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Alvarado Orthopedic Research, L.P., A California Limited Partnership v. Linvatec Corporation; and Does 1 Through 50

February 8, 2012

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



The opinion of the court was delivered by: Irma E. GONZALEZUnited States District Judge

ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS[Doc. No. 26]

Presently before the Court is Plaintiffs-Counterdefendants Alvarado Orthopedic Research, L.P. ("Alvarado") and Kenneth H. Holko ("Holko") (collectively "Plaintiffs")'s motion to dismiss Defendant-Counterclaimant Linvatec Corporation ("Linvatec")'s first amended counterclaims. [Doc. No. 26.] For the reasons below, the Court GRANTS IN PART and DENIES IN PART Plaintiffs' motion.

BACKGROUND

Plaintiff-Counterdefendant Alvarado is a limited partnership under the laws of California with its principal place of business in San Diego, California. [Doc. No. 1, Compl. ¶ 4.] Alvarado's principal is Dr. Thomas Peterson. [Id. ¶ 14] Plaintiff-Counterdefendant Holko is a metallurgical engineer residing in San Diego and a citizen of California. [Id. ¶¶ 5, 14.] Defendant-Counterclaimant Linvatec is a corporation under the laws of Florida with its principal place of business in Florida. [Id. ¶ 6.]

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. [Compl. ¶ 14.] Alvarado, through Peterson, invented the design of a patented blade shape, "ribbed" saw blades that come with or without the special coating. [Id. at ¶¶ 14-15.] The special coating and the ribs on the blades substantially reduce fine metal debris which accumulates in open wounds during orthopedic surgery. [Id. ¶ 14.]

On November 13, 1989, Alvarado entered into a licensing agreement with Zimmer, Inc. ("Zimmer"), which allowed Zimmer to market, sell, and distribute surgical blades that made use of Alvarado's patented blade coating or blade shape. [Compl. ¶ 9, Ex. A.] In December 1997, Zimmer assigned all of its interests under the license agreement to Linvatec. [Id. ¶ 12, Ex. C.]

Plaintiffs allege that 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. [Compl. ¶¶ 15, 19, Ex. A at 6-7.] 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.Ex. A at 7.] Under the agreement, Kenneth Holko Inc. is the exclusive manufacturing supplier of the coated blades. [Id. Ex. A at 23-24.] The agreement also provides that it is governed by California law. [Id. Ex. A at 19.]

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. [Compl. ¶¶ 23-24.] 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. [Id. ¶ 25.] Upon this disclosure, Plaintiffs allege that they discovered Linvatec had been calculating royalty payments based on discounted sales price rather than the advertised list price as required under the agreement. [Id.]

From late 2008 through August 2009, Linvatec assured Plaintiffs it would investigate their concerns. [Compl. ¶ 25.] In April 2010, Plaintiffs unsuccessfully sought additional information from Linvatec regarding their concerns. [Id. 26.] 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. [Id. ¶¶ 19-22.] Plaintiffs further allege that Linvatec intentionally concealed information and misled them regarding the royalty payments. [Id. ¶ 30.]

On February 4, 2011, Plaintiffs filed a complaint against Linvatec alleging four causes of action for: (1) breach of contract, (2) breach of fiduciary duty, (3) fraud, and (4) accounting. [Compl.] On August 23, 2011, the Court granted Linvatec's motion to dismiss and dismissed without prejudice Plaintiffs' claims for fraud and breach of fiduciary duty and their request for punitive damages. [Doc. No. 14.]

On September 6, 2011, Linvatec filed an answer to the complaint and counterclaims against Plaintiffs. [Doc. No. 16.] On October 17, 2011, Linvatec filed an amended answer and counterclaims against Plaintiffs alleging six causes of action for: (1) declaratory judgment; (2) breach of the covenant of good faith and fair dealing; (3) unjust enrichment; (4) breach of contract; (5) accounting; and (6) negligent misrepresentation. [Doc. No. 21, Am. Countercl.] In the counterclaims, Linvatec alleges that following the commencement of this lawsuit by Plaintiffs, Linvatec discovered that two of the four patents licensed in the agreement had expired in 2004. [Id. ¶¶ 21-22, 25-26, 50.] Linvatec alleges that Plaintiffs never informed them that the patents had expired and Plaintiffs' patent attorney falsely informed Linvatec that the patents would not expire until 2009. [Id. ¶¶ 47-49.] Livantec alleges that this caused it to pay Plaintiffs more royalties than were owed under the licensing agreement. [Id. ¶ 50.] By the present motion, Plaintiffs seek to dismiss Linvatec's counterclaim for negligent misrepresentation as to both Plaintiffs and Linvatec's remaining counterclaims as to only Holko.*fn1 [Doc. No. 26-5, Pl.'s Mot. at 8-10.] ///

DISCUSSION

I. Legal Standards for a Motion to Dismiss

A complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." FED. R. CIV. P. 8(a). 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. FED. R. CIV. P. 12(b)(6); Navarro v. Block, 250 F.3d 729, 731 (9th Cir. 2001). The court must accept all factual allegations pleaded in the complaint as true, and must construe them and draw all reasonable inferences from them in favor of the nonmoving party. Cahill v. Liberty Mutual Ins. Co., 80 F.3d 336, 337-38 (9th Cir.1996). To avoid a Rule 12(b)(6) dismissal, a complaint need not contain detailed factual allegations, rather, it must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim has "facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 1949 (2009) (citing Twombly, 550 U.S. at 556).

However, "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." Twombly, 550 U.S. at 555 (quoting Papasan v. Allain, 478 U.S. 265, 286 (1986)) (alteration in original). A court need not accept "legal conclusions" as true. Iqbal, 129 S. Ct. at 1949. In spite of the deference the court is bound to pay to the plaintiff's allegations, it is not proper for the court to assume that "the [plaintiff] can prove facts that [he or she] has not alleged or that defendants have violated the . . . laws in ways that have not been alleged." Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 526 (1983). "Where a complaint pleads facts that ...


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