Medrad, Inc. v. Sprite Development, LLC et al

Filing 80

Opinion and Order Signed by the Honorable Joan H. Lefkow on 9/6/2011:Mailed notice(mad, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
MEDRAD, INC., a Delaware corporation,
Plaintiff/Counterdefendant,
v.
SPRITE DEVELOPMENT, LLC, SPRITE
SOLUTIONS, LLC, HANS MISCHE, LLC,
ROBERT BECK, LLC, Minnesota
corporations, HANS MISCHE, individually,
and ROBERT BECK, individually,
Defendants/Counterclaimants.

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No. 08 CV 5088
Judge Joan H. Lefkow

OPINION AND ORDER

Medrad, Inc. (“Medrad”) brought suit against Sprite Development, LLC
(“Development”); Sprite Solutions, LLC (“Solutions”);1 Hans Mische, LLC; Robert Beck, LLC;
and Hans Mische and Robert Beck. Development, Hans Mische, LLC, and Robert Beck, LLC
(collectively, “counterclaimants”) filed a counterclaim against Medrad for fraudulent
inducement, violation of the Sherman Act, 15 U.S.C. §§ 1–2, conversion, and breach of contract.
Before the court is Medrad’s motion to dismiss the counterclaims. For the following reasons, the
motion [#66] is granted.

BACKGROUND2

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The court dismissed Solutions in its September 8, 2010 Opinion and Order based on the parties’
agreement that Solutions was never a valid Minnesota limited liability company. See Dkt. No. 61 at 7.
2
The facts recounted in this section are taken from the counterclaim and are presumed true for
the purpose of resolving the pending motion. Where the allegations of the counterclaim conflict with the

Development is in the business of creating and developing technological concepts in the
cardiovascular medical industry. It owns various patents relating to cardiovascular medical
technology, including a method, devices, and systems that deal with the mechanical removal of
occlusive material from the body using catheters and catheter systems. Medrad develops and
sells medical devices. While its focus was on medical imaging, it also has expanded into the
market for mechanical thrombectomy (i.e., the removal of clots). Development’s thrombectomy
technology was designed to use an injector system like that developed by Medrad.
In August 2004, Medrad and Development began negotiating a contract for Medrad to
develop medical procedures and technology based on Development’s intellectual property. The
products Medrad sought to develop based on Development’s patents were directly competitive
with those of Possis, another company that designed, manufactured, marketed, and sold
thrombectomy catheter and injector systems. Medrad represented that it had the experience,
resources, and capabilities to develop the products at issue. After months of negotiations, a Joint
Development Agreement (“development agreement”) was entered into on July 26, 2005 between
Solutions and Medrad in which Solutions agreed to license its patents to Medrad in exchange for
certain payments as set out in the agreement.3 Beck and Mische signed the development
agreement on Solutions’s behalf.4 In the development agreement, Medrad agreed to do the

Joint Development Agreement, attached to Medrad’s complaint and central to the counterclaim, the Joint
Development Agreement prevails. See N. Indiana Gun & Outdoor Shows, Inc. v. City of South Bend, 163
F.3d 449, 454 (7th Cir. 1998) (“[W]hen a written instrument contradicts allegations in the complaint to
which it is attached, the exhibit trumps the allegations.”).
3
Although the counterclaim refers to Development as the party that entered into the development
agreement, the development agreement clearly indicates that Solutions, not Development, was the party to
the agreement.
4
In its September 8, 2010 Opinion and Order, ruling on defendants’ motion to dismiss for lack of
jurisdiction and improper venue, the court concluded that Beck and Mische could be held individually
liable on the contract.

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following: (1) cooperate with Solutions in the development of thrombectomy and related
products using Solutions’s technology, (2) establish a plan for developing these products, (3)
design and develop these products according to the plan, (4) pay such expenses as were
reasonably necessary to design and develop these products, (5) perform and pay for reasonably
necessary clinical trials, (6) take responsibility and pay for obtaining regulatory approvals for the
products, and (7) consider Solutions’s input and requests in the development process and work
cooperatively with Solutions to resolve concerns. Medrad also entered into consulting
agreements with Hans Mische, LLC and Robert Beck, LLC for services Beck and Mische were
to provide Medrad in connection with the development agreement.
Despite its representations, Medrad did not use commercially reasonable efforts to
develop and commercialize the products covered by the development agreement. Specifically,
Medrad did not fund a development budget for the products until 2008 and, when it did so, the
budget was intentionally inadequate. Medrad also failed to implement an appropriate
development plan and involve Solutions (or, for that matter, Development) in any development
activities. Medrad also only acknowledged meeting one milestone under the development
agreement, even though its internal documentation indicates that additional milestones were met.
Instead of fulfilling its duties under the development agreement, Medrad was seeking to acquire
Prossis, Development’s direct competitor. This pursuit began in fall 2005, not long after Medrad
finalized the development agreement with Solutions. Medrad used the development agreement
as a bargaining chip in its pursuit of Prossis, which it eventually did acquire.
On February 11, 2008, Development demanded that Medrad make a milestone payment
of $200,00 that was due upon Medrad’s confirmation of in vivo proof of the ability of the

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product to ablate and aspirate clots without inducing clinically significant vessel damage and
clinically significant hemolysis in specified animal models. This was demonstrated at the latest
in January 2007. Medrad has refused to make the payment to Development. Instead, on April
14, 2008, Medrad sent notice that it intended to terminate the development agreement. Medrad
has also claimed a right to Development’s patents and requested that Development and Mische
join in a patent application for rights previously controlled and fully covered by Development’s
patents.
LEGAL STANDARD
A motion to dismiss under Rule 12(b)(6) challenges a complaint for failure to state a
claim upon which relief may be granted. Fed. R. Civ. P. 12(b)(6); Gen. Elec. Capital Corp. v.
Lease Resolution Corp., 128 F.3d 1074, 1080 (7th Cir. 1997). In ruling on a motion to dismiss,
the court accepts as true all well-pleaded facts in the plaintiff’s complaint and draws all
reasonable inferences in the plaintiff’s favor. Nixon v. Page, 291 F.3d 485, 486 (7th Cir. 2002).
In order to survive a Rule 12(b)(6) motion, the complaint must not only provide the defendant
with fair notice of the claim’s basis but must also establish that the requested relief is plausible
on its face. Ashcroft v. Iqbal, --- U.S. ----, 129 S. Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009); see
also Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007).
The allegations in the complaint must be “enough to raise a right of relief above the speculative
level.” Twombly, 550 U.S. at 555. Allegations of fraud are subject to the heightened pleading
standard of Rule 9(b), which requires a plaintiff to “state with particularity the circumstances
constituting fraud or mistake.” Fed. R. Civ. P. 9(b). This means that the plaintiff must plead the

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“who, what, when, where, and how: the first paragraph of any newspaper story.” DiLeo v. Ernst
& Young, 901 F.2d 624, 627 (7th Cir. 1990).
ANALYSIS
I.

Proper Parties
Medrad first argues that the counterclaims for fraudulent inducement, conversion, and

breach of contract fail because counterclaimants are not the proper parties to be bringing these
claims.5 These claims are premised on the development agreement entered into between Medrad
and Solutions. As the court has already found and all defendants previously acknowledged,
Solutions was never a valid Minnesota limited liability company. While Development, Mische,
and Beck may be able to bring claims against Medrad based on the Development Agreement,
their standing to do so has not been properly established in the counterclaim. The fraudulent
inducement, breach of contract, and conversion claims will thus be dismissed.

II.

Fraudulent Inducement Claim
Even had counterclaimants properly alleged their standing to bring the fraudulent

inducement claim, it would not survive as pleaded. Their fraud claim is based on several alleged
misrepresentations, the majority of them being promises of future action embodied in the
development agreement. “A cause of action to recover damages for fraud may not be maintained
when the only fraud alleged relates to a breach of contact.” Lee v. Matarrese, 793 N.Y.S.2d 457,

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Counterclaimants attempted to address this argument by filing an amended counterclaim. As
this amended counterclaim was not filed in accordance with Federal Rule of Civil Procedure 15(a)(1)(B)
or with leave of court, the court struck the amended counterclaim on February 22, 2011. See Dkt. No. 76.

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457 (N.Y. App. Div. 2005).6 The alleged misrepresentations memorialized in the development
agreement thus are not actionable for fraud.
Counterclaimants maintain, however, that Medrad’s representation that it had the
experience, resources, and capabilities to develop the products being discussed was not a
promise of future action and is the predicate for its fraud claim. The court does not accept that
this alleged misrepresentation of Medrad’s prior experience and current capabilities allows
counterclaimants to pursue the other alleged misrepresentations contained in the contract as part
of a fraud claim. It may, however, be sufficient to sustain an independent claim for fraudulent
inducement independently, for it appears to be a statement that was collateral to the contract.
See WIT Holding Corp. v. Klein, 724 N.Y.S.2d 66, 68 (N.Y. App. Div. 2001) (“[A]
misrepresentation of material fact, which is collateral to the contract and serves as an inducement
for the contract, is sufficient to sustain a cause of action alleging fraud.”). Although Medrad
asks the court to find that its representations about its experience and capabilities are merely
non-actionable puffery, the court is not prepared to do so at this stage. See Novak v. Kasaks, 216
F.3d 300, 315 (“While statements containing simple economic projections, expressions of
optimism, and other puffery are insufficient, defendants may be liable for misrepresentations of
existing facts.” (citations omitted)). While the pleadings cast doubt as to whether
counterclaimants could prevail on their claim, they will be given the opportunity to replead their
fraud claim solely based on the misrepresentation contained in ¶ 51(a) of their counterclaim.
III.

Antitrust Claims

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New York law applies to the state law claims, as provided in the development agreement. Even
were Minnesota or Illinois law to apply, the result would be the same.

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Counterclaimants have brought claims for violation of sections 1 and 2 of the Sherman
Act. To state a claim under section 1, they must allege that (1) Medrad entered into a contract,
combination, or conspiracy; (2) they suffered an accompanying antitrust injury; and (3) the
contract, combination, or conspiracy resulted in an unreasonable restraint of trade in the relevant
market. Omnicare, Inc. v. UnitedHealth Grp., Inc., 629 F.3d 697, 705 (7th Cir. 2011). For their
monopolization claim under section 2, counterclaimants must allege that (1) Medrad currently
possesses monopoly power in the relevant market, and (2) that Medrad willfully acquired that
power. Endsley v. City of Chicago, 230 F.3d 276, 282 (7th Cir. 2000). For their attempted
monopolization claim under section 2, they must allege that (1) Medrad had a specific intent to
achieve monopoly power, (2) Medrad showed predatory or anticompetitive conduct directed at
accomplishing its unlawful purpose, and (3) there is a dangerous probability that Medrad’s
attempt to monopolize will be successful. Frantzides v. Northshore Univ. HealthSystem Faculty
Practice Assocs., --- F. Supp. 2d ----, 2011 WL 1231163, at *4 (N.D. Ill. Mar. 30, 2011). For all
antitrust claims, counterclaimants must allege that they have suffered an antitrust injury, namely
injury resulting from acts that either reduce output or raise prices to consumers. Wagner v.
Magellan Health Servs., Inc., 121 F. Supp. 2d 673, 681 (N.D. Ill. 2000). This counterclaimants
have not done, as there is no allegation that Medrad’s actions reduced the production of
thrombectomy devices or caused the price of such devices to increase. Instead, the only injury
alleged is the destruction and diminution in value of counterclaimants’ patents. How this injury
is more than just an injury to a single competitor, something the antitrust laws were not enacted
to protect, is not explained. See Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477,
488, 97 S. Ct. 690, 50 L. Ed. 2d 701 (1977) (“The antitrust laws . . . were enacted for ‘the

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protection of competition not competitors.’” (quoting Brown Shoe Co. v. United States, 370 U.S.
294, 320, 82 S. Ct. 1502, 8 L. Ed. 2d 510 (1962))); Goodloe v. Nat’l Wholesale Co., No. 03 C
7176, 2004 WL 1631728, at *7 (N.D. Ill. July 19, 2004). “Without any allegation as to how
market-wide competition will be affected, the complaint fails to allege a claim on which relief
may be granted.” Wagner, 121 F. Supp. 2d at 682 (quoting Elecs. Commc’ns Corp. v. Toshiba
Am. Consumer Prods., Inc., 129 F.3d 240, 245 (2d Cir. 1997)).
IV.

Conversion Claim
To state a claim for conversion under New York law, counterclaimants must allege that

(1) the property subject to conversion is a specific identifiable thing, (2) they had ownership,
possession, or control over the property before its conversion, and (3) Medrad exercised an
unauthorized domain over the property in question to the alteration of its condition or to the
exclusion of counterclaimants’ rights. Moses v. Martin, 360 F. Supp. 2d 533, 541 (S.D.N.Y.
2004). A conversion action may not be maintained “where damages are merely being sought for
breach of contract.” Id. (quoting Peters Griffin Woodward, Inc. v. WCSC, Inc., 452 N.Y.S.2d
599, 600 (N.Y. App. Div. 1982)). Here, it appears that counterclaimants are seeking to do just
that: recover for Medrad’s use of the patents as agreed to in the development agreement and the
consulting agreements. The development agreement gave Medrad an exclusive license to the
patents. If counterclaimants choose to replead this claim, they should make clear how Medrad’s
actions were anything other than in conformance with these agreements and how they
constituted the exercise of unauthorized domain over the patents at issue.

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V.

Breach of Contract Claim
Medrad also sought dismissal of the breach of contract claim based on the fact that

counterclaimants failed to properly allege the performance of their obligations under the
development agreement. The court agrees that this allegation is missing and must be pleaded in
order to state a breach of contract claim.
CONCLUSION AND ORDER
For the foregoing reasons, Medrad’s motion [#66] is granted. Counterclaimants have
until September 23, 2011 to file an amended counterclaim. This case will be called for a status
hearing on September 29, 2011.

Dated: September 6, 2011

Enter: ___________________________________
JOAN HUMPHREY LEFKOW
United States District Judge

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