Osseous Technologies of Am., Inc. v. DiscoveryOrtho Partners LLC

• Decision Date: 28 December 2010
• Docket Number: No. G042747.,G042747.
• Citation: 119 Cal.Rptr.3d 346,2010 Daily Journal D.A.R. 19,10 Cal. Daily Op. Serv. 16,191 Cal.App.4th 357
• Court: California Court of Appeals Court of Appeals
• Parties: OSSEOUS TECHNOLOGIES OF AMERICA, INC., Plaintiff and Appellant, v. DISCOVERYORTHO PARTNERS LLC, Defendant and Respondent.

191 Cal.App.4th 357

119 Cal.Rptr.3d 346

10 Cal. Daily Op. Serv. 16

2010 Daily Journal D.A.R. 19

OSSEOUS TECHNOLOGIES OF AMERICA, INC., Plaintiff and Appellant,

v.DISCOVERYORTHO PARTNERS LLC, Defendant and Respondent.

No. G042747.

Court of Appeal, Fourth District, Division 3, California.

Dec. 28, 2010.

Enterprise Counsel Group, Patrick D. Flannery, Benjamin P. Pugh, and James S. Azadian for Plaintiff and Appellant.

Summers & Shives, Sandra P. Llaneta for Defendant and Respondent.

OPINION

IKOLA, J.

Faced with accusations it was breaching a services agreement by failing to pay what it allegedly owed for services rendered, Osseous Technologies of America, Inc. (Osseous), sued for declaratory relief (Code Civ. Proc., § 1060) ¹ rather than waiting for a breach of contract action to be filed against it. Defendant DiscoveryOrtho Partners, LLC (DiscoveryOrtho), demurred to the complaint on the grounds the trial court should exercise its discretion under section 1061 to "refuse to exercise the power" to decide declaratory relief actions. In sustaining the demurrer, the court reasoned declaratory relief would not be "necessary or proper at the time under all the circumstances" ( § 1061) because the facts as pleaded amounted to a breach of contract dispute (looking to past conduct) rather than a forward-looking pronouncement of the rights and duties of the parties. The court did not abuse its discretion by sustaining the demurrer without leave to amend and entering judgment accordingly.

FACTS

"On appeal from a judgment dismissing an action after sustaining a demurrer without leave to amend ... [w]e give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] Further, we treat the demurrer as admitting all material facts properly pleaded, but do not assume the truth of contentions, deductions or conclusions of law." ( City of Dinuba v. County of Tulare (2007) 41 Cal.4th 859, 865, 62 Cal.Rptr.3d 614, 161 P.3d 1168.) We therefore base our recitation of the underlying facts on the facts pleaded in Osseous's complaint for declaratory relief and attachments thereto.

Dispute Between Osseous and DiscoveryOrtho

Osseous "develops and markets innovative, high quality products for surgeons and restorative clinicians in dental and sinus surgery sectors." Osseous believed one such technology to be particularly promising, with possible applications beyond dental and sinus surgery. "To that end, [Osseous] became interested in seeking out an asset sale or license with medical device manufacturers for its existing ... technology."

Osseous entered into a written marketing agreement (which Osseous attached to the complaint) with DiscoveryOrtho on December 3, 2008. The marketing agreement pertained to the promising Osseous technology noted above. Osseous disclosed it had begun discussions with Medtronic (a prominent medical technology company) regarding the Osseous technology. Osseous indicated it would like DiscoveryOrtho to "[p]rovide outreach/introductions/interface to [potential] licensing partners i.e. Stryker, Globus, Synthes, and Zimmer etc."

Pursuant to the marketing agreement, DiscoveryOrtho agreed to "1. Identify Potential Strategic Partners. [¶] 2. Provide Market Outreach to those strategic partners in presenting the licensing opportunity. [¶] 3. Facilitate further discussions with Medtronic management and assist in negotiating a licensing/acquisition agreement if possible. [¶] 4. Evaluate/Negotiate term sheet in conjunction with Osseous with a potential non-Medtronic strategic partner. [¶] DiscoveryOrtho will present Osseous a summary target list of potential strategic licensing partners within 2 weeks of beginning the project and will update Osseous on its outreach efforts weekly."

Osseous's obligations under the marketing agreement pertained to exclusivity and fees. The exclusivity provision stated: "Osseous agrees to work with DiscoveryOrtho exclusively for a six month period, renewable for an additional three months if mutually agreed by DiscoveryOrtho ... and Osseous. However, if during the conclusion of the six month term, a term sheet is actively under consideration or an introduction made by [DiscoveryOrtho] reemerges as an interested party at a later date, [DiscoveryOrtho]/Osseous will continue to abide by the terms of the agreement in good faith." The fee provision allocated "a percentage of the total value of the final license or asset sale transaction" to DiscoveryOrtho. The parties agreed to one fee formula for a Medtronic transaction, then provided: "The percentage paid to DiscoveryOrtho on a non-Medtronic license or acquisition would be 5% of the transaction/gross consideration of up to $25 million plus 9% on any incremental gross amount from $25 million and above."

"On or about December 5, 2008, two days after entering the [marketing] agreement, [Osseous's] President, William Knox, on his own initiative and unassisted by [DiscoveryOrtho], made contact and began discussions with Zimmer Dental, Inc. ('Zimmer') regarding [Osseous's] existing ... technology and products. Thereafter, [DiscoveryOrtho] provided consulting services pursuant to the Agreement designed to assist [Osseous] in its negotiations with Zimmer."

"On or about February 1, 2009, [DiscoveryOrtho] and [Osseous] entered into a [contract addendum]. [¶] Pursuant to the Addendum, [Osseous] recognized that [DiscoveryOrtho's] 'creation of new product designs/applications for the [technology] created additional value to [Osseous]' and agreed to pay [DiscoveryOrtho] 8.5% of the total transaction/gross consideration for any license, IP acquisition, distribution or co-development agreement on such new product designs or applications."

"In or about June 2009, [Osseous] reached a Distribution Agreement with Zimmer ... regarding [Osseous's] existing ... technology and products...." Citing a confidentiality agreement, Osseous did not attach the Zimmer distribution agreement to the complaint or quote its key provisions. Instead, Osseous characterized it as not "involv[ing] an asset sale or upfront license, or [DiscoveryOrtho's] creation of any new product designs or applications."

"[DiscoveryOrtho] sent [Osseous] an invoice on or about June 23, 2009, demanding that [Osseous] pay [DiscoveryOrtho] exorbitant sums for upfront payments, milestones, royalties, yearly minimums, product transfer prices and call options all based at the 8.5% rate specified in the Addendum and extending over the entire life of the Zimmer Distribution Agreement...." Osseous "disputed, and hereby again disputes, the Invoice and the amounts stated thereon and/or that any account has been stated between [Osseous] and [DiscoveryOrtho] for any of those amounts." The invoice, attached to the complaint, indicates a $2,250,000 upfront payment was due, and set forth a schedule (stretching over at least 5 years) for additional payments.

Procedural History

The July 2, 2009 complaint avers an actual controversy exists as to "whether [DiscoveryOrtho] is entitled to any payment from [Osseous] pursuant to the Agreement or Addendum for any consulting services provided by [DiscoveryOrtho] to [Osseous] in connection with or in assistance to the Zimmer Distribution Agreement." The prayer for relief requests a declaration on multiple questions pertaining to the interpretation of the DiscoveryOrtho agreement (with addendum) and its applicability to the Zimmer distribution agreement. The complaint contends neither the agreement nor the addendum apply to the Zimmer distribution agreement. The complaint further contends DiscoveryOrtho's "recovery of any amount for its services should be limited to and measured on a quantum meruit basis for the reasonable value of the services provided by [DiscoveryOrtho] in connection with the Zimmer Distribution Agreement."

The filing of the complaint occurred more than six months after the execution of the marketing agreement (which by its terms lasted for six months unless extended). There was no allegation in the complaint that, other than alleged current and prospective payment obligations, the marketing agreement (or a successor agreement) was still in effect at the time of filing.

DiscoveryOrtho demurred to the complaint. On September 25, 2009, the court held a hearing and ultimately sustained the demurrer without leave to amend. The court reasoned: "The case as alleged in the complaint is nothing more than a 'breach of contract' action. Plaintiff signed a contract; and invoices were sent for services rendered by defendant. Plaintiff disputes the services provided and does not want to honor the bills. There are no allegations in the complaint that suggest that declaratory relief will regulate future conduct by the parties.... [¶] The determination sought ... is not necessary or proper under the circumstances." The court indicated there was no possible amendment of the complaint that could change the result, rejecting counsel's suggestion that further explanation "of the Zimmer distribution agreement and further flushing out the issues with [the] invoice" could change the court's calculus. Judgment was entered on November 6, 2009.

In March 2010, DiscoveryOrtho sued Osseous for breach of contract in the United States District Court for the Southern District of New York. ² The federal case is still pending; we take judicial notice of the fact that on August 16, 2010, the district court denied Osseous's motion to dismiss for lack of jurisdiction or to abstain from deciding the case in favor of the action before this court.

DISCUSSION

Standard of Review

Ordinarily, "[w]hen a demurrer is sustained, we determine [de novo] whether the complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse." ( City of Dinuba v....