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Alvarado Orthopedic Research v. Linvatec Corporation

August 23, 2011

ALVARADO ORTHOPEDIC RESEARCH, L.P., A CALIFORNIA LIMITED PARTNERSHIP; AND KENNETH H. HOLKO, AN INDIVIDUAL, PLAINTIFFS,
v.
LINVATEC CORPORATION, A FLORIDA
CORPORATION; AND DOES 1 THROUGH 50, INCLUSIVE, DEFENDANTS.



The opinion of the court was delivered by: Irma E. Gonzalez, Chief Judge United States District Court

ORDER GRANTING DEFENDANT'S MOTION TO DISMISS [Doc. No. 8]

Presently before the Court is Defendant Linvatec's motion to dismiss Plaintiffs' claims for fraud, breach of fiduciary duty, and punitive damages. This motion is suitable for disposition without oral argument pursuant to Civil Local Rule 7.1(d)(1). For the reasons set forth below, the Court GRANTS Defendant's motion.

BACKGROUND

Unless otherwise noted, the following facts are drawn from Plaintiffs' complaint.

Plaintiff Alvarado is a limited partnership under the laws of California with its principal place of business in San Diego, California. Alvarado's principal is Dr. Thomas Peterson. Plaintiff Kenneth Holko is a metallurgical engineer residing in San Diego and a citizen of California. Defendant Linvatec is a corporation under the laws of Florida with its principal place of business in Florida.

Alvarado is in the business of creating surgical blades used in orthopedic surgery. Holko and Peterson produced a patented nickel-case coating for surgical saw blades. Alvarado, through Peterson, invented the design of a patented blade shape, "ribbed" saw blades that come with or without the special coating. The special coating and the ribs on the blades substantially reduce fine metal debris which accumulates in open wounds during orthopedic surgery.

On November 13, 1989, Alvarado entered into a licensing agreement with Zimmer, Inc., which allowed Zimmer to market, sell, and distribute surgical blades that made use of Alvarado's patented blade coating or blade shape. [Compl., Ex. A.] In December 1997, Zimmer assigned all of its interests under the license agreement to Defendant Linvatec. [Id., Ex. C.]

The agreement requires Linvatec to pay royalties to Alvarado for each blade sold that includes Plaintiffs' proprietary technology and to provide Alvarado with quarterly statements listing the number of blades sold and the calculated royalties.*fn1 The agreement permits Alvarado to request an independent Certified Public Accountant to audit Linvatec's records "as may be necessary to verify the accuracy of the reports made during the previous calendar year." [Id. ¶ 9 & Ex. A.] Under the agreement, Plaintiff Holko is the exclusive manufacturing supplier of the coated blades. The agreement also provides that it is governed by California law.

Sometime in 2008, Plaintiffs contacted Linvatec with concerns that (1) Linvatec was not using the then-current list prices of blades to calculate Alvarado's royalties and (2) Linvatec failed to include in its reports-and thus failed to pay royalties for-some of the blades it sold. Unsatisfied with Linvatec's assurances that any decrease in sales stemmed from normal fluctuations in the market, Plaintiffs requested that Linvatec disclose the actual list prices for each blade sold under the agreement. Upon this disclosure, Plaintiffs discovered Linvatec had been calculating royalty payments based on discounted sales price rather than the advertised list price as required under the agreement.

From late 2008 through August 2009, Linvatec assured Plaintiffs it would investigate their concerns. In April 2010, Plaintiffs unsuccessfully sought additional information from Linvatec regarding their concerns. Plaintiffs claim that they were forced to rely on Linvatec's representations in the quarterly reports because (1) calculating the royalty payments involved a substantial amount of sales data and (2) Plaintiffs did not have direct possession of the underlying data. Plaintiffs further allege that Linvatec intentionally concealed information and misled them regarding royalty payments.

On February 4, 2011, Plaintiffs initiated this action. Plaintiffs' complaint alleges four causes of action: (1) breach of contract, (2) breach of fiduciary duty, (3) fraud, and (4) accounting. All of Plaintiffs' claims arise under California law; however, Plaintiffs allege the Court has diversity jurisdiction over this action. Plaintiffs allege, and Linvatec has not disputed, that the parties are completely diverse and that the amount in controversy exceeds $75,000, as required by 28 U.S.C. § 1332.

Linvatec now moves to dismiss Plaintiffs' claims for fraud and breach of fiduciary duty, and their request for punitive damages.

LEGAL STANDARD

A motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure tests the legal sufficiency of the claims asserted in the complaint. Navarro v. Block, 250 F.3d 729, 731 (9th Cir. 2001). "Dismissal can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1990) (citation omitted). Leave to amend should be ...


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