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Medrad, Inc., A Delaware Corporation v. Sprite Development

September 6, 2011

MEDRAD, INC., A DELAWARE CORPORATION, PLAINTIFF/COUNTERDEFENDANT,
v.
SPRITE DEVELOPMENT, LLC, SPRITE SOLUTIONS, LLC, HANS MISCHE, LLC, ROBERT BECK, LLC, MINNESOTA CORPORATIONS, HANS MISCHE, INDIVIDUALLY, AND ROBERT BECK, INDIVIDUALLY, DEFENDANTS/COUNTERCLAIMANTS.



The opinion of the court was delivered by: Judge Joan H. Lefkow

OPINION AND ORDER

Medrad, Inc. ("Medrad") brought suit against Sprite Development, LLC ("Development"); Sprite Solutions, LLC ("Solutions");*fn1 Hans Mische, LLC; Robert Beck, LLC; and Hans Mische and Robert Beck. Development, Hans Mische, LLC, and Robert Beck, LLC (collectively, "counterclaimants") filed a counterclaim against Medrad for fraudulent inducement, violation of the Sherman Act, 15 U.S.C. §§ 1--2, conversion, and breach of contract. Before the court is Medrad's motion to dismiss the counterclaims. For the following reasons, the motion [#66] is granted.

BACKGROUND*fn2

Development is in the business of creating and developing technological concepts in the cardiovascular medical industry. It owns various patents relating to cardiovascular medical technology, including a method, devices, and systems that deal with the mechanical removal of occlusive material from the body using catheters and catheter systems. Medrad develops and sells medical devices. While its focus was on medical imaging, it also has expanded into the market for mechanical thrombectomy (i.e., the removal of clots). Development's thrombectomy technology was designed to use an injector system like that developed by Medrad.

In August 2004, Medrad and Development began negotiating a contract for Medrad to develop medical procedures and technology based on Development's intellectual property. The products Medrad sought to develop based on Development's patents were directly competitive with those of Possis, another company that designed, manufactured, marketed, and sold thrombectomy catheter and injector systems. Medrad represented that it had the experience, resources, and capabilities to develop the products at issue. After months of negotiations, a Joint Development Agreement ("development agreement") was entered into on July 26, 2005 between Solutions and Medrad in which Solutions agreed to license its patents to Medrad in exchange for certain payments as set out in the agreement.*fn3 Beck and Mische signed the development agreement on Solutions's behalf.*fn4 In the development agreement, Medrad agreed to do the following: (1) cooperate with Solutions in the development of thrombectomy and related products using Solutions's technology, (2) establish a plan for developing these products, (3) design and develop these products according to the plan, (4) pay such expenses as were reasonably necessary to design and develop these products, (5) perform and pay for reasonably necessary clinical trials, (6) take responsibility and pay for obtaining regulatory approvals for the products, and (7) consider Solutions's input and requests in the development process and work cooperatively with Solutions to resolve concerns. Medrad also entered into consulting agreements with Hans Mische, LLC and Robert Beck, LLC for services Beck and Mische were to provide Medrad in connection with the development agreement.

Despite its representations, Medrad did not use commercially reasonable efforts to develop and commercialize the products covered by the development agreement. Specifically, Medrad did not fund a development budget for the products until 2008 and, when it did so, the budget was intentionally inadequate. Medrad also failed to implement an appropriate development plan and involve Solutions (or, for that matter, Development) in any development activities. Medrad also only acknowledged meeting one milestone under the development agreement, even though its internal documentation indicates that additional milestones were met. Instead of fulfilling its duties under the development agreement, Medrad was seeking to acquire Prossis, Development's direct competitor. This pursuit began in fall 2005, not long after Medrad finalized the development agreement with Solutions. Medrad used the development agreement as a bargaining chip in its pursuit of Prossis, which it eventually did acquire.

On February 11, 2008, Development demanded that Medrad make a milestone payment of $200,00 that was due upon Medrad's confirmation of in vivo proof of the ability of the product to ablate and aspirate clots without inducing clinically significant vessel damage and clinically significant hemolysis in specified animal models. This was demonstrated at the latest in January 2007. Medrad has refused to make the payment to Development. Instead, on April 14, 2008, Medrad sent notice that it intended to terminate the development agreement. Medrad has also claimed a right to Development's patents and requested that Development and Mische join in a patent application for rights previously controlled and fully covered by Development's patents.

LEGAL STANDARD

A motion to dismiss under Rule 12(b)(6) challenges a complaint for failure to state a claim upon which relief may be granted. Fed. R. Civ. P. 12(b)(6); Gen. Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1080 (7th Cir. 1997). In ruling on a motion to dismiss, the court accepts as true all well-pleaded facts in the plaintiff's complaint and draws all reasonable inferences in the plaintiff's favor. Nixon v. Page, 291 F.3d 485, 486 (7th Cir. 2002). In order to survive a Rule 12(b)(6) motion, the complaint must not only provide the defendant with fair notice of the claim's basis but must also establish that the requested relief is plausible on its face. Ashcroft v. Iqbal, --- U.S. ----, 129 S. Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009); see also Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007). The allegations in the complaint must be "enough to raise a right of relief above the speculative level." Twombly, 550 U.S. at 555. Allegations of fraud are subject to the heightened pleading standard of Rule 9(b), which requires a plaintiff to "state with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b). This means that the plaintiff must plead the "who, what, when, where, and how: the first paragraph of any newspaper story." DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990).

ANALYSIS

I. Proper Parties

Medrad first argues that the counterclaims for fraudulent inducement, conversion, and breach of contract fail because counterclaimants are not the proper parties to be bringing these claims.*fn5 These claims are premised on the development agreement entered into between Medrad and Solutions. As the court has already found and all defendants previously acknowledged, Solutions was never a valid Minnesota limited liability company. While Development, Mische, and Beck may be able to bring claims against Medrad based on the Development Agreement, their standing to do so has not been properly established in the counterclaim. The fraudulent inducement, breach of contract, and conversion claims will thus be dismissed.

II. Fraudulent Inducement Claim

Even had counterclaimants properly alleged their standing to bring the fraudulent inducement claim, it would not survive as pleaded. Their fraud claim is based on several alleged misrepresentations, the majority of them being promises of future action embodied in the development agreement. "A cause of action to recover damages for fraud may not be maintained when the only fraud alleged relates to a breach of contact." Lee v. Matarrese, 793 N.Y.S.2d 457, 457 (N.Y. App. ...


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