Case3:10-cv-03668-WHA Document37 Filed11/10/10 Page1 of 5

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6 IN THE UNITED STATES DISTRICT COURT
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FOR THE NORTHERN DISTRICT OF CALIFORNIA
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10 RANDALL KING NELSON in his capacity as
a security-holder representative of the
For the Northern District of California

11 shareholders of Kerberos Proximal Solutions, No. C 10-03668 WHA

Inc.,
United States District Court

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Plaintiff,
13 ORDER DENYING
v. DEFENDANTS’ MOTION
14 TO DISMISS
EV3, INC., FOXHOLLOW
15 TECHNOLOGIES, INC., COVIDIEN, PLC,
COVIDIEN GROUP S.A.R.L., a Luxembourg
16 Company, and COV DELAWARE, a Dublin,
Ireland Corporation,
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Defendants.
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INTRODUCTION
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In this action on behalf of shareholders alleging that a parent company did not fulfill its
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obligations under a merger agreement, defendants moved to dismiss all claims due to lack of
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standing and in the alternative to dismiss two of the three claims as a matter of law. Subsequent
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to a hearing on the motion, the parties have stipulated to a form of shareholder notice that is
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discussed in a separate order. For the reasons set forth below, defendants’ motion in other
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respects is DENIED.
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STATEMENT
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Plaintiff Randall King Nelson sues on behalf of shareholders of Kerberos Proximal
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Solutions, Inc. A merger united two makers of medical devices. Kerberos’s product was the
Rinspirator, a hand-held device for infusing fluid into, and aspirating debris out of, coronary
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1 and peripheral arteries. Defendant FoxHollow Technologies, Inc. manufactured SilverHawk, a

2 device for removing plaque from peripheral arteries. The devices appeared to complement each
3 other, and the larger FoxHollow acquired Kerberos.
4 The deal was an earnout agreement for an initial payment of $33 million which was to
5 be followed by additional payments based on Rinspirator sales during the second and third
6 years of the merger — from September 2007 to August 2009. The merger agreement obligated
7 the surviving entity to “use commercially reasonable efforts to market, promote, sell and
8 distribute” Rinspirator. According to the complaint, Kerberos shareholders expected the
9 earnout proceeds to exceed the initial payment. The agreement allowed for up to $117 million
10 in deferred payments.
For the Northern District of California

11 But no additional payments were ever made. Rinspirator sales withered. Plaintiff
United States District Court

12 alleges that FoxHollow shunned plaintiff’s offers to help with the integration, pushed away key
13 Kerberos workers, neglected its own workforce, inadequately trained salespeople, created sales
14 disincentives, choked off research and development, and ignored the cardiovascular market.
15 Moreover, FoxHollow squandered opportunities for synergy. For example, FoxHollow
16 positioned Rinspirator as a preparation for SilverHawk with the slogan, “Rinse. Hawk. Walk.”
17 Plaintiff alleges that this strategy ignored the utility of using Rinspirator afterward as well, to
18 remove debris generated by SilverHawk.
19 Defendant ev3, Inc. acquired FoxHollow just as the earnout period began. Plaintiff
20 alleges that ev3 exacerbated all of FoxHollow’s blunders with respect to Rinspirator and
21 compounded the sales problems. After the close of the fruitless earnout period, ev3 was
22 acquired by defendant Covidien, PLC.
23 Plaintiff asserts three claims in his complaint: breach of written contract, breach of the
24 implied covenant of good faith and fair dealing, and breach of fiduciary duty. This action was
25 removed from state court based on diversity jurisdiction. Defendants moved to dismiss the
26 complaint on the ground that Nelson lacks authority to bring suit as a shareholder
27 representative. Defendants also moved to dismiss the implied covenant and fiduciary duty
28 claims as insufficiently pled.

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1 A hearing on defendants’ motion focused on the standing issue. The parties disputed
2 whether a clause in the agreement authorized plaintiff to act as a shareholder representative only
3 for limited types of claims (defendants’ view) or for any claim (plaintiff’s view). A subsequent
4 order set out the sources of frustration in interpreting the clause, and set a one-day trial to
5 determine whether Nelson has representative standing to pursue the claims in the complaint
6 (Dkt. No. 28). The parties subsequently stipulated to a form of notice which would give each
7 shareholder the opportunity to opt into being represented by plaintiff Nelson in this action; the
8 proposed notice will be addressed in a separate order.
9 ANALYSIS
10 1. BREACH OF THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING
For the Northern District of California

11 The parties agree that, under the merger agreement, Delaware law governs. Under
United States District Court

12 Delaware law, the implied covenant attaches to every contract. The Delaware Supreme Court
13 recently stated:
14 The implied covenant of good faith and fair dealing involves a cautious
enterprise, inferring contractual terms to handle developments or contractual
15 gaps that the asserting party pleads neither party anticipated. [O]ne generally
cannot base a claim for breach of the implied covenant on conduct authorized by
16 the agreement. We will only imply contract terms when the party asserting the
implied covenant proves that the other party has acted arbitrarily or
17 unreasonably, thereby frustrating the fruits of the bargain that the asserting
party reasonably expected. When conducting this analysis, we must assess the
18 parties’ reasonable expectations at the time of contracting and not rewrite the
contract to appease a party who later wishes to rewrite a contract he now
19 believes to have been a bad deal. Parties have a right to enter into good and bad
contracts, the law enforces both.
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Nemec v. Shrader, 991 A.2d 1120, 1125–26 (Del. 2010) (internal quotation marks and footnotes
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omitted) (emphasis added).
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The merger agreement expressly established that defendants had to perform with
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commercially reasonable efforts. Defendants contend that plaintiff has failed to state a claim
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because the covenant cannot imply a contract term — acting in good faith — where the parties
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have expressly bargained for a different term — performing with commercially reasonable
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efforts. Defendants’ argument fails for two reasons.
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First, the merger agreement was not so explicit that it left no gaps for implicit terms.
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Although the merger agreement itself ran eighty-five pages, the section regarding the

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1 obligations of the parent ran only seven lines — and most of that dealt with proper calculation
2 of the sales amounts. This action is concerned only with the following language: “Parent shall
3 use commercially reasonable efforts to market, promote, sell and distribute” the Rinspirator.
4 This provision is so spare that defendants cannot credibly claim that a good faith requirement
5 would burden them with more than they bargained for.
6 Second, commercially reasonable efforts do not exclude good faith. Although
7 defendants are correct that the agreement did establish an express standard of performance, the
8 implied covenant is consistent with that express provision. Defendants are, in essence, asking
9 that a reasonableness requirement not be read into a contract calling for reasonable efforts.
10 Defendants also contend that the implied covenant claim must fall because it is factually
For the Northern District of California

11 indistinguishable from the contract claim. Plaintiff correctly counters, however, that his
United States District Court

12 complaint sets forth facts specific to his implied covenant claim.

13 The complaint alleges that FoxHollow and ev3 unreasonably came to see Rinspirator as
14 a device that called attention to, rather than compensated for, SilverHawk’s shortcomings. The
15 complaint also alleges that defendants arbitrarily ignored the cardiovascular market. Plaintiff
16 has not pled facts suggesting that Kerberos shareholders waived their implied right to be treated
17 fairly by the defendants. Plaintiff is not asking that the contract be rewritten after the fact.
18 Defendants’ motion to dismiss on this ground is therefore DENIED.
19 2. BREACH OF FIDUCIARY DUTY
20 Defendants move to dismiss the breach of fiduciary duty claim because they assert that
21 no such duty existed. Defendants contend that the legal relationship was purely contractual,
22 that a fiduciary duty cannot arise from an arms-length transaction, and, in any case, the express
23 terms of the agreement ruled out a fiduciary duty.
24 Yet under Delaware law, a fiduciary duty can arise even outside of a traditional agency
25 relationship. The Supreme Court of Delaware has held, “[a] fiduciary relationship is a situation
26 where one person reposes special trust in another or where a special duty exists on the part of
27 one person to protect the interests of another.” Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 901
28 A.2d 106, 113 (Del. 2006) (quotation marks omitted). A court must assess whether the two

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1 parties’ interests aligned, whether the defendant exerted dominion or control, and whether there
2 was evidence of self-dealing. Id. at 114.
3 Defendants argue that the “commercially reasonable efforts” required in the merger
4 agreement left room for defendants to pursue their own interests and was thus incompatible
5 with a fiduciary relationship. But plaintiff has alleged sufficient facts in the complaint to
6 suggest that his relationship with defendants went well beyond that of an ordinary commercial
7 transaction. Plaintiff alleges that, at the outset, Rinspirator was thought to be a good
8 counterpart to SilverHawk, suggesting that the interests of each company were aligned. After
9 the merger, defendants controlled the fate of Rinspirator. While it is true that FoxHollow
10 obtained this control by paying $33 million for the device, Kerberos’s shareholders expected at
For the Northern District of California

11 least that much more based on Rinspirator sales. Plaintiff also alleges that, after the merger,
United States District Court

12 defendants promoted SilverHawk at the expense of, instead of alongside, Rinspirator,

13 suggesting self-dealing.
14 These facts sufficiently state a claim for breach of fiduciary duty under Delaware law to
15 survive a Rule 12(b)(6) motion. Therefore, defendants’ motion to dismiss plaintiff’s fiduciary
16 duty claim is DENIED.
17 CONCLUSION
18 For the foregoing reasons, defendants’ motion to dismiss the implied covenant and
19 fiduciary duty claims is DENIED.
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21 IT IS SO ORDERED.
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23 Dated: November 10, 2010.
WILLIAM ALSUP
24 UNITED STATES DISTRICT JUDGE
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