Herrmann Holdings Ltd. v. Lucent Technologies Inc.
| Citation | 302 F.3d 552 |
| Decision Date | 03 September 2002 |
| Docket Number | No. 01-11424.,01-11424. |
| Parties | HERRMANN HOLDINGS LTD.; Annem Invst. Ltd.; Herrmann Technology Trust, Plaintiffs-Appellants, v. LUCENT TECHNOLOGIES INC., Defendant-Appellee. |
| Court | United States Courts of Appeals. United States Court of Appeals (5th Circuit) |
Geoffrey L. Harrison (argued), Shawn L. Raymond, Barry Craig Barnett, Susman Godfrey, Dallas, TX, for Plaintiff-Appellant.
Kathleen McElroy LaValle, William Michael Byrd, Jr. (argued), Mark Raymond
Steiner, John M. Jackson, Jackson Walker, Dallas, TX, for Defendant-Appellee.
Appeal from the United States District Court for the Northern District of Texas.
Before DAVIS, DeMOSS and STEWART, Circuit Judges.
Herrmann Holdings, Ltd., AnnEm Investments, Ltd., and Herrmann Technology Trust (collectively, "the Herrmanns") appeal the district court's dismissal, for failure to comply with Federal Rules of Civil Procedure 9(b) and 12(b)(6), of their claims against Lucent Technologies Inc. ("Lucent"). For the reasons that follow, we affirm in part, reverse in part, and remand for further proceedings.
First we will summarize the facts alleged in the Herrmanns' second amended complaint, which for purposes of Lucent's motion to dismiss pursuant to Rule 12(b)(6) and 9(b) are accepted as true and construed in the light most favorable to the Herrmanns.1
The Herrmanns owned all 1,000,000 of the outstanding shares of common stock of Herrmann Technology, Inc. ("HTI"), which designed and developed passive thin film filters for use in telecommunications optical networking. On June 16, 2000, Lucent and the Herrmanns signed an Agreement and Plan of Merger ("Agreement"), whereby Lucent acquired HTI for 6,770,200 shares of Lucent stock, worth approximately $438 million based on the closing stock price of $60 that day.
The Herrmanns could not sell any of their Lucent stock in a public transaction on the open market until Lucent filed, and the Securities and Exchange Commission ("SEC") declared effective, a Form S-3 registration statement ("S-3"). The Herrmanns insisted that this happen as soon as practicable. To that end, section 5.1 of the Agreement provides that
Lucent shall use its reasonable best efforts to prepare, file and cause to become effective, as promptly as practicable after Lucent shall have received all relevant information to be provided by the Company or the Shareholders in connection with such filing, the Registration Statement covering the public resale of such shares of Lucent Common Stock to be issued in connection with the Merger....
Agreement (emphasis added). The Herrmanns provided Lucent with all of the "relevant information" for Lucent's preparation of the S-3 prior to the June 16th closing. Section 5.8 of the Agreement similarly obligated Lucent to
use its reasonable best efforts to take or cause to be taken all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable Law to consummate and make effective in the most expeditious manner practicable, the transactions contemplated by this Agreement including (i) ... the making of all necessary registrations and filings and the taking of all reasonable steps as may be necessary to obtain an approval or waiver from, or to avoid an action or proceeding by any governmental or regulatory authority.
Id. (emphasis added). Section 14(q) of the Agreement defined "reasonable best efforts" as "prompt, substantial and persistent efforts as a prudent Person desirous of achieving a result would use in similar circumstances; provided that the Company, the Shareholders, Lucent or Acquisition, as applicable, shall be required to expend only such resources as are commercially reasonable in the applicable circumstances." Id. Lucent was obligated to pay all costs, expenses, and fees in connection with the registration of the S-3.
On June 20, the Herrmanns called Lucent's counsel to check on the status of Lucent's filing of the S-3. On June 27, 2000, eleven days after the HTI acquisition, Lucent acquired Chromatis Networks ("Chromatis"), a much larger optical networking company, for approximately $4.3 billion in Lucent stock based on the closing stock price of $57.70. That day, Lucent's counsel reported to HTI that Lucent was "preparing the S-3 filing" and asked whether it was okay to "delay filing the [HTI] S-3 for a week or two to build in the [HTI] S-3 into our Chromatis S-3." The next day, the Herrmanns responded that they did not want delay, did not want Lucent to combine the HTI S-3 with the Chromatis S-3, and instructed Lucent to "please proceed with the preparation of the S-3 for [HTI] only."
On June 30, 2000, Lucent sent the Herrmanns questionnaires seeking information for preparing the S-3. Although the Herrmanns had given this information to Lucent before closing, the Herrmanns completed and sent back the questionnaires on July 3, 2000. On July 13, 2000, the Herrmanns contacted Lucent's counsel about the status of the S-3. Lucent's counsel said that he did not understand the cause for the delay and would check on it. When the Herrmanns called Lucent's counsel again, he reported that Lucent expected to file the S-3 sometime during the following week.
On July 20, 2000, Lucent reported disappointing third quarter results, a net loss of $301 million compared with the net income of $763 million a year earlier, and lowered its fourth quarter estimates. Lucent's stock price fell that day from $64.50 to $54.31. The following day, Lucent sent the Herrmanns a draft S-3, which combined the HTI S-3 and the Chromatis S-3.
Lucent filed the combined HTI/Chromatis S-3 on July 28, 2000, six weeks after the HTI acquisition. The SEC declared the S-3 effective on August 7, 2000. Lucent's stock closed that day at $42.06 per share and continued to decline, due in part to disappointments in its optical networking business.
On March 30, 2001, the Herrmanns brought suit against Lucent. In their second amended complaint, the Herrmanns alleged claims for breach of contract and violations of article 581-33 of the Texas Securities Act and section 27.01 of the Texas Business and Commerce Code. On May 14, 2001, Lucent filed a motion to dismiss the Herrmanns' claims pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b). On October 5, 2001, the district court granted the motion, refused the Herrmanns' request for leave to amend their complaint, and entered final judgment in favor of Lucent. The Herrmanns now appeal.
We review de novo dismissals pursuant to Rule 12(b)(6) for failure to state a claim upon which relief may be granted or pursuant to Rule 9(b) for failure to plead fraud with particularity. Askanase v. Fatjo, 130 F.3d 657, 669 (5th Cir.1997). In doing so, we accept as true the well-pleaded factual allegations in the complaint and construe the complaint in the light most favorable to the plaintiff. ABC Arbitrage Plaintiffs Group v. Tchuruk, 291 F.3d 336, 357-58 & n. 104 (5th Cir.2002); Lovelace v. Software Spectrum Inc., 78 F.3d 1015, 1017 (5th Cir.1996). The dismissal will be upheld only if "it appears beyond doubt that the plaintiff can prove no set of facts that would entitle him to relief." U.S. ex rel. Thompson v. Columbia HCA/Healthcare Corp., 125 F.3d 899, 901 (5th Cir.1997).
We review the denial of leave to amend the complaint for abuse of discretion. Lewis v. Fresne, 252 F.3d 352, 356 (5th Cir.2001).
The Herrmanns complain first that the district court erred in dismissing their breach of contract claim. The resolution of this issue turns on whether, under Texas law, the Herrmanns' allegations that Lucent failed to use its "reasonable best efforts" to file and cause to become effective a S-3 covering the shares of Lucent stock, as required by § 5.1 and § 5.8 of the Agreement, give rise to a claim against Lucent for breach of contract. As our jurisdiction in this case is based on diversity of citizenship, we have a duty to apply Texas law. See Erie R. Co. v. Tompkins, 304 U.S. 64, 79-80, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The Texas Supreme Court has not yet ruled on the enforceability of best efforts clauses in breach of contract actions. Accordingly, in deciding this case, we are required to make an Erie guess as to what the Texas Supreme Court would most likely decide. Barfield v. Madison County, Miss., 212 F.3d 269, 271-72 (5th Cir.2000). Our task is to "attempt to predict state law, not to create or modify it." United Parcel Service, Inc. v. Weben Indus., Inc., 794 F.2d 1005, 1008 (5th Cir. 1986). In making an Erie guess, we defer to intermediate state appellate court decisions "unless convinced by other persuasive data that the highest court of the state would decide otherwise." First Nat'l Bank of Durant v. Trans Terra Corp., 142 F.3d 802, 809 (5th Cir.1998). We may also refer to rules in other states that Texas courts might look to. Hill v. London, Stetelman, & Kirkwood, Inc., 906 F.2d 204, 207 (5th Cir.1990). The Texas courts have not considered contractual obligations to use "reasonable best efforts" to file a S-3 "as promptly as practicable" and "in the most expeditious manner practicable." No Texas case precludes the Herrmanns' recovery for breach of such obligations. Based on our review of decisions by Texas courts and courts in other jurisdictions, we conclude that the Texas Supreme Court would decide that dismissal of the Herrmanns' breach of contract claim at the 12(b)(6) stage is premature.
The district court found an intermediate appellate Texas court ruling on the enforceability of best efforts clauses in breach of contract actions to be instructive. See CKB & Assocs., Inc. v. Moore McCormack Petroleum, Inc., 809 S.W.2d 577 (Tex.App.1991). In CKB, the Dallas Court of Appeals considered CKB's agreement "to use its best efforts to process [15,000 barrels per day of] crude oil...
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