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Wallack v. Idexx Laboratories, Inc.

United States District Court, S.D. California

April 14, 2014



GONZALO P. CURIEL, District Judge.

Presently before the Court are Motions to Dismiss filed by Defendants Matthew Wright ("Wright") and Stephen Walters ("Walters"), (ECF No. 52); and Idexx Laboratories, Inc. ("Idexx") and Idexx Reference Laboratories, Inc. ("Idexx RL")[1], (ECF No. 53). Plaintiffs Seth Wallack ("Plaintiff") and San Diego Veterinary Imaging, Inc. ("SD Imaging") opposed the motions, (ECF Nos. 65, 67), and Defendants replied, (ECF Nos. 60, 61). Having considered the parties' submissions and the applicable law, the Court GRANTS in part and DENIES in part both Defendants' motions to dismiss.


Plaintiff, a licensed veterinarian, established S.D. 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. S.D. Imaging hired Defendant Walters, a professional software developer, and offered him 20% of S.D. Imaging's stock. Using the name "DVMinsight, " Plaintiff named the software, established a website, created a trademark, and conducted his tele-radiology practice. He also decided to conduct his tele-radiology practice under the name, "DVMinsight."

Plaintiff also registered a trademark for the name DVMinsight ("the Trademark") with S.D. Imaging as the owner. In 2004, Plaintiff began working on an operation called the Veterinary Imaging Center of San Diego, Inc. ("the Center") which formally launched in December 2005. The Center replaced S.D. Imaging for most but not all of Wallack's work. Eventually, Walters ceased to offer services to S.D. Imaging and worked solely at the Center.

In late 2005, Defendant Wright, a veterinary radiologist, joined Plaintiff and Walters at the Center. Wright was invited to assist Plaintiff in developing the software platform and in time became the manager and resident radiologist of the Center so that Wallack could devote time to raise funds. Plaintiff and Wright became close colleagues and interacted constantly with Walters to develop the software program.

In 2006, Plaintiff, Wright, and Walters established a new company, DVMinsight, Inc. ("DVM") of which Plaintiff and Wright each owned 40%, and Walters 20%. All three were named officers and directors of DVM. Plaintiff claims the three owners understood that S.D. Imaging retained ownership of the Trademark but permitted DVM to conduct all operations under the trade name "DVMinsight" and use the name "DVMinsight" for the software. DVM was to complete the development of the software. DVM would provide a website and its own software that allows treating veterinarians to upload, store, organize and review imagery and allow them to obtain immediate diagnoses and consultations from online veterinary radiologist whom DVM had previously screened. DVM enrolled its veterinary radiologists in a program called "Sighthounds Radiology". Wright, who handled this matter, had his own company rather than DVM to register the name "Sighthounds Radiology" as a fictitious business name. By 2008, DVM largely succeeded in developing the software program and by 2009, DVM's software program was functional, popular, and successful.

In April 2009, Wright traveled to Defendant Idexx's headquarters in Maine and met with officers and employees to discuss the possibility of selling DVM to Idexx. Upon his return, Wright reported that Idexx had "expressed only a passing interest in purchasing DVM or the Software Program" and "it would not pay more than $1 million for the entire DVM operation." Wright said the discussions with Idexx had been unsuccessful, inconclusive, and they only offered $1 million for DVM. Wright mentioned that he spoke with a Fred Farber, an officer of Idexx, but provided no other names. Wright and Plaintiff agreed that the purchase price of $1 million was well below what they believed the value of DVM at the time. When Wallack inquired whether Wright would pursue further negotiations or discussions with Idexx, Wright emphatically responded that any discussions with Idexx were over and there would be no further discussions. However, Plaintiff later discovered inconsistencies in Wright's representation that there would be no further discussions with Idexx. An email dated July 26, 2009 from Wright to Wallack titled "IDEXX" shows that there was contact between Wright and RJ Dupree, an executive at Idexx.

Plaintiff claims that from mid-2009 onward, Wright became "inexorably unfair" towards Plaintiff, on the telephone, in emails, and in the open workplace. Initially, it started with mocking Wallack's alleged lack of social skills and inability to take full advantage of DVM's commercial value. Walters began to openly 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 had seized control of the books, records and accounting for DVM and worked solely on DVM business ceasing work on all other related veterinary radiology business work. By summer of 2009, Wright and Walters began goading Wallack that they would pay Wallack to "just to go away." 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 (Animal Insides, Inc.) and Walters (Computer Bugs).

In August 2009, Plaintiff had an email exchange with Wright requesting a general update on DVM's profitability in the prior months and requested a meeting of the board of directors of DVM to discuss the current and prior months' financial records. In the email exchange, Wright represented that DVM is "not really all that profitable at this point." At the meeting of the board of directors in August, Plaintiff was not presented with standard corporate financial records but was presented with an Income and Expense Graph separated by months. Plaintiff claims that the bar graph showed approximate net income for the first seven months of 2009 between $25, 000 and $30, 000; however, Wright falsely stated that DVM was "not really profitable at this point."

In October 2009, Wright and Walters, without notice or consent, terminated Plaintiff as an administrator of the software program. In December 2009, they also unilaterally changed ownership of DVM's domain name and transferred it to a new host which denied Plaintiff access. Plaintiff no longer had administrative access to DVM's platform and was frozen out of the financial matters of DVM by Wright. Since the August 2009 meeting, no further financial documents regarding DVM were provided to Wallack by Wright. Wright and Walters also 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.

Also, in an email dated December 7, 2009, Wright indicated that there was going to be an excess of $120, 000 to $150, 000 of profit disbursement for 2009. This email was sent to Plaintiff without any financial data to support the financial findings. Plaintiff asserts there is an inconsistency between Wright's comment in August 12, 2009 that DVM was not really profitable and an email dated December 7, 2009 indicating that there was going to be an excess of $120, 000 of profit disbursement for 2009. Plaintiff does not understand how the financial fortunes of DVM could have drastically improved during those four months.

Due to the hostile work environment and financial manipulations, in December 2009, 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 DVM. 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.[3] The Stock Purchase Agreement ("the Purchase Agreement") was signed on December 31, 2009.

The Purchase Agreement also included 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. Wright angrily insisted that Plaintiff sign the Purchase Agreement on December 31, 2009. Late in the day on December 31st, Plaintiff was presented with the customer list that was to list all of DVM's current customers. Wright indicated that if the list was over-inclusive, he would not strictly enforce it against Plaintiff. After carefully reviewing the list after the Agreement was signed, Plaintiff claims Wright refused to remove the names of non-customers, even though prior to signing the Purchase 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. This was 4.3 times higher than the value of $686, 250 that they used to buy Plaintiff out and 3.2 times more than the alleged $1 million valuation that Idexx had asserted in December 2009. During the 21 month period from Plaintiff's sale of his stock in DVM to Wright and Walters, Plaintiff claims DVM did not acquire or develop any new asset or line of business of substantial value, did not improve its services or transform itself so as to increase its value, and the market conditions did not materially improve; in fact, the market conditions deteriorated during this time.

During the years in questions, in 2010, DVM worked on about 131, 207 cases, an increase of about 26, 000 cases from 2009 or a 24% increase. In 2011, before the sale of DVM to Idexx in September, DVM performed about 123, 088 cases to that point. Plaintiff alleges that an increase of about 25, 000 cases per year would not justify a purchase price of $3.2 million in September 2011 based on a $1million value Idexx had asserted in April 2009.

Plaintiff further complains that a reasonable inference can be made that Wright reached an understanding with Fred Farber and/or TJ Dupree whereby Idexx would purchase DVM for about $3 million at some future time. Around August 2009, Idexx bought another veterinary company, VDIC for about $6.7 million. Plaintiff asserts that Idexx and Wright agreed to delay the purchase of DVM because Idexx was in the process of negotiating the purchase of VDIC and it took time for Idexx to integrate and use VDIC's software based on tele-radiology platform/services. Theoretically, DVM could have been sold to Idexx at an earlier time, such as January 2010 after Wallack sold his stock to Wright/Walters.

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 and ...

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