Edgepoint Capital Holdings, LLC v. Apothecare Pharmacy, LLC

• Decision Date: 06 July 2021
• Docket Number: No. 20-1810,20-1810
• Citation: 6 F.4th 50
• Parties: EDGEPOINT CAPITAL HOLDINGS, LLC, Plaintiff, Appellant, v. APOTHECARE PHARMACY, LLC, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

6 F.4th 50

EDGEPOINT CAPITAL HOLDINGS, LLC, Plaintiff, Appellant,

v.APOTHECARE PHARMACY, LLC, Defendant, Appellee.

No. 20-1810

United States Court of Appeals, First Circuit.

July 6, 2021

Michael D. Brier, with whom Kevin T. Peters and Gesmer Updegrove, LLP were on brief, for appellant.

Andrew R. Dennington, with whom Julie M. Muller and Conn Kavanaugh Rosenthal Peisch & Ford, LLP were on brief, for appellee.

Before Lynch, Lipez, and Thompson, Circuit Judges.

LYNCH, Circuit Judge.

In this breach of contract action by EdgePoint Capital Holdings, LLC ("EPCH"), arising out of the sale of the defendant Apothecare Pharmacy, LLC ("Apothecare"), two primary issues were raised: one of federal securities law and one of state contract interpretation law. On cross-motions for summary judgment the district court rejected Apothecare's federal securities law defense that the contract sued on was void under Section 29(b) of the Securities Exchange Act of 1934 ("Exchange Act"). EdgePoint Cap. Holdings, LLC v. Apothecare Pharmacy, LLC, 478 F. Supp. 3d 75, 81-82 (D. Mass. 2020). However, it granted summary judgment in Apothecare's favor on the ground that, as a matter of Massachusetts contract interpretation law, EPCH was not entitled to the fee it sought. Id. at 83. We affirm the grant of summary judgment to Apothecare. Apothecare's federal securities law defense is valid, and therefore the plaintiff EPCH may not recover.

I. Facts

EPCH is an investment banking firm based in Beachwood, Ohio. Most of EPCH's work is assisting companies in the selling of their businesses. EdgePoint Capital Advisors, LLC ("EPCA") is affiliated with EPCH and together the parties refer to them as "EdgePoint." EPCH and EPCA are legally distinct, but they are owned by the same person and share expenses, office space, and some employees. EPCH handles asset sales and is not registered and has never been registered as a broker-dealer. EPCA, by contrast, is a registered broker-dealer and was registered in Massachusetts at the time of the events in this case. EdgePoint benefits from using EPCH rather than its higher-cost registered arm EPCA to complete transactions that do not require a broker-dealer.

EdgePoint's practice when engaging a new client is to allocate the contract to either EPCH, its non-registered arm, or EPCA, its registered arm. It says it does this based on its view of whether the engagement will involve a securities transaction, as only registered brokers may broker securities transactions. 15 U.S.C. § 78o(a)(1). EdgePoint admits it assigns contracts from EPCH to EPCA well after it has started its efforts on behalf of its client if it comes to believe the engagement will involve a securities transaction. EdgePoint says it often looks to the Letter of Intent between its client and a prospective buyer to determine whether an EPCH contract should be reassigned to EPCA, and its practice allows contracts to be assigned "within ... a month of closing." EdgePoint prefers to handle transactions through EPCH when possible to avoid the "[Financial Industry Regulatory Authority ("FINRA")] tax on all FINRA transactions ... [and the] record-keeping obligations for FINRA." Because of the expense sharing agreement between EPCA and EPCH, EdgePoint also finds it "easier to administ[er] the transactions that are done [through EPCH]."

The defendant Apothecare is a long-term care pharmacy company serving group home patients, hospice patients, and others who require special pharmaceutical packaging. Apothecare provides services to over 5,100 "beds" at more than 1,000 institutions in New England and had sales of approximately $26 million in 2015. Rudy Dajie purchased Apothecare in 2012 and served as its Chief Executive Officer until November 2019.

A. Apothecare's Dealings with EdgePoint

Sometime before December 2015, Dajie became interested in selling Apothecare. Dajie was introduced to EdgePoint in December 2015. On December 18, Daniel Weinmann, a managing director at EdgePoint employed by both EPCH and EPCA, delivered a pitch presentation to Dajie about the services EdgePoint could provide. The presentation listed "EdgePoint" as a registered broker-dealer, and Weinmann's email signature included the language "EdgePoint, Member of FINRA."

The next day, on December 19, Weinmann emailed Dajie a draft engagement letter (the "Sell-Side Agreement") listing EPCA, EdgePoint's registered broker-dealer arm, as the contracting party.

Six months later, on June 15, 2016, Weinmann sent Dajie a new draft of the Sell-Side Agreement. EdgePoint had unilaterally revised the agreement to list EPCH, its non-registered arm, rather than EPCA as the contracting party.¹ The file name of the revised agreement was "EPCA-Apothecare Sell-side Agreement 6-15-16," contrary to the terms of the revised agreement. (Emphasis added.) The cover message did not explain or identify this change, and stated only that "[a]ttached is the revised sell-side agreement we discussed on our call today." The change was also not highlighted, "redlined," or otherwise emphasized in the draft. Dajie testified that no one at EdgePoint told him that there were two separate entities, explained the distinction between EPCH and EPCA, or alerted him that the agreement had been modified to list EPCH as the contracting party.

The final Sell-Side Agreement was executed on September 6, 2016. It stated that

Apothecare Pharmacy, LLC and all related affiliates (collectively known as the "Seller") hereby engages and authorizes EdgePoint Capital Holdings, LLC ("EdgePoint") to assist the Seller in the sale of all or part of the Company or its assets (including real estate assets held in a related holding company) or assisting in the formation of a joint venture. Seller agrees to advise EdgePoint of any buyers, agents (i.e. Brokers, etc.), or other Transactional Partners that the Seller wishes to consider in addition to those identified by EdgePoint and agrees to allow EdgePoint to pursue discussions with them.

...

Seller agrees to engage EdgePoint as its sole representative in the sale of Seller, and further agrees to direct all Inquiries as to the sale of such company(ies) to EdgePoint. (Emphasis added.)

The Sell-Side Agreement required Apothecare to make an initial payment of $35,000: $15,000 as a "commitment fee" and $20,000 as an "additional" payment thirty days later. It also specified that if a sale was made, Apothecare would be required to pay EPCH a "Success Fee" equal to the greater of $350,000 or 1.75% of the transaction value up to $40 million plus 7.0% of the transaction value in excess of $40 million.

This breach of contract suit is based on the "tail provision" of the contract, which stated that if the agreement was terminated by either party, "[Apothecare] ... shall be obligated to pay [EPCH] a fee as previously outlined [if] ... within 18 months of the date of the termination of this contract" it completed "any Transaction with a company or individual identified or contacted by [Apothecare] or EdgePoint during the term of this agreement (a ‘Transactional Partner’)."²

On October 26, 2016, Matthew Lazowski, an EdgePoint employee, sent Dajie a draft sixty-page Confidential Information Memorandum ("CIM"). The following day, Lazowski sent Dajie a "Potential Buyers List" of approximately four hundred companies. Clearview Capital, LLC ("Clearview") and Starboard Capital Partners, LLC ("Starboard") were on the list.

The CIM is a marketing document designed to inform potential buyers about Apothecare's business. The CIM draft explained EdgePoint's role in selling Apothecare. It stated that EPCA, not EPCH, had prepared the CIM and was "the Company's exclusive advisor in th[e] proposed transaction." The CIM explained that it was "solely for use by prospective purchasers considering acquiring the Company" and that Apothecare "reserves the right to negotiate with one or more prospective purchasers at any time and to enter into a definitive agreement for sale of the Company ...." (Emphasis added.) The CIM asked that "[p]arties interested in pursuing this transaction" specify their preferred "[d]eal structure (i.e., stock/asset)." It also stated that the existing Apothecare management team "intend[ed] to continue leading the growth of Apothecare to the extent desired by a buyer."

After reviewing the October 26 draft CIM with Dajie, Weinmann emailed a revised draft to Dajie on November 2. The November 2 draft also referred to EPCA and did not mention EPCH. Dajie and Weinmann agreed, due to concerns that Apothecare's financial records understated its accounts receivable, not to circulate the November 2 CIM to potential buyers until the CIM was updated with new financial statements. The problems with Apothecare's accounts receivable were not fully resolved before Apothecare terminated its engagement with EPCH and the CIM was never shown to any potential investors.

Lazowski stated at his deposition that at some point between September 27 and October 27, 2016, he contacted Matthew Blevins, an employee at Clearview. Lazowski said that, without referring to Apothecare directly, he asked Blevins if Clearview would be "interested in a roughly 6 million dollar [Earnings Before Interest, Taxes, Depreciation, and Amortization] pharmacy/drug distribution business located east of the Mississippi." Between October 2016 and February 2017, EPCH contacted six additional companies as "potential investor[s] or purchaser[s]." It did not disclose the name of or confidential information about Apothecare to these companies. No additional potential buyers were contacted after February 2017.

On August 21, 2017, Apothecare sent EPCH a notice of its intent to terminate the Sell-Side Agreement.³ EPCH did not respond.

B. Apothecare's Eventual Sale Independent of EdgePoint

On November 30, 2017, Dajie's estate planning attorney Christopher Graham had lunch with P.J. Smith, a managing director of Starboard to discuss an investment opportunity unrelated to Apothecare. At this...