Walgreen Co. v. Theranos, Inc.

Filing 22

REPORT AND RECOMMENDATIONS re #11 MOTION to Dismiss filed by Theranos, Inc. Please note that when filing Objections pursuant to Federal Rule of Civil Procedure 72(b)(2), briefing consists solely of the Objections (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 8/14/2017. Signed by Judge Mary Pat Thynge on 7/27/17. (cak) (Main Document 22 replaced on 7/27/2017) (cak).

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
WALGREEN, CO.,

)
)
)
)
)
)
)
)
)

Plaintiff,
v.
THERANOS, INC.,
Defendant.

C.A. No. 16-1040-RGA-MPT

REPORT AND RECOMMENDATION
I.

INTRODUCTION
Walgreen Co. (“Walgreens”) filed its complaint against Theranos, Inc.

(“Theranos”) on November 8, 2016 alleging breach of the Amended and Restated
Theranos Master Service Agreement (“MSA”).1 Walgreens alleges that, pursuant to the
MSA, Theranos must refund the money obtained under the agreement and pay for
damages.2 Specifically, Walgreens asserts that Theranos must repay a $100 million
dollar Innovation Fee, and the purchase of a $40 million dollar convertible note (Counts
I and II).3 Walgreens also claims Theranos breached the implied covenant of good faith
and fair dealing (Count III).4 Theranos argues Walgreens lacks “sufficient justification
for accelerated repayment” of the convertible note, and there is no basis for
Walgreens’s claim for alleged breach of the implied covenant of good faith and fair
dealing.5
Currently before the court is Theranos’s motion to dismiss Counts I and II, insofar
1

D.I. 2 at ¶ 1.
Id.
3
Id. at ¶ 3.
4
Id. at ¶¶ 174-185.
5
D.I. 12 at 2.
2

as they relate to the convertible note, and Count III in its entirety pursuant to FED. R.
CIV. P. 12(b)(6) for failure to state a claim upon which relief can be granted.6
II.

BACKGROUND
Walgreens is an Illinois corporation.7 It provides pharmacy, health, and well-

being services by way of its more than 8,000 stores in the United States.8
Theranos is a Delaware corporation, which was founded in 2003 as a next
generation healthcare system built on the premise of using proprietary, patented
technology to offer a range of diagnostic tests from only a few droplets of blood.9
Commercial blood testing traditionally involves the venipuncture methodology of
drawing blood, referred to as venous draws, using needles and large vials.10 When
Theranos approached Walgreens in 2010 with an innovative technology to revolutionize
blood testing, it stated it had developed “small point-of-care devices that, for the first
time, can run any blood test in real-time for less than half the cost of central lab tests.”11
Theranos confirmed it could offer “in-store blood testing from a single finger-stick,”
which was purportedly capable of detecting viruses, such as STDs and H1N1, or the
“earliest appearance of cancers and other diseases.”12 In a subsequent meeting on
March 22, 2010, Theranos represented that this proprietary technology had been
“comprehensively validated” by “ten of the fifteen largest pharmaceutical companies,”

6

D.I. 11.
D.I. 2 at ¶ 12.
8
Id. at ¶ 2.
9
Id. at ¶¶ 13-15.
10
Id. at ¶ 19.
11
Id. at ¶¶ 19-20.
12
Id. at ¶ 20.
7

2

and had been used by numerous current and past clients, including research institutions
and U.S. and foreign government health and military organizations.13 Based on
Theranos’s representations, Walgreens continued to perform additional due diligence.14
On May 7, 2010, Theranos sent a Regulatory Summary to Walgreens stating the
finger-stick technology had received approval to be launched in clinical studies, and that
Theranos was positioned to receive approval to introduce the technology outside of the
clinical field.15 The Regulatory Summary also stated Theranos intended to open two
laboratories for collecting and analyzing the clinical data.16 Based on Theranos’s
representations, and information obtained through Walgreens’s due diligence, the two
parties entered into an initial Master Services Agreement on July 30, 2010.17
For any laboratory to perform testing, it is required to comply with the Clinical
Laboratory Improvement Amendments of 1988 (“CLIA”), and be state certified, as well
as by the Centers for Medicare and Medicaid Services (“CMS”).18 The CLIA certification
requires labs to perform proficiency testing three times annually on sets of blind
samples for every test which the lab offers, beginning at the time of CLIA certification.19
In a January 2012 presentation, Theranos assured Walgreens that its CLIAcertified labs would offer “the highest quality testing from a finger-stick,” and that they
would be the “world’s first finger-stick based CLIA-certified labs.”20 During the same
13

Id. at ¶ 24.
Id. at ¶ 28.
15
Id. at ¶¶ 31-32.
16
Id. at ¶ 31.
17
Id. at ¶¶ 32-33.
18
Id. at ¶ 34.
19
Id.
20
Id. at ¶ 37.
14

3

presentation, Theranos claimed its technology would require 99.9% less blood while
having a “state of the art result turnaround,” thus making it “the nation’s lowest cost and
highest quality laboratory provider.”21
On June 5, 2012, Walgreens and Theranos entered into the MSA.22 The MSA
provided a framework under which “Theranos Wellness Centers” could operate inside
Walgreens stores, where technicians would collect blood samples.23 It was the parties’
intention and expectation that blood would be collected using Theranos’s finger-stick
technology, that would be tested at one of two CLIA-certified labs owned and operated
by Theranos.24 The blood results would then be sent directly from Theranos’s labs to
the requesting physician, who would provide the information to the patient.25
Under the terms of the MSA, Walgreens agreed to pay Theranos an Innovation
Fee of up to $100 million dollars.26 Walgreens ultimately ended up paying Theranos the
full $100 million dollars pursuant to a December 2013 amendment to the MSA.27
Additionally, the MSA required Walgreens to provide $40 million dollars in exchange for
a $40 million dollar convertible note, which is convertible into equity under certain
circumstances.28 The MSA gave both parties the right to terminate the relationship for
cause.29 In the event that Walgreens terminated the relationship, Theranos would be

21

Id. at ¶ 38.
Id. at ¶ 39; D.I. 2-1 at 1.
23
D.I. 2 at ¶ 39.
24
Id.
25
Id.
26
Id. at ¶ 41.
27
Id.; see also D.I. 2-1 at Ex. D.
28
D.I. 2 at ¶ 42; D.I. 2-1, Ex. A at ¶ 21; D.I. 2-1, Ex. A at 28-33.
29
D.I. 2 at ¶ 44; D.I. 2-1, Ex. A at ¶ 24(c).
22

4

obligated to refund the Innovation Fee within 180 calendar days of the termination
date.30
Pursuant to the MSA, the parties agreed to introduce the Theranos Wellness
Centers in a select number of Walgreens stores through a pilot program.31 The pilot
program would allow the parties to assess the business and operating models and
determine how best to expand the services to other Walgreens stores.32 The pilot
program did not require expansion to a specific number of stores, nor did it set any
particular time frame for doing so.33 The pilot program began on March 20, 2013 at a
single store in Phoenix, Arizona.34 By the fall of 2015, there were a total of 41 Theranos
Wellness Centers.35
Thereafter, Walgreens learned, through numerous news reports, that there were
multiple problems associated with Theranos’s finger-stick technology and its two CLIAcertified labs. On October 15, 2015, The Wall Street Journal published an article
reporting, inter alia, that because Theranos collected only a small amount of blood, it
had to increase those samples’s volume through dilution, which could dramatically
increase the chances of erroneous results, and this dilution process was generally
considered a poor laboratory practice when frequently done.36 The article specifically
stated that “some of the potassium results at Theranos were so high that patients would

30

D.I. 2 at ¶ 44; D.I. 2-1, Ex. A at ¶ 24(d)(i)(1).
D.I. 2 at ¶ 46; D.I. 2-1, Ex. A at 25.
32
Id. at ¶ 46.
33
Id. at ¶ 47.
34
Id. at ¶ 48.
35
Id. at ¶ 49.
36
Id. at ¶¶ 52, 54.
31

5

have to be dead for the results to be correct.”37
On January 25, 2016, CMS issued a letter to Theranos concluding that the
Newark, California lab was not in compliance with CLIA requirements.38 Theranos was
required to submit to CMS a proposed plan of correction by confirming the violations
were resolved and action was taken to correct all deficiencies identified by CMS.39
When asked about this report, Theranos assured Walgreens that the issues had been
addressed, and it was in the process of “updating [its] quality assurance/control
processes to a more automated system.”40 Walgreens subsequently learned from a
January 27, 2016 Wall Street Journal article, that a CMS audit uncovered a number of
quality assurance issues at Theranos’s Arizona lab in April 2015.41
The next day, January 28, 2016, Walgreens issued a notice of breach of the
MSA to Theranos.42 Walgreens stated in the letter that Theranos was in breach of its
obligations under the MSA due to the deficiencies found by CMS at its Newark
laboratory.43 The two parties agreed to stop sending any clinical laboratory tests to
37

Id. at ¶ 54.
Id. at ¶ 68 (“Specifically, CMS identified Condition-level deficiencies in the
following areas: (1) inadequate operating procedures and Quality Control in the
Hematology area; (2) inadequate operating procedures, corrective actions, and
equipment preventative maintenance across the lab’s analytic system; (3) inadequate
Laboratory Director qualifications and management protocols, including failure to ensure
Quality Control and Quality Assurance programs were established and maintained; (4)
inadequate Laboratory Technical Supervision qualifications for high complexity testing;
and (5) insufficient number of personnel qualified to perform testing functions of the
volume and complexity performed in the laboratory.”).
39
Id. at ¶ 70.
40
Id. at ¶¶ 65-66.
41
Id. at ¶ 63.
42
Id. at ¶ 74.
43
Id. at ¶ 75; D.I. 2-1, Ex. A at ¶ 19(c) (“Each party will perform its obligations
under this Agreement: (i) in a timely and professional manner; (ii) in conformance with
38

6

Theranos’s Newark, California lab.44
On February 4, 2016, Theranos responded to Walgreens’s notice of breach.45
Theranos represented that many of the violations identified by CMS “have already been
corrected, and the CMS Letter is not reflective of the current state of our Newark lab.”46
Theranos continued “the CMS Letter indentifie[d] curable deficiencies in our Newark
lab” and “provide[d] an express mechanism for Theranos to remedy those deficiencies”
via submission of a proposed plan of correction.47 Theranos also accused Walgreens of
breaching the MSA for closing the sole Theranos Wellness Center in California, due to
the revelations of the January 27, 2016 Wall Street Journal article, before the applicable
cure period had expired.48
In a February 25, 2016 letter, Theranos stated that it “has been steadfast in its
commitment to patient safety,” and “has worked comprehensively over the past months
to ensure best-in-class systems are in place in its Newark lab before resuming those
tests, including hiring new leadership.”49
A March 18, 2016 letter to Theranos from CMS revealed that Theranos’s
proposed plan of correction had been rejected.50 The letter also detailed proposed
sanctions against Theranos, including revoking the Newark, California lab’s CLIA
that level of care and skill ordinarily exercised by other professional companies [of] a
similar size and in similar circumstances; and (iii) in compliance in all material respects
with all applicable laws.”).
44
D.I. 2 at ¶ 74.
45
Id. at ¶ 76.
46
Id.
47
Id.
48
Id. at ¶ 78.
49
Id. at ¶ 81.
50
Id. at ¶ 96.
7

certification, and banning Theranos’s CEO and COO from owning or operating any
other lab for at least two years.51 Walgreens did not learn of this fact until April 13, 2016
when it was reported by the press.52
On May 18, 2016, The Wall Street Journal reported Theranos had issued “tens of
thousands” of corrected blood test reports to doctors and patients.53 The corrected
reports included every test conducted in 2014 and 2015 using Theranos’s proprietary
technology.54 Furthermore, the corrected reports included test results from both of
Theranos’s laboratories.55 Dr. Kingshuk Das, Theranos’s replacement Newark lab
director, confirmed The Wall Street Journal’s report and estimated that the corrected
reports numbered 50,000.56 Theranos later confirmed it had known of quality issues
related to the tests since September 2015, but claimed the total of voided or corrected
tests was 31,000.57
Walgreens sent a letter to Theranos terminating the MSA for cause on June 12,
2016.58 Like the January 28, 2016 letter, Walgreens stated Theranos failed to perform
its obligations under the warranty clause of the MSA.59 Thereafter, Walgreens
accordingly closed all Theranos Wellness Centers.60
Subsequently, on July 7, 2016, CMS set forth its final determination regarding
51

Id. at ¶ 97.
Id. at ¶ 98.
53
Id. at ¶ 104.
54
Id.
55
Id.
56
Id. at ¶ 105.
57
Id. at ¶ 113.
58
Id. at ¶ 114.
59
Id.; See 2-1, Ex. A at ¶ 19(c).
60
Id. at ¶ 114.
52

8

Theranos’s Newark lab.61 In the letter, CMS explained that after it had rejected
Theranos’s initial proposed plan of corrections, it received a total of five collective
submissions for corrections from Theranos.62 CMS ultimately rejected all proposals.63
The letter also imposed sanctions against Theranos, including revocation of the Newark
lab’s CLIA certification, and prohibited Theranos’s CEO and COO from owning,
operating, or directing a laboratory for at least two years.64
III.

GOVERNING LAW
A.

Motion to Dismiss Under 12(b)(6)

In analyzing a motion to dismiss under FED. R. CIV. P. 12(b)(6), a review of
Rule 8(a)(2) is necessary. It requires that a pleading contain a “short and plain
statement of the claim showing that the pleader is entitled to relief.” That standard
“does not require ‘detailed factual allegations,’ but . . . demands more than an
unadorned, the-defendant-unlawfully-harmed me accusation.”65 Thus, to survive a
motion to dismiss under Rule 12(b)(6), a complaint “must contain sufficient factual
61

Id. at ¶ 125.
Id. at ¶ 126.
63
Id. at ¶ 127 (“After careful review, [CMS has] determined that the laboratory’s
[collective] submission again does not constitute a credible allegation of compliance and
acceptable evidence of correct for the deficiencies cited during the CLIA recertification
and complaint survey completed on December 23, 2015, and does not demonstrate that
the laboratory has come into Condition-level compliance and abated the immediate
jeopardy.”).
64
Id. at ¶ 128 (“Other sanctions include: limitation of the laboratory’s CLIA
certificate for the specialty of hematology; a civil money penalty; a Directed Portion of a
Plan Correction; suspension of the laboratory’s approval to receive Medicare and
Medicaid payments for any services performed for the specialty of hematology;
cancellation of the laboratory’s approval to receive Medicare and Medicaid payments for
all laboratory services.”).
65
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 555 (2007)).
62

9

matter, accepted as true, to ‘state a claim for relief that is plausible on its face.’”66 The
purpose of a Rule 12(b)(6) motion to dismiss is to test the sufficiency of the complaint,
not to resolve disputed facts or decide the merits of the case.67 Evaluating a motion to
dismiss under Rule 12(b)(6) requires the court to accept as true all material allegations
of the complaint.68 “The issue is not whether a plaintiff will ultimately prevail, but
whether the claimant is entitled to offer evidence to support the claims.”69 A motion to
dismiss may be granted only if, after, “accepting all well-pleaded allegations in the
complaint as true, and viewing them in the light most favorable to the plaintiff, plaintiff is
not entitled to relief.”70
To survive a motion to dismiss under Rule 12(b)(6), the factual allegations must
be sufficient to “raise a right to relief above the speculative level, on the assumption that
all the allegations in the complaint are true (even if doubtful in fact).”71 A plaintiff is
obliged “to provide the ‘grounds’ of his entitle[ment] to relief’” beyond “labels and
conclusions.”72 Heightened fact pleading is not required: rather “enough facts to state a
claim to relief that is plausible on its face” must be alleged.73 Rejected are unsupported

66

Id. (quoting Twombly, 550 U.S. at 570); see FED. R. CIV. P. 12(b)(6).
Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir. 1993).
68
Spruill v. Gillis, 372 F.3d 218, 223 (3d Cir. 2004).
69
In re Burlington Coat Factory Secs. Litig., 114 F.3d 1410, 1420 (3d Cir. 1997)
(internal quotation marks and citations omitted).
70
Maio v. Aetna, Inc., 221 F.3d 472, 481-82 (3d Cir. 2000) (internal quotation
marks and citations omitted).
71
Twombly, 550 U.S. at 555; see also Victaulic Co. v. Tieman, 499 F.3d 227, 234
(3d Cir. 2007).
72
Twombly, 550 U.S. at 555.
73
Id. at 570.
67

10

allegations, “bald assertions,” or “legal conclusions.”74 Further, “the tenet that a court
must accept as true all of the allegations contained in a complaint is inapplicable to legal
conclusions.”75 The analysis is a “context-specific task that requires the reviewing court
to draw on its judicial experience and common sense.”76 Well-pled facts which only
infer the “mere possibility of misconduct” do not show that “the pleader is entitled to
relief” under Rule 8(a)(2).77 “When there are well-pleaded factual allegations, a court
should assume their veracity and then determine whether they plausibly give rise to an
entitlement of relief.”78
B.

Breach of Contract

To survive a motion to dismiss for failure to state a breach of contract claim, a
plaintiff must demonstrate the existence of the contract (whether express or implied),
the breach of an obligation imposed by that contract, and the resultant damage to the
plaintiff.79 “Clear and unambiguous language found in a contract is to be given its
ordinary and usual meaning.”80 Furthermore, under Delaware contract law, “the parties
74

Iqbal, 556 U.S. at 678 (“Threadbare recitals of the elements of a cause of
action, supported by mere conclusory statements do not suffice.”); see also Morse v.
Lower Merion Sch. Dist., 132 F.3d 902, 906 (3d Cir. 1997) (“[A] court need not credit a
complaint’s ‘bald assertions’ or ‘legal conclusions’ when deciding a motion to dismiss.”)
(citations omitted); Schuylkill Energy Res., Inc. v. Pennsylvania Power & Light Co., 113
F.3d 405, 417 (3d Cir. 1997) (“unsupported conclusions and unwarranted inferences”
are insufficient); Nami v. Fauver, 82 F.3d 63, 69 (3d Cir. 1996) (allegations that are
“self-evidently false” are not accepted).
75
Iqbal, 556 U.S. at 678; see also Twombly, 550 U.S. at 555 (A court is “not
bound to accept as true a legal conclusion couched as a factual allegation.”).
76
Iqbal, 556 U.S. at 679.
77
Id.
78
Id.
79
Anderson v. Wachovia Mortg. Corp., 497 F. Supp. 2d 572, 581 (D. Del. 2007)
(citing WLIW Tech., LLC. v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del. 2003)).
80
Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006).
11

intentions determine whether two separately executed documents are in reality one
agreement.”81
C.

Good Faith and Fair Dealing

“Under Delaware law, an implied duty of good faith and fair dealing is interwoven
into every contract.”82 “When used with the implied covenant, the term ‘good faith’
contemplates ‘faithfulness to the scope, purpose, and terms of the parties’ contract.’”83
“In order to plead successfully a breach of an implied covenant of good faith and fair
dealing, the plaintiff must allege a specific implied contractual obligation, a breach of
that obligation by the defendant, and resulting damage to the plaintiff.”84
This doctrine, however, does not provide a Delaware court with the
authority to rewrite or supply omitted provisions to a written contract.
Rather, a court should be cautious when implying a contractual obligation
and do so only where obligations which can be understood from the text of
the written agreement have nevertheless been omitted from the
agreement in the literal sense.85
A court should focus on “the parties’ reasonable expectations at the time of
contracting.”86 However, the express terms of the contract, and not an implied covenant

81

In re Phillip Servs. (Del.), Inc., 284 B.R. 541, 546 (Bankr. D. Del. 2002), aff'd,
303 B.R. 574 (D. Del. 2003).
82
Anderson v. Wachovia Mortg. Corp., 497 F. Supp. 2d 572, 581 (D. Del. 2007).
83
Allen v. El Paso Pipeline GP Co., LLC, 113 A.3d 167 (Del. Ch. 2014) (citing
Gerber v. Enter. Prods. Hldgs., LLC, 67 A.3d 400, 418 (Del. 2013)) (emphasis in
original).
84
Anderson v. Wachovia Mortg. Corp., 497 F. Supp. 2d 572, 581-82 (D. Del.
2007) (citing Fitzgerald v. Cantor, C.A. 16297-NC, 1998 WL 842316, at *1 (Del. Ch.
Nov. 10, 1998)).
85
Fitzgerald v. Cantor, C.A. 16297-NC, 1998 WL 842316, at *1 (Del. Ch. Nov.
10, 1998) (citing Cincinnati SMSA Ltd. Partnership v. Cincinnati Bell Cellular Sys. Co.,
708 A.2d 989, 992 (Del. 1998)).
86
Nemec v. Shrader, 991 A.2d 1120, 1126 (Del. 2010) (citing Cont’l Ins. Co. v.
Rutledge & Co., 750 A.2d 1219, 1234 (Del. Ch. 2000)).
12

of good faith and fair dealing, will govern the parties’ relations when the terms expressly
address the issue.87 “[T]he plaintiff must advance provisions of the agreement that
support this finding in order to allege sufficiently a specific implied contractual
obligation.”88
“When presented with an implied covenant claim, a court first must engage in the
process of contract construction to determine whether there is a gap that needs to be
filled.”89 If a gap exists, the court must determine “whether the implied covenant should
be used to supply a term to fill the gap.”90 Delaware courts will only imply contract terms
when “the party asserting the implied covenant proves that the other party has acted
arbitrarily or unreasonably, thereby frustrating the fruits of the bargain that the asserting
party reasonably expected.”91 “Thus, parties are liable . . . when their conduct frustrates
the ‘overarching purpose’ of the contract. . . .”92
IV.

DISCUSSION
A.

Convertible Note (Counts I and II)
1.

Lack of Standing

Walgreens asserts it is entitled to “immediate repayment of its purchase of
the convertible note.”93 Theranos responds that Walgreens does not own the note and

87

Fitzgerald, 1998 WL 842316, at *1 (citing Sanders v. Devine, CIV. A. 14679,
1997 WL 599539, at *6 (Del. Ch. Sept. 24, 1997)).
88
Id.
89
Allen v. El Paso Pipeline GP Co., LLC, 113 A.3d 167, 183 (Del. Ch. 2014).
90
Id.
91
Nemec, 991 A.2d at 1126 (citing Dunlap v. State Farm Fire & Cas. Co., 878
A.2d 434, 442 (Del. 2005)).
92
Dunlap, 878 A.2d at 442.
93
D.I. 2 at ¶ 155.
13

fails to show any basis that it is the proper party to claim repayment.94 Theranos argues
that because the note was purchased and signed by WVC Investments (“WVC”),
Theranos owes an obligation to WVC, not Walgreens.95 Walgreens raises four
counterarguments: (1) the note and the MSA comprise a single agreement; (2) the
MSA grants Walgreens the right to purchase the note; (3) WVC is a wholly-owned
subsidiary of Walgreens and the MSA expressly defines “Walgreens” as “Walgreen Co.
and its wholly owned subsidiaries;” and (4) the note interchangeably refers to both WVC
and Walgreens.96
It is evident from the language in the MSA and the note that the two are
inextricably linked. A general rule of contract law states “where two writings are
executed at the same time and are intertwined with the same subject matter, they
should be construed together and interpreted as a whole, each one contributing to the
ascertainment of the true intent of the parties.”97 Both documents were executed on
June 5, 2012.98 Furthermore, the two writings are interrelated. Paragraph 21 of the
MSA concerns the convertible note. It states in pertinent part:
In partial consideration for Walgreens’ commitments set forth in this
Agreement . . . Walgreens shall have the right to purchase, or cause its
affiliate [WVC] to purchase, [the note]. . . . To exercise its right to
purchase the [note] . . . Walgreens shall execute and deliver to [Theranos]

94

D.I. 12 at 5; D.I. 16 at 1-4.
D.I. 12 at 5.
96
D.I. 15 at 9-10.
97
Kroblin Refrigerated Xpress, Inc. v. Pitterich, 805 F.2d 96, 107 (3d Cir. 1986)
(citing Von Lange v. Morrison-Knudsen Co., 460 F. Supp. 643, 647–48 (M.D. Pa.1978),
aff'd, 609 F.2d 504 (3d Cir.1979)).
98
See D.I. 2-1, Ex. A, Schedule H-1; id., Ex. A at 1.
95

14

a certificate in the form set forth on Schedule H-2.99
Schedule H-2, the certificate evidencing the right to purchase the note, also
explicitly refers to Paragraph 21 of the MSA.100 It is evident the note is incorporated by
reference into the MSA by language in either instrument. This supports the conclusion
that the note is enforceable by Walgreens.
The MSA defines “Walgreens,” which is used throughout the document and the
note, as “Walgreen Co. and its wholly-owned subsidiaries.”101 Paragraph 21 allows
Walgreens to exercise its right to purchase the note by executing and delivering to
Theranos a certificate as set forth on Schedule H-2, which occurred through the
signature of Wade Miquelon, President of WVC, a wholly-owned subsidiary of Walgreen
Co., on the appropriate documents.102
Moreover, the certificate evidencing the right to purchase the note explicitly refers
to Walgreen Co.103 It provides “. . . this certificate evidences the right granted to
[Walgreen Co.] under the [MSA] to purchase [the note] . . . in substantially the form set
forth in Schedules H-1 of the [MSA]. . . .”104
The note also references the term “investor,” which includes both Walgreens and
WVC.105 This term clearly includes both companies as evidenced by Paragraph 2(a) of
99

Id., Ex. A, Schedule B at ¶ 21 (emphasis added); see id., Ex. A, Schedule H-1;
id., Ex. A, Schedule H-2.
100
Id., Ex. A, Schedule H-2 (“Pursuant to Section 21 of that certain Amended and
Restated Theranos Master Service Agreement. . . .”).
101
Id.,Ex. A, Schedule E at ¶ 43.
102
Id., Ex. A, Schedule B at ¶ 21 (emphasis added); see id., Ex. A, Schedule H2; D.I. 15 at 9.
103
D.I. 2-1, Ex. A, Schedule H-2.
104
Id.
105
See generally id., Ex. A, Schedule H1; id., Ex. A, Schedule H-2.
15

the note which states:
At any time prior to repayment by [Theranos] of the Note, if services are
being offered in at least 1,000 investor locations. . . . At any time prior to
repayment by [Theranos] of the Note, if services are being offered in at
least 2,500 investor locations. . . .106
Although “investor” is defined in the note as “the Person specified in the
introductory paragraph of this Note or any Person who shall at the time be the
registered holder of this Note,” it does not make sense for “investor” to refer only to
WVC in this context.107 WVC is the investment division of Walgreens and therefore
does not have locations in which blood testing services could be offered.108
Therefore, Walgreens has standing to bring a claim for repayment of the note
because the note and the MSA are inexorably related.
2.

Deficient Pleading
Theranos argues Walgreens fails to allege a breach of any

obligation under the MSA pertaining to the note; “a breach of any obligation created by
the note itself;” or any harm suffered as a result of any breach.109 Walgreens responds,
and this court agrees, that the note was intended to be sine qua non of the MSA and
therefore “a material breach of one constitutes a material breach of the other.”110
Accordingly, Walgreens has pled adequate factual allegations which are sufficient to
106

Id., Ex. A, Schedule H-1 at ¶ 2(a) (emphasis added).
Id. at ¶ 3.
108
D.I. 15 at 10; see generally D.I. 15-1.
109
D.I. 12 at 6.
110
D.I. 15 at 12; Restatement (Second) of Contracts § 236 (1981); see, e.g.,
Carco Grp., Inc. v. Maconachy, 644 F. Supp. 2d 218, 236-37 (E.D.N.Y. 2009), rev’d on
other grounds, 383 F. App’x 73 (2d Cir. 2010) (Where two separate agreements were
dependent on each other and must be construed together, a breach of one constitutes a
breach of the other).
107

16

raise a right to relief above the speculative level.
3.

Restitution and Damages
Theranos contends Walgreens, having argued it is entitled to

damages in its complaint, and subsequently having asserted it is entitled to restitution in
its reply, is not entitled to both.111 Theranos is correct, but misinterprets Walgreens’s
argument. In its response, Walgreens states “Walgreens, accordingly, seeks it common
law contract remedies. For example, given Theranos’s material breach, Walgreens may
elect restitution as a remedy.”112 Walgreens then continues by relying on case law and
noting “[a]lternatively, Walgreens may be entitled to immediate repayment of the Note if
. . . the Pilot was, in fact, not successful.”113 Clearly Walgreens is asserting remedies in
the alternative. Furthermore, Walgreens has adequately pled it is entitled to damages
as a result of Theranos’s alleged breach of the warranty provision of the MSA.114
B.

Good Faith and Fair Dealing (Claim III)
Theranos argues Walgreens’s claim for breach of the implied covenant of

good faith and fair dealing should be dismissed because it ignores the parties agreed
upon obligations and seeks to impose additional obligations on Theranos.115
Specifically, Theranos asserts Walgreens failed to provide notice and opportunity to
cure for its alleged default, and to plead Theranos acted “arbitrarily or unreasonably in a
way that frustrated the overarching purpose of the parties agreement.”116 Walgreens
111

D.I. 16 at 5-6.
D.I. 15 at 13 (emphasis added).
113
Id. at 14 n.8 (emphasis added).
114
See D.I. 2 at ¶¶ 155-56, 172-73.
115
D.I. 12 at 11.
116
Id.
112

17

responds that it was never obligated to provide notice and opportunity for its implied
covenant claim and, that it has pled sufficient facts in accordance with FED. R. CIV. P.
12(b)(6).117
1.

Overarching Purpose
Under the MSA, both parties had reasonable expectations that the

blood testing and analysis would be accomplished via Theranos’s finger-stick
technology and “Edison machine.”118
Paragraph 2(a) of the MSA implies Theranos’s finger-stick and “Edison” devices
will be used to “make testing less invasive, faster and far more accessible, effective,
and actionable. . . .”119 Although this paragraph does not reference or limit the mode of
technology to be used, the MSA explicitly mentions blood testing.120 The last sentence
notes “[o]ther types of specimens collected will be nasal and throat swabs as well as
urine samples.”121 The separate references of blood samples from other specimens in
Paragraph 2(a) suggests that blood testing and Theranos’s proprietary technology are
the primary concern of the MSA.
In further support, Paragraph 2(e) reads “it is the parties’ intention for Walgreens
to act as a patient service center and collect blood samples via finger-stick technology,
small samples of urine, saliva, feces, or swabs with laboratory testing to be performed
by Theranos at a CLIA certified offsite laboratory. . . .”122 Paragraph 15, which
117

D.I. 15 at 15-17.
D.I. 2-1, Ex. A, Schedule C at 1.
119
Id., Ex. A at ¶ 2(a).
120
Id.
121
Id.
122
Id., Ex. A at ¶ 2(e) (emphasis added).
118

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addresses the type of services Walgreens is to perform under the MSA, unequivocally
states “Walgreen[s] technicians will draw blood using the finger-stick technique. . . .”123
Additionally, Paragraph 16 requires Theranos to “deliver . . . lancets/blood collecting
devices (finger stick devices) . . . to Walgreens locations on an as needed basis.”124
In its complaint, Walgreens alleges Theranos approached it in “early 2010 with
the promise of an innovative technology that would revolutionize blood testing.”125
Walgreens also avers a Theranos representative contacted it via email in January 2010
representing Theranos could offer “in-store blood testing from a single finger-stick.”126
Although, as Theranos points out, the MSA does not either define “device(s)” as
finger-stick technology or require Theranos to exclusively use the finger-stick devices,
the unequivocal purpose of the MSA was to implement and employ the finger-stick and
“Edison” devices in Walgreens’s pharmacies.127
2.

Arbitrarily and Unreasonably
Theranos denies ever frustrating the overarching purpose of the

MSA by acting arbitrarily and unreasonably because the MSA did not require it to use
either its finger-stick technology or its own laboratories (under certain circumstances).128
It argues Delaware courts are not permitted to impose new terms into a contract that
could have been bargained for but were not.129 As previously discussed, Walgreens

123

Id., Ex. A at ¶ 15.
Id., Ex. A at ¶ 16.
125
D.I. 2 at ¶ 18.
126
Id. at ¶ 20.
127
D.I. 12 at 14-15; see generally D.I. 2-1 at Ex. A.
128
D.I. 12 at 14-15.
129
Id. at 15.
124

19

had a reasonable expectation that the blood testing to be performed at its stores would
be accomplished through the use of Theranos’s finger-stick technology.
Walgreens contends that in a March 22, 2010 meeting, Theranos touted that it
had “developed a ‘proprietary, patented technology’ capable of running ‘comprehensive
blood tests from a single finger-stick, in real-time at the point of care, outside of
traditional lab settings.’”130 Theranos assured Walgreens that the technology was
“viable and consumer-ready,” and would be available to the general public as early as
“later that year.”131
Shortly thereafter, on May 7, 2010, Theranos represented that its proprietary
technology was approved by the Food and Drug Administration (“FDA”) for clinical trials
and its technology was positioned to receive approval for use outside of the clinical
field.132 Theranos’s technology eventually received FDA approval, but it is unclear when
this occurred.
During a January 2012 presentation, Theranos similarly assured Walgreens that
its labs would become the “world’s first finger-stick based . . . labs” offering the “highest
quality testing from a finger-stick. . . .”133 It also “highlighted purported advancements”
of its blood testing services, and claimed its finger-stick technology required “99.9% less
blood,” with the testing results available within 4 to 24 hours.134
These representations by Theranos pertain solely to its finger-stick technology

130

D.I. 2 at ¶ 22.
Id. at ¶¶ 24-25.
132
Id. at ¶¶ 31-32.
133
Id. at ¶ 37.
134
Id. at ¶ 38.
131

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and its device for analyzing blood samples. Although the MSA allowed Theranos to use
third party laboratories in its absence of obtaining CLIA certification, its representations
and assurances led Walgreens to reasonably expect at the time of contracting, that
Theranos would use its finger-stick technology, at least a majority of the time, to collect
blood samples. As evident from the complaint, Theranos’s decision to stop using its
finger-stick technology was an unexpected occurrence.
3.

Notice and Opportunity to Cure
Theranos argues Walgreens did not adhere to the notice and

opportunity to cure requirements of Paragraph 24 of the MSA before terminating the
agreement, and therefore, does not have a valid claim for repayment of the Innovation
Fee.135 Theranos also argues Walgreens is attempting to insert additional terms into the
MSA through its claim for breach of the implied covenant of good faith and fair
dealing.136 Walgreens responds that it was neither required to provide notice nor an
opportunity to cure the alleged breach.137
As previously discussed, the court finds that the overarching purpose of the MSA
was to use and develop Theranos’s proprietary finger-stick technology in Walgreens’s
stores. Therefore, Theranos’s argument that Walgreens is attempting to insert new
terms into the MSA falls short.
Under the MSA, Walgreens is not necessarily required to provide notice
135

D.I. 12 at 11-13; D.I. 16 at 9-10.
D.I. 12 at 13-16; D.I. 16 at 6-8 (Theranos argues the MSA does not
contemplate a specific instrument for drawing blood, nor does it require Theranos to use
its own laboratories if they are not CLIA certified, and therefore by attempting to insert
these terms into the MSA, Walgreens’s claim is invalid.).
137
D.I. 15 at 15-16.
136

21

and an opportunity to cure an alleged breach of the implied covenant of good faith and
fair dealing.
Paragraph 24 of the MSA outlines the procedures for terminating the agreement
for cause based on a breach of a material provision within the contract.138 Notably, it
only refers to “termination due to unsatisfactory pilot or inability to realize pricing” and
“termination for cause.”139 These two provisions, as well as Paragraph 24 in its entirety,
do not require Walgreens to provide notice and an opportunity to cure in regards to a
claim of purported breach of the implied covenant of good faith and fair dealing.
Paragraph 24(b) does not apply because the pilot program was never implemented,
thus there was no inability to realize pricing.140 Paragraph 24(c) is also inapplicable
because Walgreens’s claim for breach of the implied covenant of good faith and fair
dealing is not the reason it terminated the MSA, and because Paragraph 24(c) pertains
to “material provisions” within the MSA.141 Under Delaware law, the implied covenant of
good faith and fair dealing attaches to every contract and is not a “material provision”
within the meaning of Paragraph 24(c).142 In fact, Walgreens unequivocally states it
terminated the MSA for cause due to Theranos’s alleged breaches of the express
warranties in Paragraph 19(c) of the MSA.143 It would be impossible for Walgreens to
give adequate notice and opportunity to cure an alleged breach of the implied covenant
138

See D.I. 2-1, Ex. A at ¶ 24(c) (“If either party breaches a material provision of
this Agreement. . . .”) (emphasis added).
139
Id.
140
See generally D.I. 2.
141
Id.; see also D.I. 2-1, Ex. A at ¶ 24(c).
142
See Pedrick v. Roten, 70 F. Supp. 3d 638, 649 (D. Del. 2014).
143
Compare D.I. 2 at ¶¶ 146-47, 154-55, 160-61 with D.I. 2 at ¶¶ 176-85; D.I. 15
at 14-20.
22

of good faith and fair dealing after having properly terminated the MSA for cause.144
This point is reinforced by Theranos’s argument that the overarching purpose of the
MSA was not to implement and employ the finger-stick and “Edison” devices in
Walgreens’s stores.145
Moreover, construing the facts in a light most favorable to the non-moving party,
it is evident Theranos knew of problems pertaining to its proprietary technology, as well
as its two CLIA-certified labs, and unsuccessfully attempted to cure those deficiencies
before Walgreens noticed.146 Had Walgreens been required to provide notice and
opportunity to cure those issues, the facts show Theranos would still have been in
default, even if Paragraph 24(c) were applicable.147
Thus, Walgreens need not comply with the notice and opportunity to cure
requirements in order to bring a claim for alleged breach of the implied covenant of
good faith and fair dealing. However, Paragraph 24(d) of the MSA does not allow
recovery of the Innovation Fee based on a breach of the implied covenant of good faith
and fair dealing.148 Yet, Walgreens has pled sufficient facts to raise a right to relief
above the speculative level.149 Accordingly, the court need not address Walgreens’s
144

D.I. 15 at 15-16 (Walgreens argues it terminated the contract for cause based
on Theranos’s alleged breaches of the warranties under Paragraph 19(c) of the MSA,
and added its claim for breach of the implied covenant of good faith and fair dealing only
after terminating the contract in accordance with the requirements in Paragraph 24(c).).
145
D.I. 12 at 13-15; D.I. 16 at 6-9.
146
See D.I. 2 at ¶¶ 51-73, 76, 85-91, 95-97, 104-107, 113-15, 125-130, 142.
147
See D.I. 2-1, Ex. A at ¶ 24; D.I. 2 at ¶ 142; see generally D.I. 2 at ¶¶ 51-142.
148
D.I. 2-1, Ex. A at ¶ 24(d)(i)(1) (“In the event Walgreens terminates this
Agreement pursuant to Sections 24.b or 24.c . . . then within one hundred eighty (180)
days of the termination date Theranos will refund the Innovation Fee. . . .”).
149
See D.I. 2 at ¶¶ 184-85 (In addition to arguing it is entitled to repayment of the
Innovation Fee and convertible note, Walgreens asserts it has suffered further damages
23

futility argument.150
V.

CONCLUSION
For the reasons contained herein, it is recommended that:
(1) Theranos’s motion to dismiss counts I and II (D.I. 11), as they relate to the

convertible note, and count III in its entirety pursuant to FED. R. CIV. P. 12(b)(6) for
failure to state a claim upon which relief can be granted be DENIED.
This Report and Recommendation is filed pursuant to 28 U.S.C. § 636(b)(1)(B),
FED. R. CIV. P. 72(b)(1), and D. Del. LR 72.1. The parties may serve and file specific
written objections within fourteen (14) days after being served a copy of this Report and
Recommendation. Objections and responses are limited to ten (10) pages each.
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
available on the Court’s website, www.ded.uscourts.gov.
Dated: July 27, 2017

/s/ Mary Pat Thynge
UNITED STATES MAGISTRATE JUDGE

to be proven.); see generally id. at ¶¶ 174-85.
150
See D.I. 15 at 16-17.
24