Fischell et al v. Cordis Corporation
Filing
61
MEMORANDUM AND ORDER granting in part and denying in part 41 Motion to Dismiss; Granting as to Counts III and Count IV; Denying on Counts I, II and V. Signed by Judge Peter G. Sheridan on 9/26/2016. (eaj, )
NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
TIM A. FISCHELL, ROBERT E.FISCHELL.
and DAVID R. FISCHELL,
Plaintiffs,
Civil Action No. 1 6-cv-00928 (PGS)
MEMORANDUM AND ORDER
V.
CORDIS CORPORATION,
Defendant.
SHERIDAN, U.S.D.J.
This matter comes before the Court on Defendant, Cordis Corporation’s motion to dismiss
the first amended complaint (ECF No.4 1).
Facts & Procedural History:
On February 19, 2015 Plaintiffs Tim Fischell, Robert Fischell. David Fischell, and
IsoStent, LLC., the company the Fischells founded, (collectively “Plaintiffs”) filed the Complaint.
On May 14, 2015 Plaintiffs filed the First Amended Complaint in the United States District Court
for the District of Western Michigan. The First Amended Complaint (“FAC”) alleges: (1) breach
of contract (Count I); (2) breach of the implied covenant of good faith and fair dealing (Count II);
(3) breach of fiduciary duty (Count III); (4) fraud and fraudulent concealment (Count IV); and (5)
unjust enrichment (Count V). (ECF No. 7). On February 22, 2016 the case was transferred to this
District, and Defendants now seek dismissal of Plaintiffs’ FAC. This action arises out of a patent
sub-licensing agreement between the parties.
The Parties
Plaintiffs are entrepreneurs who are named inventors on more than 100 patents for medical
devices, including coronary stent devices and technology. (ECF No. 7, FAC ¶ 2). Coronary stents
are tubes that can be inserted into blood vessels to prevent blockages and constrictions, and are
used to prevent heart attacks and other illnesses. (Id.)
Cordis Corporation (“Defendant”), a
subsidiary of Johnson & Johnson (“J & J”), manufactures medical devices including stents
catheters.
The 1999 Agreement
In June 1999, Plaintiffs entered into a patent royalty agreement (“1999 Agreement”) (FAC,
Ex. A) with Defendant. Pursuant to the 1999 Agreement, Plaintiffs assigned Defendant the right
to use and sell certain coronary stent patents. Defendant agreed to protect Plaintiffs’ intellectual
property rights and pay Plaintiffs royalties from products made, sub-licensed, or sold by Defendant
that incorporated Plaintiffs’ patents and intellectual property.
Under the 1999 Agreement,
Defendant agreed to pay Plaintiffs 1% of net sales on a country-by-country basis on each product
manufactured, used, or sold by Defendant (FAC, Ex. A,
¶
2.2), and Defendant retained the
exclusive right to commence legal action, at its discretion, against entities that potentially infringe
any of the “royalty bearing patents” that Plaintiffs had assigned to Defendants. (Id. at
¶
2.12).
According to the 1999 Agreement, a “royalty bearing patent” is a patent and patent application
owned by Defendant or its affiliates as a result of the Agreement between Defendant and Plaintiffs.
and all future patents related to and patents issued from Plaintiffs’ patents. (Id. at
¶
1.7).
Additionally, Defendant was required to keep records of sales with respect to which a royalty
should be payable according to the Agreement, and Defendant is required to send Plaintiffs a
2
written report of the amount of royalty accrued based on those sales, and then pay Plaintiffs the
amount of royalty indicated in the report. (Id. at
¶ 2.5).
The 2001 Agreement
In December 2001, the parties entered into an agreement (“2001 Agreement”) (FAC, Ex.
B), which amended the 1999 Agreement to adjust certain royalty rates, but otherwise left the 1999
Agreement in full effect.
For many years, the 1999 Agreement and 2001 Agreement between Plaintiffs and
Defendant were honored. Defendant and/or its sub-licensees Guidant Corporation (“Guidant”)
and then Abbott Laboratories (“Abbott”) made royalty payments to Plaintiffs. Moreover, at
various times, Defendant filed infringement actions against manufacturers who had not licensed
the Plaintiffs’ intellectual property or patents. (FAC
January 2006, Guidant paid Plaintiffs royalties.
¶
5). Specifically, from February 2004 to
(FAC
¶
32-33).
In 2006, Guidant sold its
cardiology division to Abbott, who then paid royalties to Plaintiffs until 2012. (FAC
These royalties amounted to approximately $10-is million annually. (FAC
¶
33-34).
¶ 34).
Pertinent Contract Provisions
There are four contract provisions primarily at issue in this case: §2.12, §2.13, §2.2, and
§2.5. (FAC, Ex. A). The first is
§
2.12, which states:
2.12: If either party becomes aware of any product or activity of any third party that
involved infringement of any ROYALTY BEARING PATENT, then they shall
promptly notify the other party. CORDIS may, in its discretion, take whatever
action it believes to be necessary against such third party. If CORDIS elects to take
legal action, the FISCHELLS will fully cooperate therewith at CORDIS expense.
(FAC, Ex. A). Plaintiffs claim that Defendant has breached this provision because it failed to pay
royalties on certain patents, and failed to compel Abbott to pay royalties, and has not taken legal
3
action against companies that have infringed on the Plaintiffs’ patents. Provision
§
2.13 is also at
issue here. It states:
2.13: As a result of the settlement of a lawsuit or for any other reason CORDIS
shall have the right to sublease any of the ROYALTY BEARING PATENTS to a
third party as long as the appropriate one (1%) percent ROYALTY is paid to the
FISCHELLS in accordance with the terms of the AGREEMENT.
(FAC, Ex. A). Plaintiffs claim that Defendant has breached this provision by not paying the
appropriate royalty on sales and use of certain patents. Section 2.13 builds upon Section 2.2 of the
contract, which states:
2.2: ROYALTY On a country-by-country basis where a VALID CLAIM of a
ROYALTY BEARING PATENT is practiced by CORDIS, for each ROYALTY
BEARING PRODUCT manufactured, used, or sold by CORDIS, CORDIS shall
pay the FISCHELLS a royalty of one percent (1%) of NET SALES of each
ROYALTY BEARING PRODUCT; provided, however, that the royalty shall be
paid only once. notwithstanding the number of countries in which such ROYALTY
BEARING PRODUCT is manufactured, used or sold. The ROYALTY shall be
paid by CORDIS within sixty (60) days after the end of each CALENDAR
QUARTER. The payment shall be in the form of three separate checks; i.e., one
check each for 1/3 of the total 1% ROYALTY to Robert E. Fischell, David R.
Fischell and Tim A. Fischell. All three checks shall be mailed to Dr. Robert E.
Fischell.
—
.
(FAC, Ex. A). Plaintiffs claim that Defendant has breached this provision by not paying the
appropriate royalty rate on valid royalty bearing patents. Section 2.5 of the contract is also at issue.
This provision states:
2.5: RECORDS CORDIS shall keep complete and accurate records of sales with
respect to which a royalty is payable according to this Agreement, and CORDIS
shall render to the FISCHELLS a written report setting forth the amount of royalty
accrued based on such sales, and CORDIS shall, upon rendering such report, remit
to the F1SCHELLS the amount of royalty shown thereby.
—
(FAC, Ex. A). Plaintiffs claim that Defendant has breached the contract by not providing a report
to Plaintiffs listing the royalties they are owed.
4
The relevant change to the contract in the 2001 Amendment was an amendment to §2.2,
which addressed the payment of royalties. (FAC, Ex. B). Section 2.2 of the 2001 Amendment
states:
2.2: ROYALTIES. The following shall be added to the end of Paragraph 2.2: For
the avoidance of doubt, the parties agree that a coated stent that is a ROYALTY
BEARING PRODUCT shall be accorded the following royalty payment schedule:
First, if the product is coated with heparin alone, or an equivalent anti
thrombogenic coating, it shall have a royalty attached to it of nine-tenths of one
percent (0.9%) of NET SALES. Second, if the product is a stent coated with a drug
other than heparin, which drug is an anti-restenosis drug such as sirolimus, then the
product shall have a royalty attached to it of seven-tenths of one percent (0.7%) of
NET SALES. Any stent that is a ROYALTY BEARING PRODUCT and is sold
without a drug coating or covered by a claim of a patent having a drug coating
claim, shall retain the original royalty of 1.0%. In the event that there are other drug
coatings not contemplated by this clause, the Parties agree to negotiate the royalty
rate in good faith, beginning with a premise that the premium of the value of the
drug shall retain a rate of 0.5% of Net Sales.
(FAC, Ex. B). The amendment changes the rate of certain royalties, but otherwise leaves the 1999
Agreement in full force. (ECF No. 7,
¶ 20).
Failure to Pay or Compel Payment of Abbott Royalties Since 2012
Plaintiffs’ allege two different situations that have occurred that give rise to this suit.
Plaintiffs first allege that Defendant failed to pay, and failed to compel companies to pay royalties
to Plaintiffs, which breached the 1999 and 2001 Agreements. (FAC
¶ 47-53).
Sometime between
2006 and 2010, Abbott sold coronary stent devices and technologies to various companies,
including to Boston Scientific Corporation (“BSC”), that utilized Plaintiffs’ patents. Plaintiffs
contend that neither Defendant nor Abbott paid any royalties to Plaintiffs for these sales, and that
the amount of royalties from these sales would amount to tens of millions of dollars. (FAC
¶ 35-
39). In 2010, Defendant sued BSC in federal court in the District of Delaware for selling stents
that infringed upon Plaintiffs’ stent patents that Plaintiffs had licensed to Defendant. (FAC
¶ 40).
The District of Delaware granted BSC’s motion for summary judgment on the ground that the
5
Fischefls’ patent rights were exhausted as to BSC. (FAC
¶ 41).
According to the Plaintiffs, that
Court stated in dicta that certain claims of Plaintiffs patent were invalid, and BSC’s “Promus”
stent did not infringe the asserted patents (this statement is referred to as the “June 2012 Order”).
(FAC
¶ 41).
In September 2012, Abbott notified Defendant that based on the June 2012 Order, it would
no longer pay royalties for certain coronary stent products. Also around this time, Abbott had
stopped paying royalties to Defendant that were owed to Plaintiffs for domestic sales of other
coronary stent products (Vision and Xience series). (FAC
¶ 42-43).
Abbott also halted paying
royalties for its international sales subject to the original Guidant License, even though these were
not at issue in the case at the Delaware District Court. (Id. at
¶
44). On December 21, 2012,
Coletti, acting on behalf of Cordis, was in touch with Abbott and confirmed that the Vision and
Xience stents were considered “royalty-bearing” pass-through patents pursuant to the Guidant
License, and that failure to pay Plaintiffs royalties for the sales of these stents amounted to non
compliance with the Guidant License. (FAC,
¶
45-46). However, according to the complaint,
Abbott has failed pay royalties for domestic or foreign sales of the royalty-bearing stents, and
Defendant has done little else to compel Abbott to pay. (FAC,
¶ 47-48).
In May 2013, the U.S. Court of Appeals for the Federal Circuit affirmed the Delaware
District Court’s decision but vacated the Court’s statements with respect to the invalidity and the
finding of non-infringement regarding Plaintiffs’ patents. However, since then, Defendant has
failed to compel Abbott to pay royalties owed to Plaintiffs under the 1999 Agreement. Moreover,
Defendant has also failed to pay royalties to Plaintiffs for Abbott’s use and sale of stent products
under the Guidant License. (FAC
¶ 49-5 1).
6
Plaintiffs also allege that Defendant has failed to provide them with reports detailing the
amount of royalties owed, which violates the 1999 Agreement. (FAC
¶ 52).
Failure to Pay Pre-2004 Royalties
In late 2002 or early 2003, Plaintiffs informed a representative of Cordis, Paul Coletti
(“Coletti”), that they believed certain stents that Guidant manufactured and sold likely infringed
Plaintiffs’ patents. (FAC
¶ 21).
In January 2004, approximately one year later, Coletti informed
Plaintiffs that Guidant and Cordis had entered into an agreement regarding this infringement, and
Guidant agreed to pay royalties to Cordis to “pass-through” to Plaintiffs going forward (February
2004 Settlement & Release Agreement, “Guidant License”).
Pursuant to this February 2004 Agreement, Defendant sub-licensed particular patents of
Plaintiffs to Guidant. (FAC
¶ 26).
When Plaintiffs asked whether they would receive payments
from Guidant for the patents used prior to the agreement between Defendant and Guidant,
Defendant indicated that it had released Guidant from the obligation to pay for stents sold prior to
the February 2004 Guidant License. (FAC
¶ 27).
Plaintiffs, however, assert that Defendant and Guidant actually agreed that Defendant
would be responsible for paying royalties to Plaintiffs for sales prior to February 2004. (FAC
¶
25). At that same time, Plaintiffs requested a copy of the Guidant License from Coletti. Coletti
denied the request for the entire license, but sent over a page excerpted from the Guidant License
that confirmed that any pass-through royalties payable to Plaintiffs from Guidant through
Defendant would be paid by Guidant after the execution of the Guidant License, and any royalties
from sales prior to the Guidant License would be waived. (FAC, Ex. C). Plaintiffs assert that they
relied on this communication and did not attempt to access the full and complete Guidant License,
7
or pursue payments or royalties from pre-February 2004 sales. Plaintiffs believe that royalties
from these sales would have totaled at least $25 million dollars (FAC
¶ 30-31).
In 2012, Plaintiffs asked Defendant for a copy of the Guidant License, which Defendant
declined to provide, due to “confidentiality concerns.” (FAC, ¶ 54-55). Defendant only gave
Plaintiffs an excerpt of the Guidant License. However, in 2013, Plaintiffs reviewed a copy of the
Guidant License, which had been filed with the SEC, for the first time. (FAC, ¶ 56). The provision
of the Guidant License regarding pass-through royalties, Section 2(d) reads as follows:
A New Section 2.9A is added as follows: 2.9A Fischell Patents. CORDIS hereby grants to
GUIDANT an irrevocable, non-exclusive, worldwide right and license (without the right
to sublicense) to make, have made, use or sell, or otherwise dispose of Licensed Products
under the Fischell Patents in all fields, and to practice processes and methods under the
Fischell Patents in all fields. The license granted pursuant to this Section 2.9A shall be
paid-up as to J&J. Any pass-through royalties payable with respect to Net Sales by
GUIDANT of Licensed Products, including future Licensed Products (i) after the date of
execution of this Agreement shall be payable by GUIDANT and (ii) prior to the date of
execution of this Agreement shall be waived and, zfpayable, paid by CORDIS. (CORDIS
represents that, unless noted on Schedule 1L, the pass-through royalty rate is [***].
Payments under this Section 2.9A shall be made by GUIDANT to CORDIS, which shall
then forward such payments as part of its contractual obligations.
(FAC, Ex. F) (italicizes added).
After reviewing the Guidant License, Plaintiffs claim that
Defendant had misrepresented the terms of the royalty agreement, which Plaintiffs claim cost them
at least $25 million. (FAC,
¶ 57-60).
Both alone and together, these two situations form the basis of Plaintiffs’ claims in this
suit.
Plaintiffs’ Claims in this Suit
Plaintiff’s commenced this action as a result of Defendant’s alleged: (I) failure to pay
royalties for pre-February 2004 sales of patent-bearing stents; (2) misrepresentation of the terms
of the Guidant License; and (3) failure to compel Abbott to pay royalties for their use, manufacture,
8
and sale of stent products in violation of the 1999 Agreement and Guidant License. Plaintiffs seek
damages of at least $65 million, and punitive damages.
Defendants contend that Plaintiffs Complaint fails to state a claim and seek dismissal of
same.
Motion to Dismiss pursuant to I 2(b)(6)
On a motion to dismiss for failure to state a claim pursuant to Fed. R. Civ. P. 1 2(b)(6), the
Court is required to accept as true all allegations in the Complaint and all reasonable inferences
that can be drawn therefrom, and to view them in the light most favorable to the non-moving party.
See Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384 (3d Cir. 1994). “To survive
a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true. to state
a claim to relief that is plausible on its face.” Ashcroft v. Jqbal, 556 U.S. 662, 678 (2009) (quoting
Bell Ati. Corp.
V.
Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007)). While
a court will accept well-pleaded allegations as true for the purposes of the motion, it will not accept
bald assertions, unsupported conclusions, unwarranted inferences, or sweeping legal conclusions
cast in the form of factual allegations. Iqbal, 556 U.S. at 678-79; see also Morse v. Lower Merion
School District, 132 F.3d 902, 906 (3d Cir. 1997). The pertinent question is whether the claimant
can prove any set of facts consistent with his or her allegations that will entitle him or her to relief,
not whether that person will ultimately prevail. Semerenko
V.
Cendant Corp.. 223 F.3d 165. 1 73
(3d Cir.), cert. denied, Forbes v. Semerenko, 531 U.S. 1149, 121 S. Ct. 1091 (2001). “The pleader
is required to ‘set forth sufficient information to outline the elements of his claim or to permit
inferences to be drawn that these elements exist.” Kost v. Kozakewicz, 1 F.3d 176, 183 (3d Cir.
1993) (quoting 5A Wright & Miller, Fed. Practice & Procedure: Civil 2d
§ 1357 at 340). A
complaint should be dismissed only if the well-pleaded alleged facts, taken as true, fail to state a
9
claim. See In re Waifarin Sodium. 214 F.3d 395, 397-98 (3d Cir. 2000). While a complaint
attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a
plaintiff’s obligation to provide the ‘grounds of his entitle[mentl to relief requires more than
labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do,
Factual allegations must be enough 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)
Twombly, 550 U.S. at 555, 127 S. Ct. at 1964-65 (internal citations and quotations omitted).
Count I
—
Breach of Contract
Plaintiffs contend that Defendant breached its contract, the June 1999 Agreement and 2001
Agreement, when it: (1) failed to pay or compel the payment of royalties to Plaintiffs for the foreign
sales of Abbott’s stent products that used Plaintiffs’ patents; (2) failed to pay or compel the
payment of royalties to Plaintiffs for Abbott’s U.S. sales of specific stents that use Plaintiffs’
patents; (3) failed to pay or compel the payment of royalties to Plaintiffs for Abbott’s sales to BSC
and other companies; and (4) failed to deliver a written report to Plaintiffs detailing the amount of
royalties owed to Plaintiffs based on sales of royalty-bearing patents. (FAC,
¶ 64-66).
Defendants
assert that there was no breach of the 1999 Agreement because Defendant had complete discretion
over whether to take action against a third-party for possible infringement, and that Plaintiffs do
not adequately detail which sections of the contract were breached.
In New Jersey, there are four elements to a breach of contract claim that the pleader must
demonstrate: (1) a contract; (2) a breach of that contract; (3) damages resulting from that breach;
and (4) that the party performed its own contractual duties. Video Pipeline v. Buena Vista Home
Entertainment, Inc., 210 F. Supp. 2d 552, 561 (D.N.J. 2002) (internal citations omitted).
10
In reviewing the First Amended Complaint, the Court finds that Plaintiffs have stated a
plausible claim for breach of contract. Plaintiffs assert the existence of a contract by alleging that.
jijn June 1999, the Fischells entered into a patent royalty agreement with Cordis regarding certain
of the Fischells’ medical device patents.” (FAC
¶ 4). According to this contract, Defendant
promised “to pay the Fischells royalties for products made, sold, or sub-licensed by Cordis that
incorporated the Fischells’ patents and other intellectual property, among other promises.” (Id.).
Plaintiffs allege further that Defendant was obligated to “keep complete and accurate records of
sales with respect to which a royalty is payable according to this Agreement.” (FAQ
¶ 19).
Therefore, Plaintiffs have adequately alleged that a contract existed, and the provisions of which
Defendant breached.
Plaintiffs have also adequately alleged breach of the 1999 Agreement.
Specifically,
Plaintiffs assert Defendant breached the agreement when Defendant’s sub-licensee halted royalty
payments to Plaintiffs, and Defendant did little to compel the sub-licensee to pay the royalties.
(FAC
¶ 6). Moreover, Plaintiffs aver that, “[i]n addition to failing to pay or compel payment of
royalties.. .Cordis has failed to provide the Fischells with written reports setting forth the amount
of royalties accrued and payable based on sales of royalty-bearing stents, as required by the June
1 999 Agreement.” (FAQ
¶
52).
As such, Plaintiffs have adequately alleged that Defendant
breached the 1999 Agreement.
Lastly, Plaintiffs assert that damages have resulted from Defendant’s breach of contract by
alleging that, “Cordis’s failure to compel Abbott to pay royalties, or to itself pay the royalties owed
to Plaintiffs, has so far deprived Plaintiffs of in excess of $20 million due to them for that one
royalty stream alone.” (FAC
¶ 6). Plaintiffs allege further that royalty payments from “Guidant’s
11
pre-February 2004 sales of royalty-bearing stents would have totaled not less than S25 million.”
(FAC
¶ 31).
Accordingly, Plaintiffs have alleged that a contract exists between the parties, Defendants
breached that contract, and damages result from that breach. Therefore, Plaintiffs have set forth a
plausible claim for breach of contract, and Defendant’s Motion to Dismiss Count I is DENIED.
Count II
—
Breach of Implied Covenant of Good Faith and Fair Dealing
Plaintiffs allege that Defendant breached the implied covenant of good faith and fair
dealing by “actively concealing the fact that it deprived Plaintiffs of pre-2004 patent royalties for
stent products manufactured by Guidant in order to gain access to Guidant’s rapid-exchange
balloon catheter technology.” (FAC
¶ 76). Plaintiffs also assert that Defendant acted in bad faith
when it failed to pay or “compel Abbott to pay royalties for its sales of stents
BSC and others
—
—
including sales to
that practice at least one claim of the ‘856 patent and other patents assigned to
Cordis, despite the validity of those patents and Plaintiffs’ repeated requests that Cordis do so.”
Id. Defendant counter Plaintiffs have not sufficiently plead that defendant acted with an improper
motive. Defendant further maintains that “[t]rue or false, a motive of increased sales is not one
intended to intentionally injure the Fischells or destroy their expectations.” (ECF No. 41-1 at 17).
Defendant also asserts that Plaintiffs failed to allege that any of Defendant’s actions were “outside
the range of risks” the Fischells assumed under the 1999 Agreement. (ECF No. 41-1 at 17).
Under New Jersey law, “a covenant of good faith and fair dealing is implied in every
contract.” Sons of Thunder, Inc. v. Borden. Inc., 148 N.J. 396, 420 (1997). “A plaintiff may be
entitled to relief in an action under the covenant [of good faith and fair dealingj if the defendant
acts with ill motives and without any legitimate purpose to destroy the plaintiffs reasonable
expectations. However, bad motive or intention is essential, and an allegation of bad faith or unfair
12
dealing should not be permitted to be advanced in the abstract and absent improper motive.”
Ilassler v. Sovereign Bank, 644 F.Supp.2d 509, 518 (D.N.J. 2009) (quoting Elliot & Frantz, Inc.
v. Ingersoll-Rand Co., 457 F.3d 312, 329 (3d Cir. 2006)).
In reviewing the allegations of the Complaint, the Court finds that Plaintiffs have
sufficiently pled the claim of breach of the implied covenant of good faith and fair dealing. At the
pleading stage, allegations of bad faith are sufficient to withstand the motion to dismiss. See Alin
v. American Honda Motor Co., 2010 WL 1372308, *11 (D.N.J. Mar. 31, 2010); see also
Seidenberg v. Summit Bank, 348 N.J.Super. 243, 791 A.2d. 1068 (App. Div. 2002).
Here,
Plaintiffs’ allegations are not in the abstract, but instead Plaintiffs have sufficiently alleged that
Defendant acted in bad faith when it failed to compel certain royalty payments from third parties.
The Court is unpersuaded by Defendant’s argument that any action taken by Defendant was within
the risk of the contract, as this is a fact question that is not ripe for determination at the pleading
stage. Because Plaintiffs have adequately alleged bad faith, they have stated a plausible claim for
breach of the covenant of good faith and fair dealing. As such, Defendant’s motion to dismiss this
Count is denied.
Count III
—
Breach of Fiduciary Duty
Defendant asserts that there were no fiduciary obligations between the parties because the
transaction was an ordinary arms-length commercial transaction. Defendant also contends that
Plaintiffs’ claim for breach of fiduciary duty is barred by the economic loss doctrine. The essence
of a fiduciary relationship is that one party places trust and confidence in another who is in a
dominant or superior position.
F.G. v. MacDonell, 150 N.J. 550, 563 (1997).
A fiduciary
relationship arises between two persons when one person is under a duty to act for or give advice
for the benefit of another on matters within the scope of their relationship. Restatement (Second)
13
of Tons
§ 874 cmt. a (1979); see In re Strotning’s Will. 12 N.J.
Super. 217. 224 (App. Div.), certif
denied, 8 N.J. 319 (1951) (stating essentials of confidential relationship “are a reposed confidence
and the dominant and controlling position of the beneficiary of the transaction”). However, there
is typically no fiduciary relationship present in an arms-length commercial transaction or sale. See
Estate ofMaglione v. Gulf Oil Coip., 2007 WL 527940 at *5 (App. Div. 2008) (finding no duty
to disclose existed because the sale was an arms-length commercial transaction and no fiduciary
relationship existed); see also Skelcy v. UnitedHealth Group, Inc., 2012 WL 6087492 at *8 (D.N.J.
Dec. 6, 2012) (finding that the parties “were in the position of regular contracting parties; no
fiduciary relationship existed.”).
Plaintiffs argue that the parties were in a fiduciary relationship because, pursuant to the
1999 and 2001 Agreements, “Plaintiffs gave Cordis the exclusive right to own, use, and control
certain of Plaintiffs’ patents in exchange for Cordis’s promise to pay royalties on the Net Sales of
all royalty-bearing stents made, sold, or licensed by Cordis, among other promises.” (FAC
¶ 81).
Additionally, Plaintiffs assert that “[b]y virtue of Cordis’s unfettered discretion to license
Plaintiffs’ patents, Cordis assumed fiduciary duties to Plaintiffs.” (FAC
¶ 83). Finally, Plaintiffs
state that “Cordis has acted intentionally, willfully, maliciously, and in bad faith, including by
actively concealing evidence of its self-dealing at Plaintiffs’ expense.” (FAC
¶ 86).
Here, the Court finds that, in reviewing the Complaint as a whole, there is nothing to
indicate there was a fiduciary relationship between the parties. There are no facts in the Complaint
showing that the parties had unequal bargaining power, or that Defendant was in a dominant
position over Plaintiffs.
business people.
Instead, the Complaint indicates that both parties are sophisticated
Indeed, Plaintiffs describe themselves as “leading innovators in the stent
technology field” and “named on greater than forty U.S. patents for coronary stents and stent
14
delivery systems alone.” (FAC
¶ 14). Accordingly, in reviewing the Complaint, the Court finds
that the relationship of the parties is that of an arms-length commercial transaction, not a fiduciary.
Therefore, Defendant’s Motion to Dismiss this Count III is granted, and the breach of fiduciary
duty claim is dismissed.
Count IV
—
Fraud and Fraudulent Concealment (Inducement”)
Defendants contend that Plaintiffs’ claim for fraud: (1) is not pleaded with the required
particularity under Fed. R. Civ. P. 9(b); (2) that the alleged misrepresentations would not have
been material; (3) that the Plaintiffs did not sufficiently argue that they relied on the alleged
misrepresentations; (4) and that the fraud claim is barred by the economic loss doctrine because it
arises from the contract between the parties.
In order to state a claim for common law fraud in New Jersey, a plaintiff must allege “(1)
a material misrepresentation of a presently existing or past fact; (2) knowledge or belief by the
defendant of its falsity; (3) an intention that the other person rely on it; (4) reasonable reliance
thereon by the other person; and (5) resulting damages. Gennari v. Weichert Co. Realtors, 148 N.J.
582, 610, 691 A.2d 350 (N.J. 1997) (citingJewish Ctr. ofSussex Cnty. v. Whale, 86 N.J. 619. 62425, 432 A.2d 521 (N.J. 1981)). An allegation of fraud is subject to heightened pleading standards.
Pursuant to Fed. R. Civ. P. 9(b), “in alleging fraud or mistake, a party must state with particularity
the circumstances constituting the fraud or mistake.” A complaint can satisfy Rule 9(b) if it
“describes the circumstances of the alleged fraud with precise allegations of date, time or place.”
Naporano Iron & Metal Co. v. Am. Crane Corp., 79 F. Supp. 2d 494, 511 (D.N.J. 1999) (internal
citations omitted). Generally “to satisfy this heightened standard, the plaintiff must plead or allege
the date, time, and place of the alleged fraud or otherwise inject precision or some measure of
15
substantiation into a fraud allegation” (Frederico v. Home Depot, 507 F.3d 1 88, 200 (3d. Cir.
2007) (internal citations omitted).
However, “[t]he economic loss doctrine prohibits plaintiffs from recovering in tort
economic losses to which their entitlement only flows from contract.” Chen v. HD Dimension,
Corp. 2010 WL 4721514 at *8 (D.N.J. Nov. 15, 2010). Essentially, the economic loss doctrine
functions to eliminate recovery on “a contract claim in tort claim clothing.” SRC Constr. Coip. v.
Ati. City Hoits. Auth., 935 F.Supp.2d 796, 801 (D.N.J. 2013). Therefore, “if through its tort claim,
a plaintiff simply seeks to enhance the benefit of the bargain [it] contracted for, (quoting the
economic loss doctrine applies. If, however, a plaintiff asserts that a defendant breached a duty
owed to the plaintiff that is independent of the duties that arose under the contract the economic
loss doctrine does not apply.”
G&F Graphic Services, Inc. v. Graphic Innovators, Inc., 18
F.Supp.3d 583, 588-89 (D.N.J. 2014) (citing Saltiel v. GSI Consultants, Inc., 170 N.J. 297, 310317 (2002)). Defendants contend that Plaintiff’s fraud claims are seeking to redress contract
claims under a tort theory, and therefore are barred under the economic loss doctrine.
However, a well-settled exception to the economic loss doctrine is fraud in the inducement
of a contract. “The distinction between fraud in the inducement and fraud in the performance of a
contract remains relevant to the application of the economic loss doctrine in New Jersey.” Bracco
Diagnostics, Inc. v. Bergen Brunswig Drug Co., 225 F.Supp.2d 557, 563 (D.N.J. 2002). The
distinction lies “between a misrepresentation of a statement of intent at the time of contracting,
which then induces detrimental reliance on the part of the promisee, and the subsequent failure of
the promisor to do what he has promised.” (Id.) (internal citation omitted). Therefore, New Jersey
case law has “permitted a fraud claim to proceed with a breach of contract claim generally appear
to have involved a fraud in the inducement of a contract or an analogous situation based on pre
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contractual misrepresentations.”
Id. (internal citation omitted).
The threshold question is
regarding the economic loss doctrine’s applicability to fraud and contract claims plead together “is
whether the allegedly tortious conduct is extraneous to the contract.” Id. at 564 (internal citation
omitted).
Here, Plaintiffs assert that Defendant materially misrepresented that Defendant and
Guidant had agreed that Defendant would be responsible for paying royalties to Plaintiffs for sales
before February, 2004. (FAC,
¶ 92). Furthermore, Plaintiffs contend that Defendant and its
representative, Coletti, continuously misled Plaintiffs in refusing to provide Plaintiffs with a full
copy of the Guidant License with the terms of the royalty agreement between Defendant and
Guidant. and that Plaintiffs relied on Defendant’s misrepresentations.
(FAC,
¶ 89-102).
Specifically, Plaintiffs state that from January 24 to January 28, Defendant informed Plaintiffs of
the Guidant License, but misrepresented which party would be responsible for paying the passthrough royalties to Plaintiffs. (FAC,
¶ 91-93). Plaintiffs also allege that on February 22, 2004,
Coletti sent Plaintiffs an agreement that misrepresented the status of the pass-through royalties.
(FAC
¶ 29). Plaintiffs attest that in relying on Defendant’s representations about the pre-February
2004 royalties, “Plaintiffs made no further attempts to acquire a complete copy of the Guidant
License from Cordis or to pursue royalties from Cordis or Guidant for Guidant’s pre-February
2004 sales of royalty-bearing stents.” (FAC
¶ 30).
Here, Plaintiffs assert that Defendant materially misrepresented that Defendant and
Guidant had agreed that Defendant would be responsible for paying royalties to Plaintiffs for sales
before February, 2004. (FAC,
¶ 92). Furthermore, Plaintiffs contend that Defendant and its
representative, Coletti, continuously misled Plaintiffs in refusing to provide Plaintiffs with a full
copy of the Guidant License with the terms of the royalty agreement between Defendant and
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Guidant, and that Plaintiffs relied on Defendant’s misrepresentations.
(FAC,
¶
89-102).
Specifically, Plaintiffs state that from January 24 to January 28, Defendant informed Plaintiffs of
the Guidant License, but misrepresented which party would be responsible for paying the passthrough royalties to Plaintiffs. (FAC,
¶ 91-93).
Plaintiffs also allege that on February 22, 2004,
Coletti sent Plaintiffs an agreement that misrepresented the status of the pass-through royalties.
(FAC ¶ 29). Plaintiffs attest that in relying on Defendant’s representations about the pre-February
2004 royalties, “Plaintiffs made no further attempts to acquire a complete copy of the Guidant
License from Cordis or to pursue royalties from Cordis or Guidant for Guidant’s pre-February
2004 sales of royalty-bearing stents.” (FAC
¶ 30).
Moreover, Plaintiffs have also alleged a claim for “fraudulent concealment” (as alleged in
the Complaint), but also refer to this claim as one for “fraudulent inducement” in their opposition
papers. As with Plaintiffs’ common law fraud claim, Defendants contend that it fails to meet
heightened pleading and is barred by the economic loss doctrine.
“In order to establish a claim for fraudulent inducement under New Jersey law, the
following elements must be proven: (1) a material representation of a presently existing or past
fact; (2) made with no knowledge of its falsity; and (3) with the intention that the other party rely
thereon; (4) resulting in reliance by that party; (5) to his detriment.” RNC Sys., Inc. v. Modern
Tech. Gip., Inc., 861 F. Supp. 2d 436, 451 (D.N.J. 2012) (internal citations omitted). “Fraud
requires clear and convincing proof.” McConkey v. AON Corp., 354 N.J. Super. 25, 45-46 (App.
Div. 2002). However, “a plaintiff may be permitted to proceed with tort claims sounding fraud in
the inducement so long as the underlying allegations involve misrepresentations unrelated to the
performance of the contract, but rather precede the actual commencement of the agreement.” Chen
v. HD Dimension, Corp. 2010 WL 4721514 at *8 (D.N.J. Nov. 15, 2010).
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Here, the Court finds that the alleged fraud occurred after the contract between Plaintiffs
and Defendant was entered. Thus, the economic loss doctrine prohibits the claim.
The
Defendant’s motion to dismiss this Count is granted. The Court notes, but makes no ruling, that
some of these facts may concern a breach of duty of good faith and fair dealing. The Plaintiff may
amend the Complaint
Count V
—
Unjust Enrichment
Plaintiffs also request that they be allowed to plead unjust enrichment in the alternative to
their cause of action for the breach of contract claim. “The doctrine of unjust enrichment rests on
the equitable principle that a person shall not be allowed to enrich himself unjustly at the expense
of another.” Goldsmith v. Camden Cnty. Surrogatec Office, 408 N.J. Super. 376, 382 (App. Div.
2009). ‘A cause of action for unjust enrichment requires proof that ‘defendant{s] received a benefit
and that retention of that benefit without payment would be unjust.” Id. at 382.
Moreover,
“[u]njust enrichment is not an independent theory of liability, but is the basis for a claim of quasicontractual liability.” Id. at 382. However, “A quasi-contract claim cannot exist when there is an
enforceable agreement between parties.” MK Strategies, LLC v. Ann Taylor Stores Corp., 567
F.Supp.2d 729, 733-34 (D.N.J. 2008) (citing Callano v. Oakwood Park Homes Coip., 91 N.J.
Super. 105 (App. Div. 1966)).
Here, the parties do not dispute that the contract in question was a valid agreement, and
Defendant argues that because there was a valid and enforceable contract, a separate claim for
unjust enrichment should not be allowed. (ECF No. 41). However, at the pleading stage it would
be unnecessary to dismiss a claim that might be pled in the alternative. See Pa/men v. LG
Electronics USA, Inc. 2008 WL 294585 (D.N.J. July 30, 2008) (declined to dismiss claim of unjust
enrichment under New Jersey law where plaintiff pled in the alternative to recover on a contract);
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see also, CDK Global, LLC. v. TulleyAutornotive Grp., Inc., 2016 WL 1718100 at *7 (D.N.J. April
29, 2016) (“[Alt the pleading stage, dismissal of an unjust enrichment claim because it might turn
out to be superfluous would be premature”). Thus, the Court will allow the claim for unjust
enrichment to proceed, since it is just the pleading stage. The motion to dismiss is denied on this
count.
ORDER
For the reasons set forth above,
IT IS on this 26th day of September, 2016;
ORDERED that Defendant’s motion to dismiss is denied on Counts 1, II, and V; and it is
further
ORI)ERED that Defendant’s motion to dismiss is granted on Count III and Count IV.
LAI%1
J1
1 VLAAt”4Y1.r.
PETER G. SHERIDAN, U.S.D.J.
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