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Formulatrix, Inc. v. Rigaku Automation, Inc.

United States District Court, D. Massachusetts

November 1, 2018

FORMULATRIX, INC., Plaintiff,
v.
RIGAKU AUTOMATION, INC. and RIGAKU AMERICAS HOLDING, INC., Defendants.

          MEMORANDUM OF DECISION AND ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

          Judith Gail Dein, United States Magistrate Judge

         I. INTRODUCTION

         Plaintiff Formulatrix, Inc. (“Formulatrix”) has brought this action against Rigaku Automation, Inc. (“Rigaku”) and Rigaku Americas Holding, Inc. (“Rigaku Americas”) (together “Rigaku”) for breach of contract and other causes of action related to a January 2015 Customer Support Agreement (“CSA”) between the parties. At the heart of Plaintiff's complaint is its allegation that Rigaku failed to comply with certain provisions of the CSA governing the transmission of business documents within a 90 day period. Defendants dispute this allegation and assert counterclaims against Plaintiff, alleging that Formulatrix breached the CSA by improperly withholding installment payments due to Rigaku and that Formulatrix violated Mass. Gen. Laws ch. 93A by engaging in a pattern of extra-contractual demands coupled with the threat of contractual nonperformance or litigation.

         On June 22, 2015, Formulatrix initiated the instant action against Defendants alleging the following causes of action: breach of contract; tortious interference with contractual and/or advantageous business relationship; breach of the covenant of good faith and fair dealing; request for attorneys' fees under the CSA; unfair and deceptive conduct in violation of Mass. Gen. Laws ch. 93A § 11; and enforcement of a guaranty given by Rigaku America in the CSA. (See Docket No. 1). On April 5, 2016, Defendants filed a Counterclaim asserting claims of breach of contract; breach of the covenant of good faith and fair dealing; declaratory judgment; violation of Mass. Gen. Laws ch. 93A § 11; and attorneys' fees under the CSA. (See Docket No. 17). On August 25, 2016, following a ruling on Defendants' motion to dismiss, which struck Formulatrix's tortious interference and ch. 93A claims (Docket No. 15), Formulatrix filed an Amended Complaint reasserting the claims that survived Defendants' motion to dismiss. (See Docket No. 42). On September 1, 2016, Defendants filed a Counterclaim reasserting the same causes of action asserted in its original Counterclaim. (See Docket No. 43).

         This matter is before the court on Formulatrix's “Motion for Partial Summary Judgment” (Docket No. 66), by which Formulatrix is seeking summary judgment with respect to Rigaku's claims for (1) breach of contract, (2) breach of the covenant of good faith and fair dealing, and (3) violation of Mass. Gen. Laws ch. 93A. This matter is also before the court on Rigaku's “Motion for Partial Summary Judgment” (Docket No. 70), by which Rigaku is seeking summary judgment with respect to all of Formulatrix's remaining claims, and affirmatively on its own breach of contract and breach of the covenant of good faith and fair dealing claims. Both parties are also seeking summary judgment on the issue of entitlement to attorneys' fees. For the reasons detailed herein, Formulatrix's Motion for Partial Summary Judgment is DENIED and Rigaku's Motion for Partial Summary Judgment is ALLOWED IN PART AND DENIED IN PART. Specifically, Rigaku's motion is ALLOWED with respect to Count I of Rigaku's Counterclaim (breach of contract), Count II of Formulatrix's Amended Complaint (breach of covenant of good faith and fair dealing), but DENIED with respect to Count IV of Formulatrix's Amended Complaint (guaranty) and Count V of Rigaku's Counterclaim (attorneys' fees). With respect to Count I of Formulatrix's Amended Complaint (breach of contract), Rigaku's motion is ALLOWED as to the reports required by Art. 2.02 and accurate representations and warranties under Schedule 5.06, but otherwise DENIED. As detailed herein, this court concludes that the issue of entitlement to attorneys' fees is premature.

         II. STATEMENT OF FACTS [1]

         The following facts are undisputed unless otherwise indicated.

         The CSA

         Formulatrix is in the business of developing, manufacturing, and selling protein crystallization automation products (“Automation Products”) to customers in the protein crystallization industry. (PF ¶ 1). As of the beginning of 2015, Rigaku was a direct competitor to Formulatrix in the Automation Products industry. (PF ¶¶ 2, 4). On January 15, 2015, Formulatrix presented Rigaku with an offer to purchase its assets, and thereafter, the two companies engaged in negotiations related to the offer. (DOppF ¶ 1).

         Effective January 20, 2015, Formulatrix and Rigaku entered into a Customer Support Agreement (“CSA” or “Agreement”). (PF ¶ 2). Generally speaking, under the CSA, Rigaku agreed to exit the business of developing, manufacturing, and selling protein-crystallization-automation equipment; to transfer certain assets and license certain intellectual property to Formulatrix; to transfer certain business documents to Formulatrix within 90 days; and to provide transition support services to Formulatrix for up to 90 days. (See PEx. 1 Arts. 1.01, 1.02, 2.01, 2.04, 3.01). In turn, Formulatrix agreed to provide support services to Rigaku's protein-crystallization customers and to pay Rigaku $2 million upon the execution of the CSA and then an additional sum of $1.825 million in equal installments over the course of 12 months commencing on January 20, 2016, one year after the execution of the CSA. (See PEx. 1 Arts. 1.02, 4.01).

         The parties agree that Formulatrix did not conduct due diligence with respect to Rigaku's financial representations and warranties before signing the CSA. (PF ¶ 6; DR ¶ 6). However, the parties dispute whether this was by mutual agreement, as Rigaku contends, or because Rigaku refused to allow Formulatrix to conduct such due diligence, as Formulatrix contends. (See DR ¶ 6; PROppF ¶ 2). Among the representations and warranties provided by Rigaku in the CSA is a schedule containing Rigaku's financial information. (PEx. 1 Art. 5.06, Schedule 5.06). Rigaku's financial information, provided in Schedule 5.06, includes Rigaku's revenue for FYE2014 and projected revenue for FYE2015. (Id.). Formulatrix asserts, but Rigaku disputes, that Formulatrix agreed to pay Rigaku the amount of monetary consideration in the CSA in reliance upon Rigaku's representations and warranties as to such revenue. (See PF ¶ 5; DR ¶ 5).

         At the heart of Formulatrix's case is the CSA's records transfer provision, which provides in relevant part:

Art. 2.04 Records. On or promptly following the Effective Date, and in no event later than ninety (90) days following the Effective Date, Rigaku shall deliver to Formulatrix a copy of all of the following records of Rigaku (whether such materials are evidenced in writing, electronically or otherwise) with respect to the Products[2]: (i) purchasing and production records; (ii) all customer lists (including contact information for each customer); (iii) all vendor, supplier and service provider lists (including a copy or description of the underlying commercial agreements or arrangements with such vendors, suppliers or service providers); (iv) blueprints, technology, technical designs, drawings, specifications; (v) pricing and cost information, including a copy of any purchase order to be filled by Formulatrix, (vi) service support records and (vii) other books, records and files used or held for use by or on behalf of Rigaku, in each case which are solely related to the Products or used solely in conjunction with the Business[3] (the “Records”). Rigaku shall provide all Records in excel format or shall provide Formulatrix with a copy of the software necessary to access the Records in their existing format, in each case to the extent reasonably practicable.

(PEx. 1 Art. 2.04).

         At issue in the instant case is whether Rigaku breached the CSA's record transfer provision by failing to transmit within 90 days certain documents that Formulatrix asserts were required to be transferred pursuant to the CSA. Specifically, the parties dispute whether the transfer of documents related to historical instrument sales and service revenue (invoices, quotes, and purchase orders) was required under the CSA, and whether, if required, the transfer of these documents and/or their transfer within 90 days was a material term of the CSA. (See PF ¶¶ 5, 7; DR ¶¶ 5, 7; Docket No. 67 at 6, 12; Docket No. 80 at 14-15). Formulatrix contends that such documents were necessary for it to confirm Rigaku's representations in the CSA regarding Rigaku's financial information so that Formulatrix could determine if the purchase price Formulatrix had agreed to was justified. (See Docket No. 67 at 11-12). Rigaku contends that these documents were irrelevant since the purchase price was not dependent on any historic sales and revenue figures and that Formulatrix is using the documents as a belated justification for failing to make payments when due. (See Docket No. 80 at 1, 14-15, 20).

         The CSA also provides for the award of attorneys' fees, stating that “In any action or proceeding brought to enforce any provision of this Agreement, or where any provision hereof or thereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy.” (PEx. 1 Art. 9.12). The parties dispute which party should be considered the “successful party” entitled to attorneys' fees in the present litigation.

         Performance During The 90 Day Record Transfer Period

         Immediately following the execution of the CSA, the parties began performance. There is no dispute that Formulatrix transferred $2 million to Rigaku and that Rigaku stopped developing, manufacturing, and selling protein-crystallization products, announced this stoppage to both its staff and its customers, and also encouraged third parties to contact Formulatrix to purchase additional protein-crystallization products. (DF ¶ 3; DOppF ¶ 4; PROppF ¶ 4). Rigaku also began providing Formulatrix with transition support by tasking Rigaku personnel to facilitate the transition of support services; giving Formulatrix access to its intellectual property; and transferring Rigaku source code and software in accordance with the CSA. (DOppF ¶¶ 4, 7; PROppF ¶¶ 4, 7). As of January 21, 2015, Rigaku began transferring records and other data related to its Automation business to Formulatrix by making data available to Formulatrix through a dedicated VPN (virtual private network) and by way of email transfers. (DOppF ¶ 8).

         Between January and April 20, 2015, Formulatrix communicated to Rigaku frustration with the pace, organization, accuracy, and completeness of the records it was receiving from Rigaku. (See DOppEx. 18; PEx. 11; PEx. 14). On January 30, 2015, Jeremy Stevenson, the President and CEO of Formulatrix, emailed Rigaku's CFO expressing concern that the data Rigaku was sending to Formulatrix wasn't “being validated, ” and asked whether there was a way to reconcile Rigaku's service revenue figures listed in the CSA with the records being transferred to Formulatrix. (See DOppEx. 18 at 1). On March 11, 2015, Stevenson again emailed Rigaku expressing concern about the pace of the record transfer and frustration that Formulatrix had not yet been able to get a complete customer list from Rigaku as of that date. (PEx. 11 at RIGAKU-001691). Stevenson indicated that Formulatrix needed the data from the record transfer both to “take over operations of support, and to validate the rep[resentations] and warrant[ies] in the Customer Service Agreement, ” and that he wouldn't consider the data transfer properly completed until Formulatrix could “validate [that] it all ties out - revenue, [purchase orders], customers, service contracts, installed systems and service call data.” (Id.). Rigaku's CFO responded, stating that while the CSA did not call for the data to be delivered in a particular manor, he “appreciate[d] the desire to get data in a format that is easy to review, ” and his team was working to get Formulatrix “clean” data. (Id. at RIGAKU-0001690). After this exchange Rigaku and Formulatrix continued to work together on the data transfer. It is undisputed that Formulatrix began to take over Rigaku's customer support obligations in mid-April 2015. (See DOppF ¶ 18).

         On April 3, 2015, Formulatrix emailed Rigaku again expressing concerns, this time about received data sets that were missing customer quotes and invoices. (PEx. 14). Formulatrix relayed that it needed that information to “move forward with maintenance” and “verify the representations and warranties” in the CSA. (Id.). During the record transfer process, Formulatrix asked Rigaku to quality check its data and service contract records prior to sending them to Formulatrix. (See PROppF ¶ 11; DOppEx. 10 at 38). Rigaku never refused to provide the data and records Formulatrix requested, in the formats requested. (See DOppF ¶ 15; PROppF ¶ 15). A Rigaku employee who worked on the record transfer averred that members of Rigaku's transfer team “incurred significant time and expense quality-checking data, providing reformatted data, and creating records that did not previously exist, ” which “greatly slowed down the transfer process.” (DEx. 16 at 1-2). Formulatrix does not dispute that its request that Rigaku quality check its data slowed down the data transfer process. (See PROppF ¶ 12).

         On April 20 and 21, 2015, Formulatrix emailed Rigaku spreadsheets identifying purchase orders, quotes, and invoices that Formulatrix believed it had not yet received. (PF ¶ 11). On April 27, Rigaku responded, advising that the invoices related to its current service contracts had been uploaded to the shared VPN folder. (PF ¶ 11; PEx. 17 at 1).

         Communications Leading Up To Litigation

         Though the parties continued to work together under the CSA after the April 20, 2015 record transfer deadline, their relationship continued to break down. Formulatrix asserts, but Rigaku disputes, that Rigaku interfered with Formulatrix's attempts to hire former Rigaku employees. (See DF ¶ 4; PR ¶ 4; PEx. 5 at 7-8). Additionally, after the record transfer deadline, Formulatrix personnel informed Rigaku that Formulatrix would withhold support service to Rigaku customers until Formulatrix received all of the data. (See DOppEx. 9 at 159; DOppEx. 25 at 1). Rigaku's CFO brought this information to the attention of Formulatrix's President, asserting that Rigaku had provided Formulatrix with “enough information to carry out the support services.” (See PReplyEx. 8 at 3). Formulatrix's President responded by stating that despite Formulatrix's belief that Rigaku had breached the agreement, Formulatrix had “not stopped [its] effort to take over support.” (PReplyEx. 4 at 3). However, he subsequently clarified that Formulatrix was not yet in a position to take over European support of Rigaku products because Formulatrix “lack[ed] documents and . . . [did not] have a team in place.” (Id. at 2).

         As of around May 1, 2015, Formulatrix engaged Rigaku in discussions regarding a potential contract addendum related to Rigaku's continued transfer of data and records. (See PEx. 18). Formulatrix sent Rigaku an early stage draft of its proposed addendum to the CSA, which required that records be provided in a specific format and be fully quality-checked. (Id. at 3-4). The draft addendum also provided that if Rigaku failed to meet a revised record transfer deadline, Formulatrix would be entitled to a refund of the $2 million in consideration it had paid and would have no further obligations under the contract. (Id. at 4). Rigaku reviewed the proposed addendum, but ultimately did not agree to an amendment. (See PEx. 19 at 1; DOppEx. 28; DOppEx. 29). On June 18, 2015, Formulatrix emailed Rigaku stating that there were “two directions we can go”: either negotiate an amendment to the CSA by the following week wherein, Rigaku would agree to “[p]ayment of $100K per month for each month the data is not transferred, retroactive to the due date”; “[p]ayment of $50K per month for each month where either [t]he service revenue reports or payments aren't received, retroactive to the due date of the first report”; coverage of “legal fees post contract closing and through acceptance of the agreement”; and an agreement to deliver data that “will be meaningful and substantially correct as was verbally promised to us when negotiating the contract, ” or Formulatrix would file suit against Rigaku with “a Complaint prepared” and “ready to submit.” (DOppEx. 29). Formulatrix further stated that if Rigaku did not respond by the next day, it would assume that Rigaku was not agreeing to negotiate the amendment. (See id.). It is Rigaku's position that through these discussions about amending the contract and this threat of litigation, Formulatrix violated ch. 93A.

         On June 22, 2015, Formulatrix filed the Complaint in this action. (See Docket No. 1). Formulatrix took the position that, to the extent that Rigaku had not provided Formulatrix with invoices, quotes, or purchase orders to validate Rigaku's service revenue as listed in the CSA, such unvalidated revenue constituted damages Formulatrix had suffered from Rigaku's alleged breach of contract. (See DEx. 8 at 9-10).

         Continued Records Transfer

         The parties agree that by June 2, 2015, after the record transfer deadline but before the filing of the instant action, Rigaku had transferred and quality checked all engineering data to Formulatrix. (DOppF ¶ 25). By July 29, 2015, Rigaku had transferred and quality checked all of the CRM (customer relationship management) data. (DOppF ¶ 26; PROppF ¶ 26).

         On July 28, July 31, September 19, and November 4, 2015, Formulatrix emailed Rigaku supplemental lists of purchase orders, quotes, and invoices that Formulatrix had not received. (PF ¶ 13). Rigaku responded with additional information and records throughout this period and into January 2016. (PF ¶ 14).

         Rigaku asserts that by January 13, 2016, it had transferred all data and records that Formulatrix had identified as missing in any outstanding list. (DR ¶ 13). On January 19, 2016, the day before the first installment payment was due, Rigaku emailed Formulatrix stating that Rigaku believed it had transferred the last of the data to Formulatrix. (DOppEx. 38). Formulatrix's CFO responded the next day, stating “I will not have time available to focus on this for about two weeks. I'll certainly review and respond as usual.” (Id.). Rigaku asserts that Formulatrix never provided Rigaku any further notice that it believed there were additional records missing. (DOppF ΒΆ 36). ...


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