   IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

CHANNEL MEDSYSTEMS, INC.,                   )
a Delaware corporation,                     )
                                            )
             Plaintiff and                  )
             Counterclaim Defendant,        )
                                            )
      v.                                    )    C.A. No. 2018-0673-AGB
                                            )
BOSTON SCIENTIFIC CORPORATION,              )
a Delaware corporation, and NXT             )
MERGER CORP., a Delaware corporation,       )
                                            )
             Defendants and                 )
             Counterclaim Plaintiffs.       )

                         MEMORANDUM OPINION

                      Date Submitted: September 6, 2019
                      Date Decided: December 18, 2019

Daniel A. Mason, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP,
Wilmington, Delaware; William M. Lafferty, Thomas W. Briggs, Jr., and Richard
Li, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware;
Andrew G. Gordon, Jaren Janghorbani, Paul A. Paterson, and Andrew J. Markquart,
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, New York, New
York; Attorneys for Plaintiff Channel Medsystems, Inc.

Karen L. Pascale, James M. Yoch, Jr., and Paul J. Loughman, YOUNG CONAWAY
STARGATT & TAYLOR LLP, Wilmington, Delaware; Matthew M. Wolf, Edward
Han, Amy DeWitt, Tara Williamson, William Louden, and William Young, Jr.,
ARNOLD & PORTER KAYE SCHOLER LLP, Washington, DC; Attorneys for
Defendants Boston Scientific Corporation and NXT Merger Corp.




BOUCHARD, C.
      This post-trial opinion resolves claims arising from Boston Scientific

Corporation’s decision to terminate a merger agreement it entered into on November

1, 2017 (the “Agreement”) to acquire Channel Medsystems, Inc., an early stage

medical device company with one product—a global endometrial ablation device

named Cerene. Under the Agreement, Boston Scientific could only be required to

close the transaction if Cerene received FDA approval by September 30, 2019.

      In late December 2017, Channel discovered that its Vice President of Quality,

Dinesh Shankar, had falsified expense reports and other documents as part of a

fraudulent scheme by which he stole approximately $2.6 million from the company.

Unbeknownst to Channel, some of the documents Shankar falsified were contained

in Channel’s submissions to the FDA seeking approval of the Cerene device.

      Promptly after discovering Shankar’s fraud, Channel notified Boston

Scientific and the FDA. Channel interacted with both of them in a fully transparent

manner over the next few months as it thoroughly investigated and took actions to

remediate the effects of Shankar’s fraud. On April 18, 2018, the FDA accepted

Channel’s remediation plan, which strongly signaled that Shankar’s fraud would not

be the cause of any failure of the FDA to approve the Cerene device and which made

the FDA’s approval a distinct possibility. Despite this positive development, Boston

Scientific terminated the Agreement on May 11, 2018.




                                         1
      On March 28, 2019, consistent with the timeframe for receiving FDA

approval the parties expected when they entered into the Agreement, the FDA

approved the Cerene device. Trial of this action commenced the next month.

      The primary issue in this case is whether Boston Scientific was entitled to

terminate the Agreement because (i) certain representations in the Agreement were

inaccurate as of the date it entered into the Agreement and (ii) the failure of such

representations to be true and correct has or reasonably would be expected to have a

“Material Adverse Effect” on Channel. For the reasons discussed below, the court

finds that although Shankar’s fraud caused a number of representations to be

inaccurate as of the date of the Agreement, Boston Scientific failed to prove that the

failure of such representations to be true and accurate reasonably would be expected

to have a Material Adverse Effect. The court thus concludes that Boston Scientific

was not entitled to terminate the Agreement and that Channel is entitled to an order

of specific performance requiring Boston Scientific to close the merger.

      This decision reaches two other conclusions of note: first, that Boston

Scientific breached its obligation under the Agreement to use commercially

reasonable efforts to consummate the merger and, second, that Boston Scientific was

not fraudulently induced to invest approximately $11 million in Channel in making

a series of investments from 2015 to 2017.




                                          2
I.        BACKGROUND

          The facts recited in this opinion are the court’s findings based on the testimony

and documentary evidence presented during a four-day trial held in April 2019. The

record includes stipulations of fact in the Pre-Trial Stipulation and Order, over 900

trial exhibits, twenty-five depositions, and live testimony from seven fact and five

expert witnesses.

          A.        The Parties

          Plaintiff Channel MedSystems (“Channel” or the “Company”) is a Delaware

corporation headquartered in Emeryville, California.1 It is a privately held medical

technology company and the developer of the Cerene device.2

          Defendant Boston Scientific Corporation (“Boston Scientific” or “BSC”) is a

Delaware corporation headquartered in Marlborough, Massachusetts.3                 It is a

publicly traded medical technology company.4 Defendant NXT Merger Corp., a

wholly owned subsidiary of Boston Scientific, also is a Delaware corporation

headquartered in Marlborough, Massachusetts.5




1
    Pre-Trial Stipulation and Order (“PTO”) ¶ II.B.1 (Dkt. 170).
2
    Id.
3
    Id. ¶ II.B.2.
4
    Id.
5
    Id. ¶ II.B.3.
                                              3
         B.       Channel Develops the Cerene Device

         In 2011, Channel began to develop Cerene, a device used for global

endometrial ablation, which is a procedure to treat heavy menstrual bleeding by

ablating the uterine lining. Most technologies for this procedure require general

anesthesia and must be performed using large pieces of equipment in a hospital

operating room or ambulatory surgery center.6

         The procedure using Cerene is less painful because it uses cryotherapy (cold

temperature) rather than heat-based (burning) techniques.7              Channel designed

Cerene for use in an office setting without general anesthesia. Because Cerene is a

handheld, disposable device, physicians do not need to invest capital to purchase

equipment in order to use the device.8

         C.       The FDA Approval Process

         As Boston Scientific has acknowledged, the FDA “stringently regulates

medical devices by means of a comprehensive regulatory system” that is “designed

to ensure the safety and effectiveness of medical devices.”9 Under this system—

established through the Federal Food, Drug, and Cosmetic Act (“FDCA”) and the


6
    JX 403.006.
7
 Tr. 6-7 (Coté). All citations to “Tr.” refer to the Trial Transcript Volumes I-IV from April
15-18, 2019 (Dkt. 186; Dkt. 187; Dkt. 188; Dkt. 189).
8
    JX 180.006; Tr. 7 (Coté).
9
    JX 21.020.


                                             4
1976 Medical Device Amendments, 21 U.S.C. §§ 360c-360k—the FDA is charged

with “regulating the safety and effectiveness of medical devices, and the conditions

for their design, manufacture, performance, labeling, and use.”10

         The FDCA divides medical devices into three classes—Class I, II, and III.11

Class III devices, such as Cerene, “are subject to the most stringent regulatory

controls of all device classes.”12 According to Boston Scientific, these devices must

undergo an “indisputably thorough, rigorous, and costly pre-market review (some

1,200 FDA man hours at hundreds of thousands of dollars in cost) by the FDA.”13

         Before a company can market a Class III device, the FDA must review and

provide a premarket approval (“PMA”) of the device. In order to conduct a clinical

study on humans to collect data for a PMA, an applicant may obtain an

Investigational Device Exemption (“IDE”). After conducting such a study, an

applicant must submit detailed information about its device to the FDA in a PMA




10
  United States/FDA Amicus Brief, Horn v. Thoratec, 2004 WL 1143720, at *2 (“FDA
Brief”).
11
     21 U.S.C. § 360c.
12
     FDA Brief at *6.
13
     JX 21.021; see FDA Brief at *8, *20; Sullivan Dep. 38-39; Pierce Dep. 221-23.


                                             5
application.14 An applicant can apply for a PMA in a single submission or in

multiple submissions known as modules.15

          The review process for a PMA is a “massive undertaking” that is “thorough

and scientifically rigorous.”16 “In reviewing a PMA, FDA scientists carefully

evaluate all of the data and information submitted by the manufacturer” and will

often request that the manufacturer provide additional information.17

          As part of the FDA’s review, multiple experts scrutinize the applicant’s

compliance with the FDA’s Quality System Regulation (“QSR”).18 For example,

the Center for Devices and Radiological Health’s Office of Compliance conducts a

two-tiered evaluation. It first evaluates the information in the PMA and then

conducts a thorough in-person inspection, called a “pre-approval inspection”:

          Inspection will include an assessment of the firm’s capability to design
          and manufacture the device as claimed in the PMA and confirm that the
          firm’s quality system is in compliance with 21 C.F.R. 820, Quality
          System Regulation. The inspectional process considers the extent to
          which the firm has established a formal [quality system] program and
          has assured that the approved design is properly translated into
          specifications via process validation.19

14
     21 C.F.R. § 814; JX 755.007 (Ulatowski Expert Report).
15
     JX 755.007.
16
     FDA Brief at *8; see also Tr. 413 (Ulatowski).
17
  FDA Brief at *8 (citing 21 C.F.R. § 814.37); Tr. 413 (Ulatowski); 21 C.F.R.
§ 814.20(b)(14).
18
     JX 755.007-008.
19
     Id. .010.


                                              6
As part of this process, the FDA also may conduct bioresearch monitoring

inspections to ensure the quality and integrity of clinical trial data submitted in

support of an application for a PMA.20

         After completing its review, the FDA will provide a PMA only if the agency

finds, among other things, that there is a reasonable assurance of safety and

effectiveness of the device and that the applicant complies with the QSR. 21 The

FDA’s finding of a reasonable assurance of safety and effectiveness must be based

on “valid scientific evidence.”22

         D.     Cerene’s Initial FDA Approval and Clinical Study Results

         On September 13, 2016, the FDA approved an IDE for CLARITY, Channel’s

clinical study for Cerene.23 CLARITY involved 242 patients and satisfied its

primary safety and effectiveness endpoints, as there were no serious adverse events

and patients experienced successful reduction in bleeding.24

         On July 31, 2017, Channel submitted a “shell” to the FDA setting forth the

proposed contents of its four PMA modules, as well as a rough timeline for



20
     See id.; Tr. 140 (Yu); Tr. 414-15 (Ulatowski).
21
     Tr. 411, 415-16 (Ulatowski), Tr. 555-56 (Pierce), Tr. 683 (Carr).
22
     21 C.F.R. § 860.7(c)(1).
23
     JX 85.
24
     JX 774.006-009; Tr. 112-13 (Yu).


                                               7
submitting the modules.25 Channel submitted Modules 1 and 2 on August 16, 2017

and November 21, 2017, respectively.26

         E.       Boston Scientific and Channel’s Relationship

                  1.   Boston Scientific’s Initial Investments in Channel

         Between 2013 and 2015, Boston Scientific invested approximately $8 million

in Channel, acquiring approximately 15% of Channel’s equity.27 Before making

these investments, Boston Scientific obtained information about Channel’s

operations and finances.28

         Boston Scientific’s initial 2013 investment entitled it to have an observer on

Channel’s Board of Directors.29 This right gave Boston Scientific “access to

anything that was presented to the board,” such as information about CLARITY,

regulatory submissions, operations, and financial projections.30

         Christopher Kaster, Boston Scientific’s Vice President of Business

Development and Venture Capital, held the observer position until he became a full



25
     JX 150; JX 168.
26
     JX 171; JX 214.
27
     PTO ¶¶ II.E.2; JX 58; JX 49.002; JX 922.001.
28
  See, e.g., JX 26 (BSC Presentation dated February 5, 2013 on Channel’s clinical program
timeline and estimated costs).
29
     JX 27.004.
30
     Tr. 12 (Coté).


                                             8
Board member in late 2017.31 As a Board observer, Kaster provided Boston

Scientific senior executives, including David Pierce, Executive Vice President and

President of Medical/Surgery for Boston Scientific, with updates about Channel.32

                2.       Channel Provides Boston Scientific with Periodic Updates

         After Boston Scientific made its initial investment in Channel, it provided

Boston Scientific with periodic updates on the “status of [Channel’s] business.”33

These presentations covered a variety of topics, including CLARITY, Cerene’s

performance, and Channel’s quality system.34 According to Ulric Coté, Channel’s

CEO, Channel provided these presentations to update Boston Scientific on its

existing investment, not to solicit additional investments.35 These updates included

references to Shankar as part of Channel’s team and as Director of Quality

Assurance.36




31
     Kaster Dep. 12-13, 46.
32
     Id. at 73; Pierce Dep. 40-43; JX 107.
33
     Tr. 13-16 (Coté).
34
  See, e.g., JX 901 (Presentation titled ‘Boston Scientific Update,” dated March 25, 2016),
JX 941 (same, dated Dec. 14, 2016).
35
     Tr. 13-16 (Coté).
36
     JX 36.004; JX 49.042; JX 901.043.


                                             9
          In June 2014, Channel stated that it would seek ISO 13485 certification, which

would allow Cerene to be marketed in the European Union.37 On March 13, 2017,

Channel received its ISO 13485 certification.38

                   3.   Boston Scientific Looks to Acquire Channel

          Until early 2017, Boston Scientific focused on “monitoring” its investment in

Channel, and did not pursue an acquisition of Channel’s remaining equity.39 In

spring 2017, Boston Scientific learned that “other suitors” might seek to purchase

Channel.40 Boston Scientific then began “to think about buying the company.”41

          On June 22, 2017, Boston Scientific and Channel entered into a non-binding

Letter of Intent, which contemplated Boston Scientific purchasing the remaining

equity of the company that it did not already own for up to $275 million, conditioned

on FDA approval of Cerene.42 Although Boston Scientific had “already completed

certain functional due diligence,” the transaction was “subject to satisfactory

completion by [Boston Scientific] of additional diligence.”43



37
     JX 1101.026; Tr. 190-91 (Patel).
38
     PTO ¶ II.D.2.
39
     Tr. 969-71 (Morrison); Tr. 493-95 (Pierce).
40
     JX 106; JX 108.
41
     Tr. 900, 971, 972-73 (Morrison).
42
     JX 135 ¶ 1.
43
     Id.¶ 2.


                                             10
                4.     Boston Scientific Engages in Due Diligence

         Before and after signing the Letter of Intent, Boston Scientific conducted

detailed due diligence of Channel. During this diligence, “everything that was

within the company [was] made available” to Boston Scientific, including all

regulatory, financial, and quality documents.44 Boston Scientific had access to

Channel’s “data room” containing, among other records, extensive clinical,

regulatory, quality, and financial information.45 Channel also provided Boston

Scientific with additional information as requested.46      Terence Carr, Boston

Scientific’s Multisite Vice President of Quality,47 acknowledged that Channel

“placed no limitations on Boston Scientific’s access to its quality systems or

materials.”48

         On June 5, 2017 and August 24, 2017, Boston Scientific conducted on-site

visits to Channel as part of its due diligence.49 Carr, who was Boston Scientific’s

corporate representative concerning its diligence and interactions with Shankar,50



44
     Tr. 17 (Coté).
45
     Coté Dep. 90; Bracey Dep. 76-77, 225.
46
     Tr. 17 (Coté); Tr. 652-53 (Carr).
47
     Tr. 577 (Carr).
48
     Id. 653.
49
     See JX 121; JX 123; JX 179; JX 180.
50
     JX 722.006-007, 009-010.


                                             11
attended the second on-site visit.51 Doug Bachert, a quality manager at Boston

Scientific responsible for the quality-related diligence of Channel, attended the first

on-site visit and met with Shankar for approximately 45 minutes.52

         Bachert was satisfied after his June 5 meeting that Channel was “representing

compliance” to certain quality standards, but he “had not made a determination as to

whether [Channel] complied sufficiently or not.”53 On June 13, Bachert told his

colleagues that Channel’s system was “stated as [ISO] 14971 [risk management]

compliant; needs to be confirmed.”54 Boston Scientific thereafter conducted its own

diligence into Channel’s quality system.55

                5.      The Merger Agreement

         On November 1, 2017, Channel and Boston Scientific entered into an

Agreement and Plan of Merger (as defined above, the “Agreement”).56 Under the

Agreement, Boston Scientific agreed, subject to certain conditions, (i) to purchase

immediately Series C-1 preferred stock in Channel for approximately $5.6 million,

increasing its ownership to approximately 20% of the Company’s equity; and (ii) to


51
     Tr. 586 (Carr).
52
     Tr. 588-90 (Carr); see Bachert Dep. 55, 65, 75; Tr. 974 (Morrison).
53
     Bachert Dep. 70.
54
     JX 130.001.
55
     See Tr. 971 (Morrison); Bachert Dep. 73-74.
56
     JX 1 (the “Agreement”).


                                              12
acquire Channel’s remaining equity for up to $275 million pursuant to a put-call

structure.57 Under the put-call provision, Boston Scientific could exercise a “call”

option at any time to acquire Channel and, after obtaining a PMA for Cerene from

the FDA, Channel could exercise a “put” option to close the deal.58

         The Agreement also permitted Boston Scientific to designate a director to

Channel’s Board. Boston Scientific named Kaster as its Board designee.59 Tom

Robinson, General Manager of the Boston Scientific Women’s Health Division,

assumed Kaster’s former position as Board observer.60

         F.       Channel Discovers That Shankar Defrauded the Company

         On December 29, 2017, Coté and Rhonda Bracey, Channel’s Vice President

of Finance, discovered certain expense reports from Shankar bearing Coté’s

signature that Coté had never seen before.61 Coté and Bracey looked into the reports

and discovered they were illegitimate.62            Over the course of the New Year’s

weekend, Coté, Bracey, and William Malecki, Channel’s Chief Operating Officer,




57
     Agreement §§ 1.1, 1.5(a), 1.6(g); PTO ¶ I.A.
58
     Agreement § 1.1.
59
     PTO ¶ II.E.4; Kaster Dep. 46.
60
     Tr. 18 (Coté); Robinson Dep. 40-41.
61
     Tr. 21-22 (Coté).
62
     Id. 22-23.


                                             13
conducted an initial investigation into purchase orders, invoices, and expense reports

submitted by Shankar.63

         Through this investigation, Channel discovered that six of the vendors for

which Shankar had been submitting purchase orders and invoices were shell

companies registered to Shankar himself.64 Most of these companies were named to

imitate certain legitimate vendors, e.g., Nelson Scientific Research (shell company)

versus Nelson Labs (legitimate company).65 Shankar’s scheme involved paying the

legitimate vendors with his personal credit card and then issuing invoices to Channel

from his shell companies.66 In some cases, Shankar submitted invoices for work that

was never performed; in other cases, he submitted invoices for amounts exceeding

the cost of work that was performed and pocketed the difference.67

         Shankar laid the groundwork for his submission of fraudulent invoices during

the regular budgeting process by socializing the names of his shell companies. For

example, Shankar referred to just “BSI” rather than BSI Group (legitimate company)

or BSI America (shell company).68 Shankar also provided inflated estimates for the


63
     Id. 22-23; Bracey Dep. 152-56; Malecki Dep. 138-45, 148-51, 156-61.
64
     Coté Dep. 123-24; Bracey Dep. 154-56; Malecki Dep. 157-60.
65
     Tr. 30 (Coté); Malecki Dep. 160; JX 400.009; JX 576.004.
66
     JX 430.004.
67
     Tr. 23-24 (Coté); JX 355.008.
68
     Tr. 30 (Coté).


                                            14
costs of services during the budget process so that, when he later issued purchase

orders from his shell companies seeking approval for those services, the amounts

already appeared in Channel’s budget and did not arouse suspicion.69           The

subsequent invoices for payment of those same amounts thus did not arouse

suspicion either.70

           Through this part of his scheme, Shankar stole just over $2 million from

Channel.71 Separately, Shankar stole approximately $577,000 from Channel by

submitting fraudulent expense reports that purported to be from various vendors,

both authentic and fake.72 Most of Shankar’s fraudulent invoices and expense

reports—which account for “about 4 or 5%” of the total number submitted during

his employment—were for amounts below $10,000 such that, under Channel’s

policy at the time, CEO approval was not required for payment. 73 Shankar’s deceit

stunned Channel’s management team. As Coté testified: “To say I was shocked

would be an understatement. I’m still shocked.”74




69
     Id. 28.
70
     Id.
71
     JX 415.005; JX 922.002.
72
     JX 415.005; JX 922.002.
73
     Tr. 29-30 (Coté); JX 415.014-021.
74
     Tr. 26 (Coté).


                                          15
         An executive of Greenleaf Health, Inc. (“Greenleaf”), a healthcare regulatory

and quality consulting firm that Channel retained to conduct an independent review,

testified credibly that Shankar was “quite adept at [his] falsifications,” which “were

not apparent on the surface” of Channel’s records.75 During diligence, Boston

Scientific itself requested and received purchase orders from certain entities (BSI

America, Western Packaging, and ETC Engineering Services) that Channel later

discovered were shell companies that Shankar created.76 Neither the names, the

amounts, nor anything else in those documents triggered any concerns at Boston

Scientific, just as they had not at Channel.77

         On January 2, 2018, Channel confronted Shankar with the initial evidence of

his wrongdoing, which Shankar eventually admitted.78 Channel immediately placed

Shankar on leave and terminated his employment shortly thereafter.79

         G.     Channel’s Investigation and Remediation Efforts

                1.     Channel’s Internal Investigation

         After placing Shankar on leave, Channel continued to assess the scope and

effects of his fraud. Channel retained Fenwick & West LLP to help with the

75
     Tr. 314-15 (Elder).
76
     JX 159.006.
77
     Tr. 977-78 (Morrison).
78
     Bracey Dep. 158; JX 239.003.
79
     Tr. 20-21 (Coté); JX 355.005.


                                           16
investigative process.80 In carrying out its investigation, Fenwick & West retained

forensic accountants, Hemming Morse LLP, “to conduct an audit of all of the

financials and the expenses and invoices of the company.” 81 Hemming Morse

confirmed that Shankar stole approximately $2.57 million.82

         Channel also contacted the legitimate vendors to obtain their original invoices

and reports.83 It then conducted line-by-line reviews of those documents and other

records to identify information that Shankar falsified in whole or in part.84

         Through its investigation, Channel discovered that, out of approximately 138

test reports that Channel submitted to the FDA in connection with its IDE and first

two PMA modules, six reports contained information that Shankar falsified.85

Channel also submitted four of these six reports to BSI, from which Channel was

seeking a European Conformity (“EC”) certificate for Cerene.86 The EC certificate

allows Channel to place a “CE Mark” on Cerene and to market the device in the




80
     JX 403.002.
81
     Tr. 44 (Coté); JX 430.005; JX 403.002; JX 279.005.
82
     JX 430.012; JX 403.002.
83
     See, e.g., JX 251; JX 241.
84
   Tr. 37-38 (Coté); Tr. 136 (Yu); Tr. 187 (Patel); see, e.g., JX 533.004 (listing discrete
discrepancies).
85
     Tr. 38, 50 (Coté); Tr. 119-21 (Yu); JX 658.004-007.
86
     JX 581.004-005.


                                             17
European Union. Channel has yet to market Cerene in Europe and has no plans to

do so.87

         In addition to finding that Shankar falsified some records it submitted to the

FDA, Channel discovered that Shankar falsified other records that were not

submitted to the FDA involving (i) measurements of component parts and (ii)

calibration certificates for equipment used in inspecting, manufacturing, and testing

Cerene.88 An April 2018 Board presentation, prepared while Channel was working

to remediate the effects of Shankar’s fraud, noted that certain other records, such as

corrective and preventative action records (“CAPAs”) and Management Reviews,

also needed additional work to become compliant with FDA regulations.89

         On January 17, 2018, Channel referred Shankar’s fraud to the Department of

Justice for potential prosecution.90 The Department of Justice pursued criminal

charges against Shankar, who pled guilty and is now in prison.91 Shankar has since

repaid almost all of the $2.57 million he stole from Channel.92




87
     Tr. 60 (Coté).
88
     Id. 38-40; Tr. 178-79, 188 (Patel); JX 580; JX 652.
89
     JX 427.011; Tr. 247-48 (Patel).
90
     Tr. 44-45 (Coté); JX 269; JX 271; JX 279.
91
     Tr. 45-46 (Coté); JX 915; JX 916; JX 917.
92
     JX 917.007; Tr. 45 (Coté).
                                              18
                2.     Greenleaf’s Initial Assessment

         As previously mentioned, Channel retained Greenleaf to conduct an

independent assessment of (i) Channel’s investigation of Shankar’s fraud, and (ii)

“Channel’s quality system related to past operations and plans for future

operations.”93 Two Greenleaf executives—former FDA officials David Elder and

Michael Chappell—visited Channel’s offices from February 5-8, 2018, to review

Channel’s processes, procedures, regulatory submissions, and records, and to

interview Channel management.94

         According to Elder, the purpose of Greenleaf’s independent assessment was

“[t]o bring an outside set of eyes to the work that Channel had done internally, to

see if [Greenleaf] observed anything that perhaps [Channel] didn’t notice, to verify

that [Channel’s] assessment was complete or, if [Greenleaf] found any gaps, to

identify those gaps with the idea that [Channel] would review the gaps and take

additional action, if needed.”95 Greenleaf documented its assessment in a report

dated March 6, 2018 (the “Greenleaf Report”).

         The Greenleaf Report concluded that (i) Channel officials were “thorough”

and “earnest[]” in their investigation, “open and forthcoming with information[,] and


93
     JX 355.006.
94
     Tr. 258-59 (Elder); JX 355; JX 356.
95
     Tr. 260-61 (Elder).


                                           19
placed no restrictions” on Greenleaf’s access to information; (ii) Shankar “act[ed] in

isolation”; and (iii) Shankar “was not directly involved in the collecting and

reporting of clinical data.”96         Critically, Greenleaf did not find evidence that

Shankar’s conduct “affected the outcome of the clinical study or impacted safety and

efficacy data from the study.”97

          The Greenleaf Report commented, however, “that each and every action,

decision, and record with which [Shankar] was involved is suspect, particularly

those with which he was solely involved,”98 such that they should be “further

investigated.”99 Greenleaf similarly noted that it “has no confidence in [Shankar]

performing his routine responsibilities as VP of Quality Assurance (QA).”100

Greenleaf recommended ways for Channel to improve its quality system in light of

deficiencies it observed in order to bring the system up to compliance with FDA

regulations required for the PMA.101 For example, “Greenleaf concluded that

effective internal audits were not actually conducted” because they had been




96
     JX 355.006-007; Tr. 262-65 (Elder).
97
     JX 355.007.
98
     Id. .009.
99
     Tr. 271 (Elder).
100
      JX 355.009.
101
      Tr. 55 (Coté); JX 355.021-028.


                                              20
Shankar’s responsibility and that Shankar, on behalf of Channel, “failed to review

cleanroom monitoring reports,” which was required under the QSR.102

                3.      Channel’s Fraud Implication Assessment Quality Plan

         After conducting its initial investigation and receiving the Greenleaf Report,

Channel prepared a comprehensive Fraud Implication Assessment Quality Plan to

identify and remediate the effect of Shankar’s misconduct on Channel’s quality

system, which Channel implemented over much of 2018.103                   Channel’s work

consisted of both “top-down” and “bottom-up” assessments.104

                        a.    Top-Down Assessment

         To address the potential impacts of Shankar’s fraud that were identified during

Channel’s initial investigation, Channel opened fourteen internal audit reports

(“IARs”), each of which addressed a distinct area, including falsified supplier test

reports and regulatory submissions, calibration records, and component inspection

records.105 Channel performed a risk assessment in connection with each IAR and




102
   JX 356.009. As discussed below, the parties dispute whether all of the regulations in
the QSR applied to Channel as of the Agreement Date. The court concludes that they did
not and that only the QSR’s design control requirements applied to Channel at that time.
See infra Part IV.A.1.a.
103
      JX 382; JX 576.
104
      Tr. 161 (Patel); JX 382; JX 576.
105
      Tr. 48-49 (Coté); Tr. 130-31 (Yu); Tr. 159, 174-75 (Patel); JX 380; JX 383; JX 576.


                                             21
identified necessary corrective actions,106 which included re-performing certain tests

affected by Shankar’s fraud.107

         Greenleaf had identified two potential concerns involving the CLARITY

study. The first was that unsterile devices could have caused patient infections

during the study because Shankar fabricated certain sterility records. The second

was that using torque wrenches that were in an unconfirmed state of calibration could

have caused some devices in the study to suffer “out-of-box” failures because

Shankar had fabricated calibration records.108 Channel’s subsequent investigation

into these potential concerns found that Shankar’s actions did not affect the

CLARITY study.

         Sterility. To address potential sterility concerns, Channel had Tim Achuff,

an expert in microbiology, review the original, authentic, sterilization test report data

from Nelson Laboratories.109 Achuff determined that Cerene met sterilization

requirements and his analysis confirmed that “[t]he sterility of the Cerene device

was still intact.”110 In addition, Dr. Andrew Brill, Channel’s medical liaison,


106
    See, e.g., JX 652.005 (listing corrective actions related to Henry Servin & Sons); JX
533.005 (listing corrective actions related to sterilization); JX 580.004 (listing corrective
actions related to equipment calibration).
107
      Tr. 40 (Coté).
108
      JX 355.008.
109
      JX 533.028-034; Tr. 58 (Coté).
110
      Tr. 126 (Yu); Tr. 376 (Woodard).


                                             22
reviewed infections of CLARITY patients and “corroborate[d] that there is no

evidence that the integrity of the Cerene device packaging nor the sterility of the

Cerene device was compromised.”111

         Boston Scientific’s own quality expert, Richard Reeves, observed that “if you

[use Cerene on] 200 patients and there’s no traceable infection, that’s pretty good

evidence that there isn’t a problem.”112 Reeves further testified that Brill’s study

“looked pretty good” and he had no reason to doubt Brill’s conclusion.113

         Out-Of-Box Failures. To address potential calibration issues, Channel sent

the potentially affected equipment (e.g., torque wrenches) back to the manufacturers

for recalibration.       The manufacturers found that the equipment “measured in

calibration upon arrival” and satisfied their specifications.114 Channel also obtained

documentation from its suppliers confirming that the equipment does not go in and

out of calibration.115 This was important because if the equipment was properly



111
      JX 389; Tr. 57-58 (Coté); Tr. 376 (Woodard).
112
      Reeves Dep. 206.
113
      Tr. 829-31 (Reeves).
114
      Tr. 40-41 (Coté); Tr. 188-89 (Patel).
115
   Tr. 41 (Coté); Tr. 189 (Patel); Tr. 373 (Woodard); JX 580.007-008, 066-077. Contrary
to Boston Scientific’s assertion, Malecki did not admit “that there is no way to confirm that
the tools used to make the devices used in the CLARITY trial were in calibration when
they were being used to make the devices.” Defs.’ Br. 53. Malecki simply acknowledged
the obvious point that it is not possible to go back in time as a general matter. See Malecki
Dep. 261 (Q: “We can’t go back in time and test the tools when they were actually used

                                              23
calibrated when it was retested by the suppliers, the equipment would have

functioned properly when used on the CLARITY devices.                     Channel further

determined that it already had addressed any risks posed by out-of-calibration tools

satisfactorily through its risk management process.116 Channel therefore confirmed

that falsified calibration records did not affect any CLARITY devices.117

         In addition to addressing the two issues just discussed, Channel thoroughly

investigated, among other issues, falsified component inspection records from one

of its suppliers.118 Specifically, Channel re-inspected components it had on hand

from the same lots used in devices manufactured for CLARITY.119 Channel then

conducted a risk assessment of its manufacturing process, which included numerous

inspections and functional performance tests of every device, and evaluated the risk

of nonconforming components not fitting together.120 The re-inspection and risk

assessment found that “no new risks [were] introduced.”121




to make . . . the product, right?” A: “We can’t go back in time, period”); see also Malecki
Dep. 260.
116
      Tr. 373 (Woodard).
117
      JX 580.005.
118
      JX 652.004-005.
119
      Tr. 180 (Patel).
120
      Id. 180-81; Tr. 374 (Woodard); JX 652.005, 015-068; JX 751 ¶ 131.
121
      Tr. 181 (Patel).


                                            24
                        b.    Bottom-Up Assessment

          Channel also conducted a bottom-up assessment to address Greenleaf’s

concern that every area with which Shankar was involved was suspect. The bottom-

up assessment entailed assessing all aspects of Channel’s quality system, and

particularly those under Shankar’s control.122

          Channel classified its various types of quality system records into fifteen

categories.123 For thirteen of these categories, which ranged in number from four to

515 records, Channel reviewed every one of its records.124 Included within this

review, Channel reviewed all of the 515 lot history records documenting Channel’s

manufacturing processes for the devices used in the CLARITY study, and

determined that Shankar’s fraud did not impact manufacturing.125

          The remaining two categories (document change orders and incoming

inspection records) contained over 1,500 records, which made it impracticable to

review every record.126 For these two categories, Channel (i) reviewed all of the

records generated by Shankar and (ii) conducted a random sampling of the remaining




122
      Tr. 49 (Coté); JX 576.003.
123
      JX 732.010-011.
124
      Id. .014.
125
      Tr. 374-75 (Woodard); JX 732.012.
126
      See JX 732.014.


                                           25
records,127 using a “nationally recognized” sample plan similar to one that the FDA

uses.128 Ultimately, although Channel identified certain issues with its quality

system unrelated to Shankar’s fraud, which it fully remediated, the bottom-up

assessment revealed no additional issues relating to Shankar’s fraud that could affect

Cerene’s safety and efficacy.129

                4.       Greenleaf’s Follow-up Assessment

         In June 2018, Greenleaf conducted a follow-up, in-person assessment to

review Channel’s progress in addressing Greenleaf’s prior recommendations.130

Greenleaf’s follow-up assessment is documented in a July 2018 report, which found

that Channel had made an “appropriate level of progress” and “many recommended

actions were completed and others were progressing appropriately.”131

         Greenleaf also analyzed the two potential connections between Shankar’s

conduct and the CLARITY issues it had previously identified concerning sterility

and “out-of-box” failures. Greenleaf provided an update describing the work

Channel had done to ensure that Shankar’s actions had no impact on either issue.132


127
      Tr. 168-70, 205-11 (Patel); JX 732.010-011, 014.
128
      Tr. 170, 208-11 (Patel); JX 576.003.
129
      Tr. 51-52 (Coté); Tr. 170-71 (Patel); Tr. 369 (Woodard); JX 732.012.
130
      Tr. 279 (Elder).
131
      JX 634.007, 010; Tr. 282-83 (Elder).
132
      JX 634.007-008.


                                             26
         In addition, Greenleaf and Channel discussed Channel’s classification of the

IARs Channel had prepared as part of its top-down assessment.133 Channel had

classified the IARs as “minor” based on the definitions in its internal audit process

at the time.134 Greenleaf disagreed. It believed that Channel should have classified

certain IARs as “major.”135 Greenleaf also found that “the impact of the questionable

classifications may be minimal since in the current environment all issues have

received the appropriate visibility and prioritization within the company.”136

Channel later updated its definitions of “major” and “minor” based on Greenleaf’s

feedback.137

         Boston Scientific contends that Channel classified issues as “minor” and used

IARs instead of CAPAs to reduce “the likelihood that FDA would review them.”138

As noted below, however, Channel decided to provide all of the IARs (however

classified) to the FDA.139 Boston Scientific’s quality expert (Reeves) acknowledged

that the FDA did not raise any issues with Channel’s classifications or its use of



133
      JX 592.
134
      Tr. 175-77 (Patel); JX 592.
135
      JX 592.
136
      JX 634.011; Tr. 287-88, 342-43 (Elder).
137
      Tr. 253-54 (Patel).
138
      Defs.’ Br. 15.
139
      Tr. 253 (Patel); Tr. 803 (Reeves); JX 380.


                                                27
IARs and that “the FDA is not shy when it believes that people should be doing

things by way of CAPA.”140 He testified further “that the classification of minor or

major was not intended to prevent the FDA from learning about the issues.”141

         H.      Channel Promptly Discloses Shankar’s Fraud to the FDA and BSI

         As Channel was investigating and remediating Shankar’s misconduct, it also

was communicating transparently with regulators about these issues.

                 1.       Disclosure to the FDA

         On January 11, 2018, Channel retained Greenleaf to advise it on its

communications with the FDA, and in particular how best to provide the FDA with

all relevant information about Shankar’s misconduct.142

         On January 22, 2018, Channel emailed the FDA’s lead reviewer of its

application for a PMA to request a call, which took place on January 25. 143 During

that call, Channel informed the FDA of the basic facts about Shankar’s fraud, and

what steps Channel intended to take to remediate that fraud.144 Channel told the

FDA that Shankar falsified certain testing and other records, some of which it had




140
      Tr. 805 (Reeves).
141
      Id. 804.
142
      JX 262.015-024.
143
      Tr. 126-27 (Yu); JX 270.
144
      Tr. 127-28 (Yu); JX 279.


                                            28
submitted to the FDA.145 On February 1, the FDA asked Channel to withdraw and

re-submit PMA Module 2 with corrected records, which Channel did.146

          On March 16, 2018, Channel management, accompanied by Brill and Elder

of Greenleaf, met with the FDA.147 Before the meeting, Channel provided the FDA

with more than 250 pages of information about Shankar’s fraud, including the

Greenleaf Report, Channel’s Fraud Implication Assessment Quality Plan, the 14

IARs addressing Shankar’s fraud, and Brill’s adverse event review. 148 At the

meeting, Channel delivered a presentation on Shankar’s misconduct, its scope and

effects, and Channel’s remediation plan.149 The FDA asked a number of questions

about these and other issues, which Channel answered.150

          At the end of the March 16 meeting, the “FDA thanked the company for their

transparency and for coming forward with the information quickly.”151 Elder asked

the FDA if it “would be interested in subsequent discussions regarding the issues




145
      Tr. 128 (Yu).
146
      Id. 129; JX 294; JX 494.
147
      Tr. 64 (Coté); Tr. 129, 132-33 (Yu); JX 401.
148
      JX 380; see Tr. 64-65 (Coté); Tr. 130-31 (Yu).
149
      Tr. 66 (Coté); Tr. 129-30 (Yu); JX 401.
150
      JX 401.002-004.
151
      Id. .004; Tr. 67 (Coté).


                                                29
and the status and progress of the company’s remediation,” to which the FDA

responded: “follow-up would take place through the inspection process.”152

         On April 18, 2018, Channel had a follow-up call with the FDA.153 The FDA

told Channel that it “ha[d] addressed all of FDA’s concerns and that the agency

appreciate[d] the company’s transparency and timeliness.”154 Since that date, the

FDA has not sought any more information about Shankar’s fraud.155

                2.     Disclosure to BSI

         Channel also disclosed Shankar’s misconduct to BSI.156 Channel told BSI

that the fraud affected some documentation Channel had submitted to it.157 BSI told

Channel that it would address the issue during its upcoming assessments.158

         In the fall of 2018, BSI conducted two assessments—one relating to

Channel’s ISO 13485 quality certification and the other relating to Cerene’s

technical file.159 The BSI representative who conducted the two assessments were




152
      JX 401.004; Tr. 133-34 (Yu).
153
      Tr. 138 (Yu); JX 436.
154
      JX 436.
155
      Tr. 139 (Yu).
156
      Tr. 61 (Coté); Tr. 191-93 (Patel); JX 581.
157
      JX 581.014.
158
      Tr. 61-62 (Coté); Tr. 193-95 (Patel); JX 581.037.
159
      Tr. 195-97 (Patel); JX 709; JX 685.


                                               30
the same individuals whom Channel had informed of Shankar’s fraud.160 During the

assessments, BSI reviewed corrected reports for tests affected by Shankar’s fraud.161

BSI’s own microbiologist also reviewed the corrected sterility test reports.162

         BSI concluded that all ISO 13485 requirements “continue to be effectively

implemented,” that “[c]ontinued certification is confirmed,” and that Channel’s “EC

certificate remains valid.”163 This meant, as Boston Scientific’s quality expert

(Reeves) acknowledged, that Channel at all times possessed a valid ISO 13485 and

EC certificate.164 At no point did BSI ever indicate that these certificates or

Channel’s CE Mark were invalid.165

         After these assessments were completed, Channel was certified under the

2016 version of the ISO 13485 standard, which has “additional [quality system]

requirements” and is “more rigorous” than the 2003 version under which Channel

was previously certified.166




160
      Tr. 820-21 (Reeves).
161
      Tr. 196-97 (Patel); Tr. 821-23 (Reeves); JX 685.009-010.
162
      Tr. 823-24 (Reeves); JX 685.003.
163
      Tr. 62-63 (Coté); Tr. 197-99 (Patel); JX 685.003; JX 709.004.
164
      Tr. 817-18, 825 (Reeves); see JX 751 ¶¶ 109-10.
165
      Tr. 63 (Coté).
166
      Tr. 197-99 (Patel); Tr. 816 (Reeves); JX 725.


                                              31
         I.     Channel Keeps Boston Scientific Informed of Developments

         The trial evidence demonstrates that Channel also was transparent with

Boston Scientific. Since discovering Shankar’s fraud, Channel provided Boston

Scientific with frequent and thorough updates about its investigatory and

remediation work, often via Kaster and Robinson.167

         In January 2018, Coté regularly called Kaster and Robinson to update them

on Channel’s investigation.168 During this period, Kaster remained “very supportive

and reiterated Boston’s interest in Channel.”169 Robinson thanked Coté for his

“continued transparency,”170 and relayed the updates to senior executives of Boston

Scientific, including Pierce.171

         Robinson reported in early January, for example, that Shankar had been

“invoicing for new [calibration] tests that did not take place,” that numerous reports

were “in question,” that “they will obviously have to redo the calibration tests (which

likely would have to happen in manufacturing move and [manufacturing] module




167
   Tr. 70-71 (Coté); see, e.g., JX 238; JX 247; JX 258; JX 261; JX 271; JX 275; JX 279;
JX 282; JX 288; JX 295; JX 321; JX 353.
168
      Tr. 42-43, 70-71 (Coté); JX 239; Kaster Dep. 188-89.
169
      JX 271.
170
      JX 261.
171
      JX 259; JX 264; Robinson Dep. 206.


                                             32
submission anyway),” and that Channel was taking remedial actions.172 Kaster

commented: “Bottom line is that to the best of my knowledge this will not have a

material impact on the FDA timelines,” an assessment with which Robinson

agreed.173 A few days later, Robinson provided another update, which noted that

Channel “will have to redo some tests—e.g., residual sterilization bioburden.”174

            On January 25, 2018, Coté, Malecki, and Yu met with Robinson and Pierce.175

Coté updated them on Channel’s work and shared Channel’s plans to meet with the

FDA to discuss the Greenleaf Report, which occurred in March 2018.176 Pierce did

not express any concerns about the effects of Shankar’s conduct on Channel’s

quality system, clinical trial data, or Cerene during this meeting.177

            After the January 25 meeting, Coté repeatedly told Pierce and others at Boston

Scientific: “Please do not hesitate to call me with any questions.”178 During the next

three months, Boston Scientific never asked for any additional information relating



172
      JX 259.
173
      JX 264.
174
      Id.
175
      Tr. 75 (Coté); Tr. 468 (Pierce); JX 275.
176
      Tr. 468-69 (Pierce); JX 456.
177
   Pierce Dep. 85-87, 100-01; see also Pierce Dep. 82 (agreeing that “[n]o one is
suggesting [in January 2018] . . . that Mr. Shankar’s fraud could impact the acquisition
even if the FDA approves the product”).
178
      See JX 275.


                                                 33
to Shankar’s conduct, Channel’s remediation, or its communications with the

FDA.179 Instead, teams of Boston Scientific personnel pressed forward with their

work on the integration of Channel without apparent regard for Shankar’s fraud.180

         On February 21 and 22, 2018, a Boston Scientific team visited Channel’s

headquarters as part of its integration work.181 At the meeting, Coté updated Boston

Scientific on the results from Greenleaf’s assessment.182 Nobody from Boston

Scientific expressed any potential concerns about its acquisition of Channel.183

         On March 6, 2018, the same day Channel received the Greenleaf Report, Coté

provided a copy of the report to Boston Scientific and “suggest[ed] we schedule a

call with the appropriate [subject matter experts] the week of the 19th to discuss the

meeting with the FDA and to share updates as may be appropriate.”184 No one from

Boston Scientific responded to Coté’s suggestion.185




179
      Tr. 517, 520-24, 529 (Pierce).
180
      Id. 469, 517-19.
181
      JX 456.002; JX 302.
182
      Tr. 71 (Coté); JX 456; JX 366.
183
      Tr. 74 (Coté); Tr. 526-27 (Pierce).
184
      JX 353; JX 456.002; Tr. 72-73 (Coté).
185
      Tr. 516, 526-27 (Pierce).


                                              34
            On March 16, after meeting with the FDA, Coté “reached out [to Boston

Scientific] several more times offering to provide an update on our dialogue with the

FDA.”186 Again, no one from Boston Scientific responded.187

            Boston Scientific employees uniformly testified that Channel was fully

transparent with Boston Scientific in the aftermath of discovering Shankar’s fraud.

Kaster testified that Coté kept him “regularly updated as to what was going on with

the company’s investigation”188 and he thanked Coté for the “thorough update[s]”

and reassured him “[t]his will al[l] get resolved.”189 Robinson similarly testified he

“always found Mr. Coté to be transparent in [his] interactions with him,”190 and

that Coté was “timely, forthcoming, transparent.”191 Pierce testified he had “no

reason to doubt” that Channel was fully transparent with Boston Scientific at all

times.192




186
      JX 456.002.
187
      Id.
188
      Kaster Dep. 191.
189
      JX 257.
190
      Robinson Dep. 99.
191
      Id. 219.
192
      Tr. 533 (Pierce); see also Tr. 474-75 (Pierce).


                                               35
         J.      The FDA Accepts Channel’s Remediation Plan
         On April 18, 2018, the FDA accepted Channel’s remediation plan for its PMA

application. This action strongly signaled that Shankar’s fraud would not impede

the FDA from approving the Cerene device and made premarket approval of the

device a distinct possibility. Coté emailed Pierce the next day to report the good

news.193

         Three days later, on April 22, Pierce replied and raised with Channel for the

first time concerns about Shankar’s fraud.194 Pierce claimed that Boston Scientific

found the “Greenleaf report to be extremely troubling,” requested Channel’s

communications with the FDA and BSI, and explained that:

         Candidly, we don’t have confidence that, if all of the details set forth in
         the Greenleaf report (not to mention its obvious gaps) were fully
         disclosed to the FDA, the FDA would be acquiescing of the underlying
         facts or optimistic of a PMA submission based on existing study data.195

         Despite suggesting in his April 22 email that Channel had not made full

disclosure to the FDA, Pierce testified that he never meant to suggest that Channel

had not been forthcoming with FDA.196 Pierce and no one else at Boston Scientific

ever identified the purported “obvious gaps” in the Greenleaf Report referenced in


193
      JX 456.002.
194
      Tr. 73 (Coté); Tr. 526-27 (Pierce).
195
      JX 456.004.
196
      Tr. 530 (Pierce).


                                             36
his email.197 Pierce acknowledged that the FDA had the Greenleaf Report and thus

could draw its own conclusions about any such gaps.198

            Surprised by Pierce’s April 22 email, Coté asked for an in-person meeting as

soon as possible.199 Pierce did not respond.200 Coté reached out to Boston Scientific

five times trying to schedule a call or meeting.201 No one responded.202

            K.    Boston Scientific Terminates the Agreement

            On May 11, 2018, Boston Scientific sent Channel a notice of termination. It

stated in relevant part that:

            BSC hereby terminates [the Agreement] pursuant to Section 8.1(f), in
            light of multiple breaches of Channel’s representations and warranties
            in Article III of the Agreement, and Section 8.1(i). The representations
            and warranties breached by Channel include, but are not limited to,
            those set forth in Sections 3.18(c), 3.22(a), 3.22(c), 3.22(f) of the
            Agreement. These representations and warranties were breached as of
            the date of the Agreement and are not curable.203




197
      Id. 531.
198
      Id.
199
      Tr. 76 (Coté); JX 440; JX 456.002-003.
200
      Tr. 76 (Coté); Tr. 532-35 (Pierce).
201
      Tr. 536 (Pierce).
202
      Tr. 78-79 (Coté); Tr. 536 (Pierce).
203
      JX 475.


                                               37
Pierce made the decision on behalf of Boston Scientific to terminate the Agreement.

In doing so, the sole documentary evidence he relied on was the Greenleaf Report.204

         Pierce decided to terminate the Agreement after receiving feedback about the

Greenleaf Report in a March 29 meeting with Carr, Donna Gardner, Boston

Scientific’s Vice President of Regulatory Affairs, the Vice President of Research

and Development, and Pierce’s legal counsel, Mark Myhra.205 At this meeting, no

one discussed any steps Boston Scientific could take to remediate Channel’s quality

system.206

         L.      The FDA Reviews Channel’s PMA

         On August 10, 2018, Channel submitted its final PMA module to the FDA.207

By that time, Channel had finished resubmitting the reports in earlier modules that

Shankar’s fraud had affected.208

         On August 28, 2018, the FDA accepted Channel’s PMA application, which

the FDA formally filed on September 6, 2018.209 The filing took place about three



204
      Tr. 484, 522-23, 537 (Pierce).
205
   Tr. 471-74 (Pierce); Tr. 620 (Carr noting Mr. Sukthankar, the Vice President of
Research and Development, was also in attendance).
206
      Carr Dep. 148-49; see also Tr. 640 (Carr).
207
      Tr. 139 (Yu).
208
      Id. 138-39.
209
      Id. 140.


                                              38
months later than planned based on Channel’s initial timeline for its PMA, which

was prepared before discovery of Shankar’s fraud.210

         The FDA proceeded to review Channel’s PMA substantively.211 Boston

Scientific’s quality expert (Reeves) testified that, because of Shankar’s fraud, the

FDA would review Channel’s PMA application “with more laser-like focus than

they would if they were just reviewing this PMA as they normally do.”212 The FDA

made numerous, detailed requests for additional information, none of which

appeared to concern Shankar’s fraud, to which Channel responded promptly.213

         The FDA also completed four separate bioresearch monitoring inspections,

one at Channel and three at separate CLARITY trial sites to evaluate, among other

things, the quality and integrity of Channel’s clinical trial data.214 At the end of an

FDA inspection, if inspectors observe regulatory violations, they identify them on a

“Notice of Inspectional Observations” known as a “Form 483.”215 The FDA’s




210
      JX 169 (estimating date of final PMA module to be June 1, 2018).
211
      Tr. 413 (Ulatowski); Tr. 683 (Carr); JX 755.007-011, 015-017.
212
      Reeves Dep. 211.
213
      Tr. 413 (Ulatowski); JX 755.015-017.
214
      Tr. 140 (Yu); Tr. 413-14 (Ulatowski); JX 711; JX 720; JX 755.016.
215
      Tr. 141 (Yu); JX 755.016.


                                             39
inspectors did not issue any Form 483’s after conducting their bioresearch

monitoring inspections.216

         From January 22 through February 1, 2019, the FDA conducted a

pre-approval inspection of Channel, which lasted seven business days and included

a detailed inspection of Channel’s quality system. 217 The FDA inspector made two

relatively minor observations (unrelated to Shankar’s fraud) on a Form 483, to which

Channel responded on February 22, 2019.218

         M.     The FDA Approves Channel’s PMA

         On March 28, 2019, the FDA approved Channel’s application for premarket

approval of the Cerene device.219 Cerene therefore received FDA approval during

the first quarter of 2019, as Boston Scientific originally contemplated before signing

the Agreement,220 and six months ahead of the September 30, 2019 contractual

deadline in the Agreement.221 The FDA explicitly found that there is a “reasonable




216
      Tr. 141 (Yu); Tr. 414-15 (Ulatowski); JX 711; JX 720; JX 755.016.
217
      Tr. 141 (Yu); Tr. 199-201 (Patel); JX 723.002-003; JX 755.016.
218
      Tr. 141-43 (Yu); Tr. 201 (Patel); JX 740; see also Tr. 369-70 (Woodard).
219
      JX 2.
220
      JX 187.006.
221
      Agreement § 10.2 (definition of “FDA Approval”).


                                             40
assurance of the safety and effectiveness of [the Cerene] device.”222 The FDA also

found that Channel and its contract manufacturer comply with the FDA’s QSR.223

          Reeves confirmed that the FDA’s approval necessarily reflects its conclusion

that Cerene is safe and effective, that Channel’s quality system is compliant with the

QSR, and that its clinical data is reliable, describing FDA approval as “the proof in

the pudding.”224 As a “former FDAer,” Elder of Greenleaf was “pleased to see that

Channel was transparent and provided FDA with information,” particularly the

Greenleaf Report that he worked on, before the FDA approved Cerene.225 To Elder,

this meant that the FDA “had all of the information [it] needed to make an informed

decision” when approving Cerene.226 Due to the FDA’s approval, Channel can

market Cerene in the United States immediately.227

II.       PROCEDURAL HISTORY

          On September 12, 2018, Channel filed a verified complaint asserting two

claims. Its first claim asserts that Boston Scientific breached Section 6.3(b) of the

Agreement “by declaring its intention to cease performing its obligations thereunder


222
      JX 757.029.
223
      Id. .030.
224
      Tr. 831, 844-49 (Reeves); Reeves Dep. 208.
225
      Tr. 290-91 (Elder).
226
      Id. 291.
227
      Tr. 560 (Pierce).


                                            41
and to terminate the [Agreement] without a valid basis,” and seeks the remedy of

specific performance under Section 10.6 of the Agreement.228 Its second claim seeks

a declaratory judgment that (i) Boston Scientific breached its obligations under the

Agreement, (ii) no Material Adverse Effect (“MAE”) occurred, (iii) Channel did not

breach any representations or warranties that would reasonably be expected to have

an MAE, and (iv) Boston Scientific had no right to terminate the Agreement.229

          On October 3, 2018, Boston Scientific filed three counterclaims. Its first

claim is for fraud in the inducement based on alleged misrepresentations and

omissions about Channel’s quality systems. Its second claim seeks rescission of the

Agreement based on breaches of various representations and warranties. Its third

claim seeks a declaratory judgment that Boston Scientific had the right to—and

did—terminate the Agreement under Sections 8.1(f) and 8.1(i) of the Agreement.230

          The court held a four-day trial in April 2019 and heard post-trial argument on

July 26, 2019. At that hearing, the court requested supplemental briefing on an issue

of contractual interpretation concerning Section 8.1(f) of the Agreement, which the

parties completed on September 6, 2019.




228
      Dkt. 1 ¶¶ 89-90.
229
      Id. ¶ 101.
230
      Dkt. 25 ¶¶ 41-60.
                                            42
III.   FRAMEWORK OF THE ANALYSIS

       The parties’ disputes are primarily contractual. Boston Scientific contends

that it terminated the Agreement in accordance with its terms. Channel contends

that Boston Scientific did not validly terminate the Agreement and seeks an order of

specific performance to compel Boston Scientific to close the merger.

       The analysis of the parties’ claims focuses primarily on the following three

provisions in the Agreement:

        Under Section 7.2(b), Boston Scientific’s obligation to consummate
         the merger is subject to satisfaction of the condition that each of
         Channel’s representations and warranties in the Agreement “shall
         have been true and correct at the time originally made . . . except to
         the extent that the failure of any such representations and warranties
         to be true and correct does not have and would not reasonably be
         expected to have a Material Adverse Effect” on Channel (the
         “Representations Condition”).

        Under Section 8.1(f)(i), Boston Scientific can terminate the
         Agreement at any time if any of Channel’s representations and
         warranties in the Agreement “shall be inaccurate or shall have been
         breached as of the Agreement Date . . . such that the condition set
         forth in Section 7.2(b) would not be satisfied.”

        Under Section 6.3(b), from the “Agreement Date until the Effective
         Time,” Boston Scientific “will take all further action that is
         necessary or desirable to carry out the purposes of this Agreement”
         and “shall use its commercially reasonable efforts to take all such
         action and refrain from taking any actions which would be
         reasonably expected to frustrate the essential purposes of the
         transactions contemplated by the Agreement.”

       Section 7.2(b) also contains a “bring-down condition” that requires that each

of Channel’s representations and warranties in the Agreement “shall be true and
                                      43
correct as of the Effective Time,” i.e., when the merger closes.231 That aspect of

Section 7.2 is not at issue here. In this case, Boston Scientific relies on Section

7.2(b) solely for alleged inaccuracies in or breaches of Channel’s representations and

warranties as of the “Agreement Date,” i.e., November 1, 2017.

      The termination right in Section 8.1(f) does not contain a cure provision for

any inaccuracy in or breach of a representation and warranty as of the Agreement

Date.232 Section 8.1(f), however, incorporates the closing condition in Section

7.2(b), which has a built-in MAE requirement. Specifically, the closing condition

in Section 7.2(b) “shall be deemed to be satisfied unless any failures of the

representations and warranties . . . to be true and correct has or would reasonably be

expected to have a Material Adverse Effect on [Channel].”                  Thus, the

Representations Condition “examines the inaccuracy of specific representations and

uses as its measuring stick whether the deviation between the as-represented

condition and the actual condition would reasonably be expected to constitute a




231
   See generally Lou R. Kling & Eileen T. Nugent, Negotiated Acquisitions of Companies,
Subsidiaries and Divisions § 1.05[2], at 1-41 (2019 ed.) (describing “the critical
‘bringdown’ condition”).
232
   Section 8.1(f) does contain a cure provision for “an inaccuracy in or breach of any
representation or warranty of [Channel] as of a date subsequent to the date of this
Agreement,” but that provision is irrelevant to this case. Agreement § 8.1(f).


                                          44
Material Adverse Effect.”233 The “reasonably be expected” standard is an objective

standard.234

       In its termination notice, Boston Scientific also relied on Section 8.1(i) of the

Agreement as a second ground for termination. Under Section 8.1(i), Boston

Scientific can terminate the Agreement at any time if “there shall have occurred any

Material Adverse Effect with respect to [Channel].” The termination right in Section

8.1(i) does not depend on the existence of an inaccuracy in or breach of any

representation or warranty in the Agreement but is subject to a cure provision. By

the time of trial, which occurred after the FDA approved the Cerene device, Boston

Scientific’s reliance on Section 8.1(i) was an afterthought that depended entirely on

whether or not Boston Scientific could prove an MAE for purposes of Section 8.1(f).

       The analysis of the claims that follows proceeds in five parts. Section IV

analyzes whether Boston Scientific was entitled to terminate the Agreement under

Section 8.1(f).235 Section V addresses Boston Scientific’s reliance on Section 8.1(i).


233
    Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347, at *46 (Del. Ch. Oct. 1, 2018),
aff’d, 198 A.3d 724 (Del. 2018).
234
   See id. at *65 (citation omitted); Frontier Oil v. Holly Corp., 2005 WL 1039027, at *33
(Del. Ch. Apr. 29, 2005) (“The test—‘would have’ or ‘would reasonably be expected to
have’—is an objective one.”).
235
   When this decision refers to Boston Scientific’s exercise of a right to terminate under
Section 8.1(f), the court is referring to the first subsection of that provision, i.e., Section
8.1(f)(i). In a footnote in its opening brief, Boston Scientific argued that the Agreement
was properly terminated under Section 8.1(f)(ii) as well because Channel breached a
covenant in Section 5.2 of the Agreement by manufacturing non-compliant devices that

                                              45
Section VI analyzes whether Boston Scientific breached Section 6.3(b). Section VII

analyzes whether Channel is entitled to the remedy of specific performance. Section

VIII analyzes whether Boston Scientific is entitled to damages based on its

fraudulent inducement claim.

IV.      BOSTON SCIENTIFIC’S TERMINATION UNDER SECTION 8.1(f)

         Boston Scientific’s lead argument is that it properly terminated the Agreement

under Section 8.1(f) based on certain representations in the Agreement that were

inaccurate as of the date of the Agreement.236 As just discussed, Section 8.1(f)

permits Boston Scientific to terminate the Agreement at any time if any of Channel’s

representations in the Agreement “shall be inaccurate. . . such that the condition set

forth in Section 7.2(b) would not be satisfied.”237 The Representations Condition in




were used in the CLARITY study. Defs.’ Br. 42-43 & n.3. A covenant is a promise of
future performance. Akorn, 2018 WL 4719347, at *8. Channel finished manufacturing the
CLARITY devices more than six months before entering into the Agreement. Tr. 331-33
(Elder). Thus, Channel could not have breached the covenant in question based on this
conduct.
236
   The parties frame their arguments in terms of “breaches” of representations. The court
finds it more helpful to frame the alleged “breaches” of representations as “inaccuracies”
because they are statements of fact. See Kenneth A. Adams, A Manual of Style for Contract
Drafting 116 (4th ed. 2017) (“One breaches an obligation, but not a statement of fact
(whether you call it that or a representation). Instead, a statement of fact is accurate or
inaccurate. If Abigail says that it’s Monday but in fact it’s Tuesday, Abigail hasn’t
‘breached’ anything. Instead, she’s made an inaccurate statement.”).
237
      Agreement § 8.1(f).


                                            46
Section 7.2(b) in turn provides that Boston Scientific must consummate the merger,

subject to various other conditions, if:

         Each of the representations and warranties of the Company contained
         in this agreement . . . shall have been true and correct at the time
         originally made, . . . except to the extent the failure of any such
         representations and warranties to be true and correct does not have and
         would not reasonably be expected to have a Material Adverse Effect.238

         Boston Scientific bears the burden of “proving by a preponderance of the

evidence the facts supporting the exercise of its termination rights.”239 Thus, to

validate its termination of the Agreement under Section 8.1(f), Boston Scientific

must prove that: (i) one or more of the representations in the Agreement was

inaccurate as of the Agreement Date and (ii) the failure of such representation(s) to

be true and correct “has or reasonably would be expected to have a Material Adverse

Effect” on Channel.240 The court analyzes these two issues next.

         A.     Whether Any of Channel’s Representations Was Inaccurate
         Boston Scientific argues that Shankar’s fraud rendered a number of

representations in the Agreement inaccurate as of the date of the Agreement. Each

of the representations Boston Scientific contends was inaccurate contains a

materiality qualifier. The parties did not analyze the meaning of the term “material”



238
      Id. § 7.2(b) (emphasis added).
239
      Akorn, 2018 WL 4719347, at *4.
240
      Agreement § 7.2(b).
                                           47
or its variations (e.g., “in all material respects”) for purposes of assessing the

accuracy of the representations in the Agreement in their own right.

            In Frontier Oil v. Holly Corp.,241 this court considered the meaning of the term

“material” as used in a warranty in a merger agreement. The court explained that,

“[i]n the context of the Merger Agreement, the concept of ‘Material Adverse Effect’

and ‘material’ are analytically distinct, even though their application may be

influenced by the same factors.”242 The court then applied a disclosure-based

standard of materiality for purposes of interpreting the warranty.243

            Last year, in Akorn, Inc. v. Fresenius Kabi AG, Vice Chancellor Laster

carefully studied the meaning of the term “in all material respects” in a covenant in

a merger agreement.244 There, the acquirer (Fresenius) argued, based on Frontier

Oil, “that the phrase ‘in all material respects’ requires only a ‘substantial likelihood

that the . . . fact [of breach] would have been viewed by the reasonable investor as

having significantly altered the ‘total mix’ of information.’”245 Although noting the



241
      2005 WL 1039027.
242
      Id. at *38.
243
    Id. (“A fact is generally thought to be ‘material’ if [there] is ‘a substantial likelihood
that the … fact would have been viewed by the reasonable investor as having significantly
altered the ‘total mix’ of information made available.’”) (quoting TSC Indus. v. Northway,
Inc., 426 U.S. 438, 449 (1976)).
244
      Akorn, 2018 WL 4719347, at *86.
245
      Id.


                                               48
“oddity of relying on a disclosure-based standard to evaluate contractual

compliance,” the court endorsed using the “the Frontier Oil test (as conceived by

Fresenius).”246 The court explained that the test “strives to limit the operation [of

the covenants in question] to issues that are significant in the context of the parties’

contract, even if the breaches are not severe enough to excuse a counterparty’s

performance under a common law analysis.”247 Based on the analysis in Akorn, the

court will apply here the disclosure-based standard that Akorn endorses in evaluating

the alleged inaccuracies of representations in the Agreement.

          Boston Scientific argues that Shankar’s fraud rendered three categories of

representations inaccurate at signing. The court considers each of these categories

in the three sections that follow.

                    1.   Compliance with Applicable Healthcare Laws

          Boston Scientific’s primary argument is that Channel’s representation in

Section 3.22(a) of the Agreement was inaccurate as of the Agreement Date because




246
    Id. Vice Chancellor Laster did not apply this test when analyzing the alleged
inaccuracies of various regulatory compliance representations because the merger
agreement in Akorn included a “materiality scrape” provision that “scrape[d] away those
specific qualifiers [in the representations themselves] in favor of an aggregate MAE
qualifier.” Id. at *64. The Agreement here does not contain such a provision.
247
      Id. at *86.


                                           49
Channel failed to design, manufacture, and test Cerene in material compliance with

applicable “Healthcare Laws.” In Section 3.22(a), Channel represented that:

         The Company and its Subsidiaries are in material compliance with all
         Healthcare Laws applicable to the Company and is Subsidiaries, or the
         Company Business. The design, manufacture, testing, and distribution
         of the Products by or on behalf of the Company and its Subsidiaries is
         being conducted in compliance with all applicable Healthcare Laws,
         including, without limitation, the FDA’s current good manufacturing
         practice regulations at 21 C.F.R. Part 820 for medical device products
         . . . .248

The “good manufacturing practice regulations” referenced at the end of this

provision are known as the “Quality System Regulation” or “QSR.” The QSR is a

system of quality regulations “for medical devices that are commercially distributed

[to] ensure that the product is reliable and developed correctly.” 249 The QSR

contains many subparts, one of which is 21 CFR § 820.30, entitled “Design

Controls.”250

         As of the date of the Agreement, the FDA had not approved Channel to sell

and distribute products in the United States but it had approved Channel to conduct

its CLARITY clinical trial under an approved investigational device exemption




248
      Agreement § 3.22(a).
249
      Tr. 358-59 (Woodard).
250
      See 21 CFR § 820.


                                          50
(IDE).251 As a general matter, an approved IDE exempts a company “from all of the

quality system regulations, with the exception of design controls.”252

         The exemption afforded to an approved IDE, however, contains an important

qualification. Specifically, under 21 CFR § 812.1(a), an approved IDE “exempts a

device from the . . . good manufacturing practice requirements under section 520(f)

[of the Federal Food, Drug, and Cosmetic Act] except for the requirements found in

§ 820.30, if applicable (unless the sponsor states an intention to comply with these

requirements under § 812.20(b)(3) or § 812.140(b)(4)(v)).”253 In other words, a

sponsor who has obtained an approved IDE is only required to comply with the

design control requirements of the QSR (Section 820.30) unless it elects to comply

with other requirements of the QSR by stating an intention to do so.

         Channel does not dispute that it did not comply with the entirety of the QSR

as of the date of the Agreement.254 Rather, Channel argues that it complied with the

only subpart of the QSR that applied to the Cerene device when it entered into the

Agreement (i.e., the subpart for device controls) and that the rest of the QSR was

inapplicable because Channel never stated an intention to comply with those other



251
      Tr. 359 (Woodard); see also JX 171 (referencing Cerene’s IDE exemption # G160101).
252
      Tr. 359 (Woodard).
253
      21 CFR § 812.1(a) (JX 782) (emphasis added).
  See Defs.’ Reply Br. 10-12 (listing nine sections within six subparts of the QSR that
254

Channel did not contest it did not comply with as of the date of the Agreement) (Dkt. 196).
                                            51
requirements and thus was exempt from them. Boston Scientific counters that the

entire QSR did apply to the Cerene device because Channel stated an intention to

comply with those requirements and that, even if Channel did not, Channel

materially failed to comply with the design control requirements in any event. The

preponderance of the evidence supports Channel on the first point but supports

Boston Scientific on the second. The court addresses those two issues next.

                      a.    Channel Had to Comply Only with the QSR’s Design
                            Control Requirements as of the Agreement Date
         In support of its position that Channel expressed an intention to comply with

all of the requirements of the QSR, Boston Scientific relies on certain statements in

Channel’s application for an IDE and in its quality manual. Boston Scientific first

points to the following statements in Channel’s IDE application:

          “All products are manufactured to Channel Medsystems quality
           system requirements”

          “All components in the Cerene device and the collection bag are
           purchased to approved specifications using standard operating
           procedures”

          “Critical material and component specifications are . . . inspected at
           Incoming Inspection”

          “Suppliers of these components/materials are monitored by use of
           an Approved Supplier List”

          “sterilization of the Cerene device is performed by ProTech”255

255
      Defs.’ Br. 36 (quoting JX 810 at CHANNEL-0016099).
                                           52
         Significantly, the statements quoted above appear to be ones that the FDA

requires a sponsor to include in an IDE application.                         Specifically,

21 C.F.R. § 812.20(b)(3) provides, in relevant part, that an IDE application “shall

include”:

         A description of the methods, facilities, and controls used for the
         manufacture, processing, packing, storage, and, where appropriate,
         installation of the device, in sufficient detail so that a person generally
         familiar with good manufacturing practices can make a knowledgeable
         judgment about the quality control used in the manufacture of the
         device. 256

It would be illogical that statements made in an application for an IDE that the FDA

requires a company to include in the application would preclude the company from

obtaining the benefit of an IDE, i.e., the benefit of developing a product before

commercialization free of certain regulations. If that were the case, the IDE

application process would preclude every company from receiving the benefit of an

IDE. For this reason, the court concludes that the “states an intention” qualification

to the exemption in Section 812.1(a) requires the sponsor to expressly state its

intention to comply with the full QSR (or parts of it) for the exemption from the

QSR (other than design controls) to not apply.




256
      21 CFR § 812.20(b)(3) (JX 783).


                                             53
         Channel’s FDA expert credibly testified that Channel’s IDE application does

not contain “any affirmative statements” that it intends to comply with all of the

QSR,257 and Boston Scientific has identified no such statement. Boston Scientific

instead asks the court to look to the contents of Channel’s quality manual for an

expression of such an intention.

         Specifically, Boston Scientific contends that Channel expressed an intention

to comply with the entire QSR because Channel’s “quality system requirements”—

which is referenced in the IDE application—are defined in its quality system manual

to require compliance with the entire QSR. For support, Boston Scientific points to

the following statement in the quality manual: “The Quality Department has full

responsibility and authority for establishing, implementing and maintaining the

Quality Management System in accordance with the requirements of . . . 21 CFR

Part 820 Quality System Regulation.”258




257
      Tr. 420 (Ulatowski).
258
    Defs.’ Br. 36-37 (quoting JX 45.003). Boston Scientific also contends that the reference
in the quality manual to 21 C.F.R. Part 820 must have been intended to refer to the entire
QSR because the quality manual lists as “not applicable to [Channel’s] products and
processes” one section of the QSR (21 C.F.R. § 820.170) pertaining to “installation
activities.” Id. at 37-38. As the quality manual itself makes clear, this regulation would
never apply to Channel because there “are no installation activities” for the Cerene device.
See JX 45.004. Thus, one cannot infer from the reference to Section 820.170 in the quality
manual that Channel was attempting to make an affirmative statement of a present intention
to comply with all of the other requirements of the QSR.
                                            54
         The statement in the quality manual quoted above, however, does not reflect

a present intention to comply with all of the QSR requirements. Rather the statement

implies that the full QSR was not in effect at the time, thus the reason the Quality

Department was responsible for “establishing” and “implementing” such a system.

Lori-Ann Woodard, Channel’s quality expert, testified knowledgeably and credibly

that a single-device start-up company like Channel would begin by complying with

the design control requirements in Section 820.30 and then ramp up to full

compliance by the time it applies for premarket approval (PMA) and begins

marketing its product.259 The statement of the Quality Department’s responsibility

and authority in the manual is consistent with this approach.

         Apart from the lack of any affirmative statement of a present intention to

comply with the QSR in Channel’s quality manual, Boston Scientific’s reliance on

the manual fails for a separate reason. Inherent in the “states an intention” exception

to the exemption in Section 812.1(a), the sponsor must make the statement to the

FDA. Boston Scientific concedes that Channel did not submit its quality manual to

the FDA in its IDE application but maintains that the manual was still subject to




259
      Tr. 360-61 (Woodard).


                                          55
inspection by the FDA.260 The FDA, however, only engages in such inspections for

the PMA application process, not the IDE application process.261

         Finally, Boston Scientific elicited expert testimony that Section 812.1 only

exempts the device receiving the IDE from the QSR and not the company, and

therefore, Channel was still required to comply with the rest of the QSR.262 FDA

guidance, however, specifically and clearly states the contrary: “Sponsors of IDE’s

are also exempt from the Quality System (QS) Regulation except for the

requirements for design controls.”263 The court credits the agency’s guidance over

the proffered testimony.264 For this and the other reasons discussed above, the court

concludes that Channel only needed to comply with the design controls section of

the QSR (21 C.F.R. § 820.30) when it entered into the Agreement.

                          b.   Channel’s Representation in Section 3.22(a) was
                               Inaccurate as of the Agreement Date
         The court turns next to whether Channel’s representation under Section

3.22(a) of the Agreement was inaccurate because it was not in material compliance

with 21 C.F.R. § 820.30, the design control requirements. Under those requirements,



260
      Defs.’ Reply Br. 15.
261
      JX 736 ¶ 25; compare 21 C.F.R. § 814 (PMA), with 21 C.F.R. § 812 (IDE).
262
      Tr. 706-07 (Reeves).
263
      JX 791.001.
264
      Tr. 700 (Reeves).


                                            56
Channel must “establish and maintain procedures to control the design of the device

in order to ensure that specified design requirements are met.”265 Specifically,

Channel was required to establish and maintain procedures for, among other things,

design verification, design validation, and the documentation and approval of design

changes before their implementation.266 The results of design verification and

validation had to be included in a design history file, which “each manufacturer shall

establish and maintain . . . for each type of device.”267

         Boston Scientific focuses on two issues:

          According to the Greenleaf Report, “the rationale and the internal
           discussions that resulted in the decision to institute [changes to
           Cerene] in the design history file were not always detailed,”268
           despite such detail being required under Section 820.30.269

          Shankar’s falsified test records impacted verification and validation
           testing, which is done under the design control requirements of
           Section 820.30.270




265
      21 C.F.R. § 820.30(a)(1).
266
      21 C.F.R. § 820.30(f)-(g), (i).
267
      21 C.F.R. § 820.30(f)-(g), (j).
268
    JX 356.010; see JX 356.024 (noting “there were only a few incidents where there was
a record of the elements of the findings that resulted in the decision to make changes in the
device” and “documentation of the reason for the change was commonly not available”).
269
      JX 736.030 (Reeves Expert Report); JX 356.023.
270
      Tr. 396 (Woodard); Tr. 306 (Elder).


                                             57
         As to the first issue, Boston Scientific argues that the lack of documentation

on the reasons for implementing changes to the device is contrary to Section

820.30’s requirement that manufacturers adhere to procedures for “identification,

documentation, validation, . . . review, and approval of design changes before their

implementation.”271 Channel counters that even if that is the case, it is not material

because the Greenleaf Report further states that “Channel maintains a robust design

control program with detailed device evolutional changes well documented in

change control documentation and detailed engineering drawings.”272 Considered

alone, the lack of detail in the design history file noted in the Greenleaf Report would

not be significant to the parties in the context of the Agreement. Combined with the

presence of falsified records in the design history file, however, the court finds that

Channel’s noncompliance with the design control requirements was material.

         The parties focus on the fact that Shankar falsified seven records on

sterilization validation and package seal integrity that appeared in six reports.273 As

Elder explained and as documented in the Greenleaf Report, these falsified


271
      21 C.F.R. § 820.30(i).
272
      JX 356.010.
273
   See JX 356.014-016 (documenting “false records submitted in regulatory filings to
FDA”); JX 658.004-007 (listing “altered . . . reports that were submitted to FDA”). The
record also reflects that Shankar falsified records concerning (i) measurements of at least
four component parts and (ii) instrument and equipment calibration, which Channel did not
submit to the FDA. JX 356.016-019.


                                            58
documents were used in verification and validation testing274 and, by Channel’s own

admission six of these documents were included in the design history file as of the

date the Agreement was signed.275 Elder further testified that Channel’s quality

system had “significant issues” that “resulted in fraudulent documents being

created,”276 and Channel’s own quality expert acknowledged that a design history

file that contains false test reports cannot comply with Section 820.30.277

         Channel counters that because the design history file included numerous other

records, the presence of only six test reports containing falsified documents was not

material.278 For materiality purposes, however, the small percentage of affected test

reports is not determinative. Depending on the circumstances, a single test report

generated from falsified content may be significant enough to establish material non-

compliance with Section 820.30.


274
    Tr. 305-06 (Elder) (confirming that Shankar had “falsified records of dimensional
inspections conducted [of] components used in the production of medical devices . . . used
in verification and validation testing.”); see also JX 356.016-017.
  Pl.’s Resp. Br. 73 (“Of the numerous records contained in the [design history file] as of
275

November 1, 2017, six were inauthentic.”) (Dkt. 193).
276
      Tr. 320 (Elder); JX 637.001-002.
277
      Tr. 396 (Woodard).
278
    Tr. 50 (Coté); Tr. 119-20 (Yu). In January 2018, Channel had approximately 170
quality records in its quality system, 138 of which were submitted to the FDA in connection
with Channel’s IDE and first two PMA modules. Tr. 119-20 (Yu). The second PMA
module was filed with the FDA after the Agreement was entered into on November 1,
2017, and thus it is unclear how many of these records were in the design history file as of
the Agreement Date.


                                            59
         Focusing on the contents of the reports, Channel asks the court to consider as

part of the total mix of information the results of its internal investigation, which

validated the conclusions in the six affected test reports and found after “a really

deep dive” that “Shankar had no impact.”279 The fact that Channel’s investigation

determined that the falsified documents did not alter the conclusions of the affected

test reports, however, does not mean that the presence of falsified quality records

could not be significant to a reasonable acquirer for other reasons—for example, as

presenting a potential obstacle to obtaining FDA approval for the Cerene device.

         Although a close call, having carefully considered the evidence of record, the

preponderance of the evidence demonstrates that a reasonable investor/acquirer

would view the manner in which Channel failed to comply with the design control

requirements of Section 820.30 “as having significantly altered the ‘total mix’ of

information.”280 In particular, the lack of compliance with a portion of the quality

system regulation due to the creation of false records concerning equipment

calibration, sterility, and device packaging used in verification and validation testing

of the device likely would be significant to a reasonable acquirer. Even if the

falsified records did not impact the integrity of the design history file, the very fact

that there were falsified records in the design history file would call into question


279
      Tr. 405-06 (Woodard).
280
      Akorn, 2018 WL 4719347, at *86.
                                           60
Channel’s ability to secure FDA approval. Accordingly, the court finds that the

representation in Section 3.22(a) was inaccurate as of the date of the Agreement.

                 2.       Clinical Study Device Compliance

          In its second category, Boston Scientific argues that Channel breached

Sections 3.22(f), 3.32(b), and 3.32(c) as of the date of the Agreement, because “all

of the devices used in the CLARITY clinical trial were manufactured under a

noncompliant quality system, when Shankar was the sole quality assurance

employee.”281 In Section 3.22(f), Channel represented and warranted that all of its

clinical trials complied in all material respects with applicable healthcare laws:

          All preclinical and clinical trials . . . that have been or are being
          conducted by or on behalf of, or sponsored by, [Channel] . . . have been
          conducted in compliance in all material respects with standard medical
          and scientific research procedures and the experimental protocols,
          procedures, and controls pursuant to applicable Healthcare Laws . . . .282

In Section 3.32(b), Channel represented and warranted that the goods and services

Channel supplied complied in all material respects with applicable laws:

          The goods and services supplied by [Channel] have complied, in all
          material respects, with all Laws and with all government, trade
          association and other mandatory and voluntary requirements,
          specifications and other forms of guidance.283




281
      Defs.’ Br. 42-43.
282
      Agreement § 3.22(f).
283
      Id. § 3.32(b).


                                             61
In Section 3.32(c), Channel represented and warranted that its products did not

contain any material defect:

          None of the Products developed, used, manufactured or sold by
          [Channel] prior to the Closing contained any material quality, design,
          engineering, manufacturing or safety defect.284

          With respect to Sections 3.22(f) and 3.32(b), Boston Scientific has not

identified any applicable laws or requirements that Channel failed to comply with,

other than design control requirements of the QSR. Boston Scientific also has not

identified any evidence relevant to these representations other than the records

Shankar falsified concerning “components used in the production of medical devices

used in the human clinical study.”285 In other words, Boston Scientific’s argument

concerning the inaccuracy of Sections 3.22(f) and 3.32(b) duplicates the argument it

made concerning Section 3.22(a), discussed in the previous section. Thus, for the

same reasons that the representation in Section 3.22(a) was inaccurate, Boston

Scientific has proven by a preponderance of the evidence that Sections 3.22(f) and

3.32(b) also were inaccurate as of the date of the Agreement.

          With respect to Section 3.32(c), which focuses on whether device itself was

defective, Boston Scientific argues in essence that because the Greenleaf Report


284
      Id. § 3.32(c).
285
      Tr. 305-06, 309 (Elder); JX 356.016-018.


                                             62
said, “all of the devices in the [CLARITY clinical] study had been manufactured

under a noncompliant quality system,” those devices must have been materially

defective.286         Noncompliance with certain validation and verification testing

requirements, however, does not mean that the Cerene device necessarily was

defective and, critically, Boston Scientific has failed to identify any evidence of an

actual material defect. For this reason, the court finds that Boston Scientific failed

to prove by a preponderance of the evidence that the representation in Section

3.32(c) was inaccurate as of the date of the Agreement.

                 3.      Statements to the FDA

         Boston Scientific’s final category of alleged inaccurate representations

focuses on the veracity of Channel’s communications with and submissions to the

FDA, which implicates Sections 3.18(c), 3.22(c), and 3.22(h) of the Agreement.

Section 3.22(c) provides that Channel’s regulatory filings were true and correct:

         All applications, notifications, submissions, information, . . . and
         filings . . . , when submitted to the FDA or any other Governmental
         Authority, were true, accurate and complete in all material respects as
         of the date of submission.287

In Section 3.22(h), Channel represented and warranted that Channel had not “made

an untrue statement of material fact to the FDA or any other Governmental


286
      Defs.’ Br. 19; see also id. 42-46.
287
      Agreement § 3.22(c).


                                            63
Authority” or done anything that “would reasonably be expected to provide a basis”

for the FDA to invoke its “Fraud Policy.”288 Section 3.18(c) addresses more

generally applications and submissions in support of “Permits” and requires them to

be “true, complete and correct in all material respects.”289 The term “permits” is

defined as “permits, licenses, franchises, approvals, authorizations, registrations,

clearances, and exemptions . . . necessary for [Channel] to . . . carry on its

business.”290

          As of the date of the Agreement, Channel had made submissions to the FDA

for its IDE and Module 1 of its PMA application, which included three of the six test

reports that contained information that Shankar falsified.291 These three test reports

included the sterilization validation and package seal integrity records discussed

above.292 Boston Scientific argues that the false records in Channel’s IDE and

Module 1 submissions were material because, as Channel’s own expert (Timothy

Ulatowski) testified, “[w]hen submitted, [Channel’s submissions] were significant



288
      Id. § 3.22(h).
289
      Id. § 3.18(c).
290
      Id. § 3.18(b)(i).
291
   Tr. 114, 119-21 (Yu); Tr. 38 (Coté); JX 356.014 (Greenleaf report confirming that
Shankar “caused false information to be submitted in regulatory filings to FDA”). Channel
submitted Module 2 for the PMA to the FDA on November 21, 2017, after signing the
Agreement, and withdrew it later. Tr. 129 (Yu).
292
      JX 658.004-006.


                                           64
in regard to, for example, approval of the IDE.”293 Boston Scientific also contends

that the severe consequences for filing any false statement with the government such

as criminal liability under 18 U.S.C. § 1001, an injunction, or invocation of the

FDA’s Fraud Policy undermines any contention that filing false information with

the FDA would be insignificant to a reasonable acquirer.294

         Channel counters, once again, that the results of its investigation negate the

materiality of these test reports. As discussed above, however, a reasonable acquirer

would find the fact that falsified reports were submitted to the FDA to alter the total

mix of information for other purposes, namely to call into question Channel’s ability

to secure FDA Approval. For this reason, Boston Scientific has proven by a

preponderance of the evidence that the false information submitted to the FDA

before the Agreement Date was “material.” Thus, Sections 3.18(c), 3.22(c), and

3.22(h) were inaccurate as of the date of the Agreement.295



293
      Tr. 437-38 (Ulatowski).
294
      Defs.’ Br. 48.
295
   With respect to Sections 3.22(c) and 3.22(h), Boston Scientific asserts that Channel also
provided falsified information to BSI because the “technical information submitted by
[Shankar] through upload . . . to BSI’s website portal for review included some of the same
false information that had been submitted to FDA.” Defs.’ Br. 41-42 (quoting JX 356.019).
In making this argument, Boston Scientific did not identify which specific laws or legal
requirements govern submissions to BSI, which is necessary to determine if Channel
committed a violation. Regardless, for the reasons explained above, Boston Scientific has
proven that the representations in Sections 3.22(c) and 3.22(h) were inaccurate based on
Channel’s submissions to the FDA, making any further violations of those provisions based
on its submissions to BSI cumulative.
                                            65
                                      *****

         In sum, for the reasons discussed above, Boston Scientific has proven by a

preponderance of the evidence that Channel’s representations in Sections 3.18(c),

3.22(a), (c), (f), (h), and 3.32(b) of the Agreement were inaccurate at signing but

failed to prove the inaccuracy of Section 3.32(c).

         B.     Whether Channel’s Inaccurate Representations in the Agreement
                Would Reasonably Be Expected to Result in an MAE
         Having determined that a number of the representations in the Agreement

were inaccurate as of the Agreement Date, the next question is whether Boston

Scientific has proven that the failure of those representations “to be true and correct

has or would reasonably be expected to have a Material Adverse Effect” on

Channel.296 Before turning to consider the evidence on this question, the court

addresses several legal issues relevant to how the termination provision in Section

8.1(f) operates.




296
      Agreement § 7.2(b).
                                          66
                    1.   Legal Framework of Section 8.1(f)

          The Agreement defines “Material Adverse Effect” in relevant part, as follows:

          “Material Adverse Effect” means with respect to [Channel], any change
          or effect occurring after the Agreement Date that, when taken
          individually or together with all other adverse changes or effects
          occurring after the Agreement Date, is materially adverse to the
          business, results of operations, assets or financial condition of
          [Channel].297

The definition in the Agreement goes on to enumerate a series of carve-outs, but

none of them are relevant to this case.

          As is typical with MAE clauses, the Agreement does not define what

“material” means for purposes of an MAE.298 In the absence of such a definition,

Delaware courts applying MAE clauses—including, most recently, in Akorn—have

held that the “effect should ‘substantially threaten the overall earnings potential of

the target in a durationally-significant manner.’”299

          Seizing on a different part of the Akorn decision, discussed above, where the

court considered the standard for a covenant that used “in all material respects”

language, Boston Scientific suggests that the court should apply a disclosure-based

standard of materiality in determining whether there has been a Material Adverse


297
      Id. § 10.2.
298
      See Akorn, 2018 WL 4719347, at *48 (citations omitted).
299
   Id. at *53 (quoting In re IBP, Inc. S’holders Litig., 789 A.2d 14, 68 (Del. Ch. 2001));
see also Hexion, 965 A.2d at 738; Frontier Oil, 2005 WL 1039027, at *34.


                                            67
Effect.300 According to Boston Scientific, the operative question should be whether

“the fraud would have been important to BSC’s decision to enter into the

Agreement.”301 This position is devoid of merit. The “concept of ‘Material Adverse

Effect’ and ‘material’ are analytically distinct.”302 And, as just mentioned, Akorn

itself applied the significantly higher standard of materiality that Delaware courts

have used in the past in the absence of a contractual definition of materiality when

applying MAE clauses.

          In Akorn, based on a thorough review, Vice Chancellor Laster summarized

other teachings from our law relevant to applying an MAE clause, as follows:

          A buyer faces a heavy burden when it attempts to invoke a material
          adverse effect clause in order to avoid its obligation to close. A short-
          term hiccup in earnings should not suffice; rather the Material Adverse
          Effect should be material when viewed from the longer-term
          perspective of a reasonable acquirer. In the absence of evidence to the
          contrary, a corporate acquirer may be assumed to be purchasing the
          target as part of a long-term strategy. The important consideration
          therefore is whether there has been an adverse change in the target’s
          business that is consequential to the company’s long-term earnings
          power over a reasonable period, which one would expect to be
          measured in years rather than months.303




300
      Defs.’ Br. 83-84.
301
      Id. 83.
302
      Frontier Oil, 2005 WL 1039027, at *38.
303
      Akorn, 2018 WL 4719347, at *53 (citations omitted).


                                               68
“The ‘reasonably be expected to’ standard is an objective one.”304                    “Future

occurrences qualify as material adverse effects” and “an MAE can have occurred

without the effect on the target’s business being felt yet.” 305 But “a mere risk of an

MAE cannot be enough.”306 “There must be some showing that there is a basis in

law and in fact for the serious adverse consequences prophesied by the party

claiming the MAE.”307           When determining if something would reasonably be

expected to result in an MAE, the court considers “quantitative and qualitative

aspects.”308

            During post-trial argument, the parties disagreed on how the termination

provision in Section 8.1(f) interacts with the Representations Condition in Section

7.2(b), which contains the forward-looking “would reasonably be expected” MAE

requirement. The court requested supplemental briefing on that dispute, which




304
      Id. at *46 (internal quotation marks omitted).
305
      Id.
306
    Id. at *65; see also Kling & Nugent, supra note 231, § 11.04[9], at 11-60 n.102
(discussing the “reasonably be expected to” standard).
307
    Akorn, 2018 WL 4719347, at *65 (quoting Frontier Oil, 2005 WL 1039027, at *36
n.224). Vice Chancellor Laster noted that one commentator “argues that the ‘would
reasonably be expected’ formulation is best thought of as meaning ‘likely to happen,’ with
the likely, in turn, meaning a ‘degree of probably greater than five on a scale of ten,’” which
the Vice Chancellor equated to “more likely than not.” Id. at *65 n.646 (citations omitted).
308
      Id. at *65 (citing Frontier Oil, 2005 WL 1039027, at *37).


                                               69
highlighted two temporal issues concerning the interplay of those provisions. The

court addresses these temporal issues next.

          To repeat, under Section 8.1(f), Boston Scientific may terminate the

Agreement “at any time prior to the Effective Time” if “any representation or

warranty of [Channel] contained in this Agreement shall be inaccurate or shall have

been breached as of the Agreement Date . . . such that the [Representations

Condition] would not be satisfied.”309 The Representations Condition in Section

7.2(b), including the preface, states in relevant part:

          7.2 Conditions to the Obligation of [Boston Scientific] and Merger
          Sub. The obligations of [Boston Scientific] to consummate the Merger
          after delivery of . . . a Put Option Election Notice by [Channel] are
          subject to the satisfaction of the following further conditions . . . :

                                         ***

          (b)(i)    Each of the representations and warranties of [Channel]
          contained in this Agreement . . . shall have been true and correct at the
          time originally made . . . except to the extent the failure of any such
          representations and warranties to be true and correct does not have and
          would not reasonably be expected to have a Material Adverse Effect on
          [Channel]. . . . For clarity, it is agreed that the condition set forth in
          clause (b)(i) of this paragraph shall be deemed to be satisfied unless any
          failures of the representations and warranties identified in clause (b)(i)
          to be true and correct has or would reasonably be expected to have a
          Material Adverse Effect on Channel.310




309
      Agreement § 8.1(f).
310
      Id. § 7.2.
                                             70
         The first temporal issue arising from reading these two provisions together is

determining what date the court should look to in assessing whether there was a

reasonable expectation that an MAE would occur at some point in the future. The

second issue is at what point in time, as of that date, an MAE “would reasonably be

expected” to occur.

         With respect to the first issue, Channel contends that Section 8.1(f) requires

the court to evaluate whether there was a reasonable expectation of an MAE as of

the date Boston Scientific provided its notice of termination, i.e., on May 11, 2018.311

Boston Scientific agreed during post-trial argument that the termination date was the

relevant date,312 but then changed its position. It now asserts that the relevant date

is “shortly after March 6, 2018” because that is when Boston Scientific read the

Greenleaf Report and “formed the expectations that led to termination.”313 This flip

of position is odd given Boston Scientific’s stance at post-trial argument that the

two-month difference between March and May of 2018 is immaterial to whether it

was entitled to terminate the Agreement under Section 8.1(f).314 In any event, the

court finds that the appropriate date to use is the termination date.


311
      Pl.’s Supp. Answering Br. 1, 18 (Dkt. 207).
312
      See Post-Trial Tr. 25, 43 (July 26, 2019) (Dkt. 203).
313
      Defs.’ Supp. Opening Br. 13 (Dkt. 206).
314
   Post-Trial Tr. 43 (“So what – the logical way to read the contract is at the time you
terminate – because you can terminate at any time – was there a reasonable expectation of

                                                71
      The critical language of the MAE provision in Section 7.2(b) is that an MAE

must “reasonably be expected”—an objective standard. As a matter of common

sense, the logical time to test whether a party had an objective right to terminate

under Section 8.1(f) is to examine the facts and circumstances when the party

actually took action to terminate. This approach is not only logical, it provides

precision by fixing a specific date to apply the terms of the contract, whereas using

an earlier date invites guesswork and imprecision on what date to use. Boston

Scientific advances no persuasive reason for using an earlier date and the court can

conceive of none. To the contrary, Boston Scientific’s change of position appears

to be a pretext to try to elide evidence unhelpful to its case (i.e., the FDA’s approval

of Channel remediation plan in April 2018) even though Boston Scientific did not

have the strength of its convictions to terminate the Agreement before Channel

received that approval. Based on the foregoing, the court finds that the most sensible

way to read the Agreement is to consider, as of the termination date, whether there

was a reasonable expectation of an MAE.

      With respect to the second issue, Channel contends that Section 8.1(f) requires

Boston Scientific to prove, as of termination, that any inaccuracies in Channel’s

representations were such that an MAE would reasonably be expected as of the time


an MAE. So May-March, I mean, it doesn’t matter because there was – nothing happened
materially between – ”).


                                          72
of the anticipated closing.315 Boston Scientific agrees that the “reasonably be

expected” language in Section 7.2(b) is “an inherently forward-looking concept,”316

but it is silent on what time frame the court should consider in applying Section

8.1(f), which means the inquiry would be open-ended.317 For the reasons explained

below, the court agrees with and adopts Channel’s interpretation.

          A key difference between the parties’ interpretations is their treatment of the

preface to Section 7.2(b), quoted above, as it relates to Section 8.1(f). Before

considering where the parties disagree about the preface, it is useful to review what

is not in dispute. The Agreement makes clear that: (i) Channel could only exercise

its put-right if Cerene received FDA approval on or before September 30, 2019; (ii)

upon receipt of FDA approval, Channel had twenty-one days to deliver a Put Option

Election Notice; and (iii) upon delivery of the Put Option Election Notice, Boston

Scientific would be obligated to close within 15 days.318 The record also shows that,

when the parties entered into the Agreement, they expected that FDA would approve

Cerene in the first quarter of 2019.319 All of this means that the parties expected the

transaction to close in April or May of 2019.

315
      Pl.’s Supp. Answering Br. 1.
316
      Defs.’ Supp. Reply Br. 9 (Dkt. 209).
317
      Id. 6.
318
      Agreement §§ 1.1(b), (d), 10.2 (definitions of “FDA Approval” and “Put Period”).
319
      JX 437; JX 438; JX 297.004-005, 011-012.


                                             73
          Turning to the parties’ areas of disagreement, Channel contends that because

“Section 7.2(b) is a closing condition . . . whether it ‘would not be satisfied’ . . .

therefore must be assessed at the expected time of closing.”320 For the reasons just

explained, the way the preface operates supports this timing.

          As an interpretative matter, Channel argues that the preface “is a necessary

and indispensable part of the section” both “grammatically and logically” because

they are “both part of the same sentence” and “without the preface, Section 7.2(b)

contains nothing more than an abstract statement.”321 The court agrees. Indeed, the

ability to terminate “at any time prior to the Effective Time”—language upon which

Boston Scientific relies heavily—itself appears in the preface of Section 8.1(f).322 It

would be illogical to construe one of the two provisions at issue (Section 8.1(f)) in

tandem with its preface while disregarding the preface for the other (Section 7.2(b)).

          Boston Scientific makes essentially two other arguments opposing Channel’s

interpretation. Both are without merit.

          First, Boston Scientific argues that Channel’s interpretation would require it

“to delay the exercise of its termination rights until the issuance of a Put Option

Election Notice” and thus render meaningless the language in the preamble of


320
      Pl.’s Supp. Answering Br. 1.
321
      Id. 6.
322
      The preface of Section 8.1 is quoted in full in Part V below.


                                               74
Section 8.1 allowing it to terminate “at any time.”323 This is incorrect. Requiring

Boston Scientific to prove, as of termination, that any inaccuracies in Channel’s

representations would reasonably be expected to have a Material Adverse Effect as

of an anticipated closing date, does not mean that Boston Scientific would have to

wait to terminate until after the issuance of a Put Election Option. Boston Scientific

can terminate “at any time prior to the Effective Time”—whether or not Channel

has delivered a Put Option Election Notice. To do so under Section 8.1(f) without

violating the other terms of the Agreement simply means that Boston Scientific must

show there was an inaccurate representation that, as of termination, would

reasonably be expected to have a Material Adverse Effect as of when the parties

anticipated the merger would close. Interpreting the Agreement in this manner gives

meaning to all parts of Sections 7.2(b) and 8.1(f).

         Second, Boston Scientific argues that Channel’s interpretation would “render

meaningless the cure provision in Section 8.1(f),”324 which is limited to “an

inaccuracy in or breach of any representation . . . of [Channel] as of a date subsequent

to the date of this Agreement.”325 This is a non sequitur. The fact that Boston

Scientific could not validly terminate the Agreement under Section 8.1(f) unless the



323
      Defs.’ Br. 1-5; Defs.’ Supp. Reply Br. 9.
324
      Defs.’ Supp. Reply Br. 10.
325
      Agreement § 8.1(f).
                                              75
alleged breach of representation reasonably would be expected to have a Material

Adverse Effect has nothing to do with the cure provision in Section 8.1(f). Indeed,

Channel does not dispute that it has no contractual right to cure a representation that

was inaccurate as of the Agreement Date, which is logical because one cannot go

back in time to fix a representation made as of a date in the past.326 But that does

not mean that Boston Scientific is exempted from having to establish that such an

inaccuracy would reasonably be expected to have a Material Adverse Effect in order

to terminate under Section 8.1(f). Nor does it mean that Boston Scientific may not

have other recourse, such as indemnification rights, for inaccurate representations

that would not reasonably be expected to rise to the level of a Material Adverse

Effect.327

                                          *****

       For the reasons explained above, the court concludes that Boston Scientific

has the burden to prove that, as of the termination date, the inaccurate representations

in the Agreement would reasonably be expected to have a Material Adverse Effect



326
   Post-Trial Tr. 77 (“[Y]ou can’t cure a breach of rep at signing because you can’t go
back and make it true at signing”).
327
    See Agreement § 9.2(a) (Channel “shall . . . indemnify, defend and hold harmless
[Boston Scientific] . . . from and against . . . any breach by [Channel] of any representation
[or] warranty . . . made by [Channel] in this Agreement.”); see also Kling & Nugent supra
note 231, § 1.05[2] at 1-41 (“If a representation is false when made, that is, when the
agreement is executed, the representing party may be liable for damages whether or not the
transaction closes.”).
                                             76
on Channel around the time the parties’ expected the merger to close. As it turns

out, the precise timeframe in the future for examining whether an MAE would

reasonably be expected ends up being of little consequence in this case. That is

because, as discussed in the next section, the court finds that Boston Scientific has

not proven that, as of the termination date, the inaccurate representations would

reasonably be expected to have a Material Adverse Effect at any future point in time.

                2.    Boston Scientific’s Evidence of an MAE

         On June 19, 2018, about one month after terminating the Agreement, Boston

Scientific asserted in a letter to Channel that its “submission of false information to

regulators has placed the approval of Cerene in jeopardy, thereby substantially

threatening Channel’s overall earnings potential.”328 This assertion flew in the face

of many facts known to Boston Scientific when it terminated the Agreement several

weeks earlier, on May 11, 2018—most significantly, the FDA’s acceptance of

Channel’s remediation plan for premarket approval on April 18, 2018.329 That action

was the culmination of the following series of events:

          In late January 2018, Channel met with the FDA and made it aware
           of Shankar’s fraud, including the six falsified reports submitted to
           the FDA.330


328
      JX 514.006.
329
      JX 456.005.
330
      Tr. 126-28 (Yu); JX 270; JX 279.


                                          77
          In February 1, 2018, the FDA asked Channel to withdraw and
           re-submit PMA Module 2 with corrected records, which Channel
           did.331

          In March 16, 2018, Channel and representatives of Greenleaf met
           with the FDA.332 One week before that meeting, Channel provided
           the FDA with more than 250 pages of information about Shankar’s
           fraud, including: (i) the Greenleaf Report, (ii) Channel’s Fraud
           Implication Assessment Quality Plan, (iii) the fourteen IARs
           addressing Shankar’s fraud, (iv) Brill’s adverse event review, and
           (v) a lengthy report summarizing Channel’s investigation and
           remediation efforts related to its IDE and PMA Module 1.333

          After receiving this information, “the FDA thanked the company for
           their transparency and for coming forward with the information
           quickly.”334 When asked if the FDA “would be interested in
           subsequent discussions regarding the issues and the status and
           progress of the company’s remediation,” the FDA responded that
           “follow-up would take place through the inspection process.”335

          On April 18, 2018, the FDA told Channel that it “ha[d] addressed
           all of FDA’s concerns and that the agency appreciate[d] the
           company’s transparency and timeliness.”336 Since that date, the
           FDA did not seek any more information about Shankar’s fraud.337

          Also on April 18, 2018, the FDA and Channel discussed the
           schedule for continuing to submit the remaining modules of the
           PMA and to complete the process by July—only one month later
           than the originally forecasted submission date of June.338

331
      Tr. 129 (Yu); JX 294; JX 494.
332
      Tr. 64 (Coté), 129, 132-33 (Yu); JX 401.
333
      JX 380; see Tr. 64-65 (Coté); Tr. 130-31 (Yu).
334
      JX 401.004; Tr. 67 (Coté).
335
      JX 401.004; Tr. 133-34 (Yu).
336
      JX 436.001.
337
      Tr. 139 (Yu).
338
      Id. 138; JX 436.
                                             78
      The FDA’s acceptance of Channel’s remediation plan on April 18, 2018

strongly signaled that Shankar’s fraud would not be the cause of any failure of the

FDA to provide premarket approval of the Cerene device and made receipt of

premarket approval—the triggering event for Channel to exercise its put-right under

the Agreement to close the merger—a distinct possibility.           Indeed, the FDA

approved Channel’s PMA application on March 28, 2019, consistent with the

timeframe Boston Scientific expected before it signed the Agreement. That approval

occurred a few weeks before trial. The court considers next the qualitative and

quantitative aspects of the evidence of an MAE that Boston Scientific offered at trial.

                    a.     Qualitative Significance

      Presumably because Channel received FDA approval for Cerene, Boston

Scientific did not press at trial its initial explanation for a reasonably expected MAE,

i.e., that Shankar’s fraud substantially threatened Channel’s overall earnings

potential by jeopardizing its chances of obtaining FDA approval. Rather, Boston

Scientific shifted its strategy to argue that Shankar’s fraud was reasonably expected

to have a Material Adverse Effect notwithstanding Channel’s receipt of FDA

approval on the theory that Boston Scientific would still need to remediate and retest

the product before placing Cerene on the market.

      Pierce, who read the Greenleaf Report in early March 2018, testified he made

the decision on behalf of Boston Scientific to terminate the Agreement after
                                          79
receiving feedback about the Greenleaf Report from several Boston Scientific

executives during a March 29 meeting.339 The Greenleaf Report was the sole

documentary evidence Pierce relied on in deciding to terminate the Agreement.340

According to Pierce, the report made it clear to him that Boston Scientific “could

only market [Cerene] in good faith by going all the way back to the beginning and

redoing the entire design history file, redoing the IDE submission, reconducting the

clinical trial, and ultimately resubmitting the PMA.”341 This stated belief is not

credible, however, given the circumstances surrounding Pierce’s decision to

terminate the Agreement.

          To start, Pierce already had received the information contained in the

Greenleaf Report through the periodic updates Channel was providing Kaster and

Robinson.342 Pierce also oddly purported to rely on the Greenleaf Report in deciding

to terminate the Agreement while ignoring Greenleaf’s fundamental conclusion—




339
      Tr. 471-73, 478-79 (Pierce).
340
      Id. 537.
341
   Id. 472-73, 537; see also id. 485-86. Carr testified that he and other executives at the
meeting shared Pierce’s view, but Pierce was the one who made the decision and the other
executives to which Carr referred (Gardner and Sukthankar) did not testify at trial. Tr.
620-21 (Carr).
342
      See supra Part I.I.


                                            80
that it did not find evidence that Shankar’s activities had any impact on Channel’s

clinical data.343

         Significantly, Pierce decided to terminate the Agreement without taking any

number of actions one reasonably would have expected him to take before making

such a consequential decision.        For example, before Pierce terminated the

Agreement, no one at Boston Scientific: (i) spoke with Greenleaf or Channel about

the findings in the Greenleaf Report;344 (ii) used an outside consultant to examine

the effect of Shankar’s fraud;345 (iii) quantified the costs of remediating Channel’s

quality systems;346 or (iv) made any effort to understand what Channel had done to

improve its quality systems since discovering Shankar’s fraud.347

         Pierce also did not confer with a number of executives whose perspectives on

Channel and terminating the Agreement would seem highly relevant. Pierce did not

consult with Boston Scientific’s Head of Quality or its Chief Medical Officer, whose

“major responsibility is the clinical work associated with Boston Scientific’s

products and also understanding the clinical risks and benefits of Boston Scientific’s




343
      JX 355.006-007.
344
      Tr. 516 (Pierce).
345
      Id. 522-23.
346
      Tr. 640 (Carr).
347
      Id. 642.


                                          81
products.”348 He also did not consult with Kaster, Boston Scientific’s designee to

Channel’s Board and long-time Board observer, whom Pierce acknowledged knew

more about Channel than he did.349 At the time, Kaster believed, based on the regular

Board updates he was receiving, that Shankar’s fraud was “more or less” a

“non-issue”:

         Q.      So your reaction initially upon learning this was you thought this
                 was all a non-issue unless any of his actions impacted the data,
                 and by “data,” in your mind, when you conveyed that you were
                 talking about human patient data?
         A.      Yes.
         Q.      Okay. And you know today, or at least based on what you know
                 today, none of his actions impacted human patient data?
         A.      Correct.
         Q.      And I think it’s fair to say based on this you still feel this is all a
                 non-issue; correct?
         A.      More or less, yeah.350

Nor did Pierce consult with Robinson, Channel’s Board observer.351

         Boston Scientific has no written record of the March 29 meeting and,

incredibly, it did not generate a “single scrap of paper” assessing the impact of

Shankar’s fraud on Channel’s quality system after it received the Greenleaf


348
      Pierce Dep. 46; Tr. 541 (Pierce).
349
      Tr. 538-39 (Pierce).
350
    Kaster Dep. 214 (objections omitted); Tr. 539-40 (video of Kaster deposition
testimony); see also Kaster Dep. 85 (Kaster “did not have doubts” that Channel “fix[ed]
whatever problems there were” arising from “Shankar’s fraudulent activities on Channel
and its quality systems.”).
351
      Tr. 516 (Pierce).


                                               82
Report.352 The lack of any such documentation not only casts doubt on the bona

fides of the termination decision, it belies Pierce’s representation to Coté in an April

22 email that Boston Scientific was “thoroughly assessing the entire impact of

Dinesh Shankar’s actions on your quality systems, pre-clinical and clinical data as

well as the putative product.”353

         When asked how he could justify scrapping all the work Channel had done on

the Cerene device and essentially starting from scratch even after the FDA approved

the device, Pierce testified that it was “based upon Boston Scientific’s expectations

of quality” and not an action another company necessarily would take under the same

circumstances.354 The weight of the evidence before the court, however, shows that

Pierce’s explanation is inconsistent with how Boston Scientific itself has acted in the

past and that Boston Scientific’s litigation position of the need to start from scratch

to remediate Cerene is not objectively reasonable.

         The record demonstrates, and the court finds, that FDA approval of Cerene,

which appeared likely when Boston Scientific terminated the Agreement, undercuts

Boston Scientific’s assertion that it would need to keep Cerene off the market while

it engages in its own remediation efforts and potentially conducts an additional



352
      Id. 528.
353
      JX 456.004.
354
      Tr. 476-77, 478 (Pierce).
                                          83
clinical trial. Channel’s receipt of FDA approval meant that the FDA—a highly

respected neutral third party—had meticulously examined Channel’s PMA

submission and found that there is “reasonable assurance” that Cerene is “safe and

effective.”355

         Testimony from Boston Scientific’s own employees confirm the importance

of FDA approval. For example, Carr, a senior member of Boston Scientific’s quality

staff who participated in the March 29 meeting with Pierce,356 testified:

         Q.     The PMA approval progress is rigorous. Correct?
         A.     That’s correct.
         Q.     And approval of a PMA indicates that FDA believes a product is
         safe and effective. Correct?
         A.     Correct.
         Q.     FDA would not approve a product that doesn’t meet its high
         standards. Correct?
         A.     I would believe that to be true, yes.357

         Boston Scientific’s corporate representative Lisa Sullivan similarly endorsed

the significance of FDA approval. She testified that Boston Scientific has repeatedly

contended in “thousands of product liability cases” that FDA approval demonstrates

that products are safe and effective and that Boston Scientific has always been

willing to rely on the FDA’s statements.358 In 2018, for example, in response to a



355
      JX 757.029-030.
356
      Tr. 578-79, 620-21 (Carr).
357
      Id. 683.
358
      Sullivan Dep. 46.
                                           84
60 Minutes investigatory piece about Boston Scientific’s transvaginal mesh

products, Boston Scientific stated that “[a]ny allegations [that] continu[e] to question

the integrity or legitimacy of [the] resin [used in these products] are false and

irresponsible” because the FDA had determined that a change in the resin supplier

“did not raise any new safety or effectiveness concerns.”359

         Boston Scientific’s quality expert (Reeves) could not identify any instance

where Boston Scientific—or any other company—voluntarily rebuilt a quality

system for a device from scratch and redid its clinical testing after receiving FDA

approval.360 To the contrary, Reeves acknowledged that even after one of his clients

had received multiple warning letters from the FDA and had been advised to rebuild

its quality system, the client continued to market the product during remediation.361

         Boston Scientific offered no fact testimony of any instance where it

voluntarily rebuilt a quality system from scratch and/or redid clinical testing for an

FDA-approved device without prompting from the FDA, and evidence of its own

past practices belies that this would be necessary before marketing Cerene. In 2015,

Boston Scientific acquired American Medical Systems (“AMS”), a men’s health

products company, which had recently received a warning letter from the FDA


359
      JX 327.004.
360
      Tr. 837-38 (Reeves).
361
      Id. 836-37.


                                          85
concerning validation issues.362 As discussed below, Boston Scientific identifies

AMS as its best comparable to Channel for the cost of remediation. Yet Boston

Scientific kept AMS’s products on the market throughout the AMS remediation

process, despite having received an FDA warning letter—something Channel has

never received.363

         Boston Scientific argues that even with FDA approval, Shankar’s fraud would

reasonably be expected to have a Material Adverse Effect because completion of the

merger would expose Boston Scientific to products liability litigation, competitive

harm, and future regulatory action.364 Each of these concerns is a risk that a

businessperson legitimately would consider, although—to repeat—there is not a

“single scrap of paper” that Boston Scientific actually analyzed any of these risks

when Pierce made the termination decision.365 Rather, the evidence about these

concerns consists of seemingly after-the-fact rationalizations, is highly speculative

and does not come close to proving that, as of the termination, Boston Scientific

reasonably expected that these concerns would rise to the level of a Material Adverse

Effect.



362
      Tr. 611 (Carr); JX 738.013.
363
      Tr. 675-78 (Carr).
364
      Defs.’ Br. 58-62.
365
      Tr. 528-29 (Pierce).


                                          86
         With respect to product liability claims, Boston Scientific elicited testimony

that details about Shankar’s fraud and Channel’s remediation likely would be

“significant fodder” for plaintiff’s attorneys in a hypothetical product liability

case.366 Boston Scientific, however, failed to identify any defect or substantive

problem with Cerene that could form the basis of a products liability claim and it

made no effort to quantify the increased risk of such hypothetical claims.

         In Frontier Oil, this court declined to find that a pending toxic tort litigation

that “could be catastrophic” for the company caused an MAE where the buyer had

not “demonstrated (or even seriously tried to demonstrate) the likelihood” of an

MAE resulting from the litigation or to give the court “the basis to make a reasonable

and an informed judgment of the probability of an outcome on the merits.”367 The

court noted that “the mere existence of a lawsuit cannot be determinative” of an

MAE but rather “[t]here must be some showing that there is a basis in law and in

fact for the serious adverse consequences prophesied by the party claiming the

MAE.”368

         Here, Boston Scientific’s product liability concerns are far weaker than the

concerns that were found deficient in Frontier Oil because there is no pending



366
      Tr. 434-35 (Ulatowski); Tr. 480-81 (Pierce).
367
      Frontier Oil, 2005 WL 1039027, at *12, *36.
368
      Id. at *36 n.224.
                                              87
litigation, there is no identified product defect or articulated basis for a product

liability claim, and no showing has been made about the likelihood of any exposure

or the costs involved. In short, there is no basis here “in law and in fact” for the

serious consequences about which Boston Scientific is now professing concern.

         With respect to competitive harm, Pierce testified that “the idea of fraud could

and would be used by competitors to try to establish doubt around” Cerene.369

Competitors undoubtedly will seize upon whatever debating points they think will

help them gain market share but it is not self-evident that focusing on Shankar’s

fraud would have a material impact on Cerene sales given the imprimatur of FDA

approval. Apart from simply identifying the risk of competitive harm, Boston

Scientific did not present any evidence showing how Cerene’s projected sales would

be reduced because of Shankar’s fraud if it proceeded to sell the product upon

receiving FDA approval, let alone reduced so significantly as to cause a Material

Adverse Effect.370

         Finally, Boston Scientific argues that if the deal closes, Boston Scientific

would be “susceptible to future regulatory action” on Cerene because Channel failed



369
      Tr. 481 (Pierce).
370
    The only impact on sales for which Boston Scientific provided evidence was an analysis
by its valuation expert. He analyzed the projected impact of delaying sales of Cerene for
two to four years to re-remediate the product and, potentially, to conduct a new clinical
trial. This analysis is discussed in Part IV.B.2.b.


                                            88
to submit two documents to the FDA that were created after the FDA accepted

Channel’s remediation plan: the second Greenleaf report, prepared in June 2018,

and an internal audit of Channel’s quality management system conducted by a

consultant (Linda Lovett) in September 2018.371         It stands to reason that the

introduction of any new healthcare product inherently carries a risk of future

regulatory action, thus Boston Scientific must show that Shankar’s fraud would

reasonably be expected to significantly increase this risk. It has not done so.

         Channel’s FDA expert (Ulatowski) credibly testified that the FDA would not

have expected Channel to produce either of these documents unsolicited.372

Ulatowski explained (and the record confirms) that the FDA stated at its March 2018

meeting with Channel that the FDA inspector would follow up at the premarket

approval inspection about anything the inspector thought was important to review,

which is the FDA’s usual procedure.373 The contents of the two documents in

question also do not raise any red flags concerning Shankar’s fraud.

         As to the second Greenleaf report, Boston Scientific focuses on its reference

to a “new data integrity issue” concerning a vendor, Henry Servin & Sons, which

inspected certain components. The cited data integrity issue, however, concerned


371
      Defs.’ Br. 15, 61.
372
      Tr. 423-24 (Ulatowski).
373
      Id. 423-25; JX 401.004.


                                           89
the vendor’s own computer server and was completely unrelated to Shankar’s

fraud.374 Boston Scientific also draws attention to Greenleaf’s recommendation in

its second report that Channel ensure that its classification of the IARs it opened to

investigate Shankar’s fraud as “minor” is supportable. Each of these IARs was

provided to the FDA and, importantly, the second Greenleaf report specifically

found that “the impact of the questionable classifications may be minimal since in

the current environment, all issues have received the appropriate visibility and

prioritization within the company.”375

         As to the Lovett audit, which was a regularly scheduled internal audit that the

FDA normally would not receive,376 Boston Scientific does not contend that any of

its observations or concerns pertained to Shankar’s fraud. The audit, furthermore,

provided an overall positive assessment of Channel’s quality system: “continued


374
   When investigating Shankar’s fraud, Channel discovered that Henry Servin & Sons had
sold its server, which “housed all of the raw data for not only Channel, but for some other
clients as well.” Tr. 179 (Patel). In response, Channel (i) informed the FDA about the
issue in an IAR it provided to the FDA, (ii) opened a CAPA, (iii) terminated the vendor,
(iv) re-inspected components that the vendor inspected, and (v) conducted a risk
assessment that did not identify any additional risks. Id. 179-85; JX 380.073; JX 652.004-
005.
375
      JX 634.011.
376
   See JX 595.076 (“The audit was completed to identify gaps and/ or opportunities in the
company’s quality management system according to the internal audit schedule[].”);
Tr. 281-82 (Elder) (explaining that the FDA normally permits a company to maintain
confidentiality of internal audits “to make sure it’s done well so the company can identify
their deficiencies and take corrective action to address them outside of an FDA
inspection.”).


                                            90
enhancement and implementation is encouraged to assure the associated [Quality

System] controls and procedures continue to demonstrate full compliance to

applicable regulations [and] standards.”377

         In sum, the weight of the evidence demonstrates convincingly that Boston

Scientific’s professed need—notwithstanding FDA approval of the Cerene device—

to remediate and retest Cerene before placing it on the market is not objectively

reasonable, and that Boston Scientific’s concerns about potential products liability

litigation, competitive harm, and future regulatory action are based on little more

than unsubstantiated speculation. The court next turns to the quantitative aspects of

the evidence of an MAE that Boston Scientific presented at trial.

                       b.   Quantitative Significance

         Boston Scientific asserts that Shankar’s fraud and the related inaccurate

representations in the Agreement made it “reasonable to expect that the value of

Channel had been substantially impaired.”378       There is no bright-line test for

determining an MAE based on quantitative considerations. As discussed in Akorn,

one influential treatise observes “that most courts which have considered decreases

in the 40% or higher range found a material adverse effect to have occurred.”379 The


377
      JX 595.077 (emphasis added).
378
      Defs.’ Br. 13.
379
    Akorn, 2018 WL 4719347, at *53 (citing Kling & Nugent, supra note 231, §11.04[9],
at 11-66).
                                         91
Akorn decision itself found that remediation costs that equated to approximately

21% of the target’s standalone equity value implied by the merger agreement “would

be ‘material when viewed from the longer-term perspective of a reasonable

acquiror.’”380      For the reasons explained below, Boston Scientific failed to

demonstrate any material decline in Channel’s value.

         Boston Scientific based its quantitative case for proving an MAE on testimony

from its expert, Tim Cummins, a managing director of Stout Risius Ross, LLC.381

Cummins assessed the impact of Shankar’s fraudulent activities “on the value to

[Boston Scientific] of Channel . . . as of November 1, 2017.”382 To do so, Cummins

estimated the value of Channel to Boston Scientific based on the information

available at signing. He then compared this value to his estimate of “the value of

Channel to [Boston Scientific] had [Boston Scientific] been aware of Mr. Shankar’s

actions and been able to incorporate the expected costs and time delays necessary to

remediate Channel’s quality assurance system and perform new clinical trials for

Channel’s only product, the Cerene Cryotherapy Device.”383




380
      Id. at *74 (quoting IBP, 789 A.2d at 68).
381
      Tr. 994 (Cummins).
382
      JX 738.004; Tr. 998 (Cummins).
383
      JX 738.006.


                                              92
         Starting with Boston Scientific’s pre-agreement deal model, Cummins

adjusted (i) the time and cost required to remediate Channel’s quality system and,

potentially, to conduct a new clinical trial and (ii) the discount rate.384 Cummins

analyzed three potential scenarios, which forecasted delays in realizing cash flows

of two, three, four years, respectively: (i) a two-year remediation process with no

new clinical trial, (ii) one year of remediation followed by a new two-year clinical

trial, and (iii) two years of remediation followed by a new two-year clinical trial.385

He applied two different discount rates to these three scenarios: the 13% discount

rate used by Boston Scientific in its pre-Agreement deal model and a 15% discount

rate “to incorporate a scenario that included . . . some additional assumption of risk

in those cash flows.”386 As depicted below, Cummins estimated that Channel’s

value to Boston Scientific decreased by 24% to 54% under these six scenarios from

the value of $488 million that Boston Scientific’s initial deal model placed on

Channel:387




384
      Tr. 998-99 (Cummins).
385
      Id. 1019, 1030.
386
      Id. 1025-26.
387
      Id. 1001, 1010, 1029-30.
                                          93
                           13% Discount Rate             15% Discount Rate

 2-Year Delay         -24% ($115 million decline)    -37% ($180 million decline)

 3-Year Delay         -33% ($163 million decline)    -46% ($225 million decline)

 4-Year Delay         -42% ($203 million decline)    -54% ($262 million decline)


The court does not credit this analysis for numerous reasons discussed next.

         First, and foremost, Cummins premised his analysis on the assumption that

Boston Scientific would need to shelve Cerene for two to four years while it rebuilt

Channel’s quality systems and possibly undertakes a new clinical trial.         This

assumption came from “perspectives” that Boston Scientific employees provided in

the midst of litigation that Cummins did not attempt to validate independently.388 As

discussed above, Boston Scientific failed to offer any persuasive evidence to

establish that this assumption is objectively reasonable. Indeed, as discussed above,

Boston Scientific’s own track record and the testimony of its own witnesses belie

the contention that it was necessary to remediate and retest Cerene before placing it

on the market given the FDA’s approval of the device.389

         The valuation impact of shelving Cerene for two to four years is massive.

Channel’s valuation expert, Kenneth Lehn, a finance professor at the University of



388
      Id. 1042-43.
389
      See Part IV.B.2.a.
                                          94
Pittsburgh, testified credibly and without contradiction that, depending on the

scenario, between 91% and 95% of the reduction in Channel’s value modeled by

Cummins’ analysis is attributable to delaying Channel’s cash flows into the future

by two to four years.390 Cummins’ failure to provide a reliable basis for putting these

cash flow delays into his model undermines the soundness of the key driver of his

model.391

         Second, Cummins’ model analyzed the putative change in Channel’s value to

Boston Scientific, which incorporated merger synergies,392 instead of analyzing any

reduction in the standalone value of Channel. This decision flies in the face of this

court’s uniform approach to valuing a target on a standalone basis in determining

whether an MAE has occurred.393 Boston Scientific also has not argued—nor could




390
      Tr. 1075, 1090-93, 1097 (Lehn); JX 749 ¶¶ 40-42, 47.
391
   See Tr. 1096 (Lehn) (stating that “to say that in perpetuity all those free cash flows get
pushed out, to me, requires some reliable basis. And Mr. Cummins has provided none.”).
392
   Tr. 1064 (Cummins); see also Morrison Dep., February 26, 2019, 66-69 (discussing
synergies included in BSC’s pre-agreement deal model); Morrison Dep., March 13, 2019,
39-40, 45-46, 48, 53, 62 (same).
393
   Akorn, 2018 WL 4719347, at *56 (“[E]very prior decision has looked at changes in
value relative to the seller as a standalone company.”). Boston Scientific argues that using
synergies would be beneficial to Channel because, as the court in Akorn noted, “it increases
the denominator for purposes of any percentage-based comparison.” Defs.’ Reply Br. 24
(quoting Akorn, 2018 WL 4719347, at *56). The point here, however, is that the refusal to
use a standard methodology again calls in to question the reliability of Cummins’ work.
See Akorn, 2018 WL 4719347, at *56 (“Akorn’s desire to include synergies is
understandable . . . but it is not supported by the Merger Agreement or the law.”).


                                             95
it—that the text of the Agreement compels use of a different approach here.394 More

broadly, Cummins adopted the rest of Boston Scientific’s model without considering

whether the inputs were appropriate and did not alter its base model even when he

believed it made assumptions that “didn’t seem likely.”395

         Third, Cummins uncritically accepted an assumption for remediation costs

that Boston Scientific provided to him. Specifically, Cummins used a $17 million

estimate for remediation costs he received from Carr based on Boston Scientific’s

purchase of AMS.396 But Cummins made no effort to consider if this comparison

was valid. He just “took the word of Boston Scientific employees about AMS being

an appropriate example without attempting to independently validate that.”397

         Had Cummins inquired, he might (and should) have questioned whether AMS

was a relevant comparable. Carr testified that he “didn’t do any specific research”

394
   See Agreement §10.2 (defining “Material Adverse Effect” to refer, in relevant part, to
“any change or effect occurring after the Agreement Date that . . . is materially adverse to
the business, results or operations, or assets or financial condition of the Company,” i.e.,
Channel.).
395
   Cummins Dep. 108 (“Q: So even if the BSC’s model was incorrect, you were still going
to use that? A: As the baseline, yes.”), 112-13 (“A: [T]hey had no working capital
investment assumption in year 1 of their model, which didn’t seem likely. Q: And did you
go back and ask why they had no working capital and investment assumption? A: I did.
Q: What was the response? A: They didn’t have a great answer to that.”); Tr. 1082-89
(Lehn); Tr. 1051-52 (Cummins); JX 749 ¶¶ 44-46 (Lehn Expert Report).
396
      JX 766; Tr. 610-13 (Carr); Tr. 1014-17 (Cummins).
  Tr. 1051 (Cummins); see also Tr. 1050 (Cummins) (“Q: So aside from what BSC
397

employees told you, you have no reason to think Channel’s quality system remediation
work would be similar to AMS’s quality system remediation. Correct? A: Correct.”).


                                            96
as to what comparable would be the best for Cummins to use and he admitted that

AMS—which had four product families with multiple products in each—was the

most expensive remediation he ever oversaw at Boston Scientific.398 On the eve of

trial, Boston Scientific was compelled to produce remediation costs for four recent

remediation efforts of single-device start-up companies, which ranged from $1.88

million to $3.52 million.399 Yet Cummins never reviewed any of them in performing

his analysis to see if they were more suitable for making a comparison.400

         Fourth, in three of the six scenarios in his model, Cummins increased the

discount rate by two percentage points to account for increased competition once

Boston Scientific introduced the product after performing two to four years of

remediation and, potentially, a new clinical trial.401 Cummins testified he would

have preferred another approach to address the “increased risk profile,” essentially

admitting that the increase to the discount rate was little more than a non-rigorous

“fudge factor.”402




398
      Tr. 673, 675 (Carr).
399
      JX 925; JX 926.
400
      Tr. 1054-55 (Cummins).
401
      Id. 1034-35.
402
   Id.; see also Tr. 1086 (Lehn testifying that this discount rate manipulation “becomes a
fudge factor. There’s no empirical basis for increasing the base discount rate of 13 percent
by 2 percentage points”).


                                            97
            Boston Scientific takes Channel’s valuation expert (Lehn) to task for

criticizing Cummins’ analysis without providing his own opinion on valuation. It is

Boston Scientific, however, not Channel, who bears the burden to prove an MAE.

Boston Scientific also relies on Lehn’s testimony that “it is reasonable to believe, at

least directionally” that the fraud reduced Channel’s value compared to its value as

represented in the Agreement.403 Lehn testified, credibly, that this belief was

reasonable but he did not opine on “how significant” any reduction would be.404

Lehn’s acknowledgement of a “directional” reduction in value of unknown

significance does not satisfy Boston Scientific’s significant burden to prove an

MAE.

            The only expert who provided an opinion that an MAE would reasonably be

expected was Cummins. For the reasons explained above, the court finds that

Cummins’ analysis is not reliable and does not credit it. As such, Boston Scientific

failed to provide any quantitative evidence of a reasonably expected MAE.

                                          *****

            For the reasons explained above, Boston Scientific failed to prove based on

both qualitative and quantitative factors that it was entitled to terminate the

Agreement under Section 8.1(f).


403
      Tr. 1107-08 (Lehn).
404
      Id.
                                             98
V.       BOSTON SCIENTIFIC’S TERMINATION UNDER SECTION 8.1(i)
         Boston Scientific’s notice of termination invoked Section 8.1(i) as a second

ground for terminating the Agreement in addition to Section 8.1(f).405 Under Section

8.1(i), Boston Scientific can terminate the Agreement at any time, subject to a cure

provision, if an MAE with respect to Channel shall have occurred:

         8.1 Termination of Agreement. This Agreement may be terminated
         and the Merger may be abandoned at any time prior to the Effective
         Time, notwithstanding the delivery of a Put Option Election Notice or
         Call Option Election Notice or any requisite approval and adoption of
         this Agreement and the transactions contemplated hereby by the
         Company Stockholders:

                (i)   by [Boston Scientific], if there shall have occurred any
         Material Adverse Effect with respect to [Channel] . . . provided,
         however, that if the circumstances giving rise to such Material Adverse
         Event are capable of being ameliorated or cured prior to the
         Termination Date, then for so long as the party that has experienced a
         Material Adverse Event continues to exercise commercially reasonable
         efforts to ameliorate or cure the circumstances giving rise to such
         Material Adverse Event, this Agreement may not be terminated
         pursuant to this Section 8.1(i) prior to the Termination Date . . . .406

The termination right in Section 8.1(i) does not depend on the existence of any

inaccuracy in or breach of any representation in the Agreement.




405
      JX 475.
406
   Agreement § 8.1(i) (emphasis added). The Termination Date is 90 calendar days after
the date of delivery of an option election notice, which may be extended up to 30 days if
the parties are still seeking “any other governmental approvals or authorizations as may be
reasonably necessary in connection with the closing of the merger.” Id. § 8.1(b).


                                            99
         By the time of trial, which occurred after FDA approval of Cerene, Boston

Scientific’s reliance on Section 8.1(i) became an afterthought. Apart from quoting

the provision, Boston Scientific devoted literally one sentence of its opening post-

trial brief to the issue, which simply refers back to its argument for proving an MAE

under Section 8.1(f).407 Accordingly, for all the reasons discussed previously for

why Boston Scientific failed to prove an MAE for purposes of terminating the

Agreement under Section 8.1(f), it also failed to do so under Section 8.1(i).

VI.      CHANNEL’S CLAIM FOR BREACH OF SECTION 6.3
         Channel asserts that, apart from failing to prove an MAE under Sections 8.1(f)

or 8.1(i), Boston Scientific could not terminate the Agreement for the independent

reason that it breached its obligation to use “commercially reasonable efforts”’ to

consummate the merger. In Section 6.3(b) of the Agreement, Boston Scientific

covenanted to:

         Take all further action that is necessary or desirable to carry out the
         purposes of this Agreement, and . . . use its commercially reasonable
         efforts to take all such actions and . . . refrain from taking any actions
         which would be reasonably expected to frustrate the essential purposes
         of the transactions contemplated by this Agreement, if [Boston
         Scientific] were to deliver a Call Option Election Notice or [Channel]
         were to deliver a Put Option Election Notice.408




407
      Defs.’ Br. 87.
408
      Agreement § 6.3(b).


                                            100
         Our Supreme Court interpreted a similar covenant to “impose obligations to

take all reasonable steps to solve problems and consummate the transaction.”409

“When evaluating whether a merger partner has used reasonable best efforts, this

court has looked to whether the party subject to the clause (i) had reasonable grounds

to take the action it did and (ii) sought to address problems with its counter party.” 410

Channel bears the burden of proving by the preponderance of the evidence that

Boston Scientific breached Section 6.3(b) of the Agreement.411

         Channel asserts that Boston Scientific violated the obligations it owed under

Section 6.3(b) “through its cursory, careless and unreasonable actions in purporting

to terminate the Agreement for no valid basis with no meaningful consideration.”412

The court agrees. For the reasons discussed above, Boston Scientific did not have

reasonable grounds to terminate the Agreement when it did, particularly given that




409
      Williams Cos. v. Energy Transfer Equity, L.P., 159 A3d 264, 272 (Del. 2017).
410
   Akorn, 2018 WL 4719347, at *91. Although the Agreement here refers to the use of
“commercially reasonable efforts” while the provision in Akorn referred to the use of
“reasonable best efforts,” Delaware “case law [contains] little support for . . . distinctions”
between these two clauses. Id. at *87 & n.796.
411
   See id. at *4 (the party alleging improper exercise of termination by a counterparty
because that party was in material breach of its own obligations bears the burden of proving
by a preponderance of the evidence the facts necessary to establish its claim that the
exercising party could not exercise those rights).
412
      Pl.’s Resp. Br. 88.


                                             101
the FDA already had accepted Channel’s remediation plan, which made it likely

Channel would receive premarket approval for the Cerene device.413

         Boston Scientific claims its receipt of the Greenleaf Report in early March

was the pivotal moment that made it realize the need to terminate the Agreement,

but the record shows that Boston Scientific made no reasonable efforts to engage

with Channel or to take other appropriate actions to attempt to keep the deal on track

after that point. Specifically:

          After receiving the Greenleaf Report on March 6, Boston Scientific
           did not exercise its right under the Agreement to obtain additional
           information from Channel and did not raise any concerns with
           Channel for six weeks.414

          On April 22—after learning three days earlier that the FDA had
           accepted Channel’s remediation plan—Boston Scientific emailed
           Channel claiming there were “obvious gaps” in the Greenleaf
           Report but Boston Scientific did not identify what they were.415

          After receiving Pierce’s April 22 email, Channel provided the
           information Boston Scientific had requested in the email, and Coté
           reached out to Pierce or other Boston Scientific representatives five
           times trying to schedule a call or meeting—but no one from Boston
           Scientific responded to his requests.416

          On May 11, Boston Scientific terminated the Agreement without
           ever (i) raising any concerns, or seeking to communicate with

413
      See supra Part IV.B.2.
414
      Tr. 516-17, 526-27 (Pierce).
415
      JX 456.004.
416
      Tr. 74 (Coté); Tr. 531-37 (Pierce).


                                            102
             Greenleaf or (ii) engaging any outside experts to analyze Channel’s
             clinical data, its quality system, or Cerene.417

          To borrow the words of a similar case, Boston Scientific’s “utter failure to

make any [meaningful] attempt to confer with [Channel] when [Boston Scientific]

first became concerned with [the Greenleaf Report], both constitutes a failure to use

reasonable best efforts to consummate the merger and shows a lack of good faith.”418

The lack of good faith here is corroborated by contemporaneous evidence that

Boston Scientific was looking for a way out of its deal with Channel due to growing

concerns that Cerene would be difficult to market and that the proposed transaction

was complicating a potential divestment of part of Boston Scientific’s business.

          In December 2017, for example, Boston Scientific’s Director of Marketing,

Jenny Lee, and Vice President of Sales, Scott Sanders, were openly discussing how

to terminate the transaction because of Cerene’s low rates of amenorrhea (the

complete cessation of menstrual bleeding). In one email, Sanders posited: “[W]hy

would we want to sell a technology with the worst [amenorrhea] data.”419 Lee

replied: “Only way to get out of deal is if FDA doesn’t approve the device.”420


417
      Tr. 516, 522-23 (Pierce).
418
    Hexion, 965 A.2d at 755-56 (finding breach of provision requiring reasonable best
efforts to obtain financing where Hexion failed to confer with its counterparty when it first
became concerned about the potential issue of insolvency).
419
      JX 231.
420
      Id. .002.


                                            103
            On January 26, 2018, Sanders brought his concerns to his manager, Kristin

LaRocca, Boston Scientific’s Vice President of Sales for Urology and Pelvic

Health.421 Three days later, LaRocca emailed Pierce with a summary of the “Pro’s”

and “Con’s” of the Channel deal.422 The “Con’s” included low amenorrhea rates

and a crowded competitive landscape, but did not mention Shankar’s fraud.423

LaRocca concluded that Cerene “will be a very heavy lift to commercialize” and

urged Pierce to “not move forward [with the deal] based on the material adverse

changes in the business due to the degradation in the data [on amenorrhea rates]

reported.”424

            Also in early 2018, Boston Scientific was considering a sale of its entire

“Surg-Gyn” business, which covered products like Cerene.425 But Boston Scientific



421
      JX 276.
422
      JX 280.
423
      Id.
424
   Id. Boston Scientific asserts that it knew of Channel’s amenorrhea rates before entering
into the Agreement, and that the rates were only one factor in evaluating the benefits of the
device. Defs.’ Br. 68; see Tr. 453-54, 547 (Pierce). As discussed above, however, the
evidence of record shows that even if Boston Scientific was aware of the amenorrhea rates
before entering into the Agreement, there was growing concern among Boston Scientific
employees about the data. In an apparent attempt to distance these concerns from
termination of the Agreement, Pierce testified that LaRocca was not involved in the
decision to terminate. Tr. 575 (Pierce). This testimony flies in the face of Boston
Scientific’s designation of LaRocca as a Court of Chancery Rule 30(b)(6) representative
on its “decision to terminate the Merger Agreement.” JX 722.008.
425
      JX 323; JX 338; JX 395.


                                            104
recognized that the Channel deal was “complicating” it from coming to an

agreement.426         Charlie Attlan, Boston Scientific’s Senior Vice President for

Corporate Strategy and Business Development, warned Pierce at the end of February

2018 that it was “too complicated to be discussing sale of Surg Gyn . . . while at the

same time . . . finalizing option exercise on Channel.”427 By March 13, 2018, Pierce

indicated that he wanted to “sell it all,” leading Attlan to ask: “Dealing with the

Channel put would not be trivial here . . . you’d want to divest that as well?” 428

Pierce replied: “Yes. Realize the complexity of this.”429

            Boston Scientific argues that “motive to avoid a deal does not demonstrate the

lack of a contractual right to do so.”430 That is true but beside the point. The

evidence of Boston Scientific’s motives simply adds credence to and corroborates

other robust facts demonstrating that Boston Scientific did not fulfill its obligations

to engage with Channel in a commercially reasonable manner to vet any concerns it

may have had about the findings in the Greenleaf Report and to keep the transaction

on track thereafter. To the contrary, Boston Scientific simply pulled the ripcord.




426
      JX 323; Pierce Dep. 184.
427
      JX 338.
428
      JX 395.
429
      Id.
430
   Defs.’ Br. 86 (citing William Cos., Inc. v. Energy Transfer Equity, L.P., 2016 WL
3576682, at *2 (Del. Ch. June 24, 2016), aff’d, 159 A.3d 164 (Del. 2017)).
                                             105
VII. CHANNEL’S REQUEST FOR SPECIFIC PERFORMANCE

         Channel requests that the court grant the remedy of specific performance to

require Boston Scientific to close the merger in light of its wrongful termination of

the Agreement. As a general matter, specific performance is appropriate if the

requesting party establishes “that (1) a valid contract exits, (2) it is ready, willing,

and able to perform, and (3) that the balance of equities tips in favor of the party

seeking performance.”431 Channel bears the burden of proving that it is entitled to

specific performance by clear and convincing evidence.432 The only one of the three

elements in dispute is the balance of the equities, which clearly weighs in Channel’s

favor for two reasons.433

         First, the parties expressly agreed that a failure to perform under the

Agreement would cause irreparable harm for which the remedy of specific

performance would be available: “The parties hereto agree that irreparable damage

may occur in the event that any provision of this Agreement was not performed in



431
      CC Fin. LLC v. Wireless Prop,’s, LLC, 2012 WL 4862337, at *8 (Del. Ch. Oct. 1, 2012).
432
      Akorn, 2018 WL 4719347, at *4.
433
   Boston Scientific contends in a footnote that Channel waived the right to seek specific
performance because its response brief omitted “any serious or substantive argument.”
Defs.’ Reply Br. 42 n.7. This argument fails. Boston Scientific has been on notice since
the outset of the case that the primary relief Channel was seeking is an order of specific
performance. Channel’s verified complaint expressly sought specific performance (Dkt. 1
¶ 90, Prayer for Relief ¶ b) and its initial brief did address the issue, albeit briefly. See Pl.’s
Resp. Br. 91-92.


                                               106
accordance with the terms hereof and that the parties may be entitled to seek specific

performance of the terms hereof.”434 Although this provision does not tie the court’s

hands in fashioning appropriate equitable relief, it reflects the parties’ understanding

that specific performance would be available in this circumstance, which is entirely

consistent with past Delaware cases granting specific performance for failure to

perform under a merger agreement.435

         Second, clear and convincing evidence demonstrates that the equities weigh

in Channel’s favor. Channel itself was a victim of Shankar’s fraud. Promptly upon

discovering the fraud, Channel acted in good faith by fully investigating and

remediating the fraud with the assistance of expert advisors and doing so while being

fully transparent with its regulators (FDA and BSI) and its counterparty (Boston

Scientific). Boston Scientific, on the other hand, will obtain the essence of what it

bargained for by closing the transaction—an FDA-approved Cerene device.

Although several of Channel’s representations were inaccurate as of the date of the

Agreement, Shankar’s fraud did not compromise Channel’s quality system or its

clinical study in such a manner that would warrant termination of the Agreement

under the bargain the parties struck in the Agreement. Finally, Boston Scientific

434
      Agreement § 10.6.
435
   See IBP, 789 A.2d at 84 (granting specific performance of the merger agreement after
finding party improperly terminated the merger agreement); Hexion, 965 A.2d at 762
(requiring Hexion to specifically perform its obligations consistent with the merger
agreement after finding it breached certain provisions of the agreement).
                                          107
breached its obligation to use commercially reasonable efforts to consummate the

transaction.

VIII. BOSTON SCIENTIFIC’S FRAUDULENT INDUCEMENT CLAIM

         Apart from its claims arising under the Agreement, Boston Scientific asserts

that Channel fraudulently induced it to invest approximately $11 million in Channel

from 2015 to 2017, for which Boston Scientific seeks damages. 436 The elements of

a fraudulent inducement claim, for which Boston Scientific bears the burden of

proof,437 are as follows:

         1) a false representation, usually one of fact, made by the defendant;
         2) the defendant’s knowledge or belief that the representation was false,
         or was made with reckless indifference to the truth; 3) an intent to
         induce the plaintiff to act or to refrain from acting; 4) the plaintiff’s
         action or inaction taken in justifiable reliance upon the representation;
         and 5) damage to the plaintiff as a result of such reliance.438

For the reasons discussed next, Boston Scientific failed to carry its burden of proof

on its fraud claim. The court focuses on the evidence concerning the first two

elements, which is dispositive.




436
    Defs.’ Br. 70. As initially pled, Boston Scientific’s fraud claim also sought rescission
of the Agreement. See Counterclaim ¶ 46 (Dkt. 25). Boston Scientific did not address this
request for relief during post-trial briefing and thus waived the issue.
437
   See Ross Hldg. & Mgmt. Co. v. Advance Realty Gp., 2014 WL 4374261, at *37 (Del.
Ch. Sept. 4, 2014) (placing the burden of proof on the plaintiff to prove its fraudulent
inducement claim against the defendants).
438
      Stephenson v. Capano Dev. Inc., 462 A.2d 1069, 1074 (Del. 1983).


                                           108
         A.     Boston Scientific Failed to Prove that Channel Made a False
                Representation

         Boston Scientific contends that Channel made essentially two false

representations to induce it to invest in Channel: “[i] that Shankar was a bona fide

Director of Quality and [ii] that Channel would, and did receive, certification for the

ISO 13485 quality standard.”439 For support, Boston Scientific points to written

statements from documents Channel provided to Boston Scientific during the 2013

to 2017 period.440

         With respect to Shankar’s role at Channel, Boston Scientific points to

statements in the following documents: (i) an April 2013 email from Coté describing

Shankar as Channel’s “Director of Quality”441 and (ii) two presentations in February

2014 and May 2016 identifying Shankar as part of Channel’s “Highly Experienced

Team” and describing his qualifications as follows:




439
      Defs.’ Br. 70.
440
    Boston Scientific attempted to elicit testimony from each of its own fact witnesses
concerning oral statements Channel made that allegedly were false, but their testimony
strained credibility and collapsed into admissions that they were relying only on written
documents. See Tr. 493 (Pierce); Tr. 651 (Carr); Tr. 953-54, 967-68 (Morrison). Boston
Scientific thereafter abandoned its reliance on purported oral statements for its fraud claim.
See Defs.’ Reply Br. 36 (“BSC made clear that the false statements on which it relies were
made in documents.”).
441
      JX 33.


                                            109
         15 years experience in the areas of operational management, quality
         assurance and regulatory affairs. Prior leadership roles at Intrapace, C8
         Medisensors and Flextronics. MSEE from Drexel.442

A fundamental problem with Boston Scientific’s fraud claim is that these statements

were true. Indeed, Boston Scientific concedes that Shankar held the title of “Director

of Quality,” and it does not challenge the factual accuracy of any specific statement

in the description of his qualifications.443

         Instead of challenging the literal truth of any of these statements, Boston

Scientific argues they show that Channel held out Shankar “as a Director of Quality

who would adequately perform his duties.”444 According to Boston Scientific, “[t]he

omission of the fact that Shankar failed to discharge those duties is sufficiently

misleading to support a claim of fraud.”445 For support, Boston Scientific cites

Metro Communication Corp. BVI v. Advanced Mobilecomm Technologies Inc.446

         In Metro, a telecommunications venture provided to a prospective investor

management reports that “included specific statements regarding ‘applications for

digging permits [that] were submitted to . . . municipality authorities,’ and reported

that ‘[w]e are making efforts to obtain the permit [in Sao Paolo] by the end of

442
      JX 36.004 (February 2014 presentation); JX 49.042 (May 2016 presentation).
443
      See Defs.’ Reply Br. 35.
444
      Defs.’ Br. 88 (emphasis added).
445
      Defs.’ Reply Br. 35.
446
      854 A.2d 121, 144-46 (Del. Ch. 2004).


                                              110
July.’”447 In the context of deciding a motion to dismiss under Court of Chancery

Rule 9(b) for failure to plead fraud with particularity, the court found that

“[a]ssuming the truth of the allegations in the complaint, those statements were

misleading because they described the permitting process without indicating that

some of the permits were obtained through bribery.”448 Unlike in Metro, the

statements Boston Scientific identifies here consist of straightforward biographical

facts and do not speak to how Shankar performed his job at Channel in any

qualitative sense such that omitting his asserted failure to do so “adequately” would

render the statements that Channel actually made misleading.

          With respect to Channel’s ISO 13485 certification, Boston Scientific points

to statements in the following documents: (i) a 2014 presentation stating that

Channel would seek ISO 13485 certification;449 (ii) a November 2016 email from

Coté stating that Channel had “passed the 13485 certification audit,”450 and (iii) a

May 2017 board presentation stating that Channel “[r]eceived certificate for ISO

13485.”451 Once again, each of these statements was true. Channel did seek an ISO



447
      Metro, 854 A.2d at 145.
448
      Id. at 146.
449
      JX 1101.026.
450
      JX 99.
451
   JX 117.023; see also Bachert Dep. 73 (recalling that Shankar stated “Channel is 13485-
certified by BSI.”).


                                          111
13485 certification; BSI issued a report in November 2016 “stating that Channel met

the requirements of ISO 13485:2003”; and Channel “received its ISO 13485

certification” in March 2017.452

         Relying again on Metro, Boston Scientific argues that these statements were

misleading because Channel failed to disclose that it had submitted some fraudulent

documents to obtain the certification from BSI. Boston Scientific, however, failed

to prove that the documents in question were necessary to obtain the certification or

that Channel was in possession of an unlawful certification. In fact, after Channel

disclosed Shankar’s fraud to BSI, BSI reported that Channel’s “[c]ontinued

certification is confirmed and the EC certificate remains valid.”453 Given the

absence of any evidence that Channel violated a legal requirement in connection

with obtaining its ISO 13485 certification from BSI, the statements in Channel’s

documents referenced above were not false or misleading.

         B.     Boston Scientific Failed to Prove Channel’s Knowledge of Falsity
                or Recklessness

         Even if any of the statements discussed above constituted a misrepresentation,

Boston Scientific’s fraud claim would still fail because it has not proven (i) that




452
      PTO ¶ II.D.1-2.
453
  JX 684.003 (October 2018 BSI report) (emphasis added); Tr. 62-63 (Coté); see also JX
709 (September 2018 BSI report stating that Channel continued to effectively implement
ISO 13485:2003 and had fully implemented the new ISO 13485:2016 standards).
                                          112
Channel knew that any of the statements discussed above were false or (ii) that it

acted with reckless indifference to the truth. The court addresses these issues, in

turn, next.

            Beginning with the issue of knowledge, the general rule under Delaware law

is that “a corporation is liable for the acts and knowledge of its agents—even when

the agent acts fraudulently or causes injury to third persons through illegal

conduct.”454 There is an important exception to this rule where the employee

“abandons the [employer’s] interests” and “act[s] solely to advance his own personal

financial interest, rather than that of the corporation itself.”455 This exception is

limited, but it covers the “unusual” case where the employee’s actions show “the

type of total abandonment of the corporation’s interests that is characteristic of, for

example, outright stealing from the corporation.”456 Even stealing may not be

enough to trigger this exception if the company still receives a benefit from its

employee’s actions.457



454
      Stewart v. Wilmington Tr. SP Servs., Inc., 112 A.3d 271, 303 (Del. Ch. 2015).
455
      Id.
456
      Id.
457
    Id. at 310 (declining to apply the adverse interest exception to an employees’ alleged
theft where a complaint was “replete with allegations” that the employees’ fraud allowed
the company to be authorized as Delaware-domiciled captive insurers); see also In re Am.
Int’l Grp. Inc., Consol. Deriv. Litig., 976 A.2d 872 (Del. Ch. 2009), aff’d sub nom.
Teachers’ Ret. Sys. of La. v. Gen. Re Corp., 11 A.3d 228 (Del. 2010) (declining to extend
the adverse interest exception where the “Complaint plainly pleads that AIG’s participation

                                             113
         This case provides a classic example for when the adverse interest exception

should apply. The evidence shows that Shankar’s fraud was for his own benefit, and

to the detriment of Channel. He stole a large sum of money from Channel and

falsified its records, which put Channel at risk of not receiving FDA approval and

jeopardized its merger with Boston Scientific. Shankar’s theft, pure and simple,

represented a “total abandonment of [Channel’s] interests.”458

         Boston Scientific argues that “Shankar’s fraud was not solely intended to

advance his personal interest [because] it also advanced the company in that he

helped Channel obtain IDE approval, ISO 13485 certification, and CE mark based

on documents he falsified to conceal Channel’s quality system deficiencies.”459 This

assertion lacks factual support. Boston Scientific provided no evidence that Shankar

intended to help Channel obtain any of these approvals through his fraudulent

actions. Indeed, his fraud and the falsified documents he submitted to regulators had

the potential to endanger these approvals, and there is no evidence that Channel

would not have received these approvals absent Shankar’s fraud.




in each of the schemes resulted in tangible (if eventually short-lived) benefits to the
corporation”).
458
      Stewart, 112 A.3d at 303.
459
      Defs.’ Reply Br. 37.


                                          114
          This case is markedly different from In re American International Group,

Inc., Consolidated Derivative Litigation,460 on which Boston Scientific relies. In

that case, the court imputed knowledge to a corporation at the motion to dismiss

stage where it was clear, on the face of the complaint, that the top-ranking employees

engaging in fraud benefitted both the company (by increasing its stock price) and

themselves (by increasing their own compensation and chances for promotion).461

Here, Shankar’s fraud provided no benefit to Channel, only detriment. For this

reason, the court will not impute his knowledge of the fraud to Channel. Thus, even

if any of the representations discussed previously were false, Boston Scientific has

failed to prove that Channel knew they were false.

          Nor did Boston Scientific prove that Channel was “reckless” in making any

of the allegedly false representations. To establish recklessness, Boston Scientific

must prove that Channel, through its employees, “consciously ignored specific

warning signs that illicit activities were occurring.”462 “[O]rdinary negligence is

insufficient to support a claim of common law fraud,” and it is not sufficient for the

facts to show “that the managers should have known about” the fraud.463




460
      976 A.3d 872.
461
      Id. at 892.
462
      Metro, 854 A.2d at 147.
463
      Id. at 148.
                                         115
         Boston Scientific asserts that evidence of the following warning signs is

sufficient to prove that Channel acted with reckless indifference to the truth:

              failure to perform due diligence in hiring Shankar;

              failure to enact sufficient “checks and balances necessary for
               strong cash control” despite warnings from its financial auditor;

              discovery of the fraud only by happenstance;

              failure to properly verify, monitor, or audit its vendors;

              failure to keep minutes of Management Review meetings or
               review internal audit reports, some of which had no findings;

              failure to detect Shankar’s theft of more than $2.5 million,
               despite Channel’s cash reserves rarely being over $10 million in
               any quarter.464

This evidence demonstrates, at most, negligence on the part of Channel and its

employees and is not sufficient to prove recklessness because the evidence does not

establish that anyone at Channel consciously ignored any warning signs of Shankar’s

fraud.

         Contrary to Boston Scientific’s assertions, for example, William Malecki,

Channel’s Chief Operating Officer, vetted Shankar by speaking to someone Malecki

knew at a previous employer identified on Shankar’s resume and confirming that

Shankar had worked there for eight years.465 Although one could argue it was


464
      Defs.’ Reply Br. 38-39.
465
      Malecki Dep. 85-86.
                                            116
negligent not to do more, there is no evidence that any warning signs (e.g., a previous

termination due to theft or fraud, or poor performance reviews) materialized from

Malecki’s vetting that Channel consciously disregarded.

         The cited evidence concerning Channel’s financial auditor concerned a

recommendation for handling cash disbursements.466 Coté credibly testified without

contradiction, that the auditor never identified anything related to Shankar’s fraud

and that the fraud “had nothing to do with” the auditor’s recommendation.467

         Boston Scientific does not explain how the fraud’s accidental discovery shows

recklessness—if anything that fact cuts against the notion that Channel consciously

disregarded warning signs. Boston Scientific also does not cite evidence that anyone

at Channel knew that it was failing to audit its suppliers or that its internal audit

reports were being forged.

         As to the amount of Shankar’s fraud, although $2.57 million represented a

significant percentage of Channel’s cash reserves in any given quarter, $2.57 million

was the total amount that Shankar stole over almost five years and not at one time. 468

In total, Shankar’s fraudulent invoices and expense reports accounted for “about 4

or 5%” of the total number of invoices and expense reports submitted during his


466
      JX 80; Tr. 32 (Coté).
467
      Tr. 32-33 (Coté).
468
      See JX 916 (Shankar’s Plea Agreement).


                                           117
employment at Channel,469 most of which were for amounts below the threshold that

required Coté’s approval to avoid detection.470

          Boston Scientific suggests Channel was reckless because “[i]t was in

Channel’s best interest for its management to turn a blind eye” before an agreement

to sell the company was signed.471 This is speculation—not evidence. What the

record shows is that Channel was transparent with the FDA and Boston Scientific

upon discovering Shankar’s fraud, and acted with dispatch to address it.472 This type

of responsible conduct is hardly what one would expect from someone intent on

turning a blind eye.

          In sum, the court finds based on the preponderance of evidence that there is

no legal basis to impute Shankar’s knowledge to Channel and that Channel did not

act with reckless indifference to the truth. This conclusion provides an independent

basis for entry of judgment in Channel’s favor on Boston Scientific’s fraud claim

apart from the failure to prove the existence of a false statement.473




469
      Tr. 29-30 (Coté).
470
      See id. 29.
471
      Defs.’ Reply Br. 39.
472
      See supra Part I.F-I.
473
   Channel advances several other arguments for why the fraud claim should fail. The
court need not address these issues in view of its findings on the lack of a false statement
and the failure to prove Channel’s knowledge of falsity or recklessness.
                                           118
IX.   CONCLUSION

      For the reasons explained above, Boston Scientific was not entitled to

terminate the Agreement and breached its obligation to use commercially reasonable

efforts to consummate the merger; Channel is entitled to an order of specific

performance requiring Boston Scientific to close the merger; and Boston Scientific

failed to prove its claim for fraudulent inducement. The parties are directed to confer

and to submit an implementing order consistent with this decision within five

business days.




                                         119
