Roche Diagnostics Corp.. v. Med. Automation Sys. Inc.

• Decision Date: 24 May 2011
• Docket Number: No. 11–1446.,11–1446.
• Citation: 646 F.3d 424
• Parties: ROCHE DIAGNOSTICS CORPORATION, Plaintiff–Appellant,v.MEDICAL AUTOMATION SYSTEMS, INC.; Gregory A. Menke; and Kurt M. Wassenaar, Defendants–Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

646 F.3d 424

ROCHE DIAGNOSTICS CORPORATION, Plaintiff–Appellant,

v.MEDICAL AUTOMATION SYSTEMS, INC.; Gregory A. Menke; and Kurt M. Wassenaar, Defendants–Appellees.

No. 11–1446.

United States Court of Appeals, Seventh Circuit.

Argued May 9, 2011.Decided May 24, 2011.

Michael Rosiello (argued), Attorney, Barnes & Thornburg LLP, Indianapolis, IN, for Plaintiff–Appellant.John F. Cambria (argued), Attorney, Alston & Bird, New York, NY, Wayne C. Turner, Attorney, Bingham McHale LLP, Indianapolis, IN, for Defendants–Appellees.Before EASTERBROOK, Chief Judge, and WOOD and WILLIAMS, Circuit Judges.EASTERBROOK, Chief Judge.

Roche Diagnostics makes glucose monitors and other diabetes-related products that incorporate software written by Medical Automation Systems (MAS). Roche's contract with MAS entitles it to use the software for two years after the contract's initial term (2006 through 2010) and any extension. It also gives Roche a right of first refusal should MAS agree to sell its stock or assets to one of Roche's competitors “during the term of this Agreement.” MAS notified Roche that it would not extend the contract after the original expiration date. Roche learned that investors in MAS were negotiating to sell their stock to Alere, Inc., which Roche considers to be a competitor. It told MAS in December 2010 that it would match Alere's offer, but MAS replied that, because the transaction would not close until 2011, Roche's right of first refusal did not apply.

The contract provides for arbitration of disputes about the right of first refusal but allows either party to ask a judge for equitable relief while arbitration is ongoing. Invoking the diversity jurisdiction, Roche asked for an injunction pending arbitration. Because the merits of the dispute will be resolved by the arbitrator, we do not discuss the terms of the contract or the nature of the parties' contentions beyond the few words already written. Some of these details appear in the district court's opinion. 771 F.Supp.2d 936 (S.D.Ind.2011). It is enough for now that the district court concluded—and MAS does not deny—that Roche has a reasonable chance of prevailing in the arbitration.

The district court concluded that Roche will suffer irreparable injury if Alere acquires MAS. The acquisition could undermine the value of Roche's right to use the software through 2012. The court also concluded that the difficulty of undoing a sale (soon to be followed by a merger) could reduce, if not eliminate, the value of Roche's right of first refusal. At the same time, the district judge found, enjoining the sale would cause irreparable harm to MAS and Alere by prolonging the uncertainty about who is entitled to control MAS's business. Delay could reduce the value of MAS to Alere, leading it to withdraw (or reduce the price), to the detriment of MAS's stockholders. The district judge concluded that the best way to balance these competing interests would be to allow the sale to proceed, subject to a requirement that MAS allow Roche to use the software through 2012. The district court issued an injunction implementing this decision; the injunction expires as soon as the arbitrator renders a decision (or at the end of 2012, if the arbitrator still has not acted).

Roche asked us for an injunction pending appeal. We concluded that the sale can proceed if MAS and Alere respect Roche's exclusive rights, and if the parties ensure that MAS is maintained as a separate firm so that the transaction can be undone and the business transferred to Roche—with its full value intact—should the arbitrator rule in Roche's favor. The hold-separate portion of our injunction sets these conditions:

1. MAS survives the merger in its current form as an independent, though wholly or partially owned, corporate entity;

2. There are no material changes in MAS's operations;

3. There are no material changes in MAS's business plans;

4. Alere does not hire any current or former employees, officers, or directors of MAS;

5. MAS does not hire any current or former employees, officers, or directors, of Alere;

6. No current or former employees, officers, or directors of Alere serve as directors or board members of MAS;

7. No current or former employees, officers, or directors of MAS serve as directors or board members of Alere;

8. MAS does not share with Alere any confidential or proprietary information regarding Roche or any other company with which MAS does business;

9. MAS does not share with Alere any of MAS's own confidential and proprietary information except to the extent that MAS shares such information with third-parties in its normal course of business; and

10. MAS does not transfer or dispose of any material assets or make any material acquisitions.

MAS and Alere elected not to close the transaction under these conditions. We accelerated the briefing and argument of the appeal. Meanwhile the arbitration is under way: the arbitrator has allowed extended discovery and set a hearing for September. This does not seem like an expedited schedule, but none of the litigants has complained.

Appellate review of a district judge's decision balancing the harms in a proceeding requesting equitable relief is deferential. See Ashcroft v. ACLU, 542 U.S. 656, 664–65, 124 S.Ct. 2783, 159 L.Ed.2d 690 (2004). MAS contends that deferential review leads straight to affirmance, because after an evidentiary hearing the district judge reached a thoughtful conclusion recognizing the injury that could be done by either closing the deal or delaying the closing. The problem with MAS's argument is that the district judge included, as an injury on MAS's side of the ledger, the harm that would be done by delaying a final decision about whether MAS's business goes to Alere or to Roche. The district court wrote that this injury could be avoided by allowing the sale to proceed. Yet closing the sale will not avoid uncertainty. Until the arbitrator decides, uncertainty continues whether the sale has closed or not. The chance that the arbitrator will decide that Roche properly exercised a right of first refusal, and thus is entitled to acquire MAS, means that the final outcome cannot be known today. It is the arbitration agreement between Roche and MAS, not an injunction, that prolongs uncertainty.

Because “uncertainty” is a wash, we need to ask whether Roche or MAS faces the greater harm. The district judge said that Roche's harm is the greater, if effects of uncertainty from delay are put aside. We agree. Roche faces harm from acts that may undermine its right to use the software in connection with diabetes-related products. And it faces harm from the fact that parties to the sale of a business—whether accomplished by merger, the sale of assets, or the transfer of all stock—commonly make changes that impede any effort to restore the status quo ante. Often the point of the deal is to give one firm access to another's assets, including its intellectual property, and its executives too. The acquiring firm may install new managers in order to protect or enhance its investment, may move assets to or from the acquired business in order to achieve economies of scope (often called synergies), and may alter the acquired firm's business plans substantially.

A careful study concluded that changes of this kind prevent divestiture that would solve antitrust problems. See Kenneth G. Elzinga, The Antimerger Law: Pyrrhic Victories?, 12 J.L. & Econ. 43 (1969). A recognition that eggs can't be unscrambled underlies the Hart–Scott–Rodino Antitrust Improvements Act, 15 U.S.C. §§ 15c–15h, 18a, which entitles antitrust enforcers to notice of impending sales and mergers, so that anticompetitive acquisitions can be tackled while effectual relief is still...