Opinion
03 Civ. 5384 (SAS).
July 20, 2004
Raymond J. Dowd, Esq., DOWD MAROTTA LLC, New York, New York, for Plaintiffs.
Manachem O. Zelmanovitz, Esq., Rachelle M. Barstow, Esq., Amanda R. Waller, Esq., MORGAN, LEWIS BOCKIUS LLP, New York, New York, for Defendants J.P. Morgan Chase Bank and J.P. Morgan Securities, Inc.
Kevin J. Toner, Esq., HELLER EHRMAN WHITE MCAULLIFE LLP, New York, New York, for Defendant Intralinks, Inc.
Harold Hirshman, Esq., SONNENSCHEIN NATH ROSENTHAL LLP, Chicago, IL, for Defendant William Blair Company, L.L.C.
Marshall Beil, Esq., Christine M. Fecko, Esq., MCGUIREWOODS LLP, New York, New York, for Defendant Banc of America Securities, L.L.C.
Frank H. Wohl, Esq., LANKLER SIFFERT WOHL LLP, New York, New York, for Defendant Heller Ehrman White McAuliffe LLP.
OPINION AND ORDER
I. INTRODUCTION
This suit arises out of the failed initial public offering ("IPO") of Intralinks, Inc. ("Intralinks"), and the subsequent private financing undertaken by the company. Plaintiffs allege multiple violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), specifically Rule 10b-5 promulgated thereunder. Plaintiffs also assert claims under the Employee Retirement Income Security Act of 1974 ("ERISA"), and under state law. Defendants now move, pursuant to Federal Rules of Civil Procedure 12(b)(1) and (6) or 12(e), for: (1) dismissal of the first nine counts of the Complaint for failure to state a claim, (2) denial of supplemental jurisdiction over plaintiffs' state law claims, and (3) dismissal of the Complaint for lack of subject matter jurisdiction, or, in the alternative, (4) a more definite statement. Plaintiffs oppose dismissal and seek leave to amend the Complaint.
See 15 U.S.C. § 78j(b).
See 17 C.F.R. § 240.10b-5.
See 29 U.S.C. § 1001, et seq.
In the First Amended Complaint ("FAC"), plaintiffs also alleged violations of the 1933 Securities Act, 15 U.S.C. § 77k (the "Securities Act"), and the Bank Holding Act, 12 U.S.C. § 1972. These claims (counts one through three and seven and eight, FAC ¶¶ 294-330, 380-396) were withdrawn in response to the instant motion. See Plaintiffs' Memorandum of Law in Opposition to Defendants' Motion to Dismiss ("Pl. Mem.") at 1.
II. BACKGROUND
The factual allegations of the Complaint are assumed to be true for the purposes of the motion to dismiss.
A. Adams and Muldoon Found Intralinks
In 1996, Adams and Muldoon, with others, co-founded and incorporated Intralinks. Intralinks provides and manages secure digital workspaces for the execution of financial and commercial transactions. Adams served as Director, President, and Chief Executive Officer from Intralinks's founding until February 2000, and as Chairman of the Board from May to October of 2000. Muldoon served as Intralinks's Chief Financial Officer and Treasurer from Intralinks's founding through 2000, as Director through 1998, and as an observer to the Board through January 2001. All plaintiffs owned Intralinks stock or stock options prior to Intralinks's January 31, 2001 financing (the "G financing").
See FAC ¶ 259.
See id.
See id. ¶ 3.
See id. ¶ 264.
See id. ¶¶ 3-18, 253.
B. Intralinks Implements the 1997 Stock Incentive Plan
In 1997, Intralinks introduced a Stock Incentive Plan (the "1997 Plan") to award compensation to company officers. Adams was granted a total of 823,788 stock options and Muldoon was granted a total of 261,152 stock options pursuant to the 1997 Plan.
See id. ¶¶ 266-276.
See id. ¶¶ 270, 272.
C. Intralinks Agrees to Undertake Its IPO with JP Morgan as Lead Underwriter
By January 2000, Intralinks had raised $65,000,000 in private financing, and was a successful private company. On April 16, 2000, defendants J.P. Morgan Chase Bank and J.P. Morgan Securities, Inc. (collectively, "JP Morgan"), and Banc of America Securities, L.L.C., and William Blair Co., L.L.C. (together with JP Morgan, "Bank defendants") agreed to underwrite Intralinks's IPO for a seven percent underwriting fee. JP Morgan represented to Intralinks that 85% of the stock would be sold to investors who would hold the stock for a long period of time ("strong hands"). JP Morgan also represented to Intralinks that it would price the IPO if the Intralinks IPO was oversubscribed by fifteen percent, the difference between the total IPO offering and the percentage of shares being sold into "strong hands."
See id. ¶ 34.
See id. ¶ 30.
See id. ¶ 41.
See id. ¶ 55.
Plaintiffs allege that representations regarding both the Bank defendants' compensation and JP Morgan's intentions regarding the IPO were materially false because JP Morgan intended to engage in illegal aftermarket activities after the IPO. Such activities include "laddering" (requiring customers to make purchases in the aftermarket in exchange for an allocation of stock during the IPO), "spinning" (buying back the IPO allocation and then re-selling the stock to the customers in order to receive increased commissions on the sale), and the use of undisclosed tie-in agreements.
See id. ¶¶ 30-31, 43, 57.
See id. ¶¶ 42, 43, 48-54, 66-69. For an extensive discussion of the type of illegal conduct that JP Morgan allegedly planned to undertake, see In re Initial Public Offering Sec. Litig., 241 F. Supp.2d 281, 293-94, 306-21 (S.D.N.Y. 2003).
D. JP Morgan Extends Private Loans to Adams and Muldoon
In the Spring of 2000, JP Morgan extended $500,000 lines of credit to Adams and Muldoon. In order to secure the loans, Adams and Muldoon entered into pledge agreements, pledging their Intralinks stock to JP Morgan as collateral. JP Morgan represented to Adams and Muldoon that JP Morgan would protect the value of the collateral and look solely to the collateral for payment.
See FAC ¶ 134; see also Adams and Muldoon's Loan Agreements, Exs. 4, 7 to Affidavit of Rachelle M. Barstow in Support of Defendants' Motion to Dismiss ("Barstow Aff.").
See FAC ¶¶ 142-144, 371.
See id. ¶ 371.
E. JP Morgan Refuses to Price Intralinks's IPO
After hiring the Bank defendants to underwrite the IPO, plaintiffs subsequently embarked upon a "road show," a marketing trip designed to generate interest in Intralinks prior to the IPO, which was scheduled for July 26, 2000. As of July 24, 2000, the Intralinks IPO was oversubscribed. On July 24, just before the end of the road show and the scheduled pricing date, the Bank defendants convinced Adams and Intralinks "to increase the number of shares offered in the IPO from 4.6 million to 5.3 million" due to strong demand Prior to July 26, JP Morgan refused an all-cash offer from someone identified as William Frey to purchase $2,500,000 worth of Intralinks stock, allegedly because Frey would not engage in the illegal practices of spinning and laddering.
See id. ¶¶ 30, 33.
See id. ¶¶ 184, 192.
Id. ¶¶ 96, 97.
See id. ¶ 188.
On July 26, 2000, Intralinks filed a registration statement for the IPO with the Securities Exchange Commission ("SEC"). Thereafter, JP Morgan refused to price and sell the IPO. The only reason given for the failure to price was a vague reference to the stock not being sufficiently over-subscribed. However, 7.7 million shares were subscribed for the 5.4 million share offering.
See id. ¶ 98.
See id. ¶ 195.
See id. ¶ 196.
See id. ¶ 195.
Plaintiffs allege that, in reality, JP Morgan refused to price the deal because it learned that it might become the subject of an SEC inquiry into its IPO allocation practices and feared criminal prosecution for such practices. Intralinks never made an IPO, and today remains a privately held company.
See id. ¶ 119; see also id. ¶¶ 205-206.
F. Adams and Muldoon Enter into Exit Agreements with Intralinks
In September of 2000, pursuant to a bridge loan executed by Intralinks, defendant William Blair valued Intralinks's common stock at $8.50 per share; the total value of Intralinks was estimated to be $202 million. On October 29, 2000, Adams executed an Exit Agreement with Intralinks, pursuant to which all of his stock options became immediately vested at prices ranging from $1.14 to $2.60 per share. Muldoon entered into a similar agreement on December 29, 2000. The $8.50 per share price was the most recent valuation of Intralinks's common stock when Adams and Muldoon executed their Exit Agreements.
See id. ¶¶ 207-208, 210, 216.
See id. ¶ 209.
See id. ¶ 215.
See id. ¶¶ 209-218.
G. Defendant Intralinks Executes G Financing
Plaintiffs further allege that sometime in October, 2000 Intralinks began planning a new round of private financing, the G financing, the details of which were not disclosed to Adams and Muldoon. Plaintiffs allege that Intralinks's management set up a secret website, "IntraLinks-Services," to disclose the financing to all shareholders except plaintiffs. William Blair conducted another evaluation of the company in January of 2001 for the G financing. The January, 2001 pre-financing valuation of Intralinks was $55 million, almost $150 million less than the September valuation. Furthermore, a change in the valuation formula resulted in a 1200% increase in the number of outstanding Intralinks shares, from 17,223,656 to 221,000,000. This valuation reflected a price of $0.54 per share, down from the September valuation of $8.50 per share.
See id. ¶ 230.
See id. ¶ 231.
See id. ¶ 235.
See id. ¶ 242.
See id. ¶¶ 219-227, 232.
The initial closing of Intralinks's G financing occurred on January 31, 2001. The financing raised $30.15 million in new financing and had an additional $12.8 million of debt converted to Series G Preferred Stock. Through the G financing, Intralinks increased the number of B, C, D, E, and F preferred shares, thus protecting all shareholders, other than plaintiffs, from drastic dilution in the value of their shares.
See id. ¶ 253.
See id. ¶¶ 242-244.
Plaintiffs allege that in order to maintain the value of their own stock, Intralinks's Board of Directors created a new pool of options in the G financing representing the equivalent of fifteen percent of Intralinks's total stock. JP Morgan was also allowed to protect its interest in Intralinks by exchanging worthless stock warrants executable at $8.50 per share for common stock valued at $0.54 per share. Plaintiffs claim that they learned about the "Intralinks-Services" website just two weeks prior to the closing of the G financing, and were only able to determine the extent of the damage that the G financing would have on their holdings after its closing on January 31.
See id. ¶¶ 247-250.
See id. ¶ 251.
See id. ¶¶ 254-255.
III. LEGAL STANDARD
"Given the Federal Rules' simplified standard for pleading, `[a] court may dismiss a complaint only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations.'" The task of the court in ruling on a Rule 12(b)(6) motion is "merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof." When deciding a motion to dismiss pursuant to Rule 12(b)(6), courts must accept all factual allegations in the complaint as true and draw all reasonable inferences in plaintiff's favor.
Swierkiewicz v. Sorema N.A., 534 U.S. 506, 514 (2002) (emphasis added) (quoting Hishon v. King Spalding, 467 U.S. 69, 73 (1984)).
Saunders v. Coughlin, No. 92 Civ. 4289, 1994 WL 98108, at *2 (S.D.N.Y. Mar. 15, 1994).
See Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002).
At the motion to dismiss stage, the issue "is not whether a plaintiff is likely to prevail ultimately, but whether the claimant is entitled to offer evidence to support the claims. Indeed it may appear on the face of the pleading that a recovery is very remote and unlikely but that is not the test."
Chance v. Armstrong, 143 F.3d 698, 701 (2d Cir. 1998).
Given the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) governing fraud claims, plaintiffs must allege all elements of a 10b-5 claim with specificity in order to survive a motion to dismiss.
See In re Initial Public Offering Sec. Litig., 241 F. Supp.2d at 372.
IV. DISCUSSION
As stated above, plaintiffs have withdrawn claims one, two, three, seven, and eight of the Complaint. This leaves four federal claims — claims four, five, six, and nine. Defendants now move to dismiss all of these claims.
See Pl. Mem. at 1.
A. Claim Four — 10b-5 Claim Based on the Registration Statement
Plaintiffs allege that defendants violated Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, by making material misstatements and omissions in the July 26, 2000 registration statement. Defendants move to dismiss this claim, asserting that plaintiffs lack standing.
See 15 U.S.C. § 78j(b).
See 17 C.F.R. § 240.10b-5; see also FAC ¶¶ 331-45.
Defendants also assert that plaintiffs have not suffered any recoverable damages in connection with the registration statement and that the claim is time barred. Because I conclude that plaintiffs lack standing, I will not address the alternative grounds for dismissal.
To successfully plead a claim under Rule 10b-5, a plaintiff must allege that the fraud occurred "in connection with the purchase or sale of securities." The Supreme Court has interpreted this to mean that only a purchaser or seller of a security has standing to sue under Rule 10b-5. "Early in the development of such actions under § 10(b) and Rule 10b-5 . . . [the Second Circuit] ruled that no private action under those provisions is available to persons who were neither buyers nor sellers of the relevant securities."
17 C.F.R. § 240.10b-5.
See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975).
Grace v. Rosenstock, 228 F.3d 40, 46 (2d Cir. 2000).
There is no allegation in this Complaint that anyone bought or sold stock in reliance on the registration statement, as no IPO ever occurred. Plaintiffs have not provided a single case suggesting that an agreement to undertake an IPO, without any purchase or sale of securities, can form the basis for a Rule 10b-5 claim. Moreover, any agreement to undertake the IPO could not have been made in reliance upon the registration statement, as that statement was not filed until July 26, 2000, well after the agreement. Because it is clear from the pleadings that no purchase or sale occurred in connection with the registration statement, plaintiffs lack standing to bring claim four.
B. Claim Five — 10b-5 Claim Based on the Exit Agreements and the "G Financing"
Claim five purports to plead a 10b-5 violation by Intralinks based on the Exit Agreements entered into by Adams and Muldoon and the subsequent G financing of Intralinks. Essentially, plaintiffs allege that the failure of Intralinks' board of directors to disclose the details of the G financing to Adams and Muldoon prior to the execution of the Exit Agreements constituted fraud. Defendants move to dismiss this claim, alleging that it is time barred and fails to adequately plead scienter. Because the claim is time barred, I will not address the scienter argument.
See FAC ¶¶ 346-366.
See id. ¶¶ 359, 361-363.
Plaintiffs claim to satisfy the purchaser or seller requirement of Rule 10b-5 by their execution of their Exit Agreements. Given that the claim is time barred, there is no need to decide whether the Exit Agreements constitute a purchase or sale. I note, however, that the purchase of stock options has been found to satisfy Rule 10b-5's purchase or sale requirement. See, e.g., The Wharf (Holdings) Ltd. v. United Intern. Holdings, Inc., 532 U.S. 588, 593 (2001).
1. Statute of Limitations
Section 9(e) of the Exchange Act provides that "[n]o action shall be maintained to enforce any liability created under this section, unless brought within one year after the discovery of the facts constituting the violation. . . ." On July 30, 2002, Congress enacted the Sarbanes-Oxley Act of 2002 (the "Act"), which provides, in relevant part, that:
15 U.S.C. § 78i(e). This limitations period applies to claims under section 10(b). See Lampf, Pleva, Lipkind, Prupis Petigrow v. Gilbertson, 501 U.S. 340, 359-60 (1991).
[A] private right of action that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws, as defined in section 3(a)(47) of the Securities Exchange Act of 1934 ( 15 U.S.C. § 78c(a)(47)), may be brought not later than . . . 2 years after the discovery of the facts constituting the violation. . . .
Sarbanes-Oxley Act of 2002, Pub.L. No. 107-204, § 804(b), 116 Stat. 745, 801; see also 28 U.S.C. § 1658.
This court need not decide whether section 9(e)'s one-year limitation or Sarbanes-Oxley's two-year limitation applies, because plaintiffs' claim is barred even under the longer two-year period.
A plaintiff in a federal securities case will be deemed to have discovered fraud for purposes of triggering the statute of limitations when a reasonable investor of ordinary intelligence would have discovered the existence of the fraud. . . . Moreover, when the circumstances would suggest to an investor of ordinary intelligence the probability that she has been defrauded, a duty of inquiry arises, and knowledge will be imputed to the investor who does not make such an inquiry.
Dodds v. Cigna Sec. Litig., 12 F.3d 346, 350 (2d Cir. 1993) (citations omitted).
"Discovery of facts for the purposes of this statute of limitations `includes constructive or inquiry notice, as well as actual notice.'"
Rothman v. Gregor, 220 F.3d 87, 96 (2d Cir. 2000) (quoting Menowitz v. Brown, 991 F.2d 36, 41-42 (2d Cir. 1993)).
To be placed on inquiry notice, plaintiffs "need not be able to learn the precise details of the fraud, but they must be capable of perceiving the general fraudulent scheme based on the information available to them." A plaintiff in a securities fraud case "is charged with knowledge of publicly available news articles and analysts' reports," to the extent that they constitute "storm warnings" sufficient to trigger inquiry notice. "The issue that the Court must consider is . . . whether Plaintiffs `had constructive notice of facts sufficient to create a duty to inquire further into that matter. An investor need not have notice of the entire fraud to be on inquiry notice.'"
Salinger v. Projectavision, Inc., 972 F. Supp. 222, 229 (S.D.N.Y. 1997).
Westinghouse Elec. Corp. v. `21' Int'l Holdings, Inc., 821 F. Supp. 212, 222 (S.D.N.Y. 1993).
Dodds, 12 F.3d at 350.
Newman v. Warnaco Group, Inc., 335 F.3d 187, 193 (2d Cir. 2003) (quoting Dodds, 12 F.3d at 351-52).
Available information must establish "a probability, not a possibility" of fraud to trigger inquiry notice. Moreover, in the context of dismissal, "defendants bear a heavy burden in establishing that the plaintiff was on inquiry notice as a matter of law. Inquiry notice exists only when uncontroverted evidence irrefutably demonstrates when plaintiff discovered or should have discovered the fraudulent conduct."
Id. at 194.
Nivram Corp. v. Harcourt Brace Jovanovich, Inc., 840 F. Supp. 243, 249 (S.D.N.Y. 1993).
Once sufficient storm warnings appear, "plaintiffs must exhibit `reasonable diligence' in investigating the possibility that they have been defrauded. If they fail to meet this obligation, plaintiffs will be held to have had `constructive knowledge' of the fraud against them."
Addeo v. Braver, 956 F. Supp. 443, 449 (S.D.N.Y. 1997) (citations omitted).
2. Claim Five Is Time Barred
The original Complaint in this action was filed on July 21, 2003. Defendants argue that claim five is time barred because plaintiffs had actual knowledge of the G financing in or around January 2001, and knowledge of the dilution of their stock shortly thereafter. Furthermore, defendants point to a March 16, 2001 letter from William O'Connor, plaintiffs' attorney at that time, threatening, in substance, to bring this very claim. Obviously, if plaintiffs had constructive notice of this claim in March of 2001, it is time barred.
The Amended Complaint was filed on December 15, 2003.
See Reply Mem. at 5.
See id.; see also 3/16/01 Letter, Ex. 3 to Barstow Aff. ("Mar. 16 Ltr.").
Plaintiffs contend that they did not have such notice. "Plaintiffs do not claim that they didn't have some idea that the `G' Round was `fishy,' but the extent of the concealment and the fraudulent misrepresentations continues to be revealed day-by-day." In fact, plaintiffs allege, certain facts regarding the defendants' misconduct did not come to light until January 2004.
Pl. Mem. at 5.
See id.
The fact that plaintiffs continue to gather information regarding claim five does not change the fact that they were on constructive notice of the claim in March of 2001. Although defendants bear a heavy burden at the motion to dismiss stage, that burden has been satisfied here. In the March 16 letter, plaintiffs accused Intralinks of making "untrue statements of material fact and the omission of other material facts . . . which operated as a fraud and deceit against the Common Shareholders and the Option Holders." The letter goes on to detail the G financing, the "Intralinks-Services" website, the dilution of plaintiffs' shares from $8.50 per share to $0.54 per share, and the alleged self-dealing of Intralinks's board of directors.
Mar. 16 Ltr.
See id.
Given the detail present in the March, 2001 letter, plaintiffs were clearly aware of the alleged scheme at that time. The fact that they were not yet aware of every detail is irrelevant. Because March of 2001 is more than two years before the filing of the Complaint, claim five is time barred under both Section 9(e)'s one-year statute of limitations and Sarbanes-Oxley's two-year statute of limitations.
Defendants also allege that plaintiffs have failed to plead scienter with the particularity required under the Private Securities Litigation Reform Act of 1995 ("PSLRA"). See 15 U.S.C. § 48u-4(b)(2). However, as noted earlier, I will not address this issue.
C. Claim Six — 10b-5 Claim Based on the Pledge Agreements
Claim six alleges that JP Morgan violated Rule 10b-5 in connection with the $500,000 loans to Adams and Muldoon and the related stock pledges. Adams and Muldoon claim that prior to entering into the pledge agreements, JP Morgan fraudulently represented that it would look solely to the value of the collateral (plaintiffs' Intralinks stock) for repayment. JP Morgan moves to dismiss, arguing that plaintiffs could not have reasonably relied on the alleged misstatements when they pledged their stock as collateral for the loans.
See FAC ¶¶ 367-379.
See Def. Mem. at 14-17. JP Morgan also seeks dismissal on the following grounds: (1) statute of limitations, (2) lack of standing, (3) failure to adequately plead scienter and (4) failure to identify the purported misrepresentations. Because plaintiffs cannot plead reliance, I need not address JP Morgan's alternative grounds for dismissal. I note, however, that defendants' argument that the statute of limitations has run is not an appropriate ground for dismissal because defendants have not presented "uncontroverted evidence" that "irrefutably demonstrates" when plaintiffs "discovered or should have discovered the fraudulent conduct." Nivram, 840 F. Supp. at 249. Similarly, the claim should not be dismissed on standing grounds because plaintiffs have pled that they pledged stock to JP Morgan, which satisfies Rule 10b-5's purchase or sale requirement. See Mallis v. FDIC, 568 F.2d 824, 829 (2d Cir. 1977).
"The general rule is that reasonable reliance must be proved as an element of a securities fraud claim." JP Morgan submits that given the language of the pledge agreement, Adams and Muldoon cannot demonstrate that they reasonably relied on any oral representation that JP Morgan would look solely to the stock for repayment. Specifically, the pledge agreements state, in relevant part:
Harsco Corp. v. Segui, 91 F.3d 337 (2d Cir. 1996).
The remedies provided herein in favor of the Bank shall not be deemed exclusive, but shall be cumulative, and shall be in addition to all other remedies in favor of the Bank existing at law or in equity. . . . The pledge of the Collateral hereby shall not in any way preclude or restrict any recourse by the Bank against the Obligor or any other person or entity liable with regard to the Secured Obligations or any other collateral therefor.
Pledge Agreements of Adams and Muldoon (emphasis added), Exs. 6 and 9 to Barstow Aff. at 6.
Plaintiffs allege that when entering into the loan and pledge agreements, they relied on JP Morgan's oral representations that the Bank would look solely to the collateral for repayment. However, as a matter of law, these representations cannot overcome the plain language of the pledge agreements, which provides that the pledge is not the only method of recovery available to JP Morgan. Just as "[r]eliance on statements which are directly contradicted by the clear language of the offering memorandum through which plaintiffs purchased their securities cannot be the basis for a federal securities fraud claim," neither can reliance on statements directly contradicted by a pledge agreement, where the pledge constitutes the alleged sale of securities. Because plaintiffs cannot plead reliance, claim six is dismissed.
See FAC ¶¶ 371-372.
See Harsco, 91 F.3d 337; Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 195 F. Supp.2d 551 (S.D.N.Y. 2002), vacated on other grounds, 343 F.3d 189 (2d Cir. 2003); Ruff v. Genesis Holding Corp., 728 F. Supp. 225 (S.D.N.Y. 1990).
Feinman v. Schulman Berlin Davis, 677 F. Supp. 168, 170 (S.D.N.Y. 1988) (citing Kennedy v. Josephthal Co., 814 F.2d 798, 804-05 (1st Cir. 1987)).
D. Claim Nine — ERISA Claim
Plaintiffs' final federal claim is that the dilution in the value of their stocks violated ERISA. Defendants move to dismiss this claim on the ground that plaintiffs' stock options are not protected by ERISA.
1. Applicable Law
"To state a claim under ERISA, a plaintiff must allege and establish the existence of an `employee benefit plan' that is governed by ERISA." Contrary to plaintiffs' claim that the existence of an ERISA plan is a question of fact, whether a plan is governed by ERISA "is cognizable on a Rule 12(b)(6) motion; where the record contains the undisputed terms of the disputed plan, as the record does here, a Court may decide the applicability of ERISA as a matter of law."
Albers v. Guardian Life Ins. Co. of Am., No. 98 Civ. 6244, 1999 WL 228367, at *2 (S.D.N.Y. Apr. 19, 1999) (citing 29 U.S.C. § 1003(a)).
See Pl. Mem. at 12.
Foster v. Bell Atl. Tricon Leasing Corp., No. 93 Civ. 4527, 1994 WL 150830, at *1 (S.D.N.Y. Mar. 29, 1994).
There are two types of ERISA plans, "employee welfare benefit plans" and "employee pension benefit plans." Plaintiffs argue that the 1997 Stock Incentive Plan is an "employee pension benefit plan."
An "employee pension benefit plan" is defined as:
any plan, fund, or program . . . established or maintained by an employer . . . to the extent that by its express terms or as a result of surrounding circumstances such plan, fund or program (i) provides retirement income to employees, or (ii) results in a deferral of income by employees for periods extending to termination of covered employment or beyond.
Specifically excluded from this definition are "payments made by an employer to some or all of its employees as bonuses for work performed, unless such payments are systematically deferred to the termination of covered employment or beyond, or so as to provide retirement income to employees." "A bonus plan excluded from ERISA will be found where payments made are not to provide retirement income, but, instead, to serve some other purpose, such as providing increased compensation as an incentive or reward for a job well done."
29 C.F.R. § 2510.3-2(c); see also Foster, 1994 WL 150830, at *2.
Hahn v. National Bank, N.A., 99 F. Supp.2d 275, 279 (E.D.N.Y. 2000) (quotation marks omitted).
2. The 1997 Plan Is Not an ERISA Plan
Defendants argue that neither the Exit Agreements nor the 1997 Plan are governed by ERISA, and that claim nine must therefore be dismissed. Plaintiffs contend that because the 1997 Plan systematically defers compensation, involves managerial discretion, and is a written plan intended to protect the employees' options, it qualifies as an ERISA plan, and that Plaintiffs have therefore stated a claim under ERISA.
See Def. Mem. at 20-23.
Not surprisingly, plaintiffs do not dispute defendants' assertion that the Exit Agreements are not protected by ERISA. These agreements are outside the ambit of ERISA because they merely provide for the payment of fixed sums and benefits for a fixed amount of time, involving no managerial discretion or ongoing administrative program. See Exit Agreements of Adams and Muldoon, Exs. 11, 12 to Barstow Aff. See also Friedensohn v. Prodigy Servs. Corp., No. 97 Civ. 3571, 1998 WL 426793, at *4 (S.D.N.Y. July 27, 1998); Fludgate v. Mgmt. Techs., Inc., 885 F. Supp. 645, 649 (S.D.N.Y. 1995).
Plaintiffs' argument is wholly without merit. The 1997 Plan does not qualify as an "employee pension benefit plan" — it is clearly a bonus plan. The first paragraph of the Plan states that its purpose is "to attract and retain the best available talent and to encourage high levels of employee performance which benefit the Company and its shareholders." It provides key personnel "with financial incentives to put forth their maximum efforts for the success of the Company's business." Because the 1997 Plan's purpose was to provide incentives for employee performance, not retirement income, it clearly qualifies as a bonus plan.
1997 Stock Incentive Plan, Ex. 13 to Barstow Aff. at 1.
Id.
A bonus plan can be an ERISA plan if it systematically defers payment until the termination of employment or beyond. The 1997 Plan does not have these characteristics. It specifically states that options may only be granted during the period from 1997 to 2000. Furthermore, "the term of each option shall not be more than 10 years from the date of grant." Most revealing, "options may be subject to earlier termination in the event of Option Holder's termination of service." There is nothing in this language, nor anywhere in the Plan, that suggests that the granting of options or the exercise of such options is deferred to or beyond the termination of employment. In fact, the language suggests that the compensation committee could specifically decide not to allow the exercise of options if employment is terminated. "Where, as here, a bonus plan by its terms neither provides retirement income nor systematically defers income to the termination of participants' employment or beyond, the applicable regulation requires that it be excluded from the definition of `pension plan' under ERISA." Because the 1997 Plan does not qualify as a pension plan under ERISA, claim nine is dismissed.
Id. at 3.
Id.
Foster, 1994 WL 150830, at *3.
E. State Law Claims
Where a complaint pleads both federal and common-law claims, "the district court may decline to exercise supplemental jurisdiction" over state claims if "the district court has dismissed all claims over which it has original jurisdiction." Although invocation of section 1367(c) is discretionary, "in the usual case in which all federal law claims are eliminated before trial, the balance of factors to be considered under the [supplemental] jurisdiction doctrine — judicial economy, convenience, fairness, and comity — will point toward declining to exercise jurisdiction over the remaining state law claims." In the case before me, the only remaining claims are premised on state law. Because this litigation is at a relatively early stage, the "balance of factors" all weigh in favor of dismissal pursuant to section 1367(c).
Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 350, n. 7 (1987) (citations omitted); see also DiLaura v. Power Auth. of State of NY, 982 F.2d 73, 80 (2d Cir. 1992) ("Once a district court has determined that the original federal claim should be dismissed, its decision to relinquish jurisdiction over a supplemental state claim will be reversed only for abuse of discretion.").
V. CONCLUSION
For the foregoing reasons, defendants' motion to dismiss is granted. Because no federal causes of action remain, the Complaint is dismissed in its entirety for lack of subject matter jurisdiction. Plaintiffs' request for leave to amend is denied. Defendants' motion for costs is denied. The Clerk of the Court is directed to close these motions [Nos. 15 21 on the docket sheet] and this case.
Given the dismissal of the Complaint, there is no need to consider the motion for a more definite statement.
"When a cause of action is dismissed because of pleading deficiencies, the usual remedy is to permit plaintiff to replead its case." However, where, as here, "a claim is dismissed as a matter of law because it fails to state a claim, repleading would be `futile'." In re Initial Public Offering Sec. Litig., 241 F. Supp.2d at 397 (citations omitted).
SO ORDERED: