme, Shankar stole just over $2 million from
Channel.71 Separately, Shankar stole approximately $577,000 from Channel by
submitting fraudulent expense reports that purported to be from various vendors,
both authentic and fake.72 Most of Shankar’s fraudulent invoices and expense
reports—which account for “about 4 or 5%” of the total number submitted during
his employment—were for amounts below $10,000 such that, under Channel’s
policy at the time, CEO approval was not required for payment. 73 Shankar’s deceit
stunned Channel’s management team. As Coté testified: “To say I was shocked
would be an understatement. I’m still shocked.”74
69
Id. 28.
70
Id.
71
JX 415.005; JX 922.002.
72
JX 415.005; JX 922.002.
73
Tr. 29-30 (Coté); JX 415.014-021.
74
Tr. 26 (Coté).
15
An executive of Greenleaf Health, Inc. (“Greenleaf”), a healthcare regulatory
and quality consulting firm that Channel retained to conduct an independent review,
testified credibly that Shankar was “quite adept at [his] falsifications,” which “were
not apparent on the surface” of Channel’s records.75 During diligence, Boston
Scientific itself requested and received purchase orders from certain entities (BSI
America, Western Packaging, and ETC Engineering Services) that Channel later
discovered were shell companies that Shankar created.76 Neither the names, the
amounts, nor anything else in those documents triggered any concerns at Boston
Scientific, just as they had not at Channel.77
On January 2, 2018, Channel confronted Shankar with the initial evidence of
his wrongdoing, which Shankar eventually admitted.78 Channel immediately placed
Shankar on leave and terminated his employment shortly thereafter.79
G. Channel’s Investigation and Remediation Efforts
1. Channel’s Internal Investigation
After placing Shankar on leave, Channel continued to assess the scope and
effects of his fraud. Channel retained Fenwick & West LLP to help with the
75
Tr. 314-15 (Elder).
76
JX 159.006.
77
Tr. 977-78 (Morrison).
78
Bracey Dep. 158; JX 239.003.
79
Tr. 20-21 (Coté); JX 355.005.
16
investigative process.80 In carrying out its investigation, Fenwick & West retained
forensic accountants, Hemming Morse LLP, “to conduct an audit of all of the
financials and the expenses and invoices of the company.” 81 Hemming Morse
confirmed that Shankar stole approximately $2.57 million.82
Channel also contacted the legitimate vendors to obtain their original invoices
and reports.83 It then conducted line-by-line reviews of those documents and other
records to identify information that Shankar falsified in whole or in part.84
Through its investigation, Channel discovered that, out of approximately 138
test reports that Channel submitted to the FDA in connection with its IDE and first
two PMA modules, six reports contained information that Shankar falsified.85
Channel also submitted four of these six reports to BSI, from which Channel was
seeking a European Conformity (“EC”) certificate for Cerene.86 The EC certificate
allows Channel to place a “CE Mark” on Cerene and to market the device in the
80
JX 403.002.
81
Tr. 44 (Coté); JX 430.005; JX 403.002; JX 279.005.
82
JX 430.012; JX 403.002.
83
See, e.g., JX 251; JX 241.
84
Tr. 37-38 (Coté); Tr. 136 (Yu); Tr. 187 (Patel); see, e.g., JX 533.004 (listing discrete
discrepancies).
85
Tr. 38, 50 (Coté); Tr. 119-21 (Yu); JX 658.004-007.
86
JX 581.004-005.
17
European Union. Channel has yet to market Cerene in Europe and has no plans to
do so.87
In addition to finding that Shankar falsified some records it submitted to the
FDA, Channel discovered that Shankar falsified other records that were not
submitted to the FDA involving (i) measurements of component parts and (ii)
calibration certificates for equipment used in inspecting, manufacturing, and testing
Cerene.88 An April 2018 Board presentation, prepared while Channel was working
to remediate the effects of Shankar’s fraud, noted that certain other records, such as
corrective and preventative action records (“CAPAs”) and Management Reviews,
also needed additional work to become compliant with FDA regulations.89
On January 17, 2018, Channel referred Shankar’s fraud to the Department of
Justice for potential prosecution.90 The Department of Justice pursued criminal
charges against Shankar, who pled guilty and is now in prison.91 Shankar has since
repaid almost all of the $2.57 million he stole from Channel.92
87
Tr. 60 (Coté).
88
Id. 38-40; Tr. 178-79, 188 (Patel); JX 580; JX 652.
89
JX 427.011; Tr. 247-48 (Patel).
90
Tr. 44-45 (Coté); JX 269; JX 271; JX 279.
91
Tr. 45-46 (Coté); JX 915; JX 916; JX 917.
92
JX 917.007; Tr. 45 (Coté).
18
2. Greenleaf’s Initial Assessment
As previously mentioned, Channel retained Greenleaf to conduct an
independent assessment of (i) Channel’s investigation of Shankar’s fraud, and (ii)
“Channel’s quality system related to past operations and plans for future
operations.”93 Two Greenleaf executives—former FDA officials David Elder and
Michael Chappell—visited Channel’s offices from February 5-8, 2018, to review
Channel’s processes, procedures, regulatory submissions, and records, and to
interview Channel management.94
According to Elder, the purpose of Greenleaf’s independent assessment was
“[t]o bring an outside set of eyes to the work that Channel had done internally, to
see if [Greenleaf] observed anything that perhaps [Channel] didn’t notice, to verify
that [Channel’s] assessment was complete or, if [Greenleaf] found any gaps, to
identify those gaps with the idea that [Channel] would review the gaps and take
additional action, if needed.”95 Greenleaf documented its assessment in a report
dated March 6, 2018 (the “Greenleaf Report”).
The Greenleaf Report concluded that (i) Channel officials were “thorough”
and “earnest[]” in their investigation, “open and forthcoming with information[,] and
93
JX 355.006.
94
Tr. 258-59 (Elder); JX 355; JX 356.
95
Tr. 260-61 (Elder).
19
placed no restrictions” on Greenleaf’s access to information; (ii) Shankar “act[ed] in
isolation”; and (iii) Shankar “was not directly involved in the collecting and
reporting of clinical data.”96 Critically, Greenleaf did not find evidence that
Shankar’s conduct “affected the outcome of the clinical study or impacted safety and
efficacy data from the study.”97
The Greenleaf Report commented, however, “that each and every action,
decision, and record with which [Shankar] was involved is suspect, particularly
those with which he was solely involved,”98 such that they should be “further
investigated.”99 Greenleaf similarly noted that it “has no confidence in [Shankar]
performing his routine responsibilities as VP of Quality Assurance (QA).”100
Greenleaf recommended ways for Channel to improve its quality system in light of
deficiencies it observed in order to bring the system up to compliance with FDA
regulations required for the PMA.101 For example, “Greenleaf concluded that
effective internal audits were not actually conducted” because they had been
96
JX 355.006-007; Tr. 262-65 (Elder).
97
JX 355.007.
98
Id. .009.
99
Tr. 271 (Elder).
100
JX 355.009.
101
Tr. 55 (Coté); JX 355.021-028.
20
Shankar’s responsibility and that Shankar, on behalf of Channel, “failed to review
cleanroom monitoring reports,” which was required under the QSR.102
3. Channel’s Fraud Implication Assessment Quality Plan
After conducting its initial investigation and receiving the Greenleaf Report,
Channel prepared a comprehensive Fraud Implication Assessment Quality Plan to
identify and remediate the effect of Shankar’s misconduct on Channel’s quality
system, which Channel implemented over much of 2018.103 Channel’s work
consisted of both “top-down” and “bottom-up” assessments.104
a. Top-Down Assessment
To address the potential impacts of Shankar’s fraud that were identified during
Channel’s initial investigation, Channel opened fourteen internal audit reports
(“IARs”), each of which addressed a distinct area, including falsified supplier test
reports and regulatory submissions, calibration records, and component inspection
records.105 Channel performed a risk assessment in connection with each IAR and
102
JX 356.009. As discussed below, the parties dispute whether all of the regulations in
the QSR applied to Channel as of the Agreement Date. The court concludes that they did
not and that only the QSR’s design control requirements applied to Channel at that time.
See infra Part IV.A.1.a.
103
JX 382; JX 576.
104
Tr. 161 (Patel); JX 382; JX 576.
105
Tr. 48-49 (Coté); Tr. 130-31 (Yu); Tr. 159, 174-75 (Patel); JX 380; JX 383; JX 576.
21
identified necessary corrective actions,106 which included re-performing certain tests
affected by Shankar’s fraud.107
Greenleaf had identified two potential concerns involving the CLARITY
study. The first was that unsterile devices could have caused patient infections
during the study because Shankar fabricated certain sterility records. The second
was that using torque wrenches that were in an unconfirmed state of calibration could
have caused some devices in the study to suffer “out-of-box” failures because
Shankar had fabricated calibration records.108 Channel’s subsequent investigation
into these potential concerns found that Shankar’s actions did not affect the
CLARITY study.
Sterility. To address potential sterility concerns, Channel had Tim Achuff,
an expert in microbiology, review the original, authentic, sterilization test report data
from Nelson Laboratories.109 Achuff determined that Cerene met sterilization
requirements and his analysis confirmed that “[t]he sterility of the Cerene device
was still intact.”110 In addition, Dr. Andrew Brill, Channel’s medical liaison,
106
See, e.g., JX 652.005 (listing corrective actions related to Henry Servin & Sons); JX
533.005 (listing corrective actions related to sterilization); JX 580.004 (listing corrective
actions related to equipment calibration).
107
Tr. 40 (Coté).
108
JX 355.008.
109
JX 533.028-034; Tr. 58 (Coté).
110
Tr. 126 (Yu); Tr. 376 (Woodard).
22
reviewed infections of CLARITY patients and “corroborate[d] that there is no
evidence that the integrity of the Cerene device packaging nor the sterility of the
Cerene device was compromised.”111
Boston Scientific’s own quality expert, Richard Reeves, observed that “if you
[use Cerene on] 200 patients and there’s no traceable infection, that’s pretty good
evidence that there isn’t a problem.”112 Reeves further testified that Brill’s study
“looked pretty good” and he had no reason to doubt Brill’s conclusion.113
Out-Of-Box Failures. To address potential calibration issues, Channel sent
the potentially affected equipment (e.g., torque wrenches) back to the manufacturers
for recalibration. The manufacturers found that the equipment “measured in
calibration upon arrival” and satisfied their specifications.114 Channel also obtained
documentation from its suppliers confirming that the equipment does not go in and
out of calibration.115 This was important because if the equipment was properly
111
JX 389; Tr. 57-58 (Coté); Tr. 376 (Woodard).
112
Reeves Dep. 206.
113
Tr. 829-31 (Reeves).
114
Tr. 40-41 (Coté); Tr. 188-89 (Patel).
115
Tr. 41 (Coté); Tr. 189 (Patel); Tr. 373 (Woodard); JX 580.007-008, 066-077. Contrary
to Boston Scientific’s assertion, Malecki did not admit “that there is no way to confirm that
the tools used to make the devices used in the CLARITY trial were in calibration when
they were being used to make the devices.” Defs.’ Br. 53. Malecki simply acknowledged
the obvious point that it is not possible to go back in time as a general matter. See Malecki
Dep. 261 (Q: “We can’t go back in time and test the tools when they were actually used
23
calibrated when it was retested by the suppliers, the equipment would have
functioned properly when used on the CLARITY devices. Channel further
determined that it already had addressed any risks posed by out-of-calibration tools
satisfactorily through its risk management process.116 Channel therefore confirmed
that falsified calibration records did not affect any CLARITY devices.117
In addition to addressing the two issues just discussed, Channel thoroughly
investigated, among other issues, falsified component inspection records from one
of its suppliers.118 Specifically, Channel re-inspected components it had on hand
from the same lots used in devices manufactured for CLARITY.119 Channel then
conducted a risk assessment of its manufacturing process, which included numerous
inspections and functional performance tests of every device, and evaluated the risk
of nonconforming components not fitting together.120 The re-inspection and risk
assessment found that “no new risks [were] introduced.”121
to make . . . the product, right?” A: “We can’t go back in time, period”); see also Malecki
Dep. 260.
116
Tr. 373 (Woodard).
117
JX 580.005.
118
JX 652.004-005.
119
Tr. 180 (Patel).
120
Id. 180-81; Tr. 374 (Woodard); JX 652.005, 015-068; JX 751 ¶ 131.
121
Tr. 181 (Patel).
24
b. Bottom-Up Assessment
Channel also conducted a bottom-up assessment to address Greenleaf’s
concern that every area with which Shankar was involved was suspect. The bottom-
up assessment entailed assessing all aspects of Channel’s quality system, and
particularly those under Shankar’s control.122
Channel classified its various types of quality system records into fifteen
categories.123 For thirteen of these categories, which ranged in number from four to
515 records, Channel reviewed every one of its records.124 Included within this
review, Channel reviewed all of the 515 lot history records documenting Channel’s
manufacturing processes for the devices used in the CLARITY study, and
determined that Shankar’s fraud did not impact manufacturing.125
The remaining two categories (document change orders and incoming
inspection records) contained over 1,500 records, which made it impracticable to
review every record.126 For these two categories, Channel (i) reviewed all of the
records generated by Shankar and (ii) conducted a random sampling of the remaining
122
Tr. 49 (Coté); JX 576.003.
123
JX 732.010-011.
124
Id. .014.
125
Tr. 374-75 (Woodard); JX 732.012.
126
See JX 732.014.
25
records,127 using a “nationally recognized” sample plan similar to one that the FDA
uses.128 Ultimately, although Channel identified certain issues with its quality
system unrelated to Shankar’s fraud, which it fully remediated, the bottom-up
assessment revealed no additional issues relating to Shankar’s fraud that could affect
Cerene’s safety and efficacy.129
4. Greenleaf’s Follow-up Assessment
In June 2018, Greenleaf conducted a follow-up, in-person assessment to
review Channel’s progress in addressing Greenleaf’s prior recommendations.130
Greenleaf’s follow-up assessment is documented in a July 2018 report, which found
that Channel had made an “appropriate level of progress” and “many recommended
actions were completed and others were progressing appropriately.”131
Greenleaf also analyzed the two potential connections between Shankar’s
conduct and the CLARITY issues it had previously identified concerning sterility
and “out-of-box” failures. Greenleaf provided an update describing the work
Channel had done to ensure that Shankar’s actions had no impact on either issue.132
127
Tr. 168-70, 205-11 (Patel); JX 732.010-011, 014.
128
Tr. 170, 208-11 (Patel); JX 576.003.
129
Tr. 51-52 (Coté); Tr. 170-71 (Patel); Tr. 369 (Woodard); JX 732.012.
130
Tr. 279 (Elder).
131
JX 634.007, 010; Tr. 282-83 (Elder).
132
JX 634.007-008.
26
In addition, Greenleaf and Channel discussed Channel’s classification of the
IARs Channel had prepared as part of its top-down assessment.133 Channel had
classified the IARs as “minor” based on the definitions in its internal audit process
at the time.134 Greenleaf disagreed. It believed that Channel should have classified
certain IARs as “major.”135 Greenleaf also found that “the impact of the questionable
classifications may be minimal since in the current environment all issues have
received the appropriate visibility and prioritization within the company.”136
Channel later updated its definitions of “major” and “minor” based on Greenleaf’s
feedback.137
Boston Scientific contends that Channel classified issues as “minor” and used
IARs instead of CAPAs to reduce “the likelihood that FDA would review them.”138
As noted below, however, Channel decided to provide all of the IARs (however
classified) to the FDA.139 Boston Scientific’s quality expert (Reeves) acknowledged
that the FDA did not raise any issues with Channel’s classifications or its use of
133
JX 592.
134
Tr. 175-77 (Patel); JX 592.
135
JX 592.
136
JX 634.011; Tr. 287-88, 342-43 (Elder).
137
Tr. 253-54 (Patel).
138
Defs.’ Br. 15.
139
Tr. 253 (Patel); Tr. 803 (Reeves); JX 380.
27
IARs and that “the FDA is not shy when it believes that people should be doing
things by way of CAPA.”140 He testified further “that the classification of minor or
major was not intended to prevent the FDA from learning about the issues.”141
H. Channel Promptly Discloses Shankar’s Fraud to the FDA and BSI
As Channel was investigating and remediating Shankar’s misconduct, it also
was communicating transparently with regulators about these issues.
1. Disclosure to the FDA
On January 11, 2018, Channel retained Greenleaf to advise it on its
communications with the FDA, and in particular how best to provide the FDA with
all relevant information about Shankar’s misconduct.142
On January 22, 2018, Channel emailed the FDA’s lead reviewer of its
application for a PMA to request a call, which took place on January 25. 143 During
that call, Channel informed the FDA of the basic facts about Shankar’s fraud, and
what steps Channel intended to take to remediate that fraud.144 Channel told the
FDA that Shankar falsified certain testing and other records, some of which it had
140
Tr. 805 (Reeves).
141
Id. 804.
142
JX 262.015-024.
143
Tr. 126-27 (Yu); JX 270.
144
Tr. 127-28 (Yu); JX 279.
28
submitted to the FDA.145 On February 1, the FDA asked Channel to withdraw and
re-submit PMA Module 2 with corrected records, which Channel did.146
On March 16, 2018, Channel management, accompanied by Brill and Elder
of Greenleaf, met with the FDA.147 Before the meeting, Channel provided the FDA
with more than 250 pages of information about Shankar’s fraud, including the
Greenleaf Report, Channel’s Fraud Implication Assessment Quality Plan, the 14
IARs addressing Shankar’s fraud, and Brill’s adverse event review. 148 At the
meeting, Channel delivered a presentation on Shankar’s misconduct, its scope and
effects, and Channel’s remediation plan.149 The FDA asked a number of questions
about these and other issues, which Channel answered.150
At the end of the March 16 meeting, the “FDA thanked the company for their
transparency and for coming forward with the information quickly.”151 Elder asked
the FDA if it “would be interested in subsequent discussions regarding the issues
145
Tr. 128 (Yu).
146
Id. 129; JX 294; JX 494.
147
Tr. 64 (Coté); Tr. 129, 132-33 (Yu); JX 401.
148
JX 380; see Tr. 64-65 (Coté); Tr. 130-31 (Yu).
149
Tr. 66 (Coté); Tr. 129-30 (Yu); JX 401.
150
JX 401.002-004.
151
Id. .004; Tr. 67 (Coté).
29
and the status and progress of the company’s remediation,” to which the FDA
responded: “follow-up would take place through the inspection process.”152
On April 18, 2018, Channel had a follow-up call with the FDA.153 The FDA
told Channel that it “ha[d] addressed all of FDA’s concerns and that the agency
appreciate[d] the company’s transparency and timeliness.”154 Since that date, the
FDA has not sought any more information about Shankar’s fraud.155
2. Disclosure to BSI
Channel also disclosed Shankar’s misconduct to BSI.156 Channel told BSI
that the fraud affected some documentation Channel had submitted to it.157 BSI told
Channel that it would address the issue during its upcoming assessments.158
In the fall of 2018, BSI conducted two assessments—one relating to
Channel’s ISO 13485 quality certification and the other relating to Cerene’s
technical file.159 The BSI representative who conducted the two assessments were
152
JX 401.004; Tr. 133-34 (Yu).
153
Tr. 138 (Yu); JX 436.
154
JX 436.
155
Tr. 139 (Yu).
156
Tr. 61 (Coté); Tr. 191-93 (Patel); JX 581.
157
JX 581.014.
158
Tr. 61-62 (Coté); Tr. 193-95 (Patel); JX 581.037.
159
Tr. 195-97 (Patel); JX 709; JX 685.
30
the same individuals whom Channel had informed of Shankar’s fraud.160 During the
assessments, BSI reviewed corrected reports for tests affected by Shankar’s fraud.161
BSI’s own microbiologist also reviewed the corrected sterility test reports.162
BSI concluded that all ISO 13485 requirements “continue to be effectively
implemented,” that “[c]ontinued certification is confirmed,” and that Channel’s “EC
certificate remains valid.”163 This meant, as Boston Scientific’s quality expert
(Reeves) acknowledged, that Channel at all times possessed a valid ISO 13485 and
EC certificate.164 At no point did BSI ever indicate that these certificates or
Channel’s CE Mark were invalid.165
After these assessments were completed, Channel was certified under the
2016 version of the ISO 13485 standard, which has “additional [quality system]
requirements” and is “more rigorous” than the 2003 version under which Channel
was previously certified.166
160
Tr. 820-21 (Reeves).
161
Tr. 196-97 (Patel); Tr. 821-23 (Reeves); JX 685.009-010.
162
Tr. 823-24 (Reeves); JX 685.003.
163
Tr. 62-63 (Coté); Tr. 197-99 (Patel); JX 685.003; JX 709.004.
164
Tr. 817-18, 825 (Reeves); see JX 751 ¶¶ 109-10.
165
Tr. 63 (Coté).
166
Tr. 197-99 (Patel); Tr. 816 (Reeves); JX 725.
31
I. Channel Keeps Boston Scientific Informed of Developments
The trial evidence demonstrates that Channel also was transparent with
Boston Scientific. Since discovering Shankar’s fraud, Channel provided Boston
Scientific with frequent and thorough updates about its investigatory and
remediation work, often via Kaster and Robinson.167
In January 2018, Coté regularly called Kaster and Robinson to update them
on Channel’s investigation.168 During this period, Kaster remained “very supportive
and reiterated Boston’s interest in Channel.”169 Robinson thanked Coté for his
“continued transparency,”170 and relayed the updates to senior executives of Boston
Scientific, including Pierce.171
Robinson reported in early January, for example, that Shankar had been
“invoicing for new [calibration] tests that did not take place,” that numerous reports
were “in question,” that “they will obviously have to redo the calibration tests (which
likely would have to happen in manufacturing move and [manufacturing] module
167
Tr. 70-71 (Coté); see, e.g., JX 238; JX 247; JX 258; JX 261; JX 271; JX 275; JX 279;
JX 282; JX 288; JX 295; JX 321; JX 353.
168
Tr. 42-43, 70-71 (Coté); JX 239; Kaster Dep. 188-89.
169
JX 271.
170
JX 261.
171
JX 259; JX 264; Robinson Dep. 206.
32
submission anyway),” and that Channel was taking remedial actions.172 Kaster
commented: “Bottom line is that to the best of my knowledge this will not have a
material impact on the FDA timelines,” an assessment with which Robinson
agreed.173 A few days later, Robinson provided another update, which noted that
Channel “will have to redo some tests—e.g., residual sterilization bioburden.”174
On January 25, 2018, Coté, Malecki, and Yu met with Robinson and Pierce.175
Coté updated them on Channel’s work and shared Channel’s plans to meet with the
FDA to discuss the Greenleaf Report, which occurred in March 2018.176 Pierce did
not express any concerns about the effects of Shankar’s conduct on Channel’s
quality system, clinical trial data, or Cerene during this meeting.177
After the January 25 meeting, Coté repeatedly told Pierce and others at Boston
Scientific: “Please do not hesitate to call me with any questions.”178 During the next
three months, Boston Scientific never asked for any additional information relating
172
JX 259.
173
JX 264.
174
Id.
175
Tr. 75 (Coté); Tr. 468 (Pierce); JX 275.
176
Tr. 468-69 (Pierce); JX 456.
177
Pierce Dep. 85-87, 100-01; see also Pierce Dep. 82 (agreeing that “[n]o one is
suggesting [in January 2018] . . . that Mr. Shankar’s fraud could impact the acquisition
even if the FDA approves the product”).
178
See JX 275.
33
to Shankar’s conduct, Channel’s remediation, or its communications with the
FDA.179 Instead, teams of Boston Scientific personnel pressed forward with their
work on the integration of Channel without apparent regard for Shankar’s fraud.180
On February 21 and 22, 2018, a Boston Scientific team visited Channel’s
headquarters as part of its integration work.181 At the meeting, Coté updated Boston
Scientific on the results from Greenleaf’s assessment.182 Nobody from Boston
Scientific expressed any potential concerns about its acquisition of Channel.183
On March 6, 2018, the same day Channel received the Greenleaf Report, Coté
provided a copy of the report to Boston Scientific and “suggest[ed] we schedule a
call with the appropriate [subject matter experts] the week of the 19th to discuss the
meeting with the FDA and to share updates as may be appropriate.”184 No one from
Boston Scientific responded to Coté’s suggestion.185
179
Tr. 517, 520-24, 529 (Pierce).
180
Id. 469, 517-19.
181
JX 456.002; JX 302.
182
Tr. 71 (Coté); JX 456; JX 366.
183
Tr. 74 (Coté); Tr. 526-27 (Pierce).
184
JX 353; JX 456.002; Tr. 72-73 (Coté).
185
Tr. 516, 526-27 (Pierce).
34
On March 16, after meeting with the FDA, Coté “reached out [to Boston
Scientific] several more times offering to provide an update on our dialogue with the
FDA.”186 Again, no one from Boston Scientific responded.187
Boston Scientific employees uniformly testified that Channel was fully
transparent with Boston Scientific in the aftermath of discovering Shankar’s fraud.
Kaster testified that Coté kept him “regularly updated as to what was going on with
the company’s investigation”188 and he thanked Coté for the “thorough update[s]”
and reassured him “[t]his will al[l] get resolved.”189 Robinson similarly testified he
“always found Mr. Coté to be transparent in [his] interactions with him,”190 and
that Coté was “timely, forthcoming, transparent.”191 Pierce testified he had “no
reason to doubt” that Channel was fully transparent with Boston Scientific at all
times.192
186
JX 456.002.
187
Id.
188
Kaster Dep. 191.
189
JX 257.
190
Robinson Dep. 99.
191
Id. 219.
192
Tr. 533 (Pierce); see also Tr. 474-75 (Pierce).
35
J. The FDA Accepts Channel’s Remediation Plan
On April 18, 2018, the FDA accepted Channel’s remediation plan for its PMA
application. This action strongly signaled that Shankar’s fraud would not impede
the FDA from approving the Cerene device and made premarket approval of the
device a distinct possibility. Coté emailed Pierce the next day to report the good
news.193
Three days later, on April 22, Pierce replied and raised with Channel for the
first time concerns about Shankar’s fraud.194 Pierce claimed that Boston Scientific
found the “Greenleaf report to be extremely troubling,” requested Channel’s
communications with the FDA and BSI, and explained that:
Candidly, we don’t have confidence that, if all of the details set forth in
the Greenleaf report (not to mention its obvious gaps) were fully
disclosed to the FDA, the FDA would be acquiescing of the underlying
facts or optimistic of a PMA submission based on existing study data.195
Despite suggesting in his April 22 email that Channel had not made full
disclosure to the FDA, Pierce testified that he never meant to suggest that Channel
had not been forthcoming with FDA.196 Pierce and no one else at Boston Scientific
ever identified the purported “obvious gaps” in the Greenleaf Report referenced in
193
JX 456.002.
194
Tr. 73 (Coté); Tr. 526-27 (Pierce).
195
JX 456.004.
196
Tr. 530 (Pierce).
36
his email.197 Pierce acknowledged that the FDA had the Greenleaf Report and thus
could draw its own conclusions about any such gaps.198
Surprised by Pierce’s April 22 email, Coté asked for an in-person meeting as
soon as possible.199 Pierce did not respond.200 Coté reached out to Boston Scientific
five times trying to schedule a call or meeting.201 No one responded.202
K. Boston Scientific Terminates the Agreement
On May 11, 2018, Boston Scientific sent Channel a notice of termination. It
stated in relevant part that:
BSC hereby terminates [the Agreement] pursuant to Section 8.1(f), in
light of multiple breaches of Channel’s representations and warranties
in Article III of the Agreement, and Section 8.1(i). The representations
and warranties breached by Channel include, but are not limited to,
those set forth in Sections 3.18(c), 3.22(a), 3.22(c), 3.22(f) of the
Agreement. These representations and warranties were breached as of
the date of the Agreement and are not curable.203
197
Id. 531.
198
Id.
199
Tr. 76 (Coté); JX 440; JX 456.002-003.
200
Tr. 76 (Coté); Tr. 532-35 (Pierce).
201
Tr. 536 (Pierce).
202
Tr. 78-79 (Coté); Tr. 536 (Pierce).
203
JX 475.
37
Pierce made the decision on behalf of Boston Scientific to terminate the Agreement.
In doing so, the sole documentary evidence he relied on was the Greenleaf Report.204
Pierce decided to terminate the Agreement after receiving feedback about the
Greenleaf Report in a March 29 meeting with Carr, Donna Gardner, Boston
Scientific’s Vice President of Regulatory Affairs, the Vice President of Research
and Development, and Pierce’s legal counsel, Mark Myhra.205 At this meeting, no
one discussed any steps Boston Scientific could take to remediate Channel’s quality
system.206
L. The FDA Reviews Channel’s PMA
On August 10, 2018, Channel submitted its final PMA module to the FDA.207
By that time, Channel had finished resubmitting the reports in earlier modules that
Shankar’s fraud had affected.208
On August 28, 2018, the FDA accepted Channel’s PMA application, which
the FDA formally filed on September 6, 2018.209 The filing took place about three
204
Tr. 484, 522-23, 537 (Pierce).
205
Tr. 471-74 (Pierce); Tr. 620 (Carr noting Mr. Sukthankar, the Vice President of
Research and Development, was also in attendance).
206
Carr Dep. 148-49; see also Tr. 640 (Carr).
207
Tr. 139 (Yu).
208
Id. 138-39.
209
Id. 140.
38
months later than planned based on Channel’s initial timeline for its PMA, which
was prepared before discovery of Shankar’s fraud.210
The FDA proceeded to review Channel’s PMA substantively.211 Boston
Scientific’s quality expert (Reeves) testified that, because of Shankar’s fraud, the
FDA would review Channel’s PMA application “with more laser-like focus than
they would if they were just reviewing this PMA as they normally do.”212 The FDA
made numerous, detailed requests for additional information, none of which
appeared to concern Shankar’s fraud, to which Channel responded promptly.213
The FDA also completed four separate bioresearch monitoring inspections,
one at Channel and three at separate CLARITY trial sites to evaluate, among other
things, the quality and integrity of Channel’s clinical trial data.214 At the end of an
FDA inspection, if inspectors observe regulatory violations, they identify them on a
“Notice of Inspectional Observations” known as a “Form 483.”215 The FDA’s
210
JX 169 (estimating date of final PMA module to be June 1, 2018).
211
Tr. 413 (Ulatowski); Tr. 683 (Carr); JX 755.007-011, 015-017.
212
Reeves Dep. 211.
213
Tr. 413 (Ulatowski); JX 755.015-017.
214
Tr. 140 (Yu); Tr. 413-14 (Ulatowski); JX 711; JX 720; JX 755.016.
215
Tr. 141 (Yu); JX 755.016.
39
inspectors did not issue any Form 483’s after conducting their bioresearch
monitoring inspections.216
From January 22 through February 1, 2019, the FDA conducted a
pre-approval inspection of Channel, which lasted seven business days and included
a detailed inspection of Channel’s quality system. 217 The FDA inspector made two
relatively minor observations (unrelated to Shankar’s fraud) on a Form 483, to which
Channel responded on February 22, 2019.218
M. The FDA Approves Channel’s PMA
On March 28, 2019, the FDA approved Channel’s application for premarket
approval of the Cerene device.219 Cerene therefore received FDA approval during
the first quarter of 2019, as Boston Scientific originally contemplated before signing
the Agreement,220 and six months ahead of the September 30, 2019 contractual
deadline in the Agreement.221 The FDA explicitly found that there is a “reasonable
216
Tr. 141 (Yu); Tr. 414-15 (Ulatowski); JX 711; JX 720; JX 755.016.
217
Tr. 141 (Yu); Tr. 199-201 (Patel); JX 723.002-003; JX 755.016.
218
Tr. 141-43 (Yu); Tr. 201 (Patel); JX 740; see also Tr. 369-70 (Woodard).
219
JX 2.
220
JX 187.006.
221
Agreement § 10.2 (definition of “FDA Approval”).
40
assurance of the safety and effectiveness of [the Cerene] device.”222 The FDA also
found that Channel and its contract manufacturer comply with the FDA’s QSR.223
Reeves confirmed that the FDA’s approval necessarily reflects its conclusion
that Cerene is safe and effective, that Channel’s quality system is compliant with the
QSR, and that its clinical data is reliable, describing FDA approval as “the proof in
the pudding.”224 As a “former FDAer,” Elder of Greenleaf was “pleased to see that
Channel was transparent and provided FDA with information,” particularly the
Greenleaf Report that he worked on, before the FDA approved Cerene.225 To Elder,
this meant that the FDA “had all of the information [it] needed to make an informed
decision” when approving Cerene.226 Due to the FDA’s approval, Channel can
market Cerene in the United States immediately.227
II. PROCEDURAL HISTORY
On September 12, 2018, Channel filed a verified complaint asserting two
claims. Its first claim asserts that Boston Scientific breached Section 6.3(b) of the
Agreement “by declaring its intention to cease performing its obligations thereunder
222
JX 757.029.
223
Id. .030.
224
Tr. 831, 844-49 (Reeves); Reeves Dep. 208.
225
Tr. 290-91 (Elder).
226
Id. 291.
227
Tr. 560 (Pierce).
41
and to terminate the [Agreement] without a valid basis,” and seeks the remedy of
specific performance under Section 10.6 of the Agreement.228 Its second claim seeks
a declaratory judgment that (i) Boston Scientific breached its obligations under the
Agreement, (ii) no Material Adverse Effect (“MAE”) occurred, (iii) Channel did not
breach any representations or warranties that would reasonably be expected to have
an MAE, and (iv) Boston Scientific had no right to terminate the Agreement.229
On October 3, 2018, Boston Scientific filed three counterclaims. Its first
claim is for fraud in the inducement based on alleged misrepresentations and
omissions about Channel’s quality systems. Its second claim seeks rescission of the
Agreement based on breaches of various representations and warranties. Its third
claim seeks a declaratory judgment that Boston Scientific had the right to—and
did—terminate the Agreement under Sections 8.1(f) and 8.1(i) of the Agreement.230
The court held a four-day trial in April 2019 and heard post-trial argument on
July 26, 2019. At that hearing, the court requested supplemental briefing on an issue
of contractual interpretation concerning Section 8.1(f) of the Agreement, which the
parties completed on September 6, 2019.
228
Dkt. 1 ¶¶ 89-90.
229
Id. ¶ 101.
230
Dkt. 25 ¶¶ 41-60.
42
III. FRAMEWORK OF THE ANALYSIS
The parties’ disputes are primarily contractual. Boston Scientific contends
that it terminated the Agreement in accordance with its terms. Channel contends
that Boston Scientific did not validly terminate the Agreement and seeks an order of
specific performance to compel Boston Scientific to close the merger.
The analysis of the parties’ claims focuses primarily on the following three
provisions in the Agreement:
 Under Section 7.2(b), Boston Scientific’s obligation to consummate
the merger is subject to satisfaction of the condition that each of
Channel’s representations and warranties in the Agreement “shall
have been true and correct at the time originally made . . . except to
the extent that the failure of any such representations and warranties
to be true and correct does not have and would not reasonably be
expected to have a Material Adverse Effect” on Channel (the
“Representations Condition”).
 Under Section 8.1(f)(i), Boston Scientific can terminate the
Agreement at any time if any of Channel’s representations and
warranties in the Agreement “shall be inaccurate or shall have been
breached as of the Agreement Date . . . such that the condition set
forth in Section 7.2(b) would not be satisfied.”
 Under Section 6.3(b), from the “Agreement Date until the Effective
Time,” Boston Scientific “will take all further action that is
necessary or desirable to carry out the purposes of this Agreement”
and “shall use its commercially reasonable efforts to take all such
action and refrain from taking any actions which would be
reasonably expected to frustrate the essential purposes of the
transactions contemplated by the Agreement.”
Section 7.2(b) also contains a “bring-down condition” that requires that each
of Channel’s representations and warranties in the Agreement “shall be true and
43
correct as of the Effective Time,” i.e., when the merger closes.231 That aspect of
Section 7.2 is not at issue here. In this case, Boston Scientific relies on Section
7.2(b) solely for alleged inaccuracies in or breaches of Channel’s representations and
warranties as of the “Agreement Date,” i.e., November 1, 2017.
The termination right in Section 8.1(f) does not contain a cure provision for
any inaccuracy in or breach of a representation and warranty as of the Agreement
Date.232 Section 8.1(f), however, incorporates the closing condition in Section
7.2(b), which has a built-in MAE requirement. Specifically, the closing condition
in Section 7.2(b) “shall be deemed to be satisfied unless any failures of the
representations and warranties . . . to be true and correct has or would reasonably be
expected to have a Material Adverse Effect on [Channel].” Thus, the
Representations Condition “examines the inaccuracy of specific representations and
uses as its measuring stick whether the deviation between the as-represented
condition and the actual condition would reasonably be expected to constitute a
231
See generally Lou R. Kling & Eileen T. Nugent, Negotiated Acquisitions of Companies,
Subsidiaries and Divisions § 1.05[2], at 1-41 (2019 ed.) (describing “the critical
‘bringdown’ condition”).
232
Section 8.1(f) does contain a cure provision for “an inaccuracy in or breach of any
representation or warranty of [Channel] as of a date subsequent to the date of this
Agreement,” but that provision is irrelevant to this case. Agreement § 8.1(f).
44
Material Adverse Effect.”233 The “reasonably be expected” standard is an objective
standard.234
In its termination notice, Boston Scientific also relied on Section 8.1(i) of the
Agreement as a second ground for termination. Under Section 8.1(i), Boston
Scientific can terminate the Agreement at any time if “there shall have occurred any
Material Adverse Effect with respect to [Channel].” The termination right in Section
8.1(i) does not depend on the existence of an inaccuracy in or breach of any
representation or warranty in the Agreement but is subject to a cure provision. By
the time of trial, which occurred after the FDA approved the Cerene device, Boston
Scientific’s reliance on Section 8.1(i) was an afterthought that depended entirely on
whether or not Boston Scientific could prove an MAE for purposes of Section 8.1(f).
The analysis of the claims that follows proceeds in five parts. Section IV
analyzes whether Boston Scientific was entitled to terminate the Agreement under
Section 8.1(f).235 Section V addresses Boston Scientific’s reliance on Section 8.1(i).
233
Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347, at *46 (Del. Ch. Oct. 1, 2018),
aff’d, 198 A.3d 724 (Del. 2018).
234
See id. at *65 (citation omitted); Frontier Oil v. Holly Corp., 2005 WL 1039027, at *33
(Del. Ch. Apr. 29, 2005) (“The test—‘would have’ or ‘would reasonably be expected to
have’—is an objective one.”).
235
When this decision refers to Boston Scientific’s exercise of a right to terminate under
Section 8.1(f), the court is referring to the first subsection of that provision, i.e., Section
8.1(f)(i). In a footnote in its opening brief, Boston Scientific argued that the Agreement
was properly terminated under Section 8.1(f)(ii) as well because Channel breached a
covenant in Section 5.2 of the Agreement by manufacturing non-compliant devices that
45
Section VI analyzes whether Boston Scientific breached Section 6.3(b). Section VII
analyzes whether Channel is entitled to the remedy of specific performance. Section
VIII analyzes whether Boston Scientific is entitled to damages based on its
fraudulent inducement claim.
IV. BOSTON SCIENTIFIC’S TERMINATION UNDER SECTION 8.1(f)
Boston Scientific’s lead argument is that it properly terminated the Agreement
under Section 8.1(f) based on certain representations in the Agreement that were
inaccurate as of the date of the Agreement.236 As just discussed, Section 8.1(f)
permits Boston Scientific to terminate the Agreement at any time if any of Channel’s
representations in the Agreement “shall be inaccurate. . . such that the condition set
forth in Section 7.2(b) would not be satisfied.”237 The Representations Condition in
were used in the CLARITY study. Defs.’ Br. 42-43 & n.3. A covenant is a promise of
future performance. Akorn, 2018 WL 4719347, at *8. Channel finished manufacturing the
CLARITY devices more than six months before entering into the Agreement. Tr. 331-33
(Elder). Thus, Channel could not have breached the covenant in question based on this
conduct.
236
The parties frame their arguments in terms of “breaches” of representations. The court
finds it more helpful to frame the alleged “breaches” of representations as “inaccuracies”
because they are statements of fact. See Kenneth A. Adams, A Manual of Style for Contract
Drafting 116 (4th ed. 2017) (“One breaches an obligation, but not a statement of fact
(whether you call it that or a representation). Instead, a statement of fact is accurate or
inaccurate. If Abigail says that it’s Monday but in fact it’s Tuesday, Abigail hasn’t
‘breached’ anything. Instead, she’s made an inaccurate statement.”).
237
Agreement § 8.1(f).
46
Section 7.2(b) in turn provides that Boston Scientific must consummate the merger,
subject to various other conditions, if:
Each of the representations and warranties of the Company contained
in this agreement . . . shall have been true and correct at the time
originally made, . . . except to the extent the failure of any such
representations and warranties to be true and correct does not have and
would not reasonably be expected to have a Material Adverse Effect.238
Boston Scientific bears the burden of “proving by a preponderance of the
evidence the facts supporting the exercise of its termination rights.”239 Thus, to
validate its termination of the Agreement under Section 8.1(f), Boston Scientific
must prove that: (i) one or more of the representations in the Agreement was
inaccurate as of the Agreement Date and (ii) the failure of such representation(s) to
be true and correct “has or reasonably would be expected to have a Material Adverse
Effect” on Channel.240 The court analyzes these two issues next.
A. Whether Any of Channel’s Representations Was Inaccurate
Boston Scientific argues that Shankar’s fraud rendered a number of
representations in the Agreement inaccurate as of the date of the Agreement. Each
of the representations Boston Scientific contends was inaccurate contains a
materiality qualifier. The parties did not analyze the meaning of the term “material”
238
Id. § 7.2(b) (emphasis added).
239
Akorn, 2018 WL 4719347, at *4.
240
Agreement § 7.2(b).
47
or its variations (e.g., “in all material respects”) for purposes of assessing the
accuracy of the representations in the Agreement in their own right.
In Frontier Oil v. Holly Corp.,241 this court considered the meaning of the term
“material” as used in a warranty in a merger agreement. The court explained that,
“[i]n the context of the Merger Agreement, the concept of ‘Material Adverse Effect’
and ‘material’ are analytically distinct, even though their application may be
influenced by the same factors.”242 The court then applied a disclosure-based
standard of materiality for purposes of interpreting the warranty.243
Last year, in Akorn, Inc. v. Fresenius Kabi AG, Vice Chancellor Laster
carefully studied the meaning of the term “in all material respects” in a covenant in
a merger agreement.244 There, the acquirer (Fresenius) argued, based on Frontier
Oil, “that the phrase ‘in all material respects’ requires only a ‘substantial likelihood
that the . . . fact [of breach] would have been viewed by the reasonable investor as
having significantly altered the ‘total mix’ of information.’”245 Although noting the
241
2005 WL 1039027.
242
Id. at *38.
243
Id. (“A fact is generally thought to be ‘material’ if [there] is ‘a substantial likelihood
that the … fact would have been viewed by the reasonable investor as having significantly
altered the ‘total mix’ of information made available.’”) (quoting TSC Indus. v. Northway,
Inc., 426 U.S. 438, 449 (1976)).
244
Akorn, 2018 WL 4719347, at *86.
245
Id.
48
“oddity of relying on a disclosure-based standard to evaluate contractual
compliance,” the court endorsed using the “the Frontier Oil test (as conceived by
Fresenius).”246 The court explained that the test “strives to limit the operation [of
the covenants in question] to issues that are significant in the context of the parties’
contract, even if the breaches are not severe enough to excuse a counterparty’s
performance under a common law analysis.”247 Based on the analysis in Akorn, the
court will apply here the disclosure-based standard that Akorn endorses in evaluating
the alleged inaccuracies of representations in the Agreement.
Boston Scientific argues that Shankar’s fraud rendered three categories of
representations inaccurate at signing. The court considers each of these categories
in the three sections that follow.
1. Compliance with Applicable Healthcare Laws
Boston Scientific’s primary argument is that Channel’s representation in
Section 3.22(a) of the Agreement was inaccurate as of the Agreement Date because
246
Id. Vice Chancellor Laster did not apply this test when analyzing the alleged
inaccuracies of various regulatory compliance representations because the merger
agreement in Akorn included a “materiality scrape” provision that “scrape[d] away those
specific qualifiers [in the representations themselves] in favor of an aggregate MAE
qualifier.” Id. at *64. The Agreement here does not contain such a provision.
247
Id. at *86.
49
Channel failed to design, manufacture, and test Cerene in material compliance with
applicable “Healthcare Laws.” In Section 3.22(a), Channel represented that:
The Company and its Subsidiaries are in material compliance with all
Healthcare Laws applicable to the Company and is Subsidiaries, or the
Company Business. The design, manufacture, testing, and distribution
of the Products by or on behalf of the Company and its Subsidiaries is
being conducted in compliance with all applicable Healthcare Laws,
including, without limitation, the FDA’s current good manufacturing
practice regulations at 21 C.F.R. Part 820 for medical device products
. . . .248
The “good manufacturing practice regulations” referenced at the end of this
provision are known as the “Quality System Regulation” or “QSR.” The QSR is a
system of quality regulations “for medical devices that are commercially distributed
[to] ensure that the product is reliable and developed correctly.” 249 The QSR
contains many subparts, one of which is 21 CFR § 820.30, entitled “Design
Controls.”250
As of the date of the Agreement, the FDA had not approved Channel to sell
and distribute products in the United States but it had approved Channel to conduct
its CLARITY clinical trial under an approved investigational device exemption
248
Agreement § 3.22(a).
249
Tr. 358-59 (Woodard).
250
See 21 CFR § 820.
50
(IDE).251 As a general matter, an approved IDE exempts a company “from all of the
quality system regulations, with the exception of design controls.”252
The exemption afforded to an approved IDE, however, contains an important
qualification. Specifically, under 21 CFR § 812.1(a), an approved IDE “exempts a
device from the . . . good manufacturing practice requirements under section 520(f)
[of the Federal Food, Drug, and Cosmetic Act] except for the requirements found in
§ 820.30, if applicable (unless the sponsor states an intention to comply with these
requirements under § 812.20(b)(3) or § 812.140(b)(4)(v)).”253 In other words, a
sponsor who has obtained an approved IDE is only required to comply with the
design control requirements of the QSR (Section 820.30) unless it elects to comply
with other requirements of the QSR by stating an intention to do so.
Channel does not dispute that it did not comply with the entirety of the QSR
as of the date of the Agreement.254 Rather, Channel argues that it complied with the
only subpart of the QSR that applied to the Cerene device when it entered into the
Agreement (i.e., the subpart for device controls) and that the rest of the QSR was
inapplicable because Channel never stated an intention to comply with those other
251
Tr. 359 (Woodard); see also JX 171 (referencing Cerene’s IDE exemption # G160101).
252
Tr. 359 (Woodard).
253
21 CFR § 812.1(a) (JX 782) (emphasis added).
See Defs.’ Reply Br. 10-12 (listing nine sections within six subparts of the QSR that
254
Channel did not contest it did not comply with as of the date of the Agreement) (Dkt. 196).
51
requirements and thus was exempt from them. Boston Scientific counters that the
entire QSR did apply to the Cerene device because Channel stated an intention to
comply with those requirements and that, even if Channel did not, Channel
materially failed to comply with the design control requirements in any event. The
preponderance of the evidence supports Channel on the first point but supports
Boston Scientific on the second. The court addresses those two issues next.
a. Channel Had to Comply Only with the QSR’s Design
Control Requirements as of the Agreement Date
In support of its position that Channel expressed an intention to comply with
all of the requirements of the QSR, Boston Scientific relies on certain statements in
Channel’s application for an IDE and in its quality manual. Boston Scientific first
points to the following statements in Channel’s IDE application:
 “All products are manufactured to Channel Medsystems quality
system requirements”
 “All components in the Cerene device and the collection bag are
purchased to approved specifications using standard operating
procedures”
 “Critical material and component specifications are . . . inspected at
Incoming Inspection”
 “Suppliers of these components/materials are monitored by use of
an Approved Supplier List”
 “sterilization of the Cerene device is performed by ProTech”255
255
Defs.’ Br. 36 (quoting JX 810 at CHANNEL-0016099).
52
Significantly, the statements quoted above appear to be ones that the FDA
requires a sponsor to include in an IDE application. Specifically,
21 C.F.R. § 812.20(b)(3) provides, in relevant part, that an IDE application “shall
include”:
A description of the methods, facilities, and controls used for the
manufacture, processing, packing, storage, and, where appropriate,
installation of the device, in sufficient detail so that a person generally
familiar with good manufacturing practices can make a knowledgeable
judgment about the quality control used in the manufacture of the
device. 256
It would be illogical that statements made in an application for an IDE that the FDA
requires a company to include in the application would preclude the company from
obtaining the benefit of an IDE, i.e., the benefit of developing a product before
commercialization free of certain regulations. If that were the case, the IDE
application process would preclude every company from receiving the benefit of an
IDE. For this reason, the court concludes that the “states an intention” qualification
to the exemption in Section 812.1(a) requires the sponsor to expressly state its
intention to comply with the full QSR (or parts of it) for the exemption from the
QSR (other than design controls) to not apply.
256
21 CFR § 812.20(b)(3) (JX 783).
53
Channel’s FDA expert credibly testified that Channel’s IDE application does
not contain “any affirmative statements” that it intends to comply with all of the
QSR,257 and Boston Scientific has identified no such statement. Boston Scientific
instead asks the court to look to the contents of Channel’s quality manual for an
expression of such an intention.
Specifically, Boston Scientific contends that Channel expressed an intention
to comply with the entire QSR because Channel’s “quality system requirements”—
which is referenced in the IDE application—are defined in its quality system manual
to require compliance with the entire QSR. For support, Boston Scientific points to
the following statement in the quality manual: “The Quality Department has full
responsibility and authority for establishing, implementing and maintaining the
Quality Management System in accordance with the requirements of . . . 21 CFR
Part 820 Quality System Regulation.”258
257
Tr. 420 (Ulatowski).
258
Defs.’ Br. 36-37 (quoting JX 45.003). Boston Scientific also contends that the reference
in the quality manual to 21 C.F.R. Part 820 must have been intended to refer to the entire
QSR because the quality manual lists as “not applicable to [Channel’s] products and
processes” one section of the QSR (21 C.F.R. § 820.170) pertaining to “installation
activities.” Id. at 37-38. As the quality manual itself makes clear, this regulation would
never apply to Channel because there “are no installation activities” for the Cerene device.
See JX 45.004. Thus, one cannot infer from the reference to Section 820.170 in the quality
manual that Channel was attempting to make an affirmative statement of a present intention
to comply with all of the other requirements of the QSR.
54
The statement in the quality manual quoted above, however, does not reflect
a present intention to comply with all of the QSR requirements. Rather the statement
implies that the full QSR was not in effect at the time, thus the reason the Quality
Department was responsible for “establishing” and “implementing” such a system.
Lori-Ann Woodard, Channel’s quality expert, testified knowledgeably and credibly
that a single-device start-up company like Channel would begin by complying with
the design control requirements in Section 820.30 and then ramp up to full
compliance by the time it applies for premarket approval (PMA) and begins
marketing its product.259 The statement of the Quality Department’s responsibility
and authority in the manual is consistent with this approach.
Apart from the lack of any affirmative statement of a present intention to
comply with the QSR in Channel’s quality manual, Boston Scientific’s reliance on
the manual fails for a separate reason. Inherent in the “states an intention” exception
to the exemption in Section 812.1(a), the sponsor must make the statement to the
FDA. Boston Scientific concedes that Channel did not submit its quality manual to
the FDA in its IDE application but maintains that the manual was still subject to
259
Tr. 360-61 (Woodard).
55
inspection by the FDA.260 The FDA, however, only engages in such inspections for
the PMA application process, not the IDE application process.261
Finally, Boston Scientific elicited expert testimony that Section 812.1 only
exempts the device receiving the IDE from the QSR and not the company, and
therefore, Channel was still required to comply with the rest of the QSR.262 FDA
guidance, however, specifically and clearly states the contrary: “Sponsors of IDE’s
are also exempt from the Quality System (QS) Regulation except for the
requirements for design controls.”263 The court credits the agency’s guidance over
the proffered testimony.264 For this and the other reasons discussed above, the court
concludes that Channel only needed to comply with the design controls section of
the QSR (21 C.F.R. § 820.30) when it entered into the Agreement.
b. Channel’s Representation in Section 3.22(a) was
Inaccurate as of the Agreement Date
The court turns next to whether Channel’s representation under Section
3.22(a) of the Agreement was inaccurate because it was not in material compliance
with 21 C.F.R. § 820.30, the design control requirements. Under those requirements,
260
Defs.’ Reply Br. 15.
261
JX 736 ¶ 25; compare 21 C.F.R. § 814 (PMA), with 21 C.F.R. § 812 (IDE).
262
Tr. 706-07 (Reeves).
263
JX 791.001.
264
Tr. 700 (Reeves).
56
Channel must “establish and maintain procedures to control the design of the device
in order to ensure that specified design requirements are met.”265 Specifically,
Channel was required to establish and maintain procedures for, among other things,
design verification, design validation, and the documentation and approval of design
changes before their implementation.266 The results of design verification and
validation had to be included in a design history file, which “each manufacturer shall
establish and maintain . . . for each type of device.”267
Boston Scientific focuses on two issues:
 According to the Greenleaf Report, “the rationale and the internal
discussions that resulted in the decision to institute [changes to
Cerene] in the design history file were not always detailed,”268
despite such detail being required under Section 820.30.269
 Shankar’s falsified test records impacted verification and validation
testing, which is done under the design control requirements of
Section 820.30.270
265
21 C.F.R. § 820.30(a)(1).
266
21 C.F.R. § 820.30(f)-(g), (i).
267
21 C.F.R. § 820.30(f)-(g), (j).
268
JX 356.010; see JX 356.024 (noting “there were only a few incidents where there was
a record of the elements of the findings that resulted in the decision to make changes in the
device” and “documentation of the reason for the change was commonly not available”).
269
JX 736.030 (Reeves Expert Report); JX 356.023.
270
Tr. 396 (Woodard); Tr. 306 (Elder).
57
As to the first issue, Boston Scientific argues that the lack of documentation
on the reasons for implementing changes to the device is contrary to Section
820.30’s requirement that manufacturers adhere to procedures for “identification,
documentation, validation, . . . review, and approval of design changes before their
implementation.”271 Channel counters that even if that is the case, it is not material
because the Greenleaf Report further states that “Channel maintains a robust design
control program with detailed device evolutional changes well documented in
change control documentation and detailed engineering drawings.”272 Considered
alone, the lack of detail in the design history file noted in the Greenleaf Report would
not be significant to the parties in the context of the Agreement. Combined with the
presence of falsified records in the design history file, however, the court finds that
Channel’s noncompliance with the design control requirements was material.
The parties focus on the fact that Shankar falsified seven records on
sterilization validation and package seal integrity that appeared in six reports.273 As
Elder explained and as documented in the Greenleaf Report, these falsified
271
21 C.F.R. § 820.30(i).
272
JX 356.010.
273
See JX 356.014-016 (documenting “false records submitted in regulatory filings to
FDA”); JX 658.004-007 (listing “altered . . . reports that were submitted to FDA”). The
record also reflects that Shankar falsified records concerning (i) measurements of at least
four component parts and (ii) instrument and equipment calibration, which Channel did not
submit to the FDA. JX 356.016-019.
58
documents were used in verification and validation testing274 and, by Channel’s own
admission six of these documents were included in the design history file as of the
date the Agreement was signed.275 Elder further testified that Channel’s quality
system had “significant issues” that “resulted in fraudulent documents being
created,”276 and Channel’s own quality expert acknowledged that a design history
file that contains false test reports cannot comply with Section 820.30.277
Channel counters that because the design history file included numerous other
records, the presence of only six test reports containing falsified documents was not
material.278 For materiality purposes, however, the small percentage of affected test
reports is not determinative. Depending on the circumstances, a single test report
generated from falsified content may be significant enough to establish material non-
compliance with Section 820.30.
274
Tr. 305-06 (Elder) (confirming that Shankar had “falsified records of dimensional
inspections conducted [of] components used in the production of medical devices . . . used
in verification and validation testing.”); see also JX 356.016-017.
Pl.’s Resp. Br. 73 (“Of the numerous records contained in the [design history file] as of
275
November 1, 2017, six were inauthentic.”) (Dkt. 193).
276
Tr. 320 (Elder); JX 637.001-002.
277
Tr. 396 (Woodard).
278
Tr. 50 (Coté); Tr. 119-20 (Yu). In January 2018, Channel had approximately 170
quality records in its quality system, 138 of which were submitted to the FDA in connection
with Channel’s IDE and first two PMA modules. Tr. 119-20 (Yu). The second PMA
module was filed with the FDA after the Agreement was entered into on November 1,
2017, and thus it is unclear how many of these records were in the design history file as of
the Agreement Date.
59
Focusing on the contents of the reports, Channel asks the court to consider as
part of the total mix of information the results of its internal investigation, which
validated the conclusions in the six affected test reports and found after “a really
deep dive” that “Shankar had no impact.”279 The fact that Channel’s investigation
determined that the falsified documents did not alter the conclusions of the affected
test reports, however, does not mean that the presence of falsified quality records
could not be significant to a reasonable acquirer for other reasons—for example, as
presenting a potential obstacle to obtaining FDA approval for the Cerene device.
Although a close call, having carefully considered the evidence of record, the
preponderance of the evidence demonstrates that a reasonable investor/acquirer
would view the manner in which Channel failed to comply with the design control
requirements of Section 820.30 “as having significantly altered the ‘total mix’ of
information.”280 In particular, the lack of compliance with a portion of the quality
system regulation due to the creation of false records concerning equipment
calibration, sterility, and device packaging used in verification and validation testing
of the device likely would be significant to a reasonable acquirer. Even if the
falsified records did not impact the integrity of the design history file, the very fact
that there were falsified records in the design history file would call into question
279
Tr. 405-06 (Woodard).
280
Akorn, 2018 WL 4719347, at *86.
60
Channel’s ability to secure FDA approval. Accordingly, the court finds that the
representation in Section 3.22(a) was inaccurate as of the date of the Agreement.
2. Clinical Study Device Compliance
In its second category, Boston Scientific argues that Channel breached
Sections 3.22(f), 3.32(b), and 3.32(c) as of the date of the Agreement, because “all
of the devices used in the CLARITY clinical trial were manufactured under a
noncompliant quality system, when Shankar was the sole quality assurance
employee.”281 In Section 3.22(f), Channel represented and warranted that all of its
clinical trials complied in all material respects with applicable healthcare laws:
All preclinical and clinical trials . . . that have been or are being
conducted by or on behalf of, or sponsored by, [Channel] . . . have been
conducted in compliance in all material respects with standard medical
and scientific research procedures and the experimental protocols,
procedures, and controls pursuant to applicable Healthcare Laws . . . .282
In Section 3.32(b), Channel represented and warranted that the goods and services
Channel supplied complied in all material respects with applicable laws:
The goods and services supplied by [Channel] have complied, in all
material respects, with all Laws and with all government, trade
association and other mandatory and voluntary requirements,
specifications and other forms of guidance.283
281
Defs.’ Br. 42-43.
282
Agreement § 3.22(f).
283
Id. § 3.32(b).
61
In Section 3.32(c), Channel represented and warranted that its products did not
contain any material defect:
None of the Products developed, used, manufactured or sold by
[Channel] prior to the Closing contained any material quality, design,
engineering, manufacturing or safety defect.284
With respect to Sections 3.22(f) and 3.32(b), Boston Scientific has not
identified any applicable laws or requirements that Channel failed to comply with,
other than design control requirements of the QSR. Boston Scientific also has not
identified any evidence relevant to these representations other than the records
Shankar falsified concerning “components used in the production of medical devices
used in the human clinical study.”285 In other words, Boston Scientific’s argument
concerning the inaccuracy of Sections 3.22(f) and 3.32(b) duplicates the argument it
made concerning Section 3.22(a), discussed in the previous section. Thus, for the
same reasons that the representation in Section 3.22(a) was inaccurate, Boston
Scientific has proven by a preponderance of the evidence that Sections 3.22(f) and
3.32(b) also were inaccurate as of the date of the Agreement.
With respect to Section 3.32(c), which focuses on whether device itself was
defective, Boston Scientific argues in essence that because the Greenleaf Report
284
Id. § 3.32(c).
285
Tr. 305-06, 309 (Elder); JX 356.016-018.
62
said, “all of the devices in the [CLARITY clinical] study had been manufactured
under a noncompliant quality system,” those devices must have been materially
defective.286 Noncompliance with certain validation and verification testing
requirements, however, does not mean that the Cerene device necessarily was
defective and, critically, Boston Scientific has failed to identify any evidence of an
actual material defect. For this reason, the court finds that Boston Scientific failed
to prove by a preponderance of the evidence that the representation in Section
3.32(c) was inaccurate as of the date of the Agreement.
3. Statements to the FDA
Boston Scientific’s final category of alleged inaccurate representations
focuses on the veracity of Channel’s communications with and submissions to the
FDA, which implicates Sections 3.18(c), 3.22(c), and 3.22(h) of the Agreement.
Section 3.22(c) provides that Channel’s regulatory filings were true and correct:
All applications, notifications, submissions, information, . . . and
filings . . . , when submitted to the FDA or any other Governmental
Authority, were true, accurate and complete in all material respects as
of the date of submission.287
In Section 3.22(h), Channel represented and warranted that Channel had not “made
an untrue statement of material fact to the FDA or any other Governmental
286
Defs.’ Br. 19; see also id. 42-46.
287
Agreement § 3.22(c).
63
Authority” or done anything that “would reasonably be expected to provide a basis”
for the FDA to invoke its “Fraud Policy.”288 Section 3.18(c) addresses more
generally applications and submissions in support of “Permits” and requires them to
be “true, complete and correct in all material respects.”289 The term “permits” is
defined as “permits, licenses, franchises, approvals, authorizations, registrations,
clearances, and exemptions . . . necessary for [Channel] to . . . carry on its
business.”290
As of the date of the Agreement, Channel had made submissions to the FDA
for its IDE and Module 1 of its PMA application, which included three of the six test
reports that contained information that Shankar falsified.291 These three test reports
included the sterilization validation and package seal integrity records discussed
above.292 Boston Scientific argues that the false records in Channel’s IDE and
Module 1 submissions were material because, as Channel’s own expert (Timothy
Ulatowski) testified, “[w]hen submitted, [Channel’s submissions] were significant
288
Id. § 3.22(h).
289
Id. § 3.18(c).
290
Id. § 3.18(b)(i).
291
Tr. 114, 119-21 (Yu); Tr. 38 (Coté); JX 356.014 (Greenleaf report confirming that
Shankar “caused false information to be submitted in regulatory filings to FDA”). Channel
submitted Module 2 for the PMA to the FDA on November 21, 2017, after signing the
Agreement, and withdrew it later. Tr. 129 (Yu).
292
JX 658.004-006.
64
in regard to, for example, approval of the IDE.”293 Boston Scientific also contends
that the severe consequences for filing any false statement with the government such
as criminal liability under 18 U.S.C. § 1001, an injunction, or invocation of the
FDA’s Fraud Policy undermines any contention that filing false information with
the FDA would be insignificant to a reasonable acquirer.294
Channel counters, once again, that the results of its investigation negate the
materiality of these test reports. As discussed above, however, a reasonable acquirer
would find the fact that falsified reports were submitted to the FDA to alter the total
mix of information for other purposes, namely to call into question Channel’s ability
to secure FDA Approval. For this reason, Boston Scientific has proven by a
preponderance of the evidence that the false information submitted to the FDA
before the Agreement Date was “material.” Thus, Sections 3.18(c), 3.22(c), and
3.22(h) were inaccurate as of the date of the Agreement.295
293
Tr. 437-38 (Ulatowski).
294
Defs.’ Br. 48.
295
With respect to Sections 3.22(c) and 3.22(h), Boston Scientific asserts that Channel also
provided falsified information to BSI because the “technical information submitted by
[Shankar] through upload . . . to BSI’s website portal for review included some of the same
false information that had been submitted to FDA.” Defs.’ Br. 41-42 (quoting JX 356.019).
In making this argument, Boston Scientific did not identify which specific laws or legal
requirements govern submissions to BSI, which is necessary to determine if Channel
committed a violation. Regardless, for the reasons explained above, Boston Scientific has
proven that the representations in Sections 3.22(c) and 3.22(h) were inaccurate based on
Channel’s submissions to the FDA, making any further violations of those provisions based
on its submissions to BSI cumulative.
65
*****
In sum, for the reasons discussed above, Boston Scientific has proven by a
preponderance of the evidence that Channel’s representations in Sections 3.18(c),
3.22(a), (c), (f), (h), and 3.32(b) of the Agreement were inaccurate at signing but
failed to prove the inaccuracy of Section 3.32(c).
B. Whether Channel’s Inaccurate Representations in the Agreement
Would Reasonably Be Expected to Result in an MAE
Having determined that a number of the representations in the Agreement
were inaccurate as of the Agreement Date, the next question is whether Boston
Scientific has proven that the failure of those representations “to be true and correct
has or would reasonably be expected to have a Material Adverse Effect” on
Channel.296 Before turning to consider the evidence on this question, the court
addresses several legal issues relevant to how the termination provision in Section
8.1(f) operates.
296
Agreement § 7.2(b).
66
1. Legal Framework of Section 8.1(f)
The Agreement defines “Material Adverse Effect” in relevant part, as follows:
“Material Adverse Effect” means with respect to [Channel], any change
or effect occurring after the Agreement Date that, when taken
individually or together with all other adverse changes or effects
occurring after the Agreement Date, is materially adverse to the
business, results of operations, assets or financial condition of
[Channel].297
The definition in the Agreement goes on to enumerate a series of carve-outs, but
none of them are relevant to this case.
As is typical with MAE clauses, the Agreement does not define what
“material” means for purposes of an MAE.298 In the absence of such a definition,
Delaware courts applying MAE clauses—including, most recently, in Akorn—have
held that the “effect should ‘substantially threaten the overall earnings potential of
the target in a durationally-significant manner.’”299
Seizing on a different part of the Akorn decision, discussed above, where the
court considered the standard for a covenant that used “in all material respects”
language, Boston Scientific suggests that the court should apply a disclosure-based
standard of materiality in determining whether there has been a Material Adverse
297
Id. § 10.2.
298
See Akorn, 2018 WL 4719347, at *48 (citations omitted).
299
Id. at *53 (quoting In re IBP, Inc. S’holders Litig., 789 A.2d 14, 68 (Del. Ch. 2001));
see also Hexion, 965 A.2d at 738; Frontier Oil, 2005 WL 1039027, at *34.
67
Effect.300 According to Boston Scientific, the operative question should be whether
“the fraud would have been important to BSC’s decision to enter into the
Agreement.”301 This position is devoid of merit. The “concept of ‘Material Adverse
Effect’ and ‘material’ are analytically distinct.”302 And, as just mentioned, Akorn
itself applied the significantly higher standard of materiality that Delaware courts
have used in the past in the absence of a contractual definition of materiality when
applying MAE clauses.
In Akorn, based on a thorough review, Vice Chancellor Laster summarized
other teachings from our law relevant to applying an MAE clause, as follows:
A buyer faces a heavy burden when it attempts to invoke a material
adverse effect clause in order to avoid its obligation to close. A short-
term hiccup in earnings should not suffice; rather the Material Adverse
Effect should be material when viewed from the longer-term
perspective of a reasonable acquirer. In the absence of evidence to the
contrary, a corporate acquirer may be assumed to be purchasing the
target as part of a long-term strategy. The important consideration
therefore is whether there has been an adverse change in the target’s
business that is consequential to the company’s long-term earnings
power over a reasonable period, which one would expect to be
measured in years rather than months.303
300
Defs.’ Br. 83-84.
301
Id. 83.
302
Frontier Oil, 2005 WL 1039027, at *38.
303
Akorn, 2018 WL 4719347, at *53 (citations omitted).
68
“The ‘reasonably be expected to’ standard is an objective one.”304 “Future
occurrences qualify as material adverse effects” and “an MAE can have occurred
without the effect on the target’s business being felt yet.” 305 But “a mere risk of an
MAE cannot be enough.”306 “There must be some showing that there is a basis in
law and in fact for the serious adverse consequences prophesied by the party
claiming the MAE.”307 When determining if something would reasonably be
expected to result in an MAE, the court considers “quantitative and qualitative
aspects.”308
During post-trial argument, the parties disagreed on how the termination
provision in Section 8.1(f) interacts with the Representations Condition in Section
7.2(b), which contains the forward-looking “would reasonably be expected” MAE
requirement. The court requested supplemental briefing on that dispute, which
304
Id. at *46 (internal quotation marks omitted).
305
Id.
306
Id. at *65; see also Kling & Nugent, supra note 231, § 11.04[9], at 11-60 n.102
(discussing the “reasonably be expected to” standard).
307
Akorn, 2018 WL 4719347, at *65 (quoting Frontier Oil, 2005 WL 1039027, at *36
n.224). Vice Chancellor Laster noted that one commentator “argues that the ‘would
reasonably be expected’ formulation is best thought of as meaning ‘likely to happen,’ with
the likely, in turn, meaning a ‘degree of probably greater than five on a scale of ten,’” which
the Vice Chancellor equated to “more likely than not.” Id. at *65 n.646 (citations omitted).
308
Id. at *65 (citing Frontier Oil, 2005 WL 1039027, at *37).
69
highlighted two temporal issues concerning the interplay of those provisions. The
court addresses these temporal issues next.
To repeat, under Section 8.1(f), Boston Scientific may terminate the
Agreement “at any time prior to the Effective Time” if “any representation or
warranty of [Channel] contained in this Agreement shall be inaccurate or shall have
been breached as of the Agreement Date . . . such that the [Representations
Condition] would not be satisfied.”309 The Representations Condition in Section
7.2(b), including the preface, states in relevant part:
7.2 Conditions to the Obligation of [Boston Scientific] and Merger
Sub. The obligations of [Boston Scientific] to consummate the Merger
after delivery of . . . a Put Option Election Notice by [Channel] are
subject to the satisfaction of the following further conditions . . . :
***
(b)(i) Each of the representations and warranties of [Channel]
contained in this Agreement . . . shall have been true and correct at the
time originally made . . . except to the extent the failure of any such
representations and warranties to be true and correct does not have and
would not reasonably be expected to have a Material Adverse Effect on
[Channel]. . . . For clarity, it is agreed that the condition set forth in
clause (b)(i) of this paragraph shall be deemed to be satisfied unless any
failures of the representations and warranties identified in clause (b)(i)
to be true and correct has or would reasonably be expected to have a
Material Adverse Effect on Channel.310
309
Agreement § 8.1(f).
310
Id. § 7.2.
70
The first temporal issue arising from reading these two provisions together is
determining what date the court should look to in assessing whether there was a
reasonable expectation that an MAE would occur at some point in the future. The
second issue is at what point in time, as of that date, an MAE “would reasonably be
expected” to occur.
With respect to the first issue, Channel contends that Section 8.1(f) requires
the court to evaluate whether there was a reasonable expectation of an MAE as of
the date Boston Scientific provided its notice of termination, i.e., on May 11, 2018.311
Boston Scientific agreed during post-trial argument that the termination date was the
relevant date,312 but then changed its position. It now asserts that the relevant date
is “shortly after March 6, 2018” because that is when Boston Scientific read the
Greenleaf Report and “formed the expectations that led to termination.”313 This flip
of position is odd given Boston Scientific’s stance at post-trial argument that the
two-month difference between March and May of 2018 is immaterial to whether it
was entitled to terminate the Agreement under Section 8.1(f).314 In any event, the
court finds that the appropriate date to use is the termination date.
311
Pl.’s Supp. Answering Br. 1, 18 (Dkt. 207).
312
See Post-Trial Tr. 25, 43 (July 26, 2019) (Dkt. 203).
313
Defs.’ Supp. Opening Br. 13 (Dkt. 206).
314
Post-Trial Tr. 43 (“So what – the logical way to read the contract is at the time you
terminate – because you can terminate at any time – was there a reasonable expectation of
71
The critical language of the MAE provision in Section 7.2(b) is that an MAE
must “reasonably be expected”—an objective standard. As a matter of common
sense, the logical time to test whether a party had an objective right to terminate
under Section 8.1(f) is to examine the facts and circumstances when the party
actually took action to terminate. This approach is not only logical, it provides
precision by fixing a specific date to apply the terms of the contract, whereas using
an earlier date invites guesswork and imprecision on what date to use. Boston
Scientific advances no persuasive reason for using an earlier date and the court can
conceive of none. To the contrary, Boston Scientific’s change of position appears
to be a pretext to try to elide evidence unhelpful to its case (i.e., the FDA’s approval
of Channel remediation plan in April 2018) even though Boston Scientific did not
have the strength of its convictions to terminate the Agreement before Channel
received that approval. Based on the foregoing, the court finds that the most sensible
way to read the Agreement is to consider, as of the termination date, whether there
was a reasonable expectation of an MAE.
With respect to the second issue, Channel contends that Section 8.1(f) requires
Boston Scientific to prove, as of termination, that any inaccuracies in Channel’s
representations were such that an MAE would reasonably be expected as of the time
an MAE. So May-March, I mean, it doesn’t matter because there was – nothing happened
materially between – ”).
72
of the anticipated closing.315 Boston Scientific agrees that the “reasonably be
expected” language in Section 7.2(b) is “an inherently forward-looking concept,”316
but it is silent on what time frame the court should consider in applying Section
8.1(f), which means the inquiry would be open-ended.317 For the reasons explained
below, the court agrees with and adopts Channel’s interpretation.
A key difference between the parties’ interpretations is their treatment of the
preface to Section 7.2(b), quoted above, as it relates to Section 8.1(f). Before
considering where the parties disagree about the preface, it is useful to review what
is not in dispute. The Agreement makes clear that: (i) Channel could only exercise
its put-right if Cerene received FDA approval on or before September 30, 2019; (ii)
upon receipt of FDA approval, Channel had twenty-one days to deliver a Put Option
Election Notice; and (iii) upon delivery of the Put Option Election Notice, Boston
Scientific would be obligated to close within 15 days.318 The record also shows that,
when the parties entered into the Agreement, they expected that FDA would approve
Cerene in the first quarter of 2019.319 All of this means that the parties expected the
transaction to close in April or May of 2019.
315
Pl.’s Supp. Answering Br. 1.
316
Defs.’ Supp. Reply Br. 9 (Dkt. 209).
317
Id. 6.
318
Agreement §§ 1.1(b), (d), 10.2 (definitions of “FDA Approval” and “Put Period”).
319
JX 437; JX 438; JX 297.004-005, 011-012.
73
Turning to the parties’ areas of disagreement, Channel contends that because
“Section 7.2(b) is a closing condition . . . whether it ‘would not be satisfied’ . . .
therefore must be assessed at the expected time of closing.”320 For the reasons just
explained, the way the preface operates supports this timing.
As an interpretative matter, Channel argues that the preface “is a necessary
and indispensable part of the section” both “grammatically and logically” because
they are “both part of the same sentence” and “without the preface, Section 7.2(b)
contains nothing more than an abstract statement.”321 The court agrees. Indeed, the
ability to terminate “at any time prior to the Effective Time”—language upon which
Boston Scientific relies heavily—itself appears in the preface of Section 8.1(f).322 It
would be illogical to construe one of the two provisions at issue (Section 8.1(f)) in
tandem with its preface while disregarding the preface for the other (Section 7.2(b)).
Boston Scientific makes essentially two other arguments opposing Channel’s
interpretation. Both are without merit.
First, Boston Scientific argues that Channel’s interpretation would require it
“to delay the exercise of its termination rights until the issuance of a Put Option
Election Notice” and thus render meaningless the language in the preamble of
320
Pl.’s Supp. Answering Br. 1.
321
Id. 6.
322
The preface of Section 8.1 is quoted in full in Part V below.
74
Section 8.1 allowing it to terminate “at any time.”323 This is incorrect. Requiring
Boston Scientific to prove, as of termination, that any inaccuracies in Channel’s
representations would reasonably be expected to have a Material Adverse Effect as
of an anticipated closing date, does not mean that Boston Scientific would have to
wait to terminate until after the issuance of a Put Election Option. Boston Scientific
can terminate “at any time prior to the Effective Time”—whether or not Channel
has delivered a Put Option Election Notice. To do so under Section 8.1(f) without
violating the other terms of the Agreement simply means that Boston Scientific must
show there was an inaccurate representation that, as of termination, would
reasonably be expected to have a Material Adverse Effect as of when the parties
anticipated the merger would close. Interpreting the Agreement in this manner gives
meaning to all parts of Sections 7.2(b) and 8.1(f).
Second, Boston Scientific argues that Channel’s interpretation would “render
meaningless the cure provision in Section 8.1(f),”324 which is limited to “an
inaccuracy in or breach of any representation . . . of [Channel] as of a date subsequent
to the date of this Agreement.”325 This is a non sequitur. The fact that Boston
Scientific could not validly terminate the Agreement under Section 8.1(f) unless the
323
Defs.’ Br. 1-5; Defs.’ Supp. Reply Br. 9.
324
Defs.’ Supp. Reply Br. 10.
325
Agreement § 8.1(f).
75
alleged breach of representation reasonably would be expected to have a Material
Adverse Effect has nothing to do with the cure provision in Section 8.1(f). Indeed,
Channel does not dispute that it has no contractual right to cure a representation that
was inaccurate as of the Agreement Date, which is logical because one cannot go
back in time to fix a representation made as of a date in the past.326 But that does
not mean that Boston Scientific is exempted from having to establish that such an
inaccuracy would reasonably be expected to have a Material Adverse Effect in order
to terminate under Section 8.1(f). Nor does it mean that Boston Scientific may not
have other recourse, such as indemnification rights, for inaccurate representations
that would not reasonably be expected to rise to the level of a Material Adverse
Effect.327
*****
For the reasons explained above, the court concludes that Boston Scientific
has the burden to prove that, as of the termination date, the inaccurate representations
in the Agreement would reasonably be expected to have a Material Adverse Effect
326
Post-Trial Tr. 77 (“[Y]ou can’t cure a breach of rep at signing because you can’t go
back and make it true at signing”).
327
See Agreement § 9.2(a) (Channel “shall . . . indemnify, defend and hold harmless
[Boston Scientific] . . . from and against . . . any breach by [Channel] of any representation
[or] warranty . . . made by [Channel] in this Agreement.”); see also Kling & Nugent supra
note 231, § 1.05[2] at 1-41 (“If a representation is false when made, that is, when the
agreement is executed, the representing party may be liable for damages whether or not the
transaction closes.”).
76
on Channel around the time the parties’ expected the merger to close. As it turns
out, the precise timeframe in the future for examining whether an MAE would
reasonably be expected ends up being of little consequence in this case. That is
because, as discussed in the next section, the court finds that Boston Scientific has
not proven that, as of the termination date, the inaccurate representations would
reasonably be expected to have a Material Adverse Effect at any future point in time.
2. Boston Scientific’s Evidence of an MAE
On June 19, 2018, about one month after terminating the Agreement, Boston
Scientific asserted in a letter to Channel that its “submission of false information to
regulators has placed the approval of Cerene in jeopardy, thereby substantially
threatening Channel’s overall earnings potential.”328 This assertion flew in the face
of many facts known to Boston Scientific when it terminated the Agreement several
weeks earlier, on May 11, 2018—most significantly, the FDA’s acceptance of
Channel’s remediation plan for premarket approval on April 18, 2018.329 That action
was the culmination of the following series of events:
 In late January 2018, Channel met with the FDA and made it aware
of Shankar’s fraud, including the six falsified reports submitted to
the FDA.330
328
JX 514.006.
329
JX 456.005.
330
Tr. 126-28 (Yu); JX 270; JX 279.
77
 In February 1, 2018, the FDA asked Channel to withdraw and
re-submit PMA Module 2 with corrected records, which Channel
did.331
 In March 16, 2018, Channel and representatives of Greenleaf met
with the FDA.332 One week before that meeting, Channel provided
the FDA with more than 250 pages of information about Shankar’s
fraud, including: (i) the Greenleaf Report, (ii) Channel’s Fraud
Implication Assessment Quality Plan, (iii) the fourteen IARs
addressing Shankar’s fraud, (iv) Brill’s adverse event review, and
(v) a lengthy report summarizing Channel’s investigation and
remediation efforts related to its IDE and PMA Module 1.333
 After receiving this information, “the FDA thanked the company for
their transparency and for coming forward with the information
quickly.”334 When asked if the FDA “would be interested in
subsequent discussions regarding the issues and the status and
progress of the company’s remediation,” the FDA responded that
“follow-up would take place through the inspection process.”335
 On April 18, 2018, the FDA told Channel that it “ha[d] addressed
all of FDA’s concerns and that the agency appreciate[d] the
company’s transparency and timeliness.”336 Since that date, the
FDA did not seek any more information about Shankar’s fraud.337
 Also on April 18, 2018, the FDA and Channel discussed the
schedule for continuing to submit the remaining modules of the
PMA and to complete the process by July—only one month later
than the originally forecasted submission date of June.338
331
Tr. 129 (Yu); JX 294; JX 494.
332
Tr. 64 (Coté), 129, 132-33 (Yu); JX 401.
333
JX 380; see Tr. 64-65 (Coté); Tr. 130-31 (Yu).
334
JX 401.004; Tr. 67 (Coté).
335
JX 401.004; Tr. 133-34 (Yu).
336
JX 436.001.
337
Tr. 139 (Yu).
338
Id. 138; JX 436.
78
The FDA’s acceptance of Channel’s remediation plan on April 18, 2018
strongly signaled that Shankar’s fraud would not be the cause of any failure of the
FDA to provide premarket approval of the Cerene device and made receipt of
premarket approval—the triggering event for Channel to exercise its put-right under
the Agreement to close the merger—a distinct possibility. Indeed, the FDA
approved Channel’s PMA application on March 28, 2019, consistent with the
timeframe Boston Scientific expected before it signed the Agreement. That approval
occurred a few weeks before trial. The court considers next the qualitative and
quantitative aspects of the evidence of an MAE that Boston Scientific offered at trial.
a. Qualitative Significance
Presumably because Channel received FDA approval for Cerene, Boston
Scientific did not press at trial its initial explanation for a reasonably expected MAE,
i.e., that Shankar’s fraud substantially threatened Channel’s overall earnings
potential by jeopardizing its chances of obtaining FDA approval. Rather, Boston
Scientific shifted its strategy to argue that Shankar’s fraud was reasonably expected
to have a Material Adverse Effect notwithstanding Channel’s receipt of FDA
approval on the theory that Boston Scientific would still need to remediate and retest
the product before placing Cerene on the market.
Pierce, who read the Greenleaf Report in early March 2018, testified he made
the decision on behalf of Boston Scientific to terminate the Agreement after
79
receiving feedback about the Greenleaf Report from several Boston Scientific
executives during a March 29 meeting.339 The Greenleaf Report was the sole
documentary evidence Pierce relied on in deciding to terminate the Agreement.340
According to Pierce, the report made it clear to him that Boston Scientific “could
only market [Cerene] in good faith by going all the way back to the beginning and
redoing the entire design history file, redoing the IDE submission, reconducting the
clinical trial, and ultimately resubmitting the PMA.”341 This stated belief is not
credible, however, given the circumstances surrounding Pierce’s decision to
terminate the Agreement.
To start, Pierce already had received the information contained in the
Greenleaf Report through the periodic updates Channel was providing Kaster and
Robinson.342 Pierce also oddly purported to rely on the Greenleaf Report in deciding
to terminate the Agreement while ignoring Greenleaf’s fundamental conclusion—
339
Tr. 471-73, 478-79 (Pierce).
340
Id. 537.
341
Id. 472-73, 537; see also id. 485-86. Carr testified that he and other executives at the
meeting shared Pierce’s view, but Pierce was the one who made the decision and the other
executives to which Carr referred (Gardner and Sukthankar) did not testify at trial. Tr.
620-21 (Carr).
342
See supra Part I.I.
80
that it did not find evidence that Shankar’s activities had any impact on Channel’s
clinical data.343
Significantly, Pierce decided to terminate the Agreement without taking any
number of actions one reasonably would have expected him to take before making
such a consequential decision. For example, before Pierce terminated the
Agreement, no one at Boston Scientific: (i) spoke with Greenleaf or Channel about
the findings in the Greenleaf Report;344 (ii) used an outside consultant to examine
the effect of Shankar’s fraud;345 (iii) quantified the costs of remediating Channel’s
quality systems;346 or (iv) made any effort to understand what Channel had done to
improve its quality systems since discovering Shankar’s fraud.347
Pierce also did not confer with a number of executives whose perspectives on
Channel and terminating the Agreement would seem highly relevant. Pierce did not
consult with Boston Scientific’s Head of Quality or its Chief Medical Officer, whose
“major responsibility is the clinical work associated with Boston Scientific’s
products and also understanding the clinical risks and benefits of Boston Scientific’s
343
JX 355.006-007.
344
Tr. 516 (Pierce).
345
Id. 522-23.
346
Tr. 640 (Carr).
347
Id. 642.
81
products.”348 He also did not consult with Kaster, Boston Scientific’s designee to
Channel’s Board and long-time Board observer, whom Pierce acknowledged knew
more about Channel than he did.349 At the time, Kaster believed, based on the regular
Board updates he was receiving, that Shankar’s fraud was “more or less” a
“non-issue”:
Q. So your reaction initially upon learning this was you thought this
was all a non-issue unless any of his actions impacted the data,
and by “data,” in your mind, when you conveyed that you were
talking about human patient data?
A. Yes.
Q. Okay. And you know today, or at least based on what you know
today, none of his actions impacted human patient data?
A. Correct.
Q. And I think it’s fair to say based on this you still feel this is all a
non-issue; correct?
A. More or less, yeah.350
Nor did Pierce consult with Robinson, Channel’s Board observer.351
Boston Scientific has no written record of the March 29 meeting and,
incredibly, it did not generate a “single scrap of paper” assessing the impact of
Shankar’s fraud on Channel’s quality system after it received the Greenleaf
348
Pierce Dep. 46; Tr. 541 (Pierce).
349
Tr. 538-39 (Pierce).
350
Kaster Dep. 214 (objections omitted); Tr. 539-40 (video of Kaster deposition
testimony); see also Kaster Dep. 85 (Kaster “did not have doubts” that Channel “fix[ed]
whatever problems there were” arising from “Shankar’s fraudulent activities on Channel
and its quality systems.”).
351
Tr. 516 (Pierce).
82
Report.352 The lack of any such documentation not only casts doubt on the bona
fides of the termination decision, it belies Pierce’s representation to Coté in an April
22 email that Boston Scientific was “thoroughly assessing the entire impact of
Dinesh Shankar’s actions on your quality systems, pre-clinical and clinical data as
well as the putative product.”353
When asked how he could justify scrapping all the work Channel had done on
the Cerene device and essentially starting from scratch even after the FDA approved
the device, Pierce testified that it was “based upon Boston Scientific’s expectations
of quality” and not an action another company necessarily would take under the same
circumstances.354 The weight of the evidence before the court, however, shows that
Pierce’s explanation is inconsistent with how Boston Scientific itself has acted in the
past and that Boston Scientific’s litigation position of the need to start from scratch
to remediate Cerene is not objectively reasonable.
The record demonstrates, and the court finds, that FDA approval of Cerene,
which appeared likely when Boston Scientific terminated the Agreement, undercuts
Boston Scientific’s assertion that it would need to keep Cerene off the market while
it engages in its own remediation efforts and potentially conducts an additional
352
Id. 528.
353
JX 456.004.
354
Tr. 476-77, 478 (Pierce).
83
clinical trial. Channel’s receipt of FDA approval meant that the FDA—a highly
respected neutral third party—had meticulously examined Channel’s PMA
submission and found that there is “reasonable assurance” that Cerene is “safe and
effective.”355
Testimony from Boston Scientific’s own employees confirm the importance
of FDA approval. For example, Carr, a senior member of Boston Scientific’s quality
staff who participated in the March 29 meeting with Pierce,356 testified:
Q. The PMA approval progress is rigorous. Correct?
A. That’s correct.
Q. And approval of a PMA indicates that FDA believes a product is
safe and effective. Correct?
A. Correct.
Q. FDA would not approve a product that doesn’t meet its high
standards. Correct?
A. I would believe that to be true, yes.357
Boston Scientific’s corporate representative Lisa Sullivan similarly endorsed
the significance of FDA approval. She testified that Boston Scientific has repeatedly
contended in “thousands of product liability cases” that FDA approval demonstrates
that products are safe and effective and that Boston Scientific has always been
willing to rely on the FDA’s statements.358 In 2018, for example, in response to a
355
JX 757.029-030.
356
Tr. 578-79, 620-21 (Carr).
357
Id. 683.
358
Sullivan Dep. 46.
84
60 Minutes investigatory piece about Boston Scientific’s transvaginal mesh
products, Boston Scientific stated that “[a]ny allegations [that] continu[e] to question
the integrity or legitimacy of [the] resin [used in these products] are false and
irresponsible” because the FDA had determined that a change in the resin supplier
“did not raise any new safety or effectiveness concerns.”359
Boston Scientific’s quality expert (Reeves) could not identify any instance
where Boston Scientific—or any other company—voluntarily rebuilt a quality
system for a device from scratch and redid its clinical testing after receiving FDA
approval.360 To the contrary, Reeves acknowledged that even after one of his clients
had received multiple warning letters from the FDA and had been advised to rebuild
its quality system, the client continued to market the product during remediation.361
Boston Scientific offered no fact testimony of any instance where it
voluntarily rebuilt a quality system from scratch and/or redid clinical testing for an
FDA-approved device without prompting from the FDA, and evidence of its own
past practices belies that this would be necessary before marketing Cerene. In 2015,
Boston Scientific acquired American Medical Systems (“AMS”), a men’s health
products company, which had recently received a warning letter from the FDA
359
JX 327.004.
360
Tr. 837-38 (Reeves).
361
Id. 836-37.
85
concerning validation issues.362 As discussed below, Boston Scientific identifies
AMS as its best comparable to Channel for the cost of remediation. Yet Boston
Scientific kept AMS’s products on the market throughout the AMS remediation
process, despite having received an FDA warning letter—something Channel has
never received.363
Boston Scientific argues that even with FDA approval, Shankar’s fraud would
reasonably be expected to have a Material Adverse Effect because completion of the
merger would expose Boston Scientific to products liability litigation, competitive
harm, and future regulatory action.364 Each of these concerns is a risk that a
businessperson legitimately would consider, although—to repeat—there is not a
“single scrap of paper” that Boston Scientific actually analyzed any of these risks
when Pierce made the termination decision.365 Rather, the evidence about these
concerns consists of seemingly after-the-fact rationalizations, is highly speculative
and does not come close to proving that, as of the termination, Boston Scientific
reasonably expected that these concerns would rise to the level of a Material Adverse
Effect.
362
Tr. 611 (Carr); JX 738.013.
363
Tr. 675-78 (Carr).
364
Defs.’ Br. 58-62.
365
Tr. 528-29 (Pierce).
86
With respect to product liability claims, Boston Scientific elicited testimony
that details about Shankar’s fraud and Channel’s remediation likely would be
“significant fodder” for plaintiff’s attorneys in a hypothetical product liability
case.366 Boston Scientific, however, failed to identify any defect or substantive
problem with Cerene that could form the basis of a products liability claim and it
made no effort to quantify the increased risk of such hypothetical claims.
In Frontier Oil, this court declined to find that a pending toxic tort litigation
that “could be catastrophic” for the company caused an MAE where the buyer had
not “demonstrated (or even seriously tried to demonstrate) the likelihood” of an
MAE resulting from the litigation or to give the court “the basis to make a reasonable
and an informed judgment of the probability of an outcome on the merits.”367 The
court noted that “the mere existence of a lawsuit cannot be determinative” of an
MAE but rather “[t]here must be some showing that there is a basis in law and in
fact for the serious adverse consequences prophesied by the party claiming the
MAE.”368
Here, Boston Scientific’s product liability concerns are far weaker than the
concerns that were found deficient in Frontier Oil because there is no pending
366
Tr. 434-35 (Ulatowski); Tr. 480-81 (Pierce).
367
Frontier Oil, 2005 WL 1039027, at *12, *36.
368
Id. at *36 n.224.
87
litigation, there is no identified product defect or articulated basis for a product
liability claim, and no showing has been made about the likelihood of any exposure
or the costs involved. In short, there is no basis here “in law and in fact” for the
serious consequences about which Boston Scientific is now professing concern.
With respect to competitive harm, Pierce testified that “the idea of fraud could
and would be used by competitors to try to establish doubt around” Cerene.369
Competitors undoubtedly will seize upon whatever debating points they think will
help them gain market share but it is not self-evident that focusing on Shankar’s
fraud would have a material impact on Cerene sales given the imprimatur of FDA
approval. Apart from simply identifying the risk of competitive harm, Boston
Scientific did not present any evidence showing how Cerene’s projected sales would
be reduced because of Shankar’s fraud if it proceeded to sell the product upon
receiving FDA approval, let alone reduced so significantly as to cause a Material
Adverse Effect.370
Finally, Boston Scientific argues that if the deal closes, Boston Scientific
would be “susceptible to future regulatory action” on Cerene because Channel failed
369
Tr. 481 (Pierce).
370
The only impact on sales for which Boston Scientific provided evidence was an analysis
by its valuation expert. He analyzed the projected impact of delaying sales of Cerene for
two to four years to re-remediate the product and, potentially, to conduct a new clinical
trial. This analysis is discussed in Part IV.B.2.b.
88
to submit two documents to the FDA that were created after the FDA accepted
Channel’s remediation plan: the second Greenleaf report, prepared in June 2018,
and an internal audit of Channel’s quality management system conducted by a
consultant (Linda Lovett) in September 2018.371 It stands to reason that the
introduction of any new healthcare product inherently carries a risk of future
regulatory action, thus Boston Scientific must show that Shankar’s fraud would
reasonably be expected to significantly increase this risk. It has not done so.
Channel’s FDA expert (Ulatowski) credibly testified that the FDA would not
have expected Channel to produce either of these documents unsolicited.372
Ulatowski explained (and the record confirms) that the FDA stated at its March 2018
meeting with Channel that the FDA inspector would follow up at the premarket
approval inspection about anything the inspector thought was important to review,
which is the FDA’s usual procedure.373 The contents of the two documents in
question also do not raise any red flags concerning Shankar’s fraud.
As to the second Greenleaf report, Boston Scientific focuses on its reference
to a “new data integrity issue” concerning a vendor, Henry Servin & Sons, which
inspected certain components. The cited data integrity issue, however, concerned
371
Defs.’ Br. 15, 61.
372
Tr. 423-24 (Ulatowski).
373
Id. 423-25; JX 401.004.
89
the vendor’s own computer server and was completely unrelated to Shankar’s
fraud.374 Boston Scientific also draws attention to Greenleaf’s recommendation in
its second report that Channel ensure that its classification of the IARs it opened to
investigate Shankar’s fraud as “minor” is supportable. Each of these IARs was
provided to the FDA and, importantly, the second Greenleaf report specifically
found that “the impact of the questionable classifications may be minimal since in
the current environment, all issues have received the appropriate visibility and
prioritization within the company.”375
As to the Lovett audit, which was a regularly scheduled internal audit that the
FDA normally would not receive,376 Boston Scientific does not contend that any of
its observations or concerns pertained to Shankar’s fraud. The audit, furthermore,
provided an overall positive assessment of Channel’s quality system: “continued
374
When investigating Shankar’s fraud, Channel discovered that Henry Servin & Sons had
sold its server, which “housed all of the raw data for not only Channel, but for some other
clients as well.” Tr. 179 (Patel). In response, Channel (i) informed the FDA about the
issue in an IAR it provided to the FDA, (ii) opened a CAPA, (iii) terminated the vendor,
(iv) re-inspected components that the vendor inspected, and (v) conducted a risk
assessment that did not identify any additional risks. Id. 179-85; JX 380.073; JX 652.004-
005.
375
JX 634.011.
376
See JX 595.076 (“The audit was completed to identify gaps and/ or opportunities in the
company’s quality management system according to the internal audit schedule[].”);
Tr. 281-82 (Elder) (explaining that the FDA normally permits a company to maintain
confidentiality of internal audits “to make sure it’s done well so the company can identify
their deficiencies and take corrective action to address them outside of an FDA
inspection.”).
90
enhancement and implementation is encouraged to assure the associated [Quality
System] controls and procedures continue to demonstrate full compliance to
applicable regulations [and] standards.”377
In sum, the weight of the evidence demonstrates convincingly that Boston
Scientific’s professed need—notwithstanding FDA approval of the Cerene device—
to remediate and retest Cerene before placing it on the market is not objectively
reasonable, and that Boston Scientific’s concerns about potential products liability
litigation, competitive harm, and future regulatory action are based on little more
than unsubstantiated speculation. The court next turns to the quantitative aspects of
the evidence of an MAE that Boston Scientific presented at trial.
b. Quantitative Significance
Boston Scientific asserts that Shankar’s fraud and the related inaccurate
representations in the Agreement made it “reasonable to expect that the value of
Channel had been substantially impaired.”378 There is no bright-line test for
determining an MAE based on quantitative considerations. As discussed in Akorn,
one influential treatise observes “that most courts which have considered decreases
in the 40% or higher range found a material adverse effect to have occurred.”379 The
377
JX 595.077 (emphasis added).
378
Defs.’ Br. 13.
379
Akorn, 2018 WL 4719347, at *53 (citing Kling & Nugent, supra note 231, §11.04[9],
at 11-66).
91
Akorn decision itself found that remediation costs that equated to approximately
21% of the target’s standalone equity value implied by the merger agreement “would
be ‘material when viewed from the longer-term perspective of a reasonable
acquiror.’”380 For the reasons explained below, Boston Scientific failed to
demonstrate any material decline in Channel’s value.
Boston Scientific based its quantitative case for proving an MAE on testimony
from its expert, Tim Cummins, a managing director of Stout Risius Ross, LLC.381
Cummins assessed the impact of Shankar’s fraudulent activities “on the value to
[Boston Scientific] of Channel . . . as of November 1, 2017.”382 To do so, Cummins
estimated the value of Channel to Boston Scientific based on the information
available at signing. He then compared this value to his estimate of “the value of
Channel to [Boston Scientific] had [Boston Scientific] been aware of Mr. Shankar’s
actions and been able to incorporate the expected costs and time delays necessary to
remediate Channel’s quality assurance system and perform new clinical trials for
Channel’s only product, the Cerene Cryotherapy Device.”383
380
Id. at *74 (quoting IBP, 789 A.2d at 68).
381
Tr. 994 (Cummins).
382
JX 738.004; Tr. 998 (Cummins).
383
JX 738.006.
92
Starting with Boston Scientific’s pre-agreement deal model, Cummins
adjusted (i) the time and cost required to remediate Channel’s quality system and,
potentially, to conduct a new clinical trial and (ii) the discount rate.384 Cummins
analyzed three potential scenarios, which forecasted delays in realizing cash flows
of two, three, four years, respectively: (i) a two-year remediation process with no
new clinical trial, (ii) one year of remediation followed by a new two-year clinical
trial, and (iii) two years of remediation followed by a new two-year clinical trial.385
He applied two different discount rates to these three scenarios: the 13% discount
rate used by Boston Scientific in its pre-Agreement deal model and a 15% discount
rate “to incorporate a scenario that included . . . some additional assumption of risk
in those cash flows.”386 As depicted below, Cummins estimated that Channel’s
value to Boston Scientific decreased by 24% to 54% under these six scenarios from
the value of $488 million that Boston Scientific’s initial deal model placed on
Channel:387
384
Tr. 998-99 (Cummins).
385
Id. 1019, 1030.
386
Id. 1025-26.
387
Id. 1001, 1010, 1029-30.
93
13% Discount Rate 15% Discount Rate
2-Year Delay -24% ($115 million decline) -37% ($180 million decline)
3-Year Delay -33% ($163 million decline) -46% ($225 million decline)
4-Year Delay -42% ($203 million decline) -54% ($262 million decline)
The court does not credit this analysis for numerous reasons discussed next.
First, and foremost, Cummins premised his analysis on the assumption that
Boston Scientific would need to shelve Cerene for two to four years while it rebuilt
Channel’s quality systems and possibly undertakes a new clinical trial. This
assumption came from “perspectives” that Boston Scientific employees provided in
the midst of litigation that Cummins did not attempt to validate independently.388 As
discussed above, Boston Scientific failed to offer any persuasive evidence to
establish that this assumption is objectively reasonable. Indeed, as discussed above,
Boston Scientific’s own track record and the testimony of its own witnesses belie
the contention that it was necessary to remediate and retest Cerene before placing it
on the market given the FDA’s approval of the device.389
The valuation impact of shelving Cerene for two to four years is massive.
Channel’s valuation expert, Kenneth Lehn, a finance professor at the University of
388
Id. 1042-43.
389
See Part IV.B.2.a.
94
Pittsburgh, testified credibly and without contradiction that, depending on the
scenario, between 91% and 95% of the reduction in Channel’s value modeled by
Cummins’ analysis is attributable to delaying Channel’s cash flows into the future
by two to four years.390 Cummins’ failure to provide a reliable basis for putting these
cash flow delays into his model undermines the soundness of the key driver of his
model.391
Second, Cummins’ model analyzed the putative change in Channel’s value to
Boston Scientific, which incorporated merger synergies,392 instead of analyzing any
reduction in the standalone value of Channel. This decision flies in the face of this
court’s uniform approach to valuing a target on a standalone basis in determining
whether an MAE has occurred.393 Boston Scientific also has not argued—nor could
390
Tr. 1075, 1090-93, 1097 (Lehn); JX 749 ¶¶ 40-42, 47.
391
See Tr. 1096 (Lehn) (stating that “to say that in perpetuity all those free cash flows get
pushed out, to me, requires some reliable basis. And Mr. Cummins has provided none.”).
392
Tr. 1064 (Cummins); see also Morrison Dep., February 26, 2019, 66-69 (discussing
synergies included in BSC’s pre-agreement deal model); Morrison Dep., March 13, 2019,
39-40, 45-46, 48, 53, 62 (same).
393
Akorn, 2018 WL 4719347, at *56 (“[E]very prior decision has looked at changes in
value relative to the seller as a standalone company.”). Boston Scientific argues that using
synergies would be beneficial to Channel because, as the court in Akorn noted, “it increases
the denominator for purposes of any percentage-based comparison.” Defs.’ Reply Br. 24
(quoting Akorn, 2018 WL 4719347, at *56). The point here, however, is that the refusal to
use a standard methodology again calls in to question the reliability of Cummins’ work.
See Akorn, 2018 WL 4719347, at *56 (“Akorn’s desire to include synergies is
understandable . . . but it is not supported by the Merger Agreement or the law.”).
95
it—that the text of the Agreement compels use of a different approach here.394 More
broadly, Cummins adopted the rest of Boston Scientific’s model without considering
whether the inputs were appropriate and did not alter its base model even when he
believed it made assumptions that “didn’t seem likely.”395
Third, Cummins uncritically accepted an assumption for remediation costs
that Boston Scientific provided to him. Specifically, Cummins used a $17 million
estimate for remediation costs he received from Carr based on Boston Scientific’s
purchase of AMS.396 But Cummins made no effort to consider if this comparison
was valid. He just “took the word of Boston Scientific employees about AMS being
an appropriate example without attempting to independently validate that.”397
Had Cummins inquired, he might (and should) have questioned whether AMS
was a relevant comparable. Carr testified that he “didn’t do any specific research”
394
See Agreement §10.2 (defining “Material Adverse Effect” to refer, in relevant part, to
“any change or effect occurring after the Agreement Date that . . . is materially adverse to
the business, results or operations, or assets or financial condition of the Company,” i.e.,
Channel.).
395
Cummins Dep. 108 (“Q: So even if the BSC’s model was incorrect, you were still going
to use that? A: As the baseline, yes.”), 112-13 (“A: [T]hey had no working capital
investment assumption in year 1 of their model, which didn’t seem likely. Q: And did you
go back and ask why they had no working capital and investment assumption? A: I did.
Q: What was the response? A: They didn’t have a great answer to that.”); Tr. 1082-89
(Lehn); Tr. 1051-52 (Cummins); JX 749 ¶¶ 44-46 (Lehn Expert Report).
396
JX 766; Tr. 610-13 (Carr); Tr. 1014-17 (Cummins).
Tr. 1051 (Cummins); see also Tr. 1050 (Cummins) (“Q: So aside from what BSC
397
employees told you, you have no reason to think Channel’s quality system remediation
work would be similar to AMS’s quality system remediation. Correct? A: Correct.”).
96
as to what comparable would be the best for Cummins to use and he admitted that
AMS—which had four product families with multiple products in each—was the
most expensive remediation he ever oversaw at Boston Scientific.398 On the eve of
trial, Boston Scientific was compelled to produce remediation costs for four recent
remediation efforts of single-device start-up companies, which ranged from $1.88
million to $3.52 million.399 Yet Cummins never reviewed any of them in performing
his analysis to see if they were more suitable for making a comparison.400
Fourth, in three of the six scenarios in his model, Cummins increased the
discount rate by two percentage points to account for increased competition once
Boston Scientific introduced the product after performing two to four years of
remediation and, potentially, a new clinical trial.401 Cummins testified he would
have preferred another approach to address the “increased risk profile,” essentially
admitting that the increase to the discount rate was little more than a non-rigorous
“fudge factor.”402
398
Tr. 673, 675 (Carr).
399
JX 925; JX 926.
400
Tr. 1054-55 (Cummins).
401
Id. 1034-35.
402
Id.; see also Tr. 1086 (Lehn testifying that this discount rate manipulation “becomes a
fudge factor. There’s no empirical basis for increasing the base discount rate of 13 percent
by 2 percentage points”).
97
Boston Scientific takes Channel’s valuation expert (Lehn) to task for
criticizing Cummins’ analysis without providing his own opinion on valuation. It is
Boston Scientific, however, not Channel, who bears the burden to prove an MAE.
Boston Scientific also relies on Lehn’s testimony that “it is reasonable to believe, at
least directionally” that the fraud reduced Channel’s value compared to its value as
represented in the Agreement.403 Lehn testified, credibly, that this belief was
reasonable but he did not opine on “how significant” any reduction would be.404
Lehn’s acknowledgement of a “directional” reduction in value of unknown
significance does not satisfy Boston Scientific’s significant burden to prove an
MAE.
The only expert who provided an opinion that an MAE would reasonably be
expected was Cummins. For the reasons explained above, the court finds that
Cummins’ analysis is not reliable and does not credit it. As such, Boston Scientific
failed to provide any quantitative evidence of a reasonably expected MAE.
*****
For the reasons explained above, Boston Scientific failed to prove based on
both qualitative and quantitative factors that it was entitled to terminate the
Agreement under Section 8.1(f).
403
Tr. 1107-08 (Lehn).
404
Id.
98
V. BOSTON SCIENTIFIC’S TERMINATION UNDER SECTION 8.1(i)
Boston Scientific’s notice of termination invoked Section 8.1(i) as a second
ground for terminating the Agreement in addition to Section 8.1(f).405 Under Section
8.1(i), Boston Scientific can terminate the Agreement at any time, subject to a cure
provision, if an MAE with respect to Channel shall have occurred:
8.1 Termination of Agreement. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective
Time, notwithstanding the delivery of a Put Option Election Notice or
Call Option Election Notice or any requisite approval and adoption of
this Agreement and the transactions contemplated hereby by the
Company Stockholders:
(i) by [Boston Scientific], if there shall have occurred any
Material Adverse Effect with respect to [Channel] . . . provided,
however, that if the circumstances giving rise to such Material Adverse
Event are capable of being ameliorated or cured prior to the
Termination Date, then for so long as the party that has experienced a
Material Adverse Event continues to exercise commercially reasonable
efforts to ameliorate or cure the circumstances giving rise to such
Material Adverse Event, this Agreement may not be terminated
pursuant to this Section 8.1(i) prior to the Termination Date . . . .406
The termination right in Section 8.1(i) does not depend on the existence of any
inaccuracy in or breach of any representation in the Agreement.
405
JX 475.
406
Agreement § 8.1(i) (emphasis added). The Termination Date is 90 calendar days after
the date of delivery of an option election notice, which may be extended up to 30 days if
the parties are still seeking “any other governmental approvals or authorizations as may be
reasonably necessary in connection with the closing of the merger.” Id. § 8.1(b).
99
By the time of trial, which occurred after FDA approval of Cerene, Boston
Scientific’s reliance on Section 8.1(i) became an afterthought. Apart from quoting
the provision, Boston Scientific devoted literally one sentence of its opening post-
trial brief to the issue, which simply refers back to its argument for proving an MAE
under Section 8.1(f).407 Accordingly, for all the reasons discussed previously for
why Boston Scientific failed to prove an MAE for purposes of terminating the
Agreement under Section 8.1(f), it also failed to do so under Section 8.1(i).
VI. CHANNEL’S CLAIM FOR BREACH OF SECTION 6.3
Channel asserts that, apart from failing to prove an MAE under Sections 8.1(f)
or 8.1(i), Boston Scientific could not terminate the Agreement for the independent
reason that it breached its obligation to use “commercially reasonable efforts”’ to
consummate the merger. In Section 6.3(b) of the Agreement, Boston Scientific
covenanted to:
Take all further action that is necessary or desirable to carry out the
purposes of this Agreement, and . . . use its commercially reasonable
efforts to take all such actions and . . . refrain from taking any actions
which would be reasonably expected to frustrate the essential purposes
of the transactions contemplated by this Agreement, if [Boston
Scientific] were to deliver a Call Option Election Notice or [Channel]
were to deliver a Put Option Election Notice.408
407
Defs.’ Br. 87.
408
Agreement § 6.3(b).
100
Our Supreme Court interpreted a similar covenant to “impose obligations to
take all reasonable steps to solve problems and consummate the transaction.”409
“When evaluating whether a merger partner has used reasonable best efforts, this
court has looked to whether the party subject to the clause (i) had reasonable grounds
to take the action it did and (ii) sought to address problems with its counter party.” 410
Channel bears the burden of proving by the preponderance of the evidence that
Boston Scientific breached Section 6.3(b) of the Agreement.411
Channel asserts that Boston Scientific violated the obligations it owed under
Section 6.3(b) “through its cursory, careless and unreasonable actions in purporting
to terminate the Agreement for no valid basis with no meaningful consideration.”412
The court agrees. For the reasons discussed above, Boston Scientific did not have
reasonable grounds to terminate the Agreement when it did, particularly given that
409
Williams Cos. v. Energy Transfer Equity, L.P., 159 A3d 264, 272 (Del. 2017).
410
Akorn, 2018 WL 4719347, at *91. Although the Agreement here refers to the use of
“commercially reasonable efforts” while the provision in Akorn referred to the use of
“reasonable best efforts,” Delaware “case law [contains] little support for . . . distinctions”
between these two clauses. Id. at *87 & n.796.
411
See id. at *4 (the party alleging improper exercise of termination by a counterparty
because that party was in material breach of its own obligations bears the burden of proving
by a preponderance of the evidence the facts necessary to establish its claim that the
exercising party could not exercise those rights).
412
Pl.’s Resp. Br. 88.
101
the FDA already had accepted Channel’s remediation plan, which made it likely
Channel would receive premarket approval for the Cerene device.413
Boston Scientific claims its receipt of the Greenleaf Report in early March
was the pivotal moment that made it realize the need to terminate the Agreement,
but the record shows that Boston Scientific made no reasonable efforts to engage
with Channel or to take other appropriate actions to attempt to keep the deal on track
after that point. Specifically:
 After receiving the Greenleaf Report on March 6, Boston Scientific
did not exercise its right under the Agreement to obtain additional
information from Channel and did not raise any concerns with
Channel for six weeks.414
 On April 22—after learning three days earlier that the FDA had
accepted Channel’s remediation plan—Boston Scientific emailed
Channel claiming there were “obvious gaps” in the Greenleaf
Report but Boston Scientific did not identify what they were.415
 After receiving Pierce’s April 22 email, Channel provided the
information Boston Scientific had requested in the email, and Coté
reached out to Pierce or other Boston Scientific representatives five
times trying to schedule a call or meeting—but no one from Boston
Scientific responded to his requests.416
 On May 11, Boston Scientific terminated the Agreement without
ever (i) raising any concerns, or seeking to communicate with
413
See supra Part IV.B.2.
414
Tr. 516-17, 526-27 (Pierce).
415
JX 456.004.
416
Tr. 74 (Coté); Tr. 531-37 (Pierce).
102
Greenleaf or (ii) engaging any outside experts to analyze Channel’s
clinical data, its quality system, or Cerene.417
To borrow the words of a similar case, Boston Scientific’s “utter failure to
make any [meaningful] attempt to confer with [Channel] when [Boston Scientific]
first became concerned with [the Greenleaf Report], both constitutes a failure to use
reasonable best efforts to consummate the merger and shows a lack of good faith.”418
The lack of good faith here is corroborated by contemporaneous evidence that
Boston Scientific was looking for a way out of its deal with Channel due to growing
concerns that Cerene would be difficult to market and that the proposed transaction
was complicating a potential divestment of part of Boston Scientific’s business.
In December 2017, for example, Boston Scientific’s Director of Marketing,
Jenny Lee, and Vice President of Sales, Scott Sanders, were openly discussing how
to terminate the transaction because of Cerene’s low rates of amenorrhea (the
complete cessation of menstrual bleeding). In one email, Sanders posited: “[W]hy
would we want to sell a technology with the worst [amenorrhea] data.”419 Lee
replied: “Only way to get out of deal is if FDA doesn’t approve the device.”420
417
Tr. 516, 522-23 (Pierce).
418
Hexion, 965 A.2d at 755-56 (finding breach of provision requiring reasonable best
efforts to obtain financing where Hexion failed to confer with its counterparty when it first
became concerned about the potential issue of insolvency).
419
JX 231.
420
Id. .002.
103
 On January 26, 2018, Sanders brought his concerns to his manager, Kristin
LaRocca, Boston Scientific’s Vice President of Sales for Urology and Pelvic
Health.421 Three days later, LaRocca emailed Pierce with a summary of the “Pro’s”
and “Con’s” of the Channel deal.422 The “Con’s” included low amenorrhea rates
and a crowded competitive landscape, but did not mention Shankar’s fraud.423
LaRocca concluded that Cerene “will be a very heavy lift to commercialize” and
urged Pierce to “not move forward [with the deal] based on the material adverse
changes in the business due to the degradation in the data [on amenorrhea rates]
reported.”424
Also in early 2018, Boston Scientific was considering a sale of its entire
“Surg-Gyn” business, which covered products like Cerene.425 But Boston Scientific
421
JX 276.
422
JX 280.
423
Id.
424
Id. Boston Scientific asserts that it knew of Channel’s amenorrhea rates before entering
into the Agreement, and that the rates were only one factor in evaluating the benefits of the
device. Defs.’ Br. 68; see Tr. 453-54, 547 (Pierce). As discussed above, however, the
evidence of record shows that even if Boston Scientific was aware of the amenorrhea rates
before entering into the Agreement, there was growing concern among Boston Scientific
employees about the data. In an apparent attempt to distance these concerns from
termination of the Agreement, Pierce testified that LaRocca was not involved in the
decision to terminate. Tr. 575 (Pierce). This testimony flies in the face of Boston
Scientific’s designation of LaRocca as a Court of Chancery Rule 30(b)(6) representative
on its “decision to terminate the Merger Agreement.” JX 722.008.
425
JX 323; JX 338; JX 395.
104
recognized that the Channel deal was “complicating” it from coming to an
agreement.426 Charlie Attlan, Boston Scientific’s Senior Vice President for
Corporate Strategy and Business Development, warned Pierce at the end of February
2018 that it was “too complicated to be discussing sale of Surg Gyn . . . while at the
same time . . . finalizing option exercise on Channel.”427 By March 13, 2018, Pierce
indicated that he wanted to “sell it all,” leading Attlan to ask: “Dealing with the
Channel put would not be trivial here . . . you’d want to divest that as well?” 428
Pierce replied: “Yes. Realize the complexity of this.”429
Boston Scientific argues that “motive to avoid a deal does not demonstrate the
lack of a contractual right to do so.”430 That is true but beside the point. The
evidence of Boston Scientific’s motives simply adds credence to and corroborates
other robust facts demonstrating that Boston Scientific did not fulfill its obligations
to engage with Channel in a commercially reasonable manner to vet any concerns it
may have had about the findings in the Greenleaf Report and to keep the transaction
on track thereafter. To the contrary, Boston Scientific simply pulled the ripcord.
426
JX 323; Pierce Dep. 184.
427
JX 338.
428
JX 395.
429
Id.
430
Defs.’ Br. 86 (citing William Cos., Inc. v. Energy Transfer Equity, L.P., 2016 WL
3576682, at *2 (Del. Ch. June 24, 2016), aff’d, 159 A.3d 164 (Del. 2017)).
105
VII. CHANNEL’S REQUEST FOR SPECIFIC PERFORMANCE
Channel requests that the court grant the remedy of specific performance to
require Boston Scientific to close the merger in light of its wrongful termination of
the Agreement. As a general matter, specific performance is appropriate if the
requesting party establishes “that (1) a valid contract exits, (2) it is ready, willing,
and able to perform, and (3) that the balance of equities tips in favor of the party
seeking performance.”431 Channel bears the burden of proving that it is entitled to
specific performance by clear and convincing evidence.432 The only one of the three
elements in dispute is the balance of the equities, which clearly weighs in Channel’s
favor for two reasons.433
First, the parties expressly agreed that a failure to perform under the
Agreement would cause irreparable harm for which the remedy of specific
performance would be available: “The parties hereto agree that irreparable damage
may occur in the event that any provision of this Agreement was not performed in
431
CC Fin. LLC v. Wireless Prop,’s, LLC, 2012 WL 4862337, at *8 (Del. Ch. Oct. 1, 2012).
432
Akorn, 2018 WL 4719347, at *4.
433
Boston Scientific contends in a footnote that Channel waived the right to seek specific
performance because its response brief omitted “any serious or substantive argument.”
Defs.’ Reply Br. 42 n.7. This argument fails. Boston Scientific has been on notice since
the outset of the case that the primary relief Channel was seeking is an order of specific
performance. Channel’s verified complaint expressly sought specific performance (Dkt. 1
¶ 90, Prayer for Relief ¶ b) and its initial brief did address the issue, albeit briefly. See Pl.’s
Resp. Br. 91-92.
106
accordance with the terms hereof and that the parties may be entitled to seek specific
performance of the terms hereof.”434 Although this provision does not tie the court’s
hands in fashioning appropriate equitable relief, it reflects the parties’ understanding
that specific performance would be available in this circumstance, which is entirely
consistent with past Delaware cases granting specific performance for failure to
perform under a merger agreement.435
Second, clear and convincing evidence demonstrates that the equities weigh
in Channel’s favor. Channel itself was a victim of Shankar’s fraud. Promptly upon
discovering the fraud, Channel acted in good faith by fully investigating and
remediating the fraud with the assistance of expert advisors and doing so while being
fully transparent with its regulators (FDA and BSI) and its counterparty (Boston
Scientific). Boston Scientific, on the other hand, will obtain the essence of what it
bargained for by closing the transaction—an FDA-approved Cerene device.
Although several of Channel’s representations were inaccurate as of the date of the
Agreement, Shankar’s fraud did not compromise Channel’s quality system or its
clinical study in such a manner that would warrant termination of the Agreement
under the bargain the parties struck in the Agreement. Finally, Boston Scientific
434
Agreement § 10.6.
435
See IBP, 789 A.2d at 84 (granting specific performance of the merger agreement after
finding party improperly terminated the merger agreement); Hexion, 965 A.2d at 762
(requiring Hexion to specifically perform its obligations consistent with the merger
agreement after finding it breached certain provisions of the agreement).
107
breached its obligation to use commercially reasonable efforts to consummate the
transaction.
VIII. BOSTON SCIENTIFIC’S FRAUDULENT INDUCEMENT CLAIM
Apart from its claims arising under the Agreement, Boston Scientific asserts
that Channel fraudulently induced it to invest approximately $11 million in Channel
from 2015 to 2017, for which Boston Scientific seeks damages. 436 The elements of
a fraudulent inducement claim, for which Boston Scientific bears the burden of
proof,437 are as follows:
1) a false representation, usually one of fact, made by the defendant;
2) the defendant’s knowledge or belief that the representation was false,
or was made with reckless indifference to the truth; 3) an intent to
induce the plaintiff to act or to refrain from acting; 4) the plaintiff’s
action or inaction taken in justifiable reliance upon the representation;
and 5) damage to the plaintiff as a result of such reliance.438
For the reasons discussed next, Boston Scientific failed to carry its burden of proof
on its fraud claim. The court focuses on the evidence concerning the first two
elements, which is dispositive.
436
Defs.’ Br. 70. As initially pled, Boston Scientific’s fraud claim also sought rescission
of the Agreement. See Counterclaim ¶ 46 (Dkt. 25). Boston Scientific did not address this
request for relief during post-trial briefing and thus waived the issue.
437
See Ross Hldg. & Mgmt. Co. v. Advance Realty Gp., 2014 WL 4374261, at *37 (Del.
Ch. Sept. 4, 2014) (placing the burden of proof on the plaintiff to prove its fraudulent
inducement claim against the defendants).
438
Stephenson v. Capano Dev. Inc., 462 A.2d 1069, 1074 (Del. 1983).
108
A. Boston Scientific Failed to Prove that Channel Made a False
Representation
Boston Scientific contends that Channel made essentially two false
representations to induce it to invest in Channel: “[i] that Shankar was a bona fide
Director of Quality and [ii] that Channel would, and did receive, certification for the
ISO 13485 quality standard.”439 For support, Boston Scientific points to written
statements from documents Channel provided to Boston Scientific during the 2013
to 2017 period.440
With respect to Shankar’s role at Channel, Boston Scientific points to
statements in the following documents: (i) an April 2013 email from Coté describing
Shankar as Channel’s “Director of Quality”441 and (ii) two presentations in February
2014 and May 2016 identifying Shankar as part of Channel’s “Highly Experienced
Team” and describing his qualifications as follows:
439
Defs.’ Br. 70.
440
Boston Scientific attempted to elicit testimony from each of its own fact witnesses
concerning oral statements Channel made that allegedly were false, but their testimony
strained credibility and collapsed into admissions that they were relying only on written
documents. See Tr. 493 (Pierce); Tr. 651 (Carr); Tr. 953-54, 967-68 (Morrison). Boston
Scientific thereafter abandoned its reliance on purported oral statements for its fraud claim.
See Defs.’ Reply Br. 36 (“BSC made clear that the false statements on which it relies were
made in documents.”).
441
JX 33.
109
15 years experience in the areas of operational management, quality
assurance and regulatory affairs. Prior leadership roles at Intrapace, C8
Medisensors and Flextronics. MSEE from Drexel.442
A fundamental problem with Boston Scientific’s fraud claim is that these statements
were true. Indeed, Boston Scientific concedes that Shankar held the title of “Director
of Quality,” and it does not challenge the factual accuracy of any specific statement
in the description of his qualifications.443
Instead of challenging the literal truth of any of these statements, Boston
Scientific argues they show that Channel held out Shankar “as a Director of Quality
who would adequately perform his duties.”444 According to Boston Scientific, “[t]he
omission of the fact that Shankar failed to discharge those duties is sufficiently
misleading to support a claim of fraud.”445 For support, Boston Scientific cites
Metro Communication Corp. BVI v. Advanced Mobilecomm Technologies Inc.446
In Metro, a telecommunications venture provided to a prospective investor
management reports that “included specific statements regarding ‘applications for
digging permits [that] were submitted to . . . municipality authorities,’ and reported
that ‘[w]e are making efforts to obtain the permit [in Sao Paolo] by the end of
442
JX 36.004 (February 2014 presentation); JX 49.042 (May 2016 presentation).
443
See Defs.’ Reply Br. 35.
444
Defs.’ Br. 88 (emphasis added).
445
Defs.’ Reply Br. 35.
446
854 A.2d 121, 144-46 (Del. Ch. 2004).
110
July.’”447 In the context of deciding a motion to dismiss under Court of Chancery
Rule 9(b) for failure to plead fraud with particularity, the court found that
“[a]ssuming the truth of the allegations in the complaint, those statements were
misleading because they described the permitting process without indicating that
some of the permits were obtained through bribery.”448 Unlike in Metro, the
statements Boston Scientific identifies here consist of straightforward biographical
facts and do not speak to how Shankar performed his job at Channel in any
qualitative sense such that omitting his asserted failure to do so “adequately” would
render the statements that Channel actually made misleading.
With respect to Channel’s ISO 13485 certification, Boston Scientific points
to statements in the following documents: (i) a 2014 presentation stating that
Channel would seek ISO 13485 certification;449 (ii) a November 2016 email from
Coté stating that Channel had “passed the 13485 certification audit,”450 and (iii) a
May 2017 board presentation stating that Channel “[r]eceived certificate for ISO
13485.”451 Once again, each of these statements was true. Channel did seek an ISO
447
Metro, 854 A.2d at 145.
448
Id. at 146.
449
JX 1101.026.
450
JX 99.
451
JX 117.023; see also Bachert Dep. 73 (recalling that Shankar stated “Channel is 13485-
certified by BSI.”).
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13485 certification; BSI issued a report in November 2016 “stating that Channel met
the requirements of ISO 13485:2003”; and Channel “received its ISO 13485
certification” in March 2017.452
Relying again on Metro, Boston Scientific argues that these statements were
misleading because Channel failed to disclose that it had submitted some fraudulent
documents to obtain the certification from BSI. Boston Scientific, however, failed
to prove that the documents in question were necessary to obtain the certification or
that Channel was in possession of an unlawful certification. In fact, after Channel
disclosed Shankar’s fraud to BSI, BSI reported that Channel’s “[c]ontinued
certification is confirmed and the EC certificate remains valid.”453 Given the
absence of any evidence that Channel violated a legal requirement in connection
with obtaining its ISO 13485 certification from BSI, the statements in Channel’s
documents referenced above were not false or misleading.
B. Boston Scientific Failed to Prove Channel’s Knowledge of Falsity
or Recklessness
Even if any of the statements discussed above constituted a misrepresentation,
Boston Scientific’s fraud claim would still fail because it has not proven (i) that
452
PTO ¶ II.D.1-2.
453
JX 684.003 (October 2018 BSI report) (emphasis added); Tr. 62-63 (Coté); see also JX
709 (September 2018 BSI report stating that Channel continued to effectively implement
ISO 13485:2003 and had fully implemented the new ISO 13485:2016 standards).
112
Channel knew that any of the statements discussed above were false or (ii) that it
acted with reckless indifference to the truth. The court addresses these issues, in
turn, next.
Beginning with the issue of knowledge, the general rule under Delaware law
is that “a corporation is liable for the acts and knowledge of its agents—even when
the agent acts fraudulently or causes injury to third persons through illegal
conduct.”454 There is an important exception to this rule where the employee
“abandons the [employer’s] interests” and “act[s] solely to advance his own personal
financial interest, rather than that of the corporation itself.”455 This exception is
limited, but it covers the “unusual” case where the employee’s actions show “the
type of total abandonment of the corporation’s interests that is characteristic of, for
example, outright stealing from the corporation.”456 Even stealing may not be
enough to trigger this exception if the company still receives a benefit from its
employee’s actions.457
454
Stew. v. Wilmington Tr. SP Servs., Inc., 112 A.3d 271, 303 (Del. Ch. 2015).
455
Id.
456
Id.
457
Id. at 310 (declining to apply the adverse interest exception to an employees’ alleged
theft where a complaint was “replete with allegations” that the employees’ fraud allowed
the company to be authorized as Delaware-domiciled captive insurers); see also In re Am.
Int’l Grp. Inc., Consol. Deriv. Litig., 976 A.2d 872 (Del. Ch. 2009), aff’d sub nom.
Teachers’ Ret. Sys. of La. v. Gen. Re Corp., 11 A.3d 228 (Del. 2010) (declining to extend
the adverse interest exception where the “Complaint plainly pleads that AIG’s participation
113
This case provides a classic example for when the adverse interest exception
should apply. The evidence shows that Shankar’s fraud was for his own benefit, and
to the detriment of Channel. He stole a large sum of money from Channel and
falsified its records, which put Channel at risk of not receiving FDA approval and
jeopardized its merger with Boston Scientific. Shankar’s theft, pure and simple,
represented a “total abandonment of [Channel’s] interests.”458
Boston Scientific argues that “Shankar’s fraud was not solely intended to
advance his personal interest [because] it also advanced the company in that he
helped Channel obtain IDE approval, ISO 13485 certification, and CE mark based
on documents he falsified to conceal Channel’s quality system deficiencies.”459 This
assertion lacks factual support. Boston Scientific provided no evidence that Shankar
intended to help Channel obtain any of these approvals through his fraudulent
actions. Indeed, his fraud and the falsified documents he submitted to regulators had
the potential to endanger these approvals, and there is no evidence that Channel
would not have received these approvals absent Shankar’s fraud.
in each of the schemes resulted in tangible (if eventually short-lived) benefits to the
corporation”).
458
Stewart, 112 A.3d at 303.
459
Defs.’ Reply Br. 37.
114
This case is markedly different from In re American International Group,
Inc., Consolidated Derivative Litigation,460 on which Boston Scientific relies. In
that case, the court imputed knowledge to a corporation at the motion to dismiss
stage where it was clear, on the face of the complaint, that the top-ranking employees
engaging in fraud benefitted both the company (by increasing its stock price) and
themselves (by increasing their own compensation and chances for promotion).461
Here, Shankar’s fraud provided no benefit to Channel, only detriment. For this
reason, the court will not impute his knowledge of the fraud to Channel. Thus, even
if any of the representations discussed previously were false, Boston Scientific has
failed to prove that Channel knew they were false.
Nor did Boston Scientific prove that Channel was “reckless” in making any
of the allegedly false representations. To establish recklessness, Boston Scientific
must prove that Channel, through its employees, “consciously ignored specific
warning signs that illicit activities were occurring.”462 “[O]rdinary negligence is
insufficient to support a claim of common law fraud,” and it is not sufficient for the
facts to show “that the managers should have known about” the fraud.463
460
976 A.3d 872.
461
Id. at 892.
462
Metro, 854 A.2d at 147.
463
Id. at 148.
115
Boston Scientific asserts that evidence of the following warning signs is
sufficient to prove that Channel acted with reckless indifference to the truth:
 failure to perform due diligence in hiring Shankar;
 failure to enact sufficient “checks and balances necessary for
strong cash control” despite warnings from its financial auditor;
 discovery of the fraud only by happenstance;
 failure to properly verify, monitor, or audit its vendors;
 failure to keep minutes of Management Review meetings or
review internal audit reports, some of which had no findings;
 failure to detect Shankar’s theft of more than $2.5 million,
despite Channel’s cash reserves rarely being over $10 million in
any quarter.464
This evidence demonstrates, at most, negligence on the part of Channel and its
employees and is not sufficient to prove recklessness because the evidence does not
establish that anyone at Channel consciously ignored any warning signs of Shankar’s
fraud.
Contrary to Boston Scientific’s assertions, for example, William Malecki,
Channel’s Chief Operating Officer, vetted Shankar by speaking to someone Malecki
knew at a previous employer identified on Shankar’s resume and confirming that
Shankar had worked there for eight years.465 Although one could argue it was
464
Defs.’ Reply Br. 38-39.
465
Malecki Dep. 85-86.
116
negligent not to do more, there is no evidence that any warning signs (e.g., a previous
termination due to theft or fraud, or poor performance reviews) materialized from
Malecki’s vetting that Channel consciously disregarded.
The cited evidence concerning Channel’s financial auditor concerned a
recommendation for handling cash disbursements.466 Coté credibly testified without
contradiction, that the auditor never identified anything related to Shankar’s fraud
and that the fraud “had nothing to do with” the auditor’s recommendation.467
Boston Scientific does not explain how the fraud’s accidental discovery shows
recklessness—if anything that fact cuts against the notion that Channel consciously
disregarded warning signs. Boston Scientific also does not cite evidence that anyone
at Channel knew that it was failing to audit its suppliers or that its internal audit
reports were being forged.
As to the amount of Shankar’s fraud, although $2.57 million represented a
significant percentage of Channel’s cash reserves in any given quarter, $2.57 million
was the total amount that Shankar stole over almost five years and not at one time. 468
In total, Shankar’s fraudulent invoices and expense reports accounted for “about 4
or 5%” of the total number of invoices and expense reports submitted during his
466
JX 80; Tr. 32 (Coté).
467
Tr. 32-33 (Coté).
468
See JX 916 (Shankar’s Plea Agreement).
117
employment at Channel,469 most of which were for amounts below the threshold that
required Coté’s approval to avoid detection.470
Boston Scientific suggests Channel was reckless because “[i]t was in
Channel’s best interest for its management to turn a blind eye” before an agreement
to sell the company was signed.471 This is speculation—not evidence. What the
record shows is that Channel was transparent with the FDA and Boston Scientific
upon discovering Shankar’s fraud, and acted with dispatch to address it.472 This type
of responsible conduct is hardly what one would expect from someone intent on
turning a blind eye.
In sum, the court finds based on the preponderance of evidence that there is
no legal basis to impute Shankar’s knowledge to Channel and that Channel did not
act with reckless indifference to the truth. This conclusion provides an independent
basis for entry of judgment in Channel’s favor on Boston Scientific’s fraud claim
apart from the failure to prove the existence of a false statement.473
469
Tr. 29-30 (Coté).
470
See id. 29.
471
Defs.’ Reply Br. 39.
472
See supra Part I.F-I.
473
Channel advances several other arguments for why the fraud claim should fail. The
court need not address these issues in view of its findings on the lack of a false statement
and the failure to prove Channel’s knowledge of falsity or recklessness.
118
IX. CONCLUSION
For the reasons explained above, Boston Scientific was not entitled to
terminate the Agreement and breached its obligation to use commercially reasonable
efforts to consummate the merger; Channel is entitled to an order of specific
performance requiring Boston Scientific to close the merger; and Boston Scientific
failed to prove its claim for fraudulent inducement. The parties are directed to confer
and to submit an implementing order consistent with this decision within five
business days.
119