Medical Device Lawsuit Watch - August 2009

This summary of key lawsuits affecting medical device companies is provided by the Health Care Law Group of Crowell & Moring LLP, in collaboration with the firm's Torts, Antitrust, Commercial Litigation, and Intellectual Property Groups. 

Cases in this issue:

• Boyd, et al. v. Tornier, Inc., et al.
• Medical Components, Inc. v. Arrow International, Inc.
• Synergetics USA, Inc. v. Alcon Laboratories, Inc. and Alcon, Inc.
• Prudhel, et al. v. Endlogix, Inc., et al.
• Medafor, Inc. v. Starch Medical, Inc.
• Medtronic USA et al. v. Globus Medical, Inc.
• United States v. Norian Corp.

 

Boyd, et al. v. Tornier, Inc., et al. No. 07-0751 (S.D. Ill. June 12, 2009) No. 07-0751 (S.D. Ill. June 18, 2009)

The U.S. District Court for the Southern District of Illinois held that an orthopedic device maker may be liable for breaching contracts with two of its exclusive distributors because it allegedly engaged in bad faith conduct designed to cause conditions that would have justified termination of the contracts.

Defendant Tornier, Inc. ("Tornier"), a manufacturer of medical devices, entered into distributorship agreements with Boyd Medical, Inc. ("Boyd") and Addison Medical, Inc. ("Addison") in 2003. The contracts contained identical terms regarding termination. Each contract had a one-year term and gave either party the right to terminate the contract at the end of the term upon thirty-days written notice. If not terminated, the contracts automatically renewed for another one-year term. The contracts also granted Tornier the right to terminate upon written notice at the end of any quarter in which a distributor failed to reach its projected sales quota.

The contracts expressly incorporated the "Tornier Agency Manual" which provided that Tornier could automatically terminate any distributor that fell more than twenty-five percent behind quota in any quarter. For distributors less than twenty-five percent under quota, the manual set forth a four-step procedure providing for a series of warnings.

In 2007, Tornier terminated its contracts with Boyd and Addison on the ground that they failed to meet the agreed upon quotas. Boyd and Addison filed breach of contract, fraudulent misrepresentation and negligent misrepresentation claims, alleging that Tornier failed to comply with the terms of the contract, set quotas it knew the plaintiffs could not meet, and that Tornier made certain representations that led the plaintiffs to drop nearly all other suppliers except Tornier.

Tornier moved for summary judgment of the plaintiffs' claims, arguing that the plaintiff's breach of contract and tort claims should fail as a matter of law. Tornier also argued that even if the plaintiffs prevailed on their claims, they had no compensable damages based on the limitation of liability clause in the contracts. In two separate opinions, the court denied in part and granted in part Tornier's motions for summary judgment.

Regarding the plaintiffs' breach of contract claim, the court found that there were two reasonable constructions of the distributorship contracts with regard to the termination of an agent who fails to meet a quarterly quota. The court held that the ambiguity in the contract language created a genuine issue of fact for the jury regarding whether Tornier complied with the contract termination provision, rendering summary judgment of the plaintiffs' claims inappropriate.

The court, however, agreed that all except one of the plaintiffs' misrepresentation claims should be dismissed. The plaintiffs alleged that Tornier had wrongfully terminated their distributorship contracts in light of Tornier's alleged directive that the plaintiffs should not acquire other product lines because Tornier would fill any product line voids. The court refused to grant summary judgment on this issue because there was undisputed evidence that Tornier encouraged its distributors not to carry other product lines, creating a genuine issue of material fact regarding this misrepresentation. The court dismissed the remainder of the plaintiffs' tort claims for failure to allege actionable statements, because the plaintiffs failed to show the required detrimental reliance, or because there was no evidence to support that Tornier made the misrepresentation at issue.

Finally, the court rejected Tornier's argument that the limitation of liability clauses in the contracts prohibited plaintiff's recovery of lost profits. The court found that the limitation of liability clause may not be enforceable because a question of fact existed as to whether Tornier unfairly used its stronger bargaining position to undermine the contracts. Nonetheless, the court agreed with Tornier that any lost profits arising from the breach of contract should be limited to the remaining term of Tornier's distributorship contracts with the plaintiffs, June 1, 2007 through December 31, 2007.

 

Medical Components, Inc. v. Arrow International, Inc. No. 07-2852 ( E.D. Pa. July 6, 2009)

The U.S. District Court for the Eastern District of Pennsylvania held that negligence by a patent attorney in failing to advise the U.S. Patent and Trademark Office (the "PTO") of similarities between claims of two related applications did not amount to inequitable conduct rendering the relevant patents invalid.

Medical Components, Inc. ("Medcomp") filed a suit in the U.S. District Court for the Eastern District of Pennsylvania against Arrow International, Inc. ("Arrow") alleging that Arrow infringed U.S. Patent No. 6,881,211 (the "'211 patent"), directed to a multilumen catheter. Arrow filed a counterclaim alleging that the '211 patent was invalid due to inequitable conduct by the patent attorney during prosecution.

Arrow argued that Medcomp and its patent attorney did not disclose to the PTO the existence of a second patent application which had nearly identical claims to the application which matured into the '211 patent. Arrow argued that if the patent examiner had known of the second application, he would have rejected the claims under the double patenting doctrine.

The prosecuting patent attorney testified at trial that he was not aware of the relationship between the two patent applications. When he took over the relevant patent family and prepared docketing system entries for each patent application, he reviewed the correspondence files but did not review the applications themselves. When he prepared related applications for filing, he did not carefully consider the claims. Accordingly, he failed to notice the relationship between the two applications at issue and thus, was not aware of the relationship when he filed the '211 patent application.

The court explained that to show sufficient inequitable conduct to render the '211 patent invalid, Arrow had to show by clear and convincing evidence that the patent attorney made an affirmative misrepresentation or omission of material, noncumulative information with the intent to deceive the PTO. The court noted that material evidence is any information that a reasonable patent examiner would consider important in deciding whether to grant the patent.

Both parties agreed that the relationship between the two relevant applications and the similarity between the claims was material. However, the court noted that a showing that the omitted information was material does not provide the required intent to deceive.

The court found that Arrow failed to provide clear and convincing evidence of any intent to deceive. The court also found that the actions of the patent attorney were, at best, inadvertent and, at worst, negligent, and that the patent attorney acted in good faith.

Because Arrow failed to show intent to deceive, the court declined to balance the equities to determine if the '211 patent should be held invalid. The court entered judgment in favor of Medcomp, dismissing Arrow's inequitable conduct counterclaim.

 

Synergetics USA, Inc. v. Alcon Laboratories, Inc. and Alcon, Inc. No. 08-3669 (S.D.N.Y. July, 9, 2009)

The U.S. District Court for the Southern District of New York dismissed a counterclaim for trade secret misappropriation because the defendants/counterclaim plaintiffs knew or should have known of the misappropriation claim before the limitations period expired, rendering New York's continuing tort doctrine inapplicable.

Synergetics USA, Inc. ("Synergetics") sued Defendants Alcon Laboratories, Inc. and Alcon, Inc. (collectively, "Alcon") for antitrust violations, including illegal tying and predatory pricing. Alcon counterclaimed that Synergetics misappropriated its trade secrets sixteen years earlier.

Synergetics filed a motion for summary judgment arguing that Alcon's counterclaim was time-barred. Alcon argued that the statute of limitations had been tolled under New York's continuing tort doctrine.

Under New York's continuing tort doctrine, t he date of accrual of a claim for misappropriation may be extended where the defendant has kept a secret confidential but continued to use it for commercial advantage. Where, however, the defendant discloses the secrets revealed to him, there can be no continuing tort of unlawful use. Thus, the court explained that where a plaintiff had knowledge of a defendant's misappropriation and use of its trade secret, the continuing tort doctrine does not apply.

The court held the statute of limitations was not tolled under New York's continuing tort doctrine because there was evidence that Alcon's predecessor knew or should have known of the theft of the trade secrets as early as 1992. The also court considered that in 1999, Alcon created a document reflecting its knowledge of the similarities between their product and Alcon's. The court also considered that Alcon's attorneys commented in 2002 that Synergetics appeared to be violating the firm's intellectual property rights.

Based on this evidence, the court concluded that Alcon was aware of the misappropriation and use of the trade secret by 2002 at the latest, but did not file its misappropriation counterclaim until June 2008. Since Alcon failed to file its misappropriation claim within the applicable three-year statute of limitations, the court granted Synergetics' motion for summary judgment, dismissing Alcon's misappropriation claim as time-barred.

 

Prudhel, et al. v. Endlogix, Inc., et al. No. S-09-0661 LKK/KJM (E.D. Cal. July 9, 2009)

The U.S. District Court for the Eastern District of California held that a state law strict liability tort claim that does not impose conflicting requirements on medical device makers and, therefore, does not disrupt the federal regulatory scheme is not preempted, even if it imposes a standard "literally different from the federal requirements."

Edwin Prudhel ("Prudhel") underwent an aortic stent graft repair in October 2004. During the procedure, the treating physician attempted to use a Powerlink stent - a Class III medical device designed, manufactured and sold by Endologix, Inc. ("Endologix") and pre-approved by the Food and Drug Administration ("FDA"). The operation was unsuccessful, and Prudhel died.

His family brought various state law claims against Endologix, alleging that Prudhel's death was caused by a malfunction of the stent. The plaintiffs sought damages on claims of strict liability both for manufacturing and design defects, negligence and breach of express and implied warranties.As to manufacturing, the plaintiffs alleged Endologix violated the FDA's manufacturing requirements imposed by the premarket approval process and 21 C.F.R. § 820. As to design, the plaintiffs alleged that the stent suffered design defects rendering it "unreasonably dangerous."

Endologix moved to dismiss the complaint in its entirety, arguing that the plaintiffs' claims were preempted by Section 360k of the Medical Device Amendments to the Federal Food, Drug and Cosmetic Act, 21 U.S.C. § 360c, et seq. ("MDA"). Relying on Riegel v. Medtronic, 128 S. Ct. 999 (2008), the district court noted that the plaintiffs' claims were preempted only insofar as they "impose[d] requirements on the [device] that exceed those imposed by the FDA." The court recognized that claims "premised on a violation of FDA regulations" may impose state duties that "'parallel,' rather than add to, federal requirements" and that such claims are not preempted. The court then analyzed whether the plaintiffs' complaint properly raised parallel claims.

The court held first that "state law claims are not preempted if they parallel either specific or general FDA regulations, notwithstanding the fact that only a specific requirement will trigger the MDA's preemption clause." The court then addressed "what it means to parallel a federal requirement," rejecting the argument that the state law claim must impose a requirement literally identical to the federal one. Instead, the court held that "a state law claim that requires more than mere noncompliance with federal requirements - for example, that the violation of federal requirements have been reckless or unreasonable - is not precluded, notwithstanding the fact that such a claim uses a standard that is literally 'different from' the federal requirements." This is because "[s]uch a state law claim does not impose conflicting requirements on manufacturers and thereby disrupt the federal regulatory scheme."

The court held that the plaintiffs adequately alleged a parallel claim for strict liability arising out of a manufacturing defect where the plaintiffs claimed the manufacturing was not in compliance with federal requirements. The court, however, also held that the plaintiffs' other claims were not predicated on a federal violation and were preempted, or in the alternative, inadequately pled. The court dismissed the design defect, negligence and express and implied warranty claims.

 

Medafor, Inc. v. Starch Medical, Inc. No. 09-CV-0441 (D. Minn. July 16, 2009)

The U.S. District Court for the District of Minnesota dismissed Medafor, Inc.'s ("Medafor's") trademark infringement and trade secret claims against competitor Starch Medical, Inc. ("Starch"). Medafor argued that Starch induced a former Medafor executive to disclose Medafor's confidential information. The court held that under the pleading standards announced in Twombly and Iqbal, Medafor failed to plead sufficient facts in support of its claims.

Medafor employed David Lang from July 2001 to February 2008 as v ice president of international sales and marketing . Under his employment agreement, Lang had a duty to keep Medafor's trade secrets and propriety information confidential. Following his employment at Medafor, Lang joined competitor Starch as its president. Soon after, Starch began to market its products as "improvements" over Medafor's products.

In February 2009, Medafor sued Starch for theft of trade secrets, tortious interference, trademark infringement, false designation of origin, unfair competition, false advertising, and common law trademark and trade name infringement. Medafor alleged that Lang disclosed confidential information about Medafor products to Starch. Medafor also alleged that Starch hid metadata labels for "medafor" on a video which Starch presented on both its own website and on the internet website YouTube™. Medafor alleged this metadata tag created a likelihood of confusion by consumers as to the source of the product.

Starch moved to dismiss Medafor's complaint under Federal Rule of Civil Procedure 12(b)(6), arguing that Medafor's descriptions of its trade secrets were insufficient to place Starch on notice of what it supposedly stole. Starch also argued that Medafor failed to present facts which would support its allegation that Lang breached his employment contract and disclosed information regarding Medafor's products to Starch.

The court analyzed the sufficiency of Medafor's complaint under the heightened pleading standards announced by the Supreme Court in Bell Atlantic v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009). In Twombly and Iqbal, the Court explained that although trial courts must accept factual allegations as true on a motion to dismiss, they are "not bound to accept as true a legal conclusion couched as a factual allegation." Moreover, a complaint must state a "plausible claim for relief." Accordingly, courts should examine factual allegation to determine "if they plausibly suggest an entitlement to relief." If allegations are "conclusory in nature," they are not entitled to the presumption of truth.

The Medafor district court held that Medafor had adequately pled facts supporting its claims for trademark infringement because Starch had been able to refute them. The court, however, held that Medafor's trade secret claims could not survive a motion to dismiss under the Twombly and Iqbal standards.

The court agreed with Starch that Medafor's descriptions of its trade secrets were insufficient to place Starch on notice of what it supposedly stole. Medafor's complaint described the trade secrets at issue as "business methodologies, formulas, devices, and compilations of information, including suppliers and customers." The court described these descriptions as "meaningless."

The court also found that Medafor had not pled any facts showing how the public could be confused by Starch's actions or that Lang had disclosed Medafor's confidential information to Starch. As a result, the court dismissed Medafor's trade secret claims with leave to replead the claims to cure the deficiencies identified by the court.

 

Medtronic USA et al. v. Globus Medical, Inc. No. 06-cv-04248 (E.D. Pa. July 16, 2009)

After a jury found Globus Medical, Inc. ("Globus") liable for infringement of two patents , a t a bench trial on damages and injunctive relief, the U.S. District Court for the Eastern District of Pennsylvania held that three of the four plaintiffs, Medtronic Sofamor Danek USA, Inc. ("Medtronic USA"), Medtronic Puerto Rico Operations Co. ("MPRO") and Medtronic Sofamor Danek Deggendorf, GmbH ("Deggendorf") (collectively, "Medtronic plaintiffs"), lacked constitutional standing to recover for infringement because they held limited licenses to use the patents under agreements which did not convey exclusionary rights sufficient to confer constitutional standing. The court found that the owner of the patent and fourth plaintiff in the action, Warsaw Orthopedic, Inc. ("Warsaw"), did have standing and was entitled to compensatory damages for infringement, including a reasonable royalty plus pre-judgment interest.

The four plaintiffs in this patent action were related corporate entities. Plaintiff Warsaw was the undisputed owner of t he patents at issue, which pertain to devices and methods used by spinal surgeons to stabilize bony structures. Warsaw entered into separate, nearly identical license agreements granting plaintiffs MPRO and Deggendorf "co-exclusive" licenses to use the patents for manufacturing medical devices. Warsaw expressly reserved for itself the right to manufacture products covered by the patents and to grant manufacturing licenses to its affiliates.

Plaintiffs Warsaw and Medtronic USA we re parties to a distribution agreement under which Medtronic USA held a "co-exclusive" license to distribute products covered by the patents. Absent from the distribution agreement was any express or implied promise that Warsaw would refrain from appointing other distributors. Neither Medtronic's distribution agreement, nor MPRO's or Deggendorf's license agreements granted the distributor/licensee the unilateral right to transfer its interest in the patents.

The plaintiffs manufacture d and market ed a commercial embodiment of the patented inventions called the Sextant System. The plaintiffs claimed Globus infringed by manufacturing, marketing and demonstrating a product called the Pivot System. The plaintiffs sought compensatory damages and injunctive relief, including lost profits.

Before the jury trial on damages, the parties stipulated, in writing, that Warsaw was the owner of the patents at issue and that the remaining plaintiffs were "co-exclusive" licensees of the patents. They also stipulated that Warsaw and the remaining plaintiffs shared the exclusive right to bring suit for infringement of the patents. The parties did not request formal court approval for the stipulation.

At the bench trial on damages, the plaintiffs presented evidence supporting : (1) an award of $2,866,405 for lost profits to compensate for Medtronic USA's sales of the Sextant System lost because of the infringement; (2) an award of $1,327,866 for statutory royalties on sales of the Pivot System for which Medtronic USA did not claim lost profits; and (3) entry of a permanent injunction prohibiting Globus from selling the Pivot System. Warsaw, MPRO and Deggendorf did not present any evidence of lost profits or irreparable harm because they believed the stipulation regarding standing rendered it unnecessary.

After the close of the evidence at the bench trial on damages, Globus filed a post-trial brief arguing that the three Medtronic plaintiffs, as non-exclusive licensees of the patents at issue, lacked constitutional standing to recover for infringement of the patents. As a result, Warsaw was the only plaintiff entitled to recover. Moreover, since there was no record evidence that Warsaw suffered lost profits or irreparable harm, Warsaw's recovery should be limited to reasonable royalties for infringement.

The plaintiffs responded that there was ample evidence in the trial record showing that Warsaw and the three Medtronic plaintiffs had constitutional standing. In the alternative, the plaintiffs argued that the court should re-open the record to receive evidence of Warsaw's entitlement to damages for lost profits and injunctive relief. The plaintiffs argued that re-opening the record was warranted because Globus' post-trial brief repudiation of the parties' stipulation regarding standing was untimely.

The court ultimately ruled that Warsaw was the only plaintiff with constitutional standing to sue for infringement. The court explained that constitutional standing to sue for patent infringement is established by ownership of and injury to the exclusionary rights bestowed by the patent grant. Accordingly, "[a] patentee's reservation of exclusionary rights can render a license agreement non-exclusive," and "non-exclusive licenses … confer no standing on a party to bring or even join a suit for infringement."

The court concluded that none of the license agreements between Warsaw and the Medtronic plaintiffs transferred sufficient exclusionary rights to confer constitutional standing to sue for infringement. For example, under the manufacturing license agreements between Warsaw and MPRO and Diggendorf, Warsaw reserved ultimate authority over the manufacture of the patented inventions, and MPRO and Deggendorf could not sub-license their manufacturing rights. Medtronic USA's distribution agreement did not include any express or implied promise that Warsaw would refrain from appointing other distributors. All three agreements at issue lacked other important indicia of exclusive ownership relevant to constitutional standing including, but not limited to, the unilateral right of the licensees to transfer their interest in the patents.

Because none of the Medtronic plaintiffs held the exclusionary rights necessary to obtain constitutional standing, the court held that Warsaw was the only plaintiff with standing to sue and recover against Globus for infringement.

Notwithstanding Warsaw's right to recover for infringement against Globus, the court refused to re-open the record to receive evidence of Warsaw's lost profits or evidence supporting Warsaw's claim for injunctive relief. The court rejected the plaintiffs' arguments that the record should be re-opened based on the plaintiffs' claim that Globus' post-trial challenge was "untimely" and in "repudiation" of the trial stipulation regarding standing. The court also found that the plaintiffs' reliance on the stipulation was "unjustified because constitutional standing cannot be conferred by stipulation." Moreover, the court noted that the plaintiffs were on notice that standing was an issue, but attempted to avoid the issue through objections at trial and by obtaining the stipulation at the liability phase of the trial. In the court's opinion, the plaintiffs' "attempt to avoid adjudication of constitutional standing militate [d] against re-opening the record for evidence that could have been presented at trial."

The court dismissed the claims of the three Medtronic plaintiffs with prejudice and denied Warsaw's demand for lost profits and injunctive relief. The court awarded Warsaw compensatory damages, including a reasonable royalty of $2,085,269.20 plus pre-judgment interest.

 

United States v. Norian Corp. No. 09-cr-403 (E.D. Pa. July 20, 2009)

On July 20, 2009, two Synthes, Inc. ("Synthes") executives plead guilty to charges stemming from their involvement in unauthorized clinical trials of bone cements for off-label use. The Synthes executives were charged with shipping adulterated and misbranded medical devices in interstate commerce in violation of the Federal Food, Drug, and Cosmetic Act.

The Synthes executives, Michael D. Huggins and John J. Walsh, are the president and director of clinical and regulatory affairs, respectively, of Synthes' Spine Division. A federal grand jury handed down indictments on June 16, 2009, charging Synthes, Huggins, Walsh, two other Synthes representatives, and Norian, Corp. ("Norian") with conducting unauthorized clinical trials of bone cements for off-label use. According to the government, Synthes and Norian conspired through their representatives to conduct clinical trials of Norian XR and Norian SRS without Food and Drug Administration ("FDA") approval.

Huggins and Walsh each were charged with one misdemeanor count of shipping adulterated and misbranded Norian XR in interstate commerce. In their guilty pleas, Huggins and Walsh stipulated that they were "responsible corporate officers" at the time these clinical trials occurred. Huggins and Walsh stipulated in their guilty pleas that, among other things, "Synthes and Norian trained spine surgeons to mix Norian SRS with barium sulfate and to use the resulting medical device" in certain surgeries. Norian SRS's labeling specifically provided that it was not to be mixed with any other substance.

Norian was charged with fifty-two felony counts, seven counts of making false statements in connection with an FDA inspection, and forty-four counts of shipping adulterated and misbranded Norian XR in interstate commerce with intent to defraud. Synthes was charged with forty-four misdemeanor counts of shipping adulterated and misbranded Norian XR in interstate commerce.

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This material was prepared by Crowell & Moring LLP attorneys Asaf Batelman, Matthew Fornataro, Rogelyn McLean, April Ross, Nicole S. Thompson, Carlos Uriarte, Deborah Yellin, and Angela Yu. It is made available on the Crowell & Moring website for information purposes only, and should not be relied upon to resolve specific legal questions. If you have questions or want additional information, please call your regular Crowell & Moring contact or you may contact the editor of Medical Device Lawsuit Watch.