Innomed Labs, LLC v. Alza Corp.
| Decision Date | 14 May 2004 |
| Docket Number | Docket No. 02-9491. |
| Citation | 368 F.3d 148 |
| Parties | INNOMED LABS, LLC, Plaintiff-Counter-Defendant — Appellant, v. ALZA CORPORATION, Defendant-Counter-Claimant — Appellee, Johnson & Johnson, Defendant. |
| Court | U.S. Court of Appeals — Second Circuit |
Paul F. Corcoran, Davis & Gilbert, LLP (Jennifer Tafet Klausner and Jennifer L. Schatzman, on the brief), New York, NY, for plaintiff-counter-defendant-appellant.
Harold P. Weinberger, Kramer Levin Naftalis & Frankel LLP (Jennifer L. Rochon, on the brief), New York, NY, for defendant-counter-claimant-appellee.
Before: SOTOMAYOR, and WESLEY, Circuit Judges.*
Plaintiff-appellant Innomed Labs, LLC ("Innomed") appeals from a judgment of the United States District Court for the Southern District of New York (Baer, J.) following a jury trial. Innomed and defendant-appellee ALZA Corporation ("ALZA") entered into a Distribution and Supply Agreement (the "Distribution Agreement") that gave Innomed the semi-exclusive right to distribute ALZA's patented pharmaceutical products, in return for up-front, royalty, and supply payments. Innomed alleges that ALZA committed price discrimination, in violation of the Robinson-Patman Act, 15 U.S.C. § 13(a), by charging Innomed prices that were higher than those ALZA charged the other semi-exclusive distributor of ALZA's product. Innomed also claims that ALZA's termination of the Distribution Agreement in March 2001 constituted a breach of the agreement's cure provisions, and that the termination tortiously interfered with Innomed's attempt to assign its rights under the agreement to another distributor. The district court dismissed the bulk of Innomed's breach of contract claims and its claim for tortious interference with prospective economic advantage on summary judgment. Following a trial, the jury found against Innomed on its Robinson-Patman Act claim.
On appeal, Innomed contends that two aspects of the district court's jury instructions regarding Innomed's Robinson-Patman Act claim were erroneous, necessitating a new trial. Innomed argues that the court erred in instructing the jury that the Robinson-Patman Act would not apply to the Distribution Agreement if the jury found that the agreement primarily concerned the right to distribute a patented product, and that the court defined the antitrust injury necessary to establish entitlement to treble damages too narrowly. Innomed also challenges the district court's summary judgment dismissal of its claims for breach of contract and tortious interference, arguing that disputed issues of material fact warrant a trial on these claims. We dispose of Innomed's arguments with respect to the summary judgment decision, and its challenges to a number of the district court's discovery and evidentiary rulings, in a summary order issued in conjunction with this opinion, and address only Innomed's challenges to the jury instructions here.
We hold that (1) the court erred in charging the jury that the Robinson-Patman Act would not apply to the Distribution Agreement if the jury determined that the agreement was primarily a contract for the right to distribute a patented product, but this error was not fundamental and does not warrant a new trial; and (2) the court's instruction on the antitrust injury necessary to establish Innomed's entitlement to treble damages was harmless error.
ALZA entered into the Distribution Agreement with Innomed's parent company, Hogil Pharmaceutical Corporation, in 1997. Hogil immediately assigned its rights under the Distribution Agreement to Innomed, an entity Hogil created to perform the contract. Under the terms of the Distribution Agreement, Innomed was to be a semi-exclusive distributor of three types of pills containing ALZA's patented timed-release pharmaceutical technology, which Innomed would distribute as a 24-hour cold medicine under one of Hogil's trademarks. ALZA, for its part, would manufacture the pills and supply them to Innomed for distribution.
The Distribution Agreement obligated Innomed to make three types of payments to ALZA. Innomed was to make an up-front payment of $2 million, and two milestone payments of $1 million each after ALZA's first two deliveries of pills.2 Innomed was also to purchase certain minimum quantities of the pills from ALZA each quarter, at a supply price of between $.08 and $.095 per pill for each product. Finally, at the end of each quarter, Innomed was to pay to ALZA royalties totaling 5% of Innomed's aggregate net sales for the first $20 million of net sales, and 7.5% of aggregate sales exceeding $20 million.
Innomed subsequently defaulted on several of its scheduled payments, failing to make one of the milestone payments and to pay the supply price for roughly $940,000 worth of pills that it ordered and received. In March 1999, the parties modified the Distribution Agreement to allow Innomed to cure its default by making monthly payments of $50,000, as well as quarterly royalty payments totaling 45% of its net sales. Despite these modifications, Innomed again defaulted, making only $150,000 in monthly payments and failing to pay royalties.
On November 28, 2000, after repeatedly demanding payment, ALZA notified Innomed of its intent to terminate the Distribution Agreement. ALZA invoked § 12.2(c) of the Distribution Agreement, which gave either party the right to terminate the Distribution Agreement "on 60 days' prior written notice to the other party, if such other party is in material breach of this Agreement, and such breach is not cured within 60 days ... after the date after such notice." ALZA's notification of its intent to terminate the contract triggered the sixty-day cure period, giving Innomed until January 28, 2001, to cure its default.
Section 12.2(c) also provided that if the breach was "of a nature such that it cannot be cured within 60 days despite diligent efforts, then such 60 day period shall be extended for a longer period as is reasonably necessary to cure such breach using diligent efforts." Rather than negotiating its entitlement to this provision or making the payments necessary to cure its default, however, Innomed served ALZA with a complaint and moved for a preliminary injunction on January 23, five days before the end of the cure period. On January 24, the parties entered into the first of what would later be termed "standstill agreements." Memorialized in a letter from Innomed's counsel to ALZA's counsel, the standstill agreement provided that ALZA Both parties also agreed that they would not institute legal proceedings before February 11.
On January 26, Innomed and ALZA orally agreed on a means by which Innomed could cure its default. Although this agreement ("the January 26 Agreement") was never memorialized in writing, it is undisputed that Innomed's principal, Howard Wendy, represented to ALZA that he "had a deal" with American Home Products ("AHP"), in which Innomed would assign its rights under the Distribution Agreement to AHP, in return for $8 million and a 5% royalty on gross sales. ALZA agreed that Innomed could cure its default by sharing the proceeds from the assignment with ALZA, but only if Innomed was able to finalize the assignment agreement quickly.
Although Wendy represented to ALZA on January 26 that the AHP assignment agreement was effectively final, contingent only upon AHP's satisfactory conclusion of due diligence, the actual status of the assignment agreement was sharply disputed before the district court. Wendy testified that as of January 26, he believed that the AHP agreement was binding and final in all material respects. In contrast, AHP's vice president, Gregory Bobyock, testified that as of January 26, AHP had not reached agreement with Innomed on any of the principal terms of the assignment. AHP had yet to perform the market research that would determine how much it was willing to pay Innomed in return for the assignment, and the parties therefore had not yet agreed on a price term. Consequently, AHP did not consider itself contractually bound in any way.
Shortly after the ALZA-Innomed standstill agreement expired on February 11, the parties executed another two-week standstill agreement, which was to expire on March 15. Meanwhile, on February 15, Innomed, ALZA, and AHP entered into a confidentiality agreement to facilitate AHP's ability to conduct due diligence with respect to ALZA. In the beginning of March, however, ALZA advised Innomed that it had not yet been contacted by AHP regarding the due diligence, and demanded "a more thorough explanation of what due diligence AHP has undertaken, as well as an update on the status of [Innomed's] discussions with AHP." Although Innomed's response to this request is not memorialized, AHP soon thereafter scheduled a due diligence visit to ALZA for April 2001.
ALZA and Innomed subsequently extended the standstill agreement to March 26. On March 27, ALZA was acquired by Johnson & Johnson ("J & J"), a competitor of AHP in the over-the-counter drug market. Two days later, on March 29, ALZA notified Innomed that it would not extend the standstill agreement further, and that the Distribution Agreement was terminated, effective March 26, 2001. Innomed filed this lawsuit shortly thereafter.
Innomed's initial complaint alleged that (1) ALZA had breached the termination and cure provisions of the Distribution Agreement by terminating the contract on March 26; (2) ALZA had breached the January 26 Agreement by terminating the Distribution Agreement before Innomed had sufficient time to finalize the assignment of the Distribution Agreement to AHP; and (3) ALZA had tortiously...
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