Philips Medical v. Medical Insights Diagnostics

• Decision Date: 26 January 2007
• Docket Number: No. C 06-04470 JSW.,C 06-04470 JSW.
• Citation: 471 F.Supp.2d 1035
• Court: U.S. District Court — Northern District of California
• Parties: PHILIPS MEDICAL CAPITAL, LLC, Plaintiff, v. MEDICAL INSIGHTS DIAGNOSTICS CENTERS, INC., et al., Defendants. And Related Cross Complaint.

471 F.Supp.2d 1035

PHILIPS MEDICAL CAPITAL, LLC, Plaintiff, v. MEDICAL INSIGHTS DIAGNOSTICS CENTERS, INC., et al., Defendants And Related Cross Complaint.

No. C 06-04470 JSW.

United States District Court, N.D. California.

January 26, 2007.

COPYRIGHT MATERIAL OMITTED

Marshall F. Goldberg, Edmund J. Sherman, Glass & Goldberg, Woodland Hills, CA, for Plaintiff.

Michael J.M. Brook, Lanahan & Reilley LLP, Santa Rosa, CA, Christopher Ralph Miller, William T. Webb, Hanson, Bridgett, Marcus, Vlahos & Rudy LLP, San Francisco, CA, for Defendants.

ORDER GRANTING IN PART AND DENYING IN PART DEFEDANTS' MOTIONS TO DISMISS

WHITE, District Judge.

Now before the Court are the motions to dismiss filed by Third-Party Defendant Philips Medical Systems North America, a division of Philips Electronics North America, Inc. ("PMSNA") and by Cross-Defendant Phillips Medical Capital, LLC ("PMC"). Having carefully reviewed the parties' papers, considered their arguments and the relevant legal authority, the Court hereby grants in part and denies in part the motions to dismiss by PMSNA and PMC.¹

BACKGROUND

This action arises out of the sale and/or lease of medical equipment to Cross-Complainant and Third-Party Plaintiff Medical Insights Diagnostic Centers, Inc. ("MIDC"). PMC filed a complaint against MIDC and Virgil L Williams, John A. Lynch, Arthur T. Gronner, as an individual and as a Trustee of the Arthur T. and Bonnie S. Gronner Trust Dated December 9, 1993, and Arthur T. and Bonnie S. Gronner Trust Dated December 9, 1993 ("Gronner Trust") (collectively referred to as "Counter-Claimants") in the Superior Court of California in the County of Contra Costa. In essence, PMC alleges that Counter-Claimants and Third-Party Plaintiffs breached a Master Lease Agreement ("MLA") and the attached schedules by failing to make payments for the medical equipment.

Counter-Claimants filed a cross-complaint against PMC and a third party complaint against PMSNA. PMSNA then removed the action to this Court. On August 18, 2006, Counter-Claimants filed amended complaints against PMC and PMSNA ("Amended Complaint").

Counter-Claimants allege that PSMNA and PMC are joint-venture partners and that PMSNA has a substantial and controlling business interest in PMC. (Amended Compl., ¶ 9.) Counter-Claimants further allege that PMC only provides financing for PMSNA's customers. (Id., ¶ 10.)

MIDC is a diagnostic center to which patients are referred by health care providers for magnetic resonance imaging ("MRI") scans and other diagnostic procedures. (Amended Compl., ¶ 11.) Starting in early 2002, Dr. Williams began discussing options with PSMNA for purchasing an MRI machine for MIDC. (Id., ¶ 12.) In March 2003, MIDC signed an order for an Infinion 1.5T machine. (Id., ¶ 15.) For the next several months, MIDC and Debbie Flatt, on behalf of PSMNA, discussed financing options. MIDC explained that it wanted to finance the purchase the MRI machine in such a manner that it would be the owner of the machine after a period of time. (Id., ¶ 16.) Ms. Flatt introduced MIDC to PMC, which she stated was the "finance arm" of PMSNA and implied that PMC was "inside" or "in house" financing for PMSNA. (Id.) Counter-Claimants allege that Ms. Flatt referred to Grant Buckman, who Counter-Claimants believe is an employee of PMC, as PSMNA's leasing person. (Id.)

Mr. Buckman, then represented to MIDC that PMC was the "dedicated finance arm" of PMSNA. (Id., ¶ 28.) He also referred to PMSNA as "our Medical Division," and. Eric Price of PMC referred to PMNSA's sales personnel as "our Field Sales Rep." (Id.) When told that PMC was claiming it was a entity separate from PMSNA, Mark Reinstein, a PMSNA employee, responded, "That's ridiculous. They are one and the same." (Id., ¶ 36.) Counter-Claimants further allege:

There exists, and at all times herein mentioned there existed, a unity of interest and ownership between . . . PMC and PMSNA such that any individuality and separateness between [PMC] and [PMSNA] have ceased, and . . . PMC is the alter ego of .. . PMSNA in that PMC is a joint venture formed by PMSNA and foreign banking entity for the sole purpose of providing financing to customers of PMSNA, that PMSNA and its party corporation market PMC as the financing division of PMSNA, and that PMNSA represents to its customers that PMSNA and PMC are part of the same entity.

(Id., ¶ 55.)

In August and September of 2003, MIDC decided to finance the Infinion 1.5T through PMC and informed PMC that it ultimately wanted to own the machine outright. (Id., ¶ 18.) However, the Infinion 1.5T stopped being manufactured. PMSNA suggested that MIDC use the Panorama 0.6T model instead. (Id., ¶ 20.) In November 2003, PMSNA provided written materials describing the Panorama 0.6T, which Counter—Claimants contend became express warranties. (Id., ¶ 21.)

In December 2003, MIDC decided to purchase the Panorama 0.6T and cancelled the order for the Infinion 1.5T. (Id., ¶ 22.) Counter-Claimants allege that PMSNA made several representations, both orally and in writing, regarding the Panorama 0.6T which MIDC relied on in deciding to purchase this MRI machine. These alleged representations included promises regarding "SENSE" technology, which would have made the MRI machine faster and would have enabled MIDC to process more patients, and "cardiac gating," meaning that the machine was supposed to be capable of taking images between heart beats. (Id., ¶¶ 23, 25-26, 28.) According to Counter-Claimants, PMSNA agreed to finance MIDC's acquisition of the Panorama 0.6T and MIDC then received correspondence from PMC. (Id., ¶ 28.) MIDC entered into a document entitled "Master Lease Agreement" ("MLA"), and Dr. Williams, Mr. Lynch and Mr. Gronner signed guarantees regarding the equipment. (Id., ¶¶ 34, 35; Id., Ex. 4.)

Counter-Claimants allege that PMSNA and PMC intentionally led MIDC to believe that they were one entity in order to defraud MIDC and deprive MIDC of warranties. PMSNA and PMC intended to create a finance lease whereby PMSNA would sell the Panorama 0.6T to PMC without any warranties and PMC would in turn lease or sell the MRI machine to MIDC. Through the finance lease, MIDC would only be entitled to any warranties provided by PSMNA to PMC, and MIDC would be obligated to pay PMC regardless of whether the Panorama 0.6T performed as promised to it. (Id., ¶¶ 29, 31.) Counter-Claimants dispute that the transaction regarding the Panorama 0.6T was actually a finance lease. (Id., ¶¶ 30, 34.)

Installation of the equipment began in October and November 2004. (Id., ¶ 43.) Counter-claimants allege that PMSNA's and PMC's plan to defraud MIDC included delaying delivery of critical parts of the MRI machine and coercing MIDC into prematurely signing purported acceptances of the goods. Thus, Counter-Claimants contend that MIDC did not have a meaningful opportunity to inspect the equipment before it was forced to sign the purported "acceptances." (Id., ¶¶ 33, 43, 44.)

According to Counter-Claimants, the equipment never functioned properly. MIDC did not receive the SENSE coils, or the training to use them, until six months after the "MRI magnet" was delivered, and the SENSE technology did not work with the Panorama 0.6T. (Id., ¶ 45.) Moreover, Counter-Claimants contend that the Panorama 0.6T was never able perform cardiac gating. (Id., ¶ 46.) Counter-Claimants also allege that there were other problems with the MRI equipment. (Id.) PMSNA's technicians repeatedly assured MIDC that the defects would be cured. (Id., ¶ 49.) Nevertheless, Counter-Claimants contend that despite PMSNA's attempts over a year and a half to cure the defects with the equipment, the problems with the SENSE technology, the cardiac gating, and other vascular imaging have never been fixed. (Id., ¶¶ 47, 53, 54.) Counter-Claimants allege that PMC's and PMSNA's assurances and coercion, as well as the nature of the defects, the unavailability of some of the equipment, and the complexity of the equipment, prevented MIDC from discovering the defects. (Id., ¶ 49.)

On June 13, 2006, when it became clear to MIDC that PMSNA's attempts to cure the defects had not, and would not, be successful, MIDC formally rejected the goods and/or revoked the prior putative acceptances of the goods. (Id., ¶ 54.)

Attached to the Amended Complaint are three different quotes from PMSNA and the MLA. (Id., Exs. 1-4.) The first quotation attached ("Quotation No.1"), was signed by MIDC on May 9, 2004. (Amended Compl., Ex. 1 ("Quotation No. 1") at 13.) Quotation No. 1 provides that it is effective from May 9, 2004 to June 23, 2004. (Amended Compl., Ex. 1 at 1.) It states that "By signing this quotation and/or the Purchase Order/Orders against this quote, the Customer acknowledges no other contracts, fee payments to third parties or terms and conditions will apply to the solutions, good, and/or services contained within this quote." Quotation No. 1 was for a Panorama MR 0.6T for $1,364,010. (Id. at 2.) Quotation No. 1 describes the Paraorama 0.6T in detail. (Id. at 3-12.) Quotation No. 1 provides that the Paraorama 0.6T is covered under 12 months warranty and includes two pages of "Terms and Conditions of Sale" which include, inter alia:

Leases: In the event the Customer desires to convert the purchase of any product to a lease, the Customer will arrange for the lease agreement and all other related documentation to be reviewed and approves by [PMSNA] . . . The Customer is responsible to convert the transaction to a lease, and is required to secure the leasing company's approval of all the terms and conditions in this quotation without modification. No product will be delivered to the Customer until [PMSNA] has received copies of the fully executed lease documents and has approved the same.

. . . . .

Product Warranty. Phillips provides specific product warranties with respect to each [PMSNA] product. Copies of the product warranty applicable to the products listed on the...