Gordon Rees Scully Mansukhani partner Fletcher Alford and senior counsel Daniel Kubask obtained summary judgment on behalf of the firm's client, a healthcare foundation affiliated with a nationally prominent hospital. The plaintiff was a 70-physician medical practice with offices in Northern California.
In 2012, the plaintiff approached the firm's client about the possibility that it might acquire the plaintiff's medical practice. The parties executed a Letter of Intent (LOI) governing their negotiations. The LOI provided that either party could discontinue negotiations at any time, with or without cause, and without liability to the other. The parties then embarked upon a three-year-long, on-again/off-again due diligence process, throughout which both parties were represented by AmLaw 100 legal counsel as well as multiple financial consultants and analysts.
The due diligence process culminated in a meeting of the parties’ top executives to review and negotiate the final deal documents. The plaintiff claimed that the meeting revealed no unresolved material terms, and that it left with assurances that the deal would close forthwith. The following day the CEO, CFO, and Chief Medical Officer of Gordon & Rees's client met, determined that the acquisition was not in their organization's best interests, and immediately notified the plaintiff that it was discontinuing the due diligence process and would not be consummating the transaction.
The plaintiff subsequently filed suit asserting claims for breach of the duty to negotiate in good faith, promissory estoppel, and interference with prospective economic advantage. Specifically, the plaintiff claimed that Gordon & Rees's client led it on with false assurances the deal would close, thus inducing the plaintiff to spend many hundreds of thousands of dollars in due diligence and on-boarding expenses. The plaintiff also claimed that the firm's client unreasonably refused to allow the plaintiff to acquire other practice groups and assets during the three-year due diligence process, thus causing it to lose valuable business opportunities. Finally, the plaintiff argued that Gordon & Rees's client failed to negotiate in good faith by not revealing to the plaintiff its early concerns regarding the financial viability of the proposed transaction.
Gordon & Rees's attorneys demurred to the complaint, but the judge (who had just arrived on the civil bench after a career devoted to criminal matters) overruled the demurrer and directed the parties to proceed with discovery. The firm's attorneys produced tens of thousands of pages of documents, and took and defended the depositions of each side’s CEO’s, CFO’s, and Chief Medical Officers. In those depositions, the plaintiff’s executives admitted that the LOI was intensively negotiated and drafted by both sides, that the plaintiff's management was experienced and sophisticated as a result of its prior M&A negotiations with other entities, and that they had no evidence that the firm's client's stated reasons for terminating negotiations were pretextual or otherwise insincere. Armed with this evidence, Gordon & Rees's attorneys moved for summary judgment. At this point, the case had been assigned to a new judge – one with a long track record of civil litigation experience. Over the plaintiff’s strenuous opposition, the Court granted the motion for summary judgment, endorsing essentially the same arguments the firm's attorneys had raised on demurrer.
The case raised a number of novel legal issues including whether parties have a pre-contractual duty to negotiate in good faith, and whether a right of termination must be exercised in good faith. In its order granting summary judgment, the Court found that Gordon & Rees's client had no such duties.
The San Francisco defense team would like to thank paralegal Sue Campagne and legal secretary Maria Deang for their hard work and valuable assistance throughout this case.