On July 30, 2019, the U.S. District Court for the Southern District of California issued a decision concerning the scope and interpretation of an agreement that required software maintenance. Specifically, the dispute, which included claims for declaratory relief, breach of contract, and various torts, centered around an alleged intra-corporate conspiracy to deprive plaintiff software maintenance services for imaging technology. As analyzed in greater detail in this column, the court issued rulings in both parties’ favor and ultimately did not completely grant defendants’ motion to dismiss. See Vascular Imaging Prof’l v. Digirad, No. 19cv486 JM(MSG), 2019 WL 3429178 (S.D. Cal. July 30, 2019).

Facts and Procedural History

Plaintiff Vascular Imaging Professionals (Vascular) provides a “mobile nuclear imaging service,” which requires the use of sophisticated cameras and related equipment procured from third-parties. Defendants are Digirad Corporation (Digirad Corp.) and Digirad Imaging Solutions, Inc. (Digirad Imaging, and together, Defendants). Defendants were part of the same corporate structure.

In May 2017, Vascular and Digirad Corp. entered into an Equipment Full Maintenance & Support Master Agreement (the Maintenance Agreement). This Agreement required Vascular to pay an annual fee per camera and Digirad Corp. was to provide on-demand maintenance services. Digirad Corp. was also required to provide a “Windows 7 upgrade” to five of Vascular’s cameras and one work station, which amounted to six licenses (the Upgrades).

Vascular maintained it paid the monthly fees and otherwise entirely complied with the Maintenance Agreement. It also claimed that Defendants breached the Maintenance Agreement by failing to provide Upgrades, and ignored repeated demands for the same. According to Vascular, in response to its demands for compliance with the Maintenance Agreement, Defendants “claimed that its performance was cost prohibitive and then further breached the Maintenance Agreement by purporting to terminate the agreement, without good cause.” Finally, Vascular claims that Digirad Corp., notwithstanding its purported termination of the Maintenance Agreement, continued to debit Vascular for monthly payments due under the Maintenance Agreement.

Vascular made two sets of allegations against the Defendants, both acting together and individually. First, Vascular’s complaint alleged that Defendants breached the implied covenant of good faith and fair dealing by both: (1) “fabricating” grounds to terminate the Maintenance Agreement in order to benefit Digirad Imaging, a mobile nuclear imaging service and direct competitor of Vascular, and (2) “in order to avoid its own performance obligations under the [Maintenance] Agreement.” According to Vascular, Digirad Corp.’s obligations included delivering the Upgrades as set forth in the Maintenance Agreement—which Digirad Corp. failed to do.

Second, according to Vascular, Digirad Imaging caused a breach of the Maintenance Agreement by conspiring with Digirad Corp. to ensure that the latter would withhold the Upgrades and other services, all the while continuing to debit the monthly fees from Vascular’s account, irrespective of whether Digirad Corp. continued to provide services for which they were remunerated by Vascular.  In the same vein, Vascular alleged the Defendants acted in concert to ensure that Vascular lost its clients due to service delays, so that the clients “could be solicited to contract instead with Digirad Imaging.”

Vascular sued in state superior court alleging, inter alia, breach of contract, tortious interference with contract, and intentional interference with prospective economic advantage. Vascular also sought declaratory relief in the form of a declaration that the Maintenance Agreement must be rescinded and that Vascular receive restitution. Defendants removed to federal court pursuant to diversity jurisdiction under 28 U.S.C. §1332 and filed a motion to dismiss all of Vascular’s claims.

Legal Analysis and Conclusions

This column examines the resolution of the declaratory relief, tortious interference with contract and intentional interference with prospective economic advantage.

First, the Defendants moved to dismiss the declaratory relief claim on grounds that it was duplicative of the breach of contract claim. Specifically, Defendants argued that the resolution of the breach of contract claim would resolve any questions concerning the interpretation of the Maintenance Agreement, which related inextricably to the requested declaratory relief. Vascular countered that the declaratory relief claim pertained to a request for rescission and restitution that were not encompassed by the breach of contract claims.

The court agreed with Vascular and denied Defendants’ motion to dismiss. Specifically, the court held that the breach of contract claims do not wholly encompass the declaratory relief claim because the claims sought different relief inasmuch as the breach of contract claim sought damages to “redress past wrongs, whereas the declaratory relief claim goes one step further, seeking a declaration that Plaintiff will incur no future liability, meaning resolution of the breach of contract claim will not fully resolve Plaintiff’s request for declaratory relief.”

Second, Defendants moved to dismiss Vascular’s tortious interference with contract claim on grounds that Digirad could not be liable as a matter of law for interfering with the performance of a contract to which it was a party. Defendants also alleged that Digirad Imaging could not be liable for this claim as a matter of law because Vascular’s complaint did not include facts evidencing intentional acts by Digirad Imaging designed to induce a breach or disrupt the performance of the Maintenance Agreement because, as members of the same corporate family, Digirad Corp. and Digirad Imaging could not conspire with each other. In its opposition, Vascular conceded that the claim should not have been brought against Digirad Corp.

The court agreed and dismissed Vascular’s claim against Digirad Imaging. The court reasoned that the complaint was “devoid of any facts in support of Plaintiff’s bare allegations of the conspiracy between the Defendants and Digirad Imaging intended to interfere with the contract. Such conclusory allegations do not establish the necessary elements of the claim.” Consequently, the court did not address the applicability of the intra-corporate conspiracy doctrine to the Defendants, though it did speculate in dicta that it would apply to the Defendants given that Digirad Corp. had “ownership and control” over Digirad Imaging.

Third, Defendants moved to dismiss the intentional interference with prospective economic advantage claim because Vascular “failed to allege that an economic relationship existed between it and some third party, that was known to Defendants, or that Defendants engaged in wrongful economic conduct independent of the interference itself.” Applying the five elements set forth under California common law, the court agreed with Defendants and dismissed the claim. The court reasoned that Vascular offered only “general conclusory allegations regarding lost sales and the damages to the relationship” with its customers, which did not evidence “an economic relationship between the plaintiff and some third party, with the probability of future economic benefit to the plaintiff[.]” (citations omitted). In addition, the court dismissed the claim because Vascular, aside from a cursory reference to its direct competition with Digirad Imaging, did not set forth in its complaint any allegations that Defendants had knowledge of any relationship between Vascular and the customers.

Richard Raysman is a partner at Holland & Knight and Peter Brown is the principal at Peter Brown & Associates. They are co-authors of “Computer Law: Drafting and Negotiating Forms and Agreements” (Law Journal Press).