January 22, 2022

Federal court grants summary judgment on breach of contract claim related to the contract’s termination for possible FCPA violations

On January 20, 2022, in the US District Court for the Eastern District of New York, a federal judge granted summary judgment for defendant Misonix, Inc., a US medical device company, on two of three claims in a lawsuit brought by Chinese distributor Cicel (Beijing) Science & Technology Co., Ltd.  Cicel had alleged that Misonix (1) wrongfully terminated a distribution contract over alleged conduct that might violate the Foreign Corrupt Practices Act, (2) defamed Cicel by disclosing in a Securities and Exchange Commission (SEC) filing Misonix’s investigation of Cicel’s conduct, and (3) misappropriated trade secrets from Cicel including customer and pricing information.  The court granted summary judgment on the breach of contract and defamation claims, but found there were factual disputes as to the trade secret claim and therefore denied summary judgment on that claim.  

In 2017, Cicel filed a suit asserting several claims against Misonix including breach of contract, defamation and theft of trade secrets.  According to the complaint, Misonix entered into a contract with Cicel in 2013 that made Cicel the sole distributor of certain Misonix products in China.  The term of the contract was to run until June 2018.  However, as described in court filings, around April 2016, Misonix became aware of facts suggestive of bribery by Cicel and began an internal investigation.  As stated in the Court’s memorandum and order granting summary judgment, that investigation “yielded incontrovertible proof” that Cicel was engaged in corrupt conduct.  The emails quoted in the memorandum and order indicate that Cicel engaged sub-distributors knowing that these sub-distributors paid bribes in exchange for product sales.  

Moreover, the Court found that as part of Misonix’s investigation, Misonix learned that Cicel had been fined by the Chinese government in 2014 for commercial bribery, a fact Cicel had not previously disclosed to Misonix.  As a result of these findings, Misonix terminated its agreement with Cicel.  The Court found that under New York law, a party cannot recover damages for termination of a contract if performance of the contract was accomplished through illegal conduct.  The Court further noted that such illegal conduct need not be a violation of US law, but could include violations of foreign law, such as Chinese anti-bribery laws.  The Court held that the “well-documented illegal conduct” by Cicel “render[ed] the contract unenforceable,” and therefore granted summary judgment on the breach of contract claim.  

Misonix voluntarily self-reported its investigative findings to the Department of Justice and the SEC.  It also disclosed this reporting and its investigation in a September 27, 2016 Form 8-K filing with the SEC, in which Misonix stated that it may have “knowledge of certain business practices of the independent Chinese entity that distributes its products in China, which practices raise questions” under the FCPA.  Misonix ultimately disclosed in a 2019 securities filings that the DOJ and the SEC decided not to pursue enforcement actions against Misonix in relation to the conduct that it had disclosed.

Cicel claimed in its lawsuit that the September 27, 2016 8-K was defamatory, stating that the reference to the “independent Chinese entity” was clearly a reference to Cicel.  In its complaint, Cicel had argued other filings were defamatory, but the court had previously ruled these other claims were time-barred.  The court ruled that the September 27, 2016 8-K was not defamatory because the statements were true, which is an “absolute” defense to defamation.  

The court did not grant summary judgment on the claim of theft of trade secrets, finding that Misonix “enticed a former Cicel employee to provide a ‘business plan,’” but stating that there were factual issues as to (1) whether such conduct constituted “discovery by improper means,” as required for theft of trade secret claims, and (2) whether Misonix and Cicel were in a confidential relationship.  Despite this ruling, the court further noted that the evidence of damages to Cicel from this alleged trade secret theft was unclear, and it “advised” Cicel to “carefully consider whether continuing its efforts here represent a judicious use of resources.”  

Memorandum and Order | Complaint