Case Information
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
---------------------------------------------------------------------- X 09/01/2021
:
SUZANNE LOUGHLIN, et al. :
:
Plaintiffs, :
: 20-cv-6357 (LJL) -v- : : OPINION AND ORDER
GLENN GOORD, :
:
Defendant. :
:
---------------------------------------------------------------------- X
LEWIS J. LIMAN, United States District Judge:
Defendant Glenn Goord moves, pursuant to Federal Rule of Civil Procedure 12(b)(2) and 12(b)(6), to dismiss the claim against him for lack of personal jurisdiction and failure to state a claim. For the following reasons, the motion is granted, and the Amended Complaint is dismissed, pursuant to Rule 12(b)(6), for failure to state a claim.
BACKGROUND
Plaintiffs Suzanne Loughlin, Harry Rhulen, and James Satterfield (collectively “Plaintiffs”) bring claims for breach of fiduciary duty and libel against Glenn Goord (“Defendant”), a director of Rekor Systems, Inc. (“Rekor” or the “Company”), a Delaware corporation. Dkt. No. 10 (“Amended Complaint” or “Am. Compl.”) ¶ 1, 10, 70-74, 76-91. [1] In inflammatory rhetoric, Plaintiffs allege that, as a director of Rekor, Goord participated in a campaign of retaliation against the Plaintiffs, leading to his breach of fiduciary duty to Plaintiffs and his commission of libel against them. Id. ¶¶ 40-42, 77-85. The retaliation campaign allegedly began after Rhulen made a whistleblower complaint to the Rekor board concerning Robert Berman who is Rekor’s Executive Chairman, Chief Executive Officer, and largest and controlling shareholder. Id. ¶¶ 1, 12-14, 38-41.
Goord is a “long-time friend and colleague of Berman” whom Berman recruited to join the Rekor board in 2017, id. ¶¶ 15-16, and who was elected to the Rekor board at an annual meeting held in New York City in 2019, id . ¶¶ 24-28. Goord now serves as Chair of the Rekor Compensation Committee and as a member of the Rekor Audit Committee. Id . ¶ 23. Plaintiffs allege that Goord has maintained a summer residence in New York State for more than 40 years, id. ¶¶ 17-19, and that it is his “practice . . . to spend every Summer at his New York State residence,” id . ¶ 19. There is no dispute that Goord was personally served while he was at his residence in New York State. See Dkt. No. 26, Transcript of August 13, 2021 Hearing (“Hr’g Tr.”), at 4:2-3.
Plaintiffs’ involvement with Rekor began in 2016 when Berman approached Plaintiffs about the possibility of Rekor acquiring the entities of which Plaintiffs were majority owners, Firestorm Solutions LLC and Firestorm Franchising LLC (together, “Firestorm”). Am. Compl. ¶¶ 31-32. On January 25, 2017, Rekor acquired Firestorm, as memorialized in a Membership Interest Purchase Agreement (“Purchase Agreement”) pursuant to which Firestorm became a wholly owned subsidiary of Rekor. Id . ¶¶ 33-34. Under the Purchase Agreement, each Plaintiff was compensated for his or her respective interests in Firestorm in four different ways: by a cash payment, by Rekor shares, by warrants for Rekor shares, and by promissory notes. Id . ¶ 35. Also pursuant to the Purchase Agreement, on January 25, 2017, each Plaintiff entered into an employment agreement with Rekor or a subsidiary of Rekor: Rhulen was employed as President of Rekor; Loughlin was employed as General Counsel and Chief Administrative Officer of Rekor; and Satterfield continued to serve as President and Chief Executive Officer of Firestorm. Id . ¶¶ 36-37.
Plaintiffs allege that retaliation began after Rhulen made an unspecified “whistleblower complaint to the [Rekor] Board concerning Berman,” after which “Berman decided to punish [Rhulen] as well as [Loughlin and Satterfield] by a campaign of retaliation” because “Berman believed that they were aligned against him given their collective association at Firestorm and because [Loughlin and Rhulen] are siblings.” Id . ¶¶ 38-39. Plaintiffs allege that “Berman and the [Rekor] Board, including Goord . . . , decided to use Rekor as their agent” in retaliating against Plaintiffs “and used Rekor’s corporate assets for Berman’s personal agenda to effectuate” the retaliation. Id . ¶ 40. Plaintiffs allege that Goord “aided and abetted” Berman in his retaliation against Plaintiffs, that he “acquiesced to various aspects” of the retaliation, and that “[a]t minimum, Goord knew that Berman was engaging in [retaliation] for personal reasons and with improper motive yet he did not use his authority as a member of the [Rekor] Board to stop him.” Id . ¶ 41.
Plaintiffs allege that the retaliation campaign encompassed several different incidents. For example, in 2018, Goord and the other members of the Rekor board approved the decision to remove Rhulen from his position of President of Rekor and appoint him instead as an Executive Vice President of Firestorm. Id . ¶¶ 43-45. Plaintiffs allege the decision was “not made for performance-based reasons, but for personal reasons.” Id . ¶ 44.
Rekor also did not pay Loughlin and Satterfield for services rendered and decided to close Firestorm. Specifically, in December 2018, each of the Plaintiffs resigned from their respective positions with Rekor and Firestorm, but Loughlin and Satterfield subsequently entered into a consulting agreement with Firestorm whereby they could “continue to contribute to Rekor’s success without having to deal with the hostile work environment created by Berman.” Id . ¶ 46-47. After Loughlin and Satterfield rendered services under the consulting agreement in January and February 2019, however, Berman “directed Firestorm not to pay” certain invoices for those services, “motivated, in whole or in part, by Berman’s animus toward the Plaintiffs” as part of his retaliation. Id . ¶ 53; see also id. ¶¶ 46-52. Around the same time, and “[s]ubsequent to December 2018,” the Rekor board “decided to close Firestorm as a business,” id . ¶ 54, and “in or about May 2019, Rekor terminated all franchise agreements between Firestorm and [its] franchisees,” id . ¶ 55.
In July 2019, Satterfield attempted to exercise the warrants he possessed in Rekor, and Loughlin attempted to transfer her warrants. Id. ¶¶ 56-57. The same month, “Berman, in consultation with Goord and others, decided that Rekor would not honor” those attempts, also out of animus and in retaliation. Id . ¶ 58. Goord “supported Berman’s decision” not to honor the warrants, and “knew or should have known that there was no legitimate good faith basis to refuse to honor the Warrants and that the decision to do so was made in bad faith.” Id . ¶ 59. In August 2020, each of the Plaintiffs attempted to exercise their warrants in Rekor, id. ¶ 61, but “Rekor also failed to honor” those attempts, id . ¶ 62.
On August 19, 2019, Rekor commenced an action against Plaintiffs (“Rekor Action”), which has been consolidated with this case. Id . ¶ 63; Rekor Sys., Inc. v. Loughlin , No. 19-cv- 7767 (S.D.N.Y. Aug. 19, 2019). In the Rekor Action, Rekor brings claims against the Plaintiffs in this action, alleging, among other things, that the Purchase Agreement was fraudulently induced by the Plaintiffs who allegedly made misrepresentations and omissions concerning Firestorm’s franchise business and prospects. See Rekor Sys., Inc. v. Loughlin , 2020 WL 6898271, at *2 (S.D.N.Y. Nov. 23, 2020). In the Rekor Action, Rekor seeks rescission of the Purchase Agreement which would entail rescission of Rhulen, Satterfield, and Loughlin’s warrants. See id ., at *3; Am. Compl. ¶¶ 67-68. Among other relief requested in the Rekor Action is a declaration that the warrants are void. Rekor Sys. , No. 19-cv-7767, Dkt. No. 1, Complaint, ¶ 181; id. , Dkt. No. 64, Second Amended Complaint, ¶ 202.
In their answer in the Rekor Action, Rhulen, Satterfield, and Loughlin assert twenty counterclaims alleging that (1) Rekor breached the employment agreement with Rhulen by demoting him in retaliation for his whistleblower complaint about Berman; (2) Rekor breached the warrants by stating it was Rekor’s position that the Purchase Agreement and transactions consummated thereunder were subject to recission and by not honoring Loughlin and Satterfield’s attempts to exercise or transfer the warrants; (3) Rekor anticipatorily breached the warrants issued to Rhulen; (4) Rekor’s directors breached fiduciary duties owed to Rhulen, Satterfield, and Loughlin as shareholders and warrant holders by not honoring the attempts to exercise the warrants; (5) Rekor anticipatorily breached the promissory notes; and (6) Rekor engaged in libel. Id. , Dkt. No. 71, Answer, ¶¶ 343-418. They allege that the Rekor board, “including Goord, approved the commencement” of the Rekor Action at a 2019 Rekor board meeting, Am. Compl. ¶ 64, and that the action was commenced “in bad faith and improper motive” in furtherance of Berman’s retaliation, id. ¶ 65.
Though the Amended Complaint describes several incidents allegedly related to the overall retaliation campaign against them, Plaintiffs at oral argument narrowed their claim of breach of fiduciary duty to a single decision—the decision not to honor Plaintiffs’ warrants. See Hr’g Tr., at 29:17-30:2. Plaintiffs allege that, as a member of the board, Goord owed fiduciary duties to them “as a result of their status as shareholders and warrant holders of Rekor.” Am. Compl. ¶ 70. Goord’s actions “improperly favored the interests of Rekor Board members Berman, [James] McCarthy, and [Richard] Nathan, the controlling shareholders, by preventing the active dilution of their ownership percentages by Plaintiffs’ exercise of their Warrants.” Id. ¶ 71. Plaintiffs allege that, by these actions, Goord “acted in bad faith and with an improper motive and has breached his fiduciary duties to the Plaintiffs by using Rekor as the instrument of Berman’s desire to enact revenge for [Rhulen’s whistleblower complaint].” Id . ¶ 72.
Plaintiffs also bring a claim for libel in connection with an August 14, 2019 Form 10-Q (the “Form 10-Q” or “10-Q”) filed with the Securities and Exchange Commission (“SEC”) and publicly available on Rekor’s website. Id . ¶¶ 76, 86. Plaintiffs allege that Goord, as a member of the Rekor board, “reviewed and approved” the Form 10-Q in question at a 2019 board meeting held in New York City. Id . ¶ 78. In the section on “Recent Developments,” the 10-Q contained the following statement:
On June 25, 2019, the [ sic ] we sent a letter to three former executives of the Company and Firestorm (the Firestorm Principals). The letter described the Company’s position that, because the Firestorm Principals fraudulently induced the execution of the Membership Interest Purchase Agreement pursuant to which Firestorm was acquired by the Company, the entire Membership Interest Purchase Agreement and the transactions contemplated thereby, including the issuance of the warrants, are subject to rescission.
Rekor Sys., Inc., Quarterly Report (Form 10-Q), at 33 (Aug. 14, 2019). [2] An almost identical statement was contained within “Note 13 – Commitments and Contingencies.” Id. at 26. Plaintiffs allege that “Firestorm Principals” in the above statement referred to them, that the statement that Plaintiffs had “fraudulently induced the execution of the Membership Interest Purchase Agreement” is false and was made with actual malice in furtherance of the retaliation campaign against them, and that it “disparages the Plaintiffs in their business or profession and is defamatory per se .” Id. ¶¶ 82-83.
PROCEDURAL HISTORY
After Plaintiffs initiated this action in New York State court in Sullivan County, Defendant removed the suit to this Court based on diversity jurisdiction and moved to dismiss. Dkt. Nos. 1, 3, 6. Plaintiffs then filed an Amended Complaint, Dkt. No. 10, and Defendant again moved to dismiss for lack of personal jurisdiction and failure to state a claim under Federal Rule of Civil Procedure 12(b)(2) and 12(b)(6). Dkt. No. 11. After briefing was fully submitted, the Court held oral argument on August 13, 2021. Dkt. Nos. 25-26.
LEGAL STANDARD
“On a Rule 12(b)(2) motion to dismiss for lack of personal jurisdiction, the plaintiff bears
the burden of showing that the court has jurisdiction over the defendant.”
Metro. Life Ins. Co. v.
Robertson-Ceco Corp.
,
This prima facie showing “must include an averment of facts that, if credited by the trier,
would suffice to establish jurisdiction over the defendant.”
Id
. at 85 (quoting
Ball
, 902 F.2d at
197). While the Court “construe[s] the pleadings and affidavits in the light most favorable to
plaintiffs,”
id
., the Court “will not draw argumentative inferences in the plaintiff's favor” and
need not “accept as true a legal conclusion couched as a factual allegation,”
In re Terrorist
Attacks on Sept. 11, 2011
,
To survive a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), a complaint must
include “sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on
its face.’”
Ashcroft v. Iqbal
,
“A claim has facial plausibility when the plaintiff pleads factual content that allows the
court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”
Id.
“Determining whether a complaint states a plausible claim for relief will . . . be a
context-specific task that requires the reviewing court to draw on its judicial experience and
common sense.”
Id.
at 679. Put another way, the plausibility requirement “calls for enough fact
to raise a reasonable expectation that discovery will reveal evidence [supporting the claim].”
Twombly
,
DISCUSSION
A. Personal Jurisdiction
The parties do not dispute that service of process was personally effected on Goord while he was within the State of New York. That is sufficient to establish general personal jurisdiction.
“To determine whether the exercise of personal jurisdiction is proper in a diversity case,
the Court must conduct a two-part inquiry: first, the Court looks at whether there is a basis for
personal jurisdiction under the laws of the forum state, and second, the Court must examine
whether the exercise of personal jurisdiction comports with constitutional due process.”
HSM
Holdings, LLC v. Mantu I.M. Mobile Ltd.
,
Plaintiffs predicate their assertion of personal jurisdiction on “tag” jurisdiction—i.e.,
jurisdiction flowing from personal service on an individual within the state. In
Burnham v.
Superior Court of California
,
Justice Brennan wrote an opinion concurring in the judgment to form the majority. His opinion was joined by Justices Marshall, Blackmun, and O’Connor. Without subscribing to the broad proposition that “a jurisdictional rule that ‘has been immemorially the actual law of the land,’ automatically comport[ed] with due process,” id. at 629 (quoting id. at 619), he stated that “the Due Process Clause of the Fourteenth Amendment generally permits a state court to exercise jurisdiction over a defendant if he is served with process while voluntarily present in the forum State,” id. at 628-29, and that “as a rule the exercise of personal jurisdiction over a defendant based on his voluntary presence in the forum will satisfy the requirements of due process,” id. at 639. [3]
The Second Circuit has read
Burnham
to hold that “personal service of a summons and
complaint upon an individual physically present within a judicial district of the United States . . .
comports with the requirements of due process for the assertion of personal jurisdiction.”
Kadic
v. Karadzic
,
Defendant argues that
Daimler AG v. Bauman
,
incongruous result that an individual defendant whose only contact with a forum State is a one-time visit will be subject to general jurisdiction if served with process during that visit, Burnham v. Superior Court of Cal., County of Marin ,495 U.S. 604 , 110 S.Ct. 2105, 109 L.Ed.2d 631 (1990), but a large corporation that owns property, employs workers, and does billions of dollars' worth of business in the State will not be, simply because the corporation has similar contacts elsewhere (though the visiting individual surely does as well).
Id. at 158 (Sotomayor, J., concurring).
Defendant argues that the result in Daimler undercuts the reasoning of the Burnham plurality, making it constitutionally intolerable for an individual to be subject to “tag” jurisdiction. If a corporation cannot be subject to jurisdiction based on its continuous and systematic course of business in a state, an individual should not be subject to jurisdiction based on his transitory presence in the state. Defendant also urges that the Court apply the more narrow reasoning of Justice Brennan, which—it presumes—would make it unconstitutional for personal jurisdiction to be exercised here.
There are many flaws in Defendant’s argument.
[4]
First, as a technical matter, the Court
assumed in
Daimler
that the defendant corporation was foreign and was never present in the
State. The Court there addressed a very different question than that presented here where Goord
indisputably
was
in New York when he was served. “
Daimler
. . . answered ‘the question
“whether it violates due process for a court to exercise general personal jurisdiction over
a
foreign corporation
based solely on the fact that an indirect corporate subsidiary performs
services on behalf of the defendant in the forum State.”’”
Rajoub
,
Indeed, the very quote highlighted by Defendant demonstrates the point and undermines Defendant’s argument. Justice Sotomayor assumed that the majority did not intend to disturb the rule permitting the exercise of jurisdiction based on an individual’s transient presence in the forum state. See id. at *7 (“Justice Sotomayor explicitly states [in Daimler ] that Burnham is still good law and is distinct from the Court’s holding in Daimler .”). Her point was that the Daimler holding created a discrepancy between the law of personal jurisdiction as applied to corporations and that applied to individuals. The point would have had no force had she believed or assumed that tag jurisdiction was no longer good law. In that case, there would have been no discrepancy. Tellingly, the Daimler majority did not disabuse Justice Sotomayor of her notion.
Second, both before and after
Daimler
was decided, the Second Circuit has stated its
understanding that
Burnham
held that, as a categorical matter, tag jurisdiction was constitutional.
See Kadic
,
Finally, even if Defendant was right that Justice Brenan’s concurrence provided the
operative rule of law, that would not help him in this case. Goord’s presence in New York State
was not involuntary or unknowing when he was served at his secondary residence in the State.
See Burnham
,
B. Breach of Fiduciary Duty
Plaintiffs allege that Goord breached his fiduciary duties by supporting the decision not to honor Plaintiffs’ warrants and in doing so favored the interests of Rekor’s controlling shareholders and furthered a retaliation campaign against Plaintiffs. Plaintiffs’ allegations fail to state a claim for relief. To the extent Plaintiffs were injured in their capacity as warrant holders—because Rekor did not convert their warrants into shares—that injury would not be compensated for through a breach of fiduciary duty claim. Warrant holders are not owed fiduciary duties; Plaintiffs’ claim lies in the law of breach of contract or not at all. To the extent Plaintiffs purport to assert a claim as shareholders, the claim is defective for a different reason. They do not assert that they have been injured as shareholders and, in any event, they could not overcome the business judgment rule or assert a direct claim.
Plaintiffs’ principal claim is that they experienced “direct injury . . . when the Warrants were not honored,” Dkt. No. 16, Opp., at 14. The decision by Rekor not to honor the warrants deprived Plaintiffs of their opportunity to receive Rekor shares in exchange. The loss of the opportunity to exercise the warrants, however, was experienced by Plaintiffs in their capacities as warrant holders of Rekor. It was not loss experienced as shareholders of Rekor. The fact that Plaintiffs happened to be shareholders is irrelevant. Plaintiffs would have suffered the identical loss were they not shareholders.
Thus, Plaintiffs cannot assert a claim for breach of fiduciary duty for the loss of the value
of their warrants. They were not owed fiduciary duties in their capacities as warrant holders.
Warrant holders are not owed fiduciary duties; they are owed only contractual duties. A claim
for breach of fiduciary duty “must be based on an actual, existing fiduciary relationship between
the plaintiff and the defendants at the time of the alleged breach.”
Omnicare, Inc. v. NCS
Healthcare, Inc.
,
Plaintiffs make a passing argument that they are also owed fiduciary duties in their status as shareholders. See Dkt. No. 16, Opp., at 14. But they do not assert injury, much less direct injury, suffered in their capacity as shareholders. In that capacity, they could only have gained by virtue of Rekor’s determination not to honor the warrants. The effect of a decision not to honor the warrants would be to decrease the number of Rekor shares that otherwise would have been outstanding. All else being equal, it increased the effective ownership of each of the existing shareholders. It had the same effect on Plaintiffs in their capacities as shareholders as it had on each of Goord, Berman, and the other directors, all of whom—Plaintiffs allege— benefitted in their capacities as shareholders from the decision not to honor the warrants.
Finally, to the extent that Plaintiffs’ complaint could be understood to allege some other
kind of injury experienced by them as shareholders—viz, incurring the wrath of the Plaintiffs in
their capacities as warrant holders or having to defend against the counterclaims in the Rekor
lawsuit alleging breach of contract—that claim would clearly be derivative and, in any event,
would be protected by the business judgment rule. A decision that affects each shareholder
equally in their capacities as shareholders is derivative and thus does not give rise to a direct
claim; it can be prosecuted by an individual shareholder only in the name of the corporation and
only after making demand (unless it is excused) and giving the board the opportunity to assume
control of the lawsuit.
See Tooley v. Donaldson, Lufkin & Jenrette, Inc.
,
C. Libel
Plaintiffs also bring a claim for libel, alleging that Goord, as part of the Rekor board, “reviewed and approved” the SEC 10-Q filing, which contained a statement that allegedly defamed Plaintiffs. Am. Compl. ¶ 77. In the section on “Recent Developments” and note on “Commitments and Contingencies,” the Form 10-Q reported on the fact that within the quarter just ended (specifically on June 30, 2019), Rekor had sent a letter to persons whom the 10-Q described as “three former executives of the Company and Firestorm (the Firestorm Principals)” and then described the content of the letter: “The letter described the Company’s position that because the Firestorm Principals fraudulently induced the execution of the Membership Interest Purchase Agreement pursuant to which Firestorm was acquired by the Company, the entire Membership Interest Purchase Agreement and the transactions contemplated thereby, including the issuance of the warrants, are subject to rescission.” Form 10-Q, at 26, 33; Am. Compl. ¶ 79.
Plaintiffs do not contend that the statement that Rekor had sent a letter to three former
executives of the Company and Firestorm stating the Company’s position that the issuance of the
warrants was subject to rescission alone is actionable as libel.
See
Hr’g Tr. 21:8-11, 22:20-25.
That statement was plainly true and of tremendous interest to every shareholder, each of whose
interests in Rekor would otherwise have been diluted by exercise of the warrants. A company
may take the position that warrants, or some other contractual right, were improperly obtained
and thus may not be exercised, free from the risk that in doing so they will subject themselves to
a suit not only for breach of contract but also for defamation. Rather, Plaintiffs allege that the
portion of the 10-Q statement that stated the basis for the Company’s position—that the
Membership Interest Purchase Agreement had been fraudulently induced—so shareholders
would be able to understand and therefore be able to assess the strength of the Company’s
position was itself defamatory. They allege that the statement “disparaged them in their business
and profession” and therefore was defamatory per se, that it was false and made with actual
malice to further what Plaintiffs claim was “the Retaliation Campaign,” and that it was made
“with malicious intent, in order to smear the Plaintiffs and to pressure Plaintiffs to acquiesce to
Rekor’s and the Board’s determination to repudiate their obligations to Plaintiffs pursuant to the
Warrants and the Notes, and to further the Retaliation Campaign.” Am. Compl. ¶¶ 83-85.
“Under New York law, to state a claim for defamation, a plaintiff must allege ‘(1) a
written [or spoken] defamatory statement of and concerning the plaintiff, (2) publication to a
third party, (3) fault, (4) falsity of the defamatory statement, and (5) special damages or per se
actionability.’”
Kesner v. Dow Jones & Co., Inc.
,
There is no dispute on this motion that the 10-Q statement is “of and concerning”
Plaintiffs. It is not necessary that Plaintiffs be identified by name; it is sufficient that a plaintiff
“plead and prove that the statement referred to them and that a person hearing or reading the
statement reasonably could have interpreted it as such.”
Three Amigos SJL Rest., Inc. v. CBS
News Inc.
,
Defendant argues that the 10-Q statement cannot give rise to an action in libel under New York state law first because it is a statement of opinion, and second and in the alternative, because the statement is otherwise privileged within the context of Rekor’s litigation against Plaintiffs and the context of the mandatory SEC filing.
“Since falsity is a necessary element of a defamation cause of action and only facts are
capable of being proven false, . . . only statements alleging facts can properly be the subject of a
defamation action.”
Davis v. Boeheim
,
Although the question is close, the Court concludes that the Form 10-Q statement is not protected opinion. First, the Form 10-Q statement is made in specific language. The report does not just use the term “fraud” loosely and in uncertain terms. It describes a specific document that was induced by fraud and ascribes legal consequences to it—the Membership Interest Purchase Agreement and the warrants are subject to rescission. It thus has a definite and concrete meaning.
Second, the statement that Plaintiffs “fraudulently induced the execution of the
Membership Interest Purchase Agreement” is capable of being proven true or false. That a
person has engaged in the acts of fraud that would permit the rescission of warrants under a
warrant agreement is not merely in the eye of the beholder or an opinion of a single individual.
This statement is not akin to “[l]oose, figurative or hyperbolic statements,”
Dillon v. City of New
York
,
The third factor—the immediate and larger context in which the allegedly defamatory statement was published—is closer. The context of the statement—in the sections of a Form 10- Q in which the reporting entity is required to report on “Recent Developments” and “Commitments and Contingencies”—and the language stating that it was the Company’s “position” that the Membership Interest Purchase Agreement is subject to rescission are such that the statement could be understood to convey information not regarding Plaintiffs but rather regarding a historical position of the Company that was of relevance to investors regardless of its truth or falsity. Plaintiffs do not suggest, for example, that a company could not report the fact of a material accusation by a third party against one of its senior officers that was independently relevant to share value without being subject to a defamation lawsuit. To some extent, the Form 10-Q statement is of similar quality. It could be read as a report of a historical fact—that the Company had taken this position and that it created a risk or contingency that the warrants might be cancelled but that it was only one position and that there would be others and that it was not necessarily true or accurate.
In the end, however, this factor too favors Plaintiffs at least at the initial pleading stage.
The publisher of the Form 10-Q statement is identical to the maker of the underlying statement—
that the three Plaintiffs engaged in conduct that would constitute fraudulent inducement. The
context would suggest “to the reader that [the Company] spoke with authority, and that [its]
statements were based on facts . . . [as it was] well placed to have information about [the subject
matter].”
Davis
,
important one—by forcing the revelation of the underlying facts upon which a conclusion such
as that the defendant engaged in fraud is formed, the law both gives readers the opportunity to
make their own judgment and also gives the subject of the statement the opportunity to challenge
the underlying facts and to sue on the grounds that they are defamatory if the legal requisites of
that claim are satisfied.
See id.
(“This requirement that the facts upon which the opinion is based
are known ‘ensure[s] that the reader has the opportunity to assess the basis upon which
the opinion was reached in order to draw [the reader’s] own conclusions concerning its
validity.’” (quoting
Silsdorf v. Levine
,
The Form 10-Q statement, made by the same person who made the underlying claim,
plainly implies that it is made with authority and its author is in possession of facts that would
support the accusation of fraudulent inducement. It conveys that there are facts, not disclosed to
the reader, that would establish that the Plaintiffs made misrepresentations to Rekor and that
those misrepresentations were both intentional and material. It thus carries with it a defamatory
implied assertion of fact, and, in context, would not be understood as just a label or conclusion.
[9]
That understanding is bolstered by the “common expectation” that a statement in a SEC report
“will serve as a vehicle for the rigorous and comprehensive presentation of factual matter [and
not] as one principally for the expression of individual opinion.”
Immuno
AG, 567 N.E.2d
.
at
1280;
see Steinhilber
,
fiery rhetoric or hyperbole.” (internal quotation marks omitted));
600 W. 115th St. Corp. v. Von
Gutfeld
,
Defendant argues, alternatively, that even if the 10-Q statement is not protected as
opinion, it is privileged, and that Plaintiffs have not alleged facts to overcome the privilege.
“New York ‘[p]ublic policy mandates that certain communications, although defamatory, cannot
serve as the basis for the imposition of liability in a defamation action.’”
Chandok v. Klessig
,
The facts here do not fit squarely into any privilege previously specifically recognized by
the New York Court of Appeals. In the absence of a settled interpretation of state law, the
Court’s role is to “‘predic[t] how the state’s highest court would resolve the uncertainty or
ambiguity’” “guided by decisions of the state’s lower courts, decisions on the same issue in other
jurisdictions, and ‘other sources the state’s highest court might rely upon in deciding the
question.’”
Tantaros v. Fox News Network, LLC
, No. 20-3413-cv, --- F.4th ----, 2021 WL
3821839, at *3 (2d Cir. Aug. 27, 2021) (first quoting
In re Thelen LLP
,
The 10-Q statement also does not fall squarely into the absolute privilege the New York
Court of Appeals has recognized for statements made in the “preliminary or investigative stages
of [a judicial or quasi-judicial] process, particularly where compelling interests are at stake.”
Rosenberg v. MetLife, Inc.
,
Thus, for example, in
Rosenberg
,
Admittedly, there are similarities between the facts that supported the recognition of an
absolute privilege in
Rosenberg
and those that are at issue here. In both cases, there is a public
interest that those who are charged with reporting—to the NASD and potential customers in
Rosenberg
and to the SEC and the investing public here—do so free from the concern that “their
own personal interests—especially fear of a civil action, whether successful or otherwise—
[would] have an adverse impact upon the discharge of their public function.”
Stega
, 107 N.E.3d
at 549. In both cases, the alleged falsity of the report is self-correcting. The statement at issue
here was made in the “Recent Developments” and “Commitments and Contingencies” sections
of the Form 10-Q. It reported on facts that went directly to the question of the amount of
securities called for by warrants issued by the Company. All concede that such reporting was
required.
See
17 C.F.R. § 229.202(c) (public issuer required to report on the amount of securities
called for by warrants, and the amount of warrants or rights outstanding, and any other material
terms of such rights on warrants). It plainly was material.
[10]
The Company’s decision also was
not self-executing. The warrants did not give the Company discretion whether to honor the
warrants or not,
see
Dkt. Nos. 17-5, 17-6, 17-7, 17-8, 17-9, 17-10; for the Company’s “position”
to hold, Plaintiffs would either have had to accede to that position or lose in a litigation. Thus, to
the extent that the Company’s position was established to be false, the statement would be self-
correcting. As all also concede, Rekor would have to report not just the cloud that currently is on
the exercise of the warrants by virtue of the Company’s position but any lifting of that cloud as a
result of negotiation between the parties or the outcome of this litigation.
[11]
In the end, however, the New York Court of Appeals likely would conclude that the 10-Q
statement is not protected by the absolute privilege for statements made during the preliminary or
investigative stages of a judicial or quasi-judicial proceeding because they were not made to the
SEC as part of a quasi-judicial proceeding.
See Stega
,
3d at 390 (similarly concluding that absolute privilege is not available for statements contained within an SEC 10-Q filing).
The Court concludes that the New York Court of Appeals would conclude that the 10-Q
statement at least is subject to a qualified privilege. Two state courts applying non-New York
law have held that allegedly defamatory statements contained within SEC filings are protected
by qualified privilege.
See Hampshire Grp., Ltd. V. Kuttner
,
In New York, “[a] statement is generally ‘subject to a qualified privilege when it is fairly
made by a person in the discharge of some public or private duty, legal or moral.’”
Chandok
,
The qualified privilege concerning common interest and legal duty applies to the 10-Q statement. Rekor and members of its board and investors in Rekor securities all shared a common interest in knowing both the number of shares of common stock that were outstanding and also the number of shares that could be obtained through the exercise of warrants or options. It was material to whether the Plaintiffs’ warrants could be converted into common stock. As the SEC itself has recognized, all shareholders have an interest in “(1) [t]he amount of securities called for by such warrants or rights; (2) [t]he period during which and the price at which the warrants or rights are exercisable; (3) [t]he amount of warrants or rights outstanding; (4) [p]rovisions for changes to or adjustments in the exercise price; and (5) [a]ny other material terms of such rights on warrants.” 17 C.F.R. § 229.202(c). This regulation reflects the commonsense observation that the number of warrants outstanding and whether and how they can be converted to common stock are important to the value of Rekor common stock and thus to the company as well as investors and shareholders: the more shares that can be obtained by warrant the lesser the value of any outstanding share of common stock. Thus, each shareholder shared a common interest with Rekor and its board in knowing both the position that the Company intended to take with respect to any attempted exercise of the warrants by Plaintiffs and the basis for that position. Only by understanding the position and the basis could a shareholder understand what the Company was going to do and whether its position was likely to prevail.
Plaintiffs do not dispute that Rekor had to report the position it intended to take with
respect to the warrants. The warrants on their face gave Plaintiffs the right to obtain hundreds of
thousands of shares of Rekor common stock. It would have been misleading to report that Rekor
had outstanding warrants for hundreds of thousands of shares without also disclosing that, if
Rekor had its way, those warrants would never be converted into the shares. Rekor had to say
something; shareholders were entitled to know both the position and the basis for the position. It
cannot be that the very statement that the company is required to make to avoid securities law
liability and to discharge its duties to its investors it is prohibited from making to satisfy its
obligations to the officers. That view would create the very chilling effect with respect to the
reporting of matters of public and common interest that the law of privilege is intended to avoid.
See Stega
,
The fact that a qualified privilege applies does not automatically grant Defendant
impunity, but Plaintiffs have not alleged facts to overcome the qualified privilege. Under New
York law, “[a] qualified privilege may be overcome by a showing of either ‘actual’ malice (
i.e.
,
knowledge of the statement’s falsity or reckless disregard as to whether it was false) or of
common-law malice.”
Chandok
,
Plaintiffs argue that they have alleged that the statement was made with actual malice as
part of the alleged retaliation campaign. Dkt. No. 16, Opp., at 12 (citing Am. Compl. ¶ 83).
Actual malice refers to knowledge that a statement is false or reckless disregard of its truth or
falsity; it is not the same thing as “not knowing whether something is true.”
Liberman
, 605
N.E.2d at 350;
see also New York Times Co. v. Sullivan
,
Plaintiffs’ allegations of common-law malice are also insufficient to overcome the
qualified privilege. “Common-law malice means spite or ill will, and will defeat the privilege
only if it is the one and only cause for the publication.”
Konikoff v. Prudential Ins. Co. of Am.
,
Because the 10-Q statement is protected by a qualified privilege, Plaintiffs’ libel claim fails to state a claim upon which relief can be granted.
CONCLUSION
For the foregoing reasons, the motion to dismiss is GRANTED. The Clerk of Court is
respectfully directed to close the motions at Dkt. Nos. 6 and 11. Because Plaintiffs already had
the opportunity to amend their complaint after Defendant’s first motion to dismiss and because
Plaintiffs identify no facts that could cure the defects in their pleading, dismissal with prejudice
is appropriate.
See, e.g.
,
Treppel v. Biovail Corp.
,
SO ORDERED. Dated: September 1, 2021 __________________________________
New York, New York LEWIS J. LIMAN United States District Judge
Notes
[1] The following facts are drawn from the Amended Complaint and accepted as true for purposes of this motion only.
[2] The Court may take judicial notice of Rekor’s 10-Q on a motion to dismiss as it is a “public
disclosure document[] required by law to be filed, and actually filed, with the SEC.”
Kramer v.
Time Warner Inc.
,
[3] Justice Brennan allowed that “there may be cases in which a defendant’s involuntary or unknowing presence in a State does not support the exercise of personal jurisdiction over him” and stated that “[t]he facts of the instant case do not require us to determine the outer limits of the transient jurisdiction rule.” Id. at 637 n.11. The remaining member of the Court, Justice Stevens, simply stated that “the historical evidence and consensus identified by Justice Scalia, the considerations of fairness identified by Justice Brennan, and the common sense displayed by Justice White, all combine to demonstrate that this is, indeed, a very easy case.” Id. at 640.
[4] The only other court in this District that appears to have addressed the question has rejected the
argument Defendant here advances.
See Rajoub
,
[5] In light of the Court’s conclusion that “tag” jurisdiction exists, it need not reach the alternative argument that Plaintiffs properly assert specific jurisdiction.
[6] Delaware law applies to Plaintiffs’ breach of fiduciary duty claim, as Rekor is a Delaware
corporation and “New York applies the internal affairs doctrine to claims for breach of fiduciary
duty and, thus, applies the law of the state of incorporation to such claims.”
Kravitz v. Binda
,
[7] Plaintiffs retain their contract rights against Rekor under the warrants and are entitled to whatever protection they bargained for with Rekor. See Airlines v. American Gen. , 575 A.2d 1160, 1168 (Del.1990) (explaining that warrant holders are protected by contractual rights). That is the counterclaim they are asserting in the action brought by Rekor.
[10] At oral argument, Plaintiffs’ counsel indicated that Plaintiffs collectively had warrants to purchase about 600,000 shares of stock. Hr’g Tr. 27:16-20.
[11] Indeed, the Company has reported developments in the Rekor Action in its subsequent Form 10-K and Form 10-Q filings. See Rekor Sys., Inc., Quarterly Report (Form 10-Q), at 31, 39 (Nov. 14, 2019); Rekor Sys., Inc., Annual Report (Form 10-K), at 4, 15, 46 (Mar. 30, 2020);