N.D. of Texas Again Refuses to Consider Texas Securities Act Claim Over Previous Arbitration

The Northern District of Texas has refused to reconsider an order dismissing a previously arbitrated Texas Securities Act case due to claim preclusion.  In Murchison Capital Partners, LP v. Nuance Communications, Inc., No. 3:12-CV-4746-L. (N.D. Texas, June 25, 2014), a limited partnership (“Murchison”) sued Nuance Communications for alleged securities fraud under the Texas Securities Act.  According to Murchison, Nuance fraudulently induced the partnership’s members to approve a merger with Nuance.  As part of the parties’ merger agreement, the former shareholders of Dallas, Texas-based Vocada, Inc. agreed to accept a lump sum payment and contingent future “Earnout” revenues related to a specific software program owned by Vocada.  Prior to the merger, Nuance purportedly told the Vocada shareholders the company would heavily promote the software program.  After the software consistently failed to perform in the marketplace, however, Nuance refused to pay additional funds to the former Vocada shareholders.  In response, the shareholders sought arbitration pursuant to the parties’ merger agreement.

In 2012, an arbitration panel decision said although Nuance fraudulently induced the former shareholders into agreeing to the merger, no damages were merited since the software program was not likely to perform well enough to merit a payout to the shareholders when they agreed to the merger.  A few months later, the same individuals filed their Texas Securities Act lawsuit against Nuance.   The case was dismissed based upon claim preclusion and Murchison filed a motion for reconsideration with the Northern District of Texas.

After stating the Federal Rules of Civil Procedure do not provide for a “motion for reconsideration,” the Northern District of Texas said it would treat Murchison’s request as a Rule 59(e) motion to alter or amend the court’s judgment.  The federal court also said the remedy is one that should be used sparingly.  Next, the district court examined the plaintiffs’ motion.

First, the court addressed the former shareholder’s argument “that their TSA claim currently before the court does not fall within the scope of the arbitration clause requiring only disputes regarding the Earnout Consideration and the Earnout Distribution to be arbitrated.”   In response, the court said,

Plaintiffs contend that its TSA claim involves a remedy that is completely separate from a “benefit-of-the-bargain” type remedy and separate from the Earnout Consideration. Even accepting Plaintiffs’ argument as correct, it is clear that their TSA claim relates to the Earnout Consideration. Plaintiffs’ entire claim rests on the contention that had they not been promised an Earnout Consideration, they would not have entered into the Merger Agreement. In its Memorandum Opinion and Order, filed September 30, 2013, the court laid out in great detail how the TSA claim relates to the Earnout Consideration. For these reasons, the court will deny Plaintiffs’ motion to reconsider as to this element of claim preclusion.

After that, the court dismissed the plaintiffs’ claim that the arbitral panel’s award was not a “final judgment on the merits” since the award was remanded back to the panel on the issue of out-of-pocket damages.  The court stated,

While the court is not aware of any precedent directly addressing whether an arbitration award serves as a final judgment in the context of claim preclusion, the Fifth Circuit has stated, “The application of collateral estoppel from arbitral findings is a matter within the broad discretion of the district court . . . and a district court’s discretion in deciding whether to give arbitral findings preclusive effect also keeps the risk of prejudice at an acceptable level, at least when the arbitral pleadings state issues clearly, and the arbitrators set out and explain their findings in a detailed written memorandum.” Universal American Barge Corp. v. J-Chem, Inc., 946 F.2d 1131, 1137 (5th Cir. 1991) (emphasis added) (citations omitted).

According to the Northern District of Texas,

The court addresses two other miscellaneous contentions made by Plaintiffs in their Motion for Reconsideration. First, Plaintiffs disagree with the court’s statement that the remedy afforded by the TSA is the functional equivalent of Plaintiffs having the chance to receive all actual damages (including both benefit-of-the-bargain and out-of-pocket damages). Even if the court’s identification of the remedy offered by TSA is incorrect, this distinction has no bearing on whether Plaintiffs’ TSA claim is barred because of claim preclusion. As previously discussed, Plaintiffs’ TSA claim “relates to the Earnout Consideration” and could have therefore been brought before the Arbitration Panel. Even if the TSA claim could have provided Plaintiffs with a different type of remedy, the same claim or cause of action is still involved in both suits, and the arbitration panel was a court of competent jurisdiction to consider the TSA claim. Furthermore, the type of remedy provided by the TSA has no effect on whether the Panel’s decision was final.

Second, Plaintiffs disagree with the court’s statement that “the arbitration panel did not even have to determine damages, as it held that Defendant’s fraudulent inducement was not a but-for cause of the earnout thresholds not being reached.” As manifested by Judge Solis’s decision, whether the arbitration panel needed to make a further determination regarding damages is at issue and is currently being reviewed by the Fifth Circuit. Even if the arbitration panel needed to determine further damages, this requirement has no bearing on Plaintiffs’ TSA claim being precluded and also has no impact on the finality of the Panel’s decision as previously discussed.

Because the former shareholders’ Texas Securities Act lawsuit was barred by claim preclusion, the Northern District of Texas denied Murchison’s motion to reconsider the court’s earlier order granting Nuance’s motion to dismiss the case.