United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
S. Shah United States District Judge
filed this lawsuit against a former employee, Michael Fox.
Fox responded by asserting various counterclaims against
MiMedx. MiMedx now seeks to dismiss Fox's counterclaims
for breach of contract, defamation, and declaratory judgment.
Fox also requests leave to amend his counterclaim to add
claims under the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 15 U.S.C. § 78u-6(h), and the Illinois
Whistleblower Protection Act, 740 ILCS 174/1 et seq.
For the reasons discussed below, both the motion to dismiss
and the motion for leave to amend are granted in part, denied
survive a motion to dismiss under Federal Rule of Civil
Procedure 12(b)(6), a complaint (or here, a counterclaim)
must contain factual allegations that plausibly suggest a
right to relief. Ashcroft v. Iqbal, 556 U.S. 662,
677-78 (2009); Firestone Fin. Corp. v. Meyer, 796
F.3d 822, 826-27 (applying the Rule 12(b)(6) standard to the
defendants' counterclaim). The court must construe all
factual allegations as true and draw all reasonable
inferences in the plaintiff's favor, but the court need
not accept legal conclusions or conclusory allegations.
Iqbal, at 678- 79. The court should grant leave to
amend pleadings freely “when justice so
requires.” Fed.R.Civ.P. 15(a)(2). “Leave to amend
need not be granted, however, if it is clear that any
amendment would be futile.” Bogie v.
Rosenberg, 705 F.3d 603, 608 (7th Cir. 2013).
Fox was employed at MiMedx, first as a Regional Sales
Director and later as an Area Vice President.  at 29,
¶ 8, 10. MiMedx developed and marketed products for
wound care, utilizing a particular method to manipulate
placental tissue to create skin grafts for surgical
applications.  at 8, ¶ 11. MiMedx awarded Fox stock
options each quarter of his employment.  at 30, ¶
12-16; id. at 31, ¶ 17-18;  at 10, ¶
19-24; id. at 11, ¶ 25. The company's stock
incentive plan provided that employees terminated for cause
could not exercise options that had been granted to them
under the plan.  at 37, ¶ 58. The plan defined
“cause” as dishonesty, refusal or continued
failure to perform duties for the company, fraudulent
conduct, or any conduct that could be materially damaging to
the company without reasonable good faith that such conduct
was in the best interest of the company. Id. at 38,
¶ 59. MiMedx's board of directors determined whether
an employee would be fired for cause; such determination
would be final and conclusive. Id. at 38, ¶ 60;
id. at 49.
from the acts alleged to be retaliatory in his proposed
amended counterclaim, Fox was never disciplined or informed
by anyone at MiMedx that his performance was unsatisfactory.
 at 9, ¶ 17. And though Fox performed strongly
throughout his employment-in his fourth year of employment,
for example, he was a top performing sales manager-MiMedx
demoted him in December 2015, for his refusal to participate
in a channel-stuffing scheme in which MiMedx fraudulently
recognized revenue in its certified financial statements
before the revenue had been realized or realizable and
earned.  at 7, ¶ 2; id. at 11, ¶ 26.
To effectuate the scheme, MiMedx entered into a distribution
agreement with AvKARE, Inc., which allowed MiMedx to sell
directly to the U.S. Department of Veterans Affairs.
Id. at 11, ¶ 27. MiMedx sales representatives
ordered products under AvKARE's account through
MiMedx's software, meaning MiMedx controlled AvKARE's
demand for MiMedx products. Id. ¶ 28. The
orders would be billed to AvKARE's account, but shipped
directly to VA hospitals, and MiMedx would recognize revenue
for the orders at the time of shipment. Id. These
orders, which the VA had not requested, were often in
quantities well in excess of what the VA needed. Id.
at 12, ¶ 38. MiMedx sales representatives were then
responsible for ensuring the resale of the products to end
customers and did not receive commission for an AvKARE sale
until the product was resold. Id. at 12, ¶ 29,
31; id. at 14, ¶ 40. MiMedx intended to slowly
issue returns for these products over time, concealing its
actions by balancing the returns against actual revenue in
future reporting periods. Id. at 13, ¶ 36.
2014, MiMedx senior managers began directing senior sales
managers, including Fox, to significantly increase the amount
of inventory placed in VA hospitals through AvKARE.
Id. at 14, ¶ 39. From then on, at the end of
every quarter, senior management pressured the regional sales
directors to place additional orders on behalf of AvKARE for
products neither AvKARE nor the customer had ordered or
needed. Id. ¶ 40. Fox became worried that this
practice would compromise relationships with the customers,
and in 2015 he began to push back against management
directives. Id. ¶ 41. Fox refused to
participate in the scheme and directed his sales force not to
order AvKARE products unless they felt the products were
needed. Id. Fox repeatedly raised objections that
the company's AvKARE revenue was a “false
performance number” used only to affect the stock
price, and MiMedx senior management officials acknowledged
that the number did not accurately reflect actual sales.
Id. at 15, ¶ 42-43. Fox's refusal to
participate caused him to miss an artificially inflated
revenue quota-the first quota Fox had ever missed during his
career with MiMedx. Id. ¶ 44.
October 2015, after MiMedx's Chairman of the Board and
CEO, Parker Petit, learned about Fox's objections to
MiMedx's scheme, Petit verbally reprimanded Fox at a
meeting. Id. ¶ 46. Two months later, Fox was
demoted- resulting in a large reduction in Fox's
managerial responsibilities and annual compensation.
Id. at 16, ¶ 48-49. MiMedx could not implement
its scheme without the cooperation of its area vice
presidents, like Fox. Id. at 15-16, ¶ 47. Later
in December, a MiMedx senior director spoke on the phone with
a member of the sales team saying, “I need to know not
what you're putting on for yourself but what additional
could you put on to help us hit the number for the quarter
because we're short overall. And so do you have any
additional space?” Id. at 16-17, ¶ 51.
The following year, in March 2016, a phone call between the
same salesperson and Fox's eventual replacement, Steve
Blocker, took place. Id. at 18, ¶ 55. On that
call, Blocker expressed frustration at having to meet a
“false number” and concern that customers that
didn't “have carte blanche at their facilities
[were] starting to get, you know, questions” and that
floor managers were “looking at how many grafts [were]
spilling out of every cabinet available.” Id.
at 19, ¶ 55. Blocker also stated that
“[t]here's just an insinuation that there will be
hell to pay. And, you know, [Petit] says: Well, you don't
want to be on the wrong end and not hit your number, you
know.” Id. at 20, ¶ 56.
the same time, Fox was on a conference call with various
MiMedx executives discussing a new initiative through which
MiMedx would ship shoebox-sized boxes containing small graft
products to targeted VA hospitals. Id. at 22, ¶
58. Fox expressed his concerns, saying everyone knew those
boxes would be returned. Id. A MiMedx official noted
that he understood Fox's concerns, but that they were
going through with the project nonetheless. Id. In
March 2016, MiMedx sent out the grafts discussed on the
conference call to VA hospitals that had no use for them.
Id. at 23, ¶ 61-62. Most of those grafts
remained unused and were returned or concealed by sales
representatives until MiMedx authorized their return.
Id. ¶ 65. MiMedx failed to disclose, among
other things, the contingent nature of the sales to AvKARE,
its complete control over AvKARE's subsequent sales,
MiMedx's ongoing involvement in ensuring resale of the
products sold to AvKARE, that AvKARE was not obligated to pay
MiMedx until the product was resold, and that MiMedx
maintained liability for AvKARE tissues that went missing
while being stored at VA facilities. Id. at 28,
¶ 74; id. at 29, ¶ 74-76.
November 2016, two other MiMedx employees submitted a joint
report asserting their belief that the company was engaging
in a fraudulent revenue recognition scheme in violation of
the Sarbanes-Oxley Act. Id. at 30, ¶ 78. A month
later, Fox attended an emergency meeting with MiMedx
leadership during which Petit stated that the employees who
had submitted the report would be “hurt professionally
and with every possible resource available.”
Id. at 31, ¶ 84-85. MiMedx later fired and sued
those two employees, who then filed their own suit against
MiMedx, along with a whistleblower complaint with the SEC.
Id. at 32-33, ¶ 91; id. at 37, ¶
114. After reading that whistleblower complaint, MiMedx came
to believe Fox had provided the whistleblowers with
information relating to the company's violations.
Id. at 33, ¶ 92. Fox was notified that his
employment had been terminated on December 29, 2016, during a
phone call with MiMedx's Executive Vice President and
Thornton Kuntz, the Senior Vice President of Administration.
 at 31, ¶ 20; id. at 31-32, ¶ 22;
 at 34, ¶ 95-96. Kuntz informed Fox that he was
terminated for cause and that he would have only until the
end of the day to exercise his vested stock options.  at
32, ¶ 23-24. When Fox pointed out that the market was
already closed for the day, Kuntz replied,
“exactly.” Id. at 32, ¶ 24; 
at 34, ¶ 97. In not allowing Fox to exercise his vested
options, MiMedx withheld nearly $250, 000 in Fox's
deferred compensation.  at 7, ¶ 3. Kuntz confirmed
Fox's for-cause termination in a letter.  at 32,
¶ 25; id. at 79-80;  at 34, ¶ 98.
next day, MiMedx issued a press release entitled, MiMedx
Files Lawsuits against Two Additional Former Sales
Employees for Breach of Contractual
Obligations, naming Fox and explaining its decision
to terminate his employment.  at 82. The release, quoting
MiMedx's President and Chief Operating Officer, stated
[t]he Company took employment actions with various other
employees based on the degree of transgression and the
openness and willingness of these employees to cooperate in
the Company's investigation. No. legal actions have been
taken with individuals who have cooperated and have been
truthful with the Company during the investigation.
Id. The press release went on to quote MiMedx CEO,
when an employee violates the duty of loyalty and contractual
obligations by selling competitive products or other
products, employment actions must be taken. Although the
sales employees who participated in these violations were a
very small number of the more than 300 employees in our sales
organization, we are always disappointed when individuals
choose to follow self-serving financial motives rather than
adhere to the high standards of conduct and compliance that
we foster and instill at MiMedx.
Id. The press release ended with a safe-harbor
statement, which read in part, “[t]his press release
includes statements that look forward in time or that express
met with the SEC, providing information relating to
MiMedx's alleged violations of securities laws.  at
7, ¶ 4; id. at 37, ¶ 115.
the sales representatives who had worked under Fox and whose
employment was also terminated sent Kuntz, the Senior Vice
President of Administration, an email regarding the
company's justifications for her termination.  at 33,
¶ 33. Kuntz replied, stating that
[t]he leadership of [the] group did not meet expectations
related to the investment made by the Company, and as a
result, management decided to disband the roles. While we
regret that the direct leadership provided to the [group] was
ineffective and inadequate; nonetheless, the necessary
results were not achieved in aggregate to sustain those
Id. at 86. Later, on a conference call, Petit said,
[w]e think it's well known we terminated four and filed
lawsuits against them. We've terminated some others and
didn't file lawsuits because we felt that they hadn't
reached the point of being problematic. And then we've
had some others that came clean with us. We sat people down
and said just tell us the truth, and we'll go from there.
Most of these others-all of them didn't tell us the
truth. It appeared they were-continued to dig deeper with
their lies, and the few that came clean with us, they're
still here. . . . Mostly disappointing to me is the lack of
integrity that we uncovered in the process.
 at 34, ¶ 36;  at 36-37, ¶ 110. The
purpose of the call was to discuss MiMedx's earnings with