Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_06-cv-02254/USCOURTS-casd-3_06-cv-02254-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1441 Petition for Removal- Breach of Contract

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

APPLIED HYDROGEL TECHNOLOGY,

INC.,

Plaintiff,

v.

RAYMEDICA, INC., ET AL.,

Defendants.

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Civil No: 06-CV-2254-B(POR)

ORDER DENYING IN PART AND

GRANTING IN PART

DEFENDANTS’ MOTION TO

DISMISS THE FIRST AMENDED

COMPLAINT UNDER FRCP

12(b)(6)

I. INTRODUCTION

On February 26, 2007, the Court held hearing for Defendants Raymedica, Inc.,

Raymedica LLC (together “Raymedica”), and Kornahrens’ Motion to Dismiss the First

Amended Complaint Under Federal Rule of Civil Procedure 12(b)(6). (Doc. No. 12.) For

the reasons set forth below, the Court hereby DENIES Defendants’ Motion with respect to

(1) the Second Cause of Action, Fraudulent Inducement to enter Consulting Agreement and

Amendment Against Raymedica and Kornahrens; (2) the Third Cause of Action,

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1

 Under Section 1 of the MCA, “Confidential Information” is defined as 

any information not generally known relating to the other party and includes, but is not

limited to, trade secrets, product information and development plans, manufacturing

process, product specifications projections, and information pertaining to any of the

foregoing or to research, development, business development, finances and financial

information, marketing, purchasing, suppliers, acquisitions of supplies and products,

pricing, actual and potential customers or referral sources, needs and requirements of

customers or referral customers, business expansion or accessions, or information

gained by the other party as a result of its discussions with the other party or any

business relationship with the other party. 

(MCA at 1.)

2 06-CV-2254-B (POR)

Intentional Misrepresentation Against Raymedica and Kornahrens; and (3) the Fourth

Cause of Action, Negligent Misrepresentation Against Raymedica and Kornahrens. The

Court GRANTS Defendants’ Motion with respect to the Sixth Cause of Action,

Conversion Against Raymedica and Kornahrens. The Court also GRANTS Plaintiff

Applied Hydrogel Technology, Inc. (“AHT”) leave to amend its Complaint to adequately

plead the Sixth Cause of Action of Conversion. AHT shall have twenty (20) days from the

date of the hearing on February 26, 2007, to file this amended Complaint.

II. BACKGROUND

On August 29, 2005, Raymedica and AHT entered a Mutual Confidentiality

Agreement (“MCA”), under which the parties stated that they (1) were “exploring a

possible relationship,” (2) would “be exposed to Confidential Information1

,” and (3)

“agree[d] to execute this Agreement as a condition to entering into any relationship.” (Doc.

No. 9, Ex. A at 1.) On August 31, 2005, Raymedica and AHT entered a Consulting

Agreement (“CA”), under which AHT as the “Consultant” agreed to provide Raymedica

with the benefit of its “substantial expertise in the field of Hydrogel Materials specific to

medical devices” pursuant to the MCA. (Doc. No. 2, Ex. A at 1.) 

On November 13, 2006, AHT filed its First Amended Complaint, alleging against

Raymedica and/or Kornahrens: breach of Mutual Confidentiality Agreement, fraudulent

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inducement to enter Consulting Agreement and Amendment, intentional misrepresentation,

negligent misrepresentation, misappropriation of trade secrets, and conversion. (Doc. No.

9.) Defendants then filed the present Motion to Dismiss on December 6, 2006. (Doc. No.

12.)

III. DISCUSSION

A. STANDARD OF LAW

A motion to dismiss for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6)

tests the legal sufficiency of the claims in the complaint. A claim should not be dismissed

under Rule 12(b)(6) “unless it appears beyond doubt that the plaintiff can prove no set of

facts in support of the claim which would entitle the plaintiff to relief.” Hydrick v. Hunter,

466 F.3d 676, 686 (9th Cir. 2006); see Conley v. Gibson, 355 U.S. 41, 45 - 46 (1957). The

court must accept as true all material allegations in the complaint, as well as reasonable

inferences to be drawn from them, and must construe the complaint in the light most

favorable to plaintiff. See Parks Sch. of Bus., Inc. v. Symington, 51 F.3d 1480, 1484 (9th

Cir. 1995). 

"Generally, a district court may not consider any material beyond the pleadings in

ruling on a Rule 12(b)(6) motion." Hal Roach Studios v. Richard Feiner and Co., 896 F.2d

1542, 1555 n.19 (9th Cir. 1990). "However, material which is properly submitted as part of

the complaint may be considered." Id.. 

A court may, on a Rule 12(b)(6) motion to dismiss, take judicial notice of “facts

outside the pleadings” and “matters of public record.” Mack v. S. Bay Beer Distrib., Inc.,

798 F.2d 1279, 1282 (9th Cir. 1986) (abrogated on other grounds by Astoria Fed. Sav. and

Loan Ass’n v. Solimino, 501 U.S. 104 (1991)). 

B. ANALYSIS

1. Minnesota law governs

If federal subject-matter jurisdiction is based on the parties’ diversity of citizenship,

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as it is here, the Ninth Circuit “appl[ies] the choice-of-law principles of the forum state.” 

Bassidji v. Goe, 413 F.3d 928, 933 (9th Cir. 2005). The forum state here is California, so

this Court shall apply California choice-of-law principles. 

The Ninth Circuit has held that, under California law, “[w]e must apply the law

designated by the contractual provision unless (1) the chosen state has no substantial

relationship to the parties or transaction; or (2) such application would run contrary to a

California public policy or evade a California statute.” Gen. Signal Corp. v. MCI

Telecomms. Corp., 66 F.3d 1500, 1505 (9th Cir. 1995). Both the MCA and the CA

between the parties provide that the agreements will be governed by Minnesota law. 

(MCA at 2; CA at 4.) All of the defendants are Minnesota citizens. (Doc. No. 9 at 1 - 2.) 

The only in-person meeting between the parties occurred in Minnesota. (Doc. No. 9 at 9.) 

Therefore, Minnesota has a substantial relationship to the parties or transaction. See Gen.

Signal, 66 F.3d at 1505 (holding that a party’s incorporation in New York was sufficient to

establish a substantial relationship).

California’s “narrow” public policy exception “applies only when foreign law is so

offensive to California public policy as to be prejudicial to recognized standards of

morality and to the general interests of the citizens.” Bassidji, 413 F.3d at 933. Minnesota

law for the contract and related tort claims at issue in the present motion does not rise to

this level of offensiveness to California public policy. See id. (applying public policy

exception to illegal trade with Iran, which posed an “unusual and extraordinary threat to the

national security, foreign policy, and economy of the United States”) (internal quotations

omitted).

Therefore, this Court FINDS that Minnesota law should be applied here.

2. Minnesota’s Uniform Trade Secrets Act (“UTSA”) does not bar

AHT’s Negligent Misrepresentation and Conversion claims

Defendants move to dismiss AHT’s Negligent Misrepresentation and Conversion

claims as barred by Minnesota’s UTSA, MINN. STAT. ANN. §§ 325C.01 - 07 (West 2006). 

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Under Section 325C.07, 

a) Except as provided in paragraph (b), sections 325C.01 to 325C.07 displace

conflicting tort, restitutionary, and other law of this state providing civil

remedies for misappropriation of a trade secret.

(b) Sections 325C.01 to 325C.07 do not affect:

(1) contractual remedies, whether or not based upon misappropriation

of a trade secret;

(2) other civil remedies that are not based upon misappropriation of a

trade secret; or

(3) criminal remedies, whether or not based upon misappropriation of

a trade secret.

Id. at § 325C.07.

In its First Amended Complaint, AHT alleges that Defendants negligently

misrepresented that they would enter into a licensing agreement with AHT in order to

obtain confidential information from AHT. (Doc. No. 9 at 20 - 23.) AHT further alleges

that “Defendants have converted Plaintiff’s proprietary technology including the

Confidential Information.” (Id. at 24.) “Confidential Information,” as defined by the

MCA, includes non-trade-secret information, such as product development plans,

manufacturing processes, product specifications, and marketing, pricing, and customer

information. (MCA at 1.) AHT’s negligent misprepresentation and conversion claims are

non-contractual civil remedies that are in part not based upon trade secret misappropriation. 

Therefore, the Court FINDS that Minnesota’s USTA does not bar AHT’s negligent

misrepresentation and conversion claims and DENIES Defendants’ Motion to Dismiss on

these grounds.

3. AHT’s Fraudulent Inducement, Intentional Misrepresentation,

and Negligent Misrepresentation claims are plead with sufficient

particularity, including the reliance element

Under Minnesota Rule of Civil Procedure 9.02,

In all averments of fraud or mistake, the circumstances constituting fraud or

mistake shall be stated with particularity. Malice, intent, knowledge, and

other condition of mind of a person may be averred generally.

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Under Minnesota law, AHT’s claims for fraudulent inducement and misrepresentation fall

under the heightened pleading requirements for fraud. See McBroom v. Al-Chroma, Inc.,

386 N.W.2d 369, 374 (Minn. Ct. App. 1986) (regarding misrepresentation); Williams v.

Dow Chemical Co., 415 N.W.2d 20, 27 - 28 (Minn. Ct. App. 1987) (regarding fraudulent

inducement). 

Upon consideration of AHT’s First Amended Complaint, the Court FINDS that

AHT has plead fraudulent inducement, intentional misrepresentation, and negligent

misrepresentation claims with sufficient particularity, including the reliance element of

these claims. The Court therefore DENIES AHT’s Motion to Dismiss on these grounds.

4. AHT’s Misrepresentation claims do not fail, because they are

material as to a past or existing fact

Under Minnesota law, “a representation of expectation as to future acts or events is

not sufficient to sustain a charge of fraud merely because the represented act or event did

not occur. In order to amount to actionable fraud, a representation must be material as to a

past or existing fact and not merely as to a future event.” Berryman v. Riegert, 175 N.W.2d

438, 442 (Minn. 1970). In its First Amended Complaint, AHT alleges that Defendants

seeked AHT confidential information under a misrepresentation that Defendants would

enter into a licensing agreement with AHT. (Doc. No. 9 at 20 - 23.) The Court FINDS

that AHT’s Misrepresentation Claims do not fail, as this alleged misrepresentation is tied to

the past or existing fact of the disclosure of AHT confidential information. The Court

therefore DENIES Defendants’ Motion to Dismiss on these grounds.

5. AHT’s Negligent Misrepresentation claim is not barred

Under Minnesota law, a duty of care arises in the context of negligent

misrepresentation when the accused party is “supplying information for the guidance of

others in the course of a transaction in which [it] has a pecuniary interest, or in the course

of [its] business, profession or employment.” Smith v. Woodwind Homes, Inc., 605

N.W.2d 418, 424 (Minn. Ct. App. 2000). However, where “adversarial parties negotiate at

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arm's length, there is no duty imposed such that a party could be liable for negligent

misrepresentations.” Id. In Smith, the Minnesota court affirmed the denial of a motion to

add a negligent misrepresentation claim, because both parties were “experienced at closing

real-estate transactions” and no “special relationship” has been demonstrated to counter

their status as “sophisticated equals negotiating a business transaction.” Id. 

Construing AHT’s negligent misrepresentation claim in the light most favorable to

AHT, the Court CANNOT FIND here that both parties were experienced at negotiating

mutual confidentiality agreements, consulting agreements, and licensing agreements or that

they were sophisticated equals negotiating a business transaction. Therefore, the Court

cannot conclude that Defendants had no duty to AHT because they were engaging in arm’s

length negotiations and DENIES Defendants’ Motion to Dismiss on these grounds.

6. AHT’s Conversion claim cannot stand as plead in the First

Amended Complaint

In 1989, the Eighth Circuit held that “[w]e have found no Minnesota cases which

define the bounds of ‘personal property’ subject to conversion, but the general rule is that

the cause of action only applies to tangible property, or intangible property customarily

merged in, or identified with, some document.” H.J., Inc. v. Int’l Tel. & Tel. Corp., 867

F.2d 1531, 1547 (8th Cir. 1989). In 2003, the District Court of Minnesota acknowledged

the lack of Minnesota court interpretation of the outer boundaries of “personal property,”

but referred to the Eighth Circuit decision in H.J.. See Mid-List Press v. Nora, 275

F.Supp.2d 997, 1005 (D.Minn. 2003) (holding that trade names and ISBNs could be

registered in paper documents, which constituted “sufficient ‘property interest’ to support a

claim of conversion”). 

Here, the Court FINDS that AHT did not adequately identify in the First Amended

Complaint which AHT property is subject to AHT’s conversion claim or the connection

between this property and some document. The Court therefore GRANTS Defendants’

Motion on these grounds and GRANTS AHT leave to amend its complaint in order to

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adequately plead its Conversion claim in accordance with this Order. AHT shall have

twenty (20) days from the date of the hearing on February 26, 2007, to file its amended

complaint.

IV. CONCLUSION

For the reasons set forth above, the Court hereby DENIES Defendants’ Motion to

Dismiss the First Amended Complaint Under Rule 12(b)(6) with respect to (1) the Second

Cause of Action, Fraudulent Inducement to enter Consulting Agreement and Amendment

Against Raymedica and Kornahrens; (2) the Third Cause of Action, Intentional

Misrepresentation Against Raymedica and Kornahrens; and (3) the Fourth Cause of Action,

Negligent Misrepresentation Against Raymedica and Kornahrens. The Court GRANTS

Defendants’ Motion to Dismiss with respect to the Sixth Cause of Action, Conversion

Against Raymedica and Kornahrens. The Court also GRANTS Plaintiff AHT leave to

amend its Complaint to adequately plead the Sixth Cause of Action of Conversion. AHT

shall have twenty (20) days from the date of the hearing on February 26, 2007, to file this

amended Complaint.

IT IS SO ORDERED

DATED: March 2, 2007

Hon. Rudi M. Brewster

United States Senior District Court Judge

cc: Hon. Louisa S. Porter

 United States Magistrate Judge

 All Counsel of Record

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