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Young v. Fluorotronics

November 3, 2010

JOHN A. YOUNG, M.D., INDIVIDUALLY, AND AS TRUSTEE OF THE JOHN A. YOUNG, M.D., INC. DEFINED PENSION PLAN TRUST II, PLAINTIFF,
v.
FLUOROTRONICS, INC., A CALIFORNIA CORPORATION, OLGA SHARTS, AN INDIVIDUAL, AND GIL D. TERRY, AN INDIVIDUAL, DEFENDANTS.
FLUOROTRONICS, INC., A CALIFORNIA CORPORATION, OLGA SHARTS, AN INDIVIDUAL, AND GIL D. TERRY, AN INDIVIDUAL, COUNTERCLAIMANTS,
v.
JOHN YOUNG, M.D., AN INDIVIDUAL, AND TRUSTEE OF THE JOHN A. YOUNG, M.D., INC. DEFINED PENSION PLAN TRUST II, ROES 1-100, COUNTERDEFENDANT.



The opinion of the court was delivered by: William Q. Hayes United States District Judge

ORDER

HAYES, Judge

The matters before the Court are the Motion to Dismiss Counterclaim (ECF No. 10) and the Motion to Strike Portions of the Answer and Counterclaim (ECF No. 11), filed by Counterdefendant John Young, M.D. ("Young"), individually and as Trustee of the John A. Young, M.D. Inc. Defined Pension Plan Trust II ("Pension Plan").

I. Background

On May 6, 2010, Young initiated this action by filing a Complaint against Fluorotronics, Inc. ("Fluorotronics"), Olga Sharts and Gil D. Terry. (ECF No. 1). On June 11, 2010, Fluorotronics, Sharts, Terry and Richard Kuntz filed an Answer and Counterclaim against Young. (ECF Nos. 5, 6).*fn1

A. Allegations of the Complaint

In March of 2007, Young met with Sharts and Terry "regarding a possible investment in Defendant Fluorotronics." Id. ¶ 12. "At the meeting, the parties discussed the many potential applications of Fluoro-Raman technology...." Id. "The Fluoro-Raman technology would be able to detect problems with food and drugs before they are distributed, and can also detect counterfeit drugs.... This invention is a non-destructive and rapid screening device that can be carried in a brief case or set up in multiple locations by the FDA and many other food and drug companies." Id.

On July 11, 2007, Sharts and Terry provided Young with Fluorotronics' "Private Placement Memorandum" dated January 1, 2007, a "Subscription Stock and Warrant Agreement" dated July 11, 2007, and a Balance Sheet for Fluorotronics dated December 31, 2006. Id. ¶ 13. The Private Placement Memorandum and Balance Sheet falsely stated that Fluorotronics was the owner of the "iStar ICCD Intensified CCD Detector Head camera" ("Camera") and "certain Laser Equipment" ("Laser"). Id. The Camera and the Laser were "integral part[s] of the Product that Fluorotronics was proposing to launch and offer for sale." Id. Without the Camera and Laser, "there simply is no Product and no business to generate revenue and a return or potential return on Plaintiffs' investments in Fluorotronics." Id. "Sharts directed Young's attention to the balance sheet saying repeatedly that Fluorotronics owned the Camera and Laser as was shown under the fixed assets section of the balance sheet. This statement is materially false and misleading." Id. On the Balance Sheet, Fluorotronics' intellectual property was identified as an asset which, based upon "detailed calculations," was valued at $38,000,000. Id. This statement in the Balance Sheet "is materially false and misleading." Id.

Based upon the statements in the Private Placement Memorandum, Subscription Stock and Warrant Agreement and Balance Sheet, Young made an initial investment of $10,000 in Fluorotronics for the purchase of 20,000 shares of common stock of Fluorotronics. "Every [Private Placement Memorandum] ... and updated Balance Sheet[] Young received after making his initial investment in ... Fluorotronics contained the same false and misleading statements regarding ownership of the Camera, Laser, and unsupported valuation of Fluorotronics' intellectual property." Id. ¶ 15. "Young relied on the representations in these documents" in making subsequent investments in Fluorotronics on behalf of himself and the Pension Plan between March 21, 2008 and June 2, 2009. Id. ¶ 16; see also id. ¶¶ 17-19. Young invested a total of $74,500 for the purchase of 148,000 shares of common stock in Fluorotronics. Young on behalf of the Pension Plan invested a total of $296,531 for the purchase of 170,000 shares of preferred stock in Fluorotronics. With respect to these sales of stock, "Fluorotronics did not file the required notices of exempt offering of securities" with the Securities and Exchange Commission and the California Department of Corporations. Id. ¶ 28; see also id. ¶ 29.

Contrary to the representations of Sharts and Fluorotronics, Fluorotronics did not own the Camera. The Camera was on loan to Fluorotronics from Andor Technology, Inc. ("Andor"). On November 6, 2007, Fluorotronics entered into a purchase contract with Andor for the Camera. On February 25, 2008, Andor sent Fluorotronics an invoice for $42,646.46 for the purchase of the Camera. "Fluorotronics failed to pay the invoice within 30 days from the date of the invoice, as required in the 'Terms of Payment of Sale.' Accordingly, Andor was entitled to cancel the contract." Id. ¶ 24.

On June 16, 2009, Young purchased the Camera from Andor. On February 21, 2010, Andor sent an email to Sharts stating that "there was no basis for Fluorotronics to make any claim to the Camera as Fluorotronics never paid for the Camera." Id. ¶ 26. On or after March 1, 2010, "the Camera was ... released [by Andor] to ... Young." Id.

The Complaint alleges eight causes of action: (1) fraud; (2) negligent misrepresentation; (3) intentional misrepresentation; (4) securities fraud in violation of the Securities and Exchange Act of 1934, Section 10(b) and Rule 10b-5; (5) sale of unregistered securities; (6) breach of fiduciary duty; (7) violation of Section 1507(a) of the California General Corporation Law; and (8) violation of Section 2201 of the California General Corporation Law.

B. Allegations of the Counterclaim

"At all times mentioned herein ..., Fluorotronics was the owner of a patent and system called Pulsed Laser Isochronic & Raman Fluorescense Apparatus.... One vital part of the System is the 'Camera' referred to in the Complaint, and Young knew that without the Camera, the System cannot work. At all times mentioned herein, Fluorotronics was ... the sole owner of said Camera." (ECF No. 5 ¶ 5). At all relevant times, "Young had no ownership interest in the System or the Camera"; "Young had no authority and/or right to possess ... the Camera"; and "Young had no authority and/or right to negotiate or deal with Andor Corporation ... in any manner on behalf of Fluorotronics and/or concerning the System or Camera." Id. ¶¶ 5, 6. "At all times mentioned herein, an economic and/or contractual relationship existed between Fluorotronics and Andor concerning the purchase, repair, and/or maintenance of the Camera with the probability of future economic benefit for [Fluorotronics]." Id. ¶ 8. "Young knew of the existence of that relationship between [Fluorotronics] and Andor, he knew that Fluorotronics was trying to convince investors to invest in the Corporation, and he knew that Fluorotronics needed the Camera to operate [to] convince investors to invest in the Corporation." Id. ¶ 9. Young "unlawfully [took] possession of the Camera and he keeps it to the present, notwithstanding the objections of [Counterclaimants] and their repeated requests for him to return it to [Fluorotronics]." Id. ¶ 5.

The Counterclaim alleges seven causes of action: (1) intentional interference with economic relations and/or contractual relations; (2) negligent interference with economic relations and/or contractual relations; (3) breach of employment/non-disclosure/non-compete contract; (4) conversion; (5) misappropriation of trade secrets; (6) intentional misrepresentation; and (7) negligent misrepresentation. The Counterclaim seeks compensatory damages, punitive damages, attorney's fees and costs.

C. Motion to Dismiss and Motion to Strike

On July 6, 2010, Young filed the Motion to Dismiss the Counterclaim for failure to state a claim upon which relief can be granted, and the Motion to Strike portions of the Answer and Counterclaim. (ECF Nos. 10, 11). In the Motion to Dismiss, Young contends that Sharts, Terry and Kuntz should be dismissed because only Fluorotronics is "the real party of interest that could have suffered damages based on the allegations of the Counterclaim." (ECF No. 10-1 at 9). Young contends that the Counterclaim is "unclear, ambiguous and unintelligible" because documents attached to the Complaint show that "the Camera is not 'wholly' owned by Fluorotronics," as alleged in the Counterclaim. Id. at 11. Young contends that each of the Counterclaim's seven causes of action are insufficiently pled. In the Motion to Strike, Young requests that the Court strike ten affirmative defenses in the Answer and twenty words or phrases in the Counterclaim, including the prayer for punitive damages and attorney's fees.

On July 26, 2010, Counterclaimants filed oppositions to the Motion to Dismiss and Motion to Strike. (ECF Nos. 13, 14). Counterclaimants contend that each of the Counterclaim's causes of action state sufficient facts pursuant to Federal Rule of Civil Procedure 8 or 9(b). Counterclaimants do not oppose the motion to strike nine affirmative defenses, but otherwise oppose the Motion to Strike. Counterclaimants request that the Motion to Dismiss and Motion to Strike be denied, or alternatively, that leave to amend be granted.

On August 2, 2010, Young filed reply briefs. (ECF Nos. 15, 16).

On August 4, 2010, Counterclaimants filed a notice of voluntary dismissal of Counterclaimant Kuntz pursuant to Federal Rule of Civil Procedure 41. (ECF No. 17).

II. Discussion

A. Motion to Dismiss

1. Standard of Review

Federal Rule of Civil Procedure 12(b)(6) permits dismissal for "failure to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). Dismissal under Rule 12(b)(6) is appropriate where the complaint lacks a cognizable legal theory or sufficient facts to support a cognizable legal theory. See Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990).

To sufficiently state a claim to relief and survive a Rule 12(b)(6) motion, a complaint "does not need detailed factual allegations" but the "[f]actual allegations must be enough to raise a right to relief above the speculative level." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). "[A] plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Id. (quoting Fed. R. Civ. P. 8(a)(2)). When considering a motion to dismiss, a court must accept as true all "well-pleaded factual allegations." Ashcroft v. Iqbal, --- U.S. ----, 129 S.Ct. 1937, 1950 (2009). "[F]or a complaint to survive a motion to dismiss, the non-conclusory factual content, ...


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