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DIATRONICS, INC. v. ELBIT COMPUTERS

July 16, 1986

DIATRONICS, INC., 101 Old Short Hills Road, West Orange, New Jersey 07052, Plaintiff,
v.
ELBIT COMPUTERS, LTD., Advanced Technology Center, P.O.B. 5390, Haifa 31051, Israel, Defendant



The opinion of the court was delivered by: TENNEY

TENNEY, J.,

The plaintiff in this action, Diatronics, Inc. ("Diatronics"), contends that the defendant, Elbit Computers, Ltd. ("Elbit"), violated Section 10(b) ("§ 10(b)") of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j, by making certain misrepresentations in connection with the purchase of stock. In addition, the complaint sets forth claims under state law and Israeli law for common law fraud and breach of contract. *fn1"

The defendant now moves to dismiss the action (1) for lack of subject matter jurisdiction, (2) for improper venue, (3) based on a forum selection clause in the Share Purchase Agreement, and (4) under the doctrine of forum non conveniens. For the reasons set forth below, the Court concludes that although there is subject matter jurisdiction and venue is proper, the action should be heard in Israel where the transaction took place. Accordingly, the Court dismisses the action based on the forum selection clause and under the doctrine of forum non conveniens.

 BACKGROUND

 Until 1983, the defendant in this action, Elbit, was the majority shareholder of a company known as Elmar Medical Systems Ltd. ("Elmar"). Elmar was engaged in developing a computerized hemodialysis system to treat patients suffering from kidney disease. In 1983, the plaintiff, Diatronics, purchased the defendant's majority share interest in Elmar, pursuant to the terms agreed upon in the Share Purchase Agreement ("Purchase Agreement"). Elmar became a wholly-owned subsidiary of Diatronics. The defendant entered into two subsequent agreements with Elmar, (1) the Enhancement and Development Agreement ("Development Agreement") which provided that the defendant would continue working with Elbit to complete development of the hemodialysis system, and (2) the Production Agreement, which provided that Elbit would produce a certain number of hemodialysis machines on behalf of Elmar.

 The plaintiff contends that Elbit made certain misrepresentations or omissions in connection with its sale of Elmar's shares to the plaintiff. Specifically, the plaintiff contends that approximately three months before the Purchase Agreement was signed, another company obtained a patent for a hemodialysis system which is the same as Elmar's system. The plaintiff argues that the defendant knew or should have known about the patent and the defendant failed to advise the plaintiff that such a patent existed. The plaintiff also argues that the defendant failed to perform its obligations under the Development Agreement and the Production Agreement. *fn2" The defendant denies these allegations, arguing that it did not make any misrepresentations or give any warranties concerning existing patents. The defendant also argues that Elmar's products do not infringe on the relevant patent and that the plaintiff is merely attempting to avoid paying the defendant the money owed pursuant to the three existing agreements.

 Diatronics is a Delaware corporation, and its principal place of business is West Orange, New Jersey. Diatronics was formed on June 13, 1983 by International Institute for Medical Sciences ("IIMS") for the purpose of acquiring Elmar. The defendant, Elbit, is organized under the laws of Israel and its principal place of business is in Haifa, Israel. It is in the military and civil hardware business. Elmar is also an Israeli corporation.

 Alvin S. Trenk ("Trenk") is the Chairman, President and Chief Executive Officer of Diatronics, and was previously the Chairman, President and Chief Executive Officer of IIMS. The first discussions concerning Elmar took place in late December 1982 when Trenk met with Dr. Yuval Binur, a representative of Elbit's parent company. Trenk met with Dr. Binur several times thereafter. In April 1983, Trenk met with Benjamin Peled ("Peled"), the president of Elbit. That meeting took place in New York, and Peled and Trenk discussed the possibility of Elbit's selling its shares in Elmar. *fn3"

 After the meeting in New York between Trenk and Peled, all of the significant events concerning the transaction at issue here took place in Israel. Trenk travelled to Israel in order to arrange the purchase of Elbit's shares in Elmar, and he retained an Israeli attorney, Michael Fox ("Fox"). On May 24, 1983, an Agreement in Principle was executed in Elbit's offices in Haifa. Trenk returned to Israel in July 1983 and the Purchase Agreement was signed in Israel on July 28, 1983. The Development Agreement and the Production Agreement were signed in Israel on August 25, 1983. *fn4"

 Diatronics paid Elbit $750,000 pursuant to the terms of the Purchase Agreement, and approximately $2,000,000 under the Development Agreement and the Production Agreement. Diatronics stopped making payments to Elbit in April 1984.

 Elbit contends that Diatronics failed to make payments because Diatronics and Elmar were experiencing liquidity problems. Elbit has instituted an action in Israel asserting breach of contract. Diatronics contends that it ceased making payments because it had discovered a patent belonging to a third party that prevented Elmar from marketing its product. Diatronics also contends that Elbit failed to complete the necessary research on the hemodialysis system, and that Elbit did not fulfill its obligations to Elmar under the Production Agreement. This action ensued.

 DISCUSSION

 1. Jurisdiction and Venue

 The defendant argues that this action should be dismissed for lack of subject matter jurisdiction. The Court disagrees. The Court has subject matter jurisdiction since there is complete diversity between the parties' 28 U.S.C. § 1332(a)(2). Diatronics is a citizen of Delaware and New Jersey, and Elbit is a citizen of a ...


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