Starsurgical Inc. v. Aperta, LLC

Decision Date14 August 2014
Docket NumberCase No. 10–CV–01156.
Citation40 F.Supp.3d 1069
PartiesSTARSURGICAL INC., Plaintiff, v. APERTA, LLC, et al., Defendants, Dietmar H. Wittmann, Defendant/Third–Party Plaintiff, v. Michael Deutsch, Third–Party Defendant.
CourtU.S. District Court — Eastern District of Wisconsin

Daniel M. Janssen, Johanna M. Wilbert, Patrick J. Murphy, Quarles & Brady LLP, Milwaukee, WI, for Plaintiff/Third Party Defendant.

David V. Meany, Olivia M. Kelley, Dewitt Ross & Stevens SC, Brookfield, WI, Joseph T. Leone, Joseph A. Ranney, Dewitt Ross & Stevens SC, Madison, WI, Daniel J. Habeck, Peter J. Plaushines, Cramer Multhauf & Hammes LLP, Waukesha, WI, for Defendant/Third–Party Plaintiff.


LYNN ADELMAN, District Judge.

In June 2000, Michael Deutsch and Dr. Dietmar Wittmann formed Starsurgical, Inc. (Star), a Wisconsin corporation. Subsequently, they had a falling out resulting in the present diversity case. In 1987, Wittmann, an employee of the Medical College of Wisconsin (“MCW”), invented a patch used to cover large incisions made during abdominal surgery. Later, Wittmann signed an Invention Memorandum assigning his rights in the patch to MCW's research foundation in exchange for a portion of future royalties. MCW in turn granted a license to Deutsch to manufacture and sell the patch.

Sale of the patch in the United States required the approval of the Food and Drug Administration (“FDA”). Deutsch asked MCW and Wittmann for data supporting his application for FDA approval, and Wittmann provided him with information about the patch. When Deutsch and Wittmann created Star, Deutsch assigned his rights to manufacture and distribute the patch and the FDA certification to Star and became president of the corporation and a 51% shareholder. Wittmann became vice president and a 49% shareholder. Wittmann's wife, Heide Wittmann (Heide), became treasurer. Star's bylaws gave Deutsch, as majority shareholder, power to remove Wittmann as a director, but Wittmann claims Deutsch orally agreed that he would always be a director. Deutsch denies this.

Deutsch and Wittmann agreed that initially they would receive only nominal compensation and that Deutsch would be responsible for the day-to-day administration of Star, including patch production, quality control and marketing. Wittmann provided names of potential customers, assisted with marketing efforts and procured some of the materials needed for manufacturing the patch. He also used his own funds to procure Star's domain name and created and operated what became the company's principal website. He listed Star as the owner of the site and himself as the site's administrator. Heide kept Star's books. Deutsch suggested using the trademark WITTMANN PATCH to sell the patch, and Wittmann agreed to allow Star to use his name. On April 25, 2000, Star began using the mark and in 2001, Deutsch assigned his rights in the mark to Star and registered it with the Wisconsin Secretary of State. In 2002, Wittmann applied to the U.S. Patent and Trademark Office (“USPTO”) for registration of the same mark in his name. Star did not oppose his application and in 2004, the USPTO registered the trademark to Wittmann.

Deutsch and Wittmann had a number of disagreements and in November 2002, Deutsch removed Wittmann and Heide from their positions. Deutsch also amended Star's by-laws to provide for a one-member board and increased his salary. Since then, Deutsch has been Star's sole director and board member. Around 2006, Deutsch developed an Expandable Temporary Abdominal Closure (“XTAC”) patch through Acute Care Surgical, LLC (“ACS”), another company he owned. In July 2007, Deutsch obtained FDA approval for the XTAC patch, which was somewhat similar to the Wittmann Patch, but it turned out to be a commercial failure. In 2009, Star's sole supplier of Wittmann Patches, Preservation Solutions, Inc. (“PSI”), informed Deutsch that it could no longer manufacture the Wittmann Patch because it was losing money. Deutsch offered it a higher per patch price, and PSI agreed to continue the relationship. Subsequently, PSI performed regulatory compliance-related services for Star in addition to manufacturing the patch. In 2009, Deutsch again raised his salary.

In 2009, Wittmann created another corporation, Aperta, Inc. (Aperta), and Aperta applied for FDA approval of a patch identical to the Wittmann patch but larger and capable of being re-opened more times before having to be replaced. In seeking FDA approval, Wittmann used the same information that Deutsch had used to obtain approval for the Wittmann Patch. In July 2010, Wittmann created NovoMedicus, LLC (“Novo”) to sell surgical kits containing the new patch and hired Paul van Deventer as its president and Wittmann's son, Dr. Mark Wittmann (Mark), as a consultant. Heide also performed services for Novo. In September 2010, at a trade show Deutsch learned of the existence of Novo and that it was using the WITTMANN PATCH mark to sell competing patches. Novo called its surgical kits “Wittmann Hypopacks” and distributed them in boxes listing a Wittmann Patch as one of the components. It also distributed marketing materials stating that the Wittmann Hypopack and Wittmann Patch were protected by trademarks and that other companies manufacturing or marketing the Wittmann Patch were in violation of such marks.

On the eve of the trade show, Wittmann, who had continued to administer Star's website, removed all of its content and replaced it with a page listing the domain name as being for sale. The email address and phone number listed on the site belonged to Deutsch. Star asserts that Wittmann did this to help Novo, but Wittmann states that he did it because Star had failed to pay him $62,100 for operating its website. Star offered to pay Wittmann $3000 to cover the registration fees he had paid out of his own pocket, but Wittmann rejected the offer. Wittmann did not restore the site until 2012 by which point Star had developed a new site. In December 2010, Novo sent emails to some of Star's customers stating that Novo had not licensed the right to manufacture or market the Wittmann Patch in the United States and that any company doing so was violating Novo's rights. Novo ultimately failed and in July 2012, Wittmann dissolved it. However, he continues to sell patches using the Wittmann mark in Europe.

In the present case, in its third amended complaint, Star asserts a variety of claims against Wittmann and his associates, and defendants move for summary judgment on most of them. Star also moves for summary judgment on several of them. Defendants also assert counterclaims on which Star seeks summary judgment. In addition, Wittmann brings a third-party complaint against Deutsch on which Deutsch seeks summary judgment.

Summary judgment is appropriate where “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). When considering a motion for summary judgment, I view the evidence in the light most favorable to the non-moving party and may grant the motion only if no reasonable jury could find for that party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Many of the parties' claims raise state law issues which the parties agree are governed by Wisconsin law.

As a preliminary matter, I address defendants's claim for declaratory judgment and breach of contract. Defendants have withdrawn the claims in the counterclaim and third-party complaint for a declaratory judgment related to the competition agreement and appear to have withdrawn their breach of contract claim. Defs.' Resp. to Starsurgical's and Mr. Deutsch's Summ. J.M. at 49, ECF No. 188. Therefore I will dismiss these claims.

I. Motions Relating to Star's Claims
A. Defendants' Motion for Summary Judgment on Star's Breach of Fiduciary Duty Claim

In Count 2, Star alleges that Wittmann breached a fiduciary duty by competing with it through Novo including infringing on its trademarks, tortiously interfering with its contracts with customers, shutting down its website and misappropriating its trade secrets. Ordinarily, a minority shareholder does not owe a corporation a fiduciary duty. Star, however, argues that the general rule is inapplicable here because Star was and is a closely held corporation, i.e. a corporation with few shareholders, no ready market for its stock and substantial majority shareholder participation in management. Some courts have held that a minority shareholder in a closely held corporation owes a duty of loyalty both to the corporation and other shareholders. See, e.g., Rexford Rand Corp. v. Ancel, 58 F.3d 1215, 1218 (7th Cir.1995) (applying Illinois law). These courts theorize that a closely held corporation is like a partnership and thus its shareholders owe a duty to each other and the corporation similar to that of partners—a duty to act in the “utmost good faith and loyalty.” Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578, 328 N.E.2d 505, 512–15 (1975).

Under Wisconsin law, majority shareholders in closely held corporations owe a fiduciary duty to the corporation and minority shareholders. See Grognet v. Fox Valley Trucking Serv., 45 Wis.2d 235, 241, 172 N.W.2d 812 (1969). But the Wisconsin Supreme Court has not determined whether or not minority shareholders owe a similar duty. See Estate of Sheppard ex rel. McMorrow v. Specht, 344 Wis.2d 696, 702–03, 824 N.W.2d 907 (Ct.App.2012). Thus, as a federal judge sitting in diversity I must predict how the court would rule if the present case were before it. Allstate Ins. Co. v. Menards, Inc., 285 F.3d 630, 637 (7th Cir.2002). In doing so, I look to the rulings of the state court of appeals for guidance, but that court has not addressed the issue either.1

I believe that the state supreme court would decline to impose a fiduciary duty on a minority shareholder such as Wittmann. First,...

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