Osco Motors Co. v. Marine Acquisition Corp.

OSCO MOTORS COMPANY, LLCd/b/a OSCO MOTORS CORPORATIONand ENGINE DISTRIBUTORS, INC. Plaintiffs, v. MARINE ACQUISITION CORP. d/b/a SEASTAR SOLUTIONSf/k/a TELEFLEX MARINE and HIG MIDDLE MARKET, LLC. Defendants.

C.A. No.: 13-868-RGA/MPT

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE

Date: June 24, 2014

REPORT AND RECOMMENDATION

I. Introduction

Plaintiffs, Osco Motors Company, LLC dba Osco Motors Corporation ("Osco") and Engine Distributors, Inc. ("EDI") moved on February 28, 2014 for leave to file their third amended complaint pursuant to Rule 15 of the Federal Rules of Civil Procedure ("FED. R. CIV. P.").¹ Defendants, Marine Acquisition Corp. d/b/a Seastar Solutions f/k/a Teleflex Marine ("Seastar") and H.I.G. Middle Market, LLC ("HIG") (collectively "defendants") oppose this motion.² This court has jurisdiction pursuant to 28 U.S.C. § 1332. In particular, plaintiffs seek to include additional claims against the original defendants, as well as adding Gong Luen Metal Industrial Co., Ltd, ("Gong Luen"), Quality Mark Taiwan, Co., Ltd. ("QM Taiwan"), and Mark Ebbenga ("Ebbenga") asdefendants.³ Plaintiffs' third amended complaint alleges eleven causes of action: (1) tortious interference with contractual relations against Seastar; (2) breach of contract against defendants; (3) breach of the contractual duty of good faith against defendants; (4) breach of the implied covenant of good faith and fair dealing against defendants; (5) violation of 6 DEL. C. § 2001 against defendants; (6) federal trademark infringement under 15 U.S.C. § 1114 against defendants, Gong Luen, QM Taiwan, and Ebbenga; (7) federal trademark infringement under 15 U.S.C. § 1125(a) against defendants, Gong Luen, QM Taiwan, and Ebbenga; (8) violation of 6 DEL. C. § 2001 against Gong Luen, QM Taiwan, and Ebbenga; (9) unjust enrichment against Gong Luen, QM Taiwan, and Ebbenga; (10) conversion against Gong Luen, QM Taiwan, and Ebbenga; and (11) civil conspiracy against defendants, Gong Luen, QM Taiwan, and Ebbenga.⁴

On March 28, 2014, defendants filed a brief in opposition to plaintiffs' motion, claiming that counts one, eight, nine, and ten are barred by collateral estoppel and/or res judicata, and should therefore be dismissed under FED. R. CIV. P. 12(b)(6).⁵ Defendants also contend counts six, seven, and eleven fail to state a claim upon which relief can be granted and should be dismissed under FED. R. CIV. P. 12(b)(6).⁶ Defendants further claim the third amended complaint should be dismissed under FED. R. CIV. P. 12(b)(2) because this court does not have personal jurisdiction over QM Taiwan.⁷

On April 11, 2014, plaintiffs responded to defendants' arguments and also asserted the court should stay the proceedings until the District Court for the District of Minnesota renders its decision on plaintiffs' motion to vacate the arbitration judgment made between plaintiffs and Quality Mark, Inc. ("QM").⁸ The hearing for plaintiffs' motion to vacate the arbitrator's award is scheduled for June 27, 2014.⁹

II. Background¹⁰

A. Parties

Osco is a producer and distributor of marine engines, manifolds, risers, and accessory parts.¹¹ Osco is a wholly-owned subsidiary of EDI, which sells multiple brands of marine engine components into the marine market.¹² Seastar is a manufacturer and distributor of marine control systems, engine and drive components and other product for the original equipment manufacturing and after marine market.¹³ The products sold by Seastar include manifolds produced by Osco.¹⁴ HIG is a private equity and venture capital investment firm, as well as Seastar's partner and equity sponsor.¹⁵ Gong Luen is a foundry that manufactures and produces metal castings used to mold various products, including marine engines, manifolds, and risers.¹⁶ QM Taiwan is a broker that arranges the sale and shipment of goods manufactured by GongLuen.¹⁷ Mark Ebbenga is the President of Quality Mark ("QM"), a partner of Gong Luen and QM Taiwan, and he is the owner and principal or alter-ego of QM Taiwan.¹⁸

B. Factual Background

On January 1, 2011, Osco and EDI entered into a Manufacturing Agreement¹⁹ with QM, where QM would produce manifolds for plaintiffs on an exclusive basis.²⁰ According to the Manufacturing Agreement, QM was not permitted to manufacture or sell Osco products to any entity other than plaintiffs.²¹ The parties at all times intended for the Manufacturing Agreement to be a valid agreement between Osco and/or EDI and QM and according to its terms, QM and Ebbenga utilized Gong Luen and QM Taiwan to manufacture and ship Osco products to plaintiffs.²² Additionally, the Manufacturing Agreement specified that if Osco was sold during the life of the agreement, the Manufacturing Agreement would automatically renew under the same terms and conditions with the company that purchased Osco.²³ The Manufacturing Agreement further required all disputes relating to its terms be resolved by mediation or arbitration in Minneapolis, Minnesota.²⁴

In early 2011, defendants began an investigation regarding the possible purchase of Osco and entered into a Confidentiality Agreement²⁵ with plaintiffs onJuly 25, 2011.²⁶ The Confidentiality Agreement is a form letter utilized by defendants in contemplation of purchasing companies and it referenced a "possible collaboration" between HIG and plaintiffs.²⁷ During the same time period, defendants and QM entered into a Confidentiality Agreement using a form letter similar to the Confidentiality Agreement between defendants and plaintiffs.²⁸ The Confidentiality Agreement between QM and the defendants also contained a clause that all disputes between them would be resolved in Delaware.²⁹

On or about September 11, 2012, plaintiffs and defendants executed a Letter of Intent,³⁰ whereby plaintiffs agreed not to solicit or negotiate any other potential agreements regarding the sale of Osco with any other companies, while defendants agreed to conduct timely due diligence.³¹ The Letter of Intent provided the content of the negotiations regarding defendants' potential acquisition would not be disclosed to any third parties, and the terms of the Confidentiality Agreement were incorporated within it.³²

Following the execution of the Letter of Intent between plaintiffs and defendants, Seastar had direct communications with QM and QM Taiwan about the shipment of Osco products and the fabrication of tooling to be used to manufacture products following Seastar's potential acquisition of the Osco assets.³³ In November andDecember 2012, QM's President, Mark Ebbenga, had multiple meetings with Seastar's Vice President of Sales to discuss the possible purchase of Osco.³⁴ During these meetings, Ebbenga and Seastar's Vice President of Sales agreed QM would sell Osco products directly to Seastar without plaintiffs' involvement.³⁵ Seastar and QM exchanged documents, including the Confidentiality Agreement signed between Seastar and plaintiffs.³⁶ Osco President, Glenn Cummins, Jr., ("Cummins") became aware of the communications and informed Seastar and QM that all communications regarding Osco products must be directed to plaintiffs.³⁷ Cummins also informed Seastar that all orders for Osco products needed to go through Osco and could not be transmitted directly to QM.³⁸ Additionally, Cummins mentioned to Seastar that the Manufacturing Agreement between plaintiffs and QM could not be negotiated or otherwise altered by Seastar and QM before plaintiffs finalized the sale of the Osco assets to Seastar.³⁹

During the course of Seastar's investigation regarding the potential purchase of Osco, it became aware of the Manufacturing Agreement between plaintiffs and QM.⁴⁰ Seastar learned that, as a result of the Manufacturing Agreement, QM had complete control over the Osco product being shipped to plaintiffs' customers and the tooling used to manufacture the product.⁴¹ Therefore, Seastar was aware QM was capable of shipping Osco products or products manufactured with the tooling solely owned byplaintiffs, directly to any customer of its choosing.⁴² In further review of due diligence documents, Seastar learned QM and plaintiffs jointly owned the tooling necessary for the manufacture of all Osco products, and according to the terms of the Manufacturing Agreement, Osco could own the tooling unconditionally by January 2016.⁴³ Seastar also learned Gong Luen was responsible for manufacturing all Osco products.⁴⁴

Although plaintiffs authorized certain conversations between QM and Seastar during the due diligence period, they never authorized QM and Seastar to negotiate a new manufacturing agreement that would commence after the sale of the Osco assets or to allow Gong Luen to manufacture product or fabricate tooling upon Seastar's request.⁴⁵ Plaintiffs again informed Seastar that the Manufacturing Agreement between Osco and QM was not negotiable and would transfer to Seastar in its current form following Seastar's acquisition of the Osco assets.⁴⁶ Regardless of these apparent understandings, and without plaintiffs' approval, Seastar continued to negotiate with QM to create a new manufacturing agreement between them effective following the sale of the Osco assets.⁴⁷ In contravention of the Letter of Intent and the Confidentiality Agreement, Seastar disclosed plaintiffs' confidential information regarding customers and price terms to QM.⁴⁸ Also, as negotiations between plaintiffs and Seastar continued, Seastar made direct orders to QM for specific tooling to be fabricated tomanufacture parts.⁴⁹ The requested tooling was fabricated by Gong Luen.⁵⁰ Following this request, QM contacted plaintiffs and requested approval to sell Osco products and manifolds directly to Seastar.⁵¹ Plaintiffs denied QM's request pursuant to the terms of the Manufacturing Agreement.⁵²

On January 15, 2013, the President of QM Taiwan, Ms. Lee ("Lee"), gave plaintiffs notice of an alleged breach of the Manufacturing Agreement between QM and plaintiffs, due to nonpayment of invoices.⁵³ Plaintif...