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Christensen v. Cox

Superior Court of Massachusetts, Suffolk, Business Litigation Session

November 21, 2017

Clayton M. CHRISTENSEN et al.[1]
Shawn E. COX

          Caption Date: November 20, 2017


          Edward P. Leibensperger, Justice

         Plaintiffs, Dr. Clayton M. Christensen (Clayton), Matthew Q. Christensen (Matthew), [2] Disruptive Innovation GP, LLC (Disruptive Innovation), and Rose Park Advisors, LLC (Rose Park), filed this action against defendant, Shawn E. Cox, a former employee of Rose Park. Plaintiffs assert the following six claims against Cox in their Complaint: declaratory judgment (Count I), unilateral mistake (Count II), breach of fiduciary duty (Count III), breach of contract (Count IV), violation of G.L.c. 272, § 99(Q) (Count V), and violation of G.L.c. 214, § 1B (Count VI). Cox moves to dismiss plaintiffs’ Complaint in its entirety under Mass.R.Civ.P. 12(b)(6) and Mass.R.Civ.P. 9(b). For the reasons stated below, Cox’s motion to dismiss is allowed in part and denied in part.


         The facts as revealed by the Complaint are as follows.

         Matthew is the principal founder, CEO, and Managing Partner of Rose Park and Disruptive Innovation. He is responsible for the management of Disruptive Innovation. Clayton is a professor at Harvard Business School. He created and developed the theory of " disruptive innovation, " which businesses use throughout the world. Both Matthew and Clayton are members of Disruptive Innovation.

         Rose Park is a Delaware limited liability company that the Christensens organized in 2007. It is an investment firm that the Christensens founded to apply the theory of disruptive innovation. Rose Park invests in companies whose business models are well-suited to take advantage of industry change. Matthew manages Rose Park, and Clayton serves as an advisor to Matthew on matters related to the investment strategy of disruptive innovation. The Complaint does not provide a specific identification of the members of Rose Park.

         Disruptive Innovation is a Delaware limited liability company that serves as the general partner for the Disruptive Innovation Fund, L.P. (Fund). Disruptive Innovation, as the Fund’s general partner, receives a performance fee based on the Fund’s performance. The performance fees are earned and realized at the end of the year; if the amount of performance fees exceeds the expenses incurred during the year, the result is profits. Rose Park serves as investment manager for the Fund.

         Cox is now a resident of Orem, Utah. Rose Park employed Cox from July 2010 through May 2013. Cox’s employment with Rose Park was " at will." When Rose Park hired Cox, he signed the " Rose Park Advisors, LLC Employee Handbook." The handbook provides that, as an employee, Cox would not disclose Rose Park’s proprietary and confidential information, even after his employment with the company ended. The handbook also provides that Cox will not compete with Rose Park for three months after his employment ends and will not disparage Rose Park or the Christensens at all times during and after his employment with Rose Park.[3]

         As a component of Cox’s compensation at Rose Park, Cox received, at the sole discretion of Disruptive Innovation and Rose Park, a share of the profits of Disruptive Innovation. Cox is a certified public accountant with fund operations experience. As alleged in the Complaint, the Christensens trusted Cox to carry out the daily operations of Rose Park, the Fund, and Disruptive Innovation. Cox was responsible for working with outside legal counsel to prepare, review, and approve company documents on the Christensens’ behalf. The Christensens and Disruptive Innovation trusted Cox to ensure the accurate and complete implementation of their instructions and intentions, which permitted Matthew to focus on making and managing all of the Fund’s investments. The Christensens placed this high level of trust in Cox because he and Matthew had a preexisting friendship, and they attended the same church. Cox accepted the trust and responsibility placed upon him by the Christensens.

         On January 13, 2013, Cox began secretly to pursue employment with another investment firm, Clarke Capital Partners (Clarke Capital). He engaged in extensive discussions with James Clarke, Clarke Capital’s founder and managing partner, and other Clarke Capital representatives.

         In February of 2013, Cox requested, and received from Matthew, an increase in his compensation at Rose Park based on a share of profits of Disruptive Innovation. The Complaint alleges that Cox fraudulently induced Matthew to increase his compensation and that Matthew would not have increased Cox’s compensation if he knew Cox planned to leave Rose Park.

         On April 1, 2013, Cox instructed a junior lawyer at the law firm representing Disruptive Innovation to amend Disruptive Innovation’s Amended and Restated Limited Liability Company Agreement dated January 1, 2009 (Operating Agreement). Cox instructed that the Operating Agreement be amended to add himself as a " Member." The Operating Agreement defined " Member" as, " Clayton Christensen, " " Matthew Christensen, " and founding employee " Whitney Johnson." Matthew had authorized Cox to obtain an amendment of the Operating Agreement to reflect the removal of Johnson as a Member. No one, however, authorized Cox to add himself as a Member. Cox did not disclose to the Christensens or Disruptive Innovation that he had instructed outside counsel to add himself as a Member of Disruptive Innovation under the Operating Agreement.

         On April 5, 2013, Cox delivered a one-page memo to Matthew. The memo is described and referenced in the Complaint as a " Profit Sharing Memo." Cox attaches a copy of the April 5, 2013 memo to his motion to dismiss, and argues that the court may consider the attachment because the document is referenced in the Complaint.[4] In their Opposition, plaintiffs do not dispute that the April 5, 2013 document attached to the motion to dismiss is the April 5, 2013 document that plaintiffs called the " Profit Sharing Memo" in the Complaint.

         Cox allegedly explained to Matthew that the April 5, 2013 memo was an update to the annual profit sharing percentages to reflect the agreed-upon increase in Cox’s compensation and the redistribution of the percentage ownership that was previously allocated to Johnson. Cox, however, failed to disclose to Matthew that the memo actually " details the changes in the Class B Unit ownership for Disruptive Innovation GP, LLC, " as stated at the top of the April 5, 2013 memo. The memo references Cox as a " Member" owning 60, 000 " Class B Units." Class B Units are described in Section 3.02(a)(i) of the Operating Agreement as follows:

Distributions attributable to Incentive Allocations made after January 1, 2009, to the Company [Disruptive Innovation] in its capacity as general partner of the Fund under section 6.06 of the Limited Partnership Agreement, and any earnings or returns on such Incentive Allocation amounts, shall be made to the holders of Class B Units based on the number of Class B Units held by each such holder immediately prior to such distribution.

         By documenting himself as owner of Class B Units, Cox allegedly was attempting to transform his employment-based annual profit sharing, which would terminate after Cox stopped working for Rose Park, into an economic interest that Cox could retain even after he stopped working for the company. Plaintiffs assert that Matthew signed the April 5, 2013 memo without reading it. Matthew was allegedly under the misimpression, caused by Cox, that the document concerned profit sharing, not ownership interests.

         On April 12, 2013, Cox informed Matthew that he was quitting Rose Park and joining Clarke Capital.

         In early May 2013, Cox gave Matthew signature pages for the new version of the Disruptive Innovation operating agreement that Cox had instructed Disruptive Innovation’s outside counsel to draft in April 2013 (Updated Operating Agreement). Cox represented that the document merely updated the Operating Agreement to remove Whitney Johnson as a member. Cox asked Matthew and Clayton to sign the signature pages. Cox added a schedule at the end of the document, " Schedule A, " that listed himself as being a " Member" and having " Unit Ownership" of 60, 000 " Class B Units." Again, Cox failed to disclose this to the Christensens when they signed the Updated Operating Agreement. Although not specifically stated in the Complaint, the facts alleged suggest that the Christensens executed the signature pages for the Updated Operating Agreement without reading the entire document or noting Schedule A, listing Cox as a member of Disruptive Innovation.

         At the end of May 2013, Cox stopped working at Rose Park. In June 2013, Cox requested a copy of the Updated Operating Agreement signature pages. The Christensens still did not realize that ...

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