Protege Biomedical, LLC v. Duff & Phelps Securities, LLC

United States Court of Appeals
For the Eighth Circuit
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No. 21-1368
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Protégé Biomedical, LLC
Plaintiff - Appellant
v.
Duff & Phelps Securities, LLC, and Philip I. Smith
Defendants - Appellees
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Appeal from United States District Court
for the District of Minnesota
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Submitted: October 20, 2021
Filed: April 4, 2022
[Unpublished]
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Before GRUENDER, ERICKSON, and STRAS, Circuit Judges.
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PER CURIAM.
Sometimes the unexpected happens in corporate deals. When looking for a
buyer for its business, Protégé Biomedical asked Duff & Phelps Securities for help.
But rather than looking to complete the deal, the prospective buyer allegedly stole
some of Protégé’s trade secrets, which led the company to sue Duff & Phelps and
one of its employees, Philip Smith, for damages. The district court 1 dismissed the
case, and we affirm.
I.
Once it received approval from the Food and Drug Administration for one of
its medical products, Protégé hoped to sell its business. But it needed help finding
a buyer, so it turned to Duff & Phelps. The terms of the agreement were simple. In
exchange for trying to find a buyer, Duff & Phelps received immunity from certain
types of claims, its employees were largely shielded from individual liability, and it
owed no fiduciary duties to Protégé. And all of these terms, as the parties’ contract
made clear, were subject to New York law.
Within months, one of Protégé’s competitors, Z-Medica, emerged as a
potential buyer. Z-Medica’s point person was Doug Schillinger, who sat on the
company’s board of directors. Smith had Schillinger sign a nondisclosure
agreement, which Protégé thought would bind Z-Medica too.
Based on that assumption, Protégé participated in a conference call to discuss
the potential deal with Z-Medica. At the outset of the call, one of Protégé’s co-
owners mentioned the nondisclosure agreement and explained that it was the reason
why the parties could speak freely about Protégé’s nonpublic information.
Unfortunately for Protégé, Z-Medica was not operating under the same
assumption. In its view, Schillinger had signed the nondisclosure agreement in his
personal capacity, not as Z-Medica’s representative. So after the call was over, Z-
Medica used the information it had learned to create its own competing product.
1
The Honorable John R. Tunheim, Chief Judge, United States District Court
for the District of Minnesota.
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Harmed by this turn of events, Protégé first sued Z-Medica. After Z-Medica
settled, Protégé turned its attention to Duff & Phelps and Smith, whom it sued in
state court. Duff & Phelps removed the case to federal court on the ground that
Smith, the only nondiverse defendant, had been fraudulently joined. See 28 U.S.C.
§ 1446. The case made it no further than a motion to dismiss. In the district court’s
view, Protégé had not alleged a plausible claim for relief. See Fed. R. Civ. P.
12(b)(6).
II.
Before getting to the merits, we need to decide whether this case belongs in
federal court. Generally, in a case like this one, the joinder of a nondiverse party
like Smith would mean that there is no federal jurisdiction. See 28 U.S.C. § 1332(giving federal courts jurisdiction over cases involving complete diversity of
citizenship and an amount-in-controversy over $75,000). But here the district court
held that Smith had been “fraudulently joined.” Filla v. Norfolk S. Ry. Co., 336 F.3d
806, 809 (8th Cir. 2003).
Fraudulent joinder occurs when “there is no reasonable basis in fact and law
for the claim[s] brought” against the nondiverse defendant. Wivell v. Wells Fargo
Bank, N.A., 773 F.3d 887, 893 (8th Cir. 2014) (quotation marks omitted). The
breach-of-contract claim falls into that category because Smith himself was never a
party to a contract with Protégé. See Mencher v. Weiss, 114 N.E.2d 177, 179 (N.Y.
1953). 2 The same goes for the unlawful-practice-of-law claim, because Smith, who
2
In New York, an agent like Smith is not “personally bound [to a contract]
unless there is clear and explicit evidence of the agent’s intention to . . . []add his
personal liability [to] that of his principal.” Savoy Record Co. v. Cardinal Export
Corp., 203 N.E.2d 206, 207 (N.Y. 1964) (quoting Mencher, 114 N.E.2d at 179). The
parties’ contract establishes exactly the opposite here: the obligations were “solely
corporate,” and no Duff & Phelps employee was “subject[] to any liability.” So
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is not a lawyer, never gave legal advice to Protégé. See Gardner v. Conway, 48
N.W.2d 788, 796–97 (Minn. 1951). Meanwhile, the contract itself immunizes Smith
from a breach-of-professional services claim, which is based in negligence. See
Hydro Inv., Inc. v. Trafalgar Power Inc., 227 F.3d 8, 15 (2d Cir. 2000) (applying
New York law). And finally, the remaining claims—for breach-of-fiduciary and
principal-agent duties—fail because neither Smith nor Duff & Phelps ever served as
Protégé’s fiduciary. Spinelli v. Nat’l Football League, 903 F.3d 185, 207 (2d Cir.
2018) (applying New York law); see Meese v. Miller, 436 N.Y.S.2d 496, 499 (N.Y.
App. Div. 1981). In short, without a viable claim against Smith, 3 the case can remain
in federal court.
III.
Only the claims against Duff & Phelps remain. The district court dismissed
them all for failure to state a claim. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
Protégé’s primary claim is for breach of contract. According to the complaint,
Duff & Phelps breached the parties’ contract when it failed to prevent Protégé from
disclosing its own proprietary information during the call. The problem, however,
is that the only contractual duties that Protégé identifies are those that make Duff &
Protégé had “no reasonable basis in fact and law” to sue Smith for breach of contract.
Wivell, 773 F.3d at 893 (quotation marks omitted).
3
No writ of mandamus is available because Protégé has other adequate legal
remedies. See Madison Equities, Inc. v. Crockarell, 889 N.W.2d 568, 571 (Minn.
2017). And the declaratory-judgment claim is derivative, so to the extent the other
claims lack a reasonable basis, it does too. See Whitney v. Guys, Inc., 700 F.3d 1118,
1121 (8th Cir. 2012).
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Phelps responsible for its own conduct: “keep[ing] confidential all nonpublic
information” and “not disclos[ing]” anything to “third parties.”4
Protégé’s remaining claims meet a similar fate. Protégé’s unlawful-practice-
of-law claim fails because, like Smith, Duff & Phelps never gave legal advice. See
Gardner, 48 N.W.2d at 796. Nor was it a fiduciary, which takes care of both the
breach-of-fiduciary-duty and breach-of-principal-agent-duty claims. See Spinelli,
903 F.3d at 207; Meese, 436 N.Y.S.2d at 499. And we need not consider any other
claims because Protégé’s brief largely ignores them. See Chay-Velasquez v.
Ashcroft, 367 F.3d 751, 756 (8th Cir. 2004) (requiring “meaningful argument” to
preserve a point on appeal).
IV.
We accordingly affirm the judgment of the district court.
ERICKSON, Circuit Judge, dissenting.
I agree that the terms of Protégé’s engagement agreement with Duff & Phelps
are straightforward and that New York law governs this dispute. I disagree with the
4
Even if Duff & Phelps was grossly negligent in performing the contract, as
Protégé claims, it would make no difference. As New York courts have held,
“claims based on negligent or grossly negligent performance of a contract are not
cognizable.” City of N.Y. v. 611 W. 152nd St., Inc., 710 N.Y.S.2d 36, 38 (N.Y. App.
Div. 2000); see also Megaris Furs, Inc. v. Gimbel Bros., Inc., 568 N.Y.S.2d 581,
583 (N.Y. App. Div. 1991) (“[N]egligent performance of the contract[] [is] a cause
of action which simply does not exist.”). And the allegations in the complaint do
not rise to the level of gross negligence anyway, which involve “outrageous acts of
folly,” not reasonable mistakes of fact. Hartford Ins. Co. v. Holmes Prot. Grp., 673
N.Y.S.2d 132, 133 (N.Y. App. Div. 1998) (noting that conduct “is not gross[ly]
negligen[t]” unless it “evince[d] a reckless disregard for the rights of others or
smack[ed] of intentional wrongdoing” (quotation marks omitted)).
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majority’s conclusion that Phil Smith was fraudulently joined, that Protégé has failed
to allege a plausible claim for relief against Duff & Phelps, or that the
indemnification provision immunizes Duff & Phelps from all potential liability
arising in this case.
Duff & Phelps, a multinational consultancy firm based in New York, agreed
to do more than merely keep nonpublic information it learned about Protégé’s
business confidential. It agreed to perform a number of tasks for Protégé in exchange
for a nonrefundable transaction fee equal to 3% of the aggregate value of all cash,
securities, and other property paid to Protégé in the event of a sale of the business,
but in no event less than $700,000. Compl., Ex. B, ¶ 5. Duff & Phelps estimated
the sale of Protégé’s business could fetch at least $23 million. Relevant to the claims
here, Duff & Phelps agreed to contact potential purchasers approved by Protégé and
provide the potential purchaser, under a non-disclosure agreement, with confidential
information about the business Protégé sought to sell. Compl., Exh. B, ¶ 1(c). Phil
Smith (Managing Director of the Healthcare Mergers and Acquisitions Department
in the Minneapolis, Minnesota office) signed the agreement on December 1, 2017,
on behalf of Duff & Phelps. Id. at p. 6.
Consistent with his obligations under the agreement, Smith undertook the
responsibility of getting the signatures for a potential buyer on a non-disclosure
agreement, which had been approved by Protégé and its counsel. Like the
engagement agreement, Smith signed the non-disclosure agreement for “Project
Falcon” (an internal reference for Protégé) on behalf of Duff & Phelps. Compl.,
Exh. D, p. 5. Doug Schillinger accepted the terms on behalf of DW Healthcare
Partners. Id. Curiously, Smith left the line on the non-disclosure agreement marked
“Buyer” completely blank. Id. at p. 1. Even though the potential buyer was not
identified and the only signatory on the form for the potential buyer was identified
as DW Healthcare Partners, Smith’s supervisor informed Protégé in writing that they
“have a signed non-disclosure agreement in place with DW Healthcare/Zmedica and
they would like to have a call.” Compl., Exh. F. Given the litigation that has
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followed, it is indisputable that Smith/Duff & Phelps’ efforts to obtain a non-
disclosure agreement with Z-Medica were deficient and Duff & Phelps’
representation to Protégé that there was a non-disclosure agreement in place with Z-
Medica was inaccurate. In fact, there was a judicial determination, at the motion to
dismiss stage, finding Z-Medica was not bound by the non-disclosure agreement
Duff & Phelps obtained under the terms of the engagement agreement. See Protégé
Biomedical, LLC v. Z-Medica, LLC, 394 F.Supp.3d 924, 937-38 (D. Minn. 2019).
Smith, acting on behalf of Duff & Phelps, signed both the engagement
agreement and the non-disclosure agreement at issue. He assumed responsibility for
obtaining the non-disclosure agreement with Z-Medica. As a case proceeds, it is not
uncommon for an employer to attempt to shift responsibility or advance defenses or
positions adverse to its bad-acting or negligent employee. In my experience as a
lawyer and judge, it is prudent, not fraudulent, to name as a defendant the employer
and the employee whose conduct has been called into question, particularly when
the employee is the signatory to the parties’ agreements. With no fraudulent joinder
of Smith, jurisdiction properly lies in state court.
If federal jurisdiction is proper, I would reverse the dismissal of the breach of
contract, negligence, and professional malpractice claims because the complaint is
well-pleaded under New York law as to these claims. While the complaint is no
model of clarity, Protégé has alleged it was assured prior to its decision to disclose
confidential information about its business that there was a non-disclosure
agreement with Z-Medica. At the telephone conference arranged by Duff & Phelps,
two Z-Medica representatives; Schillinger; and representatives from Duff & Phelps
remained silent when Protégé’s owner announced that he was willing to discuss
confidential business information “[s]ince we’re all under an NDA.” Protégé has
alleged that it would not have disclosed its confidential information but-for Duff &
Phelps’ representations that there was a non-disclosure agreement with Z-Medica.
The majority’s acceptance of Duff & Phelps’ attempt to escape responsibility on the
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ground that it was Protégé, not Duff & Phelps, who disclosed its own confidential
information to Z-Medica misses the crux of Protégé’s claims.
In the engagement agreement, Duff & Phelps accepted the responsibility of
obtaining a non-disclosure agreement that would preserve the confidentiality of
Protégé’s trade secrets. After this agreement was signed and when Smith thought
someone from DW Healthcare Partners had independently reached out to his client
Protégé, Smith contacted Schillinger to make sure they had “a clear path forward.”
Compl., Exh. E, p. 2; see Compl., Exh. D, p. 4. DW Healthcare Partners understood
that it would “have to go through Duff and Phelps to learn more” about Protégé.
Compl. Exh. E, p. 1.
Once Duff & Phelps undertook the duty to obtain the non-disclosure
agreement, Duff & Phelps, as an entity providing professional services, assumed a
duty to act with reasonable care and diligence. While the majority makes short work
of each of Protégé’s claims, New York expressly recognizes that “a legal duty
independent of contractual obligations may be imposed by law as an incident to the
parties’ relationship and that several types of defendants—including professionals—
can be held liable in tort for failure to exercise reasonable care, irrespective of their
contractual duties.” Dormitory Auth. v. Samson Constr. Co., 94 N.E.3d 456, 460
(N.Y. 2018) (cleaned up). “In these instances, it is policy, not the parties’ contract,
that gives rise to a duty of due care.” Sommer v. Fed. Signal Corp., 593 N.E.2d
1365, 1369 (N.Y. 1992).
Protégé alleged, as the majority notes, a professional malpractice claim. In a
malpractice claim, a defendant is “held to the level of skill and care used by others
in the community who practice the same profession.” Reis v. Volvo Cars of N. Am.,
18 N.E.3d 383, 387 (N.Y. 2014). This standard stands in contrast to a typical
negligence claim where a jury “must compare the defendant’s conduct to that of a
reasonable person under like circumstances.” Id. Even though the difference
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between these standards might be subtle, it is important to apply the correct standard
to the distinct claims. Id. at 388.
While it is undisputed that Protégé’s counsel was actively involved in
formulating the terms for an acceptable non-disclosure agreement, there is no
indication that Duff & Phelps provided the partially completed non-disclosure
agreement to Protégé prior to facilitating the meeting that allowed Z-Medica to
obtain and steal Protégé’s trade secrets. Thus, Protégé could not have decided for
itself or with the assistance of counsel whether the non-disclosure agreement bound
Z-Medica. The undisputed information in the record before us is that Protégé relied
exclusively on the terms of the engagement agreement in conjunction with the
express statements, representations, and expertise of Duff & Phelps, and no one else.
I have doubts about whether a reasonable person, let alone a business that
holds itself out as having expertise as financial advisors to multimillion dollar
transactions, could have reasonably believed that Z-Medica was bound by a
confidentiality agreement in which Z-Medica was neither identified nor a signator.
Nonetheless, at a minimum, the majority’s characterization of the alleged blunders
by Duff & Phelps as “reasonable mistakes” necessarily gives rise to questions for
the ultimate finder of fact to decide. See Havas v. Victory Paper Stock Co., Inc.,
402 N.E.2d 1136, 1139-40 (N.Y. 1980) (“It was particularly appropriate to leave
th[e] issue [of negligence] to the jury, not only because of the idiosyncratic nature
of most tort cases, or because there was room for a difference in view as to whether
[the defendant’s] conduct in the particular circumstances of this case did or did not
evidence a lack of due care, but, perhaps above all, because, in the determination of
issues revolving about the reasonableness of conduct, the values inherent in the jury
system are rightfully believed an important instrument in the adjudicative process.”)
The court’s role at this stage is limited to determining the sufficiency of the
allegations, not claim resolution. In exchange for at least $700,000, the engagement
agreement on its face obligated Duff & Phelps to do more than, as the majority finds,
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personally keep confidential all nonpublic information and not disclose anything to
third parties. Moreover, as a policy, separate and distinct from any contractual
obligation, New York law requires professionals to exercise reasonable skill and
care. The failure to do so can give rise to a tort claim. In my view, Protégé has
alleged sufficient facts to satisfy the plausibility standard for its breach of contract,
negligence, and professional malpractice claims. Of course, Protégé cannot double-
recover for its losses, but New York allows for the pursuit of both types of claims—
contract and tort—when there is an independent duty that may exist beyond
contractual duties.
The majority references the existence of a broad indemnification agreement,
which it finds immunizes Smith from liability. The indemnification provisions
consist of 2½ pages attached to the engagement agreement as Schedule A. While
the indemnification provisions require Protégé to indemnify Duff & Phelps for
nearly all imaginable claims or losses related to its services, it does not definitely
absolve Duff & Phelps from all potential liability under the undisputed facts of this
case. The provisions provide:
A. Indemnification. To the fullest extent lawful, the Company
will promptly, upon demand, indemnify and hold harmless Duff &
Phelps Securities, LLC and their affiliates (collectively, “D&P”), and
each director, officer, employee, agent, member and controlling person
of D&P (any or all of the foregoing hereinafter referred to as an
“Indemnified Person”), from and against all losses, claims, damages,
expenses (including reasonable fees and disbursements of counsel and
accountants), costs (including, without limitation, expenses, fees and
disbursement and time charges related to giving testimony or furnishing
documents in response to a subpoena or otherwise) and liabilities (joint
or several), (collectively, “Losses”), resulting directly or indirectly
from any threatened or pending investigation, action, claim, proceeding
or dispute, including securityholder actions (whether or not D&P or any
other Indemnified Person is a potential or actual named party or
witness) (collectively, a “Claim”), which (1) are related to or arise out
of any untrue statement or alleged untrue statement of a material fact
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contained in any oral or written information provided to D&P or any
other person by the Company or used by the Company in connection
with the transaction contemplated by the engagement letter or any
omission or alleged omission by the Company to state therein a material
fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or (2) are
otherwise related to or arise out of D&P’s engagement, role, activities
or the performance or nonperformance of professional services on the
Company’s behalf. The Company will not be responsible, however, for
any Losses pursuant to clause (2) of the preceding sentence which are
judicially determined to have resulted primarily and directly from the
willful misconduct or gross negligence of any Indemnified Person
seeking indemnification hereunder or related to a breach by D&P of
this Agreement; but pending any such judicial determination, the
indemnification and reimbursement obligations of the Company
hereunder shall continue to apply. The Company also agrees that
neither D&P nor any Indemnified Person shall have any liability to
the Company, its owners, parents, creditors or securityholders for
or in connection with its engagement, except such liability for
Losses incurred by the Company which are judicially determined
to have resulted primarily and directly from D&P’s or such
Indemnified Person’s willful misconduct or gross negligence or
related to a breach by D&P of this Agreement. For purposes of the
foregoing, “judicially determined” shall mean determined by a court of
competent jurisdiction.
Compl., Exh. B, p. 7 (emphasis added). The narrow areas excepted involve willful
misconduct, gross negligence, and breach of contract by Duff & Phelps.
New York has a public policy rule that prohibits parties from insulating
themselves from damages caused by grossly negligent conduct. Matter of Part 60
Put-Back Litig., 165 N.E.3d 180, 184, 186 (N.Y. 2020). Parties are allowed,
however, to contractually limit remedies that do not immunize the breaching party
from all liability for its conduct. Id. In other words, “a total immunity clause is bad;
a limitation provision, if reasonable, is not.” Id. at 187 (cleaned up).
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This is so because public policy will not permit a party who engages “in
conduct that smacks of intentional wrongdoing or evinces reckless disregard for the
rights of others . . . to escape all liability for its misconduct.” Id. at 188. “[B]ecause
the law looks with disfavor upon agreements intended to absolve a party from the
consequences of its wrongdoing, a release which purports to excuse a party from
responsibility from misconduct is subject to the closest of judicial scrutiny.” Golden
Pac. Bancorp v. F.D.I.C., 273 F.3d 509, 515 (2d Cir. 2001) (analyzing New York
law) (cleaned up).
I recognize that competing against this policy is another public policy—the
freedom of contract. Id. Under New York law, “[w]hen the clause limiting liability
is negotiated at arm’s length by sophisticated parties, provides for more than nominal
damages, and does not wholly exculpate the breaching party, the rationales
underlying the gross negligence public policy exception fail to overcome the public
policy in favor of freedom of contract” when “the only causes of action raised in the
complaint sound in breach of contract.” Id.As noted earlier, I believe Protégé has sufficiently pleaded causes of action
for not only breach of contract but also negligence and professional malpractice.
Whether it was Duff & Phelps’ conduct that caused Protégé to unwittingly disclose
its confidential business information to an entity not bound by a confidentiality
agreement amounts to gross negligence, ordinary negligence, reckless indifference,
or no claim at all is for the fact finder to determine. See Sommer, 593 N.E.2d at
1371 (“Whether this indeed is a case of simple mistake or reckless indifference is
for a jury to determine.”); Internationale Nederlanden (U.S.) Cap. Corp. v. Bankders
Tr. Co., 689 N.Y.S.2d 455, 460 (N.Y. App. Div. 1999) (quoting Food Pageant, Inc.
v. Consol. Edison Co., 429 N.E.2d 738, 740 (N.Y. 1981)) (“Where the inquiry is to
the existence or nonexistence of gross negligence, the ultimate standard of care is
different [from ordinary negligence], but the question nevertheless remains a matter
for jury determination.”).
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For these reasons, I would reverse the dismissal of the breach of contract,
negligence, and professional malpractice claims.
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