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Seth Wallack and San Diego Veterinary Imaging, Inc v. Idexx Laboratories

April 11, 2013


The opinion of the court was delivered by: Hon. Gonzalo P. Curiel United States District Judge



Presently before the Court are two Motions to Dismiss filed by Defendants Matthew Wright ("Wright") and Stephen Walters ("Walters"), (ECF No. 9-1); and Idexx Laboratories, Inc. ("Idexx") and Idexx Reference Laboratories, Inc. ("Idexx RL"), (ECF No. 15). Plaintiffs Seth Wallack ("Plaintiff") and San Diego Veterinary Imaging, Inc. ("SD Imaging") opposed the motions, (ECF Nos. 18, 19), and Defendants replied, (ECF Nos. 23, 24). Having considered the parties' submissions and the applicable law, the Court GRANTS in part and DENIES in part Defendants' Motions to Dismiss.


The Complaint asserts six causes of action: (1) securities fraud in violation of Section 10(b) and Rule 10(b)-5 of the Securities Exchange Act of 1934; (2) securities fraud in violation of California Corporations Code sections 25401, 25403, 25501, and 25504.1; (3) intentional misrepresentation and fraudulent concealment; (4) breach of fiduciary duty; (5) trademark infringement; and (6) request for declaratory relief to resolve whether Idexx RL is the alter ego of Idexx and whether Idexx or Idexx RL may continue to use the trademark at issue.

Plaintiff, a licensed veterinarian, established SD Imaging in 2002. Plaintiff was one of the first veterinary radiologists to promote "tele-radiology" -- a digital imaging technology allowing veterinarians to use the Internet to send x-rays to radiologists for an immediate consultation. Plaintiff recognized tele-radiology practices would require a software platform to store, analyze, and manipulate imagery, as well as a platform to provide consultations online. With this in mind, Plaintiff began developing a software platform to service this need in 2004. SD Imaging hired Defendant Walters, a professional software developer, and offered him 20% of SD Imaging's stock. Using the name "DVMinsight," Plaintiff named the software, established a website, created a trademark, and conducted his tele-radiology practice. Plaintiff filed a trademark application in April, 2005, and received a trademark registration for DVMinsight ("the Trademark") with SD Imaging as the owner on August 7, 2007.

Plaintiff began working on an operation called the Veterinary Imaging Center of San Diego, Inc. ("the Center") which formally launched in December, 2005. Eventually, Walters ceased to offer services to SD Imaging and worked solely at the Center. Also, late in 2005, Defendant Wright, a veterinary radiologist, joined Plaintiff and Walters at the Center. Plaintiff and Wright became close colleagues and interacted constantly with Walters to develop the software program.

In 2006, Plaintiff, Wright and Walters established DVMinsight, Inc. ("DVM") of which Plaintiff and Wright each owned 40%, and Walters 20%. Plaintiff claims the three owners understood that SD Imaging retained ownership of the Trademark but permitted DVM to operate under the trade name. By 2008, DVM largely succeeded in developing the software program and by 2009 DVM's software program was functional, popular, and successful.

Early in 2009, Wright traveled to Defendant Idexx's headquarters in Maine to discuss the possibility of selling DVM to Idexx. Upon his return, Wright reported that Idexx had expressed a "passing interest" in DVM and "would not pay more than $1 million for the entire DVM operation."

Wright said the discussions with Idexx had been unsuccessful and inconclusive.

Plaintiff claims from mid-2009 onward, Wright became "inexorably unfair" towards Plaintiff and managed to "win over" Walters who would side with Wright during the near-daily quarrels. Plaintiff also claims Wright convinced key administrative assistants they would be better off if they sided with Wright and Walters. Wright allegedly indicated that if Plaintiff did not leave DVM, Wright was prepared to manipulate corporate structures to justify improperly diverting DVM revenues to the private companies of Wright and Walters, and would conduct a series of transactions which would saddle Plaintiff with debt while depriving him of revenues. In late 2009, Wright and Walters terminated Plaintiff as an administrator of the software program, changed ownership of DVM's domain name which denied Plaintiff access, gave themselves pay raises and bonuses without offering Plaintiff the same, and engaged in ongoing discussions with DVM's accountant without explaining the nature of these discussions to Plaintiff.

Plaintiff agreed to negotiate with Wright and Walters for the sale of his 40% interest in DVM and proposed they hire a business valuation specialist to assess a fair price for Plaintiff. Plaintiff claims Wright "angrily refused" and insisted that if the purchase did not take place immediately, he would find other means of excluding Plaintiff from its operations. Upon an initial offer of $100,000, Plaintiff called Fred Farber, an Idexx officer, regarding Wright's negotiations with Idexx. Farber responded that Idexx had "floated a sales price 'in the neighborhood of $1 million' that Idexx might be willing to pay for DVM . . . and indicated that he had given no further thought to this matter and expected that Idexx would not pursue the matter any further."

Thereafter, Wright, Walters, and Plaintiff agreed to value DVM at $686,250, offering Plaintiff $274,500 for his 40% share plus $30,000 in exchange for a mutual release set forth in a purchase agreement ("the Purchase Agreement")*fn2 signed December 31, 2009. The mutual release states:

". . . [Plaintiff] releases [DVM, Wright, and Walters] and their attorneys, employees, and agents from all claims, liabilities, obligations, promises, agreements, controversies, and damages of any nature and kind . . ." specifically including "all claims under any federal, state, or local statute, rule, or regulation, as well as any claims for negligent or intentional infliction of emotional distress, breach of contract, fraud, or any other unlawful behavior, the existence of which [DVM, Wright, Walters, and Plaintiff] deny." (ECF No. 7 at 2, ¶ 2.) The Purchase Agreement also includes a non-solicitation clause forbidding Plaintiff from soliciting any listed customer of DVM. Plaintiff claims he realized only after signing the Purchase Agreement that the list was over-inclusive and included even potential clients of DVM. Plaintiff claims Wright refused to remove the names of non-customers, even though prior to signing the Agreement he indicated he would do so.

In September, 2011, Defendant Idexx RL, a subsidiary corporation owned and controlled by Idexx, acquired DVM and Animal Insides (a company owned by Wright) for a total of 3.2 million dollars, $3 million of which Plaintiff attributes to DVM. Plaintiff claims the value of DVM did not change from the date Plaintiff sold his interest to the date Idexx purchased DVM making it "inconceivable that the DVM's value improved more than four-fold during this period." Plaintiff claims that contrary to statements made by Idexx and Wright, Defendants made an agreement in 2009 for the purchase of DVM for approximately $3 million dollars, an agreement to conceal the purchase price by having Idexx*fn3 bundle their purchase with Animal Insides, and an agreement to delay the purchase until after Plaintiff's departure. Upon purchasing DVM, Idexx began use of the Trademark without permission from Plaintiff.


I. Legal Standard

Federal Rule of Civil Procedure 12(b)(6) permits a party to raise by motion the defense that the complaint "fail[s] to state a claim upon which relief can be granted," generally referred to as a motion to dismiss. The Court evaluates whether a complaint states a cognizable legal theory and sufficient facts in light of Federal Rule of Civil Procedure 8(a), which requires a "short and plain statement of the claim showing that the pleader is entitled to relief." Although Rule 8 "does not require 'detailed factual allegations,' it [does] demand[] more than an unadorned, the-defendant- unlawfully-harmed-me accusation." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). In other words, "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 (citing Papasan v. Allain, 478 U.S. 265, 286 (1986)). "Nor does a complaint suffice if it tenders 'naked assertion[s]' devoid of 'further factual enhancement.'" Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 557)."To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Id. (quoting Twombly, 550 U.S. at 570); see also Fed. R. Civ. P. 12(b)(6). A claim is facially plausible when the facts pled "allow[] the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. (citing Twombly, 550 U.S. at 556). That is not to say that the claim must be probable, but there must be "more than a sheer possibility that a defendant has acted unlawfully." Id. Facts "'merely consistent with' a defendant's liability" fall short of a plausible entitlement to relief. Id. (quoting Twombly, 550 U.S. at 557).

Further, the Court need not accept as true "legal conclusions" contained in the complaint. Id. This review requires context-specific analysis involving the Court's "judicial experience and common sense." Id. at 679 (citation omitted). "[W]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not 'show[n]'-'that the pleader is entitled to relief.'" Id.

Where a motion to dismiss is granted, "leave to amend should be granted 'unless the court determines that the allegation of other facts consistent with the challenged pleading could not possibly cure the deficiency.'" DeSoto v. Yellow Freight Sys., Inc., 957 F.2d 655, 658 (9th Cir. 1992) (quoting Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986)). In other words, where leave to amend would be futile, the Court may deny leave to amend. See Desoto, 957 F.2d at 658; Schreiber, 806 F.2d at 1401.

II. Analysis

A. The Purchase Agreement and Mutual Release

Wright and Walters claim the unambiguous language of the release conveys the intent to finally and definitively resolve all claims and buy peace, therefore all claims should be dismissed. (ECF No. 9-1 at 8: 23-24.) Plaintiff claims that Wright and Walters induced Plaintiff to enter into the Purchase Agreement by fraud and breach of fiduciary duty, effectively vitiating the Agreement and any release contained therein. (ECF No. 1 at ¶ 95; ECF No. 19 at 8: 16-23.)

DVM, Wright, Walters, and Plaintiff executed a Purchase Agreement containing a mutual release from all claims and liabilities. (ECF No. 7: Exhibit 1 at ¶ 2.) The Purchase Agreement states that the rights and obligations of the parties shall be enforced by the laws of California. (ECF No. 7: Ex. 1 at § 5.5.)

1. Release of Federal Law Causes of Action

Where violations of both state and federal laws are alleged, federal law governs all questions relating to purported releases of federal statutory causes of action. Petro-Ventures, Inc. v. Takessian, 967 F.2d 1337, 1340 (9th Cir. 1992). According to the federal anti-waiver provision of Section 29(a) of the Securities Exchange Act of 1934, any stipulation binding a person to waive federal securities claims shall be void. 15 U.S.C. § 78cc(a); Petro-Ventures, Inc., 967 F.2d at 1340-41. However, application of the rule may depend on the context in which the waiver was signed. In Burgess v. Premier Corp., plaintiffs (five doctors) invested in cattle based on the defendants' allegedly deceptive representation of quality, causing plaintiffs significant losses due to the misrepresentation. 727 F.2d 826, 830 (9th Cir. 1984). Unaware of potential securities fraud, each plaintiff signed a document releasing the defendants from all claims. Id. at 832. The court held that because "[a] release is valid for purposes of federal securities claims only if the [plaintiffs] had actual knowledge that such claims existed, the release did not preclude their claim," thereby invalidating the release. Id. at 831 (emphasis added).

In Petro-Ventures, Inc., the Ninth Circuit upheld a mutual release by distinguishing between buyers of securities in the context of "an exclusively business relationship," like the parties in Burgess, and those "acting in the adversarial setting that is characteristic of litigation." 67 F.2d at 1341-42. The court held that where an unambiguous release from liability is signed in a commercial context by parties in roughly equivalent bargaining position, with ready access to counsel, the language of the release indicates the intent of the parties. Id. at 1342-43. The court in Facebook, Inc. v. Pac. Nw. Software, Inc. also upheld a mutual release noting that "[w]hen adversaries 'in a roughly equivalent bargaining position and with ready access to counsel' sign an agreement to establish a general peace, we enforce the clear terms of the agreement," even though potential securities fraud was later discovered. 640 F.3d 1034, 1039 (9th Cir. 2011) (citing Locafrance U.S. Corp. v. Intermodal Sys. Leasing, Inc., 558 F.2d 1113, 1115 (2d Cir. 1977)). In sum, a mutual release from any future federal securities fraud claim may be upheld if it is: (1) unambiguous, (2) signed by adversaries, (3) with ready access to counsel, (4) in roughly equivalent bargaining power and (5) with the mutual intent to establish peace. See id.; Petro Ventures, Inc. 67 F.2d at 1341-42. Otherwise, a mutual release from federal securities fraud claims is void unless the parties to the agreement had actual knowledge of the claims at the time they signed the agreement. See Burgess, 727 F.2d at 831.

Neither Plaintiff nor Defendants allege that the mutual release is ambiguous, but rather differ as to whether the circumstances surrounding the signing of the Agreement are sufficient to invalidate its terms. Like the parties in Facebook and Petro Ventures, Inc., where the releases were upheld, Plaintiff and Defendants were arguably in a position of equivalent bargaining power by virtue of their personal knowledge of DVM and ownership of the company. However, the parties were not represented by counsel in negotiating the release and there is no indication that either party had ready access to counsel. It is also not clear whether the circumstances were more akin to adversaries settling a controversy by buying peace, or individuals negotiating in a purely business relationship. Finally, Plaintiff claims he was not aware of his federal securities claim until the sale of DVM in 2011, almost two years after signing the Agreement. Thus, like the plaintiffs in Burgess who successfully challenged the validity of the mutual release, Plaintiff did not have "actual knowledge" the claim existed. ...

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