A Massachusetts appellate court ruled Friday that Wilmer Cutler Pickering Hale and Dorr must face allegations that it improperly helped the majority owners of a biotechnology company client freeze out the company’s minority shareholders.
With the Massachusetts Appeals Court decision, a three-judge panel revived claims that Wilmer and another law firm, Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, breached their fiduciary duties to minority owners of Applied Tissue Technologies, a closely held Massachusetts-based company that develops wound care technologies.
The suit, filed in 2015, also targets Wilmer partner Gary Schall and Gunderson Dettmer associate Emma Eriksson Broomhead, lawyers tapped to allegedly help Applied Tissue’s majority owner wrest control of the company from minority shareholders. Broomhead, the daughter of Applied Tissue’s majority owner Elof Eriksson, used to work with Schall at Gunderson Dettmer and brought Schall into the representation shortly before he decamped for Wilmer in 2012, according to the appeals court ruling.
Dana Curhan, a solo practitioner in Boston who argued for the minority shareholders, said in an email on Friday that the lower court had dismissed the case based on “an extremely narrow view” of the Wilmer and Gunderson Dettmer lawyers’ obligations toward his clients.
“It was and is our contention that lawyers cannot willfully blind themselves to their ethical obligations when participating in and in fact orchestrating this type of takeover of a closely held company,” said Curhan. “The appeals court agreed, ruling that their conduct could support a finding of a breach of their fiduciary duties, aiding and abetting the wrongful conduct of their clients, and unfair or deceptive practices.”
Richard Zielinski of Goulston & Storrs argued the appeal for Wilmer and Schall. He said Friday that Wilmer has no comment on the ruling. Erin Higgins, of Conn Kavanaugh Rosenthal Peisch & Ford, argued the appeal for Gunderson and Broomhead. She didn’t immediately respond to a request for comment.
The suit against Wilmer and Gunderson Dettmer traces its roots to a dispute between Eriksson, and the cofounder of the company, W. Robert Allison. After starting the company, both men transferred their ownership stakes to separate family trusts—by the time the dispute arose, Eriksson’s family owned 75.5 percent of Applied Tissue while the Allison trust owned 22.5 percent. Another 2 percent stake was held by Charles Baker, described in Friday’s ruling as a former “key employee” of the company.
In early 2012, Applied Tissue was facing financial troubles and the two cofounders disagreed on how to address the issues—Eriksson wanted to contribute more funds and take a higher ownership stake, while Allison thought the company should hire new management and draft a business plan, according to the appeals court ruling. At the time, the company was operating under the terms of an agreement that gave minority shareholders a significant level of power over Applied Tissue’s business affairs.
Also around that time, Eriksson reached out to his daughter, Broomhead, who in turn brought Schall into the fold. The lawyers signed an engagement agreement to represent Applied Tissue, as opposed to Eriksson individually, the appeals court wrote on Friday.
Once brought on board as counsel, Schall and Broomhead allegedly advised Eriksson on a plan to use his majority stake to merge Applied Tissue into a new entity, subject to a different operating agreement that transferred more ownership and control to Eriksson and reduced Allison’s share. Allison responded to the corporate transaction with a lawsuit against Eriksson and the company’s CEO Karl Proppe.
Then, in 2015, Allison joined with the other minority shareholders to also pursue claims against Wilmer and Gunderson Dettmer. Those claims, which have now been revived in light of Friday’s ruling, included breach of fiduciary duty and an allegation that the lawyers aided and abetted Eriksson in breaching his fiduciary duty to the minority shareholders.