Protege Biomedical, LLC v. Duff & Phelps Securities, LLC

Background

Protégé Biomedical, LLC contracted with Duff & Phelps to help find a buyer for Protégé. The agreement required Duff & Phelps to protect Protégé’s nonpublic information, selected New York law, disclaimed a fiduciary relationship, and stated that Duff & Phelps’s obligations were corporate obligations rather than personal obligations of its employees.

Duff & Phelps employee Philip I. Smith contacted Doug Schillinger about a possible acquisition of Protégé by Z-Medica. Schillinger signed a nondisclosure agreement on behalf of Protégé’s potential buyer. During a later call, Protégé shared confidential information with Schillinger and Z-Medica representatives. Protégé alleged that Z-Medica later used the information in connection with a patent and withdrew from the potential acquisition.

Protégé sued Duff & Phelps and Smith in state court. Duff & Phelps removed the case to federal court, arguing that Smith had been fraudulently joined—that is, added without a legally supportable claim against him—to defeat federal diversity jurisdiction. Protégé moved to remand, or return, the case to state court. The defendants also moved to dismiss the complaint for failure to state a legally sufficient claim. After those motions were argued, Protégé moved to amend its complaint; the magistrate judge had not yet ruled on that motion.

Motion to Remand and Claims Against Smith

The court held that no reasonable basis in fact or law supported any of Protégé’s claims against Smith. Under the New York law governing the engagement agreement, a claim for negligent or grossly negligent breach of contract was not recognized. The court also held that Smith was not personally liable for breach of the contract because the agreement did not show the required clear and overwhelming intent for him to assume personal liability and expressly limited liability to Duff & Phelps as a corporation.

The court rejected Protégé’s other claims against Smith. It held that the agreement clearly disclaimed a fiduciary relationship; that Protégé had an agency relationship with Duff & Phelps but not personally with Smith; that Protégé’s professional-negligence claim was barred by its waiver of ordinary-negligence claims; and that Protégé did not allege that it requested or received legal advice from Smith, as required for its claim under Minnesota Statute section 481.02. The court also rejected the declaratory-judgment and mandamus claims because they depended on the unsuccessful underlying claims. The court described mandamus as unavailable for this private contract dispute.

Because Smith was fraudulently joined, the court held that federal jurisdiction existed over the remaining dispute. It denied Protégé’s Motion to Remand and dismissed the claims against Smith. The order terminated Smith from the action.

Motion to Dismiss Duff & Phelps

The court concluded that Protégé failed to plausibly state any claim against Duff & Phelps. It held that New York law did not recognize the alleged grossly negligent breach-of-contract claim. It also held that Protégé alleged that Duff & Phelps failed to prevent a disclosure, rather than that Duff & Phelps itself disclosed confidential information, and the agreement did not impose the broader obligation Protégé asserted.

The court further held that the claims for breach of fiduciary duty, breach of agency responsibilities, and professional duties failed for the reasons discussed in the opinion, including the fiduciary-duty disclaimer, the duplicative nature of the tort theories, and the waiver of ordinary-negligence claims. The unauthorized-practice-of-law claim failed because Protégé did not allege that it requested or received legal advice from Duff & Phelps. The declaratory-judgment claim failed because the underlying claims were not plausible, and the mandamus claim failed because the dispute was an ordinary private contract dispute rather than an extraordinary matter.

The court stated that it would grant Duff & Phelps’s Motion to Dismiss if the magistrate judge denied Protégé’s Motion to Amend. But the court stayed the dismissal motion instead of ruling on it immediately. The order therefore denied the Motion to Remand, dismissed the claims against Philip I. Smith, and stayed Duff & Phelps’s Motion to Dismiss pending the ruling on the Motion to Amend.