Former Shareholders of CardioSpectra, Inc. v. Volcano Corporation and Does 1-10

Filing 27

ORDER REGARDING NOTICE OF TENTATIVE RULING GRANTING MOTION TO DISMISS WITH LEAVE TO AMEND. No later than 12:00 p.m. on Monday, July 30, 2012, the parties shall file a Joint statement as stated in this Order. Signed by Judge Yvonne Gonzalez Rogers on 7/27/12. (fs, COURT STAFF) (Filed on 7/27/2012)

1
2

UNITE STATES D ISTRICT CO
ED
OURT

3

NORTHE DISTRIC OF CALIF
ERN
CT
FORNIA

4
5
6
7

FOR
RMER SHARE
EHOLDERS OF
O
CAR SPECTR , INC.,
RDIO
RA
Plaintiffs,

C
Case No.: 12
2-CV-01535 YGR
NOTICE OF TENTATIVE RULING GRA
ANTING
M OTION TO DISMISS WITH LEAVE T AMEND
TO

8

vs.
9
LCANO CORPORATION and DOES 1 - 10,
a
VOL

10

Defe
endant(s).
Northern District of California

United States District Court

11
12

TO ALL PARTIES AND THEIR ATTORNEY OF RECOR , PLEASE TAKE NOTICE OF THE FO
S
R
YS
RD
E
OLLOWING

13

TEN
NTATIVE RUL
LING ON THE MOTION TO DISMISS SC
E
CHEDULED FOR HEARING ON JULY 31, 2012 AT
G

14

2:00 P.M.
0
The Cou has review the parties’ papers a is incline to grant th motion to dismiss with
urt
wed
and
ed
he
o

15
16

leav to amend. This is a te
ve
entative rulin and the pa
ng
arties still ha an oppor
ave
rtunity to pre
esent oral

17

argu
ument. Alter
rnatively, if the parties stipulate in w
s
writing to ent of the ten
try
ntative ruling the hearin
g,
ng

18

shal be taken of calendar, and the tenta
ll
ff
ative ruling s
shall becom the order o the Court.
me
of
.
The Cou TENTATIV
urt
VELY GRAN
NTS the Motio to Dismis as follows
ss
s:
on

19
20
21

I.

INTROD
DUCTION
Plaintiff former sha
fs,
areholders of CardioSpe
o
ectra, Inc. (“C
CardioSpect
tra”), bring t action fo
this
or

22

brea of contra against Defendant Vo
ach
act
D
olcano Corporation (“Vo
olcano”) for failing to m its
meet

23

cont
tractual oblig
gation to me certain “m
eet
milestones” following a merger. Pla
aintiffs allege three claim
ms:

24

(1) Breach of Written Contr
B
W
ract; (2) Brea of the Im
ach
mplied Covenant of Goo Faith and Fair Dealing
od
g;

25

and (3) Breach of Fiduciary Duty.
o
y

26

Volcano has filed a Motion to Dismiss the C
o
M
D
Complaint fo failure to s
or
state a claim upon which
m
h

27

relie can be gra
ef
anted on the grounds that it has no du
uties or oblig
gations relat
ting to the su
ubject matter of
r

28

this lawsuit.

1

Having carefully con
c
nsidered the papers subm
mitted and th pleadings in this actio and for th
he
on,
he

2

reas
sons set forth below, the Court hereb GRANTS t Motion t Dismiss WITH LEAVE TO AMEND.
h
by
the
to
E
D

3

II.

4

BACKG
GROUND
Defenda Volcano develops and manufactu specializ medical devices that are designe
ant
d
d
ures
zed
t
ed

5

to fa
acilitate endo
ovascular pr
rocedures, en
nhance the d
diagnosis of v
vascular and structural h
d
heart disease
e,

6

and guide optim therapies, particularly in the area of cardiova
mal
y
a
ascular care. On Decemb 7, 2007,
ber

7

Volc
cano and Ca
ardioSpectra entered into an Agreem and Plan of Merger (“Agreemen through
o
ment
n
nt”)

8

whic Volcano acquired Ca
ch
ardioSpectra. See FAC ¶ 2-3; Aftah Decl. ¶ 2, Ex. A, Agre
.
¶¶
hi
eement at 1.

9

Prio to merger with Volcan CardioSp
or
no,
pectra was in the busines of develop
n
ss
ping Optical Coherence
l

10

Tom
mography (“O
OCT”) techn
nology. FAC ¶¶ 9, 15.
C

Northern District of California

United States District Court

11

The Agr
reement requ
uired Volcan to pay $25 million f the acqui
no
5.2
for
isition of Car
rdioSpectra

12

and required Vo
olcano to pay additional compensatio upon achi
y
on
ievement of specified “M
f
Milestones.”
”

13

FAC ¶¶ 3, 21. In order to pr
C
I
rotect Cardio
oSpectra’s s
shareholders’ interests, th Agreement imposed
he

14

obligations on Volcano “to act in good faith and to u commer
V
f
use
rcially reason
nable efforts to cause each
s

15

of th Milestone to be achieved on or before” the s
he
es
b
specified dat for each. I ¶ 5. The FAC
te
Id.

16

sum
mmarizes the Milestone payments as follows:
p

25

Mileston 1: paym of $11 million upon approval by U.S., Japan
ne
ment
m
n
y
nese, or Euro
opean
regulator of a first-g
rs
generation OCT System on or before December 31, 2009.
O
m
e
r
Mileston 2: paym of $10 million upon approval by U.S. regula
ne
ment
m
n
y
ators of a
“product
tized” OCT System on or before De cember 31, 2
o
2010.
Mileston 3: paym of $10 million upon cumulative cash sales o OCT Prod
ne
ment
m
n
of
ducts
(includin consoles (OCT laser light sources processors application software, d
ng
l
s,
s,
n
data
storage devices, prin
d
nters and oth related co
her
omponents), patient inter
rface modules and
pull-back devices (al referred to as a PIM) and OCT c
k
lso
)
catheters or w
wands used t
to
conduct visualization totaling $10 million w
n)
within 3 year of U.S. regulatory app
rs
proval
oductized” OCT System or otherwis e on or befo Decembe 31, 2013.
O
ore
er
of a “pro
Mileston 4: paym of $7 mi
ne
ment
illion upon c
cumulative c
cash sales of OCT Produ
f
ucts
(includin consoles (OCT laser light sources processors application software, d
ng
l
s,
s,
n
data
storage devices, prin
d
nters and oth related co
her
omponents), patient inter
rface modules and
pull-back devices (al referred to as a PIM) and OCT c
k
lso
)
catheters or w
wands used t
to
conduct visualization totaling $25 million w
n)
within 4 year of U.S. regulatory app
rs
proval
of a “pro
oductized” OCT System or otherwis e on or befo Decembe 31, 2014.
O
ore
er

26

FAC ¶ 21.
2

27

Volcano achieved th first Miles
o
he
stone (“Mile
estone 1”) an paid $11 m
nd
million to Pl
laintiffs. FA
AC

17
18
19
20
21
22
23
24

28

¶ 25 The secon Milestone (“Milestone 2”) was to be triggered by the achi
5.
nd
e
o
d
ievement of certain
f

2

1

regu
ulatory appro
ovals for a defined OCT System, wh
d
hereas the thi and fourt Milestone
ird
th
es

2

(resp
pectively, “M
Milestone 3” and “Miles
”
stone 4”) wa to be trigg
as
gered upon th achievem of certain
he
ment

3

sales volumes fo the specif OCT Pro
or
fied
oducts. Id. ¶ 21; Agreem § 2.5(a
ment
a)(ii)-(iv). If and when
f

4

Mile
estones 2-4 were achieve Volcano could be ob
w
ed,
bligated to pa up to $27 million in a
ay
7
additional

5

Mile
estone Merg Consideration payme
ger
ents. Id. ¶¶ 8, 21; Agree
ement § 2.5(
(a).
Although Milestone 2 – regulato approval for the “Ge
h
ory
l
eneration 1a OCT System – has not
m”

6
7

been achieved, Plaintiffs allege that they are entitled to the Mile
n
P
y
d
estone 2 pay
yment of $10 million
0

8

beca
ause Volcano allegedly failed to mee its contrac
f
et
ctual standar of perform
rd
mance under Section 2.5(c)
r

9

of th Agreemen FAC ¶¶ 6, 30. As no OCT Syste has recei
he
nt.
o
em
ived the requ
uired approv
vals, it follow
ws

Northern District of California

that there have been no sales of OCT Pr
b
roducts. Nev
vertheless, P
Plaintiffs alle that Volc
ege
cano has

11

United States District Court

10

ieved sales goals require to trigger Milestones 3 and 4 and that Plaintif are theref
g
ed
ffs
fore entitled to
achi

12

paym
ments of $10 million und Section 2.5(b)(iii) – Milestone 3 – and $7 m
0
der
2
million under Section

13

2.5(
(b)(iv) – Mil
lestone 4. Id ¶¶ 7, 31.
d.

14

III.

LEGAL STANDAR
L
RD

15

A motion to dismiss under Rule 12(b)(6) tes the legal s
n
sts
sufficiency o the claims alleged in the
of
s
t

16

com
mplaint. Ileto v. Glock, In 349 F.3d 1191, 1199
o
nc.,
d
9-1200 (9th Cir. 2003). All allegatio of mater
ons
rial

17

fact are taken as true. Johns v. Lucen Techs., Inc 653 F.3d 1000, 1010 (9th Cir. 2011). To surv
s
son
nt
c.,
vive

18

otion to dism
miss, “a com
mplaint must contain suff
ficient factua matter, acc
al
cepted as tru to ‘state a
ue,
a mo

19

claim to relief th is plausib on its fac
m
hat
ble
ce.’” Ashcro v. Iqbal, 5 U.S. 662 678 (2009 (quoting Bell
oft
556
2,
9)
B

20

Atl. Corp. v. Tw
wombly, 550 U.S. 544, 55 (2007)).
U
57

21

IV.

DISC
CUSSION

22

A.

COUNT I: BREACH OF WRITTEN CO
R
ONTRACT

23

Under Delaware law 1 to state a cause of act
D
w,
tion for breac of contrac a plaintiff must allege
ch
ct
f
e

24

three elements: “first, the ex
xistence of the contract, whether exp
t
press or imp
plied; second the breach of
d,

25

an obligation im
o
mposed by th contract; and third, th resultant d
hat
he
damage to th plaintiff.” VLIW Tech
he
”
h.,

26

LLC v. HewlettC
-Packard Co 840 A.2d 606, 612 (D 2003).
o.,
Del.

27

1

28

The parties agre that, under the Agreeme Delaware law governs. The choiceee
ent,
.
-of-law provi
ision in the
Agre
eement provid that it “sh be constru in accord
des
hall
ued
dance with, an governed in all respects by, the intern
nd
nal
laws of the State of Delaware . . ..” Agreem §§ 13.9( 13.16.
s
ment
(a),

3

Plaintiff do not alle they were signatories to the Agre
fs
ege
e
s
eement2 and Plaintiffs, w are form
who
mer

1
2

shar
reholders of CardioSpect do not su in their ca
tra,
ue
apacity as fo
ormer shareh
holders or all
lege that the
ey

3

were shareholde at the req
e
ers
quisite time.
Based on the foregoi the Cou GRANTS t Motion t Dismiss C
n
ing,
urt
the
to
Count I for breach of

4
5

writ contract WITH LEAV TO AMEN to correc the deficie
tten
VE
ND
ct
encies identif by Volc
fied
cano.
B.

6

COUNT II: BREACH OF THE IMPLIED COVENAN OF GOOD FAITH AND FAIR
T
D
NT
DEALING

7

Under Delaware law every cont
D
w,
tract has an i
implied cove
enant of goo faith and f dealing.
od
fair
8

Dun
nlap v. State Farm Fire & Cas. Co., 878 A.2d 43 441-42 (D 2005). The implied covenant
34,
Del.
d
9

requ
uires contrac
cting parties “to refrain from arbitrar or unreaso
fr
ry
onable condu which ha the effect of
uct
as
10

prev
venting the other party to the contrac from recei
o
o
ct
iving the fru of the bar
uits
rgain.” Id. a 442. The
at
11

Northern District of California

United States District Court

implied covenan is an inter
nt
rpretive device used by c
courts to ana
alyze unantic
cipated developments or to
12

fill gaps in the contract’s pro
g
c
ovisions as a way to ens
sure that the parties’ reas
sonable expe
ectations are
13

fulfi
illed by impl
lying terms into the agre
i
eement to be approxim what the parties wou have
est
mate
e
uld
14

barg
gained had th thought to negotiate the matter. See Nemec v. Shrader, 991 A.2d 11
hey
120, 1126-28
8
15

(Del 2010); Du
l.
unlap, supra, 878 A.2d at 441. Thus , “where the subject at is
,
t
e
ssue is expre
essly covered
16

by th contract, or where the contract is intentionall silent as to that subjec the implie duty to
he
e
ly
o
ct,
ed
17

perf
form in good faith does not come int play.” Da Greytak Enterprises, Inc. v. Maz Motors of
d
n
to
ave
,
zda
o
18

Am., Inc., 622 A.2d 14, 23 (Del. Ch.) aff sub nom., 609 A.2d 668 (Del. 19
A
(
ff’d
992).3

19

To state a cause of action under Delaware la for breach of the implied covenan of good fa
a
aw
h
nt
aith
20

m
y
obligation im
mplied in the contract an allege how a
e
nd
w
and fair dealing, a plaintiff must identify a specific o
21

brea of that ob
ach
bligation den the plai
nied
intiff the frui of the bar
its
rgain. Kuroda v. SPJS H
Holdings,
22
23
24
25

2

On Volcano, Corazon Acqu
nly
C
uisition, Inc., CardioSpectr and Christ
tra,
topher E. Ban and Paul C
nas
Castella, in th
heir
capa
acities as Shar
reholders’ Re
epresentatives were parties to the Agree
s,
s
ement. Neith Banas nor Castella sue in
her
their capacity as Shareholders’ Representati
r
S
’
ives. Banas s
sues as an ind
dividual and “
“Paul Castella FLP” (“fam
a,
mily
limit partnershi
ted
ip”) is named as a Plaintiff
d
f.
3

26
27
28

De
elaware law is “more contractarian than that of many other states,” meaning tha the legislatu and its
s
y
”
at
ure
cour allow the parties to defi the limits of their oblig
rts
p
ine
gations, and th “parties’ contractual c
hus,
choices are
respected.” GRT, Inc. v. Mara
T,
athon GTF Te
echnology, Ltd 2011 WL 2682898, at * (Del. Ch. July 11, 2011);
td.,
*12
.
see also Nemec, supra, 991 A.2d at 1126 (“
a
s
“We must . . . not rewrite th contract to appease a pa who later
he
o
arty
r
wish to rewrite a contract he now believes to have been a bad deal. Parties have a right to ent into good and
hes
e
n
e
ter
bad contracts, the law enforces both.”).
e
s

4

1

L.L.C., 971 A.2d 872, 888 (Del. Ch. 200
d
09).

2

Plaintiff have not id
fs
dentified an implied obli
igation that V
Volcano breached, but in
nstead identi
ify

3

an obligation ex
o
xpressly cove
ered by the contract. Pla
c
aintiffs alleg that “Volc
ge
cano breache the implie
ed
ed

4

cove
enant of goo faith and fair dealing by failing to act in good faith and to use comme
od
f
b
o
d
o
ercially

5

reas
sonable effor to obtain regulatory approval of t OCT Sys
rts
a
the
stem,” which is the secon milestone to
h
nd
e

6

be achieved. Ho
a
owever, the Agreement expressly es
stablished tha Volcano h “to act in good faith
at
had
n

7

and to use comm
mercially rea
asonable effo to cause each of the Milestones to be achiev on or
orts
e
ved

8

befo the spec
ore”
cified date fo each. FAC ¶ 5. Since the good fa obligatio is express covered by
or
C
e
aith
on
sly
b

9

the Agreement, a count which implies th term into the Agreem is dupli
A
hat
o
ment
icative.
Based on the foregoi analysis, the Court G RANTS the Motion to D
n
ing
,
Dismiss Coun II for brea
nt
ach

10

Northern District of California

United States District Court

11

of th implied covenant of good faith an fair dealin WITH LE
he
g
nd
ng
EAVE TO AM
MEND to the e
extent

12

Plaintiffs can id
dentify a spec
cific obligati implied i the Agree
ion
in
ement.

13

C.

14

Under Delaware law a fiduciary relationship exists “wh one pers reposes s
D
w,
y
p
here
son
special trust in
t

COUNT III: BREACH OF FIDUCIARY DUTY
F
Y

15

anot
ther or wher a special duty exists on the part of one person to protect th interests o another.”
re
d
n
f
he
of

16

Wal
l-Mart Stores Inc. v. AIG Life Ins. Co., 901 A.2d 106, 113 (D 2006) (
s,
G
C
d
Del.
(emphasis ad
dded and

17

quot
tation marks omitted). Careful “atte
s
C
ention must b paid to th word ‘special’ lest the statement be
be
he
e
b

18

thou
ught to descr too broa
ribe
adly [the cou
urt’s] concern with relat
ns
tionships wh an elem of trust, as
here
ment

19

com
mmonly unde
erstood, is pr
resent.” McM
Mahon v. Ne Castle As
ew
ssociates, 53 A.2d 601, 604 (Del. Ch.
32
,
C

20

1987 “A fiduc
7).
ciary is typic
cally one wh is entruste with the p
ho
ed
power to man
nage and con
ntrol the

21

prop
perty of anot
ther.” Rich Realty, Inc. v. Potter Anderson & Co
R
v
orroon LLP, CIV.A.09C
,
C-12-273MM
MJ,

22

2011 WL 74340 at *3 (De Super. Feb. 21, 2011) (quoting W
00,
el.
)
Wilmington Le
easing, Inc. v. Parrish

23

Leas
sing Co., L.P CIV. A. 15202, 1996 WL 752364 at *14 n.1 (Del. Ch. Dec. 23, 199 4 While
P.,
1
6
4,
19
96)).
e

24

Plaintiffs allege that they placed special trust in Vol
l
lcano, nothin in the FA justifies im
ng
AC
mposing on

25

Volc
cano the “ex
xacting stand
dards of fidu
uciary duties. Wal-Mar Stores, sup 901 A.2 at 114 (“it is
.”
rt
pra,
2d
t

26

4

27
28

Fid
duciary relatio
onships recog
gnized by Del
laware law inc
clude attorney and client, g
y
general partn
ners,
adm
ministrators or executors, gu
uardians, and principals an their agents See Bird’s Const. v. Milton Equestrian
nd
s.
s
Ctr., 1980-S, 200 WL 152895 at *4 (Del Ch. Nov. 16 2001) (citin McMahon supra, 532 A
,
01
56,
l.
6,
ng
n,
A.2d at 605).
Here the parties’ relationship does not fall within any of the limited c
e,
f
categories of relationships to which
Dela
aware courts have previous extended fiduciary duti
h
sly
f
ies.
5

1

vital importan that the ex
lly
nt
xacting stand
dards of fiduc
ciary duties not be exten
nded to quoti
idian

2

com
mmercial rela
ationships”). Additionally, although Plaintiffs al
h
llege that the were entirely depende
ey
ent

3

upon Volcano to develop an sell the OCT technolo
n
o
nd
ogy; such de
ependence do not eleva an ordina
oes
ate
ary

4

com
mmercial rela
ationship—b
based upon an arms-leng merger A
a
gth
Agreement—
—into a fiduci
iary

5

relat
tionship. Id
d.
Further, “where a dispute arises from obliga
ations that ar expressly addressed by contract, th
re
y
hat

6
7

disp will be treated as a breach of con
pute
t
b
ntract claim. In that spe
ecific contex any fiduci
xt,
iary claims

8

arisi out of th same facts that underli the contra obligation would be foreclosed a
ing
he
s
ie
act
ns
as

9

supe
erfluous.” Nemec, supra 991 A.2d at 1129. He the oblig
N
a,
ere,
gation Plaintiffs identify is contractu
ual

Northern District of California

not fiduciary. Plaintiffs’ fid
P
duciary duty claim “mere dresses [
ely
[their] breach of contract claim in
h
t

11

United States District Court

10

uciary duties’ clothing.” See Fisk Ve
entures, LLC v. Segal, CI
C
IV.A. 3017-CC, 2008 W 1961156, at
WL
fidu

12

*11 (Del. Ch. May 7, 2008) aff’d, 984 A.2d 124 (De 2009). U
M
A
el.
Under these c
circumstance even
es,

13

assu
uming a fidu
uciary relatio
onship existed, the FAC f
fails to alleg such a fidu
ge
uciary duty t was
that

14

brea
ached.
Based on the foregoi the Cou GRANTS t motion to dismiss Co
n
ing,
urt
the
o
ount III for b
breach of

15
16

fidu
uciary duty WITH LEAVE TO AMEND.
E
D

17

V.

CONCL
LUSION

18

Therefor the Court tentatively Orders the f
re,
t
following:

19

1)

The Motion to Dismiss is GRANTED WITH LEAV TO AMEN .
T
t
s
VE
ND

20

2)

Plaintiff shal have until August 20, 2
P
ll
2012 to file a second am
mended comp
plaint.

21

No later than 12:00 p.m. on Mon
p
nday, July 30 2012, the parties shall file a JOINT statement
0,
l
T

22

either (1) stipula
ating in writi to entry of this tenta
ing
ative ruling; o (2) briefly identifying the issue or
or
y
g
r

23

issu on which they wish to argue. If the parties st
ues
h
o
t
tipulate to en of the te
ntry
entative rulin then the
ng,

24

hear
ring shall be taken off ca
alendar, and the tentative ruling shal become the order of th Court. If the
e
ll
he

25

part do not so stipulate, th hearing sh be held as scheduled
ties
o
he
hall
d.

26
27
28

IT IS SO ORDERED.
Date: July 27, 2012
2

__
__________
___________
__________
__________
YVON GONZAL ROGERS
NNE
LEZ
UNITED ST
TATES DISTR
RICT COURT JUDGE
T

6