20:29, July 27 344 0 law.com

2017-07-27 20:29:05
Judge Greenlights Walgreens' $140M Suit Against Theranos

Theranos Headquarters

A U.S. magistrate judge on Thursday said that Theranos Inc. should not be allowed to avoid an attempt by Walgreen Co. to recover $40 million it says it is owed after the embattled blood-testing company failed to deliver on its fundamental promise.

The recommendation from Chief Magistrate Judge Mary Pat Thynge of the District of Delaware came in response to Theranos’ motion to dismiss part of a breach of contract suit Walgreens filed against its former business partner in November.

In its complaint, Walgreens said Theranos was required to repay a $40 million convertible note Walgreens had purchased in an agreement to operate “Theranos Wellness Centers” out of its stores. According to court documents, the deal was predicated on Theranos’ ability to provide comprehensive blood testing with just a few drops of blood taken from a single stick to a patient’s finger.

Walgreens, however, announced last June that it was terminating its relationship with Theranos after the Silicon Valley-based startup said it was voiding two years’ worth of blood test results, causing Walgreens to shudder all 41 centers at its stores.

Walgreens sought immediate repayment of the note, alleging that Theranos had violated the implied covenant of good faith and fair dealing by misrepresenting the technology it had touted as revolutionary. Theranos responded that Walgreens had failed to adhere to a provision of the agreement that required it to give Theranos notice and provide the company an opportunity to fix the supposed default.

In a 24-page report, Thynge sided with plaintiff, finding that Walgreens had pulled out of the agreement because Theranos had failed to live up to warranties in the agreement—and not for breaches to the covenant.

“It is evident Theranos knew of problems pertaining to its proprietary technology, as well as its two [Clinical Laboratory Improvement Amendments]-certified labs, and unsuccessfully attempted to cure those deficiencies before Walgreens noticed,” Thynge wrote. “Had Walgreens been required to provide notice and opportunity to cure those issues, the facts show Theranos would still have been in default.”

“Thus, Walgreens need not comply with the notice and opportunity to cure requirements in order to bring a claim for alleged breach of the implied covenant of good faith and fair dealing.”

An attorney for Theranos was not immediately available to comment, and Kevin R. Shannon, a Potter Anderson & Corroon partner representing Walgreens, declined to comment on Thursday.

Walgreens is also seeking repayment of a $100 million “innovation fee” it had negotiated with Theranos, though that claim was not a part of Thynge’s ruling.

Both sides will have a chance to object to the magistrate judge’s report, but it will ultimately be up to Judge Richard G. Andrews to decide whether to adopt its findings.

Theranos is represented by Wilmer Cutler Pickering Hale and Dorr and Delaware’s Richards, Layton & Finger.

The case is captioned Walgreen v. Theranos.