Osco Motors Company LLC v. Marine Acquisition Corp et al

Filing 48

REPORT AND RECOMMENDATIONS re 42 MOTION for Leave to File Third Amended Complaint filed by Osco Motors Company LLC. Please note that when filing Objections pursuant to Federal Rule of Civil Procedure 72(b)(2), briefing consists solely of the Ob jections (no longer than ten (10) pages) and the Response to the Objections (no longer than ten (10) pages). No further briefing shall be permitted with respect to objections without leave of the Court. Objections to R&R due by 7/11/2014. Signed by Judge Mary Pat Thynge on 6/24/14. (cak)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

OSCO MOTORS COMPANY, LLC
d/b/a OSCO MOTORS CORPORATION
and ENGINE DISTRIBUTORS, INC.
Plaintiffs,
v.

C.A. No.: 13-868-RGA/MPT

MARINE ACQUISITION CORP.
d/b/a SEASTAR SOLUTIONS
f/k/a TELEFLEX MARINE and
HIG MIDDLE MARKET, LLC.
Defendants.

REPORT AND RECOMMENDATION

I.

Introduction
Plaintiffs, Osco Motors Company, LLC dba Osco Motors Corporation (“Osco”)

and Engine Distributors, Inc. (“EDI”) moved on February 28, 2014 for leave to file their
third amended complaint pursuant to Rule 15 of the Federal Rules of Civil Procedure
(“FED. R. CIV. P.”).1 Defendants, Marine Acquisition Corp. d/b/a Seastar Solutions f/k/a
Teleflex Marine (“Seastar”) and H.I.G. Middle Market, LLC (“HIG”) (collectively
“defendants”) oppose this motion.2 This court has jurisdiction pursuant to 28 U.S.C.
§ 1332. In particular, plaintiffs seek to include additional claims against the original
defendants, as well as adding Gong Luen Metal Industrial Co., Ltd, (“Gong Luen”),
Quality Mark Taiwan, Co., Ltd. (“QM Taiwan”), and Mark Ebbenga (“Ebbenga”) as
1
2

D.I. 42.
D.I. 45.

defendants.3 Plaintiffs’ third amended complaint alleges eleven causes of action: (1)
tortious interference with contractual relations against Seastar; (2) breach of contract
against defendants; (3) breach of the contractual duty of good faith against defendants;
(4) breach of the implied covenant of good faith and fair dealing against defendants; (5)
violation of 6 DEL. C. § 2001 against defendants; (6) federal trademark infringement
under 15 U.S.C. § 1114 against defendants, Gong Luen, QM Taiwan, and Ebbenga; (7)
federal trademark infringement under 15 U.S.C. § 1125(a) against defendants, Gong
Luen, QM Taiwan, and Ebbenga; (8) violation of 6 DEL. C. § 2001 against Gong Luen,
QM Taiwan, and Ebbenga; (9) unjust enrichment against Gong Luen, QM Taiwan, and
Ebbenga; (10) conversion against Gong Luen, QM Taiwan, and Ebbenga; and (11) civil
conspiracy against defendants, Gong Luen, QM Taiwan, and Ebbenga.4
On March 28, 2014, defendants filed a brief in opposition to plaintiffs’ motion,
claiming that counts one, eight, nine, and ten are barred by collateral estoppel and/or
res judicata, and should therefore be dismissed under FED. R. CIV. P. 12(b)(6).5
Defendants also contend counts six, seven, and eleven fail to state a claim upon which
relief can be granted and should be dismissed under FED. R. CIV. P. 12(b)(6).6
Defendants further claim the third amended complaint should be dismissed under FED.
R. CIV. P. 12(b)(2) because this court does not have personal jurisdiction over QM
Taiwan.7

3

D.I. 42.
Id.
5
D.I. 45.
6
Id.
7
Id.
4

2

On April 11, 2014, plaintiffs responded to defendants’ arguments and also
asserted the court should stay the proceedings until the District Court for the District of
Minnesota renders its decision on plaintiffs’ motion to vacate the arbitration judgment
made between plaintiffs and Quality Mark, Inc. (“QM”).8 The hearing for plaintiffs’
motion to vacate the arbitrator’s award is scheduled for June 27, 2014.9
II.

Background10
A.

Parties

Osco is a producer and distributor of marine engines, manifolds, risers, and
accessory parts.11 Osco is a wholly-owned subsidiary of EDI, which sells multiple
brands of marine engine components into the marine market.12 Seastar is a
manufacturer and distributor of marine control systems, engine and drive components
and other product for the original equipment manufacturing and after marine market.13
The products sold by Seastar include manifolds produced by Osco.14 HIG is a private
equity and venture capital investment firm, as well as Seastar’s partner and equity
sponsor.15 Gong Luen is a foundry that manufactures and produces metal castings
used to mold various products, including marine engines, manifolds, and risers.16 QM
Taiwan is a broker that arranges the sale and shipment of goods manufactured by Gong

8

D.I. 47.
Id. Ex. D.
10
D.I. 42.
11
Id. at ¶ 10.
12
Id. at ¶¶ 11, 13.
13
Id. at ¶ 17.
14
Id.
15
Id. at ¶ 19.
16
Id. at ¶ 20.
9

3

Luen.17 Mark Ebbenga is the President of Quality Mark (“QM”), a partner of Gong Luen
and QM Taiwan, and he is the owner and principal or alter-ego of QM Taiwan.18
B.

Factual Background

On January 1, 2011, Osco and EDI entered into a Manufacturing Agreement19
with QM, where QM would produce manifolds for plaintiffs on an exclusive basis.20
According to the Manufacturing Agreement, QM was not permitted to manufacture or
sell Osco products to any entity other than plaintiffs.21 The parties at all times intended
for the Manufacturing Agreement to be a valid agreement between Osco and/or EDI
and QM and according to its terms, QM and Ebbenga utilized Gong Luen and QM
Taiwan to manufacture and ship Osco products to plaintiffs.22 Additionally, the
Manufacturing Agreement specified that if Osco was sold during the life of the
agreement, the Manufacturing Agreement would automatically renew under the same
terms and conditions with the company that purchased Osco.23 The Manufacturing
Agreement further required all disputes relating to its terms be resolved by mediation or
arbitration in Minneapolis, Minnesota.24
In early 2011, defendants began an investigation regarding the possible
purchase of Osco and entered into a Confidentiality Agreement25 with plaintiffs on

17

Id. at ¶ 21.
Id. at ¶ 22.
19
D.I. 47, Ex. A.
20
D.I. 42 at ¶ 23.
21
Id. at ¶ 24.
22
Id. at ¶¶ 27-28.
23
Id. at ¶ 34.
24
Id. at ¶ 35.
25
D.I. 23, Ex. B.
18

4

July 25, 2011.26 The Confidentiality Agreement is a form letter utilized by defendants in
contemplation of purchasing companies and it referenced a “possible collaboration”
between HIG and plaintiffs.27 During the same time period, defendants and QM entered
into a Confidentiality Agreement using a form letter similar to the Confidentiality
Agreement between defendants and plaintiffs.28 The Confidentiality Agreement
between QM and the defendants also contained a clause that all disputes between
them would be resolved in Delaware.29
On or about September 11, 2012, plaintiffs and defendants executed a Letter of
Intent,30 whereby plaintiffs agreed not to solicit or negotiate any other potential
agreements regarding the sale of Osco with any other companies, while defendants
agreed to conduct timely due diligence.31 The Letter of Intent provided the content of
the negotiations regarding defendants’ potential acquisition would not be disclosed to
any third parties, and the terms of the Confidentiality Agreement were incorporated
within it.32
Following the execution of the Letter of Intent between plaintiffs and defendants,
Seastar had direct communications with QM and QM Taiwan about the shipment of
Osco products and the fabrication of tooling to be used to manufacture products
following Seastar’s potential acquisition of the Osco assets.33 In November and
26

D.I. 42 at ¶ 45.
Id. at ¶ 46, 49; D.I. 23, Ex. B.
28
D.I. 42 at ¶ 50.
29
Id.
30
D.I. 23, Ex. C.
31
D.I. 42 at ¶ 51.
32
Id. at ¶ 52.
33
Id. at ¶ 53.
27

5

December 2012, QM’s President, Mark Ebbenga, had multiple meetings with Seastar’s
Vice President of Sales to discuss the possible purchase of Osco.34 During these
meetings, Ebbenga and Seastar’s Vice President of Sales agreed QM would sell Osco
products directly to Seastar without plaintiffs’ involvement.35 Seastar and QM
exchanged documents, including the Confidentiality Agreement signed between Seastar
and plaintiffs.36 Osco President, Glenn Cummins, Jr., (“Cummins”) became aware of
the communications and informed Seastar and QM that all communications regarding
Osco products must be directed to plaintiffs.37 Cummins also informed Seastar that all
orders for Osco products needed to go through Osco and could not be transmitted
directly to QM.38 Additionally, Cummins mentioned to Seastar that the Manufacturing
Agreement between plaintiffs and QM could not be negotiated or otherwise altered by
Seastar and QM before plaintiffs finalized the sale of the Osco assets to Seastar.39
During the course of Seastar’s investigation regarding the potential purchase of
Osco, it became aware of the Manufacturing Agreement between plaintiffs and QM.40
Seastar learned that, as a result of the Manufacturing Agreement, QM had complete
control over the Osco product being shipped to plaintiffs’ customers and the tooling
used to manufacture the product.41 Therefore, Seastar was aware QM was capable of
shipping Osco products or products manufactured with the tooling solely owned by
34

Id. at ¶ 55.
Id. at ¶ 56.
36
Id. at ¶ 57.
37
Id. at ¶ 58.
38
Id. at ¶ 59.
39
Id. at ¶ 60.
40
Id. at ¶¶ 61-62.
41
Id. at ¶ 63.
35

6

plaintiffs, directly to any customer of its choosing.42 In further review of due diligence
documents, Seastar learned QM and plaintiffs jointly owned the tooling necessary for
the manufacture of all Osco products, and according to the terms of the Manufacturing
Agreement, Osco could own the tooling unconditionally by January 2016.43 Seastar
also learned Gong Luen was responsible for manufacturing all Osco products.44
Although plaintiffs authorized certain conversations between QM and Seastar
during the due diligence period, they never authorized QM and Seastar to negotiate a
new manufacturing agreement that would commence after the sale of the Osco assets
or to allow Gong Luen to manufacture product or fabricate tooling upon Seastar’s
request.45 Plaintiffs again informed Seastar that the Manufacturing Agreement between
Osco and QM was not negotiable and would transfer to Seastar in its current form
following Seastar’s acquisition of the Osco assets.46 Regardless of these apparent
understandings, and without plaintiffs’ approval, Seastar continued to negotiate with QM
to create a new manufacturing agreement between them effective following the sale of
the Osco assets.47 In contravention of the Letter of Intent and the Confidentiality
Agreement, Seastar disclosed plaintiffs’ confidential information regarding customers
and price terms to QM.48 Also, as negotiations between plaintiffs and Seastar
continued, Seastar made direct orders to QM for specific tooling to be fabricated to

42

Id.
Id. at ¶ 64.
44
Id. at ¶ 65.
45
Id. at ¶ 67.
46
Id. at ¶ 68.
47
Id. at ¶ 69.
48
Id. at ¶ 71.
43

7

manufacture parts.49 The requested tooling was fabricated by Gong Luen.50 Following
this request, QM contacted plaintiffs and requested approval to sell Osco products and
manifolds directly to Seastar.51 Plaintiffs denied QM’s request pursuant to the terms of
the Manufacturing Agreement.52
On January 15, 2013, the President of QM Taiwan, Ms. Lee (“Lee”), gave
plaintiffs notice of an alleged breach of the Manufacturing Agreement between QM and
plaintiffs, due to nonpayment of invoices.53 Plaintiffs contested the unpaid invoices and
Lee advised unless the breach was remedied, the Manufacturing Agreement would
expire in 60 days or on March 15, 2013.54 On January 28, 2013, plaintiffs met with
Ebbenga, and Seastar’s Vice President of Sales to discuss a proposed extension of
terms of the Letter of Intent, particularly the extension of the provision that prohibited
plaintiffs from soliciting offers or negotiating the sale of Osco with any other entity for a
period of 90 days.55 Cummins believed Seastar had sufficient time to conduct its due
diligence, so he crossed out the 90 day extension and inserted that the agreement
would terminate on February 27, 2013.56
After the extension was signed, Lee informed plaintiffs that the outstanding
invoices had to be addressed by February 28, 2013 or the Manufacturing Agreement

49

Id. at ¶ 72.
Id. at ¶ 73.
51
Id. at ¶ 74.
52
Id. at ¶ 75.
53
Id. at ¶ 76.
54
Id. at ¶¶ 76-77.
55
Id. at ¶ 78.
56
Id. at ¶ 80.
50

8

between plaintiffs and QM would terminate.57 Cummins responded advising plaintiffs
would work with QM and QM Taiwan to resolve the problem; however, QM did not
cooperate in addressing the validity of a number of unpaid invoices prepared by QM
Taiwan.58 Seastar continued to conduct its due diligence and appeared ready to
purchase the Osco assets; however, Seastar and QM still directly communicated about
the sale of the Osco assets and the manufacturing of the Osco product.59 Seastar and
QM continued to negotiate the terms of a new manufacturing agreement, despite being
informed by plaintiffs that the present Manufacturing Agreement was non-negotiable.60
It appeared that QM and Seastar were unable to agree upon the terms of a new
manufacturing agreement, and Seastar informed Osco that the purchase of the Osco
assets could not be completed due to QM’s refusal to abide by the terms of the
Manufacturing Agreement entered into between QM and plaintiffs.61
On February 28, 2013, the day after the extension to the Letter of Intent expired,
Seastar representatives met with Ebbenga to discuss the sale and purchase of
manifolds manufactured on tooling that Seastar believed to be owned jointly by QM and
plaintiffs.62 Following this meeting, Seastar purchased Osco product directly from QM,
despite plaintiffs warnings.63 Seastar did not inform plaintiffs of these purchases.64
Defendants negotiated an agreement with QM, whereby QM would become defendants’
57

Id. at ¶ 81.
Id. at ¶ 82.
59
Id. at ¶ 83.
60
Id. at ¶ 84.
61
Id. at ¶ 85-86.
62
Id. at ¶ 87.
63
Id. at ¶ 89.
64
Id.
58

9

exclusive supplier of marine equipment.65 Plaintiffs maintain these negotiations were
substantively aided by the information obtained by Seastar during its due diligence
process.66 On October 14, 2013, Seastar acquired Mallory Marine, which was one of
plaintiffs’ largest customers of Osco product.67 Following this acquisition, Seastar now
controls a substantial portion of the marine manifold market.68
In March 2013, plaintiffs’ representatives, in an attempt to inspect the Osco
product and tooling, were denied access to Gong Luen’s Foundry in Taiwan where the
product had been manufactured pursuant to the Manufacturing Agreement with QM.69
All subsequent attempts by plaintiffs to address the status of their tooling have been
denied.70 QM Taiwan and Ebbenga now sell Osco product manufactured by Gong
Luen, with the Osco trademark removed despite plaintiffs’ ownership of the tooling.71
Although defendants were informed by QM Taiwan that Gong Luen incorrectly marked
products with the Osco trademark, they continued to accept the mislabeled products
and sold them in the marine manifold marketplace.72 Gong Luen manufactured
additional product using plaintiffs’ tooling, bearing the Osco trademark, which was sold
in the marine manifold marketplace by defendants, QM Taiwan, and/or Ebbenga.73
Meanwhile, Seastar continues to purchase directly from QM, product manufactured

65

Id. at ¶ 90.
Id.
67
Id. at ¶ 91.
68
Id. at ¶ 92.
69
Id. at ¶ 93.
70
Id. at ¶ 95.
71
Id. at ¶¶ 96-98.
72
Id. at ¶¶ 99-101.
73
Id. at ¶ 102.
66

10

from tooling solely owned by Osco.74
C.

Procedural Background

On May, 17, 2013, Osco filed its original complaint against Seastar and HIG,
alleging tortious interference with contractual relations; injunctive relief; breach of
contract; and breach of the duty to negotiate in good faith.75 On July 22, 2013,
defendants moved to dismiss the claim of tortious interference with contractual relations
pursuant to FED. R. CIV. P. 12(b)(1) for lack of standing, and the remaining three claims
under FED. R. CIV. P. 12(b)(6) for failure to state a claim.76 On August 6, 2013, Osco
filed an amended complaint adding Osco Motors Corporation, the name Osco does
business as, and EDI, as plaintiffs.77 Subsequently, defendants withdrew their FED. R.
CIV. P. 12(b)(1) motion as to the first count.78 On August 23, 2013, defendants moved
to dismiss the second, third, and fourth counts of the amended complaint pursuant to
FED. R. CIV. P. 12(b)(6) for failure to state a claim, and moved to stay the proceedings
until the resolution of an arbitration between plaintiffs and QM, then a non-party, was
concluded.79
A report and recommendation recommended defendants’ motion to dismiss
count two be granted and counts three and four be denied.80 It also denied defendants’

74

Id. at ¶ 104.
D.I. 1.
76
D.I. 12.
77
D.I. 19.
78
D.I. 20.
79
D.I. 21.
80
D.I. 34.
75

11

motion to stay proceedings.81 Defendants objected.82 On January 16, 2014, the district
judge granted defendants’ motion to dismiss counts two and four, denied the motion as
to count three, and denied defendants’ motion to stay.83 Plaintiffs were granted leave to
file an amended complaint as to count four.84
On January 29, 2014, plaintiffs filed a second amended complaint.85 Before
defendants responded to the second amended complaint, plaintiffs moved for leave to
file a third amended complaint on February 28, 2014.86 The issue of whether to grant
plaintiffs’ motion for leave to amend is presently under consideration.
1.

Arbitration Proceeding

According to the Manufacturing Agreement between Osco and QM, any dispute
would be resolved by arbitration in Minnesota under state law.87 On May 30, 2013,
plaintiffs initiated their request for arbitration, contending QM breached the
Manufacturing Agreement by selling Osco products to third parties.88 On March 11,
2014, the arbitrator ruled in favor of QM and denied all plaintiffs’ claims.89 The arbitrator
found plaintiffs breached the Manufacturing Agreement by failing to pay invoices to QM,
thereby effectively terminating the agreement on February 28, 2013.90 The arbitrator
reasoned QM could only mitigate damages caused by plaintiffs by selling Osco products
81

Id.
D.I. 35.
83
D.I. 38.
84
Id.
85
D.I. 39.
86
D.I. 42.
87
D.I. 47, Ex. A.
88
Id.
89
D.I. 46, Ex. A.
90
Id.
82

12

to third parties.91 For plaintiffs’ additional claims of misuse of confidential
information/trade secrets, wrongful retention of Osco’s tooling, wrongful interference
with contract, wrongful interference with prospective business advantage and wrongful
stealing of customers, the arbitrator concluded they were not supported by evidence
and barred by plaintiffs’ own breach of the contract.92 The arbitrator further determined
plaintiffs were liable to QM for costs of $302,052, which comprise of unpaid invoices
and mitigation expenses.93
On April 2, 2014, plaintiffs moved to vacate the arbitration award in United States
District Court for the District of Minnesota.94 QM moved to confirm the award.95 The
hearing on the motion to vacate will occur on June 27, 2014.96
III.

Position of Parties
A.

Counts 1, 8, 9, 10, and 11
Count 1

In regards to count one for tortious interference with contractual relations,
plaintiffs assert Seastar, when conducting its due diligence on the potential purchase of
Osco, became aware of the details of the Manufacturing Agreement between plaintiffs
and QM and realized QM was prohibited from manufacturing or selling Osco products to
any other company besides plaintiffs.97 Despite this knowledge, Seastar ordered Osco

91

Id.
Id.
93
Id.
94
D.I. 47, Ex. K.
95
Id., Ex. C.
96
Id., Ex. D.
97
D.I. 42 at ¶¶ 109-110
92

13

products directly from QM and stopped ordering directly from plaintiffs.98 Due to
Seastar’s purchase of Osco product directly from QM, plaintiffs contend their business
relations with other existing customers, as well as with QM, was injured.99
Defendants contend this claim is futile because plaintiffs are barred by collateral
estoppel from proving an intentional act that is a significant factor in causing the breach
of contract tortious interference with contractual relations.100 Defendants state plaintiffs
are unable to argue that QM breached the Manufacturing Agreement because that
issue was precisely litigated in the arbitration between plaintiffs and QM.101 Defendants
assert since the arbitrator determined plaintiffs breached and thus terminated the
Manufacturing Agreement, they are collaterally estopped from now claiming defendants
committed an intentional act that was a substantial factor in causing QM’s breach of the
agreement.102 In light of the arbitration findings, defendants aver any sale of Osco
products from QM to defendants after February 28, 2013 could not constitute a breach
of the agreement.103
Count 8
Count eight alleges violation of the Delaware Uniform Trade Secrets Act
(“DUTSA”), 6 DEL. C. § 2001 et. seq., against Gong Luen, QM Taiwan, and Ebbenga.
Plaintiffs contend that due to the Manufacturing Agreement between plaintiffs and QM,
Gong Luen, QM Taiwan, and/or Ebbenga obtained plaintiffs’ trade secrets relating to the
98

Id. at ¶¶ 112-113.
Id. at ¶ 114.
100
D.I. 45 at 9.
101
Id.
102
Id. at 10.
103
Id.
99

14

formula, pattern, method, technique, and process for manufacturing the Osco
product.104 Despite plaintiffs’ significant efforts to maintain the secrecy of their trade
secrets, Gong Luen, QM Taiwan, and Ebbenga used such information to manufacture
the Osco product and sell it in the marketplace.105 Plaintiffs further claim because of the
actions of Gong Luen, QM Taiwan, and/or Ebbenga in disclosing and misappropriating
the trade secrets, plaintiffs suffered substantial monetary damages.106 Defendants
assert count eight is futile because it is barred by collateral estoppel and res judicata.107
Defendants argue the issue of whether QM misappropriated plaintiffs’ trade secrets was
litigated in arbitration, and the arbitrator determined “there was no evidence that QM
used any information other than what it had become aware of during the execution of
the contract and its own industry knowledge.”108 Since the same issue was already
litigated, defendants maintain count eight is barred.
Count 9
Under count nine for unjust enrichment against Gong Luen, QM Taiwan, and
Ebbenga, plaintiffs argue that as a result of the Manufacturing Agreement between
plaintiffs and QM, Gong Luen and/or QM Taiwan acquired tooling to manufacture the
Osco product.109 According to the terms of the agreement, plaintiffs paid 50% of the
cost for all new tooling created by Gong Luen, and therefore own at least 50% of the

104

D.I. 42 at ¶ 186.
Id. at ¶¶ 190, 192.
106
Id. at ¶ 194.
107
D.I. 45 at 11.
108
Id.
109
D.I. 42 at ¶ 196.
105

15

tooling in the possession of Gong Luen and/or QM Taiwan.110 Plaintiffs claim they
cannot access the tooling and Gong Luen and/or QM Taiwan continue to use the tooling
to fill orders from QM.111 Plaintiffs additionally contend Gong Luen and/or QM Taiwan
possess the Osco product that was made pursuant to the Manufacturing Agreement,
and now sell that product to third parties, including defendants.112 Because of such
conduct, plaintiffs claim to have suffered significant monetary damages.113
Defendants respond that count nine is barred by collateral estoppel and res
judicata because this issue was already litigated and resolved in arbitration, wherein the
arbitration award explicitly rejected plaintiffs’ unjust enrichment claim.114 Defendants
further note that whether QM and/or Gong Luen, QM Taiwan, and Ebbenga were
enriched or plaintiffs impoverished was addressed since the arbitrator reduced QM’s
award by the amount Osco paid for the tooling and denied QM’s request for payment on
outstanding tooling invoices and certain monetary relief based on double counting.115
Count 10
With respect to count ten for conversion against Gong Luen, QM Taiwan, and
Ebbenga, plaintiffs assert Gong Luen and QM Taiwan intentionally and illegally
converted plaintiffs’ ownership interest in the tooling for their own personal use and
benefit to fulfill orders from QM.116 Plaintiffs also contend since Gong Luen and/or QM

110

Id. at ¶¶ 197-198.
Id. at ¶¶ 199-200.
112
Id. at ¶¶ 201-202.
113
Id. at ¶ 205.
114
D.I. 45 at 12.
115
Id.
116
D.I. 42 at ¶¶ 208, 210.
111

16

Taiwan possess the Osco product and are selling it, they have no lawful justification for
denying plaintiffs rights and benefits as joint owners of the tooling and product.117 In
light of Gong Luen’s and QM Taiwan’s conduct, including their refusal to compensate
plaintiffs, plaintiffs claim monetary damages.118
Defendants argue count ten is futile because it is also barred by collateral
estoppel and res judicata.119 Defendants state plaintiffs’ conversion claim was
previously adjudicated and denied in arbitration, where the claim was found as “not
supported by the evidence or the law and barred by [plaintiffs’] own breach of
contract.”120 The arbitrator found QM’s selling of the plaintiffs’ inventory was an
appropriate mitigation action in response to their breach.121 Because this claim was
already litigated and subsequently resolved, defendants maintain it should be
dismissed.
Count 11
For count eleven, plaintiffs allege defendants, Gong Luen, QM Taiwan, and
Ebbenga committed civil conspiracy in agreeing to deprive plaintiffs’ ownership in the
tooling and Osco products manufactured pursuant to the Manufacturing Agreement.122
In furtherance of this conspiracy, plaintiffs argue Gong Luen, QM Taiwan, and/or
Ebbenga removed Osco identifying marks on these products and sold them.123 Plaintiffs

117

Id. at ¶¶ 211, 212, 214.
Id. at ¶¶ 215-216.
119
D.I. 45 at 13.
120
Id.
121
Id.
122
D.I. 42 at ¶ 218.
123
Id. at ¶ 220.
118

17

further maintain defendants, Gong Luen, QM Taiwan, and Ebbenga willfully conspired
to misappropriate and use plaintiffs’ trade secrets in violation of DUTSA.124 Because of
the actions of these parties, the distribution and sale of goods bearing the Osco
trademark has caused confusion, mistake, and deception regarding the ownership and
authenticity of the goods made by Gong Luen from tooling solely owned by plaintiffs,
resulting in violation of Section 43(a)(1)(A) and Section 32(1) of the Lanham Act.125
Defendants note plaintiffs’ argument, that they were deprived of their ownership
of the tooling and the Osco product manufactured from the tooling, was already
resolved in the arbitration proceeding and therefore, cannot serve as the underlying
basis for conspiracy because it is barred by collateral estoppel and res judicata.126 They
reason plaintiffs’ claim for conspiracy to misappropriate trade secrets is preempted by
DUTSA, 6 DEL. C. § 2007, which bars conspiracy for misappropriation of trade secrets,
relying on Savor, Inc. v. FMR Corp.,127 and Total Care Physicians, P.A. v. O’Hara,
M.D.128 In those matters, the courts dismissed the conspiracy claims because they
relied on the same facts used to support the misappropriation of trade secrets claims.129

B.

Counts 6 and 7

In count six, plaintiffs allege defendants, Gong Luen, QM Taiwan, and Ebbenga
committed federal trademark infringement under 15 U.S.C. § 1114(1), because
124

Id. at ¶ 221.
Id. at ¶ 222.
126
D.I. 45 at 14.
127
812 A.2d 894, 898 (Del. 2002).
128
798 A.2d 1043, 1057 (Del. Sup. Ct. 2001).
129
D.I. 45 at 15.
125

18

defendants, QM Taiwan, and/or Ebbenga’s distribution and sale of goods bearing the
Osco trademark cause confusion, mistake, and deception regarding ownership and
authenticity of the goods manufactured by Gong Luen from tooling solely owned by
plaintiffs.130 The unauthorized use of plaintiffs’ federally registered mark will lead the
public to believe defendants, Gong Luen, QM Taiwan, and/or Ebbenga are affiliated
with plaintiffs and approved to manufacture such goods, decreasing plaintiffs’ revenue
through the sale of their product bearing the Osco trademark.131 Due to willful
infringement of the Lanham Act, 15 U.S.C. § 1114, plaintiffs claim significant monetary
damages, and the profits of defendants, QM Taiwan, Ebbenga, and/or Gong Luen
under 15 U.S.C. § 1117(a), treble damages pursuant to 15 U.S.C. § 1117(b), injunctive
relief pursuant to 15 U.S.C. § 1116(a), and an order compelling the impounding of all
infringing materials because of the use of counterfeit trademarks under 15 U.S.C.
§ 1116(d).132
For count seven, plaintiffs assert Gong Luen, QM Taiwan, and Ebbenga
committed federal trademark infringement under 15 U.S.C. § 1125(a).133 Similar to count
six, plaintiffs allege they are entitled to the same remedies.134
Defendants respond that plaintiffs, in the third amended complaint, admit
defendants were authorized to receive the Osco product directly from QM Taiwan and
resell it into the marketplace as a wholesale customer.135 Defendants maintain this
130

D.I. 42 at ¶¶ 170, 173.
Id. at ¶¶ 170-171.
132
Id. at ¶¶ 173-177.
133
Id. at ¶ 182.
134
Id. ¶ 184.
135
D.I. 45 at 15-16.
131

19

authorization is a defense to trademark infringement and false designation of origin, and
as a result, the Lanham Act claims fail to state a claim for relief.136
C.

Personal Jurisdiction

Defendants contend plaintiffs’ third amended complaint should be dismissed
pursuant to FED. R. CIV. P. 12(b)(2) because the court does not have personal
jurisdiction over Gong Luen, QM Taiwan, or Ebbenga.137 They assert since these
parties do not regularly do or solicit business in Delaware, nor derive substantial
revenue from services or goods used or consumed in this jurisdiction, the court does not
have general jurisdiction.138 Further, because the litigation does not arise from any
contacts by Gong Luen, QM Taiwan, or Ebbenga with this forum, the court does not
have specific jurisdiction.139 Defendants note although the forum selection clause in the
Confidentiality Agreement includes Delaware, this agreement was between defendants
and QM: Gong Luen, QM Taiwan, and Ebbenga were not parties to it.140 Defendants
assert plaintiffs’ arguments of personal jurisdiction based on conspiracy fails because
the requisite elements of a conspiracy are absent.141
In their response, plaintiffs maintain if Gong Luen, QM Taiwan, and Ebbenga are
conspirators in the two asserted violations of the Lanham Act, then they satisfy the first
two elements for jurisdiction.142 Plaintiffs claim the remaining elements are satisfied

136

Id.
Id. at 16.
138
Id. at 18.
139
Id.
140
Id.
141
Id. at 19-20.
142
D.I. 47 at 7-8.
137

20

because the Confidentiality Agreement between defendants and QM, was signed by
Ebbenga and provided all disputes be resolved in Delaware.143 Plaintiffs further note
since Ebbenga is the President of QM, a partner of Gong Luen, and the owner, principal
or alter-ego of QM Taiwan, it is reasonable to infer these parties were aware of the
Delaware jurisdiction clause in the Confidentiality Agreement.144 As a result, all
requirements of the conspiracy theory of jurisdiction are satisfied.145
IV.

Standard of Review
A.

Standard for Leave to File Amended Complaint
under Rule 15(a)

The court considers motions to amend pleadings under FED. R. CIV. P. Rule
15(a), which provides that leave shall be freely given “when justice so requires.”
Therefore, "if the underlying facts or circumstances relied upon by a plaintiff may be a
proper subject of relief, he ought to be afforded an opportunity to test his claim on the
merits.”146 While the decision of whether to grant or deny a motion to amend is within
the discretion of the court, under Foman v. Davis,147 the Supreme Court has found
leave to amend should be freely granted “in the absence of . . . undue delay, bad faith
or dilatory motive on the part of the movant, repeated failure to cure deficiencies by
amendments previously allowed, undue prejudice to the opposing party by virtue of
allowance of the amendment, futility of the amendment, etc.”148

143

Id. at 8.
Id.
145
Id.
146
Foman v. Davis, 371 U.S. 178, 182 (1962).
147
371 U.S. 178 (1962).
148
Id. at 182.
144

21

In assessing futility, the court applies the same standard of legal sufficiency as
under Rule 12(b)(6).149 Under this analysis, all factual allegations and all reasonable
inferences are accepted as true, and “the court cannot conclude beyond doubt that the
plaintiffs can prove no set of facts in support of their claim which would entitle them to
relief.”150 “Only where it is clear . . . that a claim has no possibility of succeeding on the
merits, will the court disallow it by denying leave to amend.”151 An amendment is futile
when it fails to state a claim upon which relief may be granted.152 Therefore, a proposed
amendment to a complaint will be futile if it cannot withstand a motion to dismiss.153
B.

Heightened Pleading Standard Under Rule 9(b)

FED. R. CIV. P. 9(b) provides allegations of fraud or mistake must be stated with
particularity in describing the circumstances of fraud or mistake. Rule 9(b) requires a
plaintiff plead with particularly to place a defendant on notice of the specific misconduct
being charged.154 A plaintiff may include allegations of “date, place or time” to fulfill the
particularly requirement of Rule 9(b), but they are not required.155 “Plaintiffs are free to
use alternative means of injecting precision and some measure of substantiation into
their allegations of fraud.”156 When substantive information lies within another party’s
149

In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1434 (3d Cir. 1997).
Athletes Foot of Delaware, Inc., v. Ralph Libonati Co., Inc., 445 F. Supp. 35,
50 (D. Del. 1997).
151
Agere Systems Guardian Corp. v. Proxim, Inc., 190 F. Supp. 2d 726, 736 (D.
Del. 2002).
152
In re Merck & Co., Inc., 493 F.3d 393, 400 (3d Cir. 2007).
153
Jablonski v. Pan American World Airways, Inc., 863 F.2d 289, 292 (3d Cir.
1988).
154
Seville Indus. Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786,
791 (3d Cir. 1984).
155
Id.
156
Id.
150

22

control, a plaintiff may plead based on information and belief, “but only if the pleading
sets forth the specific facts upon which the belief is reasonably based.”157 Rule 9(b)
must also be read in connection with Rule 8(a)(2), which provides “a pleading shall
contain . . . a short and plain statement of the claim.”158 In satisfying Rule(9), in
conjunction with Rule 8(a)(2), “the requirement of particularity . . . does not entail an
exhaustive cataloging of facts but only sufficient factual specificity to provide assurance
that plaintiff has investigated . . . the alleged fraud and reasonably believes that a wrong
has occurred.”159
V.

Discussion
A.

Plaintiffs’ Motion for Leave to File Third Amended Complaint
1.

Personal Jurisdiction over Gong Luen, QM Taiwan, and
Ebbenga under Count 6, 7, 8, 9, 10, and 11

In assessing the third amended complaint, it first must be determined whether
the court has personal jurisdiction over Gong Luen, QM Taiwan, and Ebbenga. To
establish personal jurisdiction, plaintiffs must present facts sufficient in satisfying two
requirements: statutory and constitutional showing that jurisdiction is proper.160
Personal jurisdiction may exist under either general jurisdiction or specific jurisdiction.
General jurisdiction is shown by a defendant’s “continuous and systematic” contacts
with the forum, regardless of whether their activities are related to the particular cause

157

Brinkmeier v. BIC Corp., 733 F. Supp. 2d 552, 559 (D. Del. 2010).
Gissen v. Colorado Interstate Corp., 62 F.R.D. 151, 154 (D. Del. 1974).
159
Temple v. Haft, 73 F.R.D. 49, 53 (D. Del. 1976).
160
Mellon Bank (East) P.S.F.S. v. Farino, 960 F.2d 1217, 1223 (3d Cir. 1992).
158

23

of action or if a plaintiff’s claim arises from a defendant’s non-forum related activities.161
Specific jurisdiction arises out of a defendant’s forum-related conduct, in that a
defendant “should reasonably anticipate being haled into court” in that forum.162 “It is
essential . . . that there be some act by which the [party] purposefully avails itself of the
privilege of conducting activities in the forum state, thus invoking the benefits and
protections of its laws.”163 When there has been a showing of minimum contacts, the
“contacts may then be considered in light of other factors to determine whether the
assertion of personal jurisdiction would comport with ‘fair play and substantial
justice.’”164 While the “court must accept as true all allegations of jurisdictional fact
made by the plaintiff and resolve all factual disputes in the plaintiff’s favor,”165 the
plaintiff must sufficiently allege facts which “establish with reasonable particularity that
jurisdiction over the defendants exists.”166 Under FED. R. CIV. P. Rule 4(e), a district
court may exercise personal jurisdiction “over non-resident defendants to the extent
permissible under the law of the state where the district court sits.”167 In its analysis, the
court must determine if there is a statutory basis for exercising jurisdiction under the

161

See Vetrovex Certainteed Corp. v. Consol. Fiber Glass Prod. Co., 75 F.3d
147, 151 n.3 (3d Cir. 1996) (citations omitted).
162
World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297 (1980).
163
Hanson v. Denckla, 357 U.S. 235, 253 (1958).
164
Burger King Corp. v. Rudzewicz, 471 U.S. 462, 476 (1985) (quoting Int’l Shoe
Co. v. Washington, 326 U.S. 310, 320 (1945)).
165
Christ v. McCormick, No. C.A. 06-275-GMS, 2007 WL 2022053, at *3 (D. Del.
July 10, 2007) (quoting Shamrock Holdings of California, Inc. v. Arenson, 421 F. Supp.
2d 800, 803 (D. Del. 2006)).
166
Id. (quoting ICT Pharms., Inc. v. Boehringer Ingelheim Pharms., Inc., 147 F.
Supp. 2d 268, 271 (D. Del. 2001)).
167
Pennzoil Prod. v. Colelli & Assocs., Inc., 149 F.3d 197, 200 (3d Cir. 1998).
24

state’s long arm statute.168
In relevant part, the Delaware Long Arm statute provides:
(c) As to a cause of action brought by any person arising from any of the
acts enumerated in the section, a court may exercise personal jurisdiction
over any nonresident, or a personal representative, who in person or
agent:
(1) Transacts any business or performs any character of work or service in
the State;
(2) Contracts to supply services or things in this State;
(3) Causes tortious injury in the State by an act or omission in this State;
(4) Causes tortious injury in the State or outside of the State by an
omission outside the State if the person regularly does or solicits
business, engages in any other persistent course of conduct in the State
or derives substantial revenue from services, or things used or consumed
in the State; . . . .169
Subsection (c)(1)-(3) and (5)-(6) are specific jurisdiction provisions, where there must be
a nexus between the cause of action and the conduct of the defendant as a basis for
jurisdiction.170 Subsection (c)(4) is a general jurisdiction provision, which requires a
greater extent of contacts, but applies when the claim is unrelated to forum contacts.171
Section 3104(c)(1) requires some act on the part of the defendant occur in
Delaware and plaintiff’s claim arise out of that act.172 Section 3104(c)(2) provides that if

168

Reach & Assocs. v. Dencer, 269 F. Supp. 2d 497, 502 (D. Del. 2003).
Round Rock Research LLC v. ASUSTeK Computer Inc., 967 F. Supp. 2d 969,
973-47 (D. Del. 2013) (quoting 10 DEL. C. § 3104(c)).
170
Monsanto Co. v. Syngenta Seeds, Inc., 443 F. Supp. 2d 636, 642 (D. Del.
2006).
171
Applied Biosystems, Inc. v. Cruachem, Ltd., 722 F. Supp. 1458, 1466 (D. Del.
1991).
172
Roquette Freres v. SPI Pharma, Inc., No. C.A. 06-540-GMS, 2009 WL
1444835, at *18 (D. Del. May 21, 2009).
169

25

a defendant’s supplies or goods are shipped to Delaware, then the defendant must also
perform the act in the state.173 Section 3104(c)(3) mandates that the tortious activity
must have occurred in Delaware.174 To satisfy the requirements of § 3104(c)(1)-(3), “the
conduct of the defendant must be directed at the residents of Delaware and the
protections of Delaware laws,”175 and “the mere placement of a product into the stream
of commerce with an awareness that it may end up in a specific state is not enough to
establish minimum contacts.”176 Therefore, “when a foreign manufacturer designs,
manufactures, labels and packages a product outside of Delaware, it has not performed
those acts in the state and the specific jurisdiction provisions under § 3104(c)(1)-(3) do
not apply.”177
In the instant matter, there is no evidence of any act by Gong Luen, QM Taiwan,
or Ebbenga that would subject them to personal jurisdiction under the long arm statute
because the third amended complaint fails to establish any connection between them
and Delaware. Plaintiffs do not satisfy the requirements of § 3104(c)(1)-(3) because
their complaint fails to allege, with reasonable particularly, that any act by these parties
or any resulting tortious injury occurred in Delaware. Plaintiffs, furthermore, fail to
satisfy § 3104(c)(4) because they do not sufficiently show that Gong Luen, QM Taiwan,
or Ebbenga derived any substantial revenue from any services or products consumed in
173

Id. at *18-19 (citing Moore v. Little Giant Indus., Inc., 513 F. Supp. 1043, 1046
(D. Del. 1981)).
174
Id. at *19.
175
Id. (citing Thorn EMI N. Am. Inc. v. Micron Tech., Inc., 821 F. Supp. 272, 274
(D. Del. 1993).
176
Id. (quoting Asahi Metal Indus. Co. v. Superior Court, 480 U.S. 102, 107
(1987)).
177
Id. at *19.
26

Delaware. The court, therefore, does not have specific or general personal jurisdiction
over Gong Luen, QM Taiwan, or Ebbenga through Delaware’s long arm statute.
The only means plaintiffs may establish personal jurisdiction is to meet the
requirements of the conspiracy theory of jurisdiction and “assert specific factual
evidence, not conclusory allegations, to show that the non-resident defendants were
conspirators in some wrongful act resulting in harm to Delaware entities or their owners
in order for the court to exercise jurisdiction over them.”178 The conspiracy theory of
jurisdiction is based upon the premise that the acts of a conspirator are imputed to all
the other co-conspirators.179 A conspirator, therefore, who is absent from the forum,
may be subject to jurisdiction if a plaintiff shows: “(1) a conspiracy to defraud existed;
(2) the defendant was a member of that conspiracy; (3) a substantial act or substantial
effect in furtherance of the conspiracy occurred in the forum state; (4) the defendant
knew or had reason to know of the act in the forum state; and (5) the act in, or effect on,
the forum state was a direct and foreseeable result of the conduct in furtherance of the
conspiracy.”180 Subjecting nonresident defendants to jurisdiction based on the
conspiracy theory comports with the notion of fair play and substantial justice because
when a defendant voluntarily participates in a conspiracy with knowledge of its acts or
effects in the forum state, he “can be said to have purposefully availed himself of the
privilege of conducting activities in the forum state, thereby fairly invoking the benefits

178

Crescent/Mach I Partners, L.P. v. Turner, 846 A.2d 963, 978 (Del. Ch. 2000).
Instituto Bancario Italiano SpA v. Hunter Engineering Co., Inc., 449 A.2d 210,
225 (Del. 1982).
180
G & G LLC v. White, 535 F. Supp. 2d 452, 464 (D. Del. 2008) (quoting
Instituto Bancario, 449 A.2d at 225).
179

27

and burdens of its laws.”181 However, “the specific factual allegations in a complaint that
proposes to invoke the ‘conspiracy theory’ must be more than a ‘facile way for [plaintiff]
to circumvent the minimum contacts requirement.’”182 The test, however, is strict and is
construed narrowly, requiring proof of each enumerated element.183
While plaintiffs allege a conspiracy existed to commit trademark infringement and
conversion, and Gong Luen, QM Taiwan, and Ebbenga were parties to the conspiracy,
plaintiffs fail to provide sufficient factual allegations that their wrongful acts resulted “in
harm to Delaware entities or their owners” to allow this court to exercise jurisdiction over
them.184 To satisfy the third element of the conspiracy theory of jurisdiction, plaintiffs
are required to show “the actual occurrence . . . in Delaware of a substantial act or
effect in furtherance of the conspiracy.”185 For example, in IOTEX Commc’ns., Inc. v.
Defries,186 the court rejected the plaintiff’s claim that a corporate director’s breach of
fiduciary duties owed to a Delaware corporation constituted a substantial act or effect
since the breach occurred physically outside of Delaware. The court reasoned that:

In the case of Delaware corporations having no substantial physical
presence in this State, an allegation that a civil conspiracy caused
injury to the corporation by actions wholly outside this State will not
181

Christ, No. C.A. 06-275-GMS, 2007 WL 2022053 at *6 (quoting Instituto
Bancario, 449 A.2d at 225).
182
G & G LLC, 535 F. Supp.2d at 464-65 (quoting Computer People, Inc. v. Best
Int’l Group, Inc., No. C.A. 16648, 1999 WL 288119 at *16 (Del. Ch. Apr. 27, 1999)).
183
Werner v. Miller Technology Mgmt., L.P., 831 A.2d 318, 330 (Del. Ch. 2003).
184
Capital Invs. Group, Inc. v. Korban, No. C.A. 10-115-GMS-SRF, 2014 WL
587363 at *9 (D. Del. Feb. 14, 2014) (quoting Benihana of Tokyo, Inc. v. Benihana, Inc.,
2005 WL 5838328 (Del. Ch. Feb. 4, 2005).
185
Id. at *9.
186
No. 15817, 1998 WL914265 (Del. Ch. Dec. 21, 1998).
28

satisfy the requirement found in the Supreme Court’s opinion in
Instituto Bancario of “a substantial effect . . . in the forum state.”187
Plaintiffs offer no sufficient factual allegations that any substantial acts or effects of the
conspiracy occurred in Delaware, and therefore, are unable to satisfy the third element.
Plaintiffs’ argument, that the acts of Gong Luen, QM Taiwan, and Ebbenga fulfill the
third element because the Confidentiality Agreement between the defendants and QM
contained a Delaware jurisdiction clause, is without merit. Even though Ebbenga
executed the Confidentiality Agreement (in his capacity as President of QM) and
allegedly is the principal or alter-ego of QM Taiwan, there is no evidence that the
agreement was signed in or has had any direct effect upon Delaware. Plaintiffs’ claim
that Gong Luen, QM Taiwan, and Ebbenga conducted business in Delaware through
the dispute resolution clause in the Confidentiality Agreement is premature because no
dispute between the defendants and QM has arisen, whereby Delaware would be
directly effected in resolving such dispute. Jurisdiction is not established over these
foreign parties since plaintiffs, Osco, a Pennsylvania corporation based in New Jersey,
and EDI, a New Jersey corporation based in New Jersey, have not alleged any resulting
harm or effect on Delaware businesses or entities. Because plaintiffs are unable to
satisfy the third element of the conspiracy theory of jurisdiction, the court need not
analyze the remaining two requirements.
Since this court does not have personal jurisdiction over Gong Luen, QM Taiwan,
and Ebbenga, counts six, seven, eight, nine, ten, and eleven against them are futile,
and should be dismissed.
187

Id. at *8.
29

2.

Collateral Estoppel and Res Judicata: Count 1 and 11 against
Defendants

Collateral estoppel, or issue preclusion, prevents parties from re-litigating the
same issues when a court of competent jurisdiction has previously adjudicated the case
on its merits and a final judgment has been entered.188 A federal court, sitting in
diversity in this Circuit, should not apply the federal law of collateral estoppel unless a
substantial federal interest exists.189 If no federal interest exists, then the court looks to
the rules of collateral estoppel of the state law that governs the second suit. However, if
the law governing the second suit adheres to the Restatement (Second) of Conflicts of
Laws § 95 comment g, then the state law where the first judgment was rendered should
be applied in the second suit.190 Section 95 comment g provides:
The local law of the State where the judgment was rendered will be
consulted to determine whether the parties should be precluded in a
subsequent action upon a different cause of action from relitigating
issues that were essential to the judgment and were actually litigated
and determined by the judgment. The same law will determine such
questions as whether a party will be held bound in a subsequent
proceeding by an admission made by him in his pleadings in the
original proceeding; whether a defendant will be precluded from raising
in a subsequent proceeding issues that he could have, but failed to,
assert in a counterclaim in the original proceeding; whether the rule of
collateral estoppel applies to an issue which a party could not have had
reviewed on appeal; whether, and to what extent, the rule of collateral
estoppel applies to the decision of questions of law that were actually
litigated and determined by the judgment; and whether the rule of
collateral estoppel applies to an issue which was incidentally determined
by the court but which the court would have had no jurisdiction to
determine it.191

188

Witkowski v. Welch, 173 F.3d 192, 198 (3d Cir. 1999).
Albanese v. Emerson Elec. Co., 552 F. Supp. 694, 698 (D. Del. 1982).
190
Id.
191
Restatement (Second) of Conflict of Laws § 95 (1971).
189

30

Delaware adheres to § 95 comment g and applies the state law of the previous
suit to the issue of collateral estoppel.192 The four standard requirements for the
application of collateral estoppel include: “(1) the issue was identical to one in a prior
adjudication; (2) there was a final judgment on the merits; (3) the estopped party was a
privity or in privity with a party to the prior adjudication; and (4) the estopped party was
given a full and fair opportunity to be heard on the adjudicated issue.”193 Mutuality of
parties is not required, and “even though a defendant in the proceeding before the court
was not a party to the earlier proceeding, Minnesota permits a defendant to invoke
collateral estoppel in the subsequent litigation commenced by a plaintiff who also had
been the claimant in the earlier proceeding . . .”194 Furthermore, collateral estoppel is
not applied strictly.195 Once determined it is available, “the decision to apply the
doctrine is left to the trial court’s discretion,”196 and must not be applied so rigidly as it
would “work an injustice on the party against whom the doctrines are urged.”197 The
doctrine should be readily applied, however, “where parties have acquiesced in the
verdict,”198 and have failed to appeal the judgment.199
Res judicata, or claim preclusion, bars a party from initiating a second suit

192

Albanese, 552 F.Supp. at 699 (citing Bata v. Hill, 139 A.2d 159 (Del. Ch.

1958)).
193

State v. Lemmer, 736 N.W.2d 650, 659 (Minn. 2007).
Aufderhar v. Data Dispatch, Inc., 452 N.W.2d 648, 650 (Minn. 1990).
195
See Hauschildt v. Beckingham, 686 N.W.2d 829, 837 (Minn. 2004).
196
Regents of Univ. of Minn. v. Medical Inc., 382 N.W.2d 201, 207 (Minn. Ct.
App. 1986).
197
Hauschildt, 686 N.W.2d at 837.
198
Ellis v. Minneapolis Com’n on Civil Rights, 319 N.W.2d 702, 704 (Minn. 1982).
199
Bruner v. Klemp, No. C1-95-2182, 1996 WL 208336, at *2 (Minn. Ct. App.
1996).
194

31

against the same adversarial party based on the same cause of action as in the first
suit.200 When “the prior judgment has been entered on the merits, the scope and
application of res judicata are determined by the law of the rendering state.”201 Under
Minnesota law, res judicata absolutely bars a subsequent claim when: “(1) the earlier
claim involved the same set of factual circumstances; (2) the earlier claim involved the
same parties or their privies; (3) there was a final judgment on the merits; and (4) the
estopped party had a full and fair opportunity to litigate the matter.”202 Like collateral
estoppel, res judicata is not applied rigidly and is invoked only after careful examination
because it “may govern grounds and defenses not previously litigated” and may block
“unexplored paths that may lead to truth.”203
Whether counts one and eleven are barred by collateral estoppel and res
judicata, and therefore futile will be addressed. For count one, defendants contend
plaintiffs are collaterally estopped from asserting the claim because the arbitrator
previously determined that QM did not breach the Manufacturing Agreement, and
plaintiffs, therefore, are unable to re-litigate the same issue and cannot satisfy all the
elements of the claim. To succeed on a claim for tortious interference with contractual
relations, plaintiffs must establish: “(1) a valid contract; (2) about which the defendants
have knowledge; (3) an intentional act by the defendants that is a significant factor in
causing the breach of the contract; (4) done without justification; and (5) which causes
200
201

Dulhaney v. Attorney General of U.S., 621 F.3d 340, 347 (3d Cir. 2010).
Riverside Memorial Mausoleum, Inc., v. UMET Trust, 581 F.2d 62, 66 (3d Cir.

1978).
202
203

Rucker v. Schmidt, 768 N.W.2d 408, 412 (Minn. Ct. App. 2009).
Hauschildt, 686 N.W.2d at 837 (quoting Brown v. Felsen, 442 U.S. 127, 132

(1979)).
32

injury.”204 If collateral estoppel is applicable in this instant matter, then plaintiffs will be
unable to prove the third element of the claim: an act of the defendants caused QM to
breach the Manufacturing Agreement with plaintiffs.
The four requirements for the application of collateral estoppel are met. First, the
same issue of whether QM breached the Manufacturing Agreement was already
determined by the arbitrator. Second, the arbitrator ruled on the merits of the dispute
between QM and plaintiffs and found in favor of QM. Third, Osco, a privity of EDI, was
a party to the arbitration. Fourth, plaintiffs had the opportunity to participate in the
adjudication proceeding. However, following the issuance of the arbitration judgment on
March 11, 2014,205 plaintiffs timely appealed on April 2, 2014, and moved to vacate the
award in the District Court of Minnesota.206 Plaintiffs clearly have not acquiesced in the
arbitrator’s judgment and until the hearing on plaintiffs’ motion to vacate is final,
collateral estoppel does not operate. Therefore, count one is not barred by collateral
estoppel and is not futile.
For count eleven, defendants contend plaintiffs are precluded from asserting a
claim of civil conspiracy due to collateral estoppel and res judicata because the
arbitrator previously determined plaintiffs’ evidence failed to show an act by QM that
was responsible for depriving plaintiffs of their tooling and the Osco product. In order to
succeed on such claim, plaintiffs need to establish: “(1) a confederation or combination
of two or more persons; (2) an unlawful act done in furtherance of the conspiracy; and
204

Cryovac Inc. v. Pechiney Plastic Packaging, Inc., 430 F. Supp. 2d 346, 357
(D. Del. 2006).
205
D.I. 42, Ex. A.
206
D.I. 47, Ex. K.
33

(3) actual damage.”207 If collateral estoppel is available, then plaintiffs will be unable to
prove the second element of their conspiracy claim.
The four requirements for the application of collateral estoppel are satisfied.
First, the same issue of whether a wrongful act was committed in furthering a
conspiracy and depriving plaintiffs’ of their tooling and products was already determined
by the arbitrator. Second, the arbitrator ruled on the merits of the dispute between QM
and plaintiffs. Third, Osco was a party in the arbitration. Fourth, plaintiffs had the full
and fair opportunity to present their case during the proceeding. In light of plaintiffs’
appeal of the arbitration finding, at this stage, however, the court will not apply either
collateral estoppel or res judicata. Count eleven, therefore, is not barred by either
doctrine.
3.

DUTSA and Count 11 against Defendants

To succeed on a claim for trade secret misappropriation, a plaintiff must establish
the elements of DUTSA, 6 DEL. C. § 2001, in relevant part, as follows:
(2) “Misappropriation” shall mean:
(b) Disclosure or use of a trade secret of another
without express or implied consent by a person who:
2. At the time of disclosure or use, knew or had
reason to know that his or her knowledge of the
trade was:
B. Acquired under circumstances giving rise to
a duty to maintain its secrecy or limit its use . . . 208
207

Digene Corp. v. Ventana Med. Sys., Inc., 476 F. Supp. 2d 444, 446 (D. Del.

2007).
208

Mattern & Assocs., LLC v. Seidel, 678 F. Supp. 2d 256, 269 (D. Del. 2010)
(quoting 6 DEL. C. § 2001).
34

DUTSA, 6 DEL. C. § 2007 provides:
(a) Except as provided in subsection (b) of this section, this chapter
displaces conflicting tort, restitutionary and other law of this State
providing civil remedies for misappropriation of a trade secret.
(b) This chapter does not affect:
(1) Contractual remedies, whether or not based upon
misappropriation of a trade secret;
(2) Other civil remedies that are not based upon misappropriation of
a trade secret; or
(3) Criminal remedies, whether or not based upon misappropriation
of a trade secret.209
This court has previously found that § 2007 was intended to “make
uniform the law with respect to trade secrets,” and “preserve a single tort cause
of action under state law for misappropriation . . . and thus to eliminate other tort
causes of action founded on allegations of trade secret misappropriation.”210
Section 2007, therefore, preempts claims that are “grounded in the same facts
which purportedly support the misappropriation of trade secrets claims.”211 A
common law claim “is grounded in the same facts as a trade secret claim if the
same facts are used to establish all the elements of both claims.”212 “If the
success of the common law claim does not depend on the success of the trade
209

Overdrive, Inc. v. Baker & Taylor, Inc., No. C.A. 5835-CC, 2011 WL 2448209,
at *4 (Del. Ch. June 17, 2011) (quoting 6 DEL. C. § 2007(a)-(b)).
210
Leucadia, Inc. v. Applied Extrusion Technologies, Inc., 755 F. Supp. 635, 637
(D. Del. 1991).
211
Beard Research, Inc. v. Kates, 8 A.3d 573, 602 (Del. Ch. 2010) (quoting
Savor, Inc. v. FMR Corp., 2001 WL 541484, at *4 (Del. Super. Apr. 24, 2001)).
212
Accenture Global Servs. GMBH v. Guidewire Software Inc., 631 F. Supp. 2d
504, 508 (D. Del. 2009) (citing Ethypharm S.A. France v. Bentley Pharmaceuticals, Inc.,
388 F. Supp. 2d 426, 434-35 (D. Del. 2005)).
35

secrets claim, that is, if a plaintiff need not prove all the facts underlying the trade
secrets claim in order to prove the common law claim, then the common law
claim is not ‘grounded in the same facts’ and is not preempted.”213 A
determination of whether the information at issue constitutes a trade secret under
DUTSA, however, does not need to be addressed before analyzing whether the
claims must be displaced.214
In the instant matter, defendants assert that count eleven of civil
conspiracy is pre-empted by § 2007 because in count five, plaintiffs claim
defendants committed trade secret misappropriation in violation of § 2001. To
establish a claim of civil conspiracy, plaintiffs must prove the elements of “(1) a
confederation or combination of two of more persons; (2) an unlawful act done in
furtherance of the conspiracy; and (3) actual damages.”215 Also, “civil conspiracy
is not an independent cause of action in Delaware, . . . it must arise from some
underlying wrong.”216 If “the factual predicate of plaintiffs’ civil conspiracy claim
mirrors the facts alleged to have constituted a misappropriation of trade
secrets,”217 then the claim will fail. For example, in Total Care Physicians, P.A. v.
O’ Hara,218 the court dismissed the plaintiff’s civil conspiracy claim because it was
based on the underlying wrongs that the defendants “blatantly violated Delaware

213

Id.
Ethypharm, 388 F. Supp. 2d at 433.
215
Total Care Physicians, P.A. v. O’Hara, 798 A.2d 1043, 1056-57 (Del. Sup. Ct.
214

2001).
216

Id. at 1057.
Id.
218
798 A.2d 1043 (Del. Sup. Ct. 2001).
217

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law by misappropriating plaintiff’s trade secrets, proprietary information, customer
lists and other proprietary information,” which were very similar to the facts
alleged to support the plaintiff’s misappropriation of trade secret claim, and relied
on evidence that the defendants misappropriated trade secrets, patient lists,
patient charts, and other information.219 In Beard Research, Inc. v. Kates,220
however, the court held the plaintiffs’ breach of fiduciary duty claim was not preempted by § 2007 because they could make the necessary showing of such
claim, even if their misappropriation of trade secrets claim failed.221
In the instant matter, plaintiffs’ allegation of civil conspiracy is based on
the following underlying acts of defendants: (1) to deprive plaintiffs of their
ownership of tooling and Osco products; (2) to remove Osco identifying marks
from Osco products and then sell them; (3) to misappropriate, use, and disclose
plaintiffs’ trade secrets in violation of § 2001; and (4) to offer and sell Osco
products bearing the Osco trademark, thereby causing confusion, mistake, or
deception as to the source, affiliation, sponsorship, or authenticity of the goods
manufactured by defendants in violation of Section 43(a)(1)(A) and Section 32(1)
of the Lanham Act.222 For plaintiffs’ claim of trade secret misappropriation under
count five, the alleged facts concern defendants’ acquisition of plaintiffs’ trade
secrets, customer lists, products sold to customers, pricing, and contracts, and

219

Id. at 1052, 1057.
8 A.3d 573 (Del. Ch. 2010).
221
Id. at 602.
222
D.I. 42 at ¶¶ 217-223.
220

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defendants’ duty to maintain secrecy under the Confidentiality Agreement.223
Plaintiffs further allege under this claim, that defendants, in contravention of the
Confidentiality Agreement, misappropriated and disclosed this information to
QM.224 For count eleven, plaintiffs’ third underlying claim or wrongful act alleging
defendants’ misappropriation of trade secrets under § 2001 is similarly based on
the same facts being alleged in count five, and plaintiffs therefore, are preempted from relying on this wrongful act to support their claim for civil
conspiracy. Plaintiffs, however, have sufficiently alleged three other underlying
wrongs in count eleven, which do not substantially rely on the allegations set
forth in count five and could be proven independent of count five. DUTSA
§ 2007 does not preclude the civil conspiracy claim because plaintiffs have
sufficiently relied on allegations of deprivation of tooling and product ownership,
removal of identifying marks and subsequent sale of products, and violations of
the Lanham Act. Count eleven, is therefore, not futile.
4.

Counts 6 and 7 against Defendants

For counts six and seven, plaintiffs allege defendants committed
trademark infringement under 15 U.S.C. § 1114(1) and 15 U.S.C. § 1125(a) of
the Lanham Act, respectively. In order for a plaintiff to prove either claim under
the Lanham Act, the following elements must be shown: “(1) it has a valid and
legally protectable mark; (2) it owns the mark; and (3) the defendant’s use of the

223
224

Id. at ¶¶ 159-161.
Id. at ¶¶ 162-165.
38

mark to identify goods or services causes a likelihood of confusion.”225
Defendants relying on § 1114(1), which states that “any person who shall,
without the consent of the registrant . . . shall be liable,” and argue plaintiffs are
unable to succeed on these claims because they gave defendants the consent to
receive Osco product directly from QM Taiwan and then to sell it into the
marketplace.226 Defendants’ argument, however, is misplaced because plaintiffs’
third amended complaint explicitly alleges they denied any request from QM to
sell Osco product directly to defendants.227 In accepting plaintiffs’ allegations and
reasonable inferences as true, plaintiffs’ sufficiently-pled assertions for violations
under the Lanham Act, adequately stating a claim for relief. Count six and seven
against the defendants, therefore, are not futile.
VI.

Order and Recommendation Disposition
Consistent with the findings contained herein,
IT IS RECOMMENDED that plaintiffs’ motion for leave to file the third

amended complaint (D.I. 42) be granted in part and denied in part, specifically
1.)

Leave to amend counts 6, 7, 8, 9, 10, and 11 against Gong Luen,
QM Taiwan, and Mark Ebbenga be denied for lack of personal
jurisdication.

2.)

Leave to amend counts 1 and 11 against defendants be granted.

3.)

Leave to amend counts 6 and 7 against defendants be granted.

225

A&H Sportswear, Inc. v. Victoria’s Secret Stores, Inc., 237 F.3d 198, 210 (3d
Cir. 2000).
226
D.I. 45 at 15.
227
D.I. 42 at ¶¶ 74-75.
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Pursuant to 28 U.S.C. § 636(b)(1)(A) and (B), FED. R. CIV. P. 72 (b)(1),
and D. DEL. LR 72.1, any objections to the Report and Recommendation shall be
filed within fourteen (14) days limited to ten (10) pages after being served with
the same. Any response shall be limited to ten (10) pages.
The parties are directed to the Court’s Standing Order in Non-Pro Se
Matters for Objections Filed under FED. R. CIV. P. 72 dated October 9, 2013, a
copy of which is found on the Court’s website (www.ded.uscourts.gov.)
Date: June 24, 2014

/s/ Mary Pat Thynge
UNITED STATES MAGISTRATE JUDGE

40