Austar Int'l Ltd. v. AustarPharma LLC

• Decision Date: 27 November 2019
• Docket Number: Civ. No. 19-8356 (KM) (MAH)
• Citation: 425 F.Supp.3d 336
• Parties: AUSTAR INTERNATIONAL LIMITED, Directly Against and Derivately on Behalf of AustarPharma LLC, Plaintiff, v. AUSTARPHARMA LLC, Defendant/Nominal Defendant, v. Rong Liu and Guangzhou Bristol Drug Delivery Co., Ltd., Defendants.
• Court: U.S. District Court — District of New Jersey

425 F.Supp.3d 336

AUSTAR INTERNATIONAL LIMITED, Directly Against and Derivately on Behalf of AustarPharma LLC, Plaintiff,

v.AUSTARPHARMA LLC, Defendant/Nominal Defendant,

v.Rong Liu and Guangzhou Bristol Drug Delivery Co., Ltd., Defendants.

Civ. No. 19-8356 (KM) (MAH)

United States District Court, D. New Jersey.

Signed November 27, 2019

Jessica Klarfeld Jacobs, Ryan M. Philp, Stephen Allen Loney, Jr., Hogan Lovells US LLP, Philadelphia, PA, for Plaintiff.

Paul H. Aloe, Kudman Trachten LLP, New York, NY, Rayna Elizabeth Kessler, Robins Kaplan LLP, New York, NY, for Defendants.

KEVIN MCNULTY. U.S.D.J.:

The complaint of plaintiff Austar International Limited ("Austar International") asserts direct and derivative claims against AustarPharma LLC ("AustarPharma"), Rong Liu, and Guangzhou Bristol Drug Delivery Co., LTD. (now known as Bostal Drug Delivery Co., Ltd. ("Bostal"). AustarPharma moves to dismiss the complaint for failure to satisfy the threshold demand requirements of Federal Rule of Civil Procedure 23.1. (DE 16). Dr. Liu and Bostal move to dismiss the complaint for failure to state a claim under Rule 12(b)(6). (DE 17). Bostal separately moves to dismiss for lack of personal jurisdiction under Rule 12(b)(2). (Id. ). Recently, defendants also filed letter briefs seeking to dismiss or stay this action in favor of a newly filed similar action in China. (DE 59, 61).

For the reasons stated herein, the motion of Dr. Liu and Bostal to dismiss (DE 17) is granted with respect to plaintiff's conversion claim (Count 3). Defendants' motions to dismiss (DE 16, 17) are in all other respects denied. Defendants' letter motions for a stay or dismissal based on international comity (DE 59, 61) are also denied without prejudice to renewal in light of later developments.

I. Summary¹

This action arises from a 15-year business relationship between plaintiff Austar International and defendant Dr. Rong Liu that has now soured.

a. Formation of AustarPharma

In 2004, Austar International and Dr. Liu created AustarPharma, a joint venture "pharmaceutical drug technology company" which is "focused on the research, development, manufacture, and commercialization of finished generic drug products and drug-delivery technology products, as well as providing research and development services to pharmaceutical companies worldwide." (Compl. ¶¶ 1, 17).

The parties formalized their relationship in a July 14, 2004 joint venture agreement. (DE 1-1). Among the purposes of the joint venture was "the establishment and management of the business of pharmaceutical research and development, manufacturing and distribution of finished drug products worldwide through a joint venture to be formed between Austar and Dr. Liu." (Id. at 4).

The parties warranted to one another that they would undertake "to use their respective best efforts to give full force and effect to the provisions of this Agreement." (Id. at 7). Austar International and Dr. Liu were each deemed to be a "Shareholder"² and they agreed that "The Shareholders acknowledge that during the subsistence of this Agreement, the Members shall use all reasonable endeavors to co-operate, promote and develop the Business to the benefit of the Company." (Id. at 12). Austar International agreed to act as financer, pledging $8 million "to finance the Company's drug development programs and projects, focusing on drug delivery products as well as strategic generic drug products." (Id. at 9). Austar International also agreed to "avail its well-established social connections, reputation and goodwill in the Chinese pharmaceutical industry to bring in business opportunities into the Company." (Id. at 12).

Dr. Liu, for his part, agreed "to take all actions necessary for the proper establishment of the Company." (Id. at 7). Section 9.4³ of the joint venture agreement further states, in part, that Dr. Liu shall:

i. contribute his experiences, know-how and general knowledge in pharmaceutical research and development, drug delivery technologies, strong connection and excellent reputation in the pharmaceutical industry in the USA to set up and operate the Company; and

ii. inject Special Projects into the Company.

A "Special Project[ ]" is defined as "any project under the Company's development, which idea(s) is originally provided by Dr. Liu and has been approved by the Board as special project under this Agreement before its implementation by the Company." (Id. at 5–6). The contract also outlines several restrictive covenants, including that under Section 13.1:

Dr. Liu (and all subsidiary, associate or affiliate thereof) shall not be engaged, directly or indirectly, in any business similar to the Business in the USA and the PRC other than through the business of the Company so long as Austar and Dr. Liu are Members and for a period of 2 years thereafter which shall include, without limitation, the following:

a) employ directly or indirectly, any person who has, at any time, within the one year period preceding the date such Member ceased to be a Member ("Transfer Date"), been a director, officer, employee or consultant to the Company and also, by reason of such employment or office is or may be likely to be in possession of any confidential information regarding the Company; and

b) take any action to interfere, directly or indirectly, with the goodwill of the Company or tamper with or induce or attempt to tamper with or induce any person who is, or who had at any time within the 2 year period preceding the Transfer Date an employee, agent, sales person, contractor, supplier, manufacturer, distributor or dealer of the Company to stop selling to the Company or otherwise to abandon the Company.

However, Clause 13.1 is limited in that it "shall not be deemed to prohibit [Austar International] from engaging, directly or indirectly, in any business similar to the Business in the PRC provided that the nature of such business is in support of the Business and shall not be conflict with the Business. Such business customer should be within in [sic] PRC." (Id. ).

AustarPharma initially had two directors. (Id. at 13). One was to be selected by Austar International and the other by Dr. Liu. (Id. ). The initial directors were Mars Ho Kwok Keung, selected by Austar International, and Dr. Liu, selected by himself. (Id. ).

b. Amended joint venture agreement

Subsequently, the parties have executed amendments to the governing agreements of AustarPharma. (DE 1-2 at 25). One, dated March 16, 2007, was in effect only briefly and seems to have no bearing on this action. On August 8, 2008, the parties again amended and restated the operating agreement. (DE 1-2 at 2). That 2008 agreement is the one that is operative today.

Pursuant to Article 6.6 of the 2008 agreement, the parties, now referred to as "Members," agreed to use "best efforts to give full force and effect to the provisions of this Agreement." (Id. at 11). Liu agreed under Sections 7.1, 7.2, and 7.3, as part of his job as CEO, to "no later than 60 days prior to the end of each Fiscal Year ... prepare and deliver" financial and personal planning reports, litigation reports, and financial statements to all members. (Id. at 11–13). Dr. Liu still agreed to contribute "his experience, know-how and general knowledge" to the development and operation of the company and to "introduce and develop special projects" for the company. (Id. at 14).

As part of the 2008 agreement, De Fortune Holding Limited ("DFH") agreed to infuse $2 million into AustarPharma in exchange for a minority stake. (Compl. ¶ 4). As a result, Austar International held a 43.87% interest in AustarPharma, Dr. Liu held a 35.89% interest, and DFH held a 19.94% interest. (Id. ¶ 33).

The board of directors was expanded to four members. Austar International was entitled to designate two directors; Dr. Liu and DFH were each entitled to elect one. (Id. ). Dr. Liu remained on the board of directors for AustarPharma.

Under the 2008 amended agreement, board approval was required for the following actions:

(a) Appointment or replacement or the auditors of the Company;

(b) Selection of the bankers of the Company;

(c) The location of the registered office of the Company; and

(d) Other issues authorized by the Members or required by this Agreement or by law.

(Id. at 15).

Section 11 of the agreement restricted transfers of "LLC Interests" and provided that "no Member shall have the right to transfer any or all of its, his or her LLC Interest, and any purported transfer or assignment thereof shall be void" if all members other than the member proposing a transfer do not agree.

Section 12 further amends the restrictive covenants:

The Members shall not engage in any business or other activities which directly or indirectly competes with specific generic drug products developed by the Company for the market in the USA so long as Austar and DFH are Members and Dr. Liu is an Employee and a Member and in each case for a period of two years after any of them ceases to be a Member, which activities shall include ...

a) employment of any Person who has, at any time within the one year period preceding the date... been a Director, officer, employee or consultant to the Company and also, by reason thereof is or may be likely to be in possession of confidential information of the Company; and

b) any action to interfere directly with the goodwill of the Company ....

"Business" is defined in the agreement to mean "pharmaceutical research and development, manufacturing and distribution of finished drug products in the PRC and the United States of America and in other activities reasonably incidental thereto." (Id. at 22). Section 12.2 then outlines the restrictions applicable to China in particular:

The restrictions in Section 12.1 shall not be deemed to prohibit Austar or DFH from engaging, directly or indirectly, in any business similar to the Company's Business involving customers in the PRC, provided that the nature of such business does not conflict with the Company's

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