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A group of medical device firm shareholders failed to show that a distributor didn’t make a reasonable effort to sell their products, the 7th Circuit Court of Appeals affirmed Thursday.
According to court records, Thomas Russell is an orthopedic trauma surgeon who invented numerous products such as bone substitutes and surgical devices to improve outcomes following orthopedic surgery.
He, along with Patrick Burke, Gerard Insley, Amanda Kiely, Paul Burke, Thomas Madden and Aideen Jennings, known in court documents as “the inventors,” were shareholders in CelgenTek Innovations Corporation, a medical device firm.
On Oct. 7, 2015, the inventors entered into an agreement with Zimmer Incorporated, a corporation that designs, manufactures and distributes medical devices. Pursuant to the agreement, Zimmer became the exclusive distributor of certain CelgenTek products.
In November 2015, CelgenTek was experiencing dire financial problems. The inventors attributed the financial woes to the massive investments, loans and advances required to fund years of research and development, ensure safety and efficacy, and clear regulatory hurdles.
In order to keep CelgenTek solvent, the parties negotiated an agreement in which Zimmer would acquire a 10% ownership of CelgenTek for $2 million, with the inventors retaining the remaining 90% ownership.
After the purchase, CelgenTek’s financial position worsened.
In February 2016, Zimmer provided CelgenTek with a purchase order for just under $1 million at Russell’s request to help keep CelgenTek afloat. Zimmer also loaned the company $2 million in April 2016, followed by approximately $350,000 that August to meet payroll obligations.
The two parties also began discussing potential plans for Zimmer to purchase the remaining 90% of CelgenTek’s stock, which it did in late September 2016. Under the terms of the agreement, Zimmer received the remaining 90% for $17,118,560, with $2,335,320 used to repay loans that Zimmer had previously made to CelgenTek.
In addition, through 2033, the inventors would retain the right to a small percent of the net yield on the products it developed of between 1.5% and 6% of net sales, depending on the product. Also Zimmer agreed to use “commercially reasonable efforts” to sell those products.
From the date the agreement was executed until Dec. 31, 2019, Zimmer paid the inventors approximately $130,000 in earnout payments. The inventors, however, believed that if Zimmer had used commercially reasonable efforts to sell the earnout products, those products would have earned payments in the millions.
The inventors invoked diversity jurisdiction to sue Zimmer in the United States District Court for the Western District of Tennessee, alleging claims of fraudulent inducement, breach of contract, breach of implied covenant of good faith and fair dealing, and declaratory judgment.
Although the inventors sued in Tennessee, the agreement included a forum selection clause that required the parties to assert any claims in Indiana. Thus, the case was transferred to the Northern District of Indiana.
In a subsequent amended complaint, the inventors set forth a single claim for breach of contract, claiming Zimmer failed to use commercially reasonable efforts to sell the earnout products. They alleged Zimmer failed to fulfill its obligations in order to “protect its existing business segments and prevent[] access to the technology by other medical device companies.”
Zimmer filed a motion to dismiss, which the district court granted.
The 7th Circuit affirmed, finding the inventors failed to state a viable claim for relief.
Judge Ilana Rovner wrote the opinion for the appellate court.
While the inventors provided a 17-page, 67-paragraph pleading pointing to 21 examples of alleged inaction by Zimmer, Rovner said what matters is how well the “pegs” of the factual allegations fit the “holes” of the legal theory.
“In this case, even taking all the Inventors’ allegations as true, none of those allegations states a claim either alone or in the aggregate for a violation of the duty to use commercially reasonable efforts to sell the earnout products as defined by this agreement,” Rovner wrote.
There are no allegations that Zimmer deviated from its usual standard of conduct, Rovner continued. Instead, the plain language of the agreement makes clear that the types of allegations listed in the inventors’ 21 examples cannot support a claim for breach of contract.
Further, while fighting the motion to dismiss, the inventors had argued in the alternative that the district court should allow them to again amend their complaint. The district could denied that motion and the 7th Circuit affirmed, noting the plaintiffs gave no indication as to how a third try would resolve the insufficiencies in the complaint.
“… The district court reasonably determined that Zimmer would be prejudiced by having to defend against another complaint given the time and resources already spent in responding to the first two,” Rovner wrote.
Chief Judge Diane Sykes and Judge John Lee concurred in Thomas A. Russell, M.D., et. al. v. Zimmer Inc., 22-2529.
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