Opinion
Case No. 98-2555-JWL
October, 2000
MEMORANDUM AND ORDER
This matter is before the court on seven motions:
• Defendant LG Technologies renews its motion to quash service of process and to dismiss for lack of personal jurisdiction (Doc. 73)
• Defendant LG Technologies renews its motion to strike the King affidavit (Doc. 95)
• Defendant LG Technologies moves for judgment on the pleadings (Doc. 69)
• Defendant Biotronix 2000, Inc. ("Biotronix 2000") moves for judgment on the pleadings (Doc. 71)
• Defendant LG Technologies Ltee ("LG Technologies") moves for summary judgment (Doc. 75)
• Plaintiffs move for partial summary judgment (Doc. 79)
• Plaintiffs move to strike the affidavits and evidence submitted with defendant LG Technologies' response to plaintiffs' partial summary judgment motion (Doc. 96)
The motions for judgment on the pleadings are granted in part and denied in part. All other motions are denied for the reasons set out below.
• Background
On December 2, 1998, plaintiffs Safety Technologies, L.C. ("Safety Technologies"), Norris Properties, Kenneth Norris and Jacob Norris filed a complaint with this court alleging that defendants L.G. Technologies, Biotronix 2000, and Robert Ewing misrepresented to the plaintiffs that the defendants' products, two needle disposal units called the "NX-2000" and "NX-3000," were certified by the Food and Drug Administration ("FDA") for sale in the United States. Count One of the complaint alleged that, in reasonable reliance upon the defendants' misrepresentations, plaintiff Safety Technologies agreed to purchase thousands of the needle disposal units from defendants Biotronix Laboratories and BioEtec. Plaintiffs alleged that defendants never had FDA certification for the units. In reliance on defendants' misrepresentation, plaintiffs alleged that they entered into loan agreements with Olathe Bank and Mercantile Bank and that the banks later foreclosed on the collateral securing the loans. Counts two through five alleged tortious interference with contract, breach of various warranties and breach of contract, all stemming from the same facts. For each count, the plaintiffs requested that the court award damages against the defendants "individually and/or collectively" in excess of $75,000.
On April 21, 1999, defendants LG Technologies and Biotronix 2000 filed a motion to quash service of process and to dismiss, arguing that this court did not have personal jurisdiction over the case. This court issued an order on July 19, 1999 denying the defendants' motion. The court found that the resolution of the jurisdiction question was inextricably tied to the substantive merits of the case and that a ruling on the jurisdictional question, therefore, was premature. The court noted that the affidavits submitted by the defendants in support of their motions consisted only of conclusory allegations and, therefore, did not sufficiently controvert the jurisdictional allegations made in the complaint.
On July 25, 2000, a final pretrial order was entered by this court following the pretrial conference. The plaintiffs' factual allegations are set out in the pretrial order. The plaintiffs allege that the defendants "individually and/or collectively, and through their agents, representatives, officers and/or counsel, represented to Safety Technologies and/or its members, agents or representatives that the needle incineration devices were FDA Class II devices that could be lawfully sold in the United States" and that defendants "individually and/or collectively, represented that the Needle Safe NX-2000 and NX-3000 units had been previously granted a so-called `FDA 510(k) certification' and approval for use and sale to the public." Plaintiffs allege specifically that:
• "Florida attorney, Greg A. Martin," in a response to a letter from Safety Technologies, stated that "Biotronix held two FDA 510(k) certifications of its units as Stage II medical devices that lawfully may be sold in the U.S."
• Defendants Biotronix 2000 and L.G. Technologies "caused to be disseminated" to plaintiff Safety Technologies a brochure on the units that represented that "FDA device numbers [are] available upon request."
• Defendants never disclosed that "the FDA numbers were rescinded or withdrawn by the FDA prior to October 17, 1996."
Plaintiffs allege that they realized that defendants did not have proper FDA certification when, on November 11, 1997, Biotronix 2000 and L.G. Technologies faxed Safety Technologies copies of two FDA 510(k) certifications for a "STEP-ONE needle disposal system" and "exit surgical instruments" and claimed that the two certifications were the basis for the defendants' claim that they had proper FDA certification.
The plaintiffs allege in the pretrial order that they ceased marketing the units after discovering that they did not have proper FDA certification and that they cooperated with the FDA in a subsequent investigation. The plaintiffs further allege that, as a result of relying on defendants' representations, plaintiffs incurred "substantial expenses for packaging, operations, research and development, product payments and marketing" and that, as a result of bank foreclosures on loans related to the transactions, plaintiffs "owed the sum of $232,092.71" as of April 23, 1999.
• Motion to quash service of process and to dismiss for lack of personal jurisdiction and motion to strike the King affidavit
Defendant LG Technologies renews its motion to quash service of process and to dismiss for lack of personal jurisdiction, and renews its motion to strike the King affidavit. LG Technologies filed its original motion to quash service of process and to dismiss for lack of personal jurisdiction on April 21, 1999. An affidavit of Linda King was attached to the plaintiffs' response. This court issued an order denying the defendant's motion because the resolution of the jurisdiction question required a resolution of the merits of the case and, therefore, was premature. The order noted that the affidavits submitted by the defendant in support of its motion consisted only of conclusory allegations and did not sufficiently controvert the jurisdictional allegations made in the complaint.
In renewing its motion to quash service of process and to dismiss for lack of personal jurisdiction, LG Technologies quotes this court's July 9, 1999 order concluding that the issue "is best reserved until a later phase of the litigation, at which point the Court will have before it a more complete record from which to determine the relevant facts." To justify this new motion, the defendant points out that discovery is complete and that it "has filed the additional Affidavits of Luc St-Georges and Yves Poulette to supplement the original Affidavit of Giles Lauriault."
LG Technologies missed the point of this court's July, 1999 order. The court cited the Tenth Circuit decision in FDIC v. Okalwn Apartments, 959 F.2d 170 (10th Cir. 1992), for the proposition that a pretrial resolution of jurisdictional questions is not appropriate where "the jurisdictional issue is dependent upon a question on the merits." Oklawn Apartments, 959 F.2d at 174. When a case is susceptible to determination on the merits by summary judgment, the jurisdictional issue is subsumed by a ruling on the merits granting summary judgment. That is not the case if the merits must be decided at trial. The Tenth Circuit explained in Schramm v. Oakes, 352 F.2d 143, 149 (10th Cir. 1965), that when the issue of jurisdiction "is dependent upon a decision on the merits," the trial court should "postpon[e] a determination upon a jurisdictional question" until trial to avoid making "a summary decision on the merits without the ordinary incidents of a trial including the right to jury." Id. In the present case, the question of whether the court has personal jurisdiction over LG Technologies requires a determination of whether LG Technologies committed the tort of misrepresentation in the state of Kansas and whether LG Technologies transacted business with Safety Technologies in the state of Kansas. As set out below, the defendants have failed to show that there is an absence of disputed questions of fact on those issues. Following Tenth Circuit precedent, this court will wait until a trial on the merits to determine whether the court has personal jurisdiction over LG Technologies. Defendant's motion to quash service of process and to dismiss for lack of jurisdiction is denied, and defendant's motion to strike the King affidavit is denied as moot.
A ruling on the merits will necessarily determine whether personal jurisdiction is established through these criteria. The court recognizes that personal jurisdiction could also be established by meeting other criteria in K.S.A. 60-308(b).
• Motions for judgment on the pleadings for failure to plead fraud with particularity and for failure to state a claim for which relief can be granted
In separate but identical motions, defendants LG Technologies and Biotronix 2000 move for judgment on the pleadings arguing that the plaintiffs failed to plead fraud with particularity and failed to state a claim for which relief can be granted. Defendants base their motions on the allegations in the plaintiffs' complaint. The plaintiffs' response correctly points out that the pretrial order supersedes the complaint, and the defendants argue in their reply that plaintiffs' factual allegations in the pretrial order were also deficient.
Pursuant to Rule 16(e), a pretrial order "control[s] the subsequent course of the action" and supersedes the pleadings. Fed.R.Civ.Pro. 16(e); Tyler v. City of Manhattan , 118 F.3d 1400, 1403 (10th Cir. 1999). "Issues not included in the pretrial order are not triable unless the order is subsequently modified." Powers v. MJB Acquisition Corp . , 184 F.3d 1147, 1152 (10th Cir. 1999). The focus of the defendants' motions on the failure of the complaint to plead fraud with particularity or to state a claim is, therefore, misguided. The pretrial order sets out the plaintiffs' factual allegations in more detail than the complaint and controls the course of this lawsuit. A number of reasons have been advanced by courts for requiring the parties to plead fraud with particularity under Rule 9(b). Some of the most common reasons include to meet the heightened need for information to enable a defendant to understand the claim and prepare a response, and to deter frivolous claims. Wright Miller, Federal Practice and Procedure: Civil § 1269 at 577-81 (2d ed. 1990). After the parties have completed discovery and a final pretrial order has been entered, none of the rationale for requiring fraud be pled with particularity apply. The defendants have all of the details of the plaintiffs' allegations from depositions, interrogatories, and other discovery. A frivolous claim could have been defeated by an early summary judgment motion or a timely attack on the pleadings. All parties have filed their final list of witnesses and exhibits and the trial is scheduled to begin in a little over a month.
Rule 8(f) provides that "all pleading shall be construed as to do substantial justice." The defendants are in no way prejudiced by a lack of particularity in the complaint. It would be an injustice for this court to dismiss the plaintiffs' action for failure to comply with Rule 9(b) more than two months after the final pretrial order was entered, without, it should be noted, any objections by the defendants concerning the specificity of the plaintiffs' claims, and barely more than one month before the trial is scheduled to begin. The defendants motion regarding Rule 9(b) particularity is without merit.
The defendants argue that Count Two of the complaint, where the plaintiffs plead tortious interference with contract, fails to state a claim for relief. In Dickens v. Snodgrass, Dunlap Co . , 255 Kan. 164, 169 (1994), the Kansas Supreme Court set out the elements necessary to prove tortious interference with a contract:
"(1) the contract; (2) the wrongdoer's knowledge thereof; (3) his intentional procurement of its breach; (4) the absence of justification; and (5) damages resulting therefrom." The plaintiffs fail in both the complaint and the pretrial order to set out factual allegations sufficient to prove these elements. There are no allegations that either LG Technologies or Biotronix 2000 intentionally procured the breach of the contract between Safety Technology and the banks. The claim of tortious interference with contract simply does not fit the facts set out by the plaintiffs. The defendants' motion to dismiss this claim is granted.
Defendants attack Count Three, breach of the warranty of merchantability, and Count Five, breach of expressed and implied warranties, on the grounds that the complaint does not allege that LG Technologies or Biotronix 2000 sold the needle incineration units to Safety Technology. The defendants also attack Count Four, breach of contract, on the grounds that the complaint does not allege that Biotronix 2000 or LG Technologies entered into a contract with Safety Technologies. On the contrary, the plaintiffs do allege in the complaint and in the pretrial order that Safety Technologies entered into a contract with and purchased the needle incineration units from Biotronix 2000 and LG Technologies. The plaintiffs allegations are sufficient to state a claim and survive LG Technologies' motion for judgment on the pleadings.
• Motions for summary judgment
A moving party is entitled to summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). In applying this standard, the court views the evidence and all reasonable inferences therefrom in the light most favorable to the nonmoving party. Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 670 (10th Cir. 1998) (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)). A fact is "material" if, under the applicable substantive law, it is "essential to the proper disposition of the claim." Id. (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). An issue of fact is "genuine" if "there is sufficient evidence on each side so that a rational trier of fact could resolve the issue either way." Id. (citing Anderson, 477 U.S. at 248).
The moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact and entitlement to judgment as a matter of law. Id. at 670-71. In attempting to meet that standard, a movant that does not bear the ultimate burden of persuasion at trial need not negate the other party's claim; rather, the movant need simply point out to the court a lack of evidence for the other party on an essential element of that party's claim. Id. at 671 (citing Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986)).
Once the movant has met this initial burden, the burden shifts to the nonmoving party to "set forth specific facts showing that there is a genuine issue for trial." Anderson, 477 U.S. at 256. The nonmoving party may not simply rest upon its pleadings to satisfy its burden. Lopez v. LeMaster, 172 F.3d 756, 759 (10th Cir. 1999); Anderson, 477 U.S. at 256. The nonmoving party must "set forth specific facts that would be admissible in evidence in the event of trial from which a rational trier of fact could find for the nonmovant." Adler, 144 F.3d at 671. "To accomplish this, the facts must be identified by reference to affidavits, deposition transcripts, or specific exhibits incorporated therein." Id.
LG Technologies moves for summary judgment and provides the court with the affidavits of Yves Poulette and Luc St. Georges. Setting aside conclusory allegations and statements made without a foundation for personal knowledge, the affidavits, in relevant part, allege that neither Mr. St. Georges or Mr. Poulette made representations to Linda King of Safety Technologies concerning FDA approval of the needle disposal units in a telephone conversation that occurred "before March 26, 1997." LG Technologies' motion also alleges that there is no evidence that LG Technologies sold the needle incineration units to Safety Technologies.
Plaintiffs move for partial summary judgment on the following five issues:
• That Group Crown, including Jack Descent, Robert Vivian, John Burne and James Christianson, was an agent of LG Technologies and Biotronix 2000.
• That BioEtec was an agent of LG Technologies and Biotronix 2000.
• That Biotronix 2000 was an agent for LG Technologies or a joint venture with LG Technologies.
• That Greg Martin was an agent for LG Technologies.
• That LG Technologies was the alter ego of Biotronix 2000.
For support, the plaintiffs cite the depositions of Linda King, Howard Gordon, Lucie Pacquette, and Lepold Marineau.
Each of the issues submitted to the court for summary judgment will be considered in turn.
• The misrepresentation claim
The affidavits submitted by LG Technologies allege that two employees of LG Technologies, Mr. Poulette and Mr. St. Georges, did not make misrepresentations to an employee of Safety Technologies, Mrs. King, concerning FDA certification of the needle incineration units. To show that there is a genuine issue for trial, the plaintiffs' response incorporates by reference the plaintiffs' statement of uncontroverted facts in their motion for partial summary judgment. The plaintiffs's statement of uncontroverted facts alleges in paragraph 112 that the deposition of Lucie Pacquette shows that Safety Technologies had requested the FDA 510(k) numbers from Mr. St. Georges and Mr. Poulette. Paragraph 19 cites the deposition of Linda King where Mrs. King testified that she asked Mr. St. Georges and Mr. Poulette for copies of the FDA certification and that they agreed to send the information.
Whether Linda King requested copies of the FDA certifications for the needle incineration units and whether employees of LG Technologies agreed to provide the certifications is material because it goes to the central question of whether LG Technologies made misrepresentations to the plaintiffs concerning FDA certification. The plaintiffs point to evidence that directly controverts the claims in the affidavits provided by LG Technologies that Linda King did not request information on FDA certification and that LG Technologies employees did not agree to provide that information. Consequently, there is a genuine issue of material fact and the defendant's motion for summary judgment must be denied.
LG Technologies' summary judgment motion must also be denied because the defendant failed to meet its initial burden to show uncontroverted facts that entitle the defendant to judgment as a matter of law. Excluding conclusory statements and allegations made without a foundation for personal knowledge, the affidavits of Mr. St. Georges, Mr. Poulette and Mr. Lauriault fail to meet the defendant's initial burden. The plaintiffs allege that, on multiple occasions, the defendants misrepresented to the plaintiffs that the units had FDA certification. Absent the conclusory allegations in the defendant's affidavits, the affidavits only allege that, on one of those multiple occasions, LG Technologies employees did not make the alleged misrepresentation. Because the defendant's affidavits do not address the plaintiffs' claim that misrepresentations were made on multiple other occasions, defendant's affidavits fail to establish facts that, if uncontroverted, entitle the defendant to judgment as a matter of law. "If the moving party fails to meet this initial burden, the motion must be denied, regardless of the nonmovant's response." Little v. Liquid Air Corp . , 37 F.3d 1069, 1075 (5th Cir. 1994).
• Whether LG Technologies was the alter ego of Biotronix 2000
In Doughty v. CSX Transportation, Inc . , 258 Kan. 493 (1995), the Kansas Supreme Court set out the test for determining when a corporation is the alter ego of another corporation:
The ultimate test for imposing alter ego status is whether, from all of the facts and circumstances, it is apparent that the relationship between the parent and subsidiary is so intimate, the parent's control over the subsidiary is so dominating, and the business and assets of the two are so mingled that recognition of the subsidiary as a distinct entity would result in an injustice to third parties. In addition to the factors used to determine a corporate alter ego status, a plaintiff must show that allowing the legal fiction of a separate corporate structure would result in injustice toward the plaintiff.258 Kan. at Syl. 8. The court cited its earlier decision in Dean Operations, Inc. v. One Seventy Associates , 257 Kan. 676 (1995), for the proposition that "[t]he mere fact that a subsidiary corporation was organized for the avowed purpose of avoiding liability on the part of the holding company does not in itself constitute fraud justifying disregard of the corporate entity of the subsidiary." Id . at 681. The Kansas Supreme Court cited with approval the ten factors set out by Judge O'Connor of this court in Schmid v. Roehm GmbH , 544 F. Supp. 272 (D.Kan. 1982), for determining alter ego status:
(1) the parent corporation owns all or a majority of the capital stock of the subsidiary; (2) the corporations have common directors or officers; (3) the parent corporation finances the subsidiary; (4) the parent corporation subscribed to all of the capital stock of the subsidiary or otherwise caused its incorporation; (5) the subsidiary has grossly inadequate capital; (6) the parent corporation pays the salaries or expenses or losses of the subsidiary; (7) the subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to it by the parent corporation; (8) in the papers of the parent corporation, and in the statements of its officers, the subsidiary is referred to as such or as a department or division; (9) the directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take direction from the parent corporation; and (10) the formal legal requirements of the subsidiary as a separate and independent corporation are not observed.Under Kansas law, the determination of whether LG Technologies is the alter ego of Biotronix 2000 is a question of fact. Doughty , 258 Kan. at 504 .
The Marineau deposition shows that Biotronix 2000 did not manufacture the needle units, had no shipping department or paid employees, and that an employee of LG Technologies, Lucie Pacquette, spent 30% of her time doing working for Biotronix 2000. The plaintiffs' motion also alleges that the defendants have failed to produce corporate minutes for Biotronix 2000. The evidence submitted by the plaintiffs fails to demonstrate that even a majority of the ten factors in Schmid indicate that LG Technologies was the alter ego of Biotronix 2000. LG Technologies' response attaches four affidavits that allege facts indicating that LG Technologies was not the alter ego of Biotronix 2000. Even ignoring the affidavits submitted by LG Technologies, the evidence presented to the court is insufficient as a basis for this court to disregard the corporate status of Biotronix 2000 as a matter of law on a motion for partial summary judgment. At the same time, however, the plaintiffs' evidence is sufficient to create a question of fact for a jury and survive the defendant's summary judgment motion.
The defendants apparently do not dispute the fact that minutes for Biotronix 2000 were not produced. LG Technologies explained that it produced the Nardelli affidavit to show that the records were kept.
The plaintiffs move to strike these affidavits on the grounds that the affiants were not listed on the defendants' final witness list. Because the court would not grant partial summary judgment even without considering the affidavits, the court need not rule on the issue of whether the affidavits are appropriate. If the defendants seek to amend their final witness list to address these issues at trial, the court will take up any objections by the plaintiffs at the limine conference.
• Whether BioEtec was an agent of LG Technologies and Biotronix 2000
The plaintiffs argue that BioEtec was an agent of LG Technologies and Biotronix 2000. To meet their initial burden, the plaintiffs point to the Marineau deposition. The testimony of Mr. Marineau suggests that BioEtec acted as an agent of Biotronix 2000 in securing sales of the needle incineration units for Biotronix 2000. LG Technologies argues that BioEtec was not the agent of Biotronix 2000 and points to a provision in the distributorship contract stating that the distributor is not the agent of Biotronix Laboratories. A genuine issue, therefore, exists as to whether BioEtec was an agent of Biotronix 2000. In contrast, the plaintiffs submit no evidence indicating that BioEtec acted as an agent for LG Technologies. Instead, the plaintiffs' breach of warranties and breach of contract claims against LG Technologies relies on a finding that LG Technologies was the alter ego of Biotronix 2000.
• Whether Group Crown, including Jack Descent, Robert Vivian, John Burne and James Christianson, was an agent of LG Technologies and Biotronix 2000
The evidence submitted by the plaintiffs shows that Crown Group and its employees acted as the agents of Biotronix 2000. The Marineau deposition establishes that Crown Group was given authority to act as the agent of Biotronix 2000 for the purpose of marketing the needle incineration units. LG Technologies does not argue that this evidence is controverted nor that the legal conclusion is incorrect. The plaintiffs, however, provide no evidence that Crown Group and its employees were agents of LG Technologies. The plaintiffs' motion seems to rely on a finding that LG Technologies was the alter ego of Biotronix 2000 in order to establish that Crown Group and its employees were also agents of LG Technologies. The plaintiffs, therefore, fail to meet their initial burden of demonstrating uncontroverted facts that show that Crown Group and its employees were agents of LG Technologies.
• Whether Biotronix 2000 was an agent for LG Technologies or a joint venture with LG Technologies"Under Kansas law, a joint venture occurs where two or more persons combine to engage in a single business enterprise for profit, such that liability is imputed to all participants." Cullip v. Domann , 255 Kan. 550, 556 (1999). The elements needed to establish a joint venture are "(1) an agreement; (2) a common purpose; (3) a community of interest; and (4) an equal right to a voice accompanied by an equal right of control over the instrumentality." Id . ; Klose v. Wood Valley Racket Club, Inc . , 267 Kan. 164, 171 (1999).
The plaintiffs do not point to uncontroverted evidence sufficient to establish all of the elements necessary for the formation of a joint venture. In fact, given the plaintiffs' claim that LG technologies was the alter ego of Biotronix 2000, it is unlikely that the plaintiffs could point to evidence indicating that Biotronix 2000 and LG Technologies had an equal right of control over the venture. The plaintiffs also fail to point to any evidence showing that Biotronix 2000 was the agent of LG Technologies.
• Whether Greg Martin was an agent for LG Technologies
Plaintiffs argue that attorney Greg Martin was an agent for LG Technologies when he sent a letter to Safety Technologies claiming that Biotronix Labratories had FDA certification for the needle incineration devices. The plaintiffs cite no evidence and do not attach a copy of Mr. Martin's letter for the court to review. Because the plaintiffs do not point to any evidence indicating that LG Technologies expressly or implicitly gave authority to Mr. Martin to act as its agent or that LG Technologies represented to the plaintiffs that Mr. Martin was its agent, the plaintiffs fail to meet their initial burden. See Shawnee State Bank , 228 Kan. at Syl. 1-3 (summarizing Kansas agency law).
IT IS THEREFORE ORDERED BY THE COURT THAT Defendant LG Technologies' renewed motion to quash service of process and to dismiss for lack of personal jurisdiction (Doc. 73) and renewed motion to strike the King affidavit (Doc. 95) are denied; that LG Technologies' motion for judgment on the pleadings (Doc. 69) and Biotronix 2000's motion for judgment on the pleadings (Doc. 71) are granted to the extent that the plaintiffs' claim of tortious interference with contract is dismissed and denied as to the remainder of the motion; that LG Technologies' motion for summary judgment (Doc. 75) is denied; and that plaintiffs' motion for partial summary judgment (Doc. 79) and motion to strike the affidavits and evidence submitted with defendant LG Technologies' response (Doc. 96) are denied.