Harris, M.D. v. Innovate Biopharmaceuticals, Inc.

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
M. SCOTT HARRIS, M.D., and
MIDDLEBURG CONSULTANTS INC.,
Plaintiffs,
C.A. No. N19C-01-055 RRC
V.
INNOVATE BIOPHARMACEUTICALS,
INC., a Delaware Corporation,
Defendant.
New Nee Nee ree eee Nee” ee” ee” ee ee” ee” ee’ Le”
Submitted: July 26, 2019
Decided: October 15, 2019
On Defendant Innovate Biopharmaceuticals, Inc.’s Motion to Dismiss.
GRANTED.
MEMORANDUM OPINION
David W. deBruin, Esquire, Gawthrop Greenwood, PC, Wilmington, Delaware, and
Jarod Bona, Esquire and Steven Levitsky, Esquire, Bona Law PC, New York, New
York, Attorneys for Plaintiffs M. Scott Harris, M.D. and Middleburg Consultants,
Inc..
Catherine A. Gaul, Esquire, Ashby & Geddes, Wilmington, Delaware, Attorney for
Defendant Innovate Biopharmaceuticals, Inc..
COOCH, R.J.
I. INTRODUCTION!
| The Introduction, Facts and Procedural History, and the Parties’ Contentions are derived from
the parties’ joint stipulation. See Exhibit to Letter to the Court at 2—9, Harris v. Innovate, N19C-
01-055, D.I. 14 (July 26, 2019) (hereinafter Joint Stipulation).
This is Innovate Biopharmaceuticals, Inc.’s (“Defendant”) Motion to Dismiss
the complaint filed by Plaintiffs, M. Scott Harris, M.D. and Middleburg Consultants
Inc. Plaintiffs in the complaint assert claims for breach of contract (Counts I and II),
negligent misrepresentation (Count II), breach of the implied covenant of good faith
and fair dealing (Count IV), and fraud (Count V). Defendant argues that the
complaint should be dismissed for failure to state any claims for which relief can be
granted.
After review of the parties’ contentions and the record, the Court concludes
that Plaintiffs have failed to sufficiently assert claims upon which relief can be
granted.” Plaintiffs sought to impose duties upon Defendant that were not
contemplated by the plain language of the relevant contracts. The Consulting
Agreement expressly contemplated delay in completion of an Initial Public Offering
(IPO), provided consideration for such delay, and obligated Defendant to deliver
unrestricted shares to Plaintiff after Plaintiff exercised the stock options. These terms
have been satisfied by Defendant. Defendant rendered compensation for the delay
and delivered the unrestricted shares two weeks after Plaintiff exercised the stock
options at issue. Further, the undisputed facts do not reflect any instances of fraud.
If. FACTS AND PROCEDURAL HISTORY
A. The Parties.
Innovate is a Delaware corporation with its principal place of business in
Raleigh, North Carolina. It is a clinical stage biotechnology company that focuses
on developing novel medicines for autoimmune and inflammatory diseases.
(Compl. { 3).
Harris is a resident of Maryland who entered into a Consulting Agreement
with Innovate through his privately held company, Middleburg Consultants, which
is a Maryland corporation. (Compl. § 2, 7).
B. The Consulting Agreement.
On or about August 29, 2016, Harris and Innovate entered into a Consulting
Agreement. Under the Consulting Agreement, Harris “agreed to provide Innovate
regulatory guidance on Innovate’s therapeutic programs, participate in regulatory
and development strategy discussions with the company, review regulatory
documents, and participate in due diligence calls with investors or strategic partners
of the company.” (Compl. 4 7).
? The parties have agreed that North Carolina law applies.
In exchange for providing these services, the Consulting Agreement
provides that “[t]he Company shall pay Consultant, and Consultant hereby agrees
to accept, as compensation for all services to be rendered to the Company, the
compensation set forth in this Section 3.” (Motion Ex. A § 3). Under Section 3.1,
entitled “Stock Options,” the agreement provides:
The Company will issue Consultant options equivalent to 0.5% of the Company on a fully
diluted basis as of Sept 13, 2016. The strike price will be set at the next round of financing
of the Company, but is expected to be $0.83 per share, but is subject to change. The initial
40% of the shares will vest immediately: with the remaining 60% will vest upon
completion of the End of Phase 2 meeting with the US FDA for INN-202, Larazotide
Acetate. The option exercise period will be 4 years after the expiration or termination of
this Agreement. If the Company has not completed an underwritten initial public offering
by June 30, 2017, the Company will make a one-time payment of $15,000 (fifteen thousand
US dollars) to Consultant in consideration of the delay to asset liquidity on public markets.
(Motion Ex. A § 3.1; see also Compl. J 12-16).
C. The Stock Option Grant and Related Agreements.
On March 21, 2017, Innovate granted Harris an option to purchase 232,725
shares of Innovate common stock at an exercise price per share of $0.785 pursuant
to the Notice of Nonstatutory Stock Option 2015 Stock Incentive Plan (the “Option
Notice”). (Compl. § 18; see also Motion Ex. B). The shares fully vested on the grant
date. (Id.). The Option Notice indicates that the “stock option is granted under and
governed by the terms and conditions of the Plan and the accompanying
Nonstatutory Stock Option Agreement, both of which are incorporated herein by
reference.” A copy of Innovate’s 2015 Stock Incentive Plan (the “Plan”) is attached
hereto as Exhibit C.
The Stock Option Notice and the Nonstatutory Stock Option Agreement
Granted Under 2015 Stock Incentive Plan (the “Option Agreement”) contains the
following statement in bold at the top of the agreement:
THE OPTION GRANTED PURSUANT TO THIS AGREEMENT AND THE
SHARES ISSUABLE UPON THE EXERCISE THEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
THEREOF UNDER SUCH ACT OR APPLICABLE LAWS OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT
SUCH REGISTRATION IS NOT REQUIRED.
(Motion Ex. B Preamble (emphasis and capitalization in original)).
Section 1 of the Option Agreement states that it:
evidences the grant by Innovate Biopharmaceuticals Inc., a Delaware corporation (the
“Company”), on the Grant Date to the Participant, a consultant/advisor of the Company, of
an option to purchase, in whole or in part, on the terms provided herein and in the Plan, the
Total Number of Shares of Common Stock at the Exercise Price Per Share, all as defined
and set forth in the accompanying Notice of Nonstatutory Stock Option (the “Notice’”’).
(Motion Ex. B § 1).
Section 9 of the Option Agreement, entitled “Entire Agreement; Governing
Law,” provides:
The Plan and the Notice are incorporated herein by reference. This Agreement, the Notice
and the Plan constitute the entire agreement between the Company and the Participant with
respect to the subject matter hereof and supersede in their entirety all prior undertakings
and agreements of the Company and the Participant with respect to the subject matter
hereof. This Agreement shall be governed by and construed in accordance with the General
Corporation Law of the State of Delaware, as to matters within the scope thereof, and the
internal laws of the State of North Carolina (without reference to conflict of law
provisions), as to all other matters.
(Motion Ex. B § 9).
Exhibit A to the Option Agreement, prepared by Innovate, contains the form
of notice that Harris would need to execute in order to exercise his option. (See
Motion Ex. B at Exhibit A). Included with that notice are certain representations
and warranties that would be made by the Participant upon exercise, including in
pertinent part:
4. I can afford a complete loss of the value of the Shares and am able to bear the
economic risk of holding such Shares for an indefinite period.
5. I acknowledge that I am acquiring the Shares subject to all other terms of the Plan,
including the Notice of Nonstatutory Stock Option and related Nonstatutory Stock Option
Agreement.
8. I understand that (i) the Shares have not been registered under the Securities Act
and are “restricted securities” within the meaning of Rule 144 under the Securities Act, (ii)
the Shares cannot be sold, transferred or otherwise disposed of unless they are subsequently
registered under the Securities Act or an exemption from registration is then available; (iii)
in any event, the exemption from registration under Rule 144 will not be available for at
least six months or one year (depending on whether the Company is subject to the reporting
obligations of the Securities Exchange Act of 1934, as amended) and even then will not be
available unless applicable terms and conditions of Rule 144 are complied with; and (iv)
there is now no registration statement on file with the Securities and Exchange Commission
with respect to any stock of the Company and the Company has no obligation or current
intention to register the Shares under the Securities Act.
(Motion Ex. B at Exhibit A 9 4, 5, 8; Compl. § 50).
Section 5(e) of Innovate’s 2015 Stock Incentive Plan (the “Plan”’) states:
Exercise of Option. Options may be exercised by delivery to the Company of a written
notice of exercise signed by the proper person ... together with payment in full as specified
in Section 5(f) for the number of shares of Common Stock for which the Option is
exercised. Shares of Common Stock subject to the Option will be delivered by the
Company following exercise either as soon as practicable or, subject to such conditions as
the Board shall specify, on a deferred basis. .. .
(Motion Ex. C § 5(e)).
Section 9(g) of the Plan, entitled “Conditions on Delivery of Stock,” states:
The Company will not be obligated to deliver any shares of Common Stock pursuant to the
Plan or to remove restrictions from shares previously delivered under the Plan until: (i) all
conditions of the Award have been met or removed to the satisfaction of the Company; (ii)
in the opinion of the Company’s counsel, all other legal matters in connection with the
issuance and delivery of such shares have been satisfied, including any applicable securities
laws and any applicable stock exchange or stock market rules and regulations; and (iii) the
Participant has executed and delivered to the Company such representations or agreements
as the Company may con-sider appropriate to satisfy the requirements of any applicable
laws, rules, regulations or contracts of the Company.
(Motion Ex. C § 9(g); Compl. ¥ 11).
D. Innovate Becomes Publicly Traded and Harris Receives $15,000 under the
Consulting Agreement.
At the time Harris entered into the Consulting Agreement and the Option
Agreement, Innovate was not a public company and its stock was not publicly
traded. (Compl. 911). While Innovate initially contemplated undertaking an initial
private offering (“IPO”) in order for its stock to become publicly listed, it ultimately
determined that it would be faster and less expensive to enter into a reverse merger
with Monster Digital, Inc. (‘Monster’), a company that was already publicly traded
on NASDAQ, rather than underwriting an IPO. (See Compl. §] 24-27).
Because Innovate did not complete an IPO by June 30, 2017, Section 3.1 of
the Consulting Agreement required payment of $15,000 to Harris as consideration
for “the delay to asset liquidity on public markets.” (Compl. {{ 15, 16, 30; Motion
Ex. A § 3.1). Harris acknowledges that Innovate paid him the $15,000 he was owed.
(See Compl. J 31-32).
The reverse merger agreement between Innovate and Monster was entered
into on July 3, 2017. (Compl. { 28). The merger did not close until January 29,
2018. (Compl. 9 33). Shares of the merged Innovate began publicly trading on
February 1, 2018. (Compl. § 35).
Section 5.6(b) of the merger agreement provided that the company “shall
file with the SEC, no later than ten (10) calendar days after the Effective Time, a
registration statement on Form S-8, if available for use by Monster, relating to the
shares of Monster Common Stock issuable with respect to Innovate Options
assumed by Monster....” (Compl. 7 29; Motion Ex. D § 5.6(b)).
The merger agreement also provides that there are no third party
beneficiaries:
10.7. Assignability; No Third Party Beneficiaries. This Agreement shall be binding
upon, and shall be enforceable by and inure solely to the benefit of, the Parties hereto and
their respective successors and assigns.... Nothing in this Agreement, express or implied,
is intended to or shall confer upon any Person (other than the parties hereto...) any right,
benefit or remedy of any nature whatsoever under or by reason of this Agreement.
(Motion Ex. D § 10.7).
On March 14, 2018, Innovate filed a Form S-3 Registration
Statement/Prospectus covering up to $175,000,000 of new common stock proposed
to be issued, as well as the re-sale of 13,990,403 shares of common stock held by
pre-existing investors. (Compl. § 55). The Form S-3 filed with the SEC was
amended three times and declared effective on July 13, 2018. (Compl. § 56). The
Form S-3 indicates that the shares being registered were part of an equity issuance
by Innovate prior to the close of the merger that raised gross proceeds
of$18,132,660.50.
E. Harris Exercises His Option.
On April 24, 2018, Innovate informed Harris about his recalculated option
terms resulting from the reverse merger. (Compl. § 39). Harris alleges that he
started communicating with Innovate in May 2018 about his desire to exercise his
options. (Compl. § 45).
Harris exercised his option under the Option Agreement on October 2, 2018,
paying $182,428.48 for 87,706 shares of Innovate common stock. (Compl. { 90).
On or about October 15, 2018, Innovate delivered the shares of Innovate common
stock to Harris with the restrictive legend removed. (See Compl. § 91). Over the
following weeks, Harris sold all of his Innovate shares for total proceeds of
$378,359.81. (See Compl. F§ 91-92).
F. Harris or his Representatives Repeatedly Ask Innovate How the Shares Could
be Made Marketable.
As alleged in the Complaint, beginning in May 2018, Harris repeatedly
communicated with an Innovate senior executive, and repeatedly asked how he,
Harris, could sell the shares. (Compl. {| 46-47).
On May 17, 2018, an Innovate senior executive told Harris that that an SEC
Form S-8 filing was required before he could sell his stock and that the filing of the
Form S-8 must be preceded by the filing of an SEC Form S-3, which was still
pending. (Compl. 4 47).
Throughout June, July, and August 2018, as Innovate’s stock price
continued to slide, Harris, or his representatives, continued to repeatedly ask
Innovate how he could sell his shares. On behalf of Harris, Merrill Lynch
repeatedly called and emailed an Innovate senior executive to ask the senior
executive specifically about the Rule 144 exemption. On June 26, 2018, the senior
executive replied, incorrectly informing Merrill Lynch that:
He [Dr. Harris] would not be able to exercise and sell the options until after Innovate files
an S-8 registration and then that is approved by the SEC. I do not have a timeframe as to
when this would occur.
(Compl. § 53-54).
On August 7, 2018, the senior Innovate executive informed Harris that “I am not
legally able to offer any advice or provide any advance notice on our SEC filings.
Please contact Steve Laumas, copied, with any further communications.” (Compl.
q{ 64).
In August 2018, Harris hired a lawyer who wrote a demand letter to Innovate
(Compl. {| 66-67).
Innovate specifically asked Wilson Sonsini, who acted as legal counsel to Innovate
on the merger, to respond to Harris’ lawyer. (Compl. {J 68-69).
During a call between Wilson Sonsini, Innovate’s counsel, and Harris’s lawyer,
on September 11, 2018, they discussed the availability of Rules 701 and 144, which,
under certain conditions, would allow Dr. Harris to remove the restrictions on
Innovate stock and sell his shares. (Compl. {J 66, 71).
Wilson Sonsini is an extremely sophisticated law firm with extensive and widely-
recognized expertise in corporate and securities law, including exemptions for re-
sales of stock issued pursuant to the Rule 701 exemption. (Compl. ¥ 79).
The Wilson Sonsini lawyer asked for a “day or two” to examine the availability of
possible exemptions. Two weeks later, and despite repeated requests by Dr.
Harris’s counsel, Wilson Sonsini had still not delivered either the opinion letter and
apparently had not even reached a conclusion about the opinion letter. (Compl. 4
77-78).
On September 26, 2018, or more than two weeks after the first counsel-to-counsel
call, the Wilson Sonsini lawyer wrote via email:
Apologies for my delay in getting back to you. After discussing this matter with our client,
it’s been determined that it is more appropriate and best for local company counsel for
Innovate Biopharmaceutical, Inc. (INNT) to review the facts regarding the option grant to
Dr. Harris, and consider if they would opine on Dr. Harris’s sale of such shares after
exercise pursuant to Rule 701(g)(3) and Rule 144.
(Compl. § 80).
G. Innovate’s Legal Counsel Provides the Required Opinion that the Shares
Would Be Exempt from Registration
Innovate’s local counsel was Hutchison PLLC in Raleigh, North Carolina.
It took the Hutchinson law firm less than two days to conclude they could issue the
standard opinion letter to Innovate’s transfer agent that the exemptions under Rules
701 and 144 would apply to Dr. Harris, that the legend could be removed from the
shares, and that the shares would be marketable. (Compl. {ff 81, 84-85).
Innovate’s counsel provided the foregoing draft legal opinion before Harris
exercised his options. (Compl. ff 83, 90).
H. Innovate Stock Price.
On April 3, 2018, the Innovate stock price was $46 per share (Compl. § 40);
on April 24, 2018, the date Innovate gave Dr. Harris his revised option figures,
Innovate’s closing stock price was $19.48 (Compl. § 41); on July 11, 2018, the
Innovate stock price was $24.18 (Compl. 4 63); on July 16, 2018, Innovate stock
fell from $23.70 per share to just over $8 per share (Compl. 4 59); on October 15,
2018, the Innovate stock price was $5.40 (491); on November 7, 2018, the Innovate
stock price was $4 (Compl. § 91); and on November 14, 2018, the Innovate stock
price was $3.46 (Compl. § 91).
Ll. Harris Files This Action and Defendant Moves to Dismiss.
On January 8, 2019, Harris filed this action against Innovate asserting
claims for breach of the Consulting Agreement (First Cause of Action), breach of
the Option Agreement and Plan (Second Cause of Action), negligent
misrepresentation (Third Cause of Action), breach of the implied covenant of good
faith and fair dealing (Fourth Cause of Action), and fraud (Fifth Cause of Action).
(D.I. 1). Innovate agreed to accept service and respond to the Complaint by
February 25, 2019. (See D.I. 2).
On February 25, 2019, Innovate file a motion to dismiss the Complaint
pursuant to Superior Court Civil Rule 12(b)(6) for failure to state a claim upon
which relief can be granted and Superior Court Civil Rule 12(b)(1) for lack of
subject matter jurisdiction over the negligent misrepresentation claim.
Harris has agreed to withdraw his First Cause of Action for breach of the
Consulting Agreement and his Third Cause of Action for negligent
misrepresentation.
Hl. THE PARTIES’ CONTENTIONS
A. Defendant’s Contentions
Defendant contends that Harris has failed to state any claims for breach of
contract given that (i) the Consulting Agreement expressly contemplated that
Innovate might not complete an IPO by a date certain in which case Harris was only
owed $15,000 (which was paid), and (ii) Innovate was only required to deliver
unrestricted shares to Harris under the Plan after he exercised his option, which the
company did within two weeks of such exercise. Defendant also contends that
Harris improperly seeks to use a phrase from the Consulting Agreement out of
context to imply terms in the Option Agreement and Plan in order to claim that
Innovate was required to make Harris’s shares publicly tradeable prior to any
exercise of the options. The unwritten terms Harris seeks to impose, however, are
directly contradicted by the express terms of the Option Agreement and Plan, which
are separate agreements from the Consulting Agreement. Because Innovate
satisfied the express terms of the agreements at issue and Harris received the benefit
of his bargain, there was no breach and Harris’s contract claims fail as a matter of
law.
Defendant contends that Harris’s claim for breach of the implied covenant of
good faith and fair dealing is deficient because (i) an implied covenant claim should
not be considered separate from the breach of contract claim where, as here, a
plaintiff alleges the same underlying facts in support of the breach of contract claim,
(ii) a party cannot breach the covenant of good faith and fair dealing if there has
been no breach of the underlying contract, and (iii) the implied covenant cannot be
used to override the express terms of an agreement. Because Harris’s implied
covenant claim violates each of these principles, it fails as a matter of law.
Finally, Defendant contends that Harris has failed to state a claim for fraud
given that (i) the economic loss rule bars tort claims when the alleged damage is to
the subject matter of the parties’ underlying contract and the plaintiff cannot
identify any separate and distinct legal duty apart from the duty created by the
parties’ contract, and (ii) Harris cannot allege justifiable reliance on any alleged
misrepresentations given Harris’s failure to investigate or allege that he was
prevented from investigating Innovate’s statements.
B. Plaintiffs’ Contentions
Plaintiff contends that the Consulting Agreement specifically contemplated
“asset liquidity to public markets” as a goal of the Agreement; and that the
$15,000 payment was compensation exclusively for the delay but did not
eliminate the understanding of the parties that the shares offered through options
were meant and understood by the parties to be made marketable.
Plaintiff contends that the Nonstatutory Stock Option Agreement (Ex. B) and
the Notice of Stock Option Exercise (Ex. A, to Ex. B) separately specifically
contemplated the marketability of the shares subject to the options (subject only to
the legitimate qualifications contained in those documents).
Plaintiff contends that Exhibit A to the Option Agreement, prepared by
Innovate, was fraudulent and materially misleading because it stated (in part) that
“(iii) in any event, the exemption from registration under Rule 144 will not be
available for at least six months or one year (depending on whether the Company
is subject to the reporting obligations of the Securities Exchange Act of 1934, as
amended) and even then will not be available unless applicable terms and
conditions of Rule 144 are complied with... .”
Plaintiff contends that the Rule 144/701(3)(g) option to remove the restrictive
legend and make the shares marketable was, as regards Harris, fully available at
least as early as February 1, 2018, the first day of trading in Innovate stock;
available throughout the period covered by the complaint; and that there was no
legitimate reason for Innovate to delay removing the restrictive legend until
October 2018.
Plaintiff contends that he had no obligation to independently verify the truth
of Innovate’s representations in the legal documents it prepared, including the
Stock Option Plan, and that he justifiably relied on those representations.
Plaintiff contends that he fully satisfied as the requirements of Section 9(g) of
the 2015 Innovate Stock Incentive Plan (Ex. C).
Plaintiff contends that he or his representatives at Merrill Lynch repeatedly
asked senior executives at Innovate how he could make his options shares
marketable and was repeatedly told, falsely, that an SEC S-8 filing was required
before they could be made marketable.
Plaintiff contends that the acts of misrepresentation and delay, recited in the
complaint, and specifically the false statements about the shares not being
marketable without an S-8 filing, intentionally prevented Harris from selling the
shares when all the conditions for an exemption from registration existed.
Plaintiff contends that as a result of these false statements and delays, he lost
economic opportunities that would have been available to him had Innovate
agreed to remove the restrictive legend as soon as Harris asked how he could
market his shares.
Plaintiff contends that Innovate’s actions were taken in bad faith and violated
the implied covenant of good faith and fair dealing, in that they subverted his
legal rights, were fraudulent, arbitrary, and unreasonable, and frustrated the fruits
of the bargain that the Harris was reasonably entitled to expect.
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Plaintiff contends that he had no obligation to exercise his options before
determining whether the shares would be marketable because, without knowing
how much they could be sold for, he could not be sure that the option exercise
price would not be more than the market value.
IV. STANDARD OF REVIEW
In reviewing a motion to dismiss under Rule 12(b)(6) the Court “(i) accepts
all well-pleaded factual allegations as true, (11) accepts even vague allegations as
well-pleaded if they give the opposing party notice of the claim, (iii) draws all
reasonable inferences in favor of the non-moving party, and (iv) only dismisses a
case where the plaintiff would not be entitled to recover under any reasonably
conceivable set of circumstances.”? Although Rule 12(b)(6) permits some leniency,
the Court must “ignore conclusory allegations that lack specific supporting factual
allegations."
V. DISCUSSION
Under the terms of the parties’ agreements, Plaintiff has no claim to the relief
sought.
Plaintiff has failed to state any claim upon for which relief can be granted.
The Complaint must be dismissed pursuant to Superior Court Civil Rule 12(b)(6).°
Despite Plaintiff's contention that the Consulting Agreement specifically
contemplated “asset liquidity to public market,’ the Consulting Agreement
expressly contemplated that Innovate might not complete an IPO by a date certain
in which case Harris was only owed $15,000. Here, Innovate paid the $15,000.
Furthermore, despite Plaintiff's contention that there was no legitimate reason for
Innovate to delay removing the restrictive legend until October 2018, Innovate was
only required to deliver unrestricted shares to Harris under the Plan after he exercised
his option, which the company did within two weeks of such exercise. Since
Defendant has satisfied the express terms of the agreements at issue and Plaintiff
received the benefit of his bargain, there was no breach and Plaintiffs contract
claims fail as a matter of law.
3 Turf Nation, Inc. v. UBU Sports, Inc., 2017 WL 4535970, at *5 (Del. Super. Ct. Oct. 11, 2017)
(citing Central Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 227 A.3d 531, 536
(Del. 2011)).
4 Id. (quoting Ramunno v. Crawley, 705 A.2d 1029, 1034 (Del. 1998)).
> Super. Ct. Civ. R. 12(b)(6).
1]
Concerning Plaintiff's claim for breach of the implied covenant of good faith
and fair dealing, this Court finds this claim to be deficient and to fail as a matter of
law. An implied covenant claim should not be considered separate from the breach
of contract claim where, as here, a plaintiff alleges the same underlying facts in
support of the breach of contract claim.® Additionally, a party cannot breach the
covenant of good faith and fair dealing if there has been no breach of the underlying
contract.’ Last, the implied covenant cannot be used to override the express terms of
an agreement.’ Since Plaintiff's implied covenant claim violates each of these
principles, it fails as a matter of law.
Finally, Plaintiff has failed to state a claim for fraud given that (i) the
economic loss rule bars tort claims when the alleged damage is to the subject matter
of the parties’ underlying contract and the plaintiff cannot identify any separate and
distinct legal duty apart from the duty created by the parties’ contract,’ and (ii)
Plaintiff's cannot allege justifiable reliance on any alleged misrepresentations given
Plaintiff's failure to investigate or allege that he was prevented from investigating
Defendant’s statements. Although Plaintiff contends that he had no obligation to
independently verify the representations made by Innovate and that Innovate’s
actions subverted his legal rights and unreasonably frustrated the fruits of the bargain
that Plaintiff expected, Plaintiff was entitled to seek independent legal counsel and
was not prevented from doing so at any stage. Even though Plaintiff asserts that
Innovate should have removed the restrictive legend at the moment that Plaintiff
® See Cordaro v. Harrington Bank, FSB, 817 S.E.2d 247 at 256 (“As a general proposition,
where a party’s claim for breach of the implied covenant of good faith and fair dealing is based
upon the same acts as its claim for breach of contract, we treat the former claim as ‘part and
parcel’ of the latter.”).
’ See Sheth v. Harlan Fin. Solutions, Inc., 2014 WL 4783017, at *1 (Del. Super. Ct. Aug. 28,
2014) (dismissing an implied covenant claim where an agreement between the parties governed
the dispute); see also McDonald v. Bank of N.Y. Mellon Trust Co., Natl. Assoc., 816 S.E.2d 861,
864-65 (N.C. Ct. App. 2018) (“defendant cannot breach a covenant of good faith and fair dealing
when a claimant fails to establish the defendant breached the underlying contract.”’).
8 JTG Equip. & Supply, LLC v. eBay, Inc., 2015 WL 303589, at *5 (N.C. Super. Ct. Jan. 23,
2015). (NC Court stating it “will not apply an implied covenant of good faith and fair dealing to
override the express terms of a contract.”’).
° See Rountree v. Chowan Cty., 796 S.E.2d 827, 830 (N.C. Ct. App. 2017) (quoting Lord v.
Customized Consulting Specialty, Inc., 643 S.E.2d 28, 30-31 (N.C. Ct. App. 2007)) (internal
quotations omitted); see also Forest2Market, Inc. v. Arcogent, Inc., 2016 WL 56279, at *3 (N.C.
Super. Ct. Jan. 5, 2016) (quoting Spillman v. Am. Homes of Mocksville, Inc., 422 S.E.2d 740,
741-742 (N.C. Ct. App. 1992)) (“[A] tort action does not lie against a party to a contract who
simply fails to properly perform the terms of the contract, even if that failure to properly perform
was due to the negligent or intentional conduct of that party, when the injury resulting from the
breach is damage to the subject matter of the contract.”).
12
asked how Plaintiff could market his shares, Innovate’s sole obligation was to
deliver unrestricted shares to Plaintiff under the Plan after he exercised his option.
Innovate satisfied this obligation by delivering the unrestricted shares within two
weeks of Plaintiffs exercise of Plaintiff's stock options.
VI. CONCLUSION
For the foregoing reasons, the Defendant’s Motion to Dismiss is GRANTED.
IT IS SO ORDERED.
(Lucu Mert _
Richard R. Cooch, R.J.
cc: Prothonotary
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