Hilsen v. American Sleep Alliance et al
Filing
55
MEMORANDUM DECISION AND ORDER - denying 28 Motion for Judgment on the Pleadings Signed by Magistrate Judge Dustin B. Pead on 7/19/2016. (las)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH, CENTRAL DIVISION
KENNETH L. HILSEN,
Plaintiff,
MEMORANDUM DECISION
v.
Case No. 2:15-cv-00714-DBP
AMERICAN SLEEP ALLIANCE, LLC, et
al.
Magistrate Judge Dustin B. Pead
Defendants.
BACKGROUND
The parties consented to this Court’s jurisdiction under 28 U.S.C. § 636(c). (ECF No. 24.)
Plaintiff Kenneth L. Hilsen (“Plaintiff”) alleges that Defendants, various LLCs, trusts, and
individuals 1 (“Defendants”) wronged Plaintiff by not properly paying him royalties for a device
Plaintiff created and later sold to Defendant American Sleep Association (“ASA”). Plaintiff seeks
declaratory relief as well as damages for breach of contract, breach of the implied covenant of
good faith and fair dealing, intentional interference with economic relations, fraudulent transfer,
misappropriation (of name and reputation), unjust enrichment, misrepresentation (intentional and
negligent), and civil conspiracy. ASA brings several counterclaims alleging that Plaintiff, not
ASA, breached the contract. ASA also alleges Plaintiff committed fraud, and was unjustly
enriched. (ECF No. 20.) Presently before the court is Plaintiff’s motion for judgment on the
1
Defendants are: American Sleep Alliance, LLC, d.b.a. American Sleep Association, LLC; Cure
My Snore, LLC, d.b.a. American Sleep Union, LLC; Ryan N. Gregerson; Jason S. Ashworth;
Rocky Burgess; the Ryan N. Gregerson Domestic Asset Protection Trust dated January 29, 2015;
the Jason S. Ashworth Domestic Asset Protection Trust dated January 29, 2015; and John Does.
pleadings. (ECF No. 28.) For the reasons set forth on the record during oral argument and as
further discussed below, the court DENIES Plaintiff’s motion.
DISCUSSION
Defendant (and Counterclaimant) ASA filed its answer and counterclaim on October 29,
2015. In its counterclaims, ASA alleges that Plaintiff committed fraud because he represented
that his Hilsen Oral Appliance could be used to treat sleep apnea, but the U.S. Food and Drug
Administration (“FDA”) had not authorized the use of the device to treat sleep apnea. (ECF No.
20.) ASA alleges that Plaintiff’s device could not be used to treat sleep apnea and that Plaintiff
never delivered certain documents as required by the parties’ agreement. (Id.) Finally, ASA
alleges that Plaintiff was unjustly enriched because the payments made to him were predicated
on a belief that the Hilsen Oral Appliance could be used to treat sleep apnea. (Id.)
Plaintiff argues that the counterclaims are barred by the applicable statutes of limitations.
(ECF No. 28 at 11–13.) Plaintiff argues alternatively that ASA’s fraud claim is precluded because
ASA could not have reasonably relied on Plaintiff’s alleged representations because the alleged
statements conflict with the parties’ written agreement. (Id. at 9–11.) Finally, Plaintiff argues the
quantum meruit claim is barred because the parties entered a written agreement. (Id. at 11–14.)
These arguments will be addressed in turn.
I.
Analysis
“A motion for judgment on the pleadings under Rule 12(c) is treated as a motion to
dismiss under Rule 12(b)(6).” Atl. Richfield Co. v. Farm Credit Bank of Wichita, 226 F.3d 1138,
1160 (10th Cir. 2000). The court must “accept the well-pleaded allegations of the [counterclaim]
as true and construe them in the light most favorable to the non-moving party.” Id. A claimant
must “state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007)).
Page 2 of 11
a. Statutes of limitations
Plaintiff argues that each of ASA’s counterclaims is barred by the applicable statutes of
limitations, but Plaintiff has not established that he is entitled to judgment in his favor based on
the pleadings alone.
1. The pleadings do not show that the fraud claims are untimely
In Utah, the statute of limitations for fraud is three years, but the “the cause of action
does not accrue until the discovery by the aggrieved party of the facts constituting the fraud . . .
.” Utah Code Ann. § 78B-2-305(3). “[T]he three-year statute of limitations for fraud ‘begins to
run from the time the person entitled to the property knows, or by reasonable diligence and
inquiry should know, the relevant facts’ of the fraud perpetrated against him.” Baldwin v. Burton,
850 P.2d 1188, 1196 (Utah 1993) (footnote omitted). Of course, “it is not necessary for a
claimant to know every fact about his fraud claim before the statute begins to run.” Id. at 1197.
ASA alleges that Plaintiff fraudulently represented that his Hilsen Oral Appliance could
be used to treat sleep apnea and that ASA did not have notice of the fraud until it received a letter
from the FDA in December 2012. Thus, ASA concludes, the October 2015 counterclaim is
timely. (ECF No. 20 at 15.) Plaintiff argues that the Sales Agreement between the parties
provided notice to ASA that the Hilsen Oral Appliance could not be used to treat sleep apnea.
Plaintiff asserts ASA received further notice from the “plain language of the 510(k)” 2 and a
certain email (ECF No. 28 at 12.) Plaintiff’s arguments will be addressed in turn.
2
The reference to 510(k) application appears to refer to a process by which a medical device
maker can market certain devices regulated by the FDA if those devices are the “substantial
equivalent” of a legally marketed device that existed before the Medical Device Amendments of
1976. See, e.g., Creech v. Stryker Corp., No. 2:07CV22 DAK, 2012 WL 33360, at *2 (D. Utah
Jan. 6, 2012).
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First, the Sales Agreement actually appears to support, rather than undermine, ASA’s
claim. As ASA suggests, the Sales Agreement contains a reference to a “Snoring and Sleep
Apnea Device Patent.” (ECF No. 30 at 5 (citing ECF No. 20, Ex. 1) (emphasis added).)
Interpreting the facts in the light most favorable to ASA, the Sales Agreement indicates that the
Hilsen Oral Appliance 3 was represented as a device that could be used to treat sleep apnea. Thus,
the Sales Agreement did not put ASA on notice of the alleged fraud.
Second, ASA’s counterclaim contains no indication that ASA received the 510(k) that
Plaintiff now alleges provided ASA with notice of the alleged fraud. In fact, the counterclaim
alleges the opposite. ASA alleges that Plaintiff failed to deliver the 510(k). (ECF No. 20 at 14–
15.) Also, the 510(k) itself is not part of the counterclaim pleadings and thus not part of the
record for purposes of this motion. See Atl. Richfield Co. v. Farm Credit Bank of Wichita, 226
F.3d 1138, 1160 (10th Cir. 2000); Miller v. Glanz, 948 F.2d 1562, 1565 (10th Cir. 1991). Thus,
the pleadings alone do not indicate that ASA was on notice, or even received the 510(k). 4
Third, the email Plaintiff references is also not part of the record that may be considered
on a motion for judgment on the pleadings. See 948 F.2d at 1565. Thus, the court will not
consider it here. Accordingly, the court must accept as true ASA’s claim that it did not have
notice of the fraud until December 2012 for purposes of the present motion.
2. Plaintiff has not shown that the breach of contract claim is untimely
Plaintiff asserts that the four-year statute of limitations applicable to a contract for the
sale of goods, found in Article Two of Utah’s Uniform Commercial Code, applies to the parties’
3
The parties clarified that the term “Hilsen Oral Appliance” refers to a device described in the
510(k) for a “Snoring Control Device,” and patent for a “Snoring and Sleep Apnea Device,”
contemplated by the parties’ Sales Agreement. (See ECF No. 20, Ex. 1; ECF No. 47.)
4
For this reason, the court cannot conclude that Paragraph fifteen of the agreement precludes
ASA’s claim. If delivery was not made, the ten-day period never began. (See ECF No. 20, Ex. 1.)
Page 4 of 11
Sales Agreement. See Utah Code Ann. § 70A-2-725(1). During oral argument, Defendants
challenged application of the four-year statute of limitations. Plaintiff objected that he had
insufficient notice of this argument prior to the hearing. To ameliorate the surprise to Plaintiff,
the court ordered supplemental briefing, which the parties submitted. (See ECF Nos. 47, 50, 54.)
As Defendants point out, Article Two applies only to contracts for the sale of goods.
(ECF No. 50); Utah Code Ann. § 70A-2-102. Goods are defined as “all things (including
specially manufactured goods) which are movable at the time of identification to the contract for
sale . . . .” Utah Code Ann. § 70A-2-105(1). Several federal courts interpreting the Uniform
Commercial Code (“UCC”) have found that a patent is not a good under Article 2 of the UCC.
E.g., Snyder v. ISC Alloys, Ltd., 772 F. Supp. 244, 247 (W.D. Pa. 1991); U.S. Test, Inc. v. NDE
Environmental Corp., 196 F.2d 1376 (Fed. Cir. 1999). Similarly, the Tenth Circuit has found that
a license to use a trademark is not a good under Oklahoma’s UCC. See Eureka Water Co. v.
Nestle Waters N. Am., Inc., 690 F.3d 1139, 1147 (10th Cir. 2012). Plaintiff does not cite any case
in which a patent, interest in a 510(k), or other license has been found to be a good under the
UCC. Accordingly, the court concludes that the patent and 510(k) interest are not goods as
defined by the Utah UCC. Accordingly, Plaintiff has not shown that the statute of limitations
provided in Article Two of the UCC applies to this action. Accordingly, the court applies Utah’s
six-year statute of limitations for written contracts. See Utah Code Ann. § 78B-2-309(2).
Plaintiff proposes several dates upon which the statute of limitations began to run, but the
earliest possible date appears to be January 1, 2010, when Plaintiff was required to deliver the
“Goods” pursuant to the Sales Agreement. 5 Even assuming the statute began to run on this date,
5
This date may be too early. While the Sales Agreement requires delivery of the “Goods” by
January 1, 2010, the agreement was not even fully executed until February 9, 2010. ASA
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the court does not find that the statute of limitations has expired because ASA filed its
counterclaim on October 29, 2015; fewer than six years from the date Plaintiff alleges
performance was due. (See ECF No. 28.)
Plaintiff makes several counterarguments in his supplemental briefing, but the court does
not find them persuasive. First, Plaintiff argues that certain language in the parties’ agreement
demonstrates that the UCC applies to the agreement. (ECF No. 54.) Thus, Plaintiff concludes,
Article Two’s four-year statute of limitations applies. Yet, Plaintiff offers no authority to suggest
that private parties can alter the scope of Utah’s UCC by agreement. Plaintiff invokes the statute
of limitations in the UCC, but as stated previously that provision only applies to contracts for the
sale of goods. The term “goods” is defined by the UCC and, as already mentioned, patent and
license interests are not included in that definition. Thus, notwithstanding any agreement
between the parties here, the UCC by its terms does not apply to the Sales Agreement because
the Sales Agreement does not involve the sale of goods as defined by the UCC.
Nonetheless, Plaintiff points out that the parties can agree to alter the limitations period.
The court agrees with this general principle. See Deer Crest Assoc. I, LC v. Silver Creek Dev.
Group, LLC, 222 P.3d 1184, 1187–88 (“Utah courts follow the general principle that parties may
contractually limit the time in which to bring an action in contract to a period shorter than that of
the applicable statute of limitations, so long as the limitation is reasonable.”) Notwithstanding
this general principle, the Sales Agreement does not explicitly address any limitations period.
Here, the Sales Agreement states that Utah, law, including its UCC, applies to the
agreement. It further provides, “[e]xcept where otherwise stated in this Agreement, all terms
employed in this Agreement will have the same definition as set forth in” Utah’s UCC. (ECF No.
suggests that the limitations period will not begin to run until Plaintiff delivers the 510(k)
required by the parties’ agreement. (See ECF No. 30.)
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20, Ex. 1.) As Plaintiff points out, the parties used a number of terms defined in the UCC. (Id.)
The court can easily conclude that the parties agreed to interpret terms in the Sales Agreement in
lockstep with the UCC. The intent to use the Utah UCC’s definitions is explicit in the Sales
Agreement. Yet, the court cannot conclude at this stage of the case that the parties also intended
to apply the statute of limitations in Article Two. It is plausible that the parties intended to apply
the UCC’s definitions to interpret the Sales Agreement, but did not intend to apply the UCC’s
shorter statute of limitations. The Sales Agreement does not explicitly resolve this issue.
The Sales Agreement does not mention a limitations period. Instead, it contradictorily
states that the parties will use terms as defined by the UCC, and then expressly defines the term
“Goods” as items that are not considered goods under the UCC. To apply Article Two’s statute
of limitations as Plaintiff requests, the court would have to go beyond the plain language of the
Sales Agreement and the UCC. Accordingly, Plaintiff seeks an interpretation of the Sales
Agreement that is, at least, premature. The court cannot go beyond the language of the Sales
Agreement in the context of Plaintiff’s motion for judgment on the pleadings, particularly where
the requested interpretation is unfavorable to Defendants. See 226 F.3d at 1160. Thus, the court
does not find, on the limited record before it, that the parties shortened the limitations period.
Next, Plaintiff argues that the Sales Agreement’s “predominant purpose” is the sale of
goods, even if it partially addresses non-goods. (ECF No. 54.) The court disagrees. The Sales
Agreement does not contemplate the sale of even a single tangible good. Instead, it requires ASA
to pay Plaintiff a patent royalty if and when ASA sells a Hilsen Oral Appliance to third parties.
Third, Plaintiff argues that ASA waived any argument regarding application of the sixyear statute of limitations. Plaintiff cites no authority to support this argument. Further, as often
discussed in the Rule 15 context, courts prefer to resolve issues on the grounds of substance
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rather than procedure. See, e.g., Hardin v. Manitowoc-Forsythe Corp., 691 F.2d 449, 456 (10th
Cir. 1982). Occasionally procedure must be rigidly enforced to preserve its value. In that regard,
Defendants are admonished that, going forward, arguments not included in briefing might not be
considered. Nonetheless, the court does not believe it would be appropriate to apply the incorrect
statute of limitations based on Defendants’ procedural misstep.
3. Plaintiff has not shown that the quantum meruit claim is untimely
Under Utah law, the limitations period for a quantum meruit claim is four years. Utah
Code Ann. § 78B-2-307(3); see Bartel v. Hill, 2002 WL 1000177 at *1 (Utah Ct. App. 2002).
While Plaintiff identifies the statute of limitations for quantum meruit claims and asserts that all
of ASA’s claims are time barred, he does not specifically analyze the quantum meruit claim in his
statute-of-limitations argument. Defendant likewise offers little analysis of this issue.
The counterclaim does not provide any payment dates. Yet, Plaintiff’s complaint indicates
that he received payments from ASA as late as February 2013. The counterclaim was filed on
October 29, 2015. Thus, even according to Plaintiff’s facts, he received funds from ASA within
the four years preceding ASA’s counterclaim. The court will not undertake an analysis on behalf
of Plaintiff to determine whether a portion of the claim might be barred. Instead, the court will
deny the motion for judgment on the pleadings on this particular topic because Plaintiff has not
demonstrated that the claim is barred.
b. The Sales Agreement does not preclude ASA’s reasonable reliance as a
matter of law
Plaintiff argues, alternatively, that ASA’s fraud claim should be dismissed because ASA
could not have reasonably relied upon Plaintiff’s oral statements because the Sales Agreement
contained contrary written information. “[U]nder Utah law ‘a party cannot reasonably rely upon
oral statements by the opposing party in light of contrary written information.’” Shelter
Page 8 of 11
Mortgage Corp. v. Castle Mortgage Co., L.C., 117 F. App’x 6, 10 (10th Cir. 2004) (citing Gold
Standard, Inc. v. Getty Oil Co., 915 P.2d 1060, 1068 (Utah 1996)). “While the question of
reasonable reliance is usually a matter within the province of the jury, there are instances where
courts may conclude that, as a matter of law, there was no reasonable reliance.” Armed Forces at
45. In Mikkelson v. Quail Valley Realty, the Utah Supreme court found that a home purchaser
could not reasonably rely on a real estate agent’s representations regarding a home’s square
footage where the correct square footage was listed on an FHA appraisal report. 641 P.2d 124,
126 (Utah 1982).
Unlike Mikkelson however, the Sales Agreement in this case does not contain clear
information that is contrary to ASA’s fraud claim. ASA complains that Plaintiff made
misrepresentations that the “Hilsen Oral Appliance was FDA cleared for both sleep apnea and
snoring . . . .” (ECF No. 20 at 14.) Plaintiff asserts that “there is no mention of sleep apnea with
respect to the 510(k).” (ECF No. 28 at 11.) While this statement is true, it does not carry the day
for Plaintiff. First, the patent interest described in the Sales Agreement explicitly mentions sleep
apnea. The Sales Agreement describes that interest as a“[p]atent interest in the Snoring and Sleep
Apnea Device Patent.” (Id. at Ex. 1.) This bolsters ASA’s claim that Plaintiff represented the
Hilsen Oral Appliance as useful for treating sleep apnea; it does not contradict ASA’s claim.
Also, while it is true that the portion of the Sales Agreement defining the “Goods” further defines
them as an interest in a “510K for Snoring Control Device 510(k),” this clause does not indicate
the device cannot be used to treat sleep apnea. Instead, it is merely silent on the sleep-apnea
issue. When read together with the patent-interest clause, the 510(k) clause cannot be read as
disclaiming the Hilsen Oral Appliance’s ability to treat sleep apnea. Thus, interpreting the Sales
Agreement in the light most favorable to ASA, the agreement suggests that the Hilsen Oral
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Appliance can be used to treat sleep apnea. Accordingly, the court cannot find as a matter of law
that ASA’s reliance was unreasonable.
c. The parties’ written agreement does not preclude the quantum meruit
claim at this stage of the litigation
Plaintiff argues that the quantum meruit claim should be dismissed because the parties
have an enforceable agreement. Defendants do not address this argument in their brief. During
oral argument, counsel for Defendants suggested that dismissal is appropriate only if there is
some certainty that a contract exists. ASA contended that the contract may be founded on the
parties’ mutual mistake, in which case it could be void. (ECF No. 47.)
Authority cited by Plaintiff indicates that dismissing the quantum meruit claims at this
stage would be error. See Northgate Vill. Dev., LC v. Orem City, 325 P.3d 123, 133 (Utah Ct.
App. 2014). The Northgate court noted that dismissing a quantum meruit claim at the pleading
stage was error, but found that the error in that case was harmless. The court remarked that:
At the outset of litigation, whether an enforceable contract exists or whether a
contract covers the parties’ dispute may be unclear. Because a claim should be
dismissed only if “it appears to a certainty that the plaintiff would be entitled to
no relief under any state of facts which could be proved in support of the claim,” a
district court should not dismiss alternative equitable claims if the existence or
applicability of a contract remain in dispute.
Northgate Vill. Dev., LC v. Orem City, 325 P.3d 123, 133 (Utah Ct. App. 2014). Accordingly, at
this stage it is premature to conclude there is an enforceable contract that applies to preclude
ASA’s quantum meruit claim.
Page 10 of 11
ORDER
Based on the foregoing, Plaintiff’s motion for judgment on the pleadings is DENIED.
(ECF No. 28.) The present record does not demonstrate that Plaintiff is entitled to judgment in
his favor on Defendants’ counterclaims.
Dated this 19th day of July 2016.
By the Court:
Dustin B. Pead
United States Magistrate Judge
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