Session v. 4D Molecular Therapeutics, Inc.

Background

R.A. Session, II worked for 4D Molecular Therapeutics Inc. as its chief business officer and later as a consultant. The parties initially had an employment agreement that provided for salary, bonuses, and stock options. They later ended the employment relationship and entered a consulting agreement on February 12, 2019. That agreement provided for monthly compensation and 140,000 stock options subject to approval by 4D’s board of directors.

4D ended the consulting agreement in September 2019. It told Session that its board had not approved 140,000 options and had approved only 35,000, which, according to 4D, resulted in about 5,000 options under the vesting schedule. Session sued 4D for breach of contract, fraud, and declaratory relief, seeking the full stock options.

4D filed counterclaims alleging that Session breached the earlier employment agreement by engaging in outside employment or business activities related to 4D’s business. 4D also alleged fraud. Session moved to dismiss the counterclaims under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a pleading does not state a legally sufficient claim.

Court’s analysis

The court dismissed the counterclaims for three stated reasons:

1. The consulting agreement replaced the employment agreement. The court held, for the reasons stated at the hearing, that the new consulting agreement superseded the earlier employment agreement. 4D’s arguments about the consulting agreement’s release provisions did not change that result.

2. The economic-loss rule barred tort recovery. The court concluded that the claims were contractual in substance. The economic-loss rule generally prevents a party from recovering tort damages for a loss governed by a contract. The court also found that the facts did not plausibly allege fraudulent inducement of a contract that could support recovery outside the contract.

3. The fraud allegations were not specific enough. Federal Rule of Civil Procedure 9(b) requires fraud to be pleaded with particularity, including the circumstances of the alleged fraud. The court found that 4D did not identify the specific statements Session made or explain why those statements were fraudulent misrepresentations. The court also stated that 4D had not adequately pleaded damages or injury.

Disposition

The court dismissed 4D’s counterclaims with leave to amend and suggested that 4D consider waiting until after the parties’ contemplated settlement conference before amending. The order disposed of Session’s motion to dismiss, identified as ECF No. 17.