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Nanosolutions, LLC, et al. v. Rudy Prajza

June 2, 2011

NANOSOLUTIONS, LLC, ET AL. PLAINTIFFS,
v.
RUDY PRAJZA, ET AL.,
DEFENDANTS.



The opinion of the court was delivered by: Emmet G. Sullivan United States District Judge

MEMORANDUM OPINION

This action arises out of an alleged breach of an Agreement in Principle entered into by Nanosolutions, LLC ("Nano") and Aquiss Beverage Technologies, Inc. ("ABT") (collectively, "plaintiffs"), and Rudy Prajza ("Prajza"), Aqiss Canada, Ltd. ("ACL") and 2221267 Ontario, Ltd. ("Ontario") (collectively "defendants"). Pending before the Court are plaintiffs' motion for leave to amend their complaint and defendants' motion and renewed motion to stay the litigation pending arbitration. Upon consideration of the motions, responses and replies thereto, the applicable law, the entire record, and for reasons set forth below, the Court will GRANT plaintiffs' motion for leave to amend the complaint, DENY AS MOOT defendants' motion to stay, and GRANT defendants' renewed motion to stay the litigation in its entirety pending arbitration.

I. BACKGROUND

Plaintiff Nano is a biotechnology company which develops "technology involving tissue-like nano-encapsulation delivery systems, providing instant delivery of payloads into the bloodstream." Pls.' Am. Compl. ("Am. Compl.") ¶ 19.*fn1 Plaintiff ABT, an affiliate of Nano, developed "the AQISS brand of vitality beverages" which provides "bio-availability of electrolytes and cell repair technology through nano-encapsulation." Am. Compl. ¶ 21. Defendant Rudy Prajza is a citizen of Canada. Defendants ACL and Ontario are two companies created by Prajza.

This case involves three contracts: a 2007 Employment Agreement between Prajza and ABT ("Employment Agreement"), a March 2010 Agreement between ABT and professional tennis player Andy Roddick, who is not a party to this case (the "Roddick Agreement"), and the June 2010 Agreement in Principle ("AIP") between all the parties in this case. The agreements will be discussed in turn.

In 2007, ABT and Prajza entered into an employment agreement ("Employment Agreement"), which provided for Prajza to become Chief Marketing Officer of ABT. Under the agreement, ABT would pay Prajza $150,000 per year plus benefits, expenses, and shares of stock, in exchange for which Prajza was to "promote the beverage brand [AQISS] and expand the existing product sales and distribution." Am. Compl. ¶ 32. According to plaintiffs, Prajza failed to perform the required functions of his position, resulting in significant losses to ABT. In mid-2008 ABT ceased making payments to Prajza under the Employment Agreement. The Employment Agreement contains no arbitration provision. Am. Compl. Ex. D.

After Prajza and ABT parted ways in 2008, ABT negotiated an endorsement agreement with professional tennis player Andy Roddick. ABT and Roddick executed the Roddick Agreement in March 2010, which grants to ABT the worldwide right to use Roddick's endorsement to promote ABT beverages, including AQISS. In consideration for the right to use the athlete endorsement, the Roddick Agreement provides, among other things, for minimum annual royalties and the payment of a royalty on the sales of ABT beverages. Am. Compl. ¶ 92. The Roddick Agreement does not contain a mandatory arbitration provision. Pls.' Opp'n to Motion to Stay, Declaration of James Hovis ("Hovis Decl.") ¶ 20.

Meanwhile, notwithstanding their troubled history, Prajza and ABT remained in contact. Following protracted negotiations, the parties executed an Agreement in Principle ("AIP") for Prajza and two companies created by him - Defendants Ontario and ACL -to market and distribute AQISS products in Canada. In the AIP, plaintiffs agreed to license Nano's technology to defendants and convey other rights in connection with the development, production and marketing of AQISS in Canada. See Am. Compl. Ex. A., AIP. In exchange for these rights, ACL and Ontario agreed to pay royalties and other fees to plaintiffs and also agreed to provide other services, including a website. Pursuant to the AIP, ABT also agreed to sublicense to ACL its rights obtained under the Roddick Agreement, so as to permit ACL to use the endorsement of Andy Roddick in the marketing of AQISS. None of the defendants are party to the Roddick Agreement. However, as a condition of receiving the sublicense from ABT, defendant ACL agreed "to be bound by all of the terms and conditions of the Roddick Agreement and to take all necessary and reasonable actions to ensure ABT's compliance therewith pertaining to the marketing and selling" of AQISS in Canada. AIP ¶ 2(a).

The AIP does not create an employment relationship between Prajza and plaintiffs, nor does it reinstate Prajza's prior employment with ABT. It does, however, contain a provision referring to that history. Paragraph 10 of the AIP provides, in relevant part:

In lieu of the payment to [plaintiffs] of any up-front licensing fees, scientific support payments, work progress payments . . . and minimum royalty payments during the first 12 months from the date first above written . . . Rudy Prajza agrees to forgive any and all accrued salary, expenses and other amounts payable to him by ABT [] through the date hereof . . .

AIP ¶ 10.

Paragraph 12(d) of the AIP contains a mandatory arbitration provision. It provides:

This Agreement and the legal relationships among the parties hereto shall be government by and construed in accordance with the substantive laws of the Province of Ontario, Canada without giving effect to the principals [sic] of conflicts of laws thereof. Conflicts between parties shall be resolved through the Arbitration Act, Ontario, held in the City of Toronto.

AIP ¶ 12(d).

Plaintiffs and defendants executed the AIP on June 24, 2010. Problems between the parties developed immediately. Plaintiffs allege that defendants breached the AIP by, among other things, changing the price at which they promised to sell AQISS, misrepresenting information about plaintiffs on ACL's website, and failing to abide by the terms and conditions of the Roddick Agreement. On August 19, 2010 ABT sent a letter to ACL terminating all of ACL's rights under the Roddick Agreement. On September 13, 2010, plaintiffs sent a letter to all defendants terminating the AIP. The next day, defendants ACL and Ontario responded by delivering to the plaintiffs a Notice to Arbitrate in Ontario, Canada. Defs.' Motion to Stay, Declaration of Jonathan Stainsby ("Stainsby Decl.") Ex. A. ("Notice to Arbitrate"). The Notice to Arbitrate sought, inter alia, a declaration that the AIP had not been terminated, an interpretation of the AIP, a declaration regarding ACL's obligations under the Roddick Agreement, specific performance of the AIP, and damages for breach of contract. Notice to Arbitrate p. 2.

Plaintiffs informed the defendants that they would not participate in the arbitration. Stainsby Decl. Ex. B. Instead, a week later, on September 20, 2010, plaintiffs filed a one count complaint alleging Fraud in the Inducement of the AIP in the Superior Court for the District of Columbia. Defendants removed the case to this Court, citing "two independently sufficient grounds for removal . . . the Federal Arbitration Act §§ 203 and 205 . . . [and] diversity[.]" Notice of Removal, Doc. No. 1 at 1-2. Following removal, defendants immediately moved to stay this case pending completion of the arbitration initiated by ACL and Ontario and "pending the outcome of any such claims as ABT may seek to bring in arbitration under the [AIP]." Defs.' Mem. in Support of Motion to Stay at 9.

Shortly after the parties finished briefing Defendants' Motion to Stay, an arbitrator appointed by the Ontario Supreme Court of Justice issued his decision on the claims that ACL and Ontario had asserted in arbitration. Defs.' Notice of Decision, Doc. No. 10. Plaintiffs did not participate in the arbitration proceedings. Defendants argued that the arbitrator's decision should not impact their motion for a stay in this Court, noting that "the arbitrator's decision does not affect [defendants'] entitlement to a stay of these proceedings under the Federal Arbitration Act until after ABT commences and completes an arbitration of its claim[s] . . . the claims asserted by ABT [in litigation] remain subject to the arbitration clause and this action must be stayed pending arbitration." Defs.' Notice of Decision at 2.

On January 31, 2011, plaintiffs filed a Motion for Leave to File an Amended Complaint. The amended complaint contains eight counts. Counts One and Two are common law claims of negligence, breach of contract, and conversion against Prajza only, and arise from Prajza's 2007 Employment Agreement with ABT. Count Three alleges fraudulent inducement to enter into the AIP against all defendants. Count Four alleges the defendants breached the AIP in several ways, including that ACL breached its obligations under the Roddick Agreement as incorporated into the AIP. Count Five asserts that Prajza converted plaintiffs' property by registering the AQISS website in his own name. Count Six claims Prajza made false statements and representations to plaintiffs in 2009 regarding his interest in again working for ABT. Count Seven claims fraud in the arbitration proceeding. Finally, Count Eight asserts defendants tortiously interfered in plaintiffs' business relationships by contacting one of Nano's owners and Andy Roddick regarding the parties' underlying disputes. Plaintiffs seek a declaratory judgment that the AIP is void, that the arbitrator lacks jurisdiction, and that the decision of the Canadian arbitrator is not binding on plaintiffs, an injunction preventing defendants from using the Roddick endorsement, and damages of $330 million. Defendants have opposed the motion for leave to amend, and have renewed their motion to stay the proceedings pending arbitration. The motions are ripe for review by the Court.

II. STANDARD OF REVIEW

A. Leave to Amend the Complaint

Under Federal Rule of Civil Procedure 15(a)(1), a party may amend its pleading once as a matter of course within twenty-one days after serving it, or, if a pleading is one to which a responsive pleading is required, within twenty-one days after service of a responsive pleading or within twenty-one days after the defendant files a motion under Rule 12(b), (e) or (f), whichever is earlier. Fed. R. Civ. P. 15(a)(1). Once the time to amend a pleading as a matter of course elapses, a plaintiff may amend the complaint with leave of the Court. Fed. R. 15(a)(2). The Rule directs courts to "freely give" leave to amend a complaint "when justice so requires." Id. "If the underlying facts or circumstances relied upon by a plaintiff may be a proper subject of relief, he ought to be afforded an opportunity to test his claim on the merits." Foman v. Davis, 371 U.S. 178, 182 (1962). Accordingly, courts should grant leave to ...


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