Opinion
Index Nos. 657391/2020 595214/2021
10-12-2022
CDx Diagnostics, Inc., formerly known as Oral Cancer Prevention International, Inc., Plaintiff, v. Mark Rutenberg, Red Mountain Medical Holdings, Inc., Adenocyte, LLC, Scott Korman, Defendants. Mark Rutenberg, Adenocyte, LLC, Plaintiff, v. Galen Management, LLC, David Jahns, William Huffnagle, Thomas Bologna, John Watts, Stacey Bauer, CDx Holdings, Inc., Defendants.
Unpublished Opinion
ROBERT R. REED, J.
The following e-filed documents, listed by NYSCEF document number (Motion 002) 23, 24, 25, 26, 27, 44, 45, 46, 47, 48, 49, 50, 51, 52, 53, 54, 55, 56, 57, 59, 63, 77, 78, 79 were read on this motion to/for COMPEL ARBITRATION.
The following e-filed documents, listed by NYSCEF document number (Motion 003) 28, 29, 30, 31, 32, 33, 34, 42, 43, 58, 61, 81, 82, 83, 84, 85, 86, 87, 107 were read on this motion to/for DISMISS.
The following e-filed documents, listed by NYSCEF document number (Motion 004) 35, 36, 37, 38, 39, 40, 41, 60, 62, 88, 89, 90, 91, 92, 93, 94, 95, 108, 109 were read on this motion to/for DISMISS.
The following e-filed documents, listed by NYSCEF document number (Motion 005) 64, 65, 66, 67, 68, 69, 70, 71, 72, 73, 74, 75, 76, 96, 97, 98, 99 were read on this motion to/for DISMISS.
The following e-filed documents, listed by NYSCEF document number (Motion 006) 100, 101, 102, 103, 104, 105, 106, 112, 113, 114, 115, 116 were read on this motion to/for DISMISSAL.
The following e-filed documents, listed by NYSCEF document number (Motion 007) 110, 111, 118, 119, 120, 121, 122 were read on this motion to/for DISMISS.
Plaintiff CDx Diagnostics, Inc., f/k/a Oral Cancer Prevention International, Inc. (CDx), is a health care technology company specializing in the development and analysis of advanced diagnostic cancer tests. From 2016 to 2019, defendant Dr. Mark Rutenberg (Rutenberg), was working on the development of a new product line for CDx for the detection of pancreatic cancer. Pursuant to an Employee Proprietary Information, Inventions, Non-Solicitation and Non-Competition Agreement (the IP Agreement) that Rutenberg signed in connection with his employment by CDx, Rutenberg assigned all rights he had in any inventions conceived or reduced to practice during his employment with the company, and in any related proprietary information, to CDx. Nevertheless, Rutenberg assigned the new pancreatic cancer technology and all associated intellectual property to a separate LLC that he owned, defendant Adenocyte LLC (Adenocyte).
In September 2020, CDx terminated Rutenberg's employment "for cause" pursuant to his Executive Employment Agreement with CDx (the EEA). In its complaint, CDx seeks a declaratory judgment that Rutenberg's purported assignment to Adenocyte was void ab initio, that CDx is the rightful owner of the Proprietary Information, Inventions, and Proprietary Rights (as those terms are defined in the IP Agreement) related to the pancreatic cancer technology that Rutenberg developed at CDx (collectively, the Pancreatic IP), and to permanently enjoin defendants from exploiting the Pancreatic IP in any way.
Rutenberg and Adenocyte filed an answer in which they assert twenty-four affirmative defenses, and counterclaims and third-party claims, including counterclaims against CDx and third-party claims against CDx Medical Holdings, Inc. (CDx Holdings, incorrectly named as CDx Holdings, Inc.), Galen Management, LLC (Galen), David Jahns (Jahns), Thomas Bologna (Bologna), and John Watts (Watts) (directors of CDx and CDx Holdings), William Huffnagle (Huffnagle, the CEO of CDx and a director of CDx and CDx Holdings), and Stacey Bauer (Bauer, the CFO of Galen).
Motion sequence nos. 002, 003, 004, 005, 006 and 007 are consolidated for disposition. In motion sequence no. 002, CDx moves, pursuant to CPLR 7503 (a) and 9 USC § 3, for an order compelling Rutenberg to arbitrate his declaratory judgment counterclaim relating to the termination of his employment by CDx, and to stay further proceedings on this claim, pending arbitration.
In motion sequence no. 003, plaintiff-counterclaim defendant CDx and third-party defendant CDx Holdings move: (1) pursuant to 3211 (a) (1) and/or (a) (7), for an order dismissing the counterclaims and third-party claims asserted as against them; (2) pursuant to 3211 (b), for an order dismissing certain affirmative defenses asserted by Rutenberg and Adenocyte; and (3) pursuant to 22 NYCRR § 130-1.1, for an award of attorney's fees, costs, and financial sanctions against Rutenberg, Adenocyte, and their counsel of record.
In motion sequence no. 004, Galen, Jahns, Huffnagle, Bologna and Bauer move: (1) pursuant to CPLR 3211(a) (1) and/or (a) (7), for an order dismissing the third-party claims asserted as against Galen and the individual defendants; (2) pursuant to CPLR 3211 (a) (8), for an order dismissing the third-party claims as against third-party defendants Galen and Bauer for lack of personal jurisdiction; and 3) pursuant to 22 NYCRR § 130-1.1, for an award of attorney's fees, costs, and financial sanctions against Rutenberg, Adenocyte, and their counsel of record.
In motion sequence no. 005, Rutenberg and Adenocyte move: (1) pursuant to 28 USC § 9 and/or CPLR 7503 (b), for an order vacating any arbitration demand that might be served by CDx, and determining that the disputes between Rutenberg and Adenocyte on the one hand and CDx on the other are not subject to arbitration; and (2) pursuant to CPLR 3211 (a) (5) and (7), for an order dismissing the sole remaining claim in the complaint (for declaratory judgment) for failure to state a claim.
In motion sequence no. 006, Rutenberg and Adenocyte move, pursuant to CPLR 3127 (b), for an order discontinuing and dismissing with prejudice their sixth counterclaim for conversion.
In motion sequence no. 007, third-party defendant Watts moves: (1) pursuant to CPLR 3211 (a) (1) and/or (a) (7), for an order dismissing the third-party claims asserted as against him; and (2) pursuant to 22 NYCRR § 130-1.1, for an award of attorney's fees, costs, and financial sanctions against Rutenberg, Adenocyte, and their counsel of record.
For the reasons set forth below, CDx's motion for an order compelling arbitration (motion sequence no. 002) is granted, and defendants' motion for an order vacating any arbitration demand, and for dismissal of the declaratory judgment cause of action (motion sequence no. 005) is denied. The motions to dismiss the counterclaims and certain affirmative defenses (motion sequence nos. 003, 004 and 007) are granted, but the motions for an award of costs and sanctions are denied. Defendants' motion for voluntary discontinuance of their sixth counterclaim for conversion (motion sequence no. 006) is granted.
FACTS
Background
CDx is a clinical laboratory company based in Suffern, New York, and was founded by Rutenberg (counterclaims and third-party claims (CTPC [NYSCEF Doc No. 8], ¶¶ 2, 44). In 2015, CDx failed to repay loans extended by its creditors, became embroiled in litigation with them, and ultimately had a civil judgment entered against it (id., ¶¶ 67-71). Faced with the possibility of being forced into an involuntary bankruptcy, CDx began rescue discussions with Galen, a private equity firm based in Stamford, Connecticut (id., ¶¶ 38, 73).
In February 2017, after extensive negotiations between Galen and CDx, Galen agreed to inject $40 million into CDx in exchange for a controlling share of the company (id., ¶ 86). Galen and CDx entered into a stock and asset purchase agreement in June 2017 (id., ¶ 89). Under the terms of the agreement, a Galen-led investor consortium purchased the operating assets of CDx, including shares of CDx (id., ¶ 90). In July 2017, the transaction closed, and special purpose vehicles affiliated with Galen became controlling shareholders of CDx Holdings, an entity that was created by Galen and the other investors to own the operating assets of CDx (id., ¶¶ 38, 89- 90). In connection with the transaction, the interests of Rutenberg and other legacy shareholders were spun out to a new entity now known as Red Mountain Medical Holdings, Inc. (Red Mountain) (id., ¶¶ 91-92). In addition, Galen obtained the right to appoint four individuals to the boards of directors of CDx Holdings and CDx (id., ¶ 97). Galen appointed Bologna, Jahns, Huffnagle and Watts to these boards (id., ¶¶ 39-42, 97).
Galen agreed that Rutenberg would remain as CEO of CDx following the closing of the transaction (id., ¶ 93). On July 7, 2017, in connection with the closing, Rutenberg and CDx entered into the EEA (NYSCEF Doc No. 27) (id., ¶ 94).
The EEA and its Provisions
The EEA provided the terms of Rutenberg's employment with CDx, including with regard to his cash and equity compensation and fringe benefits, reimbursements for business expenses, and covenants with respect to outside employment and conflicting obligations (see EEA, §§ 2, 4-5). The EEA also set forth grounds for termination for cause and procedures which must be followed in that circumstance, as well as the effects of a "for cause" termination (see id., §§ 2.3 [c], 2.4 [b], 6.1 [d]-[e], 6.2). The EEA included an integration clause: "This Agreement constitutes the entire agreement between [Rutenberg] and [CDx] with regard to the subject matter hereof" (id., § 7.5).
The EEA also contained a dispute resolution provision which mandated arbitration as the sole forum for the parties to resolve their disputes, and in which the parties covenanted not to sue one another in court for disputes subject to arbitration. Specifically, Section 7.10 of the EEA, entitled "Dispute Resolution," provided:
"The parties recognize that litigation in federal or state courts or before federal or state administrative agencies of disputes arising out of Executive's employment with the Company or out of this Agreement, or Executive's termination of employment or termination of this Agreement, may not be in the best interests of either the Executive or the Company, and may result in unnecessary costs, delays, complexities, and uncertainty. The parties agree that any dispute between the parties arising out of or relating to the negotiation, execution, performance or termination of this Agreement or Executive's employment, including, but not limited to, any claim arising out of this Agreement, claims under Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990, Section 1981 of the Civil Rights Act of 1966, as amended, the Family Medical Leave Act, the Executive Retirement Income Security Act, and any similar federal, state or local law, statute, regulation, or any common law doctrine, whether that dispute arises during or after employment, shall be settled by binding arbitration in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association; provided however, that this dispute resolution provision shall not apply to any separate agreements between the parties that do not themselves specify arbitration as an exclusive remedy. The location for the arbitration shall be the New York metropolitan area. Any award made by such panel shall be final, binding and conclusive on the parties for all purposes, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The arbitrators' fees and expenses and all administrative fees and expenses associated with the filing of the arbitration shall be borne by the Company; provided however, that at Executive's option, Executive may voluntarily pay up to one-half the costs and fees. The parties acknowledge and agree that their obligations to arbitrate under this Section survive the termination of this Agreement and continue after the termination of the employment relationship between Executive and the Company. The parties each further agree that the arbitration provisions of this Agreement shall provide each party with its exclusive remedy, and each party expressly waives any right it might have to seek redress in any other forum, except as otherwise expressly provided in this Agreement. By electing arbitration as the means for final settlement of all claims, the parties hereby waive their respective rights to, and agree not to, sue each other in any action in a Federal, State or local court with respect to such claims, but may seek to enforce in court an arbitration award rendered pursuant to this Agreement. The parties specifically agree to waive their respective rights to a trial by jury, and further agree that no demand, request or motion will be made for trial by jury" (id., § 7.10 [emphasis added]).
The IP Agreement
As a condition of his continued employment by CDx following the Galen transaction, Rutenberg was required to execute-and did execute-an Employee Proprietary Information, Inventions, Non-Solicitation and Non-Competition Agreement (the IP Agreement [NYSCEF Doc NO. 33]) (CTPC ¶ 94; see IP Agreement, § 3). Under the terms of the IP Agreement, Rutenberg assigned to CDx any and all inventions he conceived or developed during the course of his employment:
" Assignment of Inventions. Subject to Subsection 2.4, I hereby assign, grant and convey to the Company all my right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by me, either alone or jointly with others, during the period of my employment with the Company. Inventions assigned to the Company or its designee are referred to as 'Company Inventions'" (IP Agreement, § 2.3).
The IP Agreement also provided a narrow exception to the assignment for inventions that Rutenberg developed "entirely on [his] own time" and that (1) did not relate to CDx's actual or anticipated business or research; and (2) did not result from work performed by him for CDx:
"Unassigned/Nonassignable Inventions. I recognize that this Agreement will not be deemed to require assignment of any Invention that I developed entirely on my own time without using the Company's equipment, supplies, facilities, trade secrets, or Proprietary Information, except for those Inventions that either (i) relate to the Company's actual or anticipated business, research or development, or (ii) result from or are connected with work performed by me for the Company" (id., § 2.4).
A Dispute Arises Between Rutenberg and CDx Regarding the Ownership of Certain Intellectual Property
On March 23, 2018, Rutenberg filed a provisional patent application (No. 62/793061) (the '061 Patent) relating to the detection of pancreatic cancer (CTPC ¶ 119). He thereafter purported to assign his rights to the '061 Patent and related technology to defendant Adenocyte, a Delaware limited liability company (id., ¶ 214). In January 2019, Rutenberg filed a patent application for this technology (id., ¶ 123). In March 2020, CDx asserted that the '061 Patent fell within the scope of "Company Inventions" pursuant to the IP Agreement, and demanded that Rutenberg assign the '061 Patent and related intellectual property subject to the IP Agreement to CDx.
Rutenberg refused, asserting that the intellectual property did not belong to CDx. Rutenberg based his argument on section 2.4 of the IP Agreement, which excludes from this assignment obligations inventions that Rutenberg "developed entirely on [his] own time without using the Company's equipment, supplies, facilities trade secrets, or Proprietary Information." Rutenberg contends that intellectual property discussed above was developed by him prior to his employment at CDx, without using any CDx resources, and was never in the CDx pipeline, let alone something that CDx would ever want to or be able to develop (id., ¶ 132).
Rutenberg's Employment Is Terminated for Cause
In September 2020, CDx terminated Rutenberg's employment by CDx "for cause" (CTPC, ¶ 204). CDx followed the procedure for terminations for cause set forth in the EEA and referenced these provisions in its notice of termination to Rutenberg.
CDx Commences This Action, and Rutenberg and Adenocyte Assert Counterclaims Against CDx and Commence a Third-Party Action
On December 31, 2020, CDx commenced this action against Rutenberg, Red Mountain, Adenocyte, and Scott Korman by the filing of a summons and complaint (NYSCEF Doc No. 1). On February 12, 2021, CDx filed an amended complaint (NYSCEF Doc No. 6) against Rutenberg and Adenocyte, asserting a declaratory judgment claim against both Rutenberg and Adenocyte, and a claim for unjust enrichment against Adenocyte (amended complaint, ¶¶ 36-46). On February 23, 2021, CDx voluntarily discontinued all claims against Red Mountain and Korman without prejudice (NYSCEF Doc No. 7).
In the amended complaint, CDx seeks a judgment declaring that (1) the IP Agreement is valid and enforceable; (2) any purported assignment by Rutenberg of intellectual property to Adenocyte was invalid and void ab initio; (3) CDx is the rightful owner of the intellectual property relating to diagnostic tests for pancreatic cancer; and (4) defendants must formally assign the '061 Patent and related intellectual property to CDx (see amended complaint at 12 [ad damnum clause]). The amended complaint also seeks a permanent injunction, damages (in the alternative), attorney's fees and other costs incurred in bringing the action, and other relief (id.).
On March 5, 2021, defendants filed an answer, which contains twenty-four affirmative defenses, and counterclaims and third-party claims, including counterclaims against CDx and third-party claims against CDx Holdings, Galen, Jahns, Bologna, Watts, Huffnagle and Bauer.
Specifically, defendants assert the following counterclaims: misappropriation of commercial advantage, labor, skills, expenditures of good will (first counterclaim; against CDx, Galan, Jahns, Bologna, Huffnagle, Bauer and Watts); declaratory judgment (second counterclaim; against CDx and CDx Holdings); abuse of process (third counterclaim; against CDx, Galan, Jahns, Bologna, Huffnagle, Bauer and Watts); breach of the implied covenant of good faith and fair dealing (fourth counterclaim; against CDx Holdings); tortious interference with existing and prospective contract (fifth counterclaim; against Galan, Jahns, Bologna, Huffnagle, Bauer and Watts); conversion (sixth counterclaim; against CDx, Galan, Jahns, Bologna, Huffnagle, Bauer and Watts); and civil conspiracy (seventh cause of action; against CDx, Galan, Jahns, Bologna, Huffnagle, Bauer and Watts).
Rutenberg asserts that the misconduct by CDx, and the third-party defendants who controlled it, was a single scheme to fire Rutenberg, and then sue him and Adenocyte to take control of the microbubble technology, which had the collateral effect of preventing Rutenberg from being in a position to ever exercise his stock options, inasmuch as he was no longer an employee of the company.
DISCUSSION
Motion to Compel Arbitration (Motion Sequence No. 002)
In September 2020, CDx terminated Rutenberg's employment "for cause" pursuant to the EEA. In his third-party complaint and counterclaims, as part of his declaratory judgment counterclaim against CDx and CDx Holdings, Rutenberg alleges that he was "fired... from CDx for cause (where none existed) so that they could take the false position that he forfeited his rights to this stock" and seeks "a judgment declaring that his termination form [sic] CDX was improper and under the circumstances [Rutenberg] does not forfeit his rights to stock and additional compensation" (CTPC, ¶¶ 231- 232).
This claim clearly arises under the EEA, which contains a mandatory arbitration provision and a covenant not to sue in court. Specifically, the EEA's broad arbitration clause provides that "any dispute between the parties arising out of or relating to the negotiation, execution, performance or termination of this Agreement or Executive's employment... shall be settled by binding arbitration in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association.... The parties each further agree that the arbitration provisions of this Agreement shall provide each party with its exclusive remedy... and agree not to[] sue each other in any action in a Federal, State or local court with respect to such claims" (EEA, § 7.10). As more fully set forth below, because there is no question that the declaratory judgment claim is within the scope of a binding and enforceable arbitration agreement, this court must compel Rutenberg to arbitrate the claim before the American Arbitration Association (AAA), as provided for in the EEA, and stay further proceedings relating to the claim until the arbitration is complete.
It is axiomatic that an agreement to arbitrate is both favored and enforceable (see Matter of Smith Barney, Harris Upham & Co. v Luckie, 85 N.Y.2d 193, 200-201 [1995] ["Congress established a Federal policy favoring arbitration agreements, which is to be advanced by rigorous judicial enforcement of arbitration agreements and by resolution of any 'ambiguities as to the scope of the arbitration clause itself... in favor of arbitration'"] [citations omitted]; Westinghouse Elec. Corp. v New York City Tr. Auth., 82 N.Y.2d 47, 53 [1993] ["the public policy of New York State favors and encourages arbitration and alternative dispute resolutions"]).
The Federal Arbitration Act, 9 USC §§ 1 et seq (the FAA), embodies the strong national policy favoring arbitration. Section 2 of the FAA states that "[a] written provision in... a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract... shall be valid, irrevocable, and enforceable" (9 USC § 2). The FAA provides for the mandatory stay of any action involving an issue referable to arbitration by a written agreement (id., § 3). As such, "'[w]here parties enter into an agreement and, in one of its provisions, promise that any dispute arising out of or in connection with it shall be settled by arbitration, any controversy which arises between them and is within the compass of the provision must go to arbitration'" (Giahn v Giahn, 290 A.D.2d 483, 483-84 [2d Dept 2002]) [citation omitted]).
The FAA's pro-arbitration policy applies with equal force to both federal and state courts, each of which must "construe arbitration clauses as broadly as possible" (S.A. Mineracao Da Trindade-Samitri v Utah Intl., Inc., 745 F.2d 190, 194 [2d Cir 1984]; see also GAF Corp. v Werner, 66 N.Y.2d 97, 104 [1985] ["There is no question that State courts are obligated by section 3 to grant a stay of arbitration"]).
It well settled that arbitration is a favored method of dispute resolution in New York, and that New York courts will "'interfere as little as possible with the freedom of consenting parties to submit disputes to arbitration'" (Stark v Molod Spitz DeSantis & Stark, P.C., 9 N.Y.3d 59, 66 [2007] [citation omitted]; Board of Educ. of Bloomfield Cent. School Dist. v Christa Constr., 80 N.Y.2d 1031, 1032 [1992]). In evaluating a motion to compel arbitration, "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration" (Moses H. Cone Memorial Hosp. v Mercury Constr. Corp., 460 U.S. 1, 24-25 [1983]; accord State of New York v Phillip Morris Inc., 30 A.D.3d 26, 31 [1st Dept 2006], affd 8 N.Y.3d 574 [2007]).
Accordingly, New York law dictates that because "[a] written agreement to submit any controversy... to arbitration is enforceable," the court "shall direct the parties to arbitrate" when "there is no substantial question whether a valid [arbitration] agreement was made" (CPLR 7501, 7503 [a]). It must be "evident from the totality of circumstances that the parties intended to be bound by documents containing arbitration obligations" (Flores v Lower E. Side Serv. Ctr., Inc., 4 N.Y.3d 363, 370 [2005]). The "determination must be supported by evidence which affirmatively establishes that the parties expressly agreed to arbitrate their disputes" (Schubtex, Inc. v Allen Snyder, Inc., 49 N.Y.2d 1, 6 [1979]).
When deciding a motion to compel arbitration, a court has a limited role:
"In cases where the parties have adopted a broad arbitration clause, the Court of Appeals has made clear: 'Once it appears that there is, or is not a reasonable relationship between the subject matter of the dispute and the general subject matter of the underlying contract, the court's inquiry is ended. Penetrating definitive analysis of the scope of the agreement must be left to the arbitrators whenever the parties have broadly agreed that any dispute involving the interpretation and meaning of the agreement should be submitted to arbitration'" (Remco Maintenance, LLC v CC Mgt. & Consulting, Inc., 85 A.D.3d 477, 480 [1st Dept 2011] [quoting Matter of Nationwide Gen. Ins. Co. v Investors Ins. Co. of Am., 37 N.Y.2d 91, 96 [1975]).
Thus, where a party to a civil action seeks to compel arbitration, the court must determine only "'whether parties have agreed to submit their disputes to arbitration and, if so, whether the disputes generally come within the scope of their arbitration agreement'" (Phillip Morris Inc., 30 A.D.3d at 31, quoting Sisters of St. John the Baptist, Providence Rest Convent v Geraghty Constructor, 67 N.Y.2d 997, 999 [1986]; accord Verizon NY Inc. v Intergate Manhattan LLC, 2017 NY Slip Op 31731U], * 3 [Sup Ct, NY County 2017], citing Matter of County of Rockland v Primiano Constr. Co., Inc., 51 N.Y.2d 1, 7 [1980]). "The court's inquiry ends [once] the requisite relationship is established between the subject matter of the dispute and the subject matter of the underlying agreement to arbitrate" (Sisters of St. John, 67 N.Y.2d at 999). Thus, if both inquiries are answered in the affirmative, the court must compel arbitration (see id.).
Here, both inquiries are answered in the affirmative, and accordingly, the court must compel arbitration and stay Rutenberg's claims in this proceeding, pending the outcome of the arbitration.
As to the first question, there is no doubt that the parties entered into a binding and enforceable contract-the EEA-which contains a clear and unambiguous arbitration clause.
As to the second question, the parties' dispute clearly falls within the broad scope of the clear-cut arbitration clause. In fact, even an arbitration provision that is "ambiguous in scope" is "properly resolved in favor of arbitration" (Matter of PricewaterhouseCoopers LLP v Rutlen, 284 A.D.2d 200, 200 [1st Dept 2001]).
Here, the scope of the arbitration clause is clear and broad enough to cover any dispute arising from the EEA or Rutenberg's employment with CDx (including the termination of his employment). Broad arbitration clauses like the one set forth in the EEA give rise to a "presumption of arbitrability" that requires courts to "compel arbitration 'unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute'" (Mehler v Terminix Intl. Co. L.P., 205 F.3d 44, 49 [2d Cir 2000] [citation omitted]; see also Remco Maintenance, LLC, 85 A.D.3d at 480).
Rutenberg concedes that he entered into a valid agreement to arbitrate by entering the EEA. Further, Rutenberg's allegations that no cause existed for his termination and that CDx improperly caused him to forfeit his rights in CDx stock, and Rutenberg's claim seeking a declaration that his termination from CDx was improper and that he does not forfeit his stock, are disputes which clearly arise out and relate to Rutenberg's employment with CDx, the termination of his employment, and the provisions of the EEA, which provide the bases, procedures, and effects of a termination for cause, including the forfeiture of stock and options following a for cause termination (see EEA, §§ 2.3(c), 2.4(b), 6.1(d)-(e), 6.2). Accordingly, Rutenberg's claims fall within the scope of disputes which that be arbitrated.
Rutenberg makes two arguments in opposition to CDx's motion to compel arbitration, neither of which have any merit. First, Rutenberg argues that arbitration is not required here because the EEA and its arbitration clause were terminated when his title was changed from Chief Executive Officer to Chief Scientific Officer in 2019, a year before his employment with CDx was terminated for cause (see defendants' opposition memorandum [NYSCEF Doc No. 47], at 1). Specifically, Rutenberg asserts that the EEA "does not concern Dr. Rutenberg's employment by the Company as a general matter, but his specific employment as CEO only" because the EEA states that Rutenberg's position shall be as CEO and describes Rutenberg's duties in that role (id. at 16-17). Based on this reasoning, Rutenberg claims that his "removal as CEO in 2019 terminated the Executive Employment Agreement" (id. at 3). Thus, Rutenberg argues that "the Executive Employment Agreement and its arbitration provision invoked by CDx do not apply here" (id. at 2).
However, Rutenberg's claim that the EEA does not apply here because it was terminated may only be resolved by an arbitration, rather than by this court:
"Problems of arbitrability arise in two contexts, first, when parties disagree whether an arbitration clause covers a particular dispute, and second, when the parties disagree not about the scope of the arbitration clause but about "whether there is even a valid agreement to arbitrate in effect at a particular time." We further divided the second context into two factual scenarios: (1) whether the parties ever entered into an arbitration agreement at all, and (2) whether an arbitration agreement has expired or been terminated.'... In cases like the second type of factual scenario, the arbitrator decides issues like expiration or termination, which involve the interpretation of other contractual provisions and not of the arbitration clause itself" (ACEquip Ltd. v American Engineering Corp., 315 F.3d 151, 155-156 [2d Cir 2003] [citations omitted; emphasis added]).
New York courts apply the same analysis to the issue of whether an agreement to arbitrate was terminated. For example, in L & R Exploration Venture v Grynberg (22 A.D.3d 221 [1st Dept 2005]), the First Department affirmed a lower court ruling that the issue of whether an agreement containing an arbitration clause was still operative was for the arbitrator to decide: "Where, as here, there is a broad arbitration clause, the issue of whether the parties' acts or conduct may have terminated, modified or renewed the agreement is for the arbitrator" (id. at 222; see also Matter of Schlaifer v Sedlow, 51 N.Y.2d 181, 185 [1980] [once the parties have incorporated arbitration into their agreement, "all questions with respect to the validity and effect of subsequent documents purporting to work a modification or termination of the substantive provisions of the original agreement are to be resolved by the arbitrator"]; Fairfield Towers Condo. Assn. v Fishman, 1 A.D.3d 252, 254 [1st Dept 2003] ["we find unavailing Fairfield's argument that the arbitration should be stayed on the ground that Fairfield had validly terminated the CBA as of a date prior.... [T]he issue of whether the acts or conduct of the parties may have terminated... the [CBA] is properly for the arbitrator to decide"] [internal quotation marks and citation omitted]; Rianna v Marcolin USA, Inc., 2015 WL 5915283, * 3 [Sup Ct, NY County 2015] ["Under settled law, issues relating to the duration of an agreement to arbitrate are initially for the arbitrator to determine, particularly where, as here, the arbitration clause is written broadly"]; Kelly v Cantor Fitzgerald & Co., 2009 WL 10296619, * 3 [Sup Ct, NY County 2009] ["any question as to whether an arbitration agreement has been modified or terminated by subsequent documents is properly reserved for the arbitrator"]).
Importantly, in any event, the arbitration clause expressly covers disputes "relating to the... termination of... Executive's employment" (EEA, § 7.10). Thus, on its face, the clause survives any modification of Rutenberg's title at CDx and continues to require arbitration of disputes regarding Rutenberg's termination.
Second, Rutenberg argues that the court should ignore the arbitration clause and deny CDx's motion to compel arbitration because Rutenberg's declaratory judgment counterclaim relating to his employment is part of a larger dispute between the parties regarding the ownership of certain intellectual property, which is not subject to arbitration (see opposition memorandum, at 19-20). Specifically, Rutenberg argues that arbitrating his claim regarding his termination from CDx is "pointless... counterproductive and illogical" because it will present overlapping issues with the parties' dueling declaratory judgment claims related to the ownership of certain intellectual property (id.).
This argument lacks merit, as Rutenberg fails to articulate why his improper termination claim would significantly overlap with the other claims, counterclaims, or third-party claims in the action. The improper termination counterclaim is the only claim against CDx that turns on a construction of the EEA.
Moreover, it is well settled that arbitration clauses are binding contracts which must be strictly enforced, even if enforcement will lead to bifurcated and overlapping litigation. As the First Department held in PNE Media v Cistrone (294 A.D.2d 143 [1st Dept 2002]):
"The Supreme Court erred in finding that the counterclaims, although subject to an arbitration clause, were inextricably bound together with the main claims and therefore should be resolved in the same judicial forum. Indeed, "arbitration clauses, as contractual agreements, must be enforced according to their terms." Thus, the arbitration in the LLC agreement should have been enforced, even if the result is bifurcated litigation. This is consistent with New York's 'long and strong public policy favoring arbitration'" (id. at 144 [internal citations omitted]; see, e.g., Gelwan v Youni Gems Corp., 151 A.D.3d 638, 639 [1st Dept 2017] ["the arbitration clause in the retainer agreement must be enforced, despite the consequent bifurcation of the litigation"]; Primavera Labs. v Avon Prods., 297 A.D.2d 505, 506 [1st Dept 2002] [same]).
Accordingly, the court must compel arbitration of Rutenberg's counterclaim and stay proceedings on that claim pending arbitration (see 9 USC § 3; CPLR 7503 [a]; see e.g. PromoFone, Inc. v PCC Mgt., 224 A.D.2d 259, 260 [1st Dept 1996] [affirming stay of action pending arbitration]).
Motions to Dismiss Counterclaims, Third-Party Claims, Affirmative Defenses and for Sanctions (Motion Sequence Nos. 003, 004 and 007)
1. Claims Premised on the Filing of the Complaint (First, Third, Sixth and Seventh Claims)
Rutenberg and Adenocyte bring four counterclaims against CDx and the individual defendants based solely on the fact that CDx filed a summons and complaint commencing this lawsuit: misappropriation of commercial advantage (first cause of action), abuse of process (third cause of action), conversion (sixth cause of action), and civil conspiracy (seventh cause of action). Because these counterclaims are based on the filing of a complaint in a court, which is protected petitioning activity under the First Amendment, they are barred under the Noerr-Pennington doctrine.
Under the Noerr-Pennington doctrine, "citizens who petition the government for governmental action favorable to them cannot be prosecuted under the antitrust laws" (Alfred Weissman Real Estate v Big V Supermarkets, 268 A.D.2d 101, 106-107 [2nd Dept 2000]; accord Singer v de Blasio, 74 Misc.3d 1233 [A], 2022 NY Slip Op 50318[U], * 7 [Sup Ct, NY County 2022]). Courts have been broad in their application of the doctrine, concluding that efforts to influence government as part of a broader scheme, or by the use of questionable or underhanded activity, are still immune from liability (Alfred Weissman Real Estate, 268 A.D.2d at 107; see also Villanova Estates, Inc. v Fieldston Property Owners Assn., Inc., 23 A.D.3d 160, 161 [1st Dept 2005]). Although the doctrine originated in the antitrust context, it is now broadly applied to protect the right under the First Amendment to petition the government for governmental action "through litigation and activity incidental to litigation" (Matter of People v Northern Leasing Sys., Inc., 193 A.D.3d 67, 77 [1st Dept 2021] [internal citation omitted]; see also I.G. Second Generation Partners, L.P. v Duane Reade, 17 A.D.3d 206, 208 [1st Dept 2005] ["The filing of litigation falls within the protection of the Noerr-Pennington doctrine"]; Toussie v Allstate Ins. Co., 2019 WL 2435852, * 14, 2019 U.S. Dist LEXIS 20309, * 40 [ED NY 2019] ["the doctrine encompasses concerted actions before courts, and concerted efforts incident to litigation, such as filing complaints"] [internal quotations omitted]).
Accordingly, under the Noerr-Pennington doctrine, parties who petition the government for redress have First Amendment immunity from civil liability based on the petitioning activity (see Alfred Weissman Real Estate, Inc., 268 A.D.2d at 106-07). The First Department has expressly held that the Noerr-Pennington doctrine applies to common law tort claims (see Concourse Nursing Home v Engelstein, 278 A.D.2d 35, 35 [1st Dept 2000]; accord Caesars Entertainment. Operating Co. v Appaloosa Inv. Ltd. Partnership I, 48 Misc.3d 1212 [A], 2015 NY Slip Op 51095, * 4 [Sup Ct, NY County 2015] ["The claims based on these allegations are dismissed on the merits, with prejudice, because they are barred by the Noerr-Pennington doctrine, pursuant to which 'parties may not be subjected to liability for petitioning the government'"] [citation omitted]).
The Noerr-Pennington doctrine applies in this case. The summons and complaint and amended complaint fall within the scope of "petitioning activity" (see Alfred Weissman Real Estate, Inc., 268 A.D.2d at 107). Moreover, the counterclaims and third-party claims for unfair competition/misappropriation, abuse of process, conversion, and civil conspiracy are targeted at the act of bringing this lawsuit (see CTPC, first cause of action, ¶ 219 ["Misappropriation does not just exist when trade secrets on paper are physically stolen but can occur in a myriad of ways, such as by bringing a sham lawsuit so as to misappropriate the economic opportunity as well as the actual ownership of intellectual property from hapless defendants. Indeed, merely by causing CDx to file this fraudulent lawsuit, the Third-Party Defendants have usurped economic opportunity from Dr. Rutenberg and Adenocyte"]; ¶ 221 ["that intellectual property could not be stolen unless there was a sham lawsuit, and the sham law suit [sic] could not occur unless Dr. Rutenberg was first demoted"]; id., third cause of action, ¶ 237 ["the only way those controlling CDx could steal this intellectual property is through this sham lawsuit"]; id., sixth cause of action, ¶ 260 ["Through this sham lawsuit and in all other ways CDx has been maliciously and intentionally caused to falsely claim ownership to the property belonging... to Dr. Rutenberg and Adenocyte]"; id., seventh cause of action, ¶ 264 ["CDx, Galen, Jahns, Bologna, Huffnagle, Bauer and Watts each conspired with each other to achieve a common, unlawful purpose, which included the commission of the torts alleged above"]).
The Noerr-Pennington doctrine precludes precisely what Rutenberg and Adenocyte attempt to do here: interfere with the act of filing a lawsuit, which is protected First Amendment activity, by bringing civil claims against the plaintiff, CDx, based on that act (see Alfred Weissman Real Estate, Inc., 268 A.D.2d at 107 [applying doctrine to deceptive trade practices claim); Bristol-Myers Squibb Co. v Ivax Corp., 77 F Supp2d 606, 616 [D N.J. 2000] [applying doctrine to unfair competition claim]; Toussie, 2019 WL 2435852, at * 14, 2019 U.S. Dist LEXIS 20309, * 40 [recognizing application of Noerr-Pennington to abuse of process claims]; Hamilton v Accu-tek, 935 F.Supp. 1307, 1317 [ED NY 1996] [citing application of doctrine to "claims brought under a concert of action or civil conspiracy theory"]).
Accordingly, Rutenberg and Adenocyte's claims for misappropriation, abuse of process, conversion, and civil conspiracy must be dismissed because they are predicated on the filing of CDx's complaint, which is protected "petitioning activity" under the Noerr-Pennington doctrine (see Louie's Seafood Rest., LLC v Brown, 199 A.D.3d 790, 793[2d Dept 2021] ["Here, the Supreme Court properly concluded that the causes of action alleging that the defendants aided and abetted fraud and violated Judiciary Law § 487 were barred by the Noerr-Pennington doctrine.... as they were based upon litigation and activities that were incidental to litigation"]; I.G. Second Generation Partners, L.P., 17 A.D.3d at 208 [holding that "commencement of the declaratory judgment action is immunized by the Noerr-Pennington doctrine"]; see also Shapiro v Tardalo, 167 A.D.3d 555, 555 [1st Dept 2018] ["The court did not abuse its discretion in denying plaintiff leave to file a second amended complaint, where the proposed causes of action were precluded by the Noerr-Pennington doctrine"]).
In opposition to the motion, Rutenberg and Adenocyte concede that the conversion claim should be dismissed, and, indeed, move for voluntary dismissal of that claim with prejudice, pursuant to CPLR 3217 (b) (see discussion of motion sequence no. 006, infra).
With respect to the remaining three claims, Rutenberg and Adenocyte argue the sham exception to the Noerr-Pennington doctrine applies to bar that doctrine (opposition memorandum [NYSCEF Doc No. 87], at 12-15).
The exception for "sham" petitions applies in "'situations in which persons use the governmental process-as opposed to the outcome of that process-as an anticompetitive weapon'" (Singh v Sukhram, 56 A.D.3d 187, 192 [2d Dept 2008] [citation omitted; emphasis in original]; see Friends of Rockland Shelter Animals, Inc. v Mullen, 313 F Supp2d 339, 343 [SD NY 2004] [describing a sham petition as "nothing more than an attempt to directly injure a competitor"]). "To establish the sham exception to the doctrine, petitioners must prove that respondents lacked a genuine interest in seeking governmental action and that their use of the litigation process in that quest was objectively baseless" (Matter of People, 193 A.D.3d at 77 [internal citations omitted]). "The sham exception should be construed narrowly so as to avoid intrusion upon, or a chilling of, one's right to petition under the First Amendment" (In re Elysium Health-Chromadex Litigation, 354 F Supp3d 330, 336 [SD NY 2019]). "The burden of proving the exception rests with the party attempting to invoke it" (id.).
Apart from repeatedly alleging that the CDx action is a "sham lawsuit," Rutenberg and Adenocyte have failed to allege facts establishing the narrow "sham exception" to the Noerr-Pennington doctrine (see Afga Corp. v United Marketing Grp., Inc., 2003 WL 21555087, * 4 [SD NY 2003] [dismissing counterclaims because defendants/counterclaim plaintiffs "have not satisfied their burden of demonstrating the sham litigation exception"]). Rutenberg and Adenocyte fail to show, as they must, that "no reasonable litigant could realistically expect success on the merits" of CDx's declaratory judgment claim (see Professional Real Estate Investors, Inc. v Columbia Pictures Indus., Inc., 508 U.S. 49, 60 [1993]). The objective baselessness inquiry examines the" legal viability" of the request for government action (id. at 61 [emphasis in original]). "The existence of probable cause to institute legal proceedings precludes a finding that [a] defendant has engaged in sham litigation" (id. at 62).
The parties' pleadings confirm that CDx had probable cause to bring this litigation. This action seeks to resolve a dispute between CDx, on the one hand, and Rutenberg and Adenocyte, on the other, over the ownership of intellectual property. Rutenberg concedes that he executed the IP Agreement in connection with his employment with CDx, which provided for the assignment to CDx of all inventions by Rutenberg during his employment unless they did not relate to the business of CDx or his work for CDx, and Rutenberg made the invention on his own time without any company resources (see CTPC, ¶¶ 128-36). Rutenberg also concedes that he reduced the Pancreatic IP to practice during his employment with CDx (id., ¶ 132), that he used his CDx email account in connection with the development of the Pancreatic IP (id., ¶ 133), and that the genesis of the Pancreatic IP was a proposal for an "NYU-CDx collaboration," which contemplated utilizing the same "neural networks" to analyze pancreas tissue and diagnose pancreatic cancer and pre-cancer that CDx utilizes in its current technology to analyze esophagus tissue to diagnose esophageal cancer and pre-cancer (id., ¶¶ 64, 104, 110). Finally, Rutenberg admits that he discussed the idea for the Pancreatic IP in brainstorming sessions with CDx's intellectual property counsel, and that this idea appeared on multiple internal CDx schedules of potential inventions that the Company may pursue (id., ¶¶ 104-08).
Accordingly, on the face of the CTPC, this lawsuit is far from a "sham." CDx has a stake in the outcome of this case, and it cannot plausibly be said that the claims are "objectively baseless." Indeed, Rutenberg and Adenocyte have asserted their own declaratory judgment claim that mirrors CDx's declaratory judgment claim (see CTPC ¶¶ 226-33). Because an "objective litigant" could readily conclude "that the suit is reasonably calculated to elicit a favorable outcome," Rutenberg and Adenocyte's claims are barred and must be dismissed (see Singh, 56 A.D.3d at 192 ["If the objective element [of Noerr-Pennington] is not satisfied... the 'sham' exception is not applicable"]).
Accordingly, the Noerr-Pennington doctrine applies, and defendants' claims for misappropriation, abuse of process, conversion, and civil conspiracy-all of which are based on the commencement of this litigation-must be dismissed.
2. Declaratory Judgment Claim
In his second cause of action, Rutenberg brings a declaratory judgment claim against CDx and CDx Holdings that has two components. In the first component, Rutenberg seeks a declaration that his "termination form [sic] CDX was improper and under the circumstances does not forfeit his rights to stock and additional compensation" (CTPC, ¶ 232). As previously discussed, this claim is stayed as against CDx, pending arbitration.
With respect to CDx Holdings, this portion of the declaratory judgment claim is dismissed as against it, because Rutenberg was employed by CDx, not CDx Holdings, and Rutenberg's rights to stock and other compensation are governed by Rutenberg's EEA with CDx, not CDx Holdings. Moreover, the claim must be dismissed because it is redundant of Rutenberg's claim against CDx Holdings for breach of the implied covenant of good faith and fair dealing (see Artech Info. Sys., L.L.C. v Tee, 280 A.D.2d 117, 125 [1st Dept 2001]). As discussed below, that claim is based on the allegation that CDx "concoct[ed] a pretext to unfairly and in bad faith fire Dr. Rutenberg 'for cause' and, thus, deprive him of the inventive [sic] compensation rightfully due to him" (CTPC, ¶ 246). Through the implied covenant claim, Rutenberg seeks "money damages against CDx Holdings" to compensate him for loss of "inventive [sic] compensation rightfully due to him" (id., ¶¶ 246, 249). These two claims are plainly based on the same conduct: CDx Holdings' alleged "improper" termination of Rutenberg.
In the second component of their declaratory judgment counterclaim, Rutenberg and Adenocyte seeks a declaration that "CDx (through the bad faith malicious control of Galen and the individual third-party defendants) has created a cloud over Adenocyte intellectual property with the consequence that a judgment is required declaring that the intellectual property rights that Adenocyte owns to these inventions properly belong to Adenocyte, and are not in any way owned by CDx" (CPTC, ¶ 228). CDx and CDx Holdings do not seek dismissal of this portion of the second counterclaim.
3. Breach of the Implied Covenant of Good Faith and Fair Dealing (Fourth Cause of Action) and Tortious Interference with Contract (Fifth Cause of Action)
In the fourth cause of action, Rutenberg asserts a claim for breach of the implied covenant of good faith and fair dealing against CDx Holdings. In the fifth cause of action, Rutenberg asserts a claim against Galen and the individual third-party defendants for tortious interference with existing and prospective contract. These claims are procedurally improper, and must be dismissed, pursuant to CPLR 1007.
Rutenberg and Adenocyte allege that the court can adjudicate the claims against CDx, Galen and the third-party individual defendants "because, among other reasons, the Third-Party Defendants may be liable for all or part of Plaintiff's claims against Defendants" (CTPC, ¶ 34). Although Rutenberg and Adenocyte correctly recite the standard for third-party practice under CPLR 1007, they have not brought a claim for indemnity, contribution, or subrogation, or claimed that the third-party defendants "may be liable for all or part of" damages resulting from CDx's claims for a declaratory judgment and unjust enrichment against Rutenberg and Adenocyte. Rutenberg and Adenocyte's claims are therefore not proper third-party claims, and must be dismissed.
CPLR 1007, which governs third-party practice in New York courts, provides that "a defendant may proceed against a person not a party who is or may be liable to that defendant for all or part of the plaintiff's claim against that defendant" (see Sunbelt Rentals, Inc. v Tempest Windows, Inc., 94 A.D.3d 1088, 1089 [2d Dept 2012]). Under the plain language of CPLR 1007, "[t]he liability to be imposed upon a third-party defendant in a third-party action commenced pursuant to CPLR 1007 should 'arise from or be conditioned upon the liability asserted against the third-party plaintiff in the main action'" (Lucci v Lucci, 150 A.D.2d 649, 650 [2d Dept 1989] [citation omitted]; U.S. Bank N.A. v Kahn Property Owner, LLC, 64 Misc.3d 1236 [A], 2019 NY Slip Op 51435[U] * 2 [Sup Ct, Suffolk County 2019] ["third-party claims are limited to claims for contribution, indemnity, or subrogation"]). "At the least, the third-party claim must be sufficiently related to the main action to at least raise the question of whether the third-party defendant may be liable to defendant-third-party plaintiff... for the damages for which the latter may be liable to plaintiff" (Zurich Ins. Co. v White, 129 A.D.2d 388, 390 [3d Dept 1987] [internal quotation marks and citations omitted]).
CDx brought a declaratory judgment claim against Rutenberg and Adenocyte, and a claim for unjust enrichment against Adenocyte (see amended complaint, ¶¶ 36-46). However, the claims for breach of the implied covenant and for tortious interference have nothing to do with ultimate liability for these claims. That is, these third-party claims do not "arise from" and are not "conditioned upon" the liability asserted by CDx against Rutenberg and Adenocyte (see Zurich, 129 A.D.2d at 391). "Rather, they are predicated upon entirely independent theories of recovery arising from factual claims bearing no 'claim over' relation" to CDx's theory of recovery (Long Island Women's Health Care Assoc. M.D., P.C. v Haselkorn-Lomasky, 10 Misc.3d 1068 [A], 2005 NY Slip Op 52186[U], * 8 [Sup Ct, Nassau County 2005]). This is grounds for dismissal (see Zurich, 129 A.D.2d at 391 [affirming dismissal of third-party claim that "neither arises out of nor is contingent upon" the claims in the main action]; U.S. Bank N.A., 64 Misc.3d 1236[A] at * 2, 2019 NY Slip Op 51435[U], at * 2 ["It is clear that none of the third-party claims against the Gales contain the claim-over component required by CPLR 1007 and controlling case law. They are, therefore, procedurally improper and should have been asserted in a separate action against the Gales, or the Gales should have been joined as additional defendants on the counterclaims"]; Long Island Women's Health Care, 10 Misc.3d 1068[A], 2005 NY Slip Op 52186[U] at * 8 [granting summary judgment on similar grounds]; see also Board of Managers of the Beekman Regent Condominium v Bauer, 2011 NY Slip Op 32176[U] [Sup Ct, NY County 2011] [dismissing improper third-party claims under CPLR 1007 without prejudice to commencing a new action]).
Although Rutenberg and Adenocyte allege that "both the counterclaims and third-party claims share common questions of law or fact with other claims asserted in this action" (CTPC, ¶ 34), that is not the test for third-party claims under CPLR 1007: "It is not enough merely that that the two claims arise out of the same set of facts; the liability of the third-party defendant must in some way arise from or be conditioned upon the liability of the defendant/third-party to the plaintiff in the main action" (Amorizzo v Conte, 21 Misc.3d 1111 [A], 2008 NY Slip Op 52044[U], * 3 [Sup Ct, Nassau County 2008]). Rutenberg and Adenocyte also reference CPLR 1013, but that provision of the CPLR pertains to motions for permissive intervention by a non-party; it has nothing to do with third-party claims asserted by existing parties to an action. See CPLR 1013.
Accordingly, because Rutenberg and Adenocyte's third-party claims for breach of the implied covenant and tortious interference have no connection to the declaratory judgment and unjust enrichment claims brought by CDx against Rutenberg and Adenocyte in the main action, these claims are improper under CPLR 1007 and must be dismissed (see Qosina Corp. v C & N Packaging, Inc., 96 A.D.3d 1032, 1035 [2d Dept 2012] ["the third-party complaint was not permitted by CPLR 1007 since it failed to state any cause of action arising from or conditioned upon the liability asserted against C & N in the main action"]; see also Loch Sheldrake Beach & Tennis Inc. v Akulich, 141 A.D.3d 809, 812 [3d Dept 2016] [denying motion for leave to serve a third-party complaint where proposed third-party claims had no relation to main claim for declaratory judgment]).
Although Rutenberg and Adenocyte ask the Court to "consolidate the third-party claims into this action pursuant to C.P.L.R. 602" (opposition memorandum [NYSCEF Doc No. 95], at 12]), this request is denied. CPLR 602 authorizes the consolidation of actions, but provides no basis for a court to combine procedurally improper third-party claims with a main action (see CPLR 602 [a] ["When actions involving a common question of law or fact are pending before a court, the court, upon motion, may order a joint trial of any or all the matters in issue, may order the actions consolidated"]). Indeed, permitting improper third-party claims to be joined with another action would simply be an end-run around CPLR 1007, which does not allow for third-party practice "simply on the basis of common questions of law or fact" (Alexander, McKinney Practice Commentary, C1007:3, CPLR § 1007 [comparing CPLR 1007 with CPLR 602]).
Finally, Rutenberg and Adenocyte argue that their improper third-party claims should be severed pursuant to CPLR 1010 [opposition memorandum at 13]). CPLR 1010 gives the Court discretion to dismiss a third-party complaint without prejudice, sever those claims from the main action for trial, or take other action "as may be just" (CPLR 1010). However, this court declines to exercise that discretion, because, as discussed below, both the implied covenant and tortious interference claims fail to state a cause of action.
Given that the implied covenant and tortious interference claims are both procedurally improper and fail to state a cause of action, this court need not address the additional arguments that this court lacks personal jurisdiction over Galen and Bauer (see Estate of Kainer v UBS AG, 37 N.Y.3d 460, 466 [2021] [finding that it is not necessary to resolve and reject personal jurisdiction issues prior to addressing procedural issue of forum non conveniens]; Noble v Creative Tech. Servs., Inc., 126 A.D.2d 611, 613 [2d Dept 1987] ["Since all four of the plaintiff's causes of action are legally insufficient and were properly dismissed, we need not address the defendants' claim of lack of personal jurisdiction"]; see also Astudillo v Flushing Hosp. Medical Ctr., 18 A.D.3d 588, 589 [2d Dept 2005]).
A. Breach of the Implied Covenant of Good Faith and Fair Dealing
Rutenberg alleges that he entered into "several binding agreements" with CDx Holdings, including a "Restricted Stock Agreement," and that CDx Holdings "materially breached the agreements by... concocting a pretext to unfairly and in bad faith fire Dr. Rutenberg 'for cause' and, thus, deprive him of the inventive [sic] compensation rightfully due to him" (CTPC, ¶¶ 242, 246). Rutenberg further alleges that CDx Holdings breached the implied covenant of good faith and fair dealing by terminating his employment for cause, thereby "denying him the benefits" of these agreements, at least some of which he does not even identify (id., ¶ 247).
"[B]reach of the implied covenant is not a separate claim from breach of contract," but rather, "an alternative means by which a contract may be breached" (Thompson v Advanced Armament Corp., LLC, 614 Fed.Appx 523, 525 [2d Cir 2015]). "A claim for breach of the implied covenant 'may be brought, if at all, only where one party's conduct, though not breaching the terms of the contract in a technical sense, nonetheless deprived the other party of the benefit of its bargain'" (Longhi v Lombard Risk Sys., Inc., 2019 WL 4805735, * 9, 2019 U.S. Dist LEXIS 170188, * 23 [SD NY 2019] [citation omitted]). To state a breach of contract claim based on the breach of an implied covenant of good faith and fair dealing, a party must allege "the existence of a duty, breach of that duty, causation, and damages" (Hadami, S.A. v Xerox Corp., 272 F Supp3d 587, 598 [SD NY 2017]).
Rutenberg's claim against CDx Holdings for breach of the implied covenant fails to state a cause of action. CDx Holdings is not a proper defendant to this claim because CDx Holdings was not a party to the EEA, which governed Rutenberg's employment and his post-employment entitlement to equity. Rather, the EEA was entered into solely by Rutenberg and CDx (known at the time as Oral Cancer Prevention International, Inc.). This is fatal to Rutenberg's breach of the implied covenant claim, because such a claim can only be brought against a party to the contract that was allegedly breached (see Randall's Is. Aquatic Leisure, LLC v City of New York, 92 A.D.3d 463, 463 [1st Dept 2012] ["There can be no claim of breach of the implied covenant of good faith and fair dealing without a contract"]; see also Ray Legal Consulting Group v DiJoseph, III, 37 F Supp3d 704, 727 [SD NY 2014] [dismissing breach of the implied covenant claim predicated on confidentiality agreement against defendants who were not party to that agreement]; Duration Mun. Fund, L.P. v J.P. Morgan Sec., Inc., 77 A.D.3d 474, 475 [1st Dept 2010] [dismissing claim on ground that "the contractual relationships governing the relevant transactions were between plaintiffs and an entity other than defendant, namely, a nonparty affiliate of defendant"]).
In his opposition, Rutenberg contends that his breach of the implied covenant claim is based solely on the Stock Option Grant Notice, Option Agreement, and 2017 Equity Incentive Plan (the Plan) (opposition memorandum, at 22). However, all of these documents lead right back to Rutenberg's EEA. The Stock Option Grant Notice explains that the April 2, 2018 grant to Rutenberg is governed by the Plan. In turn, the Plan sets forth plan participants' rights in the event of a termination "for [c]ause" (see NYSCEF Doc No. 82, at 21, § 5 [k]). But the Plan makes clear that this provision does not apply when there is an "individual written agreement between the Company or any Affiliate [including CDx] and the Participant" (see id.). In this case, Rutenberg's EEA (which is solely between Rutenberg and CDx) defines "for Cause" termination and explains the effect of a termination "for cause" on Rutenberg's continuing rights to vested and unvested stock options (see EEA, § 2.3 [c]). Rutenberg alleges that "CDx Holdings... materially breached the agreements by... concocting a pretext to unfairly and in bad faith fire Dr. Rutenberg 'for cause'" (CTPC ¶ 246). Given that it is the EEA, and not the Plan, that defines a termination "for cause" and the impact of a "for cause" termination on Rutenberg's equity, Rutenberg cannot contest that he is alleging a breach of an implied obligation under the EEA.
Accordingly, because CDx Holdings is not a party to the EEA, the claim cannot stand.
B. Tortious Interference with Contract
Rutenberg alleges that Galen and the individual defendants "caused the CDx entities, including CDx with respect to the Executive Employment Agreement, and CDx Holdings, with respect to the Restricted Stock Option Agreement, to materially breach their contractual obligations to Dr. Rutenberg" (CTPC ¶ 252). Under New York law, a party asserting a claim for tortious interference with contract must allege (1) that a valid contract exists; (2) that a third party had knowledge of the contract; (3) that the third party intentionally and improperly procured the breach of the contract; and (4) that the breach resulted in damage to the plaintiff (Lama Holding Co. v Smith Barney, 88 N.Y.2d 413, 424 [1996]). "A 'third party' for the purposes of a tortious interference claim is someone who is not a party to the contract at issue" (Roselink Investors, L.L.C. v Shenkman, 386 F Supp2d 209, 228 [SD NY 2004]).
Rutenberg's tortious interference claim against Galen, Bauer (Galen's CFO), and the CDx director defendants (Jahns, Bologna, Watts, and Huffnagle) is barred under the economic interest doctrine, which shields a defendant from liability for interfering with a third party's contract when acting "to protect its own legal or financial stake in the breaching party's business" (White Plains Coat & Apron Co. v Cintas Corp., 8 N.Y.3d 422, 426 [2007]). "It is well settled that a corporation that acquires another corporation and then causes one of the acquired corporation's contracts to be terminated, is not liable for interference with that contract, because it had an economic justification for its actions" (American Water Enters. Inc. v Tectura Corp., 2014 NY Slip Op 32182[U], *4 [Sup Ct, NY County 2014], citing Felsen v Sol Cafe Mfg. Corp., 24 N.Y.2d 682, 687 [1969]; see, e.g. MTI/Image Group v Fox Studios E., 262 A.D.2d 20, 23 [1st Dept 1999] [because all named corporate defendants were affiliated with plaintiff's contractual counterparty, there existed an economic interest which was sufficient reason to dismiss the claim of tortious interference with contract]).
Accordingly, even assuming that Galen and the individuals defendants caused CDx and CDx Holdings to breach the EEA and other agreements between CDx entities and Rutenberg, that conduct was justified by their "clear economic interest" in CDx (see Foster v Churchill, 87 N.Y.2d 744, 750 [1996] [affirming Appellate Division's conclusion that controlling stockholder's termination of company's treasurer was justified by economic interest]; Kuhns v Ledger, 202 F Supp3d 433, 442 [SD NY 2016] [applying economic interest defense to dismiss claim that shareholder interfered with co-CEO/Executive Chairman's employment contract]; see also Johnson v Cestone, 162 A.D.3d 526, 527 [1st Dept 2018] [dismissing claim because "the allegations show that (individual defendant) was acting in the economic interest of the corporate defendants"]; Rather v CBS Corp., 68 A.D.3d 49, 60 [1st Dept 2009] [holding "the court correctly applied the economic interest doctrine to dismiss this claim against the corporate defendant"]; Benihana of Tokyo, LLC v Angelo, Gordon & Co., L.P., 259 F Supp3d 16, 32 [SD NY 2017] [finding that plaintiff's allegations that defendant "was acting to protect and enhance its economic interest in [an acquired company] and an enhanced return for its own investors" supported application of the doctrine]; Don King Prods., Inc. v Smith, 47 Fed.Appx 12, 15 [2d Cir 2002] [holding that defense applied when the third-party defendant "was acting... to protect its own economic interest in that breaching party"] [emphasis in original]).
In opposition to the motion, Rutenberg claims that the "Third-Party Defendants provide no evidence supporting their defense of economic justification," and that the Third-Party Defendants' invocation of the economic interest defense suffers from a "[t]otal lack of factual support in the record for any economic interest" [opposition memorandum [NYSCEF Doc No. 95], at 19). However, Galen and the individual defendants' economic interest in CDx appears on the face of the CTPC itself (see CTPC ¶¶ 3, 38-43 [describing Galen and the Moving Individual Defendants' status as a controlling shareholder of CDx, CDx Holdings board members, and CDx officers]). These allegations are more than sufficient to establish the applicability of the economic interest defense (see Abedine v Lord Secs. Corp., 2017 NY Slip Op 30511[U], ** 14 [Sup Ct, NY County 2017] ["Here, rather than documentary evidence, plaintiff's own allegations detail the economic relationships defendant had with JP Morgan and Deutsche Bank. As such, factual issues do not exist"]).
To overcome the economic interest defense, Rutenberg and Adenocyte must plead specific facts showing that the Galen and the individual defendants caused the alleged contractual interference through illegal or fraudulent means, or were otherwise motivated by malice toward them (Foster, 87 N.Y.2d at 750). However, the CPTC's allegations are nothing more than conclusory allegations of malice, ill will toward Rutenberg or bad faith (see CPTC ¶¶ 1 ["Galen is pursuing "selfish and unlawful objectives"]; id., ¶ 30 ["Galen's interests always come first-before the company, before minority shareholders, before doctors, and before patients"]; id., ¶ 220 ["Galen has acted "out of spite and bad faith, to also further a vindictive campaign against Red Mountain and Dr. Rutenberg, and to distract from their own intentional fiduciary breaches and gross mismanagement of CDx"]; id., ¶ 239 ["Galen and the Individual Third-Party Defendants "acted in concert with each other to further an improper, collateral purpose[]... with actual and legal malice"]). "'[B]are allegations of malice do not suffice to bring the claim under an exception to the economic interest rule'" (Audax Credit Opportunities Offshore Ltd. v TMK Hawk Parent, Corp., 72 Misc.3d 1218 [A], 2021 NY Slip Op 50794[U], * 11, ** 14 [Sup Ct, NY County 2021], quoting Rather, 68 A.D.3d at 60). Indeed, even bad faith, without more, does not satisfy the malice requirement (see Foster, 87 N.Y.2d at 750).
Accordingly, the tortious interference claim fails to state a cause of action.
4. Affirmative Defenses
CDx and CDx Holdings also move for dismissal of certain of defendants' affirmative defenses. Under CPLR 3211 (b), "[a] party may move for judgment dismissing one or more defenses, on the ground that a defense is not stated or has no merit." A court should grant a motion to dismiss affirmative defenses if the "'defenses are without merit as a matter of law because they either do not apply under the factual circumstances of [the] case, or fail to state a defense'" (Bank of Am., N.A. v 414 Midland Ave. Assocs., LLC, 78 A.D.3d 746, 748 [2d Dept 2010] [citation omitted]). "[W]here affirmative defenses 'merely plead conclusions of law without any supporting facts,' the affirmative defenses should be dismissed pursuant to CPLR 3211 (b)" (id. at 750, quoting Fireman's Fund Ins. Co. v Farrell, 57 A.D.3d 721, 723 [2d Dept 2008]).
CDx and CDx Holdings contend that there is no legal or factual basis for the following affirmative defenses listed in the Answer: "fail[ure] to mitigate... damages" (eighth defense); "privilege" (seventeenth defense); "lack of standing" (eighteenth defense); "the business judgment rule" (twentieth defense); "the statute of frauds" (twenty-second defense); and "preemption" (twenty-fourth defense) (CTPC at 12-14). This court agrees, as these are not cognizable defenses to claims for declaratory judgment and unjust enrichment. In any event, defendants' threadbare recital of the names of these defenses in their answer, without any explanation as to how they could be applicable, fails to put CDx on adequate of the defenses that may be raised in this case.
5. Sanctions
CDx, CDx Holdings, Galen and the individual defendants all move for the imposition of sanctions against Rutenberg and Adenocyte on the ground that most, if not all, of the claims asserted in the CPTC are frivolous, and that they knew or should have known that these claims have no basis in law. The motions for sanctions are denied. Sanctions are only available for "frivolous conduct," narrowly defined as conduct that is "completely without merit in law and [that] cannot be supported by a reasonable argument for an extension, modification, or reversal of existing law" (22 NYCRR 130-1.1). Even though the majority of the claims set forth in the CPTC are being dismissed, the imposition of sanctions is not appropriate here, as there is no indication that Rutenberg's and Adenocyte's position taken in this litigation is completely frivolous and without merit (see Parks v Leahey & Johnson, 81 N.Y.2d 161, 165 [1993] [dismissal does not necessarily entitle a defendant to sanctions]; see also Benishai v Benishai, 83 A.D.3d 420, 420 [1st Dept 2011]; Matter of L & M Bus Corp. v New York City Dept. of Educ., 83 A.D.3d 432, 433 [1st Dept 2011]).
6. Request for Leave to Amend
In their opposition memorandum, Rutenberg and Adenocyte contend that "if the Court dismisses any of [their] claims, leave to correct those claims would be appropriate and, arguably, required" (opposition memorandum, at 25-26). However, it would be procedurally improper to grant this request, as defendants failed to include this request for relief in a notice of motion or cross motion (see CPLR 2214 [a]; see also Arriaga v Laub Co., 233 A.D.2d 244, 245 [1st Dept 1996] [as plaintiffs failed to formally and specifically demand in notice of motion that counterclaims be stricken, the trial court did not err in denying such relief]). Accordingly, defendants' request for leave to amend is denied.
Rutenberg's and Adenocyte's Motion to Vacate Arbitration Demand and For Dismissal of the Declaratory Judgment Cause of Action (Motion Sequence No. 005)
Rutenberg and Adenocyte move "to vacate any arbitration demand that might be served by CDx and in all events to determine that the disputes between Dr. Rutenberg and Adenocyte on the one hand and CDx on the other (as set forth in their respective pleadings) are not subject to arbitration" (defendants' memorandum of law [NYSCEF Doc No. 65], at 1). This motion is denied as premature, as no demand to arbitrate has yet been served. This motion is also denied as moot, as this court has already determined that Rutenberg's counterclaim for a judgment declaring that his termination from CDx was improper, and that he does not forfeit his rights to stock and additional compensation is subject to mandatory arbitration.
Rutenberg and Adenocyte also move for dismissal of CDx's declaratory judgment claim, in which CDx asks the court to declare that it is the owner of the intellectual property that Rutenberg developed while he was employed by CDx (the Pancreatic IP), and that Rutenberg's assignment of the Pancreatic IP to Adenocyte was invalid and void ab initio.
Under CPLR 3211 (a) (7), "the sole criterion is whether the pleading states a cause of action, and if from its four corners factual allegations are discerned which taken together manifest any cause of action cognizable at law a motion for dismissal will fail" (Guggenheimer v Ginzburg, 43 N.Y.2d 268, 275 [1977]; see Siegmund Strauss, Inc. v East 149th Realty Corp., 104 A.D.3d 401, 403 [1st Dept 2013] ["The court must accept the facts alleged in the pleading as true and accord the opponent of the motion... 'the benefit of every possible favorable inference [to] determine only whether the facts as alleged fit within any cognizable legal theory'"] [citation omitted]). "'[W]here a cause of action is sufficient to invoke the court's power to render a declaratory judgment... as to the rights and other legal relations of the parties to a justiciable controversy,' a motion to dismiss that cause of action should be denied" (Neuman v City of NY, 186 A.D.3d 1523, 1525 [2d Dept 2020] [citation omitted]).
New York courts have a broad grant of authority to "render a declaratory judgment... as to the rights and other legal relations of the parties to a justiciable controversy" (see CPLR 3001). "As the First Department has explained, 'Courts in this state have followed the rule in declaratory judgment action[s] that on a motion to dismiss the complaint for failure to state a cause of action, the only question is whether a proper case is presented for invoking the jurisdiction of the court to make a declaratory judgment, and not whether the plaintiff is entitled to a declaration favorable to him'" (Allergan Fin., LLC v Pfizer Inc., 67 Misc.3d 1206 [A], 2020 NY Slip Op 50422[U], * 5 [Sup Ct, NY County 2020] [citation omitted; emphasis in original], affd as modified, 188 A.D.3d 402 [1st Dept 2020]).
This case presents a dispute about the ownership of the Pancreatic IP. As alleged in the amended complaint, the Pancreatic IP was automatically assigned, granted, and conveyed to CDx by operation of the IP Agreement between Rutenberg and CDx. Rutenberg and Adenocyte do not contest that there is a justiciable controversy between the parties. Indeed, Rutenberg and Adenocyte have answered CDx's complaint by denying that CDx owns the Pancreatic IP and by asserting their own declaratory judgment claim, asking the Court to decide who owns the IP (see CPTC ¶¶ 127-142).
In particular, Rutenberg and Adenocyte argue that the Pancreatic IP does not belong to CDx and was not subject to the assignment provision of the IP Agreement because it was "in the public domain" (see id., ¶ 128), conceived prior to July 2017 (see id., ¶ 130), and "developed without using any CDx resources" (see id., ¶¶ 132-135). They also claim that the Pancreatic IP was not automatically assigned pursuant to the IP Agreement because it "is not in any way related or connected to CDx's business or Dr. Rutenberg's work for CDx" (see id., ¶¶ 136-142). Based on Rutenberg and CDx's own allegations, there is plainly a justiciable dispute as to whether the Pancreatic IP was subject to the IP Agreement, and, ultimately, whether Rutenberg automatically assigned the Pancreatic IP to CDx pursuant to that agreement.
Rutenberg and Adenocyte likewise do not dispute that a declaratory judgment would resolve the parties' dispute. Indeed, declaratory judgments are regularly used to determine parties' rights under a contract and to ownership in property, including intellectual property (see e.g. Kalisch-Jarcho, Inc. v City of New York, 72 N.Y.2d 727, 731 [1988] ["A declaratory judgment action may be an appropriate vehicle for settling justiciable disputes as to contract rights and obligations"]; Staver Co., Inc. v Skrobisch, 144 A.D.2d 449, 450 [2d Dept 1988] [affirming denial of motion to dismiss claim for declaratory relief because "the court properly concluded that the plaintiff ha[d] sufficiently invoked its aid in assessing the parties' respective proprietary rights in an invention"]; see also Ursino v 21/23 Ave. B Realty LLC, 2020 NY Slip Op 30474[U], ** 10 [Sup Ct, NY County 2020] [sustaining declaratory judgment claim regarding property rights because "Ursino cites to no case law and does not establish through argument, evidence or analysis why it would be improper for Buyer to seek a declaration that would, essentially, clarify Buyer's and Ursino's rights as to the Property"]).
Rutenberg and Adenocyte have not made a single argument as to why this dispute is not justiciable or why this Court cannot resolve it by entering a declaratory judgment. Importantly, Rutenberg and Adenocyte have asserted a mirror-image declaratory judgment counterclaim in this case (see CTPC, ¶¶ 226-233). In connection with that counterclaim, Rutenberg and Adenocyte allege that there is "a cloud over Adenocyte intellectual property" that can only be resolved with a judgment that declares ownership over the property (see id., ¶ 228). They further allege that the ownership dispute presents a "justiciable controvers[y]" that is "ripe for judicial determination at this time," and they also allege that a declaratory judgment is an appropriate remedy because there is "no adequate remedy at law" (see id., ¶¶ 229, 233). Rutenberg and Adenocyte's own declaratory judgment counterclaim and third-party claim make clear that there is a live, ripe ownership dispute that can be resolved by this court with a declaratory judgment. Accordingly, the motion to dismiss should be denied (see NYU Langone Hosps. v Aetna Health, Inc., 2021 WL 1624399, * 1 [Sup Ct, NY County 2021] [denying motion to dismiss declaratory judgment claim as duplicative where "the defendant... impliedly concedes the propriety of such declaratory relief as the defendant has itself interposed a counterclaim for the same declaratory relief"]).
Nevertheless, Rutenberg and Adenocyte argue that CDx's declaratory judgment claim should be dismissed as "duplicative" of a breach of fiduciary duty claim that is not even asserted in the amended complaint. CDx's declaratory judgment claim cannot be "duplicative" of a claim that has not been asserted. Although CDx's original complaint included a claim for breach of fiduciary duty, CDx discontinued that claim and filed an amended complaint. Because the amended complaint contains a single cause of action for a declaratory judgment, the claim cannot be "duplicative."
Rutenberg and Adenocyte further argue that "the true cause of action is breach of fiduciary duty," and that CDx's declaratory judgment claim should be dismissed because CDx has "an adequate, alternative remedy in another form of action[]" (memorandum at 21). This argument fails, as there is no basis for Rutenberg and Adenocyte's assertion that "the true cause of action is breach of fiduciary duty." To the contrary, the amended complaint alleges that CDx is the true owner of the Pancreatic IP because Rutenberg automatically assigned the Pancreatic IP to CDx by operation of the IP Agreement (amended complaint, ¶¶ 3-5, 37). Rutenberg and Adenocyte deny that CDx is the true owner of the intellectual property (see answer, ¶¶ 3-5). Each side seeks a declaratory judgment that it, and not the other side, is the true owner of the Pancreatic IP (see amended complaint, ¶¶ 3-5, 37-40; CTPC, ¶¶ 226-233). CDx's declaratory judgment claim and Rutenberg and Adenocyte's declaratory judgment counterclaim do not seek to resolve-and, if decided, would not resolve-whether Rutenberg breached any of his fiduciary duties to CDx.
Rutenberg and Adenocyte also argue that the Delaware Chancery Court's recent conclusion that this lawsuit triggered an advancement obligation to Rutenberg (a current director and former officer of CDx) demonstrates that "the true cause of action is breach of fiduciary duty" (memorandum of law, at 21). Rutenberg and Adenocyte are wrong. The Delaware Chancery Court merely held that, under the terms of CDx's bylaws, CDx is required to advance fees and expenses incurred by Rutenberg in this litigation because CDx's declaratory judgment claim is sufficiently related to Rutenberg's service as an officer and director. That court did not conclude, as Rutenberg and Adenocyte suggest, that CDx's declaratory judgment claim was tantamount to a claim for breach of fiduciary duty.
Accordingly, the motion is denied.
Defendants' Motion for Voluntary Discontinuance of the Conversion Counterclaim (Motion Sequence No. 006)
Rutenberg and Adenocyte move for voluntary discontinuance of their conversion counterclaim. This motion is granted.
CPLR 3217 (a) (1) allows voluntary discontinuance of claims by notice and without a court order "any time before a responsive pleading is served." The First Department generally views motions to dismiss as "responsive pleadings" within the meaning of CPLR 3217 (a) (1) (see BDO USA, LLP v Phoenix Four, Inc., 113 A.D.3d 507, 511 [1st Dept 2014]). Accordingly, discontinuance after motion to dismiss in the First Department must typically be by stipulation under CPLR 3217 (a) (2), or by court order under CPLR 3217 (b).
The parties do not oppose dismissal of the conversion counterclaim but contend that "they are not prepared to waive their rights to costs and fees in making a motion that should never have been required to be brought" (opposition memorandum [NYSCEF Doc No. 112], at 1). As previously discussed, however, none of the moving parties is entitled to costs and sanctions. Accordingly, defendants' motion to voluntarily discontinue the conversion counterclaim is granted.
The court has considered the remaining arguments, and finds them to be either moot, or without merit.
Accordingly, it is
ORDERED that the motion of plaintiff CDx Diagnostics, Inc. for an order compelling defendant Dr. Mark Rutenberg to arbitrate his declaratory judgment counterclaim relating to the termination of his employment by CDx Diagnostics, Inc. and to stay this action (motion sequence no. 002) is granted; and it is further
ORDERED that defendant Dr. Mark Rutenberg shall arbitrate his claims against plaintiff CDx Diagnostics, Inc. with respect to the termination of his employment in accordance with the Executive Employment Agreement; and it is further
ORDERED that all proceedings in this action with respect to the termination of Dr. Mark Rutenberg's employment are hereby stayed, except for an application for an order to vacate or modify said stay; and it is further
ORDERED that either party may make an application by order to show cause to vacate or modify this stay upon the final determination of the arbitration; and it is further
ORDERED that the motions of plaintiff CDx Diagnostics and third-party defendants CDx Medical Holdings, Inc., Galen Management, LLC, David Jahns, Thomas Bologna, John Watts, William Huffnagle and Stacey Bauer to dismiss certain counterclaims and third-party claims asserted as against them (motion sequence nos. 003, 004, and 007), are granted, and the following counterclaims are dismissed: misappropriation of commercial advantage (first cause of action); abuse of process (third cause of action); breach of the implied covenant of good faith and fair dealing (fourth cause of action); tortious interference with existing and prospective contract (fifth cause of action); and civil conspiracy (seventh cause of action); and it is further
ORDERED that the motion of defendants Dr. Mark Rutenberg and Adenocyte, LLC for voluntary dismissal of their conversion counterclaim (sixth cause of action) (motion sequence no. 006) is granted, and the conversion counterclaim is dismissed; and it is further
ORDERED that the motion of plaintiff CDx Diagnostics, Inc. and third-party defendant CDx Medical Holdings, Inc. for dismissal of certain affirmative defenses (motion sequence no. 003) is granted, and the following affirmative defenses are dismissed: failure to mitigate damages (eighth defense); privilege (seventeenth defense); lack of standing (eighteenth defense); the business judgment rule (twentieth defense); the statute of frauds (twenty-second defense); and preemption (twenty-fourth defense); and it is further
ORDERED that the motions of plaintiff CDx Diagnostics, Inc. and third-party defendants CDx Medical Holdings, Inc., Galen Management, LLC, David Jahns, Thomas Bologna, John Watts, William Huffnagle and Stacey Bauer for costs and sanctions (motion sequence nos. 003, 004, and 007) are denied; and it is further
ORDERED that the motion of defendants Dr. Mark Rutenberg and Adenocyte, LLC for an order vacating any arbitration demand and dismissing the declaratory judgment cause of action (motion sequence no. 005) is denied; and it is further
ORDERED that the remaining counterclaim in this action-the portion of the declaratory judgment counterclaim (second cause of action) that seeks a judgment declaring that the intellectual property rights that Adenocyte, LLC owns to the inventions at issue properly belong to Adenocyte, LLC and are not owned by CDx Holdings, Inc.-is severed and continued.