N. D. Texas Holds Prior Arbitration Precludes Fraud Claim in Merger Dispute

The Northern District of Texas has reportedly dismissed a lawsuit after determining that an arbitration panel’s decision precluded the plaintiffs’ fraud claim.  In Murchison Capital Partners LP et al. v. Nuance Communications Inc., No. 3:12-CV-04746, Nuance Communications Inc. (“Nuance”) acquired all of the shares in Dallas, Texas-based Vocada for a lump sum payment and a portion of the three-year earnings of one of the company’s products above a certain revenue level.  After the product consistently failed to perform, Nuance refused to pay any additional funds to the Vocada shareholders.  In response, the shareholders sought arbitration pursuant to the parties’ merger agreement.

In 2012, an arbitration panel in New York found that although Nuance fraudulently induced the shareholders into agreeing to the merger, no benefit-of-the-bargain or out-of-pocket damages were merited because the product at issue was unlikely to perform well enough to merit a payout at the time the parties entered into the agreement.  A few months later, the Vocada shareholders filed a Texas Securities Act lawsuit against Nuance in state court.  After Nuance successfully removed the case to federal court, a U.S. District Judge dismissed the case based upon claim preclusion.

A second shareholder lawsuit seeking to vacate the panel’s arbitration award was also removed to the Northern District of Texas.  In that case, another U.S. District Judge remanded the dispute to the arbitral panel for reconsideration of the Vocada shareholders’ out-of-pocket damages.  In August, Nuance filed an appeal with the Fifth Circuit.