Recovercare, LLC v. Advanced Wound Technologies, USA, Inc. et al

Filing 30

MEMORANDUM OPINION by Judge Charles R. Simpson, III on 3/22/2012; re 14 MOTION for Preliminary Injunction; 15 MOTION Disqualify Counsel; 11 MOTION to Dismiss ; a separate order will issue in accordance with this opinion.cc:counsel (TLB)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
AT LOUISVILLE

RECOVERCARE, LLC

PLAINTIFF

v.

CIVIL ACTION NO. 3:11-CV-00215

ADVANCED WOUND TECHNOLOGIES,
USA, INC., et al.

DEFENDANTS

MEMORANDUM OPINION

This case is before the court on three motions: 1) a motion by defendants to dismiss the
complaint (DN 1, 11); 2) a motion by the plaintiff for a preliminary injunction (DN 14); and 3) a
motion by the plaintiff to disqualify counsel for the defendants (DN 15). For the reasons set forth
herein, the defendants’ motion to dismiss will be granted. Accordingly, the plaintiff’s motions for
a preliminary injunction and to disqualify counsel for the defendants will be dismissed as moot.
I. BACKGROUND
The facts herein are taken from plaintiff RecoverCare’s amended complaint and the
contract that RecoverCare attached to its complaint. This dispute arises out of a May 29, 2007
distribution agreement between plaintiff RecoverCare, Inc., and defendant Advanced Wound
Technologies, USA, Inc. (“AWT”). AWT is owned by Mark Hagopian, who also owns
defendant Biologics, Inc. Hagopian serves as the sole officer and director of both companies.
The distribution agreement between RecoverCare and AWT concerned a product
manufactured by AWT, the Microsolo900Transport System (the “900t System”). The 900t
System was a pressure redistribution mattress that used a software system to adjust the surface of

the mattress and help prevent healthcare patients from suffering pressure ulcers. Under the
distribution agreement, RecoverCare was to have exclusive rights to distribute 900t Systems in
Texas for a term of five years and the right to sell 900t Systems in any other states where there
were no exclusive dealers for the system. The distribution agreement further provided that if
AWT sold or licensed the technology for the 900t System to a third party, AWT would
unconditionally guarantee and warrant that its obligations under the distribution agreement
would be delegated to the third party. Finally, the distribution agreement provided that AWT
reserved the right to assign the distribution agreement to a third party, or to discontinue, modify,
or replace the 900t System at any time.
RecoverCare distributed the 900t Systems in accordance with the agreement. However,
according to RecoverCare’s complaint, the 900t System was replaced with an upgraded version
called the AutoVector System. RecoverCare stated in its complaint that it “currently” was
purchasing AutoVectors from Biologics.1 RecoverCare alleged, based “[u]pon information and
belief,” that “AW[T] assigned the Agreement to Biologics” and that “Biologics is the agent,
assignee and/or alter ego of AWT and is responsible for fulfilling AWT’s obligation to distribute
[the AutoVector] to RecoverCare . . . pursuant to the terms of the Agreement” (Amended
Complaint ¶¶ 24, 28).
In early February 2011, Hagopian allegedly informed RecoverCare that he was planning
to sell AWT and Biologics, along with the technology for the AutoVector, to a third party. The

1

Generally, throughout its amended complaint, RecoverCare refers to the 900t System and
the AutoVector both as the “Product.” However, RecoverCare’s complaint does distinguish between
the two systems insofar as it states that the 900t System that RecoverCare purchased from AWT was
replaced with the AutoVector, which RecoverCare purchased from Biologics (Amended Complaint
¶¶ 21-22). The complaint does not state that RecoverCare ever purchased AutoVectors from AWT
or 900t Systems from Biologics.
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sale was scheduled to occur on March 18, 2011. Hagopian supposedly told RecoverCare that
Biologics would not continue to supply RecoverCare with AutoVectors, and further stated that
AWT and Biologics would not be disclosing the existence of the distribution agreement to the
third-party purchaser. When RecoverCare submitted a purchase order on March 7, 2011,
Hagopian stated that Biologics would not fill the purchase order as requested.
RecoverCare filed a complaint against AWT and Biologics in Jefferson County,
Kentucky, Circuit Court. As amended, the complaint asserted a breach of contract claim against
the defendants for “failing to unconditionally guarantee and warrant that all of its [sic]
obligations under the Agreement will be delegated to a third party licensee, assignee or
transferee and that the Agreement will continue in full force and effect through the remainder of
the contract term.” RecoverCare also brought a claim for breach of implied duty of good faith
and fair dealing, claiming that the defendants breached that duty “by failing to disclose the
existence and terms of the Agreement to the purchaser of the Defendants prior to the closing date
of the purchase and claiming that the Agreement terminated.” RecoverCare sought injunctive
relief “preventing AWT and Biologics from terminating the Agreement and requiring AWT and
Biologics to continue supplying the Product to RecoverCare in accordance with the purchase
orders submitted by RecoverCare.”
RecoverCare also moved in the Jefferson County Circuit Court for a temporary
restraining order prohibiting the defendants from terminating the distribution agreement and
requiring them to continue to supply RecoverCare with AutoVectors. After finding that it
appeared that RecoverCare’s rights under the distribution agreement were being violated and that
RecoverCare would suffer immediate and irreparable injury therefrom, the state court issued a

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temporary restraining order prohibiting the defendants from terminating the distribution
agreement until a hearing on a motion to dissolve the restraining order was set, an order on a
motion for a temporary injunction was entered, or final judgment was entered, whichever was
earlier.
The defendants thereafter filed a motion in the Kentucky state court to dismiss
RecoverCare’s amended complaint on the ground that it failed to state a claim against the
defendant upon which relief could be granted. On April 8, 2011, the defendants removed the
case to this court on the basis of this court’s diversity jurisdiction.
On April 28, 2011, RecoverCare filed a motion for a preliminary injunction and an
expedited hearing. In the motion for a preliminary injunction, RecoverCare stated that Hagopian
had informed RecoverCare that the sale of the technology for the AutoVector had been rescheduled for April 29, 2011. On May 27, 2011, the defendants filed a response to
RecoverCare’s motion for a preliminary injunction. The defendants noted that on May 2, 2011, a
company named Joerns had purchased from Biologics the assets and patents related to the
AutoVector. The defendants stated that RecoverCare continued to purchase AutoVectors directly
from Joerns, and at the same price that it had previously paid to Biologics for them. RecoverCare
never submitted reply papers concerning the motion for a preliminary injunction,
Additionally, on April 28, 2011, RecoverCare moved to disqualify counsel for the
defendants, Frost Brown Todd. RecoverCare asserted that it had engaged Frost Brown Todd to
provide general legal representation on or about January 13, 2010, and that the representation
was ongoing. Thus, RecoverCare asserted, Frost Brown Todd could not represent the defendants,
since they were parties adverse to RecoverCare. In response, defendants argued that

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RecoverCare was no longer a Frost Brown Todd client, that the work Frost Brown Todd had
performed for RecoverCare was not substantially related to the current action, and that
RecoverCare had not shared any confidential information with Frost Brown Todd that was being
used in the current action. RecoverCare filed a reply in support of its motion to disqualify
counsel.
II. THE DEFENDANTS’ MOTION TO DISMISS
A.
Upon a motion to dismiss for failure to state a claim, a court “must construe the
complaint in the light most favorable to plaintiff” and “accept all well-pled factual allegations as
true.” League of United Latin Am. Citizens v. Bredesen, 500 F.3d 523, 527 (6th Cir. 2007). To
survive a motion to dismiss, the “complaint must contain either direct or inferential allegations
respecting all material elements” of the offense. In re Travel Agent Comm’n Antitrust Litig., 583
F.3d 896, 902 (6th Cir. 2009) (internal question marks ommitted). The complaint’s “factual
allegations must be enough to raise a right to relief above the speculative level” and must “state a
claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555,
570 (2007). A plaintiff must provide more than “labels and conclusions,” Twombly, 550 U.S. at
555, or “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory
statements.” Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). Thus, a court considering a motion
to dismiss can “begin by identifying pleadings that, because they are no more than conclusions,
are not entitled to the assumption of truth.” Id. at 1950. After doing so, the court should
determine whether the remaining well-pled factual allegations, assumed to be true, “plausibly
give rise to an entitlement to relief.” Id.

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B.
The defendants argue that RecoverCare’s complaint fails to state a claim upon which
relief may be granted with respect to AWT because the contract that RecoverCare claims AWT
breached covered only the 900t System, not the AutoVector. However, AWT no longer
distributed the 900t System, as was AWT’s right under the agreement. Thus, RecoverCare had
no claim against AWT under the agreement. The defendants further contend that RecoverCare’s
complaint fails to state a claim against Biologics. The defendants argue that Biologics was not a
party to the distribution agreement with RecoverCare, nor did the distribution agreement cover
the AutoVector that Biologics provided to RecoverCare.2
In response, RecoverCare asserts that its complaint was sufficient because it alleged that
RecoverCare had a contract with AWT for the 900t System, that the AutoVector was a
replacement of the 900t System, and that AWT assigned or transferred its rights under the
distribution agreement to Biologics. According to RecoverCare, Biologics must thus continue to
supply AutoVectors to RecoverCare through May 2012.

2

The defendants also contend that RecoverCare’s complaint must be dismissed for lack of
jurisdiction, pointing to a forum-selection clause in a copy of the contract that they attached to their
motion to dismiss. The defendants noted that the copy of the contract attached to RecoverCare’s
complaint was incomplete. The forum-selection clause in the defendants’ copy of the contract
provides, “For purposes of injunctive relief, each party consents to the jurisdiction of any federal
or state court in the Tampa metropolitan region.” In its response, RecoverCare acknowledged that
the copy of the contract attached to its complaint was incomplete, but stated that it could not confirm
that the copy provided by defendants was the correct copy without further discovery. RecoverCare
argued that, even assuming arguendo that the forum-selection clause was a part of the actual
contract, that clause was merely permissive, not mandatory, of jurisdiction and venue in Tampa,
Florida courts, and thus did not preclude this court from exercising jurisdiction over the case. As
described in the main text, this court finds that RecoverCare’s complaint should be dismissed for
failure to state a claim; thus, there is no need to determine whether the defendants have provided a
correct copy of the contract or to reach the forum-selection clause issue.
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C.
RecoverCare’s claims against both defendants must be dismissed. The distribution
agreement, which RecoverCare attached to its complaint, was, by its stated terms, between AWT
and RecoverCare and related to RecoverCare’s rights to distribute the 900t System. However,
RecoverCare’s claims for breach of contract and breach of the implied duty of good faith and fair
dealing stem from the refusal of a different company, Biologics, to sell a different product, the
AutoVector, to RecoverCare or to inform any purchaser of the AutoVector technology about the
distribution agreement. RecoverCare makes no allegations that AWT ever manufactured
AutoVectors, nor does RecoverCare ever allege that it purchased AutoVectors from AWT. By
the same token, RecoverCare has not alleged that Biologics was a party to the distribution
agreement signed by RecoverCare and AWT concerning the 900t System. In short,
RecoverCare’s claims against Biologics are premised on a contract that Biologics was not a party
to, while RecoverCare’s claims against AWT are premised on the refusal of a party other than
AWT to provide a product that AWT never manufactured or sold.
RecoverCare, apparently recognizing the incongruities of claiming that AWT breached a
contract when Biologics refused to sell a product to RecoverCare and that Biologics breached a
contract it was not a party to, alleges in its complaint that “[u]pon information and belief,”
“AW[T] assigned the Agreement to Biologics” and, further, that “Biologics is the agent, assignee
and/or alter ego of AWT and is responsible for fulfilling AWT’s obligation to distribute [the
AutoVector] to RecoverCare . . . pursuant to the terms of the Agreement” (Amended Complaint
¶¶ 24, 28). But those allegations are no more than conclusory statements providing theories for
recovery. They are not the sort of well-pleaded factual allegations that this court must accept as

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true, but instead are the types of conclusions that are not entitled to the assumption of truth.
Iqbal, 129 S.Ct. at 1950; see Twombly, 550 U.S. 544 (dismissing a complaint with allegations of
a “contract, combination or conspiracy to prevent competitive entry” in violation of the Sherman
Act because the plaintiffs’ assertion of an illegal agreement was only a legal conclusion and the
remaining factual allegations were insufficient to plausibly suggest an unlawful agreement).
Thus, this court must turn to the well-pleaded factual allegations in the complaint to
determine whether they plausibly suggest an entitlement to relief. Iqbal, 129 S.Ct. at 1951.
RecoverCare alleges that both Biologics and AWT are owned and controlled by the same person
and operate from the same office, and that Biologics fulfilled RecoverCare’s orders for
AutoVectors. But the fact that a person owns two companies and operates them out of the same
office does not show that the two companies are one and the same, nor does it show that AWT
assigned its contract to Biologics. Nor does the fact that Biologics was fulfilling orders placed by
RecoverCare for AutoVectors mean that AWT assigned the 900t System distribution agreement
to Biologics and that the 900t System agreement encompassed the AutoVector. While it is
conceivable that Biologics distributed AutoVectors to RecoverCare because AWT assigned the
distribution agreement to it and the AutoVector was covered under the distribution agreement as
a replacement of the 900t System, it is more plausible that Biologics simply fulfilled
RecoverCare’s orders for AutoVectors because it was happy to sell its product to a willing buyer.
RecoverCare’s complaint also semantically elides the distinction between the 900t
System and the AutoVector by generally referring to both as “the Product,” and only
distinguishing between the two to call the AutoVector a replacement of the 900t System. The
complaint points out that section 2.5 of the distribution agreement provided that AWT had

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reserved the right to “modify, replace, or add to” the 900t System; that same section also
provided that RecoverCare would have the “first right of refusal to distribute any replacement
products or additional products.” However, RecoverCare conspicuously failed to allege that it
was AWT that replaced the 900t System with the AutoVector, instead using the passive voice to
state the 900t System “was replaced” by the AutoVector. RecoverCare further failed to allege
that AWT ever produced or sold AutoVectors; rather, the complaint made clear that
RecoverCare had purchased AutoVectors from Biologics rather than AWT. While AWT may
have had the right to replace the 900t System under the contract, that does not mean they did so.
And while Biologics may have developed and produced a better product–the AutoVector–that
RecoverCare then purchased from them, that does not mean that AWT replaced the 900t System
with the AutoVector such that the AutoVector would fall under the contract between
RecoverCare and AWT. Simply put, the allegations are insufficient to show that the AutoVector
produced by Biologics fell under the 900t System distribution agreement between RecoverCare
and AWT.
In short, RecoverCare has not shown that it is entitled to relief, because, while it had a
five-year distribution agreement with AWT for the 900t System, its complaint alleges that a
separate company, Biologics, would not provide it with a different product, the AutoVector, or
tell a purchaser of the technology for the AutoVector about the distribution agreement for the
900t System. RecoverCare’s allegations that Biologics was the agent, assignee, or alter ego of
AWT are conclusory and not supported by sufficient factual allegations to allow any more than
an inference of the “mere possibility” that RecoverCare is entitled to relief. Iqbal, 129 S.Ct. at
1950. That is not enough. Id.

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III. CONCLUSION
For the above reasons, RecoverCare’s complaint will be dismissed. The remaining
motions will be dismissed as moot.
A separate order will issue in accordance with this opinion.

March 22, 2012

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