Former shareholders of medical device company CardioSpectra, acquired by Volcano (NSDQ:VOLC) in 2007, have another 2 weeks to correct the defects in a lawsuit seeking some $17 million in milestone payments from Volcano.
That San Diego-based medical device company paid $25.2 million up front for CardioSpectra, which developed a system to use optical coherence tomography to generate high-resolution images the coronary arteries.
The deal called for another $38 million in milestones, including an $11 million payout after regulatory wins in the U.S., Japan or the European Union "of a 1st-generation OCT system on or before Dec. 31, 2009," according to court documents.
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A 2nd, $10 million earn-out would be triggered by "approval by U.S. regulators of a ‘productized’ OCT system by the end of 2010. Two other milestone payments totalling $17 million would be due if the OCT system’s sales certain sales milestones within 4 years of the FDA nod, according to the documents.
Volcano reached the 1st milestone and doled out the requisite $11 million, but has yet to reach the 2nd U.S. regulatory milestone. The plaintiffs, including former CardioSpectra CEO Chris Banas and former COO Paul Castella, want Volcano to make the 2nd, $10 million payout anyway, according to Judge Yvonne Gonzalez Rogers, "because Volcano allegedly failed to meet its contractual standard of performance."
"As no OCT system has received the required approvals, it follows that there have been no sales of OCT products. Nevertheless, plaintiffs allege that Volcano has achieved sales goals required to trigger milestones 3 and 4 and that plaintiffs are therefore entitled to payments [of $17 million]," Gonzalez Rogers wrote.
Banas is now CEO of Bio2 Medical and is listed as a managing partner at Incyte Ventures.
The lawsuit alleges 3 claims: Breach of contract, breach of implied covenant and breach of fiduciary duty. The judge tentatively granted Volcano’s motion to dismiss the case, but gave the former CardioSpectra shareholders leave to file an amended complaint to fix the defects.
"Plaintiffs to not allege they were signatories to the agreement and plaintiffs, who are former shareholders of CardioSpectra, do not sue in their capacity as former shareholders or allege that they were shareholders at the requisite time," Gonzalez Rogers wrote, according to court documents. "The court grants the motion to dismiss count 2 for breach of the implied covenant of good faith and fair dealing with leave to amend to the extent plaintiffs can identify a specific obligation implied in the agreement.
"While plaintiffs allege that they placed special trust in Volcano, nothing in the [merger agreement] justifies imposing on Volcano the ‘exacting standards of fiduciary duties,’" she wrote. "Additionally, although plaintiffs allege that they were entirely dependent upon Volcano to develop and sell the OCT technology, such dependence does not elevate an ordinary commercial relationship – based upon an arms-length merger agreement – into a fiduciary relationship.
"Under these circumstances, even assuming a fiduciary relationship existed, the [merger agreement] fails to allege such a fiduciary duty," Gonzalez Rogers wrote.
Volcano said it believes the lawsuit to be meritless and that it plans to "vigorously defend against" the suit, according to a regulatory filing.
Volcano also revealed in the filing that St. Jude Medical filed a sealed complaint alleging infringement of a St. Jude patent, "Method and system for determining physiological variables," covering FFR- related technology. St. Jude acquired the technology and intellectual property in its $250 million buyout of Swedish medical device company Radi Medical System in 2008.
