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Wallack v. Idexx Laboratories, Inc.

United States District Court, S.D. California

April 15, 2015

SETH WALLACK and SAN DIEGO VETERINARY IMAGING, INC., Plaintiffs,
v.
IDEXX LABORATORIES, INC.; IDEXX REFERENCE LABORATORIES, INC.; MATTHEW WRIGHT; an individual; and STEPHEN WALTERS, an individual, Defendants.

ORDER GRANTING DEFENDANTS WRIGHT AND WALTERS' MOTION FOR SUMMARY JUDGMENT [Dkt. No. 87.]

GONZALO P. CURIEL, District Judge.

Presently before the Court is Defendants Matthew Wright ("Wright") and Stephen Walters' ("Walters") (collectively "Defendants") motion for summary judgment. (Dkt. No. 87.) Plaintiff Seth Wallack ("Plaintiff") opposed the motion. (Dkt. No. 93.) Defendants filed a reply. (Dkt. No. 9.) Having considered the parties' submissions, supporting documentation, and the applicable law, the Court GRANTS Defendants' motion for summary judgment.

Procedural Background

Plaintiff and San Diego Veterinary Imaging, Inc. ("SDVI") filed a complaint against Defendants Idexx Laboratories, Inc. and Idexx Reference Laboratories, Inc. on December 22, 2011 alleging numerous causes of action for federal and state securities fraud, fraud related causes of action and trademark infringement. (Dkt. No. 1.) On April 11, 2013, the Court granted in part and denied in part Defendants' motions to dismiss with leave to amend. (Dkt. No. 33.) A first amended complaint was filed on May 2, 2013. (Dkt. No. 34.) On September 12, 2013, the Court granted in part and denied in part Defendants' motions to dismiss with leave to amend. (Dkt. No. 49.) The operative second amended complaint was filed on September 26, 2013 and asserts four causes of action: (1) trademark infringement by Plaintiff SDVI against Idexx and Idexx RL; (2) breach of fiduciary duty by Plaintiff Wallack against Wright and Walters; (3) civil conspiracy by Plaintiffs against all Defendants; and (4) request for declaratory relief by Plaintiffs against Idexx and Idexx RL. (Dkt. No. 50.) Defendants Wright and Walters moved to dismiss the second cause of action for breach of fiduciary duty, and third cause of action for civil conspiracy. (Dkt. No. 52.) On April 14, 2014, the Court denied Defendants Wright and Walters' motion to dismiss the breach of fiduciary duty claim; and granted Defendants' motion to dismiss the civil conspiracy claim with prejudice. (Dkt. No. 68.) Therefore, the remaining cause of action alleged against Defendants Wright and Walters is breach of fiduciary duty which is subject to the instant motion for summary judgment.

Factual Background

Plaintiff is a licensed veterinary radiologist and established San Diego Veterinary Imaging, Inc. ("SDVI"), in 2002, to conduct his veterinary radiology practice. (Dkt. No. 93-5, Wallack Decl. ¶¶ 2, 8.) In the early 2000s, Plaintiff recognized the need and benefit of digital imagery to view x-rays over the internet instead of "making the rounds" and visiting veterinary offices, clinics and hospitals to conduct his practice. (Id. ¶¶ 2, 3, 4.) In early 2004, Plaintiff contemplated and began work to develop a software program to serve as a "platform" for veterinary radiologists where they could keep, organize, retrieve and use all of their imagery. (Id. ¶ 7.)

At that time, Plaintiff hired Defendant Stephen Walters, a computer programmer, to assist in the programming and coding of the computer platform/website. (Id. ¶ 9.) They worked together for months to develop the program and they agreed that Walters would eventually become a 20% ownership in any future company. (Id.) Walters also retained ownership of the portions of the source code/programmed information he developed related to the platform/website. (Id.)

In early 2004, Plaintiff named the software "DVMInsight" and decided to conduct his tele-radiology practice under the name "DVMInsight." (Id. ¶ 10.) In 2005, SDVI established, through GoDaddy.com a domain name and website called "DVMInsight.com" and SDVI registered the trademark "DVMInsight". (Id.)

In July 2005, Plaintiff created and incorporated a new business called Veterinary Imaging Center of San Diego, Inc. ("VICSD"). (Id. ¶ 13.) VICSD replaced SDVI for some but not all of his work. (Id.) After VICSD opened, Plaintiff performed conventional veterinary radiology and tele-radiology under its auspices. (Id.)

At the end of November 2005, Defendant Wright, a veterinary radiologist, joined Plaintiff to work at VICSD to work on the DVMInsight platform and set up a new corporation called DVMInsight. Inc. (Id. ¶ 14.) In 2005/2006, Wright became the manager and resident radiologist at VICSD so Plaintiff could generate funds by "making the rounds" to veterinary hospitals. (Id.)

Wright, through his company Animal Insides, Inc., provided online commentary on veterinary radiology and on the increasing importance of digital imaging in veterinary radiology. (Id. ¶ 15.) Plaintiff appreciated Wright's talent for writing and Wright expressed his appreciation for Plaintiff's talent for undertaking and organizing the DVMInsight/VICSD initiatives. (Id.) All three worked to complete the development of the software program. (Id.)

In September 2006, Plaintiff, Wright and Walters incorporated DVMInsight, Inc. ("DVMI"). (Dkt. No. 95-2, Ds' Concordance of Separate Statement of Undisputed Material Facts ("CSSUF") No. 1.) At the time of incorporation, the purpose of DVMInsight was threefold: 1) development of a software platform ("DVM platform") that could be used by veterinarians for teleradiology purposes; 2) operation of a website where clients and providers could use the software; and 3) the generation of teleradiology work for Plaintiff and Wright. (Id.) At the time of incorporation, Plaintiff and Wright each owned 40% of DVMI's outstanding stock, and Walters owned the remaining 20%. (Id., CSSUF No. 2.) Plaintiff, Wright and Walters were named officers and directors of DVMI. (Id.) Plaintiff was the President, Director and Shareholder. (Id., CSSUF No. 4.) Plaintiff was never an employee of DVMI but he occasionally read cases for DVMI. (Id.)

Plaintiff's role was to grow VICSD while Wright's role was to grow DVMI. (Dkt. No. 87-16, Ds' NOL, Ex. I, Wallack Depo. at 88:6-11; 90:19-91:5.) Over time, Plaintiff stepped away from being administratively involved at DVMI and allowed Wright to take over and grow the business. (Dkt. No. 87-16, Ds' NOL, Ex. I, Wallack Depo. at 71:5-16; 73:18-74:8.) Eventually, he was no longer involved in the day to day operations of DVMI as he had a lot of other things going on. (Id.) There was a clear separation of responsibilities. (Dkt. No. 87-16, Ds' NOL, Ex. I, Wallack Depo. at 90:19-91:5.) His role was to grow the VICSD business and he left Wright and Walters in charge of the DVMI business. (Id.)

From the beginning of DVMI, Walters was employed and responsible for information technology for the DVMI. (Dkt. No. 95-2, CSSUF No. 8.) In particular, Walters was responsible for programming, keeping the servers up and running, and providing high level technical support. (Id.) Wright also became an employee of DVMI after he left employment at VICSD in June/July 2009. (Id., CSSUF No. 6.) DVMI grew steadily. (Id., CSSUF No. 9.)

Around the spring 2009, Defendant Idexx Laboratories, Inc. ("Idexx") was searching for partners for its teleradiology/storage needs and issued a Request for Proposal ("RFP") to companies, including DVMI, to fulfill that need. (Id., CSSUF No. 10.) Wright made Plaintiff aware of the RFP and Defendants worked to prepare a response on behalf of DVMI to offer its ImageBank services. (Id.) Because Plaintiff devoted his full attention to VICSD, he did not have time to review the RFP or to contribute, in a substantial way, to the RFP response. (Id.)

Wright nonetheless provided Plaintiff with the RFP response, kept him apprised of the status of the response, and informed Plaintiff that in the late spring of 2009, he would be traveling to Maine, where Idexx was headquartered, to present the response and to explore any interest that Idexx had in purchasing DVMI. (Id., CSSUF No. 11.) While Plaintiff now professes to have had a desire to attend the Idexx meeting, he acknowledges that Wright did not stop him from accompanying Wright to the meeting in Maine and that Plaintiff simply had other commitments outside of DVMI that prevented him from attending. (Id.)

Wright testified that he and Farber discussed an offer where Idexx would pay a multiple of 1.1-1.2 of DVMI's gross revenues to purchase DVMI's assets. (Dkt. No. 87-15, Ds' NOL, Ex. H, Wright Depo. at 134:22-135:6.) Wright calculated the amount based on DVMI's $900, 000 gross revenues for 2008/09 and came up with a purchase price of $1 million. (Id.) When Wright returned, he informed Walters and Plaintiff about the offer of $1 million and they collectively agreed it was not acceptable. (Id. at 145:22-146:4; Dkt. No. 93-5, Wallack Decl. ¶ 22.)

While it is disputed as to who initially raised the idea of DVMI buying out Plaintiff's shares, in August 2009, the parties exchanged emails about the possibility of buying Plaintiff out. (Dkt. No. 87-18, Ds' NOL, Ex. I at 16-18[1].) Plaintiff acknowledged that since Wright and Walters grew the company, they should reap the rewards. (Id. at 16.) Plaintiff raised concern about distribution at the time for shareholder distributions since he was not involved in DVMI. (Id.) DVMI's attorney, Michael Christian ("Christian"), responded that Plaintiff should hold onto his 40% ownership and go along for the ride. (Id. at 17.) However, Plaintiff responded that he did not agree because he did not think it would be fair and could result in a "train wreck when it is time for shareholder distributions." (Id.) Plaintiff was open to a buyout. (Id.) Later, in another email, Plaintiff wrote that he did not need to get out and was fine "staying in for the ride." (Id. at 18.) At that time, discussions regarding a buyout ended. As a result, Wright proposed a shareholder meeting to discuss the issue of shareholder distribution. (Dkt. No. 93-3, P's NOL, Ex. S at 274; 277-78.) A shareholder meeting was held in August 2009. (Dkt. No. 87-17, Ds' NOL, Ex. I, Wallack Depo. at 146:2-3.)

On December 7, 2009, Plaintiff emailed Christian, DVMI's attorney, about having DVMI repurchase his shares and asked for advice. (Dkt. No. 87-20, Ds' NOL, Ex. J, Christian Depo. at 51:1-9; Dkt. No. 87-20, Ds' NOL at 18.) Plaintiff wrote,

I am forwarding an email I received today from Matt. It is good to see the company is doing well however, the context of the message concerns me with respect to fiduciary responsibilities and bonuses intended to drive the year end profits to a level that would require retention of earnings. I don't want to get into a legal battle so rather than call for an accounting evaluation I think it is better if the other shareholders buy me out. I am steadfast on this decision and believe that a complete company valuation is required to determine a fair market value.

(Dkt. No. 87-20, Ds' NOL at 18.) Christian informed Plaintiff that since he represented DVMI, he could not represent Plaintiff, a shareholder, against the interests of the company. (Dkt. No. 87-20, Ds' NOL, Ex. J, Christian Depo. at 63:3-8; Dkt. No. 87-20, Ds' NOL at 18.)

Plaintiff subsequently retained counsel, William Markham ("Markham"), to assist him in selling his shares to DVMI. (Dkt. No. 95-2, CSSUF No. 20.) In order to determine the value of DVMI, Plaintiff reached out to Farber at Idexx in December 2009 to confirm the information that Wright had relayed in April 2009 that an offer of a potential purchase price was made in the $1 to $1.1 million range. (Dkt. No. 95-2, CSSUF No. 21.)

In mid-December 2009, Plaintiff believed he had three options for effectuating the repurchase of his DVMI shares: 1) negotiations between the parties; 2) submission to binding arbitration and selection of a business valuation specialist/accountant whose valuation would be binding on the parties; or 3) litigation among the parties. (Dkt. No. 95-2, CSSUF No. 22.)

On December 18, 2009, Wallack, through his attorney, threatened to initiate a lawsuit against Defendants. (Dkt. No. 95-2, CSSUF No. 23; Dkt. No. 87-23, Ds' NOL, Ex. L at 24-25.) In an effort to resolve differences among the parties without litigation, Markham and Christian began working together in mid-December 2009 to negotiate a stock repurchase agreement. (Dkt. No. 95-2, CSSUF No. 36.) Negotiations continued through the latter part of December 2009 with the parties having vastly different views about the value of DVMI and the provisions to be included in any agreement. (Dkt. No. 95-2, CSSUF No. 37.) After negotiations with counsel and with the assistance of a third party, David Zanders, the parties reached an agreement. (Dkt. No. 95-2, CSSUF No. 37.) The parties executed a Stock Repurchase Agreement on December 31, 2009. (Dkt. No. 93-3, P's NOL, Ex. M.) Plaintiff agreed to sell his DVMI shares for $274, 500 and received a payment of $30, 000 in exchange for the settlement and mutual release. (Dkt. No. 95-2, CSSUF No. 37; Dkt. No. 93-3, P's NOL, Ex. M.)

On September 9, 2011, DVMI and Idexx entered into an Asset Purchase Agreement where Idexx purchased the assets of DVMI and Animal Insides, Inc. for around $3, 200, 000. (Dkt. No. 93-3, P's NOL, Ex. N; Dkt. No. 95-2, CSSUF No. 42.) On December 22, ...


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