United States District Court, D. Delaware
OSCO MOTORS COMPANY, LLC d/b/a OSCO MOTORS CORPORATION and ENGINE DISTRIBUTORS, INC. Plaintiffs,
MARINE ACQUISITION CORP. d/b/a SEASTAR SOLUTIONS f/k/a TELEFLEX MARINE and HIG MIDDLE MARKET, LLC. Defendants.
REPORT AND RECOMMENDATION
MARY PAT THYNGE, Magistrate Judge.
Plaintiffs, Osco Motors Company, LLC dba Osco Motors Corporation ("Osco") and Engine Distributors, Inc. ("EDI") moved on February 28, 2014 for leave to file their third amended complaint pursuant to Rule 15 of the Federal Rules of Civil Procedure ("FED. R. CIV. P."). Defendants, Marine Acquisition Corp. d/b/a Seastar Solutions f/k/a Teleflex Marine ("Seastar") and H.I.G. Middle Market, LLC ("HIG") (collectively "defendants") oppose this motion. This court has jurisdiction pursuant to 28 U.S.C. § 1332. In particular, plaintiffs seek to include additional claims against the original defendants, as well as adding Gong Luen Metal Industrial Co., Ltd, ("Gong Luen"), Quality Mark Taiwan, Co., Ltd. ("QM Taiwan"), and Mark Ebbenga ("Ebbenga") as defendants. Plaintiffs' third amended complaint alleges eleven causes of action: (1) tortious interference with contractual relations against Seastar; (2) breach of contract against defendants; (3) breach of the contractual duty of good faith against defendants;
(4) breach of the implied covenant of good faith and fair dealing against defendants; (5) violation of 6 DEL. C. § 2001 against defendants; (6) federal trademark infringement under 15 U.S.C. § 1114 against defendants, Gong Luen, QM Taiwan, and Ebbenga; (7) federal trademark infringement under 15 U.S.C. § 1125(a) against defendants, Gong Luen, QM Taiwan, and Ebbenga; (8) violation of 6 DEL. C. § 2001 against Gong Luen, QM Taiwan, and Ebbenga; (9) unjust enrichment against Gong Luen, QM Taiwan, and Ebbenga; (10) conversion against Gong Luen, QM Taiwan, and Ebbenga; and (11) civil conspiracy against defendants, Gong Luen, QM Taiwan, and Ebbenga.
On March 28, 2014, defendants filed a brief in opposition to plaintiffs' motion, claiming that counts one, eight, nine, and ten are barred by collateral estoppel and/or res judicata, and should therefore be dismissed under FED. R. CIV. P. 12(b)(6). Defendants also contend counts six, seven, and eleven fail to state a claim upon which relief can be granted and should be dismissed under FED. R. CIV. P. 12(b)(6). Defendants further claim the third amended complaint should be dismissed under FED. R. CIV. P. 12(b)(2) because this court does not have personal jurisdiction over QM Taiwan.
On April 11, 2014, plaintiffs responded to defendants' arguments and also asserted the court should stay the proceedings until the District Court for the District of Minnesota renders its decision on plaintiffs' motion to vacate the arbitration judgment made between plaintiffs and Quality Mark, Inc. ("QM"). The hearing for plaintiffs' motion to vacate the arbitrator's award is scheduled for June 27, 2014.
Osco is a producer and distributor of marine engines, manifolds, risers, and accessory parts. Osco is a wholly-owned subsidiary of EDI, which sells multiple brands of marine engine components into the marine market. Seastar is a manufacturer and distributor of marine control systems, engine and drive components and other product for the original equipment manufacturing and after marine market. The products sold by Seastar include manifolds produced by Osco. HIG is a private equity and venture capital investment firm, as well as Seastar's partner and equity sponsor. Gong Luen is a foundry that manufactures and produces metal castings used to mold various products, including marine engines, manifolds, and risers. QM Taiwan is a broker that arranges the sale and shipment of goods manufactured by Gong Luen. Mark Ebbenga is the President of Quality Mark ("QM"), a partner of Gong Luen and QM Taiwan, and he is the owner and principal or alter-ego of QM Taiwan.
B. Factual Background
On January 1, 2011, Osco and EDI entered into a Manufacturing Agreement with QM, where QM would produce manifolds for plaintiffs on an exclusive basis. According to the Manufacturing Agreement, QM was not permitted to manufacture or sell Osco products to any entity other than plaintiffs. The parties at all times intended for the Manufacturing Agreement to be a valid agreement between Osco and/or EDI and QM and according to its terms, QM and Ebbenga utilized Gong Luen and QM Taiwan to manufacture and ship Osco products to plaintiffs. Additionally, the Manufacturing Agreement specified that if Osco was sold during the life of the agreement, the Manufacturing Agreement would automatically renew under the same terms and conditions with the company that purchased Osco. The Manufacturing Agreement further required all disputes relating to its terms be resolved by mediation or arbitration in Minneapolis, Minnesota.
In early 2011, defendants began an investigation regarding the possible purchase of Osco and entered into a Confidentiality Agreement with plaintiffs on July 25, 2011. The Confidentiality Agreement is a form letter utilized by defendants in contemplation of purchasing companies and it referenced a "possible collaboration" between HIG and plaintiffs. During the same time period, defendants and QM entered into a Confidentiality Agreement using a form letter similar to the Confidentiality Agreement between defendants and plaintiffs. The Confidentiality Agreement between QM and the defendants also contained a clause that all disputes between them would be resolved in Delaware.
On or about September 11, 2012, plaintiffs and defendants executed a Letter of Intent,  whereby plaintiffs agreed not to solicit or negotiate any other potential agreements regarding the sale of Osco with any other companies, while defendants agreed to conduct timely due diligence. The Letter of Intent provided the content of the negotiations regarding defendants' potential acquisition would not be disclosed to any third parties, and the terms of the Confidentiality Agreement were incorporated within it.
Following the execution of the Letter of Intent between plaintiffs and defendants, Seastar had direct communications with QM and QM Taiwan about the shipment of Osco products and the fabrication of tooling to be used to manufacture products following Seastar's potential acquisition of the Osco assets. In November and December 2012, QM's President, Mark Ebbenga, had multiple meetings with Seastar's Vice President of Sales to discuss the possible purchase of Osco. During these meetings, Ebbenga and Seastar's Vice President of Sales agreed QM would sell Osco products directly to Seastar without plaintiffs' involvement. Seastar and QM exchanged documents, including the Confidentiality Agreement signed between Seastar and plaintiffs. Osco President, Glenn Cummins, Jr., ("Cummins") became aware of the communications and informed Seastar and QM that all communications regarding Osco products must be directed to plaintiffs. Cummins also informed Seastar that all orders for Osco products needed to go through Osco and could not be transmitted directly to QM. Additionally, Cummins mentioned to Seastar that the Manufacturing Agreement between plaintiffs and QM could not be negotiated or otherwise altered by Seastar and QM before plaintiffs finalized the sale of the Osco assets to Seastar.
During the course of Seastar's investigation regarding the potential purchase of Osco, it became aware of the Manufacturing Agreement between plaintiffs and QM. Seastar learned that, as a result of the Manufacturing Agreement, QM had complete control over the Osco product being shipped to plaintiffs' customers and the tooling used to manufacture the product. Therefore, Seastar was aware QM was capable of shipping Osco products or products manufactured with the tooling solely owned by plaintiffs, directly to any customer of its choosing. In further review of due diligence documents, Seastar learned QM and plaintiffs jointly owned the tooling necessary for the manufacture of all Osco products, and according to the terms of the Manufacturing Agreement, Osco could own the tooling unconditionally by January 2016. Seastar also learned Gong Luen was responsible for manufacturing all Osco products.
Although plaintiffs authorized certain conversations between QM and Seastar during the due diligence period, they never authorized QM and Seastar to negotiate a new manufacturing agreement that would commence after the sale of the Osco assets or to allow Gong Luen to manufacture product or fabricate tooling upon Seastar's request. Plaintiffs again informed Seastar that the Manufacturing Agreement between Osco and QM was not negotiable and would transfer to Seastar in its current form following Seastar's acquisition of the Osco assets. Regardless of these apparent understandings, and without plaintiffs' approval, Seastar continued to negotiate with QM to create a new manufacturing agreement between them effective following the sale of the Osco assets. In contravention of the Letter of Intent and the Confidentiality Agreement, Seastar disclosed plaintiffs' confidential information regarding customers and price terms to QM. Also, as negotiations between plaintiffs and Seastar continued, Seastar made direct orders to QM for specific tooling to be fabricated to manufacture parts. The requested tooling was fabricated by Gong Luen. Following this request, QM contacted plaintiffs and requested approval to sell Osco products and manifolds directly to Seastar. Plaintiffs denied QM's request pursuant to the terms of the Manufacturing Agreement.
On January 15, 2013, the President of QM Taiwan, Ms. Lee ("Lee"), gave plaintiffs notice of an alleged breach of the Manufacturing Agreement between QM and plaintiffs, due to nonpayment of invoices. Plaintiffs contested the unpaid invoices and Lee advised unless the breach was remedied, the Manufacturing Agreement would expire in 60 days or on March 15, 2013. On January 28, 2013, plaintiffs met with Ebbenga, and Seastar's Vice President of Sales to discuss a proposed extension of terms of the Letter of Intent, particularly the extension of the provision that prohibited plaintiffs from soliciting offers or negotiating the sale of Osco with any other entity for a period of 90 days. Cummins believed Seastar had sufficient time to conduct its due diligence, so he crossed out the 90 day extension and inserted that the agreement would terminate on February 27, 2013.
After the extension was signed, Lee informed plaintiffs that the outstanding invoices had to be addressed by February 28, 2013 or the Manufacturing Agreement between plaintiffs and QM would terminate. Cummins responded advising plaintiffs would work with QM and QM Taiwan to resolve the problem; however, QM did not cooperate in addressing the validity of a number of unpaid invoices prepared by QM Taiwan. Seastar continued to conduct its due diligence and appeared ready to purchase the Osco assets; however, Seastar and QM still directly communicated about the sale of the Osco assets and the manufacturing of the Osco product. Seastar and QM continued to negotiate the terms of a new manufacturing agreement, despite being informed by plaintiffs that the present Manufacturing Agreement was non-negotiable. It appeared that QM and Seastar were unable to agree upon the terms of a new manufacturing agreement, and Seastar informed Osco that the purchase of the Osco assets could not be completed due to QM's refusal to abide by the terms of the Manufacturing Agreement entered into between QM and plaintiffs.
On February 28, 2013, the day after the extension to the Letter of Intent expired, Seastar representatives met with Ebbenga to discuss the sale and purchase of manifolds manufactured on tooling that Seastar believed to be owned jointly by QM and plaintiffs. Following this meeting, Seastar purchased Osco product directly from QM, despite plaintiffs warnings. Seastar did not inform plaintiffs of these purchases. Defendants negotiated an agreement with QM, whereby QM would become defendants' exclusive supplier of marine equipment. Plaintiffs maintain these negotiations were substantively aided by the information obtained by Seastar during its due diligence process. On October 14, 2013, Seastar acquired Mallory Marine, which was one of plaintiffs' largest customers of Osco product. Following this acquisition, Seastar now controls a substantial portion of the marine manifold market.
In March 2013, plaintiffs' representatives, in an attempt to inspect the Osco product and tooling, were denied access to Gong Luen's Foundry in Taiwan where the product had been manufactured pursuant to the Manufacturing Agreement with QM. All subsequent attempts by plaintiffs to address the status of their tooling have been denied. QM Taiwan and Ebbenga now sell Osco product manufactured by Gong Luen, with the Osco trademark removed despite plaintiffs' ownership of the tooling. Although defendants were informed by QM Taiwan that Gong Luen incorrectly marked products with the Osco trademark, they continued to accept the mislabeled products and sold them in the marine manifold marketplace. Gong Luen manufactured additional product using plaintiffs' tooling, bearing the Osco trademark, which was sold in the marine manifold marketplace by defendants, QM Taiwan, and/or Ebbenga. Meanwhile, Seastar continues to purchase directly from QM, product manufactured from tooling solely owned by Osco.
C. Procedural Background
On May, 17, 2013, Osco filed its original complaint against Seastar and HIG, alleging tortious interference with contractual relations; injunctive relief; breach of contract; and breach of the duty to negotiate in good faith. On July 22, 2013, defendants moved to dismiss the claim of tortious interference with contractual relations pursuant to FED. R. CIV. P. 12(b)(1) for lack of standing, and the remaining three claims under FED. R. CIV. P. 12(b)(6) for failure to state a claim. On August 6, 2013, Osco filed an amended complaint adding Osco Motors Corporation, the name Osco does business as, and EDI, as plaintiffs. Subsequently, defendants withdrew their FED. R. CIV. P. 12(b)(1) motion as to the first count. On August 23, 2013, defendants moved to dismiss the second, third, and fourth counts of the amended complaint pursuant to FED. R. CIV. P. 12(b)(6) for failure to state a claim, and moved to stay the proceedings until the resolution of an arbitration between plaintiffs and QM, then a non-party, was concluded.
A report and recommendation recommended defendants' motion to dismiss count two be granted and counts three and four be denied. It also denied defendants' motion to stay proceedings. Defendants objected. On January 16, 2014, the district judge granted defendants' motion to dismiss counts two and four, denied the motion as to count three, and denied defendants' motion to stay. Plaintiffs were granted leave to file an amended complaint as to count four.
On January 29, 2014, plaintiffs filed a second amended complaint. Before defendants responded to the second amended complaint, plaintiffs moved for leave to file a third amended complaint on February 28, 2014. The issue of whether to grant plaintiffs' motion for leave to amend is presently under consideration.
1. Arbitration Proceeding
According to the Manufacturing Agreement between Osco and QM, any dispute would be resolved by arbitration in Minnesota under state law. On May 30, 2013, plaintiffs initiated their request for arbitration, contending QM breached the Manufacturing Agreement by selling Osco products to third parties. On March 11, 2014, the arbitrator ruled in favor of QM and denied all plaintiffs' claims. The arbitrator found plaintiffs breached the Manufacturing Agreement by failing to pay invoices to QM, thereby effectively terminating the agreement on February 28, 2013. The arbitrator reasoned QM could only mitigate damages caused by plaintiffs by selling Osco products to third parties. For plaintiffs' additional claims of misuse of confidential information/trade secrets, wrongful retention of Osco's tooling, wrongful interference with contract, wrongful interference with prospective business advantage and wrongful stealing of customers, the arbitrator concluded they were not supported by evidence and barred by plaintiffs' own breach of the contract. The arbitrator further determined plaintiffs were liable to QM for costs of $302, 052, which comprise of unpaid invoices and mitigation expenses.
On April 2, 2014, plaintiffs moved to vacate the arbitration award in United States District Court for the District of Minnesota. QM moved to confirm the award. The hearing on the motion to vacate will occur on June 27, 2014.
III. Position of Parties
A. Counts 1, 8, 9, 10, and 11
In regards to count one for tortious interference with contractual relations, plaintiffs assert Seastar, when conducting its due diligence on the potential purchase of Osco, became aware of the details of the Manufacturing Agreement between plaintiffs and QM and realized QM was prohibited from manufacturing or selling Osco products to any other company besides plaintiffs. Despite this knowledge, Seastar ordered Osco products directly from QM and stopped ordering directly from plaintiffs. Due to Seastar's purchase of Osco product directly from QM, plaintiffs contend their business relations with other existing customers, as well as with QM, was injured.
Defendants contend this claim is futile because plaintiffs are barred by collateral estoppel from proving an intentional act that is a significant factor in causing the breach of contract tortious interference with contractual relations. Defendants state plaintiffs are unable to argue that QM breached the Manufacturing Agreement because that issue was precisely litigated in the arbitration between plaintiffs and QM. Defendants assert since the arbitrator determined plaintiffs breached and thus terminated the Manufacturing Agreement, they are collaterally estopped from now claiming defendants committed an intentional act that was a substantial factor in causing QM's breach of the agreement.[102 ...